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New heights: US M&A H1 2021

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US M&A set a new record for value in H1 2021—and nearly surpassed the full-year figure for 2020

A year of historic highs and rapid change

US M&A surged to record levels in the face of pandemic-related challenges and potentially dramatic regulatory shifts

We are just heading into August, but it is already safe to say that 2021 is a historic year for US M&A. Deal value rose to a new high of US$1.27 trillion in H1 2021. This was a 324 percent increase compared to H1 2020—and was virtually equivalent to the total value recorded in all of 2020.

This torrent of deals was the result of a perfect storm of activity on the part of strategic, PE and SPAC dealmakers. The pandemic drove many corporates to offload non-core divisions and acquire digital capabilities. Corporates that thrived during the pandemic used M&A to consolidate gains. PE firms strove to deploy their massive troves of dry powder. And SPACs searched for opportunities to invest the record levels of funds they raised.

The election of Joe Biden as President significantly reduced political uncertainty that may have dampened activity in 2020 and this spurred dealmaking in 2021. However, the administration's policies could also complicate dealmaking.

The Biden Administration is taking vigorous steps to reshape antitrust policies and practices in the US. In July, the President issued an Executive Order to promote competition and lower prices throughout the economy through increased antitrust enforcement. These efforts are likely to intensify during the run-up to the US midterm elections in November 2022. The effects were already visible in the recent decision by Aon and Willis Towers Watson to call off their merger, which they first announced in March 2020. The deal would have created the world's largest insurance broker, but the Department of Justice opposed the deal on the grounds that it would eliminate competition, reduce innovation and lead to higher prices.

CFIUS has shown that it will mostly continue with the more aggressive approach to evaluating deals for national security concerns that was established by the previous administration. And with the appointment of Gary Gensler as Chair of the Securities and Exchange Commission, the administration signaled it will take a more aggressive approach to securities law enforcement.

There are a number of other looming risks as well. The possibility of rising inflation and the end of government support measures related to the pandemic could shock the market. And dealmakers are concerned about potentially frothy valuations.

But perhaps the greatest variable remains the uncertain trajectory of the pandemic. Though the US was on a course of increasing optimism as vaccines were rolled out, recent concerns about the Delta variant of COVID-19 have raised questions—and exacerbated political divisions—about how quickly economies should open up.

Despite these challenges, the outlook for dealmaking remains very positive. US GDP forecasts are upbeat, stock markets are at historic highs, and interests remain low. Moreover, the Biden Administration's economic stimulus efforts and ambitious plans for energy transition and infrastructure development will inject large sums of capital into the economy. We expect US M&A to remain very active in the second half of 2021.


US M&A hits record highs

The US enjoyed record levels of M&A activity in H1 2021, as dealmakers made up for lost time caused by pandemic-related disruptions

traffic congestion

Private equity deal activity forges ahead

US private equity has rallied following pandemic lockdowns, thanks to adaptations to remote deal processes and record dry powder

deep tech


Sector overview: TMT and healthcare continue to dominate

TMT M&A tops the sector charts again

electronic engineering

Oil & gas M&A rebounds after pandemic lows

After a year of volatility, the oil & gas industry has stabilized and M&A activity has resumed


Technology dealmaking goes from strength to strength

Technology M&A activity is thriving in 2021 as dealmakers continue to turn to the sector in search of assets with high-quality earnings and growth prospects

electronic engineering

Healthcare displays strong deal activity post-pandemic

The value of healthcare M&A in H1 surpassed pre-pandemic levels


Consumer and retail M&A picks up speed

Deals in the consumer and retail sector show signs of recovery as consumer spending
rallies post-pandemic

shopping basket

Power & renewables M&A soars on back of green policies

The power and renewables industry is positioned for a sustained period of strong deal
activity as the US focuses on hitting net zero carbon emissions by 2050

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Real estate sees welcome revival in M&A in 2021

M&A value among real estate firms quadrupled year-on-year in H1, after a tough 2020

high rise

Infrastructure M&A forges ahead, even before government boost

After a pause, investment in infrastructure has ballooned, even before the Biden administration's US$1 trillion-plus plan is passed


In focus

US dealmaking braces for more challenging antitrust environment

After campaigning for the presidency on a platform that included more aggressive antitrust enforcement, Joe Biden has taken early steps to honor those pledges

high rise

CFIUS set to continue careful scrutiny under Biden Administration

President Joe Biden's approach to the national security risks posed by foreignbacked M&A may differ in style from his predecessor, but not in substance


Reverse break-up fees emerge in response to deal terminations

Even as economies pick up, dealmakers have maintained focus on managing the risk of broken deals

money printing

SEC to take tougher line on enforcement

New Securities and Exchange Commission Chair Gary Gensler has put scrutiny of
SPACs and private funds at the top of his agenda


Notable decisions from Delaware courts

In the first half of 2021, Delaware courts issued several decisions affecting M&A dealmaking

capitol rotunda

Six trends to look out for in the second half of 2021

After a turbulent 18 months which saw M&A crash before an impressive return to form, H2 2021 is set for continued strong deal activity, as well as new challenges

