In the wake of record-setting volume and value metrics in 2018, practitioners eyed the 2019 deal market with healthy skepticism. Despite a slight downward tick in momentum and overall deal statistics, 2019 remained a robust, dynamic and competitive market with tech deals outpacing other sectors in both volume and critical features. Detailed below are our “notes from the field” for tech M&A in 2019. In addition to the areas below, we are keeping an eye on (i) whether or not the market will consistently adopt the use of AI technology in deal processes, (ii) the increased use of rep & warranty insurance by strategic tech buyers, (iii) changes to the “dual-track” exit strategy in connection with any flex in the capital markets and (iv) the increasingly sophisticated maneuvering around dual-class stock mechanics in public companies (check out a few interesting 2019 deals if this piques interest: MindBody – an irrevocable proxy; Tableau – a conditional conversion agreement; FitBit – a naked no vote fee).
Happy deal making in 2020 – we look forward to seeing you in the trenches!
Expanded Antitrust Oversight and Enforcement
Tech M&A hit the global regulatory crosshairs in 2019 – creating a deal environment in which regulatory clearance, timing and scope of review quickly become one of the most critical factors in assessing transaction risk. The heightened enforcement climate has evolved against the backdrop of ever-increasing convergence and perceived power in the tech sector, combined with a popular narrative of under-enforcement of tech deals in prior decades. This “cocktail” of factors appears to be pushing regulators worldwide to reconsider the lens with which potential competitive overlap is assessed – including regulators outside of the U.S. now regularly requesting that filings be made or conducting comprehensive (and lengthy) reviews in transactions where competitive overlap does not technically implicate jurisdictional mandates or that, in prior years, would not have been perceived as particularly sensitive. In the U.S., in addition to increased pressure on the traditional competitive overlap analysis, the U.S. Department of Justice (DOJ) and U.S. Federal Trade Commission (FTC) are particularly focused on acquisitions of “nascent technologies” by incumbent high-tech platforms. Scrutiny has become increasingly intense if the primary benefit of the deal appears to stultify a budding competitive threat – the so-called “killer acquisition.” For example, in 2019, the DOJ brought an unprecedented suit to block Sabre’s proposed acquisition of Farelogix, characterizing the deal as a “dominant firm’s attempt to eliminate a disruptive competitor after years of trying to stamp it out.”
CFIUS reform legislation also became a key consideration in deal making in 2019. Implementing regulations – which have yet to be finalized in certain respects – reflect a heightened concern over foreign access to U.S. technology and sensitive personal data of U.S. citizens. Most notable is the new requirement for mandatory pre-closing CFIUS filings in the event that a foreign buyer will acquire a U.S. business operating in specified verticals and dealing in “critical technology” – an expansive term that will continue to evolve as the government moves to regulate emerging and foundational technologies of concern to the government. The new legislation expands regulatory scrutiny – and potential interference – in cross border tech deals with any national security-related overlay (broadly defined). For example, two high-profile transactions were unwound by CFIUS in 2019 on national security grounds related to sensitive data of U.S. citizens. CFIUS compelled Shenzhen-based iCarbonX to divest its majority stake interest in PatientsLikeMe, an online community for patient seeking treatments for common health conditions and, shortly thereafter, Beijing Kunlun Tech to divest its ownership of Grindr, a popular dating app. Dealmakers should be prepared for the introduction and enforcement of non-U.S. regulatory schemes imposed to achieve parallel objectives.
Key takeaway? Be prepared for regulatory review of any tech deal – regardless of how a company may currently define the relevant competitive market. Bring regulatory experts into the deal early and prepare for jurisdictional outreach where you might not expect it. Ensure that documents and other materials presented to regulatory agencies are carefully vetted and prepared. The details, and related preparedness, matter more than ever before.
