The Hedge Fund Law Report

The definitive source of actionable intelligence on hedge fund law and regulation

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By Topic: Mergers & Acquisitions

  • From Vol. 9 No.39 (Oct. 6, 2016)

    Former Prosecutors Address Trends in Cybersecurity for Alternative Asset Managers, Diligence When Acquiring a Company and Breach Response Considerations

    Alternative asset managers must contend with numerous cybersecurity issues, including emerging threats; potential breaches in a pre-acquisition and post-acquisition context; special considerations for breaches of investor or consumer data; the handling of cybersecurity issues in the investment fund context; and the proper response to breaches. These topics were addressed in a recent panel hosted by Brian T. Davis and Dimitri G. Mastrocola, partners at international recruiting firm Major, Lindsey & Africa (MLA), and featuring Debevoise & Plimpton partners Luke Dembosky and Jim Pastore, both of whom are former federal prosecutors. This article highlights the key points from the presentation. For more on cybersecurity, see “Growing SEC Enforcement of Hedge Fund Managers Requires Greater Focus on Cybersecurity and Financial Disclosure” (Jul. 7, 2016); “SEC Chief of Staff Outlines Asset Management Initiatives on Cybersecurity and Transition Planning and Emphasizes Robust Enforcement Environment” (Jul. 7, 2016); and “SEC Guidance Update Suggests a Three-Step Framework for Investment Manager Cybersecurity Programs” (May 7, 2015). For coverage of a prior program hosted by MLA, see our two-part series on SEC examinations: “What Hedge Fund Managers Need to Know” (Jun. 16, 2016); and “Fees, Conflicts, Investment Allocations and Other Hot Topics” (Jun. 30, 2016).

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  • From Vol. 9 No.29 (Jul. 21, 2016)

    Settlement Clarifies Limitations on Activist Hedge Fund Access to the “Investment Only Exemption from Hart-Scott-Rodino Filing Requirements  

    In April 2016, the DOJ sued VA Partners I, LLC, ValueAct Capital Master Fund, L.P. and ValueAct Co-Invest International, L.P. (together, ValueAct) for alleged violations of the pre-merger notification provisions of the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR Act). At issue in the case was whether ValueAct was entitled to rely on the so-called “investment only” exemption to the HSR Act filing requirements (Investment Only Exemption). See “DOJ Lawsuit May Limit Ability of Activist Hedge Funds to Rely on ‘Investment Only’ Exemption From Hart-Scott-Rodino Filing Requirements” (Apr. 14, 2016). On July 12, 2016, the DOJ announced that ValueAct agreed to settle the charges and pay a record $11 million fine. The settlement includes an injunction against certain specified types of conduct which will presumably limit the ability of activist hedge funds to rely on the Investment Only Exemption. This article summarizes the terms of the settlement and its impact on activist hedge funds. For more on activist investing, see “Structures and Characteristics of Activist Alternative Investment Funds” (Mar. 12, 2015); and our two-part series on “Considerations for Hedge Fund Managers Pursuing Activist Strategies”: “Filing Obligations and Other Operational Considerations” (May 5, 2016); and “Settlement, Prospects, Shareholder Engagement and Proxy Access Considerations” (May 12, 2016).

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  • From Vol. 8 No.29 (Jul. 23, 2015)

    PwC White Paper Explores Hedge Fund Manager M&A Activity

    PwC recently issued a white paper on asset manager merger and acquisition activity.  The paper enumerates various factors that affect M&A activity; examines the types of acquisitions and investments asset managers are seeking; provides an overview of recent M&A and IPO activity; and discusses asset manager valuations and accounting rule changes that may affect certain elements of asset manager M&A transactions.  This article summarizes the key takeaways from the PwC paper.  For coverage of PwC’s 2012 study on this topic, see “PricewaterhouseCoopers Study Describes Recent Trends in and Outlook for Asset Manager Mergers and Acquisitions,” The Hedge Fund Law Report, Vol. 5, No. 11 (Mar. 16, 2012).  See also “Experts Offer Advice on Initiating and Structuring M&A Transactions in the Asset Management Industry (Part One of Two),” The Hedge Fund Law Report, Vol. 8, No. 18 (May 7, 2015).

