DealLawyers.com Blog

This blog by “The Activist Investor” entitled “What Activist Investors Should Know About the ValueAct HSR Lawsuit” is a good companion for these memos posted in our “Antitrust” Practice Area.

Here’s some of the findings from Herbert Smith Freehills’ new study on deal-making:

– 90% of US respondents are planning to make an acquisition over the next three years, and 71% say they are likely to make 2 or more.
– The majority of respondents (68%) say that it will likely be a major deal (with an increase of at least 5% in overall revenue).
– 98% of respondents say at least one acquisition will be a cross-border deal, and 50% say they are likely to conduct at least 2 or more cross-border deals.
– Increasing market share is the strategic driver for 20% of US dealmakers, the largest share.
– Globally, three-quarters of businesses indicate recent market volatility has either increased their appetite for M&A or had no impact on their plans for the next three years*
– Antitrust tops the list of challenges faced by companies doing deals with anxieties over data protection and cyber security on the rise

It is with great sadness that I say farewell to Phil Stamatakos. I knew Phil for over 30 years, since I was his pledge trainer at our fraternity at the U of Michigan. Phil was one of the kindest souls I have ever met. He was a rare breed in college – already mature & compassionate. I was so happy to find that we were in the same profession several years later. He was a kind & loving husband and father, just like you knew he would be when you met him as a teenager. We love you & miss you Phil!

Just loving the Cooley’s new “M&A Blog.” Here’s an excerpt from a Cooley blog about a comparison of the number of CFIUS filings between 2014 & 2013:

The new data released by CFIUS reveal that 2014 saw a dramatic jump in the number of cross-border M&A and other investment transactions reported to CFIUS as compared to 2013 (the Committee received 147 transaction Notices in 2014, up from 97 deals reported in 2013). For the third year in a row, Chinese acquirers were involved in more reported transactions than investors from any other country.

Here’s the latest set of league tables from MergerMarket that list the law firms that most often represent companies in deals, broken out on a global and regional basis…

Following up on my blog last week about the IRS and Treasury issuing new temporary regulations & final regulations that address inversion transactions and certain post-inversion transactions, here’s an excerpt from this Cleary Gottlieb memo (& see these other memos posted in our “Tax” Practice Area):

Recently released proposed regulations that would classify certain intragroup loans as equity for U.S. tax purposes could have very significant consequences for M&A transactions, private equity investments and restructurings. If adopted in their present form, the proposed regulations would eliminate strategies that have been widely used in cross-border transactions. However, the proposal could also have unpredictable consequences for the day-to-day funding practices of both U.S. and foreign-owned multinational groups. Moreover, the proposal would impose burdensome documentation and substantiation requirements on intragroup loans as a necessary condition to having the loans respected as debt for tax purposes (regardless of whether as a legal and economic matter the loans are debt).

Here’s news from this Wachtell Lipton memo:

The Superior Court of California for the County of Los Angeles has added to a growing judicial consensus that forum-selection bylaws adopted in conjunction with public-company mergers will be enforced to direct transaction-related litigation to a single board-designated forum. RealD Inc. is a Delaware-chartered, California-headquartered corporation. When the company’s board of directors approved a merger agreement with Rizvi Traverse Management LLC, a California-based private equity firm, it also adopted a bylaw requiring that any fiduciary-duty litigation involving the company be brought in the courts of Delaware.

A stockholder plaintiff nevertheless sued in California, claiming that RealD’s directors breached their fiduciary duties in approving the merger and that other parties aided and abetted that breach. Arguing that California was a more convenient forum, that no duplicative litigation was pending in Delaware (or anywhere else), and that claims against third-party defendants should not be subject to the RealD bylaw, the plaintiff urged the court to ignore the bylaw and allow his case to proceed. The California court refused. Finding that “litigating in Delaware will be reasonable and fair” and that “Delaware courts have special expertise in corporate matters,” the court rejected the plaintiff’s assertion that confining his suit to a Delaware forum would be inequitable.

Forum-selection bylaws have proved resilient against attack, withstanding challenges in New York, Texas, California and several other jurisdictions. Deal planners should continue to consider and refine the state of the art in such bylaws, which are becoming an established tool to reduce the risk of opportunistic stockholder litigation.

As explained in this Richards Layton memo, this year’s proposed amendments to Delaware’s General Corporation Law address two concerns associated with appraisal rights under Section DGCL §262 (also see this Delaware Law Weekly piece). Here’s the related excerpt:

Section 262 of the DGCL, which governs appraisal rights, would be amended in two principal respects. First, the proposed amendments would seek to limit de minimis appraisal claims in certain public company transactions. Second, the proposed amendments would give surviving corporations the option to pay each stockholder entitled to appraisal at an earlier stage of the appraisal proceeding as a means of cutting off the accrual of interest under the statute with respect to the amount paid.

