Energy & Infrastructure M&A 2024 Comparisons

Consistent with the impact on other industries, challenging credit markets, increased cost of financing and valuation gaps between buyers and sellers negatively impacted overall deal activity in the energy and infrastructure sector in the last twelve months although the effects of each were somewhat offset by significant regulatory incentives and ESG initiatives in the sector. Infrastructure investment generally involves longer hold periods and assets with longer-term contracts than traditional investments and therefore, the industry has been able to navigate inflationary trends and increased interest rates somewhat better than the broader market. With the Federal Reserve recently cutting interest rates for the first time since 2020, the market could recover in the second half of 2024 although, at the time of writing, dealmakers were waiting for the results of the November 2024 presidential elections in the US.

Sustainability as well as government incentives have both played a significant role in increasing the level of M&A activity in the sector recently. In August 2022, President Biden signed the Inflation Reduction Act (the “IRA”) into law. The IRA, which allows companies to monetise tax credits (ie, transfer them for cash), has contributed to the acceleration of investments in clean energy from both domestic and non-US investors. A purchaser of a tax credit can use it to offset its own tax liability. Over USD6.8 billion in 2024 tax credit transactions closed in the first half of 2024.

Despite the political backlash, ESG remains important and a basis for decision-making for investors in the sector. A significant amount of capital has been flowing into infrastructure funds with increasing levels of activity in energy transition, digital infrastructure and transportation. The oil and gas sector has seen several consolidations in the last 12 to 24 months recognising the demand for traditional sources of energy despite the ongoing push towards energy transition. However, ongoing geopolitical challenges and the wars in the Middle East and Ukraine are reinforcing the need to diversify and reduce reliance on traditional sources of energy.

Comparatively, overall deal activity in the energy and infrastructure sector in the US was stronger than in other parts of the world.

A new entity in the US is often incorporated in the State of Delaware although it can be incorporated in any state. Delaware remains a preferred state for incorporation due to its knowledgeable judiciary as well as its well-developed body of case law that allows for more predictable dispute resolutions for businesses and their stakeholders.

Forming an entity in Delaware is a straightforward process and can be completed within a day. Depending on the type of entity, the founder will need to prepare a certificate of incorporation and by-laws (for a corporation), a certificate of formation and a limited liability company agreement (for a limited liability company (LLC)) or a certificate of limited partnership and limited partnership agreement (for a limited partnership), and issue shares of common stock or equity interests to the initial holders. There is no capital requirement for forming an entity and it is customary for entities to be formed with a nominal amount of capital with additional capital being contributed subsequently.

When forming a new entity in the US, parties will need to consider the Corporate Transparency Act, which became effective in January 2024 and requires certain entities to report information relating to their beneficial owners as well as individuals involved in the incorporation to the US Department of the Treasury’s Financial Crimes Enforcement Network.

Founders typically choose to form a corporation, an LLC or a limited partnership as the vehicle of choice. This decision is based on, among other things, the desired governance and management structure, considerations relating to fiduciary duties and liability of members of the governing body, liability of equity owners and tax considerations.

In renewable energy projects, the operation of wind farms, solar energy farms, battery energy storage systems, and the like to produce or store renewable energy is often organised in project companies or special purpose entities formed as limited liability companies (LLCs). LLCs are typically flow-through entities for tax purposes and any income and notably, any tax credits attributable to the project company’s operations, will flow up to the ultimate owners of the LLC without being subject to tax at the project company level. In contrast, a C corporation is subject to taxation at the corporation level on any profits, and again at the shareholder level if the corporation makes a distribution to the shareholders.

If a company’s business model is one where profits are not expected for many years and profits will be reinvested into the company rather than distributed to shareholders, then the tax inefficiencies of a C corporation may be less of an issue, but tax credits generated at the C corporation level cannot flow up to its shareholders. If there are sufficient profits among the project companies that could benefit from the tax credits produced, a C corporation that owns the project LLCs could consolidate the profits, losses and tax credits to reduce the taxable income of the corporation and achieve tax efficiencies.

To qualify for certain renewable energy tax credits, including the investment tax credit, the relevant renewable energy project cannot be used or owned by a disqualified person, including a variety of tax-exempt or tax-favoured entities such as non-US investors. Ownership by a disqualified person (including through a partnership) results in disallowance of that disqualified person’s pro rata share of the investment tax credit, but disqualified persons may structure their investment in a tax equity partnership by investing through a C corporation to avoid such disallowance.

