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How to manage post-closing disputes in M&A as a result of the coronavirus

The global impact of Covid-19, or coronavirus, is one that no business can ignore. The outbreak is an international issue that touches all aspects of business, including M&A.Before the outbreak, middle market M&A transactions were on the rise and were predicted to steadily increase over the upcoming …

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Special reports: Advancing the middle market through Most Influential Women, M&A Mid-Market Awards and Rising Stars

To celebrate deals, dealmakers and dealmaking firms, Mergers & Acquisitions produces three special reports every year: the Most Influential Women in Mid-Market M&A; the M&A Mid-Market Awards; and the Rising Stars of Private Equity. These projects embody the mission of our recently relaunched and renamed parent company, Arizent, which is to advance the financial and professional service industries, including the middle market M&A community.

We encourage our audience to nominate candidates for all our special reports. Here’s an overview, including timelines. Note: There are no fees associated with any of them. Nominations are accepted only through electronic forms on our website, themiddlemarket.com.

THE MOST INFLUENTIAL WOMEN IN MID-MARKET M&A
Mergers & Acquisitions has named the 2020 Most Influential Women in Mid-Market M&A. This marks the fifth year we have produced the list, which recognizes female leaders with significant influence inside their companies and in the wider dealmaking world. It’s been gratifying to watch the project evolve over the years – and become more influential itself. This year, we received more nominations than ever before. As a result, we expanded the number honored to 42 in 2020, up from 36 in 2019. Many dealmakers are new to our list, including Rockwood Equity Partners’ Kate Faust, William Blair’s Shay Brokemond and Avante Capital Partners’ Ivelisse Simon. Read our full coverage of all the champions of change on our list, including Q&As with each individual. We open up the nomination process in September.

M&A MID-MARKET AWARDS
We are currently seeking nominations for the 13th annual M&A Mid-Market Awards, due Feb. 7. As with all our special reports, nominations are helpful but not required. There is no limit on the number of nominations, for any award category or categories, submitted by a firm or individual. The awards honor leading dealmakers and deals that set the standard for transactions in the middle market in the previous year. We look for companies and individuals who overcame the challenges the year brought, embodied the trends of the period and took their businesses to the next level. We bestow awards in eight categories: Deal of the Year, Dealmaker of the Year, Private Equity Firm of the Year, Investment Bank of the Year, Private Equity Seller of the Year, Strategic Buyer of the Year, Law Firm of the Year, and Lender of the Year. We announce the winners on TheMiddleMarket.com in late March and in the April issue of the magazine. The 2018 winners marked the 12th edition of the awards and included among the winners: Nike, Fortive, TA Associates, the Riverside Co., Luminate Capital Partners founder Hollie Haynes and more. For full coverage, see Meet the winners of the M&A Mid-Market Awards: Nike, Fortive, TA, Harris Williams.

THE RISING STARS OF PRIVATE EQUITY
We open up the nominations in April, and the deadline is in May. We look for individuals who are full-time private equity investors and whose best days are yet to come. These are the folks you predict will one day play a key leadership role at your PE firm – or will head up their own. There is no age cutoff. We publish the list online in July and in the July/August issue of the magazine. In 2019, we named 10 Rising Stars of Private Equity, including Austin Collier, Branford Castle Partners; Shawn Domanic, Sterling Partners; and Sophia Popova, Summit Partners. For profiles and video interviews, see Meet Mergers & Acquisitions’ 2019 Rising Stars of Private Equity. For Q&As, see 10 Rising Stars of Private Equity tell their tales.

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Startups chase $55 billion boom fueled by California privacy law


Businesses operating in California are required to be in compliance with a sweeping new privacy law, the California Consumer Privacy Act, starting this month. They’ll have a few months to figure out the specifics, because the state’s attorney general is still working out the final rules and isn’t expected to start enforcement until July. But the new requirements are already causing widespread anxiety among many businesses that handle consumer data.

A wave of startups, law firms and consultants are looking to take advantage of that anxiety—and to capture some of the $55 billion that companies are expected to spend on initial compliance with the law. Bart Willemsen, an analyst at Gartner who advises clients on compliance, has identified over 200 companies pitching products to help companies adhere to privacy rules. None of them actually offer a comprehensive solution. “There’s no single silver bullet,” he said.

The CCPA mandates that businesses are able to tell customers what data they have gathered about them, and to stop selling that data upon request. That requires companies to be more conscious of what data they keep and where they keep it. Building those tools from scratch can be complicated and expensive.

One startup, TerraTrue Inc., aims to help other businesses keep track of sensitive user data. “What we’re doing is building a complete privacy platform that lets companies automate the ways in which they comply all these privacy laws,” said Chris Handman, the startup’s chief operating officer.

