Advisory Board

  • Cai Hongbin
  • Peking University Guanghua School of Management
  • Peter Clarke
  • Barry Diller
  • IAC/InterActiveCorp
  • Fu Chengyu
  • China National Petrochemical Corporation (Sinopec Group)
  • Richard J. Gnodde
  • Goldman Sachs International
  • Lodewijk Hijmans van den Bergh
  • De Brauw Blackstone Westbroek N.V.
  • Jiang Jianqing
  • Industrial and Commercial Bank of China, Ltd. (ICBC)
  • Handel Lee
  • King & Wood Mallesons
  • Richard Li
  • PCCW Limited
  • Pacific Century Group
  • Liew Mun Leong
  • CapitaLand Limited
  • Martin Lipton
  • New York University
  • Wachtell, Lipton, Rosen & Katz
  • Liu Mingkang
  • China Banking Regulatory Commission (CBRC)
  • Dinesh C. Paliwal
  • Harman International Industries
  • Leon Pasternak
  • Bank of America Merrill Lynch
  • Tim Payne
  • Brunswick Group
  • Joseph R. Perella
  • Perella Weinberg Partners
  • Baron David de Rothschild
  • N M Rothschild & Sons Limited
  • Dilhan Pillay Sandrasegara
  • Temasek Holdings
  • Shao Ning
  • State-owned Assets Supervision and Administration Commission of the State Council of China (SASAC)
  • John W. Snow
  • Cerberus Capital Management, L.P.
  • Former U.S. Secretary of Treasury
  • Bharat Vasani
  • Tata Group
  • Wang Junfeng
  • King & Wood Mallesons
  • Wang Kejin
  • China Banking Regulatory Commission (CBRC)
  • Wei Jiafu
  • China Ocean Shipping Group Company (COSCO)
  • Yang Chao
  • China Life Insurance Co. Ltd.
  • Zhu Min
  • International Monetary Fund

Legal Roundtable

  • Dimitry Afanasiev
  • Egorov Puginsky Afanasiev and Partners (Moscow)
  • William T. Allen
  • NYU Stern School of Business
  • Wachtell, Lipton, Rosen & Katz (New York)
  • Johan Aalto
  • Hannes Snellman Attorneys Ltd (Finland)
  • Nigel P. G. Boardman
  • Slaughter and May (London)
  • Willem J.L. Calkoen
  • NautaDutilh N.V. (Rotterdam)
  • Peter Callens
  • Loyens & Loeff (Brussels)
  • Bertrand Cardi
  • Darrois Villey Maillot & Brochier (Paris)
  • Santiago Carregal
  • Marval, O’Farrell & Mairal (Buenos Aires)
  • Martín Carrizosa
  • Philippi Prietocarrizosa & Uría (Bogotá)
  • Carlos G. Cordero G.
  • Aleman, Cordero, Galindo & Lee (Panama)
  • Ewen Crouch
  • Allens (Sydney)
  • Adam O. Emmerich
  • Wachtell, Lipton, Rosen & Katz (New York)
  • Rachel Eng
  • WongPartnership (Singapore)
  • Sergio Erede
  • BonelliErede (Milan)
  • Kenichi Fujinawa
  • Nagashima Ohno & Tsunematsu (Tokyo)
  • Manuel Galicia Romero
  • Galicia Abogados (Mexico City)
  • Danny Gilbert
  • Gilbert + Tobin (Sydney)
  • Vladimíra Glatzová
  • Glatzová & Co. (Prague)
  • Juan Miguel Goenechea
  • Uría Menéndez (Madrid)
  • Andrey A. Goltsblat
  • Goltsblat BLP (Moscow)
  • Juan Francisco Gutiérrez I.
  • Philippi Prietocarrizosa & Uría (Santiago)
  • Fang He
  • Jun He Law Offices (Beijing)
  • Christian Herbst
  • Schönherr (Vienna)
  • Lodewijk Hijmans van den Bergh
  • Royal Ahold (Amsterdam)
  • Hein Hooghoudt
  • NautaDutilh N.V. (Amsterdam)
  • Sameer Huda
  • Hadef & Partners (Dubai)
  • Masakazu Iwakura
  • Nishimura & Asahi (Tokyo)
  • Christof Jäckle
  • Hengeler Mueller (Frankfurt)
  • Michael Mervyn Katz
  • Edward Nathan Sonnenbergs (Johannesburg)
  • Handel Lee
  • King & Wood Mallesons (Beijing)
  • Martin Lipton
  • Wachtell, Lipton, Rosen & Katz (New York)
  • Alain Maillot
  • Darrois Villey Maillot Brochier (Paris)
  • Antônio Corrêa Meyer
  • Machado, Meyer, Sendacz e Opice (São Paulo)
  • Sergio Michelsen Jaramillo
  • Brigard & Urrutia (Bogotá)
  • Zia Mody
  • AZB & Partners (Mumbai)
  • Christopher Murray
  • Osler (Toronto)
  • Francisco Antunes Maciel Müssnich
  • Barbosa, Müssnich & Aragão (Rio de Janeiro)
  • I. Berl Nadler
  • Davies Ward Phillips & Vineberg LLP (Toronto)
  • Umberto Nicodano
  • BonelliErede (Milan)
  • Brian O'Gorman
  • Arthur Cox (Dublin)
  • Robin Panovka
  • Wachtell, Lipton, Rosen & Katz (New York)
  • Sang-Yeol Park
  • Park & Partners (Seoul)
  • José Antonio Payet Puccio
  • Payet Rey Cauvi (Lima)
  • Kees Peijster
  • COFRA Holding AG (Zug)
  • Juan Martín Perrotto
  • Uría & Menéndez (Madrid/Beijing)
  • Philip Podzebenko
  • Herbert Smith Freehills (Sydney)
  • Geert Potjewijd
  • De Brauw Blackstone Westbroek (Amsterdam/Beijing)
  • Qi Adam Li
  • Jun He Law Offices (Shanghai)
  • Biörn Riese
  • Mannheimer Swartling (Stockholm)
  • Mark Rigotti
  • Herbert Smith Freehills (Sydney)
  • Rafael Robles Miaja
  • Robles Miaja (Mexico City)
  • Alberto Saravalle
  • BonelliErede (Milan)
  • Maximilian Schiessl
  • Hengeler Mueller (Düsseldorf)
  • Cyril S. Shroff
  • Cyril Amarchand Mangaldas (Mumbai)
  • Shardul S. Shroff
  • Shardul Amarchand Mangaldas & Co.(New Delhi)
  • Klaus Søgaard
  • Gorrissen Federspiel (Denmark)
  • Ezekiel Solomon
  • Allens (Sydney)
  • Emanuel P. Strehle
  • Hengeler Mueller (Munich)
  • David E. Tadmor
  • Tadmor & Co. (Tel Aviv)
  • Kevin J. Thomson
  • Barrick Gold Corporation (Toronto)
  • Yu Wakae
  • Nagashima Ohno & Tsunematsu (Tokyo)
  • Wang Junfeng
  • King & Wood Mallesons (Beijing)
  • Tomasz Wardynski
  • Wardynski & Partners (Warsaw)
  • Rolf Watter
  • Bär & Karrer AG (Zürich)
  • Xiao Wei
  • Jun He Law Offices (Beijing)
  • Xu Ping
  • King & Wood Mallesons (Beijing)
  • Shuji Yanase
  • OK Corporation (Tokyo)
  • Alvin Yeo
  • WongPartnership LLP (Singapore)

Founding Directors

  • William T. Allen
  • NYU Stern School of Business
  • Wachtell, Lipton, Rosen & Katz
  • Nigel P.G. Boardman
  • Slaughter and May
  • Cai Hongbin
  • Peking University Guanghua School of Management
  • Adam O. Emmerich
  • Wachtell, Lipton, Rosen & Katz
  • Robin Panovka
  • Wachtell, Lipton, Rosen & Katz
  • Peter Williamson
  • Cambridge Judge Business School
  • Franny Yao
  • Ernst & Young

Structuring

U.S. UPDATE – 2017 Checklist for Successful Acquisitions in the United States

Editors’ Note: This submission updates a checklist co-authored by Messrs. Emmerich and Panovka, members of XBMA’s Legal Roundtable, with their colleagues at Wachtell Lipton David A. Katz, Scott K. Charles, Ilene Knable Gotts, Andrew J. Nussbaum, Joshua R. Cammaker, Mark Gordon, Eric M. Rosof, Joshua M. Holmes, T. Eiko Stange, Gordon S. Moodie, Edward J. Lee, Raaj S. Narayan and Carmen X.W. Lu.

Highlights:

  • Global M&A volume in 2016 continued to be robust, reaching $3.7 trillion, approximately 40% of which involved cross-border deals, as compared to one-third in 2015.  Five out of the ten largest deals of the year were cross-border transactions.  The pace of deals grew during the second half of the year, especially in the U.S., and there are many signals pointing to a continued strong pace of transactions.  The big wild card, of course, is the extent to which recent political upheaval both in the U.S. and around the world will translate into increased protectionism or other upheaval in taxation, regulation or finance.  So far, the deal market is largely unfazed, and rising U.S. equity valuations provide plenty of dry powder for stock deals.
  • U.S. targets accounted for approximately $1.7 trillion of last year’s deal volume, with approximately 30% of U.S. deals involving non-U.S. acquirors.
  • We would be surprised, even in the face of significant change and uncertainty, were robust levels of cross-border M&A not to continue to be a prominent feature of the international business landscape.  Both U.S. sellers and non-U.S. buyers will remain interested in the opportunities presented by investment in the U.S., and perhaps more so in a world where economic nationalism is on the rise.
  • This post updates our checklist of issues that should be carefully considered in advance of an acquisition or strategic investment in the U.S.

MAIN ARTICLE

Global M&A volume in 2016 continued to be robust, reaching $3.7 trillion, approximately 40% of which involved cross-border deals, as compared to one-third in 2015. Five out of the ten largest deals of the year were cross-border transactions. The pace of deals grew during the second half of the year, especially in the U.S., and there are many signals pointing to a continued strong pace of transactions. The big wild card, of course, is the extent to which recent political upheaval both in the U.S. and around the world will translate into increased protectionism or other upheaval in taxation, regulation or finance. So far, the deal market is largely unfazed, and rising U.S. equity valuations provide plenty of dry powder for stock deals.

U.S. targets accounted for approximately $1.7 trillion of last year’s deal volume, with approximately 30% of U.S. deals involving non-U.S. acquirors. German, French, Canadian, Japanese and U.K. buyers accounted for approximately 65% of the volume of cross-border acquisitions into the U.S., and acquirors from China, India and other emerging economies accounted for approximately 15%. Cross-border deals involving U.S. target companies included a number of noteworthy transactions, including Bayer AG’s $66 billion acquisition of Monsanto, the $28 billion merger between Enbridge and Spectra Energy, Danone S.A.’s $12.5 billion acquisition of Whitewave Foods, and Samsung’s $8 billion acquisition of Harman International.

