285 Search Results

May 17, 2018 |
Gibson Dunn Strengthens Private Equity and M&A Practices With Four Corporate Partners

Gibson, Dunn & Crutcher LLP is pleased to announce that George Stamas, Mark Director, Andrew Herman, and Alexander Fine have joined the firm as partners.  Stamas will work in the firm’s New York and Washington, D.C. offices, while Director, Herman and Fine will be based in the Washington, D.C. office and also will work regularly in the New York office.  They all join from Kirkland & Ellis, continuing their corporate, mergers and acquisitions and private equity practices. “We are delighted to add this distinguished team to the firm,” said Ken Doran, Chairman and Managing Partner of Gibson Dunn.  “George, Mark, Andrew and Alex are talented, highly regarded lawyers and energetic business developers.  They have strong contacts in the legal and business communities in D.C., New York and internationally.  Their addition will significantly strengthen our M&A, private equity and corporate practices not just on the East Coast but across the firm worldwide.” “Many of us here at Gibson Dunn have worked opposite of this group in a number of transactions, and we have the utmost respect for them,” said Stephen Glover, a partner in the Washington, D.C. office and Co-Chair of the M&A Practice Group.  “Our combined practice will create a D.C. corporate powerhouse that will firmly establish our position as a leader in high-end corporate and M&A.  In addition, their private equity and public company M&A experience will complement and expand our national and international practice.” “We are excited about the opportunity to join the firm,” said Stamas.  “We have long admired Gibson Dunn’s culture and collaborative approach to servicing clients.  We are committed to joining the team and further developing our practice together.  We wish the very best to our former colleagues, who we hold in high regard.” About George Stamas Stamas served as a senior partner in Kirkland & Ellis’ corporate practice group since 2002 and will continue to serve as a senior partner in Gibson Dunn’s New York and Washington, D.C. offices.  He focuses on public company and private equity M&A and corporate securities transactions.  He also counsels C-level executives and board of directors on corporate governance matters. Stamas has previously served as Vice Chair of the Board of Deutsche Banc Alex Brown, Inc.; as a founding board member of FTI Consulting (NYSE); as a venture partner of international venture capital firm New Enterprise Associates; and as a member of numerous public and private corporate boards. He is an executive board member of New York private equity firm MidOcean Partners.  He also is a board member of the Shakespeare Theatre Company and on the National Advisory Council of Youth Inc.  He is a co-founder of The Hellenic Initiative and a member of The Council on Foreign Relations. Stamas is also is a partner of Monumental Partners, which controls the Washington Capitals and Washington Wizards and is a partner of the Baltimore Orioles. He graduated in 1976 from the University of Maryland Law School, where he was a member of the International Law Review, and from 1977 to 1979, he served as special counsel to Stanley Sporkin in the Enforcement Division of the Securities and Exchange Commission. About Mark Director Director represents public companies and private equity sponsors and their portfolio companies in a broad range of transactions, including M&A, leveraged buyouts, spin-offs, minority investments and joint ventures.  He also advises boards of directors and corporate executives on corporate governance, public disclosure, securities reporting, and compliance and risk management matters. He is a member of the Society for Corporate Governance and the Board of Directors of Everybody Wins! DC, a children’s literacy organization.  He serves as Vice President and a member of the Board of Directors of Washington Hebrew Congregation. Director was a partner with Kirkland & Ellis since 2002.  Before that he served as Executive Vice President and General Counsel of publicly traded US Office Products Co. and of a private equity-owned telecommunications company.  He graduated cum laude in 1984 from Harvard Law School, where he was a member of the Journal on Legislation and worked with the Hon. Douglas H. Ginsburg (then a professor at Harvard) to co-author a casebook on the regulation of the electronic mass media. About Andrew Herman Herman’s practice focuses on advising private equity sponsors and their portfolio companies on leveraged buyouts, growth equity investments and other transactions.  He also advises public companies on M&A transactions, securities law compliance and corporate governance.  He is experienced in advising on the acquisition and sale of sports franchises. Herman joined Kirkland & Ellis in 2002 and became a partner in 2004.  He graduated in 1995 from Columbia University School of Law, where he was a Harlan Fiske Stone Scholar and the submissions editor of the Journal of Transactional Law.  He received a master’s degree with honors in accounting from the University of North Carolina, Chapel Hill in 1992.  Herman serves on the Board of Directors and chairs the Finance Committee at Adas Israel Congregation. About Alexander Fine Fine’s practice focuses on advising private equity sponsors and public companies on a wide range of transactional matters, including strategic M&A, leveraged buyouts, minority investments, and joint ventures.  He also advises clients on corporate governance and securities law matters. Fine was previously a partner with Kirkland & Ellis since 2010, and before that served as Executive Vice President and Corporate Counsel of Allied Capital Corporation. He graduated in 2000 from the University of Virginia School of Law where he was a member of the Order of the Coif and of the Editorial Board of the Virginia Law Review.

April 23, 2018 |
5 Factors Driving Private Equity In Asia

Hong Kong partner Scott Jalowayski and Hong Kong associate James Jackson are the authors of “5 Factors Driving Private Equity In Asia,” [PDF] published by Law360 on April 23, 2018.

April 5, 2018 |
M&A Report – AOL and Aruba Networks Continue Trend of Delaware Courts Deferring to Deal Price in Appraisal Actions

Click for PDF Two recent decisions confirm that, in the wake of the Delaware Supreme Court’s landmark decisions in Dell and DFC, Delaware courts are taking an increasingly skeptical view of claims in appraisal actions that the “fair value” of a company’s shares exceeds the deal price.[1] However, as demonstrated by each of these recent Delaware Court of Chancery decisions—In re Appraisal of AOL Inc. and Verition Partners Master Fund Limited v. Aruba Networks, Inc.—several key issues are continuing to evolve in the Delaware courts.[2] In particular, Delaware courts are refining the criteria in appraisal actions for determining whether a transaction was “Dell-compliant.” If so, then the court will likely look to market-based indicators of fair value, though which such indicator (unaffected share price or deal price) is the best evidence of fair value remains unresolved. If not, the court will likely conduct a valuation based on discounted cash flow (DCF) analysis or an alternative method to determine fair value. The development of these issues will help determine whether M&A appraisal litigation will continue to decline in frequency and will be critical for deal practitioners.[3] DFC and “Dell-Compliant” Transactions In DFC, the Delaware Supreme Court endorsed deal price as the “best evidence of fair value” in an arm’s-length merger resulting from a robust sale process. The Court held that, in determining fair value in such transactions, the lower court must “explain” any departure from deal price based on “economic facts,” and must justify its selection of alternative valuation methodologies and its weighting of those methodologies, setting forth whether such methodologies are grounded in market-based indicators (such as unaffected share price or deal price) or in other forms of analysis (such as DCF, comparable companies analysis or comparable transactions analysis). In Dell, the Court again focused on the factual contexts in which market-based indicators of fair value should be accorded greater weight. In particular, the Court found that if the target has certain attributes—for example, “many stockholders; no controlling stockholder; highly active trading; and if information is widely available and easily disseminated to the market”—and if the target was sold in an arm’s-length transaction, then the “deal price has heavy, if not overriding, probative value.” Aruba Networks and AOL: Marking the Boundaries for “Dell-Compliant” Transactions In Aruba Networks, the Delaware Court of Chancery concluded that an efficient market existed for the target’s stock, in light of the presence of a large number of stockholders, the absence of a controlling stockholder, the deep trading volume for the target’s stock and the broad dissemination of information about the target to the market. In addition, the court found that the target’s sale process had been robust, noting that the transaction was an arm’s-length merger that did not involve a controller squeeze-out or management buyout, the target’s board was disinterested and independent, and the deal protection provisions in the merger agreement were not impermissibly restrictive. On this basis, the Court determined that the transaction was “Dell-compliant” and, as a result, market-based indicators would provide the best evidence of fair value. The Court found that both the deal price and the unaffected stock price provided probative evidence of fair value, but in light of the significant quantum of synergies that the parties expected the transaction to generate, the Court elected to rely upon the unaffected stock price, which reflected “the collective judgment of the many based on all the publicly available information . . . and the value of its shares.” The Court observed that using the deal price and subtracting synergies, which may not be counted towards fair value under the appraisal statute,[4] would necessarily involve judgment and introduce a likelihood of error in the Court’s computation. By contrast, AOL involved facts much closer to falling under the rubric of a “Dell-compliant” transaction, but the Court nonetheless determined that the transaction was not “Dell-compliant.” At the time of the transaction, the target was well-known to be “likely in play” and had communicated with many potential bidders, no major conflicts of interest were present and the merger agreement did not include a prohibitively large breakup fee. Nonetheless, the Court focused on several facts that pointed to structural defects in the sale process, including that the merger agreement contained a no-shop period with unlimited three-day matching rights for the buyer and that the target failed to conduct a robust auction once the winning bidder emerged. In addition, and importantly, the Court took issue with certain public comments of the target’s chief executive officer indicating a high degree of commitment to the deal after it had been announced, which the Court took to signal “to potential market participants that the deal was done, and that they need not bother making an offer.” On this basis, the Court declined to ascribe any weight to the deal price and instead conducted a DCF analysis, from which it arrived at a fair value below the deal price. It attributed this gap to the inclusion of synergies in the deal price that are properly excluded from fair value. Parenthetically, the Court did take note of the fact that its computation of fair value was close to the deal price, which offered a “check on fair value analysis,” even if it did not factor into the Court’s computation. Key Takeaways Aruba Networks and AOL provide useful guidelines to M&A practitioners seeking to manage appraisal risk, while also leaving several open questions with which the Delaware courts will continue to grapple: Whether market-based indicators of fair value will receive deference from the Delaware courts (and, correspondingly, diminish the incentives for would-be appraisal arbitrageurs) depends upon whether the sale process could be considered “Dell-compliant.” This includes an assessment of both the robustness of the sale process, on which M&A practitioners seeking to manage appraisal risk would be well-advised to focus early, and the efficiency of the trading market for the target’s stock, to which litigators in appraisal actions should pay close attention. For those transactions found to be “Dell-compliant,” the best evidence of fair value will be a market-based indicator of the target’s stock. Whether such evidence will be the deal price, the unaffected stock price or a different measure remains an open question dependent upon the facts of the particular case. However, for those transactions in which synergies are anticipated by the parties to be a material driver of value, Aruba Networks suggests that the unaffected share price may be viewed as a measure of fair value that is less susceptible to errors or biases in judgment. For those transactions found not to be “Dell-compliant,” DCF analyses or other similar calculated valuation methodologies are more likely to be employed by courts to determine fair value. As AOL and other recent opinions indicate, however, there is no guarantee for stockholders that the result will yield a fair value in excess of the deal price—particularly given the statutory mandate to exclude expected synergies from the computation. [1] Dell, Inc. v. Magnetar Global Event Driven Master Fund Ltd., 177 A.3d 1 (Del. 2017); DFC Global Corp. v. Muirfield Value Partners, L.P., 172 A.3d 346 (Del. 2017). See our earlier discussion of Dell and DFC here. [2] In re Appraisal of AOL Inc., C.A. No. 11204-VCG, 2018 WL 1037450 (Del. Ch. Feb. 23, 2018); Verition Partners Master Fund Ltd. v. Aruba Networks, Inc., C.A. No. 11448-VCL, 2018 WL 922139 (Del. Ch. Feb. 15, 2018). [3] It is worth noting that, after DFC and Dell, the Delaware Supreme Court summarily affirmed the decision of the Court of Chancery in Merlin Partners, LP v. SWS Grp., Inc., No. 295, 2017, 2018 WL 1037477 (Table) (Del. Feb. 23, 2018), aff’g, In re Appraisal of SWS Grp., Inc., C.A. No. 10554-VCG, 2017 WL 2334852 (Del. Ch. May 30, 2017). The Court of Chancery decided SWS Group prior to the Delaware Supreme Court’s decisions in DFC and Dell. Nonetheless, it is clear that the court would have found the transaction at issue in SWS Group not to be “Dell-compliant,” as the transaction involved the sale of the target to a buyer that was also a lender to the target and so could exercise veto rights over any transaction. Indeed, no party to the SWS Group litigation argued that the deal price provided probative evidence of fair value. See our earlier discussion of the SWS Group decision by the Delaware Court of Chancery here. [4] See 8 Del. C. § 262(h) (“[T]he Court shall determine the fair value of the shares exclusive of any element of value arising from the accomplishment or expectation of the merger or consolidation . . . .”); see also Global GT LP v. Golden Telecom, Inc., 993 A.2d 497, 507 (Del. Ch.) (“The entity must be valued as a going concern based on its business plan at the time of the merger, and any synergies or other value expected from the merger giving rise to the appraisal proceeding itself must be disregarded.” (internal citations omitted)), aff’d, 11 A.3d 214 (Del. 2010). The following Gibson Dunn lawyers assisted in preparing this client update:  Barbara Becker, Jeffrey Chapman, Stephen Glover, Eduardo Gallardo, Jonathan Layne, Joshua Lipshutz, Brian Lutz, Adam Offenhartz, Aric Wu, Meryl Young, Daniel Alterbaum, Colin Davis, and Mark Mixon. Gibson Dunn’s lawyers are available to assist with any questions you may have regarding these issues.  For further information, please contact the Gibson Dunn lawyer with whom you usually work, the authors, or any of the following leaders and members of the firm’s Mergers and Acquisitions practice group: Mergers and Acquisitions Group / Corporate Transactions: Barbara L. Becker – Co-Chair, New York (+1 212-351-4062, bbecker@gibsondunn.com) Jeffrey A. Chapman – Co-Chair, Dallas (+1 214-698-3120, jchapman@gibsondunn.com) Stephen I. Glover – Co-Chair, Washington, D.C. (+1 202-955-8593, siglover@gibsondunn.com) Dennis J. Friedman – New York (+1 212-351-3900, dfriedman@gibsondunn.com) Jonathan K. Layne – Los Angeles (+1 310-552-8641, jlayne@gibsondunn.com) Eduardo Gallardo – New York (+1 212-351-3847, egallardo@gibsondunn.com) Jonathan Corsico – Washington, D.C. (+1 202-887-3652), jcorsico@gibsondunn.com Mergers and Acquisitions Group / Litigation: Meryl L. Young – Orange County (+1 949-451-4229, myoung@gibsondunn.com) Brian M. Lutz – San Francisco (+1 415-393-8379, blutz@gibsondunn.com) Aric H. Wu – New York (+1 212-351-3820, awu@gibsondunn.com) Paul J. Collins – Palo Alto (+1 650-849-5309, pcollins@gibsondunn.com) Michael M. Farhang – Los Angeles (+1 213-229-7005, mfarhang@gibsondunn.com) Joshua S. Lipshutz – Washington, D.C. (+1 202-955-8217, jlipshutz@gibsondunn.com) Adam H. Offenhartz – New York (+1 212-351-3808, aoffenhartz@gibsondunn.com) © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

March 20, 2018 |
Supreme Court Approves Deferential Review of Bankruptcy-Court Determinations on “Insider” Status

Click for PDF On March 5, 2018, the U.S. Supreme Court issued a decision in U.S. Bank N.A. Trustee, By and Through CWCapital Asset Management LLC v. Village at Lakeridge, LLC (No. 15-1509), approving the application of the clear error standard of review in a case determining whether someone was a “non-statutory” insider under the Bankruptcy Code. We note that the Court’s narrow holding only addressed the appropriate standard of review, leaving for another day the question of whether the specific test that the Ninth Circuit used to determine whether the individual was a “non-statutory” insider was correct. The ruling is significant, however, because without the prospect of de novo review, a bankruptcy court’s ruling on whether a person is a “non-statutory” insider will be very difficult to overturn on appeal—which may have significant impact on case outcomes. The Bankruptcy Code “Insider” The Bankruptcy Code’s definition of an insider includes any director, officer, or “person in control” of the entity.[1] This definition is non-exhaustive, so courts have devised tests for identifying other, so-called “non-statutory” insiders, focusing, in whole or in part, on whether a person’s transactions with the debtor were at arm’s length. Background In this case, the debtor (Lakeridge) owed money to two main entities, its sole owner MBP Equity Partners for $2.76 million, and U.S. Bank for $10 million. Lakeridge submitted a plan of reorganization, but it was rejected by U.S. Bank. Lakeridge then turned to the “cramdown” option for imposing a plan impairing the interests of non-consenting creditors. This option requires that at least one impaired class of creditors vote to accept the plan, excluding the votes of all insiders. As the debtor’s sole owner, MBP plainly was an insider of the debtor, within the statutory definition of Bankruptcy Code §101(31)(B)(i)–(iii), so its vote would not count. Therefore, to gain the consent of the MBP voting block to pass the cramdown plan, Kathleen Bartlett (an MPB board member and Lakeridge officer), sold MPB’s claim of $2.76 million to a retired surgeon named Robert Rabkin, for $5,000. Rabkin agreed to buy the debt owed to MBP for $5,000 and proceeded to vote in favor of the proposed plan as a non-insider creditor. U.S. Bank, the other large creditor, objected, arguing that the transaction was a sham and pointing to a pre-existing romantic relationship between Rabkin and Bartlett. If Rabkin were an officer or director of the debtor, Rabkin’s status as an insider would have been undisputed. But because Rabkin had no formal relationship with the debtor, the bankruptcy court had to consider whether the particular relationship was close enough to make him a “non-statutory” insider. The bankruptcy court held an evidentiary hearing and concluded that Rabkin was not an insider, based on its finding that Rabkin and Bartlett negotiated the transaction at arm’s length. Because of this decision, the Debtor was able to confirm a cramdown plan over the objection of the senior secured lender. The Ninth Circuit affirmed the bankruptcy court’s ruling, holding that that the finding was entitled to clear-error review, and therefore would not be reversed. The Supreme Court Holds That the Standard of Review Is Clear Error On certiorari, the Supreme Court, in a unanimous opinion, took pains to emphasize that the sole issue on appeal was the appropriate standard of review, and not any determination of the merits of the “non-statutory” insider test that the Ninth Circuit had applied to determine whether Rabkin was an insider. The Supreme Court held that the Ninth Circuit was correct to review the bankruptcy court’s determination for “clear error” (rather than de novo). The Court discussed the difference between findings of law—which are reviewed de novo—and findings of fact—which are reviewed for clear error. The question in this case—whether Rabkin met the legal test for a non-statutory insider—was a “mixed” question of law and fact. Courts often review mixed questions de novo when they “require courts to expound on the law, particularly by amplifying or elaborating on a broad legal standard.”[2] Conversely, courts use the clearly erroneous standard for mixed questions that “immerse courts in case-specific factual issues.”[3] In sum, the Court explained, “the standard of review for a mixed question all depends on whether answering it entails primarily legal or factual work.”[4] Choosing between those two characterizations, the Court chose the latter. The basic question in this case was whether “[g]iven all the basic facts found, Rabkin’s purchase of MBP’s claim [was] conducted as if the two were strangers to each other.”[5] Because “[t]hat is about as factual sounding as any mixed question gets,”[6] the Court held that the clear error standard applied. The Supreme Court Avoids Adjudicating a Potentially Significant Circuit Split on Tests Used to Determine Non-Statutory Insiders All nine of the justices joined Justice Kagan’s opinion. However, the concurring opinion from Justice Sonia Sotomayor (joined by Justices Anthony Kennedy, Clarence Thomas and Neil Gorsuch) suggests grave doubts about the coherence of the Ninth Circuit’s standard for assessing non-statutory-insider status. Nevertheless, Justice Sotomayor agreed that resolving the propriety of that standard is not a task that warranted the Supreme Court’s attention. Impact of US Bank While this case does not break new ground, it firmly establishes the bankruptcy courts’ authority to make these determinations and limits appellate review. This opinion may embolden appellants (and bankruptcy courts) to push the envelope in the future. Debtors may be emboldened to seek to use a variety of affiliate-transaction structures as they seek the keys to confirming cramdown plans over the objections of senior lenders.    [1]   11 U.S.C. § 101(31)(B)(i)–(iii).    [2]   Decision at p. 8.    [3]   Ibid.    [4]   Id. at p. 2.    [5]   Id. at p. 10.    [6]   Ibid. Gibson, Dunn & Crutcher’s lawyers are available to assist with any questions you may have regarding these issues.  For further information, please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Business Restructuring and Reorganization practice group, or the following authors: Samuel A.  Newman – Los Angeles (+1 213-229-7644, snewman@gibsondunn.com) Daniel B. Denny – Los Angeles (+1 213-229-7646, ddenny@gibsondunn.com) Sara Ciccolari-Micaldi – Los Angeles (+1 213-229-7887, sciccolarimicaldi@gibsondunn.com) Please also feel free to contact the following practice group leaders: Business Restructuring and Reorganization Group: Michael A. Rosenthal – New York (+1 212-351-3969, mrosenthal@gibsondunn.com) David M. Feldman – New York (+1 212-351-2366, dfeldman@gibsondunn.com) Jeffrey C. Krause – Los Angeles (+1 213-229-7995, jkrause@gibsondunn.com) Robert A. Klyman – Los Angeles (+1 213-229-7562, rklyman@gibsondunn.com) © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

March 5, 2018 |
Supreme Court Settles Circuit Split Concerning Bankruptcy Code “Safe Harbor”

