This HLS Blog post from Wachtell succinctly summarizes some of the key provisions of the One Big Beautiful Bill Act that will impact domestic and cross-border M&A.
On the domestic front, the OBBBA makes permanent several taxpayer-favorable TCJA provisions.
– Taxpayers will again be entitled to deduct immediately 100% of the cost of depreciable tangible assets, likely increasing the appeal of acquiring assets as compared to stock.
– The deduction for up to 20% of the business income of certain noncorporate investors in certain pass-through entities is made permanent, preserving the tax efficiency of partnership, rather than corporate, joint venture structures for those investors.
– The OBBBA permanently restores the pre-2022 TCJA limitation on interest expense deductions by applying the 30% limit to an amount that approximates EBITDA, rather than EBIT. But it imposes new limits by excluding from the EBITDA calculation certain foreign-source items of income. The net impact of these changes on particular leveraged transactions will need to be assessed.
For U.S. multinationals, the OBBBA is a mixed blessing.
– It widens the scope of income of U.S.-parented “controlled foreign corporations” (“CFCs”) that is subject to current federal income taxation, but generally improves the U.S. parent company’s ability to credit foreign income taxes. Specifically, GILTI (the TCJA’s tax on CFC earnings in excess of a deemed 10% return on tangible assets) is replaced with a more costly tax on “net CFC tested income,” a concept that does not reflect a deduction for the return on tangible assets.
– However, the OBBBA liberalizes the foreign tax credit regime by increasing the amount of foreign taxes that may be credited against net CFC tested income and by no longer requiring interest expense and research and experimental expenditures to be allocated against such income.
– The OBBBA also revises the treatment of mid-year sales of CFCs, requiring a pro rata income allocation based on the period of stock ownership.
It urges M&A participants to understand the new law (many provisions of which are effective for tax years beginning after December 31, 2025) and take it into account when negotiating pricing, transaction structure and deal terms.
On Friday, Chancellor McCormick dismissed all claims against Elon Musk and X Corp. in Khalid v. Musk (Del. Ch.; 7/25). Plaintiff, a retail investor, first purchased Twitter stock after Musk said he entered an agreement to acquire the company at $54.20 per share and then sold those shares after Musk said he was terminating the merger agreement. He incurred losses to the tune of $1.88 million and sued, asserting eleven tort, fiduciary, and contractual claims. Defendants moved to dismiss based on lack of personal jurisdiction (Musk) and failure to state a claim (X defendants).
With respect to Musk’s motion to dismiss, the opinion addresses the plaintiff’s argument that Musk transacted business in Delaware by entering into the merger agreement and consented to jurisdiction under its forum selection clause. It notes that “an express consent to jurisdiction satisfies the requirements of due process and typically resolves the statutory analysis,” but a consent to jurisdiction only applies to claims under that agreement, and, with respect to those claims, plaintiff must show he was an intended third-party beneficiary — since he was not a party to the merger agreement. The court dismissed all the contractual claims, applying the reasoning of the Crispo decisions.
With respect to the plaintiff’s common law fraud claims — asserting that he was defrauded by defendants saying they would, then wouldn’t, buy Twitter — Chancellor McCormick says:
Defendants advance many arguments for dismissal. Once again, one suffices. Plaintiff has failed to adequately allege that Musk intended to induce him to buy or sell Twitter stock. There are no allegations that Musk lied when he first announced that he entered into the Merger Agreement, which led Plaintiff to buy Twitter stock. And Plaintiff does not allege that Musk lied when he sent the Termination Letter to induce Plaintiff to sell stock. Under Plaintiff’s theory, Musk sent the Termination Letter to gain leverage to renegotiate the deal price and not with intent to cause Plaintiff to act. This allegation does not support Plaintiff’s fraud claim.
“This too shall pass” doesn’t apply to CFIUS risk. Despite five years having passed since the acquisition of Jupiter Systems by Hong Kong-based acquirer, Suirui International, a July 8 Executive Order mandates that Suirui divest the interest it acquired in Jupiter Systems following a review by CFIUS, which found that the ownership posed a threat to U.S. national security. Here’s background from this Freshfields blog:
Jupiter deals in video wall display technology and visualization systems—in other words, large-scale, multi-monitor displays one might see in NASA’s Mission Control or in a military command center. Jupiter has operated for over 40 years and offers its solutions to corporate customers as well as U.S. government entities. Jupiter reports its U.S. government customers include the CIA, the NSA, and NASA. These agencies likely rely on Jupiter’s systems to display and process sensitive or classified data.
