From Skadden’s Josh LaGrange & Brian Breheny, here’s some analysis of the new Rule 13d-3 CDI that Corp Fin put out last week:
The new Compliance & Disclosure Interpretation reverses a widely-held presumption of practitioners concerning Section 13(d) beneficial ownership of issuer equity securities by members of a group, and offers additional insight into the staff’s view of the scope of Section 13(d) beneficial ownership in the context of certain voting agreements.
Exchange Act Rule 13d-5(b) provides that the “group” formed by certain agreements among two or more persons in respect of the equity securities of an issuer “shall be deemed to have acquired beneficial ownership … of all equity securities of that issuer beneficially owned by any such persons.” Previously, on the basis of guidance issued by the SEC in connection with Exchange Act Section 16, practitioners generally (and at least some courts) believed that each member of such a group was also to be treated as the beneficial owner of all such equity securities. The new CDI clarifies the SEC staff’s view that for purposes of Section 13(d), the creation of a “group” only establishes that the group itself, as a new “person,” becomes such a beneficial owner (i.e., an individual member does not acquire beneficial ownership of the issuer equity securities beneficially owned by the other members).
The new CDI expressly acknowledges the conflicting position expressed in SEC guidance concerning the same topic for purposes of Section 16, but makes no attempt to resolve the conflict, notwithstanding that the relevant Rule 16a-1 provides that “the term ‘beneficial owner’ shall mean any person who is deemed a beneficial owner pursuant to Section 13(d) of the Act and the rules thereunder … .”
Of course, any group member who actually acquires voting or investment power over the equity securities beneficially owned by other group members will become the beneficial owner of such securities as a result of acquiring such power. While that point is relatively clear in regard to holders of an irrevocable proxy to vote shares in an election of directors, the staff has now affirmatively expressed the view that a party to a voting agreement who has the right to designate one or more director nominees for whom the other parties have agreed to vote thereby becomes a beneficial owner of the issuer equity securities beneficially owned by the other parties, on the basis of having the power to direct the voting of the other parties’ securities. Note that the new CDI does not assert that a voting agreement pertaining to other matters (e.g., an agreement to vote in favor of a particular transaction or against other transactions) similarly establishes “voting power” and the consequential “beneficial ownership.”
The new CDI will not have any impact on who is required to file a Schedule 13D or who will be subject to Section 16 as a “10% beneficial owner,” and we do not expect it to have a significant general impact on secondary applications of the Section 13(d) beneficial ownership standard, such as under rights plan triggers, credit agreement change-of-control provisions or Rule 144 “affiliate” analyses. However, this new guidance will alter how issuers calculate certain investors’ beneficial ownership for disclosure in proxy statements and registration statements and consideration of 1933 Act Rule 506(d) disqualifications, and may be relevant to analyses of “conversion caps” or “blocker provisions” in convertible instruments..
The betting favorite came in (here’s a blog about the four that applied for the gig). Yesterday, the Delaware Governor nominated Delaware Court of Chancery Chancellor Leo Strine to become the next Chief Justice of Delaware’s Supreme Court. The Delaware General Assembly now has to approve the nomination. This WSJ article has notable quotes from Strine over the years. And here is Steven Davidoff’s take on the appointment…
By the way, Strine would be only the eighth Chief Justice in Delaware – the Delaware Supreme Court wasn’t created until 1951…
One of the big stories last year was Jana Partners’ attempt to pay directors that they were able to get voted onto a board of one of their portfolio companies. The corporate backlash was the adoption of bylaws that disqualified any directors that receive payments from outsiders. As noted in this Financial Times article, 33 companies have adopted such bylaws – and activists are fighting back. Prof. Bainbridge weighs in again on this topic…
Recently, the “CLS Blue Sky Blog” ran a series of academic commentaries about how the SEC should respond to Dodd Frank’s invitation to rethink the disclosure of beneficial ownership under Section 13(d). Check it out…
It’s also worth considering the proposed changes to Canada’s block shareholder reporting regimes known in Canada as the Early Warning Reporting (“EWR”) system and the Alternative Monthly Reporting (“AMR”) system.
As noted in this Towers Watson blog:
While the vast majority of North American companies involved in mergers and acquisitions use retention agreements and “stay bonuses,” companies with more successful retention strategies identify who they want to keep and negotiate retention agreements earlier in the process than other companies, according to a recent Towers Watson survey. Almost three-quarters (72%) of successful acquirers determine which employees are asked to sign retention agreements either during due diligence or during the transaction negotiations, while just 36% of less successful acquirers do so at these early stages of their deals.
Other findings from the survey of 180 companies from 19 countries include the following:
– Retention bonuses are far more common in North America (reported by 83% of the respondents) than either Europe (56%) or Asia (40%).
– Most buyers use time-based “pay to stay” provisions in their retention agreements, typically stretching from stretching from one to two years post-close
– Retention efforts only go so far. Of employees who leave despite having retention agreements, respondents said that six out of 10 cite the deal itself as a primary reason for leaving.
– Retention isn’t only a buyer concern; 70% of sellers also used retention awards in the context of their deals.
