Tag: mergers

FTC Announces 2024 Increase in HSR Notification Thresholds and Filing Fees

The Federal Trade Commission (FTC) has announced the annual revisions to the Hart-Scott-Rodino Antitrust Improvements Act (HSR Act) thresholds and HSR filing fees, which will become effective on March 6, 2024. The revised thresholds will apply to any merger or acquisition closing on or after the effective date.

The FTC is required to adjust the HSR thresholds annually based upon the change in gross national product. This year, the change in the “size of transaction” threshold has increased from $111.4 million to $119.5 million.

Under the HSR Act, when a deal satisfies the “size of person” and “size of transaction” thresholds, and no exemption from reporting is available, the deal must be reported to the FTC and the US Department of Justice, and the parties must wait for a designated period of time before closing the transaction.

Size of Person. The revised size of person thresholds will generally be met if one party involved in the deal has assets or annual sales totaling $239 million or more and one other party involved in the deal has assets or annual sales of at least $23.9 million. Satisfaction of the size of person thresholds is not required, however, if the transaction is valued at more than $478 million.

Size of Transaction. The revised size of transaction threshold will be met if the buyer will hold an aggregate amount of stock, non-corporate interests and/or assets of the seller valued at more than $119.5 million as a result of the deal.

The notification thresholds applicable to purchases of voting securities will increase as follows:

February 1, 2001 Thresholds (Original) Current Thresholds as of February 27, 2023 New Thresholds Effective March 6, 2024
$50 million $111.4 million $119.5 million
$100 million $222.7 million $239 million
$500 million $1.1137 billion $1.195 billion
25% if worth more than
$1 billion		 25% if worth more than $2.2274 billion 25% if worth more than $2.39 billion
50% if worth more than
$50 million		 50% if worth more than $111.4 million 50% if worth more than $119.5 million

The thresholds applicable to many exemptions, including those governing foreign acquisitions, also will increase. However, the $500 million threshold applicable to acquisitions of producing oil and gas reserves and associated assets will not change.

The civil penalty for failing to comply with the notification and waiting period requirements of the HSR Act has also increased to up to $51,744 per day for each day a party is in violation.

HSR Filing Fees. Additionally, the HSR filing fee thresholds and filing fee amounts have increased as follows:

Original Filing Fee Original Applicable Size of Transaction 2024 Adjusted Filing Fee 2024 Adjusted Applicable Size of Transaction
$30,000 Less than $161.5 million $30,000 Less than $173.3 million
$100,000 Not less than $161.5 million but less than $500 million $105,000 Not less than $173.3 million but less than $536.5 million
$250,000 Not less than $500 million but less than $1 billion $260,000 Not less than $536.5 million but less than $1.073 billion
$400,000 Not less than $1 billion but less than $2 billion $415,000 Not less than $1.073 billion but less than $2.146 billion
$800,000 Not less than $2 billion but less than $5 billion $830,000 Not less than $2.146 billion but less than $5.365 billion
$2,250,000 $5 billion or more $2,335,000 $5.365 billion or more

The new fees also will become effective on March 6, 2024.

© 2024 Bracewell LLP
For more news on FTC Merger and Acquisition Regulations, visit the NLR Antitrust & Trade Regulation section.

Structuring the Acquisition of an S Corporation

Introduction

S corporations, or S-corps, are one of the most popular entity choices for businesses. In contemplating the sale of an S-corp, it is important to plan how the transaction is structured from a tax perspective (ideally before an LOI is signed), both to maximize the gain on the sale and avoid pitfalls that can result in liabilities for the selling shareholders.

For corporate purposes, businesses are generally formed as limited liability companies, partnerships, or corporations. For tax purposes, however, entities are taxed as corporations, partnerships, or disregarded entities.[1] Corporations[2] are taxed as either a C corporation or an S corporation. C corporations are taxed at the corporate level and again at the shareholder level.[3] S corporations are corporations that, for federal tax purposes, elect to pass corporate income, losses, deductions, and credits through to their shareholders and are only taxed at the shareholder level.[4]

To qualify as an S corporation, the corporation must meet the requirements of Section 1361,[5] which provides that the corporation not have more than 100 shareholders, not have non-individual shareholders (with the exception of certain types of trusts, estates, and tax-exempt organizations), not have a nonresident alien as a shareholder, not have more than one class of stock, and not be an ineligible corporation (as defined in the Code).[6]

When sellers begin to explore the sale of their business, tax considerations are important to discuss at the outset so that the seller and buyer are on the same page – no one wants to attempt to renegotiate the terms of a deal in the middle of a transaction. For tax purposes, acquisitions of companies are categorized as either an asset purchase or stock purchase. In general, owners prefer to sell their stock (as opposed to the company’s assets) for a few reasons. First, a stock sale results in capital gain to the shareholders because their stock is a capital asset.[7] In an asset sale, however, noncorporate sellers (including S-corp shareholders) recognize ordinary income or capital gain, depending on the type of asset sold. Second, unlike in an asset sale, a stock sale may not require the seller to transfer company assets and licenses or obtain third party consents.

On the other hand, buyers usually want to engage in an asset sale to obtain a step-up in basis of the purchased assets. In a stock acquisition, the buyer gets a carryover basis in the acquired corporation’s assets, without any basis step-up. In an asset purchase, however, the buyer takes a cost basis in the assets, including in the target corporation’s goodwill (which otherwise will generally have a zero basis), and allows the buyer to take higher depreciation deductions to reduce the buyer’s annual tax liability.[8] Unless otherwise agreed, the buyer also does not assume corporate liabilities in an asset sale.

Sellers who agree to engage in an asset sale should negotiate with the buyer to be compensated for the additional tax that the seller may incur for engaging in an asset sale.

There are two additional ways for a buyer to obtain a basis step-up in the seller’s assets. The first is a 338(h)(10) election under Section 338 and the second is an F reorganization pursuant to Section 368(a)(1)(F) and consistent with Revenue Ruling 2008-18.[9]

Making the 338(h)(10) Election

A buyer and seller will sometimes make a 338(h)(10) election, which treats an acquisition of a corporation’s stock as a sale of assets for federal income tax purposes, but a sale of stock for legal purposes.[10] The sale is treated as if buyer and seller engaged in a regular asset sale for income tax purposes (so the buyer obtains a step-up in the tax basis of the assets), yet the seller does not need to re-title each asset.[11] Seller does not have capital gain on the sale of stock. Instead the parties must allocate the sales price among the assets based on each asset’s fair market value.[12] The price paid in excess of the fair market value of the tangible assets of the business is allocated to business intangibles and then to goodwill.[13]

The 338(h)(10) election is only available if a “qualified stock purchase” is made.[14] A “qualified stock purchase” is defined as any transaction (or series of transactions) in which a corporation purchases at least 80% of the stock (both voting and value) from a member of a consolidated group(as defined in 1.1502-1) or from shareholders of a S corporation during a 12 month period.[15] If during diligence it is revealed that the target corporation in fact failed to qualify as an S corporation, the 338 election will be invalid.[16] If the Section 338(h)(10) election is invalid, the transaction will be treated as a straight stock sale and buyer will not receive a basis step-up in the target’s assets.