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  • From Vol. 8 No.19 (May 14, 2015)

    K&L Gates Panel Offers Advice on Taxation, Regulatory and Business Integration Issues with M&A Transactions in the Asset Management Industry (Part Two of Two)

    As firms in the asset management industry structure merger and acquisition transactions – including joint ventures, acquisitions of minority interests and lift-outs of teams – they need to be aware of the potential issues that arise with such transactions.  Integrating two businesses may result in tax consequences, regulatory issues or other compliance concerns.  A panel of domain experts from K&L Gates recently discussed current trends in the asset management industry and a number of considerations in planning an acquisition or other deal with an asset manager, broker-dealer or adviser, including choice of partner, due diligence, structuring, taxation and various regulatory and compliance considerations.  Moderated by Michael S. Caccese, a practice area leader, the program featured partners Kenneth G. Juster and Michael W. McGrath; and practice area leaders D. Mark McMillan and Robert P. Zinn.  This article, the second in a two-part series, summarizes the key takeaways from that program with respect to taxation, regulatory and business integration concerns.  The first article addressed asset management industry trends, choosing a partner, due diligence and structuring considerations.  See also “PLI Panel Addresses Recent Developments with Respect to Prime Brokerage Arrangements, Alternative Registered Funds and Hedge Fund Manager Mergers and Acquisitions,” The Hedge Fund Law Report, Vol. 6, No. 41 (Oct. 25, 2013).

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  • From Vol. 8 No.18 (May 7, 2015)

    Experts Offer Advice on Initiating and Structuring M&A Transactions in the Asset Management Industry (Part One of Two)

    Mergers, acquisitions, joint ventures, acquisitions of minority interests and lift-outs of teams occur in the asset management industry for many reasons; managers may seek to grow assets under management, plan for succession, add new products or strategies or add new distribution channels.  A panel of experts from K&L Gates recently discussed current trends in the asset management industry and a number of considerations in planning an acquisition or other deal with an asset manager, broker-dealer or adviser, including choice of partner, due diligence, structuring, taxation and various regulatory and compliance considerations.  Moderated by Michael S. Caccese, a practice area leader, the program featured partners Kenneth G. Juster and Michael W. McGrath; and practice area leaders D. Mark McMillan and Robert P. Zinn.  This article, the first in a two-part series, summarizes the key takeaways from that program with respect to asset management industry trends, choosing a partner, due diligence and structuring considerations.  The second article will address taxation, regulatory and business integration concerns.  See also “Buying a Majority Interest in a Hedge Fund Manager: An Acquirer’s Primer on Key Structuring and Negotiating Issues,” The Hedge Fund Law Report, Vol. 4, No. 17 (May 20, 2011). 

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  • From Vol. 6 No.48 (Dec. 19, 2013)

    Akin Gump Partners Present Overview of Recent Developments in Fund Taxation, Fund Manager Transactions and Hedge and Private Equity Fund Investment Terms

    Akin Gump Strauss Hauer & Feld LLP (Akin Gump) recently presented its annual Private Investment Funds Conference.  During the conference, Akin Gump partner Stuart E. Leblang presented the annual tax update; partners Stephen M. Vine, Ackneil M. (Trey) Muldrow III and Stephen M. Jordan discussed recent trends in transactions involving equity stakes in fund manager businesses; and partners Blayne A. Grady and Burke A. McDavid addressed the current environment for hedge fund and private equity fund terms.  This article details salient takeaways from each of these sessions.

