M&A monitor - What European buyers need to know about US deals - Q1 2022 - Freshfields Bruckhaus Deringer
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SPACs take off All Q1’s global
in Asia deal data
M&A monitor
Q1 2022
What European buyers
need to know about US deals
Special report from the Freshfields M&A forum
M&A monitor Q1 2022
Welcome
to our Q1 M&A
monitor
In this edition we lead with a special report
from our recent M&A forum, where senior
dealmakers joined a Transatlantic group of
Freshfields partners to discuss what European
buyers need to know about US deals.
Here we round up the key takeaways, • the changing US antitrust landscape;
including: • how deal agreements are adapting to
• the critical directors’ duties under mitigate enhanced regulatory risk;
Delaware law and how they influence • issues relating to employee equity
the deal process; awards and shareholder approvals;
• whether it’s possible to negotiate and
exclusivity in US M&A; • the evolution of US deal protections.
• managing the role of activists and In this edition, we also examine the
other institutional shareholders; growth of SPACs in Asia (page 15),
• potential landmines in US IP with both Singapore and Hong Kong
agreements; welcoming their first SPAC listings
since the start of the year (thanks
• how to approach management and
to some outstanding work from
employee retention; our teams), as well as the usual
• the challenges of navigating CFIUS; quarterly deal data (page 17).
On page 15 we examine the growth of SPACs in Asia, with both Singapore and Hong Kong (above)
welcoming their first SPAC listings since the start of the year.
2
M&A monitor Q1 2022
Freshfields M&A Forum:
Acquisitions of
US targets by
European buyers
On March 9, 2022, Freshfields
welcomed leading
dealmakers to its inaugural
M&A Forum exploring the
key considerations for
European investors
acquiring US targets.
Hosted by London M&A Partner Julian
Long, the session featured insights
from other key members of Freshfields’
US and UK teams: Damien Zoubek,
co-head of the firm’s US Corporate and
M&A practice (New York); Corporate
and M&A partner Sebastian Fain
(New York); People & Reward partners
Lori Goodman (New York) and
Alice Greenwell (London); and Antitrust,
Competition and Trade partners Aimen
Mir (CFIUS) and Meghan Rissmiller
(Merger Investigations, both
Washington, DC). Here are the
highlights – if you would prefer to Our M&A Forum explored key issues for European buyers considering US acquisitions, focusing on
watch the session instead, click here. getting the target board to signing and navigating the period between signing and closing
3
M&A monitor Q1 2022
Freshfields M&A Forum: Session 1
The choreography of
getting a US target
board to signing
How a European acquiror • Revlon applies where a company
Julian Long successfully leverages – is selling “control” (and under
Partner, London and avoids tripping over – Delaware case law that means
the duties and processes majority cash deals) and holds that
because a mostly cash takeover bid
of US target boards
represents the last chance for
Damien Zoubek and Sebastian Fain, shareholders to secure a control
Damien Zoubek
Partner, New York
Corporate and M&A, New York premium for their shares, the
• Non-US buyers will often ask whether directors must follow a process that
directors of a US public company is reasonably designed to achieve
have a fiduciary duty to “shop” a bid the best price reasonably available.
Sebastian Fain (i.e., try to solicit a higher offer) However, the Delaware courts are
Partner, New York and also whether they can agree clear that there is no single legally
to exclusivity. prescribed approach for directors
• In US public M&A, the relevant duties to satisfy their Revlon obligations.
under Delaware law (where most • One way directors can meet their
Lori Goodman
US public companies are organized) Revlon duties is by preserving in the
Partner, New York
are the duty of care and the duty of merger agreement their ability to
loyalty. These duties are owned to the respond to an unsolicited bid and
company’s shareholders alone and pay an appropriate breakup fee
not other constituencies. to terminate an existing offer.
• The key cases in Delaware for That said, US boards are generally
understanding these duties within conditioned to conduct either an
the context of public company sale active or passive a pre-signing market
transactions are Revlon and Unocal. check instead; competition is seen as
4
M&A monitor Q1 2022
The board may even theoretically
take a lower headline price if
they believe the long-term value
proposition of the transaction
is better.
the easiest route to obtain a premium the start of the negotiations that they made and the board’s deliberative
and it is more difficult for competing are willing to move as fast as possible process, all of which makes it
bidders to “jump” a signed deal and that their participation is harder to favor one bidder without
(although there are many examples predicated on working outside of a a compelling justification
where deal jumps do occur). broader process to sell the target. to do so.
