Practice seems to be mixed with respect to which acquirer securities get registered in an acquirer’s Form S-4 registration statement. Specifically, my understanding is that an acquirer needs to register in its Form S-4 the number of its shares issuable in the acquisition to the shareholders of the target (plus potentially future earnout or purchase price adjustment shares), including a sufficient number of its shares to cover target shares that are issuable upon the exercise of options and/or settlement of RSUs DURING THE PERIOD AFTER THE EFFECTIVE DATE OF THE S-4 AND PRIOR TO THE CONSUMMATION OF THE ACQUISITION. Yet some S-4’s purport to also register acquirer shares issuable following the acquisition upon the exercise of options to purchase acquirer shares into which options to purchase target shares outstanding as of the closing are converted and/or settlement of acquirer RSUs into which target RSUs outstanding as of the closing are converted. Is that appropriate for/permitted in an S-4 and, if so, on what basis? Isn’t that more appropriate for a post-closing S-8 (or if S-8 is not available, on a post-closing S-1 or S-3), as opposed to an S-4? Thank you.
RE: I think some companies register the shares that are going to be issuable post-closing under an employee benefit plan in order to make it procedurally easier to register the shares on Form S-8. Here's what I mean by that - take a look at Securities Act Forms CDI 125.02:
"Question: A registrant included in its Form S-4 registration statement securities to be issued subsequent to the merger, in connection with a dividend reinvestment plan and an employee benefit plan. After the merger, can the registrant amend the registration statement for use by the two plans, providing a separate prospectus for each?
Answer: Yes, the registrant could file a post-effective amendment to the Form S-4 (on Form S-8) for the employee benefit plan, and a second post-effective amendment to the Form S-4 (on Form S-3) to cover the dividend reinvestment plan. [Feb. 27, 2009]"
So, this CDI allows a company that registered the shares issuable post-closing on its S-4 to add them to an existing Form S-8 by means of a post-effective amendment. If those shares weren't registered on the S-4, a new S-8 filing would be necessary. That's because Rule 413(a) generally prohibits adding new shares to an existing registration statement by means of a post-effective amendment.
-John Jenkins, Editor, DealLawyers.com, CCR Corp 10/20/2021
RE: Thank you. It is unclear what benefit including the shares in the S-4 confers because in any event a Form S-8 will have to be filed after the closing (see Securities Act Forms CDI 225.02) – whether in the form of a “post-effective amendment on Form S-8 to Form S-4” (if the shares were initially included in the Form S-4) or just a regular Form S-8 (if the shares were not initially included in the Form S-4); it’s the same thing. So why bother including the shares in the Form S-4? Thanks again.
RE: I'm not sure I have a definitive answer, but one advantage to this approach may be the potential to avoid additional filing fees. Because the registration fee for the shares was paid at the time of the S-4 filing, there won't be any additional fees required for a post-effective amendment converting to a Form S-8. In contrast, if the company files a new S-8, a new filing fee will be payable. While an offset of the fees paid in the S-4 filing may be available under Rule 457(p), the fee itself will be calculated based on the current market value of the securities being registered, which may be higher than at the time of the initial filing. In this situation, the fee offset wouldn't be enough to cover the entire fee.
-John Jenkins, Editor, DealLawyers.com, CCR Corp 10/20/2021
RE: Right, but that’s a real stretch, right? In other words, there are two options: (i) include the shares in the S-4 and pay the related registration fee at that time in the S-4 and post-closing file a post-effective amendment (which does not require a registration fee) or (ii) don't include the shares in the S-4 (and obviously don’t pay the registration fee for those shares in the S-4) and post-closing file an S-8 and then pay the registration fee. While it’s true that the market value of the shares being registered may be higher at the time of (ii) above (triggering a higher registration fee for those shares), it may also be lower. But is a speculative bet on which way the share price may move to save a couple of bucks in registration fees – which may backfire – really the reason some registrants have gone with option (i) above? Just want to make sure we are on the same page. Thank you again for your thoughts.
RE: I really don't think there's a big issue lurking behind the scenes here that makes this a high stakes decision. The closest one I can think of is that depending on how the target's outstanding equity awards are being treated, it may be difficult to determine (or may not be worth the effort to determine) how many shares under outstanding awards could be issued before the closing, so if you cover them all, you're guaranteed not to have a Section 5 issue and you know you won't have to pay any more filing fees for a post-closing cleanup S-8.
-John Jenkins, Editor, DealLawyers.com, CCR Corp 10/20/2021
Our client is undertaking an acquisition financing pursuant to which lender has required a pledge of 65% of the shares in the target entity's Indian PVT LTD subsidiary. Does a pledge of shares in an Indian PVT LTD come with special requirements (documentation or otherwise) that are typically not applicable to other CFC pledges?
RE: I'm afraid that's one you're going to need to discuss with counsel in India. My experience there is quite limited, but suggests that the legal requirements for entering into and enforcing financing arrangements in India can be quite complex.
