Share this Cooley M&A Team News - January 2014 February 5, 2014 Cooley M&A Team News IN THIS ISSUE JANUARY 2014 LOOKING FORWARD, LOOKING BACK Ten Most Influential M&A Developments of this Millennium Our choices for the 10 Most Influential M&A Developments of this Millennium and a few predictions for the future. FTC/DOJ DEVELOPMENTS Revised 2014 Hart-Scott-Rodino Antitrust Thresholds— Effective February 24, 2014 New, higher thresholds will take effect on February 24, 2014 and apply to all transactions which close on or after this date but before the next round of adjustments take effect in early 2015. FTC Expands HSR Reporting Obligations—Targeting Pharmaceutical Licensing Deals A new FTC rule targets the pharmaceutical industry and requires HSR notices for a broader array of licensing transactions. PRACTICE POINTERS Lengthening the Indemnification Claims PeriodDelaware law limits parties' ability to contractually agree to lengthen the period for making claims beyond the applicable statute of limitations. COOLEY NEWS Cooley Bolsters East Coast M&A Capability Cooley combined with Dow Lohnes PLLC's Washington, DC office, adding more than 50 attorneys and many other non-lawyer professionals and industry specialists. RECENT TRANSACTIONS LOOKING FORWARD, LOOKING BACK Ten Most Influential M&A Developments of this Millennium By Barbara Borden and Jennifer Fonner DiNucci, Partners, Cooley LLP, as originally published in the January-February 2014 issue of Deal Lawyers As we turn the page on a new year, many of us reflect upon the noteworthy events of the past as we look forward to the future. Deal lawyers are not exempt from this phenomenon. We present herewith our choices for the 10 Most Influential M&A Developments of this Millennium and a few predictions for the future. Though our observations may not attract the same degree of public attention as Time's "Person of the Year," we expect just as much protestation from this audience ("how could you have left off Dell/Icahn") as besets People's "Sexiest Man Alive" issue—but please make sure you properly address your complaints, as People would surely be quite confused…. "Selling a Public Company" for Dummies. Early on in the millennium, deal lawyers joyously welcomed Toys "R" Us as providing much needed guidance on a myriad of issues involved in both structuring the sales process and negotiating the terms of the agreement itself. The fact that there is little remarkable about it today speaks volumes about the impact it has had on our practice. Deal Litigation du Jour. The advent of virtually automatic deal litigation over public company acquisitions put new emphasis on the duty of candor and changed the face of stockholder disclosure, with more fulsome disclosure of the sale process, financial projections, fees paid to financial advisors and the analyses underlying the banker's fairness opinion. Has all this disclosure been more valuable to investors or to plaintiffs' attorneys seeking fees? Regardless, detailed disclosure is here to stay. Financial Advisors Are Conflicted? Del Monte and the subsequent damages award provided a wake up call on financial advisor conflicts of interest and the risks of sell-side financial advisors providing buyer financing. Seller boards now pose conflict of interest questions to their bankers and are disinclined to allow their advisors to participate in buy side financing. But if your banker has no conflicts, does it have the connections for the job? Conflicts will remain an area of risk and banks will improve in identifying and disclosing potential conflicts earlier in the process. COOLEY M&A TEAM NEWS Read prior editions of Cooley M&A Team News: December 2013 October 2013 Controlling and Interested Party Transactions, Entire Fairness and the Rise of the "Unified Standard." A host of cases have moved us down a convoluted path of burden-shifting and standard setting in transactions involving controlling or interested parties. The recent MFW case may be the Toys "R" Us of the decade if it stands up to scrutiny and brings more cohesion to what is currently the most complex corner of M&A law. Attack of the MAC. IBP/Tyson and Frontier Oil/Holly were followed by a spate of financed deals involving claims of "material adverse change" in beleaguered 2008, (witness Genesco/Finish Line and Hexion/Huntsman), and was the subject of the recent Osram Sylvania /Townsend Ventures case. No other defined term has received more attention in the M&A world. Do we know what it means yet? Probably not, but we'll all likely stay the course with deliberately vague language and the courts will have more opportunities to weigh in. Protection from Deal Protections. In a variety of instances, the Delaware Chancery Court has shown a reluctance to enjoin a transaction that has a "standard" mix of deal protections, but if the parties have to amend an agreement's aggressive deal protections to settle litigation, the Court may award substantial fees (see