Here’s analysis from Shareholder Representative Services:
A recent trend in post-closing M&A has been an increase in attempted “double-dips” where the merger agreement may provide that a buyer has the ability to recover, or at least attempt to recover, twice for the same issue. Merger agreements often wrongly assume that modifications to the closing balance sheets made during the purchase price adjustment and damages claimed against the escrow later will never overlap. As a result, the “Losses” provisions in such agreements routinely fail to clarify whether a buyer should be able to claim the same damages in both the purchase price adjustment and later as an indemnification claim against the escrow.
There are many situations where such double recovery can occur. Here are a few of the most common that SRS encounters:
– GAAP issues: The final calculation of net working capital may be reduced because of erroneous accounting, and the buyer later brings an indemnification claim for a breach of representations – alleging the seller failed to adhere to GAAP.
– “Dead” inventory: A buyer may discover that certain inventory is not resalable, reducing the value of this asset on the balance sheet. After a purchase price reduction, the merger agreement may fail to clarify whether the buyer may also bring a subsequent indemnification claim for breach of representations.
– Pending lawsuits: A reserve may be taken on the balance sheet for a pending lawsuit that was not recorded correctly at close, and the merger agreement may also provide that the buyer can recoup the amount of losses related to such litigation (plus fees, in some cases) through an indemnification claim.
In each scenario the damages in the purchase price adjustment and indemnification claim are based on the same event. However, depending on the definition of “Losses,” they may be considered two different things. For example, merger agreements frequently employ a generic definition:
“Losses” means any and all Liabilities incurred or suffered by a specified Person; provided, however, that Losses will not include any indirect, consequential, special or punitive damages except to the extent (i) awarded by a court or other authority of competent jurisdiction in any Third Party Claim or (ii) arising from fraud or intentional misrepresentation.
This clause does not expressly allow for a double dip, but buyers may cite the lack of any restriction as an implicit agreement that accounting and indemnification are separate matters so the damages do not overlap. As a result, a more specific clarification of the parties’ intent may be advisable. When clarifying this issue, two related matters must be considered. First, should the buyer be allowed to recover twice for the same loss or damage? Second, if the buyer does not prevail in its first attempt at recovery, should it be able to pursue recourse on the same facts through a different channel?
On the first issue, most parties would agree that recovering twice for the same loss is not fair or appropriate as it would result in double payment. To avoid this, the parties may want to add a clause such as:
No Double Dip. In calculating the amount of Losses related to a breach of or inaccuracy in a representation, warranty, covenant or agreement hereunder (and for purposes of determining whether a breach or inaccuracy has occurred), the Sellers shall have no liability for any Losses or Taxes to the extent such Losses or Taxes were taken into account as a liability or a reduction in the value of assets in determining Net Working Capital.
The second issue is more difficult because a claim may be determined to be invalid as a working capital adjustment for reasons that should not prevent the buyer from pursuing it as an indemnification claim (such as being a long-term rather than short-term liability). Or, it could simply be invalid on the facts, in which case a free appeal may not be appropriate. To address this issue, the parties may want to add language such as:
In the event that Buyer believes there are any facts or circumstances that are the basis for any adjustments to the [Preliminary Working Capital Statement] delivered by the Company at Closing, Buyer shall be permitted to pursue a remedy based on such facts or circumstances either as an adjustment to the Preliminary Working Capital Statement (“Adjustment”) or as an indemnification claim, but not both, other than as set forth below. Nothing in the preceding sentence shall prevent Buyer from bringing an indemnification claim based on the same facts and circumstances as a proposed Adjustment if a final, independent determination is made that (i) the proposed Adjustment is not proper based solely on the long-term or short-term nature of the applicable asset or liability, (ii) the proposed Adjustment is not being considered in connection with Working Capital because it is determined to be a legal issue rather than an accounting issue or (iii) [________________].
See our article “Working Capital Adjustment AND Indemnification Claim? No ‘Second Bite at the Apple'” in our booklet Tales from the M&A Trenches for more on this second issue.
Here’s news culled from this Wilson Sonsini memo (there are more memos on this in our “Antitrust” Practice Area):
On December 5, 2013, after a public consultation launched in March 2013, the European Commission adopted a package to simplify its review of concentrations under the EU Merger Regulation (EUMR). This initiative was undertaken by the commission to speed up the investigation of mergers at the EU level and to render their notification and review less burdensome for business.
In particular, the commission has revised the Notice on Simplified Procedure (enabling a greater percentage of mergers coming within its jurisdiction to benefit from simplified review) and the merger Implementing Regulation (detailing the information required in the context of a merger notification). In parallel, it also updated its model text for divestiture commitments. The new rules will be applicable as of January 1, 2014.
In this podcast, Greg Houston of kCura and Geof Vance of McDermott Will discuss how eDiscovery is impacting M&A litigation, including:
– What is kCura and what services does it provide?
– How does kCura work for M&A litigation?
– Tell us about McDermott Discovery. Why was the practice created?
– Could you share a success story using predictive analytics in M&A?
With Black Friday & Cyber Monday behind us, this blog by Akin Gump’s Kerry Berchem digs into a recent case that deals with whether a company’s failure to meet sales forecasts may amount to a material adverse effect.