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2 Market Review and Outlook
5 Takeover Defenses: An Update
8 Developments in Merger Control: It Ain’t Over ’til It’s Over
9 The Common Interest Privilege: Protecting Legal Discussions Among Deal Parties
10 Key Earnout Lessons for Buyers and Sellers
11 Law Firm Rankings
12 Selected WilmerHale M&A Transactions
14 Special Considerations in California M&A Deals
16 Acquisition Financial Statement Requirements in an IPO
19 A Comparison of Deal Terms in Public and Private Acquisitions
22 Trends in VC-Backed Company M&A Deal Terms
24 Initial Public Offerings: A Practical Guide to Going Public 2 Market Review and Outlook
REVIEW Global M&A Activity – 2000 to 2016
In 2016, the number of reported M&A # of deals Deal value (in $ billions) transactions worldwide dipped by 2%, 3,640
from a record 34,838 deals in 2015 to 3,174 34,838 34,191 32,879 32,933 3,057 31,833 32,610 2,996 34,191, but still represented the second- 30,600 2,658 29,815 2,755 29,055 28,320 27,952 highest annual tally since 2000. Worldwide 26,030 24,655 23,065 23,663 2,112 21,737 2,021 M&A deal value decreased 16%, from $3.64 20,808 1,880 1,748 1,744 1,833 trillion to $3.06 trillion—a total that was 1,570 1,358 still the third-highest annual figure since 1,271 2000, lagging behind only 2015’s record 981 1,021 tally and 2007’s $3.17 trillion result. The average deal size in 2016 was $89.4 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 million, 14% below 2015’s average of $104.5 million, and just shy of 2014’s Source: FactSet Mergers average of $91.0 million, but 40% above the annual average of $64.0 million for the five-year period preceding 2014. The number of worldwide billion-dollar US M&A Activity – 2000 to 2016
transactions decreased 9%, from 540 in # of deals Deal value (in $ billions) 2015 to 489 in 2016. Aggregate worldwide
billion-dollar deal value declined 21%, 2,046
from $2.68 trillion to $2.11 trillion. 1,859 1,631 1,733 1,702 Geographic Results 13,103 1,466 13,211 12,224 12,243 11,968 11,732 11,551 10,932 1,208 Total deal value decreased across all 1,119 9,596 10,072 10,190 9,637 9,140 9,518 1,020 geographic regions in 2016, with Europe 8,564 8,609 838 836 835 882 the only region seeing an increase in 816 7,278 627 569 the number of M&A transactions: 497
■■ United States: Deal volume decreased 9%, from 13,211 transactions in 2015 to 11,968 in 2016. US deal value declined 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 by a similar percentage, from $2.05 Source: FactSet Mergers trillion to $1.86 trillion. Average deal size inched up from $154.9 million in 2015 to $155.3 million in 2016—the highest average deal size in the United States since European M&A Activity – 2000 to 2016 2000. The number of billion-dollar transactions involving US companies # of deals Deal value (in $ billions) decreased by eight, from 286 in 2015 to 15,489 278 in 2016, while the total value of these 14,652 13,734 1,471 13,567 13,368 transactions decreased 11%, from $1.65 13,042 13,272 12,533 1,316 12,143 12,047 trillion to $1.47 trillion. 11,510 11,816 11,466 1,262 1,168 10,452 1,147 1,104 10,136 10,347 ■■ Europe: Deal volume in Europe improved 883 843 8,038 in 2016 for the third consecutive year. 732 740 666 639 618 601 The number of transactions increased 510 441 6%, from 14,652 in 2015 to 15,489 in 401 2016—the European market’s high point since 2000. Total deal value decreased 12%, from $1.26 trillion to $1.10 trillion, 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 contributing to a 17% decrease in average Source: FactSet Mergers deal size from $86.1 million to $71.3 million. The 2016 figure was also well from 180 in 2015 to 157 in 2016. The ■■ Asia-Pacific: The Asia-Pacific region saw below the 2014 average of $85.8 million. total value of billion-dollar transactions its second consecutive annual decline The number of billion-dollar transactions declined by 18%, from $952.5 billion in deal volume, by 8%, from 9,444 involving European companies declined in 2015 to $778.0 billion in 2016. transactions in 2015 to 8,695 in 2016. for the second consecutive year, Market Review and Outlook 3
Total deal value in the region decreased Asia-Pacific M&A Activity – 2000 to 2016
14%, from $1.06 trillion to $913.4 billion, # of deals Deal value (in $ billions) resulting in a 6% decrease in average 1,057 deal size, from $111.9 million to $105.1 million—still the second-highest total 913 9,098 9,410 9,452 9,444 deal value and average deal size in 8,807 8,799 8,848 8,695 8,268 8,304 8,368 704 the region since 2000. Billion-dollar 7,083 551 531 transactions involving Asia-Pacific 6,338 500 481 469 445 companies decreased 11%, from 190 to 4,892 404 3,800 320 296 170, while their total value declined by 271 2,727 18%, from $674.0 billion to $553.7 billion. 184 1,902 142 107 90 Sector Results Trends in M&A deal volume and value 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 varied across industries in 2016: Source: FactSet Mergers
■■ Technology: Global transaction volume in the technology sector decreased 9%, from 5,348 deals in 2015 to 4,883 deals in 2016. Despite the decline, 2016 represented Technology M&A Activity – 2000 to 2016 the second-highest annual tally since the # of deals Deal value (in $ billions) 6,573 transactions in 2000. Global deal value increased 14%, from $281.8 billion to $321.1 billion—the eighth consecutive 6,573 343 annual increase in deal value for this 321 5,348 sector. Average deal size increased 25%, 4,865 282 4,883 4,576 253 from $52.7 million in 2015 to $65.8 4,364 4,317 4,235 4,148 4,043 4,182 221 3,981 3,977 million in 2016. US technology deal 3,612 volume decreased 17%, from 2,768 to 3,138 3,024 3,105 142 133 2,296. Total deal value in the United States 123 115 106 104 followed the global trend, increasing 26%, 87 89 90 58 66 from $171.2 billion to $215.7 billion. This 48 jump in turn resulted in a 52% increase in average deal size, from $61.9 million 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
to a record level of $93.9 million. Source: FactSet Mergers
■■ Life Sciences: Global transaction volume in the life sciences sector decreased 7%, from 1,375 deals in 2015 to 1,283 Life Sciences M&A Activity – 2000 to 2016 deals in 2016, while global deal value decreased 13%, from $324.5 billion to # of deals Deal value (in $ billions) $282.1 billion—the second consecutive 387 annual decline in deal value. As a result, 1,358 1,375 325 1,283 1,169 average deal size decreased 7%, from 1,143 1,138 1,087 1,108 282 $236.0 million to $219.8 million. In the 1,065 1,081 1,082 954 845 United States, deal volume declined 796 821 771 736 by 6%, from 621 to 582. Total US deal 174 175 176 153 142 142 137 value, however, increased 14%, from 129 126 121 96 $204.0 billion to $231.8 billion, resulting 83 74 in a 21% increase in average deal size, 63 from $328.4 million to $398.3 million. 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 ■■ Financial Services: Global M&A activity in the financial services sector decreased Source: FactSet Mergers 4%, from 1,577 deals in 2015 to 1,511 deals in 2016. Despite the decline, 2016 billion to $152.1 billion, resulting in a to 498, while total deal value declined yielded the second-highest annual tally 27% decline in average deal size, from by 43%, from $116.3 billion to $66.2 since 2007, which marked the end of $138.0 million to $100.7 million. In the billion. Average deal size decreased 37%, a four-year period that saw an annual United States, financial services sector from $212.2 million to $133.0 million. average of 1,779 deals. Global deal deal volume decreased 9%, from 548 value declined by 30%, from $217.7 4 Market Review and Outlook
■■ Telecommunications: Global transaction Financial Services M&A Activity – 2000 to 2016
volume in the telecommunications sector # of deals Deal value (in $ billions) inched up from 864 deals in 2015 to 865 1,862 deals in 2016—the fourth consecutive 1,807 1,705 1,740 annual increase in deal volume. Global 404 1,577 1,511 1,468 1,460 367 1,458 1,468 1,461 telecommunications deal value increased 1,355 327 1,284 1,309 45%, from $153.2 billion to $222.6 billion, 1,243 1,232 273 1,072 a total that, when combined with flat 236 229 218 deal volume, resulted in a corresponding 206 196 152 45% increase in average deal size, 126 122 130 109 120 from $177.3 million to $257.3 million. 106 95 US telecommunications deal volume increased 4%, from 282 to 294, while total 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 deal value more than tripled, from $41.8 billion to $172.6 billion. The average US Source: FactSet Mergers telecommunications deal size in 2016, at $587.1 million, was nearly four times the 2015 average of $148.3 million.
