Morrison & Foerster LLP
May 27, 2013
©2013 Morrison & Foerster LLP | All Rights Reserved | mofo.com
Major Developments in U.S.
M&A Law and Practice
Agenda
• Overview of M&A Market
• Preliminary Agreements
• Standstills and NDAs
• LOIs and Agreements to Negotiate
• Financial Advisors
• Conflicts of Interest
• Valuation Issues
• Other Auction Issues
• Structure and Terms
• Deal Protections
• Private Acquisitions
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• Regulatory
• FCPA
• Exon-Florio
• Antitrust
• IP-Driven Deals
• Control Stockholders
• Hostile Offers/Activism
• Deal Litigation
• MoFo M&A
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Overview of M&A Market
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Heat Map: 2012 M&A Volume by Region
Source: Bloomberg
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Global Announced M&A
Target Industry
Source: Thomson Reuters
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Worldwide Cross-Border Volume
Source: Thomson Reuters
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Global Technology Transactions
The 35% YOY decline in aggregate value and 14% decline in average value
reflect a steep falloff in big-ticket deal-making.
Source: Ernst & Young, Global Technology Update
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Global M&A Market
• Worldwide M&A up 2%
• Spinoffs and divestitures increase to 47%
• Emerging markets account for 28%
• Cross-Border rose to 36%
(driven by energy and power, industrials, and consumer staples)
• Increase in Chinese outbound
• Record Japanese outbound (with almost two-thirds targets in the U.S.)
• Financing relatively cheap
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U.S. M&A Market
• Overall M&A activity with U.S. involvement down 3.8% from 2011
• Strategic deals continue
• PE: Deals at post-Lehman high, but perhaps tax-driven
• Overtly hostile acquisition attempts decrease
• Activism/agitation continues—seeking use or return to shareholders
of cash, and divestitures and sales of divisions and assets, as well as
sales of entire companies
• Fiscal cliff, tax increases now largely known, but uncertainty remains
• M&A v. IPO
• IPOs also challenged
• Impact of JOBS Act
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Private Equity
• Deal activity declines
• Focus on smaller transactions (<$50M)
• Mega-deals (>$1B) nonexistent (with Dell as a significant change in early 2013)
• Expiring capital commitments may motivate sponsors
• Secondary buyouts remain popular
• Fundraising
• Generally, up; average time to close funds down to approximately 13 months
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Earnouts and Use of Stock
as Consideration
• Earnouts
• Use in acquisitions of private companies increasing, but predominantly in life
sciences companies
• By one measure, more than 80% of private biopharma and medical device deals
include earnouts
• For deals with earnouts, average potential value of earnout as portion of overall
value decreased, to about 30%
• Form of Consideration
• Some increase in use of stock—but cash remains king (in about 68% of deals)
• Extra considerations for stock:
• Diamond proposed acquisition of Pringles from P&G for part stock—later terminated and sold
to Kellogg for cash after potential MAC at Diamond
• Court criticism in Southern Peru for buyer’s failure to get a cap/collar
• Instagram/Facebook—a reminder of (among other things) the availability of fairness hearings
in lieu of registering stock
• Value of potential tax savings increases as taxes rise
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Preliminary Agreements
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Don’t Ask, Don’t Waive Standstills
• Courts recognize flexibility of boards in designing auction/sale
processes
• Targets, and their bankers, want to maintain control, to extract value
from bidders