• The Unocal case and its progeny • In transactions where all or a • The other key Delaware case is
provide that any break-up fee or significant portion of the Corwin. Here, the Court held that
other deal protection cannot be consideration is stock, Revlon duties even if a board does not comply with
preclusive and make a competing do not apply, but the Unocal doctrine its Revlon duties (absent bad faith),
bid not reasonably attainable, so must still be adhered to in relation as long as everything is disclosed
there are limits to how tight deal to deal protections. in the proxy statement and the
protections can be (i.e., break-up fees • With respect to a sales process, where transaction is approved on an
tend to be in the range of 2-4 percent Revlon is not applicable, the business uncoerced and fully informed basis
of equity value at the deal price). judgement rule is the applicable by a majority of disinterested
standard of review, and the target shareholders, the business judgement
Employing the right tactics for board will feel like it has much more rule applies.
maximizing speed and exclusivity latitude to go bilateral earlier in • As a result, any plaintiff litigation
• Within this fiduciary construct, the process. The board may even (which happens in nearly every US
boards of US targets will almost theoretically take a lower headline public company deal) is unlikely to
always reject any request for price if they believe the long-term survive the motion to dismiss stage
exclusivity unless it is close to the value proposition of the transaction (i.e., there will be no discovery). Given
end of the process or the bidder is is better. how powerful this is to protect target
paying such an attractive price • Of course, it is not just the law of boards, we are seeing proxy
(and threatens to walk away) that the fiduciary duties that determines statements contain more and more
target board is confident no other how these situations play out – information to defeat plaintiff claims
bidder would be likely to pay more. deal dynamics and investor that Corwin should not apply because
Some bidders try to pre-empt sentiment are also critical. the proxy was deficient from a
(i.e., offer a higher price to end a disclosure standpoint.
• Once a deal is signed, the background
competitive process), but in our of the negotiations, including the • Despite the power of Corwin, we are
experience this invariably results sale process that target went not seeing target boards say that they
in them paying more for no gain. through, disclosed in the company’s can disregard Revlon and rely on
A target’s advisers will almost proxy statement in great detail. Corwin instead. However, it gives
certainly counsel the board to shop Shareholders will therefore know target boards comfort that so long
the bid anyway unless there is a whether and when the board agreed as they try in good faith to satisfy
cognizant threat that the incumbent to exclusivity, what other bidders their Revlon duties, any hindsight
bidder will withdraw if the target were contacted or made inbound second-guessing can be dismissed
contacts other parties. A better approaches (on an anonymized basis), with a fully informed and uncoerced
strategy for buyers is to indicate at the price of other bids that were shareholder vote.
5
M&A monitor Q1 2022
Do CEOs or boards have the possible. Activists will engage directly
Activists will final say?
• The CEO of a US public target will
with a company’s shareholders and
launch extensive PR campaigns
engage directly generally lead the negotiations, but
the board has the final say. Buyers
articulating why a transaction is not
the right choice for the business.
with a company’s therefore need to be wary of a CEO
getting out ahead of their board.
• It is therefore vital from the outset
to have a clear PR and IR strategy
shareholders and As an example, the CEO should be that clearly lays out the strategic
rationale of the transaction from
going back to the board to get price
launch extensive guidance and ultimately agree the the point of view of shareholders.
deal value. Failing to do so obviously As with any interaction with
PR campaigns risks the target board ultimately activist investors, parties need to
anticipate the activist’s objections
articulating why
rejecting the deal or recutting the
price, but also creates legal exposure. and respond proactively.
a transaction is • If this happens, the CEO could be
construed as breaching his or her
• Activism is not limited to
shareholders of targets seeking a
not the right fiduciary duties and the buyer could
be accused of being an aider and
higher price; we have also seen
examples of activists at the buyer
choice for the abettor. The Delaware courts are
very focused on process, so
arguing that they are overpaying,
or the transaction is not the right
business. understanding the dynamics between strategic decision for them.
a CEO and the board at large is • Making matters more complicated,
important. Likewise, because every different investor groups are now
meeting and discussion of substance adopting activist tactics. We have
will need to be disclosed in the proxy seen active fund managers start
these issues are likely to be seen by campaigns to oppose deals, and
plaintiffs’ attorneys. encouraging activists to do the work.
