Drafting and Negotiating Corporate Agreements 2015

Transcription

1 CORPORATE LAW AND PRACTICE Course Handbook Series Number B-2144 Drafting and Negotiating Corporate Agreements 2015 Co-Chairs Alyssa A. Grikscheit Deborah J. Ludewig Kevin L. Morris To order this book, call (800) 260-4PLI or fax us at (800) Ask our Customer Service Department for PLI Order Number 58758, Dept. BAV5. Practising Law Institute 1177 Avenue of the Americas New York, New York 10036

2 13 Confidentiality Agreements, Standstill Agreements, Letters of Intent and Exclusivity Arrangements (PowerPoint slides) Eva H. Davis If you find this article helpful, you can learn more about the subject by going to to view the on demand program or segment for which it was written. 299

3 300 Practising Law Institute

4 Drafting and Negotiating Corporate Agreements Confidentiality Agreements, Standstill Agreements, Letters of Intent and Exclusivity Arrangements Eva Davis January 21,

5 Drafting and Negotiating Corporate Agreements Confidentiality Agreements Standstill Agreements Letters of Intent Exclusivity Arrangements

6 Confidentiality Agreements Purpose/Use: Solely for the negotiated business transaction between the parties (Seller favorable) vs. a transaction involving the parties (Buyer favorable) Evaluation Material: Oral/written Labeled or not Exceptions: public disclosure by others or independently verified Confidentiality: Evaluation Material Negotiated Business Transaction Even the fact that Evaluation Material was shared Highly Sensitive Evaluation Material: to Permitted Persons only (primarily antitrust driven) Responsible for Representatives: Lawyers, accountants and other advisors What about Financing Sources?

7 Confidentiality Agreements (cont d) Allowed [Public] Disclosure: Legally required (e.g., by subpoena) vs. Legally required disclosures (e.g., by self- imposed disclosures in a proxy statement in a hostile deal) [Reasonable efforts] to consult with other party prior to [public] disclosure Destruction of Evaluation Material: If N ti t d B i T ti d t d If Negotiated Business Transaction does not proceed Electronic copies? Keep in legal files in the event of future dispute, arbitration or proceeding? Term Injunctive Relief: Money damages will not be sufficient (Seller favorable) vs. Money damages may not be sufficient (Buyer favorable) Negotiated merger of two public companies: Not always obvious who is the Buyer and who is the Seller

8 Confidentiality Agreements (cont d) Key Cases: Martin Marietta Materials, Inc. v. Vulcan Materials Co., 68A.3d 1208 (2012) Supreme Court of Delaware Justice Jacobs The Supreme Court of Delaware upheld the decision by Chancellor Strine of the Delaware Court of Chancery, finding that Marietta Materials, Inc. s use of confidential information in its evaluation and launch of a hostile bid and disclosure of confidential information and confidential merger discussions in its securities filings were violations of its obligations to not use such information other than for the specific purposes as stated in the confidentiality agreement. Goodrich Capital, LLC v. Vector Capital Corp., 11 CIV JSR, 2012 WL (S.D.N.Y. June 26, 2012) The court held that Vector breached its obligation under the confidentiality agreement to not use Goodrich s confidential information other than for certain specific purposes when it used such information to pursue an alternative transaction

9 Standstill Agreements Express vs. Implied Standstill (see Confidentiality Discussion above regarding Use and legally required disclosure) For a period of [ ] from the date hereto [or until such earlier time as a Sale of the Other Party occurs], The Party and its affiliates will not (and neither such Party nor its affiliates will assist, provide or arrange financing to or for others [or encourage others to]), directly or indirectly, acting alone or in concert with others, unless specifically invited on an unsolicited basis [in writing] in advance by the [board of directors of the] other Party: (i) acquire or agree, offer, seek or propose to acquire (or request permission to do so), ownership (including, but not limited to, beneficial ownership as defined in Rule 13d-3 under the Exchange Act) of any of the assets [(other than [inventory] in the ordinary course of business)] or businesses of the other Party or any securities issued by the other Party, or any option or other right to acquire such ownership (including from a third party);

10 Standstill Agreements (cont d) (ii) seek or propose to influence or control the management or the policies of the other Party or to obtain representation on the board of directors (or any committee thereof) of the other Party, or solicit or participate in the solicitation of, any proxies or consents with respect to any securities of the other Party; (iii) seek or propose to have called, or cause to be called, any meeting of stockholders of the other Party; (iv) enter into any discussions, negotiations, arrangements or understandings with any third party with respect to any of the foregoing; (v) advise, assist, encourage, act as a financing source for or otherwise invest in any other person in connection with any of the foregoing activities; (vi) propose or seek to propose any business combination, recapitalization, restructuring, liquidation, dissolution or other extraordinary transaction with respect to the other Party or any of its subsidiaries; (vii) disclose any intention, plan or arrangement inconsistent with any of the foregoing; or (viii) seek to have the other Party amend or waive any provision of this Section (aka, Don t Ask, Don t Waive )

