Wow! That was fast. I had a bunch of blogs ready to run leading up to President Trump selecting a SEC Chair. Just yesterday, I blogged about Carl Icahn providing input. And now Sullivan & Cromwell’s Jay Clayton has been tapped. Jay won’t likely need to clear much of a hurdle during his Senate confirmation hearings – but given Trump’s posturing during his campaign, he will need to sit through questions about his ties to Goldman Sachs – including his wife’s job there (as noted in this Reuters article).
Some of other candidates also were from big law firms – this article notes that Trump met with Gibson Dunn’s Debra Wong Yang. But Debra doesn’t do deals. Jay’s bio indicates he does more than deals, but he’s primarily a deal guy. You have to go a ways back to find the last SEC Chair who was a deal lawyer – Chris Cox (who was a deal lawyer before he became a Congressman).
And it’s been a long time – a real long time – since the last SEC Chair was plucked directly from a law firm. Of course, that background is quite common for a Division Director. Richard Breeden had been a law firm lawyer, but he had two gigs between firm life & becoming Chair. The closest comparison is Ray Garrett, Jr., who left a Chicago firm to become SEC Chair. Garrett had been head of Corp Fin a few years before he left his firm to lead the Commission in the early ’70s.
It’s also been a long time since someone was appointed who wasn’t previously publicly visible (this MarketWatch article notes that the wire services don’t even have Jay’s pic on file). Let me review the Chairs over my career: Shad, Breeden, Levitt, Pitt, Donaldson, Cox, Schapiro and White – all had been in the public eye before ascending to SEC Chair. Ruder is the exception here. But I’m not suggesting that visibility is some sort of SEC Chair qualification. It isn’t.
Some folks asked me yesterday what was “normal” for a SEC Chair. There really isn’t a standard for the job – the backgrounds of former SEC Chairs are all over the lot. A few have worked at the SEC before. Chair Levitt wasn’t a lawyer. Chair White was a prosecutor. Chair Ruder was an academic. Chair Cox was a Congressman. And it’s not the sort of appointment where you read tea leaves from past writings. Obviously, someone’s background plays a role – but the biggest indicator of what a Chair will do is looking at the general direction the President points to…
This K&L Gates memo highlights a DC federal court’s decision to reject claims that a joint defense privilege protected certain sensitive emails exchanged by the buyer and seller in connection with a proposed merger. The court found that the emails – which were sought by the Antitrust Division of the DOJ – did not satisfy the standards for the joint defense privilege.
The court found that documents expressing disagreements between the two companies about how the merged entities would operate were not privileged because they were not related to the parties’ common interest or made in furtherance of that interest. The memo points out that the case demonstrates the need for the parties to joint defense agreements to appreciate their limits. Here’s an excerpt:
The privilege not to disclose shared information between parties to a joint defense agreement is limited to communications: (1) on subjects about which the parties have a common interest; (2) relating to an actual or potential litigation; (3) related to the parties’ common interest; and (4) made in furtherance of that common interest. Shared communications that don’t meet these criteria are potentially subject to disclosure despite the existence of a joint defense agreement.
Be sure to check out our “Privilege Issues in M&A” webcast on January 19th for more on this important topic.
This Arnold & Porter memo suggests that the potential consequences of the US election, together with the fallout from the Brexit vote & political turbulence in Europe, may result in increased uncertainty in deal markets. Since that’s the case, it may be time to take a hard look at deal termination triggers – including MAC clauses. While acknowledging that a Delaware court has never found that a MAC clause was triggered, the memo reviews the case law and contends that parties claiming that a MAC has occurred have some arrows in their quiver:
But if nothing else, recent political events at home and abroad may perhaps remind us never to say never—the fact that there has never been a successful MAE claim does not mean that there never will be one, and a careful reading of IBP, Cooper, and Osram may provide M&A lawyers with useful arguments in uncertain times.
Just how impregnable a wall the Delaware judiciary has created when it comes to MAC clauses may soon be put to the test – with Abbott Laboratories filing a lawsuit in Chancery Court last month seeking to terminate its deal with Alere on the basis of a MAC, and Verizon saber-rattling with Yahoo! over potential MAC issues.
This PwC blog offers strategies for avoiding post-closing purchase price disputes in M&A transactions. Specific recommendations include:
Make the closing date work for both parties. Setting the closing date at the end of the month or end of the quarter makes for an easier transition from seller to buyer. By setting the closing date at the month or quarter end, you can help mitigate the monthly cut-off concerns which often lead to disputes.
Dot your i’s and cross your t’s. The more specific the parties can be when drafting the agreement, the lower the likelihood there will be a disagreement over the terms of the contract.
Avoid double trouble. Be careful about having specific inclusions or exclusions for selected accounts such as cash, debt, or income taxes, while at the same time allowing for other adjustments, such as net working capital, that may end up overlapping.
Count your chickens. Buyers naturally want to ensure that all of the assets they are paying for are there when the transaction closes, and that they are valued appropriately. Parties should also agree on procedures that will be used to verify the existence of certain high-value property, plant, and equipment.
Decide who sees what. Parties should ensure adequate language is included in the purchase agreement to mitigate the risk of one party not having sufficient access to books, records, and key personnel. Language should be specific regarding the ability to obtain electronic files, such as the general ledger system or other native files.
