Tune in tomorrow for the webcast – “Transaction Insurance as a M&A Strategic Tool” – to hear Keith Flaum of Dewey & LeBoeuf, Mark Thierfelder of Dechert and Craig Schiappo of Marsh’s Private Equity and M&A Services Group discuss how the use of insurance in deals is gaining popularity as a tool to bridge the gap on one of the most fundamental deal issues in any M&A transaction: the potential post-closing erosion of value. Please print off these course materials in advance.
I rarely blog about Professor Steven Davidoff’s writings for the NY Times’ DealBook (aka the “Deal Professor”) because I presume anyone who bothers to read this blog must also read his excellent missives. His latest blog is about that rare event, a real-life material adverse change. He writes about how Diamond Foods’ recent revelations of fraud probably constitute a MAC for Procter & Gamble’s deal to buy the company…
John Clifford of McMillan sends us this news: Increases to a merger notification threshold under Canada’s Competition Act and the investment review threshold under the Investment Canada Act recently were announced. The Competition Act generally requires advance notification of certain merger transactions involving operating businesses in Canada where “size-of-parties” and “size-of-target” financial tests are both exceeded:
– The “size-of-parties” test requires that the parties to a transaction, together with their affiliates, have assets in Canada, or annual gross revenues from sales in, from or into Canada exceeding C$400 million.
– Currently, the “size-of-target” test generally requires that the assets to be acquired or the value of assets in Canada owned by the corporation the shares of which are being acquired exceeds C$73 million, or the annual gross revenue from sales in or from Canada generated by those Canadian assets exceeds C$73 million.
2009 amendments to the Competition Act provided for an indexing of the size-of-target test to reflect annual changes to Canada’s gross domestic product. The Competition Bureau announced earlier today (February 7, 2012) that the size-of-target threshold will be increased to C$77 million. The 2012 threshold will come into effect following publication in the Canada Gazette, which the Bureau anticipates will occur on February 11, 2012. The “size-of-parties” test remains unchanged.
The Investment Canada Act requires that any non-Canadian that acquires control of a Canadian business (whether or not that business is controlled by Canadians prior to the acquisition) must file either a notification or an application for review. For the purposes of the Act, a non-Canadian includes any entity that is not controlled or beneficially owned by Canadians. Generally, direct investments (i.e., the acquisition of the shares or assets of a Canadian corporation) by WTO Investors are subject to pre-closing review and approval if the Canadian business:
– Has assets valued in excess of an annual threshold, which for 2011 was set at C$312 million; or is
– Cultural in nature and has assets in excess of C$5 million.
The Investment Review Division announced that the review threshold for the direct acquisition of non-cultural businesses by WTO Investors likely would increase to C$330 million in 2012, retroactively effective back to January 1, 2012. It is expected that the Minister of Industry will confirm that adjustment in the very near future.
As noted in this Weil alert, Bill Baer has been nominated as the new head of the DOJ’s Antitrust Division.
Here are the results from Weil Gotshal’s 5th annual survey of sponsor-backed going private transactions that looks at the material transaction terms and trends in going private transactions in the United States, Europe and Asia-Pacific.
Here is an excerpt from Shareholder Representative Services’ new 3rd Edition of “Tales from the M&A Trenches“:
Many shareholders think that when you sell a company, each security holder simply gets their percentage of the proceeds. In reality, however, the formulas are often much more complicated and mistakes are frequently made. SRS has worked on numerous transactions in which the spreadsheet delivered at closing contains inaccuracies, does not match the formula contained in the document or fails to account for potential changes to distribution pro rata percentages.
While most attorneys are aware of these issues, the M&A community may not realize the magnitude and frequency of the problem. A friend of ours who is the general counsel of a large investment fund told us that the greatest value he provided to the fund in his early years on the job was identifying mistakes or unresolved issues in capitalization tables in connection with M&A transactions. He said the errors or adjustments amounted to millions of dollars that would have been misallocated. In SRS’ experience, we find that upwards of a third of the spreadsheets we receive have issues that require further clarification before distributions can be accurately made.
There are several common reasons for this, such as the complications of taking into account the liquidation preferences and participation caps attributable to the preferred stock, whether and to what extent holders of options or unvested stock participate in various distributions, and the often complicated terms of management carveout plans. Below is a summary of some of the major challenges we see with these calculations and payouts:
– Are the parties that participate in the closing payment the same as those that participate in the escrows or other future payments, and are the percentages the same?
