ICLG13th Edition

Mergers & Acquisitions 2019

Aabø-Evensen & Co Advokatfirma Advokatfirman Törngren Magnell Alexander & Partner Rechtsanwaelte mbB Ashurst Hong Kong Atanaskovic Hartnell Bär & Karrer Ltd. BBA Bech-Bruun D. MOUKOURI AND PARTNERS Debarliev Dameski & Kelesoska Attorneys at Law Dittmar & Indrenius E&G Economides LLC ENSafrica Ferraiuoli LLC Gjika & Associates GSK Stockmann HAVEL & PARTNERS s.r.o.

The International Comparative Legal Guide to:

Schoenherr SEUM Law Shardul Amarchand Mangaldas & Co. Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates Škubla & Partneri s. r. o. SZA Schilling, Zutt & Anschütz Rechtsanwaltsgesellschaft mbH Vieira de Almeida Villey Girard Grolleaud Wachtell, Lipton, Rosen & Katz Walalangi & Partners (in association with Nishimura & Asahi) WBW Weremczuk Bobeł & Partners Attorneys at Law WH Partners White & Case LLP Zhong Lun Law Firm

Houthoff Kelobang Godisang Attorneys Kılınç Law & Consulting Law firm Vukić and Partners Loyens & Loeff Maples Group Matheson MJM Limited Moravčević Vojnović and Partners in cooperation with Schoenherr Motta Fernandes Advogados Nader, Hayaux & Goebel Nishimura & Asahi Nobles NUNZIANTE MAGRONE Oppenheim Law Firm Popovici Niţu Stoica & Asociaţii Ramón y Cajal Abogados

A practical cross-border insight into mergers and acquisitions

Published by Global Legal Group, with contributions from:

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The International Comparative Legal Guide to: Mergers & Acquisitions 2019

General Chapters:

Country Question and Answer Chapters:

1 Global M&A Trends in 2019 – Scott Hopkins & Adam Howard, Skadden, Arps, Slate, Meagher &

Flom (UK) LLP 1

4 Albania Gjika & Associates: Gjergji Gjika & Evis Jani 14

5 Angola Vieira de Almeida: Vanusa Gomes & Paulo Trindade Costa 21

6 Australia Atanaskovic Hartnell: Jon Skene & Lawson Jepps 27

7 Austria Schoenherr: Christian Herbst & Sascha Hödl 34

8 Belgium Loyens & Loeff: Wim Vande Velde & Mathias Hendrickx 45

9 Bermuda MJM Limited: Jeremy Leese & Brian Holdipp 55

10 Botswana Kelobang Godisang Attorneys: Seilaneng Godisang &

Laone Queen Moreki 62

11 Brazil Motta Fernandes Advogados: Cecilia Vidigal Monteiro de Barros 67

12 British Virgin Islands Maples Group: Richard May & Matthew Gilbert 75

13 Bulgaria Schoenherr: Ilko Stoyanov & Katerina Kaloyanova 82

14 Cameroon D. MOUKOURI AND PARTNERS: Danielle Moukouri Djengue &

Franklin Ngabe 91

15 Cayman Islands Maples Group: Nick Evans & Suzanne Correy 96

16 China Zhong Lun Law Firm: Lefan Gong 103

17 Croatia Law firm Vukić and Partners: Zoran Vukić & Ana Bukša 110

18 Cyprus E&G Economides LLC: Marinella Kilikitas & George Economides 117

19 Czech Republic HAVEL & PARTNERS s.r.o.: Jaroslav Havel & Jan Koval 124

20 Denmark Bech-Bruun: Steen Jensen & David Moalem 131

21 Finland Dittmar & Indrenius: Anders Carlberg & Jan Ollila 138

22 France Villey Girard Grolleaud: Frédéric Grillier & Daniel Villey 146

23 Germany SZA Schilling, Zutt & Anschütz Rechtsanwaltsgesellschaft mbH:

Dr. Marc Löbbe & Dr. Michaela Balke 153

24 Hong Kong Ashurst Hong Kong: Joshua Cole & Chin Yeoh 161

25 Hungary Oppenheim Law Firm: József Bulcsú Fenyvesi & Mihály Barcza 168

26 Iceland BBA: Baldvin Björn Haraldsson & Stefán Reykjalín 174

27 India Shardul Amarchand Mangaldas & Co.: Iqbal Khan & Faraz Khan 181

28 Indonesia Walalangi & Partners (in association with Nishimura & Asahi):

Luky I. Walalangi & Siti Kemala Nuraida 188

29 Ireland Matheson: Fergus A. Bolster & Brian McCloskey 193

30 Italy NUNZIANTE MAGRONE: Fiorella Alvino & Fabio Liguori 202

31 Japan Nishimura & Asahi: Tomohiro Takagi & Kei Takeda 208

32 Korea SEUM Law: Steve Kim & Hyemi Kang 217

33 Luxembourg GSK Stockmann: Marcus Peter & Kate Yu Rao 225

34 Macedonia Debarliev Dameski & Kelesoska Attorneys at Law:

Emilija Kelesoska Sholjakovska & Ljupco Cvetkovski 231

35 Malta WH Partners: James Scicluna & Rachel Vella Baldacchino 238

36 Mexico Nader, Hayaux & Goebel: Yves Hayaux-du-Tilly Laborde &

Eduardo Villanueva Ortíz 245

37 Montenegro Moravčević Vojnović and Partners in cooperation with Schoenherr:

Slaven Moravčević & Miloš Laković 252

Contributing Editors

Scott Hopkins and Lorenzo Corte, Skadden, Arps, Slate, Meagher & Flom (UK) LLP

Sales Director

Florjan Osmani

Account Director

Oliver Smith

Sales Support Manager

Toni Hayward

Sub Editor

Jenna Feasey

Senior Editors

Caroline Collingwood Rachel Williams CEO

Dror Levy

Group Consulting Editor

Alan Falach Publisher

Rory Smith

Published by

Global Legal Group Ltd. 59 Tanner Street London SE1 3PL, UK Tel: +44 20 7367 0720 Fax: +44 20 7407 5255 Email: info@glgroup.co.uk URL: www.glgroup.co.uk

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Disclaimer

This publication is for general information purposes only. It does not purport to provide comprehensive full legal or other advice. Global Legal Group Ltd. and the contributors accept no responsibility for losses that may arise from reliance upon information contained in this publication. This publication is intended to give an indication of legal issues upon which you may need advice. Full legal advice should be taken from a qualified professional when dealing with specific situations.

Continued Overleaf

2 The MAC is Back: Material Adverse Change Provisions After Akorn – Adam O. Emmerich &Trevor S. Norwitz, Wachtell, Lipton, Rosen & Katz 4

3 The Dutch ‘Stichting’ – A Useful Tool in International Takeover Defences – Alexander J. Kaarls &

Willem J.T. Liedenbaum, Houthoff 10

The International Comparative Legal Guide to: Mergers & Acquisitions 2019

Country Question and Answer Chapters: 38 Mozambique Vieira de Almeida: Guilherme Daniel & Paulo Trindade Costa 259

39 Netherlands Houthoff: Alexander J. Kaarls & Willem J.T. Liedenbaum 266

40 Norway Aabø-Evensen & Co Advokatfirma: Ole Kristian Aabø-Evensen &

Gard A. Skogstrøm 275

41 Poland WBW Weremczuk Bobeł & Partners Attorneys at Law: Łukasz Bobeł 289

42 Portugal Vieira de Almeida: Jorge Bleck & António Vieira de Almeida 296

43 Puerto Rico Ferraiuoli LLC: Fernando J. Rovira-Rullán &

María del Rosario Fernández-Ginorio 302

44 Romania Popovici Niţu Stoica & Asociaţii: Teodora Cazan 309

45 Saudi Arabia Alexander & Partner Rechtsanwaelte mbB: Dr. Nicolas Bremer 315

46 Serbia Moravčević Vojnović and Partners in cooperation with Schoenherr:

Matija Vojnović & Vojimir Kurtić 322

47 Slovakia Škubla & Partneri s. r. o.: Martin Fábry & Marián Šulík 331

48 Slovenia Schoenherr: Vid Kobe & Bojan Brežan 337

49 South Africa ENSafrica: Professor Michael Katz & Matthew Morrison 348

50 Spain Ramón y Cajal Abogados: Andrés Mas Abad &

Lucía García Clavería 357

51 Sweden Advokatfirman Törngren Magnell: Johan Wigh & Sebastian Hellesnes 364

52 Switzerland Bär & Karrer Ltd.: Dr. Mariel Hoch 370

53 Turkey Kılınç Law & Consulting: Levent Lezgin Kılınç & Seray Özsoy 378

54 Ukraine Nobles: Volodymyr Yakubovskyy & Tatiana Iurkovska 384

55 United Arab Emirates Alexander & Partner Rechtsanwaelte mbB: Dr. Nicolas Bremer 392

56 United Kingdom White & Case LLP: Philip Broke & Patrick Sarch 400

57 USA Skadden, Arps, Slate, Meagher & Flom LLP: Ann Beth Stebbins &

Thomas H. Kennedy 408

EDITORIAL

Welcome to the thirteenth edition of The International Comparative Legal Guide to: Mergers & Acquisitions. This guide provides corporate counsel and international practitioners with a comprehensive worldwide legal analysis of the laws and regulations of mergers and acquisitions.

