CFIUS Reform: How Private Equity Funds Are Affected

Guest post by Rod Hunter, Sylwia A. Lis, and Karl Paulson Egbert, Partners at Baker McKenzie LLP

With the signature of President Trump on August 13, 2018, the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA) became law. FIRRMA represents the most significant changes to the law governing the Committee on Foreign Investment in the United States (CFIUS or Committee) since the creation of the U.S. foreign investment regime in 1988. Although prompted primarily by national security concerns with Chinese investments, the legislation will affect investments by all non-U.S. investors, including investors in private equity and other funds. The changes reflect a trend across advanced markets for greater scrutiny of investments made via fund vehicles.

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SEC Divisions’ Issue Public Statement on Digital Assets and ICOs, Echoing Recent Enforcement Actions

Guest post by  – Cleary Gottlieb Steen & Hamilton LLP

On November 16, 2018, the U.S. Securities and Exchange Commission (“SEC”) Division of Corporation Finance (“Corp. Fin.”), Division of Investment Management, and Division of Trading and Markets issued a joint public statement on “Digital Asset Securities Issuance and Trading.”  The public statement is the latest in the Divisions’—and the Commission’s—steady efforts to publicly outline and develop its analysis on the application of the federal securities laws to initial coin offerings (“ICOs”) and certain digital tokens.  These efforts have combined a series of enforcement proceedings with public statements by Chairman Jay Clayton and staff, including a more detailed statement of the SEC’s analytical approach in Corp. Fin. Director William Hinman’s speech on digital assets in June 2018.

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Materiality and Efforts Qualifiers – Some Distinctions, Some Without Differences

Guest post by Daniel E. Wolf and Eric L. Schiele, Kirkland & Ellis LLP

Much deserved attention has been paid to the first finding of a “material adverse change” (MAC) by a Delaware court in the recent Akorn decision. Of perhaps equal practical importance to dealmakers is the court’s guidance on a question that has long occupied draftspersons — whether or not there is, and the extent of, any legal difference between the many shades of qualifiers used in deal agreements on two key terms: materiality modifiers and efforts covenants. Building on earlier Delaware decisions, the court reached a clear split decision on this question.

In the case of efforts covenants, the court noted that qualifiers like “best efforts”, “reasonable best efforts”, “commercially reasonable efforts” and shades in between are used to define “how hard the parties have to try” to satisfy a commitment in the agreement such as obtaining regulatory approvals. VC Laster cited an ABA publication that purports to set a hierarchy among these clauses, with each prescribing a slightly different level of required efforts. However, he pointed to a string of recent cases, including the decision in Williams v. ETE, which view these standards — even when they appear in the same agreement — as largely interchangeable despite clearly seeming to suggest the parties intended a difference. In the Williams case, the court found that the “commercially reason- able efforts” and “reasonable best efforts” standards both “impose[d] obligations to take all reasonable steps to solve problems and consummate the transaction”. In another case (Alliance Data), the Delaware court said that even a flat “best efforts”, typically considered the most demanding standard, “is implicitly qualified by a reasonableness test”. A recent New York decision (Holland Loader) suggests that New York law will similarly imply a reasonableness standard regardless of which modifier is used.

By contrast, the Akorn decision confirms a sharp, and perhaps larger than expected, distinction between the two most common materiality qualifiers used to modify representations, covenants and closing conditions — “material adverse change/effect” and “in all material respects”. In the case of a MAC, VC Laster closely followed Delaware precedent (including Hexion and IBP) in holding that a buyer asserting a MAC “faces a heavy burden” and the relevant effect must “substantially threaten the overall earnings potential of the target in a durationally significant manner”. But in interpreting the similar-sounding “in all material respects” standard, the court articulated a much lower burden, stating that this qualifier merely “seeks to exclude small, de minimis, and nitpicky issues” and to limit the operation of the representation, covenant or condition to “issues that are significant in the context of the parties’ contract”.

