In a review of 1,350 deals done between 2007-2011, CMS’ fourth annual M&A Study highlights some key differences in the legal provisions used in merger & acquisition agreements across Europe and the US including:
– Earn-out deals are more popular in the US. 38% of US deals had an earn-out component compared with just 14% in Europe in 2011. Earn-out clauses quite often give rise to difficult negotiations, and subsequent disputes. In Europe we more often see purchase price gaps being bridged by vendor loans or option arrangements.
– Material Adverse Change (MAC) clauses are much more popular in the US than in Europe where they were used in 93% of the deals compared to just 16% of deals in Europe.
– Not only are baskets much more prevalent in the US, but the basis of recovery is different. In the US, 59% of deals are based on ‘excess only’ recovery as opposed to ‘first dollar’ recovery compared with only 28% in Europe in 2011 for ‘excess only’ recovery.
– Working capital adjustments continue to be by far the most frequently used criteria on a purchase price adjustment in the US, used in 77% of deals as opposed to just 26% in Europe in 2011, where the deal contained a purchase price adjustment.
– Basket thresholds tend to be lower in the US with 88% being less than 1% of the purchase price compared with 55% in Europe.
Hat tip to Francis Pileggi for pointing out this interview with Delaware Supreme Court Chief Justice Myron Steele on the pros of incorporating in Delaware…
AOL’s shareholders delivered a resounding victory today to the Company’s management and board in re-electing the full slate of incumbent director nominees — over ISS recommended dissident directors nominated by activist hedge fund Starboard Value LP. The victory represents a clear and powerful message that a well-developed and well-articulated business strategy for long-term success will be supported by investors notwithstanding activist generated criticism and ISS support.
For several months, Starboard waged a damaging proxy fight to elect its own slate of three directors to the AOL board. The board and management of AOL countered Starboard’s destructive campaign by presenting, and continuing to execute on, their plan for long-term business value. AOL warned that Starboard had no viable business plan and was pursuing a short-term, value-destructive, and self-interested strategy. Nevertheless, ISS chose to cast its support with two of Starboard’s nominees, in part relying on the wrongheaded notion that the dissident nominations posed “little risk”. In doing so, ISS chose to support a dissident fund notwithstanding the fund’s lack of understanding of the Company’s fundamental business model.
Despite Starboard’s relentless campaign and undeterred by ISS’s recommendation, AOL’s management and directors refused to waver from their commitment to a long-term strategy for enhancing shareholder value. With the strong teamwork of management and the board’s lead and other independent directors, AOL’s leadership forcefully presented their case to investors. They delivered investor presentations, participated in public conference calls and issued “fight letters” to combat the campaign of misleading claims spread by Starboard and expose the faulty logic of ISS’s position. They were able to leverage the Company’s strong relationships with key portfolio managers, relationships developed long before Starboard had emerged on the scene.
Today’s results confirm that investors will not blindly follow the recommendation of ISS — when presented with a well-articulated and compelling plan for the long-term success of the Company, they are able to cut through the cacophony of short-sighted gains promised by activist investors touting short-term strategies. AOL’s shareholders showed today that when a Company’s management and directors work together to clearly present a compelling long-term strategy for value, investors will listen.
Tune in today for the webcast – “How to Cope with the M&A Litigation Explosion” – to hear Wilson Sonsini’s Ignacio Salceda, Wachtell Lipton’s David Katz and NERA’s Marcia Kramer Mayer to not only learn of the causes of the M&A litigation maelstrom, but how you can best cope with its consequences – to changes in deal structures to developments in how deals are negotiated. Please print these course materials in advance.
The Division of Corporation Finance of the Securities and Exchange Commission recently issued a letter that for the first time granted no-action relief for the use of notice and access for a proxy statement in a M&A transaction. The no-action letter, SAIC, Inc. (avail. Apr. 27, 2012), involved the upcoming merger of a holding company into its operating subsidiary to eliminate the holding-company structure. The Division has routinely granted no-action relief from various securities law provisions in similar circumstances. For example, the Division has routinely permitted a post-merger company to take into account the pre-merger company’s SEC reporting history in determining its eligibility to use Form S-3.
