This Sidley memo (p. 7) discusses how antitrust regulators’ increasingly hardline approach to remedies is making it increasingly difficult to resolve antitrust issues associated with M&A transactions. Here’s the intro:
Since the implementation in 1978 of the Hart-Scott-Rodino Act (HSR Act), which requires the prior notification of most transactions above a certain size (currently $101 million), parties to transactions that raise serious antitrust issues have often sought to negotiate remedies with the government that would resolve the antitrust issues but also allow the transaction to proceed. In any given year, two dozen or more transactions have been allowed to proceed after the parties entered into consent decrees that allowed the transaction to go forward on the condition that the parties take certain actions or restrict their conduct in a way that the government concluded would resolve its concerns.
The remedies the government seeks takes two possible forms: (1) structural relief, which usually requires the sale of the part of one of the businesses in the market that raises antitrust concerns or (2) behavioral (or conduct) relief, which involves the parties agreeing to certain conduct restrictions designed to prevent anticompetitive behavior by the combined company. In the United States there has always been a preference for structural remedies where possible; nonetheless, for many years the government has accepted behavioral remedies where structural remedies were not viable.
In the past decade the U.S. antitrust enforcement agencies — the Antitrust Division of the Department of Justice (DOJ) and the Federal Trade Commission (FTC) — have increasingly and consistently made clear that they will accept behavioral remedies only in rare circumstances, which has limited parties’ options for resolving antitrust concerns where structural remedies are not available. And in the past year, senior enforcement officials at both agencies have more strongly objected to behavioral remedies and questioned whether even structural remedies are appropriate when the transaction raises particularly serious concerns or occurs in an already concentrated market. Parties to transactions that raise complex antitrust issues should consider at an early stage the regulatory risks posed by their potential transaction, and each party should try to limit or mitigate its own risk.
The memo reviews the history of antitrust remedies, the shift away from behavioral remedies, and the implications of the changing environment on parties trying to complete M&A transaction. It offers some advice on assessing and addressing the antitrust risks associated with a potential deal. Among other things, the memo highlights the need to determine early in the deal process whether the proposed transaction raises significant antitrust risk, whether there is a meaningful risk of a challenge and, if so, whether there could be an economically viable settlement that would be accepted in the current environment.
By now, the succession of high-profile scandals involving companies like Boeing and Activision Blizzard have convinced even the most jaded observers (like me, for instance) that allegations of poor performance on ESG-related issues can have a devastating impact on a company’s business. That means identifying potential trouble on the ESG front is critical for buyers – but how exactly do you do that when conducting due diligence?
That’s the question that this recent Cooley blog attempts to answer. It identifies some of the big picture ESG issues that need to be considered and offers some practical advice on how to get your arms around them. This excerpt discusses conducting due diligence on employee retention issues:
In today’s changing workplace climate, the ability of a target to retain workers, especially compared to its industry peers, may provide some indication of any hidden ESG issues in the workplace. At the very basic level, buyers should closely review retention statistics. Savvy buyers may also want to review more “soft” indicators of employee satisfaction. This includes a review of the scope of the benefits available to employees – from parental leave, miscarriage and/or surrogacy/in vitro fertilization support to work-from-home flexibility policies – and an examination of the ways in which management values and considers the views of employees.
For example, does the company have a formal review process? Are there town hall meetings with management? And in what ways do employees participate in the success of the company? The overall satisfaction of employees may indicate whether the company is at risk of floundering in an environment where workers have growing power.
Other due diligence topics covered by the blog include board governance, management’s attitude toward ESG issues, the target’s approach to potential sexual harassment issues, workplace diversity, environmental impact and geopolitical risks.
According to a recent survey conducted by DataSite, the future of M&A is female. In light of the data suggesting that female-led transactions outperform those led by males, that’s probably a good thing. Here’s an excerpt from the press release announcing the survey’s results:
In a survey of 600 global dealmakers – 55% of whom were women, and 45% of whom were male – there were more female Millennial dealmakers (born between 1981-1996) than males and the percentage of female dealmakers from the next generation, Generation Z, (born between 1997-2012) is double that of their male counterparts. Yet, male dealmakers dominate both Generation X (born 1965-1980) and Baby Boomers (born 1946-1964), and today hold many of the senior roles in the M&A space, such as senior manager, or group head (56% male, 36% female). The opposite is true among middle and entry level dealmaking roles, such as manager, non-manager, or associate, with women accounting for 65% compared to 44% for men.
The survey also addressed workplace culture, both positive and negative. One of the disappointing findings in the survey is that female dealmakers felt less appreciated and supported than their male counterparts and double the number of women compared to men (6% v. 3%) felt burned out. On the positive side, despite the crushing pace of dealmaking and stretched resources last year, 70% of women and 74% of men don’t plan to leave their current job anytime soon. The survey suggests that “manager help, including checking in on workloads and overall well-being” may have contributed to this result.
