DealLawyers.com Blog

In a piece entitled “Zipcar Makes S.E.C. Filing After Executive’s Twitter Message,” DealBook provides a reminder that deal lawyers need to remain vigilant in the wake of a deal to monitor what executives might be doing on social media channels – since that activity may require filings to be made with the SEC. There is good analysis in this “100 F Street” blog…

Here’s an interesting piece that Allen Matkin’s Keith Bishop recently blogged:

For several years, I taught a law school class covering sales, personal property leases, and documents of title – Uniform Commercial Code Articles 1, 2, 2A, and 7. At one time, the UCC was the big thing in American law. Now it has become workaday area of the law. Nonetheless, it remains an important, and I fear, often overlooked, subject.

I suspect that many lawyers negotiating asset purchase agreements may fail to recognize and address basic UCC issues. For example, they may spend a great deal of time negotiating express warranties while not recognizing that the UCC will impose (if not properly disclaimed) implied and other warranties. (My former students will recognize that under the UCC, there are three types of warranties – express, implied and warranties that are neither express nor implied.) Similarly, an asset purchase agreement may not take into account the risk of loss rules that apply to the sale of goods under the UCC.

Some questions to consider the next time you negotiate an asset purchase agreement:

– Does my agreement involve a transaction in goods subject to the UCC?
– Do I understand how warranties (express, implied and other) are made and disclaimed under the UCC?
– Do I understand the UCC’s risk of loss rules and are those rules properly addressed in the agreement?
– Do I understand the UCC’s remedy provisions and my client’s rights and obligations in the event of a breach or anticipatory repudiation?

A useful housekeeping task for the summer might be to review your form of asset purchase agreement with the UCC in mind. California, like Rudyard Kipling’s cat, walks alone in many respects. We don’t refer to “articles” of the California UCC, we call them “divisions”. Also, there is no Article 2a in the California UCC, it’s Division 10.

Based on an analysis of all of the transactions supported by Drooms’ virtual data rooms in 2012, the top ten most popular code names used for projects and assets this year were:

1. Phoenix
2. Gold
3. Mars
4. Blue
5. Sky
6. Alpha
7. Pegasus
8. Emerald
9. Platinum
10. Horizon

In this podcast, Gregg Passin of Mercer explains the findings from a recent Mercer survey on retention and success bonuses in M&A transactions, including:

– What were your survey’s main findings?
– Any surprises?
– What should companies do in the wake of the survey

Check out this video by Justin Hamill of Paul Weiss on “Quasi-Appraisal: The Unexplored Frontier of Stockholder Litigation?”

This Davies Ward memo notes how at least three Canadian companies recently have adopted advance notice policies – Mundoro Capital, MAG Silver and most recently Bell Copper. Such a policy, which is effective upon adoption by the board, requires any person proposing to nominate a director for election at a meeting of shareholders to provide the company with advance notice of, and prescribed details concerning, any such proposed nominee. Unless proper notice is given to the company in accordance with the prescribed notice period, any such proposed nominee is ineligible for election at the shareholders meeting. Each of Mundoro Capital and MAG Silver put its advance notice policy to shareholders for approval, on the basis that the policy would terminate on expiry of the shareholders meeting (but after the election of directors) if not approved by shareholders at that meeting. The memo then delves into these policies in detail…

MoFo, in partnership with 451 Research Group, recently released the results of its second “M&A Leaders Survey,” which gauges tech-sector attitudes around deal making. The survey is based on a broad sampling of CEOs, CFOs, in-house counsel, venture capital and private equity firms, investment bankers and outside lawyers; more than 300 deal professionals responded. Some of the key findings are:

– Though half of respondents predict upswing in activity in next six months, the overall level of optimism is markedly lower than in April survey.
– Most dealmakers cite uncertain prospects for the U.S. economy as a prime cause of their reluctance to execute transactions.
– Other key deal roadblocks include the persistent European debt crisis, and anxiety over the so-called “fiscal cliff” facing the U.S. in January.