A section 338(h)(10) election is made jointly by the purchaser and seller on Form 8023.[17] S corporation shareholders who do not sell their stock must also consent to the election. The election must be made not later than the 15th day of the 9th month beginning after the month in which the acquisition date occurs.[18]

If the target failed to qualify as an S corporation (thereby becoming a C corporation), an election can be made to treat the sale of the corporation’s stock as an asset sale under Section 336(e). The election can be made if target is owned by a parent corporation that sells at least 80% of target’s stock.[19] A 336(e) election closely resembles a 338(h)(10) election, but the purchaser does not have to be a corporation.[20] Note that a transaction that qualifies under both 336(e) and 338(h)(10) will be treated as 338(h)(10) transaction.[21]

Consequences of a 338(h)(10) Election

Under the Regulations, the target corporation is treated as making a deemed sale of its assets and liquidating following the deemed asset sale.[22] The transaction is treated as a taxable acquisition of 100% of the target’s assets for income tax purposes.[23] This means that the stock cannot be acquired in a tax free transaction or reorganization (such as a transfer to a controlled corporation, merger or spinoff) or a transaction where the seller does not recognize the entire amount of gain or loss realized on the transaction.[24]

Issues with a 338(h)(10) Election

While the 338 election can be a useful way for a buyer to achieve a basis step-up without burdening the seller to retitle and transfer assets, the following disadvantages of the election should be considered:

  1. The rules under Section 338 require all S corporation shareholders (whether or not they sell their stock) to pay tax on all of the target’s assets, even if selling less than 100% of the target.[25] This effectively eliminates any structuring of a deal on a tax-deferred basis (i.e. where seller only pays tax on the consideration attributable to non-rollover equity). Sellers need to be aware that they will pay tax on all of the target company’s assets regardless of the percentage of assets sold.
  2. The election presents an issue for rollover transactions where the seller rolls over more than 20% of its equity on a pre-tax basis in a Section 721 or Section 351 transaction (in which seller receives equity in buyer, buyer’s parent, a holding company that holds target, or another form of equity). Rolling over more than 20% of equity will invalidate the 338(h)(10) election because it will not meet the “purchase” requirement under Section 338.[26]
  3. If the target company’s S corporation election turns out to be invalid (which happens frequently due to the ease with which S corporation status can be voided), the 338(h)(10) election will be invalid, thereby eliminating any advantage provided by the election.[27] Note that the seller will also be in breach of its representations and warranties under the purchase agreement.

F-Reorganization

An alternative to a 338(h)(10) election is an F reorganization, or F reorg., which allows sellers to avoid the potential issues that come with a 338 election. In an F reorg., the seller recognizes gain only with respect to the assets that it is deemed to have sold, allows the seller to roll over equity on a pre-tax basis, and avoids some of the risk that the target may have not properly qualified as an S-corp (thereby invalidating a Section 338(h)(10) election).

Engaging in an F-Reorganization

The first step in an F reorg. is to engage in a tax free reorganization of the S-corp.[28] Shareholders of the target S-corp (“T”) form a new corporation (“Holdco”) and transfer their shares in T to Holdco in exchange for Holdco shares. As a result of the transaction, T shareholders own all shares of Holdco, which in turn owns all shares of T, making T a fully owned subsidiary of Holdco. Holdco then elects to treat T as a Qualified Subchapter S Subsidiary (“QSub”) by making the election on form 8869. For federal tax purposes, T, as a QSub, becomes a disregarded entity and all assets and liabilities of T are treated as part of Holdco.[29] Note that the QSub election made by T also suffices as the S-corp election for Holdco.[30] After T becomes a QSub of Holdco, T converts into a limited liability company (“LLC”) under state law in a nontaxable transaction by converting from one disregarded entity to another.[31] Holdco will need to obtain its own EIN, but T retains its old EIN after the conversion.[32] Once the conversion to an LLC is complete, the shareholders of Holdco can sell some or all of the LLC interests of T; the sale is treated as an asset sale for tax purposes, thereby resulting in a step up in basis for the purchaser.[33] The seller recognizes gain from the deemed sale of each asset of T. If less than 100% of the LLC interests are sold to the buyer, the transaction is treated as the purchase of a proportionate interest in each of the LLC assets, followed by a contribution of the respective interests to a partnership in exchange for ownership interests in the partnership, resulting in a stepped up basis in the assets for buyer.[34] In this scenario, T is no longer a QSub and is converted to a partnership for tax purposes.[35]

Note that a straight conversion of the existing S corporation target from an S-corp to an LLC should not be done because it is treated as a taxable liquidation of the S corporation (i.e. a deemed sale of its assets) resulting in a fully taxable event to the shareholders.[36]

Alternatively, the S-corp could form a new LLC, contribute all its business assets and liabilities to the new LLC in exchange for the LLC interests, and sell the LLC interests to the buyer. However, the transfer of assets might require third party consents; the F reorg. achieves the same result without any potential assignment issues, and even preserves the historical EIN of the S-corp.

Advantages of an F-Reorganization

The F-reorganization is an effective way to avoid the issues that arise with a 338(h)(10) election:

  1. If the acquisition is for less than 100% of the target, the S-corp shareholders will only recognize gain on the portion of the LLC sold by the S-corp parent. Any portion of the LLC interests rolled over will be tax-deferred. Rollover transactions are perfectly suitable in a F reorg. and do not present the issues that come with a 338(h)(10) election.
  2. The converted LLC retains its old EIN number and is essentially the same entity for legal purposes. This can be useful for a target in a regulated industry (such as healthcare, food services, manufacturing, etc.) by possibly avoiding the need to reapply for new permits and licenses.
  3. An F reorg. can be useful for planning purposes under Section 1202 (Qualified Small Business Stock, or QSBS), which allows shareholders of a C corporation to exclude from their taxable income the greater of ten million dollars or ten times the adjusted basis of their stock upon a sale.[37] One requirement is that the stock must be stock of a C corporation, not an S corporation.[38] S corporation shareholders who want to qualify under 1202 can perform an F reorg. and contribute the LLC interests of their operating company to a newly formed C corporation in a tax free exchange under 351. The S corporation (which owns the C corporation which owns the LLC) is now an eligible shareholder of QSBS and will qualify for favorable treatment under Section 1202.[39]

Footnotes

[1] Reg. §301.7701-2. Entities may also be taxed as cooperatives or as tax-exempt organizations if the statutory requirements are met.

[2] For purposes of this article, a corporation includes a limited liability company (LLC) that has elected to be taxed as a corporation.

[3] IRC §11(a).