Furthermore, non-US investors utilise C corporations as blockers to block the flow of US taxable income from flowing up to the non-US investors. Due to the blocker’s existence, non-US investors do not need to file US tax returns. The blocker also provides a cleaner exit because such non-US investors can later sell the stock of the blocker, rather than the individual projects held by the blocker, and generally avoid US tax liability as non-US investors are not taxed on their US capital gains.

Energy and infrastructure assets have a high barrier to entry because of the capital-intensive nature of the industry and increased regulatory oversight. Early investors therefore tend to be governments, institutional investors, sovereign wealth funds and venture capital arms of strategic or sector-focused family offices with access to significant capital.

In renewable energy projects such as solar and wind farms, it was historically typical to monetise available federal tax incentives by accessing capital from investors in exchange for the renewable energy developer providing the investor with the right to claim the tax benefits associated with the project. The IRA has provided companies with other options to monetise tax credits, including direct pay and transferability.

Historically, the partnership flip was the most common structure for monetising tax assets. In a partnership flip structure, the project is typically financed with a combination of developer equity, tax equity, investor equity and, in some cases, debt. The tax equity investor will typically acquire an interest in the project company (or the disregarded entity that owns the project company) for cash. The tax equity investor is initially allocated as much as 99% of tax items (ie, tax credits and depreciation), and that allocation subsequently flips down to 5%, generally after achieving a specified after-tax internal rate of return.

Cash may be distributed differently from the proportion in which tax items are allocated (eg, the developer may have a preference in cash distributions for a certain period). The developer generally has an option to purchase the tax equity investor’s stake after the flip threshold is met.

Infrastructure projects may also be developed through a collaboration between public and private entities to finance, develop and operate the projects involving long-term contracts with revenue-sharing mechanisms.

This sector also uses concession agreements that grant a private entity the right to operate and maintain infrastructure assets for a specified period, typically in exchange for upfront payments, ongoing fees or revenue-sharing arrangements. This is common in sectors such as transportation, where private operators manage toll roads, parking infrastructure, airports, ports and other similar facilities.

The US energy and infrastructure sector attracts capital from both domestic and foreign sources, including foreign institutional investors and sovereign wealth funds. Investments from non-US sources, even minority investments, are subject to the regulations on foreign investments into the US.

Government funding is available to emerging companies through research institutions, grants and government spending programmes. The nature of the funding and the impact of it on the capital structure and the business (including intellectual property) is a point of diligence for private investors that follow public funds into an emerging company.

While specific investment terms depend on the size of the investor’s stake in the asset and the structure of the investment, an investor holding a substantial minority interest in a privately held asset can expect to receive certain governance and economic rights to protect its investment. These rights are consistent with minority rights in joint ventures (JVs) more generally and may include pre-emptive rights and other anti-dilution protections, proportionate board representation, veto rights over certain material actions, information rights, tag-along and other exit rights as well as a right to regular dividends and registration rights.

Furthermore, transactions involving these assets or targets often involve the creation of JVs between parties, with many of the underlying assets being subject to the Committee on Foreign Investment in the United States (the “CFIUS”) jurisdiction and review (see 7.3 Restrictions on Foreign Investments). Investors in this space must consequently consider their specific exit rights in the event their co-investor elects to sell to a non-US buyer triggering the CFIUS review.

In such a case, the CFIUS may require that the joint venture (JV) enter into a national security agreement (NSA) in connection with the sale, which may impose certain restrictions on the JV, including limitations on procurement, access to certain assets, etc, which will be consistent with the terms of the NSA in each case. Investors may therefore want to negotiate certain consent rights over entry by the JV into and/or participation rights with respect to the negotiation of any NSA.

Although each transaction is different and the terms depend on the goals of the parties and subsequent obligations as well as the size of the investment, investment and governance documentation has been well-developed in the US over time via repeated negotiations involving sophisticated parties possessing significant experience in the industry.

Early-stage companies are not required to change their form at a later point in their life cycle, although if they were formed as an LLC or another pass-through entity for tax simplicity, they may convert to a corporation before or after raising meaningful third-party capital. They are similarly not required to re-incorporate in a different jurisdiction, especially if they were originally incorporated in the State of Delaware but may in exceptional circumstances choose to do so.

Energy and infrastructure investors are more likely to pursue a private sale to obtain liquidity rather than a public offering, as a private sale may allow investors to obtain a higher value more efficiently than an exit via a public offering given the size and scale required for public companies to operate on a cost-effective basis within the overall regulatory landscape.