• But courts increasingly skeptical of common “don’t ask, don’t waive”
standstill provisions, where bidder cannot even ask for a waiver of the
standstill
• Complete Genomics court enjoins company from enforcing DADW provisions, and
orders company to tell plaintiffs if anyone asks for waiver (Del. Ch. Nov. 27, 2012)
• ancestry.com court orders disclosure of prior DADW provision, even though already
waived (Del. Ch. Dec. 16, 2012)
• Skepticism applied in context of targets that actually decided to sell themselves
• Focus is on the “don’t ask,” rather than on the standstill generally—which gets its
own attention
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Don’t Ask, Don’t Waive Standstills
• Courts suggest that targets:
• Understand the impact of the provision and how to use it to extract best bids
• Disclose to shareholders, along with impact on “most likely buyers”
• Allow private, if not public, requests for waivers (but some courts also recognize
potential disclosure obligation of target receiving such a request)
• Consider allowing automatic fall-aways (e.g., if company signs agreement with
another party)
• Consider waiving before signing with winning bidder
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More on NDAs
• Backdoor Standstills
• Martin Marietta—court enjoins unsolicited bid for Vulcan by Martin Marietta, on
basis of nonuse and nondisclosure restrictions in NDAs, despite ambiguities
(Del. Ch. May 2012, Del. Supreme Ct. Jul. 2012)
• Potential buyers should consider overall impact of non-use and non-disclosure
provisions, as well as more direct standstills
• But typical standstill language still provides broader protection for targets
• Nonreliance Clauses
• Buyer’s nonreliance agreement in NDA precludes fraud claims against seller for
misstatements made to “induce” participation in auction process (RAA
Management, LLC v. Savage Sports Holdings, Inc. (Del. Supreme Ct., May 2012))
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LOI’s/Agreements to Negotiate
• Agreement in LOI to negotiate in good faith may imply that there are
no material conditions beyond those stated in the LOI (EQT
Infrastructure Ltd. v. Smith (SDNY 3/20/12))
• Breached by potential seller who demanded increase in price for business over that
contemplated by LOI when seller couldn’t find a buyer for another business not
mentioned in LOI
• Court enforces agreement to negotiate in good faith by imposing
equitable license (PharmAthene, Inc. v. SIGA Technologies, Inc.
(Del. Ch. 12/16/11))
• Buyer and seller agree in merger agreement that, if merger does not close, they’ll
negotiate in good faith a license, based on attached term sheet
• Merger doesn’t close; parties negotiate license, but seller demands terms more
favorable than those in term sheet
• Court, after reviewing term sheet and context of negotiations, finds breach and
awards “equitable payment stream” of 50% of net profits for next 10 years
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Financial Advisors
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Financial Advisors & Conflicts of Interest
• A continuing plaintiffs’ favorite…
• Banks participating in settlements: El Paso (2012)—Goldman gives
up $20M fee; Del Monte (2011)—Barclays gives up $21M fee and
pays in $23.7M
• In El Paso:
• El Paso financial advisor discloses conflicts with respect to 19% ownership and
board seats at Kinder Morgan; lead banker ownership of about $340K of Kinder
Morgan stock not disclosed
• El Paso retains second financial advisor, which receives fee only if El Paso did
Kinder Morgan deal
• Court finds attempts to establish ethical wall inadequate, given continuing role of
first financial advisor
• Complicated by El Paso CEO interest in purchasing portion of the business
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Financial Advisors & Conflicts of Interest
• Potential financial advisor aiding and abetting liability?
