You might think that with 2023’s challenging M&A environment, PE fund employees would be experiencing a big compensation hit. This Institutional Investor article says that’s not the case. In fact, this excerpt says that those folks are seeing double-digit increases in their pay:
The median total cash compensation for all levels of private equity employees — analysts through managing directors and partners — rose 13 percent in 2023, according to a survey of 1,179 workers across the U.S. by Odyssey Search Partners, a recruiting firm focused on alternative investment professionals. Analysts, the most junior employees, got the biggest bump this year, with a 21 percent increase in total cash compensation. All others expect raises in 2023, except for managing directors and partners, who said theirs would be flat.
The pay increases during a tough year aren’t as counterintuitive as they seem, Anthony Keizner, a partner at Odyssey, said. Unlike other professionals, such as investment bankers that rely on transactions, the most lucrative parts of private equity compensation stem from the performance of funds that span several years. Private equity firms charge investors management fees annually, so they can afford to pay higher salaries and bonuses, and right now they have to do that, according to Keizner.
The article goes on to say that the reason firms have to pay up for talent is that there’s still a strong demand for trained laterals in the PE industry. Funds have a lot of dry powder and they need quality people to work on deals and with portfolio companies. So, if one PE fund isn’t willing to keep its employees happy, there’s another one that will jump at the chance to do that.
About this time last year, I blogged about Chancellor McCormick’s decision in Crispo v. Musk, (Del. Ch.; 10/22) which addressed an issue that Delaware is still sorting out – the circumstances under which a stockholder may assert a claim as a third-party beneficiary to an acquisition agreement. Earlier this week, she revisited that issue while addressing a mootness fee petition in that case. Her opinion sheds some light on the enforceability of a contractual provision intended to preserve claims for target stockholders’ expectancy damages in the event of the buyer’s breach.
The parties to a merger agreement don’t usually agree to convey third-party beneficiary status on target shareholders because, among other things, nobody wants to give plaintiffs’ lawyers a right to kibbitz in negotiations to resolve problems on a deal. But many targets are interested in preserving the ability to seek expectancy damages on behalf of their stockholders, and one alternative that has been devised to achieve that objective is a so-called “Con Ed clause” asserting the target’s right to seek those damages.
The Twitter merger agreement included a Con Ed clause, but the Chancellor noted that in the absence of language designating stockholders as third-party beneficiaries of the agreement, such a provision may not be enforceable. This excerpt from her opinion summarizes that argument:
A target company has no right or expectation to receive merger consideration, including the premium, under agreements that operate like the Merger Agreement. The Merger Agreement provides that at the “Effective Time” (defined as the time when the parties file the certificate of merger with the Secretary of State), stock will be converted into the right to receive merger consideration. Under this framework, no stock or cash passes to or through the target. Rather, merger consideration is paid directly to the stockholders. Accordingly, only a stockholder expects to receive payment of a premium under the Merger Agreement.
Where a target company has no entitlement to a premium in the event the deal is consummated, it has no entitlement to lost-premium damages in the event of a busted deal. Accordingly, a provision purporting to define a target company’s damages to include lost-premium damages cannot be enforced by the target company. To the extent that a damages-definition provision purports to define lost-premium damages as exclusive to the target, therefore, it is unenforceable. Because only the target stockholders expect to receive a premium in the event a merger closes, a damages-definition defining a buyer’s damages to include lost-premium is only enforceable if it grants stockholders third-party beneficiary status.
However, Chancellor McCormick pointed out that this interpretation would violate the “cardinal rule” of contract construction “that, where possible, a court should give effect to all contract provisions.” That led her to suggest an alternative construction that wouldn’t violate this principle:
There is another possible construction, which involves interpreting the Merger Agreement as granting stockholders third-party beneficiary status that vest in exceptionally narrow circumstances and for the limited purpose of seeking lost premium damages. As discussed above, third-party beneficiary status is a creature of contract and can be expressly or impliedly limited by the parties’ contractual scheme. If stockholders had third-party beneficiary status to bring a claim for lost premium damages, then such standing would be impliedly limited by the parties’ contractual scheme.
The Chancellor went on to address the nature of those implied limitations on the stockholders’ third-party beneficiary status and indicated that this status would vest only if the deal were terminated and abandoned and the remedy for specific performance was no longer available. Any such right also would be concurrent with the target’s right to pursue damages under the merger agreement.
Chancellor McCormick didn’t resolve which of these competing interpretations was the correct one. Instead, she ruled that any third-party beneficiary rights the plaintiff may have had did not vest, and therefore the plaintiff’s claim was not meritorious when filed. As a result, she denied the plaintiff’s motion for a mootness fee award.
