SECTION 1: Market overview
1.1 What have been the key trends in the M&A market in
your jurisdiction over the past 12 months and what have been
the most active sectors?
Record levels of capital held by financial sponsors and
strategic acquirers looking to offset low growth prospects
prompted fierce competition in 2017 for quality assets, forcing
buyers to offer higher premiums.
Buyer enthusiasm has also resulted in more seller-favourable
deal terms. Deal structures that originated with private equity
(PE) sellers, involving limited or no post-closing
indemnification and the use of representations and warranties
insurance (RWI) as the primary source of post-closing recourse
for buyers, have become commonplace in private deals in recent
years. At the same time, forced to pay high prices, buyers have
become more discriminating, placing increased pressure on due
According to Mergermarket, telecom, media and technology led
all industries by volume, accounting for 23% of total deals,
while energy, mining and utilities dominated activity by value
with 20% of total value.
1.2 What M&A deal flow has your market experienced and
how does this compare to previous years?
2017 ended strong with December announcements of the year's
two largest deals, CVS Health's $67.8 billion acquisition of
Aetna, followed by Walt Disney's $68.4 billion acquisition of
certain assets of 21st Century Fox, not to mention Broadcom's
hostile bid to acquire Qualcomm for $130 billion. Despite these
high-profile deals, according to Mergermarket, the aggregate
value of deals involving US targets fell to $1.3 trillion from
$1.5 trillion in 2016 and a record-setting $1.9 trillion in
Deal volume, however, actually increased slightly from 5,325
deals in 2016 to 5,347 deals in 2017. This uptick suggests 2017
did not see an overall decline in M&A activity but rather
fewer mega deals, likely driven by uncertainty over tax policy
and deregulation following the 2016 US presidential
1.3 Is your market driven by private or public M&A
transactions, or both? What are the dynamics between the
Both are prevalent in the US. In recent years, however,
private deals have been increasingly driven by PE sellers with
greater sensitivity toward post-closing risks, which has caused
private deals to be structured more like public deals, with
limited or no post-closing seller exposure.
1.4 Describe the relative influence of strategic and
financial investors on the M&A environment in your
Strategic investors, many with surplus cash and looking to
M&A to offset low growth, typically drive competition for
deals, but record levels of dry powder made well-funded
financial investors formidable rivals to their strategic
counterparts in 2017. In particular, according to Mergermarket,
PE buyouts of domestic targets rose 12.3% by value and 10.4% by
volume compared to 2016.
SECTION 2: M&A structures
2.1 Please review some recent notable M&A transactions
in your market and outline any interesting aspects in their
structures and what they mean for the market.
Several notable 2017 M&A transactions involved
splitting-up the surviving company after closing to unlock
additional value. Following the closing of the Dow
Chemical/DuPont merger in August 2017 after a 21-month
regulatory approval process, the combined business will be
split into three independent public companies. Similarly,
Humana's partnership with two PE firms to acquire Kindred
Healthcare, announced in December 2017, will result in the
consortium splitting Kindred into two businesses at closing,
with the resulting hospital company 100% owned by the PE firms
and the resulting homecare company owned initially by all
three, but with put/call arrangements allowing Humana to take
out the financial sponsors over time.
General Motors' sale of its Opel/Vauxhall automotive
business to Groupe PSA in August 2017 was also notable for
having been designed to address certain regulatory hurdles, as
the accompanying sale of Opel/Vauxhall's financing operations
was structured to close separately in October 2017 due to
longer regulatory approval timelines.
2.2 What have been the most significant trends or factors
impacting deal structures?
See Questions 1.1 and 1.3.
SECTION 3: Legislation and policy changes
3.1 Describe the key legislation and regulatory bodies that
govern M&A activity in your jurisdiction.
US M&A activity is governed by both federal and state
Applicable federal laws and regulation may include:
- Federal securities laws enforced by the US
Securities and Exchange Commission
- Antitrust laws enforced by the US
Department of Justice and Federal Trade Commission
- Federal tax laws enforced by the Internal
- Foreign investment laws enforced by the
Committee on Foreign Investment in the US (CFIUS) which
reviews transactions that could result in a foreign investor
holding significant influence over a US business
State laws typically address corporate governance matters,
including fiduciary duties, stockholder rights, voting
requirements and state taxes. M&A transactions are usually
governed by the laws of the state in which the target company
is incorporated, although targets incorporated outside of
Delaware or New York often elect for their transaction to be
governed by Delaware or New York law given the more extensive
caselaw in those states.
Stock exchange listing requirements may also be implicated
in transactions involving listed companies.
|NB: Values may exclude
certain transactions, for example asset
3.2 Have there been any recent changes to regulations or
regulators that may impact M&A transactions or activity and
what impact do you expect them to have?
