Here’s a VERY interesting recent development in the M&A arena.
The Board of Directors of Visx Inc., in its recent merger with Advanced Medical Optics Inc., hired their own separate counsel to conduct due diligence in the transaction. Though predicted for sometime as likely to occur in today’s SOX environment this is the first Board we’ve heard of taking this step.
While an obvious additional cost for the transaction it would appear to be another (and welcome) revenue avenue for the legal community.
Following the chaotic election season, the country now knows that President George W. Bush will serve an additional four years as President of the United States. We have a good idea what that means for the big ticket items—tax policy, foreign policy, the War on Terror, and education—but what exactly does it mean for antitrust?
Four years ago when Tim Muris took over from Bob Pitofsky the position of Chairman of the Federal Trade Commission, and Charles James took over from Joel Klein as the chief antitrust enforcer at the Department of Justice, many predicted significant changes in antitrust enforcement goals. To a large degree, those predictions were incorrect. In particular the FTC continued aggressively to enforce the antitrust laws, with changes only at the margins from the previous administration.
Today, we’ll look very briefly at what the FTC has accomplished over the last four years, and what we should expect from a new administration. For those of you who do not pay as close attention to the machinations of the FTC as some of us do, Chairman Muris recently stepped down from his post at the FTC, and Deborah Majoras was named interim Chair of the FTC (she was a recess appointment by the President, who did not win confirmation from the Senate for a full appointment). Now that President Bush has won reelection, we should expect that Majoras’ appointment will be made permanent, and that she can now move forward to place her imprimatur on the policies of the FTC.
When he took over as Chair of the FTC, Tim Muris promised “continuity” in antitrust enforcement, and made that a recurring theme of the early speeches and papers put forth during his administration. It also was a theme in his enforcement agenda—from merger policy, to enforcement guidelines, to other areas of non-merger civil antitrust enforcement.
The FTC continued aggressively to investigate mergers in all industries—obtaining antitrust relief involving mergers in everything from super premium ice cream, to software, and from pickles and canned tuna to hospitals.
Chairman Muris also made it clear that it would be a goal of the FTC to stop what he saw was rampant abuse of the patent process by pharmaceutical companies, which he believes harm competition by excluding generic alternatives from the market. During his tenure, the FTC successfully sued companies for improperly listing patents in the Orange Book in attempt to extend the life of pioneer drugs, and thwarted efforts of drug companies to use the provisions of the Hatch-Waxman Act to bottleneck generics from entry into the market through abuses in the patent settlement process.
The FTC, under Tim Muris, also made it a point to bring actions against companies which sought to extend or maintain their monopolies through the abuse of the government or quasi-government process. For example, we saw the FTC bring action against several companies for interfering with the standard-setting process. In addition, the FTC continued to bring actions against physician groups for illegally colluding to bargain for better rates.
Chairman Muris also strived to make the decision-making process at the FTC more transparent. Under his watch, the FTC issued numerous guidelines and retrospectives, including a paper that provided insight into the FTC’s thinking of the State Action doctrine, how to improve competition in drug, health care and petroleum markets, as well as a seven-year retrospective of FTC merger challenges, that provided statistical information as to when the FTC would most likely challenge mergers.
And unlike past administrations, the FTC under Chairman Muris provided a great deal of insight into why the agency decided not to challenge mergers—for example, the FTC issued extensive decisions explaining the decision not to challenge the Cruise Line merger, the RJR Reynolds/Brown & Williamson merger, and the merger of two drug companies, Genzyme and Novazyme.
Chairwoman Majoras has not yet set forth a broad vision for change or continuity at the FTC, nor has she provided an indication that there will be significant changes in antitrust policy (quite likely because her appointment would only have been temporary had President Bush not secured reelection). Nevertheless, as we all have the tendency to do, we still can make several modest observations about what we should expect during the next several years from the FTC:
* Chairwoman Majoras was formerly at the Department of Justice, and primarily was responsible for the Department’s Microsoft case and settlement. To some, the DOJ’s settlement of the Microsoft case without seeking more extensive relief from the company for its antitrust transgressions (some argued that Microsoft should have been split into two or more separate companies) failed to fulfill its enforcement responsibilities. Whether the Microsoft settlement represents Majoras’ belief that the government should take a laissez faire approach to antitrust enforcement—or instead simply represented the best relief that the DOJ could achieve in that particular case—remains to be seen.