While investors are less likely to pursue a public offering, if a US-based energy and infrastructure business chooses to go public, it is more likely to list its securities in the US rather than elsewhere. A foreign listing may allow an issuer to register in a more optimal regulatory environment for public disclosure. For example, specialised environmental disclosures mandated by the US Securities and Exchange Commission (the “SEC”) for issuers engaged in material mining operations or the required annual conflict minerals disclosures may make the US a less attractive regulatory regime. However, given the other advantages of listing in the US, including access to US capital markets, a domestic US company is unlikely to list on a foreign exchange.

No information provided in this jurisdiction.

A private sale process is typically run as a banker-led auction to maximise deal value and competitive tension although bilateral transactions may be pursued depending on circumstances. For example, if there is an obvious buyer for an asset willing to pay an attractive price, the seller might prefer a bilateral transaction to avoid the longer timelines and higher costs associated with an auction process. Similarly, an interested buyer may choose to pre-empt an auction to avoid having to compete with other bidders for the asset.

In a private sale process, the transaction structure can be tailored to achieve the specific goals of the parties involved. If the entire company is being sold, the transaction is typically structured as a sale of 100% of the outstanding equity of the target company. If the company has several equity holders, including multiple institutional investors or members of the management team, the transaction is typically structured as a merger, which allows for the sale of 100% of the equity without requiring the execution of the purchase agreement by each equity holder.

If the target business is being carved out of a broader business of the seller or if the seller is selling specific assets, then the transaction is typically structured as an asset sale or a sale of both stock and assets. A buyer may also prefer to acquire assets rather than stock for other reasons, such as avoiding acquiring unknown liabilities. However, on the whole, stock acquisitions are generally simpler to implement.

Asset acquisitions can be more cumbersome for a number of reasons, including requiring third-party consents to assign individual assets, and in many cases the key contracts (project debt, concession agreements, etc) related to an energy and infrastructure asset or business cannot be assigned without counterparty consents that could be avoided by structuring a transaction as a stock deal. Parties therefore typically prefer to structure the transaction as a stock purchase or merger when possible.

Parties will also need to take tax and commercial considerations into account when choosing a transaction structure.

A private sale is typically conducted for cash consideration although a buyer may require or permit the selling equity holders to roll over a certain portion of the cash consideration into the buyer in exchange for equity in the buyer. The size of the rollover depends on various factors, including the goals of the parties; providing additional motivation and upside for management equity holders; demand for the asset; valuation and valuation gap between the parties; and the availability of credit. Buyers may also look to negotiate earn-outs and other forms of deferred consideration to address any valuation gaps.

A significant number of private transactions in the energy and infrastructure sector as well as in other industries now use representations and warranties insurance (RWI) as a buyer’s sole or partial recourse for inaccuracies in a seller’s representations and warranties, except in the case of fraud. It is possible for sellers to retain some skin in the game but a seller will often require that a buyer generally not have recourse to it and buyers are generally getting comfortable with RWI as their source of recourse. The RWI market has evolved such that there is no meaningful difference in the cost of the policy whether or not sellers retain some risk of loss.

If no RWI policy is obtained or if there is limited recourse to a seller despite a buyer obtaining a RWI policy, a buyer will need to consider the creditworthiness of the seller in determining the need for an escrow or holdback arrangement. If the seller is a private equity fund or other institutional stockholder that owns the target through a special purpose vehicle that will not be creditworthy following closing, a buyer will often insist on an escrow. In general, when there is recourse to a seller, buyer holdbacks are less popular with sellers than escrows.

Although there are a few examples of spin-offs of energy and infrastructure businesses, they are not common in this sector. The analysis as to whether a business should be spun off from a parent or sold to a third party in a private sale is also not specific to the energy and infrastructure industry.

Spin-offs involve the creation of an independent public-listed company by a public-listed parent typically by distributing all of the shares of a newly formed subsidiary known as a SpinCo to the parent’s stockholders.

Numerous factors can figure into a company’s decision to execute a spin-off and they include:

• narrowing a parent’s and SpinCo’s business models to appeal to different types of investors;
• sharpening management’s focus on a parent’s and SpinCo’s respective narrowed businesses; and
• separating higher growth rate businesses from lower growth rate businesses so that each business trades at a market price per share appropriate for their valuation and growth prospects.

Subject to satisfying certain requirements, spin-offs can be done on a tax-free basis for both the stockholders and a parent. Before a SpinCo is spun off, a parent often transfers assets and liabilities to a SpinCo in a tax-free D reorganisation. Under the plan of reorganisation, a parent’s distribution of SpinCo stock to its stockholders can be done without the parent recognising any taxable gain.