-John Jenkins, Editor, DealLawyers.com, CCR Corp 10/18/2021
Assume that a registrant did not early adopt any of the new S-K financial disclosure provisions in its recent 10-K. It is now preparing an S-4 registration statement. Target is not S-3 eligible and/or not a filer. Is there a reason why the registrant is prohibited from dropping the 301 selected financial data for itself and the target now? The tricky part is the registrant is incorporating its information by reference so the 301 selected for the registration would "get into" the document so there is, technically, a mismatch. Should we specifically not incorporate the selected financial data into the S-4? Am I overthinking this?
RE: I think you may be kind of stuck when it comes to the buyer, absent some sort of discussion with the Staff. The problem with trying to carve-out the Item 301 information you provided in your 10-K is that if you opt to incorporate by reference, Item 13 of Form S-4 calls for you to incorporate "the registrant’s latest annual report on Form 10-K filed pursuant to Section 13(a) or 15(d) of the Exchange Act which contains audited financial statements for the registrant’s latest fiscal year for which a Form 10-K was required to be filed." The form doesn't appear to permit incorporation by reference of only selected sections of the document.
To my knowledge, there's no guidance on this, but I'd argue that the SEC's statement in the adopting release about early adopting the revised line items in their entirety shouldn't be interpreted to require Item 301 information about the target if the registration statement includes that information about the buyer. I think since there are separate line item disclosures that apply to the buyer and to the target, the decision as to whether or not to include Item 301 information for the target should be considered to be distinct from the buyer's decision concerning whether to disclose that information about itself.
I'd recommend you run this scenario past the Staff. If you do, please let us know what they say.
-John Jenkins, Editor, DealLawyers.com, CCR Corp 4/13/2021
Q: Which case or cases in Delaware are likely to be the benchmark case/cases for the host of deals terminated due to Covid-19 that are in litigation?
RE: Honestly, your guess is as good as mine. I don't think there's any real way to handicap that.
-John Jenkins, Editor, DealLawyers.com, CCR Corp 5/20/2020
RE: Judge Lastar has set a Aug 24-26 trial for the Anbang/Mirae dispute and Judge Glasscock set a June 2nd date for an evidentiary hearing in the FSCT/Advent dispute (ahead of their June 6 merger termination date).
RE: I am wondering if any lawyers following the Anbang v. Mirae MAE case in Delaware which had an August trial have written anything on their observations from the trial. The case is AB Stable VIII LLC v. MAPS Hotels and Resorts One LLC.
RE: I haven't seen any play-by-play of the trial, but Cravath did a fairly extensive write-up of the case in a document. The trial is also touched on in a Cooley blog:
-John Jenkins, Editor, DealLawyers.com, CCR Corp 10/22/2020
RE: Interesting write-ups, thank you. Similarly, have you seen any analysis of the TCO/SPG litigation that is in Michigan state court? The Cravath presentation covers it, but I am wondering if anyone has evaluated the merits of the arguments made to date.
RE: I've blogged about the Taubman/Simon case a couple of times.
-John Jenkins, Editor, DealLawyers.com, CCR Corp 10/22/2020
RE: If TCO prevails is their remedy likely to be specific performance or damages?
RE: That kind of assessment would require much more of a deep dive into the case than I've taken. However, as I understand it, the way the lawsuit is currently postured, Taubman would face some challenges in obtaining a merger price-based damages award in this round of litigation. So, if it prevails but does not obtain an order of specific performance (which is never a sure thing), then there may be further procedural litigation to come in order for it to be awarded significant damages. See a blog from Allison Frankel.
-John Jenkins, Editor, DealLawyers.com, CCR Corp 11/13/2020
Q: Is there any relationship between a goodwill write-down and M&A? For example, do companies have an incentive to write down a division or asset before they sell / spin it off? Or the opposite?
RE: I'm not a tax expert, but I suppose that under certain circumstances it may make sense from a tax standpoint for a seller to do this. Perhaps there's a scenario where it would allow the buyer to justify a more favorable purchase price allocation among the acquired assets, or — and I'm just making this up as I go along here — perhaps there might be a scenario involving an stock sale & a 338(h)(10) election where taking this kind of write-off in advance might make sense?
Aside from that ill-informed speculation, I think there are a couple of things that might provide incentives for a seller to take a goodwill hit prior to a sale. First, such a decision might remove a potential distraction (i.e., the buyer's questions about the value of the portion of business associated with the goodwill that's been written off) from the due diligence and negotiation process. That would provide the seller with a "cleaner" story to market to potential buyers - because it has cleaned the skeletons out of its closet.
Second, I think it's important to keep in mind that the seller is going to have rep to the accuracy of its financial statements in the purchase agreement. Writing off goodwill isn't something that companies can decide to do at their discretion. GAAP requires impairment testing, and mandates write-downs if the results of those tests demand it. There's an element of judgment involved, but a company that's selling a business has an incentive to make sure it can stand behind its reported results.
-John Jenkins, Editor, DealLawyers.com, CCR Corp 10/30/2020
Q: In Akorn, Chancellor Laster relied on the standard established by seminal Delaware cases that an MAE must “substantially threaten the overall earnings potential of the target in a durationally significant manner.” Are there any guide posts / ranges from case law as to what % decline in overall earnings potential is a MAE?