■■ VC-Backed Companies: The number Telecommunications M&A Activity – 2000 to 2016 of reported acquisitions of VC-backed # of deals Deal value (in $ billions) companies increased 6%, from 531 in 2015 to 561 in 2016. Once all 2016 535 acquisitions are accounted for, 2016 deal 1,852 activity should be in line with the total of 574 deals in 2014, but will likely fall 1,279 1,200 1,192 short of the tallies of 608 and 589 in 2010 1,153 1,121 229 232 240 866 220 227 865 223 and 2011, respectively. Total deal value 856 833 820 823 864 771 189 758 724 increased 42%, from $58.1 billion in 2015 670 145 153 127 to $82.4 billion in 2016, but was below 108 105 88 76 2014’s total deal value of $88.5 billion. 61 67
OUTLOOK 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Heading into 2017, macroeconomic Source: FactSet Mergers uncertainty and high stock market interest rate only once in the preceding sell side, private equity firms—having valuations may create headwinds for the decade, the Federal Reserve increased increased their fundraising for the M&A market, despite high levels of cash the rate in December 2016 and again in fourth consecutive year—are facing held by both strategic and private equity March 2017, and further rate hikes are pressure to exit investments and return acquirers, an uptick in inbound M&A widely expected in the coming year. capital to investors, even if investor activity, and the continued desire of returns are dampened by increases in many companies to pursue acquisitions ■■ Market Conditions: There is growing the level of equity invested in deals. to supplement organic growth. On sentiment that US stocks might have balance, the M&A market remains reached their peak valuations in the ■■ Venture Capital Pipeline: Many venture- fundamentally sound, and deal activity first quarter of 2017. Record high stock backed companies and their investors in 2017 should approach the aggregate market valuations may discourage prefer the relative ease and certainty of deal volume and value of 2016. Important buy-side activity by acquirers concerned being acquired to the lengthier and more factors that will affect M&A activity in about over-paying, while also making uncertain IPO process. Deal volume the coming year include the following: some sellers less willing to accept for sales of VC-backed companies will buyer stock as consideration because of depend in part on the extent of the ■■ Macroeconomic Conditions: The US perceptions of limited upside potential ongoing correction in private company economy lost momentum over the and significant downside risk. valuations, as well as the health of the last three months of 2016 and the year IPO market. Although the number of ended with an annual growth rate ■■ Private Equity Impact: On the buy US venture-backed IPOs declined for of 1.6%—its weakest performance in side, private equity firms are sitting the second consecutive year in 2016, five years, while the global economy on record levels of “dry powder” to their solid aftermarket performance remains mired in the pattern of low deploy, but the supply of capital is is likely to generate demand for growth that has persisted for a decade. intensifying competition for attractive additional VC-backed IPOs in 2017. < Moreover, after raising its benchmark deals and driving up prices. On the Takeover Defenses: An Update 5
Set forth below is a summary of stock but opposed by management and PROHIBITION OF STOCKHOLDERS’ common takeover defenses available the board. In addition, opponents believe RIGHT TO ACT BY WRITTEN CONSENT to public companies—both established that supermajority requirements—which public companies and IPO companies— generally require votes of 60% to 80% Should stockholders have the right and some of the questions to be considered of the total number of outstanding to act by written consent without by a board in evaluating these defenses. shares—can be almost impossible to holding a stockholders’ meeting? satisfy because of abstentions, broker Written consents of stockholders can be CLASSIFIED BOARDS non-votes and voter apathy, thereby an efficient means to obtain stockholder frustrating the will of stockholders. approvals without the need for convening Should the entire board stand for re- election at each annual meeting, or Trends in Takeover Defenses Among IPO Companies should directors serve staggered three-year terms, with only one-third of the board 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 standing for re-election each year? Overall: 77% Overall: 77% 90% Supporters of classified, or “staggered,” 83% 85% 76% 76% boards believe that classified boards 73% 75% 74% 85% 83% 88% enhance the knowledge, experience and 69% 75% 73% 72% 80% 76% expertise of boards by helping ensure 58% 53% 50% that, at any given time, a majority of the directors will have experience and Section 203 of the Delaware Classified board corporation statute (not opt out)* familiarity with the company’s business. These supporters believe classified boards Overall: 76% Overall: 96% promote continuity and stability, which 88% 91% 88% in turn allow companies to focus on 100% 99% 100% 99% 98% 100% 70% 71% 87% long-term strategic planning, ultimately 60% 62% 98% 97% 86% leading to a better competitive position 45% 44% and maximizing stockholder value. 75% Opponents of classified boards, on the Supermajority voting requirements to approve other hand, believe that annual elections mergers or change corporate charter and bylaws Blank check preferred stock increase director accountability, which in turn improves director performance, Overall: 88% Overall: 8% 11% and that classified boards entrench 10% 10% 10% directors and foster insularity. 6% 9% 96% 96% 5% 5% 92% 93% 91% 4% 79% 75% 78% 89% SUPERMAJORITY VOTING 70% None REQUIREMENTS Prohibition of stockholders’ What stockholder vote should be right to act by written consent Multi-class capital structure required to approve mergers or amend 90% the corporate charter or bylaws: a Overall: 94% Overall: 59% 78% 99% 65% majority or a “supermajority”? 96% 98% 96% 97% 93% 96% 85% 52% Advocates for supermajority vote 86% requirements claim that these provisions 41% help preserve and maximize the value 65% of the company for all stockholders by Limitation of stockholders’ 14% ensuring that important corporate actions right to call special meetings Exclusive forum provisions* are taken only when it is the clear will of the stockholders. Opponents, however, Overall: 95% Overall: 1% believe that majority-vote requirements 98% 98% 96% 96% 96% make the company more accountable 94% 8% 91% 93% to stockholders by making it easier for 92% stockholders to make changes in how None None None None None None None None None the company is governed. Supermajority 85% requirements are also viewed by their detractors as entrenchment provisions Advance notice requirements Stockholder rights plan used to block initiatives that are supported *Delaware corporations only by holders of a majority of the company’s Source: WilmerHale analysis of SEC filings from 2007 to 2016 (2011–2016 only for exclusive forum provisions) for US issuers. 6 Takeover Defenses: An Update
a formal meeting, but can result in a Prevalence of Takeover Defenses Among IPO Companies single stockholder or small number of and Established Public Companies stockholders being able to take action without prior notice or any opportunity IPO ESTABLISHED PUBLIC COMPANIES for other stockholders to be heard. If COMPANIES S&P 500 RUSSELL 3000 stockholders are not permitted to act by Classified board 77% 11% 43% written consent, all stockholder action 21% to 41%, 18% to 57%, must be taken at a duly called stockholders’ Supermajority voting requirements to approve 76% dependng on type dependng on type meeting for which stockholders have mergers or change corporate charter and bylaws of action of action been provided detailed information Prohibition of stockholders’ right to act about the matters to be voted on, and 88% 71% 72% by written consent at which there is an opportunity to ask questions about proposed business. Limitation of stockholders’ right to call 94% 37% 51% special meetings
LIMITATION OF STOCKHOLDERS’ Advance notice requirements 95% 97% 91% RIGHT TO CALL SPECIAL MEETINGS Section 203 of the Delaware corporation statute 77% 95% 83% Should stockholders have the right to call (not opt out)* special meetings, or should they be required to wait until the next annual meeting of Blank check preferred stock 96% 95% 94% stockholders to present matters for action? Multi-class capital structure 8% 9% 11% If stockholders have the right to call special meetings of stockholders, one or a few Exclusive forum provisions* 59% 36% 38% stockholders may be able to call a special meeting, which can result in abrupt Stockholder rights plan 1% 3% 5% changes in board composition, interfere with the board’s ability to maximize *Delaware corporations only Source: IPO company data is based on WilmerHale analysis of SEC filings from 2007 to 2016 (2011–2016 only for exclusive forum provisions) for US issuers. stockholder value, or result in significant Established public company data is from SharkRepellent.net at year-end 2016. expense and disruption to ongoing corporate focus. A requirement that only of director nominations, provide important stockholder and the sale of more than 10% the board or specified officers or directors information about the experience and of the company’s assets. In general, an are authorized to call special meetings of suitability of board candidates. These interested stockholder is any stockholder stockholders could, however, have the effect provisions could also have the effect that, together with its affiliates, beneficially of delaying until the next annual meeting of delaying until the next stockholders’ owns 15% or more of the company’s actions that are favored by the holders of meeting actions that are favored by the stock. A public company incorporated a majority of the company’s stock. holders of a majority of the company’s stock. in Delaware is automatically subject to Section 203, unless it opts out in its original corporate charter or pursuant ADVANCE NOTICE REQUIREMENTS STATE ANTI-TAKEOVER LAWS to a subsequent charter or bylaw Should stockholders be required to notify the Should the company opt out of any amendment approved by stockholders. company in advance of director nominations state anti-takeover laws to which it Remaining subject to Section 203 helps or other matters that the stockholders would is subject, such as Section 203 of the eliminate the ability of an insurgent to like to act upon at a stockholders’ meeting? Delaware corporation statute? accumulate and/or exercise control without paying a reasonable control premium, Advance notice requirements provide Section 203 prevents a public company but could prevent stockholders from that stockholders at a meeting may incorporated in Delaware (where more accepting an attractive acquisition offer only consider and act upon director than 90% of all IPO companies are that is opposed by an entrenched board. nominations or other proposals that have incorporated) from engaging in a “business been specified in the notice of meeting combination” with any “interested BLANK CHECK PREFERRED STOCK and brought before the meeting by or at the stockholder” for three years following direction of the board, or by a stockholder the time that the person became an Should the board be authorized to designate who has delivered timely written notice to interested stockholder, unless, among other the terms of series of preferred stock the company. Advance notice requirements exceptions, the interested stockholder without obtaining stockholder approval? afford the board ample time to consider attained such status with the approval the desirability of stockholder proposals of the board. A business combination When blank check preferred stock is and ensure that they are consistent with includes, among other things, a merger authorized, the board has the right to issue the company’s objectives and, in the case or consolidation involving the interested shares of preferred stock in one or more Takeover Defenses: An Update 7
Differences in Anti-Takeover Practices Among Types of IPO Companies the exclusive forum in which it and its directors may be sued by stockholders?
ALL IPO VC-BACKED PE-BACKED OTHER IPO Following a 2010 decision by the Delaware COMPANIES COMPANIES COMPANIES COMPANIES Court of Chancery (and now expressly authorized by the Delaware corporation Classified board 77% 88% 79% 49% statute), numerous Delaware corporations Supermajority voting requirements to have included provisions in their approve mergers or change corporate 76% 84% 79% 52% corporate charter or bylaws to the effect charter and bylaws that the Court of Chancery of the State Prohibition of stockholders’ right to act of Delaware is the exclusive forum in 88% 94% 91% 70% by written consent which state-law stockholder claims may be brought against the company and its Limitation of stockholders’ right to call 94% 97% 97% 82% special meetings directors. Proponents of exclusive forum provisions are motivated by a desire to Advance notice requirements 95% 98% 98% 84% adjudicate stockholder claims in a single jurisdiction that has a well-developed Section 203 of the Delaware corporation 77% 96% 40% 73% and predictable body of corporate case law statute (not opt out)* and an experienced judiciary. Opponents Blank check preferred stock 96% 97% 99% 90% argue that these provisions deny aggrieved stockholders the ability to bring litigation Multi-class capital structure 8% 7% 5% 12% in a court or jurisdiction of their choosing.
