Monthly Archives: August 2014

Facilitating Mergers and Acquisitions with Earnouts and Purchase Price Adjustments

The following post comes to us from Albert H. Choi, Albert C. BeVier Research Professor of Law at University of Virginia Law School.

In mergers and acquisitions transactions with privately-held (or closely-held) target companies, transacting parties will often agree to make payments to the target shareholders contingent upon some post-closing measures. Two often used arrangements are purchase price adjustments (PPAs) and earnouts. With a purchase price adjustment mechanism, payment to the target shareholders will be adjusted based on an accounting metric (such as the net working capital or shareholders’ equity) calculated shortly after the deal is closed. For instance, with a purchase price adjustment based on the target’s net working capital, as the target’s post-closing net working capital goes up or down compared to a pre-closing estimate, consideration to the target shareholders increases or decreases in accordance. Similarly, with an earnout, the transacting parties will agree upon post-closing performance targets, using measures such as earnings, net income, or gross revenue, and the amount of consideration that the target shareholders are entitled to receive will depend on whether such targets are met over the earnout period.


Ten Key Points from the SEC’s Final Money Market Rule

The following post comes to us from Dan Ryan, Leader of the Financial Services Advisory Practice at PricewaterhouseCoopers LLP, and is based on a PwC publication.

After six years of debate over the risks and operations of money market funds (MMFs)—and events such as the fall of Lehman Brothers, breaking the buck at the Reserve Primary Fund, rancor between financial regulators, and hundreds of industry comment letters—the SEC finally adopted MMF reform on July 23rd. The final rule will fundamentally alter certain aspects of MMF operations and accounting, and the way these funds are viewed by investors.


Symbolic Corporate Governance Politics

Marcel Kahan is the George T. Lowy Professor of Law at the New York University School of Law. This post is based on a paper co-authored by Professor Kahan and Edward Rock, Saul A. Fox Distinguished Professor of Business Law at the University of Pennsylvania School of Law.

Corporate governance politics display a peculiar feature: while the rhetoric is often heated, the material stakes are often low. Consider, for example, shareholder resolutions requesting boards to redeem poison pills. Anti-pill resolutions were the most common type of shareholder proposal from 1987–2004, received significant shareholder support, and led many companies to dismantle their pills. Yet, because pills can be reinstated at any time, dismantling a pill has no impact on a company’s ability to resist a hostile bid. Although shareholder activists may claim that these proposals vindicate shareholder power against entrenched managers, we are struck by the fact that these same activists have not made any serious efforts to impose effective constraints on boards, for example, by pushing for restrictions on the use of pills in the certificate of incorporation. Other contested governance issues, such as proxy access and majority voting, exhibit a similar pattern: much ado about largely symbolic change.


European Commission Imposes €20 Million Fine for Failing to Notify a Merger

The following post comes to us from Sullivan & Cromwell LLP and is based on a Sullivan & Cromwell publication by Juan Rodriguez, Axel Beckmerhagen, Patrick Gorman.

On 23 July 2014, the European Commission fined Marine Harvest ASA €20 million for failing to notify its acquisition of Morpol ASA in accordance with the EU Merger Regulation and closing the transaction prior to receiving the European Commission’s approval. This is the first time the European Commission has imposed a fine in relation to a two-step transaction comprising a sale of a block of shares followed by a mandatory public bid for the remainder of the target’s shares. The level of fine is a further reminder that failure to comply with the EU Merger Regulation can have significant financial and reputational consequences.


New Credit Default Swap Terms to Be Implemented in September 2014

The following post comes to us from Isabel K.R. Dische and Leigh R. Fraser, partners at Ropes & Gray LLP, and is based on a Ropes & Gray publication by Ms. Dische, Ms. Fraser, and Molly Moore.

Earlier this year, the International Swaps and Derivatives Association Inc. (ISDA) published the 2014 Credit Derivatives Definitions (the 2014 Definitions). The 2014 Definitions introduce a new government bail-in Credit Event trigger for credit default swap (CDS) contracts on financial Reference Entities in non-U.S. jurisdictions and also modify the typical terms of sovereign CDS contracts in light of the Greek debt crisis, by allowing a buyer of protection to deliver upon settlement the assets into which the Reference Obligation has converted even if such assets are not otherwise deliverable. Further, they create a concept of a Standard Reference Obligation, which means that most CDS contracts on a given Reference Entity would have the same Reference Obligation, thereby increasing the fungibility of such CDS contracts.


Nationalize the Clearinghouses!