No More MAEs (Yet)
To paraphrase the legendary Ron Burgundy from Anchorman, a material adverse effect (or “MAE”) is still “kind of a big deal” in tech M&A, especially when considering the Delaware Court of Chancery concluded in late 2018 – for the first time – that a buyer could walk away from a merger transaction because (among other matters) there was an MAE on the business of the seller in Akorn (worrying some practitioners that the bar for establishing the occurrence of more MAEs had been lowered, as discussed in more detail in our prior blog post). More recently, in its decision in Channel MedSystems, the Delaware Court of Chancery reaffirmed that establishing the occurrence of an MAE is a tall order. In Channel MedSystems, the Court found that although an executive of Channel MedSystems knowingly falsified documents that were submitted to the FDA in support of a pending application for FDA approval of a medical device (and, notably, Channel MedSystem’s only product), Boston Scientific failed to prove that such actions would likely result in an MAE. The Court found that, despite the breach of various representations and warranties, Boston Scientific was not permitted to terminate the deal and that Channel MedSystems was entitled to specific performance requiring Boston Scientific to close the transaction because the falsified reports would not have had a significant and long-term effect on the financial performance of the company. The Channel MedSystems decision reinforces the fact-specific nature of the finding in Akorn, and demonstrates that buyers still have a steep hill to climb before being able to walk away from a deal as a result of adverse developments in the seller’s business.
M&A Deal Litigation
While In re Trulia, Inc. Stockholder Litigation effectively marked the end of “disclosure-only” settlements in Delaware state courts, “disclosure-only” suits have reemerged in the federal court system where there is no consistent body of law deterring plaintiffs from bringing security law claims against merger parties for purported failures to accurately and completely disclose information. According to Cornerstone Research, the number of M&A class action filings increased from 34 in 2015 to 85 in 2016, 198 in 2017, and 182 in 2018. This trend continued in the first half of 2019, but at a slightly slower pace (72 filings in 1H19 compared to 91 in 1H18 and 91 in 2H18). The overwhelming majority of these cases are resolved pre-close, with the target company filing supplemental disclosures with the SEC. However, unlike the pre-Trulia regime, the parties typically do not enter into a “disclosure-only” settlement. Instead, the target company issues additional disclosures to moot plaintiffs’ disclosure claims and, as a result, plaintiffs agree to voluntarily dismiss their actions. Thereafter, plaintiffs’ counsel often demands a “mootness fee” (for the alleged benefit conferred by the supplemental disclosures), over which the parties can negotiate or litigate, if necessary. This past year we also witnessed an uptick in stockholder books and records demands (under Section 220 of the Delaware General Corporation Law) in connection with M&A transactions. These demands are often a precursor to post-close merger litigation, asserting breach of fiduciary duty claims (under Delaware law) or disclosure claims (under federal law). The purpose of such books and records demands (among other potential strategies) is to provide plaintiffs’ attorneys with more information regarding the underlying transaction and related process so that they can then use that information to draft a more detailed complaint with the goal of surviving a motion to dismiss – e.g., overcome a Corwin challenge in a breach of fiduciary duty case or satisfy the heightened pleading requirements of the Private Securities Litigation Reform Act (PSLRA) in a Section 14 case.
2019 marked another year of hypervigilance by tech buyers in the areas of data protection compliance and data rights. Companies with global operations that spent significant resources coming into compliance with the General Data Protection Regulation (GDPR) when it was implemented in the European Union in 2018, have found themselves this past year going through a similar compliance exercise in connection with the rollout of the California Consumer Privacy Act (CCPA), which became effective January 1, 2020. In addition to these new regulatory regimes, the heightened sensitivity in the market to privacy related matters is a result of the increasing importance of data to the business models of many in the tech sector. Companies that look to leverage the information they collect must implement dynamic data practices to ensure that they can comply with future legislative developments relating to the use of such information. As an outgrowth of these legislative and market realities, we have seen tech buyers spend an increasing amount of time and energy scrutinizing sellers’ data privacy practices and policies.