Among the many legalese-heavy paragraphs appearing under the “Miscellaneous” heading at the back of transaction agreements is a section that stipulates the laws of the state that will govern the purchase agreement as well as disputes relating to the deal. Often, it is coupled with a section that dictates which courts have jurisdiction over these disputes. While the state of incorporation or headquarters of one or both parties is sometimes selected, anecdotal as well as empirical evidence suggests that a healthy majority of larger transactions choose Delaware or New York law. Reasons cited include the significant number of companies incorporated in Delaware, the well-developed and therefore more predictable legal framework in these jurisdictions, the sophistication of the judiciary in these states, the perception of these being “neutral” jurisdictions in cases where each party might otherwise favor a “home” state, and the desired alignment with the governing law of related financing documents (usually New York).
Posts Tagged ‘Kirkland & Ellis’
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.
A footnote in a recent Delaware decision should relieve some of the anxiety felt in the investment banking community that the courts were inviting plaintiffs to allege fiduciary duty breaches by a target board in any sale where the fairness opinion analysis could be perceived as “weak”.
In the never-ending quest to construct claims to attack virtually every announced public M&A transaction, plaintiff attorneys continuously seek to exploit new angles that appear to gain any amount of traction with the Delaware courts. In a May 2013 decision in Netspend, the court found that the plaintiffs had shown a likelihood of success on the merits of a Revlon claim arising out of a single-bidder sale process. Among the factors cited by VC Glasscock as giving rise to the likely breach of fiduciary duties was the board’s reliance on what he termed a “weak” fairness opinion. The court noted that the deal price of $16 was well below the valuation range implied by the financial adviser’s discounted cash flow (DCF) analysis ($19.22 to $25.52), although within the range of values implied by the other two primary methodologies (comparable companies and comparable transactions, both of which the court discounted because of the lack of similarities to the precedents cited).
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.
The MFW decision that was issued earlier this year by the Chancellor of the Delaware Chancery Court has been the subject of much discussion with respect to transactions involving controlling shareholders.  But the decision also addressed another important topic: the interplay between the exchange rules and Delaware law with respect to director independence. MFW seemed to align the Delaware law test for director independence with the specific, detailed independence requirements in the exchange rules, but Delaware decisions since MFW continue to reflect highly fact-intensive inquiries that look beyond the bright-line exchange rules. Accordingly, it is important to consider both the exchange rules and the latest guidance from Delaware courts when assessing director independence.
The Delaware courts have often repeated the bedrock principle that there is no one path or blueprint for the board of a target company to fulfill its Revlon duties of seeking the highest value reasonably available in a sale transaction. The courts have usually deferred to the judgment of the directors as to whether the requisite market-check is best achieved by a limited pre-signing process, a full-blown pre-signing auction or a post-signing fiduciary out. However, as evidenced in the recent decision by VC Glasscock in NetSpend, it is equally true that the courts will also not automatically bless a sale process simply because the deal protection provisions fall with- in the range of “market” terms. Especially in a single-bidder sale process, the courts will continue to seek evidence of a fully informed and thoughtful approach by the target board to the sale process and deal protection terms with the goal of maximizing value for shareholders.
Appraisal, or dissenters’, rights, long an M&A afterthought, have recently attracted more attention from deal-makers as a result of a number of largely unrelated factors. By way of brief review, appraisal rights are a statutory remedy available to objecting stockholders in certain extraordinary transactions. While the details vary by state (often meaningfully), in Delaware the most common application is in a cash-out merger (including a back-end merger following a tender offer), where dissenting stockholders can petition the Chancery Court for an independent determination of the “fair value” of their stake as an alternative to accepting the offered deal price. The statute mandates that both the petitioning stockholder and the company comply with strict procedural requirements, and the process is usually expensive (often costing millions) and lengthy (often taking years). At the end of the proceedings, the court will determine the fair value of the subject shares (i.e., only those for which appraisal has been sought), with the awarded amount potentially being lower or higher than the deal price received by the balance of the stockholders.
While deal counsel have always addressed the theoretical applicability of appraisal rights where relevant, a number of developments in recent years have contributed to these rights becoming a potential new frontier in deal risk and litigation:
A record date, often viewed in the merger context as a mere mechanic to be quickly checked off a “to do” list, creates a frozen list of stockholders as of a specified date who are entitled to receive notice of, and to vote at, a stockholders’ meeting. A tactical approach to the timing of the record date can have strategic implications on the prospects for a deal’s success, while the failure to comply with the rules relating to setting a record date could cause a significant delay in holding the vote, leaving the door open for a topping bidder or dissident stockholder to emerge or gather support. As a result, it is important that dealmakers understand the basic mechanics and rules of setting a record date and the tactical repercussions of the record date construct.
Starting first with the legal requirements, there are several key inputs that inform the mechanics of setting a record date, including laws of the company’s state of incorporation, the company’s organizational documents, federal securities laws, rules of the applicable securities exchange and the relevant merger agreement. Taken together, these requirements dictate the necessary procedural and governance steps for setting the record date and establish the minimum and maximum time periods between the record date and the meeting, as well as between the board action setting the record date and the record date itself.
With valuations stabilizing and the M&A market heating up, a rebirth of stock-for-stock deals, after a long period of dominance for all-cash transactions, may be in the offing. If this happens, we expect to see renewed use of the term “merger of equals” (MOE) to describe some of these all-equity combinations. As a starting point, it may be helpful to define what an MOE is and, equally important, what it isn’t. The term itself lacks legal significance or definition, with no requirements to qualify as an MOE and no specific rules and doctrines applicable as a result of the label. Rather, the designation is mostly about market perception (and attempts to shape that perception), with the intent of presenting the deal as a combination of two relatively equal enterprises rather than a takeover of one by the other. That said, MOEs generally share certain common characteristics. First, a significant percentage of the equity of the surviving company will be received by each party’s shareholders. Second, a low or no premium to the pre-announcement price is paid to shareholders of the parties. Finally, there is some meaningful sharing or participation by both parties in “social” aspects of the surviving company.
While each of the aspects of an MOE deal will fall along a continuum of “equality” for the shareholders of each party, there are a handful of key issues that require special attention in an MOE transaction:
The “crown jewel” lock-up, a staple of high-stakes dealmaking technology in the 1980s M&A boom, has been showing some signs of life in the contemporary deal landscape, albeit often in creative new forms. As traditionally conceived, a crown jewel lock-up is an agreement entered into between the target and buyer that gives the buyer an option to acquire key assets of the target (its “crown jewels”) separate and apart from the merger itself. In the event that the merger fails to close, including as a result of a topping bid, the original buyer retains the option to acquire those assets. By agreeing to sell some of the most valuable pieces of the target business to the initial buyer, the traditional crown jewel lock-up can serve as a significant deterrent to competing bidders and, in some circumstances, a poison pill of sorts.
Given the potentially preclusive nature of traditional crown jewel lock-ups, it is not surprising that they did not fare well when challenged in the Delaware courts in the late 1980s. As the Supreme Court opined in the seminal Revlon case, “[W]hile those lock-ups which draw bidders into a battle benefit shareholders, similar measures which end an active auction and foreclose further bidding operate to the shareholders detriment.” Building on the holding in Revlon, the court in Macmillan said that “Even if the lockup is permissible, when it involves ‘crown jewel’ assets careful board scrutiny attends the decision. When the intended effect is to end an active auction, at the very least the independent members of the board must attempt to negotiate alternative bids before granting such a significant concession.” Although crown jewel lock-ups fell out of favor following these rulings, modern and modified versions of the traditional crown jewel lock-up have been finding their way back into the dealmakers’ toolkit.