Our new Deal Lawyers Download podcast features my interview with Goodwin’s Sean Donahue on the universal proxy rules. Topics addressed in this 19-minute podcast include:
– How will universal proxy change the dynamic of proxy contests?
– What strategic and tactical opportunities does universal proxy create for activists? – What are some vulnerabilities that public companies may not have focused on?
– What should public companies do between now and September 1 to put themselves in the best position to deal with the universal proxy rules?
If you have something you’d like to talk about, please feel free to reach out to me via email at john@thecorporatecounsel.net. I’m 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.
This recent blog by Paul Weiss’s Jeffrey Marell provides some advice to boards to keep in mind when they navigate the volatility and uncertainty of current market conditions. One piece of advice he offers up is the need for patience, because putting deals together & getting to closing is going to take more time in the current environment:
When markets are rising (or at least stable), it is typically much easier for companies to agree on M&A terms. Deals are, of course, still done during times of volatility, but deal valuations and modeling get more complex due to their dependence on market pricing. Deals may involve stock considerations. Even cash deals may be affected because buyer access to credit markets may be based on stock valuations. Even if the transaction involves private assets, valuations may look to public company comparables.
Separately, added scrutiny from antitrust regulators will mean that deal terms related to such approvals will be more complicated to negotiate and the approval process itself will be lengthier. Given this, boards should anticipate a longer timeline and more fits and starts than a typical M&A process in a stable or up-market environment.
This Fenwick memo discusses a proposed FTC consent order involving a completed acquisition that targets the terms of the non-competition language included in the acquisition agreement. Here’s the intro:
Last month, in a proposed consent order settling a challenge to a previously consummated transaction, the Federal Trade Commission not only succeeded in partially unwinding the transfer of certain assets but also secured a victory in substantially narrowing the scope of the noncompete provisions of the parties’ asset sale agreement.
The challenge thus underscores the commitment of FTC leadership to aggressively pursue consummated transactions it believes to be anticompetitive, but it is most noteworthy for its focus on the parties’ noncompete provisions, which historically have received little attention from the antitrust agencies. Moreover, existing federal court precedent arguably supports the legality of the specific provisions challenged by the FTC.
As such, this action is entirely consistent with FTC Chair Lina Khan’s stated intention to aggressively expand the reach of existing antitrust law, even when doing so potentially entails litigation risks. Going forward it also serves as a warning that, as noted in a joint statement by Khan and the FTC’s two other Democratic commissioners, the agency will scrutinize mergers and acquisitions agreement noncompete provisions “with a critical eye.”
The FTC’s press release announcing the proposed consent order highlighted the aspects of the non-competition provision that it found objectionable. It said that the non-compete that the seller was required to sign as part of the deal not only prohibited the seller from competing in the markets in which the gas stations it sold operated, but in many other markets as well. Even in the markets where the acquired gas stations operated, the FTC’s complaint alleged that the non-compete was “unreasonably overbroad in geographic scope and longer than reasonably necessary to protect a legitimate business interest.”
The memo provides additional background on the case and offers up some key takeaways from the case, including the need to appropriately calibrate a non-compete’s scope to the business being acquired, and the importance of being prepared to defend the duration of any non-compete provisions related to an acquisition.
Elon Musk apparently has had a lot of company over the past couple of months when it comes to trying to wiggle out of a deal. According to a recent analysis by Bloomberg Law’s Grace Maral Burnett, deal terminations have spiked in the last two months:
Last month, 48 controlling-stake global M&A deals (deals for control of the assets or entity to be acquired, e.g., buyouts, takeovers) were terminated, marking the highest monthly count of terminated controlling-stake deals since June 2020. And for all categories of deals combined—including spin-offs, joint ventures, venture capital financing rounds, and other minority stake investments—June’s total of 61 terminated deals marked the highest monthly termination count since November 2021.
To date, July has seen 21 terminations of controlling-stake deals, including the largest—and arguably one of the most drama-filled—deal terminations of the year: Elon Musk’s teetering $44 billion buyout of Twitter Inc.
Overall, the year hasn’t shaped up too badly thus far – Grace’s analysis says that the number of deal terminations for the year are roughly about the same as last year. On the other hand, the dollar volume of busted deals has surpassed that of the same period during 2020.
Speaking Musk & Twitter, here’s a copy of Musk’s filing opposing Twitter’s motion to expedite the proceedings and here’s a copy of Twitter’s latest filing in response. There is a hearing at 11:00 am eastern this morning in front of Chancellor McCormick addressing Twitter’s motion. Unfortunately, the Chancellor recently tested positive for COVID-19, so the meeting will be held via Zoom. This info comes from the Chancery Daily’s Twitter feed, which has all sorts of other details on the hearing. You can access a live audio feed of the hearing by dialing (774) 267-2687.