Exclusive forum provisions* 59% 55% 68% 54% STOCKHOLDER RIGHTS PLANS
Stockholder rights plan 1% 2% 0.5% 1% Should the company establish a poison pill? A stockholder rights plan (often referred *Delaware corporations only Source: WilmerHale analysis of SEC filings from 2007 to 2016 (2011–2016 only for exclusive forum provisions) for US issuers. to as a “poison pill”) is a contractual right that allows all stockholders—other than those who acquire more than a series without stockholder approval under every stockholder (a “one share, one vote” specified percentage of the company’s state corporate law (but subject to stock model), some companies go public with stock—to purchase additional securities exchange rules), and has the discretion a multi-class capital structure under which of the company at a discounted price to determine the rights and preferences, specified pre-IPO stockholders (typically if a stockholder accumulates shares of including voting rights, dividend rights, founders) hold shares of common stock common stock in excess of the specified conversion rights, redemption privileges that are entitled to multiple votes per share, threshold, thereby significantly diluting and liquidation preferences, of each such while the public is issued a separate class that stockholder’s economic and voting series of preferred stock. The availability of common stock that is entitled to only power. Supporters believe rights plans are of blank check preferred stock can one vote per share. Use of a multi-class an important planning and strategic device eliminate delays associated with a capital structure facilitates the ability of because they give the board time stockholder vote on specific issuances, the holders of the high-vote stock to retain to evaluate unsolicited offers and to thereby facilitating financings and strategic voting control over the company and to consider alternatives. Rights plans can alliances. The board’s ability, without pursue strategies to maximize long-term also deter a change in control without further stockholder action, to issue stockholder value. Critics believe that a the payment of a control premium to preferred stock or rights to purchase multi-class capital structure entrenches the all stockholders, as well as partial offers preferred stock can also be used as an holders of the high-vote stock, insulating and “two-tier” tender offers. Opponents anti-takeover device. them from takeover attempts and the view rights plans, which can generally will of public stockholders, and that the be adopted by board action at any time MULTI-CLASS CAPITAL STRUCTURES mismatch between voting power and and without stockholder approval, as an economic interest may also increase the entrenchment device and believe that rights Should the company sell to the public possibility that the holders of the high-vote plans improperly give the board, rather a class of common stock whose voting stock will pursue a riskier business strategy. than stockholders, the power to decide rights are different from those of the whether and on what terms the company is class of common stock owned by the EXCLUSIVE FORUM PROVISIONS to be sold. When combined with a classified company’s founders or management? board, rights plans make an unfriendly Should the company stipulate in its takeover particularly difficult.< While most companies go public with a corporate charter or bylaws that the Court single class of common stock that provides of Chancery of the State of Delaware is the same voting and economic rights to 8 Developments in Merger Control: It Ain’t Over ’til It’s Over
Two recent enforcement actions, ALTICE: GUN-JUMPING and a buyer may not influence the ordinary one in the United States and one in BECOMES INTERNATIONAL course day-to-day operations of the seller. Europe, serve as reminders that there are The antitrust agencies have offered limited In 2014, cable operator Altice obtained antitrust risks to be addressed after a deal guidance regarding permissible activities clearance from the French Competition is signed and even after it has closed. prior to closing. They do, however, Authority (Autorité de la Concurrence, understand that parties need to engage ADC) to purchase SFR, one of the main VALEANT: MORE ENFORCEMENT in some integration planning before mobile phone operators in France. Shortly AGAINST NON-REPORTABLE closing and that a buyer may have a thereafter, the ADC conducted dawn TRANSACTIONS legitimate reason for placing limits on the raids on both companies (and another non–ordinary course behavior of a seller. In 2015, Valeant acquired Paragon for Altice subsidiary). In those raids, the ADC discovered evidence that Altice $69 million, below the size-of-transaction TAKEAWAYS threshold for notifications pursuant to the had been informed of and had involved Hart-Scott-Rodino (HSR) Act. Paragon itself in some of SFR’s corporate decisions The Valeant and Altice cases are reminders makes polymer discs (known as “buttons”) before obtaining clearance from the ADC that merger control is not limited to that are used to make gas permeable and consummating the transaction. reportable transactions and the substantive contact lenses. Bausch + Lomb, a Valeant For example, it appears that Altice had antitrust/competition merits. Valeant subsidiary, is also a major producer of approved a tender offer in which SFR is yet another reminder that parties to buttons for gas permeable lenses. After participated and the renegotiation of non-reportable transactions that may acquiring Paragon, Valeant later acquired an infrastructure agreement with a bring anticompetitive effects to a US Pelican Products, the only FDA-approved competitor; Altice apparently also obtained market need to recognize that the lack supplier of packaging for a particular type the withdrawal of a specific discount of a filing obligation does not mean that the transaction is free from antitrust of contact lens, potentially giving Bausch offer and influenced SFR’s M&A strategy. review or enforcement. Parties to mergers + Lomb sole access to Pelican’s packaging. Effectively, Altice gained control of SFR at least in part prior to receiving regulatory between competitors or mergers with Even though neither transaction approval. To resolve these allegations, potential vertical anticompetitive effects, was reportable and both had been Altice paid a fine of €80 million. in particular, should consider potential consummated, the Federal Trade antitrust risk, even for small transactions. Commission (FTC) opened an In most jurisdictions, including the There are ways to manage risk of antitrust investigation of both acquisitions. In United States, if a transaction must be enforcement for non-reportable transactions November 2016, the FTC challenged reported to the antitrust authorities, the (including, in some cases, voluntary Valeant’s acquisition of Paragon, alleging transaction may not be consummated notification of the transaction pre-closing), but parties to a transaction may have that Valeant and Paragon combined until the reviewing agency has granted inconsistent incentives and so the level of accounted for 65–100% of all buttons clearance, and the parties must remain risk and available methods of mitigating risk produced for three different types of gas truly separate entities until closing. If one should be carefully considered pre-signing. permeable lenses. In settlement, Valeant party begins to operate less than fully agreed to divest the Paragon business independently of the other party before Altice is a reminder that managing the and Pelican assets it had acquired—more clearance, that is known as “gun-jumping.” period between signing and closing can be than a year after the deals had closed. To date, the vast majority of gun-jumping complex when the transaction is reported in enforcement actions have been in the one or more jurisdictions. In some cases, While such investigations are unusual United States. In foreign jurisdictions, the review period may be brief and therefore in other jurisdictions, the US antitrust enforcement has varied from sporadic the complexity is limited. However, if the agencies regularly investigate and bring to nonexistent; indeed, the case against transaction raises material antitrust issues, enforcement actions against unreported Altice is the ADC’s first gun-jumping the review period may be lengthy, and in and/or consummated transactions. If enforcement action. As this case shows, those cases any integration planning process one of the agencies learns about a non- there is growing interest in gun-jumping or consultation on non–ordinary course reportable transaction that it thinks may enforcement outside of the United States, matters must be handled with care to avoid raise antitrust issues, it can and often and it is reasonable to expect more such gun-jumping violations. While only a few— does open an investigation. Because actions from non-US authorities. and, for the most part, only the most such investigations are not subject to egregious—gun-jumping violations result the strict timelines in the HSR Act, Determining what is permissible and what in enforcement, any conduct that the they can be lengthy and wide-reaching. is prohibited in the period between signing agencies may view as gun-jumping can Accordingly, a party to a transaction that and closing of a reportable transaction is result in delay of the substantive merger raises antitrust issues cannot relax just complex. In general, the parties must investigation or harm the parties’ credibility because the transaction is not reportable. continue to act as independent entities in arguing the substantive competition until closing. They may not begin to merits, and will definitely increase the cost integrate their businesses before closing, of the review process. < The Common Interest Privilege: Protecting Legal Discussions Among Deal Parties 9
During a deal, counsel for both Relative Strength of Common Interest Protection for Typical Deal Communications sides confront myriad legal issues STRENGTH OF COMMON TOPIC OF COMMUNICATION regarding valuation, tax treatment and INTEREST PROTECTION regulatory compliance. Though on Defense strategies regarding anticipated shareholder activist groups Strong opposite sides of the transaction, counsel opposing the transaction may believe coordination on these issues Defense strategies regarding anticipated government antitrust Strong will improve the deal’s outcome. But investigations such coordination also risks destroying Potential environmental liability associated with soon-to-be acquired Moderate a privilege that otherwise protects facilities attorney-client communications from Potential tax strategies Moderate disclosure to adversaries in subsequent litigation. Fortunately, the common Regulatory disclosures Weak interest doctrine allows deal parties, in certain circumstances, to share otherwise Interpretation of labor and employment contractual obligations Weak privileged material while also protecting it from disclosure to future adversaries. the threat of impending litigation) agreement, communications regarding PROTECTED COMMUNICATIONS are less likely to be protected. due diligence are likely not protected because the parties’ interests are still Given that communications regarding Ordinarily, confidential communications adverse. In contrast, communications expected litigation are more assured of between attorney and client are protected regarding a regulatory inquiry will likely protection, parties may be tempted to from disclosure to third parties under the be protected if those communications brand nearly all of a deal’s joint legal attorney-client privilege. Likewise, the occur after an agreement has been concerns as “anticipated litigation.” work product doctrine protects documents signed, when the parties’ interests have But that strategy may have unintended prepared as a result of reasonably aligned. Thus, parties should not share negative consequences, including: anticipated or ongoing litigation. These sensitive information until their legal protections can be lost, however, if a ■■ unnerving the other party by unduly interests have aligned in some respect. communication is disclosed to someone emphasizing the threat of litigation; outside the attorney-client relationship. ■■ triggering disclosure obligations to JURISDICTION IN WHICH The common legal interest doctrine shareholders, who may use the litigation PRIVILEGE WILL BE ASSESSED provides an exception to this rule. It as grounds to oppose the deal; or Perhaps the biggest factor in determining permits parties represented by separate ■■ exposing both parties to disruptive and whether the communication will be counsel but nonetheless sharing a expensive document retention obligations. protected is the court in which it will common legal interest to communicate be examined. Courts have varying regarding that legal issue without PERSONS MAKING THE interpretations of the common interest waiving the attorney-client privilege. COMMUNICATION doctrine. New York’s highest court recently The doctrine presents a tantalizing held that its protections do not apply Communications between non-lawyers option—parties can communicate shared unless litigation is ongoing or reasonably are more likely to be viewed as non-legal legal concerns without fear of being anticipated. Other states—for instance, business communications and less likely exposed. Nonetheless, parties should Texas and Florida—have a similarly limited to be protected by the doctrine than proceed cautiously, as the strength of the interpretation of the doctrine. In contrast, communications between attorneys. Some doctrine’s protection will depend on: (1) Delaware protects communications courts have even held that the doctrine the subject of the communication, (2) the from disclosure regardless of whether only protects communications between persons making the communication, (3) litigation is pending or anticipated. parties’ lawyers. Deal parties should, the parties’ relationship at the time of the accordingly, communicate through communication, and (4) the jurisdiction their respective counsel to the extent CONCLUSION in which the privilege will be assessed. practical or (if non-lawyers must make The common interest doctrine can the communication) make clear that the SUBJECT OF THE COMMUNICATION protect privileged information shared in communication is at the request of lawyers. a transaction, but it is a tool that should Courts generally agree that be treated with caution. Communications communications regarding a shared PARTIES’ RELATIONSHIP AT unrelated to anticipated litigation are threat of litigation are protected. In TIME OF COMMUNICATION vulnerable to disclosure, but parties contrast, communications regarding may guard against this risk by being The timing of the communication is other shared legal concerns (absent mindful of the factors noted above. < also crucial. Before parties sign a merger 10 Key Earnout Lessons for Buyers and Sellers