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  • From Vol. 6 No.43 (Nov. 8, 2013)

    Sidley Austin Private Funds Conference Addresses Recent Developments Relating to Fund Structuring and Terms; SEC Examinations and Enforcement Initiatives; Seeding Arrangements; Fund Mergers and Acquisitions; CPO Regulation; JOBS Act Implementation and Compliance; and Derivatives Reforms (Part Two of Three)

    Sidley Austin LLP recently presented a conference entitled “Private Funds 2013: Developments and Opportunities.”  At the conference, Sidley partners offered updates, market color and practice recommendations on hedge and private equity fund structuring, regulation, operations and transactions.  The Hedge Fund Law Report is covering the conference in a three-part article series.  The first article covered the sections of the conference addressing fund structuring developments, single-investor funds, first loss capital arrangements, side letter terms, hard wiring of feeder funds for ERISA purposes, liquidity terms, fee terms, founder share classes and expense allocations and caps.  See “Sidley Austin Private Funds Conference Addresses Recent Developments Relating to Fund Structuring and Terms; SEC Examinations and Enforcement Initiatives; Seeding Arrangements; Fund Mergers and Acquisitions; CPO Regulation; JOBS Act Implementation and Compliance; and Derivatives Reforms (Part One of Three),” The Hedge Fund Law Report, Vol. 6, No. 41 (Oct. 25, 2013).  This second installment addresses recent developments in SEC examinations and enforcement (including a discussion of compliance policy violations, valuation practices and allocation of investment opportunities); insider trading issues (including the use of political intelligence firms, expert networks and deputized directors); the SEC’s new policy requiring admissions of wrongdoing and best practices for compliance; seeding arrangements; and fund manager mergers and acquisitions (including a discussion of key terms and negotiating points for such transactions).  The third article in this series will describe regulatory developments impacting fund managers, including commodity pool operator registration and regulation, implementation and compliance with the JOBS Act and derivatives reforms.

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  • From Vol. 6 No.41 (Oct. 25, 2013)

    Sidley Austin Private Funds Conference Addresses Recent Developments Relating to Fund Structuring and Terms; SEC Examinations and Enforcement Initiatives; Seeding Arrangements; Fund Mergers and Acquisitions; CPO Regulation; JOBS Act Implementation and Compliance; and Derivatives Reforms (Part One of Three)

    Sidley Austin LLP recently hosted a conference in its New York office entitled “Private Funds 2013: Developments and Opportunities.”  At the conference, Sidley partners discussed various structuring, regulatory, operational and transactional developments impacting private funds and their managers.  The Hedge Fund Law Report is publishing a three-part series of articles covering the most important insights arising out of the conference.  In this first installment, we summarize the parts of the conference dealing with recent developments in fund structuring, single-investor funds, first loss capital arrangements, side letter terms, hard wiring of feeder funds for ERISA purposes, liquidity terms, fee terms, founder share classes and expense allocations and expense caps.  The second article in the series will discuss recent developments in SEC examinations and enforcement (including a discussion of compliance policy violations, valuation practices, allocation of investment opportunities, insider trading issues, use of political intelligence firms and expert networks, the SEC’s new policy requiring admissions of wrongdoing and best practices for compliance); seeding arrangements; and fund mergers and acquisitions (including a discussion of key terms and negotiating points for such transactions).  The third article will provide an update on regulatory developments impacting fund managers, including recent issues involving commodity pool operator registration and regulation, implementation and compliance with the JOBS Act and derivatives reforms.

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  • From Vol. 6 No.41 (Oct. 25, 2013)

    PLI Panel Addresses Recent Developments with Respect to Prime Brokerage Arrangements, Alternative Registered Funds and Hedge Fund Manager Mergers and Acquisitions

    A recent Practising Law Institute (PLI) program provided a timely overview of current issues with respect to the establishment of prime brokerage arrangements, including the negotiation of prime brokerage agreements; mergers and acquisitions of hedge fund managers; and the formation and operation of registered funds.  This article summarizes the key points from that presentation.  The speakers were Nora M. Jordan, a partner at Davis Polk & Wardwell LLP; Harry Jho, Principal of Harry Jho LLC; and Andrew Siegel, a partner and General Counsel of Perella Weinberg Partners.