RE: No, not really, and that's likely because Akorn was the first case in which a Delaware court upheld a deal termination based on a MAE clause.
-John Jenkins, Editor, DealLawyers.com, CCR Corp 10/27/2020
A SpinCo as per the tax matters agreement has agreed to restrictions on a sale for 2 years after the distribution unless they obtain any of a) consent from the parent b) a private letter ruling c) an opinion from an accounting firm. In practical terms, how much of an impediment is that tax matters agreement to a sale? Is it fairly common / easy to get a) b) or c)? The Spin was clean, i.e. not done for tax purposes, to facilitate a sale, no M&A discussions prior etc, so some practitioners argue a sale could happen 6 months after the Spin distribution if one gets a), b) or c)
RE: I'm not a spin-off expert, but I'm not aware of any generally applicable answer to that question. I think it depends on the parties and their risk appetite, as well as the facts and circumstances of the situation. As a practical matter, there's no often incentive for the parent to consent, and getting an IRS letter ruling takes quite a bit of time and involves uncertainty. That means that the most viable alternative may be an opinion, but whether any opinion a reputable firm will be willing to provide will be strong enough to make anyone willing to proceed is another issue. The general rule is that there aren't any "no-brainers" when it comes to divisive reorgs and their aftermath.
-John Jenkins, Editor, DealLawyers.com, CCR Corp 9/24/2020
Q: What is the funding mechanism for the take private of a US listed Chinese ADR. Would the sanctions being contemplated affect the take privates if they are being funded by Chinese banks?
RE: I guess that's going to depend on the facts of the particular deal. Although the financing commitments haven't been made public, the merger agreement for the 58.com transaction appears to contemplate a fairly standard private equity-type financing arrangement, although it is led by a Chinese bank, Shanghai Pudong Development Bank Co., Ltd. Shanghai Branch.
As for the sanctions, the legislation leaves a lot of discretion in the hands of the Treasury Secretary and the President in determining which foreign persons are contributing to the failure of the Chinese government to meet its obligations with respect to Hong Kong, but it does authorize the imposition of sanctions against foreign banks that engage in transactions with such persons. However, sanctions on financial institutions wouldn't be imposed until a year after the bank was named in a report submitted to Congress, so it doesn't appear that they would affect deals in the near term at least.
-John Jenkins, Editor, DealLawyers.com, CCRcorp 7/6/2020
Q: What is the risk to the target board to agreeing to a termination (via settlement agreement) of a cash deal at a premium rather than pursue litigation against the buyer? RESI agreed to a termination of its acquisition by Amherst - and now a shareholder has filed a books & records demand around the process of the termination. Is the board relying on business judgement standard or something similar? It seems strange that the repercussions for the target board seem relatively mild so far.
RE: Generally, the decision of a fully-informed, disinterested board as to whether or not to pursue litigation in a situation like this would be subject to business judgment review. The books and records request is undoubtedly intended to try to find some evidence of conflicts of interest or other misconduct that would result in greater scrutiny of the board's actions, and/or to serve as the basis for a disclosure claim.
-John Jenkins, Editor, DealLawyers.com, CCR Corp 6/3/2020
RE: What is the downside to the board / target company in the best case outcome for the books & record plaintiff? I am trying to understand the scope of monetary risk in an extreme outcome. Also, is the "cover" provided by business judgement to the target board stronger or weaker if the state in question was not Delaware.
RE: Analyzing the downside here is well beyond what I can do in a Q&A forum. I suppose the worst case would be that the plaintiff finds something that strongly suggests the directors breached their duty of loyalty in making the decision, which would subject the directors to liability in damages for breach of fiduciary duty. From a damages standpoint, I guess the ultimate downside would be personal liability for lost profits from the transaction, but that seems an unlikely result. There are always a lot of issues involved in proving the amount of damages.
-John Jenkins, Editor, DealLawyers.com, CCRcorp 6/3/2020
Q: If the parties to a merger start discussing a change of merger terms during the proxy filing process, does that have to be disclosed in the proxy amendments as the document works it way through SEC review.
RE: Yes. Private, preliminary discussions may not need to be disclosed right away (although they would be if the deal was structured as a tender offer). The way it usually works is that developments in the deal may first appear in an 8-K disclosure, but that they ultimately wind up being disclosed in the definitive proxy statement as well.
If the definitive proxy has already been mailed, the changes may be disclosed by means of a supplement. If the changes to price and terms rise to the level of a fundamental change in the information contained in the proxy, then the company would need to file preliminary revised materials with the SEC and wait at least 10 days before mailing. The fundamental change issue is more likely to arise when the disclosure involves a price cut.
For an example of changes in the deal post-mailing that were addressed through proxy supplements, see the filings Tetraphase made in its recent deal with AcelRx.
For an example of the kind of disclosures about the back and forth in a successful deal jumping scenario, see Anixter International's filings beginning last October. The company signed up a deal with Clayton Dubilier, but that deal was subsequently jumped by WESCO.
