322 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.

May 10, 2018 |
Webcast: FCPA M&A: Identifying and Mitigating Anti-Corruption Risk In Cross-Border Transactions

International M&A increasingly implicates the U.S. Foreign Corrupt Practices Act (FCPA) and other anti-bribery laws, which are proliferating in major economies around the world. Gibson Dunn panelists, including partners in the U.S., Europe and Asia, examine FCPA risks associated with cross-border transactions, discuss ways in which these issues arise, and offer strategies for mitigating anti-corruption risks and successfully completing the deal. View Slides [PDF] PANELISTS: Michael S. Diamant is a partner in Gibson Dunn’s Washington, D.C. office and a member of the firm’s White Collar Defense and Investigations Practice Group. He also serves on the firm’s Finance Committee. His practice focuses on white collar criminal defense, internal investigations, and corporate compliance. Mr. Diamant has broad white collar defense experience representing corporations and corporate executives facing criminal and regulatory charges. He has represented clients in an array of matters, including accounting and securities fraud, antitrust violations, and environmental crimes, before law enforcement and regulators, like the U.S. Department of Justice and the Securities and Exchange Commission. Mr. Diamant also has managed numerous internal investigations for publicly traded corporations and conducted fieldwork in nineteen different countries on five continents. Mr. Diamant also regularly advises major corporations on the structure and effectiveness of their compliance programs. Lisa A. Fontenot is a corporate partner in Gibson Dunn’s Palo Alto office and a member of the firm’s Mergers and Acquisitions Practice Group. She counsels clients across a variety of industries, including some of the world’s leading technology companies and innovative startups, with particular experience in the telecom, media and technology (TMT) sectors. Ms. Fontenot counsels clients as to M&A matters with over 20 years’ extensive experience representing both U.S. and foreign strategic buyers and sellers successfully completing cross-border acquisitions, joint ventures and investments. Ms. Fontenot also represents private equity/venture capital investors in connection with their investment in, and equity dispositions of, portfolio companies and related securities matters. Stephen I. Glover is a partner in Gibson Dunn’s Washington, D.C. office and Co-Chair of the firm’s Mergers and Acquisitions Practice Group. Mr. Glover has an extensive practice representing public and private companies in complex mergers and acquisitions, joint ventures, equity and debt offerings and corporate governance matters. Mr. Glover’s clients include large public corporations, emerging growth companies and middle market companies in a wide range of industries. He also advises private equity firms, individual investors and others. Benno Schwarz is a German-qualified partner in Gibson Dunn’s Munich office and a member of the firm’s International Corporate Transactions and White Collar Defense and Investigations Practice Groups. Mr. Schwarz has many years of experience in the area of corporate anti-bribery compliance, especially issues surrounding the enforcement of the US FCPA and the UK Bribery Act as well as Russian law. Fang Xue is Chief Representative of Gibson Dunn’s Beijing office and a member of the firm’s Corporate Department and its Mergers and Acquisitions and Private Equity Practice Groups. Ms. Xue has broad-based corporate and commercial experience. She has represented Chinese and international corporations and private equity funds in cross-border acquisitions, private equity transactions, stock and asset transactions, joint ventures, going private transactions, tender offers and venture capital transactions, including many landmark deals among those. MCLE CREDIT INFORMATION: This program has been approved for credit in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 1.0 credit hour, of which 1.0 credit hour may be applied toward the areas of professional practice requirement.  This course is approved for transitional/non-transitional credit. Attorneys seeking New York credit must obtain an Affirmation Form prior to watching the archived version of this webcast.  Please contact Jeanine McKeown (National Training Administrator), at 213-229-7140 or jmckeown@gibsondunn.com to request the MCLE form. Gibson, Dunn & Crutcher LLP certifies that this activity has been approved for MCLE credit by the State Bar of California in the amount of 1.0 hour. California attorneys may claim “self-study” credit for viewing the archived version of this webcast.  No certificate of attendance is required for California “self-study” credit.

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.

February 28, 2018 |
Webcast: Shareholder Engagement & Activism – Preparing for the 2018 Proxy Season

The subject of shareholder engagement and activism rightfully continues to be the focus of discussion in boardrooms and in-house legal departments across the country. With no public company “too big” to be the subject of an activist intervention, it is imperative for corporations to proactively manage the risk of a disruptive activist campaign. Our team of experienced corporate, governance and litigation attorneys will be joined by proxy solicitation and public relations experts from Innisfree and Joele Frank to discuss the steps that corporations should be taking to prepare for the 2018 proxy season. View Slides [PDF] PANELISTS: Eduardo Gallardo is a partner in Gibson Dunn’s New York office. His practice focuses on mergers and acquisitions and corporate governance matters. Mr. Gallardo has extensive experience representing public and private acquirers and targets in connection with mergers, acquisitions and takeovers, both negotiated and contested. He has also represented public and private companies in connection with proxy contests, leveraged buyouts, spinoffs, divestitures, restructurings, recapitalizations, joint ventures and other complex corporate transactions. Mr. Gallardo also advises corporations, their boards of directors and special board committees in connection with corporate governance and compliance matters, shareholder activism, takeover preparedness and other corporate matters. Brian Lutz is a partner in Gibson Dunn’s San Francisco and New York offices where he is Co-Chair of the Firm’s National Securities Litigation Practice Group. Mr. Lutz has experience in a wide range of complex commercial litigation, with an emphasis on corporate control contests, securities litigation, and shareholder actions alleging breaches of fiduciary duties. He represents public companies, private equity firms, investment banks and clients across a variety of industries, including bio-pharma, tech, finance, retail, health care, energy, accounting and insurance. Mr. Lutz has twice been named a Rising Star by Law360 in the Securities category—a distinction awarded annually to five attorneys nationwide under the age of 40. He also has been named a Leading Lawyer in M&A Defense by Legal 500. Mr. Lutz was named “Litigator of the Week” by AmLaw Litigation Daily (an American Lawyer publication) for his work in securing a rare preliminary injunction that prevented a hostile takeover attempt of the pharmaceutical company Depomed, Inc. Lori Zyskowski is a partner in Gibson Dunn’s New York office where she is a member of the Firm’s Securities Regulation and Corporate Governance Practice Group. Ms. Zyskowski advises public companies and their boards of directors on a wide range of corporate law matters, including corporate governance, compliance with U.S. federal securities laws and the requirements of the major U.S. stock exchanges, and shareholder engagement and activism matters. She formerly served as Executive Counsel, Corporate, Securities & Finance at the General Electric Company, where she advised GE’s board of directors and senior management on corporate governance and securities law issues. Matthew Sherman is President, a Partner and a founding member of JOELE FRANK, a leading strategic financial communications and investor relations firm.  Mr. Sherman has more than 22 years of experience providing strategic corporate, financial and crisis communications counsel to Boards of Directors and executive leadership of public corporations and private equity firms involved in M&A, hostile takeovers, proxy contests, shareholder activism defense, spin-offs, reorganizations, financial restructurings, management changes, litigation, regulatory actions and a wide range of corporate crises. Scott Winter is a Managing Director of Innisfree M&A Incorporated. Mr. Winter advises companies and investors on all aspects of shareholder engagement focusing on hostile and friendly acquisitions, shareholder activism, contested shareholder meetings, corporate governance, and other proxy solicitation matters. Mr. Winter has been involved in most of the significant U.S. hostile takeovers in the past decade as well as activism situations involving, among others, Barington, Corvex, Elliott Management, Engaged Capital, Icahn Associates, Land & Buildings, Lone Star Value, JANA Partners, Marcato, Pershing Square, SachemHead, Sandell, Starboard Value, Third Point, Trian, and ValueAct. MCLE CREDIT INFORMATION: This program has been approved for credit in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 1.0 credit hour, of which 1.00 credit hour may be applied toward the areas of professional practice requirement.  This course is approved for transitional/non-transitional credit. Attorneys seeking New York credit must obtain an Affirmation Form prior to watching the archived version of this webcast.  Please contact Jeanine McKeown (National Training Administrator), at 213-229-7140 or jmckeown@gibsondunn.com to request the MCLE form. Gibson, Dunn & Crutcher LLP certifies that this activity has been approved for MCLE credit by the State Bar of California in the amount of 1.0 hour. California attorneys may claim “self-study” credit for viewing the archived version of this webcast.  No certificate of attendance is required for California “self-study” credit.  

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 1, 2018 |
Dell, DFC Global and the Changing Landscape of Appraisal Actions

New York partners Barbara Becker and Eduardo Gallardo and New York associate Daniel Alterbaum are the authors of “Dell, DFC Global and the Changing Landscape of Appraisal Actions,” [PDF] published by Financier Worldwide Magazine in February 2018.

February 2, 2018 |
India Business Law Journal Names Gibson Dunn Transaction Among its Deals of the Year

India Business Law Journal has named Tikona Digital Networks’s acquisition by Bharti Airtel, the largest mobile network operator in India, among its annual list of Deals of the Year 2017 in the mergers and acquisitions category.  New York partner Richard Birns advised Goldman Sachs, a stake holder of Tikona Digital Networks, in this acquisition by Bharti Airtel. The list was published on February 2, 2018.

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 10, 2018 |
Webcast: The Current (and Future) State of Oil and Gas M&A

Commodity prices tend to drive M&A and A&D activity in the energy sector, and one can argue that price stability is as important, if not more important, than whether prices are high or low. Obviously, it is a bit more complicated than that, as a number of factors come into play. While it is impossible to predict the future, particularly in regard to oil prices, we can discuss what we have been seeing, what we are seeing now, and what we expect to see in the future. Please join members of Gibson Dunn’s Mergers and Acquisitions and Oil and Gas Practice Groups for a 60 minute presentation to (1) discuss the current state of mergers and acquisitions at the corporate level (“M&A”) and acquisitions and divestitures at the asset level (“A&D”) in those segments of the energy sector comprised of upstream oil and gas, midstream oil and gas, and oilfield services; (2) identify trends in M&A and A&D in those segments; and (3) use their crystal balls to attempt to foresee what the future holds for M&A and A&D in those sectors. View Slides [PDF] PANELISTS: Michael P. Darden is Partner-in-Charge of the Houston office of Gibson, Dunn & Crutcher, chair of the firm’s Oil & Gas practice group, and a member of the firm’s Energy and Infrastructure and Mergers and Acquisitions practice groups. His practice focuses on international and U.S. oil and gas ventures, including LNG, deep-water and unconventional resource development projects, international and U.S. infrastructure projects, asset acquisitions and divestitures and energy-based financings, including project financings, reserve-based loans and production payments. Tull Florey is a partner in the Houston office of Gibson, Dunn & Crutcher and a member of the firm’s Mergers & Acquisitions, Capital Markets, Oil & Gas and Securities Regulation and Corporate Governance practice groups. He has an extensive corporate and securities law practice, emphasizing transactional and governance matters. His practice focuses on mergers and acquisitions and securities offerings for companies in the energy industry. He has particular experience with clients engaged in oilfield service, oil and gas exploration and production, oilfield equipment manufacturing, midstream and seismic. Justin T. Stolte is a corporate partner in the Houston office of Gibson, Dunn & Crutcher, and a member of the firm’s Mergers and Acquisitions, Energy and Infrastructure, and Oil and Gas practice groups. He represents exploration and production companies, midstream companies, private equity clients, and other financial institutions in complex transactions across the energy sector, with a particular focus on acquisitions, divestitures, and joint ventures involving upstream and midstream oil and gas assets. He also has significant experience representing management teams in line-of-equity investments from private equity sponsors. MODERATOR: Jeffrey A. Chapman is Co-Chair of Gibson Dunn’s Global Mergers and Acquisitions Practice Group. He maintains an active M&A practice representing private equity firms and public and private companies in diverse cross-border and domestic transactions in a broad range of industries. MCLE CREDIT INFORMATION: This program has been approved for credit in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 1.0 credit hour, of which 1.00 credit hour may be applied toward the areas of professional practice requirement.  This course is approved for transitional/non-transitional credit. Attorneys seeking New York credit must obtain an Affirmation Form prior to watching the archived version of this webcast.  Please contact Jeanine McKeown (National Training Administrator), at 213-229-7140 or jmckeown@gibsondunn.com to request the MCLE form. Gibson, Dunn & Crutcher LLP certifies that this activity has been approved for MCLE credit by the State Bar of California in the amount of 1.0 hour. California attorneys may claim “self-study” credit for viewing the archived version of this webcast.  No certificate of attendance is required for California “self-study” credit.

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.