TerraTrue grew out of work the startup’s founders, who were previously executives at Snap Inc., did to build that company’s internal privacy systems. The company has raised $4.5 million from investors so far. It joins a host of other startups helping companies prepare for the CCPA, including Austin-based Osano Inc., which has raised over $8 million, and Securiti Inc., which announced a $31 million round of investment in August.

Other companies like DataFleets Ltd. are pitching sophisticated machine learning tools designed to minimize the risk of exposing customers’ private information. “The data never leaves their phone, they retain complete control with it, it remains compliant with data regulations,” said David Gilmore, the company’s chief executive officer.

Some companies have already been adapting to stricter privacy rules elsewhere, such as the European Union’s General Data Protection Regulation, or GDPR. Those that have done so are better prepared to comply with California’s law, according to Peter Reinhardt, CEO of Segment.io Inc., a San Francisco-based startup that is helping customers navigate the new data laws. The laws aren’t identical, but some of the preparation is transferrable. “CCPA hits hard the companies that aren’t operating globally and this is the first time they need to deal with it,” said Reinhardt.

The CCPA only applies to companies that generate more than $25 million in annual revenue, handle personal information of more than 50,000 people or devices, or earn more than half their revenue from selling personal information. Many companies are experiencing significant privacy rules for the first time, and some seem prepared to test the limits. Alphabet Inc.’s Google and Facebook Inc. contend that they’re exempt from rules governing companies that sell data, since they say they don’t share consumer data with ad buyers.

Other companies will likely ignore some of the bill’s provisions until they see how it’s enforced. The California Attorney General’s Office has said it has limited resources for enforcement. Handman of TerraTrue says many businesses are unsure about what they need to do, which “creates a greater interest in products that clarify that confusion.”

Even companies who could handle the law independently may be tempted to pay for outside help. Marco Zappacosta, the CEO of the California-based local services company Thumbtack Inc., said he has assigned staff on his engineering, product, marketplace, policy and legal teams to prepare the company for the new rules. But he hopes to have them back to their regular jobs soon. “Look, you talk to any tech company and I bet they will tell you they are engineering or product constrained,” said Zappacosta. “Any effort that takes away from that has an opportunity cost.”

The CCPA likely won’t be the last new privacy rule that companies have to figure out. India is considering sweeping legislation, and the United Kingdom could formulate its own approach once when it leaves the European Union. U.S. states like New York and Washington are considering their own legislation, as is Congress.

Technology industry groups worry that a regulatory patchwork could make compliance more burdensome. That could be bad news for businesses trying not to run afoul of any new laws. But it could be a welcome development for those companies who want to help them do so.

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ByteDance weighs TikTok stake sale over U.S. concerns


China’s ByteDance Inc. created one of the country’s rare global hits with the addictive video app TikTok. Now the U.S. government is threatening that success as officials in Washington warn the service presents a security threat.

The Beijing-based company, led by Chief Executive Officer Yiming Zhang, is weighing a range of options to address those concerns, according to people familiar with the matter. Advisors are pitching everything from an aggressive legal defense and operational separation for TikTok to sale of a majority stake, said the people, asking not to be named because the discussions are private. Selling more than half the business could raise substantially more than $10 billion, one person said.

ByteDance would prefer to maintain full control of the business if possible, given its soaring popularity and profit potential. It may argue that TikTok presents no security threat or that the U.S. has no legal standing over the business.

ByteDance has considered selling a chunk of TikTok if necessary to protect the value of the business, the people said. The most likely sale scenario would be for the company to sell a majority stake to financial investors, one person said. Earlier investors include SoftBank Group Corp., Sequoia Capital and Susquehanna International Group.

Talks about TikTok’s future are preliminary and no formal decision has been made, the people said. A representative for the company said there have been no discussions about any partial or full sale of TikTok. “These rumors are completely meritless,” the representative said.

ByteDance has emerged as the world’s most valuable startup on the explosive popularity of TikTok, where more than a billion, largely young, users share short clips of lip-syncing and dance videos. But with escalating tensions between China and the U.S., American politicians have warned the app represents a national security threat and urged an investigation. The Committee on Foreign Investment in the U.S., better known as CFIUS, has begun a review of ByteDance’s 2017 purchase of the business that became TikTok, Bloomberg News reported in November.

“I remain deeply concerned that any platform or application that has Chinese ownership or direct links to China, such as TikTok, can be used as a tool by the Chinese Communist Party to extend its authoritarian censorship of information outside China’s borders and amass data on millions of unsuspecting users,” Senator Marco Rubio wrote in a letter to the Treasury Department, which chairs CFIUS.

