As confidence in M&A activity seems to have turned a corner, the use of acquirer stock as acquisition currency is a serious consideration for executives and advisers on both sides of the table. A number of factors play into the renewed appeal of stock deals, including an increasingly bullish outlook in the C-level suite and higher and more stable stock market valuations, as well as deal-specific drivers like the need for a meaningful stock component in tax inversion transactions (see recent post on this Forum).
Posts Tagged ‘Acquisition agreements’
In Activision Blizzard, Inc. v. Hayes, No. 497, 2013 (Del. Nov. 15, 2013), the Delaware Supreme Court addressed the question of whether the purchase by Activision Blizzard, Inc. (“Activision”) of shares of its own stock, as well as net operating loss carryforwards (“NOLs”), from Vivendi, S.A. (“Vivendi”) constituted a “merger, business combination or similar transaction” under Activision’s amended certificate of incorporation and, as a result, required the approval of stockholders. The Court held that, despite its form as the combination of two entities, the transaction at issue did not require the approval of stockholders. “Indeed,” observed the Court, “it is the opposite of a business combination. Two companies will be separating their business connection.”
Private equity funds are increasingly using representations and warranties (R&W) insurance and related products (such as tax, specific litigation and other contingent liability insurance) in connection with acquisitions as they become more familiar with the product and its advantages.  Acquirors considering R&W insurance frequently raise concerns about the claims process and claims experience. A recent claim against a policy issued by Concord Specialty Risk (Concord) both provides an example of an insured’s positive claims experience and highlights the possibility for a buyer to recover multiple-based damages under R&W insurance.
R&W Insurance Advantages
Under an acquisition-oriented R&W policy, the insurance company agrees to insure the buyer against loss arising out of breaches of the seller’s representations and warranties. The insurer’s assumption of representation and warranty risk can result in better contract terms for both buyer and seller. For example, the seller may agree to make broader representations and warranties if buyer’s primary recourse for breach is against the insurance policy, and the buyer may agree to a lower cap on seller’s post-closing indemnification exposure as it will have recourse against the insurance policy. In addition, R&W insurance often simplifies negotiations between buyer and seller, resulting in a more amicable, cost-effective and efficient process.
Court of Chancery Revisits Covenants Against Waiving “Don’t Ask/Don’t Waive” Provisions
In a recent bench ruling, In re Complete Genomics, Inc. Shareholder Litigation, the Court of Chancery offered new insight into the ability of a target board to promise an acquiror that the target will not waive a “don’t ask/don’t waive” standstill provision.
A “don’t ask/don’t waive” standstill provision is typically found in a confidentiality agreement that a target requires potential bidders to enter into before being entitled to receive sensitive target information. The “don’t ask/don’t waive” provision precludes a potential bidder from making a private approach to the target board and from requesting any waiver of the standstill itself. If the target later signs a merger agreement with another party containing a negative covenant prohibiting the waiver of standstill agreements, the “don’t ask/don’t waive” and the negative covenant (the “Coupled Provisions”) preclude the previous bidder from ever providing a topping bid to the target.
In any transaction facing a meaningful delay between signing and closing, dealmakers on both sides of the table spend a considerable amount of time thinking about allocating the various risks resulting from that delay (e.g., regulatory, business and financing). Most of the discussion centers on “deal certainty,” with sellers focused on contract provisions that force buyers to move quickly through transaction hurdles and obligate them to close despite potentially changed circumstances or unfavorable regulatory demands. In a prior M&A Update that focused on the allocation of antitrust risk, discussed here, we addressed merger agreement terms that outline the required efforts and remedy concessions by buyers, as well as the possible use of a reverse termination fee payable to the seller if the deal terminates because of the failure to obtain required antitrust approvals.
If you have regularly read merger agreements over the past decade, you may have had a creeping feeling. You also may not be alone. Over the past decade the number and type of merger agreement lock-ups have materially increased. We examine this phenomenon in our article Lock-Up Creep, prepared for the Journal of Corporation Law symposium: Ten Years After Omnicare: The Evolving Market for Deal Protection Devices held at University of Iowa College of Law. Not only have new lock-ups arisen, but the terms of these lock-ups have become more varied as attorneys negotiate ever more intricate terms.
