In an update to a prior alert (thanks to past John circa five years ago for this blog title!), Venable recently released a detailed memo providing an overview of when a person is acting as a so-called finder. As the memo notes, the term “finder” is not defined in federal securities laws but is limited by activities a person cannot perform lest they be deemed a “broker” or “dealer” and therefore subject to registration. As John noted, this is a murky and complex area, and it remains so even with the greater certainty provided by the recent legislative exemption for M&A brokers, which unfortunately is somewhat more limited than the withdrawn 2014 no-action letter that previously provided an exemption.
For anyone needing a summary of the legal issues, parameters of available exemptions and pitfalls of being classified as an unregistered broker, this is an excellent resource. Here’s an excerpt with an important reminder that, notwithstanding a federal exemption, state laws and regulations continue to apply:
Both the M&A Brokers No-Action Letter and the Federal Exemption do not affect state laws and regulations on the matter. While the Federal Exemption may motivate states to adopt corresponding exemptions, Congress’s decision not to preempt state law leaves unresolved the potential for conflicting requirements that would impair the usefulness of the Federal Exemption.
In response to the M&A Brokers No-Action Letter, the North American Securities Administrators Association adopted a uniform state model rule designed to provide an exemption for M&A Brokers from registration as brokers, dealers, and agents under state law. However, the model rule is not self-executing and must be adopted by a state before it becomes effective in a specific jurisdiction.
As a result, state-level broker registration remains an important consideration for M&A Brokers, even if an exemption exists at the federal level. Interestingly, New York has recently proposed, then failed to adopt, a state regulatory regime of business finders. Certain states, including California, Texas, and Michigan, have some form of a registration exemption for M&A Brokers. Therefore, finders should consult the applicable state broker-dealer regulations prior to engaging in activities in the particular state.
In light of the federal legislative exemption, states may be taking action on this front. Keith Bishop points out on his blog that Nevada recently announced updates to the Nevada Administrative Code, which include a new exemption for certain M&A brokers that is similar, but not exactly the same as, NASAA’s model exemption.
In the first week of July, Nasdaq published four FAQs focused on SPACs. The FAQs address the following topics:
– When a SPAC falls below the Publicly Held Shares, Market Value of Publicly Held Shares, Market Value of Listed Securities and/or the Shareholder requirements due to shareholder redemptions
– Information required when a SPAC holds a meeting to extend its deadline to complete a business combination
– How Nasdaq determines compliance with the price-based listing requirements in a de-SPAC where the target is publicly traded
– Whether SPACs must hold annual meetings
This Loeb & Loeb blog notes that one of the new FAQs will complicate transactions involving OTC-quoted target companies looking to use a SPAC to move to Nasdaq. Here’s the full FAQ (#1863):
How does Nasdaq determine compliance with the price-based listing requirements in the case of a SPAC business combination where the target company is a publicly traded company?
In the case of a transaction where a SPAC acquires 100% of a publicly-traded target company or is acquired by a publicly-traded target company, Nasdaq generally relies on the trading price of the publicly-traded target company (adjusted for any applicable exchange ratio and for the additional cash provided by the SPAC) to determine compliance with the price-based listing requirements.
The blog goes on to provide the following example and takeaway:
For example, under this FAQ, if a target’s stock is trading at $1.00 per share and it will be converted into the SPAC’s stock on a one-for-one basis, Nasdaq will assume that the trading price of the post de-SPAC company’s stock is $1.00 per share, regardless of valuation of the target, fairness opinions, or the trading price of the SPAC’s stock. In the scenario I just gave, the company would not be able to meet the minimum share price requirement under Nasdaq’s initial listing rules.
Companies looking to do a de-SPAC involving a publicly traded company will need to ensure that conversion ratios for the publicly traded company’s stock will result in the combined company meeting Nasdaq’s initial listing requirements.
In late June, I blogged about the significant changes proposed by the FTC and DOJ to the Hart-Scott-Rodino (HSR) Premerger Notification and Report Form. For more information on the substance of the proposal, this Mintz post excerpted below succinctly describes the changes:
The key proposed changes include expanded and new requirements to submit the following:
Transaction Information
– Details about transaction rationale and details surrounding investment vehicles or corporate relationships.
– Detailed transaction timeline.
– Existing agreements between the parties (including those that were in effect within the previous one year).
Competition Information
– Information and narratives related to products or services in both horizontal and non-horizontal business relationships such as supply agreements.
– More granular geographic information for certain overlaps.
– Expanded information on other acquisitions in the previous 10 years within the overlapping markets.
– Projected revenue streams.
Customer information.
– Document Submissions
– Expanded scope for “4c” and “4d” documents that analyze the competitive effects of the proposed transaction.