11 Standstill Agreements (cont d) Key Cases: In re Complete Genomics, Inc. Shareholder Litigation, C.A. No VCL (Del. Ch. Nov. 9, 2012) (transcript ruling) Vice-Chancellor Laster Vice-Chancellor Laster enjoined the enforcement of the Don t Ask/Don t Waive provision because it impermissibly limited the Genomics board s ongoing statutory and fiduciary obligations to properly p evaluate a competing offer, disclose material information, and make a meaningful merger recommendation to its stockholders. (p. 18) In re Ancestry.com, Inc. Shareholder Litigation, C.A. No CS (Del. Ch. Dec. 17, 2012) (transcript t ruling) Chancellor Strine Chancellor Strine clarified that there is no per se Delaware rule against DADW provisions and recognized that not allowing DADW provisions may debilitate the auction process, but also emphasizes that DADW provisions are potent and are subject to careful judicial review

12 Standstill Agreements (cont d) Key Cases: Koehler v. NetSpend Holdings Inc., 2013 Wl (Del. Ch. May 21, 2013) - Court of Chancery, unpublished opinion - Vice-Chancellor Glasscock Vice-Chancellor Glasscock acknowledged that DADW standstills can be justified to create an actual auction-like process, but in NetSpend s situation, once its board determined that there was to be a likely sale to TSYS, the Directors Revlon duties applied and the board s decision to continue the vitality of the DADW provisions and to import them into the Merger Agreement were not informed, logical or reasonable actions. (p. 19)

13 Standstill Agreements (cont d) Key Takeaways: Standstill provisions are used with care and for value-maximizing purposes consistent with directors fiduciary duties in order to withstand judicial scrutiny. Board and its advisors should be aware of the use and potency of DADW provisions, particularly in conjunction with non-solicitation provisions. Stockholders should be informed about the use and potency of DADW provisions prior to a stockholder vote on the sale of the target. Restrictions on private waiver requests are of particular concern. Target board should consider revising standstill agreements to include: (1) a carve-out allowing restricted bidders to privately request a waiver of the standstill (without the need for public announcement of the waiver), or (2) a fall-away provision stating that the standstill restrictions will automatically terminate upon the occurrence of certain events, such as the target t announcing or entering into a change of control transaction

14 Letters of Intent Pros: Focus on the key issues Set forth basic deal terms so parties can decide whether to proceed with transaction While not binding, in the absence of materially changed circumstances, key terms often don t change (e.g., a moral agreement) Momentum; Psychological value in getting an agreement early For certain parties may be tactical advantages/leverage to getting deal points determined early

15 Letters of Intent (cont d) Cons: Non-binding deal terms can become binding deal terms (e.g., due to earlier moral agreement) Set up expectations that may not be met Good faith negotiations to reach a deal -- binding obligation? Best efforts to reach a deal binding obligation? Risk: Emphatically say they are not binding, but party may rely on the words and actions of the other side and may have monetary damages based on reliance

16 Letters of Intent (cont d) Best Efforts: Despite its name, in California and Delaware, a best efforts provision requires only those efforts that are commercially reasonable under the circumstances. In New York, the cases are mixed requiring reasonable methods to complete a task in some cases (with the extent of performance required by reason being subject to the facts of the case, with varying results) and still other cases finding a covenant unenforceable without objective standards against which performance can be judged. Illinois courts tie best effort clauses to the implied obligation of good faith, which, absent explicit criteria, can be satisfied by a wide range of performance levels

17 Letters of Intent (cont d) Good Faith Negotiations California courts may find an intent to negotiate in good faith even when there is no unequivocal manifestation ti of the intent t to do so in the contract. t In New York, even a manifest intent to negotiate in good faith is largely unenforceable if material open terms remain outstanding at the time of the good faith commitment. In Delaware, however, an express duty to negotiate in good faith is likely enforceable even if the material terms to be negotiated remain open. In Illinois, the duty restricts parties from abandoning the deal or pushing for conditions at odds with the preliminary agreement, but only where such preliminary agreement explicitly contemplates good faith negotiations. As long as it is explicit that the parties intend to be bound to the duty, however, Illinois courts do not require that other material terms be agreed upon

