DealLawyers.com Blog

Tune in tomorrow for the webcast – “This Is It! M&A Nuggets” – to hear Weil Gotshal’s Rick Climan, Kaye Scholer’s Joel Greenberg and McDermott Will’s Wilson Chu impart a whole lot of practical guidance!

– John Jenkins

In an appraisal case decided just last week, the Delaware Chancery Court provided another reminder that – even with Corwin providing a path for post-closing business judgment review – process still matters.  In Dunmire v. Farmers & Merchants, Chancellor Bouchard was skeptical about the seller’s process:

To start, the Merger was not the product of an auction. No third parties were solicited and no confidential information was disseminated to any other potential buyer. F&M explored the Merger at the instance of the Snyder family, which controlled both F&M and NexTier at the time of the Merger and stood on both sides of the transaction. Although a Special Committee of the F&M board was formed for the ostensible purpose of establishing an independent group to negotiate on behalf of F&M’s minority stockholders, the record does not inspire confidence that the negotiations were truly arms-length.

The Chancellor identified shortcomings in both the composition and functioning of the Special Committee, and noted that the transaction was not subject to a majority of the minority condition.  As a result of these & other process flaws, Chancellor Bouchard gave no weight to the $83 merger price in the appraisal proceeding – and awarded the dissenting shareholders $91.90 per share.

– John Jenkins

Acquisitions can have a significant impact on a company’s direct and indirect cost rates, and on the cost of performing its contractual obligations. This Shepard Mullin blog discusses the challenges that companies face when it comes to the allocation & allowability of M&A costs under government contracts.  Here’s an excerpt:

The regulations applicable to the allowability and allocability of costs under government contracts include specific requirements regarding the treatment of costs that are likely to arise from mergers and acquisitions.  The requirements are scattered throughout the Federal Acquisition Regulation (“FAR”) Cost Principles and the Cost Accounting Standards (“CAS”).  Some are complex.  Others are impenetrable.  Government auditors are instructed and trained to scrutinize these costs with a critical eye.

Failure to appropriately navigate this regulatory thicket can result in consequences ranging from disallowance of costs to False Claims Act investigations.

– John Jenkins

Earlier this year, some commentators questioned whether the Delaware Chancery Court’s traditional use of letter opinions to address preliminary and procedural matters was being gradually jettisoned in favor of greater reliance on oral “bench rulings” – which are in turn becoming increasingly substantive.

The M&A Law Prof Blog summarized media reports about the potential shift:

For many years the courts have admonished us all not to pay attention to transcript rulings as they do not create precedent. Sure, that makes sense if the rulings are off the cuff rulings from the bench. But there appears to be “an increasingly structured approach by the Court in rendering oral rulings, including recitations of underlying facts and explicit citation to legal authorities — and may even resolve legal questions that are more than simply ministerial, or intended to keep litigation moving forward.”

There’s no denying that bench rulings have become more substantive in recent years — for example, see this White & Williams memo on the chancery court’s 2014 bench ruling in Swomley v. Schlecht — but why we should care?  Here’s one reason:

One has to pay for transcripts while letter opinions and memo opinions are free as part of the public record. Also, transcripts don’t get hoovered up in many of the electronic legal databases.

This suggests that the increased use of bench rulings could make the already “inside baseball” world of Delaware corporate litigation even more insular.  Is this kind of a shift happening?  Well, if changes in the number of letter opinions are a fair barometer, I think the jury’s still out.  I recently visited the Chancery Court’s website, and – based on a word search for “letter opinion” – here’s what I found:

– 58 letter opinions were issued through September 30, 2016, compared to 78 through the same date last year.

– An average of 92 letter opinions per year were issued from 2009 through 2015. In 2016, the Court is on a pace to issue 77 letter opinions.

That looks like a pretty dramatic drop.  But the analysis isn’t as straightforward as these numbers make it appear.

There’s a lot of volatility year-to-year in the number of letter opinions that the Chancery Court issues, so a single year’s drop – even a significant one – isn’t necessarily predictive.  For example, in 2012, it issued only 70 letter opinions, while that number jumped to 122 the following year.

Furthermore, from 2009 – 2015, letter opinions comprised between 35% and 45% of the total opinions & orders the Court issued each year.  Although 2016 has seen a sharp drop in the number of letter opinions, total opinions & orders are down sharply as well.  As a result, letter opinions still represent 41% of the total opinions & orders issued through September 30, 2016 – well within historical averages.

There’s a very significant missing piece to the analysis – what I don’t have any data on are the number of bench rulings themselves.  But overall written opinions are down significantly, and bench rulings might be taking up some of the slack.

– John Jenkins

This Fox Rothschild blog flags the Delaware Chancery Court’s opinion in the latest iteration of the Dell appraisal case – & says that it may serve as a roadmap for determining fee awards in future appraisal proceedings. Here’s an excerpt:

In re Appraisal of Dell Inc. provides a useful discussion of the Court of Chancery’s calculation of a fee award in an appraisal case based on the benefit conferred to the dissenting stockholders. The decision discusses when expenses should be deducted from the benefit conferred before calculating the fees, and other issues of import. This opinion will undoubtedly serve as a roadmap for future fee awards granted in appraisal cases.