For what it’s worth, Chancellor McCormick’s opinion suggests that there’s a straightforward fix for enforceability issues associated with a Con Ed clause. The parties could avoid requiring a court find an implied right to third party beneficiary status by expressly conveying third-party beneficiary status in the limited circumstances that the Chancellor enumerated. The limited nature of that status may make that alternative more palatable to dealmakers than a traditional third-party beneficiary provision.
If you needed any more proof about how challenging M&A financing conditions are, check out this recent Axios article, which says that equity contributions to US LBO transactions are at record levels. The article says the reason that PE sponsors are putting more skin in the game is simple – debt is getting very expensive:
Debt’s gotten pretty expensive this year, so the companies being acquired by PE firms can’t afford as much of it. Loans to companies purchased by PE firms have yielded 11% on average at issuance during Q3, a record high, according to PitchBook LCD.
PE firms have been forced to use more of their funds’ own money. Equity contributions are collectively around 51% this year, PitchBook LCD says — the first time that metric crossed the 50% threshold since the firm began tracking the data back in 1997. For comparison, the average equity contribution in the 10 years through 2021 was 41%.
While debt may account for a lower percentage of total capitalization than in years past, that doesn’t mean the burden of carrying that debt is declining. According to the article, interest payments are eating up a larger share of target company earnings than they have since 2007.
Meredith recently blogged about the distinction Delaware courts have traditionally drawn between an “expert determination” and “legal arbitration” when referring to dispute resolution language in the provisions of an acquisition agreement dealing with a purchase price adjustment. That blog pointed out that when the operative language calls for an expert determination, the third-party decision-maker does not have the authority to make binding decisions on matters of law or contract interpretation. Instead, its authority is limited to factual disputes within its expertise. In contrast, the third-party decision-maker’s authority when acting as an arbitrator is broader and is subject to much more limited review by a court.
The Chancery Court’s decision in Archkey Intermediate Holdings v. Mona, (Del. Ch.; 10/23), points out that Delaware recognizes a third alternative dispute resolution mechanism – an “Accountant True-Up” – and this excerpt from Vice Chancellor Laster’s opinion discusses that ADR procedure:
In between the two poles is another well-established form of ADR: the Accountant True-Up Mechanism. Purchase agreements governing the sale of private companies routinely include Accountant True-Up Mechanisms. Comm. on Int’l Com. Disputes, N.Y.C. Bar Ass’n, Purchase Price Adjustment Clauses and Expert Determinations: Legal Issues, Practical Problems and Suggested Improvements 1 (2013) [hereinafter “N.Y.C. Bar Report”]. In one standard use case, the parties “agree that any dispute concerning the values reported in the financial schedules used by the parties to determine the amount of any price adjustment are to be submitted to an independent accounting firm for a final and binding determination.”
The Vice Chancellor goes on to catalogue the standardized steps involved in an Accountant True-Up:
– The agreement gives the purchaser a defined period of time to prepare a proposed post-closing statement to be used to adjust the purchase price.
– The purchaser submits the proposed post-closing statement to the seller.
– The agreement gives the seller a defined period of time to review the proposed post-closing statement.
– If the seller agrees with the statement, then then the purchase price is adjusted based on the post-closing statement.
– If the seller disagrees with the statement, then the seller submits a written response detailing any objections.
– If the seller submits an objection notice then the parties engage in negotiations for a set period.
– If the disputes remain, they are submitted to an accountant for resolution.
– During the dispute resolution phase, the parties tender initial and rebuttal submissions with supporting documentation.
– The accountant’s determination is final and binding.
The Sheppard Mullin blog that Meredith referred to in her blog pointed out that language in an acquisition agreement to the effect that an independent accountant will serve as “an expert and not as an arbitrator” is a key indicator of the parties’ intent to obtain an expert determination. In this case, the stock purchase agreement provided that the independent accountant “shall act as an arbitrator.” But Vice Chancellor Laster concluded that this was not dispositive, and that the language of the agreement considered as a whole supported the conclusion that the dispute resolution process involved an Accountant True-Up.
As usual, there’s a lot more going on in this case than I can cover here. Fortunately, Glenn West has a more detailed take on the decision in his latest blog. In particular, be sure to check out his take on language in the opinion that could form the basis for a “malicious adjustment” claim.
Datasite recently published a survey of more than 500 global dealmakers on how generative AI is impacting the M&A process. In our latest Deal Lawyers Download Podcast, Doug Cullen, Datasite’s Chief Product & Strategy Officer, joined me to discuss the survey. Doug addressed the following topics addressed in this 13-minute podcast:
– Overview of survey’s scope and methodology
– Current role of AI in M&A transaction process
– Most significant potential benefits and obstacles to incorporating AI into deal processes
– Survey respondents’ assessment of the biggest upsides to using AI in M&A deals
– Survey respondents’ major concerns about the implications of AI
We’re always looking for new podcast content, so if you have something you’d like to talk about, please reach out to me at john@thecorporatecounsel.net or Meredith at mervine@ccrcorp.com. We’re wide open when it comes to topics – an interesting new judicial decision, other legal or market developments, best practices, war stories, tips on handling deal issues, interesting side gigs, or anything else you think might be of interest to the members of our community are all fair game.