January 7, 2018 |
2017 Year-End German Law Update

Click for PDF “May you live in interesting times” goes the old Chinese proverb, which is not meant for a friend but for an enemy. Whoever expressed such wish, interesting times have certainly come to pass for the German economy. Germany is an economic giant focused on the export of its sophisticated manufactured goods to the world’s leading markets, but it is also, in some ways, a military dwarf in a third-tier role in the re-sketching of the new world order. Germany’s globally admired engineering know-how and reputation has been severely damaged by the Volkswagen scandal and is structurally challenged by disruptive technologies and regulatory changes that may be calling for the end of the era of internal combustion engines. The top item on Germany’s foreign policy agenda, the further integration of the EU-member states into a powerful economic and political union, has for some years now given rise to daily crisis management, first caused by the financial crisis and, since last year, by the uncertainties of BREXIT. As if this was not enough, internal politics is still handling the social integration of more than a million refugees that entered the country in 2015, who rightly expect fair and just treatment, education, medical care and a future. It has been best practice to address such manifold issues with a strong and hands-on government, but – unfortunately – this is also currently missing. While the acting government is doing its best to handle the day-to-day tasks, one should not expect any bold move or strategic initiative before a stable, yet to be negotiated parliamentary coalition majority has installed new leadership, likely again under Angela Merkel. All that will drag well into 2018 and will not make life any easier. In stark contrast to the difficult situation the EU is facing in light of BREXIT, the single most impacting piece of regulation that will come into effect in May 2018 will be a European Regulation, the General Data Protection Regulation, which will harmonize data protection law across the EU and start a new era of data protection. Because of its broad scope and its extensive extraterritorial reach, combined with onerous penalties for non-compliance, it will open a new chapter in the way companies world-wide have to treat and process personal data. In all other areas of the law, we observe the continuation of a drive towards ever more transparency, whether through the introduction of new transparency registers disclosing relevant ultimate beneficial owner information or misconduct, through obligatory disclosure regimes (in the field of tax law), or through the automatic exchange under the OECD’s Common Reporting Standard of Information that hitherto fell under the protection of bank secrecy laws. While all these initiatives are well intentioned, they present formidable challenges for companies to comply with the increased complexity and adequately respond to the increased availability and flow of sensitive information. Even more powerful than the regulatory push is the combination of cyber-attacks, investigative journalism, and social media: within a heartbeat, companies or individuals may find themselves exposed on a global scale to severe allegations or fundamental challenges to the way they did or do business. While this trend is not of a legal nature, but a consequence of how we now communicate and whom we trust (or distrust), for those affected it may have immediate legal implications that are often highly complex and difficult to control and deal with. Interesting times usually are good times for lawyers that are determined to solve problems and tackle issues. This is what we love doing and what Gibson Dunn has done best time and again in the last 125 years. We therefore remain optimistic, even in view of the rough waters ahead which we and our clients will have to navigate. We want to thank you for your trust in our services in Germany and your business that we enjoy here and world-wide. We do hope that you will gain valuable insights from our Year-End Alert of legal developments in Germany that will help you to successfully focus and resource your projects and investments in Germany in 2018 and beyond; and we promise to be at your side if you need a partner to help you with sound and hands-on legal advice for your business in and with Germany or to help manage challenging or forward looking issues in the upcoming exciting times. ________________________________ Table of Contents 1.  Corporate, M&A 2.  Tax 3.  Financing and Restructuring 4.  Labor and Employment 5.  Real Estate 6.  Data Protection 7.  Compliance 8.  Antitrust and Merger Control ________________________________ 1. Corporate, M&A 1.1       Corporate, M&A – Transparency Register – New Transparency Obligations on Beneficial Ownership As part of the implementation of the 4th European Money Laundering Directive into German law, Germany has created a new central electronic register for information about the beneficial owners of legal persons organized under German private law as well as registered partnerships incorporated within Germany. Under the restated German Money Laundering Act (Geldwäschegesetz – GWG) which took effect on June 26, 2017, legal persons of German private law (e.g. capital corporations like stock corporations (AG) or limited liability companies (GmbH), registered associations (eingetragener Verein – e.V.), incorporated foundations (rechtsfähige Stiftungen)) and all registered partnerships (e.g. offene Handelsgesellschaft (OHG), Kommanditgesellschaft (KG) and GmbH & Co. KG) are now obliged to “obtain, keep on record and keep up to date” certain information about their “beneficial owners” (namely: first and last name, date of birth, place of residence and details of the beneficial interest) and to file the respective information with the transparency register without undue delay (section 20 (1) GWG). A “beneficial owner“ in this sense is a natural person who directly or indirectly holds or controls more than 25% of the capital or voting rights, or exercises control in a similar way (section 3 (2) GWG). Special rules apply for registered associations, trusts, non-charitable unregulated associations and similar legal arrangements. “Obtaining” the information does not require the entities to carry out extensive investigations, potentially through multi-national and multi-level chains of companies. It suffices to diligently review the information on record and to have in place appropriate internal structures to enable it to make a required filing without undue delay. The duty to keep the information up to date generally requires that the company checks at least on an annual basis whether there have been any changes in their beneficial owners and files an update, if necessary. A filing to the transparency register, however, is not required if the relevant information on the beneficial owner(s) is already contained in certain electronic registers (e.g. the commercial register or the so-called “Unternehmensregister“). This exemption only applies if all relevant data about the beneficial owners is included in the respective documents and the respective registers are still up to date. This essentially requires the obliged entities to diligently review the information available in the respective electronic registers. Furthermore, as a matter of principle, companies listed on a regulated market in the European Union (“EU“) or the European Economic Area (“EEA“) (excluding listings on unregulated markets such as e.g. the Entry Standard of the Frankfurt Stock Exchange) or on a stock exchange with equivalent transparency obligations with respect to voting rights are never required to make any filings to the transparency register. In order to enable the relevant entity to comply with its obligations, shareholders who qualify as beneficial owners or who are directly controlled by a beneficial owner, irrespective of their place of residence, must provide the relevant entity with the relevant information. If a direct shareholder is only indirectly controlled by a beneficial owner, the beneficial owner himself (and not the direct shareholder) must inform the company and provide it with the necessary information (section 20 (3) sentence 4 GWG). Non-compliance with these filing and information obligations may result in administrative fines of up to EUR 100,000. Serious, repeated or systematic breaches may even trigger sanctions up to the higher fine threshold of EUR 1 million or twice the economic benefit of the breach. The information submitted to the transparency register is not generally freely accessible. There are staggered access rights with only certain public authorities, including the Financial Intelligence Unit, law enforcement and tax authorities, having full access rights. Persons subject to know-your-customer (“KYC“) obligations under the Money Laundering Act such as e.g. financial institutions are only given access to the extent the information is required for them to fulfil their own KYC obligations. Other persons or the general public may only gain access if they can demonstrate a legitimate interest in such information. Going forward, every entity subject to the Money Laundering Act should verify whether it is beneficially owned within the aforementioned sense, and, if so, make the respective filing to the transparency register unless the relevant information is already contained in a public electronic register. Furthermore, relevant entities should check (at least) annually whether the information on their beneficial owner(s) as filed with the transparency or other public register is still correct. Also, appropriate internal procedures need to be set up to ensure that any relevant information is received by a person in charge of making filings to the registers. Back to Top 1.2       Corporate, M&A – New CSR Disclosure Obligations for German Public Interest Companies  Effective for fiscal years commencing on or after January 1, 2017, large companies with more than 500 employees are required to include certain non-financial information regarding their management of social and environmental challenges in their annual reporting (“CSR Information“). The new corporate social responsibility reporting rules (“CSR Reporting Rules“) implement the European CSR Directive into German law and are intended to help investors, consumers, policy makers and other stakeholders to evaluate the non-financial performance of large companies and encourage companies to develop a responsible and sustainable approach to business. The CSR Reporting Rules apply to companies with a balance sheet sum in excess of EUR 20 million and an annual turnover in excess of EUR 40 million, whose securities (stock or bonds etc.) are listed on a regulated market in the EU or the EEA as well as large banks and large insurance companies. It is estimated that approximately 550 companies in Germany are covered. Exemptions apply to consolidated subsidiaries if the parent company publishes the CSR Information in the group reporting. The CSR Reporting Rules require the relevant companies to inform on the policies they implemented, the results of such policies and the business risks in relation to (i) environmental protection, (ii) treatment of employees, (iii) social responsibility, (iv) respect for human rights and (v) anti-corruption and bribery. In addition, listed stock corporations are also obliged to inform with regard to diversity on their company boards. If a company has not implemented any such policy, an explicit and justified disclosure is required (“comply or explain”). Companies must further include significant non-financial performance indicators and must also include information on the amounts reported in this respect in their financial statements. The CSR Information can either be included in the annual report or by way of a separate CSR report, to be published on the company’s website or together with its regular annual report with the German Federal Gazette (Bundesanzeiger). The CSR Reporting Rules will certainly increase the administrative burden placed on companies when preparing their annual reporting documentation. It remains to be seen if the new rules will actually meet the expectations of the European legislator and foster and create a more sustainable approach of large companies to doing business in the future . Back to Top 1.3       Corporate, M&A – Corporate Governance Code Refines Standards for Compliance, Transparency and Supervisory Board Composition Since its first publication in 2002, the German Corporate Governance Code (Deutscher Corporate Governance Kodex – DCGK) which contains standards for good and responsible governance for German listed companies, has been revised nearly annually. Even though the DCGK contains only soft law (“comply or explain”) framed in the form of recommendations and suggestions, its regular updates can serve as barometer for trends in the public discussion and sometimes are also a forerunner for more binding legislative measures in the near future. The main changes in the most recent revision of the DCGK in February 2017 deal with aspects of compliance, transparency and supervisory board composition. Compliance The general concept of “compliance” was introduced by the DCGK in 2007. In this respect, the recent revision of the DCGK brought along two noteworthy new aspects. On the one hand, the DCGK now stresses in its preamble that good governance and management does not only require compliance with the law and internal policies but also ethically sound and responsive behavior (the “reputable businessperson concept”). On the other hand, the DCGK now recommends the introduction of a compliance management system (“CMS“). In keeping with the common principle of individually tailored compliance management systems that take into account the company’s specific risk situation, the DCGK now recommends appropriate measures reflecting the company’s risk situation and disclosing the main features of the CMS publically, thus enabling investors to make an informed decision on whether the CMS meets their expectations. It is further expressly recommended to provide employees with the opportunity to blow the whistle and also suggested to open up such whistle-blowing programs to third parties. Supervisory Board In line with the ongoing international trend of focusing on supervisory board composition, the DCGK now also recommends that the supervisory board not only should determine concrete objectives for its composition, but also develop a tailored skills and expertise profile for the entire board and to disclose in the corporate governance report to which extent such benchmarks and targets have been implemented in practice. In addition, the significance of having sufficient independent members on the supervisory board is emphasized by a new recommendation pursuant to which the supervisory board should disclose the appropriate number of independent supervisory board members as well as the members which meet the “independence” criteria in the corporate governance report. In accordance with international best practice, it is now also recommended to provide CVs for candidates for the supervisory board including inter alia relevant knowledge, skills and experience and to publish this information on the company’s website. With regard to supervisory board transparency, the DCGK now also recommends that the chairman of the supervisory board should be prepared, within an appropriate framework, to discuss topics relevant to the supervisory board with investors (please see in this regard our 2016-Year-End Alert, section 1.2). These new 2017 recommendations further highlight the significance of compliance and the role of the supervisory board not only for legislators but also for investors and other stakeholders. As soon as the annual declarations of non-conformity (“comply or explain”) are published over the coming weeks and months, it will be possible to assess how well these new recommendations will be received as well as what responses there will be to the planned additional supervisory board transparency (including, in particular, by family-controlled companies with employee co-determination on the supervisory board). Back to Top 1.4       Corporate, M&A – Employee Co-Determination: No European Extension As set out in greater detail in past alerts (please see in this regard our 2016 Year-End Alert, section 1.3 with further references), the scope and geographic reach of the German co-determination rules (as set out in the German Co-Determination Act; Mitbestimmungsgesetz – MitbestG and in the One-Third-Participation Act; Drittelbeteiligungsgesetz – DrittelbG) were the subject of several ongoing court cases. This discussion has been put to rest in 2017 by a decision of the European Court of Justice (ECJ, C-566/15 – July 18, 2017) that held that German co-determination rules and their restriction to German-based employees as the numeric basis for the relevant employee thresholds and as populace entitled to vote for such co-determined supervisory boards do not infringe against EU law principles of anti-discrimination and freedom of movement. The judgment has been received positively by both German trade unions and corporate players because it preserves the existing German co-determination regime and its traditional, local values against what many commentators would have perceived to be an undue pan-Europeanization of the thresholds and the right to vote for such bodies. In particular, the judgment averts the risk that many supervisory boards would have had to be re-elected based on a pan-European rather than solely German employee base. Back to Top 1.5       Corporate, M&A – Germany Tightens Rules on Foreign Takeovers On July 18, 2017, the amended provisions on foreign direct investments under the Foreign Trade and Payments Ordinance (Außenwirtschaftsverordnung – AWV), expanding and specifying the right of the Federal Ministry for Economic Affairs and Energy (“Ministry“) to review whether the takeover of domestic companies by investors outside the EU or the European Free Trade Area poses a danger to the public order or security of the Federal Republic of Germany came into force. The amendment has the following five main effects which will have a considerable impact on the M&A practice: (i) (non-exclusive) standard categories of companies and industries which are relevant to the public order or security for cross-sector review are introduced, (ii) the stricter sector-specific rules for industries of essential security interest (such as defense and IT-security) are