One of the things that struck me about the results of the survey was that many of the boorish behaviors that women have disproportionately experienced in other professional settings appear to have been shared by female and male M&A lawyers on a relatively more equitable basis. For example, while female M&A lawyers report that they are more likely to be interrupted while speaking than male M&A lawyers (21% v. 13%) and having others take credit for their ideas (15% v. 12%), more males than females reported having their ideas ignored (14% v. 13%), overhearing insults about their culture (14% v. 9%), and having their judgment questioned (13% v. 12%).
The overall findings on boorishness support my longstanding belief that senior M&A lawyers are generally more misanthropic than they are misogynistic – and as someone who was once marked down on a performance evaluation for “general unpleasantness,” I think I know what I’m talking about here.
Language addressing compliance with U.S. trade restrictions & other sanctions is a common feature of reps & warranties in acquisition agreements. Well, Bloomberg Law’s Grace Maral Burnett says that language is getting an update as a result of the Ukraine crisis. Here’s an excerpt from her analysis on how merger agreements have changed the language of these provisions over the past month:
Russian President Vladimir Putin’s recognition of the Donetsk and Luhansk republics on Feb. 21 resulted in an immediate White House executive order prohibiting transactions with those and certain other occupied regions of Ukraine, and a Feb. 22 Treasury Department declaration of sanctions on Russian banks and Kremlin-connected elites and restrictions on Russian sovereign debt.
These actions are significant parts of the Ukraine-related sanctions that have been a centerpiece of the U.S. response to the Russian invasion that began on Feb. 24. The crisis that they addressed is likely to further increase in importance, with Russian forces refocusing their efforts on the Donbas region, where Donetsk and Luhansk are major cities.
Based on an advanced Bloomberg Law transactional precedent search, eight publicly filed M&A agreements that contain references to the Donetsk and Luhansk regions in otherwise typical sanctions-related provisions have been executed by deal parties between Feb. 27 and March 29.
The majority of these deals are large—valued at above $1 billion dollars—and most were advised by the some of the top-ranked M&A law firms as deal counsel. The largest deal among them is the currently pending $10.7 billion Thoma Bravo acquisition of Anaplan Inc.
In these agreements, references to the Donetsk and Luhansk regions of Ukraine have been added to defined terms such as “Sanctioned Person,” “Sanctioned Country,” and “Sanctioned Jurisdiction,” which are in turn referenced in representations and warranties pertaining to sanctions.
The analysis also includes some samples of specific language addressing the Donetsk & Luhansk regions, and also discusses agreements in which “Russia” is specifically mentioned in the agreement’s definition of a “Sanctioned Person” or “Sanctioned Country.”
Seyfarth Shaw recently published the 2020/2021 edition of its “Middle Market M&A SurveyBook”, which analyzes key contractual terms for more than 175 middle-market private target deals signed during 2020 & 2021. The survey focuses on deals with a purchase price of less than $1 billion. Here are some of the findings regarding indemnity escrows for insured & uninsured deals:
– The median indemnity escrow amount during the period of 2020 and 2021 (“2020/2021”) for the non-insured deals surveyed was approximately 8% of the purchase price (as compared to approximately 10% in 2018 and 2019).
– Approximately 91% of non-insured deals had an indemnity escrow amount of 10% or less (as compared to approximately 83% in 2019), but only approximately 26% of non-insured deals had an indemnity escrow amount of 5% or less, which is consistent with 2019.
– The median indemnity escrow amount in 2020/2021 for the insured deals surveyed was approximately 0.5% of the purchase price (as compared to approximately 0.6% in 2019 and 0.9% in 2018). It is plain to see the dramatic impact that R&W insurance has on the indemnity escrow amount (approximately 0.5% for insured deals, as compared to approximately 8% for non-insured deals).
– The vast majority of insured deals had an indemnity escrow amount of less than 5%, and of those deals, approximately 89% had an indemnity escrow amount of 1% or less (as compared to 91% in 2019). This is consistent with the prevailing R&W insurance structure of including a retention (deductible) equal to approximately 1% of deal value.
The survey also covers other indemnity-related provisions, rep & warranty survival provisions & carve-outs from general survival provisions, fraud exceptions & definitions, and governing law provisions.
Last year, I blogged about a situation in which a hacker apparently changed the payment instructions that a target shareholder provided to a paying agent in connection with a merger, and successfully diverted the shareholder’s consideration to the hacker’s account. That hot mess ended up in the Chancery Court’s lap, and last week, in Sorenson Impact Foundation v. Continental Stock Transfer & Trust Co., (Del. Ch.; 4/22), the Court addressed a motion to dismiss the case.
