Last week, Corp Fin issued a new batch of Compliance & Disclosure Intrepretations – this batch relates to Sections 13(d) and 13(g), and related Schedules 13D and 13G. Here is a memo analyzing changes in the Staff’s positons as compared to the old Telephone Interps.
We just announced a new webcast – “Ask the Experts: Schedule 13D and Schedule 13G Issues” – for December 8th, where you’ll get to ask questions of former Senior SEC Staffers about one of the trickiest areas around…an area that becomes more important as shareholder activism continues to grow.
This September-October issue of the Deal Lawyers print newsletter was just sent to the printer and includes articles on:
– Convertible Debt Exchange Offers: Considerations for Distressed Issuers
– Mitigating Value and Dilution Risks in Stock-for-Stock Mergers
– Caveat Everybody: Changes in Control as Assignments of Contract Rights
– Substituting Tort for Contract: Tortious Interference Claims Against M&A Affiliates
If you’re not yet a subscriber, try a “free for rest of ’09” no-risk trial to get a non-blurred version of this issue on a complimentary basis.
Joel Greenberg of Kaye Scholer brings us the following analysis of New York’s new power of attorney law on deals:
September 1, 2009 was the effective date for a series of amendments to the New York General Obligations Law that impose requirements for powers of attorney executed within New York State by individuals. Powers of attorney executed by persons other than individuals or by individuals (including New York domiciliaries) in a jurisdiction other than New York in accordance with the laws of that jurisdiction are not subject to these requirements.
On its face, the legislation appears to apply to powers of attorney embodied in other documents often used for M&A and other commercial transactions, such as shareholder representative provisions in acquisition agreements, shareholder lockup agreements and security agreements.
The operative provision provides in relevant part:
Section 5-1501B. Creation of a valid power of attorney; when effective.
1. To be valid, a statutory short form power of attorney, or a non-statutory power of attorney, executed in this state by an individual, must:
(a) Be typed or printed using letters which are legible or of clear type no less than twelve point in size, or, if in writing, a reasonable equivalent thereof.
(b) Be signed and dated by a principal with capacity, with the signature of the principal duly acknowledged in the manner prescribed for the acknowledgement of a conveyance of real property.
(c) Be signed and dated by any agent acting on behalf of the principal with the signature of the agent duly acknowledged in the manner prescribed for the acknowledgement of a conveyance of real property…
(d) Contain the exact wording of the:
(1) “Caution to the Principal” in paragraph (a) of subdivision one of section 5-1513 of this title ; and
(2) “Important Information for the Agent” in paragraph (n) of subdivision one of section 5-1513 of this title.
The legislation is not limited to New York domiciliaries or to documents governed by New York law; it purports to apply whenever a power of attorney is executed within New York State by an individual. In situations where some of the parties are individuals and there is a possibility that there may be documents executed within New York State, one solution may be to excise the provisions constituting a power of attorney from the principal deal documents and to include them in a separate document that conforms to the requirements of the legislation.
This approach would permit the more formal process of execution required by the legislation (i.e., acknowledgment before a notary public) to be accomplished before the remaining deal documents are complete and should have the additional benefit of confining any issues as to validity based on alleged non-compliance to the power of attorney.
This does not purport to be a complete summary of the legislation or to address all of the issues that it raises. The legislation is new and there is little or no secondary guidance to its potential application.
This does not purport to be a complete summary of the legislation or to address all of the issues that it raises. The legislation is new and there is little or no secondary guidance to its potential application.
On TheCorporateCounsel.net Blog today, I blogged about the impact of this new NY law on the federal securities laws.
Some members are telling me that the British Virgin Islands is growing fast as a place where entities are incorporated to facilitate deals and joint ventures. Other members note that BVI is to this decade what the Cayman Islands were to the last one – a sort of semi-shady tax haven that sells itself very hard as a jurisdiction of incorporation. Below is a poll for your input on this issue.
Regardless of your feelings on this topic, it is important to know what steps can be taken once you have successfully obtained a judgment against a BVI company in a foreign jurisdiction. One question often asked is whether the BVI Court has a general procedure for recognising foreign judgments other than where a bilateral treaty exists (the BVI legal system is based on English Law and therefore many of the statutes and applicable common law principals are similar). In our “International” Practice Area, we have posted memos to help you answer this question.
The venture capital industry is going through some evolutionary changes, as noted in today’s TheCorporateCounsel.net Blog entitled “VC = Venture Cataclysm?” Keep up with how much VC is evolving by tuning into this webcast on TheCorporateCounsel.net tomorrow – “Venture Capital: Facing a Changing World” – featuring Jonathan Axelrad of Goodwin Procter, Steve Bochner of Wilson Sonsini and Gordy Davidson of Fenwick & West.