A parent can also transfer to its stockholders, without recognising taxable gain or loss, any cash and debt obligations received from the SpinCo in exchange for assets and liabilities transferred to the SpinCo. A number of requirements must be met for the spin-off to receive tax-free treatment for both stockholders and a parent, including:

• active trade or business — both the parent and the SpinCo must be engaged in a qualifying active trade or business that has been conducted for at least a five-year period prior to the spin-off, although an expansion of the original business is permitted. Often, whether a business is an expansion or an entirely new business must be evaluated. If the qualifying active trade or business was acquired during the five-year period, it must have been acquired through a tax-free transaction;
• “control” — the parent must “control” the SpinCo immediately before the distribution (“control” is defined as owning at least 80% of the voting power of the SpinCo voting stock and at least 80% of each class of its non-voting stock) and the parent must distribute “control” of the SpinCo;
• business purpose — the parent must be motivated by a non-tax-related business purpose to distribute shares of the SpinCo to its shareholders;
• no “device” — the spin-off must not be principally used as a “device” for distribution of earnings and profits to stockholders;
• continuity of interest — pre-distribution stockholders must continue to own a sufficient amount of stock of the parent and the SpinCo following distribution, with no prior commitment to sell the stock; and
• continuity of business enterprise — both the parent and the SpinCo must continue their respective historic businesses or continue to use a significant portion of their respective historic business assets in a business after the spin-off.

It is possible for a business combination to immediately follow a spin-off although these types of transactions do not tend to be commonplace in the energy and infrastructure sector. In order to ensure the spin-off remains tax-free, the most common transaction structures are the Morris Trust and the Reverse Morris Trust transactions.

In both the Morris Trust and Reverse Morris Trust transactions, the parent spins off the relevant business to a SpinCo and then either merges with a third party (a Morris Trust transaction) or merges the SpinCo with a third party (a Reverse Morris Trust transaction). In order to preserve the tax-free nature of the spin-off, the parent’s stockholders will need to own a majority of the combined business following the merger. Each transaction in a contemporaneous spin-off and business combination is typically conditioned on the completion of the other.

If an acquisition of parent or SpinCo stock is contemplated after the spin-off, parties should ensure compliance with the safe harbours available under the relevant Treasury Regulations to ensure no tax liability is triggered on the original spin-off.

Spin-off transactions typically take six to 12 months to be consummated. The process begins with the parent company identifying the assets that should be included in the SpinCo and structuring the spin-off, which can be a long process and can take months to plan. Once the plan is in place, the execution, implementation and preparation of and obtaining clearance for any securities filings to be made with the SEC in respect of the spin-off can take as much as four to nine months.

The parent may seek to obtain a private letter ruling from the Internal Revenue Service to ensure the spin-off qualifies for tax-free treatment under Section 355 of the Internal Revenue Code. Updated procedures for obtaining a private letter ruling on tax-free treatment for a spin-off were released in May 2024, which have generally made it more difficult to obtain a ruling on certain issues and may increase reliance on tax opinions. This process can take six months or longer to complete but is typically done in parallel to the consummation process.

Most transactions involving public energy and infrastructure companies are friendly transactions and do not typically contemplate or otherwise involve stakebuilding in the target company. Hostile transactions are uncommon for energy and infrastructure due to the prevalence of privately held companies and the regulatory approvals that need to be obtained in connection with such an acquisition.

As a general matter, acquiring a significant stake in the target prior to or in connection with making an offer for a US listed public company is not typical or customary for various reasons, including the following:

• an acquisition of beneficial ownership of more than 5% of the outstanding shares of a class in a public company requires the acquirer to report the acquisition to the SEC. This results in a public disclosure of both the acquisition and the acquirer’s purpose for the transaction, including plans to influence control of the company. An acquirer must also amend its filing within two business days of any material change in the facts previously submitted, which includes a change in the acquirer’s purpose for acquiring the shares;
• several states in the US, including Delaware have adopted statutory measures to protect companies from unwanted takeovers. While laws vary among states, in general, these restrict an acquirer that has, without target board approval, acquired target shares in excess of a threshold from entering into a subsequent business combination with the target for a certain period of time; and
• any acquisition of shares in excess of the applicable thresholds under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the “HSR Act”) requires a filing with the Federal Trade Commission (the “FTC”) and the Department of Justice (the “DOJ”). The target will become aware of any filings made under the HSR Act.

A non-US acquirer will need to consider foreign investment restrictions when engaging in stakebuilding activities.

US federal securities laws and Delaware laws do not require an acquirer to make a mandatory offer for a public or privately held target upon reaching a certain ownership threshold. Certain other states, such as Pennsylvania, have control share cash-out laws that require an acquirer to purchase the shares of other stockholders of the company at a fair price if that acquirer’s ownership of the company exceeds a certain ownership or voting power threshold.