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  • From Vol. 6 No.20 (May 16, 2013)

    Seeding, Strategic Stakes and the Evolving Market for Third-Party Investments in Hedge Fund Management Businesses

    Hedge fund managers may seek parties to acquire strategic stakes in their businesses or revenue streams for various reasons, including the desire to expand or monetize their businesses.  To help hedge fund managers understand the current market for such arrangements, a recent report provided a thorough look at hedge fund seeding, identified seven discrete seeding models and described recent merger and acquisition activity in the hedge fund space.  The report also provided an overview of recent fund launches and closures.  This article summarizes the key takeaways from the report.  See also “How to Structure Exit Provisions in Hedge Fund Seeding Arrangements,” The Hedge Fund of Law Report, Vol. 3, No. 40 (Oct. 15, 2010).

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  • From Vol. 5 No.24 (Jun. 14, 2012)

    Davis Polk “Hedge Funds in the Current Environment” Event Focuses on Establishing Registered Alternative Funds, Hedge Fund Manager M&A and SEC Examination Priorities

    On May 11, 2012, the New York City Bar Association held its annual “Hedge Funds in the Current Environment” program co-hosted by law firm Davis Polk & Wardwell LLP.  Speakers at this event addressed various topics of current relevance to the hedge fund industry, including: SEC examination priorities, such as insider trading, trade reviews and asset verification; establishing registered alternative funds; trends in hedge fund manager mergers and acquisitions; and hedge fund advertising after passage of the Jumpstart Our Businesses Startups (JOBS) Act.  Notably, Norm Champ, Deputy Director of the Office of Compliance Inspections and Examinations with the SEC, provided an up-to-date view of the SEC’s examination priorities in relation to hedge funds and their managers.  This article summarizes the key points discussed at the conference relating to each of the foregoing topics.

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  • From Vol. 5 No.11 (Mar. 16, 2012)

    PricewaterhouseCoopers Study Describes Recent Trends in and Outlook for Asset Manager Mergers and Acquisitions

    In February 2012, the Asset Management Division of accounting firm PricewaterhouseCoopers LLP released a report entitled “Asset Management M&A Insights: The Way Forward” (Report).  The Report is a compilation of white papers and survey results designed to “provide perspectives on the recent trends and outlook relating to asset management mergers and acquisition activity in the U.S. and major global markets.”  This article summarizes the key topics discussed in the Report, including: an analysis of merger and acquisition (M&A) deals in the asset management arena in the U.S. in 2011; a forecast for U.S. M&A deal activity in 2012; analyses of M&A activity in Europe and Asia; an explanation of the important roles human capital issues play in mergers and acquisitions; and an explanation of the role of various accounting principles, including issues related to consolidation and valuation, in asset management M&A.  Overall, the Report concluded that, in 2011, completed deals were scarce and deal values were relatively low.  While there is no clear indicator that 2012 will be better, the Report points to various factors that may contribute to increased M&A activity in the asset management arena for 2012.  For a discussion of recent litigation involving M&A in the hedge fund arena, see “Federal Court Decision Addresses the Enforceability of an Earnout Provision in the Sale of a Hedge Fund Management Business,” The Hedge Fund Law Report, Vol. 5, No. 10 (Mar. 8, 2012).

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  • From Vol. 5 No.10 (Mar. 8, 2012)

    Federal Court Decision Addresses the Enforceability of an Earnout Provision in the Sale of a Hedge Fund Management Business

    This article summarizes the factual background and legal analysis in a recent federal court decision on the enforceability of an earnout provision in the sale of a hedge fund management business.  The dispute described in this article and the Court’s analysis of the dispute will inform the drafting of earnout and related provisions in documents governing the purchase and sale of a hedge fund management business.  For more on structuring considerations in connection with acquisitions of hedge fund managers, see “Buying a Majority Interest in a Hedge Fund Manager: An Acquirer’s Primer on Key Structuring and Negotiating Issues,” The Hedge Fund Law Report, Vol. 4, No. 17 (May 20, 2011).