– Certain ordinary course documents.
Ultimate Parent and Controlled Entities Information
– Organizational charts for funds and limited partnerships.
– Identification of officers, directors, board observers, significant creditors, and holders of non-voting securities.
– Expanded minority shareholder information.
Labor Market Information
– Disclosure of information intended to identify labor market issues.
– Classification of employees by Standard Occupational Classification system categories.
– Workplace safety information.
Information on Subsidies from Foreign Governments or Entities of Concern
– Data required to fulfill the Merger Filing Fee Modernization Act of 2022.
We’re posting memos and other materials in our “Antitrust” Practice Area here on DealLawyers.com.
The DLA Piper Global Foreign Direct Investment team just released a 2023 edition of their Multi-jurisdiction Guide for Screening Foreign Investments. The intro to the guide explains that screening activities have expanded in many jurisdictions to cover considerations related to cybersecurity, consumer protection, data privacy, supply chain and strategic sectors, and governments are increasingly willing to intervene in offshore transactions on the basis of domestic impacts that are more indirect or limited. It gives the following examples:
The interagency Committee on Foreign Investment in the United States (CFIUS) has intensified its scrutiny of proposed transactions. The CFIUS has also expanded its retrospective reviews of consummated transactions in potentially sensitive sectors where the parties had not submitted a notification or declaration. The U.K. National Security and Investment Act 2021 (NSIA) took effect in January 2022, establishing new requirements for mandatory notification to the Investment Security Unit within the Department for Business, Energy and Industrial Strategy (BEIS) for certain acquisitions resulting in equity interests over 25% or material influence over businesses active in 17 specified sensitive sectors. In 2022 Canada also introduced a new National Security Review of Investments Modernization Act, which can substantially strengthen the existing national security review. And in the EU, Romania introduced its FDI regime in 2022 and new or enhanced regimes are expected in Belgium, Slovakia, Netherlands, Ireland, Estonia, Slovenia, Spain and Sweden in 2023.
The interactive guide reviews developments in foreign investment screening practices in 35 jurisdictions across the Americas, Europe, Africa, Asia, and Australia.
Last month, the SEC announced a settled enforcement action against Insight Venture Management LLC alleging that the fund advisor charged excess management fees & failed to disclose a conflict of interest relating to its fee calculations. This excerpt from the SEC’s press release describes its allegations:
According to the SEC’s order, Insight’s limited partnership agreements for certain funds it advised allowed it to charge management fees based on the funds’ invested capital in individual portfolio investments and required Insight to reduce the basis for these fees if Insight determined that one of these portfolio investments had suffered a permanent impairment. The order finds that, from August 2017 through April 2021, Insight charged excess management fees by inaccurately calculating management fees based on aggregated invested capital at the portfolio company level instead of at the individual portfolio investment security level, as required by the applicable limited partnership agreements.
Further, the SEC’s order finds that Insight failed to disclose to investors a conflict of interest in connection with its permanent impairment criteria. Because Insight did not disclose its permanent impairment criteria, investors were unaware that the criteria Insight used were narrow and subjective, making them difficult to satisfy. Therefore, the order finds that Insight’s investors were unaware that Insight’s permanent impairment criteria granted Insight significant latitude to determine whether an asset would be considered permanently impaired so as to reduce the basis used to calculate Insight’s management fees.
Without admitting or denying the SEC’s allegations, the fund advisor consented to an order finding that it had violated Sections 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rules 206(4)-7 and 206(4)-8 thereunder. It also agreed to a cease-and-desist order and censure and to pay a $1.5 million penalty and $864,958 in disgorgement and prejudgment interest.
A recent Weil blog on the enforcement action offers some recommendations to PE fund advisors to avoid finding themselves in a similar situation:
In response to this enforcement action, advisers should (i) review, and carefully adhere to, (a) any implemented impairment or write-down policies, especially with respect to fee reduction practices, and (b) the relevant provisions set forth in their fund documentation, including any distinctions between “investments” and “portfolio companies” and any interplay with write-downs and, if applicable, (ii) disclose to investors (a) all relevant criteria used in the impairment analysis and (b) the fact that the adviser has a conflict of interest in applying any subjective impairment criteria, as an impairment may reduce management fees and/or impact a fund’s carried interest waterfall.
Woodruff Sawyer recently published its 2023 Guide to Representations & Warranties Insurance, which provides an overview of current market conditions, policy terms and considerations for potential purchasers of RWI. In light of commentary suggesting a tightening claims environment, I thought what the report had to say on claims was pretty interesting. Here’s an excerpt:
Halfway through 2023, we’ve found the rate of claims has been relatively consistent with previous years, while the number of claims has increased. This increase is largely attributable to the surge of M&A activity in 2021. However, we have seen interesting shifts emerging in the timing of claims noticed, types of claims filed, and areas insurers will expect heightened diligence in the future.