Here’s analysis from SRS | Shareholder Representative Services:

While much attention has been focused on whether the Bush tax cuts will expire at year-end, one tax change is almost certain – a new 3.8% Medicare tax on net investment income will take effect on January 1, 2013. Targeting high net worth individuals with modified adjusted gross income of $200,000 or more ($250,000 for married couples filing jointly), the new tax could hit some or all of your short and long-term capital gains from the sale of equity in M&A transactions. For M&A deals with an initial closing date in 2012, or older deals with escrows scheduled to be released next year, the maximum federal tax rate could rise to 23.8% (20% + 3.8%) on net long-term capital gains (versus 15% in 2012) and 43.4% (39.6% + 3.8%) on net short-term capital gains (versus 35% this year). As a result of this likely increase, there are two tax tips you should consider as part of your year-end planning if you recently participated in M&A transactions.

Tax Tip #1: Consider Electing out of the Installment Method for Reporting Gains from M&A Transactions: Given the projected rise in taxes on investment income, shareholders in M&A deals that closed in 2012 should consider accelerating recognition of their capital gain. While most transactions with escrows and holdbacks use the installment method to defer taxes until merger proceeds are actually received, such as when an escrow is released, taxpayers usually have the option to elect out of the installment method and recognize the entire gain from the sale at closing, thereby locking in 2012 tax rates. Further, this election can be deferred until taxpayers file their 2012 returns, thereby providing shareholders with plenty of time to evaluate their options. Cash flow planning is also essential when determining whether to make this election as the taxes on the gain allocated to the escrow or holdback will most likely be due prior to the escrow release date if the taxpayer elects out of installment method.

Tax Tip #2: Consider Selling your Escrow Interest to a Third Party: Unfortunately, electing out of the installment method to accelerate recognition of the capital gain most likely only works for M&A deals that will have closed in 2012 because the election has probably already been made on earlier transactions. What about deals that closed prior to 2012 that have escrows yet to been released? Consider selling your escrow interest to a third party prior to December 31, 2012. Doing so should lock in the 2012 capital gains rate as well as eliminate further exposure from potential indemnification claims and losses.

Below is the opening of this case study from Laurel Hill:

On October 17, 2012, after what amounted to a nearly year long proxy battle, the shareholders of Mosquito Consolidated Gold Mines were ultimately able to have a say on the stewardship of their company. The prolonged battle – which involved an invalidated meeting, court proceedings and eventually a court-ordered meeting with an independent chair and tabulator- resulted in shareholders of Mosquito overwhelmingly electing a new slate of directors proposed by The Concerned Shareholders.

The board battle commenced in the fall of 2011, when two existing directors, Mr. Hongzue Fu and Mr. Shaun Dykes, without notice, were excluded from director nominations in the Management Information Circular. International Energy and Mineral Resources Investment Company Limited (“IEMR”), of which Mr. Fu is president, was the largest shareholder of Mosquito, representing at the time 16.20% of the outstanding shares. Shaun Dykes had been Exploration Manager for the company since 1994. Mr. Dykes had guided the flagship CuMo project from the beginning of exploration to where its sits today – a $16 billion asset based on the 2009 Preliminary Economic Analysis. In spite of such an asset, the market capitalization of the company languished at $30 million.

Recently, Nixon Peabody posted its “2012 MAC Survey.” Here is an excerpt:

Between our inaugural survey published in 2002, following the tragic events of September 11, 2001, and our 2003 results, we witnessed a trend toward probidder MAC clauses accompanied, however, with an expansion in the specific exclusions that are focused on acts of war and terrorism and on broad-based market volatility. As time passed and the business environment improved during the 2004-2007 period, our surveys reported increasingly pro-target formulations with a far more robust list of exclusions. That pro-target trend ceased between our 2008 and 2009 results when our surveys showed an increase in the negotiating strength of bidders with a declining list of exclusions to MAC provisions. The results for 2010 and 2011 showed slight increases in the use of exclusions over 2008-2009,
signaling increased negotiating strength of targets over the prior period.

Results from our current survey show the average number of exceptions per deal remained about the same year-over-year, but with both marked increases and decreases in specific elements and exclusions as further discussed herein, signaling continued robust negotiation
to the overall formulation of MAC provisions without a clear year-over-year shift in overall negotiating strength between bidders and targets. Given the overall decline in M&A deal activity during the fourth quarter of 2011 and in 2012 to date, we expected to see a greater degree of change in MAC clauses toward formulations favoring bidders. However, this year’s mixed bag may simply reflect a general shift in attention to certain risks over others rather than an overall shift in bargaining power.