Recently, Rezwan Pavri of Wilson Sonsini helped me answer the following question in our “Q&A Forum”:
Question: In a venture capital/private equity financing, what is a “pull up” provision? Fenwick’s most recent survey refers to “pull up” provisions as opposed to pay-to-play provisions.
Answer: A “pull-up” is a variation on the basic pay-to-play structure that provides incentives to existing investors to continue funding a company by allowing investors to pull forward existing shares of the company’s capital stock into a new series of preferred stock with superior rights to existing preferred stock. This structure often encourages investors in junior series of preferred stock to invest in the current financing round because it provides them with an opportunity to move at least some of their junior preferred stock into a senior series of preferred stock (and thereby get out from under a stack of preferred stock with senior liquidation preferences).
“Pull-up” features can often be combined with other provisions found in a traditional pay-to-play structure in order to achieve a recapitalization of a company. “Pull-ups” are often accomplished through contractual exchange rights that are baked into the stock purchase agreement for the current financing round.
Awhile back, we blogged about the abandonment of the Endocare Inc./Galil merger and the potential for antitrust scrutiny of transactions even if they are not subject to Hart-Scott-Rodino pre-merger review. This recent Davis Polk memo, discussing the two opposing statements made by the FTC Chairman and Commissioners on the Endocare/Galil merger, notes that the FTC’s actions indicate that it will not make concessions from its rules for small companies.
On June 8, 2009, the FTC issued two statements expressing opposing views as to Endocare, Inc.’s announcement that its proposed merger with Galil Medical, Ltd. had been terminated “as a result of” the FTC’s ongoing investigation. The proposed merger between the medical device companies, both of which develop prostate and renal cancer therapies, was too small to be reportable under the Hart-Scott-Rodino Act.
The FTC investigation began in late 2008, more than six months prior to the company’s announcement. According to the statement of Commissioner J. Thomas Rosch,the parties had produced several boxes of hard-copy documents, but declined to produce additional documents requested on the grounds that the burden would be too great on the small companies’ “severely limited resources.” In a harsh rebuke of the FTC, Commissioner Rosch argued that the case “represents a ‘poster child’ for how protracted investigation of a transaction or practice can result in the Commission failing to determine in a timely fashion whether there is a ‘reason to believe’ that a transaction or practice will violate the antitrust laws and the public interest.” He blamed the lengthy investigation on the Commission’s own failure to apply remedies available to it to enforce the subpoena, and emphasized the public policy reasons weighing in favor of the merger, including the “very small and diminishing share of the market” for the particular type of therapy the proposed merger was intended to develop.
In a joint statement, FTC Chairman Jon Leibowitz, Commissioner Pamela Jones Harbour, and Commissioner William E. Kovacic expressed their sharp disagreement with Commissioner Rosch’s portrayal of the investigation and downplayed these policy arguments, emphasizing that a small company’s claim of limited resources will not serve as an exemption from full compliance with a second request: “No special rule or Section 7 principle . . . exempts two small companies with small scientific/engineering staffs and limited resources from meaningful antitrust review, even when the companies claim that their proposed transaction will enable them to conduct additional research and development relating to a socially significant product.” The Commissioners instead blamed the lengthy investigation on the parties’ failure to provide a complete record or to negotiate the scope of the subpoena, and noted that “even the parties’ self-selected documents were insufficient to substantiate the parties’ purported efficiencies claims.”
When I came back from a nice two-week vacation at the end of August and started to reconnect with friends in law firms, I was shocked at how a lot of people are starting to fully prepare for a busy Fall. It would seem that the reported end of the recession means that healthy companies are ready to begin an acquiring spree (this recent NY Times article says the same thing).
Take this anonymous poll to let us know how you feel about the near term for dealmaking:
Below is a note from Watson Wyatt regarding the impact of FAS #141 on M&A activity:
We can count mergers and acquisitions activity as one more casualty of the credit crisis: During the last 12 months, deals have sharply declined in volume and size. As a result, an important change in the M&A landscape has not received the attention it would have attracted just a couple of years ago.
The new Statement of Financial Accounting Standards 141R, “Business Combinations,” and 160, “Noncontrolling Interests in Consolidated Financial Statements,” might have fallen below the radar screen of many corporate dealmakers so far, but they have significantly changed the way costs for M&A deals must be managed and reported. While driven by the desire to increase transparency of accounting for deal costs, the new rules are also likely to have significant implications for HR’s management of staff reduction and other integration issues.