Timing of Claims Noticed – Historically, most claims have been noticed within the first year after binding. However, in 2022–2023, an increasing number of claims were noticed between 12 to 18 months post-close.
Types of Claims Filed – First-party, or indemnification, claims (where the insured brings a claim directly to the carrier) remain more common than third-party claims. However, third-party claims are on the rise for 2023 and will likely continue to uptick. Of the most frequently cited first-party claims, breaches of the financial and material contracts reps continue to involve the greatest potential for loss and are the claims most likely to exceed the self-insured retention (SIR), which is the portion of cost the insured must bear before the R&W policy responds.
Heightened Diligence – Data security/privacy breaches are hot on the heels of financial statements and material contracts. Carriers are increasingly concerned about the adequacy of cyber coverage, and buyers should expect this to be an area of heightened diligence. It is crucial that buyers understand the far-reaching implications of insurance diligence. In the haste of M&A deal flow, buyers can neglect to conduct adequate insurance diligence on the target company. Likewise, many purchase agreements lack clear and concise insurance representations by the sellers.
The Guide also discusses the frequency of the breaches reported in RWI claims, and notes that reps & warranties concerning financial statements, data security & privacy, employee benefits and employment top the list.
Last week, in Coster v. UIP Companies, (Del.; 6/23), the Delaware Supreme Court affirmed Chancellor McCormick’s earlier decision holding that the company’s board had a “compelling justification” for authorizing a dilutive share issuance to resolve a stockholder deadlock. The decision marks the lawsuit’s second trip to Delaware’s highest court. The first time around, the Supreme Court overruled an earlier Chancery Court decision and held that the Chancellor must address the argument that the board interfered with the plaintiff’s voting rights and leverage as an equal stockholder without a compelling reason to do so.
Two precedents featured prominently in the Supreme Court’s initial decision overruling the Chancery Court. The first, Schnell v. Chris-Craft Industries, stands for the proposition that actions taken by an interested board with the intent of interfering with a stockholder’s voting rights are a breach of the directors’ fiduciary duty. The second, Blasius v. Atlas Industries, holds that even good faith actions by the board that have the effect of interfering with voting rights require a “compelling justification.”
On remand, Chancellor McCormick determined that the board acted in good faith and established the compelling justification required to support its decision to issue the shares, and the Supreme Court affirmed her decision. In reaching that conclusion, the Supreme Court conducted an extensive review of Delaware case law interpreting Schnell and Blasius and concluded that the standards “have been and can be folded into Unocal review to accomplish the same ends – enhanced judicial scrutiny of board action that interferes with a corporate election or a stockholder’s voting rights in contests for control.” It then summarized what courts must do when confronted with claims that board action interferes with voting rights:
When a stockholder challenges board action that interferes with the election of directors or a stockholder vote in a contest for corporate control, the board bears the burden of proof. First, the court should review whether the board faced a threat “to an important corporate interest or to the achievement of a significant corporate benefit.” The threat must be real and not pretextual, and the board’s motivations must be proper and not selfish or disloyal. As Chancellor Allen stated long ago, the threat cannot be justified on the grounds that the board knows what is in the best interest of the stockholders.
Second, the court should review whether the board’s response to the threat was reasonable in relation to the threat posed and was not preclusive or coercive to the stockholder franchise. To guard against unwarranted interference with corporate elections or stockholder votes in contests for corporate control, a board that is properly motivated and has identified a legitimate threat must tailor its response to only what is necessary to counter the threat. The board’s response to the threat cannot deprive the stockholders of a vote or coerce the stockholders to vote a particular way.
Applying this standard to the Chancellor’s decision, the Supreme Court upheld her findings that the company’s board was properly motivated in responding to the existential threat posed by the stockholder deadlock. It also upheld Chancellor McCormick’s conclusion that the board’s actions in authorizing the share issuance were reasonable and proportionate to the existential threat posed by the potential stockholder deadlock and that its response was not preclusive or coercive.
Ultimately, it looks like the key takeaway from this decision is that Blasius is officially gone as an independent standard of review, and is instead subsumed into the Unocal standard – just as then-Vice Chancellor Strine advocated more than 15 years ago. For more in-depth discussion of the potential implications of this doctrinal shift, be sure to check out the commentary on this decision from Prof. Stephen Bainbridge and Prof. Ann Lipton.
