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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.

An Alternative to M&A – Pre-Sale Joint Venture As First Step of a Staged Sale

At times when funding may not be available or general economic uncertainty may otherwise preclude a M&A transaction from being completed, it is worth contemplating a pre-sale joint venture as a viable alternative.  The advantages are clear.  For the ultimate seller, it can be the first step toward a full exit.  For the ultimate buyer, it provides a unique opportunity for a particularly thorough due diligence and valuation exercise.  While a pre-sale joint venture is not easily implemented, under certain circumstances the mix of assets, goodwill and/or know-how contributed by both parties may be more attractive, and the joint venture may be easier to accomplish, than identifying a party with the wherewithal or willingness to complete a traditional M&A transaction.  Cash will of course eventually change hands at the sale stage when the purpose of the joint venture has been fulfilled and one party purchases the joint venture from the other party.

While this type or “pre-sale joint venture” has many similarities to a more typical joint venture formed for an operating business purpose, there are some important differences.  For starters, while the lifespan of many joint ventures may be shorter than the parties might expect at the outset, the pre-sale joint venture version is short-lived by definition.  Governance and conflict resolution remain very important issues to consider and negotiate, but given that the eventual sale is a main driver rather than a distant or remote possibility, the exit plan is key to the parties, but preparing the exit upfront can lead to tough negotiations.

Joint venture exit mechanisms are legendary both for their dramatic names and their unpredictability – “shootouts,” “standoffs” and “Russian roulettes.”  If from the very beginning the parties intend to separate from the joint venture, the best advice may be to opt for an unassumingly named but efficient combination of put and call options, which gives both joint venture partners a guaranteed right to buy or sell according to their long-term strategies.  Obviously, to be able to implement such a structure, there must be a clear understanding as to how the acquiring partner will fund the other partner’s exit, and importantly how the buyout price will be determined.

There are a number of ways to price such a transaction.  For example, a formula may be used to determine value if the options are exercisable within a fixed time period or the parties may elect to base the price on market value or the net asset value, which may be determined by a third party appraisal or otherwise.  Whatever the method, it is crucial that the joint venture agreement sets out a clear and detailed mechanism for determining price, including such items as calculation methods, reference dates, roles and identity of experts and many more.

Maybe more than any other business combination, joint ventures are risky and uncertain despite negotiating the most detailed provisions in the joint venture agreement.  But one question each party will have to answer is whether they want a risky and uncertain deal [...]

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Caveat Emptor: Successor Liability for FLSA Claims

One of the primary advantages to acquiring businesses through asset sales as opposed to stock sales is the buyer’s ability to avoid successor liability.  There are exceptions to this rule in most states, including:  (i) impliedly or expressly assuming the liability in the asset purchase agreement; (ii) fraudulent sales of assets for the purpose of escaping liability; (iii) sales that are de facto mergers; and (iv) where the purchase is a mere continuation of the seller.  As a general matter, these exceptions are difficult to prove for parties seeking to establish successor liability.

In Teed v. Thomas & Betts Power Solutions, LLC, the U.S. Court of Appeals for the Seventh Circuit recently addressed the limits of successor liability and ruled that an asset purchaser was liable for the seller’s pre-sale violations of the Fair Labor Standard Act (FLSA).  The company, faced with a lawsuit for FLSA violations, defaulted on their bank loan.  The company’s subsidiary ended up in receivership and its assets were sold for $22 million.  The sale agreement provided that the sale was “free and clear of all liabilities” and expressly excluded any liabilities related to the existing FLSA litigation.

The Seventh Circuit ruled that a determination of successor liability for FLSA claims should be made pursuant to federal common law, not state law.  Although the buyer in this case appropriately disclaimed all successor liability for most claims under applicable state law, the buyer was not absolved of successor liability for FLSA claims.  Under federal law, unless there is a “good reason” to withhold it, successor liability should be enforced with respect to federal labor and employment laws.

The Seventh Circuit discussed hypothetical examples of “good reasons.”   Certain examples are fairly straightforward, such as lack of notice of the claim.  The court also discussed the possibility that finding successor liability existed gave preference to litigation creditors over secured creditors because the buyer would have paid less at auction if it knew FLSA claims were being assumed.  The court rejected the argument because the buyer clearly priced the transaction assuming that the FLSA claims would be left behind.

While addressing various arguments, the Seventh Circuit discussed sales in Chapter 7 or 11 bankruptcy cases, noting that the estate has obligations to maximize recovery for all creditors and to enforce a rigid statutory priority scheme.  The court implied that a sale in bankruptcy could occur free of FLSA obligations.  There is substantial authority in other jurisdictions for the proposition that sales pursuant to Bankruptcy Code section 363 can occur free and clear of labor and employment liabilities.

The Teed case serves as a cautionary tale to purchasers of distressed assets.  Purchasers should not get too comfortable in the assumption that pursuing asset sales avoids all successor liability and carefully evaluate both federal and state standards for successor liability for all claims, especially labor and employment claims.  If substantial risk exists, purchasers should consider requiring that the sale occur pursuant to a formal bankruptcy case.

