Category Archives: Staying Sharp

Staying Sharp is a series highlighting recent news, trends and developments that may aid a corporate lawyer in their practice and interactions with clients. The postings in the series may not be updated after their initial posting.

California Consumer Privacy Act of 2018

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Privacy Please! You can’t see me right?

On June 28, 2018, Governor Jerry Brown signed into law the California Consumer Privacy Act (CCPA). The CCPA has many similarities to the General Data Protection Regulation of the European Union (GDPR), but there are several differences.  Given that California is the home of many tech giants, it makes sense for this legislation to be enacted here and it also means there will be a big push by such tech giants to remove some teeth from the law.

What Is It

CCPA protect the rights of Californians to access and delete the information that companies collect.  CCPA permits Californians to opt out of their data being sold and prohibits the sale of personal information from those under 16.   Additionally, CCPA would provide consumers in certain cases with a right of action in the event of a data breach if the company failed to implement and maintain “reasonable security procedures”.  CCPA is targeted at larger businesses which either (i) have an annual gross revenue in excess of $25,000,000, (ii) buy, sell, or receive for commercial purposes personal information for 50,000 or more customers, or (iii) derive more than half of their annual revenue from selling consumers’ personal information.

Why

Consumers have been calling for stronger data privacy rights.  As the CCPA notes:

As the role of technology and data in the daily lives of consumers increases, there is an increase in the amount of personal information shared by consumers with businesses. California law has not kept pace with these developments and the personal privacy implications surrounding the collection, use, and protection of personal information.

Data breaches affecting consumers worldwide have become routine and without doubt the large consumer breaches of late combined with the Cambridge Analytics scale has certainly spurred action to be quickly taken.  News reports say that the CCPA was a law minute compromise between California lawmakers and Californians for Consumer Privacy. Critics have argued that because of the rush to implement, the CCPA is too broad.

What Now

The CCPA will not become effective until January 1, 2020 and certainly many revisions will be made to the regulations.  Open questions include:

  1. How will CCPA be enforced?
  2. How do you know if someone is a Californian?
  3. How do companies make the privacy rules for Californians compatible with those in other states or countries?
  4. Will a national data privacy rule follow?

For lawyers, this will certainly spur discussion with clients on data privacy policies and practices, representations made in contracts and how to best limit liability in the event of a breach.  Keep an eye out for the latest developments on how this may impact your clients (and you personally).

For those interested in reading the full text of the CCPA (because, truth time, we lawyers find that kind of reading exciting), you can find it here.

Defining Independent Contractor

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The sharing economy has led to an increasing number of independent contractors. But what is an independent contractor? A recent decision by the California Supreme Court (Dynamex Operations West, Inc. v. Superior Court of Los Angeles, No. S222732 Cal. Sup. Ct. Apr. 30, 2018) has adopted a modified “ABC” test in a case involving this question.  The court was asked to determine what test should apply in determining what “employ” and “employer” means under the California Industrial Welfare Commission wage orders (note this important limitation). The court declined to apply the Borello test in favor of a more rigid 3 factor approach known as the “ABC” test.

Under the new stricter test, a person will only be considered an independent contractor if the hiring entity can prove all three of the following:

A.  that the worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact;

B. that the worker performs work that is outside the usual course of the hiring entity’s business; and

C. that the worker is customarily engaged in an independently established trade, occupation or business of the same nature as the work performed.

The court declined to apply the test to other wage and hour laws.  For corporate lawyers, Dynamex is a reminder that the definition of an independent contractor is ever changing.

Link

Representations and Warranties Insurance (RWI) is insurance designed to cover losses resulting from a breach of representations and warranties.  It is increasing in popularity in the M&A world and will certainly change how escrows and allocation of risk will work.  There is a lot to read out there on RWI, but one article I found helpful is here.

Debt and M&A

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M&A Weekly Watch

Back in my day, students didn’t tote around macbooks or ipads. We had Dell laptops and for many, they were the go to computer maker of choice. Times have changed and we hear less about Dell, especially after it went private in 2013. That has changed since the announcement that Dell has proposed to acquire EMC for $67 billion, which numerous news sources have cited as the biggest tech deal ever.

Aside from making the headlines for the overall deal size, the Dell EMC proposed M&A is big news because it will be one of the largest leveraged deals in history, with Dell taking on an estimated $50B in debt to finance this M&A.

Debt and M&A – A Lawyer’s Take

As lawyers we may recuse ourselves from business decisions, like how a deal is going to be financed but questions like this are crucial to deal structure and effective negotiations. Knowing that debt will be used in an M&A may affect closing conditions, termination rights and timing of the deal. Due diligence is normally reserved for the target, but in a debt deal, the buyer may want to do its own due diligence to ensure it’s not prohibited from incurring such debt, for example, if there are agreements with covenants requiring a certain leveraged ratio.