[4] IRC §1363. For state tax purposes, treatment of S corporation status varies – certain states either conform with the federal treatment or conform with certain limitations and adjustments, while others do not recognize the S election at all and tax S corporations as regular corporations. In particular, California imposes an entity level tax of the greater of $800 or 1.5% of net income.

[5] Section references are to the Internal Revenue Code of 1986, as amended.

[6] See IRC §1361 (for example, an insurance company or certain financial institutions). In addition, Form 2553 must be filed to make the S corporation election.

[7] See IRC §1221(a).

[8] See IRC §1012(a) and §167.

[9] A 338(g) election also obtains a basis step-up, but results in two layers of tax and is not generally used for domestic transactions.

[10] IRC 338(a).

[11] Reg. 1.338(h)(10)-1(d)(9).

[12] In accordance with the allocation provisions set forth in IRC 1060 and Reg. 1.338-6 and 1.338-7.

[13] Reg. 1.338-6(b)(vi) and (vii).

[14] IRC 338(a).

[15] IRC 338(d)(3) and Reg. 1.338(h)(10)-1(c). For the purposes of this article, we assume that target is a standalone S-corp.

[16] Reg. 1.338(h)(10)-1(c)(5). However, the transaction may still qualify under Section 336(e). See below.

[17] Reg. 1.338(h)(10)-1(c)(3). Form 8883 also needs to be filed. If an F reorg is done, form 8594 will need to be filed.

[18] Reg. 1.338(h)(10)-1(c)(3).

[19] Reg. 1.336-2(a). The election is made unilaterally by seller and target. See Reg. 1.336-2(h).

[20] Reg. 1.336-1(b)(2). See Reg. 1.336-1 – Reg. 1.336-5 for the mechanics of making the 336(e) election and what qualifies as a “qualified disposition” under 336.

[21] Reg. 1.336-1(b)(6)(ii)(A).

[22] See Reg. 1.338(h)(10)-1 for the tax aspects of the deemed asset sale and liquidation.

[23] A deemed asset sale under Section 338 does not give rise to California sales tax. Cal. Code of Regs. 1595(a)(6).

[24] IRC 338(h)(3). See below for rollover transactions.

[25] Reg. 1.338(h)(10)-1(d)(5).

[26] IRC 338(h)(3)(A)(ii). Beware of situations where the acquiror appears to “purchase” at least 80% of target’s stock (and target rolls over 20% or less of its stock in a 351 transaction), but the acquiror in fact does (or might be deemed to) “purchase” less than 80% of target’s stock, thereby invalidating a 338, 338(h)(10), or 336(e) election. This most commonly occurs where purchaser is a newly formed corporation and target rolls over 20% (or less) of its shares. See Ginsburg, Levin & Rocap, Mergers, Acquisitions, and Buyouts, § 4.06.1.2.2 (relating to redemption of stock held by target’s shareholders and recharacterizing a 351 transaction and cash sale as a single 351 exchange with boot).

[27] See footnote 16.

[28] In accordance with Rev. Rul. 2008-18.

[29] IRC 1361(b)(3).

[30] Rev. Rul. 2008-18. Obviously, Holdco must meet all the requirements of an S-corp. In many cases, the parties will file Form 2553 to treat Holdco as an S corporation as a “belt and suspenders” step.

[31] Upon conversion, T is no longer treated as a QSub per 1361(b)(3). The conversion has no tax consequences; see Reg. 1.1361-5(b)(3), example 2, where the merger of two disregarded entities owned by the same entity is a disregarded transaction for tax purposes because the assets continue to be held by the same entity. The same should apply when one disregarded entity converts to another. The QSub can also merge with a newly formed LLC subsidiary of Holdco to achieve the same result.

[32] Rev. Rul. 2008-18.

[33] Rev. Rul. 99-5; Reg. 1.1361-5(b)(3), example 2.

[34] Rev. Rul. 99-5; see also Rev. Rul. 99-6.

[35] Id. Although not required, a Section 754 election is often required by the Buyer.

[36] IRC 336(a).

[37] IRC 1202(b). See Section 1202 for the requirements to qualify for QSBS.

[38] IRC 1202(c).

[39] The S corporation shares do not qualify as QSBS. The new shares of the C corporation issued after the reorganization qualify as QSBS to begin the 5 year holding period.

Article By Ben Gruen of Stubbs Alderton & Markiles, LLP

For more corporate law legal news, click here to visit the National Law Review.

© Copyright 2023 Stubbs Alderton & Markiles, LLP

Top Legal Industry Highlights for November 2022: Law Office Hiring and Expansion, Industry Awards and Recognition, and the Latest Updates in Diversity and Inclusion

Happy Holidays from the National Law Review! We hope you are remaining safe and healthy as Thanksgiving rolls around. Read more below for the latest in law firm hiring and expansion, noteworthy industry awards and recognitions, and the latest news in law firm diversity, equity, and inclusion efforts.

Additionally, please be sure to check out the latest Legal News Reach podcast episode from the NLR: “What’s New In Law Firm Thought Leadership? with Alistair Bone, Vice President for Passle.”

Law Firm Hiring and Expansion

Oblon, McClelland, Maier & Neustadt, LLP has added attorney Mark Nagumo as Of Counsel in the firm’s Chemical Patent Practice Group. Mr. Nagumo, who is a former U.S. Patent and Trademark Office administrative patent judge, has a great deal of experience in chemical research, particularly with regard to biomolecules, materials, and a wide range of other analytical techniques.

“We are thrilled to welcome Mark to our firm,” said Oblon Managing Partner Philippe Signore. “Mark is an extremely knowledgeable and respected chemical patent attorney whose many years of experience at the USPTO offers tremendous value and benefits to our clients. He is a great addition to our team.”

Polsinelli PC has appointed two new co-chairs of the firm’s Business Department: Jane Arnold and Kolin Holladay. Ms. Arnold, an experienced attorney in mergers and acquisitions, is based in the St. Louis office, where she currently serves as Office Managing Partner. Mr. Holladay, who also focuses his practice on mergers and acquisitions, is a Shareholder in the firm’s Nashville office.

“The selection of Arnold and Holladay as Business Department Co-Chairs reflects the firm’s long-standing commitment to inclusion, representation, and geographic diversity at every level,” said Chase Simmons, Chairman and Chief Executive Officer of Polsinelli. “Both are leaders who are highly respected within our firm and the industries in which they practice. Under their leadership, the Business Department will continue to create meaningful opportunities for our lawyers and clients, all consistent with our strategic priorities.”

James M. Tartaglia has rejoined Steptoe & Johnson PLLC as Of Counsel in the firm’s Charleston office. With a background in mineral title opinions and due diligence, Mr. Tartaglia joins the firm’s Energy Group , where he will focus his practice on energy contract law.