– John Jenkins

Davis Polk’s Ning Chiu recently blogged about a Harvard study that provides empirical data on the impact of universal proxies on proxy contests:

A paper by the Harvard Law School Program on Corporate Governance offers the first empirical analysis of proxy contests and the potential impact of universal proxies, and concludes that a universal proxy rule is unlikely to strongly favor either companies or dissidents.  In fact, it would have slightly favored management nominees if it had been used at the proxy contests reviewed in the paper.

The use of separate proxy cards by contestants limits shareholders’ ability to select the candidates of their choice. As a result, the study concludes that 22% of proxy contests at large U.S. companies between 2008 & 2015 may have had “distorted outcomes” – meaning that another candidate may have been elected if universal proxies were used:

Of the 17 contests examined, the study shows that 14 involved distorted choices between sides, and that eight favored dissidents.  This means, using the study’s assumptions, that a universal proxy rule would have instead favored management nominees in those cases.  The imbalance is slight, however, which leads the study to conclude that universal proxies are unlikely to overwhelmingly benefit one side or the other. In 11 of the 17 contests, there may have been a distorted choice within sides, and a number of those seem to involve either the CEO or the chairman.

One limitation of the study is that it did not cover small cap companies – which is where most of the action is when it comes to proxy fights.

– John Jenkins

According to Dykema’s “12th Annual M&A Outlook Survey,” most dealmakers think M&A activity will tread water during the upcoming year. Survey respondents believe that the global M&A market is leveling off in 2016, & nearly half said they expect the market would see no significant change in the coming year.

Here are some other highlights:

– Just 28% of respondents identified their outlook on the U.S. economy as positive, down from 48% in 2015.  But, as with the general M&A outlook, most respondents moved to a neutral outlook – up to 54% compared with 37% last year.

– 49% of respondents said availability of capital was most responsible for fueling current M&A activity, essentially the same percentage as in 2015. 25% credited favorable interest rates, a 7 percentage point increase from 2015, despite the Fed’s December 2015 rate increase.

– Respondents said U.S. financial buyers had the most influence on U.S. deal valuation over the past 12 months – the first time strategic buyers weren’t seen as the most influential since the 2008 survey.

– 68% of respondents expect an increase in M&A activity from privately owned businesses, down from 72%t last year. The 4% difference mirrors the drop in the percentage of respondents predicting M&A growth this year.

– 70% of respondents said they expect an acquisition involving their company or one of their portfolio companies in the next 12 months, up from 67% in 2015. 48% percent expect a sale, compared with 42% last year.

– Aging business owners seeking to sell were again seen as the top driver for growth in M&A activity from privately owned businesses.

I recently blogged about Cleary’s thoughts on pre-closing privacy issues.  Now, Cleary’s followed up with this blog addressing risks associated with sharing & transferring personal data to a buyer, and the buyer’s post-closing use of that data.  Here’s an excerpt discussing the risks of sharing personal data between signing & closing:

M&A lawyers are not always aware of the risks associated with disclosure of personal data between signing and closing.  In particular, M&A agreements often contain a clause providing for access to books and records between signing and closing, enabling the purchaser to request certain types of data it reasonably needs, including for purposes of integration planning.

But it is a mistake to assume that because a deal is signed, personal data relating to the target business may be shared freely between the purchaser and the seller.  While some M&A agreements state that the seller need not provide access to information prior to closing if providing such access would be in violation of applicable law, such a carve out is not necessarily applied in practice and, in any case, understanding whether a particular disclosure is in violation of privacy laws may be difficult.

– John Jenkins

This Thompson Hine memo offers suggestions for making working capital adjustment provisions in purchase agreements less ambiguous & reducing the potential for post-closing disputes.  Here’s the intro:

While most purchase agreement provisions will not be read after the closing of an M&A transaction, there is one provision that is sure to be revisited: the working capital adjustment. The purpose of a working capital adjustment is to ensure that the target company has an agreed upon level of working capital at closing and to discourage the sellers from manipulating working capital prior to closing.

The memo provides advice on definitional provisions, effective use of pre-closing estimates, dispute resolution & working capital escrows.

– John Jenkins

This November-December issue of the Deal Lawyers print newsletter was just posted – & also sent to the printers – and includes articles on:

– Disclaimers & Limits on Claims Outside of the Contract
– Due Diligence: Patient Protection & Affordable Care Act Considerations
– FCC Licenses: The Forgotten Stepchildren of M&A
– Reverse Break-Up Fees: Move Along, Nothing to See Here
– The Takeaways: Two Chancery Decisions on Informed, Uncoerced Stockholder Approval

Remember that – as a “thank you” to those that subscribe to both DealLawyers.com & our Deal Lawyers print newsletter – we are making all issues of the Deal Lawyers print newsletter available online. There is a big blue tab called “Back Issues” near the top of DealLawyers.com – 2nd from the end of the row of tabs. This tab leads to all of our issues, including the most recent one.

And a bonus is that even if only one person in your firm is a subscriber to the Deal Lawyers print newsletter, anyone who has access to DealLawyers.com will be able to gain access to the Deal Lawyers print newsletter. For example, if your firm has a firmwide license to DealLawyers.com – and only one person subscribes to the print newsletter – everybody in your firm will be able to access the online issues of the print newsletter. That is real value. Here are FAQs about the Deal Lawyers print newsletter including how to access the issues online.

– John Jenkins