Managing the evolving role • Activists generally are unlikely to
oppose a cash sale via an auction
of activists, actively managed
unless they believe there has been
funds, and institutional
a process deficiency.
shareholders
• To mitigate activism risk, sellers
Damien Zoubek and Sebastian Fain,
must anticipate the market reaction,
Corporate and M&A, New York
including by getting their bankersto
• Activism is often a catalyst for analyse when their investors came
transactions (e.g., sales of divisions in and at what price, to assess
or whole businesses, spinoffs etc), whether a transaction is going to be
so buyers looking for assets should viewed favorably by the investor base.
monitor where activists are
• The buyer’s board and management
building stakes.
should consider whether they will
• Activism is also an issue once a need a shareholder vote that might
deal has been signed. Activists may provide an activist with the
choose to oppose a deal, or they opportunity to oppose.
may push a buyer to raise its bid • It is important for parties to talk to
(known as bumpitrage). their proxy solicitors and find out
• In both scenarios, the activist how they see the situation. They also
playbook is to create as much PR and have data that can be critical in
investor relations difficulty as responding to an activist.
6M&A monitor Q1 2022
US landmines for should focus on this issue early in
IP-sensitive acquirors
Sebastian Fain,
their diligence in order to have
time to find a solution that is also In an asset deal
Corporate and M&A, New York
acceptable to the seller.
the buyer may
How to approach
• In the US, IP licenses may by their
terms purport to give the signatories management and employee try to not acquire
access to all of the target’s IP and
all of its affiliates’ IP, with the term
retention – the latest
techniques and risks
a problematic
“affiliate” broadly defined. This could
be problematic because it may be read Lori Goodman, license or
as covering future affiliates, i.e., the
entire corporate group of an acquiror.
People & Reward, New York
• Buyers will typically want to know
package the
• The case law on how courts interpret when they can start talking to the
target’s CEO and management team
contract and
this type of “up the chain” affiliate
definition differs between states. about post-closing roles, employment try to sell it.
In New York for example, the general arrangements, retention packages
view is that it applies to affiliates at and the like.
the time of signing unless otherwise • Here again, fiduciary duties apply
expressed, but in Delaware the courts – officers owe fiduciary duties to the
have taken it to cover future affiliates. company’s shareholders (and in most
This potentially puts the target cases the CEO is also a director, so
company at risk of litigation if the clearly has fiduciary duties in that
counterparty believes it has not been capacity). As a result, these types of
given the IP rights it is entitled to. compensation discussions implicate
• There are ways to structure around duty of loyalty considerations.
this, but none are perfect. In an asset The plaintiffs’ theory around this
deal the buyer may try to not acquire would be that management engaging
a problematic license or package in compensation discussions puts
the contract and try to sell it. them in a position where they are
Buyers may also, depending on the conflicted and may favor one bidder
way the contract is drafted, be able over another based on their post-
to adapt their charter so it prevents closing roles and what their
the agreement from binding compensation may (or may not) be.
upstream affiliates. • The way that US public company
• The strategy for dealing with these boards deal with this is to control
types of licenses will be fact- and when the management team is
jurisdiction-specific. In industries allowed to engage in these
where technology is critical (such as discussions and under what
technology and healthcare), buyers process and procedures.
7M&A monitor Q1 2022
There are also plenty of cases where
the target is not running an auction
and the board agrees to engage
in bilateral negotiations after a
pre-signing market check that does
not yield any better offers.
Damien Zoubek, bidders try to have these discussions earlier stage. As with other things in
Corporate and M&A, New York with the CEO or other management US public company fiduciary duty
• Against this backdrop, these talks in team members before management is cases, the courts are more accepting
many cases only take place in the authorized by the target board to do of process steps that are discussed
final days before signing, so buyers so. Again, it is important to and approved by the board (or a
should build this into the deal remember that, as with the deal committee) in advance as opposed to
timeline. This is especially true in process itself, there will be detailed them happening without the board’s
an auction or competitive situation disclosure in the proxy statement of knowledge or input.
where the price may not be known any discussions around management
• There are also plenty of cases where
until the auction is complete and a compensation, and so shareholders
the target is not running an auction
buyer is picked; in these scenarios it (and plaintiffs) will have full visibility
and the board agrees to engage
is quite normal for the target board into when these conversations
in bilateral negotiations after a
to restrict such discussions until after happen along the process timeline.
pre-signing market check that does
winner is known and the price and • Sometimes it is not possible to do not yield any better offers. In these
other key deal terms are agreed. At things in this order and every cases, the target board may free up
that point, the conflict issue is mostly situation is fact specific. We have the management team earlier
abated as there is no way advised on auctions involving because a bidder has been selected
for the management team to strategics and PE bidders where both
and price has been agreed with
arguably “sway” the transaction wanted to retain the target’s founder,
several weeks to go for diligence and
to any one bidder. who was also the controlling
contract negotiations.
