Tuesday, June 24, 2014
Now we have another in the series of videos from Rick Climan and Keith Flaum at Weil in which they negotiate provisions of a merger agreement before an audience - with some animation to keep you engaged. This series is really interesting and - especially for young associates - worth every minute of time you spend with it. This latest video revisits the issue of indemnification and damages that the pair discussed in an earlier video (Rube Goldberg). In this video they discuss negotiating waivers of consequential damages.
The case on consequential damages that Keith refers to in the video is Biotronik v Conor Medsystems Ireland.
Friday, May 16, 2014
Antoniades, et al have a paper, No Free Shop. There have always been two sides to the g0-shop issue. On the one side, if a company has the right to proactively shop itself post-signing, that should be good, right? In Topps, Chief Justice Strine called the go-shop "sucker's insurance". Generally, employing a go-shop provision is one of several ways that a board can, in good faith, reassure itself that it has received the highest price reasonably available in a sale of control.
On the other hand, when one looks at the way go-shops are actually deployed, one wonders what is going on. By now, they are regularly included in merger agreements with private equity buyers and rarely included in merger agreements with strategic buyers. If you believe that private equity buyers have characteristics of a common value buyers and strategic buyers are more like private value buyers, then the go-shop takes on a different, less appealing light.
The paper from Antoniades, et al backs up this view; go-shops are associated with lower initial prices and fewer competing offers. These results raise the question whether boards can reasonably rely on the go-shop to confirm valuations. Here's the abstract:
Abstract: We study the decisions by targets in private equity and MBO transactions whether to actively 'shop' executed merger agreements prior to shareholder approval. Specifically, targets can negotiate for a 'go-shop' clause, which permits the solicitation of offers from other would-be acquirors during the 'go-shop' window and, in certain circumstances, lowers the termination fee paid by the target in the event of a competing bid. We find that the decision to retain the option to shop is predicted by various firm attributes, including larger size, more fragmented ownership, and various characteristics of the firms’ legal advisory team and procedures. We find that go-shops are not a free option; they result in a lower initial acquisition premium and that reduction is not offset by gains associated with new competing offers. The over-use of go-shops reflects excessive concerns about litigation risks, possibly resulting from lawyers' conflicts of interest in advising targets.
Guhan Subramanian's 2007 Business Lawyer paper, Go-Shops v No-Shops, came to a different conclusion with respect to the utility of go-shops.
Thursday, May 15, 2014
Students in my just completed M&A class will enjoy Rick Climan's latest installment of this series of mock negotiations with Keith Flaum. This one on a potentially controversial customary carveout to the MAE.
The lesson -- even though everyone is including it, doesn't mean you have to!
Tuesday, September 10, 2013
This course is an overview of how acquisition agreements work. It will provide aspiring and practicing deal lawyers with an understanding of the deal process and their role in it.
The course will have four modules. Each module includes video lectures and a LawMeet® - an interactive exercise that involves posting a video response to a real world problem presented by a client or partner, followed by peer and expert review. Click here to see how a LawMeet® works. The first module will be available no later than September 9, 2013.
Students of mine who took this course last year thought it was great. If you are taking an M&A class now, or if you plan on taking an M&A class in the Spring, this MOOC would be a valuable addition.
Friday, May 31, 2013
I received a couple of emails from readers who enjoyed the previous youtube clip of highlighting issues related to sandbagging (Like the cat that ate the canary) in merger agreements. Now, here's another one - consider it free/fun CLE (especially you summer associates!) in which Rick Climan and Keith Flaum walk us through unexpected issues in indemnification provisions.
More specifically, the topic for this clip is the question of whether there should be indemnification for any direct or indirect damages that relate from any direct or indirect breach of any representation or warranty. Hmmm. Word to the wise associate - don't fall for it. Why? Here's the Rube Goldberg hypothetical to explain why:
Wednesday, April 24, 2013
Macia and Moeller of TCU have posted their paper, Signaling and Risk Allocation in Merger Agreements. They argue that targets use firm specific MAC carveouts to signal their unobservable quality. By declining to include firm specific MAC carveouts (e.g. carveouts relating to restatements or CEO retention, etc), high quality firms are able to create a separation from low quality firms that tend to include more firm specific MAC carveouts. It's an interesting paper. I will ignore (not really) their subtle finance dig:
[T]here are only few rigorous academic studies about MAC clauses, arguably because of a lack of readily available data. Instead, MAC clauses have been almost exclusively studied by practitioners and legal scholars.
