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Inside M&A – Winter Issue

McDermott recently released the Winter 2014 issue of Inside M&A, which focuses on current issues surrounding mergers and acquisitions.  Articles in this issue include:

Delaware Court of Chancery Upholds Forum Selection Bylaws
During the last several years, shareholders have challenged nearly every merger and acquisition (M&A) transaction that targeted a U.S. public company where the value of the transaction was greater than $100 million and the offer price was at least $5 per share.  As a result of this litigation explosion, many corporations have adopted forum selection bylaws that require such challenges to be brought in the target company’s state of incorporation.  Chancellor Leo E. Strine Jr.’s decision in Boilermakers Local 154 Retirement Fund v. Chevron Corp. to uphold such bylaws is an important step toward reducing the burden and expense of litigation over M&A deals.
Read the full article.

Crying Revlon: Delaware Courts Dismiss Claims in Morton’s Restaurant Group Acquisition
In In Re Morton’s Restaurant Group, Inc. Shareholders Litigation, Chancellor Leo E. Strine Jr. dismissed all claims in an action arising out of the acquisition of Morton’s Group, Inc.  This case is another example of attempted misuse of the so-called Revlon “entire fairness” test by plaintiffs.  It also demonstrates that a board engaged in a sale process can protect itself and the transaction by conducting an extensive market check and by sharing the proceeds of the sale ratably amongst all stockholders.
Read the full article.

Managing Risk—Captive Insurance Companies
Soaring insurance costs combined with sound risk management policies often lead risk managers to consider a strategy that includes self-insurance, often taking the form of a captive insurance company.  Properly constructed and maintained, a captive insurance company can produce both business and tax benefits.
Read the full article.


Inside M&A – Fall Issue

McDermott recently released the Fall 2013 issue of Inside M&A, which focuses on current issues surrounding mergers and acquisitions.  Articles in this issue include:

M&A Corporate Governance: Oversight of the Board’s Financial Advisors
Recent Delaware Court of Chancery decisions highlight the need for corporations engaging in M&A transactions to increase their oversight of financial advisors.

Paving the Way for More Tender Offers: DGCL 251(h) Streamlines Two-Step Merger Process
The newly added Section 251(h) of the Delaware General Corporation Law (DGCL) allows the completion of a second-step merger without stockholder approval under certain circumstances.

Cross-Border M&A: Managing the CFIUS Review Process
Parties engaging in cross-border M&A transactions should be cognizant of the potential negative outcomes in the Committee on Foreign Investment in the United States (CFIUS) review process and take appropriate measures to protect their interests.

Illinois Appellate Court Decision Requires More Than At-Will Employment As Consideration For Non-Compete Agreements

On June 24, 2013, the Appellate Court of Illinois (First District) issued a decision in Fifield v. Premier Dealer Servs., 2013 IL App (1st) 120327, that will make it more difficult for Illinois employers to enforce post-employment non-compete agreements against newly hired employees who are employed for less than two years and leave, for whatever reason, and join a competitor.  The issue in Fifield was whether the promise of at-will employment to a new employee, without more, constitutes consideration adequate to support postemployment restrictive covenants.  Fifield lost his job after his employer was acquired but was subsequently offered employment with the successor company.   As a condition to his employment with the successor company, Fifield signed a two-year post-employment non-compete agreement.  The agreement contained a carve-out allowing Fifield to work for a competitor if he was fired without cause within the first year of employment.  Three months later, Fifield resigned and joined a competitor.  He and his new employer obtained a declaratory judgment that Fifield’s non-compete agreement was not enforceable because Fifield had not received adequate consideration.  The Illinois Appellate Court upheld that decision.

Illinois Courts have long since held that the promise of continued “at-will” employment may not be sufficient consideration to support a non-compete agreement signed by a current employee, due to the illusory nature of the promise.  In particular, many Illinois Courts have held that if the employee remains employed for less than two years, the non-compete may not be valid unless it is supported by other consideration.  The Fifield Court applied that rule to circumstances where a new employee is required to sign a non-compete agreement as a condition of employment.

Unless the Fifield decision is narrowed or reversed, employers in Illinois should evaluate whether they need a post-employment restrictive covenant from a new-hire and, if so, offer additional consideration beyond the job.  Employers should also consider the need for post-employment restrictive covenants when making acquisition strategy decisions and calculating acquisition costs.  In the deal context, it is common for employees to be terminated by the seller before the deal closes and hired by the buyer after the deal closes.  In light of Fifield, buyers should carefully consider which of the seller’s employees have trade secrets or other information such that it is important to restrict that employee from working for a competitor.  If that is the case, the buyer should consider offering a fixed-term employment agreement or other consideration such as a signing bonus to avoid the result in Fifield.  Alternatively, the buyer may consider structuring the deal so that key employees of the seller are bound by non-compete agreements with the seller that are transferred upon the closing of the transaction.

The French Legal Framework Relating to Profit-Sharing Premiums

The French legal system provides a variety of ways to secure the involvement of employees in the growth and profits of their company, including compulsory deferred profit-sharing plans (accords de participation), optional voluntary cash-based profit-sharing plans (intéressement), and other similar mechanisms.

The Amended Social Security Financing Law of 2011 provided for a new legal framework entitled “profit-sharing” premium (prime de partage des profits), which set forth rules to allocate premiums to the benefit of employees in the event their company decides to increase dividend distributions to its equityholder(s) (the “Premium Allocation Rules”). These Premium Allocation Rules are in force but have not yet been codified.  According to recent government declarations, however, the Premium Allocation Rules could be abrogated by the end of 2013.