Click for PDF On February 27, 2018, the U.S. Supreme Court issued a decision in Merit Management Group, LP v. FTI Consulting, Inc. (No. 16-784), settling a circuit split regarding the “safe harbor” provision in § 546(e) of the Bankruptcy Code.  That section bars the avoidance of certain types of securities and commodities transactions that are made by, to or for the benefit of covered entities including financial institutions, stockbrokers and securities clearing agencies. Circuits had split regarding whether the safe harbor protects a transfer that passes through a covered entity, where the entity only acts as a conduit and has no beneficial interest in the property transferred.  In Merit Management, the Court held that the safe harbor does not apply when a covered entity only acts as a conduit, and that the safe harbor only applies when the “relevant transfer” (i.e., the “overarching” transfer sought to be avoided) is by, to or for the benefit of a covered entity.  As a result, the Court held that the safe harbor did not protect a private securities transaction where neither the buyer nor the seller was a covered entity, even though the funds passed through covered entities. The Bankruptcy Code “Safe Harbor” The Bankruptcy Code permits a trustee to bring claims to “avoid” (or undo) for the benefit of the bankruptcy estate certain prepetition transfers or obligations, including claims to avoid a preference (11 U.S.C. § 547) or fraudulent transfer (11 U.S.C. § 548(a)).  Section 546(e) limits those avoidance powers by providing that, “[n]otwithstanding” the trustee’s avoidance powers, “the trustee may not avoid a transfer that is” (1) a “margin payment” or “settlement payment” “made by or to (or for the benefit of)” a covered entity, or (2) “a transfer made by or to (or for the benefit of)” a covered entity “in connection with a securities contract . . . or forward contract.”  11 U.S.C. § 546(e).  The sole exception to the safe harbor is a claim for “actual fraudulent transfer” under § 548(a)(1)(A).  Id. Background Merit Management involved the acquisition of a “racino” (a combined horse racing and casino business) by its competitor.  To consummate the transaction, the buyer’s bank wired $55 million to another bank that acted as a third-party escrow agent, which disbursed the funds to the seller’s shareholders in exchange for their stock in the seller.  The buyer subsequently filed for Chapter 11 bankruptcy protection and a litigation trust was established pursuant to the buyer’s confirmed reorganization plan.  The trustee sued one of the selling shareholders that received $16.5 million from the buyer, alleging that the transaction was a constructive fraudulent transfer under § 548(a)(1)(B) because the buyer was insolvent at the time of the purchase and “significantly overpaid” for the stock. The district court held that the safe harbor barred the fraudulent transfer claim because the transaction was a securities settlement payment involving intermediate transfers “by” and “to” covered entities (the banks).  The Seventh Circuit reversed, holding that the safe harbor did not apply because the banks only acted as conduits and neither the buyer nor the shareholder was a covered entity.  In so holding, the Seventh Circuit diverged from other circuits that had applied the safe harbor to transactions consummated through a covered entity acting as a conduit.[1]  Those circuits interpreted the disjunctive language in the safe harbor that protects transfers “by or to (or for the benefit of)” a covered entity to mean that a transfer “by” or “to” a covered entity is protected even if the transfer is not “for the benefit of” the covered entity.  The Supreme Court granted certiorari to settle the circuit split. The Supreme Court Holds That the Safe Harbor Does Not Protect a Transfer When a Covered Entity Only Acts as a Conduit   The Supreme Court affirmed the Seventh Circuit’s decision, holding that the safe harbor does not protect a transfer when a covered entity only acts as a conduit.  The crux of the decision is that a safe harbor analysis must focus on whether the “relevant transfer,” meaning the “overarching” or “end-to-end” transfer that the trustee seeks to avoid, was by, to or for the benefit of a covered entity.  Whether an intermediate or “component” transfer was made by or to a covered entity is “simply irrelevant to the analysis under § 546(e).”[2]  The Court reasoned that, as an express limitation on the trustee’s avoidance powers, § 546(e) must be applied in relation to the trustee’s exercise of those powers with respect to the transfer that the trustee seeks to avoid, not component transfers that the trustee does not seek to avoid.[3]  In the case before it, because the trustee sought to avoid the “end-to-end” transfer from the buyer to the shareholder, and neither was a covered entity, the safe harbor did not apply. The Court Avoids Adjudicating a Potentially Significant Defense The shareholder did not argue in the lower courts that the buyer or the shareholder was a covered entity.  In its briefing in the Supreme Court, the shareholder argued that the buyer and seller were both covered entities because they were customers of the banks that facilitated the transaction, and the definition of “financial institution” in 11 U.S.C. § 101(22)(A) includes a “customer” of a financial institution when the institution “is acting as agent or custodian for a customer.”  During oral argument, Justice Breyer indicated that he might have been receptive to that potentially dispositive argument.  However, the decision expressly avoids adjudicating the argument on the basis that the shareholder raised the point “only in footnotes and did not argue that it somehow dictates the outcome in this case.”  Id. at n. 2.  As a result, the “customer-as-financial-institution defense” will likely be litigated in the lower courts going forward. Impact of Merit Management As a result of Merit Management, parties to securities and commodities transactions should expect that, in the event of a bankruptcy filing, the safe harbor will not protect a transaction unless the transferor, transferee or beneficiary of the “overarching” transfer is a covered entity.  Routing a transfer through a covered entity will no longer protect the transaction.  Given the increased importance placed on whether a party to the overarching transfer is a covered entity, Merit Management may lead to a new wave of litigation regarding the scope of the covered entities, including the circumstances in which the customer of a financial institution constitutes a covered entity, and related planning strategies to fall within such scope.    [1]   See, e.g., In re Quebecor World (USA) Inc., 719 F. 3d 94, 99 (2d Cir. 2013); In re QSI Holdings, Inc., 571 F. 3d 545, 551 (6th Cir. 2009); Contemporary Indus. Corp. v. Frost, 564 F. 3d 981, 987 (8th Cir. 2009); In re Resorts Int’l, Inc., 181 F. 3d 505, 516 (3d Cir. 1999); In re Kaiser Steel Corp., 952 F. 2d 1230, 1240 (10th Cir. 1991).    [2]   Decision at p. 14.    [3]   See id. at pp. 11-14 (“If a trustee properly identifies an avoidable transfer . . . the court has no reason to examine the relevance of component parts when considering a limit to the avoiding power, where that limit is defined by reference to an otherwise avoidable transfer, as is the case with §546(e). . . .”). Gibson, Dunn & Crutcher’s lawyers are available to assist with any questions you may have regarding these issues.  For further information, please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Business Restructuring and Reorganization practice group, or the following authors: Oscar Garza – Orange County, CA (+1 949-451-3849, ogarza@gibsondunn.com) Michael A. Rosenthal – New York (+1 212-351-3969, mrosenthal@gibsondunn.com) Douglas G Levin – Orange County, CA (+1 949-451-4196, dlevin@gibsondunn.com) Please also feel free to contact the following practice group leaders: Business Restructuring and Reorganization Group: Michael A. Rosenthal – New York (+1 212-351-3969, mrosenthal@gibsondunn.com) David M. Feldman – New York (+1 212-351-2366, dfeldman@gibsondunn.com) Jeffrey C. Krause – Los Angeles (+1 213-229-7995, jkrause@gibsondunn.com) Robert A. Klyman – Los Angeles (+1 213-229-7562, rklyman@gibsondunn.com) © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

March 1, 2018 |
To Form an Entity or Not to Form an Entity, That Is the Question; Deciding Between an Entity Joint Venture and a Contractual Strategic Alliance

Click for PDF People often speak of forming a joint venture as if the meaning of the term “joint venture” is self-evident.  However, the term “joint venture” can be used to describe a wide array of arrangements between two or more parties.  The universe of these arrangements can be divided into two broad categories: joint ventures that are implemented solely through contractual arrangements, which we refer to as “Contractual JVs,” and those in which the parties jointly own one or more entities, which we refer to as “JV Companies.”  Therefore, one of the first questions that the parties and their counsel should consider when developing the joint venture structure is “Will the joint venture be solely contractual or will the parties each own a stake in one or more legal entities that conduct the joint venture business?” A JV Company Is a Substantial Undertaking Establishing a JV Company offers a number of advantages that may be difficult to achieve through a Contractual JV.  For example, a JV Company may make it easier for the parties to share assets to be used in the venture business, manage liability risks associated with the business and establish a management team that is focused solely on the venture.  But establishing a JV Company may also be significantly more complex than forming a Contractual JV; this complexity may make a JV Company more expensive and burdensome for the venture parties than a Contractual JV. Some of the reasons for the additional complexity include the following: Additional Negotiation and Documentation: In addition to agreeing on the economic terms of the joint venture, the parties have to negotiate and document the governance arrangements of the JV Company, their obligations to make contributions to, and rights to receive distributions from, the JV Company, and the terms and conditions under which a party may exit the joint venture, such as through a transfer of joint venture company equity or a sale of the JV Company. Operational Burdens: Operating a JV Company imposes burdens on the parties that they may not have in connection with a Contractual JV.  Among other requirements, the JV Company may have to obtain required licenses and permits, design and implement internal controls and procedures, produce its own financial statements, maintain its corporate existence and books and records separate from those of the parties and, as noted below, employ a workforce, appoint officers and retain a managing board.  These burdens will increase both the time and expense required to run the joint venture. Governance Issues: Depending on the governance structure of the JV Company, the management decision-making process can also be much more involved than in a Contractual JV.  The parties must develop and implement mutually agreeable governance arrangements, potentially at the board and senior management levels, and each party must devote time to overseeing the venture.  Procedural requirements, for example, requirements for calling and conducting board or member meetings and taking board or member action, must be complied with or waived.  As the number of members of the joint venture with governance rights increases, so does the potential complexity of the JV Company’s governance arrangements as well as the potential for disputes about decisions the board and/or the members must make. Issues Associated with Terminating and Unwinding the Venture:  Terminating a joint venture structured as a JV Company may be more complicated than terminating a Contractual JV.  Unless the JV Company will be sold to a third party, the venture parties must decide what to do with the JV Company itself, how to provide for its liabilities and how any remaining JV Company assets will be distributed among the parties.  For example, will tangible assets be returned to the party that contributed them to the JV Company? Who will receive and/or be entitled to use any JV Company intellectual property? If the venture business will not be continued by one of the parties, they must wind it down and take any related required actions, such as terminating the JV Company’s employees, notifying the JV Company’s creditors, etc. It is important to note that the factors outlined above are generalizations, and this discussion is not intended to suggest that Contractual JVs are inevitably simpler than JV Companies, or that formation and structuring issues arising in connection with Contractual JVs are more easily resolved than those involving JV Companies.  Contractual JVs may present issues and impose burdens on the venture parties similar to those described above.  For example, the various contractual arrangements necessary to manage a complex Contractual JV can look like, and be just as difficult as, governance of a JV Company, with each party appointing representatives to a managing board that oversees the venture business.  Similarly, terminating a Contractual JV can raise issues like those implicated by terminating a JV Company if the parties’ business operations are significantly intertwined. Deciding between a JV Company or a Contractual JV The following list of questions is intended to help potential venture parties evaluate whether a JV Company or a Contractual JV is the best way to achieve their joint venture goals.  It may also help the parties identify areas where they have differing views about the proposed joint venture.  It is neither an exhaustive list nor one that can always be ticked through in a linear fashion as many of these considerations are related and/or address overlapping issues. Scope of the joint venture: Will the joint venture operate a stand-alone, self-sustaining business with many moving parts, such as designing, manufacturing and selling products all over the world, or will it have a simpler purpose, such as supplying a particular product or service to one of the parties?  Will the venture business be large in scope, or relatively small? The more complicated and expansive the enterprise, the more likely it is that a JV Company structure will be appropriate.  The simpler the purpose of the joint venture, the more likely it is that it can be structured as a Contractual JV. Need for significant investment:  Will the joint venture require significant capital expenditures or investment to be funded by contributions from both parties, for example, to conduct research, build facilities or purchase equipment?  If yes, it may make sense for a JV Company to own the assets that are created with this investment. New line of business, products or markets:  Do the parties plan to pool their respective resources and/or combine complementary assets to develop a new business (i.e., one that no party currently engages in)?  As was discussed above in “Need for Significant Investment,” if joint efforts are required to create a new business, it may make sense to establish a JV Company through which the parties can jointly own the venture business. Role of the parties:  Do both parties expect to have significant input into management decisions regarding the joint venture business?  If yes, it may be easier for the parties to provide such input if the venture business is run by a JV Company, rather than by one of the parties in a Contractual JV. Need for dedicated management team:  Will the venture business be sufficiently complex that it should be managed by a separate team focused only on the venture business, rather than by managers who are juggling responsibilities to the joint venture and one of the parties?  Will the joint venture benefit from a separate compensation structure tied to performance of the venture business to incentivize the management team?  If the answer to either question is yes, then this would support a decision to establish a JV Company. Need for separate employee base:  Will the joint venture need employees who are focused solely on the venture business?  Or can the venture business be run just as, or more, efficiently by employees of one or more parties?  If the former, this fact would support establishing a JV Company.  If the parties are contemplating transferring employees to the JV Company, they should also consider the willingness of their employees to work for the JV Company.  Employees may be reluctant to leave an established company to work for an unproven one. Intellectual property considerations:  Will the joint venture develop intellectual property to be used primarily in its business, such as new product designs or trademarks, and/or will the parties contribute certain existing intellectual property to the joint venture?  If yes, the parties may wish to form a JV Company to control these intellectual property assets, maintain applicable intellectual property registrations and otherwise protect the joint venture’s intellectual property rights.  However, a JV Company may not be required if new intellectual property is not needed for the joint venture business, or if the intellectual property to be used in the joint venture will be owned and controlled solely by one party. Liability concerns:  Will the joint venture business generate significant liability risk?  If yes, the parties may want to own the business through a JV Company to help develop a liability shield. Foreign law concerns: Will the joint venture operate in a jurisdiction that curtails foreigners’ rights to conduct certain businesses or own property?  For example, Canada restricts the ability of non-Canadians to own and control Canadian telecommunications carriers.  China limits the percentages of businesses in the financial sector, such as banks, securities firms and insurers, that foreigners may own.  If such restrictions will prevent one of the parties from owning the venture business, a Contractual JV may be the more attractive option. Ability to transfer assets to the venture:   If the venture business requires the use of assets owned by the parties, can these be transferred easily?  If there are encumbrances preventing the transfer of these assets, such as pledges to creditors, a Contractual JV may be a better choice. Regulatory issues:  Is the venture business in a highly regulated industry?  Does it require licenses that cannot be transferred, specialized employees and/or substantial infrastructure designed to ensure compliance with applicable laws?  If yes, and one of the parties already has such licenses, employees and/or infrastructure, it may be desirable for that party to continue to run the business, rather than transfer it to a new company. Strategic objectives:  What are the parties’ respective strategic objectives?  Does the venture represent an opportunity for one party to learn about a new business?  Or for a party to gain access to new funding, technology or markets?  In some cases, it may be easier for a party to achieve a strategic goal if a JV Company is established.    For example, let’s assume that the venture will be the sole supplier of raw materials to one of the parties.  That party may want the venture business to be contributed to a JV Company so the party can exercise more control over the business and have the option to buy out the other party in the event of any dispute between them.  Another example is an arrangement under which one party will adapt technology developed by the second party for use in the first party’s business.  In this context, it may make sense for the first party and the second party to form a JV Company, because joint ownership of the enterprise may make it easier for the first party to learn about the technology and control its commercialization. Term of the joint venture:  Do the parties expect the joint venture to have an extended or indefinite life?  Or is the venture being formed to take advantage of a short-term opportunity?  If the joint venture is expected to have an extended life, a JV Company may be the better choice. Exit plans:  Do the parties have a specific plan for how they will exit or terminate the joint venture?  For example, do they envision growing the venture business for several years and then selling it to a third party or taking the business public?  Is one party hoping that it can eventually buy out the other party’s interest?  Is the other party hoping that it can exit the business after participating in the joint venture for a period of time?  In these circumstances, it may be easier to develop exit plans if the parties establish a JV Company. Tax Considerations Tax planning is a critical element of venture planning, and parties would be well-advised to involve tax counsel as early as possible in the venture planning process.  Parties that form a Contractual JV should be aware of the risk that a Contractual JV may be treated as a separate entity for federal income tax purposes.  Generally, an arrangement under which the participants jointly conduct a business and share profits and losses will be treated as a partnership under the Internal Revenue Code.  (If a Contractual JV is such an arrangement, the parties can elect to treat the arrangement, i.e., the Contractual JV, as a corporation instead of a partnership for federal income tax purposes.)  Factors that courts consider when evaluating whether a Contractual JV is a partnership for federal income tax purposes include, among others, each party’s contributions to the venture, who controls income and withdrawals, if the venture is conducted in the joint names of the parties and if the parties have mutual control over the venture.  Significantly, if a Contractual JV is treated as a separate entity for federal income tax purposes, there is also a risk that a party’s activities that the parties do not consider to be part of the venture are nonetheless treated as part of the Contractual JV for federal income tax purposes.  These risks may result in unintended tax consequences.  In contrast, forming a JV Company provides certainty about what activities will be treated as part of the venture, and such certainty will make tax planning easier. By bringing more certainty to the taxation of the venture, the creation of a JV Company may also offer more opportunities for tax planning than a Contractual JV.  This is particularly the case in the cross-border context; if the venture will involve operations in multiple countries, it may be advisable to form multiple local-country entities to manage their tax liability.  Moreover, recent changes to the tax law, particularly those changes impacting the taxation of non-US income earned by US taxpayers, require particular attention.  Conclusion The decision whether to establish a JV Company or a Contractual JV is not always easily made.  There is no formula that can be applied to produce the right result.  Although the answers to the questions posed above do not invariably dictate whether a JV Company or a Contractual JV will be the best structure, they may provide valuable insight.  In some instances, one approach will have clear advantages over the other.  However, in most situations, the parties will be able to be accomplish their objectives through either a JV Company or a Contractual JV.  In these cases, the parties must balance a number of potentially competing considerations, and then make a judgment call. Gibson, Dunn & Crutcher’s lawyers are available to assist with any questions you may have regarding these issues. For further information, please contact the Gibson Dunn lawyer with whom you usually work or the authors of this alert: Stephen I. Glover – Washington, D.C. (+1 202-955-8593, siglover@gibsondunn.com) Eric B. Sloan – New York (+1 212-351-2340, esloan@gibsondunn.com) Alisa Babitz – Washington, D.C. (+1 202-887-3720, ababitz@gibsondunn.com) Please also feel free to contact any of the following practice group leaders: Mergers and Acquisitions Group: Barbara L. Becker – New York (+1 212-351-4062, bbecker@gibsondunn.com) Jeffrey A. Chapman – Dallas (+1 214-698-3120, jchapman@gibsondunn.com) Stephen I. Glover – Washington, D.C. (+1 202-955-8593, siglover@gibsondunn.com) Private Equity Group: Sean P. Griffiths – New York (+1 212-351-3872, sgriffiths@gibsondunn.com) Steven R. Shoemate – New York (+1 212-351-3879, sshoemate@gibsondunn.com) Ari Lanin – Los Angeles (+1 310-552-8581, alanin@gibsondunn.com) Charlie Geffen – London (+44 (0)20 7071 4225, cgeffen@gibsondunn.com) Scott Jalowayski – Hong Kong (+852 2214 3727, sjalowayski@gibsondunn.com) Tax Group: Art Pasternak Washington, D.C. (+1 202-955-8582, apasternak@gibsondunn.com) Jeffrey M. Trinklein – London/New York (+44 (0)20 7071 4224/+1 212-351-2344), jtrinklein@gibsondunn.com) © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