Typical M&A transaction structures in the energy and infrastructure sector are a stock or equity purchase, a merger of a privately held target with a buyer or its wholly owned subsidiary and an asset purchase. While public companies in this space are less common, if the target’s shares were publicly listed, transactions to acquire US public companies are typically structured as mergers. This could be achieved by way of a one-step merger or a two-step transaction involving a tender offer followed by a second-step merger.

In a one-step merger, a buyer (or its subsidiary) merges with the target in a single-step statutory merger that is approved by the target’s public stockholders. A two-step merger combines a tender offer with a merger where the acquirer makes a public offer to purchase all outstanding shares of the target directly from the stockholders first. In a typical friendly two-step merger, the follow-on merger will be expressly contemplated by the transaction agreement and the stockholders squeezed out in the merger will receive the same consideration offered to stockholders in the tender offer.

Certain states (ie, Delaware pursuant to Section 251(h) of the Delaware General Corporation Law) permit the follow-on merger to be consummated without a vote of the target’s stockholders so long as shares representing at least a sufficient amount of voting power to approve the merger under that state’s statutory laws or the target’s charter (ie, a majority of the issued and outstanding shares in Delaware) are tendered in the first step tender offer.

Transactions in this space involving a privately held target could involve a rollover of a portion of their consideration by the seller in exchange for stock in the buyer group. Earn-outs and other forms of contingent consideration are also regularly used (more so recently) in private company acquisitions to bridge any differences in valuation between a buyer and a seller.

For public companies, the consideration payable may be cash, stock or a combination of both. Contingent payments and rights are not commonly used in acquisitions of US public companies. While, as a general matter, US federal and state laws do not generally prescribe or otherwise require the payment of a minimum price in an acquisition, there may be circumstances where the same price is required to be paid to all of the stockholders of the company.

For example, the all-holders rule under US tender offer regulations requires the same price be paid to all tendering shareholders in a tender offer and, in the context of a two-step merger prescribed by statute (ie, a merger under Section 251(h) of the Delaware General Corporation Law), an acquirer is required to pay the same price to stockholders tendering in the tender offer or being squeezed out in the merger.

Furthermore, in states that follow Delaware’s Revlon standard, directors are required, in the context of a sale of control of a company, to obtain the highest price reasonably attainable in respect of such a sale. The board may, as part of its analysis of whether the transaction is in the best interest of the company’s stockholders, seek a fairness opinion from a financial advisor, in which such advisor would render its opinion as to the fairness, from a financial perspective, of the consideration to be received by the stockholders in the transaction.

Tender offers are not common in the energy and infrastructure sector as most of the target companies are privately held with transactions typically structured as stock sales or mergers. To the extent the target is a publicly listed company, a buyer will typically condition the tender offer on its acquisition of the amount of target stock required to complete the back-end squeeze-out merger of the shareholders that did not tender their shares.

Other customary closing conditions in an acquisition, whether structured as a tender offer or otherwise, include:

• clearances from necessary regulatory authorities, including applicable antitrust and foreign investment approvals;
• no legal restraints prohibiting the transaction;
• accuracy of representations and warranties subject to negotiated materiality standards;
• compliance with covenants in all material respects; and
• no material adverse effect on the target (which is a negotiated defined term).

M&A transactions in the US are typically implemented pursuant to definitive stock or equity purchase, asset purchase or merger agreements.

It is customary for the acquirer and the target to enter into a merger agreement in connection with a public acquisition whether one-step or two-step, and in the acquisition of a private company, depending on the structure of the transaction, the buyer may enter into a merger agreement with the target or a purchase agreement with the seller of the stock, equity or assets.

Neither US securities laws nor Delaware laws require certain funds for launching a tender offer or entering into an acquisition or merger agreement and in any event, in the context of privately negotiated sales, parties are free to agree terms relating to the buyer’s financing. Transaction agreements typically include representations relating to the acquirer’s financing.

If the acquirer needs third-party financing to fund the acquisition, it is typical for the acquirer to obtain debt commitments from lenders at signing and for the transaction agreement to require the acquirer to use efforts to enforce the commitment. An acquisition will not typically be conditioned on the availability of financing. Instead, if the buyer does not have a sufficient balance sheet to fund the acquisition proceeds and committed third-party financing is unavailable when required to close, the agreement is typically terminable (by either or both parties) and the buyer is required to pay the seller a reverse break fee.

No information provided in this jurisdiction.

No information provided in this jurisdiction.