expanded and specified, (iii) there is a reporting requirement for all takeovers within the relevant categories, (iv) the time periods for the review process are extended, and (v) there are stricter and more specific restrictions to prevent possible circumventions. Under the new rules, a special review by the German government is possible in cases of foreign takeovers of domestic companies which operate particularly in the following sectors: (i) critical infrastructure amenities, such as the energy, IT and telecommunications, transport, health, water, food and finance/insurance sectors (to the extent they are very important for the functioning of the community), (ii) sector-specific software for the operation of these critical infrastructure amenities, (iii) telecom carriers and surveillance technology and equipment, (iv) cloud computing services and (v) telematics services and components. The stricter sector-specific rules for foreign takeovers within the defense and IT-security industry are also expanded and now also apply to the manufacturers of defense equipment for reconnaissance and support. Furthermore, the reporting requirement no longer applies only to transactions within the defense and IT-security sectors, but also to all foreign takeovers that fall within the newly introduced cross-sector standard categories described above. The time periods allowed for the Ministry to intervene have been extended throughout. In particular, if an application for a clearance certificate is filed, the clearance certificate will be deemed granted in the absence of a formal review two months following receipt of the application rather than one month as in the past, and the review periods are suspended if the Ministry conducts negotiations with the parties involved. Further, a review may be commenced until five years after the signing of the purchase agreement, which in practice will likely result in an increase of applications for a clearance certificate in order to obtain more transaction certainty. Finally, the new rules provide for stricter and more specific restrictions of possible circumventions by, for example, the use of so-called “front companies” domiciled in the EU or the European Free Trade Area and will trigger the Ministry’s right to review if there are indications that an improper structuring or evasive transaction was at least partly chosen to circumvent the review by the Ministry. Although the scope of the German government’s ability to intervene in M&A processes has been expanded where critical industries are concerned, it is not clear yet to what extent stronger interference or more prohibitions or restrictions will actually occur in practice. And even though the new law provides further guidance, there are still areas of legal uncertainty which can have an impact on valuations and third party financing unless a clearance certificate is obtained. Due to the suspension of the review period in the case of negotiations with the Ministry, the review procedure has, at least in theory, no firm time limit. As a result, the M&A advisory practice has to be prepared for a more time-consuming and onerous process for transactions in the critical industries and may thus be forced to allow for more time between signing and closing. In addition, appropriate termination clauses (and possibly break fees) must be considered for purposes of the share purchase agreement in case a prohibition or restriction of the transaction on the basis of the amended AWV cannot be excluded. Back to Top 2. Tax 2.1       Tax – Unconstitutionality of German Change-of-Control Rules Tax loss carry forwards are an important asset in every M&A transaction. Over the past ten years the German change-of-control rules, which limit the use of losses and loss carry forwards (“Losses“) of a German target company, have undergone fundamental legislative changes. The current change-of-control rules may now face another significant revision as – according to the German Federal Constitutional Court (Bundesverfassungsgericht – BVerfG) and the Lower Tax Court of Hamburg – the current tax regime of the change-of-control rules violates the constitution. Under the current change-of-control rules, Losses of a German corporation will be forfeited on a pro rata basis if within a period of five years more than 25% but not more than 50% of the shares in the German loss-making corporation are transferred (directly or indirectly) to a new shareholder or group of shareholders with aligned interests. If more than 50% are transferred, Losses will be forfeited in total. There are exceptions to this rule for certain intragroup restructurings, built-in gains and – since 2016 – for business continuations, especially in the venture capital industry. On March 29, 2017, the German Federal Constitutional Court ruled that the pro rata forfeiture of Losses (share transfer of more than 25% but not more than 50%) is not in line with the constitution. The BVerfG held that the provision leads to unequal treatment of companies. The aim of avoiding legal but undesired tax optimizations does not justify the broad and general scope of the provision. The BVerfG has asked the German legislator to amend the change-of-control rules retroactively for the period from January 1, 2008 until December 31, 2015 and bring them in line with the constitution. The legislative changes need to be finalized by December 31, 2018. Furthermore, in another case on August 29, 2017, the Lower Tax Court of Hamburg held that the change-of-control rules, which result in a full forfeiture of Losses after a transfer of more than 50% of the shares in a German corporation, are also incompatible with the constitution. The ruling is based on the 2008 wording of the change-of-control rules but the wording of these rules is similar to that of the current forfeiture rules. In view of the March 2017 ruling of the Federal Constitutional Court on the pro-rata forfeiture, the Lower Tax Court referred this case also to the Federal Constitutional Court to rule on this issue as well. If the Federal Constitutional Court decides in favor of the taxpayer the German tax legislator may completely revise the current tax loss limitation regime and limit its scope to, for example, abusive cases. A decision by the Federal Constitutional Court is expected in the course of 2018. Affected market participants are therefore well advised to closely monitor further developments and consider the impact of potential changes on past and future M&A deals with German entities. Appeals against tax assessments should be filed and stays of proceedings applied for by reference to the case before the Federal Constitutional Court in order to benefit from a potential retroactive amendment of the change-of-control rules. Back to Top 2.2       Tax – New German Tax Disclosure Rules for Tax Planning Schemes In light of the Panama and Paradise leaks, the respective Finance Ministers of the German federal states (Bundesländer) created a working group in November 2017 to establish how the new EU Disclosure Rules for advisers and taxpayers as published by the European Commission (“Commission“) on July 25, 2017 can be implemented into German law. Within the member states of the EU, mandatory tax disclosure rules for tax planning schemes already exist in the UK, Ireland and Portugal. Under the new EU disclosure rules certain tax planners and advisers (intermediaries) or certain tax payers themselves must disclose potentially aggressive cross-border tax planning arrangements to the tax authorities in their jurisdiction. This new requirement is a result of the disclosure rules as proposed by the OECD in its Base Erosion and Profit Shifting (BEPS) Action 12 report, among others. The proposal requires tax authorities in the EU to automatically exchange reported information with other tax authorities in the EU. Pursuant to the Commission’s proposal, an “intermediary” is the party responsible for designing, marketing, organizing or managing the implementation of a tax payer´s reportable cross border arrangement, while also providing that taxpayer with tax related services. If there is no intermediary, the proposal requires the taxpayer to report the arrangement directly. This is, for example, the case if the taxpayer designs and implements an arrangement in-house, if the intermediary in question does not have a presence within the EU or in case the intermediary cannot disclose the information because of legal professional privilege. The proposal does not define what “arrangement” or “aggressive” tax planning means but lists characteristics (so-called “hallmarks“) of cross-border tax planning schemes that would strongly indicate whether tax avoidance or abuse occurred. These hallmarks can either be generic or specific. Generic hallmarks include arrangements where the tax payer has complied with a confidentiality provision not to disclose how the arrangement could secure a tax advantage or where the intermediary is entitled to receive a fee with reference to the amount of the tax advantage derived from the arrangement. Specific hallmarks include arrangements that create hybrid mismatches or involve deductible cross border payments between related parties with a preferential tax regime in the recipient’s tax resident jurisdiction. The information to be exchanged includes the identities of the tax payer and the intermediary, details about the hallmarks, the date of the arrangement, the value of the transactions and the EU member states involved. The implementation of such mandatory disclosure rules on tax planning schemes are heavily discussed in Germany especially among the respective bar associations. Elements of the Commission’s proposal are regarded as a disproportionate burden for intermediaries and taxpayers in relation to the objective. Further clarity is needed to align the proposal with the general principle of legal certainty. Certain elements of the proposal may contravene EU law or even the German constitution. And the interaction with the duty of professional secrecy for lawyers and tax advisors is also still unclear. Major efforts are therefore needed for the German legislator to make such a disclosure regime workable both for taxpayers/intermediaries and the tax administrations. It remains to be seen how the Commission proposal will be implemented into German law in 2018 and how tax structuring will be affected. Back to Top 2.3       Tax – Voluntary Self-Disclosure to German Tax Authorities Becomes More Challenging German tax law allows voluntary self-disclosure to correct or supplement an incorrect or incomplete tax return. Valid self-disclosure precludes criminal liability for tax evasion. Such exemption from criminal prosecution, however, does not apply if the tax evasion has already been “detected” at the time of the self-disclosure and this is at least foreseeable for the tax payer. On May 5, 2017 the German Federal Supreme Court (Bundesgerichtshof – BGH) further specified the criteria for voluntary self-disclosure to secure an exemption from criminal prosecution (BGH, 1 StR 265/16 – May 9, 2017). The BGH ruled that exemption from criminal liability might not apply if a foreign authority had already discovered the non- or underreported tax amounts prior to such self-disclosure. Underlying the decision of the BGH was the case of a German employee of a German defense company, who had received payments from a Greek business partner, but declared neither the received payments nor the resulting income in his tax declaration. The payment was a reward for his contribution in selling weapons to the Greek government. The Greek authorities learned of the payment to the German employee early in 2004 in the course of an anti-bribery investigation and obtained account statements proving the payment through intermediary companies and foreign banks. On January 6, 2014, the German employee filed a voluntary self-disclosure to the German tax authorities declaring the previously omitted payments. The respective German tax authority found that this self-disclosure was not submitted in time to exempt the employee from criminal liability. The issue in this case was by whom and at what moment in time the tax evasion needed to be detected in order to render self-disclosure invalid. The BGH ruled that the voluntary self-disclosure by the German employee was futile due to the fact that the payment at issue had already been detected by the Greek authorities at the time of the self-disclosure. In this context, the BGH emphasized that it was not necessary for the competent tax authorities to have detected the tax evasion, but it was sufficient if any other authority was aware of the tax evasion. The BGH made clear that this included foreign authorities. Thus, a prior detection is relevant if on the basis of a preliminary assessment of the facts a conviction is ultimately likely to occur. This requirement is for example met if it can be expected that the foreign authority that detected the incorrect, incomplete or omitted fact will forward this information to the German tax authorities as in the case before the BGH. In particular, there was an international assistance procedure in place between German and Greek tax authorities and the way the payments were made by using intermediaries and foreign banks made it obvious to the Greek authorities that the relevant amounts had not been declared in Germany. Due to the media coverage of the case, this was also at least foreseeable for the German employee. This case is yet another cautionary tale for tax payers not to underestimate the effects of increased international cooperation of tax authorities. Back to Top 3. Financing and Restructuring 3.1       Financing and Restructuring – Upfront Banking Fees Held Void by German Federal Supreme Court On July 4, 2017, the German Federal Supreme Court (Bundesgerichtshof – BGH) handed down two important rulings on the permissibility of upfront banking fees in German law governed loan agreements. According to the BGH, boilerplate clauses imposing handling, processing or arrangement fees on borrowers are void if included in standard terms and conditions (Allgemeine Geschäftsbedingungen). With this case, the court extended its prior rulings on consumer loans to commercial loans. The BGH argued that clauses imposing a bank’s upfront fee on a borrower fundamentally contradict the German statutory law concept that the consideration for granting a loan is the payment of interest. If ancillary pricing arrangements (Preisnebenabreden) pass further costs and expenses on to the borrower, the borrower is unreasonably disadvantaged by the user (Verwender) of standard business terms, unless the additional consideration is agreed for specific services that go beyond the mere granting of the loan and the handling, processing or arrangement thereof. In the cases at hand, the borrowers were thus awarded repayment of the relevant fee. The implications of these rulings for the German loan market are far-reaching. The rulings affect all types of upfront fees for a lender’s services which are routinely passed on to borrowers even though they would otherwise be owed by the lender pursuant to statutory law, a regulatory regime or under a contract or which are conducted in the lender’s own interest. Consequently, this covers fees imposed on the borrower for the risk assessment (Bonitätsprüfung), the valuation of collateral, expenses for the collection of information on the assessment of a borrower’s financing requirements and the like. At this stage, it is not yet certain if, for example, agency fees or syndication fees could also be covered by the decision. There are, however, good arguments to reason that services rendered in connection with a syndication are not otherwise legally or contractually owed by a lender. Upfront fees paid in the past, i.e. in 2015 or later, can be reclaimed by borrowers. The BGH applied the general statutory three year limitation period and argued that the limitation period commenced at the end of 2011 after Higher District Courts (Oberlandesgerichte) had held upfront banking fees void in deviation from previous rulings. As of such time, borrowers should have been aware that a repayment claim of such fees was possible and could have filed a court action even though the enforcement of the repayment was not risk-free. Going forward, it can be expected that lenders will need to modify their approach as a result of the rulings: Choosing a foreign (i.e. non-German) law for a separate fee agreement could be an option for lenders, at least, if either the lender or the borrower is domiciled in the relevant jurisdiction or if there is a certain other connection to the jurisdiction of the chosen law. If the loan is granted by a German lender to a German borrower, the choice of foreign law would also be generally recognized, but under EU conflict of law provisions mandatory domestic law (such as the German law on standard terms) would likely still continue to apply. In response to the ruling, lenders are also currently considering alternative fee structures: Firstly, the relevant costs and expenses underlying such fees are being factored into the calculation of the interest and the borrower is then given the option to choose an upfront fee or a (higher) margin. This may, however, not always turn out to be practical, in particular given that a loan may be refinanced prior to generating the equivalent interest income. Secondly, a fee could be agreed in a separate fee letter which specifically sets out services which go beyond the typical services a bank renders in its own interest. It may, however be difficult to determine services which actually justify a fee. Finally, a lender might charge typical upfront fees following genuine individual negotiations. This requires that the lender not only shows that it was willing to negotiate the amount of the relevant fee, but also that it was generally willing to forego the typical upfront fee entirely. However, if the borrower rejects the upfront fee, the lender still needs to rely on alternative fee arrangements. Further elaboration by the courts and market practice should be closely monitored by lenders and borrowers alike. Back to Top 3.2       Financing and Restructuring – Lingering Uncertainty about Tax Relief for Restructuring Profits Ever since the German Federal Ministry of Finance issued an administrative order in 2003 (“Restructuring Order“) the restructuring of distressed companies has benefited from tax relief for income tax on “restructuring profits”. In Germany, restructuring profits arise as a consequence of debt to equity swaps or debt waivers