February 14, 2018 |
Compliance Reminders for Private Fund Advisers – 2018

Click for PDF Private fund advisers are subject to a number of regulatory reporting requirements and other compliance obligations, many of which need to be completed on an annual basis.  This Client Alert provides a brief overview. 1.         Regulatory Filing Obligations under the Advisers Act A private fund adviser that is either a registered investment adviser (“RIA“) or an exempt reporting adviser (“ERA“) under the U.S. Investment Advisers Act of 1940, as amended (the “Advisers Act“), must comply with a number of regulatory reporting obligations.  Chief among these is the obligation to update the adviser’s Form ADV and Form PF filings with the SEC on an annual basis.  The following is a brief summary of those filing obligations and the applicable deadlines (assuming a fiscal year end of December 31, 2017): Form ADV Annual Update (3/31/2018 deadline).  Each RIA and ERA has an ongoing obligation to update the information provided in its Form ADV no less frequently than annually.  This annual update must be filed within 90 days of the end of the adviser’s fiscal year.  An RIA must update the information provided in both the “check the box” portion of its Form ADV (Part 1A) and in its “disclosure brochure” (Part 2A).  An ERA is only required to update the information reported in its abbreviated Part 1A filing.  This year, most private fund advisers will be filing for the first time on the amended Part 1A that went into effect on October 1, 2017.[1]  We strongly recommend that each private fund adviser build extra time into its annual Form ADV updating process for this year in order to assess and address any changes to its reporting obligations.All such updates must be filed with the SEC electronically through IARD.  To avoid last minute delays, we recommend that each RIA and ERA check its IARD account early to ensure that its security access codes are up-to-date and that it has sufficient funds in its IARD account to cover all Federal and state filing fees. Each RIA is also required to update the information provided in its “supplemental brochures” (Part 2B) no less frequently than annually.[2]  Although an RIA is not required to publicly file its supplemental brochures with the SEC, up-to-date supplemental brochures must be kept on file at the RIA’s offices. Disclosure Brochure Delivery (4/30/2018 deadline).  An RIA is also required to deliver an updated version of its Part 2A disclosure brochure to all clients within 120 days of the end of its fiscal year.[3]  An RIA may comply with this requirement either by mailing a complete copy of its updated brochure to its clients or by sending a letter providing a summary of any material changes that have been made to the brochure since its last annual update and offering to provide a complete copy of the updated brochure upon request free of charge.[4] Forms PF and CPO-PQR (4/30/2018 deadline).  An RIA with regulatory assets under management attributable to private funds exceeding $150 million is required to provide a report on Form PF to the SEC regarding its private funds’ investment activities.  For most private fund advisers, the Form PF is required to be filed once a year within 120 days of the end of the RIA’s fiscal year.  However, a private fund adviser with assets under management exceeding certain thresholds may be required to file more frequently and/or on shorter deadlines.[5]  In addition, the information that such a large private fund adviser must provide to the SEC is significantly more extensive.An RIA that is also registered under the Commodity Exchange Act (“CEA“) as a Commodity Pool Operator (“CPO“) or Commodity Trading Adviser (“CTA“) should consider its reporting obligations under Form CPO-PQR, a Commodity Futures Trading Commission (“CFTC“) form that serves the same purpose as, and requires the reporting of similar types of information to, Form PF.  In theory, a dual registrant may comply with its reporting obligations under both the Advisers Act and the CEA by filing a single Form PF.  However, the CFTC still requires certain information to be provided in a Form CPO-PQR filing in order to take advantage of this feature. 2.         Annual Compliance Program Review Rule 206(4)-7 under the Advisers Act (the “Compliance Program Rule“) requires an RIA (but not an ERA) to review no less frequently than annually the adequacy of its compliance policies and procedures and the effectiveness of their implementation.  Although the Compliance Program Rule does not require that these reviews be in writing, the SEC’s examination staff has a clear expectation that an RIA will document its review.  SEC examiners routinely request copies of an RIA’s annual compliance program review reports as part of the examination process. Producing an annual compliance program review report need not be overly burdensome.  Although an RIA may consider engaging a third party to conduct a comprehensive audit of the firm’s compliance program from time to time, under normal circumstances an RIA can take a more risk-based approach to the process.  For example, an RIA might build a review around the following three themes where potential compliance risks may be most acute: Compliance policies and procedures that may be affected by changes in the RIA’s business or business practices since the last review was conducted; Any areas where SEC examiners have identified deficiencies or where the firm has experienced compliance challenges; and Any changes in applicable law, regulation, interpretive guidance or regulatory priorities. In addition, a CCO should document in the annual review report any incremental improvements that have been made to the firm’s compliance program throughout the year, not just as part of a formal annual review process. 3.         Notable Regulatory Developments  The following is a brief summary of the more notable regulatory developments for 2017 that a private fund adviser may want to consider when conducting its annual compliance program review: Fees and Expenses.  The SEC continues to focus on industry practices concerning the collection of non-investment advisory fees from portfolio companies and on the allocation of certain of the adviser’s expenses to funds.  This past year, in continuation of a line of enforcement actions against private fund advisers dating back to 2015, the SEC’s Enforcement Division settled several enforcement actions against private equity firms in which violations of fiduciary duties were found with respect to the collection of non-advisory fees and/or the allocation of expenses.[6]  Examples of the types of practices that could trigger SEC scrutiny (particularly if not the subject of clear prior disclosure and/or a contractual basis in the applicable fund governing documents) include: re-characterizing non-investment advisory fee revenue in a manner intended to avoid triggering management fee offsets; charging accelerated monitoring or similar fees to portfolio companies; allocating expenses related to the adviser’s overhead and/or back-office services to its funds; allocating broken deal expenses to funds without allocating a portion of those expenses to other potential co-investors (especially affiliated co-investors); and negotiating discounts on service provider fees for work performed on behalf of the adviser without also making the benefit of those discounts available to the adviser’s funds. We continue to encourage private fund advisers to review their financial controls with respect to fee collection, management fee offsets and expense allocation to ensure that their practices are consistent with their funds’ governing documents (including any disclosure documents) and in line with SEC expectations.  We also encourage private fund advisers to periodically review their policies regarding fee collection and expense allocation practices to make sure that they are up-to-date and comprehensive. Cybersecurity.  The SEC continues to make cybersecurity a high priority for the entire financial services industry.  In the past three years, OCIE has published five “Risk Alerts” relating to cybersecurity and identified cybersecurity as one of its examination priorities in 2015, 2016, 2017 and 2018.[7]  In addition, the SEC’s Division of Enforcement has formed a “CyberUnit” to focus on combatting cyber-related threats.  In light of this regulatory focus, we recommend that each private fund adviser review its information security policies and practices thoroughly and implement enhancements to address any identified gaps promptly. Custody Rule.  One two occasions in February 2017, the staff of the SEC’s Division of Investment Management issued interpretive guidance on Rule 206(4)-2 under the Advisers Act (the “Custody Rule“). In a no-action letter, the staff was asked to affirm that an adviser did not have custody under the Custody Rule in circumstances where an investment adviser was authorized to instruct a custodian to transfer client funds to a designated third party account pursuant a standing letter of instruction from the client to both the adviser and the custodian.  The staff refused, stating that “an investment adviser with power to dispose of client funds or securities for any purpose other than authorized trading” has access to the client’s assets and is therefore subject to the Custody Rule.  However, the staff did grant relief from the surprise audit requirements under the Custody Rule in circumstances where a standing letter of instruction meeting certain conditions is in place.[8] In a separate “IM Guidance Update,” the staff also cautioned investment advisers that, even in circumstances where the adviser’s investment management agreement with a client prohibits the adviser from gaining access to the client’s assets, the adviser may still “inadvertently” be subject to the requirements of the Custody Rule in circumstances where the client’s custodian agreement purports to grant the adviser broader access to the client’s assets.[9] Together, both interpretations demonstrate that the SEC continues to take a broad view of what constitutes “custody” under the Custody Rule.  Advisers may wish to review their custody arrangements in view of this interpretive guidance to ensure that they are in strict compliance with the Custody Rule. OCIE “Frequent Findings” Reports.  OCIE issued two Risk Alerts in 2017 in which it summarized the most frequent findings from its compliance examinations of investment advisers.  The first report focused on OCIE’s exam findings generally and identified the following topics as the five most frequently cited deficiencies:   failure to adopt or implement adequate compliance policies and procedures in accordance with Compliance Program Rule or to perform adequate annual reviews of such compliance policies and procedures; failure to submit accurate or timely regulatory filings; failure to comply with the Custody Rule; failure to comply with Rule 204-1 under the Advisers Act (the “Code of Ethics Rule“); and failure to maintain proper books and records in compliance with Rule 204-2 under the Advisers Act (the “Books and Records Rule“).[10] The second report focused more specifically on OCIE’s findings with respect to investment adviser advertising practices, and identified a number of topics as frequently cited deficiencies, including the use of misleading performance results, misleading one-on-one representations, misleading claims of compliance with voluntary performance standards, cherry-picked profitable stock selections, misleading selection of recommendations, and inadequate compliance policies and procedures.  The staff also identified several common deficiencies as a result of its “touting initiative” focusing on the use of “accolades” in advertising materials, including the misleading use of third-party rankings or awards, and the misleading use of professional designations and testimonials.[11] Other Conflicts.  Finally, private fund advisers should remain vigilant for any other practices or circumstances that could present actual or potential conflicts of interest.  Several recent enforcement actions serve to emphasize the SEC’s view that the failure to properly address and disclose potential conflicts of interest is a breach of an investment adviser’s fiduciary duties under the Advisers Act, even in the absence of clear harm to investors.[12]   4.         Compliance Program Maintenance Each private fund adviser should (and in some cases must) perform certain annual maintenance tasks with respect to its compliance program.  The following is a list of mandatory and recommended tasks that should be completed: Code of Ethics Acknowledgements.  Each RIA is required under the Code of Ethics Rule to obtain a written acknowledgement from each of its “access persons” that such person has received a copy of the firm’s Code of Ethics and any amendments thereto.  As a matter of best practice, many RIAs request such acknowledgements on an annual basis.  In addition, each access person must provide an annual “securities holdings report” at least once every 12 months and quarterly “securities transactions reports” within 30 days of the end of each calendar quarter.  We recommend that each RIA review its records to ensure that each of its access persons has complied with these acknowledgement and personal securities reporting requirements, as the failure to maintain such documentation is a frequent deficiency identified by the SEC’s examiners.[13] Custody Rule Audits.  Compliance with the Custody Rule generally requires a private fund adviser to prepare annual audited financial statements in accordance with US GAAP for each of its private funds and to deliver such financial statements to each fund’s investors within 120 days of the fund’s fiscal year end (180 days in the case of a fund-of-funds). Disclosure Documents/ Side Letter Certifications.  In addition to the updates to an RIA’s disclosure and supplemental brochures on Form ADV Parts 2A and 2B discussed above, private fund advisers whose funds are continuously raising new capital (e.g., hedge funds) should review the offering documents for their funds to ensure that the disclosure in these documents is up-to-date.  A private fund adviser should also check to see that it has complied with all reporting, certification or other obligations it may have under its side letters with investors. Privacy Notice.  An investment adviser whose business is subject to the requirements of Regulation S-P (e.g., because it maintains records containing “nonpublic personal information” with respect to “consumers”) is required to send privacy notices to its “customers” on an annual basis.  As a matter of best practice, most private fund advisers simply send privacy notices to all of their clients and investors, often at the same time they distribute the annual updates to their disclosure brochures on Form ADV (see above).  We recommend that each adviser review its privacy notice for any updates to reflect changes in its business practices and for compliance with the applicable safe harbor provided in Regulation S-P. Political Contributions.  For a firm whose current or potential investor base includes state or local government entities (e.g., state or municipal employee retirement plans or public universities), we recommend that the political contributions of any of the firm’s “covered associates” be reviewed for any potential compliance issues under Advisers Act Rule 206(4)-5 (the “Pay-to-Play” rule). 5.         Other Potential Compliance Obligations Depending on the scope and nature of a private fund adviser’s business, numerous other regulatory reporting requirements and other compliance obligations may apply.  For example: Rule 506(d) Bad Actor Questionnaires.  For a private fund adviser whose funds are either continuously raising capital (e.g., hedge funds), or where the firm anticipates raising capital in the next twelve months, we recommend that the firm ensure that it has up-to-date “Bad Actor Questionnaires” under Regulation D Rule 506(d) on file for each of its directors, executive officers and any other personnel that are or may be involved in such capital raising efforts.  Firms that are or are contemplating engaging in general solicitations under Rule 506(c) of Regulation D should also review their subscription procedures to ensure that they are in compliance with the enhanced accredited investor verification standards required under that Rule. ERISA.  Funds that are not intended to constitute ERISA “plan assets” (e.g., because the fund is a “venture capital operating company” or because “benefit plan investors” own less than 25% of each class of equity of the fund) are typically required to certify non-plan asset status to their ERISA investors annually.  Thus, a private fund adviser should confirm that its funds have continued to qualify for a plan asset exception and prepare the required certifications.  In addition, investment advisers to funds that are ERISA plan assets sometimes agree to prepare an annual Form 5500 for the fund as a “direct filing entity.”  This approach allows underlying ERISA plan investors to rely on this Form 5500 with respect to the investment and have more limited auditing procedures for their own Forms 5500.  If this approach is used, Form 5500 is due 9-1/2 months after year-end (i.e., October 15 for calendar year filers).  Alternatively, if the fund does not itself file a Form 5500, it will need to provide ERISA investors the information they need to complete their own Forms 5500. CFTC Considerations.  A private fund adviser that is registered as either a CPO or a CTA, or which relies on certain exemptions from registration as a CPO or CTA, is subject to certain annual updating and/or reaffirmation filing requirements under the CEA and the rules adopted by the CFTC thereunder. Exempt Advisers.  Many advisers and general partners of private funds that trade in a de minimis amount of commodity interests (i.e., futures, options on futures, options on commodities, retail forex transaction, swaps) are not required to register under the CEA as a CPO, but need to qualify for, and rely on, an exemption from CPO registration.  CFTC Regulation 4.13(a)(3) provides an exemption for advisers and general partners of private funds that engage in a de minimis amount of commodity interests (the “De Minimis Exemption“) pursuant to a test found in that regulation.  Other exemptions from registration as a CPO or a CTA may be available to advisers or general partners of private funds.  An adviser or general partner must claim an exemption from CPO registration with respect to each fund that invests in commodity interests by filing an initial exemption through the National Futures Association (“NFA“) website and must reaffirm its exemption filing within 60 days after the end of each calendar year or else the exemption will be deemed to be withdrawn. Registered CPOs and CTAs.  If a private fund does not qualify for the De Minimis Exemption or another exemption, the adviser or general partner of that private fund may be required to register with the CFTC as a CPO or a CTA, resulting in annual fees, disclosure, recordkeeping and reporting requirements.  Notably, a registered CPO must file an annual report with respect to each relevant commodity pool that it operates and update disclosures to investors (unless a limited exemption under CFTC Regulation 4.7 applies).  A registered CPO should also consider reporting obligations under Form CPO-PQR, which would need to be filed with the NFA within 60 days of the end of each calendar quarter (depending on AUM).  Similarly, registered CTAs must consider reporting obligations under Form CTA-PR, which must be filed with the NFA within 45 days after the end of each calendar quarter.  If a manager or general partner is dually-registered as both a CPO and a CTA, it must complete Form CTA-PR and Form CPO-PR with respect to the relevant private funds. Other Considerations – Clearing, Trading and Uncleared Margin.  Regardless of whether an adviser or general partner claims an exemption from CPO registration with respect to a private fund, the simple fact that the private fund invests in commodity interests makes the private fund a “commodity pool” and the adviser and general partner CPOs (even if they are exempt from registration).  The designation as a commodity pool has some practical implications for private funds as commodity pools are considered “financial entities” under Section 2(h)(7)(C)(i) of the CEA and are therefore subject to mandatory clearing, trade execution and margin requirements with respect to their swaps activities.  Notably, rules requiring commodity pools to exchange variation margin for uncleared swaps came into force on March 1, 2017. Exchange Act Reporting Obligations.  A private fund adviser that invests in “NMS securities” (i.e., exchange-listed securities and standardized options) is reminded that such holdings may trigger various reporting obligations under the Securities Exchange Act of 1934 (the “Exchange Act“). For example: Schedules 13D & 13G.  An investment adviser that exercises investment or voting power over more than 5% of any class of a public company’s outstanding equity securities must file a holdings report on Schedule 13G if it qualifies as a passive institutional investor.[14]  Schedule 13G filings must be made within 45 days of the end of the calendar year and within 10 days after the end of any calendar month in which the adviser’s holdings in the applicable equity security exceeds 10%.  A Schedule 13G filer is also required to file an amended report on Schedule 13G within 10 days after the end of any calendar month in which its holdings in an NMS security exceeded 10% and within 10 days after the end of any calendar month after that in which such holdings changes by more than 5%.  An investment adviser that does not qualify as a passive institutional investor must file a report on Schedule 13D within 10 days of acquiring more than 5% of any class of an issuer’s outstanding equity securities and “promptly” (typically within 24 hours) after any material change in the information provided in the Schedule 13D (including any change in such adviser’s holdings of more than 1% or a change in the adviser’s investment intent with respect to such holdings). Form 13F.  An institutional investment adviser who exercises investment discretion over accounts holding publicly-traded equity securities[15] having an aggregate fair market value in excess of $100 million on the last trading day of any month in a calendar year must report such holdings to the SEC on Form 13F within 45 days after the end of such calendar year and within 45 days after the end of each of the first three calendar quarters of the subsequent calendar year. Form 13H.  A private fund adviser whose trading activity in NMS securities exceeds certain “large trader” thresholds[16] is required to file a report on Form 13H “promptly” (within 10 days) after exceeding the threshold.  In addition, such filings must be amended within 45 days after the end of each calendar year and promptly after the end of each calendar quarter if any of the information in the Form 13H becomes inaccurate. Section 16.  A private fund adviser that holds a greater than 10% voting position in a public company or whose personnel sit on the board of directors of a public company may also have reporting obligations under Section 16 of the Exchange Act and be subject to that Section’s restrictions on “short swing profits.” Regulation D and Blue Sky Renewal Filings.  A private fund that engages in a private offering lasting more than one year may be subject to annual renewal filing requirements under Regulation D and/or State blue sky laws. State Pay-to-Play and Lobbyist Registration Laws.  A private fund adviser that is soliciting state or local government entities for business may be subject to registration and reporting obligations under applicable lobbyist registration or similar state or municipal statutes in the jurisdictions where the adviser is engaged in such activities. Cross-Border Transaction Reporting Requirements.   A private fund adviser that engages in cross-border transactions or which has non-US investors in its funds may be subject to various reporting requirements under the Department of Treasury’s International Capital System (“TIC“) or the Bureau of Economic Analysis’ (“BEA“) direct investment survey program.  In general, investments that take the form of investments in portfolio securities are subject to TIC reporting requirements, while investments that take the form of direct investments in operating companies are subject to the BEA’s reporting requirements. A direct investment is generally defined by the BEA as an investment that involves a greater than 10% voting interest in an operating company.  For purposes of applying this definition, general partners are the only entities considered to have a voting interest in a limited partnership.  Limited partner interests are not considered voting securities.  The BEA’s reporting requirements apply to any direct investment that exceeds $3 million in size (whether by a US investor overseas or by a non-US investor in the US), even if the BEA has not provided notice to the applicable investor that a reporting obligation applies.  Which BEA Form applies, and the extent of the reporting person’s reporting requirements, depends on the size and nature of the direct investment.  This year, the BEA will conduct a 5-year “benchmarking survey” of all foreign direct investment into the United States.  As of the date of this Client Alert, the BEA had not yet published the version of Form BE-12 that it will use to conduct the survey, but a private fund adviser that is either domiciled outside the U.S. or that makes direct investments into the U.S. through offshore funds should keep track of developments in this area. In general, any cross-border investment (whether by an investor in a fund or by a fund in a portfolio security) that does not meet the BEA’s definition of a direct investment is reportable under TIC.  Again, the form to be used and the frequency and scope of the reporting obligation depends on the size and nature of the investment.  In general, however, unless an investor receives written notice from the Federal Reserve Bank of New York to the contrary, an investor is only required to participate in the TIC’s “benchmark surveys”, which are conducted once every five years.[17]  In addition, the reporting requirement generally falls on the first (or last) US financial institution in the chain of ownership at the US border, which means that in many cases for private fund advisers, the actual reporting obligations applies to the fund’s custodian bank or prime broker, and not to the private fund adviser itself. European Regulatory Reporting Requirements.  Private fund advisers that are either registered as alternative investment fund managers (“AIFMs“) or authorized to manage or market alternative investment funds (“AIFs“) in the European Economic Area (“EEA“) are required to regularly report information (referred to as transparency information) to the relevant regulator in each EEA jurisdiction in which they are so registered or authorized (“Annex IV Reports“).  The process of registering to market an AIF is not consistent across jurisdictions.  Registration of some type (which can range from mere notice to a formal filing-review-approval process lasting many months) is generally necessary before any marketing of the AIF may take place. Once registered, the AIFM must begin making Annex IV Reports in each relevant jurisdiction.  The transparency information required by the Annex IV Reports concerns the AIFM and the AIFs it is managing or marketing in the EEA.  The AIFM must provide extensive details about the principal markets and instruments in which it trades on behalf of the AIFs it manages or markets in the EEA, as well as a thoughtful discussion of various risk profiles.  Preparing Annex IV Reports, therefore, can be a challenging exercise.  Further, while Annex IV Reports are conceptually analogous across jurisdictions, the precise reporting requirements imposed by each regulator differ. The reporting frequency will depend on the type and amount of assets under management of the AIFM, as well as the extent of leverage involved, but will be yearly, half-yearly, or quarterly. The reports must be filed within one month of the end of the annual (December 31st), half yearly (June 30th and December 31st) or quarterly (March 31st, June 30th, September 30th and December 31st) reporting periods, as applicable.  Furthermore, AIFMD requires the AIF to prepare annual reports for its European investors, covering a range of specified information. We generally recommend that firms assess reporting requirements on an on-going basis in accordance with any changes to assets under management, and in consultation with reliable local counsel. As well as requiring the submission of Annex IV reports, AIFMD also imposes other requirements on AIFMs for information to be given to investors and regulators on an on-going basis (including in relation to the acquisition of control of EU companies by the AIF).  Consequently, we have seen an increase in the number of firms choosing to adopt a “rent-an-AIFM” approach, effectively outsourcing the compliance function to a local service vendor.  This removes the need to continually monitor shifts in local regulations, but not the need to do the internal collection and analysis of investment data required to complete the filings. EU General Data Protection Regulation.  The European Union General Data Protection Regulation (“GDPR”) is a replacement for the current Data Protection Directive in the EU.  Notably, the scope of the GDPR has been broadened and now extends to data controllers and processors outside the EU whose processing activities relate to the offering of goods or services (even if for free) to, or monitoring the behavior of, data subjects within the EU.  Non-EU funds that are subject to the GDPR may be required to appoint an EU-based representative in connection with their GDPR obligations. The GDPR makes existing data protection obligations more onerous, and introduces a raft of new obligations. For example, the GDPR expands the information that must be provided to data subjects about how their data is processed, and introduces more stringent consent requirements.  In addition, the GDPR places onerous accountability obligations on data controllers and data processors to demonstrate compliance with the GDPR.  This includes requiring them to appoint data protection officers in certain instances and: (i) maintain and develop records of processing activities, (ii) conduct a data protection impact assessment (this applies only to data controllers), prior to data processing that is inherently “high risk” (e.g. a systematic monitoring of a publicly accessible area on a large scale), and (iii) implement data protection, including by not repurposing data (subject to limited exceptions, including consent) and through data minimization (which refers to the principle that personal data must be adequate, relevant and limited to what is necessary in relation to the purposes for which it is processed). Breaching the GDPR carries serious reputational and financial risk. A range of sanctions may be imposed for non-compliance, including fines of up to the greater of EUR 20,000,000 or 4% of total worldwide annual revenue for the preceding financial year, whichever is higher.[18] The Markets in Financial Instruments Directive II (“MiFID II”).  MiFID II came into force on January 3, 2018.  The impact of MiFID II on a firm will depend upon the relevant firm’s regulatory classification.  The MiFID II framework will continue to apply directly to EU discretionary portfolio managers conducting MiFID activities (“MiFID AIFMs“), but has now been extended to apply directly to management companies of undertakings for the collective investment in transferable securities (“UCITS“) and EU AIFMs which manage separate discretionary accounts.  MiFID II also harmonizes the EU’s regulatory approach to non-EU investment firms by introducing a passport regime for the provision of services to eligible counterparties and professional clients in the EU.  In order for a country to be eligible for a third country passport, the EU Commission will have to assess whether the relevant firm is subject to equivalent supervision in its home jurisdiction.  A MiFID third country passport may offer UK firms currently passporting their services to other EU countries under MiFID access to EU markets post-Brexit. MiFID AIFMs have needed to update their systems, controls, policies and procedures to address the following regulatory changes introduced by MiFID II: Best execution:  MiFID II has raised the best execution standard from an obligation to take “all reasonable steps” to an obligation to take “all sufficient steps consistently”, to achieve the best possible result for the customer. In addition, firms are now subject to more onerous disclosure obligations regarding best execution (including a requirement to publish annually information relating to the firm’s top five execution venues (including brokers, regulated markets, multi-lateral trading facilities and organized trading facilities) by volume, and on the execution quality provided by each (by reference to each different class of instrument). Client Categorization:  As a result of mis-selling concerns connected to the sale of complex products to local government authorities, under MiFID II firms are no longer permitted to treat such investors as eligible counterparties or as per se professional clients.  Under MiFID II, local authorities are now automatically deemed to be retail clients, with the ability to request an “opt-up” process in order to become elective professional clients.  If local authorities are unable to satisfy the opt-up criteria, firms will need to assess whether their existing permissions allow them to continue providing services to such entities or if additional retail permissions are necessary. Inducements and Investment Research:  MiFID II imposes additional restrictions affecting how discretionary investment managers may pay for research. Under MiFID II, firms carrying out MiFID business comprising portfolio management are restricted from how they may accept fees, commissions, or any monetary or non-monetary benefits paid or provided by a third party (e.g. research from an investment bank) in relation to the provision of services to clients.  Such firms may, nonetheless, continue to receive third party research without contravening the inducements rules, provided that they pay for research either directly from their own resources or from a separate research payment account controlled by the firm but charged to its clients (the latter will need to satisfy a number of requirements, including as to transparency). Product Governance:  A new regime has been introduced which imposes requirements on firms that manufacture and distribute financial instruments to act in the clients’ best interests during the lifecycle of the relevant products (for PE firms, the product is the fund itself).  The granular rules include requirements to ensure the clear identification of a target market, the review of existing products and their suitability for the target market, and review the risks for new products. Scope of Transaction Reporting Rules:  Prior to MiFID II, MiFID’s reporting rules applied to financial instruments admitted to trading on EU regulated markets and assets that derive their value from such investments (e.g. OTC derivatives). MiFID II extends the scope of the transaction reporting requirements to all financial instruments traded, or admitted to trading, on EU trading venues (this will expand the reporting regime to cover instruments traded on, inter alia, multi-lateral trading facilities and organized trading facilities). This is aimed at providing greater  transparency and ensuring that the MiFID II reporting requirements mirror the scope of the Market Abuse Directive. Telephone Recording:  Prior to MiFID II, the majority of private equity firms were exempt from the requirements to record calls and other electronic communications, under an exemption for discretionary managers. However, this exemption has now been removed and recording requirements under MiFID II apply to all communications that relate to activities such as arranging deals in investments, dealing in investments as agents, managing investments and in certain circumstances, managing AIFs.  The requirements cover communications that were intended to result in a transaction, even if the communication does not, in fact, result in a transaction.  Telephone recording is required to be carried out on a best endeavors basis and the recordings must be retained for 5 years.  UK Exemptions for Non-MiFID AIFMs.  In the UK the Financial Conduct Authority (“FCA”) has granted a number of exemptions from the above requirements to AIFMs that are not MiFID AIFMs.  For example: the scope of the Telephone Recording obligations is limited to activities which involve financial instruments being traded on a trading venue or for which a request for admission has been made; the Inducements and Investment Research obligations do not apply to an AIF or collective investment scheme, which generally invests in issuers or non-listed companies in order to acquire control over such companies; and the Best Execution obligations do not apply, but AIFMs that are not MiFID AIFMs will nonetheless still need to comply with the best execution rules under the AIFMD Level 2 Regulations. However, it is also worth noting that these exemptions will not be available if and when an AIFM is carrying on MiFID business. In practice, our experience has been that firms managing collective funds and segregated accounts have chosen to apply common standards across their MiFID and non-MiFID business activities. Tax.  Depending on the structure and nature of a private fund adviser’s investment activities and/or client base, certain tax filings or tax compliance procedures may need to be undertaken.  Examples include: Investments by U.S. persons in non-U.S. entities may need to be disclosed on IRS Form 5471 (ownership in non-U.S. corporation), IRS Form 8865 (ownership in non-U.S. partnership) and IRS Form 8858 (ownership in non-U.S. disregarded entity), which forms are required to be filed together with such U.S. persons’ annual U.S. federal income tax returns. Investments by non-U.S. persons in U.S. entities may need to be disclosed on IRS Form 5472 (25% ownership in a U.S. corporation).  For tax years beginning on or after January 1, 2017, a U.S. disregarded entity that is wholly owned by a non-U.S. person is treated as a U.S. corporation for purposes of determining any reporting obligations on IRS Form 5472. Transfer of property by a U.S. person to a foreign corporation may require the U.S. person to file an IRS Form 926. Ownership of interests in or signature authority over non-U.S. bank accounts and similar investments, may need to be disclosed under foreign bank and financial accounts reporting regime (FBAR) on Form FinCEN 114, the due date of which has been moved to April 15th for initial filings, with an automatic extension available to October 15th. Managers may need to report the existence of certain accounts to the U.S. IRS or their local jurisdiction under FATCA or the OECD Standard for Automatic Exchange of Financial Account Information – Common Reporting Standard. Managers should be aware that IRS Forms W-8 provided by non-U.S. investors generally expire after three years from the execution date of the form and they may need to collect updated IRS Forms W-8 from their non-U.S. investors. Clients are urged to speak to their Gibson Dunn contacts if they have any questions or concerns regarding these or any other regulatory requirements.   [1]   See Significant Amendments to Form ADV go into Effect on October 1, 2017, Gibson Dunn Client Alert (Sept. 25, 2017) https://www.gibsondunn.com/significant-amendments-to-form-adv-go-into-effect-on-october-1-2017/.  The most significant changes to Form ADV include the formalization of the SEC’s practice of permitting so-called umbrella registration of multiple private fund advisers operating as a single firm and the expansion of reporting requirements for advisers of separately managed accounts.   [2]   An RIA is required to prepare a supplemental brochure for each supervised person that (i) formulates investment advice for and has direct contact with a client, or (ii) has discretionary investment power over client assets (even if such person does not have direct client contact).  As a practical matter, most private fund advisers prepare supplemental brochures for each member of their investment committees and/or each of their portfolio managers.   [3]   As a technical matter, investors in a private fund are not considered “clients” of the fund’s investment adviser.  As a matter of best practice, however, most private fund advisers make updated copies of their disclosure brochures available to the investors in their funds.   [4]   Such letters must also provide a website address (if available), e-mail address (if available) and telephone number by which a client may obtain a copy of the RIA’s current disclosure brochure, as well as the website address through which a client may obtain information about the adviser through the SEC’s Investment Adviser Public Disclosure (IAPD) system.   [5]   In particular, a hedge fund adviser with more than $1.5 billion in regulatory assets under management attributable to its hedge funds is required to report on Form PF on a quarterly basis within 60 days of the end of each calendar quarter and to complete an additional section of the Form (Section 2).  A private liquidity fund adviser with more than $1.0 billion in combined regulatory assets under management attributable to both registered money market funds and private liquidity funds is required to report on Form PF on a quarterly basis within 15 days of the end of each calendar quarter and to complete an additional section of the Form (Section 3).  A private equity fund adviser with more than $2.0 billion in regulatory assets under management attributable to its private equity funds is only required to file on an annual basis within 120 days of the end of its fiscal year, but is required to complete an additional section of the Form (Section 4).   [6]   See TPG Capital Advisers, Advisers Act Release No. 4830 (Dec. 21, 2017); and Platinum Equity Advisers, Advisers Act Release No. 4772 (Sept. 17, 2017).  See also Apollo Management V, L.P., et. al.¸ Advisers Act Release No. 4493 (Aug. 23, 2016); Blackstreet Capital Management, LLC, et. al., Exchange Act Release No. 77957, Advisers Act Release No. 4411 (Jun. 1, 2016); Equinox Fund Management, LLC, Securities Act Release No. 10004, Exchange Act Release No. 76927, Advisers Act Release No. 4315 (Jan. 19, 2016); Cherokee Investment Partners, LLC, et. al., Advisers Act Release No. 4258 (Nov. 5, 2015); Fenway Partners, LLC, et. al., Advisers Act Release No. 4253 (Nov. 3, 2015); Blackstone Management Partners L.L.C., et. al., Advisers Act Release No. 4219 (Oct. 7, 2015); Kohlberg, Kravis Roberts & Co., Advisers Act Release No. 4131 (Jun. 29, 2015); and Alpha Titans, LLC, et al., Exchange Act Release No 74828, Advisers Act Release No. 4073, Investment Company Act Release No. 31586 (Apr. 29, 2015).   [7]   See OCIE Cybersecurity Initiative, National Exam Program Risk Alert, Vol. IV, Issue 2 (Apr. 15, 2014); Cybersecurity Examination Sweep Summary, National Exam Program Risk Alert, Vol. IV, Issue 4 (Feb. 3, 2015); OCIE’s 2015 Cybersecurity Examination Initiative, National Examination Program Risk Alert, Vol. IV, Issue 8 (Sept. 15, 2015); Cybersecurity: Ransomware Alert, National Exam Program Risk Alert, Vol. VI, Issue 4 (May 17, 2017); and Observations from Cybersecurity Examinations, National Exam Program Risk Alert, Vol. VI, Issue 5 (Aug. 7, 2017).  See also, Examination Priorities for 2015, National Exam Program, Office of Compliance Inspections and Examinations (Jan. 13, 2015); Examination Priorities for 2016, National Exam Program, Office of Compliance Inspections and Examinations (Jan. 11, 2016); Examination Priorities for 2017, National Exam Program, Office of Compliance Inspections and Examinations (Jan. 12, 2017); and 2018 National Exam Program Examination Priorities, National Exam Program, Office of Compliance Inspections and Examinations (Feb. 7, 2018).   [8]   Investment Adviser Association, SEC No-Action Letter (pub. avail. Feb. 21, 2017).   [9]   Inadvertent Custody: Advisory Contract Versus Custodial Contract Authority, IM Guidance Update No. 2017-01 (February 2017). [10]   The Five Most Frequent Compliance Topics Identified in OCIE Examinations of Investment Advisers, National Exam Program Risk Alert, Vol. VI Issue 3 (Feb. 7, 2017). [11]   The Most Frequent Advertising Rule Compliance Issues Identified in OCIE Examinations of Investment Advisers, National Exam Program Risk Alert, Vol. VI Issue 6 (Sept. 14, 2017). [12]   See, e.g., Centre Partners Management, LLC, Advisers Act Release No. 4604 (Jan. 10, 2017) and New Silk Road Advisors, Advisers Act Release No. 4587 (Dec. 14, 2016). [13]   See Footnote 10 above and accompanying text. [14]   To qualify as a passive institutional investor, an investment adviser must be an RIA that purchased the securities in question “in the ordinary course of business and not with the purpose or effect of changing or influencing the control of the issuer nor in connection with or as a participant in any transaction having such purpose or effect.” [15]   The SEC maintains a definitive list of securities subject to Form 13F reporting at http://www.sec.gov/divisions/investment/13flists.htm. [16]   A “Large Trader” is defined as any person that exercised investment discretion over transactions in Regulation NMS securities that equal or exceed (i) two million shares or $20 million during any single trading day, or (ii) 20 million shares or $200 million during any calendar month. [17]   The next 5-year benchmark survey will cover foreign investment in U.S. securities and is scheduled to be conducted in 2019. [18]   For a further discussion of the requirements of the GDPR, see The General Data Protection Regulation: A Primer for U.S.-Based Organizations that Handle EU Personal Data, Gibson Dunn Client Alert (Dec. 4, 2017) https://www.gibsondunn.com/the-general-data-protection-regulation-a-primer-for-u-s-based-organizations-that-handle-eu-personal-data/. Gibson, Dunn & Crutcher’s lawyers are available to assist in addressing any questions you may have regarding these developments.  Please contact any member of the Gibson Dunn team, the Gibson Dunn lawyer with whom you usually work, or any of the following leaders and members of the firm’s Investment Funds practice group: Chézard F. Ameer – Dubai (+971 (0)4 318 4614, cameer@gibsondunn.com) Jennifer Bellah Maguire – Los Angeles (+1 213-229-7986, jbellah@gibsondunn.com) Edward D. Sopher – New York (+1 212-351-3918, esopher@gibsondunn.com) Y. Shukie Grossman – New York (+1 212-351-2369, sgrossman@gibsondunn.com) Mark K. Schonfeld – New York (+1 212-351-2433, mschonfeld@gibsondunn.com) Edward D. Nelson – New York (+1 212-351-2666, enelson@gibsondunn.com) Marc J. Fagel – San Francisco (+1 415-393-8332, mfagel@gibsondunn.com) C. William Thomas, Jr. – Washington, D.C. (+1 202-887-3735, wthomas@gibsondunn.com) Gregory Merz – Washington, D.C. (+1 202-887-3637, gmerz@gibsondunn.com) © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

