M&A 2018 Annual Review

imposes a mandatory declaration filing requirement, with penalties for failure to file equal to the value of the transaction. 6 • The pilot program covers “critical technologies” developed for use in one of 27 industries, including pharmaceuticals, biotechnology, and battery manufacturing in addition to those more traditionally associated with national security concerns, such as semiconductors. • The definition of “critical technologies” includes items subject to export control restrictions, but also “emerging and foundational technologies.” In November 2018, The Department of Commerce’s Bureau of Industry and Security issued an Advance Notice of Proposed Rulemaking identifying 14 categories of “emerging technologies” and requesting public comments on the categories identified and appropriate definitions. As expected, the Commerce Department’s list includes artificial intelligence, robotics, and 3D printing among the emerging technologies that will be covered by the CFIUS pilot program (and also subject to export control licensing requirements). 7 These regulatory challenges are expected to impact PE sponsors, including those with foreign LPs as well as those based outside the U.S. These changes have already begun to result in process changes for deals, including targeted front-end diligence for all parties involved in answering the threshold question of whether they are looking at a covered transaction and whether a declaration is required. 3 CONTINUED CREATIVITY EXPECTED FOLLOWING A STRONG YEAR FOR PE BUYERS 2018 was a strong year for the private equity industry. Available capital was at an all-time high, and 2018 deal volume for PE buyers exceeded record levels. • Tech transactions dominated PE activity, as they have for the past couple of years, headlined by Vista Equity Partners’ acquisition of Apptio and KKR’s acquisition of BMC Software. • PE firms engaged in as many tech deals as did more traditional tech strategic acquirers, with some PE firms taking advantage of potential synergies with existing portfolio companies and some PE firms buying earlier stage companies lacking the stronger cash flows of more traditional PE targets. • The healthcare sector saw increased focus from PE firms,as exemplified by KKR’s acquisition of Envision Healthcare, the acquisition of Athenahealth by Veritas Capital and Evergreen Coast Capital, and the acquisition of LifePoint Health by a consortium composed of Apollo Global Management, ATP Private Equity Partners and RCCH Healthcare Partners. • PE firms increased their activity in the $1 billion + M&A market, and in club deals among mega- funds and sector-specialist funds. Sponsors also partnered with strategic investors, as in the acquisition by Humana, TPG Capital and Welsh, Carson of Kindred At Home (with a put/ call option giving Humana the right over time to buy the rest of Kindred At Home) and Curo Health Services. While the threat of a general economic slowdown lingers, available capital and creative investment strategies, particularly with respect to assets that may become distressed in any slowdown, should continue to drive an active PE market throughout 2019. 4 DELAWARE COURT (FINALLY) FINDS AN MAE – BUT LEAVES THE BAR HIGH AND NOT MUCH CLEARER Until the Delaware Chancery Court’s decision in Akorn v. Fresenius on October 1, 2018, no Delaware court had found a material adverse effect (MAE) that justified the termination of a merger transaction. 8 Akorn had particularly egregious facts: • Year-over-year second quarter and full year revenue declined 29% and 27%, operating income declined by 84% and 134%, and earnings per share declined by 96% and 170%. • The court also estimated a 21% reduction in value from the deal price based on the costs and effects of the company’s myriad regulatory violations. While many undoubtedly will search for significance underlying this 21%, Vice Chancellor Laster added that “[n]o one should fixate on a particular percentage as establishing a bright-line test.” The court also raised questions about the extent to which such a downturn must be “unexpected,” rather than allowing the parties to allocate the risk contractually, and drew attention MANY ASPECTS OF 2017’S TAX CUTS AND JOBS ACT REMAIN TO BE REFINED IN THE COMING YEAR (OR EVEN YEARS). 3 MORRISON & FOERSTER 2018 M&A ANNUAL REVIEW