* We know that Majoras already has a good working relationship with the Justice Department (she is the first person to hold both the Chair position at the FTC and a senior position at the DOJ), and likely will make it a priority to work closely with the DOJ to ensure enforcement continuity between the two agencies. One notable shortcoming of antitrust agencies over the last four years was the continuing in-fighting between the agencies over which should have jurisdiction to review matters (the agencies have concurrent jurisdiction to review antitrust matters). With her DOJ past and good-working relationship with the Justice Department, Majoras should be able to smooth over the rough patches, resulting in a more efficient antitrust enforcement.
* The merger wave of the 1990s is not expected to return with the same vigor, but surely there will be more activity than there has been in the past four years. Chairwoman Majoras likely will be faced with a greater number of decisions on whether to challenge mergers than Chairman Muris. Because we likely will see a new wave of consolidation in the high-tech, retail and health care markets, it will be interesting to see whether the FTC closely scrutinizes the new wave of consolidation, or holds back on enforcement even in consolidating industries. During Muris’ administration the FTC continued aggressively to pursue merger enforcement in markets that were significantly consolidated, with a few notable exceptions that may have been challenged in an even more enforcement-friendly administration (for example, in the Cruise Lines and Tobacco mergers).
* Under Chairman Muris’ watch, the FTC was criticized by some for failing to pursue certain types of aggressive private-market abuse cases. During the last four years, the FTC brought very few actions alleging that private conduct, rather than abuse of the government process cases, violated the antitrust laws. In fact, in speeches and in briefs to the appellate courts, many suggested that the FTC presented a more “business-friendly” approach to antitrust, curbing the enthusiasm, for example, to require owners of “essential facilities” to share their assets with competitors, and to challenge aggressive bundled pricing strategies. Notably, the FTC did not bring a single action involving “vertical” restraints during the Muris administration (i.e., restraints involving relationships between different levels of the distribution chain). It remains to be seen whether the FTC, under Majoras, will continue to eschew enforcement in that area.
For antitrust practitioners, it will be interesting to see where Majoras takes the FTC. Those who predicted a lax enforcement regime under a Republican administration learned quickly that under Chairman Muris, the FTC still remained active in antitrust enforcement. Before we conclude otherwise over the next few years, we should take a wait-and-see approach with Majoras as well.
**Note: Here’s an interesting exchange we recently had with a reader arising from mine and Larry’s M&A Deal Points Study.**
Dear Deal Guys,
I was wondering whether one of the variables you analyzed included whether the indemnification provisions apply both pre and post closing, or just post closing? I suppose it’s arguably implicit in the findings re exclusive remedies, but I’ve often seen those provisions phrased with the intro “Provided that the Closing has occurred . . .”
On the one hand I’d be surprised if you had looked into this, but on the other, the study is so all-inclusive that I had to ask.
No, this isn’t a political message. I saw a recent article by a Prof Robert Cialdini that talked about effective negotiation based on a dating experiment he did.
The daters used three styles of persuasion.
Some tried the coercive approach – – threatening their partners with consequences if they didn’t yield. The strategy was a disaster, driving the partner further away from the communicator’s position.
Others attempted to argue that they had the more reasonable view and that it made sense for their partner to adopt it. Their partners were not moved.
But a third set used a simple – and successful – procedure: the relationship-raising approach. Before requesting a change, they mentioned their existing relationship. An example: “You know, we’ve been together for a while now.”
The author asserted that the lessons from this dating experiment applied to the business world too.
This makes sense to me. It reminds me of what I tell clients about getting deals done, especially joint ventures: A good document cannot fix a bad relationship but a good relationship can fix a bad document.
Well, well, I think our “Where is the Love?” blog struck a cord with many readers. Below is a tidbit (with permission) from Tom Hanley in DC. If you have any “Love Stories” (i.e., anecdotes of abusive, obnoxious, over-the-top negotiation behavior) you’d like to share, please email me or Larry and we’ll post some of the “Best of…” This could get pretty interesting.
For those of you who’ve yet to hear this outrageous voicemail message that has been whizzing around the internet for the past couple of weeks. The voice message purports to be from opposing counsel over comments made to a draft agreement. Give it a listen but I must warn you to close your door and be prepared for a few choice F-Bombs.
What’s up with this guy? Bad hair day? Last time I checked, ranting, raving, and threats to make the life of other side’s lawyer a “living hell” just isn’t on Dale Carnegie’s list.
For the purposes of this blog, let’s refer to this ranting, condescending, obnoxious, cocky-for-no-apparent-reason jerk, Terminator-Mini-Me as “A-H” (I’ll let you guess what that stands for).
Let’s get past the questions about his lack of civility and ask: Is A-H’s negotiating style effective?