Suirui and its Chinese parent company are cloud communication service carriers similarly specializing in video conferencing solutions . . . After buying Jupiter for an undisclosed sum, Suirui installed its co-Chairman as Chairman of Jupiter and its co-CPO as CEO. Beyond announcing these overlapping executive appointments, Jupiter’s website currently contains no disclosure of the acquisition itself[.]
The blog summarizes what the order requires, as follows:
Immediate Access Prohibitions: Suirui and its affiliates are immediately barred from accessing Jupiter’s non-public source code, technical information, IT systems, and U.S. facilities.
Complete Divestment: Within 120 days, Suirui must divest all interests in Jupiter, including transferring or destroying assets such as intellectual property, source code, and customer contracts.
Jupiter’s Divestment of the Jupiter Asia Companies: A unique requirement for this presidential order is that Jupiter is required to divest all interests or rights in any assets or operations of the Jupiter Asia Companies—three entities organized in Hong Kong and China—created after the completion of the Transaction.
Buyer Pre-Approval: The divestment is subject to CFIUS non-objection; CFIUS has 30 days to object to potential buyers once proposed. The order specifically mentions factors on which an objection might be based, such as whether the buyer is a U.S. citizen and whether they have ties to the Chinese sellers.
Compliance Monitoring: Until divestment is complete, the parties must provide weekly compliance certifications to CFIUS and are subject to audit requirements.
It also provides a list of key factors in CFIUS’s review, and these key takeaways:
Non-passive Chinese investments in U.S. businesses that pose any colorable national security risk are almost certain to be prohibited.
Even without public reporting, CFIUS has means to identify non-filed transactions.
CFIUS’s reach extends well beyond the pre-closing transaction review process. Companies that fail to engage with CFIUS appropriately may find themselves subject to retroactive scrutiny that could ultimately result in forced divestment.
A forced divestment can result in destruction of value of the company. In structuring its divestment requirement, CFIUS is less likely to be sympathetic to value destruction concerns if the national security considerations should have been obvious and it appears that the parties sought to avoid detection of the transaction by customers or CFIUS.
I *think* (please reach out if I am wrong) that this marks only the 10th time this power has been used to formally block or unwind a transaction since the first in 1990.
The updates to the Schedule 13D/G CDIs for the 2023 rule amendments I blogged about earlier this week aren’t the only recent development coming out of Corp Fin that’s relevant to M&A practitioners.
– Back in March, I noted that the discussion on acquired company financial statements in the SEC’s Division of Corporation Finance’s Financial Reporting Manual hadn’t been updated since before the 2020 overhaul of the S-X acquired company financial statement rules. That’s no longer the case!
– And for folks who regularly reference the SEC’s Compliance & Disclosure Interpretations, check out this new page on the SEC’s website where Corp Fin has consolidated all of its CDIs in one place so, per this LinkedIn post, everyone now has the ability to search for potentially relevant guidance simply by clicking Ctrl + F.
This recent HLS Blog from A&O Shearman does a deep dive on earnouts. Quoting Vice Chancellor Laster’s words, “an earn-out often converts today’s disagreement over price into tomorrow’s litigation over the outcome,” the blog notes that “disputes resulting from earn-out provisions mean that the parties’ negotiations over price are effectively only postponed until after closing.” When more money is allocated to the earnout and the duration is longer, disputes are more likely. And, in fact, disputes often also arise out of the dispute resolution process itself.
Pointing to a 2023 decision in which the Third Circuit overruled the District Court’s ruling that compelled arbitration, the blog notes that these disputes often center on distinguishing between arbitration and expert determination as outlined in the contract. Here are the blog’s tips for dispute resolution:
Include a dispute resolution mechanism. The agreement should set for the method and venue for handling any disputes. Arbitration tends to be quicker and more cost effective and include greater confidentiality. However, litigation includes availability of appeal and may alleviate concerns over arbitrator competency or compromise judgements.
Clearly define whether the third-party decider is acting as an arbitrator or an expert. Use explicit language such as “acting as an expert, not an arbitrator” to avoid ambiguity.
Limit the authority of the expert to specific factual disputes within their technical expertise. For example, specify that the expert’s role is confined to resolving accounting-related issues relating to the calculation of EBITDA, revenues or other financial milestone as applicable, and not broader disputes as to whether the buyer used the requisite level of efforts to achieve the milestone or complied with the applicable covenants regarding the conduct of business during the earn-out period.
The parties may want to limit what the independent accountant can review to minimize the time and expense of engaging the independent accountant to resolve the dispute. For example, they can limit the independent accountant’s review to: (i) items raised in the objection notice that have not been resolved by the parties and (ii) factual or mathematical errors contained in the information provided to or by the buyer.