Vice Chancellor Glasscock dismissed the plaintiff’s claims against the paying agent on jurisdictional grounds, and also dismissed claims alleging that the buyer was responsible for its agents’ breach of the letter of transmittal & paying agent agreement. As to these latter claims, the Vice Chancellor cited Wenske v. Blue Bell Creameries, Inc., (Del. Ch.; 7/18), for the proposition that “Delaware law recognizes no theory under which a principal can be vicariously liable for its agent’s non-tortious breach of contract.” However, Vice Chancellor Glasscock declined to dismiss claims that the buyer breached its obligations under the merger agreement concerning the payment of the merger consideration:
The Merger Agreement imposes duties on Parent, and it is reasonably conceivable that it also provides rights to the Plaintiffs (as third-party beneficiaries) here. The Plaintiffs’ “First Cause of Action (Breach of Contact—against Tassel Parent)” recites generally that the Merger Agreement entitles Parent to receive the Plaintiffs’ stock (and note) “in exchange for payment as set forth in the Merger Agreement,” and further that the Plaintiffs had complied with the conditions precedent in order to receive Merger consideration, and became “automatically entitled to receive their pro rata portion of the Merger consideration . . . pursuant to Section 3.3(i) of the Merger Agreement . . . .”
That Section of the Merger Agreement includes a provision explaining the conditions precedent for consideration to be paid, to which the Plaintiffs cite in averring that they have met those conditions precedent. Once that happens, under Section 3.3(i), the stockholder is “entitled” to receive the Merger consideration. The Section goes on to explain the duties of Parent thereafter: to pay the sum due to each such compliant stockholder to the Paying Agent.
The Vice Chancellor noted that the complaint alleges that both the Plaintiffs’ conditions precedent to payment and the buyer’s payment obligation were satisfied, and that “read holistically” it was reasonably conceivable that the merger agreement imposed an obligation on the buyer to ensure that payment was made to the recipients entitled to receive it.
Our latest Deal Lawyers Download podcast features my interview with Sullivan & Cromwell’s Rita-Anne O’Neill. Rita serves as co-chair of the ABA’s Acquisition of Public Companies Subcommittee, and recently spearheaded the completion of the ABA’s Public Targets Deal Points Survey, which our podcast focused on. Topics addressed in this 21-minute podcast include:
– Universe of transactions surveyed and methodology
– Changes in market practice since the 2017 survey
– Impact of tightening regulatory environment on deal terms
– Noteworthy trends in reps & warrants, covenants and deal protections
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.
Yesterday, the SEC announced rule proposals intended to enhance disclosure and investor protection in SPAC initial public offerings and in de-SPAC transactions. Here’s the 372-page proposing release & here’s the 3-page fact sheet. The SEC is pitching the proposal as a way to level the playing field between SPACs & traditional IPOs, which SEC Chair Gary Gensler emphasized in his statement on the proposal. This excerpt from the fact sheet summarizes the additional disclosure & investor protections for SPAC IPOs & de-SPACs that would be put in place under the proposed rules:
– Enhanced disclosures regarding, among other things, SPAC sponsors, conflicts of interest, and dilution;
– Additional disclosures on de-SPAC transactions, including with respect to the fairness of the transactions to the SPAC investors;
– A requirement that the private operating company would be a co-registrant when a SPAC files a registration statement on Form S-4 or Form F-4 for a de-SPAC transaction;
– A re-determination of smaller reporting company status within four days following the consummation of a de-SPAC transaction;
– An amended definition of “blank check company” to make the liability safe harbor in the Private Securities Litigation Reform Act of 1995 for forward-looking statements, such as projections, unavailable in filings by SPACs and certain other blank check companies; and
– A rule that deems underwriters in a SPAC initial public offering to be underwriters in a subsequent de-SPAC transaction when certain conditions are met.
The proposal would also add a new Rule 145a, which provides that a business combination involving a reporting shell company and another entity that is not a shell company constitutes a “sale” of securities to the reporting shell company’s shareholders and would establish a non-exclusive Investment Company Act safe harbor for SPACs that, among other things, enter into a de-SPAC agreement within 18 months of their IPO & complete the deal within 24 months following the IPO.
The proposed rules about the fairness of the transaction would require disclosure similar to that required in going private deals and, like the going private rules, are intended to incentivize sponsors to shape the transaction process in a more investor-favorable way. The biggest news in the rule proposal is probably the loss of the PSLRA safe harbor for projections in de-SPAC transactions, which is something that the Staff has telegraphed was coming for a long time. However, the extension of Section 11 liability to the de-SPAC target & the potential that the IPO underwriters might also face Section 11 liability for the de-SPAC are also significant. As usual, Tulane’s Ann Lipton has a Twitter thread that’s full of insights on some of the issues raised by the proposal.
