2019 Insights A collection of commentaries on the critical legal issues in the year ahead. Editorial Board Thomas H. Kennedy Head of Global Knowledge Strategy Boris Bershteyn Adrian J. S. Deitz Victor Hollender Scott C. Hopkins Edward B. Micheletti Robin Davidson Jenna Cho Marketing and Communications This collection of commentaries provided by Skadden, Arps, Slate, Meagher & Flom LLP and its affiliates is for educational and informational purposes only and is not intended and should not be construed as legal advice. These commentaries are considered advertising under applicable state laws. Contents 01 Corporate 02 Capital Markets 16 Corporate Restructuring 18 M&A / Governance 32 Litigation / Controversy 60 Regulatory 84 Financial Regulation 98 Index of Skadden-Authored Articles From 2018 Corporate Capital Markets US Capital Markets Face Uncertainty Entering 02 2019, With Volatility Likely to Continue SEC Continues Steady Progress With 06 Regulatory, Enforcement Goals New UK IPO Rules Encourage Independent 10 Research, Address Perceived Conflicts of Interest New HKEx Rules Spur Bumper Year in Hong Kong Capital 12 Markets, but Lasting Impact Remains Unclear 14 Recent Trends in Renewable Energy Corporate Restructuring Second Circuit Adopts Secured Creditor Cramdown 16 Standard Based on Market Efficiency M&A / Governance 2019 US and Global M&A Outlook: Despite Mounting 18 Headwinds, Potential Remains for the New Year Latin America Trend to Watch: Representations 21 and Warranties Insurance US and EU Antitrust Enforcers Remain Active 24 and Aggressive, With Some New Wrinkles 26 US Corporate Governance: Turning Up the Heat 29 Trending Topics in Executive Compensation 2019 Insights Capital Markets Performance in the U.S. capital markets was mixed in 2018, US Capital with the equity new issuance market showing strength through Markets Face most of the year and the debt issuance markets softening. The initial public offering (IPO) market had its strongest year since Uncertainty 2014, though it weakened in the fourth quarter due to significant market volatility. In 2019, the U.S. economy is forecasted to Entering 2019, continue to grow, albeit at a slower pace, and most economic With Volatility indicators remain sound, with an unemployment rate of 3.9 percent and 312,000 jobs added in December 2018. However, Likely to ongoing concerns over interest rates, domestic and geopolitical Continue events, trade and the decelerated pace of global economic growth could cause further market volatility. Debt Markets. The U.S. high-yield debt market ended 2018 42 percent lower by Contributing Partner dollar volume and 39 percent lower by number of issuances than 2017. The $191 billion in total issuance was the lowest since 2008 ($144 billion), and the number of issuances Michelle Gasaway / Los Angeles fell to 436, the lowest in two decades. (High-yield activity in 2018 was frequently replaced with term loan B issuances, which are more attractive to investors when interest rates are rising and provide borrowers with covenant packages that are increasingly bond-like in Counsel flexibility.) Proceeds from U.S. high-yield bond offerings were largely used for refinancings (67 percent of issuances), with only 16 percent used for M&A activity. For the first time since 2008, in 2018 there were no issuances in December — a period of over 40 days Benjamin K. Marsh / New York without an issuance that continued until January 10, 2019. US High-Yield Corporate Bonds Associates Dollar Value Number of High-Yield Issues 378 369 359 billion Agnes N. Aniol / Los Angeles 326 billion billion 330 billion 287 billion Lilit Kazangyan / Los Angeles 273 billion billion 247 210 866 843 billion Jeremy A. Zucker / New York billion 808 758 191 billion 144 626 632 714 billion 493 436 563 578 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 U.S. investment-grade debt market volume in 2018 was $1.25 trillion (1,983 issuances), ending seven consecutive years of increases after a record volume of $1.42 trillion (2,346 issuances) in 2017. Increasing interest rates and market volatility combined with the December 2017 tax reform, which encouraged repatriation of overseas cash and reduced the tax benefits of issuing debt, caused the decline. The largest issuer by volume was CVS Health Corp., with $40 billion raised in connection with its acquisition of Aetna, representing the third-largest U.S. corporate bond transaction in history. Overall, investment-grade issuances related to M&A increased in 2018 by dollar volume, totaling $226 billion by year-end. US Investment-Grade Corporate Bonds Dollar Value Number of Investment-Grade Issues 1,424 1,321 1,351 billion 4,119 billion billion 1,249 1,193 billion 1,115 1,123 1,15 3 billion billion billion billion 937 890 billion 871 billion billion 2,402 2,267 2,346 2,120 2,188 2,191 1,983 1,833 1,833 1,912 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: Bloomberg 2 Looking Ahead Equity Markets. After a volatile start to