It is divided into two main sections:

Three general chapters. These chapters are designed to provide readers with an overview of key issues affecting mergers and acquisitions, particularly from the perspective of a multi-jurisdictional transaction.

Country question and answer chapters. These provide a broad overview of common issues in mergers and acquisitions in 54 jurisdictions.

All chapters are written by leading mergers and acquisitions lawyers and industry specialists, and we are extremely grateful for their excellent contributions.

Special thanks are reserved for the contributing editors Scott Hopkins and Lorenzo Corte of Skadden, Arps, Slate, Meagher & Flom (UK) LLP for their invaluable assistance.

Global Legal Group hopes that you find this guide practical and interesting.

The International Comparative Legal Guide series is also available online at www.iclg.com.

Alan Falach LL.M.

Group Consulting Editor

Global Legal Group

Alan.Falach@glgroup.co.uk

1

Chapter 1

Skadden, Arps, Slate, Meagher & Flom (UK) LLP

Scott Hopkins

Adam Howard

Global M&A Trends in 2019

Global M&A activity continued to accelerate in the first half of 2018

following the strong end to 2017, a year that was marked by several

headline-making megadeals (deals valued above US$10 billion).

Buoyed by record stock market highs, GDP growth and low

borrowing costs, global deal value in 2018 reached US$3.53 trillion,

an increase of 11.5 per cent as compared to 2017 and the third-

highest value on record according to Mergermarket. Global deal activity in 2018 was driven largely by strategic

transactions, with many companies seeking to strengthen their

competitive position in the market by pursuing “scope deals” that

gave them something new, such as new capabilities or access to new

markets. Overall, cross-border transactions accounted for a lower

percentage of total global M&A deals in 2018 as compared to 2017.

Globally, the value of leveraged buyouts increased by 25 per cent in

2018 as private equity funds increasingly participated in public-to-

private deals. Campaigns and capital deployed by activist investors

seeking M&A initiatives and board changes continued to have a

significant influence on corporate strategy in 2018.

The record-high valuations seen at the end of 2017 continued in

2018, with 26 of the 36 total megadeals taking place in the first half

of the year before deal activity declined in the second half of 2018,

particularly during the last quarter. Average deal value increased by

19.6 per cent in 2018 as compared to 2017, but an overall decline in

the number of deals in 2018 suggests some buyers may be more

cautious regarding M&A activity.

Despite the record-breaking first half of 2018, the second half of the

year saw a significant drop in M&A activity, particularly during Q4.

The prospect of a “no-deal” Brexit in Europe looks set to be a focal

point for businesses through 2019, with deal activity in the U.K.

cooling until there is greater certainty regarding the U.K.’s future

relationship with the EU. Trade wars between the U.S., China and

Europe are expected to continue along with the volatility in global

stock markets. We expect that the impact of these factors on M&A

activity in 2019 may be offset by vast cash resources, private equity

dry powder looking to be deployed and the prominence of activist

investors seeking M&A initiatives involving the sale of a company

or spin-off of businesses.

The United States

In 2018, the U.S. experienced another year of healthy M&A activity

driven by a record-breaking stock market, robust economic growth

and the U.S. tax reform that was adopted in the fourth quarter of

2017. Deal value in the U.S. increased by 15.4 per cent to US$1.3

trillion in 2018 as compared to 2017, the second-highest value on

record according to Mergermarket.

President Donald Trump’s tax reform, reducing the corporate tax

rate to 21 per cent and shifting position on the repatriation of

overseas profits into the U.S., contributed to M&A activity in 2018.

U.S. companies put their cash reserves to use, increasingly

consolidating their strategic position, while also participating in

large share buyback plans. The prevalence of domestic deals in

2018 is indicative of the liquidity that is in the hands of U.S.

companies. We expect domestic M&A activity to remain strong in

2019 – despite the challenges in U.S. politics and the 2020 election

in sight – partly as a result of companies looking to take advantage

of the recent tax reform.

We saw a rise in U.S. megadeals in 2018 with a total of 18 announced

as compared to 15 in 2017. Megadeal activity coincided with

regulatory approvals of AT&T’s US$105 billion acquisition of Time

Warner and Bayer’s US$66 billion acquisition of Monsanto, two of

the largest megadeals to be completed in the U.S. in 2018 following

their announcement in Q3 2016. Total deal value is expected to

remain high in 2019 whilst the economic conditions in the U.S. and

abroad remain conducive for deal activity.

The Federal Reserve raised interest rates four times in 2018, each by

0.25 per cent, with policymakers anticipating two further raises in

2019 towards a median target of 3 per cent by 2020. As interest rates,

the cost of servicing debt and equity market volatility increase, buyers

may focus further on consolidating their strategic position over

pursuing opportunistic acquisitions.

Technology continues to be a significant sector with the potential to

reshape entire industries. Technology companies entering new sectors

are expected to continue to influence M&A deal activity. In addition,

nontechnology companies seeking to acquire technology companies,

along with strategic consolidation within the sector, contributed

significantly to M&A activity in the U.S. and abroad during 2018.

In August 2018, the legal authority and scope of the Committee on

Foreign Investment in the United States (CFIUS) was expanded

through the Foreign Investment Risk Review Modernization Act of

2018 (FIRRMA). Notable changes included the widening of the

jurisdiction for CFIUS to review transactions between foreign persons

and U.S. businesses. The legislation includes a focus on critical

technologies, businesses that relate to critical infrastructure and

businesses involved in the collection or maintenance of sensitive

personal data of U.S. citizens. The long-term effects of FIRRMA

remain unclear, but its introduction coincided with a dramatic

decrease in inbound M&A from China into the U.S. Further, it is

difficult to predict how far the regulations will go to curtail foreign

investment in U.S. businesses. In its current form, CFIUS has broad

scope to review any M&A activity between a U.S. business and a

foreign investor, and we expect foreign investment into the U.S. to be

subject to further regulation in 2019.

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Separately from CFIUS, the U.S. has been involved in an ongoing

trade war with China and has had trade friction with Europe and

Canada. President Trump introduced tariffs on aluminium and steel

products, primarily targeted toward these jurisdictions, which each

have counteracted with tariffs of their own on U.S. goods. The U.S.

and China each have imposed tariffs of US$250 billion and US$110

billion, respectively, on the other country’s goods.

Further, in May 2018, President Trump announced that the U.S.

would be withdrawing from the Iran Nuclear Deal. Following this,

the U.S. sanctions programme, with a particular focus on Iran, was

heightened in November and extended to companies trying to do

any kind of business in Iran. The effect of these sanctions,

combined with all other existing sanctions, is another factor that

might have a negative impact on M&A activity outside of the U.S.

Europe

In Europe, M&A activity reached US$989.2 billion in 2018, its

highest level since the financial crisis. Despite the political

uncertainty in Europe, M&A continued to shine, particularly in the

first half of 2018, with cross-border deals in Europe being

particularly prominent. This surge in activity was driven by foreign

investment into Europe, which, in light of Brexit negotiations and a

strong U.S. dollar, saw U.S. businesses particularly interested in

acquiring European assets.

Brexit remains the most significant challenge for M&A activity in the

U.K. Following the publication of the EU’s draft withdrawal

agreement, the historic defeat of Prime Minister Theresa May’s Brexit

deal in Parliament and the growing question of border control between

Ireland and Northern Ireland, the prospect of a “no-deal” Brexit poses

a number of unknown risks to U.K. businesses. We observed a decline

in M&A activity in Europe’s largest markets during the second half of

2018, with the U.K., France and Germany all recording significant

drops in total deal value compared to the first half of 2018.

There was a record number of activist campaigns and companies

targeted, globally as well as in Europe, in 2018. M&A initiatives

accounted for 33 per cent of all activist campaigns globally in 2018.