18 Letters of Intent (cont d) Recommended Binding Terms: Governing Law Jurisdiction Exclusivity/Termination Dates Confidentiality Standstill (if included) Expenses/Expense Reimbursement for Failed Deal The disclaimer itself

19 Letters of Intent (cont d) Non-Binding Terms: Everything else, including any deal terms, such as purchase price determination and adjustments, t allocation of liabilities, representations, ti warranties and indemnity, it MAC/MAE clauses, break-up fees, non-compete, etc. Good faith negotiations or best efforts to reach a deal: remove these statements (or make non-binding term)

20 Letters of Intent (cont d) Key Cases: SIGA Technologies, Inc. v. PharmAthene, Inc., 67 A.3d 330 (2013) Supreme Court of Delaware Vice-Chancellor Parsons The Delaware Supreme Court held that PharmAthene was entitled to expectation damages for a breach of SIGA s contractual duty to negotiate in good faith because 1) SIGA contractually agreed to negotiate in good faith based on the terms of an unsigned and expressly non-binding term sheet, and 2) the parties would have reached an agreement but for [SIGA] s bad faith negotiations. C l d B ki R bbi 96 C l A 4 th 1251 (C l A 2002) Copeland v. Baskin Robbins, 96 Cal. App. 4 th 1251 (Cal. App. 2002) The California Court of Appeal held that plaintiff could maintain an action for breach of an agreement to negotiate, but was not entitled to expectancy damages because there is no way of knowing what the ultimate terms of the agreement would have been or even if there would have been an ultimate agreement. (p. 1264)

21 Letters of Intent (cont d) Key Cases: First Nat. Mortg. Co. v. Federal Realty Inv. Trust, 631 F.3d 1058 (2011) The Ninth Circuit upheld a jury verdict finding that the parties intended to form a lease when they signed a LOI with express language that the terms were accepted by the parties subject only to approval of the terms and conditions of a formal agreement, even though ultimately, no formal agreement was signed

22 Exclusivity Arrangements Who is bound? Seller, equityholders, directors, officers? Scope? Reorganization, dissolution, recapitalization, merger, consolidation Sale or license of all, substantially all or a material portion of assets Sale of debt or sale of certain specified assets Another transaction that would prevent or impede, delay or have adverse effect on proposed transaction Assist,,p participate, p negotiate or furnish information to others Obligation of Seller to notify Buyer if inquiry regarding a possible transaction (that would fall within Exclusivity definition) Cease all existing discussions Automatic termination after time period vs. Seller to affirmatively terminate

23 Exclusivity Arrangements (cont d) Key Case: Gemini Investors, Inc. v. AmeriPark, Inc., 643 F. 3d 43 (2011) The First Circuit upheld the district court s finding ambiguous the exclusivity provision of the non-binding term sheet s restriction to not discuss the financing for the transaction with any person or entity since this phrase was not defined

24 Eva Davis PARTNER Chair, West Coast Private Equity +1 (213) Practice Eva Davis is the Chair of West Coast Private Equity at Winston & Strawn. For more than 20 years, Corporate Governance Eva has advised her clients on U.S. and cross-border complex business transactions with a Corporate and Transactional particular focus on mergers and acquisitions and private equity. As an advisor to strategics and Mergers & Acquisitions private equity funds and their portfolio companies, Eva has counseled domestic and international Private Equity Transactions Securities and Capital Markets Education Harvard University, JD, 1990 Duke University, BA, 1987 Bar Admissions California clients in public and private M&A transactions, public and private debt and equity financing transactions, including initial public offerings, and distressed sales and investments in and out of bankruptcy. Eva has also represented public companies and their boards of directors and special committees in connection with enterprise-transformative business opportunities and legal challenges, as well as providing corporate governance advice. Eva has served as lead deal counsel and negotiated and completed transactions in a wide variety of industries, including automotive, consumer products, energy, entertainment, financial services, manufacturing, medical devices, pharmaceutical, retail, semiconductor, technology and telecommunications. Her transactional experience includes deals ranging from tens of millions of dollars (for initial private equity investments and financings) to more than $1 billion (for acquisitions, industry consolidations and dispositions). In 2014, Eva was recognized by Chambers USA in the Corporate/ M&A/ Private Equity category and was also honored with a Client Choice Award for her M&A work in California. Eva s clients describe her as terrific in mid-market private equity M&A: very straightforward, very knowledgeable and really gets to the meat of a negotiation process very well, and a multi-faceted legal professional who is flexible and easy to work with, and has a razor-sharp legal mind

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