Even assuming that the “ends-justify-the-means” camp is right (and that’s a HUGE assumption that I don’t necessarily agree with), I just don’t think that berating and intimidation is in his client’s best interests. In fact, I think A-H’s tactics virtually guarantee blowback – and even blow up. So my answer is “no.”
If you back someone into a corner, that person will most likely become entrenched in his or her position just to prove he’s right (or to piss you off). Lawyers are generally a competitive lot (as are our clients). We like to win. As such, the prospects for deal-gridlock are very high when egos go unchecked. A-H’s ego needed some checking. (I understand that A-H is a 7-8 year associate, what he really needed was parental supervision.)
In any event, my guess is that the deal maker’s ego has Sickle Cell Anemia qualities as the silent killer of many deals. I’ve been involved in one too many deals where the tipping point rested on keeping a lawyer’s ego in check.
We all have egos, so for the sake of your client’s deal, the $64K question is “how do you keep egos from killing your deal?” Your guess is as good as mine.
I note that a tactical show of anger may sometimes be effective but it’s dangerous in the wrong hands (I’m inclined to say that A-H’s hands are wrong).
On the other hand, did the recipient of message set A-H off by being condescending on the treatment of A-H’s comments. Did the recipient treat A-H like a stepchild by summarily dismissing A-H’s comments as trivial. So how does A-H look to his client when opposing counsel summarily rejects his intellectual work-of-art? Can you feel the onset of deal rigor mortis…?
Lastly, are “gentlemen dealmakers” going the way of the dinosaurs? I don’t think so. In fact, most of us can be (and are) professional and civil while still being strong, assertive advocates for our client’s interests.
So, being an “A-H” doesn’t make you a deal maker – in fact, it makes you a deal killer. As a senior partner told me a long time ago: At the end of the day, all you have is your reputation.
School’s back and so am I with a recent case that will grab your attention (it certainly grabbed mine).
Check out Vega v. Jones Day (2004 WL 1719279 (Cal. App. 2 Dist)). A copy of the opinion has been posted in the “Mergers & Acquisitions” Practice Area.
The facts: Plaintiff was a shareholder of target in an acquisition in which P received shares of buyer’s stock. P claimed that Jones Day, buyer’s counsel, defrauded P by actively concealing the terms of one of those infamous “toxic preferred stock” financings that was done between signing and closing of the acquisition agreement. Instead of providing a previously prepared supplemental disclosure schedule that “clearly described and properly disclosed” the toxic provisions, buyer’s counsel delivered a “sanitized” version that did not include the toxic provisions. JD also made statements to the effect that this financing was “no big deal,” “nothing unusual,”and “standard.” Two weeks before the closing, JD filed the Certificate of Designations with the Delaware Secretary of State.
P sued JD for fraud and negligent misrepresentation. JD’s defense was that, as opposing counsel, it had no duty to disclose to target, P (a target shareholder), or target’s counsel.
The Court didn’t buy JD’s defense and held that, once JD “specifically undertook to disclose the transaction, and having done so, [JD] is not at liberty to conceal a material term. Even where no duty to disclose would otherwise exist, ‘where one does speak he must speak the whole truth to the end that he does not conceal any facts which materially qualify those stated…”
Can you say “Ouch!”?
How many times have you delivered disclosure schedules that contained a one-line reference to a set of closing docs that evidence an otherwise complex transaction? In light of Vega, can you sleep at night knowing that you’ve “properly disclosed.” What happened to caveat emptor and opposing counsel’s obligation to its client to figure out what’s in that stack of documents? Is the Vega court is saying that the Ragu Approach (“it’s in there!”) just isn’t enough and that you must not only put the “material facts” under someone’s nose but you must also wave a your arms and yell “HEY BUDDY, LOOK HERE!”?
The opinion has many more pearls of wisdom that will make you do a double take (e.g., the fact that the Certificate of Designation was publicly available wasn’t good enough). Take a look at it.
On the other hand, maybe I’m just over-reacting because the Court’s just reminding us of what our mommies always told us: “Now sweetie, it’s not nice to tell stories…”
Speaking of buyer’s investigation, did you think that I’d miss this opportunity to plug our Deal Points Study?
The question: how does the buyer’s knowledge acquired in the due diligence process (or otherwise) affect the buyer’s right to rely on the seller’s representation and warranties with regard to indemnification, walk rights, and other remedies? Specifically, what did the parties actually negotiate on the allocation of this risk?
Our Study shows that 49% of deals expressly reserved to the buyer the right to rely on the seller’s representation and warranties – notwithstanding the buyer’s knowledge of an inaccuracy in the seller’s representation and warranties. Because such provisions may be viewed by the cautious seller as an invitation for the buyer to “close-and-sue,” these types of provisions are sometimes affectionately known as “sandbagging” clauses (the buyer would, of course, prefer to call them “benefit-of-the-bargain” clauses).