TikTok has said it strives to create a safe and positive online environment. “We are not influenced by any foreign government, including the Chinese government; TikTok does not operate in China, nor do we have any intention of doing so in the future,” the company said in October.

It’s not clear whether U.S. regulators have authority in the case. CFIUS historically has reviewed foreign companies’ investments in the U.S., including acquisitions, for national security concerns, but Musical.ly, the app that would become TikTok, was a Shanghai-headquartered business when ByteDance purchased it two years ago for about $800 million. ByteDance didn’t seek CFIUS approval at the time, perhaps because it was a deal between two Chinese companies, even though the app had a substantial following in the U.S.

ByteDance may have a legal argument that the U.S. committee doesn’t have legal standing to force a divestiture, like it did in the case of the gay dating app Grindr. Beijing Kunlun Tech Co. acquired the U.S. app in January 2018, but in May CFIUS required the company to sell off the service no later than June 2020 because it could give foreigners access to sensitive data. ByteDance may also be able to argue that its data is less sensitive or that all operations and data could be quarantined in a separate U.S. subsidiary. The Trump administration broadened CFIUS’ powers last year.

The advantage to selling a stake quickly would be to reap profits from TikTok’s success now, rather than risk a deterioration in value if the U.S. takes punitive measures. ByteDance prefers financial backers rather than strategic investors, like a music or media company, to avoid conflicts in the future, one person said.

Though ByteDance has become synonymous with TikTok, its business goes well beyond the music-oriented video app. Zhang founded the business in 2012 as a laboratory for the country’s leading artificial intelligence engineers to come up with innovative products. His first hit was a news app called Jinri Toutiao, or Today’s Headlines, which spawned dozens of copycats from rivals.

In China, Zhang is the rare entrepreneur who has kept his independence from the country’s twin giants, Alibaba Group Holding Ltd. and Tencent Holdings Ltd. Indeed, he built a reputation for raiding China’s established tech giants for talent, paying premium compensation of $1 million or more a year.

Toutiao became a model for how ByteDance could generate profit, creating a mobile experience that’s a cross between Google and Facebook for would-be advertisers. The startup reached a valuation of $75 billion last year, according to CB Insights.

TikTok was one of the most popular apps in the world last year with 656 million installs, according to Sensor Tower. It’s on track to surpass that total this year, the research firm said. The U.S. has had about 124 million downloads.

In October, Senate Minority Leader Chuck Schumer of New York and Republican Senator Tom Cotton of Arkansas wrote to the acting director of National Intelligence, referring to TikTok as a “potential counterintelligence threat we cannot ignore.” They said their concerns include the safety of data on the platform and possible foreign influence campaigns in the U.S.

“A company compromised by the Chinese Communist Party knows where your children are, knows what they look like, what their voices sound like, what they’re watching and what they share with each other,” Senator Josh Hawley said during a hearing in November. “All it takes is one knock on the door of their parent company, based in China, from a Communist Party official, for that data to be transferred to the Chinese government’s hands whenever they need it.”

Even Facebook Inc. Chief Executive Officer Mark Zuckerberg called out TikTok, citing privacy and freedom of speech concerns after the Chinese firm allegedly scrubbed its platform of politically sensitive content, such as videos of pro-democracy protests in Hong Kong. TikTok, which has denied those allegations, announced in October it has formed a team that includes two former U.S. lawmakers to review its content moderation policy. It also said U.S. data is beyond the reach of China’s government.

“We store all TikTok US user data in the United States, with backup redundancy in Singapore,” it said in the October post. “Our data centers are located entirely outside of China, and none of our data is subject to Chinese law.”

ByteDance has been building TikTok’s operations in the U.S., hiring hundreds and establishing American data centers to quarantine local information. It has also begun bringing on lobbyists in Washington, seeking to hire a U.S. policy chief and retaining the public affairs and lobbying firm Monument Advocacy, Bloomberg News reported last month.

Zhang has hoped ByteDance would be able to retain full control of TikTok by splitting off the U.S. business operationally, one person said. But it’s not clear whether that will be enough given the continued political pressure.

“While it tried to run its overseas operation independently from its China operation, given that the overseas operation is eventually held by the same entity that owns the China operation, it is hard to say that it is completely out of influence from the Chinese government,” said Ke Yan, a Singapore-based analyst with Aequitas Research.

A TikTok stake sale would likely push back any initial public offering for ByteDance. The company has considered an IPO in the U.S. or Hong Kong as soon as next year, but still needs to beef up its international operations and hire a chief financial officer. Selling equity in TikTok would provide the parent company with more cash and delay the need for a capital fundraising.