Among the most watched M&A developments on the
regulatory front in 2017 were: (1) federal tax reform, (2)
antitrust enforcement and (3) CFIUS practices.
Although the highly anticipated Tax Cut and Jobs Act (TCJA)
did not go into effect until January 1 2018, uncertainty
surrounding tax reform throughout 2017 likely put many deals,
especially mega deals, on hold. See Question 6.1 for more
details on the TCJA's potential impact.
With respect to antitrust enforcement, recent developments
suggest only a modest shift away from the aggressive merger
enforcement of the Obama administration. The administration has
nominated mainstream enforcers to lead antitrust agencies and
has shown its willingness to block some deals deemed to be
anticompetitive, such as the Department of Justice's suit to
block AT&T's $85 billion acquisition of Time Warner.
However, it's still too early in Trump's tenure to identify how
much antitrust enforcement may change.
With respect to CFIUS, the Trump administration has shown
its willingness to block transactions that it deems a threat to
national security, including barring the proposed sale of
Lattice Semiconductor to a Chinese PE firm in September 2017
and MoneyGram's proposed sale to a Chinese acquirer in December
3.3 Are there any rules, legislation or policy frameworks
under discussion that may impact M&A in your jurisdiction
in the near future?
See Question 3.2 for a discussion of federal
At the state level, Delaware courts have continued to
transform the landscape of stockholder litigation in public
Two key appraisal decisions were issued in 2017 that granted
significant weight to the market-based merger price in
determining "fair value" where a public company is sold
pursuant to a competitive arms-length bidding process,
indicating that appraisal claims will likely become limited to
controller transactions, management buyouts and transactions
involving a flawed sale process.
Delaware courts also continue to dismiss post-closing
fiduciary duty actions based on a 2015 ruling that
change-of-control transactions will be reviewed under the
highly deferential "business judgment rule" (BJR) once approved
by a majority of disinterested shareholders in a
"fully-informed" and "uncoerced" vote. Following that ruling,
2017 decisions applied BJR even when the directors approving
the transaction were not independent and disinterested and
found it inapplicable only in egregious instances of coercion,
making future challenges to mergers much more difficult once
ratified by stockholders.
SECTION 4: Market idiosyncrasies
4.1 Please describe any common mistakes or misconceptions
that exist about the M&A market in your jurisdiction.
In the US, information disclosed through due diligence only
limits the seller's liability to the extent that it is also
disclosed in the corresponding disclosure schedules to the
acquisition agreement and, contrary to what many foreign
acquirers expect, information provided in the data room
typically does not qualify a seller's representations and
4.2 Are there frequently asked questions or often
overlooked areas from parties involved in an M&A
Foreign buyers in markets that use a locked box approach to
purchase price often have questions regarding post-closing
purchase price adjustments commonly used in the US (see
The trend toward using RWI as a backstop or substitute for
seller indemnities is also sometimes unfamiliar to non-US
buyers (see Question 5.7).
4.3 What measures should be taken to best prepare for your
Buyers and sellers should consult with US M&A counsel
early to understand what practices are typical for the US
SECTION 5(a): Public M&A
5.1 What are the key factors involved in obtaining control
of a public company in your jurisdiction?
In order to close a negotiated public company merger in the
US, the transaction must typically be recommended by the target
board and approved by a majority vote of the target's
stockholders. This stockholder approval requirement poses a
closing risk because it is usually satisfied after public
announcement and state law generally requires the target to
have a "fiduciary out" to permit consideration of unsolicited
Activist investors may sometimes quietly acquire influence
over a US public company without board or stockholder approval
by accumulating shares through trading in the market and entry
into swaps or other derivative transactions as a means to press
for board representation or change in company policy.
5.2 What conditions are usually attached to a public
Common closing conditions in public deals include:
- Bring-down of representations and
warranties and compliance with pre-closing covenants, usually
subject to a materiality standard
- No material adverse effect since signing
- Receipt of any necessary shareholder
approval and required regulatory approvals
- Absence of any governmental order or legal
impediment preventing the transaction
Once common, financing conditions are now very rare in US
public deals and were included in only 2% of 2016 deals
according to the ABA's 2017 public M&A study.
5.3 What are the current trends/market standards for break
fees in public M&A in your jurisdiction?
The average fiduciary termination fee paid to buyer,
typically as a result of taking certain actions in respect of
competing offers, decreased slightly in size to 3.39% of equity
value in 2016 from 3.51% in 2015 according to the 2017 ABA
study. Break fees or expense reimbursement is sometimes also
payable upon a "naked no vote" (i.e., where target stockholders
vote down the deal or the minimum tender condition fails in the
absence of a competing offer); such fees appeared in 26% of
deals in 2016, 3% more than in 2015.