Acquirers sometimes pay a ■■ Sanofi was slow to respond to FDA parties negotiating post-closing earnout portion of the acquisition price correspondence prior to the passing obligations in an acquisition agreement: through an “earnout,” in which the of the milestone date, after which date ■■ seller (or its stockholders) are eligible its rate of correspondence increased. Phrases such as “diligent efforts” and to receive additional payments based This allegedly caused the FDA to “commercially reasonable efforts,” on the post-closing performance of the approve the drug only as a third-line which are frequently used in earnout acquired business. An earnout can be treatment for the relevant indication. provisions, are often undefined or a useful device to bridge a valuation poorly defined and create a significant ■■ Sanofi failed to address FDA concerns gap between buyer and seller. risk of post-closing disputes. Absent or develop an appropriate sales and contractual provisions to the contrary, In September 2016, the US District Court marketing apparatus in a timely manner. these phrases subject the post-closing for the Southern District of New York, ■■ Sanofi expended greater efforts behavior of the buyer to an objective test applying New York law, issued an opinion to commercialize a competing of the sufficiency of its efforts to achieve in UMB Bank, N.A. v. Sanofi that builds drug it was developing. the earnout, and courts will measure upon a growing line of cases addressing a buyer’s conduct against industry a buyer’s obligations when operating THE COURT’S DECISION standards or the conduct of peers (or, in a business subject to an earnout (or a Sanofi’s case, its efforts to commercialize contingent value right, the public company The court, ruling on Sanofi’s motion a competing drug candidate). equivalent). The case provides a number to dismiss, allowed the claim for ■■ of key lessons for buyers and sellers. breach of contract to proceed. It held Buyers should try to qualify any that the plaintiffs’ alleged facts were restrictions on their post-closing BACKGROUND sufficient to find that Sanofi failed business operations by providing that to use “efforts or resources normally their actions or inactions must not be In 2011, Sanofi acquired Genzyme, a used in the pharmaceutical business to “taken with the intent of avoiding or biotechnology company, for $74.00 per commercialize or promote the drug” to reducing the payment of any earnout share in cash plus a contingent value right obtain FDA approval and successfully payment” or similar language. Courts of up to $14.00 per share payable upon market the drug. In particular, the court have placed significant emphasis on achievement of specified milestones, noted that the following arguably fell this language in finding that post- including FDA approval of Lemtrada, short of “efforts or resources normally closing actions or inactions with a a clinical-stage product candidate for used” by pharmaceutical companies: justifiable business justification do not treatment of multiple sclerosis, and violate the earnout requirements. achievement of commercial milestones ■■ Sanofi’s inadequate response ■■ Courts are reluctant to infer obligations for the drug after approval. The contingent to FDA concerns; on the part of the buyer based on value rights agreement (CVR agreement) ■■ Sanofi’s delay in rolling out the implied covenant of good faith entered into by Sanofi in connection with marketing materials or assembling and fair dealing if the acquisition the merger required Sanofi to use “diligent a Lemtrada sales team; and agreement describes in reasonable efforts” to achieve the milestones. The ■■ detail what the buyer is required to do CVR agreement defined “diligent efforts” Sanofi’s lack of urgency to monetize (and perhaps more importantly, what as “using such efforts and employing Lemtrada in light of an expiring patent. the buyer is not required to do). such resources normally used by Persons The court compared all of these in the pharmaceutical business.” deficiencies unfavorably to Sanofi’s ■■ Conversely, courts are more willing directly analogous efforts to promote to allow breach of contract claims Following the completion of the its other competing drug. to proceed if the sellers can point to acquisition, Sanofi did not obtain FDA specific obligations in an acquisition approval of Lemtrada by the applicable However, the court dismissed the claim agreement that the buyer has allegedly milestone deadline, or meet the first sales for breach of the implied covenant of failed to meet. Sellers should consider milestone. The trustee on behalf of the good faith and fair dealing because carefully what obligations are important rights holders then brought a claim for it was based on the same facts as the to the achievement of the earnout and breach of contract, alleging that Sanofi breach of contract claim, noting that, should negotiate for their inclusion breached the express terms of the CVR “under New York law … a separate in the contract, and buyers should agreement by failing to use “diligent cause of action for breach of the implied consider what obligations they are efforts” and also breached the implied covenant of good faith and fair dealing willing to accept. It can be in both covenant of good faith and fair dealing. … cannot lie when a breach of contract parties’ interest to describe post-closing In support of its claims, the trustee claim based on the same facts is already requirements in reasonable detail. alleged, among other things, that: pleaded.” The implied covenant “does not create obligations that go beyond those ■■ While buyers generally do not have a ■■ Although the FDA had expressed intended and stated in … the contract.” common law obligation to maximize concerns about the methodology an earnout, they should not take used in Lemtrada’s Phase III trials, actions intended to harm the acquired Sanofi nevertheless proceeded LESSONS company’s ability to achieve the earnout with the same methodology. Sanofi builds on a line of cases in Delaware without a bona fide business reason. < and New York offering lessons for Law Firm Rankings 11
Counsel in Sales of Eastern US VC-Backed Companies – 1996 to 2016
Wilmer Cutler Pickering Hale and Dorr LLP 236
Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP 158
Cooley LLP 118
Goodwin Procter LLP 113
Morgan, Lewis & Bockius LLP 79
Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. 72
DLA Piper LLP (US) 70
Wilson Sonsini Goodrich & Rosati, P.C. 70
Morris, Manning & Martin, LLP 62
Foley Hoag LLP 52
Ropes & Gray LLP 52
Locke Lord LLP 48
Nixon Peabody LLP 43
Hutchison PLLC 33
Choate Hall & Stewart LLP 29
The above chart is based on VC-backed companies located east of the Mississippi River. Source: Dow Jones VentureSource
Counsel in Sales of Eastern US VC-Backed Tech and Life Sciences Companies – 2008 to 2016
Technology Life Sciences
Wilmer Cutler Pickering Hale and Dorr LLP 63 29 92
Cooley LLP 49 15 64
Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP 29 14 43
Goodwin Procter LLP 29 5 34
DLA Piper LLP (US) 18 9 27
Wilson Sonsini Goodrich & Rosati, P..C. 17 7 24
Morgan, Lewis & Bockius LLP 19 4 23
Pepper Hamilton LLP 8 14 22
Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. 14 6 20
Nelson Mullins Riley & Scarborough LLP 11 7 18
Foley Hoag LLP 10 7 17
Foley & Lardner LLP 10 4 14
Morse, Barnes-Brown & Pendleton, PC 5 8 13
Morris, Manning & Martin, LLP 6 6 12
Wyrick Robbins Yates & Ponton LLP 8 3 11
0 2The above chart is based on VC-backed companies located east of the Mississippi River. Source: Dow Jones VentureSource Counsel of Choice for Mergers and Acquisitions serving industry leaders in technology, life sciences, energy and cleantech, financial services, DEFENSE, communications and beyond
Acquisition of Acquisition of Sale of medical imaging business to Acquisition by Acquisition of Sale of Gulf Oil business to Acquisition by Acquisition of Serena Software Soha Systems Varian Medical Systems salesforce.com 3scale ArcLight Capital Partners Hudson’s Bay Company Newport Corporation $540,000,000 $60,000,000 $276,000,000 $2,800,000,000 (co-counsel) $980,000,000 (including contingent payments) $29,100,000 Undisclosed $250,000,000 Pending July 2016 May 2016 October 2016 June 2016 December 2015 February 2016 (as of March 31, 2017) April 2016
Sale of global portfolio of hemostasis products to Acquisition of Acquisition of Acquisition of the Acquisition of Acquisition of software services business of Acquisition of Acquisition by Acquisition of Mallinckrodt Linear Technology Viventia Bio Electronic Funds Source FitnessKeeper SPARC Softmart FP Resources USA Phenomenex $410,000,000 $14,800,000,000 $35,400,000 $1,485,000,000 (including contingent payments) Undisclosed (co-counsel) (including contingent payments) Undisclosed $34,000,000 $65,500,000 Undisclosed July 2016 February 2016 March 2016 March 2017 September 2016 October 2015 May 2016 August 2016 November 2016
Acquisition of Acquisition of Alfa Aesar research Acquisition of Acquisition by chemicals business of Acquisition by Acquisition by Acquisition of Acquisition by Oncura Partners Diagnostics Empower Software Sucampo Pharmaceuticals Johnson Matthey REWE Group salesforce.com MilkMakers Hologic $19,000,000 Undisclosed $200,000,000 (including contingent payments) £256,000,000 Undisclosed $32,400,000 Undisclosed $1,650,000,000 January 2016 April 2017 January 2016 September 2015 December 2016 April 2016 August 2016 March 2017
Sale of 25% equity interest by Blackstone to Sale of US wealth and investment management business to Acquisition by Acquisition of Acquisition by Acquisition of Acquisition by HNA Tourism Group Stifel Thomson Reuters ExecuPharm Google Ace Data Centers OSI Systems $6,500,000,000 (counsel to special committee) Undisclosed Undisclosed $135,000,000 Undisclosed $73,300,000 $269,000,000 March 2017 December 2015 January 2017 October 2016 August 2016 September 2015 September 2016 14 Special Considerations in California M&A Deals