Predictions – as has been famously and variously attributed to Niels Bohr, Yogi Berra and others – are tough, especially about the future. What we can expect in 2017, as a Trump administration takes up the reins of power in the U.S., the U.K. inches and lurches toward Brexit, Italy regroups, France and Germany hold elections, and Chinese signals on outbound investment (which surged more than 350% for 2016 U.S. deals as compared to 2015 levels) and outbound capital movement are both mixed and opaque, is beyond our powers of prediction, however ex-cited the U.S. equity markets may currently be.

That said, we would be surprised, even in the face of significant change and uncertainty, were robust levels of cross-border M&A not to continue to be a prominent feature of the international business landscape. Both U.S. sellers and non-U.S. buyers will remain interested in the opportunities presented by investment in the U.S., and perhaps more so in a world where economic nationalism is on the rise.

What won’t change is that advance preparation, strategic implementation and sophisticated deal structures that anticipate likely concerns will continue to be critical to successful acquisitions in the U.S. It will remain the case that cross-border deals involving investment into the U.S. are more likely to fail because of poor analysis, planning and execution than fundamental legal or political restrictions.

The following is our updated checklist of issues that should be carefully considered in advance of an acquisition or strategic investment in the U.S. Because each cross-border deal is unique, the relative significance of the issues discussed below will depend upon the specific facts, circumstances and dynamics of each particular situation.

  • Political and Regulatory Considerations. Even if investment into the U.S. remains mostly well-received and generally not politicized or made a pawn in broader global economic and other confrontations (an assumption that will be monitored very closely in M&A circles and more broadly), prospective non-U.S. acquirors of U.S. businesses or assets should undertake a thoughtful analysis of U.S. political and regulatory implications well in advance of any acquisition proposal or program, particularly if the target company operates in a sensitive industry, if post-transaction business plans contemplate major changes in investment, employment or business strategy, or if the acquiror is sponsored or financed by a foreign government, or organized in a jurisdiction where a high level of government involvement in business is generally understood to exist. It is imperative that the likely concerns of federal, state and local government agencies, employees, customers, suppliers, communities and other interested parties be thoroughly considered and, if possible, addressed prior to any acquisition or investment proposal becoming public. It is also essential that a comprehensive communications plan, focusing not only on public investors but also on all these core constituencies, be in place prior to the announcement of a transaction so that all of the relevant constituencies can be addressed with the appropriate messages. It will often be useful, if not essential, to involve experienced public relations firms at an early stage in the planning process. Similarly, potential regulatory hurdles require sophisticated advance planning. In addition to securities and antitrust regulations, acquisitions may be subject to CFIUS review (discussed below), and acquisitions in regulated industries (e.g., energy, public utilities, gaming, insurance, telecommunications and media, financial institutions, transportation and defense contracting) may be subject to an additional layer of regulatory approvals. Regulation in these areas is often complex, and political opponents, reluctant targets and competitors may seize on perceived weaknesses in an acquiror’s ability to clear regulatory obstacles. High-profile transactions may also result in political scrutiny by Congress, state and local officials.

    Finally, depending on the industry involved and the geographic distribution of the work-force, labor unions will continue to play an active role during the review process. Pre-announcement communications plans must take account of all of these interests.

  • Transaction Structures. Non-U.S. acquirors should be willing to consider a variety of potential transaction structures, especially in strategically or politically sensitive transactions. Structures that may be helpful in sensitive situations include no-governance and low-governance investments, minority positions or joint ventures, possibly with the right to increase ownership or governance over time; partnering with a U.S. company or management team or collaborating with a U.S. source of financing or co-investor (such as a private equity firm); utilizing a controlled or partly controlled U.S. acquisition vehicle, possibly with a board of directors having a substantial number of U.S. citizens and prominent U.S. citizens in high-profile roles; or implementing bespoke governance structures (such as a U.S. proxy board) with respect to specific sensitive subsidiaries or businesses of the target company. Use of debt or preferred securities (rather than ordinary common stock) should also be considered. Even more modest social issues, such as the name of the continuing enterprise and its corporate location or headquarters, or the choice of the nominal legal acquiror in a merger, can affect the perspective of government and labor officials.
  • CFIUS. Under current U.S. federal law, the Committee on Foreign Investment in the United States (CFIUS) – a multi-agency governmental body chaired by the Secretary of the Treasury, the recommendations of which the President of the United States has personal authority to accept or reject – has discretion to review transactions in which non-U.S. acquirors could obtain “control” of a U.S. business or in which a non-U.S. acquiror invests in U.S. infrastructure, technology or energy assets. That authority was notably used in 2016 to block the Aixtron and Lumileds transactions. Although filings with CFIUS are voluntary, CFIUS also has the ability to investigate transactions at its discretion, including after the transaction has closed. While it is not clear if and how CFIUS’s review of cross-border transactions will change in a Trump administration, we believe three useful rules of thumb in dealing with CFIUS will continue to be useful:
    • first, in general it is prudent to make a voluntary filing with CFIUS if the likelihood of an investigation is reasonably high or if competing bidders are likely to take advantage of the uncertainty of a potential investigation;
    • second, it is often best to take the initiative and suggest methods of mitigation early in the review process in order to help shape any remedial measures and avoid delay or potential disapproval; and
    • third, it is often a mistake to make a CFIUS filing prior to initiating discussions with the U.S. Department of the Treasury and other officials and relevant parties. In some cases, it may even be prudent to make the initial contact prior to the pub-lic announcement of the transaction. CFIUS is not as mysterious or unpredictable as some fear – consultation with Treasury and other officials (who – to date – have generally been supportive of investment in the U.S. economy) and CFIUS specialists will generally provide a good sense of what it will take to clear the process. Retaining advisors with significant CFIUS expertise and experience is often crucial to successful navigation of the CFIUS process. Transactions that may require a CFIUS filing should have a carefully crafted communications plan in place prior to any public announcement or disclosure. In addition, given that CFIUS will require a draft filing in advance of the official filing, building in sufficient lead time is essential.

    While still an evolving product, in the past year some insurers have begun offering insurance coverage for CFIUS-related non-consummation risk, covering payment of the re-verse break fee in the event a transaction does not close due to CFIUS review, at a cost of approximately 10-15% of the reverse break fee.

  • Acquisition Currency. While cash remains a common form of consideration in cross-border deals into the U.S., non-U.S. acquirors should think creatively about potential avenues for offering U.S. target shareholders a security that allows them to participate in the resulting global enterprise. For example, publicly listed acquirors may consider offering existing common stock or depositary receipts (e.g., ADRs) or special securities (e.g., contingent value rights). When U.S. target shareholders obtain a continuing interest in a surviving corporation that had not already been publicly listed in the U.S., expect heightened focus on the corporate governance and other ownership and structural arrangements of the non-U.S. acquiror, including as to the presence of any controlling or large shareholders, and heightened scrutiny placed on any de facto controllers or promoters. Creative structures, such as the issuance of non-voting stock or other special securities of a non-U.S. acquiror, may minimize or mitigate the issues raised by U.S. corporate governance concerns. As we have said previously, the world’s equity markets have never been more globalized, and the interest of investors in major capital markets to invest in non-local business never greater; equity consideration, or equity issuance to support a transaction, should be considered in appropriate circumstances.
  • M&A Practice. It is essential to understand the custom and practice of U.S. M&A trans-actions. For instance, understanding when to respect – and when to challenge – a target’s sale “process” may be critical. Knowing how and at what price level to enter the discussions will often determine the success or failure of a proposal; in some situations it is prudent to start with an offer on the low side, while in other situations offering a full price at the outset may be essential to achieving a negotiated deal and discouraging competitors, including those who might raise political or regulatory issues. In strategically or politically sensitive transactions, hostile maneuvers may be imprudent; in other cases, unsolicited pressure might be the only way to force a transaction. Takeover regulations in the U.S. differ in many significant respects from those in non-U.S. jurisdictions; for example, the mandatory bid concept common in Europe, India and other countries is not present in U.S. practice. Permissible deal protection structures, pricing requirements and defensive measures available to U.S. targets will also likely differ in meaningful ways from what non-U.S. acquirors are accustomed to in deals in their home countries. Sensitivity must also be given to the distinct contours of the target board’s fiduciary duties and decision-making obligations under state law. Finally, often overlooked in cross-border situations is how subtle differences in language, communication expectations and the role of different transaction participants can impact transactions and discussions; advance preparation and ongoing engagement during a transaction must take this into account.
  • U.S. Board Practice and Custom. Where the target is a U.S. public company, the customs and formalities surrounding board of director participation in the M&A process, including the participation of legal and financial advisors, the provision of customary fairness opinions and the inquiry and analysis surrounding the activities of the board and the financial advisors, can be unfamiliar and potentially confusing to non-U.S. transaction participants and can lead to misunderstandings that threaten to upset delicate transaction negotiations. Non-U.S. participants need to be well-advised as to the role of U.S. public company boards and the legal, regulatory and litigation framework and risks that can constrain or prescribe board action. These factors can impact both tactics and timing of M&A processes and the nature of communications with the target company.
  • Distressed Acquisitions. Distressed M&A is a well-developed specialty in the U.S., with its own subculture of sophisticated investors, lawyers and financial advisors. The U.S. continues to be a popular destination for restructurings of multinational corporations, including those with few assets or operations in the country, because of its debtor-friendly reorganization laws. Recently, this trend has been most evident in the bankruptcy filings of non-U.S. based companies in the energy and shipping sectors. Among other ad-vantages, the U.S. bankruptcy system has expansive jurisdiction (such as a world-wide stay of actions against a debtor’s property and liberal filing requirements), provides relative predictability in outcomes and allows for the imposition of debt restructurings on non-consenting creditors, making reorganizations more feasible. In recent years, court-supervised “Section 363” auctions of a debtor’s assets (as opposed to the more traditional Chapter 11 plan of reorganization) have become more common, in part because they can be completed comparatively quickly, efficiently and cheaply. Additionally, large foreign companies have increasingly turned to Chapter 15 of the U.S. Bankruptcy Code, which accords debtors that are already in foreign insolvency proceedings key protections from creditors in the U.S. and has facilitated restructurings and asset sales approved abroad. Firms evaluating a potential acquisition of a distressed target based in the U.S. should consider the full array of tools that the U.S. bankruptcy process makes available, including acquisition of the target’s fulcrum debt securities that are expected to be converted in-to equity through an out-of-court restructuring or plan of reorganization, acting as a plan investor or sponsor in connection with a plan of reorganization, backstopping a plan-related rights offering or participating as a bidder in a “Section 363” auction. Transaction certainty is of critical importance to success in a transaction in bankruptcy, and non-U.S. participants accordingly need to plan carefully (especially with respect to transactions that might be subject to CFIUS review, as discussed above) to ensure that they will be on a relatively level playing field with U.S. bidders. Acquirors also need to be aware that they will likely need to address the numerous constituencies involved in a bankruptcy case, each with its own interests and often conflicting agendas, including bank lenders, bondholders, distressed-focused hedge funds and holders of structured debt securities and credit default protection, as well as landlords and trade creditors.
  • Financing. Heading into 2017, recent trends that have influenced acquisition financing may be reversing. Rising interest rates deserve a moment of reflection, including in terms of the still-available opportunity to lock in long-term fixed rates to finance acquisitions, and in the challenges to de-lever post-acquisition so as to best position the company for future refinancings that may be in a higher-rate environment. On the other hand, the U.S. regulatory oversight of banks that led to leveraged lending constraints may be relaxed by the new administration, allowing banks more flexibility to finance acquisitions at higher leverage levels. Moreover, acquisition financing commitments that had been constrained, particularly for acquisitions requiring long regulatory approval periods be-tween signing and closing, may become less so. Additionally, if tax-related costs to repatriate offshore cash of U.S. corporations are reduced, the result may be new tax-efficient structures for financing deals. None of this is assured, of course, and therefore careful consideration of financing-related market trends and developments is more important than ever in planning acquisitions.