“We’re looking forward to having Jim back at the firm,” said Steptoe & Johnson CEO Christopher L. Slaughter. “His skill set and knowledge of the oil and gas industry strengthens our energy contracts practice and will be an asset to our clients.”

As of November 1st, 2022, Proskauer Rose LLP has promoted 33 of its attorneys – 25 to partner, and 8 to senior counsel. This class of promotions is the firm’s largest to date, and it includes attorneys from nine different offices around the world.

“We are delighted to promote this talented group of lawyers, whose values, entrepreneurial spirit and drive represent the best of the Firm,’” said Steven M. Ellis, Chairman of Proskauer. “We congratulate each of these new partners and senior counsel on this milestone and wish them continued success as they support our clients, secure historic victories, set precedents and serve as strategic partners.”

The following attorneys have been promoted to partner: Michelle Annese, Kimberly Braun, Ryan Carpenter, Aliza Cinamon, Grant Darwin, Christopher Elson, Nolan Goldberg, Laura Goldsmith, Oliver Howley, John Ingrassia, Philip Kaminski, Christine Lazatin, Shawn Ledingham, Matthew Levy, Stéphanie Martinier, Richard Miller, Bharat Moudgil, Adam Nelson, Caroline Robbins, Cameron Roper, Bradley Schecter, Adam Scoll, Sean Spence, Scott Patrick Thurman, and Harriet West.

The following attorneys have been promoted to senior counsel: Stephen Chuk, Pinchos Goldberg, Allison Lynn Martin, Jennifer Rigterink, Jurate Schwartz, Jennifer Yang, Edward Young, and Oleg Zakatov.

Frost Brown Todd has combined with California-based law firm Alvarado Smith, effective January 1, 2023. The combined firm will have more than 575 attorneys in 17 offices across nine states and Washington, D.C, with AlvaradoSmith’s addition providing strategic expansion into the Los Angeles, Orange County, and San Francisco markets.

“AlvaradoSmith is known for successfully taking on matters and clients often associated with big firms, while FBT has the resources of a large firm with the culture of a boutique shop,” said AlvaradoSmith Managing Shareholder Ruben Smith. “That’s why we’re confident this combination will be an excellent fit, allowing us to grow our capacity and resources while still retaining our deep connection to clients and community. We look forward to a very productive future with Frost Brown Todd.”

“This merger is a natural next step and tremendous growth opportunity for both Frost Brown Todd and AlvaradoSmith,” said FBT Chief Executive Officer Adam Hall. “As one of the largest and most influential economies in the world, California intersects with every one of Frost Brown Todd’s practice groups and many of our offices. We know our clients will benefit greatly from the extensive knowledge and relationships that AlvaradoSmith attorneys have cultivated throughout the state for decades. We look forward to working with them as we significantly expand our presence in California and strengthen Frost Brown Todd’s preeminent industry teams.”

Legal Industry Awards and Recognition

Ballard Spahr has received 26 National Tier 1 rankings in the 2023 Best Law Firms and a total of 160 rankings across all Best Law Firms categories. Best Law Firms rankings are gathered based on surveys from clients and professional references. To qualify, a law firm must have one attorney who is recognized in the current edition of Best Lawyers in a Best Law Firms-ranked practice area or metro area.

Ballard Spahr received National Tier 1 rankings in the following categories:

  • Banking and Finance Law
  • Bankruptcy and Creditor Debtor Rights / Insolvency and Reorganization Law
  • Commercial Litigation
  • Copyright Law
  • Corporate Law
  • Criminal Defense: White-Collar
  • Employment Law – Management
  • Environmental Law
  • Labor Law – Management
  • Land Use & Zoning Law
  • Litigation – Banking & Finance
  • Litigation – Bankruptcy
  • Litigation – First Amendment
  • Litigation – Intellectual Property
  • Litigation – Labor & Employment
  • Litigation – Patent
  • Litigation – Real Estate
  • Media Law
  • Mergers & Acquisitions Law
  • Patent Law
  • Public Finance Law
  • Real Estate Law
  • Securities / Capital Markets Law
  • Securities Regulation
  • Trademark Law
  • Trusts & Estates Law

Lauren Wachtler, partner at Barclay Damon’s New York office, will be honored with the prestigious Hon. Shira A. Scheindlin Award for Excellence in the Courtroom by the New York State Bar Association’s Commercial & Federal Litigation Section. Ms. Watchler’s practice focuses on commercial and business litigation matters, and she advocates for women’s equality in the legal profession as well as mentoring and educating young attorneys.

The Scheindlin Award is presented annually on or around November 6, the date women were granted the right to vote in 1917 in New York state. “It is a true honor to receive the Scheindlin Award,” said Ms. Wachtler. “Judge Scheindlin was a gifted jurist and continues to be a role model for women in our profession.”

The award honors its namesake Shira A. Scheindlin, the Commercial & Federal Litigation Section’s former chair and former district judge for the Southern District of New York. Scheindlin said, “I extend my sincerest congratulations to Lauren for being selected to receive the Scheindlin Award. Her commitment to the legal profession and mentoring young women attorneys is truly inspiring and continues to grow year after year. Women litigators still face adversity in the courtroom; however, Lauren’s work will hopefully pave the way for future generations of women litigators.”

Foley & Lardner LLP has received the Corporate Citizen Award from the Three Harbors Boys Scouts of America Council, which seeks to honor a particular organization that exemplifies the Scout Law through community service and upstanding business practices. The award will be presented at the Distinguished Citizen Award Dinner in Milwaukee on November 17, 2022.

Foley was selected for its long-standing support of Scouting, as well as the firm’s significant pro bono support through Partner Peter Fetzer to Three Harbors Council. Mr. Fetzer is a partner in the firm’s Milwaukee office, where he focuses his practice on securities regulation, mergers and acquisitions, corporate governance and general corporate counseling to mutual funds, exchange traded funds, publicly traded investment advisers and public companies.

Diversity, Equity, and Inclusion in the Legal Profession

Womble Bond Dickinson attorneys Britt Biles and Stephanie Yarbrough have been selected for inclusion on Women We Admire’s 2022 Top 50 Women Leaders in the Law list, which celebrates influential and successful women in the legal field.

Ms. Biles is a Litigation Group Partner who played a key role in the federal government’s response to the Covid-19 pandemic. After her time as Associate White House Counsel and SEC senior enforcer, Biles became Senior Counsel of the Small Business Administration, where she was principal legal advisor to the CARES Act Administrator and an active participant in drafting guidance for the Paycheck Protection Program. At Womble Bond Dickinson, she focuses her practice on business litigation and government investigations.

Ms. Yarbrough is a Womble Bond Dickinson Global Board Member and Economic Development Team Co-Chair who has spent her two-decade legal career aiding economic development in the southeastern United States by helping domestic and international companies expand their operations to Charleston and surrounding regions. Yarbrough’s role in creating thousands of new jobs and billions in investments has led her to become an industry thought leader, speaking at local and national events and appearing in a 2017 New York Times article about Charleston’s economy.