-John Jenkins, Editor, DealLawyers.com, CCR Corp 6/1/2020
Q: Which case or cases in Delaware are likely to be the benchmark case / cases for the host of deals terminated due to COVID-19 that are in litigation?
RE: Honestly, your guess is as good as mine. I don't think there's any real way to handicap that.
-John Jenkins, Editor, DealLawyers.com, CCRcorp 5/20/2020
Q: Can a VC firm (who has a director on the board of a public company) make a distribution of shares in that public company to its LP's while that director might be privy to material information (e.g., earnings results that have not been released, M&A etc.)?
RE: Not cut and dried, but I think most fund lawyers think that's a risky thing to do from an insider trading perspective. Here's an excerpt from a Morgan Lewis memo:
"Another consideration a fund must take into account before making an in-kind distribution is the potential for securities law liability. Some commentators have suggested that either the SEC or private litigants (including the limited partners receiving the distribution) might pursue the fund if it distributes securities in-kind to its limited partners when the manager of the fund has access to material nonpublic information, on the theory that this distribution is tantamount to a sale because either (i) it has reason to know that sales by the limited partners will inevitably result or (ii) the general partner has a pecuniary interest in the distribution itself through its rights to carried interest."
-John Jenkins, Editor, DealLawyers.com, CCRcorp 5/15/2020
Q: What is the reason REIT poison pills have 5% triggers?
RE: I'm not a REIT expert, but my guess is that it likely has to do with the fact that REITs already have 5/50 ownership restrictions in their charter documents for tax purposes, and setting the trigger at this lower level is a further safeguard against acquisitions of large blocks that may create issues under those provisions.
In today's environment, it's possible that some REITs may also be looking to preserve NOLs — and, therefore, adopting the 5% trigger that these pills customarily feature. That usually isn't an issue for REITs, but these are strange times.
-John Jenkins, Editor, DealLawyers.com, CCR Corp 4/29/2020
Q: In a typical merger agreement, how does the buyer stay abreast of operational/financial progress at the seller? Does the buyer usually rely on reasonable access rights to get monthly P&L updates?
RE: Access rights would typically allow the buyer to obtain interim financial information, but bear in mind that one of the functions of all interim covenants is to keep the buyer informed about material changes in the seller's operations and financial condition. Covenants obligating the seller to operate in the ordinary course often contain a list of actions that require notice and consent from the buyer. Obviously, provisions of the agreement requiring the seller to provide notice of breaches of reps and warranties are another way of compelling it to furnish information to the buyer about its operations.
-John Jenkins, Editor, DealLawyers.com, CCR Corp 4/29/2020
Q: Has anyone come across a list of issuers that adopted poison pills in the last crisis (i.e., 2008 and 2009)?
RE: I'm not aware of a list, but there were a number of high-profile companies that adopted them back then. Citigroup, Ford and Pulte Homes come to mind. A lot of pills put in place during the financial crisis were NOL pills. A Latham memo doesn't identify companies by name, but it does have a lot of statistics on pill adoptions during that time.
-John Jenkins, Editor, DealLawyers.com, CCR Corp 4/28/2020
Q: Why do some of the rights plans recently adopted say they are not in response to any specific takeover offer, and others omit to say that? How do issuers weigh whether to include such a sentence, an example of which is below. What is the benefit to issuers who chose to make that statement vs those that don't? "The Rights Plan has not been adopted in response to any specific takeover bid or other proposal to acquire control of the Company."
RE: Delaware courts are more deferential to actions taken by a board on a "clear day" — i.e., not in response to a specific threat, and lawyers sometimes use this language to help position the company to defend the board's decision to adopt a pill.
-John Jenkins, Editor, Deallawyers.com , CCR Corp. 4/27/2020
RE: Does the issuer have to be "clean", i.e., not have received takeover offers for a certain period before adoption of the pill to be able to make such a statement? If so, what would that period be?
RE: I think that whether or not something is regarded as being adopted on a "clear day" or not is a judgment call based on the facts and circumstances.
-John Jenkins, Editor, Deallawyers.com, CCR Corp. 4/27/2020
Q: Firm is considering acquiring a private company. To do so, it wants to form an LLC, which would own a controlling interest in a special purpose entity. In the transaction, the shareholders of the target would receive cash and a minority interest in the special purpose entity. Trying to figure out whether the "same issuer" portion of Section 3(a)(9) of the 1933 Act could apply. Any thoughts are appreciated.
RE: Perhaps I'm missing something in the transaction structure, but it looks to me like you've got target shareholders receiving an interest in an acquiring entity that's separate from the target itself. I don't think the fact that the shareholders are receiving stock in the same issuer that the buyer has an interest in will skin the cat here, because the transaction doesn't involve an exchange of securities in the target entity itself.
The SEC has granted no-action relief for certain exchange transactions where the "same issuer" requirement has been in question. This Morrison & Foerster memo provides a good summary of those & you may want to take a look at it. Again, I apologize if I've misunderstood the question.