Deal protection measures are not relevant to private company transactions customary in this sector as the board of directors of the target does not typically have a fiduciary out allowing it to recommend a better alternative transaction. Stockholders of a privately held target are either party to the agreement (in a stock purchase) and bound by the contract to sell, or in a transaction structured as a merger expected to approve the transaction immediately following signing (in practice this occurs concurrently with signing).

In a public company transaction, parties will often negotiate deal protections, which can take the following forms:

• restricting the target from soliciting an alternative transaction or from providing confidential information to third parties that can lead to an alternative transaction subject to the ability for the board to engage with another party making a superior proposal;
• restricting the board from changing its recommendation except under certain circumstances, including when there is a superior proposal;
• match rights to allow the acquirer to match the terms of a superior proposal;
• break fee payable to the acquirer if the agreement is terminated by the target to accept a superior proposal or by the acquirer due to a change in the target board’s recommendation (typically between two and 4% of the equity value of the transaction); and
• force the vote covenants which require the target board to submit the transaction for the approval of the target’s stockholders even if the target board changes its recommendation with respect to the transaction.

A bidder not being able to acquire 100% of a target and requiring additional governance rights as a result is not generally applicable to transactions involving US public companies.

In public company acquisitions, acquirers frequently enter into voting agreements or tender agreements with stockholders that own a significant percentage of the target, which require the stockholders to vote for the transaction or tender their shares in the tender offer and vote against any alternative transaction. These agreements are transaction-specific, but they frequently include a termination right in favour of the relevant stockholder in the event:

• the target board changes its recommendation in respect of the transaction; or
• the acquirer reduces or changes the type of consideration payable in the transaction.

A private transaction is entered into pursuant to an exemption available under securities laws and does not involve a securities regulator or a stock exchange process while a public company acquisition is subject to disclosure and filing requirements pursuant to securities laws and SEC review and clearance of the relevant filings.

A tender offer may generally be extended by the acquirer under securities laws and regulations. When a tender offer is contemplated in a negotiated transaction, the acquirer will typically be obligated to extend one or more times if any closing conditions, including receipt of regulatory clearances, are not satisfied at the time the tender offer expires.

Depending on the subsector, the formation and operation of energy and infrastructure companies may be subject to industry-specific regulatory requirements. The regulatory bodies involved and the business activities subject to their authority include the following:

• federal regulatory bodies such as the Federal Energy Regulatory Commission (the “FERC”) (interstate transmission of electricity, natural gas, and oil);

• the Nuclear Regulatory Commission (commercial nuclear power plants and other uses of nuclear materials);
• the Environmental Protection Agency (human health and environment);
• the FTC (telecommunications, mainly consumer protection);
• the Federal Maritime Commission (US international ocean transportation);
• the Surface Transportation Board (the “STB”) (modes of surface transportation, primarily railroads, including railroad line sales, mergers, and other economic aspects of railway operation);
• the CFIUS (see 7.3 Restrictions on Foreign Investments); and
• public utility commissions that regulate utilities in each of the applicable states and state environmental agencies.

With respect to publicly listed companies, the SEC is the primary securities market regulator in the US. M&A transactions involving such companies are subject to various federal laws and SEC rules and regulations, including in respect of disclosures to stockholders and rules and procedures for conducting a tender offer.

The laws of the state of incorporation of the target also govern the transaction, specifically the stockholder approvals required, the fiduciary duties of the board and target management and the conduct of stockholder meetings to approve the transaction.

In addition, stock exchange rules may be relevant in M&A transactions involving public companies, particularly when a publicly listed buyer is issuing more than 20% of its issued and outstanding shares of stock as consideration in a transaction. In such a case, certain stock exchange rules require the acquirer to obtain the approval of the acquirer’s stockholders before the shares can be listed on the relevant exchange, even if the laws of the acquirer’s state of incorporation do not require a stockholder vote for the issuance.

The CFIUS reviews certain investments by foreign persons to determine if such investments pose a threat to the national security of the US. The CFIUS is an inter-agency committee led by the Secretary of the Treasury. Filings with the CFIUS are mandatory for certain transactions involving per se sensitive “TID US businesses”, which deal in “critical technologies”, “covered investment critical infrastructure” and “sensitive personal data”.

Otherwise, filings for transactions subject to the CFIUS’s jurisdiction are voluntary, although the CFIUS has the authority to require post-completion changes, including divestment, to transactions that do not undergo the CFIUS’s review prior to completion. Parties to transactions that are subject to the CFIUS’s jurisdiction often voluntarily submit transactions for review in order to receive outright approval or negotiate a mitigation agreement to address the CFIUS’s perceived national security concerns. While the CFIUS does not provide for restrictions based on investors being from certain countries, it assesses the potential risk presented by each foreign investor and in doing so, takes the investor’s country of origin into account.