Bradley Arant Boult Cummings LLP Partner Gary L. Howard has been selected to serve a one-year term as Vice Chair of the Defense Research Institute’s Diversity and Inclusion Committee. The Birmingham, Alabama attorney has been active with DRI for many years, previously serving as Diversity Expo Chair, Diversity for Success Seminar & Corporate Expo Program Chair, and Annual Meeting Steering Committee Member. Howard’s appointment comes on the heels of his 2021 Albert H. Parnell Outstanding Program Chair Award, which he received for creating engaging educational programming for DRI.

Mr. Howard’s 25-year legal career has seen him managing commercial litigation related to class actions, mass torts, contract disputes, insurance cases, and related matters. He has argued in state and federal courtrooms and is admitted to practice in more than ten states.

Moore & Van Allen have announced the creation of a new Civil Rights & Racial Equity Assessments Practice within their White Collar, Regulatory Defense & Investigation Practice. Fifteen of MVA’s most experienced investigative attorneys will harness the firm’s ESG, internal and cross-border probe, and human trafficking prevention expertise to conduct public-facing racial equity and civil rights audits. These reviews will assist businesses interested in improving their internal and external diversity practices.

Valecia M. McDowell, who will be leading the new practice, commented, “Our Civil Rights & Racial Equity Assessments Practice brings together our deep experience and bench strength in key areas to help our clients strategically assess their internal and external practices, programs, and policies to more thoroughly and thoughtfully address diversity, equity, and inclusion (DEI).”

Article By Chandler Ford, Shelby Garrett, and Crissonna Tennison of The National Law Review / The National Law Forum LLC

For more business of law legal news, click here to visit the National Law Review.

Copyright ©2022 National Law Forum, LLC

Accounting Cases Involving SPACs

The Accounting Class Action Filings and Settlements—2021 Review and Analysis report features a spotlight section on accounting-related SPAC cases.

Special purpose acquisition companies (SPACs) have become an increasingly popular way for private companies to become publicly traded. The process typically proceeds through four phases:

  1. The SPAC initial public offering (IPO), when the SPAC becomes public as a shell company;
  2.  the search for a merger target, which typically involves a definitive time period (e.g., two years);
  3. the merger closing, during which time the SPAC sponsor and target company announce the merger, file a proxy statement, and solicit shareholder approval; and
  4. the period when the equity of the combined company becomes publicly traded, often referred to as the “De-SPAC” period.

Commentators have cited various reasons for the popularity of SPACs, including the perception of market participants that a private company may have more certainty as to pricing and control over the deal terms through a SPAC as compared to a traditional IPO.1 During 2021, there were 613 SPAC IPOs—nearly twice the number of traditional IPOs—and the $144.5 billion of capital raised was record-setting.2

SPAC filings that include accounting allegations tripled in 2021 as compared to the prior year.

SEC Statements Regarding Financial Accounting and Reporting

The increased popularity of SPACs has led to certain concerns from regulators. For example, the U.S. Securities and Exchange Commission (SEC) issued an investor bulletin on SPACs highlighting that the increased number of SPACs seeking to acquire an operating business may result in fewer attractive initial acquisitions.3 As of December 31, 2021, 575 SPACs were still searching for a merger target.4

The SEC has also highlighted concerns related to financial accounting and reporting issues that SPACs may face. For example, the SEC’s Acting Chief Accountant, Paul Munter, issued a statement on March 31, 2021, that raised questions about whether private company targets have the people and processes in place and the time that is needed to successfully transition to public company reporting requirements. Mr. Munter highlighted examples of complex financial accounting and reporting issues, including accounting for complex financial instruments and the need to comply with public company requirements for reporting on internal controls.5

Shortly after his March 31 statement, Mr. Munter and John Coates, the Acting Director of the SEC’s Division of Corporation Finance, issued a statement on April 12, 2021, that addressed accounting and reporting considerations for warrants issued by SPACs.6 The statement resulted in almost 500 SPACs restating their accounting for warrants by June 22, nearly all of which identified a material weakness in internal controls.7

Recent Trends in SPACs Involving Accounting Issues

During 2019 and 2020, only a handful of federal securities class actions involving SPACs were filed, but in 2021, federal filings involving SPACs became the dominant filing trend.8 Consistent with that overall trend, SPAC filings that include accounting allegations tripled in 2021 as compared to the prior year.

There are several trends in SPAC cases involving accounting issues over the past three years:

  • Approximately one in three initial complaints involving SPACs from 2019 through 2021 included accounting issues.
  • Three law firms—The Rosen Law Firm, Glancy Prongay & Murray LLP, and Pomerantz LLP—were associated with almost 80% of accounting case filings involving SPACs from 2019 through 2021.
  • Short-seller reports were commonly cited in cases involving SPACs. However, those reports were cited over one and a half times more often in accounting cases as compared with non-accounting cases filed during 2019 through 2021.
  • The median filing lag after a De-SPAC transaction was much greater in 2019–2020 (450 days) than it was in 2021 (106 days) for accounting case filings from 2019 through 2021 involving SPACs.
  • Inappropriate revenue recognition and weaknesses in internal controls were the most common allegations in SPAC accounting cases, followed by allegedly omitted disclosures of related-party transactions.

Because filings of SPAC cases have largely occurred very recently, based on our research only one of these cases had reached settlement as of the end of 2021, and this case included accounting allegations. As more of these cases progress, SPAC cases may play a role in future accounting case settlement trends.

1     “What You Need to Know About SPACs – Updated Investor Bulletin,” U.S. Securities and Exchange Commission, May 25, 2021, https://www.sec.gov/oiea/investor-alerts-and-bulletins/what-you-need-know-about-spacs-investor-bulletin.

2     Jay R. Ritter, “Initial Public Offerings: Updated Statistics,” Warrington College of Business, University of Florida, p. 48, https://site.warrington.ufl.edu/ritter/files/IPO-Statistics.pdf, accessed April 8, 2022.

3   “What You Need to Know About SPACs – Updated Investor Bulletin,” U.S. Securities and Exchange Commission, May 25, 2021, https://www.sec.gov/oiea/investor-alerts-and-bulletins/what-you-need-know-about-spacs-investor-bulletin.

4   SPACs still searching for a target are those that have completed their IPO but not yet announced a De-SPAC transaction target. See SPAC Insider.

5  Paul Munter, Acting Chief Accountant, “Financial Reporting and Auditing Considerations of Companies Merging with SPACs,” U.S. Securities and Exchange Commission, March 31, 2021, https://www.sec.gov/news/public-statement/munter-spac-20200331.

6  John Coates, Acting Director, Division of Corporation Finance, and Paul Munter, Acting Chief Accountant, “Staff Statement on Accounting and Reporting Considerations for Warrants Issued by Special Purpose Acquisition Companies (‘SPACs’),” U.S. Securities and Exchange Commission, April 12, 2021, https://www.sec.gov/news/public-statement/accounting-reporting-warrants-issued-spacs.