The Akorn decision is a useful reminder that there sometimes is a gap between practitioners’ expectations about theoretical formulations and real-world outcomes when those expectations are judicially tested. While we do not necessarily expect the deal community suddenly to abandon negotiations around efforts formulations or to depart significantly from market practice for materiality qualifiers, parties can use an informed understanding of the case law to more effectively deploy negotiating leverage and goodwill where it matters most.


Daniel E. Wolf, Partner

www.kirkland.com/dwolf

Daniel Wolf’s practice focuses on mergers and acquisitions where he represents public and private companies, as well as private equity firms, in a variety of domestic and international transactions. His transactional experience spans the range of M&A activity including many significant cross-border and contested transactions. He also counsels public company clients on governance, finance, securities and other general corporate matters.

Eric L. Schiele, Partner

www.kirkland.com/eschiele

Eric Schiele is a corporate partner in the New York office of Kirkland & Ellis LLP. His practice primarily encompasses public and private mergers and acquisitions and board advisory work, including hedge fund activism defense.

Kirkland & Ellis LLP

www.kirkland.com

For more than 100 years, Kirkland has provided exceptional service to clients around the world in complex litigation, corporate and tax, intellectual property, restructuring and counseling matters. The groundwork has been established for another century of superior legal work and client service.

This communication is distributed with the understanding that the author, publisher and distributor of this communication are not rendering legal, accounting, or other professional advice or opinions on specific facts or matters and, accordingly, assume no liability whatsoever in connection with its use. Pursuant to applicable rules of professional conduct, this communication may constitute Attorney Advertising. © 2018 KIRKLAND & ELLIS LLP. All rights reserved.

Sellers Alleged Breach of Stock Purchase Agreement Did Not Excuse Buyer in M&A Transaction from Its Own Performance

Guest post by Philip D. Amoa, Associate – McCarter & English, LLP

Original Title: Delaware Law Updates: Sellers Alleged Breach of Stock Purchase Agreement Did Not Excuse Buyer in M&A Transaction from Its Own Performance; Right of Set-Off Did Not Apply to Unliquidated Claims

According to the Merriam-Webster Dictionary, the word “unliquidated” is defined as “not calculated or established as a specific amount.” The Post Holdings case (Post Holdings, Inc., and Michael Foods of Delaware, Inc., v. NPE Seller Rep LLC, C.A. No. 2017-0772 AGB [Del. Ch. Oct. 29, 2018]) shed light on how a party’s right of set-off was construed to have limited applicability. The case also showed how a party may be excused from its obligations under a contract.

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Digital Tokens: Rethinking the term “Cryptocurrency”

Guest post by Daniel DeWolf, Rachel Gholston, and Marine Bouaziz of Mintz Edge

What are the similarities between a one dollar bill, a share of a company, and a pre-paid gift card? The answer is……..not so much! The same is true of the similarities between virtual currencies, security tokens, and utility tokens; in truth, not so much. Yet, if you follow the world of digital tokens in the media and popular press, you would think that virtual currencies, security tokens, and utility tokens are all very similar because they are often concurrently and interchangeably discussed under the topic of “cryptocurrency.”  On the news, in numerous blog articles, and even in investment prospectuses, “cryptocurrency” is used to describe virtual currencies, security tokens, and utility tokens even though they are very different concepts, each of which is subject to different legal frameworks and regulations. While each of these items are created on distributed ledgers using blockchain software, from both a legal and a functional perspective, the similarity ends there. We should re-think the use of the word “cryptocurrency,” and instead use the terms that are specific to the categories that have developed: virtual currencies, security tokens, and utility tokens.  In our descriptions below we provide further information on the meanings of each of these categories.

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Is Delaware Really a ‘Sandbagging State’?

Guest post by Daniel E. Wolf, Partner, Kirkland & Ellis LLP

In the private M&A context, “sandbagging” refers to a buyer, who despite having knowledge of a breach of representation or warranty by a seller at some time before closing, proceeds with the closing and then seeks indemnification from the seller for the breach of representation or warranty of which it had prior knowledge.

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