CONNECTICUT: An Introduction to Corporate/M&A

Connecticut: Selective M&A Activity 

Despite lower M&A multiples, we anticipate that clients will be selectively active in their investment and M&A activity this year.

At the state level, Connecticut is continuing to enjoy a current budget surplus, and we have witnessed an increasing number of announcements regarding new job creation and the arrival of companies (especially in Fairfield County and the rest of the southwestern portion of the state). These developments, and others, continue to bode well for economic activity in the state.

At a practice area level, we believe that our business law clients – in Connecticut and nationally – are acutely aware of a variety of broad trends that have affected deal activity and overall operations:

Market conditions 

We believe that trends such as the following are top of mind for clients:

- Reduced availability of traditional debt financing (although somewhat offset by the rise in private credit) and lower financing multiples seem to be compressing deal multiples generally

- Interest rate increases during 2023 and their likely effect on (i) portfolio company cash flow and performance and (ii) buyout models.

- Inflation and its impacts on inputs for companies (particularly the costs of labor and materials) and customer behavior.

- Supply chain stresses continue to bedevil certain existing portfolio companies and potential acquisition targets.

- Multiples in the M&A market may be adversely affected by negative developments in the equity capital markets (and debt financing multiples, as noted above).

- Less robust M&A pipeline due to the above factors and seller anxiety whether now is the right time to sell. On the other hand, we have seen numerous large deals close in the first half of 2023 on both the buy and sell side and private equity “dry powder” remains high. Particular exceptions seem to be in the healthcare space and proprietary deals.

- Continued geopolitical instability due to the war in Ukraine and its collateral effects has touched many clients in a variety of ways, ranging from increased fuel costs to the need to ensure compliance with sanctions.

- ESG initiatives of limited partners and other business partners continue to influence private funds, their advisers and their portfolio companies.

Regulatory trends 

Clients can expect to be impacted by a host of regulatory initiatives which will add increased complexity and/or cost to both dealmaking and general compliance. These regulatory trends include proposed rulemaking and other activity by the SEC, the Federal Trade Commission and the US Treasury’s Financial Crimes Enforcement Network (FinCEN).

Antitrust 

As a practical matter, the FTC has continued its suspension of grants of early termination of the pre-merger waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. More substantively, the Department of Justice (DOJ) is more aggressively pursuing commercial activity and transactions which DOJ believes may be anticompetitive. And, as widely noted in the press, the FTC has collected public comment on proposed rules which would render many non-competition agreements unenforceable.

Regulation of Private Equity Funds Adviser

The SEC’s proposed rule changes under the Investment Advisers Act are attracting substantial attention by both registered and unregistered investment advisers. These rule changes would, among other things:

- Prohibit certain indemnification and exculpation provisions and practices (all advisers)

- Prohibit various negotiated business practices such as acceleration of payments on sale of a company and limiting carried interest clawbacks to “net of taxes” amounts (all advisers)

- Require disclosure of, if not outright prohibit, “preferential treatment” (including side letter provisions governing liquidity and fund portfolio information) (all advisers)

- Require written compliance reviews (registered advisers only)

- Require fairness opinions for, and prompt disclosure of, adviser-led secondary transactions (registered advisers only)

- Require standardized disclosure of fees and expenses and detailed quarterly performance reports for investors (registered advisers only)

- Require prompt (within one day) disclosure of certain major fund events, including a GP clawback, an LP giveback, removal of the GP, termination of the investment period and termination of the fund (registered advisers only)

Section 13(d) Rule Changes 

The SEC’s proposed rule changes seek to modernize reporting under Schedules 13D and 13G, with changes that would, among other things:

- Accelerate filings – A Schedule 13D would be due within 5 days, not 10 days, after crossing 5%, and amendments would be due within one business day after a material change. Certain 13G filing requirements would also be accelerated.

- Amend the definition of a Section 13(d) “group” – A “group” would include relationships where a party shares information about an upcoming Schedule 13D filing. On the other hand, the rules would now clearly exempt certain other communications among investors which are made without the purpose or effect of changing or influencing control of the issuer.

In late April 2023, the SEC reopened the comment period for this rulemaking to June 27, 2023, or until 30 days after the date of publication of the reopening release in the Federal Register, whichever is later.

Rule 10b5-1 Plans 

The SEC has adopted rule changes to Rule 10b5-1 plans which allow corporate insiders an affirmative defense to insider trading liability for certain pre-planned sales (or purchases) of publicly-traded securities. Among other features, the SEC’s rule changes provide for a cooling off period before an insider’s transactions may commence under a Rule 10b5-1 plan The new cooling-off period for directors and officers runs until the later of: (1) 90 days following plan adoption or modification; or (2) two business days following the disclosure in certain periodic reports of the issuer’s financial results for the fiscal quarter in which the plan was adopted or modified (but not to exceed 120 days following plan adoption or modification). In addition, enhanced disclosure requirements require specific disclosure of Rule 10b5-1 plans in issuers’ quarterly reports (Form 10-Q’s) and will require certain box-checking in Section 16 filings (Forms 4 and 5).

Corporate Transparency Act 

FinCEN is charged with promulgating regulations to implement the Corporate Transparency Act. The CTA imposes beneficial ownership reporting to “discourage the use of shell corporations as a tool to disguise and move illicit funds…” In late 2022, FinCEN adopted final rules that require many newly created private companies to promptly disclose information regarding 25% or greater beneficial owners and/or substantial control parties. Existing private companies would be obligated to report such information within one year after the rules become effective (January 1, 2024, which means that all companies in existence before such date will need to report by January 1, 2025). This disclosure may not be entirely novel for those clients which have opened bank or other accounts, but will likely capture more information (and will be filed with a governmental entity).

Taken together, these various initiatives and amendments will likely increase cost and administrative burden and increase the chance of inadvertent violations.