Interest Rates and M&A

Many news articles have been reporting that Dell is motivated to undertake this M&A now before the rumored interest rate hikes occur. An October 12, 2015 report by Marketplace on the proposed Dell EMC M&A cited academics who don’t believe that interest rates drive M&A or that they even affect corporate decisions. Without more study on this topic, I can’t say for sure, but it’s likely that interest rates will continue to be heavily discussed in M&A.

 

Practice Tips for Drafting Earn-Outs

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Covenant of Good Faith and Fair Dealing and Its Application in Earn-Out Provisions

20150603Earn-outs are a common provision in merger agreements, allowing the buyer to defer paying a portion of the purchase price until the seller has “earned” it, meaning that seller has achieved some financial target or other agreed upon condition.  In the recent case of Lazard Technology Partners, LLC, v. Qinetiq North America Operations LLC, April 23, 2015, Strine, L., 2015 WL 1880153, the Delaware Supreme Court made an important ruling regarding the covenant of good faith and fair dealing and its application in earn-out provisions, from which attorneys can learn good practice tips for earn-outs.

Background

Qinetic North America Operations (“Buyer”) acquired Cyveillance, Inc. (“Seller”) for $40M. The merger agreement included an earn out provision that said that if certain revenue targets were achieved, Seller may receive up to an additional $40M. The key language from the earn out provision reads as follows:  Buyer was prohibited from “taking any action to divert or defer revenue with the intent of reducing or limiting the Earn Out Payment” (“Earn Out Provision”).

Not surprisingly, revenue targets weren’t reached and earn out payments weren’t made. Lazard as the seller’s representative brought suit against the Buyer alleging (1) breach of the Earn Out Provision and (2) violation of the covenant of good faith and fair dealing by Buyer for failing to take certain actions that Seller believed would have resulted in the revenue target being reached.

Ruling

Delaware Supreme Court affirmed the Court of Chancery’s decision in favor of Buyer, finding that (1) there was no proof that Buyer intended to avoid the earn out and (2) the implied covenant of good faith and fair dealing couldn’t be relied on because “there was no gap to be filled”, i.e. the Earn Out Provision was clear on the obligations of Buyer.  Both courts took a 4 corners approach to the merger agreement and found that there was no violation.

Practice Tips for Drafting Earn-Outs

The Lazard Qinetic case yields good practice tips for drafting earn-outs that attorneys representing either buyer or seller can apply.

In representing the buyer attorneys should either (a) disclaim any implied duty of good faith and fair dealing or (b) make very clear in the earn out provision of the merger agreement what the express post-closing obligation of Buyer is, including the standard to be used. In this case, the Earn Out Provision was clear that it was an intent based standard.  What helped in this case was that there was a track record during negotiation that Buyer rejected all attempts by Seller to include more stringent post closing covenant (ex: act in good faith to maintain level of business, preserve customer relationships, etc.). Seller agreed to not include these provisions so the court wasn’t going to second guess the final merger agreement.

In representing the seller attorneys should (a) seek an express good faith obligation to maximize the earn out and (b) be weary of using an intent standard in a post closing affirmative covenant.

In general, I think another good practice tip is to not assume that the implied covenant of good faith and fair dealing will help to expand a party’s obligations in a dispute involving earn-outs. Attorneys should draft the merger agreement to very clearly lay out each party’s obligations.

Spin-Off and M&A Combination

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M&A Weekly Watch

Verizon’s announcement that it will acquire AOL for $4.4 billion is the big M&A news of the week. Many view AOL as a dinosaur internet provider, however, AOL is a mass media corporation which, according to Verizon’s press release, can help Verizon “build the biggest media platform in the world”. AOl has acquired several companies in its corporate history, including Mapquest, Moviefone, Techcrunch and The Huffington Post.  The Huffington Post has been one of the most discussed issues of the Verizon-AOL acquisition, as rumors have swirled that Verizon plans to spin-off The Huffington Post for $1 billion.

20150520-Spin-OffWhat is a Spin-Off?

A spin-off is a mechanism for creating an independent company separate from the parent company. In a 100% spin-off, the parent company will dividend shares in the new company to its shareholders. This compensates the shareholders for the loss of value of the new company. In a partial spin-off, the parent company will distribute fewer than all of the shares in the new company.

What is the Purpose of a Spin-Off?

A spin-off is undertaken when the new company is expected to generate more value on its own than it would if it remained as part of the parent company. There are other reasons why corporations cite for pursuing a spin-off including allowing each entity to focus on its business strategy or to create a targeted investment opportunity in each of the business entities.