In addition to the deal-structuring final merger agreement. This mechanism employees, rather than investors— issues that typically arise in can eliminate the delays between signing can block or fail to approve a merger any acquisition, M&A transactions the merger agreement and obtaining transaction even if such holders hold less involving a party incorporated or based stockholder approval—and the risk of a than a majority of the total outstanding in California raise a number of special competing suitor emerging in the interim— shares of the target. In contrast, Delaware issues and opportunities. Some of these that formerly existed under Delaware law. law requires a merger to be approved issues affect permissible deal terms, deal by the affirmative vote of the holders of a majority of the outstanding stock structure and the manner in which a BUSINESS COMBINATIONS deal is consummated, and others apply entitled to vote on the matter; no class generally to California employees. The California Corporations Code or series voting is mandated by statute. has a number of other provisions that ■■ Section 1203 requires an “affirmative DEAL LOCKUPS may affect acquisitions and other opinion in writing as to the fairness business combination transactions: of the consideration to the shareholders” Since the Delaware Supreme Court’s of the subject corporation in transactions ■■ Section 1101 requires that, in a merger decision in Omnicare in 2003 limited the with an “interested party.” The statute involving a California corporation, ability of an acquirer to guarantee deal is not confined to an opinion as to the all shares of the same class or series approval by means of voting agreements, fairness of the consideration “from a of any constituent corporation be private company acquisitions have financial point of view”—the normal “treated equally with respect to any formulation in an investment banking routinely employed simultaneous “sign- distribution of cash, rights, securities, fairness opinion—and it is unclear and-close” and “sign-and-vote” transaction or other property” unless all holders of whether, and in what circumstances, structures. In the former, the closing the class or series consent otherwise. a more extensive opinion may be occurs concurrently with the initial signing This requirement is potentially stricter required in a transaction subject to the of the acquisition agreement. In the latter, than the comparable rules in Delaware, statute. Section 1203 does not apply in shareholders provide their approval by which have been interpreted—at least in acquisitions where the subject corporation written consent immediately after the some cases—to allow different forms of has fewer than 100 shareholders, or definitive acquisition agreement is signed. payment to be made to different holders in which the issuance of securities is of the same class of stock, as long as qualified after a fairness hearing under Although California courts have not equivalent value is paid and minority California law, as discussed below. considered deal lockups and it is unclear shareholders are not disadvantaged. whether California would follow ■■ Omnicare at all, California law does Section 1101 also limits the ability of “QUASI-CALIFORNIA” CORPORATIONS provide more flexibility than Delaware an acquirer in a “two-step” acquisition transaction (such as a tender offer Section 2115 of the California law in the protocol for obtaining followed by a second-step merger) to Corporations Code—the “quasi- merger approval from shareholders. cash out untendered minority shares. California” corporation statute—purports California law does not require a signed If an acquirer holds between 50% and to impose various California corporate merger agreement to be adopted by 90% of a California target’s shares, law requirements on corporations shareholders, but only requires shareholder the target’s non-redeemable common incorporated in other states, including approval of the “principal terms” of the shares and non-redeemable equity Delaware, if specified tests are met. The merger. Shareholder approval can occur securities may be converted only into law applies to any company other than a before or after board approval of the non-redeemable common shares of public company with shares listed on the merger and the signing of the merger the surviving or acquiring corporation Nasdaq Capital Market, Nasdaq Global unless all holders of the class consent agreement. Where the target is a California Market, Nasdaq Global Select Market, otherwise. This means that, in all-cash corporation, shareholder approval can NYSE or NYSE MKT, if that company: or part-cash two-step acquisitions of proceed contemporaneously with the ■■ California corporations, the minimum conducts a majority of its business in signing of the definitive agreement— tender condition needs to be 90%, which California (as measured by property, and can even precede signing if the can be a difficult threshold to reach. payroll and sales tests); and principal terms of the transaction do ■■ ■■ has a majority of its outstanding not change after shareholder approval. With limited exceptions, Section 1201 requires that the principal terms of a voting securities held of record by By contrast, Delaware law requires the merger be approved by the holders of persons having California addresses. signed merger agreement to be adopted a majority of each class of outstanding If a corporation is subject to the quasi- by stockholders. Since 2014, however, shares (unless a higher percentage is California corporation statute, a number Delaware has permitted prospective specified in the corporate charter). of California corporate law provisions Therefore, the holders of any class of execution of stockholder consents that apply—purportedly to the exclusion of outstanding shares—including common can become effective upon the occurrence the law of the corporation’s jurisdiction stock, which generally is controlled of a subsequent event, such as the board of incorporation—including provisions by current and former founders and approval, execution and delivery of a that directly or indirectly affect Special Considerations in California M&A Deals 15
M&A transactions. These California alternative to SEC registration that on the grounds that they are contrary to provisions, and their counterparts still results in essentially freely public policy. The enforcement of non- under Delaware law, address: tradable stock—a “fairness hearing” competition agreements in California authorized by Section 3(a)(10) of is particularly problematic, because a ■■ shareholder approval requirements in the Securities Act of 1933. California statute provides that non- acquisitions (which are generally more competition agreements are unenforceable extensive than the stockholder approval The fairness hearing procedure is available except in very limited circumstances, such requirements under Delaware law); where either party to the transaction as in connection with the sale of a business. ■■ dissenters’ rights (which differ from is a California corporation, or a quasi- Delaware law in a number of respects); California corporation as discussed In addition, California courts generally above. Fairness hearings are also possible will not enforce a non-competition ■■ limitations on corporate distributions if a significant number of the target’s agreement governed by the laws of (which are more restrictive than under Delaware law); shareholders are California residents, another state unless the non-competition regardless of the parties’ jurisdictions of agreement would be enforceable under ■■ indemnification of directors and officers incorporation, or if the issuer is physically California law. If a former employee (which is more limited than in Delaware); located in California or conducts a against whom an out-of-state company ■■ mandatory cumulative voting in significant portion of its business in seeks to enforce a non-competition director elections (permitted but California. There is no hard-and-fast agreement is a resident of California not required in Delaware); and rule as to how many target shareholders at the time enforcement is sought, this ■■ the availability of the California must reside in California before an limitation can preclude enforcement in fairness hearing procedure described acquisition can qualify for a California California of an otherwise valid non- below to approve the issuance of fairness hearing, but transactions have competition agreement entered into when stock in an M&A transaction (an qualified when a significant minority the employee resided in another state, even alternative to SEC registration that has of the target’s shareholders have been if the parties’ contract expressly provided no counterpart in Delaware law). California residents. There also is no that the law of that state governed. definitive guidance on what constitutes Some California courts, however, have In 2005, the Delaware Supreme Court held conducting a significant portion of a shown a willingness to enforce the that Section 2115 is invalid as applied company’s business in California. parties’ choice of law provision when it to a Delaware corporation. Although appeared that the former employee had existing California precedent upholds A fairness hearing is conducted before moved to California in an effort to avoid Section 2115, an appellate case in 2012 a hearing officer of the California his or her contractual obligations. suggested that Section 2115 cannot compel Department of Business Oversight. California law to be applied when the The hearing officer reviews some of the STOCK OPTIONS matter falls within a corporation’s internal disclosure documents, but there are few affairs (for example, voting rights rules governing their content, and the If any California residents are to receive of shareholders, payment of dividends documents—a notice to shareholders of options or other equity incentives, then to shareholders, and the procedural the hearing, followed by an information the stock option or other equity incentive requirements of shareholder derivative statement—are much less extensive than a plan must comply with California suits). However, no California appellate proxy statement or registration statement law. For example, an option must be court has squarely ruled on the matter governed by SEC rules. At the conclusion of exercisable (to the extent vested) for at since the Delaware decision. Unless the hearing, and assuming that the hearing least six months following termination of and until Section 2115 is invalidated officer determines that the proposed employment due to death or permanent by the California Supreme Court, a transaction terms are fair, a permit is and total disability and, unless the non-California corporation acts at issued that “qualifies” the acquirer’s optionee is terminated for cause, for at its peril in ignoring this statute, since its securities for issuance in the transaction. least 30 days following termination of application to out-of-state corporations employment for any other reason. may depend on forum shopping and a Fairness hearings are open to the race to the courthouse. Careful transaction public. It is possible, but unusual, for a If a company does not wish to extend planning is required if a non-California competitor or another bidder to appear these rights to all plan participants, it corporation is deemed to be a “quasi- at the hearing and contest the fairness can use a separate form of agreement California” corporation. of the transaction—for example, by containing the required provisions for making a higher bid on the spot. California participants. California option FAIRNESS HEARINGS and equity incentive plan requirements NON-COMPETITION AGREEMENTS do not apply to a public company to In M&A transactions involving the the extent that it registers option shares Courts are sometimes reluctant to issuance of stock, California law offers with the SEC on a Form S-8. < a relatively efficient and inexpensive enforce non-competition agreements 16 Acquisition Financial Statement Requirements in an IPO
The basic financial statement SIGNIFICANT ACQUISITIONS been signed and closing is subject only requirements for a company going to normal closing conditions. Even if General Requirements public are well known. No sensible a potential transaction is not probable Significance Tests. Subject to the limited company would embark on the IPO and thus does not require separate exceptions described below and based process if it did not believe that it could financial statements under Rule 3-05, on the application of three significance satisfy these obligations. Less familiar some disclosure about the transaction tests, Rule 3-05 of Regulation S-X requires to many IPO candidates—and sometimes may be required in the Form S-1 to separate financial statements for a the cause of unpleasant surprises for satisfy general antifraud requirements, significant “business” that is acquired by unsuspecting companies, even late in the or if a portion of the IPO proceeds will a company during the periods presented process—is the possible need for additional be used to finance the acquisition. in its Form S-1 registration statement. financial statements and pro forma Separate financial statements for a Treatment of Related Businesses. financial information in circumstances business whose acquisition is “probable” Regulation S-X treats completed involving significant acquisitions, but not yet completed are also required or probable acquisitions of “related” dispositions and equity investments. if the proposed acquisition meets—at the businesses as a single transaction for These additional requirements, which 50% level—any of the three significance the purposes of determining whether are described below, are imposed by SEC tests for acquisition financials. financial statements are required to rules and are not required by GAAP. be included and, if so, which financial Definition of “Business.” Rule 11-01(d) statements are needed. For this purpose, SIGNIFICANCE TESTS FOR of Regulation S-X provides that the term businesses are deemed to be related ACQUISITION FINANCIALS “business” should be evaluated in light if they are under common control or of the facts and circumstances involved management; the acquisition of one The significance tests for acquisition and whether there is sufficient continuity business is conditioned on the acquisition financials are based on the definition of the acquired entity’s operations prior of the other business; or each acquisition of a “significant subsidiary” under Rule to and after the acquisition to make is conditioned on a single common event. 