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.

…continue reading: M&A Representations and Warranties Insurance: Tips for Buyers and Sellers

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. [1] 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. [2]

…continue reading: Bank Regulators Tackle Leveraged Lending

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.

…continue reading: A New Playbook Part 2 — Global Securities Enforcement Stepping Up

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)).

…continue reading: Friendly Tender Offers and Related Issues – A Teaching Tool

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.

KCAP Financial

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.”

…continue reading: SEC Enforcement Focusing on Valuation Issues

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.

…continue reading: SEC Speaks 2013: Waiting for the New Guard

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.

…continue reading: Collateral Consequences of the UBS and RBS LIBOR Settlements

Starting in February 2013, the Iran Threat Reduction and Syria Human Rights Act (the “Threat Reduction Act”) will impose new reporting requirements on U.S. domestic and foreign companies that are required to file reports with the U.S. Securities and Exchange Commission (the “SEC”) pursuant to Section 13(a) of the Securities Exchange Act of 1934 (the “Exchange Act”). In particular, Section 219 of the Threat Reduction Act added new Section 13(r) to the Exchange Act. Under Section 13(r), Annual Reports on Form 10-K, Annual Reports on Form 20-F and Quarterly Reports on Form 10-Q filed pursuant to Exchange Act Section 13(a) must include disclosure of contracts, transactions and “dealings” with Iranian and other entities. Section 13(r) is effective beginning with reports with a due date after February 6, 2013.

The Staff of the Division of Corporation Finance of the SEC (the “SEC Staff”) has provided helpful guidance on implementation of these new requirements in Exchange Act Compliance and Disclosure Interpretations Questions 147.01-147.07 (available at http://www.sec.gov/divisions/corpfin/guidance/exchangeactsections-interps.htm). However, many questions remain, and the following questions and answers represent the consensus views of the undersigned law firms.

None of the firms subscribing to this report intends thereby to give legal advice to any person. The undersigned firms recommend that counsel be consulted with respect to matters addressed in this report. The answers below may need to be modified based upon unique facts and circumstances.

…continue reading: Section 13(r) Disclosure Guidance for Public Companies

In our annual missive last year, we wrote about the need to restore trust in our system of corporate governance generally and in relations between boards of directors and shareholders specifically. We continue to be troubled by the tensions that have developed over roles and responsibilities in the corporate governance framework for public companies. The board’s fundamental mandate under state law – to “manage and direct” the operations of the company – is under pressure, facilitated by federal regulation that gives shareholders advisory votes on subjects where they do not have decision rights either under corporate law or charter. Some tensions between boards and shareholders are inherent in our governance system and are healthy. While we are concerned about further escalation, we do not view the current relationship between boards and shareholders as akin to a battle, let alone a revolution, as some media rhetoric about a “shareholder spring” might suggest. However, we do believe that boards and shareholders should work to smooth away excesses on both sides to ensure a framework in which decisions can be made in the best interests of the company and its varied body of shareholders.

…continue reading: Preserving Balance in Corporate Governance

We wish we could tell you something fascinating about what happened to the private equity industry in 2012. But it was just not that kind of year. Private equity deal volume was flat compared with 2011. New funds continued to be raised at a modest pace. There were no particularly interesting new developments in the deal market.

However, private equity, despite the challenges facing the industry and the harsh spotlight put on it by the presidential campaign, continued to thrive. This post looks back on some of the trends that we saw in the industry in 2012 and some predictions as to what awaits it in 2013 and beyond.

Trends in 2012

Some of the trends that we saw in the private equity industry in 2012 included:

…continue reading: Private Equity Trends in 2012