Spin-Off and M&A

A spin-off can also be combined with an M&A transaction, which is a particularly favorable option for shareholders of the parent company. Several media outlets have suggested that not only could Verizon spin-off The Huffington Post after the AOL acquisition, but that the Huffington Post may be acquired by a private equity firm or German based digital publisher Axel Springer.

In a spin-off and M&A combination, one of the key factors your client is going to be looking for is how to structure the transaction in a tax free manner. As always, one of the key initial steps when undergoing a complex transaction is to consult your tax colleagues and to do so as early as possible. The spin-off and M&A combination can take on different structures, but one option which I wanted to highlight in light of the Verizon/AOL/The Huffington Post Deal is what’s known as the Reverse Morris Trust.

Investopedia defines a Reverse Morris Trust as when a parent company “creates a subsidiary, and that subsidiary and a smaller external company merge and create an unrelated company. The unrelated company then issues shares to the shareholders of the original parent company. If those shareholders control over 50% of the voting right and economic value in the unrelated company, the Reverse Morris Trust is complete. The parent company has effectively transferred the assets, tax-free, to the smaller external company.”

There are many issues you should consider in structuring a spin-off and M&A combination, and these are deal term specific so I won’t go into greater detail here, but as a corporate law practicioner, it is always good to generally know that this spin-off and M&A combinations exists, can be done semi-concurrently and if effected correctly, can yield financial benefits for your corporate client’s shareholders.

Standstill Agreement and Revlon Duties

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20150504-Standstill-RevlonM&A Tips in Light of Potential Salesforce Acquisition

Rumor has it that Salesforce has been approached with an acquisition offer by a large technology company. The identity of the buyer (and the certainty of such an acquisition) are unknown but news articles are throwing out names including IBM, Oracle and Microsoft. Given Salesforces’ high market cap of $47 million, the list of potential acquirers is fairly short and being narrowed each day.

While a Salesforce acquisition is still speculation, its potential is a great reason to discuss 2 important items for corporate lawyers to remember when it comes to mergers and acquisitions: standstill agreement and Revlon duties.

Standstill and Silent: Ensure that Any Potential Acquirer Signs a Confidentiality and Standstill Agreement

Depending on the exact details of a proposed merger and acquisition transaction, but particularly in a merger and acquisition involving a public company, the parties should enter into a confidentiality and standstill agreement. A potential acquirer will rightfully want to do a due diligence review of a target company, however the target company should protect itself before providing access to its confidential information and business records. A standstill agreement is usually included as part of a confidentiality or non-disclosure agreement but it may be structured as a separate agreement.

There are 2 types of standstill agreement:

(1) One type provides that the parties agree to deal exclusively with each other for a certain period of time. This helps to align the parties’ incentives to undertake due diligence and negotiations in good faith and steady force.

(2) The second type is a form of anti-takeover protection which helps to ensure that a potential acquirer will not use the confidential information they have obtained as part of the due diligence review to undertake a hostile bid of the target company. The standstill agreement will typically provide an exhaustive list of coercive actions including tender offers and proxy fights which the potential acquirer is precluded from doing for a certain period of time.

Remember Revlon Duties: Target Board Must Obtain the Best Price for Stockholders in a Sale of a Company

In Revlon, Inc. v. MacAndrews & Forves Holdings, Inc., the Supreme Court of Delaware held that in a transaction involving a change of control, the board of the target company must act according to their fiduciary duties and obtain the best price possible for stockholders. For lawyers, it is our job to ensure that the board of the target company is documenting with detail the discussions, analysis and extra steps taken to ensure they meet their Revlon duties. Salesforce is one of the largest cloud computing companies and although any serious acquisition offer will likely involve a hefty consideration amount, the board is still obligated to act to maximize value for its shareholders and the lawyers representing Salesforce will certainly be reminding them of this duty.

Standstill Agreement and Revlon Duties

A standstill agreement should be drafted with full consideration of the board’s Revlon duties. Entering into a standstill agreement cannot preclude the board from fulfilling its Revlon duties. Exclusivity for a finite period of time is encouraged to protect a deal and align incentives but it cannot preclude consideration of other parties or transactions which may yield higher value for stockholders.

SEC KBR Enforcement Action: Confidentiality Agreements and Dodd-Frank

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Confidentiality Agreements and Dodd-Frank: Ensuring Whistle Blower Reporting Under Dodd-Frank is Not Prevented

The Securities and Exchange Commission (SEC) recently took an enforcement action against Kellogg Brown & Root (KBR) in response to KBR’s use of a form confidentiality agreement it required employees to sign which stated that they would not discuss anything related to an internal investigation without the prior authorization of KBR’s legal department. The internal investigation was undertaken by KBR in response to an SEC investigation of complaints of unethical conduct and potential violations of federal securities laws. The form confidentiality agreement also included a provision that said any unauthorized disclosure of information may be grounds for disciplinary action or termination.