• Compare Del Monte, where court encouraged plaintiffs to add financial advisor,
with El Paso, where court said liability unlikely since conflicts disclosed
• Boards need to be informed of material conflicts faced by advisors
• Evolving practice: Banks’ agreement in engagement letter to
disclose, and disclosure of, their potential conflicts
(a.k.a. “relationships”)
• May need to go to level of individual banker (see El Paso)
• Continued use of “independent” second bank
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Financial Valuation Issues
• Appraisals: Courts raise multiple substantive issues as they
determine a specific “fair” value
• See, for example, findings of courts in Gearreald v. Just Care (Del. Ch. 4/30/12);
In re Appraisal of The Orchard Enterprises (Del. Ch. 7/18/12):
• Preference for supply-side over historical equity risk premium
• Company-specific risk premiums discouraged in favor of appropriate adjustments
to cash flows
• Deals: Though often treating banker methodologies as disclosure
issues and “quibbles,” courts are commenting on various issues,
such as:
• Choice of equity risk premium (El Paso)
• Methodologies such as “relative valuation” (Southern Peru)
• Key for boards: Understand the material assumptions
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Other Auction Issues
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Disparate Treatment of Bidders
• Novell court finds potential bad faith by directors (and hence potential
personal liability) in unexplained apparent differential treatment of
bidders (Del. Ch. 1/3/13)
• Winning bidder allowed to team with other PE firms and with other major investor in
company, and was informed of strategic buyer interest in concurrent acquisition of
some of company’s assets, while another bidder apparently was not
• But courts continue to recognize valid reasons for differential
treatment of bidders
• In BJ’s Wholesale Club, court dismissed claim where target board, citing
competitive and regulatory risks, during auction process declined to provide
confidential info to competitor who had no history of domestic acquisitions
(Del. Ch. Jan. 2013)
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Structure and Terms
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Continuing Evolution of
Deal Protections
• Force the vote—Courts accept use of provision, as authorized by
statute, but then increase attention on change of recommendation
provisions (e.g., Compellent (Del. Ch. Dec. 2011); Complete
Genomics (Del. Ch. Nov. 2012))
• Extending financing—In Complete Genomics, court finds
nonproblematic buyer’s extension to distressed target of bridge loan
convertible into about 22% of target stock, after target explored other
options
• Asset lock-up—Apple/AuthenTec included option to license
AuthenTec patents if another company acquired AuthenTec
• In private equity deals, go-shops continue to be the norm
(Quest Software; Dell)
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Developments in
Private Acquisitions
• Indemnity terms
• Average cap on indemnity falls slightly, with 10% caps gaining popularity, but within
a broad range
• Silence on sandbagging continues to decrease; pro-sandbagging language in about
68% of private deals
• Rep and warranty survival periods cluster around 18 months, within
range generally of 12 to 24 months, with exceptions for “fundamental”
reps and other specific issues
• Continuing increase in use of professional stockholder representative
firms, and related increase in use of “war chest” set-aside
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Some Comfort on Transfer Issues
• Court finds that, under Delaware statute, reverse triangular merger
does not constitute an assignment of the target’s assets, by operation
of law or otherwise (Meso Scale Diagnostics, Del. Ch. Feb. 22, 2013)
• Reverse triangular merger thus did not breach target’s in-bound technology license
that prohibited transfers by operation of law
• Provides greater certainty of effect of acquisition on target’s existing
contracts, following questions arising from same court’s opinion in an
earlier proceeding (Del. Ch. Apr. 8, 2011)
• But, other jurisdictions still have cases that suggest that a reverse
triangular merger in some circumstances could constitute an
assignment (e.g., SQL Solutions v. Oracle, N.D. Cal., Dec. 18, 1991)
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Regulatory
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FCPA
• Violations continue to be a potentially expensive problem
• Regulators expect anti-corruption due diligence for deals, but allow
flexible approach
• Exemplified in Pfizer and Wyeth settlements:
• Reward Pfizer for its due diligence and compliance efforts by not imposing successor liability
in connection with its acquisition of Wyeth
• Punish Pfizer for pre-acquisition conduct of another acquired entity, due to a lack of FCPArelated due diligence, investigation, compliance or remediation efforts
• SEC and DOJ guidance issued November 2012, but didn’t answer
much
• States that acquisition by itself does not create liability where none existed before
• Continued emphasis on self-reporting
• Value of “risk based” due diligence
