This Skadden memo provides an overview of key considerations in structuring and performing anti-corruption due diligence in an M&A transaction. Here’s an excerpt from the intro:
A successful merger or acquisition requires careful consideration of many components and diligence in a number of specialties. Corruption issues, generally, and the global reach of the Foreign Corrupt Practices Act and the U.K. Bribery Act 2010, specifically, can present unique challenges to the structure of a deal and a party’s approach to diligence.
The memo identifies some innovative strategies for managing anti-corruption risk – such as a “phased investment” approach:
One novel approach to managing anti-corruption risk is a phased or staged investment in a target company. An acquirer that is not comfortable with a target’s corruption risk may consider an initial, limited investment, which should be well below the threshold at which regulators will impute control. The acquirer can invest further if the target company meets compliance bench-marks.
The memo highlights areas of emphasis for anti-corruption deal diligence and risk management at the pre-signing stage, during the process of structuring the deal, and after the closing.
This recent blog from Weil Gotshal’s Glenn West takes issue with the idea that the standard “no 3rd party beneficiaries” boilerplate is the right approach for private company M&A. This excerpt explains that, in many private deals, a blanket disclaimer of intent to benefit non-parties is inappropriate:
The fact is that many merger or purchase and sale agreements do contain obligations that are intended to benefit persons who are not named parties. For example, it is not uncommon for a private company acquisition agreement to state that the seller’s indemnification obligations are in favor not only of the named buying entity, but also in favor of its affiliates, who may actually suffer the losses being indemnified.
Similarly, the nonrecourse provision that private equity buyers include to limit exposure beyond the specific named parties to the agreement is clearly intended to benefit (and be enforceable by) persons (affiliates) who, by definition, are not the named parties. But the provisions relating to continued employment for target company employees are specifically not intended to be enforceable by those employees, who are otherwise strangers to the contract.
Without careful drafting to identify which provisions are and are not intended to be excepted from the “no third-party beneficiary” clause, a conflict can be created that threatens the bargained-for benefits for nonparty affiliates (a sinking of a friendly ship if you will). After all, “where a provision in a contract expressly negates enforcement by third parties, that provision is controlling.”
Buyers & sellers need to carefully determine which contractual provisions are intended to benefit 3rd parties and add appropriate language carving those provisions out of the standard “no 3rd party beneficiaries” boilerplate.
This SRS Acquiom study reviews the financial & other terms of 795 private target deals that closed during the period from 2013 through 2016. Here are some of the key findings about trends in last year’s deal terms:
– Earnouts in non-life sciences deals in 2016 remained steady at 14%, but they were much more often based on a specific metric other than revenue or earnings, 36% of 2016 deals using such other metrics compared to only 13% of 2015 deal.
– Use of a separate escrow for post-closing purchase price adjustments increased to 39% of 2016 deals that had purchase price adjustment mechanisms, up from just 27% in 2015.
– The median general survival period for representations and warranties dropped slightly to 16 months, compared to 18 months in recent years.
– Use of deductible baskets jumped to 42% of 2016 deals, from 30% in 2015.
– Pro-sandbagging clauses in agreements continued to grow, in 58% of 2016 deals, up from 52% in the prior 2 years; anti-sandbagging clauses dropped to 0% of 2016 deals.
– Inclusion of a materiality scrape for determining both breach and damages almost doubled from 19% in 2015 deals to 34% of 2016 deals.
– Use of a Material Adverse Effect standard for the accuracy of seller’s representations and warranties at closing jumped to 43% in 2016 deals from only 31% of 2015 deals.
The survey also notes that the Delaware Chancery Court’s decision in Cigna v. Audax continues to influence a number of deal terms, including the survival periods for “fundamental” reps & warranties and the structure of appraisal rights conditions.
– Special Considerations in California M&A Deals
– Alternatives to Traditional Working Capital True-Ups: The Locked Box Mechanism
– Chart: Delaware Standards of Review for Board Decisions
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This PwC memo addresses the need for cross-border buyers & sellers to be fluent in the differences between US GAAP and IFRS accounting standards. Here’s an excerpt from the intro:
While “numbers” may seem to be a universal language, the stories they tell can convey very different meanings. The “era of convergence” between US GAAP and IFRS has ended. While new accounting standards may be closer aligned, there remain potentially significant differences in both the bottom-line
impact of accounting conventions and disclosure requirements.
Understanding these differences and their impact on key deal metrics, as well as both short- and long-term financial reporting requirements, will lead to a more informed decisionmaking process. It can also help minimize last-minute surprises that can significantly impact deal value or completion.
The memo reviews some of the common differences between GAAP & IFRS and highlights areas of potential concern for dealmakers.
Last month, I blogged about the Chancery Court’s decision in Hsu Living Trust v. ODN Holding (Del. Ch.; 5/17) – the latest Delaware decision to limit the rights of preferred stockholders & the board’s obligations to them. In the wake of that decision, this Cleary blog provides tips to preferred investors on how to protect their interests – and to directors, on how to enhance their position in the event of a fiduciary challenge.
The blog notes that the ability of preferred stockholders to elect a majority of the board in the event of default may not adequately protect their interests after ODN Holding. Here’s an excerpt with some alternative protections:
Investors should consider other protections—such as a penalty interest rate following a failure to effect a redemption or stockholder consent rights over company cash expenditures—to safeguard the benefits of the redemption right. In addition, a preferred stock investor might seek to obtain a right —enforceable by specific performance—to foreclose on company assets or unilaterally cause a sale or liquidation of the company following the company’s failure to comply with a demand for redemption, which would eliminate board discretion and make a fiduciary challenge less likely.