Ahem...ok, temper in check. Here's the abstract:
Acquirers and targets allocate interim risk in merger agreements through Material Adverse Change (MAC) clauses and exclusions [bjmq: e.g. carveouts]. While virtually all acquisitions have MAC clauses, there is broad cross-sectional variation in the number and type of MAC exclusions. Using comprehensive hand-collected data, we find that acquisitions with fewer firm-specific MAC exclusions, i.e., stronger abandonment options for the acquirers, are associated with higher acquirer announcement returns, higher combined surplus gains, higher target announcement returns, and better prior target performance. Fewer firm-specific MAC exclusions appear to be credible signals of higher target quality and are more prevalent when information asymmetries are likely high and signaling is particularly beneficial. In contrast, more market-wide MAC exclusions are not associated with higher acquirer or target gains although acquirers tend to assume the largely exogenous, market-wide interim risk when the expected completion periods are longer.
Tuesday, February 26, 2013
In this client alert, Gibson Dunn details the results of its survey of no-shop and fiduciary-out provisions contained in 59 merger agreements filed with the SEC during 2012 reflecting transactions with an equity value of $1 billion or more. Among other things, they have compiled data relating to
- a target’s ability to negotiate with an alternative bidder,
- the requirements to be met before a target board can change its recommendation,
- each party’s ability to terminate a merger agreement in connection with the fiduciary out provisions, and
- the consequences of such a termination.
Tuesday, December 4, 2012
The typical M&A confidentiality agreement contains a standstill provision, which among other things, prohibits the potential bidder from publicly or privately requesting that the target company waive the terms of the standstill. The provision is designed to reduce the possibility that the bidder will be able to put the target "in play" and bypass the terms and spirit of the standstill agreement.
In this client alert, Gibson Dunn discusses a November 27, 2012 bench ruling issued by Vice Chancellor Travis Laster of the Delaware Chancery Court that enjoined the enforcement of a "Don't Ask, Don't Waive" provision in a standstill agreement, at least to the extent the clause prohibits private waiver requests.
As a result, Gibson advises that
until further guidance is given by the Delaware courts, targets entering into a merger agreement should consider the potential effects of any pre-existing Don't Ask, Don't Waive standstill agreements with other parties . . .. We note in particular that the ruling does not appear to invalidate per se all Don't Ask, Don't Waive standstills, as the opinion only questions their enforceability where a sale agreement with another party has been announced and the target has an obligation to consider competing offers. In addition, the Court expressly acknowledged the permissibility of a provision restricting a bidder from making a public request of a standstill waiver. Therefore, we expect that target boards will continue to seek some variation of Don't Ask, Don't Waive standstills.
December 4, 2012 in Cases, Contracts, Deals, Leveraged Buy-Outs, Litigation, Lock-ups, Merger Agreements, Mergers, State Takeover Laws, Takeover Defenses, Takeovers, Transactions | Permalink | Comments (0) | TrackBack (0)
Tuesday, November 6, 2012
Two interesting papers that raise the question of the true value of disclosure. The first is by Steven Davidoff and Claire Hill, Limits of Disclosure. Disclosure has been a common regulatory device since it was by Louis Brandeis ("Sunlight is said to be the best of disinfectants", Other People's Money). Indeed, our system of securities regulation is built upon this premise. Davidoff and Hill look at just how effective disclosure was in the run up to the financial crisis with respect to retial investors and in regulation of executive compensation. They come away disappointed:
The two examples, taken together, serve to elucidate our broader point: underlying the rationale for disclosure are common sense views about how people make decisions — views that turn out to be importantly incomplete. This does not argue for making considerably less use of disclosure. But it does sound some cautionary notes. The strong allure of the disclosure solution is unfortunate, although perhaps unavoidable. The admittedly nebulous bottom line is this: disclosure is too often a convenient path for policymakers and many others looking to take action and hold onto comforting beliefs in the face of a bad outcome. Disclosure’s limits reveal yet again the need for a nuanced view of human nature that can better inform policy decisions.