Decide what is material. If the contract is silent regarding when a dispute is considered material, then anything is fair game.
This Cleary blog notes that recent amendments to Section 251(h) of the DGCL – which provides a streamlined process for second-step mergers following tender offers that satisfy its conditions – may increase the attractiveness of tender offers to private equity buyers. This excerpt summarizes the key changes to the statute:
Section 251(h) now expressly exempts “rollover stock”, which is broadly defined to include shares transferred to the acquiror or its affiliates pursuant to a written agreement in exchange for equity in the acquiror or its affiliates, from the requirement in Section 251(h) that all shares not purchased in the tender offer be converted in the second-step merger into the same consideration as was offered to tendering stockholders.
Additionally, the amendments make clear that all shares of rollover stock contributed to the acquiror and its affiliates prior to the effectiveness of the merger, including shares contributed after the tendered shares are accepted for purchase, will count for purposes of determining whether the acquiror owns the minimum number of shares necessary to allow the second-step merger to proceed without a vote.
Private equity buyers often want the target’s senior executives to roll over their equity as part of a deal. These amendments allow the Section 251(h) requirements to be satisfied through a rollover that takes place after the tender offer. This facilitates a management equity rollover by eliminating the need to work around the SEC’s “best price rule” – which requires that the same consideration per share be paid in tender offers.
This Dentons memo points out that 2016 has been a robust year for foreign direct investment in the United States – but says that the US election results have thrown continued growth in that area into question. In particular, the memo notes the potential implications of changes in US policy on Chinese investment:
China has been the number two investor (behind Canada) in terms of inbound M&A for the year so far. In recent years it has favored investing in developed nations, viewing them as more attractive due to their stable and open economies. However, the rise of right-leaning populism in the US and Europe in the past year may prompt China devote more of its FDI to emerging, liberalizing economies—particularly those in Asia, such as Singapore, Vietnam and Malaysia.
With China already facing a sluggish domestic economy, tariffs enacted by the West could cause a substantial fall in the nation’s GDP due to its current reliance on exports; this could theoretically discourage Chinese investors from engaging in FDI at all. Considering that China is a hub for outbound FDI, we could see a slowing of the global M&A market altogether.
Nixon Peabody recently posted its 2016 MAC Survey. Here’s an excerpt:
This year’s survey found that although the economy has shown many signs of marked improvement since the 2007-2008 financial crisis, the continued widespread inclusion of elaborate MAC clauses indicates the clauses have now become a permanent fixture in M&A deals.
For 15 years, Nixon Peabody has tracked the evolution of Material Adverse Change clauses in acquisition agreements. This year’s survey suggests the uncertainty surrounding the swearing in of the first new president since the financial crisis is weighing on the minds of bidders, targets, and their counsel. The increase in the exception for MAC changes arising from larger political conditions seems likely attributable to questions surrounding the effects of Brexit and the U.S. election.
The MAC Survey is particularly timely this year – as this Deal Professor column notes, Abbott Laboratories & Alere are currently battling in Chancery Court over a MAC clause.
This Fried Frank memo discusses President Obama’s recent decision to block a pending deal that would have resulted in the acquisition of the US business of Aixtron AG, a German semiconductor company, by a Chinese investment fund. The President’s action was taken upon the recommendation of The Committee on Foreign Investment in the United States, or “CFIUS” – and represents only the third time in history that a deal has been blocked by an American President on national security grounds.
This excerpt highlights key takeaways about the trends & features of the CFIUS review process that can be drawn from the decision to block the Aixtron deal:
First, CFIUS has jurisdiction to review the acquisition of a non-U.S. company if it involves a U.S. subsidiary or other U.S. business. Second, CFIUS remains focused on investments in the high-tech sector – and semiconductors in particular – especially when the company’s technology has military applications. Third, CFIUS scrutiny is heightened in the case of Chinese investments, as all three presidential actions under CFIUS have involved Chinese acquirors. We expect these trends to continue in the next administration, and that CFIUS’ jurisdiction and activity may even expand.
This Sullivan & Cromwell memo addresses the Aixtron situation, & also discusses possible changes on the horizon for CFIUS review – including broadening the factors to be considered by CFIUS beyond national security to include economic & other considerations.
Francis Pileggi recently blogged about the Chancery Court’s decision in IAC Search v. Conversant – where the Court held that a disclaimer of extra-contractual representations in a purchase agreement was sufficient to preclude a fraud claim. This excerpt summarizes the reasons for the Court’s dismissal of the case:
Resolution of the claim turned on the application of Delaware case law that addresses anti-reliance clauses in purchase agreements. A key fact that the fraud claim was based on was the accuracy of information provided during due diligence that the parties chose not to incorporate into an express representation or warranty in the agreement.
A specific provision in the agreement provided that the seller disclaimed making any extra-contractual representations. Likewise, the buyer acknowledged that the seller did not make any representations that were not expressly included in the agreement. In addition, the parties included in their agreement a standard integration clause that defined the universe of writings that made up the parties’ agreement.
Here’s some shameless self-promotion – if you’re interested in reading more on this topic, I’ve posted a long-form blog over on “John Tales” discussing Delaware’s approach to contractual disclaimers.