Typical “sandbagging” language runs the gamut from stealthy provisos stating that “the seller’s representations and warranties survive the Closing and any investigation conducted by the buyer” to the more detailed provisions that also deal with issues of constructive knowledge, such as the following from the ABA’s Model Asset Purchase Agreement:
“The right to indemnification, reimbursement or other remedy based upon such representations, warranties, covenants and obligations shall not be affected by any investigation (including any environmental investigation or assessment) conducted with respect to, or any Knowledge acquired (or capable of being acquired) at any time, whether before or after the execution and delivery of this Agreement or the Closing Date, with respect to the accuracy or inaccuracy of or compliance with any such representation, warranty, covenant or obligation.”
On the other hand, an aggressive seller may attempt to include a so-called “anti-sandbagging” provision that precludes an indemnity claim by the buyer for breaches known by the buyer before closing. An example of such a clause is:
“[t]he Company Stockholders and Company Optionholders shall not be liable under this Article VII with respect to any Damages arising out of or related to matters within the knowledge of Parent at the Effective Time…”
(Proton Energy Systems, Inc. acquisition of Northern Power Systems, Inc.)
Our Study found 6 deals in 2003 (7.2% of the deals reviewed) with anti-sandbagging clauses compared with 6 deals in 2002 (6.8%), 5 deals (5.88%) in 2001, and only 1 deal in 2000. As such, we’ll stick our necks out with the observation that this slight upward trend may be an indication of sellers having more success at the negotiation table. On the other hand, are there just more MBOs in the study sample (where knowledge-based limitations may be a more frequent topic of discussion since seller’s key management just flipped to buyer’s side)?
Interestingly, about 43% (up from 34% in 2002) of the deals in our Study were silent on this investigation-survival issue. Assuming that it is a virtually standard practice for the buyer’s first draft to include a benefit-of-the-bargain provision, silence on this issue may still be a “win” for the seller because it could mean that the seller was successful at negotiating out that clause. At the very least, we can expect this issue to continue receiving more attention at the negotiation table.
Before you blindly pull the trigger on a close-and-sue option, check out the detailed analysis of the legal and practical arguments regarding benefit-of-the-bargain and anti-sandbagging clauses in the Commentary to Section 11 of the ABA’s Model Asset Purchase Agreement.
If you’d like a free copy of our Deal Points Study, just email me or Larry.
A who buyer doesn’t want conduct due diligence? Been there, done that. Ever been tempted to tell the client (buyer) that a full-body-armor set of reps could serve as a substitute for buyer’s lack of adequate due diligence. That thought has crossed my mind…
A recent (well, kind of) article in March 8 issue of The Deal, however, reminded me that merely “buying seller’s reps” may not be the smoothest path to M&A nirvana.
The authors, Todd David and Marc Gustafson of Alston & Bird, discussed their successful defense of a seller against buyer’s negligent misrepresentation claim. Essentially, they convinced the court, applying NY law, that buyer failed to exercise adequate due diligence in investigating the truth of seller’s reps.
The authors also point out that the buyer’s duty to protect itself from misrepresentation through due diligence is commensurate with buyer’s sophistication.
So, does this mean that buyer always has a common law duty to investigate? Can we really sleep at night relying on contractual provisions (hopefully) preserving the benefit of buyer’s bargain as framed in seller’s reps? Is this all part of that caveat emptor thing? Sounds like it.
One thing’s for sure, notions of duty to investigate, reasonable reliance and the like, give us lawyers lots of ammo to convince our clients that our sending the hoards of young lawyers to lay siege upon seller’s sprawling suburban corporate campus is good for the client’s business – and ours.
The Gipper’s approach with the USSR still rings true: Trust … but verify.
A pretty far-reaching pair of Congressional bills recently passed the House and Senate: H.R. 4520, the American Jobs Creation Act of 2004 and S. 1637, the Jumpstart Our Business Strength (JOBS) Act of 2004. As these two bills go to conference, they are substantially similar and would impose significant penalties on any arrangements that did not meet their stringent requirements.
Under the JOBS Act, plans permitting distributions of deferred compensation triggered by, and occurring during the first year after, a change of control (to be defined in future regulations) to Section 16 officers would be subject to penalties, including a 20% excise tax imposed on the officer (which would be in addition to any excise tax imposed by Section 4999 of the Internal Revenue Code). In addition, that distribution would be non-deductible to the company. This is one piece of legislation to watch.