with regard to the portion of such debt that is unsustainable. Debtors and creditors typically ensured the application of the Restructuring Order by way of a binding advance tax ruling by the tax authorities thus providing for legal certainty in distressed debt scenarios for the parties involved. However, in November 2016, the German Federal Tax Court (Bundesfinanzhof – BFH) put an end to such preferential treatment of restructuring profits. The BFH held the Restructuring Order to be void arguing that the Federal Ministry of Finance had lacked the authority to issue the Restructuring Order. It held that such a measure would need to be adopted by the German legislator instead. The Ministry of Finance and the German restructuring market reacted with concern. As an immediate response to the ruling the Ministry of Finance issued a further order on April 27, 2017 (“Continuation Order”) to the effect that the Restructuring Order continued to apply in all cases in which creditors finally and with binding effect waived claims on or before February 8, 2017 (the date on which the ruling of the Federal Tax Court was published). But the battle continued. In August 2017, the Federal Tax Court also set aside this order for lack of authority by the Federal Ministry of Finance. In the meantime, the German Bundestag and the Bundesrat have passed legislation on tax relief for restructuring profits, but the German tax relief legislation will only enter into force once the European Commission issues a certificate of non-objection confirming the new German statutory tax relief’s compliance with EU restrictions on state aid. This leaves uncertainty as to whether the new law will enter into force in its current wording and when. Also, the new legislation will only cover debt waivers/restructuring profits arising after February 8, 2017 but at this stage does not provide for the treatment of cases before such time. In the absence of the 2003 Restructuring Order and the 2017 Continuation Order, tax relief would only be possible on the basis of equitable relief in exceptional circumstances. It appears obvious that no reliable restructuring concept can be based on potential equitable relief. Thus, it is advisable to look out for alternative structuring options in the interim: Subordination of debt: while this may eliminate an insolvency filing requirement for illiquidity or over indebtedness, the debt continues to exist. This may make it difficult for the debtor to obtain financing in the future. In certain circumstances, a carve-out of the assets together with a sustainable portion of the debt into a new vehicle while leaving behind and subordinating the remainder of the unsustainable portion of the debt, could be a feasible option. As the debt subsists, a silent liquidation of the debtor may not be possible considering the lingering tax burden on restructuring profits. Also, any such carve-out measures by which the debtor is stripped of assets may be challenged in case of a later insolvency of the debtor. A debt hive up without recourse may be a possible option, but a shareholder or its affiliates are not always willing to assume the debt. Also, as tax authorities have not issued any guidelines on the tax treatment of debt hive ups, a binding advance tax ruling from the tax authorities should be obtained before the debt hive up is executed. Still, a debt hive up could be an option if the replacement debtor is domiciled in a jurisdiction which does not impose detrimental tax consequences on the waiver of unsustainable debt. Converting the debt into a hybrid instrument which constitutes debt for German tax purposes and equity from a German GAAP perspective is no longer feasible. Pursuant to a tax decree from May 2016, the tax authorities argue that the creation of a hybrid instrument amounts to a taxable waiver of debt on the basis that tax accounting follows commercial accounting. It follows that irrespective of potential alternative structures which may suit a specific set of facts and circumstances, restructuring transactions in Germany continue to be challenging pending the entry into force of the new tax relief legislation. Back to Top 4. Labor and Employment 4.1       Labor and Employment – Defined Contribution Schemes Now Allowed In an effort to promote company pension schemes and to allow more flexible investments, the German Company Pension Act (Betriebsrentengesetz – BetrAVG) was amended considerably with effect as of January 1, 2018. The most salient novelty is the introduction of a purely defined contribution pension scheme, which had not been permitted in the past. Until now, the employer would always be ultimately liable for any kind of company pension scheme irrespective of the vehicle it was administered through. This is no longer the case with the newly introduced defined contribution scheme. The defined contribution scheme also entails considerable other easements for employers, e.g. pension adjustment obligations or the requirement of insolvency insurance no longer apply. As a consequence, a company offering a defined contribution pension scheme does not have to deal with the intricacies of providing a suitable investment to fulfil its pension promise, but will have met its duty in relation to the pension simply by paying the promised contribution (“pay and forget”). However, the introduction of such defined contribution schemes requires a legal basis either in a collective bargaining agreement (with a trade union) or in a works council agreement, if the union agreement so allows. If these requirements are met though, the new legal situation brings relief not only for employers offering company pension schemes but also for potential investors into German businesses for whom the German-specific defined benefit schemes have always been a great burden. Back to Top 4.2     Labor and Employment – Federal Labor Court Facilitates Compliance Investigations In a decision much acclaimed by the business community, the German Federal Labor Court (Bundesarbeitsgericht – BAG) held that intrusive investigative measures by companies against their employees do not necessarily require a suspicion of a criminal act by an employee; rather, less severe forms of misconduct can also trigger compliance investigations against employees (BAG, 2 AZR 597/16 – June 29, 2017). In the case at hand, an employee had taken sick leave, but during his sick leave proceeded to work for the company owned by his sons who happened to be competing against his current employer. After customers had dropped corresponding hints, the company assigned a detective to ascertain the employee’s violation of his contractual duties and subsequently fired the employee based on the detective’s findings. In the dismissal protection trial, the employee argued that German law only allowed such intrusive investigation measures if criminal acts were suspected. This restriction was, however, rejected by the BAG. This judgment ends a heated debate about the permissibility of internal investigation measures in the case of compliance violations. However, employers should always adhere to a last-resort principle when investigating possible violations. For instance, employees must not be seamlessly monitored at their workplace by way of a so-called “key logger” as the Federal Labor Court held in a different decision (BAG, 2 AZR 681/16 – July 27, 2017). Also, employers should keep in mind a recent ruling of the European Court of Human Rights of September 5, 2017 (ECHR, 61496/08). Accordingly, the workforce should be informed in advance that and how their email correspondence at the workplace can be monitored. Back to Top 5. Real Estate Real Estate – Invalidity of Written Form Remediation Clauses for Long-term Lease Agreements On September 27, 2017, the German Federal Supreme Court (Bundesgerichtshof – BGH) ruled that so-called “written form remediation clauses” (Schriftformheilungsklauseln) in lease agreements are invalid because they are incompatible with the mandatory provisions of section 550 of the German Civil Code (Bürgerliches Gesetzbuch – BGB; BGH, XII ZR 114/16 – September 27, 2017). The written form for lease agreements requires that all material agreements concerning the lease, in particular the lease term, identification of the leased premises and the rent amount, must be made in writing. If a lease agreement entered into for a period of more than one year does not comply with this written form requirement, mandatory German law allows either lease party to terminate the lease agreement with the statutory notice period irrespective of whether or not a fixed lease term was agreed upon. The statutory notice period for commercial lease agreements is six months (less three business days) to the end of any calendar quarter. To avoid the risk of termination for non-compliance with the written form requirement, German commercial lease agreements regularly contain a general written form remediation clause. Pursuant to such clause, the parties of the lease agreement undertake to remediate any defect in the written form upon request of one of the parties. While such general written form remediation clauses were upheld in several decisions by various Higher District Courts (Oberlandesgerichte) in the past, the BGH had already rejected the validity of such clauses vis-à-vis the purchasers of real property in 2014. With this new decision, the BGH has gone one step further and denied the validity of general written form remediation clauses altogether. Only in exceptional circumstances, the lease parties are not entitled to invoke the non-compliance with the written form requirement on account of a breach of the good faith principle. Such exceptional circumstances may exist, for example, if the other party faced insolvency if the lease were terminated early as a result of the non-compliance or if the lease parties had agreed in the lease agreement to remediate such specific written form defect. This new decision of the BGH forces the parties to long-term commercial lease agreements to put even greater emphasis on ensuring that their lease agreements comply with the written form requirement at all times because remediation clauses as potential second lines of defense no longer apply. Likewise, the due diligence process of German real estate transactions will have to focus even more on the compliance of lease agreements with the written form requirement. Back to Top 6.  Data Protection Data Protection – Employee Data Protection Under New EU Regulation After a two-year transition period, the EU General Data Protection Regulation (“GDPR“) will enter into force on May 25, 2018. The GDPR has several implications for data protection law covering German employees, which is already very strictly regulated. For example, under the GDPR any handling of personnel data by the employer requires a legal basis. In addition to statutory laws or collective agreements, another possible legal basis is the employee’s explicit written consent. The transfer of personnel data to a country outside of the European Union (“EU“) will have to comply with the requirements prescribed by the GDPR. If the target country has not been regarded as having an adequate data protection level by the EU Commission, additional safeguards will be required to protect the personnel data upon transfer outside of the EU. Otherwise, a data transfer is generally not permitted. The most threatening consequence of the GDPR is the introduction of a new sanctions regime. It now allows fines against companies of up to 4% of the entire group’s revenue worldwide. Consequently, these new features, especially the drastic new sanction regime, call for assessments of, and adequate changes to, existing compliance management systems with regard to data protection issues. Back to Top 7. Compliance 7.1       Compliance – Misalignment of International Sanction Regimes Requires Enhanced Attention to the EU Blocking Regulation and the German Anti-Boycott Provisions The Trump administration has been very active in broadening the scope and reach of the U.S. sanctions regime, most recently with the implementation of “Countering America’s Adversaries Through Sanctions Act (H.R. 3364) (‘CAATSA‘)” on August 2, 2017 and the guidance documents that followed. CAATSA includes significant new law codifying and expanding U.S. sanctions on Russia, North Korea, and Iran. The European Union (“EU“) has not followed suit. More so, the EU and European leaders openly stated their frustration about both a perceived lack of consultation during the process and the substance of the new U.S. sanctions. Specifically, the EU and European leaders are concerned about the fact that CAATSA authorizes secondary sanctions on any person supporting a range of activities. Among these are the development of Russian energy export pipeline projects, certain transactions with the Russian intelligence or defense sectors or investing in or otherwise facilitating privatizations of Russia’s state-owned assets that unjustly benefits Russian officials or their close associates or family members. The U.S. sanctions regime differentiates between primary sanctions that apply to U.S. persons (U.S. citizens, permanent U.S. residents and companies under U.S. jurisdiction) and U.S. origin goods, and secondary sanctions that expand the reach of U.S. sanctions by penalizing non-U.S. persons for their involvement in certain targeted activities. Secondary sanctions can take many forms but generally operate by restricting or threatening to restrict non-U.S. person access to the U.S. market, including its global financial institutions. European, especially export-heavy and internationally operating German companies are thus facing a dilemma. While they have to fear possible U.S. secondary sanctions for not complying with U.S. regulations, potential penalties also loom from European member state authorities when doing so. These problems are grounded in European and German legislation aimed at protecting from and counteracting financial and economic sanctions issued by countries outside of the EU and Germany, unless such sanctions are themselves authorized under relevant UN, European, and German sanctions legislation. On the European level, Council Regulation (EC) No 2271/96 of November, 22 1996 as amended (“EU Blocking Regulation“) is aimed at protecting European persons against the effects of the extra-territorial application of laws, such as certain U.S. sanctions directed at Cuba, Iran and Libya. Furthermore, it also aims to counteract the effects of the extra-territorial application of such sanctions by prohibiting European persons from complying with any requirement or prohibition, including requests of foreign courts, based on or resulting, directly or indirectly, from such U.S. sanctions. For companies subject to German jurisdiction, section 7 of the German Foreign Trade and Payments Ordinance (Außenwirtschaftsverordnung – AWV), states that “[t]he issuing of a declaration in foreign trade and payments transactions whereby a resident participates in a boycott against another country (boycott declaration) shall be prohibited” to the extent such a declaration would be contradictory to UN, EU and German policy. With the sanctions regime on the one hand and the blocking legislation at EU and German level on the other hand, committing to full compliance with U.S. sanctions whilst falling within German jurisdiction, could be deemed a violation of the AWV.  Violating the AWV can lead to fines by the German authorities and, under German civil law, might render a relevant contractual provision invalid. For companies conducting business transactions on a global scale, the developing non-alignment of U.S. and European / German sanctions requires special attention. Specifically, covenants with respect to compliance with U.S. or other non-EU sanctions should be reviewed and carefully drafted in light of the diverging developments of U.S. and other non-EU sanctions on the one hand and European / German sanctions on the other hand. Back to Top 7.2       Compliance – Restated (Anti-) Money Laundering Act – Significant New Requirements for the Non-Financial Sector and Good Traders On June 26, 2017, the restated German Money Laundering Act (Geldwäschegesetz – GWG), which transposes the 4th European Anti-Money Laundering Directive (Directive (EU 2015/849 of the European Parliament and of the Council) into German law, became effective. While the scope of businesses that are required to conduct anti-money laundering procedures remains generally unchanged, the GWG introduced a number of new requirements, in particular for non-financial businesses, and significantly increases the sanctions for non-compliance with these obligations. The GWG now extends anti money laundering (“AML“) risk management concepts previously known from the financial sector also to non-financial businesses including good traders. As a matter of principle, all obliged businesses are now required to undertake a written risk analysis for their business and have in place internal risk management procedures proportionate to the type and scope of the business and the risks involved in order to effectively mitigate and manage the risks of money laundering and terrorist financing. In case the obliged business is the parent company of a group, a group-wide risk analysis and group-wide risk management procedures are required covering subsidiaries worldwide who also engage in relevant businesses. The risk analysis must be reviewed regularly, updated if required and submitted to the supervisory authority upon request. Internal risk management procedures include, in particular, client due diligence (“know-your customer”), which requires the identification and verification of customers, persons acting on behalf of customers as well as of beneficial owners of the customer (see also section 1.1 above on the Transparency Register). In addition, staff must be monitored for their reliability and trained regularly on methods and types of money laundering and terrorist financing and the applicable legal obligations under the GWG as well as data protection law, and whistle-blowing systems must be implemented. Furthermore, businesses of the financial and insurance sector as well as providers of gambling services must appoint a money laundering officer (“MLO“) at senior management level as well as a deputy, who are responsible for ensuring compliance with AML rules. Other businesses may also be ordered by their supervisory authority to appoint a MLO and a deputy. Good traders including conventional industrial companies are subject to the AML requirements under the