January 29, 2018 |
2017 Year-End Activism Update

This Client Alert provides an update on shareholder activism activity involving NYSE- and NASDAQ-listed companies with equity market capitalizations above $1 billion during the second half of 2017, as well as a look back at trends for the 2017 calendar year. Activism activity declined modestly during the second half of 2017, similar to the trend we found in the second half of 2016, which can be partially attributed to the passing of the proxy season. Overall, activist activity rose slightly in 2017 from 2016. In 2017, Gibson Dunn’s Activism Update surveyed 98 public activist actions involving 82 companies and 63 activist investors, compared to 90 public activist actions involving 78 companies and 60 activist investors in 2016. Our survey covers 46 total public activist actions, involving 36 different activist investors and 39 companies targeted, during the period from July 1, 2017 to December 31, 2017. Six of those companies faced advances from multiple investors, including three companies that faced coordinated actions by activist groups. Equity market capitalizations of the target companies ranged from just above the $1 billion minimum covered by this survey to approximately $235 billion. By the Numbers – 2017 Full Year Public Activism Trends *Includes data compiled for both 2017 Mid-Year and Year-End Activism Update publications. **All data is derived from the data compiled from the campaigns studied for the 2017 Year-End Activism Update. Additional statistical analyses may be found in the complete Activism Update linked below. In the second half of 2017, activists most frequently sought to influence target companies’ business strategies (63.0% of campaigns), while changes to board composition and M&A-related issues (including pushing for spin-offs and advocating both for and against sales or acquisitions) were sought in 41.3% and 34.7% of campaigns, respectively. Changes to corporate governance practices (including de-staggering boards and amending bylaws) (23.9% of campaigns), changes in management (10.9% of campaigns), and requests for capital returns (10.9% of campaigns) were relatively less common. Seven campaigns involved proxy solicitations during the second half of 2017, five of which reached a vote. Finally, activism was most frequent among small-cap companies (64.1% of companies targeted had equity market capitalizations below $5 billion). More data and brief summaries of each of the activist actions captured by our survey follow in the first half of this publication. The most notable change from prior periods surveyed is the decrease in publicly filed settlement agreements, as our survey captured only four such agreements in the second half of 2017, compared to 12 in the first of 2017 and 13 in the second half of 2016. The decline in publicly filed agreements may be partially attributable to the decrease in the percentage of actions in which activists sought board seats. Though certain key terms of settlement agreements, including standstills, voting agreements, ownership thresholds and non-disparagement agreements, remain nearly ubiquitous, we think it is notable, despite the small sample size, that all four agreements covered in this edition of Activism Update included expense reimbursement provisions, which had been on the decline during prior periods. We hope you find Gibson Dunn’s 2017 Year-End Activism Update informative.  If you have any questions, please do not hesitate to reach out to a member of your Gibson Dunn team. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding the issues discussed in this publication.  For further information, please contact the Gibson Dunn lawyer with whom you usually work, or any of the following authors in the firm’s New York office: Barbara L. Becker (+1 212.351.4062, bbecker@gibsondunn.com) Richard J. Birns (+1 212.351.4032, rbirns@gibsondunn.com) Dennis J. Friedman (+1 212.351.3900, dfriedman@gibsondunn.com) Eduardo Gallardo (+1 212.351.3847, egallardo@gibsondunn.com) Adam J. Brunk (+1 212.351.3980, abrunk@gibsondunn.com) Please also feel free to contact any of the following practice group leaders and members: Mergers and Acquisitions Group: Jeffrey A. Chapman – Dallas (+1 214.698.3120, jchapman@gibsondunn.com) Stephen I. Glover – Washington, D.C. (+1 202.955.8593, siglover@gibsondunn.com) Jonathan K. Layne – Los Angeles (+1 310.552.8641, jlayne@gibsondunn.com) Securities Regulation and Corporate Governance Group: Brian J. Lane – Washington, D.C. (+1 202.887.3646, blane@gibsondunn.com) Ronald O. Mueller – Washington, D.C. (+1 202.955.8671, rmueller@gibsondunn.com) James J. Moloney – Orange County, CA (+1 949.451.4343, jmoloney@gibsondunn.com) Elizabeth Ising – Washington, D.C. (+1 202.955.8287, eising@gibsondunn.com) Lori Zyskowski – New York (+1 212.351.2309, lzyskowski@gibsondunn.com) © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

January 9, 2018 |
Recent Developments in UK Public Takeover Regulation – A Brief Summary of Recent Rule Changes and the Landmark Decision in The Panel on Takeovers and Mergers v King

Click for PDF Enforcement of Panel Rulings A few weeks ago, the Court of Session in Edinburgh (the Court)[1] delivered its landmark judgement in the case of The Panel on Takeovers and Mergers v David Cunningham King[2] – the first case in which the UK Takeover Panel (the Panel) applied to court for an enforcement order pursuant to its rights under the Companies Act 2006 (the Act). On 13 March 2017, the Takeover Appeal Board (TAB) published its decision that Mr King had acted in concert with other persons to acquire more than 30% of the voting rights in Rangers Football Club (Rangers) and in consequence had incurred an obligation under the Code to make a mandatory offer at a price of 20 pence per Rangers share for all the shares not already held by King and his concert parties. TAB directed that King make this mandatory offer by 12 April 2017. As previously written about[3], King failed to comply with the direction of TAB and on 13 April, the Panel commenced proceedings in the Court seeking  an order requiring Mr King to comply with its rulings. The Court acknowledged that whilst “in nearly all cases, if asked by the Panel to enforce its decision by granting an order”, it would do so, nonetheless it confirmed that there may be rare cases where it may not do so and that the wording of the legislation allowed for this inherent discretion to refuse to grant an order. The Court went on to find in favour of the Panel, helpfully noting “the Panel is the body which is charged with the duty of evaluating the evidence and making findings of fact” – the court is not acting in this context as a court of appeal. Earlier this week, a number of changes to the City Code on Takeovers and Mergers (the Code) were introduced. Significant Asset Sales in Competition with Offers The first set of changes, which the Panel consulted on earlier last year, principally relate to the situation where a target company is considering a “significant” asset sale with a view to distribution of the company’s cash balances including the asset sale proceeds to its shareholders, in competition to an offer or possible offer[4]. The Panel has introduced a set of changes to: (i) prevent asset buyers in such cases from circumventing certain provisions of the Code; and (ii) ensure that shareholders have the benefit of competent independent advice and comprehensive information from the target company board on the competing asset sale. We have previously commented on some of the proposed changes put forward by the Panel[5]. The key change following the consultation process[6] is that the Panel has raised the threshold for asset sales which would normally be regarded as significant from 50% to 75% having regard to relative values ascribed to consideration, assets and profits. The first set of rule changes also cover the use and supervision (by financial advisers) of social media for the publication of information by parties to an offer. Bidder Statements of Intention and Code Timetable Changes The second set of changes which the Panel consulted on in autumn 2017[7] principally related to: (i) the enhanced scope and timing of statements of intention by bidders in relation to a target company; and (ii) a new rule prohibiting bidders from publishing their offer document in the first 14 days from publication of the announcement of the firm intention to make an offer, other than with the consent of the target board. Following the recent Code changes, bidders will now be required to make statements of intention with regard to the target’s: (a) research and development functions (if any); (b) material changes to the balance of skills and functions of the target company’s employees and management; and (c) location of the target company’s headquarters and headquarter functions – first in the firm intention offer announcement and also in its offer document. These changes present yet another challenge for bidders or possible bidders of UK Code companies. First, bidders will now in practice be required to undertake more comprehensive diligence and analysis at a much earlier stage by bidders with respect to the new matters outlined above. Whilst the Panel conceded following feedback during the consultation process[8] that there may be circumstances where the bidders intentions may change during an offer and that in such circumstances the bidder would be required to announce any new intentions promptly, the Panel pushed back against the ability of a bidder to satisfy these new intention statement requirements by stating that it would undertake a review of the target’s business following an offer. Second is the new important change to the takeover timetable and offer document posting date. In practice, the change means that a hostile bidder will no longer be able to launch and close  a so-called “bullet offer” – that is, a bid where the firm intention offer and offer document are announced and posted on the same day with a view to closing the offer on the 1st closing date (21 days later). The tide has turned yet again against bidders of UK companies.    [1]   The Court of Session is Scotland’s supreme civil court which is divided into the Outer House and Inner House. This case was heard at first instance by one Lord Ordinary sitting in the Outer House.    [2]   Panel on Takeovers and Mergers v King [2017] CSOH 156    [3]   https://www.gibsondunn.com/uk-public-ma-learnings-from-some-recent-contested-cases-before-the-uk-takeover-panel/    [4]   Panel Consultation Paper: “Asset Sales and Other Matters” – PCP 2017/1 – http://www.thetakeoverpanel.org.uk/wp-content/uploads/2017/07/PCP.192957_1.pdf    [5]   https://www.gibsondunn.com/uk-public-ma-when-is-a-final-offer-not-final-part-2/    [6]   See Response Statement – RS 2017/1 – http://www.thetakeoverpanel.org.uk/wp-content/uploads/2017/12/RS2017-1.pdf    [7]   Panel Consultation Paper: “Statements of Intention and Related Matters” – PCP 2017/2 – http://www.thetakeoverpanel.org.uk/wp-content/uploads/2017/09/PCP-re-statements-of-intention-September-2017.pdf    [8]   See Response Statement – RS 2017/2 – http://www.thetakeoverpanel.org.uk/wp-content/uploads/2017/12/FinalRS2017-2.pdf If you require further information on the Code changes outlined above or guidance on these recent developments, please contact the author of this note, Selina Sagayam (ssagayam@gibsondunn.com), the Gibson Dunn lawyer with whom you normally work, or the following partners in the firm’s London office.  We would be pleased to assist you. Nigel Stacey (+44 (0)20 7071 4201, nstacey@gibsondunn.com) Charlie Geffen (+44 (0)20 7071 4225, cgeffen@gibsondunn.com) Patrick Doris (+44 (0)20 7071 4276, pdoris@gibsondunn.com) Jonathan Earle (+44 (0)20 7071 4211, earle@gibsondunn.com) © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