Late last month, John blogged about a recent Sidley memo that reviewed all announced public transactions from January 1, 2018 through April 30, 2023 that included CVRs as part of the consideration and identified the key components of CVRs and trends in their terms. Now, we’ve also uploaded a new podcast featuring the authors of that memo, Sidley partners Sharon Flanagan and Sally Wagner Partin, that covers the following topics:
– Overview of CVRs – Prevalence of CVRs in recent M&A deals, both generally and in life sciences transactions
– Structural issues to consider and standardization of terms of CVRs
– Litigation risk, accounting considerations and other disadvantages to buyers and sellers when using CVRs
– Expectations for the use of CVRs in the near term
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.
Programming note: In observance of Independence Day, we will not publish a blog Monday or Tuesday. We will be back on Wednesday.
Earlier this week, the FTC and DOJ announced significant proposed changes to the Hart-Scott-Rodino (HSR) Premerger Notification and Report Form. As noted in Chair Lina Khan’s statement, this is the first time the agencies have undertaken a comprehensive review of this form in its almost 45-year history. The FTC also posted this FAQ on the Federal Register Notice page, which explains why these changes are being proposed as follows:
The proposed changes stem from a top-to-bottom review of the information collected in the HSR Form by the federal antitrust enforcers at the FTC and the DOJ’s Antitrust Division (the Agencies) to update the information and improve the efficiency and efficacy of premerger review. Additionally, the proposed changes implement mandates as required by the Merger Filing Fee Modernization Act of 2022
The Agencies use information on the form to deploy their limited resources to those transactions most likely to require in-depth review through the issuance of Second Requests. Insufficient information on the HSR Form burdens both the merging parties and the Agencies to collect and confirm basic information not on the form and conduct a rudimentary competition analysis in the initial waiting period, which is typically 30 days.
Over the past several decades, transactions (subject to HSR filing requirements) have become increasingly complex, with the rise of new investment vehicles and changes in corporate acquisition strategies, along with increasing concerns that antitrust review has not sufficiently addressed concerns about transactions between firms that compete in non-horizontal ways, the impact of corporate consolidation on American workers, and growth in the technology and digital platform economies. When the Agencies experienced a surge in HSR filings that more than doubled filings from 2020 to 2021, it became impossible to ignore the changes to the transaction landscape and how much more complicated it has become for agency staff to conduct an initial review of a transaction’s competitive impact. The volume of filings at that time also highlighted the significant limitations of the current HSR Form in understanding a transaction’s competitive impact.
This Covington alert summarizes the notable proposed changes, which include expanded document production requirements, narrative responses, identification of officers, directors, or board observers, information relating to prior acquisitions and a diagram of the deal structure, among other things. What does this mean for HSR filers? As John previewed last year, if adopted, these changes could substantially increase the time and cost of HSR filings, even for reportable transactions that don’t raise competition concerns. The alert quantifies that impact as follows:
In particular, the FTC estimates that, if the proposed changes take effect, the average HSR filing would require 144 hours to prepare—nearly 4x the 37 hours that the FTC estimates it takes under the current system. The FTC also estimates that for parties with more complex transactions/filings—which it says constitute 45% of all filings—the proposed changes would result in an HSR filing taking 259 hours to prepare, which is 7x the current average. Assuming that the FTC’s estimates are correct, parties to HSR-reportable transactions will require significantly more time to prepare their filings than the typical 10 business days that many merger agreements contemplate.
In the meantime, as noted in the FTC’s press release, the next step is the publication of the Notice in the Federal Register, which will start the clock on the 60-day comment period.
Leading up to the 2023 proxy season, there was much debate about how universal proxy would change the game. With a more level playing field and possibly lower costs, would companies see a spike in activism? In this M&A update, Kirkland analyzed all of the activist campaigns at US-listed companies from September 1, 2022 through June 16, 2023 and compared the data to prior periods. As detailed further below in the key takeaways from the article, UPC did not result in a significant spike in activism in the 2023 season — its impact was more nuanced:
– Activity levels: Activism levels remained high, but fewer campaigns resulted in proxy fights while more settled
– Target size: Activism campaigns targeted companies of all sizes, but the vast majority of proxy fights occurred at smaller companies
– Number of nominees: Activists did not nominate more candidates per slate
– Proxy fight costs: While universal proxy theoretically lowered the cost of entry for an activist, proxy fight costs did not come down and there was no surge in bare-bones campaigns
– Proxy advisor recommendations: While ISS and Glass Lewis continue to require that activists make a case for change, they are placing greater emphasis on individual director qualifications
– Litigation: In a highly litigious proxy season, companies challenged the validity of activist nominations at unprecedented levels
– Success level: Universal proxy may be increasing the odds of at least some activist success, but it has not opened the floodgates