• Companies continue to increase diligence, compliance efforts
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Exon-Florio
• Increasing investigations and enforcement
• President unwinds acquisition of wind turbines by Chinese company (Ralls)
• House report recommends against using Huawei, ZTE equipment (10/8/12)
• Where implicated, parties are negotiating more heavily their
obligations to take steps to obtain CFIUS approvals
• Parties reach out to CFIUS earlier in the process (even before the definitive
agreement is signed)
• Parties engage consultants, PR
• Mitigation measures have included:
• allowing only U.S. persons to handle specified products and services, and advance
notice of foreign national visits
• advance notice of any material introduction, modification, or discontinuation in
certain products and services
• ensuring the continued production of certain products
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Antitrust
• Remains an issue, particularly in horizontal mergers
• Some deals nixed or challenged (AT&T/T-Mobile (12/11), Anheuser-Busch InBev/Modelo (1/13))
or allowed subject to divestitures (Hertz (8/12))
• Size doesn’t matter—non-reportable mergers (below $70.9M for 2013), deals involving
distressed firms, and minority investments subject to challenge (e.g., Magnesium
Elektron/Revere Graphics—$15M acquisition)
• Increasing interest in use of behavioral remedies and scrutiny of vertical or
conglomerate mergers
• Reactions in deal structures: Hell or high water covenants, reverse
termination fees
• Highly individualized—parties negotiating more specific obligations to divest or take other steps
depending on market context
• Antitrust RTFs through November 2012 ranged from 2.3% to 4.3%
• In December, ICE agreed to pay a 9.2% RTF to NYSE (following the DOJ’s objection to ICE’s bid in 2011
and the EC’s refusal to approve prior Deutsche Borse offer)
• 2011 included other prominent fees, like Google/Moto Mobility (20%) and AT&T/T-Mobile (15%, including
value of spectrum to be transferred)
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IP-Driven Deals
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IP-Driven Deals
• Patent-driven deals continue grabbing headlines
• Consortium (IV, RPX, Apple, Microsoft, Google, others)/Kodak (BK sale)—$525M with a grant
back (1,100 patents and a license to others)
• Microsoft/AOL—$1.1B (925 patents plus a license for more)
• Facebook/Microsoft—$550M, with a license back (650 patents—as purchased by Microsoft
from AOL); Facebook/IBM (750 patents)
• Intel/InterDigital—$375M (1,700 patents)
• What to expect in 2013?
• Trend to realize value of patent assets continues
• Continued attempts to divest large portfolios in bankruptcy sales
• E.g., Qimonda (started competitive bidding for roughly 7,500 patents and applications)
• May see more (smaller) deals in broader variety of industries
• May see more sales by non-distressed operating companies seeking to realize value of excess
patent assets
• Expect more complex grant-back discussions
• Value impact of existing licenses (expect limited disclosure of existing licenses by larger
operating sellers)
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IP-Driven Deals
• Evolving deal structures
• Straight all-cash sales
• Sale with back-loaded royalty participation
• Monetization through joint ventures and special-purpose vehicles
• Split sale of patent assets and remaining operating business (with retained license)
• Valuation continues to be significant challenge
• E.g., Kodak initially valued portfolio at $3B+ and ultimately sold for $525M
• No broadly accepted method of valuing patents
• “Price per patent” comparison is questionable guideline
• Valuation and bidding dynamics differ significantly if buyers focused on offensive vs.
defensive value
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Control Stockholders
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Control Stockholders
• Southern Peru—Delaware Supreme Court affirms both $2B+ in
damages and $300M+ in attorneys’ fees (Aug. 27, 2012)
• Synthes—Potential safe harbor for sale to third party with equal
treatment for all (Del. Ch. Aug. 2012)
• Court acknowledges controlling shareholder’s right to a premium
• Other shareholders still may challenge motive (e.g., Infogroup plaintiffs allege
liquidity)
• Revlon applicability to sale of a controlled corporation still open—though courts
note it’s an odd situation
• Quest Software—independent committee offered 19.9% option to
Dell to counter stake held by 34% holder/CEO who had teamed with
PE firm
• Controversial, but Dell ended up paying more than Insight and purchasing the
company
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Hostile Offers/Activism
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Hostile Offers/Activism
• “Hostile” acquisition possible, but most overtly hostile offers end up with
target remaining independent or in hands of another
• Hostile offers down, both in aggregate and as proportion of the market
• Airgas (Feb. 2011) did not make would-be hostile bidder’s job any easier
• Activism/agitation for sale, return of capital, and other strategic changes pose
