Mergers & Acquisitions

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The views expressed in this post, as in all of my posts, are mine alone and should not be taken to represent the views of Fasken Martineau DuMoulin LLP or any of my partners or associates.

A little over five years have passed since the U.K. Takeover Code was reformed on September 19, 2011 in order to prohibit deal protection provisions — including lock-ups, “no shop/no talk” covenants and termination or “break” fees — in M&A deals involving the acquisition of publicly-listed U.K. companies.  Seizing upon a rare and valuable opportunity to conduct some natural experiments into the effect on the U.K. M&A market of this regulatory change, a pair of students from Stanford and Harvard recently published a study on the impact of the 2011 Reforms on U.K. deal volumes, the incidence of competing offers, deal premiums and deal completion rates.[i]  The results of their study are both interesting and instructive.

Among other things, they found that:

  • the ratio of U.K. deals to non-U.K. deals[ii] decreased by approximately 50% after the 2011 Reforms;
  • this reduction in deal volume was not offset by any increase in the incidence of competing offers or deal premiums in the U.K.; and
  • as a result, the U.K. M&A market experienced an estimated quarterly loss of approximately US$19.3 billion in deal volume following the 2011 Reforms, implying a quarterly loss, assuming a conservative average deal premium of 20%, of approximately $3.3 billion to shareholders of U.K. public companies since the 2011 Reforms were put in place.


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Seagate Technology’s Unusual Alliance with ValueAct Capital: Is There Method in Seagate’s Madness in Inviting an Activist Wolf into the Fold?

Last month, Seagate Technology plc, an $11 billion company in the data-storage business, announced a secondary block trade in which it facilitated the transfer of roughly 9.5 million ordinary shares, representing an approximate 4%

Nordex Explosives Ltd. (Nordex), a Canadian explosives manufacturer listed on the TSX Venture Exchange, and Société Anonyme d’Explosifs et de Produits Chimiques (EPC) entered into a private placement and subsequent going private transaction on June 15, 2016. EPC was to purchase Nordex shares for $0.12 per share.

However, subsequent to Nordex’s announcement of the EPC

The views expressed in this post, as in all of my posts, are mine alone and should not be taken to represent the views of Fasken Martineau DuMoulin LLP.

“That’s off market.”

As a deal lawyer, I’ve heard that phrase more times than I care to remember.  It’s supposed to be a knock-down argument.  We’re supposed to pack up our bags and go home, cease and desist from any further discussion of a deal term once our counterparty claims that it differs from what other contracting parties have customarily agreed upon.

Occasionally there’s even an element of rebuke in the claim that a term is “off market”.  The unspoken accusation is that, like neglectful schoolchildren, we simply haven’t done our homework (Tsk. Tsk.).  Basketball fans old enough to remember NBA hall-of-fame centre Dikembe Mutombo may recall the finger wag with which he habitually celebrated blocking a shot.[i]  “That’s off market” is a bit like one of Mutombo’s finger-wagging blocks: not only is the proposed deal term emphatically rejected; we’re encouraged to draw the conclusion that the proposal should never have been attempted. (Get that weak $#!+ outta here.)

I find this confounding.[ii]  Settling a dispute between contracting parties simply by reference to what other contracting parties have agreed upon in the past seems, on its face, a suspect approach to getting the right result.  We’re talking about a trend, right?  A market trend.[iii]  We’re supposed to follow the trend, without question?  I’m tempted to call that approach to contract negotiation “lemming-like”, except I’m afraid that doing so would be unfair to lemmings.[iv]

Of course, those who negotiate contracts by reference to market custom are unlikely to view the practice as mindless crowd-following with potentially undesirable consequences.  On the contrary, the intended significance of market custom is that it serves as a proxy of sorts for reasonableness.  The reasonableness of including or excluding a certain provision (or a certain form of provision) in a contract is supposed to be established by the fact that a whole bunch of other contracting parties in a broad range of circumstances have entered into contracts that include or exclude that provision (or form of provision).  By establishing reasonableness in this manner, market custom arguments tacitly appeal to our intuition that there is strength in numbers.  Surely all of those people could not have gotten things all wrong? If a majority (in some cases, a substantial majority) of other contracting parties have determined that this or that term should be included in a certain type of agreement, that’s probably sufficient evidence that it’s a reasonable result, no?

It all sounds rather plausible at first blush.  A substantial difficulty arises, however, because in attempting to establish reasonableness on the strength of brute numbers, market custom arguments become disconnected from an essential constituent element of reasonableness: namely, reason itself.  To say that X is ‘reasonable’ is to say, as the term itself suggests, that X is able to be justified by reason.  But, perversely, arguments based upon market custom increasingly surrender any supposed claim to reasonableness the more we focus on reasons and how they might influence the inclusion or exclusion of this or that term in a contract.