    Important questions to ask when considering a transaction that requires debt financing include: what is the appropriate leverage level for the resulting business; where financing with the most favorable costs, terms and conditions is available; what currencies the financing should be raised in; and how fluctuations in currency exchange rates can affect costs, repayment and covenant compliance; how committed the financing is or should be; which lenders have the best understanding of the acquiror’s and target’s businesses; whether there are transaction structures that can minimize financing and refinancing requirements; and how comfortable a target will feel with the terms and conditions of the financing.

  • Litigation. Stockholder litigation accompanies many transactions involving a U.S. public company but generally is not a cause for concern. Excluding situations involving competing bids – where litigation may play a direct role in the contest – and going-private or other “conflict” transactions initiated by controlling shareholders or management – which form a separate category requiring special care and planning – there are very few examples of major acquisitions of U.S. public companies being blocked or prevented due to shareholder litigation or of materially increased costs being imposed on arm’s-length acquirors. In most cases, where a transaction has been properly planned and implemented with the benefit of appropriate legal and investment banking advice on both sides, such litigation can be dismissed or settled for relatively small amounts or other concessions. Moreover, the rate of such litigation (and the average number of lawsuits per deal) declined in 2015 and 2016, due in part to a seminal case in a key jurisdiction for such litigation (Delaware) that reduced the incentives for the stockholder plaintiffs’ attorneys to bring such suits by signaling that disclosure-only settlements (and the attorneys’ fees they generated) would face significantly more scrutiny. Some, but not all, other courts have followed Delaware’s lead in this regard. In any event, sophisticated counsel can usually predict the likely range of litigation outcomes or settlement costs, which should be viewed as a cost of the deal.

    While well-advised parties can substantially reduce the risk of U.S. stockholder litigation, the reverse is also true – the conduct of the parties during negotiations can create “bad facts” that in turn may both encourage stockholder litigation and provoke judicial rebuke, including significant monetary judgments. Sophisticated litigation counsel should be included in key stages of the deal negotiation process. In all cases, the acquiror, its directors, shareholders and offshore reporters and regulators should be conditioned in advance (to the extent possible) to expect litigation and not to view it as a sign of trouble. In addition, it is important to understand the U.S. discovery process in litigation is significantly different than the process in other jurisdictions and, even in the context of a settlement, will require the acquiror to provide responsive information and documents (including emails) to the plaintiffs.

  • Tax Considerations. With Republicans in control of the White House, the Senate and the House of Representatives, comprehensive tax reform is likely to be enacted in 2017. It is anticipated that such reform will be based on the House GOP plan and the Trump plan which, despite their differences, are aligned on a number of key issues, including significant reduction in tax rates, deduction of capital expenditures, potential limitations on the deductibility of interest expense, and repatriation relief. While the specific outcome of this process remains to be seen, such tax reform is anticipated to increase the attractiveness of investing in the U.S.

    U.S. tax issues affecting target shareholders or the combined group may be critical to structuring a cross-border transaction. In transactions involving the receipt by U.S. target shareholders of non-U.S. acquiror stock, the potential application of so-called “anti-inversion” rules, which could render an otherwise tax-free transaction taxable to exchanging U.S. target shareholders and also result in potentially significant adverse U.S. tax consequences to the combined group, must be carefully evaluated. Non-U.S. acquirors frequently will need to consider whether to invest directly from their home jurisdiction or through U.S. or non-U.S. subsidiaries, the impact of the transaction on tax at-tributes of the U.S. target (e.g., loss carryforwards), the deductibility of interest expense incurred on acquisition indebtedness and eligibility for reduced rates of withholding on cross-border payments of interest, dividends and royalties under applicable U.S. tax treaties. In particular, non-U.S. acquirors should carefully review the impact of recently finalized debt/equity regulations on related-party financing transactions. Because the U.S. presently does not have a “participation exemption” regime that exempts dividend in-come from non-U.S. subsidiaries, a non-U.S. acquiror of a U.S. target with non-U.S. sub-sidiaries should analyze the tax cost of extracting such subsidiaries from the U.S. group. Parties to a potential transaction should carefully monitor how their transaction may be affected by U.S. tax reform.

  • Disclosure Obligations. How and when an acquiror’s interest in the target is publicly disclosed should be carefully controlled and considered, keeping in mind the various ownership thresholds that trigger mandatory disclosure on a Schedule 13D under the federal securities laws and under regulatory agency rules such as those of the Federal Re-serve Board, the Federal Energy Regulatory Commission (FERC) and the Federal Communications Commission (FCC). While the Hart-Scott-Rodino Antitrust Improvements Act (HSR) does not require disclosure to the general public, the HSR rules do require disclosure to the target before relatively low ownership thresholds can be crossed. Non-U.S. acquirors have to be mindful of disclosure norms and timing requirements relating to home country requirements with respect to cross-border investment and acquisition activity. In many cases, the U.S. disclosure regime is subject to greater judgment and analysis than the strict requirements of other jurisdictions. Treatment of derivative securities and other pecuniary interests in a target other than common stock holdings can also vary by jurisdiction.
  • Shareholder Approval. Because few U.S. public companies have one or more controlling shareholders, obtaining public shareholder approval is typically a key consideration in U.S. transactions. Understanding in advance the roles of arbitrageurs, hedge funds, institutional investors, private equity funds, proxy voting advisors and other market players – and their likely views of the anticipated acquisition attempt as well as when they appear and disappear from the scene – can be pivotal to the success or failure of the transaction. It is advisable to retain an experienced proxy solicitation firm well in advance of the shareholder meeting to vote on the transaction (and sometimes prior to the announcement of a deal) to implement an effective strategy to obtain shareholder approval.
  • Integration Planning. One of the reasons deals sometimes fail is poor post-acquisition integration, particularly in cross-border deals where multiple cultures, languages and historic business methods may create friction. If possible, the executives and consultants who will be responsible for integration should be involved in the early stages of the deal so that they can help formulate and “own” the plans that they will be expected to execute. Too often, a separation between the deal team and the integration/execution teams invites slippage in execution of a plan that in hindsight is labeled by the new team as unrealistic or overly ambitious. However, integration planning needs to be carefully phased in as implementation cannot occur prior to the receipt of certain regulatory approvals.
  • Corporate Governance and Securities Law. Current U.S. securities and corporate governance rules can be troublesome for non-U.S. acquirors who will be issuing securities that will become publicly traded in the U.S. as a result of an acquisition. SEC rules, the Sarbanes-Oxley and Dodd-Frank Acts and stock exchange requirements should be evaluated to ensure compatibility with home country rules and to be certain that the non-U.S. acquiror will be able to comply. Rules relating to director independence, internal control reports and loans to officers and directors, among others, can frequently raise issues for non-U.S. companies listing in the U.S. Non-U.S. acquirors should also be mindful that U.S. securities regulations may apply to acquisitions and other business combination activities involving non-U.S. target companies with U.S. security holders. Whether the Trump administration, Congress and a new chairman of the U.S. Securities and Exchange Commission will significantly alter the regulatory landscape for public companies and transactions will be a subject of keen interest not only to non-U.S. acquirors, but to all public companies, acquirors and investors. Sweeping change has been promised and may be delivered.
  • Antitrust Issues. To the extent that a non-U.S. acquiror directly or indirectly competes or holds an interest in a company that competes in the same industry as the target company, antitrust concerns may arise either at the federal agency or state attorneys general level. Although less typical, concerns can also arise if the foreign acquiror competes either in an upstream or downstream market of the target. As noted above, pre-closing integration efforts should also be conducted with sensitivity to antitrust requirements that can be limiting. Home country or other foreign competition laws may raise their own sets of issues that should be carefully analyzed with counsel. The administration of the antitrust laws in the U.S. is carried out by highly professional agencies relying on well-established analytical frameworks. The outcomes of the vast majority of transactions can be easily predicted. In borderline cases, while the outcome of any particular proposed transaction cannot be known with certainty, the likelihood of a proposed transaction being viewed by the agencies as raising substantive antitrust concerns and the degree of difficulty in over-coming those concerns can be. In situations presenting actual or potential substantive is-sues, careful planning is imperative and a proactive approach to engagement with the agencies is generally advisable.
  • Due Diligence. Wholesale application of the acquiror’s domestic due diligence standards to the target’s jurisdiction can cause delay, waste time and resources or result in missing a problem. Due diligence methods must take account of the target jurisdiction’s legal re-gime and, particularly important in a competitive auction situation, local norms. Many due diligence requests are best channeled through legal or financial intermediaries as op-posed to being made directly to the target company. Making due diligence requests that appear to the target as particularly unusual or unreasonable (not uncommon in cross-border deals) can easily create friction or cause a bidder to lose credibility. Similarly, missing a significant local issue for lack of local knowledge can be highly problematic and costly. Prospective acquirors should also be familiar with the legal and regulatory context in the U.S. for diligence areas of increasing focus, including cybersecurity, data privacy and protection, Foreign Corrupt Practices Act (FCPA) compliance and other matters. In some cases, a potential acquiror may wish to investigate obtaining representation and warranty insurance in connection with a potential transaction, which has been used with increasing frequency as a tool to offset losses resulting from certain breaches of representations and warranties.
  • Collaboration. More so than ever in the face of the current U.S. and global uncertainties, most obstacles to a deal are best addressed in partnership with local players whose interests are aligned with those of the acquiror. If possible, relationships with the target company’s management and other local forces should be established well in advance so that political and other concerns can be addressed together, and so that all politicians, regulators and other stakeholders can be approached by the whole group in a consistent, collaborative and cooperative fashion.