7   See Will SPAC Restatement Wave Trigger Shareholder Litigation?, Cornerstone Research (2021), for further discussion.

8   See Securities Class Action Filings—2021 Year in Review, Cornerstone Research (2022), for further discussion.

Article By Elaine M. Harwood, Laura E. Simmons, Frank T. Mascari, and Sally Bai of Cornerstone Research

For more SEC and securities legal news, click here to visit the National Law Review.

Copyright ©2022 Cornerstone Research

Could the Crypto Downturn Lead to a Spike in M&A?

In 2021, we saw a cryptocurrency boom with record highs and a flurry of activity. However, this year, the cryptocurrency downturn has been significant.  We have seen drops in various cryptocurrencies ranging from 20 to 70 percent, with an estimated $2 trillion in losses in the past few months.

Industry watchers had already predicted a spike in crypto M&A from the beginning of 2022, and in a recent interview with Barron’s, John Todaro, a senior crypto and blockchain researcher at Needham & Company, said he believes this downturn could lead to a wave of mergers and acquisitions in the crypto space for the second half of this year and even into 2023.

Valuations have dropped across the board this year as the market has faced incredible volatility, and Todaro told Barron’s, “The valuations for public crypto companies have fallen by about 70% this year.”  These lower valuations could make these companies increasingly attractive targets for acquisition, and this activity has already started to pick up.

According recent coverage from CNBC, some larger crypto companies are already looking for acquisition targets in order to drive industry growth and to help them acquire more users. Todaro feels most of the M&A activity we will see will be this kind of crypto to crypto acquisition as opposed to traditional buyers, although there is still opportunity for non-crypto companies to capitalize on these lower valuations and some are already doing so.

With more government regulation coming for the crypto sector this year, it could also impact the activity level as well.  Achieving some legal and regulatory clarity could have implications for this uptick in M&A for crypto companies. Our analysis of the SEC’s recent proposed regulations, other government activity in this area, and their potential implications can be found here.

We could of course see a growing number of acquisitions across industries as valuations remain lower than a year ago, but as the crypto sector continues to see this kind of a downturn, the level of activity in this area could be much greater than it has previously seen.  With that said, both the target company and the acquirer should be looking at any transactions with the same level of due diligence instead of rushing into any deal fueled by panic or haste.

Article By Louis Lehot of Foley & Lardner LLP

For more mergers and acquisitions legal news, click here to visit the National Law Review.

© 2022 Foley & Lardner LLP

Is a Moratorium on Mergers During the Pandemic a Bridge Too Far?

In an interview with Politico’s Leah Nylen and Betsy Woodruff Swan, Rep. David Cicilline (D-R.I.) explained that he wants the next coronavirus relief package to include a moratorium on mergers while the U.S. economy struggles to face the pandemic. According to the report, the Rhode Island Congressman’s proposal would allow deals “only if a company is already in a bankruptcy or is otherwise about to fail.” Any other deals would be on hold at least until the national pandemic declaration is lifted.

In prepared remarks, Rep. Cicilline’s stated: “As millions of businesses struggle to stay afloat, private equity firms and dominant corporations are positioned to swoop in for a buying spree.” The remarks continued: “This is not complicated. Our country can leave room for merger activity that is necessary to ensuring that distressed firms have a fresh start through the bankruptcy process or through necessary divestitures while also ensuring that we do not undergo another period of rampant consolidation.”

These comments were part of the Congressman’s presentation for an event run by the Open Markets Institute (OMI), which recently said that it favors “an immediate ban on all mergers and acquisitions by any corporation with more than $100 million in annual revenue, and by any financial institution or equity fund with more than $100 million in capitalization.” The OMI claims the ban should remain in place during the current economic and health crisis.

According to the OMI, the ban is necessary because enforcement agencies are partially shut down and unable to effectively evaluate mergers. The OMI believes the ban will help “prevent a wholesale concentration of additional power by corporations that already dominate or largely dominate their industries, especially in ways that may significantly worsen the crisis that now threatens America’s health, social, and economic systems. The history of the Panic of 2008 and the subsequent Great Recession instructs us that such a massive, uncontrolled consolidation will result in the unnecessary firing of millions of employees, the unnecessary bankrupting of innumerable independent businesses, a dramatic slowing of innovation in vital industries such as pharmaceuticals, and a further concentration of power and control dangerous both to our democracy and our open commercial systems.”

Piles of Cash

The organization says that private equity firms and corporations “sit today atop vast piles of cash” and can readily swallow up distressed companies.

Rep. Cicilline and the OMI are rightfully concerned about an uptick in unlawful mergers stemming from the pandemic and should be commended for proactively raising the issue. History has demonstrated that well-capitalized firms will use economic downturns and the consequent drop in company valuations to acquire struggling rivals. And antitrust enforcers are certainly not operating at full capacity given current health and safety guidelines.

Even so, a moratorium on mergers seems like an overcorrection. Most mergers are lawful. While we can debate their overall effectiveness, since 2015, federal antitrust authorities have made second requests in less than 3% of qualifying transactions. And lawful mergers can lead to lower prices, higher quality, and increased innovation, as well as providing liquidity events.

Given these realities, lawmakers should craft legislation that aims to preserve the integrity of the pre-pandemic oversight process. This presumably can be achieved by giving regulators the power to slow down the merger review process when necessary. A resolution along these lines would seem to strike a better balance between protecting against rampant, unlawful consolidation and permitting lawful mergers to proceed.

© MoginRubin LLP

ARTICLE BY Timothy Z. LaComb of MoginRubin.
For more on COVID-19 related legislation, see the National Law Review Coronavirus News section.

Congress Enacts New Law to Control Foreign Investments in the U.S.

President Trump signed into law the Foreign Investment Risk Review Modernization Act (FIRRMA) to modernize the CFIUS review process to address 21st century national security concerns today. Congress enacted FIRRMA as Title XVII of the Fiscal Year 2019 National Defense Authorization Act, HR 5515.

Background and Rationale for the New Law

The Committee on Foreign Investment in the United States (CFIUS) is an inter-agency committee led by the Treasury Department to review transactions that could result in control of a U.S. business by a foreign person (referred to as “covered transactions”) in order to determine the effect of such transactions on the national security of the United States. CFIUS operates pursuant to section 721 of the Defense Production Act of 1950 (the “Exon-Florio” amendment), as later amended by Congress and as implemented by Executive Order.

For many years, CFIUS has worked to police national security concerns arising from investment in the U.S. by foreign companies and entities. Two transactions in the last few years have made the issue of foreign investment in the U.S. (and the role of CFIUS) notorious: first, the Dubai Ports World controversy in 2006 involving the sale of port management businesses in six major U.S. seaports to a company based in the United Arab Emirates and, second, the 2012 effort by a Chinese-owned company to purchase land for a windfarm next to a U.S. military weapons testing facility in Oregon. Current law governing CFIUS was last updated more than a decade ago, and its jurisdiction has been increasingly perceived as too limited.