To see why this is so, it is helpful to remind ourselves that reasonableness depends largely on context.  Taking a crude but ready example, it is generally not reasonable to strike another person, though most would agree that it may be reasonable to do so in self-defence.  Similarly, depending upon context — in other words, depending upon the set of background facts and circumstances against which contractual negotiations take place — what might be considered reasonable in a contract negotiation will change.

Perhaps in the specific negotiation of concern to us, the Buyer (say, of a privately-owned operating gold mine) under an Asset Purchase Agreement is paying a bargain basement purchase price, representing a significant discount to what a DCF analysis would suggest is the fair price.  It would not be unreasonable in those circumstances for the Seller to expect the Buyer — indeed, the Buyer will be economically motivated (given the value it is getting and the reasonable expectation that there would be other interested purchasers at the discounted price) — to content itself with a less comprehensive set of contractual protections than might be customary.  Far from unreasonable, in fact, this makes perfect sense since the risk of value diminution in the asset, which the Buyer might otherwise feel compelled to minimize by contract, has already been minimized by the discounted price being paid (it may even have been accounted for in arriving at the discounted price).

Or maybe price paid is not the salient feature of our fact scenario, but rather the jurisdiction in which the operating mine is located.  Let’s say it’s located in an especially high-risk political environment, perhaps a country whose government has a history of expropriating assets or enforcing an investor-hostile foreign exchange regime with significant penalties for non-compliance.  In that case, barring a scenario like the one we just considered in which the risk has already been factored into a discounted purchase price (and in many cases the risk, albeit material, may be not be readily quantifiable such that this is not practicable), it would be entirely reasonable for the Buyer to expect, and for the Seller to expect to have to provide, additional contractual protections, over and above those customarily seen in asset purchase transactions, to reflect the amount of political risk the Buyer is prepared to take on, both during the period between signing and closing[v] and during the post-closing period[vi].

As the surrounding context changes, in other words, our reasons for insisting upon/against, or for accepting/rejecting, certain contractual provisions also change.

Arguments based on market custom, however, are typically insensitive to contextual distinctions and the variations they produce in what may be considered reasonable.  They typically tell us, not what other contracting parties in circumstances substantially similar to ours have agreed upon but, what has most commonly been agreed upon by a much larger population of contracting parties, many of which were negotiating in contexts quite different from our own.

“67% of all M&A purchase and sale agreements involving privately owned targets[vii]include (or exclude) such and such a provision.”  Before reacting to that sort of statement (Oh my!  Sounds like a decisive majority…), don’t we first need to know that those agreements were negotiated in circumstances substantially similar to our own such that they reflect a standard of reasonableness appropriate to us?  Of what relevance is it to us that most M&A purchase and sale agreements involving privately owned targets do not include specific indemnities for environmental costs, for example, if most of those agreements do not involve the sale of a mine (or another environmentally taxing asset or business)?

You may wonder at this point whether I’m merely identifying a problem with ‘market’ definition.  Perhaps we can adjust for the context insensitivity of market custom arguments simply by specifying the relevant market with greater precision.  Thus, instead of comparing our Asset Purchase Agreement to all M&A purchase and sale agreements involving a privately-owned target, we might further specify ‘the relevant market’ so that it includes only asset purchase agreements (adding deal structure context) for the purchase and sale of operating mines (adding industry and development stage context) located in high-risk political environments (adding geographic/political context) at a significant discount to fair value (adding pricing context).  That certainly provides a fair amount of context and gives us a higher degree of confidence that the agreements from which we are proposing to take guidance were struck in a set of circumstances comparable to our own.

Unfortunately, however, the addition of context sensitivity to a market custom argument comes at the expense of its persuasiveness, attenuating its claim to reasonableness.  That’s because the increased focus on context has the result of shrinking the relevant market.  There are, logically, fewer asset purchase agreements than M&A purchase agreements of any form whatsoever, and fewer still that relate to the sale of mining assets, and even fewer that relate to the sale of operating mines, and so on.  At some point, the addition of context circumscribes the universe of comparable agreements, or ‘the relevant market’, so tightly that a market custom argument loses much, if not all, of its strength in numbers.  But, of course, such arguments rely upon strength in numbers for their claim to reasonableness and, consequently, their persuasiveness.  Being told that 67% of agreements in the relevant market include (or exclude) this or that provision is far less compelling — it’s far less persuasive; it provides far less evidence of reasonableness — when ‘the relevant market’ comprises only three agreements than when it comprises 50.

This is obviously a quirky result.  It demonstrates that
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