In another paper, Jeffrey Manns and Robert Anderson, The Merger Agreement Myth, take on the question of whether M&A lawyers are really creating any value or if they are just haggling over nits that no one cares about. Manns and Anderson conduct an event study to figure out whether there is value to all that drafting. They take advantage of the fact that not all merger agreements are filed with the SEC on the same day they are announced. So, they look for stock price changes that they can attribute to the addition of new information after the market learns about the terms of the merger agreement. If lawyers add value, they hypothesize that prices should rise after the market has learned the terms of the agreement - that's the value attributable to lawyers. It's basically a disclosure argument. If disclosure works, then the market should be able to instantly - or reasonably quickly - absorb new information and have that information reflected in stock prices. Like Davidoff and Hill, Manns and Anderson come away disappointed:
Our analysis shows that there is no economically consequential market reaction to the disclosure of the acquisition agreement. Markets appear to recognize that parties publicly committed to a merger have strong incentives to complete the deal regardless of what legal contingencies are triggered. We argue that the results suggest that M&A lawyers are fixated on the wrong problems by focusing too much on negotiating “contingent closings” that allow clients to call off a deal, rather than “contingent consideration” that compensates clients for closing deals that are less advantageous than expected. This approach can enable M&A lawyers to protect clients against the effects of the clients’ own managerial hubris in pursuing mergers that may (and often do) fall short of expectations.
So, disclosure as a regulatory device, or as a determiner of value, is not that successful and suggests we start looking elsewhere.
Tuesday, September 11, 2012
Our friends at LawMeets and Apprennet LLC are doing some interesting programming that should be of interest to law students and junior associates who might be just getting going. They are announcing “The Basics of Acquisition Agreements”. Faculty include our own Afra Afsharipour! See below.
The Basics of Acquisition Agreements
LawMeets is launching the first “MOOC” or massive open online course to teach transactional lawyering skills. LawMeets two-week online course on the Basics of Acquisition Agreements includes four video lectures, four interactive learning exercises and two panel discussions by leading transactional attorneys moderated by LawMeets faculty. The course is free and open to everyone.
WHO will teach the course?
The LawMeets® faculty for this course include:
- Afra Afsharipour, Professor of Law at UC Davis School of Law and former attorney at Davis, Polk & Wardwell LLP
- Jay Finkelstein, DLA Piper Partner and Adjunct Professor of Law at Stanford Law School and American University Washington College of Law
- Karl Okamoto, Professor of Law at Drexel University Earle Mack School of Law and former Dechert LLP and Kirkland & Ellis LLP Partner
Whitehead, Professor of Law at Cornell Law School and former senior counsel at
various international financial institutions
The faculty will be joined by a group of experts from law firms and corporate legal departments from around the world who will interact with the course participants through written feedback, online discussion boards and streaming video.
WHAT will the MOOC cover?
- The Why and How of Acquisitions
- A discussion of the economic and strategic motivations for acquisitions and the role lawyers play.
- Overview of the steps for completing acquisition transactions.
of an Acquisition Agreement
- An introduction to the provisions of an agreement and their interplay.
- An in-depth look at the primary “battleground” in the negotiation of an acquisition agreement.
- Due Diligence
- Why it matters. How it works. Common issues.
WHEN does the MOOC occur?
- October 23, 2012 through November 7, 2012
HOW do I participate?
- Interested participants can register for the MOOC by visiting www.LawMeets.com. Early registrants will receive email updates and the opportunity to complete a practice online exercise.
- To learn more, please visit www.LawMeets.com or email us at firstname.lastname@example.org.
Monday, August 20, 2012
Tuesday, January 3, 2012
Practitioners are often asked by their clients, "Which do you recommend to resolve disputes under a merger agreement: Litigation or Arbitration?"
Here's a Weil client alert by Sara Duran that "addresses the pros and cons of arbitration, situations where litigation may be preferable and drafting considerations for an agreement to arbitrate, in each case, from the viewpoint of US counterparties arbitrating domestically and applying US law."
Thursday, October 6, 2011
Weil, Gotshal has just released its fifth annual survey of sponsor-backed going private transactions, analyzing and summarizing the material transaction terms of going private transactions involving a private equity sponsor in the United States, Europe and Asia-Pacific. Have a look.