November 13, 2017 |
M&A Report – Two Sides to Working Capital Adjustments

Click for PDF Buyers and sellers often agree that a target company’s valuation assumes that the target will be sold on a cash-free, debt-free basis, with a normalized level of working capital.  With respect to working capital, which is typically defined as current assets minus current liabilities, the buyer wants to ensure that the target has a sufficient amount of working capital to operate in the ordinary course after closing without requiring an infusion of capital. Accordingly, the buyer and seller will typically agree upon a target for the amount of working capital the acquired company should have at closing.  Prior to closing, the seller will deliver an estimate of the amount of working capital it believes the acquired company will actually have at closing.  If the seller’s estimate exceeds the working capital target, the seller will receive an amount equal to such excess as an increase in the purchase price.  If, however, the seller’s estimate is less than the working capital target, the buyer will receive the shortfall as a purchase price reduction.  In the period immediately following closing, the buyer will perform its own calculation to determine the amount of working capital the acquired company actually had at closing.  If the amount resulting from the buyer’s calculation differs from the amount of the seller’s estimate, the purchase price will be further adjusted.  This process is often referred to as a “true-up.” Occasionally disputes between the parties regarding the working capital calculation will arise in the true-up process.  Often in these disputes the buyer’s and seller’s differing viewpoints regarding the purpose of the working capital adjustment are revealed.  On the one hand, sellers often argue that working capital must be calculated consistently with the methodology used to calculate the working capital target amount.  In other words, the seller will argue that the purpose of the working capital adjustment is to compensate for deviations from the target working capital amount, and in order for such changes to be calculated equitably, the closing amount of working capital must be calculated using the same methodology that was used in calculating the working capital target amount. On the other hand, the buyer may argue that the purpose of the working capital adjustment is to ensure that the acquired company is delivered at closing with sufficient working capital, and that determination should be made by calculating working capital in accordance with GAAP (i.e., if the closing working capital amount, calculated in accordance with GAAP, results in a deviation from the target and the estimate, which were not calculated in accordance with GAAP, then the GAAP-compliant calculation should control).  Both of these divergent viewpoints sometimes make their way into the M&A purchase agreement in the form of convoluted and unclear language regarding how working capital is to be calculated.  In contrast, at times, one side’s preferred viewpoint may be reflected in the purchase agreement without the other side’s realizing the full implications of the language. At first blush, a recent Delaware case, Chicago Bridge & Iron Co. N.V. v. Westinghouse Electric Co. LLC, 2017 WL 2774563 (Del. June 27, 2017), would seem to provide support for the seller’s viewpoint.  However, the case had highly unusual facts that ultimately limit its utility at the negotiating table for either the buyer or seller.  In the case, the Delaware Supreme Court reversed the decision of the Chancery Court, which had upheld the right of Westinghouse, as buyer, to use the post-closing working capital true-up process to claim that the financial statements of Chicago Bridge, as seller, were not based on a proper application of GAAP.  The Delaware Supreme Court stated that the true-up process is a “narrow, subordinate, and cabined remedy” only intended to account for changes in the target’s business between signing and closing of the transaction.[1] In October 2015, Chicago Bridge and Westinghouse entered into a purchase agreement pursuant to which Westinghouse agreed to acquire a wholly owned subsidiary of Chicago Bridge, CB&I Stone & Webster Inc. (“Stone”).[2]  Chicago Bridge agreed to sell Stone to Westinghouse for, inter alia, a purchase price of zero dollars and certain limitations on liability that were intended to give Chicago Bridge a clean break from the spiraling costs of the nuclear projects in which Stone was principally involved.[3]  The parties agreed that Westinghouse’s sole remedy, in the absence of actual fraud, for Chicago Bridge’s breach of the agreement’s representations and warranties was to refuse to close the transaction.[4]  In other words, for example, Westinghouse agreed that it would have no recourse for a breach of Chicago Bridge’s representation in the purchase agreement that Stone’s financial statements complied with GAAP.  Westinghouse also agreed to broad indemnification of Chicago Bridge for all future claims related to Stone and to obtain liability releases, for the benefit of Chicago Bridge, from the power utilities that would ultimately own the nuclear plants being built by Stone.[5] The agreement also contained a post-closing purchase price adjustment true-up process whereby the parties would reconcile a working capital estimate with the actual working capital of Stone at closing.[6]  This multi-step true-up process required Chicago Bridge to deliver an estimate of working capital to Westinghouse at least three days prior to closing and, subsequently, Westinghouse to deliver a similar statement to Chicago Bridge no later than 90 days after closing.[7]  The agreement required the statements to be “prepared and determined from the books and records of [Chicago Stone] and in accordance with United States [GAAP] applied on a consistent basis throughout the period indicated and with the [agreed principles].”[8]  At the conclusion of the true-up process, Westinghouse alleged that Chicago Bridge’s historical financial statements, from which Chicago Bridge’s true-up estimates were based, were not GAAP compliant and, as a result, Chicago Bridge owed it a working capital adjustment of over $2 billion.[9] The agreement also contained a dispute resolution mechanism to address disputes in the true-up process which referred the parties to an independent auditor.[10]  Prior to Westinghouse invoking the independent auditor to arbitrate its working capital adjustment claim, Chicago Bridge filed a claim with the Court of Chancery seeking a declaration that Westinghouse’s claim was not appropriate for the true-up dispute resolution mechanism because it was based principally on the allegation that Chicago Bridge’s historical financial statements were not GAAP compliant and, therefore, was barred by the limitation on liability contained in the agreement.[11]  The Court of Chancery held in favor of Westinghouse, holding that the dispute resolution mechanism established a mandatory path for resolving the parties’ disagreements over the post-closing purchase price adjustment, including disagreements as to whether Stone’s historical financial statements were GAAP compliant.[12] The Delaware Supreme Court reversed the Court of Chancery’s decision and held that the Court of Chancery must enjoin Westinghouse from submitting claims to the independent auditor or continuing to pursue already-submitted claims regarding Chicago Bridge’s historical financial statements because such claims were barred by the limitation on liability contained in the agreement.[13]  In his decision, Chief Justice Strine leaned heavily on the facts, including the limitation on liability, which he described as “unusual.”[14]  The opinion began with the declaration that “[i]n giving sensible life to a real-world contract, courts must read the specific provisions of the contract in light of the entire contract” and later stated that, although the true-up process has an important role to play, its role is “limited and informed by its function in the overall Purchase Agreement.”[15]  Chief Justice Strine further justified his decision by arguing that a ruling to the contrary would “render the [limitation on liability] meaningless and eviscerate the basic bargain” struck by the parties.[16] This decision leaves open the question of whether the Delaware courts would view the true-up process contained in traditional agreements, where the buyer is not subject to a liability bar, in the same limited way.  Some buyers will be tempted to argue that this case represents a narrow holding that does not preclude buyers in the traditional context from bringing claims regarding GAAP compliance in the post-closing purchase price adjustment true-up process.  In contrast, some sellers will be tempted to argue that Chief Justice Strine’s pronouncement that the true-up process is only intended to account for changes in the target’s business between signing and closing forecloses buyers from asserting that the working capital calculation was not performed in accordance with GAAP.  Certainly the deal terms at issue in this case were unusual, and the imposition of a liability bar seems to have weighed heavily on the outcome.  It is unclear whether a purchase agreement without a liability bar, and with unambiguous language subjecting the working capital calculation to a GAAP standard, would lead to a different result. In any event, this case should serve as a reminder that, even in a traditional acquisition agreement, post-closing purchase price adjustments should be drafted with specificity and with the buyer’s and seller’s divergent viewpoints on the purpose of the working capital adjustment in mind.    [1]   Chicago Bridge & Iron Co. N.V. v. Westinghouse Electric Co. LLC, 2017 WL 2774563 at *3 (Del. June 27, 2017) (“Chicago Bridge“).    [2]   Id. At *1.    [3]   Id.    [4]   Id. at *2.    [5]   Id.    [6]   Id. at *4.    [7]   Id. at 7-8.    [8]   Id. at *8.    [9]   Id. [10]   Id. at *9. [11]   Id. [12]  Id.; Chicago Bridge & Iron Co. N.V. v. Westinghouse Electric Co. LLC and WSW Acquisition Co., LLC, 2016 WL 7048031 at *1 (Del. Ch. Dec. 5, 2016). [13]   Chicago Bridge at 16. [14]   Id. at *5-*6. [15]   Id. at *1, *11. [16]   Id. at *14. Gibson, Dunn & Crutcher’s lawyers are available to assist with any questions you may have regarding these issues. For further information, please contact the Gibson Dunn lawyer with whom you usually work or the authors of this alert: Robert B. Little – Dallas (+1 214-698-3260, rlittle@gibsondunn.com) Eric B. Pacifici – Dallas (+1 214-698-3401, epacifici@gibsondunn.com) Please also feel free to contact any of the following practice group leaders: Mergers and Acquisitions Group: Barbara L. Becker – New York (+1 212-351-4062, bbecker@gibsondunn.com) Jeffrey A. Chapman – Dallas (+1 214-698-3120, jchapman@gibsondunn.com) Stephen I. Glover – Washington, D.C. (+1 202-955-8593, siglover@gibsondunn.com) Private Equity Group: Sean P. Griffiths – New York (+1 212-351-3872, sgriffiths@gibsondunn.com) Steven R. Shoemate – New York (+1 212-351-3879, sshoemate@gibsondunn.com) Ari Lanin – Los Angeles (+1 310-552-8581, alanin@gibsondunn.com) Charlie Geffen – London (+44 (0)20 7071 4225, cgeffen@gibsondunn.com) Paul Harter – Dubai (+971 (0)4 318 4621, pharter@gibsondunn.com) © 2017 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

November 10, 2017 |
An Expert’s View: Current Developments in Commitment Letter Negotiations

​New York partner Janet Vance is the author of “An Expert’s View: Current Developments in Commitment Letter Negotiations,” [PDF] published by Practical Law Finance on November 10, 2017.

October 27, 2017 |
10 Considerations When Selling to Private Equity Consortium

New York partner John Pollack and associate Daniel Alterbaum are the authors of “10 Considerations When Selling to Private Equity Consortium,” [PDF] published by Law360 on October 27, 2017.

October 2, 2017 |
Private Equity JVs: Part 1 – DrillCos

​Houston partners Justin Stolte and Michael Darden are the authors of “Private Equity JVs: Part 1 – DrillCos,” [PDF] published by Oil & Gas Financial Journal on October 2, 2017.

September 25, 2017 |
Significant Amendments to Form ADV Go into Effect on October 1, 2017

Investment advisers that file Form ADV with the Securities and Exchange Commission ("SEC") either as registered investment advisers ("RIAs") or as exempt reporting advisers ("ERAs")[1] are reminded that significant amendments to Part 1A of Form ADV ("Part 1A") go into effect on October 1, 2017.  For most investment advisers having a fiscal year end of December 31st, the amendments will first impact their annual updating filings that will be due on April 2, 2018. The following Client Alert provides a brief summary of the changes that have been made to Part 1A.  Investment advisers would be well-advised to begin considering how these changes will impact their Form ADV filing requirements for 2018 and how they will capture the additional data they will need to complete amended Part 1A.[2] 1.   Enhanced Reporting Regarding Separately Managed Accounts. One of the most significant changes to Part 1A is the addition of new reporting requirements for RIAs[3] with respect to their separately managed accounts ("SMAs").[4]  Specifically, new Item 5.K has been added to Part 1A that will require an RIA to identify (i) whether it has any regulatory assets under management ("RAUM") attributable to SMAs ("SMA Assets"), (ii) whether it engages in borrowing transactions on behalf of SMAs, (iii) whether it engages in derivatives transactions on behalf of SMAs, and (iv) whether any single custodian holds more than 10% of the RIA’s SMA Assets.  A "yes" answer to any of these questions will trigger a requirement to complete the applicable parts of new Section 5.K of Schedule D to Form ADV. New Section 5.K of Schedule D requires an RIA to report certain data on an aggregated basis with respect to its SMA Assets.[5]  In particular: Section 5.K(1) will require an RIA to report the percentage of SMA Assets it manages in each of twelve separate asset categories.[6]  An RIA with $10 billion or more in SMA Assets must report this data as of the end of its second fiscal quarter and as of the end of its fiscal year.  An RIA will less than $10 billion in SMA Assets is only required to report this data as of the end of its fiscal year. Section 5.K(2) will require an RIA with $10 billion or more in SMA Assets that engages in borrowing or derivatives transactions on behalf of its SMAs to report the amount of SMA Assets it manages in three ranges of "gross notional exposure:" (i) less than 10%, (ii) between 10% and 149%, and (iii) 150% or more.  For each range, the RIA is further required to report the aggregate dollar amount of all borrowings on behalf of the SMAs in such range, and the gross notional value of all derivatives held in such accounts, broken down into six categories of derivative instruments.[7]  This information must be presented on a semi-annual basis as of the end of the RIA’s second fiscal quarter and as of the end of its fiscal year.  For purposes of calculating this data, an RIA may (but is not required to) exclude SMAs with less than $10 million in RAUM.  An RIA with between $500 million and $10 billion in SMA Assets will be required to report the amount of SMA Assets it manages in each of the three ranges of gross notional exposure as of the end of its fiscal year only. Such RIAs will also be required to report the aggregate dollar amount of borrowings on behalf of its SMAs within each range of gross notional exposure, but will not be required to provide a breakdown of the derivative instruments held in such accounts.  An RIA with less than $500 million in SMA Assets will not be subject to this reporting requirement. Finally, Section 5.K(3) will require an RIA to identify each custodian that holds more than 10% of the RIA’s SMA Assets. 2.   Enhanced Reporting of Certain Information Regarding the Investment Adviser and its Business. A number of amendments have been made to Part 1A that will increase the level of detail an investment adviser is required to provide relating to itself and the nature of its business.  In particular: Item 1 of Part 1A has been amended to require an investment adviser to identify any publicly available social media sites whose content is controlled by the adviser.  In addition, the adviser will be required to report the total number of branch offices it has and identify each of its 25 largest branch offices by number of employees, including (i) the number of employees in such branch office engaged in performing investment advisory functions, (ii) any other business activities conducted by the investment adviser at the branch office, and (iii) a brief description of the investment-related activities conducted from the branch office.[8]  Further, an adviser who outsources its chief compliance officer ("CCO") function to a third party will be required to provide the name and IRS employer identification number of the CCO’s employer.  Finally, a large investment adviser with $1 billion or more in assets on its own balance sheet will be required to identify whether such assets fall within one of three ranges.[9] Item 5 of Part 1A has been amended to significantly change the manner in which RIAs report information relating to their client base.[10]  Specifically, an RIA will be required to complete a new table identifying the number of clients it has in each of thirteen enumerated classes of clients[11] and the amount of the RIA’s RAUM attributable to each class of clients.  RIA’s will also be required to identify approximately how many clients it has that do not have RAUM attributable to them (i.e., client accounts for which the RIA does not provide "continuous and regular supervisory or management services"),[12] the approximate percentage of its clients that are non-U.S. persons and the amount of its RAUM that is attributable to such non-U.S. person clients.  An RIA that manages registered investment companies or who participates in wrap fee programs will also be subject to additional reporting requirements with respect to those activities. Finally, Section 7.B(1) of Schedule D to Part 1A, under which an investment adviser is required to provide detailed information with respect to the private funds it manages, has been revised to require an investment adviser to provide the PCAOB number, if any, of the auditor of each of its private funds, and to report whether the investors in any 3(c)(1) funds it manages are required to be "qualified clients." 3.   Relying Advisers. The amendments to Part 1A also codify certain no-action relief granted by the SEC in 2012[13] permitting certain registered private fund advisers ("Filing Advisers") to register multiple entities ("Relying Advisers") under the Advisers Act using a single Form ADV filing ("Umbrella Registration").  For the most part, these amendments to Part 1A follow the already existing no-action letter precedent and do not impose significant additional reporting or other compliance burdens on a Filing Adviser that is already using Umbrella Registration.  However, as discussed below, in adopting the amendments the SEC has clarified certain interpretations of its requirements pertaining to Umbrella Registration that may result in some unexpected results for private fund advisers.  The conditions for qualifying to register Relying Advisers pursuant to an Umbrella Registration under amended Part 1A have not changed in substance.  A Filing Adviser and its Relying Advisers must operate as a single private fund investment advisory business where: (i) the firm’s only clients are private funds or SMAs for qualified clients that invest in parallel with such private funds, (ii) the principal place of business for the firm is located in the U.S., (iii) all personnel are subject to the Filing Adviser’s supervision and control, (iv) the investment activities of each Relying Adviser are subject to the Advisers Act and SEC examination, and (v) the Filing Adviser and all Relying Advisers are subject to a single compliance program and code of ethics administered by a single CCO. A Filing Adviser relying on Umbrella Registration will now be required to complete a new Schedule R to Form ADV for each Relying Adviser covered by the Umbrella Registration.  For the most part, the information that is required to be reported in Schedule R is as one would expect.  It should be noted, however, that new Schedule R will require a Filing Adviser to separately identify the basis upon which each Relying Adviser independently qualifies to register under the Advisers Act.[14]  In addition, a Filing Adviser will be required to separately report the complete ownership structure for each Relying Adviser in such Relying Adviser’s Schedule R to the same degree of detail as is required for the Filing Adviser in Schedules A and B of Form ADV.  Despite numerous requests in comment letters to do so, the SEC declined to expand the availability of Umbrella Registration beyond U.S. based RIAs whose business is limited exclusively to managing private funds.  In particular, Umbrella Registration is still not available to non-U.S. based advisers or to ERAs.  The SEC did state in the Adopting Release, however, that certain no-action relief permitting ERAs to rely on a somewhat different form of Umbrella Registration will still be available.[15] 4.   Other Changes. In addition to the changes summarized above, the SEC adopted two amendments to Rule 204-2 under the Advisers Act (the "Books and Records Rule") that expand an RIA’s record-keeping obligations with respect to written communications containing performance data.[16]  In particular: First, the SEC amended Rule 204-2(a)(16) such that RIAs will be required to maintain records to support performance claims in communications sent to any person.  Under the current rule, RIAs are only required to maintain such records for performance claims in communications sent to ten or more persons. In addition, the SEC added a new requirement to Rule 204-2(a)(7) that will require RIAs to maintain records of all written communications sent or received by the RIA relating to the performance or rate of return of any or all managed accounts or securities recommendations. Both of these amendments go into effect on October 1, 2017. Clients are urged to speak to their Gibson Dunn contacts if they have any questions or concerns regarding these or any other regulatory requirements.   [1]   RIAs and ERAs are referred to collectively herein as investment advisers.   [2]   Complete copies of the revised instructions to Form ADV and amended Part 1A can be found on the SEC’s website using the following links: General Instructions:  https://www.sec.gov/rules/final/2016/ia-4509-appendix-a.pdf Instructions for Part 1A:  https://www.sec.gov/rules/final/2016/ia-4509-appendix-b.pdf Glossary of Terms:  https://www.sec.gov/rules/final/2016/ia-4509-appendix-c.pdf Part 1A:  https://www.sec.gov/rules/final/2016/ia-4509-appendix-d.pdf In addition, a copy of amended Part 1A, marked to show changes against the current version, can also be found on the SEC’s website at https://www.sec.gov/rules/final/2016/ia-4509-form-adv-summary-of-changes.pdf.   [3]   ERAs will not be subject to these new reporting requirements.   [4]   An SMA is defined for this purpose as any client account other than a registered investment company, business development company or other pooled investment vehicle (including private funds).    [5]   The reporting requirements are somewhat akin to reporting obligations under Form PF that apply to an RIA with respect to any private funds it manages.  Unlike the data provided under Form PF, however, the data provided in response to Schedule D, Section 5.K, will be publicly available on the SEC’s website.   [6]   The asset categories are (i) exchange-traded equity securities, (ii) non exchange-traded equity securities, (iii) U.S. government/agency bonds, (iv) U.S. state and local government bonds, (v) sovereign bonds, (vi) investment grade corporate bonds, (vii) non-investment grade corporate bonds, (viii) derivatives, (ix) securities issued by registered investment companies or business development companies, (x) securities issued by other pooled investment vehicles, (xi) cash and cash equivalents, and (xii) other.   [7]   The six categories of derivative instruments are (i) interest rate derivatives, (ii) foreign derivatives, (iii) credit derivatives, (iv) equity derivatives, (v) commodities derivatives and (vi) other derivatives.   [8]   Unlike most of the information provided in Item 1 (which must be promptly updated on an other-than-annual basis if the information provided becomes inaccurate in any respect), the information with respect to an investment adviser’s branch offices will only need to be updated once a year as part of the investment adviser’s annual updating amendment to its Form ADV.   [9]   The ranges are (i) from $1 billion to $10 billion, (ii) from $10 billion to $50 billion, and (iii) more than $50 billion. [10]   ERAs, which are not required to complete Item 5 of Part 1A, will not be subject to these requirements. [11]   The enumerated classes of clients are (i) individuals (other than high net worth individuals), (ii) high net worth individuals, (iii) banking or thrift institutions, (iv) business development companies, (v) registered investment companies, (vi) other pooled investment vehicles, (vii) pension and profit sharing plans (other than government pension plans), (viii) state and municipal government entities (including government pension plans), (ix) other investment advisers, (x) insurance companies, (xi) sovereign wealth funds and foreign government institutions, (xii) corporations and other businesses, and (xiii) other clients.  [12]   In the Adopting Release, the SEC cites nondiscretionary accounts or one-time financial plans as examples of situations where, depending on the facts and circumstances, an adviser may provide investment advice but does not have RAUM.  See SEC Adopting Release, Form ADV and Investment Advisers Act Rule, Release No. IA-4509, File No. S7-09-15 (Aug. 25. 2016), https://www.sec.gov/rules/final/2016/ia-4509.pdf, at footnote 144.  [13]   See SEC No-Action Letter, Investment Advisers Act of 1940 – Sections 203(a) and 208(d) American Bar Association, Business Law Section (Pub. avail. Jan. 18, 2012), https://www.sec.gov/divisions/investment/noaction/2012/aba011812.htm. [14]   This will not be a problem for any Relying Adviser that has the same principal place of business with the Filing Adviser.  However, Relying Advisers whose principal place of business is not the same as the Filing Adviser will need to identify a separate grounds for claiming SEC jurisdiction under the Advisers Act, such as by having $100 million or more in RAUM or by having its principal place of business located outside of the U.S. [15]   See SEC Staff Interpretive Guidance, Frequently Asked Questions on Form ADV and IARD (June 12, 2017), https://www.sec.gov/divisions/investment/iard/iardfaq.shtml at "Reporting to the SEC as anExempt Reporting Adviser." [16]   ERAs are not subject to these record-keeping requirements. Gibson, Dunn & Crutcher’s lawyers are available to assist in addressing any questions you may have regarding these developments.  Please contact any member of the Gibson Dunn team, the Gibson Dunn lawyer with whom you usually work, or any of the following leaders and members of the firm’s Investment Funds practice group: Chézard F. Ameer – Dubai (+971 (0)4 318 4614, cameer@gibsondunn.com)Jennifer Bellah Maguire – Los Angeles (+1 213-229-7986, jbellah@gibsondunn.com)Edward D. Sopher – New York (+1 212-351-3918, esopher@gibsondunn.com)Y. Shukie Grossman – New York (+1 212-351-2369, sgrossman@gibsondunn.com)Mark K. Schonfeld (+1 212-351-2433, mschonfeld@gibsondunn.com)Edward D. Nelson – New York (+1 212-351-2666, enelson@gibsondunn.com)Marc J. Fagel (+1 415-393-8332, mfagel@gibsondunn.com)C. William Thomas, Jr. – Washington, D.C. (+1 202-887-3735, wthomas@gibsondunn.com)Gregory Merz – Washington, D.C. (+1 202-887-3637, gmerz@gibsondunn.com) © 2017 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

September 6, 2017 |
UK Public M&A – UK Public Companies Up for Sale: ‘Strategic Reviews’, ‘Auctions’, ‘Formal Sale Processes’ – Does It Matter? New Guidance