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capitol rotunda

Notable decisions from Delaware courts

In the first half of 2021, Delaware courts issued several decisions affecting M&A dealmaking

9 min read

Williams: Court of Chancery Finds Poison Pill Unenforceable

In February, the Delaware Court of Chancery held that a shareholder rights plan (a "poison pill") adopted by The Williams Companies, Inc. at the onset of the COVID-19 pandemic was unenforceable. In The Williams Companies Stockholder Litigation, the Court found the Williams pill to be "unprecedented in that it contained a more extreme combination of features than any pill previously evaluated by the Court—a 5 percent trigger, an expansive definition of 'acting in concert,' and a narrow definition of passive investor."

Evaluating the Williams pill under Delaware's Unocal standard, the Court first asked whether the Williams board had reasonable grounds for identifying a threat to the corporate enterprise and then whether the response was reasonable in relation to the threat posed. Importantly, the Court noted that, to satisfy Unocal, the board must do more than show good faith and reasonable investigation. Such actions must ultimately give the board "grounds for concluding that a threat to the corporate enterprise existed." However, "If the threat is not legitimate, then a reasonable investigation into the illegitimate threat, or a good faith belief that the threat warranted a response, will not be enough to save the board."

According to the Court, the Williams board identified three supposed threats: (i) the desire to prevent stockholder activism during a time of market uncertainty and a low stock price, (ii) the apprehension that hypothetical activists might pursue "short-term" agendas or distract management from guiding Williams through uncertain times, and (iii) the concern that activists might stealthily and rapidly accumulate over 5 percent of Williams' stock.

The Court characterized the three threats identified by the Williams board as "purely hypothetical," as the board was not aware of any specific activist plays afoot. The Court found that the broad category of conduct referred to as stockholder activism, without more, cannot constitute a cognizable threat under the first prong of Unocal. Similarly, the Court found the abstract risks of short-termism or distraction to be lacking. "When used in the hypothetical sense untethered to any concrete event, the phrases 'short-termism' and 'disruption' amount to mere euphemisms for stereotypes of stockholder activism generally and thus are not cognizable threats."

The third justification for the Williams pill was the concern that activists might rapidly accumulate over 5 percent of Williams stock and the belief that the pill could serve as an early-detection device to plug the gaps in the federal disclosure regime. While the Court assumed, for purposes of analysis, that this was a proper purpose, the Court found the pill to be extreme in its response. Of the twenty-one pills adopted between March 13 and April 6, 2020, only the Williams pill had a 5 percent triggering threshold. In addition, the Williams pill's "beneficial ownership" definition went beyond the default federal definitions to capture synthetic equity, such as options. Its definition of "acting in concert" went beyond the express-agreement default of federal law to capture "parallel conduct" and add the daisy-chain concept. Finally, the pill's "passive investor" definition went beyond the influence-control default of federal law to exclude persons who seek to direct corporate policies. According to the Court, this "combination of features created a response that was disproportionate to its stated hypothetical threat."

Williams reminds practitioners that Delaware courts will thoroughly review a board's decision to implement defensive measures such as a poison pill and that such measures must address legitimate threats in a reasonable manner.

Snow Phipps: Buyer Required to Close Transaction

In April, the Court of Chancery provided more guidance on Material Adverse Effect (MAE) provisions, as well as ordinary course of business and financing covenants in the context of a target affected by the COVID-19 pandemic. In contrast to last year's AB Stable decision (where the buyer was relieved of its obligation to close), in Snow Phipps v. KCAKE Acquisition, the Court resolved all issues in favor of the seller and ordered the buyers to close on its agreement to acquire DecoPac, a supplier and marketer of cake decorating products. In March 2020, at the outset of the COVID-19 pandemic, entities associated with private equity firm Kohlberg & Company agreed to acquire DecoPac from Snow Phipps, another private equity firm. Approximately a month after signing, however, the buyers told the seller that they would not close because debt financing remained unavailable. They also stated that they did not believe that DecoPac would meet the bring-down or covenant-compliance conditions in the purchase agreement because DecoPac was reasonably likely to experience an MAE and failed to operate in the ordinary course of business. The seller commenced litigation seeking specific performance of the purchase agreement.

The buyers argued that the purchase agreement's MAE representation became inaccurate because DecoPac's "performance fell off a cliff" as a result of the escalating COVID-19 pandemic. The Court of Chancery disagreed, finding that DecoPac did not breach the MAE representation given the durational insignificance and corresponding immateriality of the decline in sales. According to the Court, while DecoPac's performance dropped precipitously, it rebounded in the two weeks immediately prior to buyers' termination of the purchase agreement and was projected to continue recovering through the following year. The Court compared this to the situation in Akorn, the only Delaware Court of Chancery case to have found an MAE to be reasonably expected, where the target's downturn had, according to the seller's management, "already persisted for a year and show[ed] no sign of abating."

