This Akin Gump memo addresses recent action by CFIUS that effectively ended US based lighting & semiconductor maker Cree’s proposed sale of a division to a German company. Cree terminated the $850 million deal shortly after announcing that CFIUS raised objections to the deal & that the parties were working to address them.
The memo speculates that it was concerns over the Cree division’s silicon carbide technology – which is used in compound semiconductors – that may have prompted CFIUS to act. Other deals involving similar technology have also received a “thumbs down” from CFIUS. Here’s an excerpt summarizing the conclusions to be drawn from this most recent action:
This transaction highlights CFIUS’ focus on deals involving sensitive technology, particularly in the semiconductor sector. Since 2016, CFIUS or the President has effectively blocked a number of other transactions in the semiconductor industry involving Chinese buyers, including Aixtron-Fujian Grand Chip, GCS-San’an and Lumileds-GO Scale. With this latest outcome, CFIUS has indicated that these potential national security concerns are not limited to Chinese buyers and can arise in transactions with companies from closely allied countries.
This Cooley M&A blog is part of a series addressing M&A trends for 2017. It focuses on public company sellers’ heightened concerns about certainty during periods of regulatory & economic uncertainty. Here’s an excerpt discussing what those concerns may mean for 2017 deals:
Defining what constitutes a “material adverse change” that will let a buyer walk away from a signed deal may be subject to more negotiation than ever before. In addition to the “no MAC” out, parties are likely to focus on antitrust or other covenants relating to a party’s required efforts to obtain regulatory approvals, including through litigation and other affirmative “fix” obligations such as divestiture. Termination rights (and fees) tied to a party’s inability to obtain required approvals will also likely be more tailored and scrutinized.
Parties should pay more attention to these deal certainty provisions, particularly if potential changes in laws or regulations could undermine the economic rationale for the transaction.
The M&A Law Prof Blog discusses the growth of appraisal litigation in recent years as a result of both appraisal arbitrage & cases like Corwin that make it increasingly difficult to obtain a damages remedy for fiduciary duty claims. As a result, the stakes in appraisal cases have become higher – and in its review of Chancellor Bouchard’s DFC Global decision, the Delaware Supreme Court may soon decide how to approach determining “fair value” in appraisal proceedings.
Since the Court’s decision may strongly influence the direction of deal litigation for years to come, it’s attracted a lot of interest – not just from practitioners, but from some of the nation’s top academics. Here’s an excerpt:
In the last couple of years, at the Chancery Court, chancellors have started moving away from the view that the court will determine fair value without regard to the merger price. Now, in certain circumstances (where the deal price is a product of a competitive or robust sales price) chancellors may consider merger price as one of the relevant factors for purposes of determining fair value.
Now this question has found its way to the Delaware Supreme Court and the parties are lining up on both sides. There are even amici! Two sets of amici have rolled up: on the one side there are law professors arguing that the court should be able to presumptively rely on merger price to determine fair value in an appraisal proceeding unless that price does not result from arm’s length bargaining (DFC Holdings – Bainbridge, et al). On the other are law professors arguing requiring a court to rely on merger price to determine fair value would run counter to the language of the statutory appraisal remedy and also not always reflect fair value (DFC Holdings – Talley, et al).
Last month, I blogged about the SEC’s recent enforcement action against CVR Energy. That proceeding focused on the level of detail provided by CVR Energy about the circumstances under which a success fee could become payable to its financial advisor. This Dechert memo reviews the CVR Energy proceeding & recent Delaware case law – and notes a trend toward insisting on more details about investment banker fees and conflicts.
Here’s an excerpt summarizing the memo’s highlights:
– CVR Energy allegedly violated the tender offer rules by failing to properly disclose all material terms of its arrangements with investment banks advising CVR in connection with a hostile tender offer. Potential conflicts of interest that arose from the fee structure were not disclosed to CVR shareholders, including that the financial advisors could receive sizable “success” fees even if the hostile bidder prevailed despite the rejection of the offer by the CVR board.
– This enforcement action follows recent guidance by the SEC Staff that general disclosure that financial advisors are entitled to “customary fees” is usually insufficient and that disclosure should typically include a discussion of the fee structure, including the types of fees and circumstances that will trigger payment of the fees.
