This Cleary blog provides guidance on how to address the risks associated with a seller’s pre-closing privacy-related liabilities. Here’s an excerpt discussing why a buyer shouldn’t simply rely a “compliance with law” rep to address privacy matters:
Practitioners often rely on a general “compliance with laws” representation to address privacy-related risks; however, such a representation does not always provide sufficient protection for a purchaser against privacy and data security risks. The “compliance with laws” representation is often heavily qualified and covers a limited period of time (e.g., the target’s operation during the year prior to the transaction), which may not be appropriate for privacy matters. The representation also fails to cover certain issues of concern in the privacy context.
Specific privacy-related rep are a better approach. In addition to compliance with privacy laws, these reps can address contractual obligations & other data security measures – such as industry-standard security measures, disaster recovery, and backup equipment and facilities – that are not required by law or contract. They can also be used to address a range of other issues, including threatened enforcement actions & unauthorized data access, as well as to compel disclosure of the seller’s privacy policies & practices.
This Dechert memo notes that the DOJ & FTC continue to take a hard look at antitrust issues in M&A – as a result, deals & lawsuits are taking longer to resolve. Here are some highlights:
– In the first three quarters of 2016, there were 24 significant merger investigations, which is on pace to challenge the record of 37 set in 2015.
– Significant merger investigations through Q3 2016 lasted 9.7 months on average – on par with 2015, but more than one third longer than from 2011 to 2013.
– FTC & DOJ filed three complaints in Q3 2016 & a total of five complaints so far this year, also on pace to challenge 2015’s record level of seven complaints.
– Antitrust merger litigation is taking even longer, with 147 days between complaint and the start of trial and 27 days for trial, up 47% and 125%, respectively, from cases filed in 2015
Parties to the hypothetical average litigated transaction now have to plan on a 17 month fight for their deal – maybe more if current trends continue.
This Dechert memo reviews the position of courts in Delaware, New York & California on a buyer’s ability to hold a seller liable for a breach the buyer knew about before signing. Deal lawyers refer to this practice as “sandbagging,” and the three most important US commercial jurisdictions don’t see eye-to-eye on it. Here’s the takeaway:
Delaware law and New York law may be preferable to buyers as the governing law of an acquisition agreement because in these jurisdictions, a buyer is generally not required to show reliance to claim for a seller’s breach of a representation and warranty. On the other hand, sellers may prefer California law as buyers would be required to demonstrate reliance on the seller’s representation and warranty to make a breach of warranty claim against the seller.
Of course, parties can always bypass these default rules & negotiate for a pro-sandbagging or an anti-sandbagging clause in the acquisition agreement itself.
This Fox Rothschild blog discusses the Chancery Court’s decision in Frechter v. Cryo-Cell International, where it awarded a “mootness” fee in a case involving faulty language about removal of directors in a corporate bylaw. This excerpt summarizes the issue:
The bylaw provision at issue indicated that directors could be removed “for cause” at a “special meeting” of stockholders. The plaintiff asserted that under Section 141(k) of the Delaware General Corporation Law, stockholders have the right to remove directors without cause, and thus the provision was unlawful.
After a motion for summary judgment was filed, the company amended its bylaws to remove the language, which mooted the case. The court found that the bylaw was misleading – but since the potential harm was mostly theoretical & there was no proxy contest pending, the court awarded a fee of only $50,000.
In recent years, many public companies have moved from staggered boards – where removal only for cause is okay under Delaware law – to a single class of directors, where it’s not. It was only in 2015 that the Chancery Court invalidated bylaw provisions like the one at issue here, so the case is a reminder for companies that recently de-classified their boards to check their bylaws. It’s also a reminder that it will be cheaper to address any flawed provisions that companies find before they’re in the heat of a proxy contest.
Yesterday, the SEC posted a Sunshine Act notice for an open Commission meeting to propose universal proxy ballots next Wednesday, October 26th. This controversial rulemaking has been in the works for years, with the House of Representatives going so far to vote a few months ago to stop the rulemaking. Check out this piece on page 5 of the November-December 2014 issue of the Deal Lawyers print newsletter entitled “The Quest for Universal Ballots: Might Boards Benefit Too?”…
In addition, the SEC will vote to adopt rules to facilitate intrastate & regional offerings (amendments to Rule 147 & 504) – and to repeal Rule 505 of Regulation D…
This Cooley blog notes that the FTC & DOJ are increasingly challenging mergers on the theory that they may harm innovation. Here’s an excerpt:
Most recently, Lam and KLA-Tencor abandoned their proposed $10.6 billion merger which would have combined a manufacturer of machines used to inspect circuitry on computer chips and the largest maker of machines that etch away materials on silicon wafers used to make computer chips in the face of DOJ pressure. DOJ said in a press release that the proposed transaction presented “concerns about the ability of the merged firm to foreclose competitors’ development of leading edge fabrication tools and process technology on a timely basis.”
Potential loss of innovation was also a major focus of the DOJ in its lawsuit challenging the $34 billion Halliburton-Baker Hughes merger, which the companies ultimately abandoned.
Under the recent Corwin decision, a fully-informed vote by uncoerced and disinterested stockholders to approve a merger invokes the business judgment rule and effectively precludes almost any claim the merger was improper. Here, the alleged disclosure violations concerned (i) information regarding a competing bid, (ii) potential conflicts involving one director, and (iii) the banker’s compensation and potential conflicts.
Vice Chancellor Slights rejected each of the alleged disclosure violations – and explained when proxy disclosures are sufficient to invoke Corwin. He held that Corwin applied & that the board’s decision was protected by the business judgment rule.
This Cleary blog discusses a recent Delaware case – In re: Books-a-Million Stockholders Litigation – involving a sale of a company to its controlling stockholder (we’re posting memos on this case in our “Fiduciary Duties” Practice Area). The deal was structured to comply with MFW’s standard for business judgment rule review, but the plaintiffs contended that the special committee’s actions made MFW inapplicable. Here’s an excerpt describing the gist of the allegations:
The plaintiffs alleged that the committee’s decision to recommend the transaction was irrational and in bad faith because (i) a third party had indicated an interest in acquiring BAM at a price higher than that offered by the family, (ii) the committee determined that pursuing the third party offer was not feasible because the family (as is normal in these types of situations) indicated it was unwilling to sell its controlling interest in BAM and (iii) the committee nonetheless proceeded to negotiate with the family and ultimately recommend that the family’s offer be accepted even though the offered price was less than that proposed by the third party.
Vice Chancellor Laster rejected these arguments & applied MFW to the board’s decision. He reiterated Delaware’s long-standing position that a controlling stockholder is under no obligation to sell – and doesn’t breach any duty by offering a buyout at a lower price than a third party might offer.
This Cooley blog notes that a federal court recently refused to dismiss claims that a buyer breached its obligations to use “diligent efforts” to hit milestones for payment of “contingent value rights” issued to an acquired company’s shareholders. The blog also flags an important issue for sellers to keep in mind if earn-outs – or CVRs – are part of the deal:
According to recent case law in Delaware, buyers do not have an independent obligation under the implied covenant of good faith and fair dealing to try to maximize value or pay an earn-out if a contract’s plain language does not require it to do so, which suggests that well-advised sellers should include express efforts covenants in the acquisition agreement.