Is that Letter of Intent Binding?

Letters of intent, or term sheets (“LOIs”), are commonly used in M&A and other corporate transactions. However, when discussions between parties breakdown the question often arises, are any of the terms in the LOI enforceable?  A recent Delaware case, SIGA Technologies v. PharmAthene, which has twice been appealed to the Delaware Supreme Court, serves as an important reminder for parties to be intentional when they “agree to agree.” What is an LOI? An LOI typically summarizes the principal deal terms and oftentimes creates the framework from which parties work to reach a definitive agreement.  Parties may decide to execute an LOI for several reasons, including: an LOI may help each party better understand the other’s position on deal terms and structure, in some cases, an LOI may be submitted to regulatory agencies to initiate the approval process, and an LOI simply may be customary in the industry or the type of transaction. LOIs may include provisions regarding the structure of the transaction, the purchase price (including any earn-out component), a timeline for the transaction, key closing conditions, due diligence and access provisions, exclusivity, allocation of transaction expenses and confidentiality, among others. One of the key considerations in drafting and negotiating an LOI is to clearly identify which provisions are binding and which are non-binding.  Oftentimes, an LOI will include express provisions that identify the binding and non-binding provisions as such.  Other times, the binding nature of the terms of an LOI may be less clear. SIGA Technologies v. PharmAthene In SIGA Technologies, two biotech companies negotiated the terms of a license agreement term sheet (the “LATS”).  After negotiating the...

False Claims Act Update: A Statistical Review of 2015 and Key Events for 2016

As reported by the Department of Justice (DOJ) in a December 2015 press release, the False Claims Act (FCA) remains the federal government’s primary means for combating fraud.  In 2015, the DOJ recovered $3.583 billion in FCA actions, the fourth year in a row that such recoveries have exceeded $3.5 billion.  While the majority of these recoveries were related to healthcare and defense-related government contracts (respectively, $1.9 billion and $1.1 billion), a sizable minority (around $500 million) related to fraud in other government programs. Perhaps the most notable conclusions to be drawn from the DOJ’s recent report, however, relate to the role of whistleblowers in bringing and prosecuting FCA claims.  As stated in DOJ’s press release: “Most (FCA) actions are filed under the Act’s whistleblower, or qui tam, provisions that allow individuals to file lawsuits alleging false claims on behalf of the government.  If the government prevails in the action, the whistleblower, also known as the relator, receives up to 30 percent of the recovery.”  In 2015, the government recovered $2.9 billion from whistleblower-initiated lawsuits, and whistleblowers received a record-setting $597 million for their share. Even more notable is the fact that in 2015, for the first time, whistleblower recoveries in cases where the government declined to intervene ($334.6 million) exceeded whistleblower recoveries in cases where the government intervened ($262.9 million) – e.g., the government made a formal appearance in the case and took the lead in litigating it.  (See Fraud Statistics Overview). This statistic is contrary to a prior commonly held belief that a government decision not to intervene was the “kiss of death” to the relator’s chances...

The Year in Review―Top Ten Developments from 2015

With 2015 quickly coming to an end, it is a good time to comb back through our archives to identify the year’s key securities and corporate governance developments. Items making the list were those most likely to continue to develop in 2016 and to impact most public companies. So, without further ado… The rise of proxy access.  (See this Doug’s Note) The Department of Justice’s new prosecution guidelines.  (See this Featured Article) The SEC’s new guidance about the “directly conflicts” exclusion for shareholder proposals. (See this Doug’s Note) The SEC’s final pay ratio rules.  (See this Doug’s Note) New Auditing Standard No. 18, and its impact on audit committees.  (See this Doug’s Note) The SEC proposed new pay-for-performance rules requiring additional proxy statement disclosures regarding executive compensation and total shareholder return. (See this Doug’s Note) Increased usage of representation and warranty insurance in business combination transactions. (See this Featured Article) The SEC’s proposed rules that would broaden compensation clawbacks. (See this Doug’s Note) Decreasing the amount of time that tender and exchange offers for non-investment grade debt securities must remain open.  (See this Doug’s Note) The SEC’s strengthening of its whistleblower program. (See this Doug’s Note) This year has been unusually eventful at the SEC, PCAOB and in the broader world of corporate governance. Expect 2016 to be similarly active for public companies, with continuing focus on executive compensation and shareholder activism. Thanks for staying...

