Yearly Archives: 2019

Clear and Unambiguous Terms of Merger Agreement

Posted by Jason Halper, Jared Stanisci, and Sara Bussiere, Cadwalader, Wickersham & Taft LLP, on
Wednesday, October 9, 2019
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Jason M. Halper is partner, Jared Stanisci is special counsel, and Sara Bussiere is an associate at Cadwalader, Wickersham & Taft LLP. This post is based on a Cadwalader memorandum by Mr. Halper, Mr. Stanisci, Ms. Bussiere, William Mills, Nathan Bull, and Audrey Curtis and is part of the Delaware law series; links to other posts in the series are available here. Related research from the Program on Corporate Governance includes M&A Contracts: Purposes, Types, Regulation, and Patterns of Practice, and Allocating Risk Through Contract: Evidence from M&A and Policy Implications (discussed on the Forum here), both by John C. Coates, IV.

The Delaware Court of Chancery’s recent decision, Genuine Parts Company v. Essendant Inc., [1] provides a helpful reminder that Delaware courts will enforce the clear and unambiguous terms of a merger agreement, and will consider contractual interpretation issues on a motion to dismiss when it finds the contractual terms to be clear and unambiguous. In Essendant, the Court denied the defendant’s motion to dismiss and found that: (i) Genuine Parts Company (“GPC”) adequately pled that the termination fee in the merger agreement was not the exclusive remedy for termination or a breach of the agreement; (ii) GPC did not waive its breach of contract claim by accepting the termination fee; and (iii) GPC pled sufficient facts to support a reasonably conceivable claim that the exclusivity provision in the merger agreement between the parties was a material term of the agreement which could be the basis for a breach of contract claim. This decision once again reinforces the need for parties to be mindful when negotiating and drafting a contract that contractual provisions reflect their understanding of the agreements they have made in the event of a breach or termination of the agreement. [2] In particular, Essendant cautions that contracting parties who want to limit recovery to the terms of the termination fee provision should carefully craft broad termination fee provisions that clearly and unambiguously state the parties’ intentions. Essendant also serves as a further reminder that a contractual party’s acceptance of a termination fee, absent specific contractual language to the contrary, will not preclude that party from pursuing a breach of contract claim. READ MORE »

Secondary Liability Risks for Private Funds—Recent Developments

Posted by Ari Berman, Tom Hill, and Cassie Lentchner, Pillsbury Winthrop Shaw Pittman LLP, on
Wednesday, October 9, 2019
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Ari Berman and Tom Hill are partners and Cassie Lentchner is senior counsel at Pillsbury Winthrop Shaw Pittman LLP. This post is based on a Pillsbury memorandum by Mr. Berman, Mr. Hill, Ms. Lentchner, and Stephen Amdur.

Takeaways

  • Private funds continue to face heightened secondary liability risks arising from their portfolio investments.
  • The DOJ’s False Claims Act litigation against a private equity firm emphasizes the importance of pre-acquisition due diligence and robust compliance programs.

In an age of heightened litigation risk and a motivated Securities & Exchange Commission (SEC), private funds need to be increasingly mindful of secondary liability risks, especially when evaluating costs and benefits of potential portfolio company ownership structures. Given the uncertainties, firms must take steps to mitigate such risks—including documenting oversight, observing corporate formalities, ensuring the creation and implementation of strong internal controls, and adequately training professionals who serve as directors.

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The Role of the Creditor in Corporate Governance and Investor Stewardship

Posted by George S. Dallas, International Corporate Governance Network (ICGN), on
Wednesday, October 9, 2019
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George S. Dallas is Policy Director at International Corporate Governance Network (ICGN). This post is based on an ICGN memorandum by Mr. Dallas.

As investor stewardship extends beyond equities it can be challenging for investors to consider how to adopt their stewardship practices to include fixed income and other asset classes. In the case of corporate fixed income part of this challenge lies in creditors not having formal ownership rights—as well as sometimes competing agendas with shareholders. Yet in many areas of corporate governance there can be a significant alignment of interests that supports engagement on behalf of all financial stakeholders, both creditors and shareholders.

In ICGN’s Global Stewardship Principles the role of the creditor is presented in the context of the “ecosystem” of stewardship. [1] In this context it is important to build understanding on the role of the creditor in corporate governance and to explore areas of commonality and difference with shareholders with regard to corporate governance matters. This can provide a framework for fixed income investors to factor governance related issues into investment analysis and stewardship activities.

As providers of risk capital, both creditors and shareholders are exposed to the residual risk of companies they invest in, and debt tends to be a permanent form of capital in most companies—even if individual debt issues are serviced and then reissued. Sustainable and healthy companies should seek to maintain positive relations with both creditors and shareholders to ensure cost effective access to both debt and equity capital. In turn, boards should ensure that company governance and capital allocation mechanisms reflect a fair and appropriate balancing of shareholder and creditor interests. Easier said than done?