The SEC found that the confidentiality agreement was improper because it had the effect of prohibiting employees from reporting to the SEC any securities law violations. Rule 21F-17 of the Dodd-Frank Act of 2010 states “no person may take any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing or threatening to enforce, a confidentiality agreement with respect to such communications.”

Takeaways for Lawyers from SEC KBR Enforcement Action

Consider what exemptions need to be included in any confidentiality agreement, in particular any exemptions for legal compliance. Confidentiality agreements typically include standard exemptions for when information may be disclosed, in particular when something is a protected activity or when needed to comply with regulatory provisions. Take care to ensure that all confidentiality agreements, including those related to employment, include exemptions for legal compliance such as whistle blower reporting under Dodd-Frank. Exemptions for regulatory compliance are usually phrased broadly but consider whether the nature of the agreement is such that Dodd-Frank should be explicitly called out as an exemption.

Lawyers should also consider whether any provisions in other agreements have provisions which effectively could be seen as prohibiting or deterring an employee of a client from reporting any possible securities law violations to the SEC. This may involve amending form agreements or existing agreements.

What is Wi-Fi First?

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Defining Wi-Fi First

Wi-Fi First means a device or a system that uses Wi-Fi first (hence the name) and cellular service second only as needed. It is a heavily used term these days in discussions on the future of mobile communication. Google recently announced that it plans to launch its own wireless Wi-Fi First service, Project Fi, which many claim has the potential to revolutionize the cellular industry.

Why Wi-Fi First Matters to Lawyers

Wi-Fi First is a term lawyers should know to better understand certain clients and the goal of their particular product or service. It won’t be just Google who seeks to capitalize on this service. Project Fi is an example of a disruptive innovation (See: What is Disruptive Innovation?) and one which will (a) bring new innovation and players to the wireless market and (b) cause existing players such as the big name mobile carriers to have to reconsider their current business model.

Wi-Fi First is also a concept which should interest the masses as it has the potential to save smart phone users a lot of money. It will be interesting to see how the mobile industry will respond and whether this service inspires smart phone users to change their device preference. Project Fi is currently available on an invite only basis and works only with one device, the Nexus 6.

For more information on Project Fi in particular, check out the Project Fi page as well as Engadget’s Cheat Sheet to Project Fi.

Mergers and Acquisitions Weekly Watch

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20150424_Comcast

Comcast Withdraws from Merger with Time Warner Cable

Comcast has announced that it is formally withdrawing its proposed $45B merger with Time Warner Cable, after it failed to convince regulators at the Federal Communications Commission (FCC) to approve the transaction. Opponents of the merger argued that the transaction would result in Comcast controlling more than fifty percent of broadband.

Takeaways for Lawyers from the Failed Comcast Time Warner Merger

The failed Comcast Time Warner merger has two important takeaways for lawyers with respect to working with regulatory agencies:

1. Always Consider Which Regulatory Agencies Needs to Approve the Merger

When working on a merger, we’re trained to automatically consider if Hart Scott Rodino (HSR) approval is needed, but what about other regulatory agencies. In the Comcast Time Warner proposed merger, approval by the FCC was required. According to the FCC website:

Before a company may assign an FCC license to another company or acquire a company holding an FCC license, it must receive the Commission’s approval. The Commission reviews applications for the transfer of control and assignment of licenses and authorizations to ensure that the public interest would be served by approving the applications.

Although the FCC had not formally rejected the merger, news reports indicate that the FCC would have recommended issuing a “hearing designation order” which would have let an administrative judge decide the merits of the proposed transaction and would very likely have resulted in a no-go for the merger. The Comcast Time Warner proposed merger highlights that lawyers should always consider whether any regulatory agencies need to approve the merger based on the business of the client and the proposed transaction, and ensure that the proper specialist is contacted early to get the approval process under way as soon as possible.

2. When Regulatory Approval is Required, Ensure that the Transaction Agreements Include a Way Out for the Buyer if Regulatory Approval is Not Obtained

Many proposed mergers, particularly those with a high consideration amount and where approvals need to be obtained to effect the merger are structured as a two part, sign then close transaction. These approvals can include shareholder approvals and third party approvals, such as approvals from lenders and regulatory agencies. As the Comcast Time Warner proposed merger shows, obtaining regulatory approval is not always an easy task. If that regulatory approval isn’t obtained, the buyer in a transaction is not going to want to be sued for breach of contract for failure to close on the deal or be left with a worthless asset they cannot use because they are barred by regulatory restrictions. When regulatory approval is required, lawyers should always include a provision in the transaction agreements that essentially gives the buyer an opportunity to walk away, just as Comcast did. This is frequently structured as a closing condition; if the closing condition of the regulatory agency approval is not obtained, then the transaction cannot close and the parties are free to part ways without any breakup fees being paid.