When the board of a public company decides to undertake a strategic review, this may involve putting itself or some of its assets up for sale. These options may in turn be run as a formal auction or might involve (or be preceded by) more informal private discussions with a small number of parties to gauge market interest. These steps may be run as distinct ordered stages and in other situations may develop iteratively, often being regarded by the company itself as a continuum or variation of one and same process. Under UK takeover rules and practice, however, entering into these different stages can have markedly different consequences of strategic importance to the company. The Executive body of the UK Panel on Takeovers and Mergers (Executive) recently published new guidance in the form of a Practice Statement[1] 31 on "Strategic reviews, formal sale processes and other circumstances in which a company is seeking potential offerors"[2] (PS 31) . This alert summarises the substance of the guidance and draws out some practical considerations for companies and their advisers in these situations. Different scenarios discussed in the Practice Statement 31 PS 31 seeks to draw a distinction between the following key announcement scenarios: General strategic review announcements by target companies Strategic review announcements by companies which specifically refer to an offer, or a formal sale process (FSP), a merger or the search for a buyer for the company, as one or some of the options under consideration Announcements by companies that the board is seeking one or more potential offerors by means of a FSP Private discussions between a target company with one or more potential offerors where subsequently the target company wishes to announce a FSP. Each of the scenarios above address voluntary announcements scenarios. It should be noted there are a number of other scenarios provided for under the Code where a target company or an offeror may be required to make an announcement about a possible offer e.g. in the event of rumour or speculation, untoward target share price movement or where private discussions by a target company with potential offerors exceeds more than a very restricted number of potential offerors. These mandated situations are not addressed in PS 31 nor in this alert. Rule 2 of the Code sets out the framework for announcements (voluntary and mandated) and the Executive has also set out further guidance on this in Practice Statement 20[3] on "Secrecy, Secrecy, possible offer announcements and pre-announcement responsibilities". Why does it matter? From a target company’s perspective, it is important to understand and ideally to pre-plan for the implications under the Code, if any, of any of the announcement scenarios listed above. Entering into an offer period: First, the company will want to know if the result of the announcement is to bring it into an "offer period" under the Code. If a company enters into an offer period, a number of different requirements and restrictions will arise, many impacting the target company itself and others impacting possible offerors and third parties. With respect to the target company, these include the imposition of certain restrictions on dealings, disclosure requirements, compliance with regimes regarding circulation of information about the target company and restrictions on actions which are regarded as "frustrating actions" under the Code. In addition, whenever a company enters into an offer period, this generally attracts market and stakeholder pressures which inevitably arise from the public scrutiny and enquiry of a company (seen to be) "in play". Public identification of potential offerors and PUSU: Second, an announcement by a target company which commences an offer period must identify any potential offeror it is in talks with or from which an approach has been received (and not unequivocally rejected). This "outing" of potential offeror(s) is important as, in addition to the public revelation of interest by any such potential offeror(s) prior to any firm conclusion of any discussions with the target company (which generally operates against the interests of the offeror and in some circumstances may not also be in the interests of the target), the potential offeror then becomes subject to the so-called "put up shut up" (PUSU) 28 calendar day deadline. The PUSU deadline (which can only be extended with the consent of both the Panel and the target) requires the potential offeror to announce a firm intention to make an offer within 28 days of the announcement "outing" it or to announce that it does not intend to make an offer, in which case it will be "off-side" with respect to an offer for the target, for a number of months. The Code does however, on request of the target,  allow the Panel to grant a dispensation to the "outing" of potential offerors in the case of FSPs and the imposition of the PUSU period. Consultation with the Panel is required. Offer-related arrangements and equality of information: Thirdly, depending on the nature of the scenario in which a company is classified for purposes of the Code, the following additional restrictions may be imposed on it and the parties (including possible offerors) that it is in discussions with or wishes to commence discussions with: Restrictions on entering into any "offer-related arrangements" during an offer period: There is a general restriction under the Code from a target entering into such arrangements which are broadly defined to include any agreement, arrangement or commitment in connection with an offer including any inducement fee "or other arrangement having a similar or comparable financial or economic effect". The Code does however envisage granting a dispensation to allow a target company to enter into an inducement fee arrangement in situations where the company has announced a FSP Equality of information to subsequent bona fide offerors or potential offerors without conditions save as to conditionality and non-solicitation: In order to place all bona fide offerors or potential offerors (whether welcome or unsolicited) on an equal footing, the Code requires the target, to provide equally and promptly, on request, any information given to one (potential) offeror to another bona fide (potential) offeror. The Code also states that the passing of such information should not be made subject to any conditions other than those relating to confidentiality, reasonable non-solicitation provisions and requirements as to use of information solely in connection with an offer. Importantly, this restriction only applies in respect of information requested by a (potential) offeror where that information has already been provided to an earlier (potential) offeror but does not seek to regulate the terms imposed by a target company on the "first" offeror or potential offeror. The question then arises as to who is regarded as the "first" offeror(s) in the context of an auction sale or FSP or similar – this is important for a target company to ascertain as it sets the framework within which it may choose to run an auction process, FSP or strategic review. How does PS 31 address the different scenarios? The table below sets out the requirements and guidance set out in PS 31 with respect to the different sale scenarios identified above.   Conclusions Companies (board members, controlling shareholders and their advisers) who are considering a strategic review, running an auction process or putting the company up for sale should give due consideration to the guidance issued by the Executive in PS 31. With an increase in public-to-private activity, initiated by PE backed owners and otherwise, running an effective sale process is important and necessitates a real understanding of the dynamics of public offers, the implications and strategic options available under the Code including with respect to outing of bidders, access to information and freedom to enter into offer-related arrangements. When the Code Committee of the Panel introduced the FSP regime in 2011 which was in conjunction with, inter alia, the general prohibition on offer-related arrangements, there was an expectation that this regime would be attractive to target companies undergoing a strategic review, given the greater flexibility/ dispensations available to companies (and bidders) participating in this process. The statistics however have been uninspiring (both in terms of the numbers of FSPs launched and the success in concluding in an offer) until more recently when FSPs have gradually developed increased interest. In H1 2017, 27 firm offer intention announcements for Code companies were announced. Of these seven were FSPs – this included three main market and three AIM listed companies with offer periods commencing with a FSP announcement. In four of the six, the FSPs were part of a wider strategic review and dispensations from ‘outing’ and imposition of the PUSU deadline were sought. With this backdrop of increasing prevalence of strategic reviews and FSPs, companies and their advisers should take particular note of the guidance of the Executive in PS 31. [1] Practice Statements are issued by the Executive to provide informal guidance to companies involved in takeovers and practitioners as to how the Executive normally interprets and applies relevant provisions of UK’s City Code on Takeovers and Mergers (Code) in certain circumstances. The statements do not form part of the Code and are not binding on the Executive or the Panel. They have however been relied upon and referred to in cases where evidence of certain Executive practice on particular provisions has been in question. [2] http://www.thetakeoverpanel.org.uk/wp-content/uploads/2008/11/PDF-of-Practice-Statement-No.31.pdf [3] http://www.thetakeoverpanel.org.uk/wp-content/uploads/2008/11/PDF-of-Practice-Statement-No.20.pdf If you require further information or guidance on these developments, please contact the author of this note, Selina Sagayam (ssagayam@gibsondunn.com), the Gibson Dunn lawyer with whom you normally work, or the following partners in the firm’s London office.  We would be pleased to assist you.     Charlie Geffen (+44 (0)20 7071 4225, cgeffen@gibsondunn.com)Nigel Stacey (+44 (0)20 7071 4201, nstacey@gibsondunn.com)Jonathan Earle (+44 (0)20 7071 4211, jearle@gibsondunn.com) © 2017 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

July 20, 2017 |
UK Public M&A – “When Is a Final Offer Not Final?” Part 2

In our client alert "When is a Final Offer Not Final" on 9 November 2016 we described the way the UK’s Takeover Panel operates its rules in a pragmatic way and on a principles basis.  We described the battle for SVG Capital Plc and the conundrum that faced the Panel when HarbourVest Partners sought to acquire 100% of the assets of SVG at a higher "see through" price per share than its earlier share offer. The normal rule is that when a bidder has made a "final" offer it is not allowed subsequently to increase its offer later in the process.  In the case of SVG the Panel did allow HarbourVest to make a higher offer for the assets demonstrating, what we then described, as a good example of how the Takeover Panel operates.  That deal showed why it is so important for participants in UK public M&A to consult the Takeover Panel about their tactics in advance during any offer for UK public companies.  We also observed that the Takeover Panel is not bound by precedent and has the discretion to grant waivers or derogations from its rules where appropriate. What has happened now? The Takeover Panel has now issued a consultation paper with a view to changing its rules in relation to asset sales in competition with an offer for a UK public company.  The consultation period ends on 22 September 2017 following which, subject to the outcome of the consultation, we would expect the rules to be amended to prevent a repeat of the SVG story.  What is proposed? There are a number of proposed amendments: The most important changes would prevent bidders avoiding the existing rules by purchasing "significant assets".  In assessing what is "significant" the Panel would have regard to the consideration, assets and profits involved, with relative values of more than 50% being normally regarded as significant. Bidders who have made "no extension", "no increase" or similar statements would also be prevented from seeking to purchase significant assets for 12 months (which could be reduced in certain circumstances and with Panel consent to three months) after their share offer lapses. There would be a requirement for target boards to obtain independent advice as to the financial terms of any asset sales including a formal report on the amount shareholders would ultimately receive, similar to the requirement to receive advice in connection with an offer. Target companies would be allowed to pay an inducement fee in connection with an asset deal of up to 1% of the value of the proposed transaction. A bidder for assets would be restricted from purchasing shares in the target company during the offer period, similar to the existing restriction for bidders who have made a takeover offer. Conclusion These changes make sense and reflect the market debate at the time of the SVG deal.  They also both reinforce the importance of consulting the Panel on all issues that arise on public M&A in the UK and reflect the Panel’s ability to amend its rules quickly to keep up to date with market developments.   This Gibson Dunn client alert was prepared by Charlie Geffen, Nigel Stacey, Selina Sagayam and Anne MacPherson.  Gibson Dunn’s lawyers are available to assist with any questions you may have regarding these developments.  To learn more about these issues, please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Mergers and Acquisitions practice group, or the following: United Kingdom:Charlie Geffen – Chair, London Corporate (+44 (0)20 7071 4225, cgeffen@gibsondunn.com)Nigel Stacey – Partner, Corporate (+44 (0)20 7071 4201, nstacey@gibsondunn.com)Jonathan Earle – Partner, Corporate (+44 (0)20 7071 4211, earle@gibsondunn.com) Mark Sperotto – Partner, Corporate (+44 (0)20 7071 4291, msperotto@gibsondunn.com)Nicholas Tomlinson – Partner, Corporate (+44 (0)20 7071 4272, ntomlinson@gibsondunn.com)James Howe – Partner, Corporate (+44 (0)20 7071 4214, jhowe@gibsondunn.com)Selina Sagayam – Head of Practice Development, Transactional (+44 (0)20 7071 4263, ssagayam@gibsondunn.com)  United States:Barbara L. Becker – Co-Chair, Mergers & Acquisitions Group, New York (+1 212-351-4062, bbecker@gibsondunn.com)Jeffrey A. Chapman – Co-Chair, Mergers & Acquisitions Group, Dallas (+1 214-698-3120, jchapman@gibsondunn.com)Stephen I. Glover – Co-Chair, Mergers & Acquisitions Group, Washington, D.C. (+1 202-955-8593, siglover@gibsondunn.com)Dennis J. Friedman – Partner, Mergers & Acquisitions Group, New York (+1 212-351-3900, dfriedman@gibsondunn.com)Eduardo Gallardo – Partner, Mergers & Acquisitions Group, New York (+1 212-351-3847, egallardo@gibsondunn.com) © 2017 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

July 11, 2017 |
UK Public M&A – Learnings from Some Recent Contested Cases Before the UK Takeover Panel