The parties may also want to have the independent accountant base its decision only on those materials provided to it by the buyer and seller (rather than conducting its own independent investigation). However, if a party believes that these limitations could be disadvantageous, it should consider being silent on this issue in the agreement and negotiating it when a dispute arises.
Include or exclude procedural rules to signal the intended dispute resolution process. Arbitration provisions should reference formal procedural rules (e.g., AAA rules), while expert determinations should avoid such references and outline a less formal process.
Consider including escalation or mediation provisions, although, generally, not both, as a required preclude to litigation or arbitration, with any escalation or mediation being subject to clear and reasonably short timelines and escalation being to senior executives within each organization who have the authority to quickly resolve a dispute.
Yesterday, the Corp Fin Staff released 18 revised CDIs on the filing of Schedules 13D and 13G. Thanks to the helpful redlines provided by Corp Fin, it looks like the changes are largely clean-up, clarification and updates necessary to align the CDIs with the October 2023 amended rules that shortened the deadlines for initial and amended Schedule 13D and 13G filings, among other things. Here’s the full list of the updated CDIs, with links directly to the redlines.
Last November, I blogged about the Chancery Court’s post-trial opinion in Jacobs v. Akademos, Inc. (Del. Ch.; 10/24) in which Vice Chancellor Laster found that the sale of a distressed company to a controlling stockholder where the common stockholders received no consideration was entirely fair. Plaintiffs appealed to the Delaware Supreme Court, arguing three errors. The Court affirmed the Chancery Court’s decision by swiftly dispensing with two arguments but addressing the third — that the Chancery Court failed to address fair dealing in its entire fairness analysis — with a three-page discussion.
In the order, the Court took issue with one statement made in the Chancery Court’s opinion:
Here, the Court of Chancery stated that “the fair price evidence is sufficiently strong to carry the day without any inquiry into fair dealing.” Our Court has not gone so far. Rather, in Tesla, we stated that “[e]ntire fairness is a unitary test, and both fair dealing and fair price must be scrutinized by the Court of Chancery.”
That said, the decision confirms that the Chancery Court can consider the “evidence as a whole” and that the fairness of the price may be a “paramount consideration” in some cases, which the Court was satisfied was true in this case. It also found that VC Laster did make extensive factual and credibility determinations that supported fair dealing, citing the following evidence considered by the Vice Chancellor:
– The director defendants explained persuasively that the company lacked the funds to support a full-blown MFW process.
– During the first half of 2020, Akademos and its financial advisor conducted a dual-track process to seek outside investment or an acquisition proposal.
– The term sheet contemplated a go-shop period and committed the KV Fund to support any transaction that the directors unaffiliated with the KV Fund (“Unaffiliated Directors”) deemed superior.
– After the go-shop period concluded, the Unaffiliated Directors determined that none of the counterparties had made a superior offer.
– A majority of the Unaffiliated Directors voted in favor of the transaction (with Jacobs casting the only “no” vote).
– A majority of the Akademos directors voted in favor of the transaction (with Jacobs casting the only “no” vote).
Yes, the circumstances surrounding the U.S. Steel & Nippon Steel deal were unprecedented. You’re unlikely to ever face a similar combination of challenges in your career. But the Wachtell team via this CLS Blue Sky blog says there are some lessons to be learned from the deal — and the successful closing:
A transaction may face strong opposition, despite being a win for all key stakeholders: The U. S. Steel – Nippon Steel combination will deliver resources, advanced technology and durable, well-paying domestic jobs, allowing U. S. Steel to grow and prosper. Stockholders also benefited from one of the highest deal premia ever paid in an industrial transaction, a reflection of the successful turnaround recently executed by the U.S. Steel Board and management. None of this was enough to insulate the transaction from becoming a political football, drawing opposition from state and federal elected officials and candidates from both political parties.
Trust your judgment and focus on the long-term: The U.S. Steel Board and management team never wavered from their focus on delivering the transaction. The chattering classes said the transaction was dead. The Board was neither deterred nor distracted, pursuing a mix of strategies, including litigation, active public messaging and continued outreach to key constituencies. Others do not have all the facts a well-informed board and management team will have, and directors and management should not let outside judgments replace their own, well-informed view. Focus on the long game.
Regulatory contract terms matter, but strategic alignment and deal logic dominate: Transacting parties need to be prepared for regulatory scrutiny, even if the risk is considered low. In the current global environment, politics or other exogenous factors can easily come into play, often in unexpected ways. Not all partners will be as fully committed as U.S. Steel and Nippon Steel, especially when deals take longer than expected. Contractual efforts commitments by parties and outside dates will be critical when deals are tested, and must be considered with respect to foreign direct investment clearances, including our own CFIUS regime, in addition to antitrust requirements. When unexpected barriers appear, the strength of the strategic and financial logic of the deal are paramount. Such developments require innovative (“unprecedented”) solutions, often not capable of being addressed in advance in deal documentation nor anticipated at signing—strategic alignment and industrial logic may be determinative.