SPACs’ status under the Investment Company Act has been another hot topic in recent months, and the safe harbor approach came as a bit of a surprise to me in light of the publicly expressed views of the current head of the SEC’s Division of Investment Management. Frankly, if the SEC wanted to drive a stake through the heart of SPACs, this could have been the place to do it.
Commissioner Peirce once again dissented from the SEC’s decision, essentially arguing that the SEC came to bury SPACs, not to regulate them. She states that the rules would impose “a set of substantive burdens that seems designed to damn, diminish, and discourage SPACs because we do not like them, rather than elucidate them so that investors can decide whether they like them.”
As per the new normal for comment periods, this one expires 30 days after publication in the Federal Register or May 31, 2022, whichever is later.
The most recent issue of Evan Epstein’s Board Governance Newsletter discusses the decision of some VCs to eschew seeking board seats in connection with their investments. Here’s an excerpt:
One of the distinctive features of Tiger Global’s startup investment strategy is to be an unobtrusive capital partner. This laissez-faire attitude includes not taking board seats and rarely getting involved in a company’s operations. This has also allowed them to speed up their investment process, striking deals in a matter of days rather than weeks or months. In 2021, Tiger Global invested in 335 companies, almost a deal per day, an unprecedented number for a venture investor. But the NY-based firm did not invent this hands-off or “passive investment” approach. In 2009, Yuri Milner from DST invested $200 million in Facebook at a $10 billion valuation (plus an option to purchase extra common stock from employees at a $6.5 billion valuation) without taking a board seat, somewhat unprecedented at the time.
“You do not need to have a board seat to be influential” Yuri Milner told Jason Calcanis, as recounted in the All-In Podcast.
See below another take from Ron Conway, the founder and co-managing partner of SV Angels, telling Mark Suster from Upfront Ventures why he doesn’t take board seats:
“Board meetings take a ton of time and it’s the duty of the board to manage the CEO. SV Angels also said early-on that our mantra was to be advocates for founders, so if we were sitting on a board that was making a decision to fire the CEO or get into a big argument, we didn’t want to be part of the conversation. That conversation is necessary, boards are necessary, but that’s not SV Angels role. Our role is just to be advocates for founders, help them at inflection points, and build a great company.”
The newsletter goes on to discuss FT.com’s recent article noting that “VCs said it had become normal to pass on board seats in companies focusing on digital assets. Many founders want to limit the involvement of outside backers. A wide swath of largely unregulated projects such as DAOs do not even have formal boards.”
How does having women in leadership positions affect M&A strategies and outcomes? Those are the topics considered in this recent Intralinks report, which looked at over 11,000 transactions completed from January 1, 2010 to October 31, 2021. Only about 3% of those deals involved acquirers led by female CEOs, and 11% involved acquirers with at least 30% female representation on their boards, but as these highlights from the report demonstrate, these deals outperformed other transactions – even though the market initially didn’t think they would:
– Initial market reactions to women-led deals are more unfavorable than those for deals led by men. Shares of acquirers with female CEOs tended to underperform those of acquirers led by male CEOs by an average of 1.5 percentage points when looking at a 40-day window pre- and post-announcement. The onset of Covid-19 appears to have enhanced that disparity, as acquirers led by female CEOs saw their share prices underperform those led by male CEOs by an average of 9.6 percentage points for deals during the pandemic.
– Contrary to market reaction, deals completed by acquirers with female CEOs performed better than deals completed by acquirers with male CEOs in terms of share price performance, in the first, second- and third- year following deal completion. Companies with at least 30% female boards outperformed by 7.1 percentage points relative to all-male boards or those with less than 30% female representation.
– Deals led by women didn’t just outperform when it came to share price appreciation. Over a three-year period, these deals produced better ROE, EBITDA/sales and EBIT/adjusted sales than deals completed by acquirers with male CEOs. The most significant difference was post-closing ROE. When looking at this metric three years post-acquisition, companies led by female CEOs outperformed those led by male CEOs by 7.9 percentage points.
– Deals announced by female CEOs also have a slightly better chance of closing – 97% of the deals led by female CEOs closed, while 95% of those led by male CEOs closed. All of the female-led deals announced during the pandemic closed, while the male-led deals continued to close at a 95% rate.
There are all sorts of other interesting nuggets in the report, including the fact that companies involved in female-led deals were more likely to retain a financial advisor, that the targets in female-led deals involved less risk than those in male-led deals, and that female-led deals were more likely to include a reverse termination fee.