In Europe, a total of 58 activist campaigns were initiated in 2018 as

compared to 52 in 2017. Q4 2018 was the most active quarter for

activist campaigns and set a record for the amount of capital

deployed, notwithstanding the decrease in the total value and

volume of M&A deals during the same period.

Across Europe the rise of protectionist policies may result in a

greater number of deals being blocked by domestic regulators. The

proposed EU regulation on foreign direct investment is due to be

implemented in early 2019 with Member States implementing it

through their own national legislation. In Germany, two

acquisitions by Chinese investors were blocked in 2018 on grounds

of national security, with other countries, including the U.K.,

currently reviewing proposed legislation to be implemented in 2019.

There is mixed sentiment towards the impact new foreign

investment laws will have on overseas investment, but as the new

rules will likely be limited to particular sectors and technologies, we

do not expect them to have a significant impact in 2019 on inbound

M&A activity into Europe.

Political uncertainty in Europe was constant during 2018, with

Angela Merkel announcing in October that she will step down as

Germany’s chancellor in 2021, Spain suffering from a lack of

parliamentary majority and Italy transitioning into a new populist

government. Despite this background of uncertainty, M&A deal

volume increased in 2018 as compared to 2017, and such M&A

activity in continental Europe suggests significant M&A activity

can continue in 2019.

Asia

M&A activity in Asia continues to be dominated by China and

Japan, but for the first time there has been notable M&A activity in

India. According to Mergermarket, deal activity in Asia reached the second-highest value of all time in 2018, despite a slow Q3.

In 2018, Chinese acquisitions of U.S. companies dropped by 94.6

per cent as compared to 2017. Chinese investors faced increasing

scrutiny by overseas regulators and governments, particularly in the

U.S. In addition, trade policies of the Trump administration have

soured the relationship between the two countries and have

continued to dampen outbound M&A activity from China. The

slowdown of China’s outbound investments is also due to China’s

tightened foreign exchange, which is in turn driven by China's

dwindling foreign exchange reserves and downward pressure of the

renminbi.

We expect China’s outbound deal activity, aside from deal activity

with the U.S., to remain strong through 2019 in line with the “One

Belt, One Road” initiative. This initiative includes a wide scope of

encouraged investments in order to further enhance China’s

capabilities with Europe and Central Asia. Further, in September

2018, the China Securities Regulatory Commission revised the Code

of Corporate Governance for Listed Companies, which seeks to

boost the appeal of investment into China from overseas investors.

As Japan’s Abenomics enters its sixth year, its deal activity has seen

a marked increase in light of the effects of quantitative easing and

low borrowing costs. Japan’s outbound M&A activity to the U.S.

has increased since 2017, and, in the face of reduced competition

from Chinese companies, it appears that Japanese bidders are

considered safe buyers by U.S. regulators.

India saw its M&A activity reach an all-time high of US$99.9

billion in 2018, which included the US$16 billion acquisition by

U.S. headquartered Walmart of Flipkart, India’s leading online

retailer.

We expect that outbound M&A will remain steady through 2019

with China increasingly focusing on European targets while Japan

targets investment into the U.S.

Conclusion

Looking toward 2019, there are various cautionary signs that may

impact M&A activity, including rising interest rates, ongoing trade

wars and stock market volatility. However, there are many positive

factors that suggest M&A activity will remain robust in 2019. The

imperative for companies to utilise cash reserves to strategically

grow remains, while significant levels of private equity deal activity

and the rise in activist campaigns look to continue in the absence of

any dramatic change in economic conditions.

The effects of the U.S. tax reform make U.S. businesses well-

positioned to grow through M&A with strategic consolidation likely

to continue, with technology remaining a key sector for buyers from

other sectors.

We anticipate political uncertainty in Europe to reduce once there is

greater clarity regarding the U.K.’s future relationship with the EU.

In the meantime, European targets are expected to remain attractive

assets to inbound investment from U.S. and Asian buyers as cash

reserves are increasingly deployed in cross-border deals.

Despite China’s declining investment into the U.S., Asian domestic

and outbound activity is expected to remain consistent with that of

2018, as businesses search for greater exposure to technologies,

infrastructure and foreign real estate.

Skadden, Arps, Slate, Meagher & Flom (UK) LLP Global M&A Trends in 2019

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Acknowledgment

The authors would like to thank Samuel Unsworth for his

contribution to this chapter. Samuel is a trainee in the corporate

team in Skadden’s London office.

This chapter is provided by Skadden, Arps, Slate Meagher & Flom (UK) LLP and its affiliates for educational and information purposes only and should not be construed as legal advice. The editorial content of this chapter has been provided by the authors and does not represent the views of Skadden or any one or more of the firm’s other partners or clients.

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Skadden, Arps, Slate, Meagher & Flom (UK) LLP Global M&A Trends in 2019

© Published and reproduced with kind permission by Global Legal Group Ltd, London

Scott Hopkins Skadden, Arps, Slate, Meagher &Flom (UK) LLP 40 Bank Street Canary Wharf London, E14 5DS United Kingdom Tel: +44 20 7519 7187 Email: scott.hopkins@skadden.com URL: www.skadden.com

Adam Howard Skadden, Arps, Slate, Meagher & Flom (UK) LLP 40 Bank Street Canary Wharf London, E14 5DS United Kingdom Tel: +44 20 7519 7091 Email: adam.howard@skadden.com URL: www.skadden.com

Skadden is one of the world’s leading law firms, serving clients in every major financial centre with over 1,700 lawyers in 22 locations. Our strategically positioned offices across four continents allow us proximity to our clients and their operations. For 70 years, Skadden has provided a wide array of legal services to the corporate, industrial, financial and governmental communities around the world. We have represented numerous governments, many of the largest banks, including virtually all of the leading investment banks, and the major insurance and financial services companies.

Scott Hopkins leads Skadden’s public M&A practice in London and is co-head of the London Corporate Group, advising on complex cross-border M&A and corporate matters. Mr. Hopkins has extensive experience advising companies on a broad range of corporate governance matters and legal and regulatory responsibilities, including contentious public meetings, disclosure, directors’ duties, and individual director liability and protection. He is recognised as a leading M&A lawyer by Chambers Global and Chambers UK, in which he is described as “an outstanding lawyer to have by your side” with sources stating “his expertise was irreplaceable for us”. He also is recommended in The Legal 500 UK for his “‘strategic mind’ and ‘sharp insight’”. Mr. Hopkins ranked second in Mergermarket’s 2017 table of dealmakers targeting U.K. companies and also was profiled in Legal Week as one of the publication’s Top Dealmakers of 2017. Mr. Hopkins also is a member of the firm’s Japan practice. His most recent representations include advising: CME Group Inc. in its US$6 billion acquisition of NEX Group plc; the board of directors of Dana Incorporated in the company’s US$6.1 billion proposed acquisition of the Driveline division of U.K.-based GKN plc; International Paper Company in its unsolicited US$10.7 billion proposal to acquire Smurfit Kappa Group plc; and Vantiv, Inc. in its US$10.4 billion acquisition of Worldpay Group plc.

Adam Howard is a counsel in Skadden’s London office focusing on international capital markets and public M&A transactions. He has advised both issuers and underwriters in connection with offerings of equity and debt securities and listings in London and on various international exchanges. He regularly advises bidders and financial advisors in connection with complex cross-border M&A and corporate matters. In 2016, Mr. Howard was named by the Financial News as one of their 40 Under 40 Rising Stars in Legal Services, and in 2015 he received The M&A Advisor’s European Emerging Leaders Award. Mr. Howard's most recent representations include advising: (1) Goldman Sachs as financial advisor: (i) along with Cenkos Securities plc and Dean Street Advisers Limited, to Bain Capital, in its £1.2 billion acquisition of esure Group plc; (ii) along with Greenhill & Co. International LLP, to a consortium of funds managed by Antin Infrastructure Partners and West Street Infrastructure Partners in their US$732 million acquisition of CityFibre Infrastructure Holdings plc; and (iii) to Michael Kors in its US$1.2 billion acquisition of Jimmy Choo; (2) Phoenix Group Holdings in its £2.93 billion acquisition of Standard Life Assurance and £950 million rights issue; and (3) to Vantiv, Inc. in its US$10.4 billion acquisition of Worldpay Group plc.

