Negotiating a term sheet, LOI, or other preliminary document can sometimes feel a bit like the Wild West: local laws and unintended consequences can vary from town to town. Even a concept as seemingly straightforward as agreeing to negotiate in good faith can yield extremely different results depending on jurisdiction. The Delaware Supreme Court’s recent decision in SIGA Technologies, Inc. v. PharmAthene, Inc. is a warning shot to investors and deal makers that, unlike most other states in the US, Delaware will award expectation (i.e., “benefit-of-the-bargain”) damages for the breach of an agreement to negotiate. What this means in practical terms is that, in certain circumstances, failure to fully negotiate a deal based on a non-binding but detailed term sheet could result in full damages as if the parties had actually signed up a deal.
Posts Tagged ‘Weil Gotshal’
The recent shareholder “campaign” by a coalition of large institutional investors – AFSCME Employees Pension Plan, Hermes Fund Managers, the New York City Pension Funds, and the Connecticut Retirement Plans and Trust Funds – sought on its face to pressure the JPMorgan Chase & Co. board of directors to amend the bylaws to require that the role of chair be held by an independent director. It became a referendum on two additional issues: Mr. Dimon’s competence as a manager, and the competence of the board’s oversight of risk management. Unfortunately for “good governance,” the three issues become conflated and lead to harangues, heat, and polar positions by all sides, leading to little that’s instructive. It’s worth separating the issues to seek guidelines for the future.
Thoughtful advocates recognize that the board should have flexibility to determine leadership based on the company’s circumstances and rather than seeking to mandate the practice of independent chairmanship, view it as the appropriate default standard – or presumptive model. Even so, very few advocates of the independent chair model favor stripping an extant CEO/chair of the chair title; rather, they urge boards to consider separation upon CEO succession, unless there is an urgent need.
Weil surveyed 40 sponsor-backed going private transactions announced from January 1, 2012 through December 31, 2012 with a transaction value (i.e., enterprise value) of at least $100 million (excluding target companies that were real estate investment trusts).
For United States transactions to be included in the survey, the transaction must have closed or such transaction remains pending.
Twenty-four of the surveyed transactions in 2012 involved a target company in the United States, 10 involved a target company in Europe, and 6 involved a target company in Asia-Pacific. The publicly available information for certain surveyed transactions did not disclose all data points covered by our survey; therefore, the charts and graphs in this survey may not reflect information from all surveyed transactions.
The 40 surveyed transactions included the following target companies:
No less than two years ago, had one tried to initiate a conversation with a Private Equity Sponsor or an M&A lawyer regarding M&A “reps and warranties” insurance (i.e., insurance designed to expressly provide insurance coverage for the breach of a representation or a warranty contained in a Purchase and Sale Agreement, in addition to or as a replacement for a contractual indemnity), one might have gotten a shrug of the shoulders or a polite response to the effect of “let’s try to negotiate around the problem instead.” Perhaps because it was misunderstood or perhaps because it had not yet hit its stride in terms of breadth of coverage, reps and warranties insurance was hardly ever used to close deals. Like Harry Potter, it was the poor stepchild often left in the closet.
Today that is no longer the case. One global insurance broker with whom we work notes that over $4 billion in reps and warranties insurance worldwide was bound last year, of which $1.4 billion thereof was bound in the US and $2.1 billion thereof was bound in the EU. Such broker’s US-based reps and warranties writings nearly doubled from 2011 and 2012. Reps and warranties insurance has become an important tool to close deals that might not otherwise get done. This post is meant to highlight how reps and warranties insurance may be of use to you in winning bids and finding means of closing deals in today’s challenging environment.
On March 22, 2013, the Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System (FRB), and the Federal Deposit Insurance Corporation (FDIC) (collectively, the “bank regulators”) released their final guidance on leveraged lending activities.  The final guidance does not deviate significantly from the proposed guidance released last year on March 26, 2012, but does attempt to provide clarity in response to the many comment letters relating to the proposed guidance received by the bank regulators. The final guidance is the latest revision and update to the interagency leveraged finance guidance first issued in April 2001. 
About a year ago, we published A New Playbook for Global Securities Litigation and Regulation, in which we detailed dramatic changes in the global securities regulatory and litigation arena driven by various factors, including not only the financial crisis of 2007-2008, but also changes in tolerance in the United States to litigation brought by foreign investors against public companies listed on non-U.S. exchanges.
One year later, the regulatory environment continues to revamp with new rules being issued constantly in the United States to conform to the legislative mandates set forth in the Dodd Frank Act. The United Kingdom and European Union also seek to reinforce previous global initiatives to reform and strengthen the Pan-European financial markets.
What is more ever-present, however, is the marked increase in global enforcement activities by regulators in the United Kingdom, Canada, and the European Union, which are attempts to give teeth to the global financial reforms each jurisdiction felt necessary to potentially prevent a “repeat” of the financial crisis. This article seeks to address the increase in global securities enforcement activity and concludes that continued cooperation and coordination in enforcement activities will be required to seamlessly address the desire to strengthen global regulatory initiatives aimed at harmonizing and centralizing international securities regulation to create safer, more fundamentally sound financial markets for investors.