similar concerns for board
• Defenses
• Companies continue to remove defenses—for S&P 500, minority have pill, classified board, and
limits on shareholders’ right to call special meetings, down from prior majority
• Advance notice bylaws—failure to waive in face of “radical change” represented by Board’s
rejection of takeover bid may constitute breach of fiduciary duties (Icahn Partners LP v. Amylin
Pharmaceuticals, Del. Ch. April 2012)
• Pills adopted in face of threat, customized to circumstances—Netflix adopted pill in response to
Icahn stake has two-level trigger, for institutional v. other holders; most companies adopt shortterm pills or put them to shareholder vote
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Deal Litigation
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Continuing Increase & Evolution
in Deal Litigation
• Every public deal gets litigated (except for the lucky 4%)
• Disclosure, conflicts remain popular targets for plaintiffs
• Continued trend of forum shopping and litigation in multiple
jurisdictions
• Some companies seek Delaware Exclusive Forum provision
(usually when going public)
• Continuing criticism of “disclosure-based” settlements
• Courts have grown increasingly skeptical of the attorneys’ fees requests in these
cases
• Courts have granted partial injunctions
• In Del Monte (2011), enjoined no-shop related clauses
• In Complete Genomics, enjoined don’t-ask don’t-waive standstill, and required
company to inform plaintiffs of any target board consideration of change of
recommendation, even if not allowed under merger agreement
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Deal Litigation
• More litigation proceeds past the closing
• Plaintiffs have historically used potential injunction of deal as leverage, but courts
have not been granting injunctions
• Courts see potential monetary relief and quasi-appraisal as reducing need for
extraordinary injunctive relief (El Paso, Delphi)
• Delaware has reinforced the idea that entire fairness claims involving
controlling shareholders may generate large attorneys’ fees
• Plaintiffs look for Southern Peru returns ($1.2B+ in damages and $300M+ in
attorneys’ fees)
• Given ubiquity of exculpation clauses, plaintiffs are highly focused on
proof of a conflict of interest or alleged self-dealing
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MoFo M&A
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M&A Overview
Morrison & Foerster’s preeminent M&A practice is highly ranked and recognized both for
its diverse industry expertise and its experience with cross-border transactions. The
depth and breadth of our practice reflects the dynamic nature of our clients, which include
Fortune 500 companies, private equity sponsors, investment banks and privately-held
companies.
Some of the industry areas where we have deep transactional experience include
healthcare and healthcare technology, life sciences, technology and Internet, media,
consumer and branded products, cleantech and energy, financial services and financial
institutions, telecommunications, and retailing and gaming.
Some Relevant Statistics
• Over 250 corporate/M&A lawyers worldwide
• Served as counsel on 145 M&A transactions, which had a total disclosed value of more than
$140 billion in 2012
• Advised on 27 M&A transactions, each worth more than $1 billion in 2012
• Ranked as an “Elite” firm in Corporate M&A Nationwide by Chambers USA
• Named 2012 M&A Group of the Year by Law360
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Representative M&A Transactions
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Representative M&A Transactions
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MoFo Overview
Founded in 1883, Morrison & Foerster is now a preeminent global law firm dedicated to
delivering business-oriented results to clients around the world. Dynamic technology and
life science companies, large financial institutions, leading consumer product companies,
and other market leaders come to MoFo for legal knowledge, innovation, and business
aptitude. With over 1,000 lawyers spread across 16 offices in the world’s key financial
and technology centers, MoFo handles some of the world’s largest cross-border
transactions and resolves major disputes across multiple jurisdictions. The firm’s open
culture provides every client with access to cross-disciplinary experts across the firm’s
offices.
Our attorneys share high standards and a commitment to excellence. Our dedication to
serving client needs has resulted in enduring relationships and a record of high
achievement. We are a leader in each of our practice areas, including litigation, financial
services, intellectual property and technology, tax, and transactional work, such as
corporate, capital markets, and real estate finance.
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Global Reach in the World’s Key Markets
MOFO EUROPE
Brussels
London
MOFO USA
New York
San Francisco
Los Angeles
Palo Alto
San Diego
Washington, D.C.
Northern Virginia
Denver
Sacramento
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MOFO ASIA
Beijing
Hong Kong
Shanghai
Tokyo
Singapore
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