Tuesday, August 23, 2011
John Coates, IV has posted an interesting new paper Managing Disputes Through Contract: Evidence from M&A. The paper looks at dispute management provisions in a sample of 120 randomly chosen M&A contracts from 2007 and 2008. The paper examines contract terms “aimed at managing litigation, such as (a) clauses mandating and setting the scope for arbitration; (b) choice of law clauses, (c) forum selection clauses, (d) jury waivers, (e) clauses allocating legal costs in the event of a dispute, and (f) clauses attempting to increase or decrease the odds that a court will award specific performance as a remedy in the event of breach.”
Abstract: An important set of contract terms manages potential disputes. In a detailed, hand-coded sample of mergers and acquisition (M&A) contracts from 2007 and 2008, dispute management provisions in correlate strongly with target ownership, state of incorporation, and industry, and with the experience of the parties’ law firms. For Delaware, there is good and bad news. Delaware dominates choice for forum, whereas outside of Delaware, publicly held targets’ states of incorporation are no more likely to be designated for forum than any other court. However, Delaware’s dominance is limited to deals for publicly held targets incorporated in Delaware, Delaware courts are chosen only 20% of the time in deals for private targets incorporated in Delaware, and they are never chosen for private targets incorporated elsewhere, or in asset purchases. A forum goes unspecified in deals involving less experienced law firms. Whole contract arbitration is limited to private targets, is absent only in the largest deals, and is more common in cross-border deals. More focused arbitration – covering price-adjustment clauses – is common even in the largest private target bids. Specific performance clauses – prominently featured in recent high-profile M&A litigation – are less common when inexperienced M&A lawyers involved. These findings suggest (a) Delaware courts’ strengths are unique in, but limited to, corporate law, even in the “corporate” context of M&A contracts; (b) the use of arbitration turns as much on the value of appeals, trust in courts, and value-at-risk as litigation costs; and (c) the quality of lawyering varies significantly, even on the most “legal” aspects of an M&A contract.
Monday, June 27, 2011
When negotiating an acquisition agreement, it often appears that the other side is negotiationg language without any real knowledge of what the law actually is. One area where this is often the case is anti-sandbagging provisions. This article frames the sandbagging/anti-sanbagging issue and provides a useful summary of the law in several of the most relevant jurisdictions:
In Delaware, the buyer is not precluded from recovery based on pre-closing knowledge of the breach because reliance is not an element of a breach of contract claim. The same is true for Massachusetts and, effectively, Illinois (where knowledge is relevant only when the existence of the warranty is in dispute). But in California, the buyer is precluded from recovery because reliance is an element of a breach of warranty claim, and in turn, the buyer must have believed the warranty to be true. New York is less straightforward: reliance is an element of a breach of contract claim, but the buyer does not need to show that it believed the truth of the representation if the court believes the express warranties at issue were bargained-for contractual terms.
In New York, it depends on how and when the buyer came to have knowledge of the breach. If the buyer learned of facts constituting a breach from the seller, the claim is precluded, but the buyer will not be precluded from recovery where the facts were learned by the buyer from a third party (other than an agent of the seller) or the facts were common knowledge.
Given the mixed bag of legal precedent and little published law on the subject, if parties want to ensure a particular outcome, they should be explicit. When the contract is explicit, courts in California, Delaware, Massachusetts and New York have either enforced such provisions or suggested that they would. Presumably Illinois courts would enforce them as well, but there is very little or no case law to rely upon.
June 27, 2011 in Asset Transactions, Contracts, Deals, Delaware, Leveraged Buy-Outs, Management Buy-Outs, Merger Agreements, Private Equity, Private Transactions, Transactions | Permalink | Comments (0) | TrackBack (0)
Wednesday, May 11, 2011
The Practical Law Company has issued a new study of study of reverse termination fees and specific performance in public merger agreements. The study (which can be accessed here) covers 2010 deals (181 merger agreements with a signing value of at least $100 million). It looks like specific performance remained the dominant contractual remedy for a buyer’s failure to close the transaction due to a breach or financing failure, especially in the case of strategic buyers. Financial-buyer deals, however, were more varied.