*  *  *  *  *

As always in global M&A, results, highpoints and lowpoints for 2017 are likely to include many surprises, and sophisticated market participants will need to continually refine their strategies and tactics as the global and local environment develops. However, the rules of the road for successful M&A transactions in the U.S. remain well understood and eminently capable of being mastered by well-prepared and well-advised acquirors from all parts of the globe.

The views expressed herein are solely those of the author and have not been endorsed, confirmed, or approved by XBMA or any of the editors of XBMA Forum, nor by XBMA’s founders, members, contributors, academic partners, advisory board members, or others. No inference to the contrary should be drawn.

U.S. UPDATE – 2015 Checklist for Successful Acquisitions in the U.S.

Editors’ Note:  This submission updates a checklist co-authored by Messrs. Emmerich and Panovka, members of XBMA’s Legal Roundtable, with their colleagues at Wachtell Lipton David A. Katz, Scott K. Charles, Ilene Knable Gotts, Andrew J. Nussbaum, Joshua R. Cammaker, Mark Gordon, Eric M. Rosof, Joshua M. Holmes, T. Eiko Stange, Gordon S. Moodie, Raaj Narayan and Francis J. Stapleton.

Highlights:

  • M&A was robust in 2014, hitting several noteworthy post-crisis high-water marks: total global volume reached US$3.5 trillion, cross-border volume reached US$1.3 trillion (37% of the total) and cross-border M&A involving U.S. companies reached US$770 billion (45% of which was incoming).
  • We expect current trends to continue in 2015, driven, in several key regions, by strong corporate earnings, large corporate cash balances in search of yield, continued availability of highly attractive financing to well-capitalized borrowers and generally high stock prices. A focus on industry consolidation in a number of sectors and a thirst for technology and brands in growing economies similarly are expected to continue to motivate cross-border deals.
  • Even in a world that is increasingly fractured by international tensions and profound disagreements on politics and policy, U.S. deal markets continue to be relatively hospitable to offshore acquirors and investors.
  • This post updates our checklist of issues that should be considered in advance of an acquisition or strategic investment in the U.S.

MAIN ARTICLE

M&A was robust in 2014, hitting several noteworthy post-crisis high-water marks: total global volume reached US$3.5 trillion, cross-border volume reached US$1.3 trillion (37% of the total) and cross-border M&A involving U.S. companies reached US$770 billion (45% of which was incoming).  Acquirors from Germany, France, Canada, Japan and the United Kingdom accounted for 67% of the incoming acquisitions into the U.S., and acquirors from China, India and other emerging economies accounted for approximately 7%.  Cross-border deals announced in 2014 included some of the year’s largest, including many above US$10 billion and a number of real blockbusters.

We expect current trends to continue into 2015, driven, in several key regions, by strong corporate earnings, large corporate cash balances in search of yield, continued availability of highly attractive financing to well-capitalized borrowers and generally high stock prices.  A focus on industry consolidation in a number of sectors and a thirst for technology and brands in growing economies similarly are expected to continue to motivate cross-border deals.

Even in a world that is increasingly fractured by international tensions and profound disagreements on politics and policy, often violently so, U.S. deal markets continue to be relatively hospitable to offshore acquirors and investors.  With careful advance preparation, strategic implementation and sophisticated deal structures that anticipate likely concerns, most acquisitions in the U.S. can be successfully achieved.  Cross-border deals involving investment into the U.S. are more likely to fail because of poor planning and execution than fundamental legal or political restrictions.

The following is our updated checklist of issues that should be carefully considered in advance of an acquisition or strategic investment in the U.S.  Because each cross-border deal is unique, the relative significance of the issues discussed below will depend upon the specific facts, circumstances and dynamics of each particular situation:

  • Political and Regulatory Considerations. Even though non-U.S. investment in the U.S. remains generally well-received and is generally not politicized, prospective non-U.S. acquirors of U.S. businesses or assets should undertake a thoughtful analysis of U.S. political and regulatory implications well in advance of any acquisition proposal or program, particularly if the target company operates in a sensitive industry or if the acquiror is sponsored or financed by a foreign government, or organized in a jurisdiction where a high level of government involvement in business is generally understood to exist.  It is imperative that the likely concerns of federal, state and local government agencies, employees, customers, suppliers, communities and other interested parties be thoroughly considered and, if possible, addressed prior to any acquisition or investment proposal becoming public.  It is also essential that a comprehensive communications plan be in place prior to the announcement of a transaction so that all of the relevant constituencies can be addressed with the appropriate messages.  It will often be useful, if not essential, to involve local public relations firms at an early stage in the planning process.  Similarly, potential regulatory hurdles require sophisticated advance planning.  In addition to securities and antitrust regulations, acquisitions may be subject to CFIUS review (discussed below), and acquisitions in regulated industries (g., energy, public utilities, gaming, insurance, telecommunications and media, financial institutions, transportation and defense contracting) may be subject to an additional layer of regulatory approvals.  Regulation in these areas is often complex, and political opponents, reluctant targets and competitors may seize on perceived weaknesses in an acquiror’s ability to clear regulatory obstacles.  While we expect to see continuity in the enforcement policies at the federal level for the foreseeable future, it will be particularly important during the final phase of the Obama administration to pay careful attention to the perspectives of both parties and the political dynamics at work in Washington.  Finally, depending on the industry involved and the geographic distribution of the workforce, labor unions will continue to play an active role during the review process.
  • Transaction Structures. Non-U.S. acquirors should be willing to consider a variety of potential transaction structures, especially in strategically or politically sensitive transactions.  Structures that may be helpful in sensitive situations include no-governance and low-governance investments, minority positions or joint ventures, possibly with the right to increase ownership or governance over time; partnering with a U.S. company or management or collaborating with a U.S. source of financing or co-investor (such as a private equity firm); or utilizing a controlled or partly controlled U.S. acquisition vehicle, possibly with a board of directors having a substantial number of U.S. citizens and a prominent U.S. citizen as a non-executive chairman.  Use of preferred securities (rather than ordinary common stock) or structured debt securities should also be considered.  Even more modest social issues, such as the name of the continuing enterprise and its corporate location or headquarters, or the choice of the nominal acquiror in a merger, can affect the perspective of government and labor officials.
  • CFIUS. Under current U.S. federal law, the Committee on Foreign Investment in the United States (CFIUS) — a multi-agency governmental body chaired by the Secretary of the Treasury, and the recommendations of which the President of the United States has personal authority to accept or reject — has discretion to review transactions in which non-U.S. acquirors could obtain “control” of a U.S. business or in which a non-U.S. acquiror invests in U.S. infrastructure, technology or energy assets.  Although filings with CFIUS are voluntary, CFIUS also has the ability to investigate transactions at its discretion, including after the transaction has closed.  Three useful rules of thumb in dealing with CFIUS are:
    • first, in general it is prudent to make a voluntary filing with CFIUS if the likelihood of an investigation is reasonably high or if competing bidders are likely to take advantage of the uncertainty of a potential investigation;
    • second, it is often best to take the initiative and suggest methods of mitigation early in the review process in order to help shape any remedial measures and avoid delay or potential disapproval; and
    • third, it is often a mistake to make a CFIUS filing prior to initiating discussions with the U.S. Department of the Treasury and other officials and relevant parties. In some cases, it may even be prudent to make the initial contact prior to the public announcement of the transaction.  CFIUS is not as mysterious or unpredictable as some fear — consultation with Treasury and other officials (who generally want to be supportive and promote investment in the U.S. economy) and CFIUS specialists will generally provide a good sense of what it will take to clear the process.  Retaining advisors with significant CFIUS expertise and experience is often crucial to successful navigation of the CFIUS process.  Transactions that may require a CFIUS filing should have a carefully crafted communications plan in place prior to any public announcement or disclosure of the pending transactions.
  • Acquisition Currency. While cash remains the predominant (although not exclusive) form of consideration in cross-border deals, non-U.S. acquirors should think creatively about potential avenues for offering U.S. target shareholders a security that allows them to participate in the resulting global enterprise.  For example, publicly listed acquirors may consider offering existing common stock or depositary receipts (g., ADRs) or special securities (e.g., contingent value rights).  When U.S. target shareholders obtain a continuing interest in a surviving corporation that had not already been publicly listed in the U.S., expect heightened focus on the corporate governance and other ownership and structural arrangements of the non-U.S. acquiror, including as to the presence of any controlling or large shareholders, and heightened scrutiny placed on any de facto controllers or promoters.  Creative structures, such as the issuance of non-voting stock or other special securities of a non-U.S. acquiror, may minimize or mitigate the issues raised by U.S. corporate governance concerns.  However, the world’s equity markets have never been more globalized, and the interest of investors in major capital markets to invest in non-local business never greater, and equity consideration, or equity issuance to support a transaction, should be carefully considered in appropriate circumstances.
  • M&A Practice. It is essential to understand the custom and practice of U.S. M&A transactions.  For instance, understanding when to respect — and when to challenge — a target’s sale “process” may be critical.  Knowing how and at what price level to enter the discussions will often determine the success or failure of a proposal; in some situations it is prudent to start with an offer on the low side, while in other situations offering a full price at the outset may be essential to achieving a negotiated deal and discouraging competitors, including those who might raise political or regulatory issues.  In strategically or politically sensitive transactions, hostile maneuvers may be imprudent; in other cases, unsolicited pressure might be the only way to force a transaction.  Takeover regulations in the U.S. differ in many significant respects from those in non-U.S. jurisdictions; for example, the mandatory bid concept common in Europe, India and other countries is not present in U.S. practice.  Permissible deal protection structures, pricing requirements and defensive measures available to U.S. targets also may differ from what non-U.S. acquirors are accustomed to in deals in their home countries.  Sensitivity must also be given to the distinct contours of the target board’s fiduciary duties and decision-making obligations under U.S. law.
  • U.S. Board Practice and Custom. Where the target is a U.S. public company, the customs and formalities surrounding board of director participation in the M&A process, including the participation of legal and financial advisors, the provision of customary fairness opinions and the inquiry and analysis surrounding the activities of the board and the financial advisors, can be unfamiliar and potentially confusing to non-U.S. transaction participants and can lead to misunderstandings that threaten to upset delicate transaction negotiations.  Non-U.S. participants need to be well-advised as to the role of U.S. public company boards and the legal, regulatory and litigation framework and risks that can constrain or prescribe board action.  These factors can impact both tactics and timing of M&A processes and the nature of communications with the target company.
  • Distressed Acquisitions. Distressed M&A is a well-developed specialty in the U.S., with its own subculture of sophisticated investors, lawyers and financial advisors.  The U.S. continues to be a popular destination for restructurings of multinational corporations, including those with few assets or operations in the country, because of its debtor-friendly reorganization laws, expansive bankruptcy jurisdiction and relative predictability.  In addition, large foreign companies that file insolvency proceedings outside of the U.S. have increasingly turned to Chapter 15 of the United States Bankruptcy Code, which accords foreign debtors key protections from creditors in the U.S. and has facilitated restructurings and asset sales approved abroad.  Firms evaluating a potential acquisition of a distressed target in a U.S. bankruptcy should consider the full array of tools that may be available, including acquisition of the target’s fulcrum debt securities that are expected to become the equity through an out-of-court restructuring or plan of reorganization, acting as a plan investor or sponsor in connection with a plan, backstopping a plan-related rights offering or participating as a bidder in a court-supervised “Section 363” auction process, among others.  Transaction certainty is of critical importance to success in a “Section 363” sale process or confirmation of a Chapter 11 plan, and non-U.S. participants accordingly need to plan carefully (especially with respect to transactions that might be subject to CFIUS review, as discussed above) for transaction structures that will result in a relatively level playing field with U.S. participants.  Acquirors also need to consider the differing interests and sometimes conflicting agendas of the various constituencies, including bank lenders, bondholders, distressed-focused hedge funds and holders of structured debt securities and credit default protection.
  • Financing. Volatility in the global credit markets in 2014 was more pronounced than in the immediate past, which resulted in more frequent closings of the “windows” in which particular sorts of financing are available, particularly for non-investment grade issuers.  While the volume of financing and the rates at which financing has been available for investment grade issuers continues to be favorable and has facilitated acquisitions, a divergence has emerged for high-yield issuers looking for acquisition financing, where the availability of committed financing, particularly for deals requiring a long closing period or a substantial amount of financing, has become constrained and more costly.  This has resulted in part from activities of regulators worldwide, and particularly in the U.S., to reduce financing activity for highly leveraged deals – a trend that may continue for some time.  Important questions to consider when financing a transaction include where financing with the most favorable terms and conditions is available; how committed the financing is; which lenders have the best understanding of the acquiror’s and target’s businesses; whether to explore alternative, non-traditional financing sources and structures, including seller paper; whether there are transaction structures that can minimize refinancing requirements; and how comfortable the target will feel with the terms and conditions of the financing.
  • Litigation. Shareholder litigation accompanies virtually every transaction involving a U.S. public company but is generally not a cause for concern.  Excluding the context of competing bids in which litigation plays a role in the contest, and of going-private transactions initiated by controlling shareholders or management, which form a separate category requiring special care and planning, there are virtually no examples of major acquisitions of U.S. public companies being blocked or prevented due to shareholder litigation, nor of materially increased costs being imposed on acquirors.  In most cases, where a transaction has been properly planned and implemented with the benefit of appropriate legal and investment banking advice on both sides, such litigation can be dismissed or settled for relatively small amounts or other concessions, with the positive effect of foreclosing future claims and insulating the company from future liability.  Sophisticated counsel can usually predict the likely range of litigation outcomes or settlement costs, which should be viewed as a cost of the deal.  In all cases, the acquiror, its directors, shareholders and offshore reporters and regulators should be conditioned in advance (to the extent possible) to expect litigation and not to view it as a sign of trouble.  In addition, it is important to understand the U.S. discovery process in litigation as it is significantly different than the process in other jurisdictions and, even in the context of a settlement, will require the acquiror to provide responsive information and documents (including emails) to the plaintiffs.
  • Tax Considerations. U.S. tax issues affecting target shareholders or the combined group may be critical to structuring the transaction. In transactions involving the receipt by U.S. target shareholders of non-U.S. acquiror stock, the potential application of so-called “anti-inversion” rules, which could render an otherwise tax-free transaction taxable to exchanging U.S. target shareholders and result in potentially significant adverse U.S. tax consequences to the combined group, must be carefully evaluated.  Non-U.S. acquirors frequently will need to consider whether to invest directly from their home jurisdiction or through U.S. or non-U.S. subsidiaries, the impact of the transaction on tax attributes of the U.S. target (e.g., loss carryforwards), the deductibility of interest expense incurred on acquisition indebtedness, and eligibility for reduced rates of withholding on cross-border payments of interest, dividends and royalties under applicable U.S. tax treaties.  Because the U.S. does not have a “participation exemption” regime that exempts dividend income from non-U.S. subsidiaries, a non-U.S. acquiror of a U.S. target with non-U.S. subsidiaries may wish to analyze the tax cost of extracting such subsidiaries from the U.S. group.
  • Disclosure Obligations. How and when an acquiror’s interest in the target is publicly disclosed should be carefully controlled and considered, keeping in mind the various ownership thresholds that trigger mandatory disclosure on a Schedule 13D under the federal securities laws and under regulatory agency rules such as those of the Federal Reserve Board, the Federal Energy Regulatory Commission (FERC) and the Federal Communications Commission (FCC).  While the Hart-Scott-Rodino Antitrust Improvements Act (HSR) does not require disclosure to the general public, the HSR rules do require disclosure to the target’s management before relatively low ownership thresholds can be crossed.  Non-U.S. acquirors have to be mindful of disclosure norms and timing requirements relating to home country requirements with respect to cross-border investment and acquisition activity.  In many cases, the U.S. disclosure regime is subject to greater judgment and analysis than the strict requirements of other jurisdictions.  Treatment of derivative securities and other pecuniary interests in a target other than common stock holdings also varies by jurisdiction and such investments have received heightened regulatory focus in recent periods.
  • Shareholder Approval. Because few U.S. public companies have one or more controlling shareholders, obtaining public shareholder approval is typically a key consideration in U.S. transactions.  Understanding in advance the roles of arbitrageurs, hedge funds, institutional investors, private equity funds, proxy voting advisors and other important market players — and their likely views of the anticipated acquisition attempt as well as when they appear and disappear from the scene — can be pivotal to the success or failure of the transaction.  It is advisable to retain a proxy solicitation firm to provide advice prior to the announcement of a transaction so that an effective strategy to obtain shareholder approval can be implemented.
  • Integration Planning. One of the reasons deals sometimes fail is poor post-acquisition integration, particularly in cross-border deals where multiple cultures, languages and historic business methods may create friction.  If possible, the executives and consultants who will be responsible for integration should be involved in the early stages of the deal so that they can help formulate and “own” the plans that they will be expected to execute.  Too often, a separation between the deal team and the integration/execution teams invites slippage in execution of a plan that in hindsight is labeled by the new team as unrealistic or overly ambitious.  However, integration planning needs to be carefully phased in as implementation cannot occur prior to the receipt of certain regulatory approvals.
  • Corporate Governance and Securities Law. U.S. securities and corporate governance rules can be troublesome for non-U.S. acquirors who will be issuing securities that will become publicly traded in the U.S. as a result of an acquisition.  SEC rules, the Sarbanes-Oxley and Dodd-Frank Acts and stock exchange requirements should be evaluated to ensure compatibility with home country rules and to be certain that the non-U.S. acquiror will be able to comply.  Rules relating to director independence, internal control reports and loans to officers and directors, among others, can frequently raise issues for non-U.S. companies listing in the U.S.  Non-U.S. acquirors should also be mindful that U.S. securities regulations may apply to acquisitions and other business combination activities involving non-U.S. companies with U.S. security holders.
  • Antitrust Issues. To the extent that a non-U.S. acquiror directly or indirectly competes or holds an interest in a company that competes in the same industry as the target company, antitrust concerns may arise either at the federal agency or state attorneys general level.  Although less typical, concerns can also arise if the foreign acquiror competes either in an upstream or downstream market of the target.  As noted above, pre-closing integration efforts should also be conducted with sensitivity to antitrust requirements that can be limiting.  Home country competition laws may raise their own sets of issues that should be carefully analyzed with counsel.  The administration of the antitrust laws in the U.S. is carried out by highly professional agencies relying on well-established analytical frameworks.  The outcomes of the vast majority of transactions can be easily predicted.  In borderline cases, while the outcome of any particular proposed transaction cannot be known with certainty, the likelihood of a proposed transaction being viewed by the agencies as raising substantive antitrust concerns and the degree of difficulty in overcoming those concerns can be.  In situations presenting actual or potential substantive issues, careful planning is imperative and a proactive approach to engagement with the agencies is generally advisable.
  • Due Diligence. Wholesale application of the acquiror’s domestic due diligence standards to the target’s jurisdiction can cause delay, waste time and resources or result in missing a problem.  Due diligence methods must take account of the target jurisdiction’s legal regime and, particularly important in a competitive auction situation, local norms.  Many due diligence requests are best channeled through legal or financial intermediaries as opposed to being made directly to the target company.  Making due diligence requests that appear to the target as particularly unusual or unreasonable (not uncommon in cross-border deals) can easily cause a bidder to lose credibility.  Similarly, missing a significant local issue for lack of local knowledge can be highly problematic and costly.
  • Collaboration. Most obstacles to a deal are best addressed in partnership with local players whose interests are aligned with those of the acquiror.  If possible, relationships with the target company’s management and other local forces should be established well in advance so that political and other concerns can be addressed together, and so that all politicians, regulators and other stakeholders can be approached by the whole group in a consistent, collaborative and cooperative fashion.

*            *            *            *            *

As always in global M&A, results, highpoints and lowpoints for 2015 are likely to include many surprises, and sophisticated market participants will need to continually refine their strategies and tactics as the global and local environment develops.  However, the rules of the road for successful M&A transactions in the U.S. remain well understood and eminently capable of being mastered by well-prepared and well-advised acquirors from all parts of the globe.

The views expressed herein are solely those of the author and have not been endorsed, confirmed, or approved by XBMA or any of the editors of XBMA Forum, nor by XBMA’s founders, members, contributors, academic partners, advisory board members, or others. No inference to the contrary should be drawn.

U.S. UPDATE – A New Takeover Threat: Symbiotic Activism

Editor’s Note:  This article was co-authored by Martin Lipton, Adam O. Emmerich, Trevor S. Norwitz and Sabastian V. Niles of Wachtell, Lipton, Rosen & Katz.