This can be a complicated issue that is often missed. We have seen several agreements that have a single definition of “Pro Rata” when that is not what is intended. As an example, suppose a company that has raised $20M is sold in a transaction that pays $19M at closing with a $5M escrow. If the investors are entitled to their money back first but no more, there is a complicated question of which shareholders “own” the escrow and in which percentages and to what extent.
The preferred investors will presumably take all of the $19M paid at closing, but one can see how determining who should receive payouts from the escrow is more complex. You can also see how this answer might change based on how much of the escrow is paid out to the shareholders. Payment caps or forfeiture provisions in management incentive plans or in individual agreements with continuing employees may also result in a recalculation of post-closing distribution percentages that is not accurately reflected on the closing spreadsheet or in the deal documents.
– When employees participate in the escrow, are their contributions pre-tax or net of withholding for purposes of determining pro rata allocations?
We have seen it done both ways and it may depend on the source of the contribution (options or employee bonus/management carve-out), the tax treatment of the deal and whether it is an indemnification escrow or the establishment of an expense fund. In most cases, contributions to indemnification escrows are subject to substantial risk of forfeiture (i.e., indemnification claims) and therefore no taxable event occurs until the escrow is released. In this case, the contribution to the escrow is most likely considered to have been made on a pre-tax basis for purposes of pro rata calculations.
On January 24th, the Federal Trade Commission announced the annual adjustment of the thresholds that trigger reporting obligations (and the mandatory waiting period) under the Hart-Scott Rodino (HSR) Act. The new thresholds become effective in late February or early March (30 days from publication in the Federal Register, which had not occurred as of January 25) and will remain in effect until next year’s announcement.
Under the new thresholds, acquisitions that result in the buyer’s holding –
– less than $68.2 million in voting securities and/or assets of the seller will not be reportable (subject to the rules on aggregation).
– more than $68.2 million but less than $272.8 million are reportable if the “size of persons” test is satisfied.1
– more than $272.8 million are reportable regardless of the size of persons.
Exemptions from reporting are available for certain acquisitions, and these increases also affect some of the exemptions (most particularly the exemptions for certain acquisitions of foreign issuers or foreign assets).
The HSR filing fees have not increased, but the levels that trigger larger filing fees have increased.
– The basic filing fee remains $45,000 and is payable on transactions valued at more than $68.2 million but less than $136.4 million.
– For transactions valued at more than $136.4 million but less than $682.1 million, the filing fee is $125,000.
– For transactions valued at more than $682.1 million, the filing fee is $280,000.
The new thresholds for the Act’s prohibition on interlocking directorates are $27,784,000 for Section 8(a)(1) and $2,778,400 for Section 8(a)(2)(A).
This January-February issue of the Deal Lawyers print newsletter was just sent to the printer and includes articles on:
– M&A in 2012: Out with the Old, in with the New?
– Forward-Looking Statements: Deal Market Trends for 2012
– Joint Development Agreements: A Primer
– Tax Diligence and Tax-Related Provisions in Acquisition Agreements
– Delaware Court of Chancery Seeks To Narrow VeriFone With Potential Unintended Consequences
If you’re not yet a subscriber, try a no-risk trial to get a non-blurred version of this issue on a complimentary basis.
Kevin LaCroix has blogged a follow-up to his earlier blog about the dramatic growth in the frequency of lawsuits relating to M&A by analyzing a recent paper that concludes, among other things, that M&A-related lawsuit filings now outnumber federal securities class action lawsuit filings, and M&A-related litigation has “replaced traditional stock drop cases as the lawsuit of choice for plaintiffs’ securities lawyers.”
I’m excited to note that we have posted new sample forms of seller-friendly and buyer-friendly confidentiality agreements, courtesy of Igor Kirman of Wachtell Lipton. Not only that, but Igor has generously offered to provide free copies of his book – “M&A and Private Equity Confidentiality Agreements Line by Line: A Detailed Look at Confidentiality Agreements in M&A and Private Equity and How to Change Them to Meet Your Needs” – to the first 50 folks that email him now. In the alternative, it is available in paperback or Kindle from Amazon. Igor’s book is a “must” for those who do deals…