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A Stakeholder Approach and Executive Compensation

Posted by Seymour Burchman and Mark Emanuel, Semler Brossy Consulting Group, LLC, on
Tuesday, October 8, 2019
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Seymour Burchman and Mark Emanuel are Managing Directors at Semler Brossy Consulting Group, LLC. This post is based on their Semler Brossy publication. Related research from the Program on Corporate Governance includes Paying for Long-Term Performance by Lucian Bebchuk and Jesse Fried (discussed on the Forum here).

What does it mean for boards and compensation committees that 181 CEOs from the Business Roundtable amended a long-standing statement of corporate purpose last month? The CEOs declared that the purpose of companies is to serve their five key stakeholders—shareholders, customers, employees, suppliers, and the community, not shareholders alone.

In putting their signatures to that idea, these CEOs challenged the notion of shareholder primacy, a principle of business for the last fifty years. Not surprisingly, the Business Roundtable’s statement sparked a host of editorials in the business press, some arguing that the group had made a grievous error. Many writers seemed to suggest the choice is binary: You’re either with shareholders, or you’re not. The Business Roundtable, in contrast, implies the choice isn’t either/or. It’s both.

Rightly or wrongly, the question will now come up in many boardrooms and on many investor calls: What is being done to address the needs of all stakeholder groups? Some commentators may even point to academic research that shows a positive correlation between companies that promote the interests of stakeholders and better financial performance.

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Self-Driving Corporations?

Posted by John Armour and Horst Eidenmueller (University of Oxford), on
Tuesday, October 8, 2019
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John Armour is Professor of Law and Finance and Horst Eidenmueller is the Freshfields Professor of Commercial Law, both at the Faculty of Law at the University of Oxford. This post is based on their recent paper.

In a recent essay, we explore the implications of artificial intelligence (AI) for corporate law. Today, corporate law is primarily understood as a means of facilitating productive activity in business firms. On this view, it is a predominantly private endeavor, concerned with helping parties to lower the costs they encounter. Much of “core corporate law” can hence be explained as responses to agency and coordination problems arising between investors and managers. As a corollary, the impact of business activity on society at large is typically treated as outside the remit of core corporate law, in line with the theory that regulatory norms should apply equally to all actors, corporations or otherwise.

To what extent will AI change the regnant account of corporate law? The standard account is functional in its orientation; that is, it is premised on a social-scientific analysis of what actually happens in a business firm. The starting point for our inquiry is therefore to ask how AI will affect the activities of firms. As a preliminary step, we begin with a clear account of what is technically possible. The next step is then to apply standard analytic tools from social science—the economics of business organization—to explore the likely impact of these innovations on business practice. With a model of business practice in mind, we can begin to visualize how corporate law may be affected.

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Shareholder Activism and Governance in France

Posted by Adam O. Emmerich, Sabastian V. Niles, and John L. Robinson, Wachtell, Lipton, Rosen & Katz, on
Tuesday, October 8, 2019
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Adam O. Emmerich, Sabastian V. Niles, and John L. Robinson are partners at Wachtell, Lipton, Rosen & Katz. The following post is based on a Wachtell Lipton memorandum by Mr. Emmerich, Mr. Niles, Mr. Robinson, and Theodore N. Mirvis. Related research from the Program on Corporate Governance includes Against All Odds: Hedge Fund Activism in Controlled Companies by Kobi Kastiel.

The Finance Commission of the French National Assembly has announced a report that will recommend reforms to French securities market regulations to address shareholder activism and market transparency. The report’s recommendations focus on responding to the excesses of activists in the French market with enhanced disclosure, reduced asymmetry of regulation between activist investors and French public companies and enhanced regulations with respect to short selling.

Notably, the recommendations include reducing the threshold for disclosure of equity ownership (including derivatives and other synthetic ownership) from 5% to 3%. The report also recommends enhanced regulation of short trading (including negatively correlated instruments and arrangements) in excess of certain volume limits and increasing the powers of the French market regulator, the Autorité des marchés financiers (AMF), to enable it to respond more swiftly and effectively to market abuses.

We have in the past called for, and reported on proposed, changes to the U.S. disclosure requirements with respect to securities ownership and the regulation of short trading, which presents unique risks to market integrity. This is something that has interested U.S. market participants, legislators and regulators for a long time, but as to which little change has been made in the United States. We are encouraged to see other countries taking these risks seriously and taking steps to address them.

Climate in the Boardroom

Posted by Eli Kasargod-Staub, Majority Action, on
Monday, October 7, 2019
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Eli Kasargod-Staub is Executive Director of Majority Action and the Climate Majority Project. This post is based on his Majority Action report. Related research from the Program on Corporate Governance includes The Agency Problems of Institutional Investors by Lucian Bebchuk, Alma Cohen, and Scott Hirst (discussed on the Forum here); Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy by Lucian Bebchuk and Scott Hirst (discussed on the forum here); and Social Responsibility Resolutions by Scott Hirst (discussed on the Forum here).

Key Climate-Related Shareholder Resolutions Would Have Passed with BlackRock and Vanguard Support

The world’s largest asset managers BlackRock and Vanguard control the largest blocks of shares in nearly every publicly traded firm in the U.S. The pattern of ownership is seen in the energy and utility industries, and across the companies at which there were critical climate votes in 2019 (see Figure 13). The two asset managers were both in the top five common stock shareholders at all 28 companies with critical climate resolutions.