Many government and private industry observers have come to believe that the CFIUS review process is neither designed to, nor sufficient to, address modern threats to national security. Their perception was that China and others have cheated the system, exploited the gaps in its authorities, and have structured their investments in U.S. businesses to evade scrutiny. In short, their view was that many transactions that could pose national security concerns often escaped review altogether.

For example, in introducing the bipartisan FIRRMA in late 2017, Sens. Dianne Feinstein (D-CA) and John Cornyn (R-TX) asserted that:

To circumvent CFIUS review, China will often pressure U.S. companies into arrangements such as joint ventures, coercing them into sharing their technology and know-how. This enables Chinese companies to acquire and then replicate U.S.-bred capabilities on their own soil. China has also been able to exploit minority-position investments in early-stage technology companies to gain access to cutting-edge IP, trade secrets, and key personnel. It has figured out which dual-use emerging technologies are in development and not yet subject to export controls.

Substantive Changes in CFIUS Law

To counteract these new threats, FIRRMA is intended to strike a balance between giving CFIUS additional authority that it needs to address modern national security issues without unduly chilling foreign investment in the American economy and slowing American economic growth in the process. The new law refashions the authority of CFIUS to allow it to reach additional types of investments like minority-position investments and overseas joint ventures. Plus, it creates a new streamlined filing process to encourage notification of potentially problematic transactions. The provisions of FIRRMA make the following changes:

  • FIRRMA expands CFIUS jurisdiction to cover minority investments, any change in a foreign investor’s rights regarding a U.S. business, and any device or scheme designed to evade CFIUS, as well as the purchase, lease, or concession of certain real-estate by or to a foreign person.

  • FIRRMA recognizes the authority of CFIUS to review non-controlling, non-passive investments, especially those involving critical technology and critical infrastructure

  • FIRRMA for the first time recognizes the authority and responsibility of CFIUS to protect against the exposure of sensitive personal data as part of its national security jurisdiction.

  • FIRRMA allows CFIUS to include in the review process any emerging and critical technologies and sets reporting requirements for them.

  • FIRRMA expands CFIUS’s ability to unilaterally choose to initiate a review in the case of a breach of a prior agreement with CFIUS and with respect to covered transactions that have not been submitted to CFIUS for review.

FIRRMA modifies the definition for covered transaction to include “other investments” by a foreign person in a U.S. business that owns, operates, manufactures, supplies, or services to critical infrastructure, produces critical technologies, or maintains or collects sensitive personal data of U.S. citizens. The “other investments” provisions is designed to capture small investments that might not otherwise fall within CFIUS jurisdiction because they lack the previously-required threshold of “control.”

Procedural Changes

Among the procedural changes is that FIRRMA establishes a new expedited process for securing CFIUS clearance by filing a five-page “declaration” (instead of a lengthier written notice). After reviewing such a declaration, CFIUS may direct the parties to submit a full notice.

Any party to a covered transaction may choose to follow the declaration approach, but a declaration is mandatory for any “foreign person in which a foreign government has, directly or indirectly, a substantial interest.” This requirement may be waived by CFIUS if the foreign government does not direct the foreign business and the foreign business has previously cooperated with the Committee. CFIUS may also choose to require a mandatory declaration where a U.S. business that controls critical infrastructure, technology, or sensitive personal data is a party to the transaction.

The new legislation also is intended to improve information-sharing with U.S. allies and partners and provides needed additional resources to the panel while maintaining safeguards to ensure that CFIUS would review transactions only when necessary.

Effective Date

Effective immediately, FIRRMA increases the filing and review schedule to 45 days and the investigatory phase to a second 45 day period. The act permits CFIUS to extend the investigation period by another 15 days in “extraordinary circumstances.” The legislation also adds an additional 15 days to the President’s current 15-day review period in extraordinary cases. Thus, relatively complex CFIUS cases may routinely begin to take 105 days (45+45+15) following initiation, instead of the previous 75 days (assuming that the parties do not withdraw and refile their notice).

Certain other provisions of FIRRMA have a delayed effective date (which is the earlier of 18 months following enactment or 30 days after CFIUS determines that it has sufficient resources). For example, the delayed date applies to the expansion of “covered transactions” to include real estate located in important ports or near sensitive US government facilities such as military installations. The delayed date also applies to CFIUS’s expanded jurisdiction with respect to “other investments” in U.S. business that own critical infrastructures or technologies or that maintain sensitive personal data of U.S. citizens.

 

© 2018 Schiff Hardin LLP
This post was written by William M. Hannay of Schiff Hardin LLP.

Data Breaches Will Cost Yahoo and Verizon Long After Sale

data breach Yahoo VerizonFive Things You (and Your M&A Diligence Team) Should Know

Recently it was announced that Verizon would pay $350 million less than it had been prepared to pay previously for Yahoo as a result of data breaches that affected over 1.5 billion users, pending Yahoo shareholder approval. Verizon Chief Executive Lowell McAdam led the negotiations for the price reduction. Yahoo took two years, until September of 2016, to disclose a 2014 data breach that Yahoo has said affected at least 500 million users, while Verizon Communications was in the process of acquiring Yahoo. In December of 2016, Yahoo further disclosed that it had recently discovered a breach of around 1 billion Yahoo user accounts that likely took place in 2013.

While some may be thinking that the $350 million price reduction has effectively settled the matter, unfortunately, this is far from the case. These data breaches will likely continue to cost both Verizon and Yahoo for years to come.  Merger and acquisition events that are complicated by pre-existing data breaches will likely face at least four categories of on-going liabilities.  The cost of each of these events will be difficult to estimate during the deal process, even if the breach event is disclosed during initial diligence. First, the breach event will probably render integration of the systems of the target and acquirer difficult, as the full extent of the security issues is often difficult to assess and may evolve through time. According to Verizon executives, Yahoo’s data breaches created integration issues that had not been previously understood.  The eventual monetary cost of this issue remains unknown.

Second, where the target is subject to the authority of the Security and Exchange Commission (SEC), an SEC investigation and penalties if applicable, is likely, along with related shareholder lawsuits. As we wrote previously, The SEC is currently investigating if Yahoo should have reported the two massive data breaches it experienced earlier to investors, according to individuals with knowledge. Under the current agreement, Yahoo will bear sole liability for shareholder lawsuits and any penalties that result from the SEC investigation.

Third, there will likely be additional private party actions due to the breach. Exactly what these liabilities will be will depend on the data subject to exfiltration as a result of the breach.  In Yahoo’s case, Verizon and Yahoo have agreed to equally share in costs and liabilities created by lawsuits from customers and partners.  Multiple private party lawsuits have already been filed against Yahoo alleging negligence.