GWG, irrespective of the type of goods they are trading in. However, some of the requirements either do not apply or are significantly eased. Good traders must only conduct a risk analysis and have in place internal AML risk management procedures if they accept or make (!) cash payments of EUR 10,000 or more. Furthermore, client due diligence is only required with respect to transactions in which they make or accept cash payments of EUR 10,000 or more, or in case there is a suspicion of money laundering or terrorist financing. Suspicious transactions must be reported to the Financial Intelligence Unit (“FIU“) without undue delay. As a result, also low cash or cash free good traders are well advised to train their staff to enable them to detect suspicious transactions and to have in place appropriate documentation and reporting lines to make sure that suspicious transactions are filed with the FIU. Non-compliance with the GWG obligations can be punished with administrative fines of up to EUR 100,000. Serious, repeated or systematic breaches may even trigger sanctions up to the higher fine threshold of EUR 1 million or twice the economic benefit of the breach. For the financial sector, even higher fines of up to the higher of EUR 5 million or 10% of the total annual turnover are possible. Furthermore, offenders will be published with their names by relevant supervisory authorities (“naming and shaming”). Relevant non-financial businesses are thus well advised to review their existing AML compliance system in order to ensure that the new requirements are covered. For good traders prohibiting cash transactions of EUR 10,000 or more and implementing appropriate safeguards to ensure that the threshold is not circumvented by splitting a transaction into various smaller sums, is a first and vital step. Furthermore, holding companies businesses who mainly acquire and hold participations (e.g. certain private equity companies), must keep in mind that enterprises qualifying as “finance enterprise” within the meaning of section 1 (3) of the German Banking Act (Kreditwesengesetz – KWG) are subject to the GWG with no exemptions. Back to Top  7.3       Compliance – Protection of the Attorney Client Privilege in Germany Remains Unusual The constitutional complaint (Verfassungsbeschwerde) brought by Volkswagen AG’s external legal counsel requesting the return of work product prepared during the internal investigation for Volkswagen AG remains pending before the German Federal Constitutional Court (Bundesverfassungsgericht – BVerfG). The Munich public prosecutors had seized these documents in a dawn raid of the law firm’s offices. While the BVerfG has granted injunctive relief (BVerfG, 2 BvR 1287/17, 2 BvR 1583/17 – July 25, 2017) and ordered the authorities, pending a decision on the merits of the case, to refrain from reviewing the seized material, this case is a timely reminder that the concept of the attorney client privilege in Germany is very different to that in common law jurisdictions. In a nutshell: In-house lawyers do not enjoy legal privilege. Material that would otherwise be privileged can be seized on the client’s premises – with the exception of correspondence with and work product from / for criminal defense counsel. The German courts are divided on the question of whether corporate clients can already appoint criminal defense counsel as soon as they are concerned that they may be the target of a future criminal investigation, or only when they have been formally made the subject of such an investigation. Searches and seizures at a law firm, however, are a different matter. A couple of years ago, the German legislator changed the German Code of Criminal Procedure (Strafprozessordnung – StPO) to give attorneys in general, not only criminal defense counsel, more protection against investigative measures (section 160a StPO). Despite this legislation, the first and second instance judges involved in the matter decided in favor of the prosecutors. As noted above, the German Federal Constitutional Court has put an end to this, at least for now. According to the court, the complaints of the external legal counsel and its clients were not “obviously without any merits” and, therefore, needed to be considered in the proceedings on the merits of the case. In order not to moot these proceedings, the court ordered the prosecutors to desist from a review of the seized material, and put it under seal until a full decision on the merits is available. In the interim period, the interest of the external legal counsel and its clients to protect the privilege outweighed the public interest in a speedy criminal investigation. At this stage, it is unclear when and how the court will decide on the merits. Back to Top 7.4       Compliance – The European Public Prosecutor’s Office Will Be Established – Eventually After approximately four years of discussions, 20 out of the 28 EU member states agreed in June 2017 on the creation of a European Public Prosecutor’s Office (“EPPO“). In October, the relevant member states adopted the corresponding regulation (Regulation (EU) 2017/1939 – “Regulation“). The EPPO will be in charge of investigating, prosecuting and bringing to justice the perpetrators of offences against the EU’s financial interests. The EPPO is intended to be a decentralized authority, which operates via and on the basis of European Delegated Prosecutors located in each member state. The central office in Luxembourg will have a European Chief Prosecutor supported by 20 European Prosecutors, as well as technical and investigatory staff. While EU officials praise this Regulation as an “important step in European justice cooperation“, it remains to be seen whether this really is a measure which ensures that “criminals [who] act across borders […] are brought to justice and […] taxpayers’ money is recovered” (U. Reinsalu, Estonian Minister of Justice). It will take at least until 2020 until the EPPO is established, and criminals will certainly not restrict their activities to the territories of those 20 countries which will cooperate under the new authority (being: Austria, Belgium, Bulgaria, Croatia, Cyprus, Czech Republic, Estonia, Germany, Greece, Finland, France, Italy, Latvia, Lithuania, Luxembourg, Portugal, Romania, Slovenia, Slovakia and Spain). In addition, as the national sovereignty of the EU member states in judicial matters remains completely intact, the EPPO will not truly investigate “on the ground”, but mainly assume a coordinating role. Last but not least, its jurisdiction will be limited to “offences against the EU’s financial interests”, in particular criminal VAT evasion, subsidy fraud and corruption involving EU officials. A strong enforcement, at least prima facie, looks different. To end on a positive note, however: the new body is certainly an improvement on the status quo in which the local prosecutors from 28 member states often lack coordination and team spirit. Back to Top 7.5       Compliance – Court Allows for Reduced Fines in Compliance Defense Case The German Federal Supreme Court (Bundesgerichtshof – BGH) handed down a decision recognizing for the first time that a company’s implementation of a compliance management system (“CMS“) constitutes a mitigating factor for the assessment of fines imposed on such company where violations committed by its employees are imputed to the company (BGH 1 StR 265/16 – May 9, 2017). According to the BGH, not only the implementation of a compliance management system at the time of the detection of the offense should be considered, but the court may also take into account subsequent efforts of a company to enhance its respective internal processes that were found deficient. The BGH held that such remediation measures can be considered as a mitigating factor when assessing the amount of fines if they are deemed suitable to “substantially prevent an equivalent violation in the future.” The BGH’s ruling has finally clarified the highest German court’s views on a long-lasting discussion about whether establishing and maintaining a CMS may limit a company’s liability for legal infringements. The recognition of a company’s efforts to establish, maintain and improve an effective CMS should encourage companies to continue working on their compliance culture, processes and systems. Similarly, management’s efforts to establish, maintain and enhance a CMS, and conduct timely remediation measures, upon becoming aware of deficiencies in the CMS, may become relevant factors when assessing potential civil liability exposure of corporate executives pursuant to section. 43 German Limited Liability Companies Act (Gesetz betreffend Gesellschaften mit beschränkter Haftung – GmbHG) and section 93 (German Stock Companies Act (Aktiengesetz – AktG). Consequently, the implications of this landmark decision are important both for corporations and their senior executives. Back to Top 8.  Antitrust and Merger Control In 2017, the German Federal Cartel Office (Bundeskartellamt – BKartA) examined about 1,300 merger filings, imposed fines in the amount of approximately EUR 60 million on companies for cartel agreements and conducted several infringement proceedings. On June 9, 2017, the ninth amendment to the German Act against Restraints of Competition (Gesetz gegen Wettbewerbsbeschränkungen – GWB) came into force. The most important changes concern the implementation of the European Damages Directive (Directive 2014/104/EU of the European Parliament and of the Council of November, 26 2014), but a new merger control threshold was also introduced into law. Implementation of the European Damages Directive The amendment introduced various procedural facilitations for claimants in civil cartel damage proceedings. There is now a refutable presumption in favor of cartel victims that a cartel caused damage. However, the claimant still has the burden of proof regarding the often difficult to argue fact, if it was actually affected by the cartel and the amount of damages attributable to the infringement. The implemented passing-on defense allows indirect customer claimants to prove that they suffered damages from the cartel – even if not direct customers of the cartel members – because the intermediary was presumably able to pass on the cartel overcharge to his own customers (the claimants). The underlying refutable presumption that overcharges were passed on is not available in the relationship between the cartel member and its direct customer because the passing-on defense must not benefit the cartel members. In deviation from general principles of German civil procedural law, according to which each party has to produce the relevant evidence for the facts it relies on, the GWB amendment has significantly broadened the scope for requesting disclosure of documents. The right to request disclosure from the opposing party now to a certain degree resembles discovery proceedings in Anglo-American jurisdictions and has therefore also been referred to as “discovery light”. However, the documents still need to be identified as precisely as possible and the request must be reasonable, i.e., not place an undue burden on the opposing party. Documents can also be requested from third parties. Leniency applications and settlement documents are not captured by the disclosure provisions. Furthermore, certain exceptions to the principle of joint and several liability of cartelists for damage claims in relation to (i) internal regress against small and medium-sized enterprises, (ii) leniency applicants, and (iii) settlements between cartelists and claimants were implemented. In the latter case, non-settling cartelists may not recover contribution for the remaining claim from settling cartelists. Finally, the regular limitation period for antitrust damages claims has been extended from three to five years. Cartel Enforcement and Corporate Liability Parent companies can now also be held liable for their subsidiary’s anti-competitive conduct under the GWB even if they were not party to the infringement themselves. The crucial factor – comparable to existing European practice – is the exercise of decisive control. Furthermore, legal universal successors and economic successors of the infringer can also be held liable for cartel fines. This prevents companies from escaping cartel fines by restructuring their business. Publicity The Bundeskartellamt has further been assigned the duty to inform the public about decisions on cartel fines by publishing details about such decisions on its webpage. Taking into account recent efforts to establish a competition register for public procurement procedures, companies will face increased public attention for competition law infringements, which may result in infringers being barred from public or private contracting. Whistleblower Hotline Following the example of the Bundeskartellamt and other antitrust authorities, the European Commission (“Commission“) has implemented a whistleblowing mailbox. The IT-based system operated by an external service provider allows anonymous hints to or bilateral exchanges with the Commission – in particular to strengthen its cartel enforcement activities. The hope is that the whistleblower hotline will add to the Commission’s enforcement strengths and will balance out potentially decreasing leniency applications due to companies applying for leniency increasingly facing the risk of private cartel damage litigation once the cartel has been disclosed. Merger Control Thresholds To provide for control over transactions that do not meet the current thresholds but may nevertheless have significant impact on the domestic market (in particular in the digital economy), a “size of transaction test” was implemented; mergers with a purchase price or other consideration in excess of EUR 400 million now require approval by the Bundeskartellamt if at least two parties to the transaction achieve at least EUR 25 million and EUR 5 million in domestic turnover, respectively. Likewise, in Austria a similar threshold was established (EUR 200 million consideration plus a domestic turnover of at least EUR 15 million). The concept of ministerial approval (Ministererlaubnis), i.e., an extra-judicial instrument for the Minister of Economic Affairs to exceptionally approve mergers prohibited by the Bundeskartellamt, has been reformed by accelerating and substantiating the process. In May 2017, the Bundeskartellamt published guidance on remedies in merger control making the assessment of commitments more transparent. Remedies such as the acceptance of conditions (Bedingungen) and obligations (Auflagen) can facilitate clearance of a merger even if the merger actually fulfils the requirements for a prohibition. The English version of the guidance is available at: http://www.bundeskartellamt.de/SharedDocs/Publikation/EN/Leitlinien/Guidance%20on%20Remedies%20in%20Merger%20Control.html; jsessionid=5EA81D6D85D9FD8891765A5EA9C26E68.1_cid378?nn=3600108. Case Law Finally on January 26, 2017, there has been a noteworthy decision by the Higher District Court of Düsseldorf (OLG Düsseldorf, Az. V-4 Kart 4/15 OWI – January 26, 2017; not yet final): The court confirmed a decision of the Bundeskartellamt that had imposed fines on several sweets manufacturers for exchanging competitively sensitive information and even increased the fines. This case demonstrates the different approach taken by courts in calculating cartel fines based on the group turnover instead of revenues achieved in the German market. Back to Top     The following Gibson Dunn lawyers assisted in preparing this client update:  Birgit Friedl, Marcus Geiss, Jutta Otto, Silke Beiter, Peter Decker, Ferdinand Fromholzer, Daniel Gebauer, Kai Gesing, Franziska Gruber, Johanna Hauser, Maximilian Hoffmann, Markus Nauheim, Richard Roeder, Katharina Saulich, Martin Schmid, Sebastian Schoon, Benno Schwarz, Michael Walther, Finn Zeidler, Mark Zimmer and Caroline Ziser Smith. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding the issues discussed in this update. The two German offices of Gibson Dunn in Munich and Frankfurt bring together lawyers with extensive knowledge of corporate / M&A, financing, restructuring and bankruptcy, tax, labor, real estate, antitrust, intellectual property law and extensive compliance / white collar crime experience. The German offices are comprised of seasoned lawyers with a breadth of experience who have assisted clients in various industries and in jurisdictions around the world. Our German lawyers work closely with the firm’s practice groups in other jurisdictions to provide cutting-edge legal advice and guidance in the most complex transactions and legal matters. For further information, please contact the Gibson Dunn lawyer with whom you work or any of the following members of the German offices: General Corporate, Corporate Transactions and Capital Markets Lutz Englisch (+49 89 189 33 150), lenglisch@gibsondunn.com) Markus Nauheim (+49 89 189 33 122, mnauheim@gibsondunn.com) Ferdinand Fromholzer (+49 89 189 33 170, ffromholzer@gibsondunn.com) Dirk Oberbracht (+49 69 247 411 510, doberbracht@gibsondunn.com) Wilhelm Reinhardt (+49 69 247 411 520, wreinhardt@gibsondunn.com) Birgit Friedl (+49 89 189 33 180, bfriedl@gibsondunn.com) Silke Beiter (+49 89 189 33 170, sbeiter@gibsondunn.com) Marcus Geiss (+49 89 189 33 122, mgeiss@gibsondunn.com) Annekatrin Pelster (+49 69 247 411 521, apelster@gibsondunn.com) Finance, Restructuring and Insolvency Sebastian Schoon (+49 89 189 33 160, sschoon@gibsondunn.com) Birgit Friedl (+49 89 189 33 180, bfriedl@gibsondunn.com) Marcus Geiss (+49 89 189 33 122, mgeiss@gibsondunn.com) Tax Hans Martin Schmid (+49 89 189 33 110, mschmid@gibsondunn.com) Labor Law Mark Zimmer (+49 89 189 33 130, mzimmer@gibsondunn.com) Real Estate Peter Decker (+49 89 189 33 115, pdecker@gibsondunn.com) Daniel Gebauer (+ 49 89 189 33 115, dgebauer@gibsondunn.com) Technology Transactions / Intellectual Property / Data Privacy Michael Walther (+49 89 189 33 180, mwalther@gibsondunn.com) Kai Gesing (+49 89 189 33 180, kgesing@gibsondunn.com) Corporate Compliance / White Collar Matters Benno Schwarz (+49 89 189 33 110, bschwarz@gibsondunn.com) Michael Walther (+49 89 189 33 180, mwalther@gibsondunn.com) Mark Zimmer (+49 89 189 33 130, mzimmer@gibsondunn.com) Finn Zeidler (+49 69 247 411 530, fzeidler@gibsondunn.com) Antitrust and Merger Control Michael Walther (+49 89 189 33 180, mwalther@gibsondunn.com) Kai Gesing (+49 89 189 33 180, kgesing@gibsondunn.com) © 2018 Gibson, Dunn & Crutcher LLP, 333 South Grand Avenue, Los Angeles, CA 90071 Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