In our article we examine lock-up creep in detail. Lock-ups existed in many forms for decades, but in recent years, new lock-ups have appeared or been widely adopted, such as matching rights, which give a bidder the right to match a competing offer, as well as don’t ask, don’t waive standstills, which prevent losing bidders from making a competing bid or even requesting that a target waive such a requirement. The end result is that merger agreements contain increasingly scripted procedures for how and when a board should deal with competing bids.
On July 16, the Delaware Supreme Court  published an opinion that confirms and clarifies the scope of an accounting expert’s authority to resolve post-closing financial disputes that parties have agreed to submit for resolution under the terms of a definitive business acquisition agreement. This decision reaffirms alternative dispute resolution as the procedure of choice for quickly resolving complicated, technical financial issues that sometimes arise in the context of purchase price adjustments.
Post-closing purchase price adjustments are almost universally present in definitive agreements for the sale of a business.  These provisions—which include earn-out clauses, working capital adjustments, and debt/net debt true-ups—require an adjustment to the purchase price paid at closing, based on calculations relative to pre-closing targets, standards, or formulas. Such provisions set forth not only the methodology for determining the amount of the adjustment, but also a resolution process in the event the parties disagree on the amounts to be paid. These processes typically include (i) an exchange of the relevant financial calculations and access to work papers and supporting documentation, (ii) submission by the recipient party of objections to the calculation, (iii) a period of time within which the parties will attempt to resolve the dispute in good faith, and (iv) submission of the unresolved issues to a neutral accounting firm for ultimate resolution. 
One of the most difficult, and therefore most heavily negotiated, issues in carve-out transactions is the division of liabilities between the parent and the carved-out business. Typically, the division of liabilities will follow the business: liabilities attributable to the parent’s business will be retained by the parent, and liabilities attributable to the subsidiary or division’s business will be assigned to the subsidiary or division. As explained below, in the case of an M&A transaction, this application can vary depending on whether the transaction is a stock sale or an asset sale. 
- Stock Sale. In a stock sale, liabilities of the carved-out entity typically pass to the buyer by operation of law. The carved-out entity is acquired “as is” with all of its existing liabilities. However, to the extent the parent is creditworthy, the buyer may be able to obtain protection from certain liabilities through indemnification.
- Asset Sale. In an asset sale, by contrast, the buyer is contractually responsible only for those liabilities that it specifically assumes as part of the negotiated asset purchase agreement. This flexibility allows the parties to choose from any number of liability arrangements, from “all liabilities resulting from the ownership and operation of the carved-out division” to only specifically enumerated liabilities in a schedule, with the parent typically providing unlimited indemnification for all other liabilities. However, even where the buyer does not expressly agree to assume any liabilities, the buyer should be aware that it may nonetheless be subject to certain successor liabilities arising out of the asset purchase. 
- Applicable Law. No matter what the transaction structure, both parties should be aware that under applicable state, federal or international law, certain environmental, product and employee liabilities may pass to the buyer or be retained by the parent even if the parties have contractually provided for another allocation.
The UK Court of Appeal recently held in the Belfairs Management case  that a warranty in a sale and purchase agreement should be interpreted with regard to all of the background knowledge reasonably available to the parties at the time the agreement was entered into. The decision highlights the growing trend of the UK courts to adopt a more purposive, rather than a literal, approach to the interpretation of contracts under English law in order to give effect to the commercial intentions of the parties where the facts underlying the dispute clearly support such an interpretation and where those commercial intentions are clear. This post provides a short summary of the facts of the Belfairs Management case, as well as a discussion of the potential implications of the decision for buyers, sellers and their advisers.
In Koehler v. NetSpend Holdings Inc., the Delaware Court of Chancery found that the directors of NetSpend likely breached their Revlon duty to obtain the highest price reasonably available for stockholders by pursuing a single-bidder strategy for selling the company. The board’s lack of knowledge as to the company’s value and related failure to contact potentially interested parties set it apart from other single bidder cases such as Plains Exploration, a recent case where the court found a single-bidder sale process to be reasonable. Nevertheless, the Court declined to enjoin the merger because an injunction could risk the stockholders’ opportunity to receive a substantial premium over the market price for their shares.