Tuesday, May 3, 2011
K&E just published this "survey" of recent developments in public M&A deal terms. Unlike the broad, quantitative surveys put out by oganizations like the ABA or PLC, this one seems more impressionistic, so it may be biased by the universe of deals the authors were exposed to. Still, a worthwhile read.
Tuesday, October 19, 2010
Last week following the decision in In re Cogent, I moved on. I mean, why not, right? The court passed on the deal and it can now proceed to close. Well, not everybody is like me. Who is like a dog with a bone? Appraisal arbs, that's who. Take a look at this press release from Koyote Trading to Cogent shareholders. (The Deal Prof noticed this, too.) In it they write the following:
“We are pleased that 3M acquired a 52% stake in Cogent last week principally through the acquisition of a 38.8% stake owned by the CEO Mr. Ming Hsieh. However, as we and other owners of Cogent have been saying for some time, the $10.50 valuation is clearly inadequate by any number of metrics,” stated Zachary Prensky, co-manager of the Special Situations desk at Koyote. As stated by 3M in a press release dated Friday, October 8th, 2010, less than 15% of the outstanding publically-owned common stock of Cogent was tendered to 3M. ...
We applaud 3M’s long term commitment to a business that we are excited about. But the price offered is inadequate to 48% of Cogent shareholders that declined to participate in 3M’s tender. With the senior management and Board of Cogent committed to the $10.50 valuation, we have no choice but to explore the possible formation of a committee of shareholders to negotiate directly with 3M for a fair and adequate price for our stake. If 3M works with us, we believe we can find a middle ground that rewards minority shareholders for their long-term support of Cogent’s business plan,” added Mr. Prensky.
So, do they really think that the Cogent board will sit down and negotiate a higher price when a court has already given its blessing to the merger agreement? I doubt it. No, what they are probably up it is organizing a committee to pursue appraisal. Meet the appraisal arbs. A memo from Latham & Watkins issued way back in 2007 outlines the strategy.
[T]he Delaware Chancery Court issued its opinion in the Transkaryotic appraisal proceedings. The issue was whether some 10 million Transkaryotic shares acquired afterthe record date largely by hedge funds and arbitragers were entitled to appraisal even though the beneficial owners could not demonstrate that the particular shares had, in fact, either been voted against the merger transaction or had not voted at all—a statutory prerequisite for assertingappraisal rights.
The effect is to create a post-deal announcement market for target shares. Arbs who believe that there might be some real value in an appraisal proceeding can bid the price up and pursue and action - the reasonable costs of which may be borne by the surviving company. Looks like Koyote is thinking of something along these lines with respect to Cogent. Of course, the thing about an appraisal proceeding - it's a battle of experts and in the end the court determines the fair value of the shares - excluding any value created by the announced transaction. That's a little like when a student comes back to me asking for their exam to be re-graded. If you're lucky, it might go up. Then again, it could go down.
On a related matter, there is an open issue with top-up options and appraisal that will receive more attention as deal-makers continue their push toward ever lower and lower triggers for the top-up option. That issue has to do with the dilutive effect of the top-up on shares that may seek appraisal. If Cede tells us anything, it's that a court will analyze the top-up as an integrated part of the entire transaction. That could be troublesome if a diluted appraisal arb challenges a top-up option as part of an appraisal action.
This issue was a live one in Cogent. The plaintiffs made the following argument:
The last argument Plaintiffs make regarding the Top-Up Option is that the appraisal rights of Cogent stockholders will be adversely affected by the potential issuance of 139 million additional shares. They claim that the value of current stockholder’s shares may be significantly reduced as a result of the dilutive effect of a substantial increase in shares outstanding and the “questionable value” of the promissory note. Plaintiffs argue that the Top-Up Option will result in the issuance of numerous shares at less than their fair value. As a result, when the Company’s assets are valued in a subsequent appraisal proceeding following the execution of the Top-Up Option, the resulting valuation will be less than it would have been before the Option’s exercise.