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  • From Vol. 4 No.17 (May 20, 2011)

    Buying a Majority Interest in a Hedge Fund Manager: An Acquirer’s Primer on Key Structuring and Negotiating Issues

    The hedge fund space has seen significant recent M&A activity.  Deals in late 2010 included Man Group’s purchase of GLG Partners; RBS Wealth Management’s acquisition of BlueBay Asset Management; the acquisition by Japanese financial services group ORIX of a majority stake in U.S. hedge fund platform Mariner; and Carlyle Group’s purchase of a controlling interest in Claren Road Asset Management.  Early indications suggest that 2011 will also be a robust year for hedge fund transactions.  On the surface, hedge fund M&A may be seen simply as bringing the maturing alternative investment industry into line with the broader financial services market, where consolidation has been a fact of life for years.  Deeper reflection, however, suggests that deal activity is being driven by the unique features of the hedge fund sector itself.  Some traditional financial services firms perceive a need to begin offering hedge fund investments to their clients, and buying a fund is a way to plug that product gap.  Or, a financial services firm that already offers some hedge fund products may wish to add a focus on a particular sector, and acquiring an existing fund that fits the bill may be preferable to starting a new fund from scratch.  Acquirers may also consider hedge fund acquisition opportunities particularly appealing in light of recent performance issues and their (perhaps temporary) depressing impact on firm value.  Industry dynamics may be especially compelling to sellers as well.  From the hedge fund manager’s perspective, selling an interest in the firm may spell relief from the volatility and financial stress of recent years.  A transaction also may give principals a welcome chance to diversify personal assets by monetizing a significant stake in their business; this motivation is perhaps coming increasingly to the fore as a generation of hedge fund founders begins to consider retirement.  Finally, a hedge fund manager may be attracted by the prospect of business support from the acquirer, which may take the form of enhanced marketing resources, introductions to prospective investors, assistance with the development of new products, capital for strategic expansion, bolstered compliance and legal functions, or opportunities for cost savings and synergies.  In a guest article, Scott C. Budlong, Eva Marie Carney, Thao H.V. Do, Eric M. O’Meara, William Q. Orbe and Kenneth E. Werner, all Partners at Richards Kibbe & Orbe LLP, examine key transaction structuring points in the acquisition of a majority interest in a hedge fund manager (the “Manager”).  The authors assume a cash deal in which the acquirer (the “Acquirer”) purchases from certain principals of the Manager (the “Selling Principals”) a majority equity interest in the Manager, with the Selling Principals retaining a minority stake.  As discussed in this article, there are at least six major themes at work in such a transaction: regulatory diligence; valuation; incentives and franchise protection; control rights; the parties’ ability to increase or reduce their holdings post-closing; and investor relations.  These themes are inter-related and a successful transaction must find common ground between the Acquirer and the Selling Principals on each one.

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  • From Vol. 3 No.31 (Aug. 6, 2010)

    How Will the SEC’s New Pay to Play Rule Impact Mergers and Acquisitions of Hedge Fund Management Companies?