Reverse break fees (RBFs) paid by buyer to seller are often
used to address the risk of financing failure, particularly
where the buyer is a financial sponsor, or to address
significant regulatory or antitrust risks. RBFs to address
financing failures usually range from 5-7% of equity value,
while regulatory or antitrust RBFs vary widely.
SECTION 5(b): Private M&A
5.4 What are the current trends with regard to
consideration mechanisms including the use of locked box
mechanisms, completion accounts, earn-outs and escrow?
Unlike locked box mechanisms, which are more common in
Europe and provide for a fixed purchase price at signing using
a historical target balance sheet, completion accounts are
predominately used in US private company transactions and allow
the final purchase price to be adjusted based on the balance
sheet as of closing to account for changes in the target's
financial position since signing. The purchase price is
typically determined on a cash-free, debt-free basis with an
adjustment for closing net working capital, against an agreed
"normalised" level of working capital. As a result, interim
results are generally considered to be for the benefit of the
seller, whereas under a locked box approach, the buyer
generally obtains the benefit, and bears the risk, of interim
Earn-out provisions are rarer, as they are often difficult
to negotiate, necessitate periodic monitoring and usually
require continued seller involvement in the business.
5.5 What conditions are usually attached to a private
Other than stockholder approval, which is frequently
obtained at signing in private deals, most of the closing
conditions for public deals discussed in Question 5.2 also
apply to private company M&A.
5.6 Is it common practice to provide for a foreign
governing law and/or jurisdiction in private M&A share
No. Such agreements are typically governed by Delaware or
New York law.
5.7 How common is warranty and indemnity insurance on
private M&A transactions?
RWI policies continue to rise in popularity. The ABA's 2017
private M&A study found that 29% of transaction agreements
contemplated RWI, with 23% using it as the sole source of
recovery for breaches of representations.
Relatedly, indemnity escrow size fell from an average of
9.15% in 2014 to 6.66% in 2016/2017, possibly because many
deals used small escrows for sellers to bear the first dollars
of loss until the deductible under the RWI policy was met.
5.8 Discuss the exit environment in your jurisdiction,
including the market for IPOs, trade sales and sales to
Financial sponsors often utilise dual track processes for
their exits, exploring sales while simultaneously preparing for
an IPO. In the M&A track, there's a robust market for sales
from one PE sponsor to another, typically on seller-friendly
Financial sponsors will generally prefer an M&A exit as
pricing is agreed and the seller can liquidate its entire
position at the time of the sale. In an IPO, pre-IPO investors
are typically unable to participate fully or at all in the IPO
and are only able to sell down their block over time following
SECTION 6: Outlook 2018
6.1 What are your predictions for the next 12 months in the
M&A market and how do you expect legal practice to
US tax reform under the TCJA, effective January 1 2018, will
likely have a significant impact on US M&A activity. The
considerable corporate tax rate reduction from 35% to 21% is
expected to make US investment more attractive while the tax
holiday on repatriating overseas earnings will provide
additional sources of capital to already cash-heavy corporates.
However, new limits on the deductibility of interest expense
and net operating losses may temper target valuations and
disfavour highly leveraged deals.
With tax reform a reality, a robust economy and the Trump
administration's trade and antitrust policies leaning less
radical than initially feared, there's general consensus that
US M&A in 2018 is poised to move past the uncertainty that
characterised much of 2017. In particular, PE investors with
record amounts of capital will likely continue to play a big
role in 2018 deals.
Glenn P McGrory
Partner, Cleary Gottlieb Steen &
New York, US
T: +1 212 225 2686
Glenn P McGrory is a partner in Cleary Gottlieb's
New York office. His practice focuses on public and
private mergers and acquisitions, private equity
investments and corporate governance matters. In 2016,
The National Law Journal named him a "Mergers &
Acquisitions and Antitrust Trailblazer". McGrory joined
the firm in 2000 and became a partner in 2009. He was
resident in the Frankfurt office in 2001 and the London
office from 2003-2005. He received a JD from Yale Law
School, and an MS and a BS, magna cum laude, from
Paul M Tiger
Partner, Cleary Gottlieb Steen &
New York, US
T: +1 212 225 2495
Paul Tiger is a partner in Cleary Gottlieb's New
York office. His practice focuses on public and private
merger and acquisition transactions and private equity
investments. He also provides advice regarding
stockholder activism, corporate governance matters, and
fiduciary duties of officers and directors to
corporations and their boards. Tiger is recognised as a
"Rising Star" in M&A by IFLR1000 (2018) and Law360
(2015), and as a "Next Generation Lawyer" for Private
Equity by Legal 500 US (2017). Tiger is licensed as a
certified public accountant in Oregon (inactive). He
received a JD, with distinction and Order of the Coif,
from Stanford Law School and a BA, summa cum laude,
from the University of Oregon.