September 1, 2017 |
An Overview of DrillCo Transactions and Select Drafting Considerations

Houston partner Michael Darden and associate Matt Savage are the authors of “An Overview of DrillCo Transactions and Select Drafting Considerations,” [PDF] published by the Oil, Gas & Energy Resources Law Section of the State Bar of Texas in Volume 42, Number 1: Fall 2017 of the Oil, Gas Energy Law Section Report.

December 19, 2017 |
M&A Report – Delaware Chancery Court Decision Underscores the Risks to Buyers When Devising Earn-Outs

Click for PDF Buyers and sellers in M&A transactions sometimes structure a portion of the purchase price as an earn-out.  In an earn-out structure, the buyer pays part of the purchase price at the closing and the remainder if and when the target business achieves pre-defined milestones after the closing.  An earn-out is often a means to bridge a valuation gap in purchase price negotiations between the buyer and the seller when the seller is confident in the business’s future prospects, but the buyer is unwilling to pay full value for the business based on the seller’s projections.  A compromise can be for the buyer to agree to pay additional consideration for the business if and when the seller’s projections are achieved.  This additional consideration is the earn-out. Earn-outs force the parties to anticipate and account for future events while negotiating the acquisition agreement.  When devising an earn-out, the parties will need to agree on the milestones that trigger payment; how the earn-out is calculated upon achievement of those milestones; the process for resolving disputes over the calculation; and the mechanism for disbursing earn-out amounts. The parties also will need to agree on how much freedom the buyer will have to run the business during the earn-out period.  The seller will want the business run to maximize the earn-out payment and may push for post-closing operating covenants requiring the buyer to, among other things, provide the business with adequate capital and resources; pursue opportunities on behalf of the business; and refrain from taking actions designed to minimize earn-out payments, such as diverting opportunities from the acquired business to the buyer’s other businesses.  The buyer, on the other hand, will want to preserve maximum flexibility to operate the business in any way it sees fit. Earn-Outs and the Implied Covenant of Good Faith and Fair Dealing under Delaware Law Under Delaware law, the implied covenant of good faith and fair dealing attaches to every agreement by operation of law and prohibits a party from engaging in “arbitrary or unreasonable conduct” that prevents the other party from enjoying the benefits of the agreement.[1]  However, a court will not apply this implied covenant if (i) the terms of the agreement already expressly address the conduct at issue or (ii) it is clear that the parties considered the issue at the time of signing but declined to address such conduct in the agreement.[2] In recent years, Delaware courts have been reluctant to use the implied covenant to require a buyer to take, or refrain from taking, actions that might impact earn-out payments.  For example, a buyer does not have an implied obligation to maximize earn-out payments absent a specific covenant mandating such obligation.[3] A court might apply the implied covenant where a buyer affirmatively acts to minimize earn-out payments in ways that were wholly unanticipated at the time of signing.  However, if the parties considered including specific covenants addressing the buyer’s actions, but ultimately declined to do so, a court will not apply the implied covenant.[4] And even if a buyer affirmatively acts with the “knowledge” that its actions likely will reduce earn-out payments, a court still will not apply the implied covenant if the acquisition agreement only precludes the buyer from acting with the “intent” to reduce earn-out payments.[5] In light of this judicial landscape, well-counseled sellers typically push for specific and comprehensive operating covenants applicable to the earn-out period.  As a result, buyers tend to focus much of their energies on rebuffing sellers’ demands, in the hopes of diluting the operating covenants as much as possible. Sellers are commonly viewed as bearing a greater risk in an earn-out arrangement than buyers because the performance of the business – upon which the earn-out depends – is controlled by the buyer, a party that has an incentive not to make the earn-out payment.  A seller who objects to non-payment of an earn-out is left to argue that the buyer did not comply with post-closing operating covenants (assuming the seller successfully negotiated for the inclusion of such covenants) or advocating for the application of the implied covenant of good faith and fair dealing, an argument that is often unsuccessful. Nonetheless, in a recent Chancery Court decision, GreenStar IH Rep, LLC v. Tutor Perini Corp.,[6] a buyer was on the losing end of an earn-out dispute.  In this case, the court refused to apply the implied covenant of good faith and fair dealing to excuse the buyer from making earn-out payments that the buyer claimed were significantly over-calculated. Background The case arose from Tutor Perini’s 2011 acquisition of GreenStar Services Corporation (“GreenStar”) and its subsidiaries, including Five Star Electric Corporation (“Five Star”). The merger agreement (the “MA”) provided for an earn-out period with five one-year terms.  For each term, Tutor Perini was required to make an earn-out payment equal to 25% of GreenStar’s consolidated pre-tax profit in excess of $17.5 million, up to a cap of $8 million.  Any excess amounts that would have been paid but for the cap were to be applied to any ensuing earn-out payments falling short of the cap.[7] Within 90 days following the end of each term, Tutor Perini was required to prepare and deliver to the GreenStar interest holder representative (the “IH Rep”) a calculation of pre-tax profit for the term, which became binding on the parties if the IH Rep approved Tutor Perini’s calculation or failed to object to it within 30 days following delivery.  If the IH Rep objected to the calculation, the IH Rep and Tutor Perini were required to work together for 45 days to reach an agreement on the calculation.  If they were unable to do so, the parties were required to engage an independent accounting firm to make a binding determination of pre-tax profit.[8] For the first and second terms, Tutor Perini calculated pre-tax profits and made the earn-out payments due.  For the third and fourth terms, Tutor Perini calculated pre-tax profits but did not make the earn-out payments due.  For the fifth term, Tutor Perini neither calculated pre-tax profit nor made an earn-out payment, even though an excess amount of $3.4 million from the second term could have been applied to the fifth-term payment.[9] The IH Rep sued Tutor Perini for the unpaid earn-out amounts.[10]  In addition to raising several affirmative defenses to the IH Rep’s complaint, Tutor Perini filed a counterclaim against GreenStar’s former CEO and largest interest holder, who remained Five Star’s CEO until midway through the fifth term.[11]  In its counterclaim, Tutor Perini alleged that, over the course of the earn-out period, the former CEO fraudulently provided Tutor Perini with inaccurate information regarding Five Star’s operations and prospects, which Tutor Perini then relied on to calculate GreenStar’s pre-tax profits.[12] According to Tutor Perini, these inaccuracies caused pre-tax profits for the first four terms to be significantly overstated.[13]  Tutor Perini asked the court to rule, in part, that (i) it was not obligated to make earn-out payments for the third, fourth, and fifth terms and (ii) earn-out payments for the first and second terms, and any future earn-out payments ordered to be paid, would be offset by the former CEO in an amount equal to the alleged overstatement of pre-tax profits.[14] Tutor Perini’s Arguments and the Court’s Analysis Tutor Perini argued that its pre-tax profit calculations for the first four terms should not have triggered earn-out payment obligations under the MA.  The MA required pre-tax profit to be calculated in accordance with GAAP, and therefore to be free from material inaccuracies.  Tutor Perini reasoned that, because its pre-tax profit calculations were inaccurate, and thus not GAAP-compliant, such calculations could not form the basis for earn-out payments under the MA.[15] Alternatively, Tutor Perini argued that the MA contained a gap regarding whether pre-tax profit calculations needed to be accurate.  Accordingly, Tutor Perini asked the court to use the implied covenant of good faith and fair dealing to rule that only accurate pre-tax profit calculations could trigger earn-out payment obligations under the MA.[16] The court rejected both arguments.  It held that the MA clearly required any pre-tax profit calculation, if not objected to by the IH Rep within the timeframe specified in the MA, to be binding on the parties, regardless of whether or not Tutor Perini had prepared the calculation in accordance with GAAP.[17]  The court noted that allowing Tutor Perini to attack its own pre-tax profit calculations in order to avoid earn-out payments would lead to an unreasonable result.[18] In addition, the court ruled that the MA did not require any gap-filling and therefore did not merit application of the implied covenant of good faith and fair dealing.  According to the court, the parties would have included specific language in the MA if they had “intended to allow Tutor Perini to withhold earn-out payments whenever it believed it had calculated pre-tax profits based on inaccurate information.”[19] Key Takeaways For M&A buyers considering earn-outs, this decision offers a few key takeaways.  First and foremost, the buyer should be wary of relying heavily on a member of the seller group to calculate earn-out payments and should consider engaging a third-party accountant to review the financials and calculate the earn-out payments.  Simply stepping back and asking who will actually be preparing the financials upon which the earn-out will be determined is a crucial exercise.  The buyer may want to consider including language in the acquisition agreement specifically requiring that the earn-out calculation be performed by a neutral third-party accounting firm from the outset. Second, the buyer should be mindful that, once it delivers its earn-out calculation to the seller, generally the buyer cannot later retract the calculation.  As a result, the buyer should be completely comfortable with its calculation before delivering it to the seller. Third, the parties should not expect the implied covenant of good faith and fair dealing to come to the rescue in the event they believe they have been wronged in an earn-out arrangement.  Instead, they must negotiate specific language to protect their interests. Fourth, the parties should recognize that earn-out structures with long earn-out periods have a greater risk of resulting in a dispute.  In this case, the earn-out period was five years.  A shorter earn-out period, such as a period with a duration through the end of the fiscal year in which the closing occurs if the closing occurs mid-year or earlier, leaves less time for mischief, less time for any action taken by the buyer to sway the financial results of the business, less time for the parties to remain entangled and less time for them to become disenchanted with one another.  If an earn-out is necessary to bridge a valuation gap between a buyer and seller, the parties would be well-advised to negotiate as short an earn-out period as possible. As demonstrated by GreenStar IH Rep and other recent cases, while earn-out provisions can be complex and time-consuming to negotiate, both buyers and sellers should strive to anticipate potential issues early-on, including with respect to practical matters such as who will actually calculate the earn-out, and should draft earn-out provisions to be as clear as possible within the four-corners of the acquisition agreement.  Taking these steps can spare the parties from further cost, time and uncertainty when the earn-out payment ultimately must be calculated and delivered.    [1]   Airborne Health, Inc. v. Squid Soap, LP, 984 A.2d 126, 145-46 (Del. Ch. 2009) (internal quotation marks omitted).    [2]   Id. at 146.    [3]   See Winshall v. Viacom Int’l Inc., 76 A.3d 808 (Del. 2013).    [4]   See Am. Capital Acquisition Partners, LLC v. LPL Holdings, Inc., 2014 WL 354496 (Del. Ch. Feb. 3, 2014).    [5]   See Lazard Technology Partners, LLC v. Qinetiq North America Operations LLC, 114 A.3d 193 (Del. 2015).    [6]   GreenStar IH Rep, LLC v. Tutor Perini Corp., 2017 WL 5035567 (Del. Ch. Oct. 31, 2017) (“GreenStar IH Rep“).    [7]   Agreement and Plan of Merger by and among Tutor Perini Corporation, Galaxy Merger, Inc., GreenStar Services Corporation and GreenStar IH Rep, LLC, as the Interest Holder Representative, dated as of July 1, 2011 (available at https://www.sec.gov/Archives/edgar/data/77543/000114036111035619/ex2_2.htm), Section 2.14(a).  Thus, the maximum amount payable under the earn-out was $40 million, or five payments of up to $8 million per payment.    [8]   Id. at Section 2.14(b).    [9]   GreenStar IH Rep at *3. [10]   Id. at *1. [11]   Id.  GreenStar’s former CEO was not a party to the MA, but had earlier joined in the IH Rep’s complaint in order to challenge Tutor Perini’s initiation of arbitration against him alleging claims for breach of his employment agreement, breach of the implied covenant of good faith and fair dealing, and fraud, among others.  Thus, because GreenStar’s former CEO had joined the litigation, Tutor Perini was able to file a counterclaim against him as part of the same proceeding in which Tutor Perini defended itself against the IH Rep’s claims.  See id. and GreenStar IH Rep, LLC v. Tutorni Perini Corp., 2017 WL 715922 (Del. Ch. Feb. 23, 2017), at *2. [12]   GreenStar IH Rep at *4. [13]   Id. [14]   Defendant’s Answer to Plaintiffs’ Verified Complaint and Verified Counterclaims, 2017 WL 1002090 (Del. Ch. Mar. 9, 2017), Prayer for Relief, ¶¶ B, C. [15]   GreenStar IH Rep at *6. [16]   Id. at *7. [17]   Id. [18]   Id., n. 59. [19]   Id. at *8. The following Gibson Dunn lawyers assisted in preparing this client update:  Robert Little, Benjamin Bodurian and Paige Lager. 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 following authors: Robert B. Little – Dallas (+1 214-698-3260, rlittle@gibsondunn.com) Benjamin A. Bodurian – Washington, D.C. (+1 202-887-3688, bbodurian@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.

December 18, 2017 |
M&A Report – Delaware Supreme Court Reaffirms the Importance of Deal Price As an Indicator of Fair Value in Appraisal Actions

Click for PDF The Delaware Supreme Court’s recent decision in Dell, Inc. v. Magnetar Global Event Driven Master Fund Ltd. represents the latest significant opinion from Delaware courts that has contributed to the reduction in M&A litigation by underscoring that, in an efficient market, the deal price should be accorded significant—if not complete—deference in determining fair value in appraisal actions. Background and Decision The Dell case stems from the 2013 buyout of Dell by a private equity firm with the support of Dell’s eponymous founder, who owned approximately 15% of the outstanding shares. After a full appraisal trial, the Court of Chancery concluded that the deal price should not be afforded any weight because it was “not the best evidence of [Dell’s] fair value.” Instead, the Court of Chancery applied its own discounted cash flow analysis, which valued Dell’s shares at approximately 30% higher than the merger consideration. The Delaware Supreme Court took issue with each of the three factors that caused the Court of Chancery to choose not to take the deal price into account: No “Valuation Gap”: The Court of Chancery had concluded that “investor myopia” and hangover from Dell’s recent transformational efforts, which had not yet begun to generate anticipated results, had produced a “valuation gap” between Dell’s fundamental and market prices. This “valuation gap,” in turn, purportedly set a low floor for the sale process. However, the Delaware Supreme Court, consistent with the efficient market hypothesis long endorsed by Delaware courts, concluded that the price produced by an efficient market is generally a more reliable indicator of fair value than a post hoc analysis presented by a partisan expert witness in an appraisal proceeding. In addition, the Delaware Supreme Court explained that the trial court record showed no evidence that Dell’s shares, which were widely and heavily traded, bore the hallmarks of an inefficient market. On this basis, the Delaware Supreme Court determined that the markets could (and, in this case, did) properly assess and value the company’s long-term outlook. No “Private Equity Carve Out” for Market Evidence: The Delaware Supreme Court also concluded that the Court of Chancery erred in completely discounting the deal price due to the financial sponsors’ focus on obtaining a desirable internal rate of return, rather than on “fair value.” Consistent with its recent decision in DFC Global Corp. v. Muirfield Value Partners, L.P., the Delaware Supreme Court held that there is “no rational connection” between a buyer’s status as a financial sponsor and the question of whether the deal price is indicative of fair value for appraisal purposes, because, among other things, “all disciplined buyers, both strategic and financial, have internal rates of return that they expect in exchange for taking on the large risk of a merger, or for that matter, any sizeable investment of its capital.” The Delaware Supreme Court went on to note that the “Court of Chancery ignored an important reality: if a company is one that no strategic buyer is interested in buying, it does not suggest a higher value, but a lower one.” Theoretical Characteristics of MBOs Do Not Per Se Undermine the Probative Value of Deal Price: One of the main concerns that the Court of Chancery’s Dell opinion raised among practitioners was the view that management buyouts (MBOs) have intrinsic characteristics that would, per se, undermine the probative value of the deal price. For example, the Court of Chancery endorsed the idea that MBOs could not eliminate the threat of a “winner’s curse”—the idea that in outbidding incumbent management to “win” a deal, a buyer would likely overpay for the company because management would presumably have paid more if the company were really worth it. The Delaware Supreme Court rejected this view, concluding that any such “winner’s curse” could be mitigated through a due diligence process where bidders have access to all the necessary information. In light of the foregoing, the Delaware Supreme Court concluded that the Court of Chancery had erred in not assigning any mathematical weight to the deal price and found that the record suggested that the deal price deserved heavy, if not dispositive, weight. Key Takeaways The Delaware Supreme Court’s decision in the Dell case, combined with its consistent pronouncement in the recent DFC opinion, do not represent the death knell of M&A appraisal litigation. However, we expect these cases will further temper the escalation of appraisal litigation from arbitrageurs that acquire shares after the announcement of an M&A transaction with no interest other than the speculative value of an appraisal proceeding. The Dell and DFC decisions should also impact the manner in which appraisal proceedings are presented and tried in Delaware courts. Companies in appraisal cases should appropriately rely on market indicators (pre-transaction share price and deal price) that were unencumbered by abnormalities as the strongest indicia of fair value. In addition, companies may want to argue more aggressively that, in determining fair value, the deal price should be discounted to reflect the fact that the deal price incorporates the expectation that certain synergies will be realized—a deal-specific consideration that Delaware law excludes from the process of determining fair value. Finally, in light of the complexities of applying the methods of valuation science, judges may rely on court-appointed experts to assist the court in determining fair value where they do not otherwise defer to market indicators. Most importantly, Dell and DFC send an unequivocal message that, in appraisal cases, Delaware courts must act consistently with the tenets of the efficient market hypothesis, and that, absent clear departures from fair play and process, the deal price should be the absolute cap in the determination of fair value. The following Gibson Dunn lawyers assisted in preparing this client update:  Barbara Becker, Meryl Young, Eduardo Gallardo, Brian Lutz, Joshua Lipshutz, Colin Davis, Daniel Alterbaum and Andrew Kaplan. 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) © 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.

December 13, 2017 |
10 Tips For Managing Litigation Risk In Sell-Side M&A

New York partners John Pollack and Adam Offenhartz and associate Daniel Alterbaum are the authors of “10 Tips For Managing Litigation Risk In Sell-Side M&A,” [PDF] published by Law360 on December 13, 2017.