The UK system of public takeovers – both with regards to its rules (as set out in the Code on Takeovers and Mergers (the Code) and rulings under the Code – can be challenging to parties and practitioners not familiar with the underlying UK and European regimes on takeovers. The key features of the UK takeover system are its flexibility, certainty and speed, enabling parties to know where they stand under the Code in a timely fashion. Another key feature is that the UK takeover landscape is generally devoid of tactical litigation during the course of takeover bids and the rulings of the Executive of the UK Panel on Takeovers and Mergers (Panel) (see below for further background information) are rarely formally contested. That is not however to say that challenges do not occur and indeed the past 18 months have seen a number of publicised challenges to rulings of the Executive and decisions of the Hearings Committee of the Panel. We have summarised three recently published cases below, summarising salient points from the different complex fact patterns and drawing out some points of note and learnings for parties and practitioners alike. Some common themes are evident from these cases:  First, the importance and benefit of consulting in advance with the Executive body of the Panel. The Code is not black letter law and working out the application of the rules without the benefit of an understanding of the spirit behind the rules can result in wrong conclusions. Secondly, having a full and open dialogue with the Executive will often produce solutions and options which may not be evident on the face of the rules (see e.g. the likely different outcome if Xchanging had presented its full case and reasoning to the Executive). Finally, providing full co-operation and assistance to the Panel is of paramount importance (see e.g. Morton & Garner in the Hubco Investments case – who were found ultimately not to have breached any Code rule but who nonetheless have had the most severe sanction available to the Panel imposed on them). Background to Rulings and Challenges Executive – Hearings Committee – Appeal Board: The day to day work of UK takeover supervision and regulation is carried out by the Executive. The Executive makes rulings at the requests of parties and may also on its own initiative give rulings on the interpretation, application or effect of the Code. Any ruling of the Executive may be referred for review to the Hearings Committee[1] of the Takeover Panel. These rulings of the Executive (including disciplinary action rulings and grants or refusals to grant waivers/derogations from Code provisions) are binding on those who are made aware of it unless and until overturned on review by the Hearings Committee. Any party to a hearing (or a person denied permission to be a party to a hearing) has the right to appeal against any ruling of the Hearings Committee to an independent tribunal, now known as the Takeover Appeal Board (Appeal Board)[2]. Contested Rulings – Track Record: In any one year, the Executive will probably make hundreds of "rulings"[3] on transactions and matters falling within the scope of the Code, in fulfilment of its supervisory and regulatory function. One of the most prominent features of UK takeover regulation is the very small number of decisions of the Executive which have been contested  and reviewed by the Hearings Committee, the even smaller number which have been successfully contested[4] and the handful only number of rulings of the Hearings Committee which have been appealed to the Appeal Board[5]. Factors Behind Track Record: This impressive track record is the product of: (i) the Executive’s availability and encouragement of prior consultation on the Code to minimise instances of breaches of the Code; (ii) the Panel’s preferred mode of ensuring compliance with the Code through a constructive and consensual approach with parties engaged in takeover activity; and (iii) the high-quality, rigorous approach that the Executive takes in arriving at its findings and making its rulings – sometimes at the expense of timeliness (which is in contrast to the nimble approach of the Executive on day-to-day regulation of takeovers).  It is with this back-drop that this recent "wave" of contested rulings is of particular note. RANGERS INTERNATIONAL FOOTBALL CLUB PLC CONCERT PARTIES, BREACH OF RULE 9 MANDATORY BID REQUIREMENT & COMPLIANCE ORDERS One of the most common but often tricky areas on which the Executive is called to provide guidance relates to the existence of "concert parties" and whether a Rule 9 mandatory offer requirement has been triggered[6]. Rule 9 of the Code states that when "any person acquires … an interest in shares which (taken together with shares in which persons acting in concert with him are interested) carry 30% or more of the voting rights of a [Code] company", such persons shall be required to extend an offer to all the holders of equity shares in that company. This is the so-called "mandatory offer" or "Rule 9" offer. By way of note: (i) Parties who "come together" and are treated as concert parties, whose aggregate holdings exceed 30% of the voting rights, do not by virtue of the mere "coming together" or collusiveness, trigger a Rule 9 bid. The obligation is only triggered when one of them acquires further voting rights and then, the acquisition of even one further share will trigger a Rule 9 obligation; (ii) There is nothing objectionable or wrong in acquiring further voting rights in such circumstances – it is simply that the person(s) then incurs an obligation to extend an offer to all other shareholders. This is generally a serious and weighty obligation, in particular as the Code imposes additional structural constraints on offers made under Rule 9. Background Facts History of  Rangers F.C. and its Financial Difficulties: Rangers football club (one of the great institutions of Scottish football) has a long and colourful history. Until 2011, the club was majority-owned by the Murray Group. The club (Old Rangers) ran into financial difficulty, in February 2012 it entered into administration and in July 2012  in entered into liquidation. In December 2012, a new company, Rangers International Football Club plc (Rangers) was incorporated in Scotland and its shares were admitted to trading on the junior London market, AIM. There were various changes to the board in early 2013 but in autumn 2013, the company faced continued pressure from various football support groups to change the board. Further changes to the board were made in December 2013 and a strategic review announced in April 2014 which included proposals to issue additional equity to put towards the £20m-£30m fund-raising target set by the board. Notwithstanding these efforts, during 2014 when the events relating to this case unfolded, Rangers was in dire financial straits and the board remained unpopular with many of the fans who were concerned with a  lack of investment in the club. Background to the Concert Party Members: David Cunningham King (a long-standing supporter and investor in Rangers including in the Old Rangers (prior to the club trading on AIM) where he was a minority investor alongside the Murray Group and a non-executive director), had made various offers to invest in Rangers and to be appointed to the board. These offers had been rejected by the board even though King was perceived as an attractive figure to many shareholders fans by virtue of his reputation and longstanding support of the club.  In August 2014, the club announced that it was considering a possible "open offer". A prominent sports retailer (Mike Ashley) was rumoured to have been approached to underwrite the open offer. The Board also reached out to other parties to gain support for the offer, including a George Letham (another Rangers fan who had provided a loan facility to the club). Letham agreed to rally investor support in Rangers and was introduced by a friend to a possible investor, George Taylor (a businessman in Hong Kong where there is a Rangers Supporters Club). Letham was put in touch with Paul Murray (of the Murray family) and through Paul Murray, was put in contact with King. Letham and Murray were hoping between themselves and Douglas Park (a wealthy businessman whose coach company provided transport to Rangers teams and fans) to raise £8m for the Company. Various discussions and communications between these parties followed which are set out in detail in the Panel rulings. Board Control Proposal: In October 2014, King emailed the CEO of Rangers to present a proposal in which he stated he was working with Murray and Letham on an "exclusive ‘consortium’ basis" and they would together inject £16 million into the club (on a 50/50 debt/equity basis) on certain terms including the right to certain board seats, which would have effectively given them board control. This proposal was rejected by the Rangers board. Purchases in Breach of Rule 9: Shortly before this time, through a series of purchases in September and October 2014, Taylor acquired circa 3.16% of Rangers. On 31 December 2014, Letham, Taylor and Park (who had come to be known in the press as "The Three Bears", indicative of their shared views of the Club in the public’s eyes) purchased in aggregate 16.32% of the shares of Rangers. On the same day, King instructed his brokers to purchase 14.75% of the shares of Rangers for New Oasis Asset Management (NOAL) (a BVI company owned by an entity which acted as the trustee of trusts settled by King on behalf of himself and his family) and this purchase was settled in January 2015. As a result of these purchases and taking into their existing holdings, the shares owned by King together with Letham, Taylor, Park amounted to 34.05% of Rangers. Complaint to the Executive: In January 2015, the incumbent board of Rangers made a complaint to the Executive about the December/January purchases and a possible Rule 9 breach. The Executive promptly commenced an investigation into the matter. Letham admitted that in acquiring the shares in December 2015, he acted in concert with Messrs Taylor and Park. King however denied that he acted in concert with Messrs Letham, Taylor & Park. Summary of Rulings & Appeals Executive Ruling: Within six months, in July 2016, the Executive conveyed its "minded to rule" or preliminary findings to the parties. It took however almost another year following the indicative ruling and 18 months after the relevant purchases, for the Executive to formally rule (on 7 June 2016) that King had been acting in concert with Messrs Letham, Taylor & Park in respect of the purchases in December 2014 and January 2015, with a direction that King make a Rule 9 mandatory offer for all of the remaining Rangers shares. Hearings Committee Ruling: On 2 August 2016, King indicated to the Executive that he contested its ruling and wished the Hearings Committee to review the Executive’s decision. The Hearings Committee heard the matter on 28 November 2016. Messrs Letham, Taylor and Park served written submissions but did not appear at the hearing. King declined to appear at the hearing on the grounds that he had not been a director of NOAL and had no legal capacity to represent it. NOAL did not make any submissions and neither King nor any NOAL representative were present at the hearing before the Hearings Committee. The Rangers board submitted to the Hearings Committee that there was no concert party and that a mandatory offer was not in the interests of Rangers shareholders or Rangers. The Hearings Committee ruled on 5 December 2016, upholding the decision of the Executive and directing that King make a mandatory offer within 30 days (i.e. by 4 January 2017). Appeal Board Ruling: King contested the ruling of the Hearings Committee and his appeal was heard by the Appeal Board on 13 March 2017, who dismissed the appeal and affirmed the ruling of the Hearings Committee and directed that King announce a mandatory offer by 12 April 2017. Compliance Order: King did not comply with the direction of the Appeal Board. In the first case of its kind, the Panel has initiated proceedings in the Court of Sessions, Edinburgh seeking an order requiring King to comply with the ruling of the Appeal Board. Summary of Key Facts & Rules Relevant to Rulings "Acting in concert": The concept of acting in concert is a difficult concept as it captures a broad category of arrangements and understandings and does not lend itself to an exhaustive definition. As noted by the Panel in 1989 in the case of Guinness plc/ The Distillers Company, tacit understandings or "nods and winks" between persons co-operating to purchase shares in a company in order to obtain control of it, is enough to constitute concertedness. Establishing that persons are acting in concert involves a detailed assessment of facts – rarely is there any direct evidence of what has passed between those alleged to have acted in concert.  In addition, the "facts relevant to acting in concert may be established by … reasonable inference from all the surrounding circumstances of the case". The subjective personal motives of persons co-operating to gain control of a company are not relevant to the assessment of "acting in concert" which is based upon objective fact.  In this case, King denied that he was acting in concert with ‘The Three Bears’ and stressed that his reference to a "consortium" was in quotation marks and no formal arrangements existed.  As noted by the Hearings Committee, whilst there may well have been "… no formal consortium [however], a loose group comprising individuals co-operating with one another for a common purpose may amount to "acting in concert".  King also made the point that the group did not have any pre-agreement to vote collectively. The Hearings Committee pointed out that where a group of people with a broadly common object collaborates to purchase a block of shares, the group members may well constitute a concert party without there being a pre-agreement to vote collectively. Presumptions/ Deeming: The Panel applies certain (rebuttable) presumptions or deeming provisions which are generally set out in the Code to assist in establishing concert party relationships for the purposes of the Code.  In this case, the Panel was able to rely on its long-standing practice (now codified in the Code) that "a person, the person’s close relatives and the related trusts of any of them" are all presumed to be persons acting in concert with each other. The Code also states that "a person and each of its affiliated persons will be deemed to be acting in concert with each other" and ‘affiliated persons’ are undertakings in in respect of which any person … has the power to exercise, or actually exercises, dominant influence or control". In the absence of any meaningful evidence to the contrary (save for basic denials by King and assertions of independence), it was not difficult for the Panel to conclude that King and NOAL were presumed or deemed to be acting in concert. King was also deemed to be "interested" in the shares acquired by NOAL as he was able to exercise general control over them – this was evidenced by the fact that in January  2015, NOAL requisitioned a general meeting of Rangers with a proposal to remove the existing directors on the Rangers board and the appointment of King and others in . The fact that the relevant broker’s documentation for NOAL (through which the share acquisition was facilitated) described the purpose of the business as "to buy shares in Rangers International Football Club plc for Mr Dave King" further supported this conclusion. Panel Investigations & Co-operation: Access to relevant emails between the parties (in particular certain emails between King and Letham) first in October 2014 which evidenced an investment understanding between Letham and King (together with Paul Murray) to co-operate in gaining control of Rangers through board control, and later in December 2014, which evidenced that the two of them were co-operating directly with a view to purchasing a block of shares which would effect a change of control, was critical in proving the case against King and others. Key Takeaways for Companies and Practitioners Presumptions: The Panel relies on various presumptions and deeming principles to support its analysis of concertedness in any particular case. Parties should note the non-exhaustive list of relationships and arrangements which could trip persons over the line into concertedness , unless they are able to produce satisfactory evidence to rebut such presumptions. In the case of any doubt, consultation with the Executive is advised. Co-operation v (Testing) Panel Powers: In the majority of cases, the Panel relies on its codified exhortation to parties to co-operate with the Panel to facilitate the fulfilment of its regulatory duties. The Panel does however in addition, have statutory powers to require documents and information to be produced within a reasonable period. Parties are however advised to be open and co-operative in their dealings with the Panel – this will most likely result in a speedier resolution of the case and will be a relevant factor for consideration in connection with disciplinary rulings of the Panel. The Code states that the Panel expects any persons dealing with it do so in an open and co-operative way, to provide prompt co-operation and assistance and to take reasonable care not to provide incorrect, incomplete or misleading information (section 9(a) of the Introduction to the Code). Both the Hearings Committee and the Appeal Board noted the lack of co-operation by King in his dealings with the Executive in the course of their investigation. Whilst it took some time for the Executive formal ruling to be delivered, the Hearings Committee noted that "self-induced delay should not afford a basis for avoiding an obligation to make a Rule 9 offer" and were not inclined to impose a different remedy in this case for breach of Rule 9. Who will be bound by rulings?: Generally, a ruling of the Executive is binding on any person made aware of it unless and until overturned by the Hearings Committee or Appeal Board. Similarly, rulings of the Hearings Committee are also binding on all parties unless and until overturned by the Appeal Board. In this case, the rulings delivered were unconditional rulings (all relevant parties were made aware of the hearings and given an opportunity to be heard). The fact that none of the concert party members (King, NOAL and Messrs Letham, Taylor and Park) attended the relevant hearings before Hearings Committee or Appeal Board was not a bar to the ultimate findings against them. Neither was the fact that NOAL was not a formal party to the hearings and had not provided written submissions of its position. The fact that NOAL had been invited to apply to be heard and provide written submissions was sufficient from a procedural perspective. Parties are advised to utilise the opportunity to present their case before the Panel as mere non-attendance will not present a bar to a finding against them. Whose Views Count?: The Panel typically proactively seeks and takes into account the views of the (board of the) relevant Code company and its advisers when called upon to provide guidance or deliver rulings on the application and interpretation of the Code. The company and its advisers are generally considered to be in a good position to be able to represent and/or articulate the views and interests of the wider shareholder and stakeholder bodies. In accordance with this usual practice, the views of the Rangers board were sought. The board in their written submissions stated that it was their view that there was no concert party. The board also stated that in their view a Rule 9 mandatory offer would not be in the interests of or fair to existing shareholders of Rangers; this was because the price at which King was required to make his mandatory offer (20 pence per share) is materially lower than the private matched bargain basis at which the shares have traded in the recent past (circa 27.5 pence per share). In this case, however, the Panel and the Appeal Board did not share the views of the board noting that King "cannot avoid the obligation to make an offer by reliance on the argument that a mandatory offer would not be in the best interests of the other shareholders of Rangers" …; it is always open to the independent board of Rangers to recommend that shareholders do not accept the mandatory offer but "ultimately, whether an offer at 20p is accepted is a matter for the shareholders to whom the offer is directed, not for the Board of Rangers". What Next? As noted above, this is the first time that the Panel has sought to rely on its powers to seek a court enforcement order to require compliance with a directional ruling. Practitioners are keenly following this case and no doubt the ruling of the Edinburgh Court of Sessions and any further or alternative disciplinary action (such as "cold-shouldering" – see the Hubco case below) that the Panel chooses to take in this case will be carefully scrutinised. HUBCO INVESTMENTS PLC[7] BREACH OF THE RULES ON OPEN & CO-OPERATIVE DEALINGS & THE ‘COLD SHOULDERING’ SANCTION Background Facts The related family trusts and companies of Mr Bob Morton (Morton) (a successful Jersey-based businessman and investor) owned 28.32% of voting rights of Hubco Investments plc, a business technology group (Hubco) following the admission to trading of Hubco’s shares in 2011. On 17 July 2013, Groundlinks Limited (Groundlinks), a BVI company owned by Morton PTC Limited (Morton PTC) as trustee for the Andrew Trust (a trust for the benefit of one of Morton’s sons, Andrew) purchased shares representing circa 3.38% of Hubco.  This purchase took the holdings of Groundlinks and the other Morton family entities to more than 30% of Hubco’s voting rights and thereby appeared to trigger the requirement to make a Rule 9 mandatory offer. On questioning by the Executive, Morton alleged that the shares purchased by Groundlinks was on behalf of another Jersey resident and investor, Mr Garner (a friend of another one of Morton’s sons, Robert). Investec Wealth & Investments Limited (Investec) acted as broker for Morton and his family companies. There was no mention (as evidenced in file notes of conversations between Investec and Morton which took place shortly prior to the purchase by Groundlinks) to Investec nor reference in the minutes of the investment committee of Morton PTC, that the purchase by Groundlinks was on behalf of Mr Garner and/or that consent of the trustees to such third party purchase had been obtained. On 23 February 2015, the Panel publicly censured[8] Morton for a failure to make a Rule 9 offer following the acquisition of 39.1% of the voting rights of a different UK publicly listed company, Armour plc (Armour). In that case, Morton arranged for Armour shares to be purchased in the names of his four sons, taking the view they were not members of a concert party and using a "gift device" to effect the purchases. Prior to the statement of public censure, Morton had been twice privately censured by the Panel and in one such case the misconduct involved a breach of section 9(a) of the Introduction to the Code as mentioned above in the Rangers case. The public censure of Morton in the Armour case caused Investec to undertake a review of previous transactions in which they had acted for Morton. On 25 February 2015, Investec called Morton to inform him of the purchase of Hubco shares which went through the 30% Rule 9 threshold and advising Morton to inform the Panel. This advice was not heeded and instead in the days and weeks immediately thereafter, certain documents (comprising self-serving emails and a promissory note between Garner and Groundlinks for the equivalent amount of the purchase price of the Hubco shares) and communications (with Investec) were sent and created by Morton and Garner, to support their claim that the Groundlinks acquired shares had been bought for Garner. In April 2015, as Morton had not disclosed the purchases to the Panel, Investec reported the Groundlinks purchase of Hubco shares to the Executive. An investigation was initiated following which the Executive discovered that at the time of the Groundlinks purchase, Morton and his family companies already owned in aggregate more than 50% of the voting rights in Hubco. Under the Code, a person with more than 50% has "buying freedom", that is, the ability to acquire further shares carrying voting rights without triggering a Rule 9 mandatory offer requirement. Summary of Rulings Executive Findings: In October 2015, the Executive conveyed their finding that there was no actual breach of Rule 9 to Morton and Garner but also relayed their real concern with the manner in which the two men had conducted themselves towards the Executive. Both Morton and Garner were asked again, separately, whether they still contended that Groundlinks had purchased the shares in July 2013 pursuant to a loan arrangement between Groundlinks and Garner – both confirmed their previous evidence that there had been such an arrangement. Executive Initiates Proceedings: The Executive initiated proceedings against Morton and Garner for breach of section 9(a) of the Introduction to the Code on the grounds that they systematically provided information to the Executive which they knew to be false in the course of an investigation by the Executive into a potential breach by Morton of an obligation to announce a Rule 9 mandatory offer. Hearings Committee Rulings: The Hearings Committee concluded in a hearing on 14 December 2016[9] that there was never any arrangement between Messrs Garner and Morton relating to the purchase of Hubco shares. The Hearings Committee also concluded that both men had "lied systematically about the date on which the Promissory Note was produced and signed and the circumstances in which came it to be created". The Hearings Committee noted that Morton’s conduct in systematically lying to the Executive and inventing an agreement "is no less serious because it later transpired that the whole matter could have been sorted out satisfactorily had he acted honestly and reported the facts to the Executive as he was advised to do so at the outset". The Hearings Committee took the view that Garner’s "role in misleading the Executive was at least as prominent and sustained as that of Mr Morton". The Hearings Committee concluded that in their opinion "Morton is someone who is not likely to comply with the Code" and that accordingly, the most serious disciplinary power exercisable by the Panel to cold-shoulder an offender by declaring the offender to be a person who in the opinion of the Panel is not likely to comply with the Code, should be meted out in this case. Morton was been cold-shouldered for a period of six years from the date of the ruling (26 December 2016) and Garner was cold-shouldered for a period of two years. Neither party appealed the rulings to the Appeal Board. Summary of Key Facts & Rules Relevant to Rulings Cold-Shouldering: Cold-shouldering has only ever been meted out in two previous cases. This is an exceptional sanction which is delivered by issue of a public statement indicating that the offender is someone who in the opinion of the Panel is not likely to comply with the Code and typically specifying a period when the sanction is to remain effective. The rules of the UK Financial Conduct Authority  and certain UK professional bodies oblige their members in certain circumstances not to act for such persons in a transaction subject to the Code (including dealing in securities which may require disclosure under the Code). No Underlying Breach of a Rule 9 Obligation: It is of particular note that although the Executive investigation revealed no underlying breach of a Rule 9 obligation and accordingly no damage to shareholders through the failure to make an offer, the Panel nonetheless considered the conduct of Morton and Garner deserving of the most severe of the Panel’s sanctions. Matters Raised But Dismissed: Morton’s advisers said that he was not able to attend the hearing due to ill health and age. The Panel accepted that whilst Morton’s ill health was a good reason for non-attendance at the hearing, it did not provide an acceptable excuse for his conduct during the Executive’s investigation. Relevant Factors: The Hearings Committee took into account the prior disciplinary actions taken against Morton – both the public censure and the two private censures. These facts were relevant in its conclusion about the likelihood of non-compliance by Morton with the Code. With respect to Garner, the Hearings Committee also took into account the numerous character references adduced in his favour and noted the early stage of his business career, but ultimately concluded that cold-shouldering was nonetheless an appropriate sanction but that a shorter period was justifiable. Key Takeaways for Companies and Practitioners Breach of the Code – Procedural/Conduct Breaches: Breaches of the Code include a breach of procedural/conduct rules according to which persons dealing with the Panel must provide information and assistance to the Panel. Importance of Rule on Dealings with the Panel: This case is another pointed and stark reminder of the importance of open and co-operative dealings with the Panel and that breach of these conduct provisions of the Code (as opposed to any substantive takeover transaction rule breaches) can be met with the most serious of the disciplinary powers available to the Panel. This approach reinforces the Panel’s key objective of preserving the UK’s system of takeover regulation which is aimed at encouraging open and consultative dialogue with the regulator with a view to prompt preventative or remedial action being taken. Relevant Factors in Disciplinary Action Cases: The past conduct and behaviour of parties is a relevant factor which the Panel takes into account. As in the Rangers case, the absence of a party and their representative or advisers at a hearing will not be a bar to a lawful and enforceable ruling being made against that party. XCHANGING PLC COMPETITIVE OFFER SITUATIONS & CLARIFICATION BY COMPETING BIDDERS Background Facts In 2015, Xchanging plc (Xchanging) was the subject of takeover offer interests and various competing offers which became the subject of rulings including an Appeal Board ruling as summarised below. On 14 October, Capita plc (Capita) announced a firm intention to make a cash offer (by way of a contractual takeover offer) for Xchanging, which was recommended by the Xchanging board. The Capita offer document was posted on 17 October. On 12 November, Xchanging announced it had received an approach from Computer Sciences Corporation (CSC) about a possible cash offer. On 16 November, Xchanging announced it had received an approach from Ebix, Inc. (Ebix) regarding a possible cash offer. In accordance with Rule 2.6(d) of the Code[10], the Xchanging announcements of 12 and 16 November stated that each of CSC and Ebix were required by not later than 9 December (the 53rd day following the posting of Capita’s offer document) either to announce a firm intention to make an offer or to announce that it did not intend to make an offer for Xchanging. On 9 December, CSC announced a firm intention to make an offer for Xchanging at a higher price than the Capita offer, which was recommended by the Xchanging board. The CSC announcement stated that "as result of [their] announcement, the previous deadline of 5.00 pm on 9 December for other bidders … will be replaced by a new deadline of 5.00pm on the 53rd day following the posting of the Offer Document". On 15 December, CSC published its offer document and posted it to Xchanging shareholders. Summary of Issues Under Consideration & Rulings Executive Ruling: On 9 December, the Executive ruled that pursuant to Rule 2.6(d), Ebix must by 5.00pm on the 53rd day following the publication of CSC’s offer document, either announce a firm intention to make an offer or announce that it did not intend to make an offer for Xchanging. Xchanging, Capita and Ebix accepted this ruling. CSC however requested that the ruling should be reviewed by the Hearings Committee. Hearings Committee Rulings: On 18 December, the Hearings Committee rejected the request of CSC and upheld the ruling of the Executive, giving its written reasons on 23 December. At the hearing before the Hearings Committee, Xchanging said it was supportive of Ebix being given some time to make a higher offer but suggested a new date of 7 days before the first closing date of the CSC offer (i.e. 8 January 2016). Xchanging had not in prior discussions with the Executive in conjunction with its 9 December ruling, put this position forward for consideration. CSC’s position was that the plain meaning of Rule 2.6(d) required Ebix to confirm its position by the 53rd day following the publication of the offer document of Capita (being the first offeror); in particular the reference to the "first offeror" in this context was Capita (not CSC). Further, CSC took the position that its announcement on 9 December was not intended to refer to a new deadline for Ebix but one applicable to other bidders who had not yet even been publicly disclosed. Accordingly, there were two issues for the Hearings Committee to consider: (i) Xchanging’s alternative proposal that the clarifaction date be set at 8 January 2016; and (ii) the interpretation of Rule 2.6(d) of the Code. The Hearings Committee acknowledged the attractions of the new submission of Xchanging as to a new date for clarification of intentions, but concluded that in the absence of any ruling of the Executive on the merits of this proposal the Hearings Committee did not have the jurisdiction to consider it. On Rule 2.6(d), the Hearings Committee upheld the position of the Executive. Appeal Board Ruling: CSC appealed the decision of the Hearings Committee to the Appeal Board. The appeal was heard on 18 December, written reasons were delivered to the parties five days later and the ruling of the Appeal Board published on 15 January 2016. The Appeal Board also declined to rule on Xchanging’s proposal for an earlier deadline and dismissed CSC’s appeal against the ruling of the Hearings Committee. Summary of Key Facts & Rules Relevant to Rulings No Executive Ruling – No Jurisdiction to Review: The Code specifically envisages that the "Panel may derogate or grant a waiver to a person from the application of a rule (provided, in the case of a transaction and rule subject to the requirements of the Directive, that the General Principles are respected) either: (i) in circumstances set out in the rules; or (ii) in other circumstances where the Panel considers that the particular rule would operate unduly harshly  or in an unnecessarily restrictive or burdensome or otherwise inappropriate manner …"  (section 2(c) Introduction to the Code) Section 4(c) of the Introduction to the Code states that "the principal function of the Hearings Committee is to review rulings of the Executive". This is also reflected in the Rules of Procedure of the Hearings Committee. The Executive had the power to derogate under section 2(c) above and indeed the Executive has used its powers of derogation and waiver extensively in numerous cases. In this case however, Xchanging had not invited the Executive to rule on the proposal and therefore there was no ruling on point for the Hearings Committee to review. Deadline for Clarification by Competing Bidder(s) under Rule 2.6(d): With respect to the interpretation and application of Rule 2.6(d), the Executive had in its submissions, explained the history and rationale behind Rule 2.6(d). In this case, the rationale was to remove uncertainty as to whether Ebix will announce a firm offer in the later stages of the offer timetable when Xchanging shareholders are being called upon to make an investment decision (i.e. to accept a formal offer as contained in a published offer document). The Executive also explained that the rule was drafted in anticipation of there being only one potential competing offer. The question before the Appeal Board therefore was one of interpretation of a provision in circumstances which were not specifically addressed by those who formulated or drafted the Code provision. The Appeal Board accepted the Executive’s submission that where there are two or more bidders, the phrases "first offer" and the "first offeror’s initial offer document" should be construed as applying to the offeror whose offer document had established the offer timetable and not the offeror which first as a matter of history had published an offer document. Key Takeaways for Companies and Practitioners The Code is Not Black Letter Law: The Code should not be treated as black letter law. As the Appeal Board pointed out, whilst the Code rules have statutory underpinnings, they are not contractual in nature nor are they a form of legislation. This is a very important takeaway particularly for non-UK market participants and advisers who in the first instance often approach the Code rules as black letter law. Importance of Understanding the Spirit Behind the Code: In the light of the above, when faced with what may appear to be ambiguous drafting and/or where a party is seeking a derogation or waiver from a rule, a keen understanding of the history and rationale behind Code rules are critical – this will help shape interpretation and presentation of reasoned arguments to the Panel. The Appeal Board specifically recognised the special role of the Executive in this regard and noted that it had no reason to doubt the Executive’s contention about the basis of the rule. Whilst formal responsibility for promulgation of Code rules rests upon the Code Committee of the Panel, the Executive is very closely involved in helping to shape the rules of the Code and hence are key in helping to guide parties through the Code. Raise all relevant points and options with the Executive: This case also reflects the importance of considering and raising all reasoned proposals and options on substantive Code issues with the Executive. As noted above, the Executive is keen to engage with parties in a constructive manner. The substance of the alternative proposal of Xchanging was received sympathetically by all three ruling bodies however, as the Executive was not called upon to formally rule on it, there was no jurisdiction for either the Hearings Committee or Appeal Board to rule on it. Relevant Factors and Principles Upheld by the Panel: This case also reveals some of the key principles and factors that that the Panel seeks to respect and uphold when called upon to apply the Code (or grant derogations or waivers). First is the impact on the market and the desire to ensure that an orderly market is maintained[11] The Hearings Committee focussed on the 9 December announcement of CSC and the fact that both Ebix and the market generally would have read that announcement as re-setting the deadline not just for other unannounced bidders but for Ebix specifically. Secondly, the Panel seeks to protect the interests of target company shareholders and accordingly is usually reluctant to rule in a manner which would result in shareholders being deprived of an offer (or higher offer), if an alternative reasoned ruling or approach is available[12]. Third, the impact on the target generally and in particular whether application of a rule (or derogation or waiver from a rule) could result in a prolonged period of "siege" or uncertainty for the target company[13] (i.e. whilst a potential offeror, in particular a hostile or unsolicited offeror, is considering whether or not to make a firm offer) is generally an outcome that the Panel will seek to mitigate. In this case, the extended period was already on the cards whether or not Ebix itself was granted a further period to clarify. Further, as noted by the Panel, the concept of undue siege is generally less of an issue in the case of a recommended offer (as was the case here with respect to CSC). END NOTES: 1)     Since 2006, the Panel has published  on a "standalone" basis four concert party rulings of the Executive and Panel[14], which in each case had been accepted by the parties interested in the matter. 2)     In addition, during the same time period, rulings of the Hearings Committee and Appeal Board on three contested Rule 9 cases[15] and two cases involving disciplinary action following a breach of Rule 9[16], have been published. These published cases however reveal little of the frequency with which issues relating to concertedness and Rule 9 arise as a matter of practice – during the same period the Executive will have provided confidential guidance and delivered (in some cases, conditional or ex parte) rulings on the existence of concert parties and the application of Rule 9 in numerous cases.    [1]   The Hearings Committee of the Takeover Panel is one of two key committees of the Panel (the other being the Code Committee, which is the rule-making body of the Panel). The Hearings Committee comprises the Panel Chairman, at least one Deputy Chairman, 12 Panel members appointed by "Nominating Bodies" (being major UK financial and business institution or industry bodies) and up to eight Panel members appointed by the Panel.    [2]   NB: The review and appeals structure was modified in 2006 when the Takeover Panel was placed on a statutory footing    [3]   These will include formal "rulings", "minded to rule" decisions and grants of derogation or waiver    [4]   NB: All of the appeals against the eight publicised rulings of the Executive which were reviewed by the Hearings Committee since 2006 (when the Panel was placed on a statutory footing as part of the implementation of the European Takeovers Directive) were dismissed by the Hearings Committee. The most recent instance when an appeal against the ruling of the Executive was upheld was in 2004.    [5]   NB: To date, the Appeal Board has upheld all rulings of the Hearings Committee    [6]   See END NOTES to this client alert for recent statistics on Rule 9/ concert party rulings    [7]   Now known as Big Sofa Technologies Group PLC.    [8]   NB: Public censure is one of the sanctions that the Panel may impose for breach of the Code. Other sanctions include private censure and reporting the offender’s conduct to relevant regulatory bodies. The Panel does not have a power to fine.    [9]   NB: Morton was unable to attend the hearing due ill health and age [10]   Rule 2.6(d): When an offeror has announced a firm intention to make an offer and it has been announced that a publicly identified potential offeror might make a competing offer (whether that announcement was made prior to or following the announcement of the first offer), the potential offeror must, by 5.00 pm on the 53rd day following the publication of the first offeror’s initial offer document, either: (i) announce a firm intention to make an offer in accordance with Rule 2.7; or (ii) announce that it does not intend to make an offer, in which case the announcement will be treated as a statement to which Rule 2.8 applies. [11]   Note General Principle 4 of the Code [12]   Note General Principle 3 of the Code [13]   Note General Principle 6 of the Code [14]   Rulings relating to the following Code companies: (i) Petropavlovsk plc (2017); (ii) Opportunity Investment Management plc (2014); (iii) Bumi plc (2012); and (iv) Mitchells & Butlers plc (2010). [15]   Rulings relating to the following Code companies: (i) Bumi plc (2013); (ii) Principle Capital Investment Trust (2010); and (iii) World Television Group plc (2007). [16]   Rulings relating to the following Code companies: (i) Hubco Investments plc (2017); and (ii) Armour Group plc (2015), both cases involving Mr Bob Morton. If you require further information or guidance on these developments, please contact the author of this note, Selina Sagayam (ssagayam@gibsondunn.com), the Gibson Dunn lawyer with whom you normally work, or the following partners in the firm’s London office.  We would be pleased to assist you.     Charlie Geffen (+44 (0)20 7071 4225, cgeffen@gibsondunn.com)Nigel Stacey (+44 (0)20 7071 4201, nstacey@gibsondunn.com)Jonathan Earle (+44 (0)20 7071 4211, earle@gibsondunn.com) © 2017 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

July 6, 2017 |
Bidders Beware …? Recent Developments in the UK Public Takeover Market

