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.
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.
This Sheppard Mullin blog looks at how courts have interpreted the distinction between “best efforts” & “commercially reasonable efforts” clauses. Unfortunately, while deal lawyers often spill a lot of blood fighting over the precise terminology, it turns out that courts don’t necessarily look at these clauses in the same way that they do. Here’s an excerpt:
A survey of case law in Delaware and New York—two of the most popularly contracted-for jurisdictions in M&A transactions—demonstrates that little is clear when it comes to effort clause analysis. There are not generally bright-line or uniform requirements, and when parties do not define efforts terms, there is little certainty in how courts will interpret parties’ obligations.
In the absence of contractual provisions that serve as guidelines for measuring compliance with contracted-for efforts clauses, time spent fighting over “best” v. “commercially reasonable” efforts terminology is likely time wasted.
I’ve witnessed some M&A attorneys try to go part-time, and I have never seen it go very well or last very long. M&A attorneys are the quarterbacks of the deal, so even if you are only assigned to one deal – you have to be involved in all aspects of the deal and have to be on call 24/7 when that deal is moving quickly. And a deal often lasts for months. And there isn’t much piecemeal work that you can just pop in and do without staying intimately involved.
So in which practice area does part-time work best? You probably guessed already – the tax group:
The advantages of the tax group were a high billing rate (some of the very highest in the firm) and a lot of piecemeal, often not urgent, work. Sure, we “urgently” needed tax comments on most of our deals, and when clients are paying BigLaw rates, they almost always want a prompt response. But in my limited experience, the tax lawyers controlled their timelines more so than any of the other attorneys I worked with. There were few enough excellent tax attorneys that if they said – I will get to that tomorrow or next week – you often did not have much recourse.
Appraisal rights are getting more attention in public M&A deals & appraisal conditions appear to be making a bit of a comeback. This Cleary blog discusses these developments & provides some thoughts on how a buyer should approach negotiating appraisal conditions. Here’s the intro:
Appraisal rights in public M&A transactions have recently garnered greater attention, particularly in Delaware. As a result, more attention is being paid to the possible inclusion of a closing condition protecting the acquiror against excessive use of appraisal rights, and this should lead to careful attention being paid to the negotiation and drafting of any such conditions and related provisions. Discussed below are some of the reasons for this greater attention, and suggestions regarding negotiating and drafting such provisions.
The blog addresses key issues in negotiating appraisal conditions for both one-step mergers & two-step deals incorporating a tender offer under Section 251(h) of the DGCL.
This Cooley blog draws some lessons for dealmakers from the cybersecurity problems experienced in the Verizon/Yahoo! & Telstra/Pacnet transactions. Here’s an excerpt addressing the initial cyber risk assessment:
The acquirer should consider the cybersecurity exposure that the acquisition of the target may impose. To determine such exposure, a variety of techniques could be used in performing a review of the target. An overall cyber risk assessment early in the process can provide a general idea of the general cyber maturity of the target. In addition to a diligence review of the target’s cyber documentation (e.g., security policy, incident response policy, access control policy, etc.) by the acquirer’s legal team, a well-developed cyber questionnaire could provide a decent perspective on the cyber aspects of the target’s operations.
This Norton Rose blog also offers tips for buyers on how to approach cybersecurity due diligence.
Yesterday, the SEC proposed amendments to the proxy rules that would require parties in a contested election to use universal proxy cards that would include the names of all director nominees. The proposal would permit shareholders to vote by proxy for their preferred combination of board candidates – as they could do if they attended the meeting & voted in person. Here’s the 243-page proposing release.
The proposed rules would:
– Allow shareholders to vote for the nominees of their choice by requiring proxy contestants to provide shareholders with a universal proxy card including the names of both management & dissident nominees.
– Enable parties to include all nominees on their universal proxy cards by changing the definition of a “bona fide nominee” in Rule 14a-4(d).
– Eliminate the Rule 14a-4(d)(4)’s “short slate rule,” since dissidents would no longer need to round out partial slates with management’s nominees.
– Require proxy contestants to notify each other of their respective director candidates by specific dates.
– Require dissidents to solicit shareholders representing at least a majority of the voting power of shares entitled to vote on the election of directors
– Require proxy contestants to refer shareholders to the other party’s proxy statement for information about that party’s nominees and inform them that it is available for free on the SEC’s website.
– Require dissidents to file their definitive proxy statement with the Commission by the later of 25 calendar days prior to the meeting date or five calendar days after the registrant files its definitive proxy statement.
The SEC also proposed amendments to Rule 14a-4(b), which would require proxy cards to include an “against” voting option for director elections when that vote has a legal effect, & also enable shareholders to “abstain” in a director election governed by a majority voting standard.
The ability to provide a “withhold” voting option when an “against” vote has legal effect would be eliminated. In addition, the proposed amendments to Item 21(b) of Schedule 14A would require disclosure about the effect of a “withhold” vote in an election of directors.
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.