Communications and transparency matter: U.S. Steel approached its internal and external communications transparently and candidly. Employee communication was essential, but shareholders, customers, business partners and politicians were all critical constituencies that made a difference in the outcome. A well-designed, clear, cogent messaging campaign, through both traditional and innovative media, achieved the necessary goal of cutting through the widespread misinformation about the transaction, speaking with one voice and gaining the enthusiastic support of much of the rank-and-file union membership, who became effective advocates for the combination.
One of the most unusual aspects of the deal was that, “in addition to a national security agreement, the transaction resulted in a first-of-its-kind’ golden share,’ with highly customized, specific rights issued to the U.S. government.”
The Administration wanted a strong mechanism to complement commitments being made in the national security agreement also being agreed by the parties as part of the CFIUS process, and to reinforce the continued American character of U.S. Steel. The golden share provides the government with the right to appoint one director, and affords the President or his designee consent rights over specified matters, including reducing the capital commitments made by Nippon Steel, changing U. S. Steel’s name or headquarters, transferring jobs abroad, and certain decisions involving closing or idling of facilities, trade and labor matters and sourcing outside the United States. These rights are in addition to a commitment to a board of directors comprised of a majority of U.S. citizens.
What’s the broader lesson from this first-of-its-kind? Flexibility. The blog says staying flexible is key to identifying a creative path to closing that aligns with your “go-forward plans and strategy.”
This Troutman Pepper Locke memo reviews the DOJ’s recent settlement of litigation involving the merger between HPE and Juniper Networks. The settlement requires HPE to divest a business line to a pre-approved buyer and requires at least one license of certain Juniper technology to DOJ approved licensees. This excerpt from the memo discusses the DOJ’s willingness to use licensing as part of the remedy:
The settlement also assures that any winning licensee will have the right to any improvements to and derivatives of the licensed technology and the right to grant rights of use to the technology to its end users and service providers as reasonably needed. If the auction results in multiple bids exceeding $8 million, Juniper will be required to license to at least one additional bidder. This novel approach by the Justice Department reflects a commitment to solving unique challenges in mergers.
While not routine, license remedies have been used previously. For example, in 2017, the Federal Trade Commission (FTC) accepted a license remedy for its challenge to a pharmaceutical company’s acquisition of the U.S. rights to the drug Synacthen. The FTC alleged there that the acquisition would prevent the development of a U.S. competitor to the buyer’s monopoly. In another instance, a licensing remedy was approved in a post-consummation merger challenge.
While the licensing arrangement represents a key component of the settlement, the memo says that it is unlikely that it would have been sufficient to resolve the litigation without the accompanying divestiture, and cautions companies against assuming that a license alone will satisfy regulators.
The memo also points out that this represents the third time in the last month that the Antitrust Division has signed off on structural remedies to settle a lawsuit challenging a merger, and that its willingness to resolve merger challenges in advance of litigation should be considered when assessing the risks associated with a transaction, designing clearance strategies, and negotiating risk allocation provisions in acquisition agreements.
In a recent Business Law Today article, Woodruff Sawyer’s Yelena Dunaevsky highlights an unusual complaint that an RWI insurer recently filed against a seller and certain of its officers in an effort to enforce the insurer’s right of subrogation. Here’s an excerpt:
The complaint relates to a transaction where [Liberty Surplus Insurance Corporation] served as the representations and warranties insurance (“RWI”) carrier and paid a $12.2 million claim pursuant to an RWI policy after the purchaser in the transaction discovered that the seller had engaged in fraudulent activities. While RWI policies typically cover seller fraud, they also reserve a right for the insurer to subrogate against the seller if fraud occurs. Insurance carriers very rarely exercise this right because (1) fraud is very difficult to prove and (2) carriers do not want to earn a reputation of being tough on the sellers. However, in this case, the facts must have been such that Liberty could not avoid subrogating.
In a LinkedIn post about the lawsuit, Hunton Andrews Kurth’s Geoffrey Fehling highlights a key takeaway from the complaint’s naming of individual D&Os as defendants:
Those claims against individual D’s and O’s underscore the importance of maintaining robust D&O tail coverage after M&A deals for alleged/unproven fraud (conduct exclusions) and a range of potential losses (definition of “Loss” and related carve outs), among other issues. Because the insurer also points to post-closing acts in its complaint, the lawsuit could also result in D&O coverage issues if the runoff/tail endorsement did not account for “straddle” claims based in part on acts or omissions after the deal closed.