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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Accelerating Back-End Mergers in Public Company Acquisitions

The Corporation Law Section of the Delaware State Bar Association has proposed legislation that will amend the General Corporation Law (DGCL) to allow public companies to opt out of the current requirement to obtain stockholder approval of the back-end merger following a successful tender offer in which the buyer has obtained a majority of the target company’s voting stock.  Traditionally, an accelerated back-end merger was only available if the buyer first obtained 90 percent ownership following a successful tender offer.  In situations where the buyer was unable to achieve this 90 percent threshold, the buyer was required to proceed with the formality of obtaining stockholder approval of the back-end merger, which required the preparation of a proxy statement that would be filed with, and subject to the comments of, the Securities Exchange Commission (SEC) before it could be mailed to the target company’s stockholders in advance of the stockholder meeting to approve the back-end merger.  In addition, if the buyer was using debt financing to acquire the target company’s stock, then this delay between the closing of the tender offer and the stockholder vote approving the back-end merger frequently required the buyer to obtain bridge financing.

Avoiding the cost and delay of such “long form” back-end mergers (and avoiding the need for bridge financing) caused buyers of public companies either (a) to shun the tender offer process entirely or (b) to utilize various tools in an attempt to avoid financing constraints or ensure a faster timetable, such as the use of top-op options, subsequent offer periods under Rule 14d-11, the “Burger King” dual track tender offer/proxy statement structure, stockholder action by written consent, and other creative alternatives.  However, if Delaware adopts proposed Section 251(h) to the DGCL as expected in August 2013, then buyers will be able to acquire Delaware public companies through a tender offer without the need for a “long form” back-end merger or  top-up options, subsequent offer periods or other alternatives.  Specifically, under proposed Section 251(h), a buyer would be able to acquire a Delaware public company (defined as a corporation whose shares are listed on a national securities exchange or held by more than 2,000 stockholders) through a tender offer without stockholder approval of the back-end merger, if the following requirements are satisfied:

  • the merger agreement must expressly state that the back-end merger is governed by Section 251(h) and will be consummated “as soon as practicable” following completion of the tender offer;
  • the buyer must initiate and consummate the tender offer for the target company’s shares otherwise entitled to approve the back-end merger;
  • after the consummation of the tender offer, the buyer must own at least the number of shares of the target company otherwise necessary under the DGCL to approve the back-end merger;
  • at the time the target company’s board approves the merger agreement, no party to the merger agreement is an “interested stockholder” of the target company pursuant to Section 203(c) of the DGCL;
  • the buyer must merge with or into the target [...]

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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.

Private Equity Firms Achieve Only Partial Dismissal of “Buying Club” Antitrust Lawsuit

The U.S. District Court for the District of Massachusetts recently limited the scope of a proposed shareholder class action against a number of private equity firms that participated in buyer consortia (Kirk Dahl et al. v. Bain Capital Partners LLC et al., Case No. 1:07-cv-12388 (D. Mass. Mar. 13, 2013).  Plaintiffs, shareholders of 27 companies acquired by the buying “clubs” from 2003 to 2007, allege that the private equity firms conspired to hold down the prices paid for the acquisition targets.  Among the defendants are Bain Capital LLC, KKR & Co. LP, the Carlyle Group LP, and other prominent private equity firms.

The court’s decision criticized plaintiffs for making broad claims of a conspiracy based on evidence of friendly relationships among executives of the private equity firms and the fact that losing bidders were sometimes invited by winning bidders to form bidding clubs.  Instead, the court narrowed plaintiffs’ conspiracy claim to allege only that rival firms were prohibited from “jumping” each other’s deals or submitting competing bids once the agreements were made public.

This case was first filed in 2007, when some firms disclosed that the Department of Justice was investigating their activity.  A similar case was dismissed in 2008 (Pennsylvania Avenue Funds V. Borey, et al., Case No. C06-1737RAJ (W.D. Was. Feb. 21, 2008)).  There, the plaintiff, a shareholder of the target, alleged that at the end of the bidding process, the two previously rival bidders conspired to withdraw one of the bids and then substantially lower the remaining bid.  In dismissing the complaint, the court held that the defendants’ conduct was not unlawful per se under the antitrust laws and that plaintiff’s claims did not satisfy the rule of reason analysis based in part on facts specific to target.  (For more information on this case, please see our earlier publication, “Court Dismisses Antitrust Challenge to Joint Bid in Corporate Acquisition.”)

Although the court dismissed some of plaintiffs’ claims in the current case, the court allowed the case to proceed, illustrating the need to exercise extreme caution in connection with the formation of bidding consortia and related conduct in the context of auction processes.  Parties considering a joint bid should assume that bids could be reviewed under the antitrust laws.  Parties can reduce their antitrust risk by engaging in joint bids for pro-competitive reasons, such as allocating risk or pooling financial resources together, and not just to depress the price to be bid for the target.