Education by entertainment. This series of three paperback books – “Deal Tales” – teaches the kind of things that you won’t learn at conferences, nor in treatises or firm memos. With the set containing over 600 pages, John Jenkins – a 30-year vet of the deal world – brings his humorous M&A stories to bear.
This series is perfect to help train those fairly new to deals. And it’s also perfect for more experienced practitioners interested in what another vet has to share. John’s wit will keep you coming back for more. Check it out!
This Debevoise memo notes that the IRS recently issued a Revenue Ruling addressing issues associated with “North-South” transactions – which are often part of corporate restructurings undertaken by companies preparing for a spin-off or similar transaction. North-South transactions involve separate transfers of assets from a parent to a subsidiary and from a subsidiary to a parent in order to move assets associated with the businesses to the appropriate entities.
If treated separately, these transfers generally qualify for favorable tax treatment, but if combined, the tax consequences can be significant – even threatening the viability of the spin-off. Unfortunately, these issues have created great uncertainty in recent years, and that’s been compounded by the IRS’s unwillingness to address North-South issues. This excerpt explains:
Historically, the IRS issue to taxpayers private letter rulings confirming that in certain situations, IRS would not integrate North-South transactions. However, in January 2013, the IRS announced that it would no longer issue rulings on North-South issues. Taxpayers wishing to restructure corporate groups have faced great uncertainty as a result. The Ruling removes the “no-rule” policy and and signals that taxpayers may again obtain rulings on North-South issues.
The memo notes that the Revenue Ruling sheds some light on when the IRS will respect the independence of transaction steps in a spin-off, but doesn’t provide clear guideposts. The really important takeaway from the issuance of the Ruling may be that the IRS is back in the game – and will once again provide rulings in this important area for transaction planners.
This Fried Frank memo provides an overview of the 7 decisions interpreting the Delaware Supreme Court’s 2015 Corwin decision and an assessment of where things stand. Here’s an excerpt addressing the issues that remain open under Corwin:
– Duty of loyalty cases. As noted, while the Court of Chancery has held that Corwin cleanses even transactions where the directors were not independent and disinterested, breached the duty of loyalty, or acted in bad faith, the Delaware Supreme Court has not yet addressed the issue.
– Unocal cases. The Court of Chancery has noted that there is an issue, but has not yet definitively ruled on, whether Unocal heightened scrutiny may apply notwithstanding fully informed and uncoerced stockholder approval of a transaction.
- Coercion claims. As the Delaware courts have clarified and confirmed the high standard of materiality that will be applicable to making valid disclosure claims in the Corwin context, the plaintiffs’ bar may be considering more focus on potential claims that a stockholder vote has been coerced.
Delaware courts can apply a bewildering array of standards of review when evaluating actions of boards & controlling shareholders in M&A transactions. Keeping those standards straight can be a daunting task. Fortunately, this Gibson Dunn memo makes it easier by providing an updated version of a handy “cheat sheet” that nicely lays out the standards of review and the circumstances in which they apply.
This Cleary blog says that as a result of a recent Supreme Court decision eliminating laches as a defense to a patent infringement claim, the challenges of M&A intellectual property due diligence just increased significantly.
In SCA Hygiene Prod. v. First Quality Baby Prod.137 S. Ct. 954 (2017), the Supreme Court refused to bar damage claims for infringement occurring within the six-year period prior to filing a lawsuit, even if there was “an unreasonable, inexcusable and prejudicial delay” in bringing the suit. The case comes on the heels of an earlier decision easing plaintiffs’ ability to obtain treble damages in patent infringement cases.
So what does this mean for M&A? Buyers can’t afford a “no news is good news” approach when it comes to due diligence on potential infringement claims:
Now that plaintiffs can collect damages for infringement occurring up to six years prior to filing suit despite their delay tactics during that period, M&A purchasers cannot assume that just because the target has not heard (or heard back) from a patent holder the risk of facing suit in the future is small. Therefore, they should carefully diligence any risk of patent infringement within the preceding six years.
The blog also notes that the increased litigation risk should be considered when negotiating the terms of the transaction:
Additionally, parties should be mindful of this heightened threat of patent litigation when negotiating risk allocation in a purchase agreement. In light of diligence findings and the general risk of patent litigation in a particular industry, a buyer should carefully consider how far the look-backs in reps should extend and how long they should survive so as to mitigate the risk of costly litigation.
Since the risk that a target could face unknown infringement claims has increased, parties should consider the appropriateness of knowledge qualifiers. Finally, sellers in M&A transactions should account for their increased exposure to indemnity obligations arising from breach of such reps (associated with patent suits from long-dormant plaintiffs) and adjust their indemnity obligations accordingly.
Tune in tomorrow for the webcast – “Public Company Carve-Outs: The Nuggets” – to hear Sidley’s Sharon Flanagan, Sullivan & Cromwell’s Rita O’Neill & Covington & Burling’s Catherine Dargan discuss hot issues & tricks of the trade in dealing with public company carve-outs.
SEC rules require companies seeking shareholder approval of a deal to conduct a separate advisory vote on any “golden parachute” compensation arrangements involved in the transaction. Reading the voting policies of major institutions, you might well expect that they would vote against many of these proposals – but this Proxy Insight article says that isn’t usually the case.