• Buyers also need to take guidance shareholder. It is unrealistic to expect
from the target’s board on this topic, a founder in this situation to agree to • In a private deal where the target has
rather than simply negotiating with support a deal (and therefore pick a employee shareholders (and possibly
the relevant individuals without winner and end the auction) without even friends and family among the
confirming with the board that these also being able to choose where they stockholders) the fiduciary
conversations can take place. That would prefer to work, whether and considerations are the same, but the
does not preclude them from saying how much equity they are being litigation risk is significantly lower.
in their opening bid letter how asked to rollover etc. So, in that Whether and how the target board
important it is to retain management situation (where we had a special in those cases will manage this issue
or that holding on to key personnel is committee that made this decision), will be up to them, based on the
a predicate to reaching agreement on we freed the CEO up for retention make-up of their company’s
a transaction. Issues arise when talks (on a chaperoned basis) at an shareholder base.
8M&A monitor Q1 2022
Freshfields M&A Forum: Session 2
Navigating to closing
and how to prepare
for the journey
CFIUS/FDI and protectionism by CFIUS, creating a long and
uncertain deal process with
Aimen Mir,
Julian Long heightened risk of failure. However,
Partner, London
CFIUS, Washington, DC
the committee is on the lookout for
• Under the Trump administration, any China nexus. The investor’s
the authorities of the Committee on limited partners; its co-investors
Foreign Investment in the United (and even any history of Chinese
Aimen Mir States (CFIUS) were expanded to co-investments); and the extent of its
Partner, Washington DC cover non-controlling investments China footprint (e.g., R&D facilities,
and to create a mandatory filing JVs and even the commercial
requirement, among other things. importance of China as a market)
At the same time, CFIUS’s resources are all seen as potential red flags.
were strengthened, allowing it to A similar lens is applied to Russia.
Meghan Rissmiller
Partner, Washington DC scrutinize more deals.
• Historically, CFIUS has drawn a
• As a result, it is no longer a viable clear line between issues of national
strategy to try to rely on CFIUS not security and economic interest.
detecting the transaction – indeed However, in recent years economic
Damien Zoubek last year CFIUS called in more than considerations have become more
Partner, New York 100 non-notified deals, a few of readily accepted as national security
which involved European companies. considerations, in line with the view
CFIUS’s greater resources also mean of China as a strategic competitor
it is more willing to impose across all areas of the economy.
Lori Goodman conditions on companies.
• In some areas, the key CFIUS risk
Partner, New York
Is CFIUS just an issue for factor is the sensitivity of the target
Chinese investors? rather than the identity of the buyer.
But whereas in the past these
• President Trump was very vocal calculations typically involved assets
Alice Greenwell about US/China tensions. That has
Partner, London
in defence, technology, and
continued under the Biden government supply chains, in a
administration, which, if anything, post-COVID world, more activities
is more focused and deliberate. are deemed “critical” (healthcare
• Almost all direct Chinese being a prime example highlighted
investments are heavily scrutinized by the pandemic).
9M&A monitor Q1 2022
How should buyers respond? of the process on deal terms and words of Jonathan Kanter, head of
timelines. Failing to give CFIUS the DoJ’s antitrust division, they are
• Navigating CFIUS requires a
considerations sufficient attention “enforcers, not regulators.”
sophisticated understanding of
how the government perceives risk. early in the deal process can result in • Aside from tone, substantive
As an example, Chinese companies inadequate diligence and preparation, assumptions have also changed.
will often push for broad strategic which can lead to an unnecessarily Historically, the agencies have not
agreements with their Western long CFIUS review process. sought to intervene in vertical or
counterparties. While these may • Sometimes the committee can do non-horizontal mergers because
mean little on the ground, to a something unexpected, such as such deals were often seen as
US government official they may during a recent deal that had no pro-competitive and efficiency-
look like a route to technology apparent major risks but where the enhancing. However, in the last
transfer. Articulating the commercial government was concerned that year or so we have seen five
context around issues such as the merged business would become challenges of vertical transactions.
these, in government-friendly terms, a target for Chinese interference. • Likewise, it used to be the
is essential. In scenarios such as these, the assumption that difficult deals could
• Buyers need to know when and how challenge is then to negotiate the be resolved via remedies. Today, the
to push back if the government protections the government requires agencies have stated a preference to
identifies a potential risk and seeks without destroying the operational litigate rather than accept
mitigation. What are the concerns, or commercial rationale for “imperfect” or complex remedies.