-John Jenkins, Editor, DealLawyers.com, CCR Corp 2/8/2020
Q: Does anyone know of any guidance from the SEC, in the context of a merger proxy statement/prospectus, on when changes that occur in either the transaction or in a company's business after the effective date of the related S-4 registration statement would have to be disclosed in a post-effective amendment to an S-4, versus just filing a supplement or even just filing an 8-K including a description of the changes? A related question is whether the SEC has provided guidance on whether the supplement or 8-K would have to be printed and circulated to stockholders, or whether the filing of the document with the SEC would suffice. Thanks very much.
RE: Jim Moloney of Gibson Dunn notes: It really depends on the facts and circumstances. The SEC has said in releases and elsewhere, that a post-effective amendment should be filed whenever there is a "fundamental" change in the information (i.e., the acquirer is changing the consideration offered, altering the mix of stock and cash consideration, etc.).
In those circumstances where a fundamental change has occurred, I believe the SEC Staff would expect the acquirer to not only file a post-effective amendment, but also disseminate the information (the new prospectus and card or letter of transmittal, as applicable).
-Broc Romanek, Editor, DealLawyers.com 2/10/2010
RE: Similar situation: Acquirer is a reporting public company. Target is a non-reporting private company and immaterial to Acquirer below 20%. Acquirer and Target are delivering a joint proxy statement/prospectus only to the shareholders of the Target in connection with Target's special meeting of shareholders. The document is a proxy statement from Target and a prospectus from Acquirer.
If, after the S-4 is declared effective and the joint proxy statement/prospectus is mailed to Target shareholders but before the Target shareholder vote to approve the acquisition, Acquirer enters into a material acquisition agreement with another, different target, then the question becomes "how best to disclose to Target's shareholders and the public generally?"
It seems that an 8-K (and not a post-effective amendment to the S-4 or a supplement to the joint proxy statement / prospectus) filed during such period with the 425 box checked on the cover page that provides info regarding the subsequent material agreement and related acquisition would be adequate / appropriate disclosure (because the joint proxy statement/prospectus forward incorporates by reference any 8-K filed prior to the Target shareholders' special meeting and because the subsequent acquisition does not relate to the S-4 or the joint proxy statement/prospectus).
Does this sound reasonable? Are we missing something obvious here? Thanks in advance.
RE: You wouldn't have to do a post-effective amendment unless the new information involved a fundamental change. That's a facts & circumstances assessment, but I think many companies would conclude that, standing alone, an insignificant acquisition doesn't involve a fundamental change. That call becomes more difficult if you're dealing with a significant subsidiary. Refer to the discussion of the fundamental change issue in May 2018 issue of The Corporate Counsel.
If a post-effective amendment isn't required, I think the issue of whether you need to disseminate the 8-K/425 disclosure to the target's shareholders depends on your assessment of its materiality to their voting decision. If it's material, then there's a pretty strong argument for disseminating it to them in some fashion. One thing to keep in mind is the possibility of state law disclosure claims, and states like Delaware are more skeptical about satisfying fiduciary disclosure obligations by means of incorporation by reference than is the case with respect to the federal securities laws.
I also wouldn't view the materiality issue narrowly - just because the new acquisition doesn't relate to the pending deal, it may well alter the total mix of information about the buyer in a material way.
-John Jenkins, Editor, DealLawyers.com 1/7/2020
Q: Does a foreign investor need repeat CFIUS approval each time he raises his stake in a US company? In other words if a foreign investor was to acquire a board seat and a 10% stake in a US public company and get CFIUS approval for that transaction. If that same foreign investor was to later acquire full control of the same company - would they have to file for CFIUS again?
RE: CFIUS jurisdiction used to be limited to control transactions, but it's been expanded under FIRRMA to encompass the authority to review any proposed investment in critical technologies. As a result, I think it's possible that an investment transaction that doesn't convey control may be a covered transaction triggering potential CFIUS review, and that a subsequent control transaction could also be deemed to be a "covered transaction."
There is a pilot program under FIRRMA that's applicable to certain industries, and regulations implementing its requirements more broadly have been proposed. Refer to the materials in our "National Security Considerations" Practice Area.
-John Jenkins, Editor, DealLawyers.com, CCR Corp 12/9/2019
Q: What is the reason to provide a third party (a potential investor) with information rights with respect to potential sales of super-voting stock of the issuer? Typically I have come across information rights that entitle an existing investor to financial statements but never with respect to a potential sale of super-voting stock.
RE: I think there are a lot of reasons that a provider of fresh capital would be interested in issuances of securities that could dilute its voting or ownership position or result in a change in control, but I'm not sure what they get by just being notified of a proposed sale, unless they also have some anti-dilution protection, tag-along rights or other substantive contractual rights that would be triggered by such a transaction.
-John Jenkins, Editor, DealLawyers.com, CCR Corp 12/5/2019
Q: If Seller (DE public company) sells substantially all of its assets in an asset deal without first getting shareholder approval --can buyer be held liable? Another way to phrase this would be -- would the liability due to the failure of Seller's board to get shareholder approval of a "substantially all" asset deal attach to the actual assets, therefore leaving Buyer on the hook for Seller's mistake?