The following post comes to us from Stephen J. Lubben, Harvey Washington Wiley Chair in Corporate Governance & Business Ethic at Seton Hall University School of Law.

A clearinghouse reduces counterparty risks by acting as the hub for trades amongst the largest financial institutions. For this reason, Dodd-Frank’s seventh title, the heart of the law’s regulation of OTC derivatives, requires that most derivatives trade through clearinghouses.

The concentration of trades into a very small number of clearinghouses or CCPs has obvious risks. To maintain the vitality of clearinghouses, Congress thus enacted the eighth title of Dodd-Frank, which allows for the regulation of key “financial system utilities.” In plain English, a financial system utility is either a payment system—like FedWire or CHIPS—or a clearinghouse.

But given the vital place of clearinghouses in Dodd-Frank, it is perhaps surprising that Dodd-Frank makes no provision for the failure of a clearinghouse. Indeed, it is arguable that the United States is not in compliance with its commitment to the G-20 on this point.


The Corporate Governance of Sovereign Wealth Funds

The following post comes to us from Maria Cristina Ungureanu, a Corporate Governance Advisor at Sodali.

Initiatives of shareholder engagement must take into consideration the modern, complex nature of share ownership. Shareholders can no longer be considered as a single group, instead the shareholder base may include a range of institutional investors, hedge funds, private equity funds, sovereign wealth funds and other activist investors. There has been a significant transformation of institutional holdings in recent years, and company boards will need to adjust their behaviour and the nature in which these engage with these new categories of investors.


Sovereign Shareholder Activism: How SWFs Can Engage in Corporate Governance

The following post comes to us from Paul Rose, Professor of Law at Moritz College of Law, Ohio State University.

As the number of—and assets controlled by—sovereign wealth funds (SWFs) has increased dramatically in recent years, so too has scrutiny about how SWFs are making use of these assets. With respect to equity investments in publicly traded firms, one facet of this concern is that SWFs will become activist shareholders. This concern arises in part because of an equivocation of the term “activist” and a misunderstanding of the regulatory consequences of certain kinds of activism by SWFs.


Socially Responsible Firms

Allen Ferrell is Greenfield Professor of Securities Law, Harvard Law School. The following post is based on the paper co-authored by Professor Ferrell, Hao Liang and Professor Luc Renneboog.

The desirability of corporations engaging in “socially responsible” behavior has long been hotly debated among economists, lawyers, and business experts. Two general views on corporate social responsibility (CSR) prevail in the literature. The CSR “value-enhancing view” argues that socially responsible firms, such as firms that promote efforts to help protect the environment, promote social equality, improve community relationships, can and often do adhere to value-maximizing corporate governance practices. Indeed, well-governed firms are more likely to be socially responsible. In short, CSR can be consistent with shareholder wealth maximization as well as achieving broader societal goals. The opposite view on CSR begins with Milton Friedman’s (1970) well-known claim that “the only social responsibility of corporations is to make money”. Extending this view, several researchers argue that CSR is often simply a manifestation of managerial agency problems inside the firm (Benabou and Tirole, 2010; Cheng, Hong, and Shue, 2013; Masulis and Reza, 2014) and hence problematic (“agency view”). That is to say, socially responsible firms tend to suffer from agency problems which enable managers to engage in CSR that benefits themselves at the expense of shareholders (Krueger, 2013). Furthermore, managers engaged in time-consuming CSR activities may lose focus on their core managerial responsibilities (Jensen, 2001). Overall, according to the agency view, CSR is generally not in the interests of shareholders.


Cloud Cyber Security: What Every Director Needs to Know

The following post comes to us from Paul A. Ferrillo, counsel at Weil, Gotshal & Manges LLP specializing in complex securities and business litigation, and is based on an article authored by Mr. Ferrillo and Dave Burg and Aaron Philipp, both of PricewaterhouseCoopers LLP.

There are four competing business propositions affecting most American businesses today. Think of them as four freight trains on different tracks headed for a four-way stop signal at fiber optic speed.

First, with a significant potential for cost savings, American business has adopted cloud computing as an efficient and effective way to manage countless bytes of data from remote locations at costs that would be unheard of if they were forced to store their data on hard servers. According to one report, “In September 2013, International Data Corporation predicted that, between 2013 and 2017, spending on pubic IT cloud computing will experience a compound annual growth of 23.5%.” [1] Another report noted, “By 2014, cloud computing is expected to become a $150 billion industry. And for good reason—whether users are on a desktop computer or mobile device, the cloud provides instant access to data anytime, anywhere there is an Internet connection.” [2]


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