Chapter 2

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Wachtell, Lipton, Rosen & Katz

Adam O. Emmerich

Trevor S. Norwitz

The MAC is Back: Material Adverse Change Provisions After Akorn

On December 7, 2018, the Delaware Supreme Court upheld the

Delaware Court of Chancery’s October 1, 2018 decision which held

that Fresenius Kabi AG, a German pharmaceuticals company, had

properly terminated its merger agreement with Akorn, Inc., a U.S.

generic pharmaceuticals company.1 Akorn is the first time that a Delaware court has permitted the termination of a merger agreement

on the basis of a material adverse effect, commonly known as a

“MAC” or “MAE”. While the Delaware courts have previously

opined on the scope and effect of MAC provisions2 in public merger

agreements, no buyer had previously been able to successfully

terminate a merger agreement on such grounds. Akorn upends a longstanding view among practitioners that the Delaware courts will

generally decline to recognise a MAC3 and demonstrates, that given

sufficiently egregious facts and relevant merger agreement

provisions, the Delaware courts will allow a buyer to walk away

from a merger agreement based on changed circumstances or

contractual breaches. Akorn also provides new insights and guidance on how Delaware courts may interpret MAC provisions as

well as practical considerations relevant to M&A negotiations,

merger agreement drafting, and how to handle unexpected negative

developments going forward. The Delaware Supreme Court’s two-

page affirmation was as terse as the 246-page Court of Chancery

opinion was exhaustive, so the discussion below is largely drawn

from the latter opinion by Vice Chancellor Laster.

Background

On April 24, 2017, Fresenius Kabi AG entered into a merger

agreement to acquire Akorn, Inc. for approximately $4.75 billion.

As is customary in merger agreements, Akorn made several

representations to Fresenius, including representations regarding its

compliance with applicable regulatory requirements and

commitment to use commercially reasonable efforts to operate the

business in the ordinary course of business between signing and

closing.

The merger agreement also included termination provisions

stipulating that Fresenius could terminate the merger agreement if

Akorn’s representations failed to be true and correct as of signing

and closing and such failure “would, individually or in the

aggregate, reasonably be expected to have a Material Adverse

Effect”. Fresenius could also terminate the merger agreement if

Akorn failed to comply with its covenant to operate its business in

the ordinary course “in all material respects”. In addition,

Fresenius’s obligation to close the merger was conditioned on Akorn

not having suffered “any effect, change, event or occurrence that,

individually or in the aggregate, has had or would reasonably be

expected to have a Material Adverse Effect”. Fresenius would later

seek to terminate the merger agreement on all three grounds.

After the merger agreement was signed, Akorn’s financial

performance experienced a significant downturn, with the Court of

Chancery noting that Akorn’s business performance “fell off a

cliff”.4 Akorn downgraded its earnings guidance for the second

quarter 2017 and for the year shortly after the signing of the merger

agreement. When second quarter earnings were released in July

2017, Akorn had experienced a 29% year-over-year decline in

revenue, a 84% year-over-year decline in operating income and a

96% decline in year-over-year earnings per share.

Akorn’s business performance went from bad to worse as 2017

progressed. The company downgraded its third quarter forecast and

when earnings were released in November 2017, Akorn’s revenue

had fallen 29% year-over-year and its operating income and

earnings per share had declined 89% and 105%, respectively, over

the same period. By the fourth quarter, Akorn’s revenue had fallen

by 34%, its operating income by 105%, and its earnings per share by

300% over the year. The downward trend continued into the first

quarter of 2018, albeit at a slower pace.

As Akorn’s business faltered, Fresenius received two anonymous

whistleblower letters alleging that Akorn’s product development

process failed to comply with regulatory requirements. The letters

also raised doubts as to whether Akorn was operating its business in

the ordinary course after the signing of the merger agreement.

Fresenius brought the letters to Akorn’s attention. Relying on its

right under the merger agreement to reasonable access to

information held by Akorn and to Akorn’s officers and employees,

Fresenius (which was by this time was beginning to regret its

decision to enter into the merger agreement) began conducting an

independent investigation to determine whether Akorn had

potentially breached its obligations under the merger agreement.

Fresenius’s investigation uncovered serious and pervasive data

integrity problems at various Akorn facilities. In particular,

Fresenius uncovered a number of submissions made to the U.S.

Food and Drug Administration (“FDA”) that included false or

inadequate underlying data. These concerns came to a head in

March 2018, when Akorn met with representatives of the FDA to

disclose the data integrity issues that Fresenius had uncovered.

Following the meeting, Fresenius received a copy of the

presentation that Akorn had submitted to the FDA, which upon

review, Fresenius determined contained false, incomplete and

misleading information.

In March 2018, senior executives at Fresenius began exploring

whether Akorn’s data integrity issues and business performance

would provide grounds for terminating the merger agreement. The

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next month, the executives recommended to their superiors at

Fresenius’s parent company and the Fresenius supervisory board

that Fresenius terminate the merger agreement on the basis of the

scale of Akorn’s data integrity problems, the costs of remediation

and the decline in Akorn’s business performance. On April 22,

2018, Fresenius notified Akorn that it was terminating the merger

agreement, stating that Akorn had breached its representations

relating to regulatory compliance as well as its covenant to operate

the business in the ordinary course of business. Fresenius also cited

its right not to close the merger on the basis that Akorn had suffered

a general material adverse effect. In its termination notice,

Fresenius offered Akorn the opportunity to extend the outside date

of the merger agreement to permit further investigation into Akorn’s

data integrity issues. Akorn believed that the negative

developments did not amount to a MAC and regarded Fresenius as

simply trying to get out of the deal it had struck due to buyer’s

remorse. Akorn declined to extend the outside date of the merger

agreement, and commenced legal action against Fresenius the

following day, seeking to compel Fresenius to close the merger.

New Insights into MAC Clauses

The Delaware Court of Chancery held that the facts of the case

supported the finding that (1) Akorn had breached its

representations regarding regulatory compliance to the extent that

could reasonably be expected to have a material adverse effect on

the company, (2) Akorn had suffered a general material adverse

effect, and (3) Akorn had failed to perform in all material respects its

covenant to operate the company in the ordinary course of business.

The Delaware Supreme Court upheld the opinion of the Court of

Chancery based on the first two grounds, noting that it did not need

to consider the third. While the Court of Chancery’s 246-page

opinion is extremely fact-intensive and draws heavily from

precedent Delaware cases, notably Hexion and IBP, the latest opinion sheds new light on how Delaware courts may evaluate

MAC clauses going forward.

1. A 20% decrease in the value of the seller may constitute a MAC

Akorn provides new data points on the degree of value degradation that the Delaware courts may regard as a MAC. In evaluating

whether Akorn’s breach of its regulatory compliance representation

amounted to a “Material Adverse Effect”, the Court of Chancery

concluded that a 21% decline in Akorn’s equity value could

reasonably be expected to result in a Material Adverse Effect.5 The

Delaware courts have been hesitant in establishing quantitative

thresholds with respect to MACs, a view that is echoed in Akorn.6 In IBP, for example, the Court of Chancery held that Tyson was not justified in terminating the merger agreement notwithstanding a

64% drop in IBP’s quarterly earnings, noting a MAC must

“substantially threaten the overall earnings potential of the target in

a durationally-significant manner”.7 Notwithstanding the Court of

Chancery’s continued reluctance to establish quantitative thresholds

for determining the presence of a MAC, Akorn presents a fact pattern that may help guide the resolution of future disputes on this

issue.

To determine the size of the Akorn’s decline in equity value, the

Court of Chancery relied on internal management estimates and

expert testimony.8 Akorn estimated the economic cost of remedying

the data discrepancies to be approximately $44 million while

Fresenius estimated the cost to be as high as $1.9 billion.9 An

independent expert estimated the losses to be between $604 million

and $808 million.10 After assessing the underlying assumptions

behind Akorn’s and Fresenius’s estimates and the independent

expert report, the Court of Chancery concluded that the “most

credible outcome lies in the vicinity of the midpoint of the parties’

competing submissions, at approximately $900 million”, which

represented a decline of 21% in Akorn’s implied equity value of

$4.3 billion under the merger agreement.11 To further justify its

conclusion, the Court of Chancery added that the midpoint of the

parties’ estimates also approximated the estimates provided in the

independent expert report.12

In evaluating whether the 21% decline in equity value constituted a

“Material Adverse Effect” with respect to Akorn’s regulatory

compliance representation, the Court of Chancery first stressed that

neither party had provided the court with any information on what

they deemed material when viewed from the longer-term

perspective of a reasonable acquirer.13 Absent such estimates, the

Court of Chancery turned to the fact that Fresenius’s internal models

had already priced in over $200 million in potential losses. The

Court of Chancery noted that “[w]hen a deal is priced to perfection,

a reasonable acquiror has less ability to accommodate an expense

that equates to a substantial portion of the seller’s value”.14 The

estimated size of the losses from Akorn’s data integrity problems

was over four times the size of exposures that Fresenius had initially

been prepared to close on – a figure that the Court of Chancery

determined was a MAC.