De Minimis Exception

To implement the first of these changes, the proposed amendments would provide that the Court of Chancery shall dismiss an appraisal proceeding as to all stockholders otherwise entitled to appraisal rights, unless (1) the total number of shares entitled to appraisal exceeds 1% of the outstanding number of shares of the class or series entitled to appraisal; (2) the value of the consideration for such total number of shares exceeds $1 million; or (3) the merger was effected as a “short-form” merger under Section 253 or Section 267 of the DGCL. The amendment is designed to mitigate the risk that a plaintiff will use the appraisal process solely to gain leverage in a settlement negotiation. That is, the amendment is designed to prevent stockholders from demanding an appraisal in cases where the number of shares (or the value of those shares) is minimal, but the surviving corporation may be inclined to settle the claim to avoid the litigation costs attendant to the appraisal proceeding. As noted above, however, “short-form” mergers would not be subject to the de minimis carve-out, because appraisal may be the stockholders’ only remedy in such a merger. In addition, the de minimis carve-out would apply only in cases where the shares as to which appraisal is sought were listed on a national securities exchange immediately before the merger or consolidation.

In connection with the foregoing changes, the proposed amendments would provide that, where the corporation has adopted a provision in its certificate of incorporation granting appraisal rights in circumstances where they would not otherwise exist (e.g., in connection with amendments to the certificate of incorporation or sales of all or substantially all of the corporation’s assets), an appraisal proceeding brought thereunder will be dismissed if the de minimis carve-out would apply.

Tender of Payment

To implement the second of the principal changes to Section 262, the proposed amendments would modify Section 262(h) to provide corporations the option of limiting the accrual of statutory interest on appraisal awards by making an early payment to the appraisal claimants. Section 262(h) currently provides that, unless the Court of Chancery determines otherwise for good cause shown, interest on the amount that is determined to be the “fair value” of appraisal shares will accrue from the effective date of the merger through the date of payment of judgment, will be compounded quarterly, and will accrue at 5% over the Federal Reserve discount rate (including any surcharge) as established from time to time during that period. Since payment of “fair value” in an appraisal proceeding is not made until such amount is determined after trial, interest accrues on the full amount of the award, even if the fair value is ultimately determined to be the same as or less than the consideration paid in the merger. The proposed amendments would permit the surviving corporation to pay the appraisal claimants, at any time before the entry of judgment in the proceeding, a sum of money that it determines to be appropriate.

After making the payment, interest would only accrue upon the sum of (1) the difference, if any, between the amount so paid and the fair value of the shares as determined by the Court of Chancery, and (2) interest theretofore accrued, unless paid at that time. Any surviving corporation electing to make such a payment would be required to make the payment to all of the appraisal claimants, unless the surviving corporation has a good faith basis for contesting a particular claimant’s entitlement to an appraisal of such claimant’s shares, in which case the surviving corporation may elect to make payment only to those stockholders whose entitlement to appraisal is uncontested. The amount that the surviving corporation pays would not give rise to any inference as to the fair value of the shares as to which an appraisal is sought.

Here’s news from this Sullivan & Cromwell memo:

Yesterday evening, the Internal Revenue Service (the “IRS”) and the Treasury Department (the “Treasury”) issued new temporary regulations and final regulations that address inversion transactions and certain post-inversion transactions.

The most notable new anti-inversion rule in the temporary regulations addresses so-called “serial inversions”. This rule is intended to address a case where the “foreign acquiring corporation” previously acquired one or more domestic entities—in effect making the foreign acquiring corporation larger and more attractive as an inversion counterparty for a larger domestic entity. Under the new rule, in general, stock of the “foreign acquiring corporation” will be disregarded (for the purposes of determining the relative sizes of the domestic entity and the foreign acquiring corporation) to the extent of the value of the domestic acquisitions closed within three years of signing the new deal. This makes it more likely that the domestic entity’s shareholders will be treated as owning either at least 60% or at least 80% of the combined company and causing the combined company to be subject to consequences of being an “inverted” company. This rule will generally apply to transactions that close on or after April 4, 2016.

The other rules set forth in the Temporary Regulations are generally consistent with guidance previously issued in Notice 2014-52 and Notice 2015-79 and will generally apply as described in the original pronouncements.

In addition, yesterday evening, the IRS and the Treasury issued a notice of proposed rulemaking that, if finalized, will cause very significant changes in the structuring of debt capitalization of U.S. subsidiary groups owned by foreign corporations (and of foreign subsidiaries owned by U.S. corporations). The proposed regulations provide that certain related party debt would be recharacterized as equity, or as part-debt and part-equity, if, for example, such debt were issued to finance a related party acquisition or such debt was distributed to a related corporate shareholder. Although the main purpose of the proposed regulations may have been to negate one of the main tax benefits of an inversion, their reach extends far beyond the context of inversions and will have an impact on the tax planning of multi-national corporations and investments. The proposed regulations will apply to debt issued on or after April 4, 2016; however, such debt will retain its characterization as debt until 90 days after the final regulations are published.

As noted in these memos posted in our “Private Equity” Practice Area, a federal district court in Massachusetts held – on remand from the First Circuit – in Sun Capital Partners III v. New England Teamsters & Trucking Industry Pension Fund (D. Mass. March 28, 2016) that non-parallel private equity funds with the same sponsor are jointly & severally liable for the multi-employer pension plan withdrawal liability of a portfolio company in which they both invest under ERISA.