The last 12 months have seen various strides towards increased protectionism at a national level in the UK and other European member states and also at a European level. In the same period, we have also seen high-profile UK takeovers being derailed, others seemingly close to being derailed through the use of manipulative devices and onerous bidder "post-offer undertakings" being provided. In this alert, we summarise some of these recent developments and get behind the headlines to distil the real implications for bidders considering launching a bid in the UK. In summary, whilst the political mood has been shifting towards shoring up the regulatory weaponry to defend "important" UK companies from foreign takeovers, through a combination of superior competing priorities for the incumbent government and the sheer complexity of this exercise, it is unlikely that we will be seeing any real change in the takeover landscape in the near future. The voluntary grant of "post-offer undertakings" by bidders looking to secure a UK takeover target very much remains the exception rather than the norm and is not a route that the Panel is pushing bidders towards. Finally, bidders looking to secure 100% control of a UK target company can take comfort from the robustness of the English judiciary – as seen from the Dee Valley case, the UK courts have demonstrated that they will, if necessary, deploy stretched jurisprudential analysis to ensure that the framework within which schemes of arrangement operates are not utilised manipulatively against the interests of the wider shareholder body. UK Protectionism: Changing Gears – Which Way Is This Heading? Defence against foreign takeovers: On 11 July 2016, in her campaign speech to become leader of the Conservative Party and Prime Minister of the United Kingdom, Theresa May set the stage for "radical" action to put "people back in control". With plentiful rhetoric and gusto, she outlined the basis for a new industrial strategy which would be capable of defending important sectors from foreign takeovers. ARM Holdings Takeover Welcomed … with Qualifications: One week later, Japan’s Softbank Group Corp (Softbank) announced a $32bn bid for Cambridge-based tech company ARM Holdings plc (ARM). Ostensibly in a volte face move, May and her Chancellor Philip Hammond publicly welcomed the transaction describing it as a "vote of confidence in Britain" and the latter said that it would "turn this great British company into a global phenomenon". A Downing Street spokesperson however explained that future deals would be examined "on a case-by-case basis to ensure they are in the national interest". It was also stressed that the newly appointed PM had spoken personally to the head of Softbank who gave her certain assurances about its plans for the British chip designer (see Post Offer Undertakings below),  affirming the new interventionist approach. A few months later in mid-September, the newly recast Department for Business, Enterprise & Industrial Strategy stated that the government was looking to reform its approach to the ownership and control of critical infrastructure "in line with other major economies" and this initiative would include a review of the public interest regime under the UK’s Enterprise Act 2002. Intervention Off the Agenda?: Two key opportunities to build upon this interventionist approach followed – first, at the Conservative Party conference in October 2016 and again in January 2017, when the Green Paper setting out May’s new Industrial Strategy[1] was published. Both opportunities were eerily silent on this policy. In her October 2016 party conference speech, when describing Britain after Brexit, May once again referenced the Japanese purchase of ARM as the "biggest-ever Asian investment in Britain". The Green Paper outlined various proposals to encourage trade and investment and to unblocking remaining barriers to trade. No reference was made to "public interest tests" or defending "important" sectors. Election Manifesto Plans for Takeover Reform: For those who had breathed a sigh of relief at these developments at the end of last year and early this year, this proved to be a short reprieve. On 17 May 2017, the UK election campaign saw the publication of a Conservative party manifesto with various specific "promises" on takeover strategy and controls. "We will update the rules that govern mergers and takeovers. This will require careful deliberation but we can state now that we will require bidders to be clear about their intentions from the outset of the bid process; that all promises and undertakings made in the course of takeover bids can be legally enforced afterwards; and that the government can require a bid to be paused to allow greater scrutiny.  ….. We shall also take action to protect our critical national infrastructure. We will ensure that foreign ownership of companies controlling important infrastructure does not undermine British security or essential services. We have already strengthened ministerial scrutiny and control in respect of civil nuclear power and will take a similarly robust approach across a limited range of other sectors, such as telecoms, defence and energy.[2]" Analysis: The manifesto promises summarised above raise a number of questions and indeed resulted in a few raised eyebrows. UK takeover rules as set out in the Code on Takeovers and Mergers (Code) (which is promulgated by the Code Committee of the Panel on Takeovers and Mergers (Panel)) already requires bidders to disclose their intentions with regard to the business, employees, strategy and other target company related matters. It is not clear what further clarity from bidders is being sought. With respect to enforcement of promises and undertakings, in 2015, the Panel introduced a dual regime to govern promises and commitments during a bid about post-bid matters, comprising "post-offer intention statements" and "post-offer undertakings", each with their own monitoring and enforcement regime. Again, it is not clear what further changes are proposed and indeed how the Government would seek to implement them given that the rules governing takeovers are set out in the Code as promulgated by the Panel under its statutory powers. More worrying is the impact to the orderly conduct of a bid in line with the timetable set under the Code if a "pausing power" was introduced. One of the key characteristics of the UK system of takeovers is the certainty and speed of regulation enabling parties to know where they stand under the Code and the market to be able to evaluate and assess a bid (or possible bid). Finally, the specific protectionist proposals with respect to critical infrastructure and new scrutiny and "controls" over certain new sectors, has raised further questions. Much of the anxiety around these proposals has abated following the election results. The Government’s ability to push through reform in this area is constrained and its focus/priorities have altered – a new interventionist policy does not seem to be top on the agenda … at least for now. It is our expectation however, supported by the general wave of sentiment across Europe (see European Protectionism below) and expectations of deterioration in the UK economy following withdrawal from the EU, that the calls for intervention will in due course resurface and grow louder. By way of note, the UK’s Enterprise Act 2002 allows for intervention by the Secretary of State in mergers which give rise to specified public interest concerns – national security, media quality plurality and standards, and financial stability. In 2014, the then Business Secretary, Vince Cable called for the introduction of a new public interest test, the parameters around which have proved notoriously difficult to agree and define. The challenges with this approach have caused many to predict that the more likely development in the UK might be the establishment of the UK version of the US agency, CFIUS (Committee on Foreign Investment in the US) which within its national security remit, has taken jurisdiction over and scrutinised a broad range of international transactions from public health to  telecommunications and computers to lighting. The brief here is ‘watch and wait’. European Protectionism – New Blocking Powers? May is not alone amongst European leaders in pushing for greater powers to block foreign takeovers. Earlier this year, Germany, France and Italy called on the European Commission to review whether the bloc should be allowed to intervene in state-backed takeovers of companies in strategic sectors. It was proposed that the EU be given powers to scrutinise "investments in the EU of strategic importance both from an economic and security perspective". Germany had been pushing the protectionist agenda after a spate of Chinese takeovers and France’s president has also been a keen supporter of a new European mechanism to restrict bids on the grounds of national security or strategic importance. The challenge is however with defining the scope or parameters of any such right; other issues also arise including what if any residual powers would be left at national or member state level. Some member states, including The Netherlands (who recently proposed new rules on takeovers controls at a national level[3]), however were not supportive of the EU level proposals. With the technical and political complexities involved in taking forward such a proposal, it was no real surprise that the European Commission’s recommendation in May in a paper on globalisation recommended only further discussion on the topic but no firm action. Most recently, in meetings of the Council of the European Union held in the last two weeks of June, the proposals did not feature on the agenda rather an affirmation of the bloc’s commitment to free trade was specifically called out. With this backdrop, we are unlikely to see any moves to introduce new protectionist powers at an EU level in the medium term. Post-Offer Undertakings – The First … and More … of Its Kind? Following the possible offer for AstraZeneca plc in summer 2014, the Code Committee of the Panel undertook a review of its rules on statements of intention and commitments made by bidders (and target companies) during the course of a bid and the effect of these, in particular whether parties would be held to such statements and related enforcement issues. In January 2015, a new regime was introduced under the Code which draws the distinction between voluntary commitments made by parties to a bid and statements of intention made by such parties relating to actions which they may take or not take following an offer. Under the Code and as noted above, a bidder is required to disclose its intentions with respect to various aspects including but not limited to the target’s business, places of operation and employment matters. The Code does not however require a party to make any formal commitment or undertaking as to what actions it will take or not take following an offer. The new Code rules created a new framework to distinguish between "post-offer undertakings" (i.e. statements relating to any particular course of action that a party to an offer commits to take, or not take, after the end of the offer period and with which it will be required to comply for the period of time specified in the undertaking, unless a qualification or condition set out in the undertaking applies) and "post-offer intention statements" (i.e. statements relating to any particular course of action that a party to an offer intends to take, or not take, after the end of the offer period, which will be required to be accurate statements of the party’s intentions at the time that they are made and based on reasonable grounds). Due to the particularly onerous nature of a post-offer undertaking and the weight and seriousness with which some commitments will be treated by stakeholders and the market, the Panel requires parties wishing to make a "post-offer undertaking" to consult it in advance, to explicitly flag and disclose such commitment as a post-offer undertaking, to specify the time period for which the undertaking is to apply and to set out explicitly any qualifications or conditions to which the undertaking is subject (which in turn are limited under the Code).  In addition, the Panel will monitor compliance with the undertakings which may involve (at its discretion) the appointment of a supervisor (at the cost of the party providing the undertaking). The first major takeover in which the regime has been put to the test has been in the case of Softbank’s bid for ARM  in 2016.  Softbank  made  five distinct post-offer undertakings relating to: (i) different employee groups in ARM[4] (stated to be fulfilled within five years); (ii) the location of the global headquarters of the combined group post-offer; and (iii)  a commitment to procure that the target, ARM also made unqualified post-offer undertakings with respect to employee groups in the same terms as made by Softbank. Do the Softbank undertakings mark the trail for other foreign bidders of UK target companies going forward? We do not believe so. Given the onerous framework which post-offer undertakings would impose upon the giver of such voluntary commitments, the general expectation is that a party will only choose to make a post-offer undertaking in the most exceptional of cases; in most takeover situations parties would limit themselves to statements of intentions, a regime offering greater flexibility and accordingly bearing less onerous consequences in the event of a breach. The exceptional case might for example arise where the target or other party is in an extremely strong position from which to extract such a commitment and/or where other severe external pressures (e.g. political or governmental influence) might be brought to bear on a bidder. To date (almost 2 ½ years following introduction of the new regime), there has only been one major bid situation where a party has made a post-offer undertaking. Share-splitting Devices Used to Derail Schemes of Arrangements Popularity of Schemes of Arrangement & Key Requirements: Court approved schemes of arrangement continue to be the preferred route of effecting the takeover of a UK company[5], over and above the contractual takeover offer[6]. For a scheme of arrangement to be successful, it is first necessary for a majority in number representing at least 75% in value of the members of the company (or each relevant class of members) voting whether in person or by proxy, to vote in favour to approve the scheme at a special Court-convened meeting of shareholders of the Company. Once the two-fold voting thresholds have been achieved, in order to be finally effective, the Court is required to approve or sanction the scheme at a separate sanction hearing. Once these two limbs are satisfied, the bidder will obtain 100% control of the target company.[7] Background Facts: Given the popularity of schemes, practitioners have scrutinised the implications of the recent scheme of arrangement case involving the takeover of Dee Valley Group plc (Dee Valley). In November 2016, Severn Trent Plc (Severn Trent) made a recommended cash offer for Dee Valley to be effected by way of a scheme of arrangement. Seven individuals who were shareholders in Dee Valley opposed the Severn Trent scheme, as a the competing bidder. One of these individuals, after Severn Trent had made the offer, bought more  shares in Dee Valley. He then gifted these to 443 separate individuals, each of whom became the owner of one ordinary share in Dee Valley on 3 and 4 January 2017 (the New Shareholders). The takeover offer was close to being derailed through the actions of  the New Shareholders, who voted against the scheme of arrangement at the relevant members meeting. Through a statutory tool of enquiry and investigation, the majority of the New Shareholders explained in written responses to Dee Valley, that they were voting to protect their own or family’s jobs within Dee Valley. Issues Before the Court: On 12 January 2017, 466 out of the 828 shareholder members present (in person or by proxy) voted against the scheme. However, more than 75% in value supported the scheme. The Chairman of the meeting disallowed the votes of 434 shareholders opposing the scheme who were New Shareholders who had been gifted their shareholdings.  The case went before the High Court in the UK which was called upon to consider whether: (i) the votes of the New Shareholders were valid and what test should be applied to assess this validity; (ii) whether the Chairman was right to disallow the votes; and (iii) even if he was wrong, whether the Court nonetheless had the discretion to sanction the scheme. This is the first share-splitting case to have been heard by the UK courts. Decision & Findings: It is widely considered that the judge in the Dee Valley case reached the right decision albeit arguably through stretched analysis in order to fit the facts and also with a view to pre-empting future attempts by shareholders to utilise the two-fold voting test in schemes to achieve an objectionable outcome. The judge concluded that members voting at a class meeting directed by the court (which a members meeting to approve the scheme is) must exercise their power to vote for the purpose of benefiting the class as a whole, and not merely individual members only. He also concluded that the Chairman of the 12th January meeting had sufficient evidence to conclude that the votes of the new Shareholders were not being cast for the purpose benefiting the class as whole. The judge made it clear however that this was NOT on the basis of the motives of the members as revealed in the written responses received by Dee Valley (because at the relevant time that the Chairman disallowed the votes, he did not know what the individual responses said) but through what the judge considered to be a reasonable or justifiable conclusion from the actions of the New Shareholders in accepting a gift of a single share being "that they could have given no consideration to the interests of the class of members which they had joined" and "the only possible explanation for the conduct … was to further a share manipulation strategy to defeat the scheme by use of the majority in number jurisdictional requirement". Key Points & Implications: This case is a reminder that there are exceptions to the commonly held-perception that a vote in a general meeting of shareholders is an unconstrained right of property which allows the holder to vote free from motives of "what he considers his own individual interests". There are limitations on how members (or creditors) can vote where the meetings are court ordered or directed meetings and not the company’s own (general) meetings.  Whilst the judge was keen to point out that the evidence of motives from the written responses were not determinative in this case, it appears that it did weigh upon the approach taken. As the judge himself noted in his judgement – the "issues that this case raises are of some importance to schemes of arrangement in the future" and he was  keen to find "some mechanism by which the court could prevent legitimate schemes being defeated at the class meeting stage".  The judgement was not appealed – it would have been interesting to see how the higher courts would have approached the issues before the High Court. The facts of this case were unusual (the likelihood of obtaining written evidence of improper motives, particularly from sophisticated shareholders and/or with different motivations, is remote).There is no certainty that share-splitting and/or share acquisitions in small but numerous tranches shortly before a scheme vote cannot be used as an effective device to topple a scheme of arrangement.  Conclusion So, have buyers been put off by the UK and European markets as a result of these developments? The numbers of UK public bids in H1 2017 was up by 30% compared to H1 2016[8]. The UK is still very much "open for business" and indeed is pushing for inward investment and earnestly looking to friends further afield than Europe. According to data published by Thomson Reuters, the first six months of 2017 saw a 33% increase in European M&A, making Europe the second biggest destination globally, just behind the US but leaping past Asia-Pacific for the first time in three years. European deal-making volumes were in excess of $440bn – a surprise for many given the expectation of a sharp slowdown following Britain’s vote to leave Europe and uncertainties (now largely abided) of other political upheavals in the Eurozone. Notwithstanding the protectionist noises and other deal twists, the prospects for European M&A in H2 2017 are looking strong.    [1]   https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/586626/building-our-industrial-strategy-green-paper.pdf    [2]   https://s3.eu-west-2.amazonaws.com/manifesto2017/Manifesto2017.pdf    [3]   NB: Under the proposed new rules, corporate boards would be given a one year grace period in which they could reject an unsolicited offer and be protected from attempts by shareholders to call meetings to change management or the board. The proposals were met with pushback by many global institutional shareholders and just two weeks ago, The Netherlands Economic Affairs Minister stated that the Ministry was looking again at the proposals    [4]   NB: Softbank’s undertakings related to double the number of UK employees, increase the number non-UK employees and to maintain a specific proportion of technical employees to non-technical employees    [5]   In 2016, over 60% of UK takeovers were effected by way of  a court-approved scheme of arrangement    [6]   In a contractual takeover offer, the bidder directly extends an offer to all target shareholders to acquire their shareholding in the target company which, if accepted (and the minimum acceptance conditions are reached), results in a binding contractual transaction for the sale of the shares    [7]   NB: By way of contrast, under a contractual takeover offer, whilst the minimum so-called acceptance condition is lower (i.e. 50% + 1 share), in order to obtain full or 100% control, a bidder will need to reach the much higher level of 90% acceptances in order to "squeeze-out" any remaining minorities and obtain full control.    [8]   NB: 26 firms offers were announced during H1 2017 compared to 20 firm offers in H1 2016   If you require further information or guidance on these developments, please contact the author of this note, Selina Sagayam (ssagayam@gibsondunn.com), the Gibson Dunn lawyer with whom you normally work, or the following partners in the firm’s London office.  We would be pleased to assist you.     Mergers and Acquisitions: Charlie Geffen (+44 (0)20 7071 4225, cgeffen@gibsondunn.com) Nigel Stacey (+44 (0)20 7071 4201, nstacey@gibsondunn.com) Jonathan Earle (+44 (0)20 7071 4211, earle@gibsondunn.com) Antitrust and Competition: Ali Nikpay (+44 (0)20 7071 4273, anikpay@gibsondunn.com) © 2017 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

May 31, 2017 |
The Gross-Split Production Sharing Contract: The End of an Era for Indonesia’s Upstream Oil and Gas Industry and Traditional PSC Model

On 13 January 2017, the Ministry of Energy and Mineral Resources of the Republic of Indonesia issued Regulation No. 18 of 2017, which introduces a new form of gross-split production sharing contract and abolishes the cost recovery system, which has been a feature of Indonesia’s production sharing contracts since their inception in 1966. In this alert, we analyse the context and background of the regulation, provide an overview of its key provisions and express our views on areas that will require further clarification. Government officials hope the regulation will reinvigorate the oil and gas sector in Indonesia by drastically reducing the time for development plans to be implemented by allowing Contractors much greater control over their procurement activities. We examine this contention and review the effect of the regulation on the economics of Contractors and consider what is necessary to ensure that the Government’s objectives are met. To access a copy of our article, please click here:    Gibson, Dunn & Crutcher’s lawyers are available to assist in addressing any questions you may have regarding these issues. For further details, please contact the Gibson Dunn lawyer with whom you usually work or the authors in the firm’s Singapore office: Brad Roach +65 6507 3685 broach@gibsondunn.com Alistair Dunstan +65 6507 3635 adunstan@gibsondunn.com © 2017 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

May 8, 2017 |
UK Private Fund Limited Partnerships

On 6 April 2017, the Legislative Reform (Private Fund Limited partnerships) Order 2017 ("LRO") came into force. The LRO amends the Limited Partnerships Act 1907 ("LPA") and introduces a new form of limited partnership, the ‘private fund limited partnership’ ("PFLP") for use as a fund vehicle. UK limited partnerships are often used as investment vehicles across a range of asset classes, including private equity and real estate, due to their organisational flexibility, tax transparency and limited liability for investors. UK limited partnerships have not been as popular in recent years as certain, more flexible, forms of limited partnerships are available in other jurisdictions. The intention of the LRO is to enhance the competitiveness of UK limited partnerships compared to limited partnerships in other jurisdictions by reducing the administrative burdens and complexities of limited partnerships and codifying activities that may be taken by limited partners without jeopardising their limited liability status. Establishing a PFLP Designation as a PFLP is voluntary and open to existing and new limited partnerships. A limited partnership can elect to become a PFLP by making a filing with Companies House subject to the following conditions: (i) the PFLP is constituted by an agreement in writing; and (ii) the PFLP is a ‘collective investment scheme’ as defined in section 235 of the Financial Services and Markets Act 2000 (ignoring the exemptions from such classification for these purposes). While we would expect that most limited partnerships would be able to meet these two conditions, certain limited partnerships may fall outside of the definition of ‘collective investment scheme’ if the limited partners have significant involvement in the day-to-day operations. As was the case under the LPA prior to amendment, a PFLP must include ‘limited partnership’ or ‘LP’ after its name, but its status as a PFLP need not be disclosed in its name. It will not therefore be immediately obvious whether a partnership is a PFLP unless the Companies House filings are inspected. Once designated as a PFLP, the limited partnership will not be able to reverse the election. Both an existing limited partnership and a new limited partnership can be designated as a PFLP. It may be necessary for an existing limited partnership to amend its limited partnership agreements in order to become designated as a PFLP. To be designated as a PFLP, the general partner of a limited partnership must file either form LP7 with Companies House at the time of the initial registration of the limited partnership or form LP8 if designation as a PFLP is sought after the initial registration of the limited partnership. Key changes White list:  Limited partnerships have traditionally been a popular investment structure as they offer flexibility, tax transparency and, provided limited partners do not take part in management, limited liability to the limited partners. One problematic area under the previous law was uncertainty as to the scope of activities a limited partner could be involved in without being considered to have taken part in management of the limited partnership, with the consequent loss of limited liability status. While the fundamental position remains the same (if a limited partner engages in management it loses its limited liability), the LRO introduces a ‘white list’ of permitted activities that limited partners can undertake without the risk of being found to have taken part in management (the inclusion of this white list brings the LPA into line with equivalent limited partnership regimes in other jurisdictions, such as Jersey, Guernsey and Luxembourg). The full ‘white list’ can be found here and includes: taking part in a decision about the variation of the limited partnership agreement, the nature of the limited partnership or a disposal or dissolution of the limited partnership; consulting or advising the general partner or manager about the limited partnership’s affairs or accounts; providing surety or acting as guarantor for the limited partnership; taking part in decisions authorising the general partner to incur, extend, vary or discharge debt of the limited partnership; approving the accounts of the limited partnership or valuations of its assets; taking part in decisions regarding changes to persons in charge of the day-to-day management of the limited partnership; taking part in a decision regarding the disposal of the limited partnership, or the acquisition of another business by the limited partnership; acting, or authorising a person to act, as a director, member, employee, officer or agent of, or a shareholder or partner in, a general partner of, or a manager or adviser to, the limited partnership (provided that this does not extend to taking part in management of the partnership’s business); and appointing or nominating a representative to a committee, for example to an advisory committee. The ‘white list’ is a non-exhaustive list of activities and, therefore, it remains the case that if a limited partner undertakes an activity which is not on the list, a determination of whether a limited partner has taken part in the management of the company (and thus liable for all debts and obligations of the limited partnership as if it were a general partner) will continue to be subject to case law. Capital contributions:  Limited partners are generally required to make capital contributions to a limited partnership upon admission and, if such capital contributions are returned during the term of the limited partnership they are then liable for the debts and obligations of the limited partnership up to the amount returned. In the fund context, this restriction was typically addressed by allocating limited partners’ commitments into loan and capital contribution elements, allowing for earlier repayment of loan commitments without any adverse consequences to the limited partners. Limited partners in PFLPs are not required to contribute capital on admission to the limited partnership and may withdraw any capital contributions made to a PFLP without incurring liability for the amount withdrawn. However, the ability to withdraw capital contributions without liability does not apply (i) to capital contributions made before 6 April 2017, or (ii) where a capital contribution was made before the limited partnership became a PFLP. Winding up:  The LRO removes the requirement for the limited partners of a PFLP to obtain a court order to wind up the limited partnership in circumstances where the general partner has been removed. In such circumstances, the limited partners can instead appoint a third party to wind up the limited partnership. The LRO provides limited partners with further comfort in the ‘white list’ of activities that the appointment of a third party to wind up the limited partnership will not constitute ‘taking part in the management’ of the limited partnership. Gazette notices:  The LRO removes certain administrative burdens on PFLPs, including the requirement for a Gazette notice to be published upon the assignment by a limited partner of its interest in a PLFP to give the assignment legal effect, for the purposes of the LPA. Fewer Companies House filings:  A PFLP will not be required to notify Companies House of changes to (i) the nature of the limited partnership’s business, (ii) the character of the limited partnership or (iii) the amount of capital contributions made to the limited partnership. *          *          * These changes should make UK limited partnerships more attractive as investment vehicles by streamlining administration and bringing the law surrounding unlimited liability of limited partners into line with equivalent limited partnership regimes in, for example, Jersey, Guernsey, the Cayman Islands and Luxembourg, which have in recent years introduced reforms to make structuring and operating private funds more efficient. We expect that a significant number of fund sponsors that use UK limited partnerships will choose to register new limited partnerships as PFLPs and fund sponsors that have looked elsewhere for the formation of limited partnerships may now consider UK limited partnerships as a viable alternative. Gibson Dunn’s lawyers are available to assist with any questions you may have regarding these issues. For further information, please contact the Gibson Dunn lawyer with whom you usually work or the authors: Wayne McArdle – Partner, London (+44 (0)20 7071 4237, WMcArdle@gibsondunn.com) Chézard F. Ameer – Partner, Dubai (+971 (0)4 318 4614, CAmeer@gibsondunn.com) Josh Tod – Of Counsel, London (+44 (0)20 7071 4157, JTod@gibsondunn.com) Edward A. Tran – Of Counsel, London (+44 (0)20 7071 4228, ETran@gibsondunn.com) © 2017 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.