and is there an acceptable alternative the transaction. We are likely to see remedies going
to address them that protects the forward only when they are both:
commercial interests of the parties? US and global antitrust 1. simple and 2. structural, as well as
trends continued US enforcer hostility to
• The decision on whether to file
requires expert judgement. Often the Meghan Rissmiller, behavioral remedies, which contrasts
government may have access to Antitrust, Washington, DC with at least the EC’s position.
information that even the parties • The tone of the US antitrust agencies • Finally, the agencies are taking a
do not have that could risk the deal. – the Federal Trade Commission and more expansive view on theories
Likewise, filing in an abundance the Department of Justice – has of harm – previously their primary
of caution may see conditions changed in recent years, as it has focus was on price and quality
imposed on the transaction that among other competition authorities (i.e., the consumer welfare standard),
would not have occurred had the across the world. Previously the now they are more open to
parties chosen not to file. agencies were open to collaborating considering the impact of
• It is critical to front-load CFIUS to find solutions to perceived transactions on innovation and labor
analysis given the potential impact competition concerns. Today, in the markets, among other things.
10M&A monitor Q1 2022
How is this affecting that they can close their deals, but
deal timelines?
• FTC head Lina Khan has introduced
that the relevant agency has not
completed its investigation (so-called Today, vertical
meaningful process changes that
are affecting deal timelines; as an
“close at your own risk” letters).
Post-closing reviews of complex mergers are now
example, engaging earlier at the
transactions have always been
possible, but the letters are new and being challenged
Commission level in Staff
investigations and requiring more
introduce further uncertainty into
the process of getting to closing.
more regularly.
from the Staff to defend closing
an investigation.
Important new trends in
• Early in the pandemic, measures the allocation of antitrust
were taken to suspend the early and CFIUS/FDI risks
termination of the HSR process,
Damien Zoubek,
which meant that the normal 30-day
Corporate and M&A, New York
waiting period could be shortened
to as little as 15 days for deals with • Historically, buyers doing horizontal
no competitive impact. This was deals generally knew how to assess
originally explained as being and navigate the antitrust landscape,
temporary to deal with a record how long it would likely take to get
number of filings but is still in place through the second request process
today, extending the timelines and how to propose and implement
of even non-controversial deals. remedies to alleviate regulatory
concerns. Parties generally
• At the same time, the DoJ and FTC
negotiated regulatory commitments
are taking longer to decide which one in merger agreements within this
will review a particular transaction. framework and could usually assess
Knowing when to submit the HSR which areas posed risk and whether
notice is therefore a critical call – remedies were practical. And where
go too early and much of the 30-day there was some daylight in the
window could be eaten up by this agreed remedy standard and
back-and-forth. (The implication potential risk areas, protections
being that the Staff will have such as reverse break fees could
less time to perform its initial be discussed.
investigation and could force parties
• However, given the current
to seek additional time even when
environment, relying on traditional
there are no issues).
analysis, negotiating tactics and
• The FTC has also rescinded its prior merger agreement tools may not
approval policy and started to include be sufficient.
prior approval requirements in
• Today, vertical mergers are now
consent agreements. A prior approval
being challenged more regularly.
requirement means that if a party
Unlike horizontal overlaps, vertical
enters into a consent, any future
deals may not offer any feasible
deals in the same relevant market
structural (divestiture) remedies, and
(even those that are not HSR
behavioral remedies are largely off
reportable) must be approved by the
the table because the FTC and DoJ
FTC in advance. This can have serious
don’t like them relative to structural
implications for companies that plan
solutions. This is a great example
to do multiple acquisitions, especially
of how parties and their advisers
where the conditions can extend for
are having to think about how to
up to 20 years.
make deal documents work in these
• Finally, both the FTC and DoJ have grayer areas. From where we sit,
begun sending letters to parties at we see M&A agreements evolving in
the end of the HSR period stating a few ways.
11M&A monitor Q1 2022
• First, we’re seeing longer outside regulator stepping in to block a deal
If the buyer dates, even for transactions where
the parties agree there should not be
after their counterparts in other
countries have approved it (antitrust
wants key any substantive antitrust risk. We
had a recent deal where the outside
authorities are increasingly
coordinating across borders). Careful
individuals date was something like 15 months
just to budget for the remote
thought – even if it takes time –
can produce a swifter result than
to remain, possibility of a challenge, despite the
parties and their advisers agreeing
proceeding with all deliberate
speed from the get-go.