According to this S&P Global report, despite the increasing challenges buyers face in obtaining financing and the other macro headwinds facing dealmakers, Q3 deal terminations reached their lowest level since 2020. Here are some of the key takeaways from the report:
– Only two private equity-backed deals terminated in Q3 2023. That’s down from 14 reported in Q2 and represents the lowest number of quarterly deal terminations in the past three years.
– The value of the two busted private equity deals was less than $1 million. In Q3 2022, a total of $26.4 billion(!) in PE-backed deals were terminated.
– Q3 also showed an 85% year-on-year decline in all terminated M&A transactions. Only 31 deals were terminated during the quarter, and that’s the lowest quarterly count since at least 2020.
– Overall, the value of deals terminated in Q3 2023 was $12.9 billion. That’s a 78% decline from the $58.4 billion reported in the same quarter of 2022.
Last week, John blogged about the DOJ’s new “Mergers & Acquisitions Safe Harbor Policy” intended to incentivize voluntary self-disclosure of wrongdoing uncovered during the M&A process, which Deputy AGs had previewed in a speech and multiple prior comments. This Wilson Sonsini alert describes how acquirers can apply the policy and gives five practical suggestions:
1. Compliance Diligence Is Critical for M&A Transactions: Deputy AG Monaco made clear that the DOJ expects an acquiring company’s legal and compliance team to “have a prominent seat at the deal table.” Companies must involve outside counsel and legal and compliance personnel to conduct pre-acquisition diligence on target companies.
2. Pre-Acquisition Due Diligence Enhancements: Acquirers should review or adopt a mergers and acquisitions policy with accompanying procedures that help identify and mitigate compliance risks early in the deal process. Acquirers that do not perform effective due diligence or self-disclose misconduct may be exposed to successor liability.
3. Ensure Prompt Post-Closing Remediation: Six months is not a lot of time for an acquirer to identify misconduct, investigate it, and decide whether to self-disclose. Twelve months is not a lot of time to conduct a root cause analysis, integrate the target entity into the acquirer’s compliance program, and implement full remediation. Companies must be thinking ahead to this post-closing clock, even with the DOJ’s offers of flexibility.
4. Consider Increasing Pre-Acquisition Timing: Since the Safe Harbor Policy’s clock begins running on the date of closing, firms should consider proactively expanding the amount of time allotted for investigating and developing compliance measures to ensure timely disclosure. Because this is a DOJ-wide policy, all federal criminal violations are on the table.
5. Deciding Whether (and When) to Self-Report: If the acquiring company is unsure whether the target company’s previous conduct is illegal, it has to weigh the risks of self-reporting. If the company does not self-report and solves the problem internally, the DOJ could learn about the misconduct another way, and the company would not get credit under the Safe Harbor Policy. On the other hand, if the company self-reports, the DOJ could find that it did not meet the Safe Harbor Policy’s requirements, expand its investigation into other areas, or even alert other U.S. or foreign government agencies of the misconduct. This analysis is highly fact- and circumstance-specific.
– Overview of the methodology and scope of Seyfarth’s middle market M&A survey
– Trends in the use of representation and warranty insurance and major differences in deal terms when R&W insurance is or is not utilized
– The evolution of fraud exceptions & definitions and recent related statistics & trends
– Near-term expectations for deal activity and deal terms
We’re always looking for new podcast content, so if you have something you’d like to talk about, please reach out to me at mervine@ccrcorp.com or John at john@thecorporatecounsel.net.
In August 2021, in a series of blogs, John addressed the Pershing Square Tontine Holdings lawsuit alleging that PSTH is an unregistered investment company, the joint statement from 49 law firms challenging that assertion, and Bill Ackman’s announcement of his plans to dissolve PSTH. As John shared, the decision to dissolve hinged on the SEC’s approval of an offering by a new entity that is a variation on the usual SPAC playbook called a SPARC — special purpose acquisition rights company. Well, on September 29, Pershing Square SPARC Holdings announced that the SEC declared its registration statement effective and filed this 8-K.
The prospectus notes on the cover: “Our company is not a SPAC and we are not raising capital from public investors at this time” and “SPARs are a novel security with unique and important features.” The press release touts some unique benefits of the SPARC, as does Bill Ackman’s letter in the prospectus, which claims “SPARC builds upon the favorable investor-friendly features and superior investment alignment of PSTH compared with other SPACs with a number of material value-creating improvements.”