RE: If the seller's board breached its fiduciary duty by virtue of its failure to obtain the required approval and the buyer had knowledge of that breach, then I think it might have exposure to an aiding and abetting claim. But in the absence of that, I think there are a couple of things that would make it difficult for a plaintiff to challenge the buyer's ownership of the assets.
The failure to obtain appropriate authorization of the transfer is almost certainly a breach of the seller's fundamental reps in the asset purchase agreement, which will likely give the buyer the right to seek indemnification beyond the negotiated cap for losses that it suffers as a result of the buyer's breach. In other words, the economics of the situation may leave the seller without a viable damages remedy.
I also think that the buyer in this situation would likely assert some sort of bona fide purchaser defense to any such claim, which the seller would have to overcome in order to avoid an early stage dismissal.
-John Jenkins, Editor, DealLawyers.com, CCR Corp 11/9/2019
RE: Assuming there is no aiding and abetting liability for the buyer (which would require knowledge), I think the buyer is unlikely to face monetary damages where the seller does not obtain the requisite stockholder approval. To maximize its defense, the buyer would want a record showing that it did not believe stockholder approval was required (i.e., that the sale did not appear to constitute "all or substantially all of the assets", even if it was a "close call") and to get arms-length reps that the seller has the requisite power and authority and obtained all requisite corporate approvals to consummate the transactions.
The bigger issue for the buyer may be whether the transaction is void vs. voidable (see, e.g., Apple Computer v. Exponential Technology, suggesting this answer depends on whether the board acted in good faith) and the possibility of rescission. See also Macht v. Merchants Mortgage & Credit. Because there's not a lot of case law in this area, you might want to look at cases dealing generally with void transactions, ultra vires claims, etc. as they apply to a bona fide purchaser.
For the "close calls," I think Hollinger is probably the best case to examine. It walked back some more questionable Delaware decisions (Katz?).
Lastly, note that if a court found 271 required SH approval, it's probably a de facto breach of the duty of care by the seller board. I understand arguments to the contrary (i.e., the board innocently got it wrong), but I think there is a relatively recent case indicating that the failure to follow a statutory requirement is an automatic breach of the duty of care.
RE: Great observations. Thanks!
-John Jenkins, Editor, Deallawyers.com, CCR Corp. 11/10/2019
Q: Do managers of a Delaware LLC have the fiduciary duty to investigate and/or report misconduct by a fellow manager?
RE: You've asked a pretty narrow question, and the short answer to it is "it depends." Delaware LLCs have broad discretion to modify or even essentially eliminate the default fiduciary obligations that would otherwise apply - and many have opted to do that, relying instead solely on the obligations laid out in the contract. See this Fried Frank blog.
But there are much broader issues involved and many different ways that an obligation to investigate suspected misconduct may arise. Even if there aren't fiduciary duty issues involved, you'll need to take a hard look at how your contract defines the managers obligations. My guess is that there will be something that somebody can hang their hat on if the managers turn a blind eye to misconduct by a fellow manager. If the misconduct implicates financial statements that its lenders or others are relying upon or other obligations to third parties, that may trigger a duty to investigate. Beyond that, misconduct that may involve regulatory violations or criminal conduct may trigger obligations on the part of managers to investigate under sentencing guidelines or other policies.
-John Jenkins, Editor, DealLawyers.com, CCRcorp 10/29/2019
Q: Is there any requirement under Delaware law that the board make any recommendation when it submits a matter to a stockholder vote? In other words, can the board submit a matter that it does not support and either recommend a vote against or otherwise encourage stockholders not to approve? Assume that the vote on the matter would be binding on the corporation – not a precatory vote/shareholder proposal situation. (note – I’m aware of the DGCL provisions re mergers, charter amendments and dissolutions that include an “advisability” determination requirement – this isn’t a situation where the board would need to make that type of determination under any statutory provision).
RE: I'm not aware of any Delaware case law on this outside the M&A arena, but my gut reaction is that absent a statutory requirement obligating the board to take affirmative action, there are some situations in which a board can remain neutral and leave a particular decision up to shareholders without necessarily breaching their fiduciary duties. For instance, that's not an unheard of decision for the board to reach when it comes to tender offers - some boards opt to take a neutral position with respect to those matters.
But my tender offer example relates to a shareholder's actions with respect to its own property - and you asked about the ability of shareholders to take action that binds the company without board authorization. I think those situations would essentially be limited to those in which the DGCL or the company's certificate of incorporation gives authority to shareholders to unilaterally bind the company (e.g., adoption of a bylaw).
In order to conclude that unilateral shareholder action could bind the company, you'd have to conclude that there was no statutory or charter provision mandating affirmative board action. But that's just the first hurdle, because I think you'd next have to get around the first sentence of Section 141(a) of the DGCL, which says "The business and affairs of every corporation organized under this chapter shall be managed by or under the direction of a board of directors, except as may be otherwise provided in this chapter or in its certificate of incorporation."