The buyers also argued that the purchase agreement's ordinary course covenant was breached by DecoPac (i) drawing down US$15 million on its US$25 million revolver and (ii) implementing cost-cutting measures inconsistent with past DecoPac practice. In order for the buyers to avoid their obligation to close, the ordinary course covenant must not be complied with "in all material respects." Citing AB Stable, the Court held that such change in conduct "must significantly alter the total mix of information available to the buyer when viewed in the context of the parties' contract." While acknowledging that the US$15 million revolver draw was the largest since the seller acquired DecoPac, the Court noted that DecoPac had drawn on the revolver five times since late 2017. The Court also noted evidence that the drawdown was not in response to liquidity issues at DecoPac. In addition, the Court highlighted that DecoPac disclosed the draw request to the buyers within one day of making it, offered to repay it within two days of the buyers raising issue with it, and never used any of the funds. Based on this, the Court found that the revolver draw was not inconsistent with past practices and did not reflect a material departure from the ordinary course of business.

Importantly, the Court of Chancery also determined that the buyers breached their obligations under the purchase agreement to use reasonable best efforts to obtain debt financing. This permitted the seller to obtain specific performance of the purchase agreement, even though the purchase agreement expressly conditioned specific performance on the funding of the debt financing. Citing the prevention doctrine, the Court held that the buyers may not rely on the absence of debt financing to avoid specific performance. The Court explained that "the prevention doctrine provides that 'where a party's breach by nonperformance contributes materially to the non-occurrence of a condition of one of his duties, the non-occurrence is excused.'" According to the Court, the buyers' failure to use reasonable best efforts to obtain debt financing contributed materially to its failure to obtain debt financing. Specifically, the Court noted that each of the lenders were willing to execute debt financing on the terms of the debt commitment letter executed at the time of the purchase agreement and that the buyers refused to move forward. The Court rejected the buyers' argument that application of the prevention doctrine requires a finding of bad faith and "in a victory for deal certainty" ordered the buyers to close on the purchase agreement.

Snow Phipps reiterates the high bar that buyers must cross in order to escape their obligations under an acquisition agreement, whether it's due to a potential MAE or breach of ordinary course covenant. It also highlights the importance of carefully drafting and complying with obligations to obtain financing.

Albertsons: Earnout Dispute Survives Motion to Dismiss

In June, the Delaware Court of Chancery failed to dismiss a breach of contract claim against Albertsons Companies, Inc. in connection with its 2017 acquisition of meal kit delivery company Plated. Former Plated stockholders sued Albertsons seeking recovery of earnout consideration. The applicable merger agreement provided for an upfront cash payment of US$175 million to be followed by up to US$125 million in earnout consideration payable over the next three years if certain targets were met. While the merger agreement provided Albertsons sole and complete discretion over the operation of Plated post-closing, it expressly prohibited Albertsons from taking any action with the intent of decreasing or avoiding the earnout.

Allowing the plaintiff former stockholders' breach of contract claim to proceed, the Court held that "to adequately plead a buyer's intent to avoid an earnout, the goal of avoiding the earnout need not be 'the buyer's sole intent'; rather, a plaintiff may well plead that the buyer's actions were 'motivated at least in part by that intention.'" The Court found that the plaintiffs had adequately alleged "a scheme whereby, from the outset of negotiations between Albertsons and Plated until the closing of the merger, Albertsons deliberately hid from Plated's negotiators that it had no interest in Plated's ecommerce business and no intent to support it, much less grow it."

In addition, the Court found that the plaintiffs adequately alleged that Albertsons knew that pivoting from subscriptions to in-store sales would be unsuccessful in the short term such that Plated would miss the earnout milestones. According to the Court, "the reasonable inference allowed by these allegations is not that Albertsons sabotaged a company it just paid US$175 million for, but rather that Albertsons intended to avoid short-term Earnout targets in favor of long term gains. Even if Albertsons took these actions only in part with the purpose of causing Plated to miss the Earnout milestones, this is enough at the pleading stage to support Plaintiff's breach of contract claim." On this basis, the Court allowed the breach of contract claim to proceed.

Interestingly, the Court did dismiss fraudulent inducement claims against Albertsons based on the merger agreement's integration clause, which did not include anti-reliance language. The Court acknowledged that Delaware law is now settled that "[t]he presence of a standard integration clause alone, which does not contain explicit anti-reliance representations and which is not accompanied by other contractual provisions demonstrating with clarity that the plaintiff had agreed that it was not relying on facts outside the contract, will not suffice to bar fraud claims." However, the Court found that the plaintiff's fraudulent inducement claim was based on allegations that Albertsons lied about its "future intent" with respect to the operation of the business. "While anti-reliance language is needed to stand as a contractual bar to an extra-contractual fraud claim based on factual misrepresentations, an integration clause alone is sufficient to bar a fraud claim based on expressions of future intent or future promises."

Albertsons serves as a reminder that transactions that include earnouts can often result in post-closing disputes, even when buyers negotiate broad discretion for themselves.

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This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.

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