In reaching its conclusion, the Court of Chancery drew on a wide set

of metrics, including (1) that a bear market occurs when stock prices

fall at least 20% from their peak, (2) that studies suggest that when

a target experiences a firm-specific MAC, subsequent renegotiations

reduce the purchase price by 15% on average, (3) that, on average,

the upper and lower bounds for collars in deals involving stock

consideration generally fall within 10% to 20%, and (4) that studies

have indicated that the median reverse termination fee is equal to

6.36% of the transaction value.15 While Vice Chancellor Laster

admitted that some of the metrics referenced in the opinion provide

a “noisy indication of materiality”, he nonetheless concluded that all

the evidence collectively indicated that an expense amount totalling

20% of Akorn’s value would be material to a reasonable buyer.16

It is noteworthy that the opinion ultimately cautions against drawing

too much inference from its evaluation of Akorn’s metrics. The

opinion reiterates the holding in Hexion in which the Court of Chancery stated that “materiality for purposes of an MAE should be

viewed as ‘a term of art’”.17 Vice Chancellor Laster added that he

had “primarily weighed the evidence in the record against [his] own

intuition and experience (admittedly as a lawyer and judge rather

than as a buyer or seller of businesses)”.18 Perhaps as a signal to

future litigants, Vice Chancellor Laster noted that neither party had

provided the court with much information in helping it determine

whether the costs of remediation would be material when viewed

from the longer-term perspective of a reasonable buyer. Vice

Chancellor Laster added that “[i]t would have been helpful to have

access to expert testimony or studies about the thresholds

companies generally use when reporting material events, such as

material acquisitions” as well as thresholds that Akorn and

Fresenius had used in the past.19

2. A MAC is measured on the stand-alone value of the seller Akorn also addressed the question of whether the MAE determination should be based on the seller as a stand-alone entity

or should also include synergies arising from the merger. In an

attempt to refute the existence of a MAC, Akorn contended that any

assessment of Akorn’s decline in value should include its value to

Fresenius as a synergistic buyer, so that even if Akorn’s value had

decreased, it was still valuable to Fresenius because of what

Fresenius could do with its assets. The court rejected this argument,

noting that the plain language of the MAE clause in the merger

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agreement broadly referred to any “material adverse effect on the

business, results of operations or financial condition of the

Company and its Subsidiaries”.20 The opinion noted that had the

parties intended to adopt a synergistic approach, the definition of

MAE would have encompassed the surviving company or the

combined company.21 Moreover, the opinion added that the MAE

definition included a carve-out of any effects resulting from “the

negotiation, execution, announcement or performance” of the

merger agreement, which the Court of Chancery interpreted to

include the generation of any synergies as a result of the merger.22

The takeaway from Akorn is that a MAC can occur even if the buyer is still able to profit from the merger. The Court of Chancery

justified this conclusion because requiring the buyer to prove a loss

would require a showing of “a goodwill impairment” – a standard

that the Court of Chancery deemed too burdensome.23 Adopting

such standard would also overlook the opportunity costs buyers

typically factor in when deciding between competing projects. The

Court of Chancery did note, however, that Akorn and Fresenius

“could have bargained for such standard, but they did not”.24

3. The MAC is not premised on the doctrine of frustration In rejecting Akorn’s argument that a MAC be conditioned on

Fresenius having suffered a loss as a result of the merger, the Court

of Chancery noted that the black-letter doctrine of frustration

already serves such a purpose. Therefore, the parties, having drafted

the MAE clause, must have intended to implement a different and

lower burden of proof on the seller.25 Under black-letter law, the

doctrine of frustration discharges a contracting party’s obligations

when his or her “principal purpose is substantially frustrated

without his fault by the occurrence of an event the non-occurrence

of which was a basic assumption to which the contract was made”.26

The Court of Chancery noted that if the parties had intended for the

buyer to have to prove a loss in order to terminate the merger

agreement, they would not have expended the additional effort to

draft the MAE clause. The MAE standard, while onerous and hard

to satisfy, imposes a lower burden of proof on the seller seeking to

terminate a merger agreement than the doctrine of frustration. The

Vice Chancellor’s discussion of the doctrine of frustration as a

possible separate common law basis for termination raises the

intriguing possibility that the Delaware courts could separately

allow a buyer to terminate a merger agreement on the grounds of

frustration without having found a MAC. That would, however,

seem to require an extreme and highly unusual set of facts given the

effort specifically expended by the parties in spelling out their

termination rights. 4. The duration of a MAC might possibly be shorter for private

equity buyers In keeping with earlier Delaware holdings in Hexion and IBP, Akorn underscores that any finding of MAE must be evaluated from the

“longer-term perspective of a reasonable acquiror” and that the

“important consideration therefore is whether there has been an

adverse change in the target’s business that is consequential to the

company’s long-term earnings power over a commercially

reasonable period, which one would expect to be measured in years

rather than months”.27 In Akorn, the Court of Chancery reviewed Akorn’s performance over three quarters and against its year-on-

year performance as well as industry-wide performance before

concluding that the company had experienced a sustained decline in

business performance that was durationally significant and which

would be material to a reasonable buyer.

Interestingly, in a footnote, the opinion noted that commentators

have suggested that the durational requirement for finding a MAC

may not apply when the buyer is a financial investor “with an eye to

short-term gain”. While the opinion did not elaborate on how the

burden of proof would change for such buyers, it did cite Genesco, Inc. v. The Finish Lines, Inc., which found that two quarters of bad performance would be material to a buyer in a highly leveraged

acquisition.28 Going forward, it remains to be seen how the

Delaware courts will evaluate the durational requirement for finding

a MAC in transactions involving financial buyers.

A Framework for Risk Allocation between Buyer and Seller

The Akorn opinion supplemented its analysis of MAE clauses with a framework for understanding the types of risks that arise in a

merger and how such risks ought to be allocated between the buyer

and seller. Although not novel, this framework may provide a

helpful guide to persons negotiating or seeking to interpret or

explain (for example, to a board of directors) the allocation of risks

between the buyer and the seller. The opinion stated that, as a

general matter, the typical MAE clause allocates general market or

industry risk to the buyer.29 Company-specific risks are re-allocated

to the seller through exceptions to the carve-outs in the MAE

clause.30 The opinion distilled general market and company-

specific risks into four distinct categories:

■ Systematic risks, i.e., risks that are beyond the control of all parties and whose impact will generally extend beyond the

parties to the transaction.

■ Indicator risks, i.e., risks that signal a MAC may have occurred, such as a drop in the seller’s stock price or a credit

rating downgrade, and which is evidence of, but not in and of

itself an adverse change.

■ Agreement risks, i.e., risks that arise from the public announcement of the merger agreement and the taking of

actions contemplated thereunder, including endogenous risks

associated with getting from signing to closing.

■ Business risks, i.e., risks arising from the ordinary operations of a party and over which the party usually has significant

control.

The opinion proceeded to evaluate the MAE clause in the Akorn merger agreement under its risk classification framework. It

identified general industry changes, changes to the economy, credit

or financial or capital markets, acts of war, violence, pandemics,

disasters and other force majeure events such as earthquakes, floods and hurricanes, and changes in applicable law or regulation as

examples of systematic risks that are borne by the buyer.31 The

opinion identified risks associated with the negotiation, execution,

announcement or performance of the merger agreement and any

action taken by Akorn or its subsidiaries as required under the

merger agreement or at Fresenius’s request as examples of

agreement risks that are also borne by the buyer.32 In addition, the

opinion identified changes in Akorn’s credit ratings, declines in

market price or changes in trading volume of the shares of Akorn or

any failure by Akorn to meet projections and guidance as examples

of indicator risks also assumed by the buyer.33 Business-specific

risks were then re-allocated to the sellers through exceptions to the

carve-outs in the MAE clause, which stated that the seller is not

protected against systematic risks which have a “disproportionate

impact” on the seller, and that the indicator-risk carve-out did not

extend to the underlying causes behind the decline in the stock price,

credit rating or other indicator.34

The Court of Chancery concluded that the MAE definition in the

merger agreement ultimately leaves Akorn only bearing company-

specific business risks and opined that this outcome is economically

efficient as the seller “is better placed to prevent such risks . . . and

has superior knowledge about the likelihood of the materialization

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of such risks that cannot be prevented”.35 It takes seriously

deteriorated circumstances for those company-specific business

risks to be triggered to the point where the buyer can walk away

from the deal, but in Akorn’s case, the Court found that they were.