In late 2011, I had the privilege of chairing a panel presentation in New York City on negotiating acquisitions of public companies in transactions structured as friendly tender offers. In September 2012, I chaired a follow-up panel presentation on the same topic. Both presentations took place at the annual Institute on Corporate, Securities, and Related Aspects of Mergers & Acquisitions, sponsored jointly by the Penn State Center for the Study of Mergers and Acquisitions and the New York City Bar Association. Several of the other panelists – including Gar Bason of Davis Polk, Joel Greenberg of Kaye Scholer, and Fred Green of Weil – are widely considered among the top M&A practitioners in the nation. For much of our presentations, we utilized the format of an interactive, “mock” negotiation of key issues, with various panelists playing the roles of outside counsel for the buyer, outside counsel for the target company, and special Delaware counsel.
The other panelists and I edited the transcripts of both presentations and added comprehensive footnotes. Our goal was to create a teaching tool that would be useful to students, practitioners, and others seeking to learn about the negotiating dynamics in friendly acquisitions structured as tender offers.
Both edited transcripts have been published in the Penn State Law Review. The edited transcript of the 2011 presentation is part of the Symposium Issue of the Penn State Law Review titled “The Deal Lawyers’ Guide to Public and Private Company Acquisitions.” The edited transcripts can be accessed here (Climan et al., Negotiating Acquisitions of Public Companies in Transactions Structured as Friendly Tender Offers, 116 Penn St. L. Rev. 615 (2012)) and here (Climan et al., Negotiating Acquisitions of Public Companies—A Follow-Up, 117 Penn St. L. Rev. 647 (2013)).
Recently, the SEC’s Enforcement Division has brought three matters focused on alleged flaws (and fraud) in connection with valuation issues. Together these actions make clear that the SEC is and will be looking hard at how public companies as well as financial firms make difficult and subjective valuation decisions. Specifically, the SEC will be looking to see whether firms, and individuals, followed proper processes and applied the correct inputs in reaching these judgments. These cases also make clear that, even in times of significant market disruption, firms cannot ignore or substantially discount market inputs in making valuation judgment.
In November 2012, the SEC filed and settled In The Matter of KCAP Financial, Inc. This was the first action in which the SEC alleged that a public company had violated the provisions of Financial Accounting Standard (FAS) 157 by failing to properly value certain assets. FAS 157 requires expanded disclosures and incorporates a strong preference for market inputs to determine fair value. According to FAS 157, “[e]ven in times of market dislocation, it is not appropriate to conclude that all market activity represents forced liquidations or distressed sales.”
To be blunt, this year’s “SEC Speaks” conference in Washington, D.C., sponsored by the Practicing Law Institute, was perhaps most remarkable for what did not happen: Mary Jo White, who is widely expected to be easily confirmed as Chairman of the Commission, did not attend. This was, of course, proper and to be expected, but it nevertheless cast a shadow over the proceedings, since none of the speakers could speak definitively to Ms. White’s and her new team’s regulatory and enforcement priorities. Indeed, given that three of the four SEC division directors who spoke—including the director of the Enforcement Division—are acting directors who may be replaced, it was not surprising that none set out bold or groundbreaking initiatives. Instead, with some important exceptions, this year’s conference largely updated issues that had been covered in 2012.
This is not to say that the conference failed to provide useful information. All four of the sitting commissioners emphasized different issues. Elisse Walter, the current Chairman, emphasized the SEC’s role in developing fair and transparent markets and promoting entrepreneurship, capital growth, and job-building. Luis Aguilar discussed signs of “weakness and instability” in the market’s infrastructure and recommended that the SEC regulate and address these technological issues by, among other things, developing a “kill switch” for each exchange. Troy Paredes (who is expected to leave the Commission this summer) argued that “too much disclosure may actually obscure useful information and result in worse decision-making by investors,” and called for a “top-to-bottom review” of the current disclosure regime. Finally, Daniel Gallagher emphasized the importance of maintaining the SEC’s independence, and strongly questioned whether new legislative mandates (particularly those contained in the Dodd-Frank legislation) and the Financial Stability Oversight Council compromised that independence and minimized the SEC’s effectiveness. Whether the initiatives proposed by Commissioners Aguilar and Paredes come to fruition under Ms. White’s leadership remains to be seen.
In 2002, Arthur Andersen LLP collapsed in the wake of an obstruction of justice conviction. Since then, conventional wisdom has been that the U.S. Department of Justice (DOJ) resists filing criminal charges against large business entities because of fears of another similar failure. Indeed, the DOJ has consistently acknowledged that it considers such risks, and the U.S. Attorneys’ Manual expressly identifies “collateral consequences” as a factor that should be weighed in making charging decisions. In the wake of the Great Recession, however, the DOJ has been faced with competing pressures, especially with respect to financial institutions. On the one hand, the Lehman Brothers bankruptcy, among other bank failures and near-failures, suggested vulnerability on the part of some financial institutions and illustrated the potentially grave consequences that the collapse of a financial institution can have on the broader economy. The DOJ clearly does not want to cause a financial institution to fail. On the other hand, there is a pervasive public sentiment that large financial institutions were responsible for the economic collapse from which the country is only now emerging. Particularly in recent months, the DOJ has been criticized for its decision not to bring criminal charges against any major financial entity.