“Milestone” payments are a common feature of life science deals, both public & private. Whether you’re dealing with a contingent value right in a public company acquisition, an earnout in a private company deal or a milestone payment in a licensing agreement, it’s important to draft these provisions to minimize the risk of litigation. It’s also not easy to accomplish that objective, but this Freshfields blog provides some advice on how to do it:
The best way to reduce the risk of disputes is to define milestones so they are conditioned to objective events that the parties reasonably expect to be achieved as part of the anticipated development plan or commercialization strategy for the specific product. For example, milestones are often structured to be payable upon the initiation of a clinical trial, the regulatory approval of a product, the achievement of a minimum level of sales for the product, or other clear-cut achievements that signal value creation and/or de-risking of the asset.
Subjectively defined milestones, such as those requiring the “successful completion” of a clinical trial, as well as terms of art, should generally be avoided. When structuring milestone payments, another point to consider is whether payment should be conditioned on achievement of the triggering event by a certain date. While these types of deadlines have certain appeal, particularly for buyers and licensees, they also can raise the risk of disputes if the milestone is not achieved, as the record will be examined for any evidence that the buyer or licensee dragged their feet in an attempt to avoid making payment.
The blog also makes a point that has been recently reinforced by the Delaware Chancery Court – if you want to impose an obligation on a party to act with a particular level of diligence in achieving a milestone, you need to spell out exactly what your chosen language for the “efforts clause” means. If you don’t, then the default path for many courts will be to shrug their shoulders and say, “these clauses all look the same to me.”
I keep trying to talk myself out of blogging about Twitter because even though it’s undoubtedly the M&A case of the year, it’s also really goofy and I honestly feel a little silly writing about it. Still, against my better judgment, I will close out the week with a few highlights from the last couple of days:
– We’ve posted a copy of Twitter’s complaint in our “Litigation” Practice Area. It’s really well-done and I highly recommend that you read it if you get a chance. My guess is that Musk’s answer will also be very well done.
– There have been a lot of law professor types weighing in with their views on the case. Some of their perspectives seem pretty well thought out. Others, like this piece in The Wall Street Journal, are, as Matt Levine put it, “weird.” If you’re looking for a more substantive takedown of the WSJ piece, UCLA’s Stephen Bainbridge has a solid one for you.
– Speaking of law professors, Ann Lipton has a good post on The Business Law Prof Blog addressing how the public is about to learn that when a board decides to sell a company, it’s all about stockholders, not stakeholders. Also, check out this thread from Columbia’s Eric Talley on how settlement negotiations might play out.
– Then there’s this remarkable comment. Speaking on CNBC, former Delaware Vice Chancellor Berger said that specific performance is likely off the table because the Chancery Court would be afraid that Musk would defy its order.
In all seriousness, former VC Berger’s comment really shocked me. I think the perception that the Chancery Court would shy away from a specific performance remedy that it thought was justified because it was intimidated by Musk would be a huge blow to Delaware’s credibility and would accelerate the move of M&A litigation to federal courts, which have, among other things, the 101st Airborne potentially available to back up their orders.
CFIUS recently held its first ever conference, which included speakers from a variety of member agencies. This Holland & Knight memo says that the conference confirmed both that nature of national security concerns in foreign investment transactions is evolving and that the U.S. remains committed to an open investment environment. The memo highlights five key takeaways from the conference. This excerpt discusses one of them – the continuing expansion in CFIUS’s review of non-notified transactions:
Speakers emphasized that, since the enactment of FIRRMA, the Committee has continued to expand resources to identify and review non-notified transactions. At the same time, CFIUS officials did note that typically non-notified transactions are referred to CFIUS by other agencies. CFIUS also learns of transactions through the media, SEC filings and tips from the public.
Requests for information from CFIUS regarding non-notified transactions are not meant to be antagonistic, speakers said. As a first step, they aim to confirm whether the Committee has jurisdiction. Even though not required, parties are encouraged to provide relevant information for the CFIUS risk assessment analysis. Speakers emphasized that the majority of non-notified inquiries do not result in a request for a formal filing and that it is key to provide CFIUS with prompt responses for the benefit of the business and the Committee.
The memo points out that there is no statute of limitations for CFIUS jurisdiction over non-notified transactions and says that CFIUS officials confirmed that conducting a CFIUS analysis and risk assessment is now a de facto requirement in every foreign investment transaction.
In case you missed it, the credit markets have become pretty choppy in recent months and a lot of debt issued by private equity portfolio companies has been trading at a significant discount. That’s expected to lead some PE funds or portfolio companies to consider buying back some of that debt. This recent Davis Polk memo discusses some of the threshold issues that PE sponsors should consider before committing to that path. This excerpt addresses potential conflicts of interest:
In some cases an acquisition of portfolio company debt can raise potential conflicts of interest that a sponsor will want to consider and properly address under its fund documents or as an investor relations matter before proceeding. For instance, if the acquisition of debt is being made through a different fund than the one that holds the equity, the sponsor may face a conflict of interest by virtue of advising two funds in different parts of the company’s capital structure. In distressed scenarios, this conflict can be more acute. Resolving these conflicts may require consultation with, or approval by, each fund’s investors or limited partner advisory committee.