1-02(w) of Regulation S-X, as follows: disclosure of prior financial information material to an understanding of future Required Periods. Depending on the ■■ Investment Test: The investments operations. A presumption exists that a significance of the business whose in and advances to the target by the separate entity, subsidiary or division is acquisition is completed or probable, company and its consolidated subsidiaries a business, but a lesser component of an the company may be required to include exceed 20% of the total assets entity may also constitute a business. separate financial statements of the of the company and its consolidated business for up to three fiscal years plus Among the facts and circumstances that subsidiaries as of the end of the most any subsequent interim period (and the should be considered in evaluating whether recently completed fiscal year. comparative prior interim period), as a lesser component of an entity constitutes well as pro forma financial information a business are whether the nature of ■■ Asset Test: The proportionate share presenting the combination of the the revenue-producing activity of the of the company and its consolidated company and the acquired business for the component will remain generally the same subsidiaries of the total assets (after most recent fiscal year and any subsequent as before the acquisition, and whether intercompany eliminations) of the interim period (but not the comparative any of the following attributes remain target exceeds 20% of the total assets prior interim period). The periods for with the component after the acquisition: of the company and its consolidated which separate financial statements are physical facilities, employee base, market subsidiaries as of the end of the most required are determined by reference to the distribution system, sales force, customer significance tests for acquisition financials. recently completed fiscal year. base, operating rights, production techniques or trade names. In practice, the In some circumstances, Rule 3-06 of ■■ Income Test: The equity of the term “business” is interpreted broadly, and Regulation S-X permits audited financial company and its consolidated most acquisitions meeting the applicable statements of an acquired business (but subsidiaries in the target’s income significance tests trigger the requirement not of the registrant) covering a period from continuing operations before for separate financial statements. of nine to twelve months to satisfy the income taxes, extraordinary items requirement of financial statements for and cumulative effect of a change Definition of “Probable.” Regulation S-X a period of one year. In addition, in an in accounting principle exceeds 20% does not define the word “probable.” In IPO registration statement, an acquirer of such income of the company and general, a proposed acquisition will not may apply the period of time in which the its consolidated subsidiaries for the be considered probable if a definitive operations of an acquired business are most recently completed fiscal year. agreement has not been signed, and a included in the audited income statement proposed acquisition will be considered of the acquirer to reduce the number of probable if a definitive agreement has periods for which pre-acquisition income Acquisition Financial Statement Requirements in an IPO 17 statements are required, if there is no Periods for Which Acquisition Financials Are Required gap between the audited pre-acquisition and audited post-acquisition periods. SIGNIFICANCE TESTS STATUS OF ACQUISITION PERIODS REQUIRED
Standards for Separate Financial If all ≤ 20% Completed or probable None (unless aggregate impact of Statements. If required, the separate individually insignificant businesses financial statements generally must meet acquired since the date of most recent the standards applicable to the company’s audited balance sheet exceeds 50%) own financial statements, except: If any > 20% and all ≤ 40% Completed only One year audited plus unaudited ■■ the separate financial statements comparative interim periods need not comply with accounting standards that do not apply at all to If any > 40% and all ≤ 50% Completed only Two years audited plus unaudited nonpublic companies (such as those comparative interim periods related to segment reporting and If any > 50% Completed or probable Three years audited (two years earnings-per-share calculations); audited, if the acquirer is an EGC ■■ the effects of any nonpublic and is presenting only two years of company accounting standards audited financial statements in its IPO must be removed from the separate registration statement, and two years audited for any target company with less financial statements; and than $50 million in net revenues in its ■■ the auditor need not be registered with most recent fiscal year) plus unaudited the PCAOB and need not satisfy SEC comparative interim periods and PCAOB independence rules with respect to the company, unless the business whose acquisition has been probable for which disclosure of Potential Complications. Satisfaction completed or become probable is deemed pro forma financial information of the acquisition financial statement to be a predecessor of the company. would be material to investors. requirements of Regulation S-X can be challenging when the target business is Pro Forma Financial Information. The required pro forma information a division, business unit or collection In addition to the separate financial generally consists of a condensed balance of assets that does not have separate statements described above, Rule 11-01 sheet as of the end of the most recent financial statements and was never of Regulation S-X requires the inclusion period for which a consolidated balance separately audited. When an acquisition of pro forma financial information— sheet of the company is required in the is probable but not completed, additional presenting the combination of the Form S-1, and condensed statements complications can arise if separate company and the acquired business after of income for the company’s most recent financial statements do not exist and the giving effect to purchase adjustments—that fiscal year and any subsequent interim company does not have a contractual right meets the requirements of Rule 11-02 if: period. The company may elect to include a pro forma condensed statement of income to conduct an audit. The requirements ■■ during the company’s most recent for the corresponding interim period of of Regulation S-X can be especially fiscal year or subsequent interim the preceding fiscal year, but ordinarily problematic if an acquired business period for which a balance sheet does not unless doing so would be helpful is in a foreign jurisdiction in which is required, a significant business to explain some aspect of the combined accounting practices do not enable the combination (at the 20% level of company’s business, such as seasonality. preparation of financial statements that significance) has been completed; can be audited for SEC purposes. ■■ after the date of the company’s most When more than one acquisition has Exceptions recent balance sheet, a significant been completed or become probable Several exceptions to the acquisition business combination (at the 20% during a fiscal year, the cumulative effect level of significance) has been of the acquisitions must be assessed to financial statement requirements completed or become probable (at determine whether pro forma financial described above provide some relief. the 50% level of significance); information is required. If the cumulative ■■ EGCs: An emerging growth company ■■ the company previously was a part of effect of the acquisitions exceeds (EGC) may omit from its Form S-1 another entity and such presentation 50% for any of the significance tests financial statements of an acquired is necessary to reflect the operations described above, pro forma financial business otherwise required by and financial position of the company information must be presented for the Regulation S-X, provided that (1) the as an autonomous entity; or required periods based on the cumulative omitted financial information relates magnitude of the significance test. to a historical period that the EGC ■■ consummation of other events or reasonably believes will not be required transactions has occurred or is 18 Acquisition Financial Statement Requirements in an IPO
at the time of the contemplated offering the existing entity and showing the registration statement, the foregoing and (2) the EGC amends its Form S-1 deletion of the business being divested, periods are shortened to two years. to include all financial information along with the pro forma adjustments required by Regulation S-X at the date necessary to arrive at the remainder RELIEF FROM FINANCIAL of such amendment before distributing of the existing entity. For example, STATEMENT REQUIREMENTS a preliminary prospectus to investors. pro forma adjustments would include adjustments of interest expense arising Relief may be sought from the SEC to ■■ Recent Acquisitions: Separate financial from a revised debt structure, and removal permit the omission of any financial statements and pro forma financial of expenses that have been incurred on information are not required to be statements required by Regulation S-X or behalf of the business being divested. included in the Form S-1 for acquisitions the substitution of “appropriate statements completed within 74 days before the The periods for which pro forma financial of comparable character.” Rule 3-13 date of the final prospectus if none of information for significant dispositions requires that the relief be “consistent the significance tests are met at the must be presented are generally the same with the protection of investors.” The 50% level and the omitted financial as the required periods for significant SEC will not waive compliance with statements and pro forma financial acquisitions. In the case of discontinued GAAP accounting requirements. information are filed on a Form 8-K no operations that are not yet required to The process of seeking relief can be later than 75 days after completion of the be reflected in historical statements, acquisition. The purpose of this exception however, three years of pro forma income time-consuming and its outcome is to allow IPO companies, in most statements and any subsequent interim uncertain. The company will stand circumstances, to provide information period are required. In the case of an the best chance of success if it can about significant acquisitions on the same EGC that is presenting only two years of demonstrate that the required financial basis as existing public companies are audited financial statements in its IPO statements cannot be obtained and that required to do under the Exchange Act. registration statement, the foregoing any substituted financial information will periods are shortened to two years. provide all material financial information ■■ Roll-Up Companies: Staff Accounting needed by investors. The company can Bulletin No. 80 provides that, in the Separate financial statements for a business bolster its case by demonstrating that case of IPOs by businesses that have whose disposition has occurred or is been built by the aggregation of discrete probable are not required to be presented satisfaction of the requirement would businesses that remain substantially in the Form S-1. The pro forma financial involve “unreasonable effort or expense”— intact after acquisition, the company may information described above will suffice. the general standard contained in Rule 409 assess the significance of an acquisition under the Securities Act for relief from SEC based on the company’s consolidated SIGNIFICANT EQUITY INVESTMENTS disclosure requirements. financial statements at the time of the In theory, these standards for relief initial Form S-1 filing (or confidential The company’s equity investments also sound reasonably attainable; in practice, submission, if applicable) rather than may trigger the need for separate financial a company is rarely excused from at the time of the acquisition. statements. If either the investment test or the income test is met at the 20% level providing historical or pro forma financial SIGNIFICANT DISPOSITIONS for a 50% or less owned entity and the information in connection with an company accounts for the investment acquisition or disposition transaction, Rule 11-01 of Regulation S-X requires a by the equity method, Rule 3-09 of although a request to provide substituted company to present pro forma financial Regulation S-X requires separate financial financial information may be granted information if its disposition of a statements of such entity. This means, in appropriate circumstances. significant portion of a business—whether for example, that the company may be by sale, abandonment or distribution to required to provide separate financial CONCLUSION stockholders by means of a spin-off, split- statements for entities in which it holds up or split-off—has occurred or is probable equity investments, or for joint ventures. If a private company planning to go public and such disposition is not fully reflected If the applicable significance tests are met, has engaged in M&A activity (whether as in the company’s financial statements the requirement for separate financial a buyer or seller), it should review with its included in the Form S-1. For this purpose, statements can even extend to equity auditor whether any additional financial the disposition of “a significant portion investments or joint ventures that existed statements will be required as part of its of a business” means the disposition of a at any point during the previous three SEC registration process; if so, determine significant subsidiary, as defined above, years but have since been divested. While if they are available; and if not, develop except that the percentage changes from all three years are required to be presented 20% to 10% for each test of significance. a plan to obtain them, which may require once significance is reached, only the years auditing or re-auditing the acquired Rule 11-02 provides that a company must for which significance is greater than 20% company’s financial statements. In some prepare pro forma financial information are required to be audited. In the case of cases, the company may need to consider for a disposition by beginning with an EGC that is presenting only two years shelving its M&A plans until the IPO of audited financial statements in its IPO the historical financial statements of is completed, to avoid these issues. < A Comparison of Deal Terms in Public and Private Acquisitions 19