    Three trends are likely to increase the volume of mergers and acquisitions of hedge fund management companies – especially sales of smaller firms to larger firms and sales by banking entities of advisers to “sponsored” hedge funds.  First, various provisions of the Dodd-Frank Act (most notably, the registration provisions) are likely to increase ongoing compliance costs for hedge fund managers.  Many such costs will be fixed, and thus will adversely impact smaller hedge fund managers to a greater degree than larger ones.  Some of those smaller managers will determine that selling the advisory business is preferable to continuing to operate independently.  See “For Managers Facing Strong Headwinds, Sales of the Advisory Business Offer a Means of Preserving the Franchise While Avoiding Fund Liquidations,” The Hedge Fund Law Report, Vol. 2, No. 11 (Mar. 18, 2009).  Increased compliance costs also are likely to deter, at the margin, entry into the hedge fund management business by potential startups.  Second, the version of the Volcker Rule included in the Dodd-Frank Act is likely to cause some investment and commercial banks to divest certain internal hedge fund management businesses.  See “Implications of the Volcker Rule – Managing Hedge Fund Affiliations with Banks,” The Hedge Fund Law Report, Vol. 3, No. 10 (Mar. 11, 2010).  In cases where banks purchased going hedge fund management concerns rather than developing them internally, management buyouts may be a common deal structure.  Also, various hedge fund industry participants expect the Volcker Rule to displace traders and portfolio managers currently working at investment banks on proprietary trading desks or at in-house hedge funds.  Certain of those traders and managers will start new hedge fund management firms: some of those new firms will fail, some will continue independently and some will be sold to established players.  See “Stars in Transition: A New Generation of Private Fund Managers,” The Hedge Fund Law Report, Vol. 2, No. 49 (Dec. 10, 2009).  Third, the fundraising environment may remain difficult, causing smaller managers to sell to larger managers with more developed marketing and distribution infrastructures.  Indeed, distribution is a key consideration even in deals involving larger hedge fund managers: the proxy statement relating to Man Group’s acquisition of GLG Partners cited Man’s distribution capabilities as one of the strategic benefits of the transaction.  See "Transaction Analysis: Hedge Fund Managers Man Group and GLG Partners Announce Plans to Merge,” The Hedge Fund Law Report, Vol. 3, No. 21 (May 28, 2010).  (That acquisition is expected to close in the third quarter of 2010.)  The SEC’s recently approved pay to play rule (Rule) introduces a new category of legal risk into mergers and acquisitions of hedge fund management companies.  See “How Should Hedge Fund Managers Revise Their Compliance Policies and Procedures and Marketing Practices in Light of the SEC’s New ‘Pay to Play’ Rule?,” The Hedge Fund Law Report, Vol. 3, No. 30 (Jul. 30, 2010).  At best, the Rule will add new categories of due diligence, new integration tasks and new post-closing training requirements to such transactions.  At worst, the Rule will delay or even derail such transactions.  This article identifies concerns raised by the Rule in the hedge fund manager M&A context, and offers strategies to address them.  Specifically, this article outlines fact patterns in which the Rule can adversely affect the outcome in the purchase or sale of a hedge fund management business; identifies notable recent investment management merger and acquisition transactions and transaction trend statistics; lists the four primary options available to hedge fund managers or others to prevent or remedy violations of the Rule in connection with acquisitions of hedge fund management businesses; discusses the pros and cons of each of the primary options; and outlines five alternative options, and the benefits and burdens of each.

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  • From Vol. 3 No.21 (May 28, 2010)

    Transaction Analysis: Hedge Fund Managers Man Group and GLG Partners Announce Plans to Merge

    On May 17, 2010, Man Group plc (Man Group), the world’s largest publicly-traded hedge fund manager, and GLG Partners, Inc. (GLG), another hedge fund manager, announced an agreement for Man Group to acquire GLG in a $1.6 billion transaction that would create an alternative investment manager with approximately $63 billion of funds under management.  The proposed acquisition will occur through two concurrent transactions: (1) a cash merger among GLG, Man Group and a Man Group merger subsidiary; and (2) a share exchange among GLG’s principals (Noam Gottesman, Pierre Lagrange and Emmanuel Roman, together with their related trusts and affiliated entities) and two limited partnerships that hold shares for the benefit of key personnel who participate in GLG’s equity participation plan, and Man Group.  The Board of Directors of GLG has unanimously approved the merger and share exchange agreements and recommends that GLG’s stockholders adopt and approve the merger agreement and the merger.  This article summarizes the relevant background of the two hedge fund managers and the structure and terms of the proposed transaction.