– These developments are consistent with a general trend in Delaware case law to require more specific disclosure of financial advisor fees, conflicts and other arrangements in M&A transactions.
Well, okay, that’s not exactly a direct quote from Vice Chancellor Laster’s recent decision to modify the terms of the Dole Food appraisal settlement, but it certainly captures the spirit of it. To make a long story short, the T+3 settlement cycle – combined with huge short interest & obsolete record-keeping practices – resulted in more than 12 million additional shares having the right to make a claim to the appraisal settlement proceeds than should’ve been the case.
In determining to modify the settlement, the Vice Chancellor shared his thoughts about how this mess came to be:
This problem is an unintended consequence of the top-down federal solution to the paperwork crisis that threatened Wall Street in the 1970s. Through the policy of share immobilization, Congress and the Securities and Exchange Commission addressed the crisis using the 1970s-era technologies of depository institutions, jumbo paper certificates, and a centralized ledger. See generally In re Appraisal of Dell Inc.(Dell Ownership), 2015 WL 4313206, at *3–7 (Del. Ch. July 30, 2015).
It was an incomplete solution at the time. Since then, despite laudable and largely successful efforts by the incumbent intermediaries to keep the system working, the problems have grown. See, e.g., In re Appraisal of Dell Inc., 143 A.3d 20, 59 (Del. Ch. 2016) (holding that under current Delaware law, beneficial owners forfeited their appraisal rights by inadvertently voting in favor of the merger due to complexities created by depository system); Dell Ownership, 2015 WL 4313206, at *9–10 (holding that under current Delaware law, beneficial owners forfeited their appraisal rights due to administrative change in the name of the nominee on the share certificate necessitated by depository system).
So what’s the fix? The Vice Chancellor points to “distributed ledger technologies” – aka blockchain – which could provide a solution by “maintaining multiple, current copies of a single and comprehensive stock ownership ledger.”
This March-April issue of the Deal Lawyers print newsletter was just posted – & also mailed – and includes articles on (try a no-risk trial):
– The Corwin Effect: Stockholder Approval of M&A Transactions
– Disclosure in Appraisal Notices
– How to Deal with Equity Holdings During Spin-Offs
– Standards of Review: 2016 Delaware Decisions
– Special Supplement: Stock Options in M&A – Select 409A & Drafting Issues
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Side letters detailing special rights for certain large investors are fairly common features of private equity funds. This Nixon Peabody blog discusses the problems that can arise with the enforceability of these arrangements. Here’s the intro:
A little over a year ago, the Delaware Court of Chancery issued a forceful reminder that not all side letter agreements are enforceable. In ESG Capital Partners II, LP v. Passport Special Opportunities Master Fund, L.P. C.A. No. 11053-VCL (Del. Ch. Dec. 16, 2015) (the ESG Capital Partners Case), the court found that a side letter agreement issued to a limited partner investor in a Delaware limited partnership private fund entity (the Fund) was nullified and rendered useless by the fact that the side letter was entered into one day prior to the limited partner’s entering into the subscription agreement to acquire interests in the Fund, and the “entire agreement” clause included in the subscription agreement did not reference or otherwise contemplate the existence of any side letter agreement.
The court also found that the side letter’s provisions purported to confer a “super-limited-partner status” upon the limited partner investor in violation of the amendment provisions of the limited partnership agreement.
This PwC blog says that FASB’s new revenue recognition standard – which goes into effect for most companies in 2018 – could have significant implications for M&A. While CFOs know they’ve got an implementation deadline fast approaching, many dealmakers may not appreciate the new standard’s potential impact on acquisitions. Here’s an excerpt addressing what the new standard may mean for valuation models & due diligence:
Performance metrics could change in ways that aren’t driven by operations or cash flows. For starters, the pattern of revenue recognition may change under the new guidance, even when the underlying operations and contracting has not changed. In addition, Private Equity funds that adjust GAAP results to determine run rates for purposes of valuation will need to fully assess the impact of such changes. For example, upon adopting the new standard, there could be a loss in the ability to recognize previously deferred revenue, or a requirement to capitalize and amortize costs already incurred in a prior period. Additionally, the ability of target companies to comply with the new rules and implement any required changes to processes and systems will need to be evaluated during due diligence.
Other areas that may feel the impact of the new standard include management compensation, debt covenants, tax planning and exit strategies.
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