Generally, the Premium Allocation Rules apply to privately held companies with at least 50 employees as well as to public corporations under certain specific conditions.  If a company subject to the Premium Allocation Rules decides to distribute dividends in excess of the average amount of dividends distributed during the two previous fiscal years (an “Increased Dividend Distribution”), then the company must grant a premium (typically a cash payment) to its employees (the “Employee Premium”).   Importantly, the determination of whether an Increased Dividend Distribution has occurred does not include any amounts, whether in cash or in kind, distributed to the equity-holders of the company as a result of other non-dividend corporate actions, such as share buy-backs.

If the parent company of a “group” (as defined by the French Code of Commerce) engages in an Increased Dividend Distribution, then each company within the consolidated group that employs at least 50 people must grant the Employee Premium to its employees.

The Employee Premium must be determined by an agreement executed between the company and a representative of the employees within three months of the date on which the company decided to engage in an Increased Dividend Distribution.  Similar to collective bargaining agreements, the Employee Premium agreements may also be negotiated and executed at the industry level, as opposed to the company level.  If such an agreement is not reached, then the company must issue a statement setting out the premium amount that the company unilaterally agrees to pay, which the employee representative cannot block.  In order to avoid repeating the agreement negotiation process each time a company makes an Increased Dividend Distribution, it is possible for a company or a consolidated group to negotiate a long term agreement with the relevant employee representatives that provides the framework for, among other things, calculating and paying the Employee Premium.

An employer (whether the board of directors and its chairman, the manager(s) or the president, depending on the corporate form) that defaults on the obligation to implement the profit-sharing premium process, will risk the following penalties: up to one year of imprisonment and/or a fine of €3,750.

Practical examples

1.  Foreign companies

A foreign company incorporated outside of France and its direct French subsidiary would not be deemed to [...]

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Persons Deemed Managing Directors in Fact in Germany Have Fiduciary Duties Under German Law

Corporate Deal Source is pleased to present the first of many blog posts with an international flavor.  Today’s post discusses a German Supreme Court decision that recently altered the fiduciary duty landscape for a GmbH (i.e., a German limited liability company).  Dr. Clemens Just summarizes briefly below how the German Supreme Court came to the conclusion that an individual lacking a formal appointment as a managing director of a GmbH may indeed owe fiduciary duties to the GmbH.  Understanding these new implications is critical not only for German deal-makers but also for international deal-makers doing deals in Germany.

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Under German corporate law, the managing director of a GmbH (German limited liability company) has general fiduciary duties to the company.  While this concept has not been laid down in German corporate law statutes, it has been widely accepted by German courts.  The precise scope of these fiduciary duties is somewhat unclear, but there is in general a broad understanding that managing directors of a GmbH: (i) must keep sensitive company matters confidential, (ii) in the event of a direct conflict of interest between the managing director and the company, the managing director must act to protect the company and (iii) the managing director is prevented from exploiting its position in the company to enrich itself at the expense of the company, i.e. by accepting a commission fee in exchange for arranging a transaction with the company.

In a recent decision, the German Supreme Court (BGH) had to analyse the question of whether a managing director in fact (i.e. a person without a formal appointment as managing director but who directly or indirectly exercises substantial influence over the company’s business decisions) may also be subject to such fiduciary duties.  This fiduciary duty was analyzed in connection with a criminal embezzlement action, however, the fiduciary relationship of the person to the company had to be clarified.  The BGH held that while the threshold whether an individual can be deemed to be a “managing director in fact” is high, once that threshold has been passed, the person in question will have fiduciary duties to the company.  Consequently, an individual who can be viewed as managing director in fact cannot argue that the lack of a formal appointment as managing director precludes him owing fiduciary duties to a company.  It should therefore be carefully checked whether the test criteria of a managing director in fact of a GmbH may apply, as this may mean that such person has fiduciary duties to the company in question and could be liable for damages if it violates those fiduciary duties. 

Welcome to McDermott’s Corporate Deal Source Blog

Where have all the transactions gone?  The first quarter has quietly passed by.  Just a few weeks ago, looking through the pipeline, one could see almost unimpeded to the other side, relatively empty as the bankers say.  But hope exists, as suddenly activity seems to be reemerging.  We call it letter of intent flow (more poetically, LOI Flow).  The beginnings of real transactions.  Concurrently with these beginnings, we launch our inaugural Corporate Deal Source Blog.  And perhaps timing is on our side and we are well positioned to ride the next wave of deal activity from its very beginning.

We set out here to provide commentary, not intended for other lawyers, but for our clients and those we hope will find benefit from becoming our clients.  Our goal is to dialogue as much as one can in the blogosphere and that our followers will help drive our content through comment and suggestion.  The Corporate Deal Source Blog aims to be a professional, yet light-hearted source of pertinent information.  Some posts will be pithy updates of the LOI Flow, announcements and important releases; others will be more comprehensive analysis of meaningful changes in law, pitfalls in transacting globally or recent trends in private equity buyouts.  We will also cover issues affecting family office direct investing, corporate finance, real estate transactions and other topics of interest.  But all well tied with a common theme: deal-making and the people who make them.

With that, we invite you to follow Corporate Deal Source—a must for any true deal-maker.  We promise to excite as much as any band of lawyers possibly can.