No Reliance or Sand-bagging Defence in Delaware

In Akorn, the Court of Chancery also confirmed the contractarian nature of Delaware law and the absence of a reliance defence to a

claim for breach of representations and warranties. Previously, in

IBP, then Vice Chancellor Strine rejected the argument that a buyer could not have relied on a representation made by the seller when

the buyer had reason to be concerned about the accuracy of the

representation and had the ability to conduct due diligence to

confirm the accuracy of the representation. Writing in a separate

opinion, then Vice Chancellor Strine also noted that “due diligence

is expensive and parties to contracts in the mergers and acquisitions

arena often negotiate for contractual representations that minimize a

buyer’s need to verify every minute aspect of a seller’s business”.36

The earlier opinions noted that representations served an important

risk allocation function because they allowed the seller to lessen its

burden to independently verify the matters covered under the

representation.

Akorn echoes the views of earlier Delaware cases and rejects Akorn’s argument that the MAE qualifier to a representation

changes the nature of the representation and its risk allocation

function. Instead, the Court of Chancery held that a MAC or MAE

qualifier to a representation serves a more subtle purpose: it

“addresses the degree of deviation from the representation that is

permissible before the representation would be deemed

inaccurate”.37 Vice Chancellor Laster further held that “it should not

matter whether or not the buyer had concerns about potential

regulatory compliance issues (which the representation evidenced)

or conducted some degree of due diligence”.38 What did matter was

that the parties had allocated the risk of the issues addressed in the

representation through the representation. If the parties wished to

allocate risk any differently, the Court of Chancery suggested that

they could have done so through qualifying certain items on a

disclosure schedule. The Court of Chancery added that implying a

knowledge-based carve-out to a representation would lead to an

“expansive knowledge-based exception framed in terms of

everything the buyer knew or should have known” and which “is not

consistent with the plain language of the Merger Agreement”.39

If the parties intend that a particular known potential risk should be

borne by the buyer, it is possible to call that risk out specifically in

the disclosure schedules to the merger agreement. Going forward, it

is possible that sellers will seek to avoid free-standing MAC

conditions even more strongly than they already do, and to build

into the disclosure schedules known risks that they want the buyer to

take on.

An Objective Standard for Operating in the Ordinary Course?

The third basis on which the Court of Chancery allowed Fresenius

to terminate its agreement with Akorn was Akorn’s failure to

perform in all material respects its covenant to operate the company

in the ordinary course of business, and this failure had been

sufficiently material to satisfy the bring-down closing condition

applicable to covenants (which is at the lower “materiality” standard

and does not require an MAE). The Delaware Supreme Court did

not affirm the decision on this basis but simply noted in a footnote

that there was “no need for [them] to comment upon or to address

this reasoning to decide this expedited appeal”.

In addressing whether Akorn breached its covenant to operate in the

“ordinary course” of business between signing and closing, the

Court of Chancery appeared to adopt an objective standard,

measuring Akorn’s actions against what a “general pharmaceutical

company operating in the ordinary course of business” would do.40

In Akorn’s case, the Court did find that Akorn had engaged in

practices post-signing that were inconsistent with its own past

business practices. Notably, Akorn cancelled regular audits at four

sites in favour of less invasive “verification” audits and submitted

fabricated data to the FDA. However, the Court of Chancery’s

reference to an objective standard when evaluating what constitutes

ordinary course behaviour raises the interesting question of whether

a company that had not been operating historically according to

such objective standards would be required to “step up its game”

between signing and closing. The Court’s findings suggest that the

continuation of egregious past missteps by the seller, especially if

exacerbated by serious missteps post-signing, may amount to a

breach of the ordinary course covenant.

The Court of Chancery also suggested that the customary language

requiring Akorn to comply with its covenants “in all material

respects” invoked a materiality standard comparable to that used for

disclosures under U.S. federal securities law. Under federal

securities law, materiality hinges on whether a breach would have

been viewed by a reasonable investor as having significantly altered

the “total mix” of information. The Court of Chancery rejected

Akorn’s argument that a breach of the covenant would require a

showing of a material breach of contract under common law. The

opinion stated that the purpose of the clause “in all material

respects” was to “exclude small, de minimis, and nitpicky issues that should not derail an acquisition”. This latest interpretation of “in all

material respects” by the Court of Chancery suggests that future

analyses of breaches of covenants may rely heavily on the context

and facts at hand, and that the burden of proof may not be as onerous

as previously believed.

Tactical Considerations in Dealing with Disputes Before Terminating

Akorn also offers practical guidance for parties – buyers in particular – in navigating a potential MAC situation. A buyer under

a merger agreement whose target has suffered a precipitous decline

in its fortunes or prospects since the signing is in a difficult position.

Integrating acquired companies and making them accretive is hard

enough. When what you will receive in the deal is substantially less

than what you thought you had negotiated to buy and were paying

for, that can be a bitter pill to swallow. In a public company

acquisition, unless the value degradation is extreme, there is often

little the buyer can do. However if the target’s performance shortfall

reaches the level of potential materiality, there may be a reasonable

prospect of renegotiating the transaction at a level that makes sense

for all parties, which is what often happens. Indeed, the vagueness

and lack of precision in the MAC definition is deliberate, designed

to give both parties an incentive to find a workable solution if things

go wrong. Sometimes, however, this can be complicated by the

uncertainty of the underlying facts, legal and cultural considerations

and even personalities. A buyer might believe, for example, that as

soon as they raised the possibility of a renegotiation, they would

find themselves being sued in an unfavourable jurisdiction. In such

a case, they may be nervous to engage their counterpart in

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renegotiation discussions and may even be tempted to act

unilaterally, as Hexion did when its transaction with Huntsman

Chemical was doomed by the collapse of the chemicals industry.

In Akorn, the Court of Chancery placed substantial weight on the fact that Fresenius had made overt efforts to reach out to Akorn to

deal with the unfolding situation before terminating the merger

agreement. The difficult judgments that will have to be made in

these unfortunate situations will always be heavily dependent on the

underlying facts. Ultimately in Akorn, the Court held that Fresenius struck an acceptable balance between using its best efforts to

consummate the merger on the terms specified in the merger

agreement and pursuing its rights to terminate under the agreement

in light of the adverse developments.

Conclusion

On one level, Akorn is not a momentous case that breaks new legal ground, but is simply a recognition that given sufficiently egregious

facts, a buyer will be able to walk away from a merger agreement.

The “curse” has been broken, the “taboo” lifted, and new life

breathed back into the MAC clause. Lawyers can take comfort that

the contracts they write do mean something.

Beyond that headline, Akorn is a case that will be studied for many years as it offers significant guidance on various issues relating to

the standards used to establish a MAC. Because the situation where

a MAC-dispute comes into play is one of the most difficult and

sensitive areas of M&A law, this guidance is most welcome.

Acknowledgment

The authors gratefully appreciate the assistance of their colleague

Carmen X. W. Lu in the preparation of this chapter.

Endnotes

1. Akorn, Inc. v. Fresenius Kabi AG, Inc., No. 535, 2018 (Del. Dec. 7, 2018); Akorn, Inc. v. Fresenius Kabi AG Inc., C.A. No. 2018-0300-JTL (Del. Ch. Oct. 1, 2018).

2. See, e.g., In re IBP, Inc. S’holders Litig., 789 A.2d 14 (Del. Ch. 2001) and Hexion Specialty Chems., Inc. v. Huntsman Corp., 965 A.2d 715 (Del. Ch. 2008).

3. “Many commentators have noted that Delaware courts have

never found a material adverse effect to have occurred in the

context of a merger agreement. This is not a coincidence.”

Vice Chancellor Lamb in Hexion (supra) at 40. 4. C.A. No. 2018-0300-JTL, at 2 (Del. Ch. Oct. 1, 2018).

5. C.A. No. 2018-0300-JTL, at 185 (Del. Ch. Oct. 1, 2018).

6. The Court of Chancery noted that notwithstanding the fact

that most courts have considered decreases in profits of 40%

or higher to constitute a material adverse effect, the

“precedents do not foreclose the possibility that a buyer could

show that percentage changes of a lesser magnitude

constituted an MAE”. Id. at 132. 7. 789 A.2d 14 at 738 (Del. Ch. 2001).

8. The court relied on dollar estimates provided by Akorn and

Fresenius as well as evidence from depositions of Akorn and

Fresenius executives regarding the accuracy of the estimates.