Compellent Technologies). Will this curb strong-arming buyer behavior? Buyers beware. The Golden Age of Tender Offers. The SEC's amendments to the "all-holders, best price" rule gave new life to the two-step tender offer, and the adoption of Section 251(h) of the Delaware General Corporation Law virtually eliminated the need for top-up options and dual track tender offers and should eliminate the need for 14f-1 information statements. There's a cloud hanging over 251(h) and obtaining support (tender) agreements in connection with tender offers, but we predict Delaware will provide statutory clarification. Private Companies, Public Scrutiny. Fiduciary duties and entire fairness review have never been just for public companies, a fact seemingly sometimes lost on private company boards. In re Trados is a reminder, particularly to preferred investors and their board representatives, that process matters in private company deals too. We predict private company sell-side deal processes will come more into alignment (though likely still far from aligned) with what we see in public company practice. Omnicare Ails Us. It changed practice, gave us SEC headaches in private company S-4 deals and is broadly viewed as the precedent "Most Likely Not to Succeed." Predict we will see its demise in this decade. Don't Ask, Don't Waive. Did you start the millennium thinking it would be reasonable to ask your sell-side client's board of directors to allocate time at a board meeting to discuss and approve including seller-favorable standstill provisions in non-disclosure agreements? Neither did we. Happy New Year to you all and may 2014 bring us many more exciting M&A developments to discuss! FTC/DOJ DEVELOPMENTS Revised 2014 Hart-Scott-Rodino Antitrust Thresholds—Effective February 24, 2014 The Federal Trade Commission has completed its annual adjustments to the filing thresholds under the Hart-Scott-Rodino (HSR) Act. The new, higher thresholds will take effect on February 24, 2014 and apply to all transactions which close on or after this date but before the next round of adjustments takes effect in early 2015. With these adjustments, many transactions valued at over $75.9 million (instead of the current $70.9 million level) and closing on or after the effective date will trigger an HSR filing. Parties entering transactions which would satisfy the current HSR thresholds but not trigger a filing based on the adjusted figures should keep in mind that it is the closing date—not the date of the agreement—which governs which set of thresholds will apply. Although parties are allowed to submit a filing if their transaction satisfies the current thresholds, regardless of when their transaction is set to close, those for whom the new thresholds put them outside the reach of HSR have the option of simply waiting until February 24, and then closing without a filing. The threshold adjustments have modified in other key ways, including with respect to the size-of-person test ($151.7 million/$15.2 million instead of $141.8 million/$14.2 million with respect to the parties' revenues or total assets), the increase to $303.4 million of the "larger" part of the size-of-transaction threshold—which renders the size-of-person inapplicable—and the resetting of dollar thresholds setting the filing fee tiers and the levels tied to numerous exemptions such as the one relating to acquisitions of the voting securities of foreign issuers. The thresholds remain just one part of the, often complex, filing analysis but the adjustments will soon provide a small amount of additional room before transactions risk triggering filing requirements. FTC/DOJ DEVELOPMENTS FTC Expands HSR Reporting Obligations—Targeting Pharmaceutical Licensing Deals A new Federal Trade Commission ("FTC") rule, which became effective December 16, 2013, targets the pharmaceutical industry and requires Hart-Scott-Rodino Act (HSR) notices for a broader array of licensing transactions, expanding the types of deals that have to be notified to the government to allow antitrust enforcement agencies to scrutinize whether those deals may violate antitrust law before the licenses become effective. HSR filings are generally required for transactions valued over about $70 million (increased threshold of $75.9 million will become effective on February 24, 2014). The FTC has long required notification of exclusive licenses to patents that transfer the right to "make, use and sell" a product, such as a drug, to another firm. Previously, if the licensor retained rights to manufacture or use the product, the license was considered non-exclusive and no HSR filing was required. However, the new rule requires notification of licenses that transfer "all commercially significant rights" to "any therapeutic area (or specific indication within a therapeutic area)," even if the licensor retains manufacturing or other rights. Importantly, these rules are only applicable to the pharmaceutical