Sealing the Deal with Rep & Warranty Insurance

More and more parties to M&A transactions are utilizing representation and warranty insurance (“R&W insurance”) as a tool to reach agreement.  While R&W insurance has been around for many years, its popularity has soared recently, especially in middle market transactions valued between $20 million and $1 billion.  R&W insurance provides coverage for a breach of a representation or warranty that results in losses or an indemnification claim.  While it is available to both buyers and sellers, it is more often used by buyers. The increasing popularity is due to a number of factors, including the growth of the insurance market, which has developed better pricing for policies, expanded policy terms and features to better mirror traditional indemnification packages and established trust in the market regarding the insurers ability and willingness to administer and pay claims. Structure of R&W Insurance Policies Due to the nature of an R&W insurance policy and the developing insurance market, the terms of each R&W insurance policy are negotiated to suit the insured’s needs.  All policies are “claims-based”, meaning that the breach must occur, and the claim must be filed, during the term of the policy in order to be valid. Scope of a Policy As its name suggests, R&W insurance will only cover breaches of representations and warranties in the transaction agreement.  Generally, it does not provide coverage for breaches under the purchase price adjustment provisions, covenants or any provisions other than the representations and warranties.  A policy will typically cover all “operating” representations and warranties,¹ but the insured can also opt to insure only certain reps and warranties.  Most, if not all, policies...

New DOJ Corporate Prosecution Guidelines

On September 9, 2015, United States Deputy Attorney General Sally Yates released a memorandum titled “Individual Accountability for Corporate Wrongdoing,” the latest in a series of corporate prosecution guidelines written by Deputy Attorney Generals dating back to what is commonly – and informally – referred to as the “Holder Memo” in 1999.  The guidelines in the “Yates Memo” are not binding, but rather direct United States Department of Justice (“DOJ”)  attorneys on the appropriate manner in which to conduct corporate fraud investigations, charging decisions and strategic considerations when implementing established DOJ policies. Background of DOJ Memos The Deputy Attorney General memos have evolved, starting with the Holder Memo’s evolution to the Thompson Memo in 2003, which focused on factors a DOJ prosecutor must evaluate when determining whether or not to charge a corporation.  These factors included a corporation’s history of violations, whether the corporation voluntary disclosed its wrongdoing, and the effectiveness of the corporation’s existing compliance plans, among others. Following a storm of controversy surrounding the Thompson Memo, then Deputy Attorney General Paul McNulty issued his memo in 2006.  The polemic response to the Thompson Memo arose from the document’s corporate cooperation credit requirements which obliged companies to produce materials from their internal investigations, deny indemnification of legal fees for employees who were targets of investigation and most importantly, waive the sacrosanct attorney-client privilege. The McNulty Memo policies, in essence, still encouraged the waiver of attorney-client privilege to expedite government investigations and required companies to provide full disclosure of facts related to wrongdoing, but softened the DOJ’s stance on indemnification.  Many outside the DOJ, including former DOJ officials and...

Watch Out for Non-GAAP Disclosure Creep

Creative use of non-GAAP financial measures has become standard practice in public company disclosures. Management, quite correctly in most cases, often believes that the company’s dry GAAP financial statements fail to fully explain company performance and that adjustments and carve outs (sometimes extensive) are needed to paint a clear picture. For the most part, the SEC has taken a benign approach to the proliferation of non-GAAP disclosures, though there are anecdotal signs of increasing concern. Problems can arise, however, if a company becomes too aggressive with its non-GAAP measures. In addition, “non-GAAP disclosure creep” can become an issue as more and more adjustments and exclusions are layered on year after year without revisiting regulatory and common sense limitations. The key to avoiding such problems (whether SEC enforcement or shareholder litigation) is to be mindful of, and attentive to, the spirit of the SEC’s non-GAAP disclosure rules, which allow flexibility and discretion, but contain reasonableness limitations. The Basics. A non-GAAP financial measure is a numerical measure of financial performance, financial position or cash flows that: excludes amounts that are included in the most directly comparable GAAP measure of the company, or includes amounts that are excluded from the most directly comparable GAAP measure. In essence, it is a financial measure that depicts financial performance in a manner different from the GAAP financial statement presentation. It generally does not include non-financial statistical measures (such as unit sales, number of employees, ratios calculated using GAAP numbers). If a company uses a non-GAAP financial measure in an SEC filing (which includes proxy statements), Item 10 of Regulation S-K requires: Equally prominent presentation of...