The blog also suggests that an alternative process may have put the board in a better position:
The decision also highlights the Delaware courts’ recent emphasis on the stockholder franchise. Under the procedure set forth in the MFW shareholder litigation, the ODN board’s decision-making likely would have benefited from more deferential business judgment review had an uncoerced and informed majority-of-the-minority stockholder vote on the divestitures been combined with ODN’s use of a special board committee (assuming that committee was independent and adequately-empowered)
The biggest takeaway from the case for directors may be that the board’s compliance with its duties in authorizing a contract “does not mean that a company’s subsequent performance of the obligations in that contract will automatically pass fiduciary muster.”
This new study from MergerMarket & Donnelley takes a look at how buyers and investors are being selected and approached in M&A, IPOs & divestment transactions. Here’s an excerpt with some of the key findings:
– Negotiated sales are the deal-sourcing method of choice. Some 82% of respondents said that their use of the negotiated sales process had increased (32% of which said it had increased significantly) in the past five years.
– Finding a buyer is a slower process. Some 46% of respondents say the period of time between deciding to sell an asset and finding a buyer has increased over the past five years.
– Technology and electronic tools have changed the way sell-side dealmakers target buyers. Face-to-face meetings have become less frequent according to 52% of respondents, who attribute this to online tools such as virtual data rooms, deal marketing solutions, and video conferencing.
– Gauging what type of deal and when to execute it has also become increasingly difficult. Some 72% of respondents say that gauging market conditions to pick the best time to execute an IPO has become more erdifficult.
The study suggests that, overall, the marketing process for deals is becoming more targeted. In addition to the dramatic increase in negotiated sales, 30% of respondents said that their use of a broad auction process has declined somewhat over the past five years, while 60% said they are using targeted auctions more.
While deal lawyers have long used rights offerings as a tool to cleanse a related party transaction, they’ve done so without any clear signal from the courts that this approach actually works. However, this Cleary blog says that the Chancery Court recently hinted that those of us who’ve used rights offerings in this way might be on the right track.
At a settlement hearing last month, Vice Chancellor Laster made a number of comments suggesting that a rights offering could effectively limit insiders’ liability in a transaction with a controlling shareholder. Here’s an excerpt summarizing those comments:
Although it is important to emphasize that these comments were made at an uncontested hearing, Vice Chancellor Laster’s analysis suggests that potential liability in transactions with controlling stockholders can be substantially reduced (if not eliminated) if (1) the transaction is structured so that minority stockholders are able to participate pro rata with the controlling stockholder (e.g., as a rights offering with any rights issued being transferable), (2) there is no other alleged coercion, and (3) the controller does not receive any unique benefit at the expense of the minority.
I blogged about rights offerings over at “John Tales” a little while back. They’re cumbersome & are usually a poor option for raising capital, but if Delaware ultimately gives its imprimatur to them as a way to limit liability or avoid entire fairness review in controlling shareholder transactions, we may see a lot more of them.
The outcome of the DFC Global appraisal case that’s currently before the Delaware Supreme Court may have a significant impact on deal litigation for years to come – and it may be the most closely watched appraisal case of all time.
The Supreme Court heard oral arguments in the case on June 7th, and Steve Hecht recently blogged about some of the questions raised by the Court during the course of that argument. Here are some nuggets from the blog:
– The court asked DFC Global why they did not introduce an economics expert to corroborate the reliability of the merger price as the measure of the company’s fair value; the Chief Justice said that by not doing so, they didn’t offer much help to the Chancellor in his evaluation of the merger price and the process of wading through the respective valuation experts’ reports.
– The court asked the stockholders why their valuation expert didn’t open up his own private equity shop if he really believed in the valuation delta between merger price and his own valuation, which came out nearly two times higher than the merger price.
If you’re interested in watching the oral argument (about 50 minutes), it’s available here.
The Corwin standard generally results in the business judgment rule applying to post-closing claims arising out of a deal that’s been approved by a fully-informed shareholder vote – unless shareholder approval was somehow “coerced.” In Saba Software, the Chancery Court found that a vote was coerced when shareholders were forced to choose between a discount-priced merger & continuing to own shares in a company that had “gone dark.”
Now, in Sciabacucchi v. Liberty Media, the Court has found coercion in another setting – Charter Communications’ decision to condition a couple of beneficial acquisitions on shareholder approval of share issuances to Liberty Media, its largest shareholder, to help finance the deals. Here’s an excerpt from Steve Quinlivan’s blog summarizing the Court’s holding:
The Court held Plaintiffs had pled facts making it reasonably conceivable that the vote was structurally coercive. Those facts, and related favorable inferences, indicate that the Defendant directors achieved value for the stockholders in the acquisitions. They then conditioned receipt of those benefits on a vote in favor of transactions extraneous to the acquisitions, the Liberty share issuances and other matters.
Assuming that viable breaches of fiduciary duty inhere in the Liberty share issuances, they could not be cleansed by the vote, since that vote was not a free vote to accept or reject those transactions alone; it was a vote to preserve the benefit of the acquisitions. In other words, ratification can cleanse defects inherent in a transaction, because the stockholders can simply reject the deal. The Court stated fiduciaries cannot interlard such a vote with extraneous acts of self-dealing, and thereby use a vote driven by the net benefit of the transactions to cleanse their breach of duty.
So far, arguments that shareholder approval was coerced have proven to be the most viable line of attack against Corwin’s application to merger claims.