Highlights: 

  • Valeant Pharmaceuticals and Pershing Square employed a troubling new tactic in their hostile bid for Allergan.
  • The partnership between an activist hedge fund and a strategic acquirer enables a hostile bidder to establish a large beachhead stake more secretly, quickly and cheaply than before.
  • This lowers the hostile bidder’s cost and enables to hedge fund to catalyze a quick profit-yielding event.
  • This new stratagem premised on a “quick-profit” mentality emphasizes the urgent need for the SEC to revamp its outdated “early-warning” rules.
  • This attack came shortly after Allergan dismantled its takeover defenses in the face of activist and institutional shareholder pressure.

Main Article:

The Pershing Square-Valeant hostile bid for Allergan has captured the imagination.  Other companies are wondering whether they too will wake up one morning to find a raider-activist tag-team wielding a stealth block of their stock.  Serial acquirers are asking whether they should be looking to take advantage of this new maneuver.  Speculation and rumor abound of other raider-activist pairings and other targets.

Questions of legality are also being raised.  Pershing Square and Valeant are loudly proclaiming that they have very cleverly (and profitably) navigated their way through a series of loopholes to create a new template for hostile acquisitions, one in which the strategic bidder cannot lose and the activist greatly increases its odds of catalyzing a quick profit-yielding event, investing and striking deals on both sides of a transaction in advance of a public announcement.

The bidders conspicuously structured their accumulation plan to outflank the SEC’s outdated “early-warning” rules and the Hart-Scott-Rodino Antitrust filing requirements (by taking advantage of Regulation 13D’s 10-day filing window, and using derivatives, for which clearance is only needed to exercise options, not to buy them).  They also took express pains to sidestep Rule 14e-3 which outlaws insider-trading in connection with a tender offer, by styling themselves as co-bidders and not (yet) proceeding towards a tender offer.

This new stratagem emphasizes the crying need for the SEC to bring its early-warning rules into the 21st century, as we have been urging for several years.  The SEC should forthwith move to close the 10-day filing window and the wide loophole opened by ever-more-complex derivative trading schemes.  The only argument that anyone has come up with against fixing these rules is that activist hedge funds need the extra “juice” to excite them enough to shake up corporate America.  Even if this argument had any merit applied to activism designed to “improve” underperforming companies – which we believe it does not – it most certainly should not trump the need for fair and transparent securities markets, with full, prompt disclosure of large block accumulations, direct or derivative.  Moreover it holds absolutely no water when the goal is to give hostile bidders a “leg up” (to the tune of a billion dollar profit in one day on Allergan).

Perhaps the most novel (and, from corporate America’s perspective, disturbing) aspect of this new stratagem is the partnership between an activist hedge fund and a strategic acquirer to establish a bigger beachhead more quickly and cheaply than had previously been thought possible.  Under current rules, strategic bidders do not need an activist to pursue this tactic.  They could on their own buy options up to 4.9% in the target, and then scoop up as many more as they can in the ten days after crossing the 5% threshold before having to unmask themselves.  The activist however brings several favors to the party, in addition to some financing.  One is the questionable hope that it can legally close on the options and thus control 10% of the target’s stock (and votes) sooner than its strategic partner could.  A second is a large megaphone, and the willingness to wield it in ways that a public company likely would not, to press the case for their deal.  A third is that the activist hedge fund specializes in covert accumulations, a skill set that a strategic buyer would have to master.  But the most important thing it brings to the team is its willingness to bet billions of dollars without performing any due diligence beyond a basic review of the target’s public documents.  This is easier for an activist hedge-fund given its incentive compensation structure than for a public company.

This then is the true danger of the new Valeant-Pershing Square tactic: it is premised on a short-term “quick-profit” mentality and reliant on an inherent conflict-of-interest.  Pershing Square is betting billions of dollars that it can “knock over” Allergan.  It doesn’t care much who buys the target: it would apparently like Valeant to win, but it makes a fortune if someone else pays a higher price.  Valeant of course cares if it wins, but the cunning of the structure is that it also stands to make a tidy profit if a competitor takes its prize, unlike most failed bids where even the profit on a toehold investment would likely not cover the bidder’s costs.  In any case, Valeant is taking very little risk for its sizable “leg up” on its competition (by keeping its investment below the $76 million antitrust filing threshold).  Pershing Square’s risk is that Allergan manages to fight off the hostile bid and stay independent, which may well lead to a fizzling out of the takeover froth (a point they emphasize at every opportunity to induce Allergan shareholder support).

The structure is crafty, and good for Valeant and Pershing Square (as long as no bad facts emerge, such as undisclosed arrangements, that could get them in trouble).  But is it good for the American economy and society?  Allergan spends 17% of its revenue on research and development, compared to Valeant’s 3%, and Valeant has said it plans to cut around 20% of the combined companies’ 28,000 jobs in the merger.  We do not believe that this is the sort of economic activity that policy-makers should be actively encouraging in their rule-making (or foot-dragging).  Indeed, it appears that express statements in speeches and other forums from top officials in government, including the Chair of the SEC, have given activists encouragement that their behavior, however aggressive and self-interested, is favored in the corridors of power as well as the halls of ivy.

It is also not a coincidence that this attack comes shortly after Allergan dismantled its takeover defenses in the face of activist and institutional shareholder pressure.  Shareholder governance activists and responsible institutional investors also need to take a good look at themselves and ask whether their insistence that American companies render themselves more vulnerable to hostile takeover bids like this one has increased the true value of their portfolios and improved our Nation’s economy and its prospects, upon which the interests of investors ultimately depend.

The views expressed herein are solely those of the author and have not been endorsed, confirmed, or approved by XBMA or any of the editors of XBMA Forum, nor by XBMA’s founders, members, contributors, academic partners, advisory board members, or others. No inference to the contrary should be drawn.

CANADIAN UPDATE: Negotiating Share and Asset Purchase Agreements: Fundamental Considerations

Editors’ Note: This presentation was submitted by I. Berl Nadler, a partner at Davies Ward Phillips & Vineberg LLP and a leading Canadian corporate lawyer who has been involved in numerous high-profile financing transactions and acquisitions worldwide on behalf of multinational corporate clients. The presenters are Mr. Nadler and Paul Lamarre, partner at Davies Ward Phllips & Vineberg LLP.

 Executive Summary:  In the presentation below, the authors review key legal (including corporate, commercial, tax and regulatory) and business issues that arise when negotiating and drafting acquisition agreements in Canada which, except for the Canadian regulatory issues, have universal application. The presentation focuses primarily on negotiated acquisition agreements of assets or shares of private companies and does not address securities regulatory issues governing the acquisition of public companies, except as they apply to the issuance or transfer of securities of public companies in the context of a such  acquisitions.  Many of the legal, regulatory and business issues that arise in negotiated acquisitions of the assets or shares of private corporations – whether stand-alone private entities or subsidiaries of publicly held-corporations – are of equal relevance in the negotiation and drafting of acquisition agreements for the shares of publicly traded entities.

Negotiating Share and Asset Purchase Agreements: Fundamental Considerations

The views expressed herein are solely those of the author and have not been endorsed, confirmed, or approved by XBMA or any of the editors of XBMA Forum, nor by XBMA’s founders, members, contributors, academic partners, advisory board members, or others. No inference to the contrary should be drawn.

U.S. UPDATE: Corporate Governance Update: Shareholder Activism in the M&A Context

Editor’s Note: David A. Katz is a partner at Wachtell, Lipton, Rosen & Katz specializing in the areas of mergers and acquisitions and complex securities transactions.  The attached article by Mr. Katz and Laura A. McIntosh was first published in the New York Law Journal on March 27, 2014; the full article, including footnotes, is available here.

Highlights:

  • In 2013, activism in the M&A context grew in scope and ambition. Activists were often successful in obtaining board seats and forcing increases in deal consideration.
  • One source estimates that the percentage of activist attacks that were successful in either raising deal price or terminating a deal was a stunning 71 percent through November of 2013, an overwhelming increase from 25 percent in 2012 and 19 percent in 2011.
  • While the traditional areas of board representation and deal price no doubt will remain the highest value targets in M&A activism, appraisal rights litigation and arbitrage became a more common tactic pursued by activists in 2013.
  • One formidable barrier to these suits’ ever becoming prohibitive in M&A deals is that, in order for dissenters to have rights at all, a merger must first be consummated, however, there is a possibility that Delaware courts might entertain a cause of action known as “quasi-appraisal rights.”
  • Notably, revisions to Delaware law in 2013 may have an impact on appraisal claims.  The new law eliminates the need for top-up provisions in two-step merger agreements; these provisions enabled an acquirer to purchase newly issued shares from the target, if necessary, in order to reach the 90 percent threshold required to effect a short-form merger.  Under the new provision, shareholders now can be required by Delaware companies to make any demands for appraisal no later than the closing of the first-step offer.

Main Article:

With M&A activity expected to increase in 2014, shareholder activism is an important factor to be considered in the planning, negotiation, and consummation of corporate transactions.  In 2013, a year of relatively low deal activity,[1] it became clear that activism in the M&A context was growing in scope and ambition.  Last year activists were often successful in obtaining board seats and forcing increases in deal consideration, results that may fuel increased efforts going forward.  A recent survey of M&A professionals and corporate executives found that the current environment is viewed as favorable for deal-making, with executives citing an improved economy, decreased economic uncertainty, and a backlogged appetite for transactions.[2]  There is no doubt that companies pursuing deals in 2014—whether as a buyer or as a seller—will have to contend with activism on a variety of fronts, and advance preparation will be important.

While the traditional areas of board representation and deal price no doubt will remain the highest value targets in M&A activism, one newer area to watch for activity in 2014 is appraisal rights litigation and arbitrage, which became a more common tactic pursued by activists in 2013.  Shareholder activism is poised to have an even greater impact in the M&A context this year and companies should be aware of and prepared for this possibility if they pursue an M&A transaction.

2013 Trends to Continue

In 2013, the power and influence of activist hedge funds rose to new heights.  In financial terms, hedge fund assets under management ended the year at a new record:  capital invested in the global hedge fund industry was reported to be $2.63 trillion, while U.S. activist hedge funds are now estimated to hold close to $100 billion in assets under management.[3]

Activists have become increasingly ambitious in their selection of targets and inventive in their choice of tactics.  In 2014, as in 2013, large, well-known companies should anticipate being targeted by activist campaigns, and they can expect the activists to be sophisticated not only in their demands but also in their use of media, outside experts, and litigation strategy to achieve their objectives.  Moreover, so far in 2014, smaller companies have increasingly been targeted by activists, many of whom are newly formed activist funds.