Fourth, other government investigations, such as by the Federal Bureau of Investigation (FBI), could result in additional costs, both monetary and reputational. The FBI is currently investing the Yahoo breaches.  Verizon and Yahoo will share the costs of the FBI investigation and other potential third party investigations.

Fifth, depending on the scope of the breach, there would likely be on-going remediation costs after the deal closes. According to a knowledgeable source, as of February 2017, Yahoo had sent notifications to a “mostly final” list of users, indicating that some remaining remediation activities may yet occur.

As we have seen, merger and acquisition events involving a target with a pre-existing data breach issues create difficult to assess costs and liabilities that will survive the closing of the transaction.

ARTICLE BY Cynthia J. Larose & Brian H. Lam of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.

©1994-2017 Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. All Rights Reserved.

2016 Year In Review: Corporate Governance Litigation and Regulation

2016 year in review2016 saw many notable developments in corporate governance litigation and related regulatory developments.  In this article, we discuss significant judicial and regulatory developments in the following areas:

  • Mergers and Acquisitions (“M&A”): 2016 was a particularly significant year in M&A litigation.  In Delaware, courts issued important decisions that impose enhanced scrutiny on disclosure-only M&A settlements; confirm the application of the business judgment rule to mergers approved by a fully informed, disinterested, non-coerced shareholder vote; inform the proper composition of special litigation committees; define financial advisors’ liability for breaches of fiduciary duty by their clients; and offer additional guidance for calculating fair value in appraisal proceedings.

  • Controlling Shareholders: Delaware courts issued important decisions clarifying when a person with less than majority stock ownership qualifies as a controller, when a shareholder may bring a quasi-appraisal action in a controlling shareholder going-private merger, and when the business judgment rule applies to controlling shareholder transactions. In New York, the Court of Appeals followed Delaware’s guidance as to when the business judgment rule applies to a controlling shareholder squeeze-out merger.

  • Indemnification and Jurisdiction: Delaware courts issued decisions clarifying which employees qualify as officers for the purpose of indemnification and articulating an updated standard for exercising jurisdiction in Delaware over actions based on conduct undertaken by foreign corporations outside of the state.

  • Shareholder Activism and Proxy Access: Shareholder activists remained busy in 2016, including mounting successful campaigns to replace CEOs and board members at Chipotle and Hertz. Additionally, the SEC’s new interpretation of Rule 14a-8 has limited the ability of management to exclude a shareholder proposal from a proxy statement on the grounds that it conflicts with a management proposal.  Also, some companies have adopted “proxy rights” bylaws, which codify a shareholder’s right to directly nominate board members.

I.  M&A

A.Enhanced Scrutiny of Disclosure-Only Settlements

In January 2016, the Delaware Court of Chancery issued an important decision, In re Trulia, Inc. Stockholder Litigation,1 making clear the court’s renewed scrutiny of—and skepticism towards—so-called disclosure-only settlements of shareholder class actions. In Trulia, shareholders sought to block the merger of real estate websites Zillow and Trulia.  After litigation was commenced, the parties agreed to a settlement in which Trulia would make additional disclosures in proxy materials seeking shareholder approval of the transaction in exchange for a broad release of present and future claims by the class and fees for plaintiffs’ counsel.

Chancellor Bouchard rejected the proposed settlement and criticized disclosure-only settlements as generally unfair to shareholders.  Chancellor Bouchard noted that the Court of Chancery had previously expressed concerns regarding the incentives of plaintiff counsel to settle class action claims in which broad releases were granted in exchange “for a peppercorn and a fee”—i.e., for fees and immaterial disclosures that provided little benefit to shareholders.2  According to the Court, “these settlements rarely yield genuine benefits for stockholders and threaten the loss of potentially valuable claims that have not been investigated with vigor.”3

Continue reading at the National Law Review…

ARTICLE BY Nathan Bull, Alejandra Contreras, Jaclyn A. Hall, Jason M. Halper, Hyungjoo Han & Adam Magid of Cadwalader, Wickersham & Taft LLP
© Copyright 2017 Cadwalader, Wickersham & Taft LLP

Failure to Comply with Hart-Scott-Rodino Act Just Got More Expensive

FTC Hart-Scott-Rodino AntitrustLast November, President Obama signed into law an amendment to the Federal Civil Penalties Inflation Adjustment Act (Sec. 701 of Public Law 114-74). The amendment requires federal agencies to adjust the maximum civil penalties for violations of the laws they enforce no later than July 1, 2016.

On June 29, 2016, the Federal Trade Commission revised its Rule 1.98 to reflect the new higher levels for maximum civil penalties. The new maximums will apply to civil penalties assessed by the FTC after August 1, 2016. They include civil penalties for violations that occurred prior to the effective date. (Going forward, the maximums will be adjusted for inflation each January.)

Of particular significance to corporations that acquire, sell, or merge with other businesses, the penalties for violating the premerger reporting and waiting requirements under the Hart-Scott-Rodino Act have been increased from $16,000 per day to $40,000 per day, an increase of 150%.

As most businesspersons know, under the HSR Act, the parties to mergers and acquisitions that meet the dollar thresholds of the Act and are not otherwise exempt must file a premerger notification form, pay the appropriate fees, and wait 30 days (or possibly more) prior to closing the transaction. Failure to file the required notification or to observe the mandatory waiting period will subject the parties to civil penalties, which are now significantly higher.

Note that for continuing violations of the HSR Act, each day is a separate violation. As a result, the maximum civil penalty may be multiplied by the number of days for each violation of the applicable statute or order. (For example, a company or individual that is required to report but fails to do so for one year would be facing a fine of up to $14.6 million under the new levels.)

But statutory maximums are not automatically imposed. Before levying a civil fine, the Commission considers various factors in determining whether the maximum should be mitigated. Those factors include:

  1. Harm to the public

  2. Benefit to the violator

  3. Good or bad faith of the violator

  4. The violator’s ability to pay

  5. Deterrence of future violations by this violator and others

  6. Vindication of the FTC’s authority

Why does it happen that a company or individual fails to make the required HSR filing? The FTC reports that it frequently sees two specific scenarios:

  1. Company executives who acquire company voting shares through exercising options or warrants may fail to aggregate the value of such shares with the value of the company shares they already hold and therefore do not realize that they have satisfied the HSR size of transaction threshold test.

  2. Sometimes companies or individuals who have qualified for the “investment-only” exemption in the past may erroneously continue to rely on that exemption even though they have become active investors in the company or their holdings in the company have increased above 10%.

Other recurring scenarios can also trip up acquirers. For example, companies may not realize that patent and other IP licenses are in certain circumstances treated as the acquisition of an asset for HSR Act purposes.

ARTICLE BY William M. Hannay of Schiff Hardin LLP

© 2016 Schiff Hardin LLP