The court also relied on an independent expert’s report

calculating out-of-pocket remediation costs. It is notable that

the Court of Chancery did not devise a formulaic approach to

determining losses with Vice Chancellor Laster, noting that

he landed at a figure that made “intuitive sense to me given

the seriousness of Akorn’s regulatory problems and the ever-

expanding efforts that Akorn has been forced to make to

remediate them”. C.A. No. 2018-0300-JTL, at 184 (Del. Ch.

Oct. 1, 2018).

9. Id. at 179 (Del. Ch. Oct. 1, 2018). 10. Id. at 183. 11. Id. at 184. 12. Id. at 184. 13. The Court of Chancery suggests that had either party put

forth an estimate on what it considered to be an MAE, the

court would have taken such number into consideration. Id. at 185.

14. C.A. No. 2018-0300-JTL, at 186 (Del. Ch. Oct. 1, 2018).

15. Id. at 187–88. 16. Id. at 190. 17. 965 A.2d 715 at 742 (Del. Ch. 2008).

18. C.A. No. 2018-0300-JTL, at 186 (Del. Ch. Oct. 1, 2018).

19. Id. at 185. 20. Id. at 139. 21. Id. at 140. 22. Id. 23. Id. at 140–41. 24. Id. at 140. 25. Id. at 141. 26. Id. 27. C.A. No. 2018-0300-JTL, at 130 (Del. Ch. Oct. 1, 2018).

28. Id. 29. Id. at 121–24. 30. Id. at 122. 31. Id. at 126. 32. Id. 33. Id. 34. Id. 35. Id. at 128. 36. Cobalt Operating, LLC v. James Crystal Enterprises, LLC,

2007 WL 2142926 at 28 (Del. Ch. Jul. 20, 2007).

37. C.A. No. 2018-0300-JTL, at 195 (Del. Ch. Oct. 1, 2018).

38. Id. at 197. 39. Id. at 198. 40. Id. at 216.

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Adam O. Emmerich Wachtell, Lipton, Rosen & Katz 51 West 52nd Street New York, NY 10019 USA Tel: +1 212 403 1234 Fax: +1 212 403 2234 Email: AOEmmerich@wlrk.com URL: www.wlrk.com

Trevor S. Norwitz Wachtell, Lipton, Rosen & Katz 51 West 52nd Street New York, NY 10019 USA Tel: +1 212 403 1333 Fax: +1 212 403 2333 Email: TSNorwitz@wlrk.com URL: www.wlrk.com

Wachtell, Lipton, Rosen & Katz is one of the most prominent business law firms in the United States. The firm’s preeminence in the fields of mergers and acquisitions, takeovers and takeover defence, strategic investments, corporate and securities law, and corporate governance means that it regularly handles some of the largest, most complex and demanding transactions in the United States and around the world. It features consistently in the top rank of legal advisers. The firm also focuses on sensitive investigation and litigation matters and corporate restructurings, and in counselling boards of directors and senior management in the most sensitive situations. Its attorneys are also recognised thought leaders, frequently teaching, speaking and writing in their areas of expertise.

Adam O. Emmerich focuses primarily on M&A, Corporate Governance and securities law matters. His practice has included a broad and varied representation of public and private enterprises in a variety of industries throughout the United States, and globally in connection with mergers and acquisitions, divestitures, spin-offs, joint ventures, and financing transactions. He also has extensive experience in takeover defence and corporate governance issues. Adam is recognised as one of the world’s leading lawyers in the field of M&A in the Chambers Global guide to the world’s leading lawyers, as an expert in M&A, Corporate Governance and M&A in the real estate field by Who’s Who Legal, as an expert in both M&A and Corporate Governance by Euromoney Institutional Investor’s Guides, respectively, to the World’s Leading Mergers and Acquisitions and Corporate Governance Lawyers, and is one of LawDragon’s 500 Leading Lawyers in America.

Trevor S. Norwitz focuses primarily on M&A, corporate governance and securities law matters. He has advised a range of public and private entities in a variety of industries in connection with mergers, acquisitions, divestitures, hostile takeover bids and defences, proxy contests, joint ventures, financing transactions and corporate governance matters.

In addition to his professional practice, Trevor teaches a course in M&A at Columbia Law School, chairs the New York City Bar M&A Committee and is active on several other bar committees, and was a member of an international advisory group to the South African government on company law reform. He is a regular speaker and contributor to professional publications on topics relating to M&A and corporate governance, areas in which his expertise is recognised by Who’s Who Legal and Chambers. He holds law degrees from Oxford University and Columbia Law School.

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Chapter 3

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Houthoff

Alexander J. Kaarls

Willem J.T. Liedenbaum

The Dutch ‘Stichting’ – A Useful Tool in International Takeover Defences

A good number of high-profile, cross-border, unsolicited takeover

defence battles over the years, including the battles over control of

Gucci, Rodamco North America, Arcelor, KPN and Mylan, to name

a few, each time featured a Dutch entity with a name that can be hard

to pronounce; a “stichting”. What are those stichtings and how did they feature in those defence fights? We believe that the following

brief discussion of their features and the manner in which they are

used will show both how effective stichtings can be, and that they

can still be used much more broadly also in other international

situations.

A stichting is a private entity organised under Dutch law. Although

often operating on a non-profit basis and for charitable purposes, a

stichting may also carry out economic and social activities, and even

pure business activities. A stichting can be a shareholder in

companies and may develop business activities through subsidiaries.

In practice, a stichting is often used as a special purpose vehicle in a

variety of contexts, which may be related to corporate governance,

anti-takeover protection or estate planning.

Although there was a move among a substantial number of Dutch

listed companies some years ago to take down their stichting

structures that they had previously put in place for anti-takeover

defence purposes, many companies have left their structures in

place. Moreover, these takeover defence structures appear to have

gained popularity again in recent years, as M&A activity increased,

while at the same time popular support appeared to somewhat

increase for corporations defending themselves against unsolicited

public takeover approaches based on broad stakeholder interest

grounds.

Below, we provide a brief description of the main characteristics of

the stichting under Dutch law, followed by the most typical

structures in which stichtings are used in international transactions

for strategic and defensive purposes. By way of further illustration,

we also discuss several companies that have an anti-takeover

stichting structure in place and, where relevant, Dutch case law

relating to these stichting structures.

Main Characteristics of a Stichting

The Dutch stichting is a self-contained legal entity with separate

legal personality that has no (and cannot have) members or

shareholders. Accordingly, no one “owns” a stichting. The board of

directors is the only mandatory corporate body. In general, all

powers within the stichting are vested in its board. The stichting is

governed and, by default, represented solely by its board. The initial

board members are named in the deed of formation. The articles of

association (as initially laid down in the deed of formation) govern

any subsequent board changes. The authority to appoint and dismiss

board members is frequently attributed to the board itself in a

system of co-optation. Also, in well-defined circumstances, the

board members can be dismissed by a court. The system of co-

optation largely insulates the stichting from non-solicited bids (as

well as activist shareholder approaches).

A stichting is created solely for the purpose of clearly defined

objectives as laid down in its articles of association. As a result of

this objective clause, the articles of association provide the context

in which the stichting operates. The objectives clause may not

contain any provisions that allow payments to be made to the

stichting’s founders, except for salary or reimbursements.

The stichting is established through the execution of a notarial deed

of formation before a Dutch civil-law notary and must be registered

with the trade register at the Dutch Chamber of Commerce. Neither

any governmental approval or authorisation, nor the contribution of

any capital is required for such establishment. Once established, a

stichting can attract funding by way of fundraising, governmental or

other subsidies, donations, gifts or otherwise.

In general, the founders and board members of a stichting are not

personally liable for debts and other obligations and liabilities of the

stichting. This may be different in the event of tortious acts or in the

event of bankruptcy as a result of mismanagement.

Certain Typical Defensive Stichting Structures

Stichting preference shares

The articles of association of a publicly traded company may (and

many in the Netherlands do) provide for the creation of a separate

class of preference shares that can be called (pursuant to a separately

entered into call option agreement) at nominal value by an

independently managed stichting. It is, in principle, at the discretion

of the board of the relevant stichting (which will be set up for that

specific purpose; “stichting preference shares”) if and when to

exercise the call option. Such stichting preference shares’ sole

purpose will be to act in the best interests of the company concerned

and its business. When deciding whether to exercise the call option

at any time, the stichting board would need to determine that the

continuity of the company is threatened and seek to protect such

continuity. Such ‘protection of continuity’ would typically refer to

a hostile bid situation, but could potentially include other non-

solicited activity such as non-solicited stake building (combined

with an effort to seek to obtain “creeping control” or the like).