In SAIC, the Division addressed many of the same provisions of the securities laws that it had addressed in the past, but it also addressed Rule 14a-16, the notice and access rule. This rule allows proxy statements to be distributed electronically by mailing only a Notice of Internet Availability to shareholders. However, Rule 14a-16(m) states that it generally is not available for proxy solicitations that are made in connection with business combination transactions. In SAIC, the company argued that, unlike other types of business combinations, the transaction at hand would involve “no change in the nature of the investment” and that it was “a straightforward corporate action for which the Rule 14a-16 method of delivering proxy material would be completely appropriate.” The Division agreed, stating that the holding company “may comply with the form and manner of delivery of proxy materials described in Rule 14a-16 of the Exchange Act with respect to the proxy materials used to solicit proxies for the approval of the [m]erger by the stockholders of [the holding company].” Thus, it appears that going forward, when a merger transaction does not involve a substantial change to the company’s assets and liabilities (which is often the case with internal reorganizations and restructuring transactions), companies should evaluate whether the notice and access provisions of Rule 14a-16 are available.
John Grossbauer of Potter Anderson notes: Recently, Delaware Vice Chancellor Laster delivered this opinion in Forsythe v. ESC Fund Mgmt. Co. (U.S.) I, L.P. In the opinion concerning a proposed derivative settlement, the Court of Chancery determined that it would enter a final order approving the settlement and the plaintiffs’ fee award in sixty days unless the objectors to the settlement “make the equivalent of a topping bid.” In order to forestall the Court’s approval of the settlement, the objectors must post a secured bond or letter of credit for the benefit of the nominal defendant, CIBC Employee Private Equity Fund (U.S.) I, LP (the “Co-Invest Fund”), for the full amount of the settlement consideration – valued at $13.25 million – and apply to take over the litigation. Should the objectors pursue the derivative claims and ultimately recover less than the settlement consideration, the Co-Invest Fund will have the right to execute on the posted security to collect any shortfall between the settlement consideration and the ultimate recovery.
In his blog, Ken Adams recently proposed that the clearest way to have a party make a statement of fact in a contract is to use states instead of represents and warrants or even represents. Check it out!
In his blog, Francis Pileggi gives us this news – repeated below:
Vulcan Materials, Inc. v. Martin Marietta Materials, Inc., No. 254, 2010 (Del. May 31, 2012). This is a Delaware Supreme Court ruling after oral argument on May 31, 2012 involving the penalty imposed on a hostile bidder for breach of a confidentiality agreement entered into during amicable negotiations.
We previously highlighted the 138-page Chancery opinion decided on May 4, 2012. Today, the Delaware Supreme Court ruled, in an expedited appeal, as reported by Bloomberg, that the Chancery decision was correct, and that Martin Marietta would be barred from bidding for Vulcan Materials due to Martin Marietta’s breach of a confidentiality agreement that was signed while the companies were discussing a “friendly deal”, before it became a hostile bid. It is noteworthy that all the briefing and the oral argument on this appeal were done is less than 30 days and a decision by Delaware’s High Court was provided at oral argument.
Courtesy of Frank Reynolds of Thomson Reuters we have the Opening Brief and Answering Brief in the expedited appeal.
Thanks to this Kaye Scholer memo, we have news of another Delaware confidentiality agreement-related case in recent days, RAA Management LLC v. Savage Sports Holdings – first one was Martin Marietta Materials – where the Delaware Supreme Court affirmed enforceability of non-reliance and waiver provisions in a non-disclosure agreement to bar claims by a would-be buyer of a business based on alleged fraudulently omitted or misstated information in due diligence.
And here’s some analysis from John Grossbauer of Potter Anderson:
Recently, the Delaware Supreme Court affirmed the Superior Court’s dismissal of a complaint brought by RAA Management, LLC against Savage Sports Holdings. RAA, once a potential bidder for Savage, alleged that Savage fraudulently misled RAA into incurring $1.2 million in due diligence and negotiation costs by falsely claiming at the outset of discussions that there were “no significant unrecorded liabilities or claims against Savage.”
The Court held that non-reliance disclaimer language in the non-disclosure agreement executed by the parties prevented RAA from bringing such claims. Although the Court decided the matter under New York law, it confirmed that the results would be the same under Delaware law. A key point is that the Court rejected the attempt to read some disclosure obligation into an NDA that expressly disclaimed any reliance on anything other than final agreement representations.
As noted in this Weil alert, a corporate executive has pled guilty to criminal felony charges in connection with a company’s HSR premerger notification. He has agreed to serve five months in prison for obstruction of justice charges in connection with altering documents submitted to the DOJ and FTC as part of the premerger investigation of a proposed acquisition. The penalties obtained by DOJ against the executive, and previously against the company, highlight the caution and diligence entities should use in drafting documents in connection with an acquisition and preparing HSR filings and responses to DOJ and FTC information requests.