In 2013, activists experienced unprecedented success in the outcomes of their campaigns in the M&A context.  One source estimates that the percentage of activist attacks that were successful in either raising deal price or terminating a deal was a stunning 71 percent through November of 2013, an overwhelming increase from 25 percent in 2012 and 19 percent in 2011.[4]  Moreover, activists have had significant success in adding their designees to the boards of target companies.  Institutional Shareholder Services (ISS) estimates that activists won board seats in 68 percent of proxy fights in 2013 (not including cases in which board seats were gained without a fight in a settlement), versus 43 percent in 2012.[5]  At the same time, activists have garnered a degree of legitimacy that they have never before enjoyed.  Traditional investment funds now routinely work with activist hedge funds, and even many independent directors of target companies are more receptive to activist proposals than ever before.  As activist hedge funds become substantial shareholders in many companies, they become an increasingly significant factor for companies considering M&A activity in 2014.

Appraisal Rights: Background

An emerging weapon in the activist arsenal in the M&A context appears to be appraisal rights litigation, or at least the threat of such litigation.  Appraisal rights are a well-known but generally insignificant footnote to cash mergers:  in Delaware, shareholders who object to a cash offer for their shares have the right to dissent and seek a higher price through litigation.[6]  In order to perfect appraisal rights in Delaware, shareholders must either vote against or abstain from voting on the merger; they must also refuse to accept the merger consideration paid to the other shareholders at closing.  After the merger is completed, the dissenters then have the right to file suit in Delaware, asking a court to independently determine the value of their shares as of the merger closing date.  The dissenters have sixty days post-closing in which to pursue appraisal or accept the price paid in the merger.

Historically, appraisal rights litigation has not been significant; in the last two decades, only forty-five appraisal cases have carried through to the issuance of a post-trial opinion.  However, this type of action appears to be emerging as a more prominent feature of the M&A landscape.  Overall, the value of appraisal rights cases brought in Delaware has been rising:  one study found that appraisal claims were brought with respect to 15 percent of takeovers in 2013 and that the value of the claims was $1.5 billion, ten times the value of such claims in 2004.[7]  So far this year, twenty appraisal claims have been filed in Delaware, as compared to thirty-three in all of 2013.[8]

Various factors are contributing to the rise of appraisal rights activism, including legal developments and financial conditions as well as the general aggressiveness and ascendancy of hedge fund activists.  In terms of legal developments, a series of cases regarding appraisal rights have created greater opportunities for appraisal rights arbitrage and mitigated slightly the risks inherent in judicial determination of share value.  Setting the stage for action was a 2007 Delaware Chancery Court opinion that surprised observers by ruling that appraisal rights are available to holders of stock on the date of the merger vote, rather than on the much earlier record date.[9]  This ruling made it possible for investors to analyze a deal and purchase shares at the final hour with the intent of pursuing appraisal.[10]  As noted above, commencing appraisal proceedings then gives shareholders a sixty-day option on the merger consideration while they evaluate the potential upside of appraisal rights litigation.

While appraisal litigation is risky and can be costly, historically, it has been financially worthwhile for the plaintiffs.  One review of Delaware case law found that over 80 percent of appraisal rights cases resulted in a finding of fair value by the court that was higher than the merger price paid.[11]  Indeed, in many cases it was significantly higher, with one analysis finding a median premium of 82 percent over the merger price.[12]  These statistics may only reflect that appraisal proceedings in the past often have been brought in egregious circumstances, but the track record nevertheless appears to be spurring an increase in appraisal demands.  A further catalyst is that the Delaware appraisal statute entitles dissenters to interest, compounded quarterly from the merger closing date until the date that they receive the fair value of their shares, at a very favorable rate set by a recent amendment to the statute:  the Federal Reserve discount rate plus five percent.

With respect to determining fair value itself, the court has enormous leeway, and trials generally center on expert testimony.  From 2010 through 2013, Delaware courts consistently held that the price paid in the merger would not be given any presumptive weight in the determination of fair value for a dissenter’s shares.  Moreover, these courts reaffirmed a prior holding that the appraisal would be based on the value of the company as a going concern as of the merger date, not as of the offer date.[13]  Therefore, any value added between the closing of the offer period and the consummation of the merger would increase the fair value of the shares.[14]  While a court may choose its valuation methodology, some recent cases have determined fair value based on the discounted cash flow method, which is well-understood and lends itself to principled analysis from a financial risk-benefit standpoint.[15]  Discounted cash flow analyses, however, often produce values in excess of what a buyer would be willing to pay or the value of the company’s stock in the public trading markets.  In two widely-noted 2013 cases that went to trial, the court used the discounted cash flow methodology and determined that the fair value of the shares was significantly higher than the merger price.  In the merger of one Cox Enterprises, subsidiary with another, the court found, valuing the company as a going concern, that the fair value per share was $5.75, as opposed to the offer price of $4.80.[16]  Similarly, in the merger of 3M Company and Cogent, the plaintiffs—including four large hedge funds—won a 3.5 percent premium over the offer price.[17]  Though one case in November 2013 looked to the merger price for guidance rather than relying upon a discounted cash flow analysis, the court noted that in this particular case, the DCF methodology was essentially unavailable due to a lack of reliable projections.[18]

The highest-profile appraisal rights case of last year involved Carl Icahn’s campaign against the Dell going-private transaction.  In February 2013, a buyout group led by Michael Dell entered into an agreement to take the company private in a $24.4 billion transaction.  Icahn, who began acquiring Dell shares after the transaction agreement was announced, joined with Southeastern Asset Management and some other large Dell shareholders to oppose the transaction on the basis that the price was too low.  Icahn presented various alternative leveraged recapitalization plans over the course of several months, but both the Dell board and ISS recommended that shareholders accept the original buyout transaction instead.  Meanwhile, Icahn urged his fellow shareholders to exercise their appraisal rights under Delaware law, primarily as a means to encourage shareholders not to vote for the transaction.  Although the transaction received support from a majority of the total shares outstanding, and a majority of the shares not held by Michael Dell and affiliated parties that voted on the transaction, in the face of the Icahn campaign, the going-private transaction was not able to gain the much higher vote of a majority of the outstanding unaffiliated shares required by the original transaction agreement.  Ultimately, the buyout group increased their offer in exchange for a change in the voting rules so that the separate vote of the unaffiliated shares would be based on shares voting rather than shares outstanding.  In September 2013, the shareholders approved the transaction, and thereafter, Icahn withdrew his appraisal demand.  Whether or not Icahn ever actually intended to pursue appraisal rights litigation, the credible threat of doing so appeared to be one of several factors in his push for a higher buyout price, which he (and the other shareholders) ultimately received.  And although Icahn did not in the end pursue appraisal rights, a number of other former Dell shareholders did exercise appraisal rights.[19]

Appraisal Rights: Looking Ahead

Activists have shown increasing interest in the possibilities of appraisal rights lawsuits.  During the Dell buyout process, the Shareholder Forum, an activist organization, launched a registered trust designed to make dissenting more attractive.[20]  The idea was that dissenting Dell shareholders could trade their shares for trust units, which would be listed on an exchange and theoretically cashed out in the market at any time.  The trust was designed to mitigate one major reason that appraisal rights cases historically have held limited appeal, namely, the fact that dissenting shareholders have their investment tied up for months or years while the lawsuit is adjudicated.  The Shareholder Forum encourages investors to use appraisal rights claims as “practical investments,” particularly when held as marketable and managed holdings in an investment vehicle similar to the one developed for Dell shareholders.[21]  Whether such a market could indeed be generated is, at the moment, an open question.[22]

Similarly, arbitrageurs have picked up on appraisal claims as fertile new ground for activity.[23]  The managed fund market is flush with cash, and hedge funds facing stiff competition for returns are looking for unusual opportunities.[24]  Funds may view these claims as a way to take advantage of Delaware’s favorable interest rate, particularly in the current low interest rate environment.  They may estimate a high likelihood of receiving at least the merger price as fair value for their shares, and possibly much more.  If nothing else, the claims may be valuable as leverage for a lucrative settlement.  Reportedly, some hedge funds have begun to specialize in appraisal rights—one having raised over $1 billion for that purpose—while some very large funds have begun to diversify into this area.[25]

Exemplifying the arbitrageur approach to appraisal claims is the ongoing Dole takeover battle.  Dole shareholders were offered cash in a management buyout, and many shareholders were not satisfied with the offer price.  The deal was approved by a bare majority, and afterwards, about one-quarter of Dole’s shareholders exercised their appraisal rights.  The dissenters included four large hedge funds, all of which purchased shares after the buyout was announced and all of which have filed appraisal actions in other transactions.  The result is that Dole now faces a potential $190 million liability.[26]  Should the hedge funds win a large payout, whether through settlement or adjudication, they and others will no doubt be encouraged to repeat this approach in other cash merger transactions.

The utility of appraisal rights suits to activists and plaintiffs’ attorneys rests not only on the possibility of a large payout but also on the fact that no wrongdoing need be alleged or proven.  The usual class action in the wake of a merger rests on allegations that the board of directors somehow breached its fiduciary duties to the shareholders, a very difficult claim on which to prevail under the business judgment rule, even under the higher judicial standard of enhanced scrutiny.  By contrast, appraisal rights plaintiffs need only hope the court determines that the value of their shares exceeds the price paid in the merger—again, viewing the company as a going concern, and with significant interest component available.

It would appear that one formidable barrier to these suits’ ever becoming prohibitive in M&A deals is that, in order for dissenters to have rights at all, a merger must first be consummated; this obviously requires the majority or supermajority of holders to accept the deal.  However, there is a possibility that Delaware courts might entertain a cause of action known as “quasi-appraisal rights.”  These rights have been recognized when proxy materials were discovered, after the vote, to have contained material errors or omissions that might have influenced a shareholder’s decision to dissent.  All shareholders in quasi-appraisal have the right to pursue appraisal regardless of how they voted and even if they have already accepted cash for their shares, with no risk that they would have to return any merger consideration if the appraised value ends up lower than the paid price per share.  Quasi-appraisal is far from settled doctrine, but it potentially eliminates the significant downsides of both appraisal claims and traditional post-closing class action lawsuits, while threatening a target company with a potentially enormous payout owed to all shareholders.[27]  Delaware courts presumably recognize the significant risk of inviting such disruptive litigation by making this claim available beyond a limited use as equitable remedy, but it remains to be seen if this doctrine will develop further.

It is not uncommon in merger agreements for acquirers to seek to include appraisal closing conditions, designed to allocate the risk of significant dissent to the seller and its shareholders.  This type of condition states that if the percentage of dissenting shareholders is above a certain threshold—typically five to ten percent of the outstanding shares—the buyer no longer has an obligation to consummate the transaction.  It is possible that these conditions may become more popular as a signal to arbitrageurs and activists that too-vigorous dissent may undermine a transaction completely.  However, appraisal rights closing conditions can have the undesired effect of giving additional leverage to dissenters and should be considered carefully before being proposed by buyers.[28]  In addition, sellers should shy away from accepting such conditions as they effectively transfer the risk of non-consummation back to the seller and may significantly increase the risk that the transaction at issue is not ultimately consummated.