they may choose the substantive risk was low. Longer
outside dates, in turn, put pressure Navigating the latest
to convert their on interim operating covenants,
which govern how the business is
execution risks relating to
employees and shareholder
severance run between signing and closing. approvals in the US
packages • Second, more parties are committing
to litigate in deal agreements because
Lori Goodman,
People & Reward, New York
into retention the FTC and DoJ are showing their
propensity to challenge transactions
• The sums involved in terminating
employees during change-of-control
payments that in court (the route by which the
agencies block deals under the US
transactions can be a shock for
European acquirors – US public
extend over a antitrust laws).
company CEOs and management
• Third, we are seeing reverse breakup teams are often entitled to significant
period of years. fees agreed to more and more, even severance packages through their
in contracts with a “hell or high employment contracts.
water” clause (where theoretically
• CEOs and other senior individuals
there should be no scenario where
may even be able to resign
this sum would be payable). But with
voluntarily and receive this enhanced
parties having to evaluate the
severance; some contracts contain a
possibility of the US government
“good reason” provision, which allows
simply challenging deals it views as
the individual to quit and still receive
anti-competitive (including under
a pay-out under certain conditions.
non-traditional antitrust theories),
Egregious conduct (such as cutting
litigation has to be part of the
pay) would qualify, but so might less
strategic toolkit.
obvious issues such as the fact the
• Fourth, we are seeing an increase in CEO is now in charge of a subsidiary
“fix-it-first” strategies, where rather than the main business.
companies are completing
• If the buyer wants key individuals
divestitures before going to the to remain, they may choose to
antitrust authorities to eliminate convert their severance packages
their concerns. into retention payments that
• Finally, in complex, cross-border extend over a period of years.
deals, having a global antitrust Here, the complexities of the US tax
strategy is critical. Buyers need to code, such as Section 409A and
think about where they need to file, section 280G, need to be carefully
and when, to mitigate the risk of a thought through.
12M&A monitor Q1 2022
Even if the buyer is not US-listed,
it will still need to comply with
the securities law exceptions that
cover employees.
• Section 409A applies to deferred are increasingly seeing target comply with the securities law
compensation, very broadly defined, employees’ equity roll over into cash exceptions that cover employees.
which can cover severance. It imposes that pays out over the vesting Rule 701 of the Securities Act is
a penalty tax on employees if schedule of the awards. typically relevant at the federal
compensation is not structured • In a stock deal this is generally level, and the buyer has to meet the
carefully to comply with its payment straightforward to do, but in a cash technical requirements of the laws
timing rules, and converting deal the buyer has to determine what in every state where the target’s
severance into retention is tricky. ratio to use for the conversion, and employees live.
Section 280G imposes an excise there are strict rules under Section • If the buyer wants to do a cash-out,
tax on the individual, and a lost 409A of the US tax code about not they must assess the employees’
deduction on the company, if increasing an employee’s spread value equity plan to make sure this is
payments in connection with a as a result of a deal. allowed (although US plans are
change in control exceed 3x the typically flexible).
Alice Greenwell,
individual’s average compensation
People & Reward, London • Most US benefit plans are contractual
over the past five years.
• In some situations, employees who rather than statutory, so parties must
• Some executives may also have tax negotiate post-closing benefits and
used to receive target stock will now
gross-up clauses in their contracts, compensation comparability
receive acquirer stock. In other cases,
whereby their employer pays any covenants. Often the buyer commits
the target stock will be canceled,
additional income taxes they incur. to maintain compensation and
and new stock granted under the
Given the fact that in some deals the acquirers’ plan. benefits for a period after closing,
severance packages together can run which may require HR input at an
into tens of millions of dollars, these • This needs careful thought however, earlier stage in negotiations to ensure
will also be closely scrutinized by the not least because the route chosen the buyer can meet its commitments.
buyer’s shareholders. There are ways may require shareholder approvals.
This needs to be wrapped into the • It is also important to consider
to “mitigate” the Section 280G whether equity can be included in
overall deal approvals, otherwise the
consequences in a public deal, and any go-forward promises, because
buyer may find it has significant
lots of time is often spent on this. many European companies have
awards to satisfy and no means to
satisfy them. tighter controls than in the US
How do European buyers deal
around how far down the
with US employee equity? Lori Goodman, organization equity awards can go.
• Whether it is stock options or People & Reward, New York Sometimes buyers will say they will
restricted shares, the basic choices for • Additionally, there may be securities provide cash to match equity, but
a buyer have historically been to cash laws considerations. Even if the buyer some choose not to because it leads
them out or roll them over. Today, we is not US-listed, it will still need to to a very large packages.