Zhang and his investors would likely see benefits in buying more time for an IPO, given the U.S.-China trade war and recent stumbles by high profile startups such as WeWork and Uber Technologies Inc. SoftBank is a backer of all three companies and just engineered a bailout for WeWork.

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Why you need a MAC clause in your next deal


Material adverse change, or MAC, clauses are increasingly prevalent in M&A deals, finds a recent study conducted by Nixon Peabody. Out of the 200 deals the law firm reviewed, 196, or 98 percent, contained a MAC clause in the business, operations and financial conditions of the target, up from 87 percent in 2018. More buyers are seeking protection if a target suffers from an economic or industry downturn. Dick Langan, a partner in the law firm’s corporate practice, led the study. Mergers & Acquisitions asked Langan how buyers and sellers benefit from MAC clauses.

How are material adverse change (MAC) used in deals?
MAC clauses are used to allocate risks between bidders and targets in acquisition agreements. They serve as a risk allocation device with regard to deal certainty insofar as these agreements may require the absence of a material adverse change at the time of closing as a condition precedent. This condition precedent provides bidders with a mechanism to seek to walk from a deal or renegotiate price or deal terms if a MAC occurs between the signing and closing of an acquisition agreement. MAC clauses also serve as a risk allocation device when used to qualify representations and warranties and covenants in an acquisition agreement because they essentially allow a threshold for determining the scope of disclosure or compliance relating to risks associated with changes in the target’s business.

What are the benefits of MAC clauses?
The MAC clause can provide parties with a level of comfort as to the certainty of closing and certainty as to the pricing of the deal. When used as a closing condition, the clause provides the buyer with a liability-free walkaway under specified circumstances, which, if defined in a way that balances concerns of the buyer and the target, simultaneously can allay the target’s concern as to whether post-signing changes in the business may enable the bidder to terminate a transaction without liability and, when used in representations, warranties and covenant, can allay the target’s concern as to whether immaterial noncompliance may result in liability.

How enforceable are MACs?
Most litigation over MAC clauses result in negotiated settlements between bidders and targets, resulting in either price or walkaways being negotiated by the parties. In the limited number of reported decisions concerning MAC clauses, the courts generally have taken the view that for an event to constitute a MAC it must be significant, it must not have been reasonably foreseeable at the time of signing of the acquisition agreement, and it must not be temporary—in fact, it must have a long or lasting impact. Akorn v. Fresenius is the Delaware Chancery Court decision that a MAC had occurred that triggered a termination right in the acquisition agreement. The holding demonstrates that the courts are willing to invoke MAC clauses under the right circumstances. The circumstance in Akorn were significant enough to allow the court to conclude that the “heavy burden” required of showing that an event was of significance to the target’s long-term earning power and durationally significant. In that case, the target suffered a sudden and sustained drop in business performance evidenced by an 86 percent decline in EBITDA and 51 percent decline in adjusted EBITDA during a long pre-closing period, and made representations about regulatory compliance that proved to be materially incorrect due to a government investigation that uncovered serious and pervasive data integrity. The regulatory compliance issues that came to light as a result of whistleblower complaints were made after the signing of the acquisition agreement.

How have MAC clauses increased?
We’ve seen the increased use of MAC clauses that reflect political risks or changes in reporting or regulatory matters that are current but increasingly understood and accepted as risks affecting businesses generally. Examples of those exceptions that have been introduced into MAC clauses include exceptions for Brexit-related risks and regulatory law changes.

How do MACs favor buyers?
Due to the proliferation of exceptions to what constitutes a material adverse change on the target’s business, there have not been significant pro-bidder changes in MAC clauses. One notable exception is the increased inclusion in the definition of events that “reasonably could be expected to result” in a MAC has tended to develop a market norm of including a forward-looking element in the clause and thereby has reduced negotiation over whether events affecting a target’s prospect should be included in the definition. In addition, the trend toward increased uniformity in MAC clauses tends to reduce the level of negotiation of MAC clauses. In a deal environment where getting to the signing and announcement of the acquisition is critical, the increased uniformity assists bidders in avoiding getting bogged down in the negotiation of the MAC clause.

What is your outlook on MAC clauses in 2020?
MAC clauses will continue to be important risk allocation feature of acquisition agreements. Exceptions used in MAC clauses, which describe events that should not constitute a MAC, unless they disproportionately affect the target. They will continue to evolve in order to address changes in the financial markets, geopolitical issues and the like that deal practitioners believe are appropriate risks to be borne by the bidder effective upon the signing of the acquisition agreement.

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