The article discusses the voting behavior of major institutions when it comes to golden parachute advisory votes – and says that while investors typically oppose golden parachutes in principle, caveats in their policies often result in much higher support in practice. Here’s an excerpt:
8 out of 10 investors supported more than half of all golden parachute resolutions they voted on, indicating that there are at least some investors paying lip service to good governance through their policies, yet taking a very different approach in practice.
This could help to explain the fact that, despite their divisive nature and tendency to provoke a fair amount of shareholder opposition, golden parachute proposals still rarely fail. Of the 438 golden parachute proposals that Proxy Insight has collected, all but 30 proved to be successful with the average level of support for these being 83%.
There are a couple of outliers among institutional investors. Vanguard supported only 40% of golden parachute proposals, despite voting with management 95% of the time on other matters, while T. Rowe Price voted in favor of golden parachutes just 14% of the time, even though it supported management in 93% of other votes.
This Harvard Business Review article says that if your CEO doesn’t win the “Most Awesome CEO in Greater Dubuque” award that they’re up for this year, you’re likely going on a buying spree:
We created a model to estimate each CEO’s chance of winning an award, based upon firm characteristics (such as firm size, accounting performance, stock performance, advertising intensity), CEO characteristics (such as gender, age, and tenure), and the number of acquisitions conducted in the prior two years. Not surprisingly, we found that “runner up” CEOs – or those who would seem more likely to win but didn’t – were associated with the biggest increases in the number and value of acquisitions conducted in the post-award period. This suggests that “runner up” competitor CEOs may feel worse about losing out on an award than other competitor CEOs.
So how did these “I’ll show you guys!” deals work out? Not so well:
We found that acquisitions conducted by CEOs after losing awards had a more detrimental effect on firm accounting performance than those conducted in the pre-award period. Specifically, acquisitions conducted by competitor CEO firms in the post-award period negatively influenced return on assets more than those conducted by the same firms in the pre-award period. In addition, acquisitions conducted in the post-award period were received more negatively by stock market. This suggests that these acquisitions were rushed through without sufficient due diligence.
“You keep using that word. I do not think it means what you think it means.” – Inigo Montoya, The Princess Bride
Very few deal lawyers have escaped extended battles over whether a client is obligated to use its “best efforts,” “commercially reasonable efforts,” “reasonable best efforts” or some other defined level of “efforts” in performing its contractual obligations. But according to this blog from UCLA’s Steve Bainbridge, Mandy Patinkin’s character in The Princess Bride is right – we have no idea what we’re talking about when we talk about “best efforts.”
So what do phrases like “best efforts,” “commercially reasonable efforts” & the like really mean to the courts interpreting them? By way of explanation, Steve offers up this quote from his upcoming casebook:
Although practitioners generally believe that efforts standards differ, there is no general agreement in case law as to whether the various clauses in fact reflect different standards. Courts often use the same analysis in determining whether an efforts clause has been breached, regardless of the specific level of effort prescribed in the agreement. Specifically, courts frequently consider the facts and circumstances of the case and require that the parties act diligently, reasonably, and in good faith in complying with an efforts clause.
Here’s a recent blog from Keith Bishop with a California perspective on the meaning of a “best efforts” clause.
I recently flagged a Nixon Peabody blog about how the Chancery Court’s ESG Capital Partnersdecision highlighted significant enforceability issues for “side-letters” with private equity fund investors. Now the firm’s followed up with another blog offering some practice points for addressing this issue. Here’s an excerpt:
The ESG Capital Partners Case serves as an important reminder that private fund managers, investors and practitioners should always consider the following points to ensure enforceability of side letter agreements:
1. Integration Clauses (also known as “entire agreement” clauses)—make sure that each of the fund’s governing agreements include an integration clause that specifically references the fact that the side letter agreement will be a part of the entire agreement of the parties.
2. Subscription Agreement Provisions—in addition to the integration clause, the subscription agreement should also make clear that each applicable investor has received a copy of its side letter agreement (together with all other fund documentation) and is making its investment in the fund in reliance on the terms of all such agreements.
3. LPA Provisions—make sure that the Fund’s LPA specifically references the existence of side letter agreements, and specifically authorizes the general partner to enter into side letter agreements that supplement or alter the terms of the limited partnership agreement. Limited partner investors need to confirm this point as part of their legal diligence processes instead of assuming that a fund manager has this authority. This language would be in addition to the typical “most favored nations” provision included in each investor’s side letter agreement as further evidence that all investors were made aware that certain supplemental and preferential terms may be granted to some but not all investors in the fund;
4. PPM Provisions—make sure that the fund’s private placement memorandum references the fact that the fund may issue side letter agreements, and that it includes a risk factor highlighting the risk that such side letters may be issued to certain limited partners and not others, and that their terms may supplement or alter the terms otherwise provided in the fund’s LPA.
5. Preferential Rights—make sure that any supplemental rights granted to a limited partner in a side letter agreement do not materially or adversely affect the other limited partners in a way that would require an amendment to the fund’s LPA. When unclear, investors or sponsors should seek out advice of counsel.