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Dutch law requires a resolution of the relevant company’s general

meeting of shareholders to issue shares, or to grant the right for a

limited period of time to another corporate body (typically, the

board of a company) to issue shares. In line therewith, a call option

that is granted to a stichting requires approval by the company’s

general meeting of shareholders, whereby such a call option is

frequently already granted prior to the initial public offering of the

relevant company. Preference shares, when issued through exercise

of the call option, are typically non-listed, non-transferable and will

have equal voting rights to the publicly traded shares. The stichting

will only need to pay 25% of the nominal value per preference

share, and arrangements to (temporarily) cover such payment from

a non-distributable reserve of the company are allowed.

Typically, the mere presence of these stichting/call option structures

appears to have a ‘preventive effect’; there have only been a couple

of instances in which a stichting actually exercised its call option,

whether in the context of a non-solicited bid (KPN (2013) and Mylan (2015)) or in an activist scenario (Stork (2007) and ASMI (2010)). Examples of other corporates that have implemented

stichting preference shares structures include Aegon, AholdDelhaize,

ASML, Boskalis, DSM, Fugro, ING, Philips, Randstad, SBM

Offshore, Vopak, Wolters Kluwer, Signify and TomTom.

In the Stork situation (2007), two activist shareholders of Stork seeking to force Stork to divest its non-core businesses challenged

the composition of Stork’s supervisory board. In the ASMI case (2010), activist shareholders pursued the implementation of a new

corporate strategy by seeking to change the company’s board. Both

the stichting preference shares of Stork and ASMI, respectively,

responded by exercising the call option it held, which action, in both

cases, was challenged by the activist shareholders concerned before

the Enterprise Chamber at the Amsterdam Court of Appeals (a

specialised Dutch court for corporate disputes). In the Stork case, the court held that the call option agreement between Stork and the

stichting preference shares only permitted the exercise of the call

option in case of a hostile bid scenario. Accordingly, the Enterprise

Chamber ordered the cancellation of the preference shares. In the

ASMI case, the legality of the exercise of the call option could ultimately not be reviewed as the Dutch Supreme Court held that the

Enterprise Chamber had no jurisdiction to rule on such legality. In

both cases, the parties used the time created by the call option

exercises, and subsequent litigation, to get to solutions satisfactory

to the respective boards.

In July 2015, Mylan’s stichting preference shares exercised its call

option to acquire preference shares, even before Teva formally

confirmed its proposed non-solicited USD 40 billion bid for Mylan.

As a result, the stichting acquired 50% of the issued capital (and

voting rights) in Mylan, and thereby successfully blocked Teva’s

bid. A similar situation occurred in 2013, when América Móvil

ultimately did not pursue its intended bid for Royal KPN N.V. after

the KPN stichting responded to the announced bid by exercising its

call option. As both exercised call options were never litigated, the

legitimacy of the respective stichting’s actions was never tested,

while in both events the non-solicited bidders ultimately did not

proceed in making the announced bids.

Stichting administrative office

Through a stichting administrative office structure, one can split the

economic ownership of shares from the legal ownership thereof

(including the voting rights on the shares). In exchange for the

issuance of shares by the company, the independent stichting

concerned will issue depositary receipts for the underlying shares,

which depositary receipts (as opposed to the underlying shares) will

be admitted to (public) trading. As a result, the legal ownership of

the relevant shares will be held by the stichting, but the economic

ownership of the shares will be held by the depositary receipt

holders. All distributions received by the stichting, in its capacity as

legal owner of the shares (i.e., shareholder of the relevant company),

will typically be passed on directly to the holders of depository

receipts, securing tax transparency and economic ownership of the

underlying shares with the holders of the depository receipts.

However, the stichting’s constitutive documents can, depending on

the stichting’s purpose, provide that economic and/or voting rights

are completely or completely not, in whole or in part, temporarily or

permanently passed on. Furthermore, the holders of depositary

receipts are granted a power of attorney by the stichting to vote on

the underlying shares, which power of attorney can typically only be

withheld, limited or revoked in the event of, for example, a non-

solicited bid.

The creation of depositary receipts for shares in the share capital of

a Dutch company is a common phenomenon in Dutch law and

practice. In 2015, ABN AMRO put in place a stichting administrative

office in the context of its IPO on Euronext Amsterdam. The

depositary receipts that represented the ordinary shares in ABN

AMRO were subsequently listed. The stichting that holds the shares

in the capital of ABN AMRO (and issued the depositary receipts that

are now publicly traded) is entitled to vote the shares itself, at its

discretion but in accordance with its stated corporate purpose, if any

of a number of specified threats to the continuity of ABN AMRO

materialises. In the absence of any such threat, the stichting

consistently exercises its voting rights in accordance with the

instructions of the relevant holders of depositary receipts. For a

financial institution like ABN AMRO, this structure (as opposed to,

e.g., a preference shares option structure) means that the stichting as

existing controlling shareholder has been precleared from an (ECB)

regulatory point of view, while it can become “active” at any time

when a “threat” actually arises.

Some examples of other Dutch companies that have a similar or

different stichting administrative office structure in place include

Fugro, KLM, Unilever and Euronext.

Stichting priority shares

Most material company resolutions (e.g. the appointment of board

members or the amendment of the articles of association) can be

made subject to the prior approval of the meeting of holders of

priority shares. The priority shares may be held by an independent

stichting, that typically has the objective to serve the best interests of

the relevant company and all its stakeholders (including employees,

customers, suppliers, etc.). Accordingly, although not a strict anti-takeover device, the implementation of a priority share structure

may substantially deter hostile takeover activity, as – in the absence

of an agreement with the holder of priority shares – the existence of

the priority shares may substantially affect a bidder’s ability to gain

full control of the company within a predictable period of time (in

particular, where the acquirer would need the stichting for effecting

envisaged board changes). When a company that has implemented

a stichting priority shares is acquired, the acquirer might not be in a

position to secure full control unless it secures support of the

stichting’s board, de facto forcing a negotiated offer. Dutch companies that have a stichting priority shares in place

include AkzoNobel, Arcadis and Aalberts Industries. However,

priority share structures have lost popularity over the years, as

companies have tended to want to show the “openness” of their

corporate structures.

Houthoff The Dutch ‘Stichting’

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Stichting crown jewel

A stichting was put in place in the face of the non-solicited public

bid by Mittal Steel N.V. for Arcelor S.A., in early 2006. In this case,

the key American asset of Arcelor S.A., the Canadian steel mill

Dofasco, was placed in a stichting to ensure that Arcelor S.A. could

no longer sell or be forced to sell Dofasco (while full operational

control remained with Arcelor S.A.). This structure is often referred

to as a “crown jewel lock up”. As a result, Mittal Steel N.V. could

no longer seek US antitrust approval on the condition that Dofasco

would be sold off following the closing of its non-solicited bid.

ArcelorMittal, indeed, ultimately, after negotiating an Arcelor

board-supported deal, retained Dofasco and had to dispose of other

American production assets that it already owned itself. The

stichting structure was later unwound by the stichting board (in line

with the stichting’s own constitutive documents), when the hostile

threat no longer existed.

Dutch criteria for protective measures

A stichting structure may, without restriction (and without realistic

risk of challenge), be structured as an anti-takeover and protective

device (including the exercise of a call option or issuing depositary

receipts, as described above). However, when it involves a Dutch

(listed) corporate, protective measures can be reviewed and, where

appropriate, neutralised by the Enterprise Chamber upon the request

of one or more shareholders who hold a sufficient amount of shares

to have standing.

The criteria set out by the Dutch Supreme Court in its RNA case are

considered to be the basis for the Enterprise Chamber to assess the

permissibility of protective measures when so invoked. In short, the

Enterprise Chamber must take into consideration all “relevant

circumstances of the case”. The Enterprise Chamber would in

particular need to assess whether the management board could

reasonably have come to the conclusion that invoking the protective

measure was necessary to maintain a status quo, allowing the board to enter into discussions with the stakeholders involved without any

changes being made to the composition of the board or to the

strategy of the company (to the extent that the board would deem

such changes to not be in the best interest of the company or its

stakeholders). The relevant standard to assess whether invoking a

protective measure is justified is whether that measure, under the

given circumstances and applying a reasonable assessment of the

interests of the stakeholders involved (i.e. not only the company’s

shareholders, but all stakeholders, including the company’s

employees, customers and suppliers), is an adequate and

proportional response to the imminent threat(s).

Conclusion

The popularity of the type of stichting structures described above

has varied within the Netherlands over the years. Currently, they

appear to be gaining in popularity again. Although we believe it key

that stichting boards, in their assessments and decision-making,

truly and properly consider all stakeholder interests (so, including

where appropriate those of shareholders), we continue to see t