industry, underscoring the Commission's intense scrutiny of the industry. The new notification requirements provide the Commission with the authority to review and potentially challenge additional transactions in the industry—including transactions by innovators that grant rights to larger firms to develop and commercialize a product. The new rule is a significant development for pharmaceutical companies because it sets up hurdles to the use of common business arrangements that have immense importance to the industry. Any contemplated exclusive pharmaceutical license agreement that meets the HSR thresholds must be notified, and the parties must observe the mandatory HSR waiting period, before the license becomes effective. Companies must take the delay of HSR review into their plans when considering license agreements. Increased burdens and transaction costs that parties to exclusive pharmaceutical licenses should consider include: (i) determining if a transaction's value exceeds the HSR thresholds; (ii) negotiating appropriate risk-shifting contractual provisions in connection with the license; (iii) preparing any necessary HSR filings; and (iv) defending the substantive merits if the FTC staff decides to investigate the potential competitive effects of a transaction. PRACTICE POINTERS Lengthening the Indemnification Claims Period Delaware law limits parties' ability to contractually agree to lengthen the time period for making claims beyond the statute of limitations that would otherwise apply to the underlying claims. A line of Delaware cases (the most well known of which is GRT, Inc. v. Marathon GTF Technology, Ltd.) have held that the public policy behind statutes of limitations overrides contract language that states that representations and warranties survive "indefinitely". In such cases, Delaware courts will hold that the underlying statute of limitations governs the time period in which actions for breach may be brought. While not a new issue, this limitation under Delaware law is currently receiving attention among M&A lawyers because of the practical issues it creates for drafting agreements that implement the parties' intent. For example, claims based upon inaccurate representations would usually be based upon a breach of contract claim, for which the statute of limitations in Delaware is three years from the time of breach. As a result, a business agreement that the time period for making claims based upon "fundamental representations" shall be longer than three years presents issues for the M&A lawyers seeking to draft enforceable contract language that implements the parties' intent. Because of the potentially disastrous consequences of improperly addressing this issue in the contract, all M&A lawyers should understand the law in this area and have strategies for addressing the issues it creates. COOLEY NEWS Cooley Bolsters East Coast M&A Capability On January 1, Cooley combined with Dow Lohnes PLLC's Washington, DC office. Through the transaction, Cooley added more than 50 attorneys and many other non-lawyer professionals and industry specialists. Among those additions, we have added three partners to our M&A practice with significant deal experience, particularly in the communications, media and higher education sectors. John Byrnes has 30 years of experience as a transactional lawyer. He has broad experience working with clients in the cable television, broadcast, newspaper and technology industries. He has handled large and complex mergers, acquisitions and dispositions for cable operators, cable network owners, broadcast and newspaper owners, and technology companies. He has also assisted clients in the structuring and operations of joint ventures, strategic alliances and partnerships. He has also spent considerable time providing strategic counseling to substantial family owned businesses. Kevin Mills has nearly 20 years of experience focused on the media and communications industries as a transactional and business lawyer. He advises early and late-stage companies, private equity firms and entrepreneurs in the cable, broadband, broadcast, print, entertainment, telecom, technology, online and sports-related sectors. He has negotiated and closed numerous corporate buyouts, mergers and acquisitions, joint ventures, investments, and strategic partnerships. Ed O'Connell's practice covers a wide variety of M&A, transactional, corporate, financing and securities law matters, with a special focus on higher education institutions and media, communications and entertainment companies, as well as joint ventures between non-profit and for-profit entities in the post-secondary education sector. He has represented many media and cable companies and many of the largest investment banks in the United States. He also represents private equity and venture capital firms in connection with fund transactions and investments in the education, media, communications and Internet industries.