There's not lot of wiggle room in that sentence - the business and affairs "shall be managed by or under the direction of" the board except when the statute or the charter provide otherwise. Section 141(c) allows many powers to be delegated to committees of the board, and there's clearly implicit authority to delegate responsibilities to the officers who report to the board, but there's no express authority to delegate any of those powers to the shareholders.
For example, in the absence of something in the certificate of incorporation giving them the authority to do so, I don't think the shareholders could authorize the officers of the company to enter into a contract on its behalf, even if the board said "we're neutral" about this contract and are willing to leave it up to the shareholders. I think that situation would involve an impermissible delegation of fiduciary duties by the board.
-John Jenkins, CCRCorp 9/18/2019
RE: I generally think this is ok on permissive matters, although it is still subject to criticism. I think you run some risk on improper delegation if the vote would be binding. Maybe one exception is if the board was neutral because of a pervasive conflict of interest. The model act, for example, allows a board not to make a recommendation (on matters for which votes are statutorily required) if the board determines there's a conflict and explains why it isn't making a recommendation.
RE: Thanks. All good points. What do you think about the role DGCL 144 might play in a situation like this? If it were a matter where all of the directors arguably had an interest in the outcome of the vote, where 144(c) allows the stockholders to take action to approve/ratify.
RE: In 2003, Bausch & Lomb (a NY corp) included in its annual meeting proxy a proposal regarding de-classification of its board, where it recommended a vote against the proposal. At the previous annual meeting, a shareholder proposal was adopted recommending that the company consider de-classifying, In the 2003 proxy, the company/board said it was submitting the matter to a binding vote so the shareholders could decide, given the previous year’s shareholder proposal. It’s a pretty strange looking proposal because there is a statement from a proponent, just as if it were a shareholder proposal, although the actual source of the proposal is the company/board and not the proponent. And the board provides a statement in opposition, again just as if it were a 14a-8 shareholder proposal.
Could be that they chose to submit it, at least in part, for the reason you suggest – that they’re fundamentally conflicted because the outcome directly impacts them.
RE: That Bausch proxy statement is really interesting. I'm not a New York lawyer, but I think Section 803 of the BCL is the section that governs amendments to the certificate, and it appears to require such an amendment to be approved by the board and then submitted to shareholders. If that's so, then despite their recommendation to vote against the declassification proposal, they would have had to authorize the amendment filing before submitting it to the shareholders for approval. So, subject to being corrected by a New York lawyer, my guess is they were kind of talking out of both sides of their mouths - they authorized it, but didn't recommend it.
To me, that's a very tough position to take. In this situation, the board isn't just punting to shareholders. The statute required affirmative action on its part, and its proxy disclosure indicates that the board authorized something that it did not believe to be in the best interests of the corporation at the time it authorized it. Putting aside the whole delegation issue, I think that at least technically implicates the duty of loyalty.
I don't think provisions relating to ratification of transactions with interested directors would allow directors to punt on something that the statute required the board to authorize, nor to delegate authority to shareholders to bind the company. I think what those statutes accomplish is simply to prevent transactions that are approved in the manner specified or otherwise satisfy the statutory requirements from being voidable at the option of the corporation.
-John Jenkins, CCRCorp 9/19/2019
RE: I think 144(c) approval would be obtained as long as the disclosure indicated as much, but keep in mind that 144 is simply a validation statute and (bizarrely, in my opinion) does not automatically trigger the business judgment rule.
Q: Any thoughts on the best way to address the determination of indemnifiable losses and the payment of indemnification to a party that purchases primary shares from a private company, where the purchaser becomes a significant, but not the sole, stockholder? Any indemnification payment to the purchaser by the company for breaches of the company's reps and warranties in the stock purchase agreement would effectively represent a payment out of the purchaser's pocket, to the extent of the purchaser's ownership interest in the company. Gross up the indemnification payment? Have the company issue additional shares to the purchaser?
RE: Have the selling shareholders - not the target - pony up for the indemnification. Unless I'm reading this question wrong, it's a common technique in merger deals.
-Broc Romanek, Editor, DealLawyers.com 4/24/2006
RE: We just closed an investment where the sole remedy for breach of reps by the company was an increase in the number of shares issued; effectively the loss reduces the pre-money enterprise value and the price per share, increasing the number of shares issued. You can also handle this by an indemnity from the existing shareholders or an escrow. Insurance might also be a possible solution.
Couple of related issues to bear in mind:
-tax issues (the additional share/cash payment to the investor may be taxable as a settlement if not properly addressed);
-legal opinion issues (validly issued shares).
The math can get quite complex on the gross ups. And, obviously, the solution depends on the parties' relative leverage and the nature of the indemnifiable loss.
RE: Any further thoughts on this? Isn't it implicit that if the company is required to indemnify and hold harmless, the amount to be paid must take into account that the shareholder is indirectly paying itself a portion of the indemnity payments? I have not seen precedents with any gross-up mechanism.
RE: Goodwin Proctor did a study a few years back about indemnity provisions in growth equity financings. It has a lot of insights into questions about the parties responsible for indemnity obligations and the prevalence of indemnification gross ups in this context. The study was completed in 2013 and to my knowledge hasn't been updated, so it might be a little dated. Still, it's a good starting point.