The CFIUS has published a list of facilities that qualify as “covered investment critical infrastructure”, covering energy facilities, pipelines, refineries, data centres, rail lines, port terminals, water systems, and much more. US businesses that own, operate, manufacture, supply, or service such facilities may be considered “TID US businesses”, and foreign investments involving these businesses may be subject to mandatory filings with the CFIUS. Even in instances where filings are not mandatory, the CFIUS considers such businesses to be of elevated sensitivity.

The CFIUS’s focus is also broadening, especially with respect to threats to US energy and infrastructure. In September 2022, President Biden issued an Executive Order directing the CFIUS to focus in particular on certain technologies that are fundamental to national security, including advanced clean energy technologies. The Executive Order also directed the CFIUS to consider potential cybersecurity threats to critical infrastructure, particularly critical energy infrastructure and smart grids resulting from proposed transactions. This expanded focus is coupled with increasing enforcement activity by the CFIUS, which recently announced several enforcement actions, including a USD60 million penalty.

Potential acquirers must consider export controls in case the target actively exports or has historically exported items, software or technology and should also be aware of separate but often related regulations potentially implicated by the M&A activity including those related to sanctions laws.

The International Traffic in Arms Regulations (the “ITAR”) authorised by the Arms Export Control Act of 1976 and administered by the US Department of State’s Directorate of Defence Trade Controls (the “DDTC”) govern the manufacture, export and temporary import of defence articles, the furnishing of defence services and brokering activities involving items described on the US Munitions List. If the target has been involved in these activities in the five years prior to the acquisition, the acquirer should conduct due diligence to confirm the target’s compliance with end-user and end-use restrictions, licensing, record-keeping, notifications to the DDTC, registration and other regulatory requirements.

In general, relatively few transactions involve the ITAR. However, the ITAR, if applicable, has strict registration requirements and defines “export” to include the transfer of technical data to a foreign person in the US. The ITAR could therefore apply to entirely domestic transactions and an acquisition of a target involved in ITAR-regulated activities could require consent from the DDTC. Aside from the registration requirements, this means that, depending on the type of transaction, the entity involved in ITAR-regulated activities would need to apply for and obtain a licence from the DDTC or identify an applicable exemption.

Certain transactions are subject to antitrust review under the HSR Act. Additionally, certain aspects of review by each of the STB and the FERC, where required, also address competition.

Under the HSR Act, parties to transactions that meet certain dollar thresholds are required to submit pre-merger notification filings to the FTC and the DOJ and observe a waiting period, usually 30 days, prior to consummating the transaction, unless the transaction qualifies for an exemption. These requirements apply to mergers, acquisitions of assets, voting securities and equity interests in corporations and non-corporate entities such as LLCs and partnerships and the formation of JV entities.

There are two basic dollar thresholds under the HSR Act: the size-of-persons threshold and the size-of-transaction threshold. The size-of-persons threshold is met if a person on one side of the transaction has total assets or annual net sales of USD239 million or more, and a person on the other side has total assets or annual net sales of USD23.9 million or more.

Person for these purposes is the ultimate parent entity of the acquirer and the ultimate parent entity of the entity whose assets, securities or equity interests are being acquired. Total assets and annual net sales are determined based on the ultimate parent’s most recent fully consolidated financial statements.

The size-of-transaction threshold is met if the transaction is valued in excess of USD119.5 million. Transactions valued in excess of USD478 million are reportable regardless of the size of the persons involved.

These dollar thresholds are adjusted annually, usually in February, based on changes in the US gross national product.

The HSR Act also requires payment of a filing fee, typically paid by the acquirer, that can range from USD30,000 to USD2,335,000, depending on the value of the transaction. Transactions meeting these thresholds may qualify for one or more exemptions from the filing requirements under the HSR Act.

At the end of the 30-day waiting period, if the agency reviewing the transaction has concerns that the transaction will result in anti-competitive effects, the agency may issue a request for additional information (the “Second Request”).

The issuance of a Second Request has the effect of extending the waiting period until both parties have complied with the Second Request, which then triggers a second 30-day waiting period. The Second Request typically includes detailed requests for documents, data and narrative responses, as well as depositions of company personnel.

Compliance with a Second Request often takes three to six months and a cost of at least USD2 million to USD3 million in legal fees and expenses as well as time required from business personnel to assist with responding to the request.

If the parties believe that giving the government more time will avoid the issuance of a Second Request, they may choose to pull and re-file the HSR filing once without having to pay an additional filing fee (this has the effect of allowing the authorities an additional 30 days to review the filing without the parties having to go through a Second Request process).