These standards — the first to be developed jointly by the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) — were published in late 2007. The FASB standards took effect on Dec. 15, 2008, and thus apply to most current deals, and the companion IASB standards — International Financial Reporting Standard 3R and International Accounting Standard 27R — took effect more recently on July 1, 2009. The new standards change the accounting for business combinations and will likely affect integration decisions by acquirers in M&A deals. Historically, companies have been able to adjust goodwill to absorb post-deal cost surprises, which allowed for more streamlined due diligence. Under the new rules, however, the financial impact of an M&A deal must be booked at the time of the acquisition. With no recourse to a retroactive adjustment based on later analyses or data, there is less margin for error or oversight in due diligence, which is thus likely to require more time and create pressure for accurate calculations to be completed earlier in the process.
Subsequent job reductions, previously rolled into deal accounting, might need to be recorded and accounted for as special events if details are not finalized until post-acquisition. Many M&A transactions are driven by the prospect of eliminating redundant jobs and consolidating operations. Relocating workers and reducing headcount incur short-term costs but deliver long-term savings. Historically, the anticipated severance and related costs were rolled into the deal costs. Under the new rules, if these expenses will be booked as deal costs, they must be specifically identified at the date of acquisition.
In addition to struggling with the employee relations issues triggered by the early announcement of staff reductions, companies might need to obtain agreements with works councils, labor unions or other outside parties before projecting cuts and closures. So the costs/benefits from such staff reductions will more likely need to be recorded in a later accounting period, after the company has obtained the necessary approvals. Given the intensified scrutiny from business units and shareholders on expenses incurred, relocation and restructuring plans formerly considered standard practice might need to be reconsidered.
In addition, deal expenses and fees from internal resources and external advisers — normally capitalized into goodwill — now must be expensed as a normal profit and loss (P&L) cost in the period incurred (before or after a deal is announced). For larger deals, these costs can be significant, and oversight will likely become more rigorous. An additional impact: Transaction costs might need to be publicly disclosed before the deal is completed, potentially accelerating the timing of negotiations and compromising confidentiality.
Deals that result in partial ownership or increase a company’s interest must be measured at fair value, regardless of whether the buyer attains a controlling or noncontrolling interest. The associated goodwill is measured only once — when the initial controlling interest is obtained. All subsequent adjustments to ownership or fair value will be to equity rather than to the regular P&L accounts or goodwill. The challenge for companies is that, for each additional interest acquired, the associated fair value must be assessed and accounted for. This will probably increase the number of small transactions for which fair value calculations need to be completed and could necessitate new valuation techniques for certain nontraditionally valued assets or liabilities.
In addition to calling for more thorough due diligence and triggering more rigorous oversight, the new reporting standards will likely require a response from HR at an earlier stage in the M&A process. Companies might need to communicate upcoming HR changes to employees sooner and negotiate agreements with groups representing workers. Increased scrutiny of relocation and restructuring plans could influence companies’ decision making.
News from WilmerHale:
At its Board Meeting held last Wednesday, the FDIC issued its Final Statement of Policy on Qualifications for Failed Bank Acquisitions. As expected, the FDIC reduced the Tier 1 capital leverage ratio proposed for private equity investors investing in failed banks from 15% Tier 1 to 10% Tier 1 (but only common equity) to total assets. It also removed the “source of strength” requirement in an effort to make it easier for failing institutions to attract private equity buyers. However, the Final Statement retains many of the other elements in the original proposal with the goal of adequately protecting the failed institutions and the Deposit Insurance Fund.
The Final Statement makes clear that these requirements will apply only prospectively and will not apply to investors with 5% or less of the total voting power of an acquired institution. In a further attempt by the FDIC to encourage partnerships between private equity investors and depository institution holding companies (excluding shell holding companies) where the holding company has a clear majority interest in the acquired depository institution and an established record of success in operating such depository institutions, the Final Statement makes clear that it does not apply to investors in partnerships with such depository holding companies.
The FDIC retains the right to waive one or more of the provisions of the Final Statement if such exemption “is in the best interests” of the Deposit Insurance Fund and the “goals and objectives” of the Final Statement “can be accomplished by other means.” The Final Statement will be reviewed by the FDIC within six months.
Upon return from a lengthy vacation, I was excited to learn that the Delaware Governor has nominated Travis Laster to fill VC Lamb’s vacated spot on the Chancery Court (state’s 21-member Senate must now approve the nomination, expected next month). We surely will miss Travis’ numerous contributions to this blog – but we are excited for such a distinguished lawyer to join the bench. His Delaware colleagues appear to feel the same way:
– Delaware Corporate & Commercial Litigation Blog
– Delaware Libertarian
– Delaware Online
– Race to the Bottom
– M&A Law Prof Blog