BlackRock and Vanguard were the two largest shareholders at 18 of these 28 companies.

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The Reverse Agency Problem in the Age of Compliance

Posted by Asaf Eckstein (Ono Academic College) and Gideon Parchomovsky (University of Pennsylvania), on
Monday, October 7, 2019
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Asaf Eckstein is Associate Professor of Law at Ono Academic College and Gideon Parchomovsky is Robert G. Fuller, Jr. Professor of Law at University of Pennsylvania Law School and Professor of Law at Hebrew University School of Law. This post is based on their recent paper.

The agency problem, the idea that corporate directors and officers are motivated to prioritize their self-interest over the interest of their corporation, has had long-lasting impact on corporate law theory and practice. In recent years, however, as federal agencies have stepped up enforcement efforts against corporations, a new problem that is the mirror image of the agency problem has surfaced—the reverse agency problem.

The surge in criminal investigations against corporations, combined with the rising popularity of settlement mechanisms including Pretrial Diversion Agreements (PDAs), and corporate plea agreements, has led corporations to sacrifice directors and officers in order to reach settlements with law enforcement authorities, at all cost. While such settlements are in the best interest of companies and shareholders, they have devastating effects for individual directors and officers.

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Implied Private Right of Action Under the Investment Company Act

Posted by Rich Lincer, Robin Bergen, and Adam Brenneman, Cleary Gottlieb Steen & Hamilton LLP, on
Monday, October 7, 2019
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Rich Lincer, Robin Bergen, and Adam Brenneman are partners at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary Gottlieb memorandum by Mr. Lincer, Ms. Bergen, Mr. Brenneman, Marc Rotter, and Steven Xie.

In a recent decision, Oxford University Bank v. Lansuppe Feeder, LLC, the United States Court of Appeals for the Second Circuit held that parties that enter into contracts that violate the Investment Company Act of 1940 (the “Act”) have a private right of action under § 47(b) of the Act to sue for rescission of those contracts. The Second Circuit’s holding departs from prior decisions by two other Circuit courts and several district court decisions, amplifying potential contractual and litigation risks for funds and “inadvertent investment companies,” as well as such entities’ investors, lenders and contractual counterparties.

In Oxford University Bank, [1] a private fund issuer, which otherwise would have been required to register as an investment company, relied on the § 3(c)(7) exemption from the definition of “investment company” in the Act. The § 3(c)(7) exemption requires, among other things, that owners of the issuer’s outstanding securities be, at the time of acquisition of such securities, “qualified purchasers” (“QPs”) or “knowledgeable employees.” Holders of a class of junior notes of the issuer alleged a violation of the exemption and sued for rescission of the indenture under which the notes were issued.

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Taking a Play out of the Financial Acquirer’s Playbook

Posted by Jamie Leigh, Eric Schwartzman, and Ian Nussbaum, Cooley LLP, on
Sunday, October 6, 2019
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Jamie Leigh and Eric Schwartzman are partners and Ian Nussbaum is an associate at Cooley LLP. This post is based on their Cooley memorandum and is part of the Delaware law series; links to other posts in the series are available here. Related research from the Program on Corporate Governance includes M&A Contracts: Purposes, Types, Regulation, and Patterns of Practice and Allocating Risk Through Contract: Evidence from M&A and Policy Implications (discussed on the Forum here), both by John C. Coates, IV; and The New Look of Deal Protection by Fernan Restrepo and Guhan Subramanian (discussed on the Forum here).

As the NFL season gets underway, it is interesting to see how certain plays go from fringe status to near-universal. A recent example is the “run-pass option” that, before finding a home in every NFL team’s playbook, was used only in high school and college football games. [1] Coaches survey plays to assess what works, and, over time, some version of a useful play finds its way into a coach’s playbook and then every coach’s playbook. That is an enduring aspect of the sport: if you see a game-changer, use it.

In public M&A, some provisions in merger agreements become near-universal as practitioners study precedents and react to case law. In the early 1990s, it was typical for financial acquirers to bargain for a financing condition with a walk-away right if it could not obtain the financing for the deal. This play proved to be a losing proposition—in competition for assets with strategic parties whose bids were backed by their balance sheets, the financing condition would usually render the financial buyer’s bid a non-starter as it was deemed too risky from a deal certainty perspective in the eyes of the seller. Financial buyers, wanting to compete against strategic parties, gradually developed a new play that has now become the market norm for public company deals. They have foregone the financing condition (although a few remain bold enough to ask for it from time to time) in favor of agreeing to pay a reverse termination fee to the seller in the event that there is a financing failure. Critically, as part of this framework, the reverse termination fee generally operates as a maximum liability cap for the financial buyer, such that, following full payment of the reverse termination fee (plus any expense reimbursement or interest that may be owed to the sellers), a financial buyer eliminates any further liability to the seller on any basis. [2]

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