The press release and letter are worth a read. Here’s an excerpt:
By distributing SPARs for free to former PSTH stockholders and warrant holders, SPAR holders will not be required to invest capital until SPARC has: (1) identified a target; (2) completed its due diligence; (3) negotiated a transaction; (4) signed a definitive agreement; (5) received the required board votes and stockholder approval (provided by our Sponsor and sole stockholder); and (6) satisfied substantially all closing conditions that can be satisfied in advance, including regulatory approvals. Our structure eliminates the opportunity cost of capital for SPAR holders while we seek to identify and consummate a transaction.
For a quick primer on SPARCs — especially how they deviate from the traditional SPAC — check out this Wilson Sonsini alert, which concludes with these initial takeaways:
Although the SPARC structure appears to solve many issues for investors in SPAC IPOs, it is a novel and unique structure, so the investment community will need time to fully digest its benefits and drawbacks, which will likely depend on the success of the Pershing Square SPARC. Furthermore, the terms of the Pershing Square SPARC may differ materially from future SPARCs. The time required for potential market acceptance and the establishment of standard market terms will likely be extended due to the precipitous drop in investor interest in traditional SPACs and the uncertainty regarding the timing and scope of the final SEC rules for SPACs, including how those rules may apply to the SPARC structure.
Additionally, while the Pershing Square SPARC structure provides some assurances as to the minimum amount of post-closing cash, many of the issues that target companies face when considering a business combination with a traditional SPAC will continue to be issues when considering a combination with a SPARC. Those issues include limited certainty on the amount of post-closing cash, competing interests in setting the target’s pre-combination valuation, potential dilution from the sponsor warrants, uncertainty as to the timing and likelihood of closing the business combination from other closing conditions (e.g., the scope and duration of SEC review), limited post-closing public float prior to the target company’s lock-up expiring and onerous postclosing disclosure requirements.
I’m convinced non-law/finance/M&A folks already think we speak in gobbledygook, and “SPARC” isn’t doing us any favors. But so it goes, I guess.
Earlier this month, the SEC announced the adoption of final rules amending Regulation 13D-G. Here’s the 295-page adopting release, and here’s the 2-page fact sheet. Considering that the SEC had initially proposed a five calendar day deadline for Schedule 13D filings, this Diligent blog from Rebecca Sherratt notes that activist investors are breathing a collective sigh of relief since the final amendments give investors a little more leeway than as proposed. Although, Rebecca notes, “the jury is still out as to whether the rule amendments have the potential to shake up how activist investors build their stakes and kickstart their campaigns.”
We’ve shared some details on the final rule release on TheCorporateCounsel.net Blog. Below, I’m sharing our blog on the revised deadlines, but also check out our blog on the amendments & guidance related to derivatives and group formation.
Per the fact sheet, the amendments primarily:
– Shorten the deadlines for initial and amended Schedule 13D and 13G filings;
– Clarify the Schedule 13D disclosure requirements with respect to derivative securities; and
– Require that Schedule 13D and 13G filings be made using a structured, machine-readable data language.
Here’s more on the new filing deadlines, which differ a bit from the proposed form:
For Schedule 13D, the amendments shorten the initial filing deadline from 10 days to five business days and require that amendments be filed within two business days.
For certain Schedule 13G filers (i.e., qualified institutional investors and exempt investors), the amendments shorten the initial filing deadline from 45 days after the end of a calendar year to 45 days after the end of the calendar quarter in which the investor beneficially owns more than 5 percent of the covered class.
For other Schedule 13G filers (i.e., passive investors), the amendments shorten the initial filing deadline from 10 days to five business days. In addition, for all Schedule 13G filers, the amendments generally require that an amendment be filed 45 days after the calendar quarter in which a material change occurred rather than 45 days after the calendar year in which any change occurred.
Finally, the amendments accelerate the Schedule 13G amendment obligations for qualified institutional investors and passive investors when their beneficial ownership exceeds 10 percent or increases or decreases by 5 percent.
To ease filers’ administrative burdens associated with these shortened deadlines, the amendments extend the filing “cut-off” times in Regulation S-T for Schedules 13D and 13G from 5:30 p.m. to 10:00 p.m. Eastern time.
As usual, the amendments will be effective 90 days after publication in the Federal Register, but reporting persons aren’t required to comply with the structured data requirements until December 18, 2024 (with voluntary compliance permitted beginning December 18, 2023) or the revised 13G deadlines (not 13D deadlines!) until September 30, 2024. As an example, the adopting release states “a Schedule 13G filer will be required to file an amendment within 45 days after September 30, 2024 if, as of end of the day on that date, there were any material changes in the information the filer previously reported on Schedule 13G.” Check out our “Schedules 13D & 13G” Practice Area where we’ll post memos for more info.
If you’re wondering why we didn’t give a heads-up that this was on an upcoming open meeting agenda, that’s because it wasn’t. Here’s a blog from Broc from almost 10 years ago about the SEC’s ability to adopt rules by seriatim.