13M&A monitor Q1 2022
Damien Zoubek, fees are typically limited to 1 percent,
Corporate and M&A, New York so in situations where there are deal
• It is important to remember that protections on both sides, one party Most US deals
may assert the need for equality
none of these considerations restricts
the buyer’s ability to sever in the US. where it plays to their advantage. have no-shop
• The merger agreement will be
expressly clear that the individual
Where the deal agreement includes
fiduciary concepts on both sides, this covenants
employees do not have privity with
will often push the parties towards
the lowest common denominator. but will allow
the company to enforce; it is a moral
obligation that buyers tend to comply • In the US, what constitutes a
“superior offer” is at the discretion
the target to
with, but not something that can be
litigated by those affected. With that of the board using agreed criteria negotiate with a
(price, likelihood of completion, etc),
topping bidder
said, buyers do comply with these
commitments as they go to broader whereas in other jurisdictions there
reputational and employee relations
considerations that can be very
may be a set price increment or
percentage above the incumbent with a “superior
important for dealmakers, especially
repeat buyers.
transaction that has to be met.
• In stock deals, we sometimes see
proposal” prior to
How deal protections in the
acquirers try to negotiate so that
the target cannot terminate to take
the shareholder
US have evolved, and what
this means for European
a superior proposal and simply vote on the deal.
change its board recommendation
acquirors (a so-called “force-the-vote”
Sebastian Fain, provision). Doing so is permissible
Corporate and M&A, New York under Delaware law as a fiduciary
• Deal protections in the US have matter, but even in stock deals is
remained unchanged in recent years. not the norm. However, the target’s
Most US deals have no-shop covenants shareholders still have the final
but will allow the target say and are able to vote down
to negotiate with a topping bidder he transaction.
with a “superior proposal” prior to • Another issue worth noting is that
the shareholder vote on the deal. private equity transactions, the
The original bidder will generally agreements will often include a
have last-look matching rights and the “go shop” clause where the target
right to a break fee should the target has the right to solicit for a period
choose to proceed with the interloper. of time after signing and pay a
• Delaware case law states that break lower break-up fee for a bidder that
fees can go as high as approximately emerges during this window.
4 percent of the target’s equity value This is not a legal requirement but
at the sale price, although in bigger is included due to the perception
deals, break fees tend to be between that there could be conflicts in
2 and 3 percent (given the law of PE deals where management teams
large numbers). Outside the US, break are rolling over.
14M&A monitor Q1 2022
SPACs
take off
in Asia
As our latest De-SPAC
Debrief shows, 2021 was a
banner year for US de-SPAC
deals. Keen to foster their
own SPAC ecosystems, both
Singapore and Hong Kong
have recently launched new
regimes. Here, we round up
the latest developments.
In September 2021 Singapore became
the first major Asian bourse to
introduce a SPAC listings regime,
closely followed by the Hong Kong Stock
Exchange (HKEX) in January 2022.
January saw three SPACs list on the
Singapore Exchange (SGX), which
together raised around S$476m
(US$385m). Singapore’s SPACs are
expected to cast a wide net across
the Asia Pacific region for acquisition
targets, while the initial group of
Hong Kong listing applications suggests
their focus will primarily be on
China (indeed, most Hong Kong SPACs
have been capitalised by mainland
Chinese investors).
HKEX Hong Kong Exchange Square and International Finance Center 15M&A monitor Q1 2022
Both the Singapore and Hong Kong SPAC regimes
should provide a natural listing alternative for
emerging companies in South and Southeast Asia.
Until now these companies have been targeting
mergers with US-listed SPACs, which is currently
a challenging route for Chinese companies in
particular. Having two “close-to-home” SPAC markets
for Asian companies is a positive development
Arun Balasubramanian,
Partner, Hong Kong
Hong Kong rules set higher “Overall, the market has reacted
bar than other markets positively to the new listing rules,”
he added. “Both the SGX and the HKEX
Many aspects of Hong Kong’s regime are
offer global standards of regulation,
unique and considered tougher than
execution and disclosure, which should
those in other markets. For instance,
provide assurance to SPAC investors,
only professional investors can subscribe
promoters and targets.”
to and trade in a SPAC’s shares before it
merges with a target. At least 20 of
Major investors look to seize
those must be professional institutional
SPAC opportunity
investors, and the IPO is required to
raise at least HK$1bn (c.US$128m). By Looking ahead, the relative size and
contrast, Singapore has made SPACs liquidity of the two markets suggests
available to small retail investors and there is likely to be greater deal flow
has set its minimum valuation at lower in Hong Kong. A number of well-known
at S$150m (c.US$110m). asset management, private equity and
venture capital firms are already
To date the HKEX has received 11
promoting Hong Kong SPACS, and it is
listing applications, seven of which
expected that they will be able to
were handled by Freshfields (including
draw on their deep sourcing and
the first by Aquila Acquisition
execution capabilities to find
Corporation). Freshfields Partner
acquisition targets that will eventually
Arun Balasubramanian, who led the
be listed on the HKEX.