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  • From Vol. 3 No.1 (Jan. 6, 2010)

    Delaware Chancery Court Rules that Rival Bidder’s Lawsuit against Harbinger Capital Partners Hedge Funds Alleging Use of Non-Public Information to Hinder Bidder’s Acquisition Efforts May Proceed

    On December 22, 2009, Vice Chancellor J. Travis Laster of the Delaware Chancery Court, refused to dismiss a lawsuit brought by NACCO Industries, Inc., a Delaware holding company that owns the firm which markets Hamilton Beach appliances, against Applica, Inc., a Florida corporation that markets appliances under the Black & Decker label, as well as Harbert Management Corporation, an investment manager, and its affiliated Harbinger Capital Partners hedge funds (collectively, Harbinger).  The suit arises out of NACCO’s failed bid to purchase Applica in 2006 – a bid that began with Applica’s execution of a merger agreement with NACCO, continued with Applica’s termination of that agreement and ended with Harbinger winning Applica in a bidding contest.  NACCO complained that Harbinger’s success purportedly resulted from its advanced receipt of non-public tips through an intermediary from Applica insiders regarding the proposed Hamilton Beach-Applica merger, its resultant quiet and inexpensive accumulation of a controlling shareholder stake in Applica before Applica entered into and then terminated that agreement and its concomitant allegedly fraudulent Schedule 13D and 13G filings which failed to disclose its competing interest in Applica.  As a result, NACCO asserted claims against Applica for breach of contract and breach of the implied covenant of good faith and fair dealing; against Harbinger for tortious interference with contract, fraud, equitable fraud and aiding and abetting a breach of fiduciary duty; and against all defendants for civil conspiracy.  The court, though recognizing that potentially legitimate reasons existed for Harbinger’s conduct, nonetheless allowed the tortious interference and fraud counts to proceed against it.  In contrast, the court had “no difficulty” finding evidence inferring that Applica breached its contract with NACCO.  This article details the background of the action and the most salient portions of the court’s legal analysis.

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  • From Vol. 2 No.36 (Sep. 9, 2009)

    Jefferies Putnam Lovell Report Predicts “Winds of Change” in Asset Management M&A

    In August 2009, Jefferies Putnam Lovell, the investment banking group of Jefferies & Company, Inc., published a strategic analysis of asset management industry activity entitled “Winds of Change: First-Half 2009 M&A Activity in the Global Asset Management, Broker/Dealer, and Financial Technology Industries.”  According to this report, strategic expansion purchases will overtake survival as the main catalyst of Wall Street’s merger and acquisition (M&A) business for asset management companies over the coming year as the economy resurges.  After describing the overall decrease in deal activity during the first half of 2009, the report projects that overall deal volumes will pick up over the coming year as confidence grows that the economic crisis has passed and as divestitures continue to drive deal activity.  The report foretells that sellers’ motivations over the coming year will be driven by factors other than just a need to raise capital, including product diversification and liquidity for retiring owners.  Most notably, the report also suggests that private equity buyers, including hedge funds, will return to the business of acquiring companies even in industries that have been hit hard by the recession.  This article summarizes the most salient findings of the report and its implications for the hedge fund community.

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  • From Vol. 2 No.27 (Jul. 8, 2009)

    Delaware Chancery Court Dismisses Cable Company’s Suit against Hedge Fund for Lack of Privity

    On June 11, 2009, the Delaware Chancery Court ruled that James Cable LLC, a cable company, could not hold the hedge fund Highland Capital and its management company Highland Management (collectively, Highland), liable for the failure of a company Highland owns, Millennium Digital Media Systems LLC, to perform on its contract to purchase the assets of James Cable.  The court reasoned that James Cable failed to state a valid cause of action notwithstanding its allegation that Highland represented that it would be the source of funding for the transaction.  We discuss the factual allegations and the court’s legal analysis.