Public and private company from the process followed in SEC INVOLVEMENT M&A transactions share many a private company acquisition: characteristics, but also involve different The SEC plays a role in acquisitions ■■ Availability of SEC Filings: Due diligence rules and conventions. Described below involving a public company: typically starts with the target’s SEC are some of the ways in which acquisitions ■■ Form S-4: In a public acquisition, if filings—enabling a potential acquirer of public and private targets differ. the acquirer is issuing stock to the to investigate in stealth mode until it target’s stockholders, the acquirer must wishes to engage the target in discussions. GENERAL CONSIDERATIONS register the issuance on a Form S-4 ■■ Speed: The due diligence process registration statement that is filed with The M&A process for public is often quicker in an acquisition (and possibly reviewed by) the SEC. and private company acquisitions of a public company because of the ■■ Stockholder Approval: Absent a tender differs in several respects: availability of SEC filings, thereby offer, the target’s stockholders, and
■■ Structure: An acquisition of a private allowing the parties to focus quickly sometimes the acquirer’s stockholders, company may be structured as an asset on the key transaction points. must approve the transaction. purchase, a stock purchase or a merger. Stockholder approval is sought pursuant to a proxy statement that is filed with (and A public company acquisition is MERGER AGREEMENT generally structured as a merger, often reviewed by) the SEC. Public targets often in combination with a tender The merger agreement for an seeking stockholder approval generally offer for all-cash acquisitions. acquisition of a public company must provide for a separate, non-binding reflects a number of differences from stockholder vote with respect to all ■■ Letter of Intent: If a public company its private company counterpart: compensation each named executive is the target in an acquisition, there officer will receive in the transaction. is usually no letter of intent. The ■■ Representations: In general, the ■■ Tender Offer Filings: In a tender offer parties typically go straight to a representations and warranties from for a public target, the acquirer must file definitive agreement, due in part to a public company are less extensive a Schedule TO and the target must file a concerns over creating a premature than those from a private company; Schedule 14D-9. The SEC staff reviews disclosure obligation. Sometimes an are tied in some respects to the accuracy and often comments on these filings. unsigned term sheet is also prepared. of the public company’s SEC filings; may have higher materiality thresholds; and, ■■ Public Communications: Elaborate ■■ Timetable: The timetable before signing importantly, do not survive the closing. SEC regulations govern public the definitive agreement is often more communications by the parties ■■ Exclusivity: The exclusivity provisions compressed in an acquisition of a public in the period between the first public are subject to a “fiduciary exception” company. More time may be required announcement of the transaction permitting the target to negotiate with a between signing and closing, however, and the closing of the transaction. because of the requirement to prepare third party making an offer that may be and file disclosure documents with deemed superior and to change the target ■■ Multiple SEC Filings: Many Form the SEC and comply with applicable board’s recommendation to stockholders. 8-Ks and other SEC filings are often required by public companies that notice and timing requirements, and ■■ Closing Conditions: The closing are party to M&A transactions. the need in many public company conditions in the merger agreement, acquisitions for antitrust clearances including the “no material adverse that may not be required in smaller, change” condition, are generally tightly Set forth on the following page is a private company acquisitions. drafted, and give the acquirer little room to refuse to complete the comparison of selected deal terms in public ■■ Confidentiality: The potential damage transaction if all required regulatory target and private target acquisitions, based from a leak is much greater in an and stockholder approvals are obtained. on the most recent studies available from M&A transaction involving a public SRS|Acquiom (a provider of post-closing company, and accordingly rigorous ■■ Post-Closing Obligations: Post- confidentiality precautions are taken. closing escrow or indemnification transaction management services) and arrangements are very rare. the Mergers & Acquisitions Committee ■■ Director Liability: The board of a of the American Bar Association’s Business ■■ Earnouts: Earnouts are unusual, public target will almost certainly obtain Law Section. The SRS|Acquiom study a fairness opinion from an investment although a form of earnout arrangement covers private target acquisitions in which banking firm and is much more called a “contingent value right” is not it served as shareholder representative likely to be challenged by litigation uncommon in the life sciences sector. and that closed in 2015. The ABA private alleging a breach of fiduciary duties. ■■ Deal Certainty and Protection: The negotiation battlegrounds target study covers acquisitions that were completed in 2014, and the ABA DUE DILIGENCE are the provisions addressing deal certainty (principally the closing public target study covers acquisitions When a public company is acquired, conditions) and deal protection that were announced in 2015 (excluding the due diligence process differs (exclusivity, voting agreement, acquisitions by private equity buyers). termination and breakup fees). 20 A Comparison of Deal Terms in Public and Private Acquisitions
COMPARISON OF SELECTED DEAL TERMS properties, financial condition and the tax consequences of the transaction results of operations of the target. are excluded from this data.) The accompanying chart compares the following deal terms in acquisitions ■■ Fiduciary Exception to “No-Talk” ■■ Appraisal Rights Closing Condition: of public and private targets: Covenant: Whether the “no-talk” Whether the acquisition agreement covenant prohibiting the target from contains a closing condition providing ■■ “10b-5” Representation: A representation seeking an alternative acquirer includes that appraisal rights must not have been to the effect that no representation an exception permitting the target to sought by target stockholders holding or warranty by the target contained consider an unsolicited superior proposal more than a specified percentage in the acquisition agreement, and no if required to do so by its fiduciary duties. of the target’s outstanding capital statement contained in any document, stock. (Under Delaware law, appraisal ■■ certificate or instrument delivered by Opinion of Target’s Counsel as Closing rights generally are not available to the target pursuant to the acquisition Condition: Whether the acquisition stockholders of a public target when agreement, contains any untrue agreement contains a closing condition the merger consideration consists statement of a material fact or fails requiring the target to obtain an opinion solely of publicly traded stock.) to state any material fact necessary, of counsel, typically addressing the ■■ in light of the circumstances, to make target’s due organization, corporate Acquirer MAC/MAE Closing Condition: the statements in the acquisition authority and capitalization; the Whether the acquisition agreement agreement not misleading. authorization and enforceability contains a closing condition excusing of the acquisition agreement; and the acquirer from closing if an event ■■ Standard for Accuracy of Target Reps at whether the transaction violates or development has occurred that Closing: The standard against which the the target’s corporate charter, bylaws has had, or could reasonably be accuracy of the target’s representations or applicable law. (Opinions regarding expected to have, a “material adverse and warranties set forth in the acquisition change/effect” on the target. agreement is measured for purposes of the acquirer’s closing conditions (sometimes with specific exceptions): Fiduciary Exception to “10b-5” Representation “No-Talk” Covenant - A “MAC/MAE” standard provides that each of the representations PUBLIC (ABA) None PUBLIC (ABA) 100% and warranties of the target must PRIVATE (ABA) 25% PRIVATE (ABA) 10% be true and correct in all respects PRIVATE (SRS|ACQUIOM) 45% PRIVATE (SRS|ACQUIOM) 4% as of the closing, except where the failure of such representations and Standard for Accuracy Opinion of Target’s Counsel warranties to be true and correct of Target Reps at Closing as Closing Condition will not have or result in a material PUBLIC (ABA) PUBLIC (ABA) – adverse change/effect on the target. “MAC/MAE” 98% PRIVATE (ABA) 11% “In all material respects” None - An “in all material respects” standard PRIVATE (SRS|ACQUIOM) 16% Other standard 2% provides that the representations Appraisal Rights Closing Condition and warranties of the target must PRIVATE (ABA) “MAC/MAE” 24% be true and correct in all material PUBLIC (ABA) “In all material respects” 19% respects as of the closing. All cash deals None “In all respects” 5% Part cash/part stock deals 6% - An “in all respects” standard Combination 52% provides that each of the PRIVATE (ABA) representations and warranties of PRIVATE (SRS|ACQUIOM) All deals 49% the target must be true and correct “MAC/MAE” 31% “In all material respects” 64% PRIVATE (SRS|ACQUIOM) x in all respects as of the closing. “In all respects” 5% All deals 61% ■■ Inclusion of “Prospects” in MAC/MAE Inclusion of “Prospects” Acquirer MAC/MAE Closing Condition Definition: Whether the “material in MAC/MAE Definition adverse change/effect” definition in PUBLIC (ABA) 1% PUBLIC (ABA) 100% the acquisition agreement includes “prospects” along with other target PRIVATE (ABA) 12% PRIVATE (ABA) 91% metrics, such as the business, assets, PRIVATE (SRS|ACQUIOM) 17% PRIVATE (SRS|ACQUIOM) 97% A Comparison of Deal Terms in Public and Private Acquisitions 21
TRENDS IN SELECTED DEAL TERMS exceptions, such as the “whenever fiduciary duties require” standard. Post-Closing Claims The ABA deal term studies have been published periodically, beginning ■■ “Go-Shop” Provisions: “Go-shop” SRS|Acquiom has released a study with public target acquisitions that were provisions, granting the target a specified analyzing post-closing escrow claim announced in 2004 and private target period of time to seek a better deal activity in 720 private target acquisitions acquisitions that were completed in 2004 after signing an acquisition agreement, in which it served as shareholder (not all metrics discussed below were appeared in 3% of acquisitions representative from 2010 through announced in 2007. The incidence of reported for all periods). A review of past 2014. This study provides a glimpse these provisions grew to 11% in 2013, studies identifies the following trends, into the hidden world of post-closing before decreasing to 6% in 2015. although in any particular transaction escrow claims in private acquisitions: negotiated outcomes may vary: ■■ Appraisal Rights Closing Condition: For the second consecutive year, no cash ■■ Expense Fund: Median size of $200,000 In transactions involving acquisitions announced in 2015 had (0.25% of transaction value). 75% of deals public company targets: an appraisal rights closing condition, used less than 10% of expense fund.