Aquila advisory team alongside fellow
partners Grace Huang and Teresa Ko, Market participants are aware that
said: “This was a very complex project the HKEX does not permit “back door”
executed under significant time listings by companies that are not
pressure. We effectively developed a ready to go public. The focus therefore
new commercial, execution and is on finding high-quality targets
documentation framework in that meet the HKEX’s strict eligibility
consultation with the HKEX and requirements and can go through
various intermediaries in parallel an IPO-level due diligence and
with the application itself. disclosure process.
16M&A monitor Q1 2022
Global M&A Q1 2021,
activity by sector
8 Sector Value $bn %
7
6 1 TMT 321.21 31.63
1 2 Consumer* 159.76 15.73
5 3 Industrials and materials 148.91 14.66
M&A 4 Financials 137.08 13.50
value 5 Real estate 108.82 10.71
4 6 Energy and power 61.82 6.09
2 7 Healthcare 49.91 4.91
3 8 Infrastructure and transport 28.16 2.77
Total 1,015.67 100
* Includes retail
Sector Volume %
7 8 1 TMT 2,927 26.76
6
1 2 Consumer* 2,488 22.75
5 3 Industrials and materials 1,953 17.86
M&A 4 Financials
5 Healthcare
1,171
862
10.71
7.88
4 volume 6 Real estate 674 6.16
7 Energy and power 487 4.45
2
3 8 Infrastructure and transport 376 3.44
Total 10,938 100
* Includes retail
Source: Refinitiv (data correct to 23/3/22)
17M&A monitor Q1 2022
Global M&A Q1 2021 – value and volume
Global* USA*† Europe*† Asia-Pacific*†
M&A value M&A value M&A value M&A value
$1,015.68bn $549.59bn $224.71bn $171.45bn
M&A deal volume M&A deal volume M&A deal volume M&A deal volume
10,940 2,918 3,721 3,169
Top 3 deals Top 3 deals Top 3 deals Top 3 deals
1 Activision Blizzard/
$68.7bn 1 Activision Blizzard/
$68.7bn 1 Orange España/
$8.8bn 1 Baring Private Equity
$7.5bn
Microsoft Microsoft Masmovil Ibercom Asia/EQT
2 First Horizon/ $13.5bn 2 First Horizon/ $13.5bn 2 Allwyn Entertainment/
Cohn Robbins Holding
$7.4bn 2 Citigroup Inc- $3.7bn
Toronto-Dominion Toronto-Dominion Consumer Banking
Bank Bank Business/United
Overseas Bank
3 Alleghany/
$11.5bn 3 Alleghany/
$11.5bn 3 Mimecast/
$6.1bn 3 Paidy/ PayPal
$2.7bn
Berkshire Hathaway Berkshire Hathaway Proofpoint Holdings
Inbound: Inbound: Inbound: Inbound:
most targeted markets markets investing into markets investing into markets investing into
US companies European companies Asia-Pacific companies
US US US China
2,918 deals $549.6bn 2,454 deals $492.8bn 469 deals $77.4bn 682 deals $51.6bn
UK Canada UK US
948 deals $67.1bn 87 deals $17.9bn 678 deals $41.7bn 185 deals $21.3bn
China Japan Germany Japan
752 deals $46.2bn 44 deals $5.2bn 315 deals $15.1bn 846 deals $21.2bn
Outbound: Outbound: Outbound: Outbound:
most acquisitive markets markets US companies are markets European companies markets Asia-Pacific companies
investing into are investing into are investing into
US US UK China
3,342 deals $614.4bn 2,445 $492.8bn 660 deals $34.8bn 718 deals $41.2bn
UK Netherland US Japan
829 deals $53bn 36 deals $26.5bn 199 deals $23.4bn 805 deals $20.8bn
China UK Germany Hong Kong
719 deals $52.2bn 171 deals $25.6bn 349 deals $19.9bn 52 deals $15.6bn
Financial sponsor M&A – top 3 deals with buyside financial sponsor involvement
1 2 3
$10.4bn $7.7bn $7.5bn
Anaplan/ South Jersey Industries/ Baring Private Equity Asia/
Thoma Bravo Infrastructure Investments Fund EQT
* Deal value includes net debt of target | † Includes domestic deals | Source: Refinitiv | Data correct to 23/3/22
18M&A monitor Q1 2022
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