– 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.
This article from Scott & Scott’s Keli Swann reviews IP liability considerations in M&A transactions. Here’s an excerpt about the consequences of a purchaser’s decision to retain the seller’s information technology assets:
If the purchaser chooses to retain the IT assets, it assumes the responsibility of ensuring that all software complies with the relevant licensing agreement or the purchaser risks potential copyright infringement liability. There are a number of steps the purchaser should take to mitigate potential exposure, including conducting an internal audit of the new IT assets, evaluating any existing licenses, and determining whether any remediation is required in order to become compliant.
This Fredrikson & Byron memo points out that a decision to block your proposed deal isn’t always the biggest risk of DOJ & FTC antitrust review. As this excerpt demonstrates, sometimes that process opens up a completely different bag of snakes:
Thai Union Group P.C.L., owner of Chicken of the Sea, announced its acquisition of Bumble Bee in December 2014. A year later, under scrutiny from the Department of Justice, the deal was called off. In an ominous press release, the government stated, “Our investigation convinced us—and the parties knew or should have known from the get go—that the market is not functioning competitively today, and further consolidation would only make things worse.”
Though the deal was off, the government’s investigation was not. On December 7, 2016, the Department of Justice announced that a Bumble Bee executive had agreed to plead guilty to fixing prices for packaged seafood. According to the Department of Justice, the plea was “the first to be filed in the Antitrust Division’s ongoing investigation into price fixing” in the industry. Two weeks later, another Bumble Bee executive agreed to plead guilty to similar charges.
The lesson for transaction planners is to keep a broad perspective – most dealmakers looking at antitrust issues look at market shares and overlapping industries in order to assess potential areas of concern. That focus may turn out to be too narrow:
As Bumble Bee’s experience highlights, antitrust risk in mergers and acquisitions can take other forms. As part of merger investigations, government enforcers at both the Department of Justice and the Federal Trade Commission regularly solicit millions of documents from the merging parties and their customers and competitors. The attorneys and staff who review those documents are antitrust specialists. Agreements not to compete—whether for prices to end customers, bids for projects or hiring of employees—are bound to trigger concern.
Agreements like these are likely to constitute “red flags” to regulators & should be identified before a merger is signed. As the Bumble Bee situation shows, there’s potentially a lot more than a deal at stake.
Kevin LaCroix at “The D&O Diary” recently blogged about the continuing decline in the number of deal cases being brought in Delaware Chancery Court. Along the way, he raised an important question – weren’t exclusive forum bylaws supposed to prevent cases from being brought in other jurisdictions?
Kevin cited two different reasons why exclusive forum bylaws haven’t kept deal lawsuits in Delaware:
The first factor undermining the effectiveness of the forum selection provisions, and the reason for the plaintiffs’ lawyers recent pronounced preference for filing federal court lawsuits alleging violations of the federal securities laws (rather than state court lawsuits alleging violations of state law), is that Section 27 of the Securities Exchange of Act of 1934 gives the federal courts exclusive jurisdiction over actions alleging violations of the Act.
A company’s forum selection bylaw is ineffective with respect to action subject to the ’34 Act’s exclusive jurisdiction provision. The typical federal court merger objection lawsuit alleges that the company’s proxy materials omitted material information in violation of Section 14 of the Act and Rule 14-a-9 thereunder, and is subject to Section 27’s exclusive jurisdiction provision.
The second reason is a little more. . .well . . . Machiavellian:
As Fordham Law School Professor Sean Griffith points out in his January 2017 paper (here), defense counsel “must be seen as complicit in the out-of-Delaware dynamic because they have failed to exercise Exclusive Forum bylaws to bring the litigation back to Delaware.” As Griffith explains, the defendants’ failure to invoke the provision “must be seen as a revealed preference,” one that “demonstrates defendants’ continued interest in retaining the option of a cheap settlement and a broad release in an alternative jurisdiction.”
Some defendants are reportedly even going so far as to not bring the Trulia decision to the foreign court’s attention – even where Delaware law clearly applies. If so, Prof. Griffith suggests that the lawyers involved may be on shaky ethical ground:
Even if the settlement proponents have no interest in raising Trulia, perhaps they have some obligation to do so. The rules of professional conduct may obligate counsel under some circumstances to disclose authority contrary to their position even if that authority is not raised by opposing counsel.
The Delaware judiciary can’t be happy about these practices, and if Prof. Griffith is right on his assessment of the ethical issues, then it wouldn’t surprise me if one of these proposed settlements got very messy for the parties involved at some point in the future.