■■ “10b-5” Representations: These compared to 13% of cash acquisitions ■■ Frequency of Claims: 60% of all representations, whose frequency announced in 2005–2006. An appraisal transactions had at least one post- had fallen steadily from a peak of rights closing condition appeared in 6% of cash/stock acquisitions closing indemnification claim (including 19% of acquisitions announced announced in 2015, down sharply from purchase price adjustments) against the in 2004, were not present in any 13% in 2014 and 26% in 2013 but still escrow. 25% had more than one claim. acquisitions announced in 2015. above the low point of 4% in 2011. ■■ Size of Claims: On average, claims ■■ Accuracy of Target Reps at Closing: The MAC/MAE standard for accuracy of the In transactions involving represented 24% of the escrow. target’s representations at closing remains private company targets: 6% of all deals had claims match or exceed the escrow, and 9% of all almost universal, present in 98% of ■■ “10b-5” Representations: The prevalence acquisitions announced in 2015 compared of these representations has declined from deals had claims for half or more of to 89% of acquisitions announced in 2004 59% of acquisitions completed in 2004 to the escrow. Largest claims were for (and having peaked at 100% in 2010). 25% of acquisitions completed in 2014. fraud and breach of fiduciary duty. In practice, this trend has been offset to ■■ Accuracy of Target Reps at Closing: ■■ Bases for Claims: Most frequently claimed some extent by the use of lower standards The MAC/MAE standard for accuracy misrepresentations involved tax (18% for specific representations, such as those of the target’s representations at closing of transactions), intellectual property relating to capitalization and authority. has gained wider acceptance, appearing (11% of transactions), undisclosed ■■ Inclusion of “Prospects” in MAC/MAE in some form in 43% of acquisitions liabilities (8% of transactions) and completed in 2014 compared to 37% Definition: The target’s “prospects” employee-related (8% of transactions). were included in the MAC/MAE of acquisitions completed in 2004. ■■ Resolution of Claims: 9% of all definition in only 1% of acquisitions ■■ Inclusion of “Prospects” in MAC/MAE announced in 2015, representing a Definition: The target’s “prospects” transactions with claims had sharp decline in frequency from 10% appeared in the MAC/MAE definition claims litigated or arbitrated. On of acquisitions announced in 2004. in 12% of acquisitions completed average, contested claims were in 2014, down from 36% of acquisitions resolved in seven months. ■■ Fiduciary Exception to “No-Talk” completed in 2006. Covenant: The fiduciary exception ■■ Purchase Price Adjustments: 77% of in 95% of acquisitions announced in ■■ Fiduciary Exception to “No-Talk” all transactions had mechanisms for 2015 was based on the concept of “an Covenant: Fiduciary exceptions purchase price adjustments. Of these, acquisition proposal expected to result were present in 10% of acquisitions 65% had a post-closing adjustment in a superior offer,” up from 79% in completed in 2014, compared to 25% (favorable to the acquirer in 48% of of acquisitions completed in 2008. 2004 but down slightly from 98% in transactions and favorable to target 2012, while the standard based on the ■■ Opinions of Target Counsel: Legal opinions stockholders in 17% of transactions). mere existence of any “acquisition (excluding tax matters) of the target’s ■■ proposal,” which did not appear in any counsel have fallen in frequency from Earnouts: In non–life sciences acquisitions announced in 2011–2012, 73% of acquisitions completed in 2004 transactions, 56% of milestones that was present in 4% of acquisitions to 11% of acquisitions completed in 2014. came due were paid to some degree announced in 2015 (down from 7% in and 15% of milestones that were 2014). The standard based on an actual ■■ Appraisal Rights Closing Condition: initially claimed to be missed were An appraisal rights closing condition “superior offer” declined from 11% in disputed and resulted in negotiated was included in 49% of acquisitions 2004 to just 1% in 2015. In practice, payouts for target stockholders. these trends have been partly offset by completed in 2014, up from 43% of an increase in “back-door” fiduciary acquisitions completed in 2008. < 22 Trends in VC-Backed Company M&A Deal Terms
We reviewed all merger transactions between 2009 and 2016 involving venture-backed targets (as reported in Dow Jones VentureSource) in which the merger documentation was publicly available and the deal value was $25 million or more. Based on this review, we have compiled the following deal data:
Characteristics of Deals Reviewed 2009 2010 2011 2012 2013 2014 2015 2016
The number of deals we Sample Size 15 17 51 26 27 37 27 19 reviewed and the type of consideration paid in each Cash 60% 71% 73% 73% 59% 59% 67% 47%
Stock 0% 6% 4% 8% 8% 3% 4% 0%
Cash and Stock 40% 23% 23% 19% 33% 38% 29% 53%
Deals With Earnout 2009 2010 2011 2012 2013 2014 2015 2016
Deals that provided With Earnout 27% 29% 29% 31% 33% 30% 26% 37% contingent consideration based upon post-closing Without Earnout 73% 71% 71% 69% 67% 70% 74% 63% performance of the target (other than balance sheet adjustments)
Deals With Indemnification 2009 2010 2011 2012 2013 2014 2015 2016
Deals where the target’s With Indemnification shareholders or the buyer By Target’s Shareholders 100% 100% 98% 100% 100% 97% 100% 100%1 indemnified the other By Buyer 36% 17% 43% 62% 44% 49% 69% 37% post-closing for breaches of representations, warranties and covenants
Survival of Representations and Warranties 2009 2010 2011 2012 2013 2014 2015 2016
Length of time that Shortest 6 Mos. 9 Mos. 12 Mos. 10 Mos. 12 Mos. 12 Mos. 12 Mos. 12 Mos. representations and warranties survived the Longest 18 Mos. 21 Mos. 24 Mos. 24 Mos. 30 Mos. 24 Mos. 24 Mos. 18 Mos. closing for indemnification 2 Most Frequent 18 Mos. 18 Mos. 18 Mos. 18 Mos. 18 Mos. 12 & 18 18 Mos. 18 Mos. purposes Mos. (tie)
Caps on Indemnification Obligations 2009 2010 2011 2012 2013 2014 2015 2016
Upper limits on With Cap 100% 100% 100% 100% 100% 100% 100% 100% indemnification obligations Limited to Escrow 71% 71% 77% 81% 88% 89% 79% 83% where representations Limited to Purchase Price 0% 6% 2% 0% 0% 0% 0% 0% and warranties Exceptions to Limits3 71% 94% 96% 96% 100% 100% 100% 95% survived the closing for indemnification purposes Without Cap 0% 0% 0% 0% 0% 0% 0% 0%
1 Includes one transaction where the only representations that survive for purposes of indemnification are certain “fundamental” representations and representations concerning material contracts and intellectual property. 2 Measured for representations and warranties generally; specified representations and warranties may survive longer. Excludes one transaction in each of 2011 and 2014 where general representations and warranties did not survive. 3 Generally, exceptions were for fraud, willful misrepresentation and certain “fundamental” representations commonly including capitalization, authority and validity. In a limited number of transactions, exceptions also included intellectual property representations. Trends in VC-Backed Company M&A Deal Terms 23
Escrows 2009 2010 2011 2012 2013 2014 2015 2016
Deals having escrows With Escrow 93% 100% 94% 100% 93%4 97% 93% 89% securing indemnification % of Deal Value obligations of the Lowest5 10% 2% 5% 5% 5% 2% 4% 5% target’s shareholders Highest 15% 25% 31% 16% 20% 16% 16% 15% Most Frequent 10% 10% 10% 10% 10% 10% 10% 10% Length of Time Shortest 12 Mos. 9 Mos. 12 Mos. 10 Mos. 12 Mos. 12 Mos. 12 Mos. 12 Mos. Longest 18 Mos. 36 Mos. 36 Mos. 48 Mos. 30 Mos. 24 Mos. 36 Mos. 24 Mos. Most Frequent 12 & 18 18 Mos. 18 Mos. 12 Mos. 18 Mos. 12 Mos. 12 & 18 18 Mos. Mos. (tie) Mos. (tie)
Exclusive Remedy 46% 53% 78% 73% 60% 86% 63% 88% Exceptions to Escrow Limit Where Escrow 83% 80% 97% 100% 100% 100% 100% 93%
Was Exclusive Remedy3
Baskets for Indemnification 2009 2010 2011 2012 2013 2014 2015 2016
Deals with indemnification Deductible6 43% 56% 38% 27% 50% 44% 31% 47% only for amounts 6 above a specified Threshold 57% 44% 60% 65% 42% 56% 61% 53% “deductible” or only after a specified “threshold” amount is reached
MAE Closing Condition 2009 2010 2011 2012 2013 2014 2015 2016
Deals with closing condition Condition in Favor of Buyer 100% 100% 98% 95% 100% 97% 100% 100% for the absence of a “material adverse effect” Condition in Favor of Target 20% 19% 15% 9% 17% 19% 12% 39% with respect to the other party, either explicitly or through representation brought down to closing
Exceptions to MAE 2009 2010 2011 2012 2013 2014 2015 2016
Deals where the definition With Exception7 93% 94% 94%8 84%9 96%10 100% 100% 100% of “material adverse effect” for the target contained specified exceptions
4 One of two transactions not including an escrow at closing did require funding of escrow with proceeds of earnout payments. 5 Excludes transactions which also specifically referred to representation and warranty insurance as recourse for the buyer. 6 A “hybrid” approach with both a deductible and a threshold was used in another 2% of these transactions in 2011, 8% of these transactions in 2012, 8% of these transactions in 2013, and 8% of these transactions in 2015. 7 Generally, exceptions were for general economic and industry conditions. 8 Excludes one transaction where the specified exceptions do not apply for purposes of a standalone “material adverse effect” closing condition. 9 Includes one transaction where the specified exceptions apply for purposes of a standalone “material adverse effect” closing condition and certain representations, but do not apply for purposes of other representations. 10 The only transaction not including such exceptions provided for a closing on the same day the definitive agreement was signed. We Wrote the Book on Going Public. You can write the next chapter.
“[This book] is quickly becoming the bible of the I.P.O. market.” — The New York Times (The Deal Professor, January 19, 2010)
“Comprehensive in scope, informative, incisive, and … an important reference and informational tool.” — Burton Award, Outstanding Authoritative Book by a Partner in a Law Firm, 2013
“CEOs should keep this book at their side from the moment they first seriously consider an IPO … and will soon find it dog-eared with sections that inspire clarity and confidence.” — Don Bulens, CEO of EqualLogic at the time it pursued a dual-track IPO
“A must-read for company executives, securities lawyers and capital markets professionals alike.” — John Tyree, Managing Director, Morgan Stanley
More information at IPOguidebook.com Book available from PLI.edu Want to know more about the IPO and venture capital markets?
Our 2017 IPO Report offers a detailed analysis of, and outlook for, the IPO market, plus useful market metrics. We look at rates of adoption of JOBS Act relief by emerging growth companies, and discuss the potential impact of the new presidential administration on policy and direction at the SEC. We reflect on changes in the IPO process over the past two decades, examine the divide between governance practices of IPO companies and established public companies, and examine the growing list of recommended governance “best practices” public companies are being pressured to adopt. In other highlights we discuss multi-class capital structures, offer tips for living with the IPO “quiet period,” examine new Securities Act exemptions that have expanded the pre-IPO financing toolkit, analyze post-IPO financing alternatives, and look at the challenges and benefits of pursuing a dual-track to liquidity.
See our 2017 Venture Capital Report for an in-depth analysis of, and outlook for, the US venture capital market, including industry and regional breakdowns. The report identifies steps startups should take now if they plan to secure a Series A round in 2017, and analyzes common structures for management carve-out plans. We also lay out best practices for private companies setting option exercise prices; discuss the benefits of investing in qualified small business stock; and look at trends in venture capital financing terms, convertible debt terms and VC-backed company M&A deal terms.
To request a copy of any of the reports described above, or to obtain additional copies of the 2017 M&A Report, please contact the WilmerHale Client Development Department at [email protected] or call +1 617 526 5600. An electronic copy of this report can be found at www.wilmerhale.com/2017MAreport.
Data Sources: M&A data is sourced from MergerStat. WilmerHale compiled the data for sales of VC- backed companies from Dow Jones VentureSource. For law firm rankings, sales of VC-backed companies are included under the current name of each law firm. Other data sources are as indicated in this report. © 2017 Wilmer Cutler Pickering Hale and Dorr llp 17_0002 KW 4/17 6,000 WilmerHale recognizes its corporate responsibility to environmental stewardship. 2017 M&A Report
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