It looks like deal lawyers saw this coming, so the Cogent merger agreement included a protective provision as part of the top-up:
Plaintiffs admit that Defendants have attempted to mitigate any potential devaluation that might occur by agreeing, in § 2.2(c) of the Merger Agreement, that “the fair value of the Appraisal Shares shall be determined in accordance with DGCL § 262 without regard to the Top-Up Option, the Top-Up Option Shares or any promissory note delivered by the Merger Sub.” Plaintiffs question, however, the ability of this provision to protect the stockholders because, they argue, a private contract cannot alter the statutory fair value or limit what the Court of Chancery can consider in an appraisal.(66) Because DGCL § 262’s fair value standard requires that appraisal be based on all relevant factors, Plaintiffs contend the Merger Agreement cannot preclude a court from taking into account the total number of outstanding shares, including those distributed upon the exercise of the Top-Up Option. In addition, they argue that even if the parties contractually could provide such protection to the stockholders, § 2.2 of the Merger Agreement fails to accomplish that purpose because the Merger Agreement does not designate stockholders as third-party beneficiaries with enforceable rights.
While the issue of whether DGCL § 262 allows merger parties to define the conditions under which appraisal will take place has not been decided conclusively, there are indications from the Court of Chancery that it is permissible.(67) The analysis in the cited decisions indicates there is a strong argument in favor of the parties’ ability to stipulate to certain conditions under which an appraisal will be conducted—certainly to the extent that it would benefit dissenting stockholders and not be inconsistent with the purpose of the statute. In this case, I find that § 2.2(c) of the Merger Agreement, which states that “the fair value of theAppraisal Shares shall be determined in accordance with Section 262 without regard to the Top-Up Option . . . or any promissory note,” is sufficient to overcome Plaintiffs’ professed concerns about protecting the Company’s stockholders from the potential dilutive effects of the Top-Up Option. Accordingly, I find that Plaintiffs have not shown that they are likely to succeed on the merits of their claims based on the Top-Up Option.
When the top-up option was simply a cleaning up device to help tidy up a tender, I suspect that few merger agreements included protective provisions as part of the top-up. If we are moving toward lower and lower top-up triggers, then this kind of protective provision will become required, lest a challenge get some traction in the courts.
Wednesday, May 26, 2010
I’ve mentioned reverse termination fees previously on this blog. For those of you who attended the ABA Business Law Section’s meetings in April, you’ll know that the Practical Law Company has put together an analysis of RTFs and other remedies "available to target companies in public merger agreements for a buyer's failure to close the transaction because of a willful breach or a financing failure." The PLC study is a sophisticated analysis of RTFs and specific performance remedies in public deals announced between Q1 2009 and Q1 2010. I highly recommend taking a look. The study can be found here.
Wednesday, May 5, 2010
There has been a lot of fun merger activity and news lately. Unfortunately for me, I’ve been bogged down in end of the semester exam angst. But there is a deal that has caught my attention (in my prior life, I was a Silicon Valley lawyer): HP’s proposed $1.2 billion acquisition of Palm. HP is certainly no stranger to large tech deals, and it’s no secret that Palm has been trying to find a suitor. There is some speculation about whether now that HP has stepped up other suitors will emerge given Palm’s valuable patent portfolio which some value at approximately $1.4 billion. Of course, the usual crowds have already started investigating whether the Palm board breached its fiduciary duty to its shareholders in agreeing to sell the company to HP. According to one plaintiff’s side firm “the deal is suspicious because it appears from a review of the Company's financial statements that the inherent value of the Company's stock is greater than $5.70 per share, because the share price was as high as $6.29 just this month prior to the announcement of the deal, because the share price has been as high as $13.58 just this year and also because it appears that the Company's Board of Directors failed to shop the Company to other potential buyers to assure that its shareholders would receive the best price possible for their shares.” For those of you familiar with Delaware case law on this type of acquisition, you know well that Palm’s sale to HP is a change of control transaction that implicates Revlon duties. But, this will likely be a tough case to win on fiduciary duty grounds as the Delaware courts have stated that "there are no legally prescribed steps that directors must follow to satisfy their Revlon duties." As we have noted many times on this blog, the Delaware Supreme Court’s recent decision in Lyondell Chemical Company v. Ryan seems to confirm that only an utter failure to attempt to secure maximum value will cause directors to run afoul of their obligations under Revlon. Moreover, the terms of the Palm-HP acquisition agreement give a lot of room for a higher bidder to emerge. The $33 million termination fee is fairly low (approximately 2.75% of the deal value) and Palm’s board has a typical fiduciary out. So will other suitors come knocking at Palm’s door?