the year, the Dow Jones Industrial Average, The U.S. economy enters 2019 in its ninth S&P 500 and Nasdaq composite achieved record highs in the third quarter of 2018, driven by a strong economic backdrop and solid corporate earnings (fueled in part by the impact year of expansion, with stock markets on of tax reform, which led to a record $1 trillion of stock buybacks that boosted earnings per pace to eclipse the bull run of 1991-2001 share). Fourth-quarter volatility, however, erased the year’s gains, and the three indices as the longest in history. But whether the ended the year down 5.6 percent, 6.2 percent and 3.9 percent, respectively, from 2017, capital markets are capable of continued their worst annual performance in 10 years. Volatility soared in the fourth quarter, driven by concerns over slowing global economic growth, rising interest rates, U.S.-China trade strength depends on several factors. tensions and policy uncertainty arising from White House communications. Economic Growth. The U.S. economy Strong markets in the first three quarters helped make 2018 the best year for U.S. IPOs expanded at an accelerated pace in 2018. since 2014, with 199 IPOs raising $51 billion. IPO volume was 31 percent higher than 2017 and 168 percent higher than 2016. While aftermarket performance was mixed, U.S. gross domestic product grew 3.1 overall, IPOs significantly outperformed broader market indices. percent, marking the first year since 2005 that the economy expanded above US IPOs 3 percent. The strength was driven Dollar Value Number of IPOs by increases in government spending, 94 healthy corporate profits and increases billion 216 in consumer and business spending. The 277 199 163 167 138 152 U.S. dollar rose in value 4.3 percent in 130 59 103 62 billion 51 2018, according to the U.S. dollar index, 35 44 42 billion demonstrating positive sentiment toward billion 39 billion 39 billion 32 billion the U.S. economy. 27 billion billion 24 billion 19 billion 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Many economists expect the pace of U.S. economic growth to moderate in 2019. The leading sector for IPOs by volume in 2018 was technology, with a number of tech While a reduced economic growth rate unicorns completing highly anticipated IPOs. Other top sectors were health care and does not necessarily mean a recession consumer products and services. Special purpose acquisition companies continued to constitute a significant amount of IPO volume, with 43 deals, representing 19 percent is imminent, it could negatively impact of total IPO proceeds. In 2018, 33 China-based companies completed IPOs, raising $9.2 stock prices and corporate earnings, and billion, a 140 percent increase over 2017. In addition, music-streaming service provider reduce investor confidence. Nevertheless, Spotify garnered significant attention when it went public in April 2018 by means of an many economists have indicated that a unconventional direct listing, potentially leading the way for a select few others to follow recession in 2019 is unlikely, and invest- suit. (For example, messaging platform service provider Slack has discussed a possible direct listing.) Companies also continued to take advantage of recent Securities and ment banks remain generally bullish on Exchange Commission (SEC) accommodations, such as the ability for all issuers to confi- the near-term outlook for capital markets dentially submit draft registration statements and omit certain financial statements previ- activity. However, the longer the govern- ously required for interim drafts. (See “SEC Continues Steady Progress With Regulatory, ment shutdown lasts, the more pressure Enforcement Goals.” See also “New HKEx Rules Spur Bumper Year in Hong Kong Capital Markets, but Lasting Impact Remains Unclear.”) there is on some of these forecasts. Follow-on activity was relatively flat, both by dollar volume and number of deals. Block Corporate Earnings. Moderating earn- trades represented 28 percent of total follow-on offerings, down slightly from 30 percent ings growth could present challenges to in 2017 and down significantly from a record 49 percent in 2016. The decline in block trades is attributed largely to weaker aftermarket performance resulting from tighter capital markets activity, with a forecasted discounts to market price relative to marketed follow-ons. decline from 9 percent in 2018 to 7-8 percent in 2019. However, with S&P 500 US Follow-On Activity multiples at five-year lows, arguably the Dollar Value Number of Follow-On Offerings market already has adjusted prices in 794 732 anticipation of a slowdown. Stronger- 708 732 685 609 630 587 603 than-anticipated earnings growth could 492 improve investor confidence and slow 213 186 194 185 billion 170 billion billion 172 billion recent market declines, facilitating billion 149 billion 150 153 150 billion 135 billion billion billion activity as issuers seek to take advan- billion 257 tage of rising valuations.