-John Jenkins, Editor, DealLawyers.com 3/7/2019
RE: I don't believe that study addresses this question, other than in a very specific context.
RE: I don't think a litigator would find it "implicit"....
Q: Company A is a private company exploring a reverse merger with a public company, where private company would merge with a subsidiary of the public company, and would survive the merger. In the context of this transaction, Company A's shareholders would likely own, in the aggregate, a majority of the public company stock following the merger. Company A has various agreements in place with change in control provisions. One frequently appearing provision in Company A's documents provides that a change in control occurs if the shareholders prior to a transaction cease to own shares in Company A representing a majority of the voting power of Company A following such transaction. These provisions do not specify whether voting power must be held directly (i.e., shares of Company A) or whether voting power could be held indirectly (i.e., shares of public company, which owns 100% of Company A). Is there a prevailing view as to whether change in control definitions tend to be interpreted strictly in a situation like this? In other words, do most practitioners take the conservative view that a change in control occurred, where the definition of change in control fails to carve out control through indirect voting power? Or does the logical view (i.e., Company A's shareholders still control Company A, albeit indirectly) tend to be more common?
RE: I think the general approach to these clauses is to parse them pretty closely and interpret them fairly conservatively. Case law in this area is highly fact dependent, and the courts look very closely at the contract language itself. Ambiguities in defined terms or the absence of a definition for key terms like "voting power" can lead to unpredictable results. For instance, see this blog's discussion of how a NY court approached interpreting a clause where this term was undefined.
--John Jenkins, Editor, DealLawyers.com 3/25/2019
Q: What would cause an S-3 eligible registrant to elect to comply with Item 12 of Form S-4 rather than Item 10?
RE: One reason companies might want to take the Item 12 approach and deliver their 10-K & 10-Qs along with the prospectus/proxy statement may be state law limits on incorporation by reference. For instance, Delaware doesn't necessarily buy into the "access equals delivery" approach to SEC filings when it comes to incorporation by reference. As a result, people may opt to deliver the quarterly reports from which information that's material to an investment decision is incorporated along with the prospectus/proxy statement.
--John Jenkins, Editor, DealLawyers.com 12/26/2018
Q: How quickly does a public company need to roll out a code of conduct and anonymous hotline to an acquired company? Day 1 seems a bit much. Is there any hard and fast rule or prevailing practice in this regard?
RE: In my experience, rolling out the buyer's code of conduct and the anonymous hotline is one of the things that happens pretty quickly. Those policy documents are often part of the package that HR will provide to acquired company employees on the day of the closing. NYSE and Nasdaq rules require codes of conduct to apply to all directors, officers and employees, so they will apply to employees of the acquired company at the time of the acquisition. Of course, codes of conduct may need revision based upon the issues identified during due diligence and the integration process, so it isn't unusual to see changes made to reflect issues associated with the newly acquired business over a period of months following the acquisition.
--John Jenkins, Editor, DealLawyers.com 12/7/2018
Q: A registrant filed a Form S-4 to acquire a private entity. On the significant subsidiary test, the target exceeded the conditions at the 20% level, but not above the 40% level. In its S-4, the registrant included the target's 2017 audited financial statements as well as interim financial statements as of and for the period ended March 31, 2018. The acquisition closed on September 1, 2018, and the registrant timely filed the required 8-K. In that 8-K, the registrant indicated that the target's financial statements as well as pro forma financial information would be filed by amendment. Looking at Rule 3-05 of Reg. S-X (and, by reference, Rule 3-01), and given the results of the significant subsidiary test, it would seem that the Form 8-K/A should include the target's 2017 audited financial statements (which can be incorporated by reference from the S-4) as well as interim financial statements as of and for the period ended June 30, 2018. On this latter front, June 30 financials appear to be required because the September 1 closing date is more than 135 days after March 31. However, in confirming the above analysis, I came across section 2045.16 of the Division of Corporation Finance's Financial Reporting Manual. Section 2045.16 seems to say that, for purposes of the 8-K filing, the registrant in the example above can rely on March 31 financial statements filed as part of its S-4 (assuming there were no material events impacting the target subsequent to March 31), such that no financial statements are required at all. Is my interpretation of this section correct? And how does that square with Rule 3-05? (On this latter question, is just that General Instruction B-3 of Form 8-K supersedes the reference to Rule 3-05 of Item 9.01?)
RE: Yes, your interpretation is correct. The Staff is basically cutting companies that have done what your client did a little slack when it comes to the 8-K requirement. In terms of how the rules fit together, think of it this way - your client prepared an S-4 that included acquired company financial statements that met the requirements of Rule 3-05 of S-X. General Instruction B. 3. to Form 8-K says that you don't need to report information that's "substantially the same" as what you've reported previously. In interpreting that instruction, the Staff has taken the position that previously filed financial statements that don't include only one quarter of information that would otherwise be required are "substantially the same" as what you've filed. So, they don't do violence to 3-05, because they go in through the back door of the General Instruction to 8-K to provide this relief.
--John Jenkins, Editor, DealLawyers.com 12/7/2018