December 8, 2017 |
MOFCOM Clears Semiconductor Merger with a Two-Year “Hold-Separate” Condition

The Chinese Ministry of Commerce (“MOFCOM“) recently conditionally approved Advanced Semiconductor Engineering’s proposed acquisition of Siliconware Precision Industries under China’s Anti-Monopoly Law. Despite the parties’ market shares in China not exceeding 30%, the decision[1] imposes a two-year “hold-separate” condition, under which the two companies must remain as two independent competitors, with unchanged business models and market practices. The AML has a compulsory pre-closing merger control review with low financial thresholds, catching many global transactions even if they do not have any nexus with China.  MOFCOM has been particularly concerned by transactions that may affect Chinese competitors or customers, consistent with its mandate under the AML.  Between 2011 and 2013, MOFCOM imposed hold-separate remedies in 4 transactions.  Most observers believed that MOFCOM has stayed away from such remedies in the recent years because of the difficulty to monitor hold-separate arrangements. MOFCOM’s recent decision confirms that hold-separate arrangements are still part of MOFCOM’s toolbox. Given the importance of the high tech sector for the Chinese government, we can expect more of these remedies in future high tech transactions. 1.    Background Advanced Semiconductor Engineering, Inc. (“ASE“) and Siliconware Precision Industries Co., Ltd (“Siliconware“) (together, the “Parties“) are Taiwanese integrated-circuit semiconductor packaging and testing companies. On 30 June 2016, they signed a merger agreement (the “Transaction“), according to which the Parties would establish Advanced Semiconductor Investment Holding Co., Ltd (the “Holding Company“), which would fully own and acquire sole control of both ASE and Siliconware. The Transaction triggered merger filings in Taiwan, the US and China. The Taiwanese Trade Commission and the US Federal Trade Commission issued their unconditional clearance decisions in November 2016 and May 2017, respectively. 2.    MOFCOM filing and review procedures The Parties first filed their notification to MOFCOM on 25 August 2016. At the end of Phase 3 (which was supposed to end on 11 June 2017), the Parties withdrew their filing and submitted a fresh filing on 6 June 2017. On 6 July 2016, MOFCOM commenced its Phase 2 review of the second filing, thus extending the final review deadline to 29 November 2017. The deal was cleared on 24 November 2017, 15 months after the first filing. 3.    Decision MOFCOM’s review focused on a narrow product market of semiconductor packaging and testing (“P&T“) outsourcing service. Upon examination of the market, MOFCOM found that there is a distinction between P&T services provided by integrated design and manufacturing (“IDM“) companies, such as Samsung, and those provided by professional outsourcing companies, such as the Parties. MOFCOM noted that P&T providers in the former category have their own semiconductor brand and cover all elements of production, including design, manufacturing, P&T and sales, with some players even selling electronic products for end use. MOFCOM commented that IDM companies have been “gradually stripping off” lower end production services, such as P&T, and outsourcing them to companies such as the Parties. ASE and Siliconware are ranked first and third in the global market and fifth and first in the Chinese market for semiconductor P&T outsourcing services, respectively. Post-merger, MOFCOM noted that ASE would rank first in both the global and Chinese markets, with a combined market share of approximately 25 to 30% in both markets. In contrast, the global market share of the next three competitors would be approximately 10 to 15% each, with the rest of the competitors being fragmented with a market share of less than 4%. MOFCOM’s market investigation revealed that customers are relatively “sticky” in this sphere due to the risks, costs and length of time (approximately six months to two years) involved in switching providers. In addition, MOFCOM noted that ASE and Siliconware are close competitors and the most important providers of P&T outsourcing services for many customers in China. Given the Parties’ strength in the market, MOFCOM found that post-merger, the merged entity would have the ability and motive to raise prices and to carry out other harmful practices, such as a price discrimination strategy maximizing profits to the detriment of Chinese customers with weak bargaining power. However, the anti-competitive effects of the Transaction would be offset to an extent by the rapid development of the industry and P&T service providers’ dependence on their clients. In order to address MOFCOM’s concerns, the Parties offered commitments, pursuant to which the two companies will remain independent of each other for 24 months, by keeping their financial, HR, pricing, sales, production capacity and procurement matters separate. The Holding Company will exercise limited shareholders’ rights during this period. In addition, the Parties will provide P&T services to clients in a non-discriminatory way and set the prices and transaction conditions in a reasonable manner. Both Parties also undertake not to restrict customers’ selection of, or transition to, other providers. 4.    Commentary A hold-separate remedy generally requires merging parties to keep all or a portion of their businesses independent post-merger, until the condition is removed with MOFCOM’s express approval. Critics of the hold-separate remedy argue that this is an inappropriate intervention into the economic operations of undertakings and constitutes an overstepping of MOFCOM’s regulatory powers. In addition, hold-separate remedies are difficult and time-consuming to monitor for compliance. Prior to ASE/Siliconware, MOFCOM used the hold-separate remedy on four occasions. MOFCOM’s first two uses of this remedy were both in the hard-disk sector: a 12-month hold-separate condition in Seagate’s acquisition of Samsung’s hard-disk business in 2011; and a 24-month hold-separate condition in Western Digital and Hitachi’s merger in 2012. In Seagate/Samsung, MOFCOM lifted the condition in 2015, only after a detailed review of the parties’ fulfilment of their hold-separate obligations. In Western Digital/Hitachi, MOFCOM carried out an investigation into the parties’ alleged failure to observe the hold-separate obligation, which resulted in a delayed and only partial removal of the condition in October 2015 and a fine of 600,000 yuan (c. USD 90,000) for two violations. MOFCOM also imposed a 24-month hold-separate obligation in agricultural trader Marubeni’s buyout of Gavilon in April 2013. Most recently, MOFCOM imposed the longest hold-separate obligation to date in the MediaTek/Mstar merger in August 2013. There, MOFCOM required Mstar’s LCD chip business to be independently operated for 36 months. In contrast to the four hold-separate conditions previously imposed by MOFCOM, the condition in ASE/Siliconware automatically expires after a fixed period. This is a significant advantage for the Parties, as MOFCOM’s approval process for removing a hold-separate condition can be lengthy and complicated. Finally, this shows that MOFCOM will pay close attention to the impact of a merger on Chinese market players, even if the merging parties’ market shares are low. This is in line with MOFCOM’s mandate under Article 24 of the Anti-Monopoly Law, which is to assess the impact of a merger on the development of the national economy. Considering that the development of the high tech sector is a priority for the Chinese government, we may see more hold-separate conditions in the future.    [1]   Dated 24 November 2017. English version available at http://english.mofcom.gov.cn/article/policyrelease/buwei/201711/20171102677556.shtml. Gibson Dunn lawyers are available to assist in addressing any questions you may have regarding these issues.  Please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Antitrust and Competition Practice Group, or the authors in the firm’s Hong Kong office: Sébastien Evrard (+852 2214 3798, sevrard@gibsondunn.com) Emily Seo (+852 2214 3725, eseo@gibsondunn.com) Please also feel free to contact any of the following practice group leaders and members: Hong Kong Kelly Austin (+852 2214 3788, kaustin@gibsondunn.com) Sébastien Evrard (+852 2214 3798, sevrard@gibsondunn.com) Brussels Peter Alexiadis (+32 2 554 72 00, palexiadis@gibsondunn.com) Jens-Olrik Murach (+32 2 554 72 40, jmurach@gibsondunn.com) David Wood (+32 2 554 72 10, dwood@gibsondunn.com) London Patrick Doris (+44 20 7071 4276, pdoris@gibsondunn.com) Charles Falconer (+44 20 7071 4270, cfalconer@gibsondunn.com) Ali Nikpay (+44 20 7071 4273, anikpay@gibsondunn.com) Philip Rocher (+44 20 7071 4202, procher@gibsondunn.com) Deirdre Taylor (+44 20 7071 4274, dtaylor2@gibsondunn.com) Munich Michael Walther (+49 89 189 33-180, mwalther@gibsondunn.com) Kai Gesing (+49 89 189 33 180, kgesing@gibsondunn.com) Washington, D.C. D. Jarrett Arp (+1 202-955-8678, jarp@gibsondunn.com) Adam Di Vincenzo (+1 202-887-3704, adivincenzo@gibsondunn.com) Scott D. Hammond (+1 202-887-3684, shammond@gibsondunn.com) Joseph Kattan P.C. (+1 202-955-8239, jkattan@gibsondunn.com) Joshua Lipton (+1 202-955-8226, jlipton@gibsondunn.com) Cynthia Richman (+1 202-955-8234, crichman@gibsondunn.com) Joshua H. Soven (+1 202-955-8503, jsoven@gibsondunn.com) New York John A. Herfort (+1 212-351-3832, jherfort@gibsondunn.com) Peter Sullivan (+1 212-351-5370, psullivan@gibsondunn.com) Denver Richard H. Cunningham (+1 303-298-5752, rhcunningham@gibsondunn.com) Ryan T. Bergsieker – Denver (+1 303-298-5774, rbergsieker@gibsondunn.com) Dallas Veronica S. Lewis (+1 214-698-3320, vlewis@gibsondunn.com) Brian Robison (+1 214-698-3370, brobison@gibsondunn.com) M. Sean Royall (+1 214-698-3256, sroyall@gibsondunn.com) Robert C. Walters (+1 214-698-3114, rwalters@gibsondunn.com) San Francisco Rachel S. Brass (+1 415-393-8293, rbrass@gibsondunn.com) Trey Nicoud (+1 415-393-8308, tnicoud@gibsondunn.com) Los Angeles Daniel G. Swanson (+1 213-229-7430, dswanson@gibsondunn.com) Samuel G. Liversidge (+1 213-229-7420, sliversidge@gibsondunn.com) Jay P. Srinivasan (+1 213-229-7296, jsrinivasan@gibsondunn.com) Rod J. Stone (+1 213-229-7256, rstone@gibsondunn.com) Sarretta C. McDonough (+1 213-229-7227, smcdonough@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.

December 6, 2017 |
Webcast: State of the Art: Critical Developments and Trends in M&A

This fast-paced program will explore the latest trends, structures, pitfalls and opportunities in M&A. The presentation will address pertinent topics including: “Lock box” deal structures; Representation and warranty insurance update; Latest M&A-related SEC guidance; Termination fees and suits for breach; Developments in appraisal rights claims; and Issues in purchase price adjustment provisions. View Slides [PDF] PANELISTS: Robert B. Little is a partner in the Dallas office of Gibson, Dunn & Crutcher, where he is a member of the firm’s Mergers and Acquisitions, Private Equity, Capital Markets, Energy and Infrastructure, Securities Regulation and Corporate Governance, and Global Finance Practice Groups. Mr. Little’s practice focuses on corporate transactions, including mergers and acquisitions, securities offerings, joint ventures, investments in public and private entities, and commercial transactions. He also advises business organizations regarding matters such as securities law disclosure, corporate governance, and fiduciary obligations. In addition, he represents investment funds and their sponsors along with investors in such funds. Mr. Little has represented clients in a variety of industries, including energy, retail, technology, transportation, manufacturing, and financial services. Candice S. Choh is a partner in the Century City office of Gibson, Dunn & Crutcher, where she is a member of the firm’s Private Equity, Mergers and Acquisitions, Capital Markets, Investment Funds, and Securities Regulation and Corporate Governance Practice Groups. Ms. Choh has a broad-based corporate practice encompassing mergers and acquisitions, private equity and capital markets transactions. She has represented both public and private companies as well as private equity funds in domestic and international business combination transactions across a wide variety of industries. Ms. Choh has also represented private equity funds in fund formation transactions and both issuers and underwriters in several debt and equity offerings. Jonathan L. Corsico is a partner in the Washington, D.C. office of Gibson, Dunn & Crutcher, where he is a member of the firm’s Mergers and Acquisitions, Private Equity, and Securities Regulation and Corporate Governance Practice Groups. Mr. Corsico’s practice focuses on mergers and acquisitions, where he represents corporations, private equity firms and boards of directors in a wide range of matters, public and private, friendly and hostile, domestic and cross-border. Mr. Corsico also has significant experience representing clients in connection with stockholder activism, joint ventures and minority investments. MCLE CREDIT INFORMATION: This program has been approved for credit in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 1.50 credit hours, of which 1.50 credit hours may be applied toward the areas of professional practice requirement.  This course is approved for transitional/non-transitional credit. Attorneys seeking New York credit must obtain an Affirmation Form prior to watching the archived version of this webcast.  Please contact Jeanine McKeown (National Training Administrator), at 213-229-7140 or  jmckeown@gibsondunn.com   to request the MCLE form. Gibson, Dunn & Crutcher LLP certifies that this activity has been approved for MCLE credit by the State Bar of California in the amount of 1.50 hours. California attorneys may claim “self-study” credit for viewing the archived version of this webcast.  No certificate of attendance is required for California “self-study” credit.  

November 27, 2017 |
M&A Report – How Representations and Warranties Insurance Is Transforming Risk Allocation in M&A Transactions