Other considerations identified in the memo include restrictions on buybacks contained in the relevant credit agreements or indentures, the need to navigate securities law disclosure issues associated with repurchases, potential tax implications, and whether the buyback would create issues for funds that want to maintain qualification as “venture capital operating companies.”
Judging from the comments submitted on the SEC’s SPAC proposal, it’s pretty clear that those in the M&A business aren’t exactly fans of the SEC’s proposed rule changes. This recent article from Bloomberg Law’s Preston Brewer says that one aspect of the proposal that caused particular discomfort at the annual SPAC conference relates to the SEC’s characterization of its new underwriter liability scheme for SPAC deals as a “clarification” of existing standards:
The most concerning aspect of the Commission’s proposed SPAC rules involves what the SEC describes as a clarification of rules, particularly underwriting rules. Under the clarification, enforcement for rule violations could be retrospective as well as prospective. That prospect has roiled the SPAC industry.
SPAC Conference speakers like Ellenoff are rightly unsettled by the SEC using this language because it connotes that actors should have been conforming to this interpretation all along. Since SPACs have been around since 1993, issuing clarifications of the rules governing their conduct that contradict in essential ways how the SEC has regulated SPACs for all those years feels unfair.
This interpretation also feels disingenuous. The SEC claims that proposed new Rule 140a would “clarify” that an underwriter in a SPAC IPO is also liable for most later financings—whether the underwriter participates directly or indirectly. The transaction would be treated as a distribution of securities of the surviving public entity in a de-SPAC transaction within the meaning of Section 2(a)(11) of the Securities Act.
Of course, in addition to whatever potential enforcement consequences may lurk in the SEC’s pitch that this is a “clarification” of existing requirements, such an action also could add an arrow to the quiver of the plaintiffs’ bar in their efforts to expand the already target rich environment for SPAC litigation.
As has appeared inevitable for some time, Elon Musk formally attempted to terminate his merger agreement with Twitter on Friday. Here’s the termination letter from Musk’s lawyers. There’s already been a lot of good stuff written about the legal issues at play here (See this piece from Matt Levine and this one from Case Western law prof. Anat Alon-Beck), so I’m not going to reinvent the wheel. I just have a couple of observations.
– First, overall, the reasons Musk set forth allegedly giving him grounds to terminate don’t seem very compelling. I don’t think a court is going to be very interested in interpreting the access rights granted to Musk under Section 6.4 of the merger agreement, which are intended to allow him to obtain information “for any reasonable business purpose related to the consummation of the transactions contemplated by this Agreement”, to provide an open door to conduct the kind of due diligence investigation that he should’ve conducted prior to signing the deal.
– Second, it strikes me that the one allegation that might have some legs under the right alignment of planets is this one, which challenges Twitter’s compliance with the ordinary course covenant in Section 6.1 of the agreement:
Finally, Twitter also did not comply with its obligations under Section 6.1 of the Merger Agreement to seek and obtain consent before deviating from its obligation to conduct its business in the ordinary course and “preserve substantially intact the material components of its current business organization.”
Allegedly, Twitter’s conduct in firing a couple of high-ranking employees, as well as its announcement on July 7 that it was laying off a third of its talent acquisition team, implicates the ordinary course provision. Musk’s lawyers also point out that Twitter has instituted a general hiring freeze and – demonstrating that Musk’s side of the table isn’t lacking in chutzpah – contend that recent post-Musk deal resignations also resulted in a material breach of this covenant.
I think that what makes the final allegation a little more interesting than the first is that it could potentially give a court pause about whether Twitter acted reasonably, given its obligations under the ordinary course covenant, in taking some of these actions with respect to senior employees without seeking Musk’s consent. It still seems like a stretch to me, but allegations of breaches of the ordinary course covenant in the AB Stable case are what got traction in the Delaware courts,
Do I think this argument based on non-compliance with the ordinary course covenant is a winner? Nope. Twitter will undoubtedly point out that Musk has done nothing but sow chaos and play fast and loose with some of his own obligations under the merger agreement nearly since the day he signed it. Frankly, I don’t think that kind of conduct is going to make the Chancery Court terribly sympathetic to arguments based on an alleged covenant foot fault by Twitter.
What’s more interesting to me is, if this does end up with the Chancery Court issuing a ruling holding that Musk isn’t entitled to terminate, what kind of remedy might it fashion? There’s at least the chance that, having sown the wind, Elon Musk just might reap the whirlwind.