Notably, revisions to Delaware law in 2013 may have an impact on appraisal claims.  A new Section 251(h), designed to facilitate two-step mergers, now permits acquirers who comply with certain conditions to effect a squeeze-out merger without a shareholder vote if, after a tender or exchange offer, the acquirer owns the number of shares that would be needed to approve the merger agreement at a shareholder vote.[29]  The new law eliminates the need for top-up provisions in two-step merger agreements; these provisions enabled an acquirer to purchase newly issued shares from the target, if necessary, in order to reach the 90 percent threshold required to effect a short-form merger.  Under the new provision, shareholders now can be required by Delaware companies to make any demands for appraisal no later than the closing of the first-step offer.  Previously, shareholders had been legally required to wait to exercise their appraisal rights until after the consummation of the second-step merger.  Moreover, appraisal rights are available to target shareholders in all mergers effectuated under Section 251(h), including cashless exchange offers, which, if effectuated outside of the new provisions, do not give rise to appraisal rights.[30]

Preparing for M&A Activism

Hedge fund activists may well be motivated by their recent success and newly acquired mainstream credibility to pursue energetic activity in 2014, particularly if M&A deal volume as a whole increases as predicted.  In essential respects, preparing for shareholder activism in the M&A context is no different from preparing for shareholder activism generally.  Companies should, as always, prioritize clear and frequent communication, meet with significant shareholders to hear and understand their concerns, and consistently articulate the long-term, strategic vision that the board is pursuing.

It may be a useful exercise for management and the board to take a step back and look at any proposed transaction from the perspective of an aggressive activist investor, in order to understand and take steps to minimize any potential vulnerabilities that could be exploited by activists.  Currently, merger parties closely scrutinize the possibility of an interloper and include provisions in the merger agreement to allocate the risk of this possibility between the buyer and the seller.  Potential target companies may want to consider structural takeover defenses in advance of beginning any extraordinary transaction process to ensure as much as possible that the target board maintains control over the transaction from start to finish.  The possibility of activist attacks should be discussed during the negotiation stage of the transaction, so that any affected deal terms can be agreed upon and incorporated into the merger agreement and other documents.  The deal partners should cooperate and work closely with their financial and legal advisors as well their communications teams to plan their response to any activist efforts to derail the transaction.  Potential targets must keep track of any significant stock purchases occurring in the run-up to a deal and consider carefully the identity and goals of such buyers.  In light of the scope and success of activist efforts in 2013, no company pursuing a significant transaction in 2014 should underestimate the potential impact of activist campaigns in the M&A context.

 

_________

[1] Mergermarket reports that deal value in 2013 was $2,215.1 billion, down 3.2 percent from $2.288.8 billion in 2012.  2013 saw the lowest deal value since 2010.  See Mergermarket M&A Trend Report: 2013 (Jan. 3, 2014) available at www.mergermarket.com/pdf/Mergermarket.2013.FinancialAdvisorM&ATrendReport.pdf.

[2] KPMG 2014 M&A Outlook Survey Report at 1, available at www.kpmg.com/IE/en/IssuesAndInsights/ArticlesPublications/Documents/2014-m-a-outlook-survey-report.pdf.

[3] See HFR Global Hedge Fund Industry Report, Jan. 21, 2014 available at www.hedgefundresearch.com/?fuse=products-irglo.

[4] See Alan Klein, “Shareholder Activism in M&A Transactions,” Simpson Thacher & Bartlett Memorandum, Feb. 26, 2014, available at https://blogs.law.harvard.edu/corpgov/2014/02/26/shareholder-activism-in-ma-transactions.

[5] See Stephen Foley, “Activist hedge funds managers get board welcome,” Financial Times, Dec. 23, 2013, available at www.ft.com/cms/s/0/71362352-68e0-11e3-bb3e-00144feabdc0.html#axzz2x0FxobX6.

[6] Del. Gen. Corp. L. § 262, available at delcode.delaware.gov/title8/c001/sc09/.  As discussed below, appraisal rights are now available to target shareholders in exchange offers if the merger is consummated under new Section 251(h) of the Delaware corporation law.  See text accompanying note 30.

[7] See Steven M. Davidoff, “New Form of Shareholder Activism Gains Momentum,” NYTimes.com Dealbook, Mar. 5, 2014 (citing an unpublished paper by Professor Minor Myers and Professor Charles Korsmo), available at dealbook.nytimes.com/2014/03/04/a-new-form-of-shareholder-activism-gains-momentum/?_php=true&_type=blogs&_r=0.

[8] Bloomberg Law Database (search conducted Mar. 18, 2014).

[9] In re Appraisal of Transkaryotic Therapies, Inc., C.A. No. 1554-CC (Del. Ch. May 2, 2007), available at courts.delaware.gov/opinions/(wshozyqwortjg2bswbmuwzbl)/download.aspx?ID=91460.

[10] Transkaryoticat 7-8 (“Respondents raise one policy concern that deserves mentioning. They argue that this decision will ‘pervert the goals of the appraisal statute by allowing it to be used as an investment tool for arbitrageurs as opposed to a statutory safety net for objecting stockholders.’  That is, the result I reach here may, argue respondents, encourage appraisal litigation initiated by arbitrageurs who buy into appraisal suits by free-riding on Cede’s votes on behalf of other beneficial holders—a disfavored outcome.” (footnotes omitted)).

[11] See Jeremy Anderson & Jose P. Sierra, “Unlocking Intrinsic Value Through Appraisal Rights,” Law360, Sept. 10, 2013, available at www.law360.com.

[12] See Lawrence M. Rolnick & Steven M. Hecht, “Del. Weighs in on Fair Value in Appraisal Rights Cases,” Law360, Aug. 7, 2013, available at www.law360.com.

[13] See, e.g., Golden Telecom v. Global GT LP, 11 A.3d 214 (Del. 2010) (rejecting any rule that would require the Court of Chancery to defer to the merger price in an appraisal proceeding); Merion Capital LP v. 3M Cogent Inc., C.A. No. 6247 (Del. Ch. July 8, 2013) (reiterating that the going concern value of the company is the relevant inquiry), available at courts.delaware.gov/opinions/download.aspx?ID=191670.

[14] Cede & Co. v. Technicolor, Inc., 684 A.2d 289, 298 (Del. 1996) (stating that “value added to the going concern by the ‘majority acquirer,’ during the transient period of a two-step merger, accrues to the benefit of all stockholders and must be included in the appraisal process on the date of the merger”).

[15] See, e.g., The Brattle Group, “Recent Guidance from the Delaware Court of Chancery,” Summer 2013, available at www.brattle.com/system/publications/pdfs/000/004/891/original/Recent_Guidance_From_the_Delaware_Court_of_Chancery.pdf?1378903543; Edward M. McNally, “Are Appraisal Cases Coming Back?” Del. Bus. Ct. Insider, July 17, 2013, available at www.morrisjames.com/pp/article-184.pdf.

[16] Towerview LLC v. Cox Radio, Inc., C.A. No. 4809 (Del. Ch. June 28, 2013), available at www.delawarebusinesslitigation.com/uploads/file/towerview%20v%20%20cox%20radio.pdf.

[17] Merion Capital, L.P. v. 3M Cogent, Inc., supra.

[18] Huff Fund Investment Partnership v. CKx, Inc., C.A. No. 6844-VCG (Del. Ch. Nov. 1, 2013), available at courts.delaware.gov/opinions/download.aspx?ID=196960.

[19] Bloomberg Business Week, “T. Rowe to Magnetar Demand Dell Appraisal After Buyout (Correct),” Nov. 28, 2013 (“T. Rowe Price Group Inc. and more than 100 other Dell Inc. shareholders who control a combined 47.5 million shares spurned the company’s buyout offer to seek a potentially higher payout through the Delaware court system”), available at www.businessweek.com/news/2013-11-28/t-dot-rowe-to-magnetar-capital-demand-dell-appraisals-after-buyout; see also M&A Law Prof Blog, “Dell Appraisal,” Nov. 29, 2013, available at lawprofessors.typepad.com/mergers/2013/11/dell-appraisal.html.

[20] See The Shareholder Forum, Dell Valuation Home Page, available at http://www.shareholderforum.com/dell/index.htm.

[21] See The Shareholder Forum, “Appraised Value Rights: A Summary for Investors,” available at http://www.shareholderforum.com/appraisal/Program/20131209_AVR-summary.pdf.

[22] See, e.g., Liz Hoffman, “Dell Buyout Critics Seek New Market for Appraisal Rights,” Law360, June 21, 2013, available at www.law360.com.

[23] See, e.g., William Savitt, “Dissenters Pose Bigger Risks to Corporate Deals,” Nat. L.J., Feb. 10, 2014, available at www.nationallawjournal.com/id=1202642062604/Dissenters-Pose-Bigger-Risks-to-Corporate-Deals?slreturn=20140225205634.

[24] See, e.g., “Activists and Regulators:  A Word from Rodgin Cohen,” 14 M&A J. 7 (Feb. 2014).

[25] See, e.g., Liz Hoffman, “Dole Food Deal Passes by Slim Margin as Hedge Funds Seek Appraisal,” WSJ.com, Oct. 31, 2013, available at blogs.wsj.com/moneybeat/2013/10/31/dole-food-deal-passes-by-slim-margin-as-hedge-funds-seek-appraisal/.

[26] See Davidoff, supra.

[27] For a full discussion of quasi-appraisal case law in Delaware, see Robert B. Schumer et al., “Quasi-Appraisal:  The Unexplored Frontier of Stockholder Litigation?” 12 M&A J. 2 (Jan. 2012).

[28] For a thorough discussion of appraisal closing conditions, see “Appraisal Arbitrage:  Will It Become a New Hedge Fund Strategy?” Latham & Watkins M&A Deal Commentary, May 2007, available at www.lw.com/upload/pubContent/_pdf/pub1883_1.pdf .

[29] Del. Gen. Corp. L. § 251(h). Section 251(h) mergers are not available to “interested stockholders” (holding 15 percent or more of the target shares).

[30] Del. Gen. Corp. L. § 262.

The views expressed herein are solely those of the author and have not been endorsed, confirmed, or approved by XBMA or any of the editors of XBMA Forum, nor by XBMA’s founders, members, contributors, academic partners, advisory board members, or others. No inference to the contrary should be drawn.

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