Click for PDF Under a buy-side representations and warranties insurance (“RWI”) policy, the buyer in an M&A transaction recovers directly from an insurer for losses arising from certain breaches of the seller’s representations and warranties in the acquisition agreement.  By shifting the risk of such losses from the seller to an insurer, the buyer and seller can limit or even eliminate the seller’s liability for certain rep breaches, all without materially diminishing the buyer’s coverage. The Evolving RWI Market As RWI has gained market acceptance over the last few years, a significant number of new insurers have entered the RWI market.  With this increased competition, market forces have led insurers to offer improved terms to buyers seeking RWI coverage. For instance, just a few years ago, RWI premium amounts generally ranged from 3% to 4% of coverage limits, and RWI “retention” (i.e., deductible) amounts generally ranged from 1.5% to 2% of deal value.  Since then, premium and retention amounts have steadily decreased.  In today’s market, RWI premiums are routinely below 3% of coverage limits, and retention amounts are generally 1% of deal value or lower. Moreover, buyers have become more comfortable with the RWI claims process.  Initially, buyers were skeptical that insurers would actually pay claims made under RWI policies.  However, as insurers have routinely paid valid claims over the last few years, the stereotype that it is more difficult to collect under an RWI policy than under a customary seller indemnity has been broken. As a result of these changes, along with an increasingly competitive, seller-friendly deal climate, buyers have become more comfortable relying primarily or exclusively on RWI, which has allowed them to limit or even eliminate the traditional seller indemnity. Limiting the Seller’s Liability with an Indemnity “Strip” Consider a $500 million transaction in which the buyer seeks a $50 million indemnity for breaches of the seller’s reps.  If the buyer instead obtains an RWI policy with a $50 million coverage limit and a $5 million retention, the buyer and seller will only need to allocate the risk of the first $5 million in losses between them. Often, the parties will agree to split such losses evenly, with a deductible applying to the buyer’s first $2.5 million in losses and a seller indemnity of at least twelve months applying to the buyer’s next $2.5 million in losses.  As a result, the seller’s liability for rep breaches will be limited to a $2.5 million “strip,” equal to just 0.5% of deal value. Under many RWI policies, the retention will “drop down” to a reduced amount – generally 50% of the initial retention – on the first anniversary of the closing.  When combined with a seller indemnity like the one described above, the retention drop-down limits the buyer’s liability for rep breaches covered under the policy to the $2.5 million deductible, because when the seller indemnity expires, the RWI retention drops down to prevent a coverage gap. Eliminating the Seller’s Liability with a “No-Survival” Deal Alternatively, the parties might agree to completely eliminate the seller’s liability for certain rep breaches.  In a “no-survival” deal, some or all of the seller’s reps do not survive the closing.  Accordingly, the seller will not indemnify the buyer for breaches of such reps following the closing, and the buyer will look solely to the RWI policy to recover losses from such rep breaches. Many insurers are now willing to offer the same coverage limit, initial retention, drop-down retention, and scope of coverage in a deal without a seller indemnity as in a deal with a seller indemnity.  Most insurers will impose a modest premium increase to reflect the perceived moral hazard of a no-seller indemnity transaction structure. Using the above example, if the parties eliminate the seller indemnity, the buyer’s incremental exposure will be limited to the amount that would have been covered by the seller’s indemnity strip (i.e., $2.5 million), with the buyer’s aggregate exposure equaling $5 million, or 1% of deal value.  If the RWI policy includes a typical drop-down retention, the buyer will only face this incremental exposure up until the retention drop-down date. The General Benefits of RWI Using RWI to limit or eliminate the seller’s liability for rep breaches obviously benefits the seller.  But it benefits the buyer, too. RWI can help distinguish the buyer’s bid in an auction process; in addition to making the bid more attractive economically, it can meaningfully shorten negotiations over the acquisition agreement, which can be an important factor in a competitive process. Also, using RWI to limit the seller’s liability may make the seller more willing to expand the substantive coverage of its reps and to reduce the use of knowledge qualifiers, thereby improving the buyer’s basis for recovery under the policy. The Unique Benefits of No-Survival Deals While limiting the seller indemnity can meaningfully shorten the negotiation timeline, eliminating it entirely can dramatically simplify negotiations.  For example, even in a $100 million transaction, the respective deal teams can spend a surprising amount of time negotiating a $500,000 indemnity strip. Eliminating the seller indemnity also can enhance the buyer’s coverage under the RWI policy.  Most policies will include two types of “coverage enhancement.”  First, they will include a “full materiality scrape” – i.e., they will “read out” materiality qualifiers in the reps for purposes of determining whether a rep has been breached and the amount of losses resulting from such a breach.  Second, they will not impose a “damages exclusion” on the buyer’s recovery – i.e., they will cover a range of damages, including consequential damages and those based on multiples of earnings and lost profits. In a no-survival deal, most RWI policies will include these coverage enhancements as a matter of course (that said, before including a materiality scrape, the insurer will want to confirm that the seller has populated the disclosure schedule without regard to the materiality qualifiers in the reps). By contrast, in a deal with an indemnity strip, most policies will only include these coverage enhancements if the acquisition agreement includes a full materiality scrape and does not include a damages exclusion (and, as mentioned above, the insurer will scrutinize the seller’s population of the disclosure schedule before including a materiality scrape).  In essence, while the insurer is generally willing to offer coverage enhancements, if the seller is providing an indemnity, the insurer is generally only willing to offer such coverage enhancements to the extent the seller also does so. Accordingly, seeking a seller indemnity can jeopardize the buyer’s efforts to obtain coverage enhancements under the RWI policy, since the seller may resist a materiality scrape or insist on exclusions for certain categories of damages.  By contrast, if the seller indemnity is eliminated, most insurers will provide these coverage enhancements as a matter of course. A no-survival deal also may help the buyer preserve important relationships with the seller after the closing.  At times, the buyer will be relying on a transition services agreement with the seller.  In addition, members of the seller group often continue serving as members of the acquired business’s management team.  Under these circumstances, a seller indemnity could put the buyer in the unenviable position of suing its new service provider or management team after the closing. Finally, from a post-closing claims administration standpoint, a no-survival deal may prove less burdensome for the buyer than a deal with an indemnity strip.  When a claim arises in a no-survival deal, the buyer can work with a stable, creditworthy insurer to process the claim, rather than also having to concurrently seek a small recovery from the seller, as it would in a deal with an indemnity strip.  Also, a no-survival deal allows the parties to avoid establishing an escrow fund. The Limits of RWI Despite its benefits, RWI is not a panacea.  As its name suggests, RWI only covers rep breaches; it does not cover covenant breaches, purchase price adjustments, or other payment obligations that might arise under an acquisition agreement. In addition, the buyer customarily purchases RWI coverage in an amount equal to approximately 10% of deal value.  This leaves the buyer exposed to extraordinary losses from fundamental rep breaches in excess of the coverage limit.  In a transaction with a seller indemnity, the seller might agree to indemnify the buyer for losses arising from fundamental rep breaches in excess of the RWI coverage limit.  In a no-survival deal, however, it is relatively uncommon for the seller to provide a standalone indemnity for fundamental rep breaches. RWI also can pose a trap for the unwary in terms of coverage for pre-closing taxes.  RWI will cover the tax reps in the acquisition agreement, and some policies will also include a standalone pre-closing tax indemnity to the extent the seller provides one.  However, as described further below, pre-closing tax coverage under the RWI policy will be limited to coverage for taxes that the buyer does not know about when the policy is bound. So, for instance, accrued taxes for pre-closing periods that are not yet payable would not be covered under the policy, even though such taxes typically would be covered under the seller’s standalone pre-closing tax indemnity.  Thus, even if the buyer agrees to a no-survival deal, it should nevertheless consider insisting that the seller provide a standalone pre-closing tax indemnity covering taxes for which the buyer will not have coverage under the RWI policy. Finally, most policies will include a range of coverage exclusions or limitations.  First, as mentioned above, the buyer will not be able to recover for liabilities it knew about when the policy was bound, regardless of whether such liabilities are included in the disclosure schedule.  Thus, the buyer’s due diligence will pose a Catch-22: the buyer will want to conduct a comprehensive diligence process so that it is fully aware of all of the target company’s risks, but doing so will deprive the buyer of coverage under the policy for any liabilities that it uncovers. Second, some policies may include a blanket carve-out from coverage for certain categories of losses, including those arising from the following liabilities (whether known or unknown to the buyer): asbestos and polychlorinated biphenyls; transfer taxes, taxes accrued on the balance sheet, taxes disclosed on the disclosure schedule, and net-operating losses and other types of deferred tax assets; underfunded benefit plan liabilities; and liabilities related to employee misclassification and compliance with wage-and-hour laws. Increasingly, some insurers are willing to at least provide “excess” coverage for some or all of the above liabilities.  The buyer will look to a primary environmental, tax, benefits, wage-and-hour, or other insurance policy to recover its initial losses.  Then, the RWI insurer will cover losses in excess of a specified dollar threshold – i.e., the RWI policy will “sit in excess” to the primary policy. Plugging RWI Coverage Gaps Almost every buyer will experience some heartburn over a liability that it uncovers during diligence, or over a potential liability that it knows will be subject to an RWI carve-out or excess coverage limitation.  If the buyer decides that it cannot bear the risk of such a loss, and it still wants to do the deal, then it will need to work with the seller to find a way to share the risk. One way is through an upfront deduction to the purchase price.  While this will provide the buyer with guaranteed coverage for at least some amount of the risk, a purchase price deduction is an imprecise remedy, as it might exceed or fall short of the ultimate liability. An alternative is for the seller to provide a “special” indemnity, often backed by an escrow fund, for the identified liability.  For example, the buyer may be worried about asbestos liabilities, which will be subject to a carve-out or excess coverage limitation under the RWI policy.  Accordingly, the seller would indemnify the buyer for any losses arising from such liabilities, irrespective of the deductible or cap applicable to general rep breaches.  While a special indemnity invites the risk of future disputes with the seller, it allows for more precision than an upfront purchase price deduction. Finally, the buyer might simply look to utilize a primary insurance policy, with excess coverage being provided under the RWI policy.  If the target company already has adequate primary insurance policies in place, then those policies often can be rolled over post-closing.  If such policies are inadequate, then the RWI insurer often will be willing to underwrite an environmental, tax, benefits, wage-and-hour, or other primary insurance policy to go along with the RWI policy. 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: Jeffrey A. Chapman – Dallas (+1 214-698-3120, jchapman@gibsondunn.com) Jonathan Whalen – Dallas (+1 214-698-3196, jwhalen@gibsondunn.com) Benjamin A. Bodurian – Washington, D.C. (+1 202-887-3688, bbodurian@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 21, 2017 |
M&A Report – Selecting Joint Venture Leaders: Alternative Approaches and Relevant Considerations

A critical factor in the success of a joint venture, like any business enterprise, is the effectiveness of its executive leadership.  As a result, venture parties take very seriously the question of how the CEO and other senior executives of the venture will be selected.  There is a range of potential answers to this question, as described below.  The challenge for the venture parties and their advisors will be to select an approach and adapt it, as need be, to suit their particular circumstances. Different approaches to CEO and executive selection include: Joint Selection: Each venture party must approve the selection of the CEO and other executives of the venture company.  The venture parties work together closely to identify and agree on the persons appointed to each position. If the joint venture has more than two members, this approach can be modified to require approval by a majority or supermajority of the venture parties, or venture parties holding a specific amount of equity in the venture company. Veto: One venture party selects the CEO and/or other executives of the venture company, but the other venture party has the right to veto any of the proposed candidates.   This approach is very similar to the “joint selection” approach above because the parties must ultimately agree on the executives selected.  If the joint venture has more than two members, they must decide whether any, or only certain, “non-selecting” venture parties can veto a candidate. Selection by the Board: The board or other governing body of the joint venture selects the CEO and other executives.  The joint venture parties appoint the board members, but otherwise do not have a formal or official role in selecting the CEO and other executives (depending on the circumstances, a venture party may be able to indirectly control or influence executive selection by acting through the venture party’s board representatives). Selection by One Venture Party: One venture party selects the CEO and may also have the right to select other specifically identified executives of the venture company.  Another venture party has the right to select a different set of specifically identified executives, such as the CFO or General Counsel.  No venture party has the right to veto selections of the other venture party. Alternating Venture Party Selection: This approach, which is chosen less often than those listed above, is similar to the “selection by one venture party” approach, except the venture parties take turns selecting the CEO, who will serve a prescribed term.  For example, one venture party selects the initial CEO for a two-year term.  The second venture party subsequently selects the second CEO, also for a two-year term, and so on.  If other executives are also selected in this manner, the parties may decide to stagger the length of their terms to provide for some continuity of senior management. Co-CEO arrangement: The joint venture has two co-CEOs, each selected by a different venture party.  This approach is also relatively less common.  When it is chosen, the venture parties will need to determine the scope of each co-CEO’s authority, including what decisions, if any, a particular co-CEO may make unilaterally, and what decisions, if any, require the approval of both co-CEOs.  The venture parties will also need to decide whether to mandate how deadlocks between the co-CEOs will be resolved. The approaches described above can be modified and/or combined in innumerable ways to meet the needs of the venture parties.  Many joint ventures will employ at least two different approaches; one approach for selecting the initial executive team, the members of which are often identified in the joint venture formation documents, and one approach for selecting their successors.  (As a practical matter, if the joint venture will operate an ongoing business immediately after the joint venture is formed, the venture parties will need to identify the executive team in the formation documents.)  For example, the venture parties may jointly agree on the identity of the initial CEO and executive team as set forth in the joint venture formation documents, and provide that the joint venture board will select all successor executives.  Or the venture parties may agree that the joint venture will have co-CEOs for an initial period but once that period ends, the parties will jointly agree on a single CEO.  Or, if the joint venture has several members, they may agree that the two venture parties owning the most equity in the venture company will take turns selecting the CEO and the CFO; however, if one venture party subsequently becomes the majority owner, it will have the sole right to appoint the CEO and CFO. The approach(es) that make sense for any specific situation will depend on the applicable facts and circumstances, including the negotiating dynamics and the leverage of each venture party.  Relevant factors may include, among others: The number of venture parties: for example, a joint venture with a small number of venture parties may believe the “joint selection” approach will be the most straightforward approach to implement.  A joint venture of this kind may also lend itself more easily to the “veto” approach or the “alternating venture party selection” approach.  The “co-CEO” approach  may work best with a joint venture with only two parties. The venture parties’ respective equity ownership of the venture: for example, the “selection by one venture party” approach may make more sense when one venture party will be the majority owner of the joint venture and the other venture party or parties will hold much smaller, minority positions in the venture company.  In contrast, if each venture party will have the same amount of equity and the same governance rights, the equitable nature of the “joint selection” approach or the “selection by the board” approach may make them more desirable alternatives. The respective bargaining power of the venture parties and the tenor of the negotiations: for example, a venture party with greater negotiating leverage than the other venture parties may be able to insist that it select the CEO.  In contrast, if the venture parties have more or less equal negotiating leverage, they may agree on the “joint selection” approach.  Difficult negotiations may result in more cumbersome approaches; for example, if the venture parties in a two member venture are not willing to collaborate on CEO selection, they may employ the “alternating venture party selection” approach or the “co-CEO” approach. The relationship of the venture parties to the joint venture business and/or experience in the joint venture industry: for example, if one venture party has run the business that will become the joint venture business and the other venture party does not have experience in the joint venture’s industry, the venture parties may agree that the experienced party can take the lead in choosing executives, and adopt the “selection by one venture party” approach or the “veto” approach. The venture parties’ respective objectives with respect to the venture: for example, a venture party that intends to take a more passive role in the venture, or a venture party that joined the venture in order to exit the joint venture business over time, may be comfortable with the “selection by the board” approach or allowing the other venture parties to select the executives. The form of the venture company: for example, the limited liability company form will give the venture parties significant flexibility to tailor the executive selection process to their needs.  In contrast, fewer options may be available when the limited partnership form is used due to restrictions on limited partners’ rights to control the limited partnership’s business.  In addition, a venture party that invests as a limited partner may not expect to have a significant voice in the selection of the executive team. Ideally, the venture parties will select venture executives in a non-contentious manner, none of the venture parties will force arbitrary management changes and all of the venture parties will work to achieve smooth management transitions.  Viewed against this standard, approaches based on consensus, such as the “joint selection” and “selection by the board” approaches, seem preferable, and approaches that mandate change or create uncertainty about the chain of command, such as the “alternating venture party selection” and the “co-CEO” approaches, seem problematic.   However, venture parties and their advisors should be aware that no single approach or combination of approaches will work well under every set of circumstances, nor is any single approach or combination doomed to failure.  As noted above, the key to choosing the right approach or combination of approaches for a particular joint venture will depend on its specific facts and circumstances. In addition to negotiating how the CEO and other executives will be selected, the venture parties may also spend time negotiating various related matters: Executive Qualifications: Regardless of the CEO selection approach employed, the venture parties may develop a set of qualifications that each executive must have, such as criteria relating to education, industry background and expertise, as well as particular skill sets.  Similarly, the venture parties may agree on other parameters that narrow the search pool, such as requiring that the executives currently work, or have worked, for one of the venture parties. Relationship between the CEO and the Board: The venture parties may also seek to define the parameters of the relationship between the CEO and the joint venture board. For example, the joint venture agreements may specify whether the CEO will be a member of the board and, if the CEO is a board member, whether there are certain matters on which the CEO cannot vote, such as whether to call additional capital from the venture parties.  In addition, the venture parties often seek to restrict the executive team’s authority by developing a long list of matters that require board consent, such as incurring debt above specified thresholds, entering into certain contracts, placing certain liens on venture assets, etc.  Depending on the thresholds used in these lists and the size of the joint venture, these board approval requirements may be seen as interfering with the ordinary business of the venture company and the executive team’s ability to run the joint venture business.  However, these restrictions help ensure that the venture parties, through their board representatives, have a voice in the direction and operation of the joint venture.  Finding the right balance between these competing considerations may be difficult, but the venture parties and their advisors should keep both in mind when developing the list of matters that require board consent. Removal: In addition to selecting the CEO and other executives, the venture parties may also legislate who can remove the CEO and other executives.  For example, this authority can be delegated to the board, exercised by a majority, supermajority or unanimous decision of the venture parties or reserved for the venture party that had the right to appoint the CEO or other executive. Transferability of Rights: If a venture party has rights to transfer its equity in the venture company, the venture parties must also determine whether any rights the transferor has to select and remove the CEO and other executives are also transferable, and whether such transferability depends on various factors, such as whether the transferee is a third party, another venture party or an affiliate of the transferor. The executive selection approach ultimately used in any particular joint venture will be the product of the unique circumstances and deal dynamics of that joint venture.  The factors that influence this decision will also affect related matters, such as removal of venture executives.  When designing the approach for their joint venture, the venture parties and their advisors should consider not just their current circumstances and relationships, but also how such factors may change over time.  As illustrated by some of the examples above, different approaches can be combined and/or modified to accommodate any number of situations. 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) 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) 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.