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  • From Vol. 2 No.24 (Jun. 17, 2009)

    Transaction Terms Analysis: Hedge Fund Ramius Buys Investment Bank Cowen to Go Public Pursuant to Reverse Merger

    On June 3, 2009, one of the nation’s largest private hedge fund managers, Ramius LLC, agreed to a “reverse merger” with public investment bank Cowen Group, Inc.  As a result of this reverse merger, the private hedge fund management company will merge with and obtain control of nearly 71 percent of the stock and operations of the publicly-traded investment bank.  This merger not only allows Ramius to go public without the formality and expense of an initial public offering, a major benefit of all reverse mergers, but also gives the firm an investment banking platform on which it can offer new services, including fixed-income sales, trading and origination and real-estate banking.  Ramius anticipates that its new platform may prove profitable as a source of high-margin revenues, especially as the hedge fund industry faces the imminent possibility of intensive regulation.  For more on hedge funds entering the investment banking business, see “Interview With Drinker Biddle Partner David Matteson on Citadel’s Entry Into the Investment Banking Business,” The Hedge Fund Law Report, Vol. 2, No. 20 (May 20, 2009).  This article summarizes the material terms of the transaction, based on an analysis conducted by The Hedge Fund Law Report of the Transaction Agreement and Agreement and Plan of Merger and the Asset Exchange Agreement.  The article will be of particular interest to any hedge fund manager contemplating any sort of transaction with a public entity, and any manager considering entry into the investment banking business.

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  • From Vol. 2 No.14 (Apr. 9, 2009)

    Hedge Funds Buffeted by Losses and Redemptions Consider Fund Mergers as an Alternative to Winding Up

    Losses and redemptions have combined of late to threaten the viability of many hedge funds managers, especially smaller and mid-sized managers.  In response to that threat, some hedge fund managers have sold their advisory businesses to larger entities.  While selling managers give up a degree of autonomy, they get (or hope to get) an offsetting amount of additional capital (from sale proceeds and new investor sources), operational resources, distribution reach and talent.  In the March 18, 2009 issue of The Hedge Fund Law Report, we explored in depth sales of hedge fund advisory businesses.  See “For Managers Facing Strong Headwinds, Sales of the Advisory Business Offer a Means of Preserving the Franchise While Avoiding Fund Liquidations,” The Hedge Fund Law Report, Vol. 2, No. 11 (Mar. 18, 2009).  A related type of transaction – less common in the hedge fund industry and hence less frequently discussed – involves mergers of hedge funds themselves.  Hedge fund mergers have similar goals to sales of advisory businesses (namely, avoiding a wind down and preserving a going concern), but implicate different legal, regulatory and operational considerations.  We explore various aspects of hedge fund mergers, including: investor consent requirements, opt-out rights, asset transfers, due diligence, valuation, treatment of side pockets, operational issues and talent retention.  We also describe a new strategic alternative available to fund managers struggling with losses and redemptions.

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  • From Vol. 2 No.11 (Mar. 18, 2009)

    For Managers Facing Strong Headwinds, Sales of the Advisory Business Offer a Means of Preserving the Franchise While Avoiding Fund Liquidations

    Many hedge fund managers, especially those with relatively lower levels of assets under management, find themselves between the Scylla and Charybdis of declining revenues and rising costs.  On the revenue front, performance declined an average of 18 percent across hedge fund strategies during 2008, meaning that many managers did not collect performance fees last year, and are unlikely to collect such fees until they regain their high water marks – which can take years.  Also, declining performance during 2008 and substantial redemptions shrunk assets under management, which reduced management fees.  At the same time, the exposure of various investment frauds, combined with widespread losses, increased scrutiny by major investors of hedge fund manager operations, compliance, risk management and reporting.  In short, as revenue has dwindled, the cost of doing business as a hedge fund manager has increased.  Managers faced with this daunting set of circumstances generally have the option (subject to the language of fund documents) of liquidating their funds and returning the proceeds to investors.  But many managers have invested a significant amount of time, effort and personal reputation in building a hedge fund management company; recreating that complex web of relationships among employees, investors, counterparties, creditors and others following a liquidation can be a herculean task.  Accordingly, instead of liquidation, various managers have evaluated and in some cases consummated sales of the management company to other, generally larger hedge fund managers or others in complimentary lines of business.  We explore in detail various aspects of sales of hedge fund advisory businesses, including: recent precedents, the scope and focus of due diligence, deal structures and consideration (including the increasing prevalence of earnouts), investor consent issues and key personnel retention mechanisms.

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