The STB has exclusive jurisdiction over transactions involving mergers of railroads or line sales, with any transaction involving more than one Class I railroad subject to the highest level of scrutiny. The STB reviews for anti-competitive effects of the transaction and can impose conditions on the transaction to reduce these effects.

Lastly, the FERC possesses jurisdiction over most direct and indirect US wholesale power generation, marketing, and transmission businesses and assets, reviewing the effect of the transaction on competition, rates and regulation, and the potential for cross-subsidisation, and in many cases will require formal, public-record approval proceedings to be completed prior to closing. The FERC will continue to have regulatory authority over the investor (as a control party) following closing. Further, unlike with the STB, the FERC does not have exclusive jurisdiction over these types of transactions. So, a single transaction can potentially be subject to the jurisdiction and approval of the FTC and the DOJ under the HSR Act and the FERC under the Federal Power Act, and in some states, state utility commissions.

Labour Matters

From a labour law standpoint, in M&A transactions in the US, acquirers should consider compliance with state and federal wage and hour laws, including evaluating whether employees are correctly classified as exempt or not exempt from the federal and state overtime regulations and determining if wages are being paid correctly and in a timely way. An acquirer will also need to assess whether the target’s independent contractors are correctly treated as non-employees.

In the US, employees are generally employed at-will. Employment arrangements, other than for senior members of the management team, are memorialised in the form of offer letters rather than in longer form employment agreements. An acquirer will want to review the forms of offer letters, employee handbooks and policies to confirm compliance with laws prohibiting discrimination and harassment, as well as laws regarding paid and unpaid leaves of absence, vacation and annual leave. Acquirers will also need to look into the target’s compliance with immigration laws and ensure its employees are authorised to work in the US.

Fewer than 12% of employees in the US are represented by a union, so labour union involvement in transactions is somewhat uncommon. However, if the target has employees that are represented by a union, the applicable collective bargaining agreement may require that the union be notified in advance of the closing of a transaction or a change in the ownership or control of the target. If there is no such provision in the union agreement, there is no requirement to consult with or obtain approval from the union prior to closing an acquisition.

However, even if not required, it is not unusual for parties to inform the union of the transaction as a courtesy, typically at the same time that employees are so informed, following the signing of the transaction.

Benefits Matters

There are a variety of benefits, including welfare, pension, and executive compensation arrangements, in the US that buyers should consider. Many benefits are governed by both federal and state laws and in some cases, local laws. Benefits matters to consider in connection with US acquisitions include:

• the application of Sections 280G and 4999 of the Internal Revenue Code, which are the rules governing golden parachute payments in connection with a change in control. Excess parachute payments may trigger an additional 20% excise tax (in addition to regular income taxes) on the recipient and a loss of deduction for the payor unless certain mitigating actions are taken and this is something that all parties are focused on prior to closing;
• successor liability rules, which may result in acquirer liability for certain benefit matters, including in connection with multiemployer pension plans in which the target participates or continuation of health coverage laws;
• reviewing the benefit plans of the target for compliance with the Affordable Care Act. Non-compliance is often accompanied by significant penalties that are typically not assessed until years later, when supporting records may be difficult to locate and produce; and
• post-closing employee covenants, which may include protections regarding salary and wage rate, bonuses, severance, benefits and service credit.

Parties should also ensure proper structuring of the cancellation, cash-out or conversion of any equity and equity-based awards given the complex rules applicable to such transactions under the US tax code (including Section 409A of the Internal Revenue Code).

There are no currency control regulations applicable to M&A transactions in the US and no approval is needed from the Federal Reserve or any central bank or banking authority in connection with an energy and infrastructure M&A transaction in the US.

There have been some key judicial and legislative developments in recent years that are likely to impact energy and infrastructure transactions.

Internal Governance Agreements

Earlier this year, the Delaware Court of Chancery in West Palm Beach Firefighters’ Pension Fund v Moelis & Company, C.A. No. 2023-0309-JTL (Del. Ch. 23 February 2024), struck down provisions in a Delaware public corporation’s stockholders’ agreement for inappropriately restricting the board of directors’ powers under Delaware law. The provisions found to be invalid fell into the following categories:

• provisions granting prior approval rights to the stockholder (and founder) with respect to significant actions taken by the company; and
• provisions granting the stockholder the right to control the size of the board of directors and control a majority of the composition of the board of directors and committees of the board.

The decision drew a distinction between commercial contracts that restrict the powers of the board (for example, a credit agreement containing dividend restrictions) and internal governance contracts that do the same. It found that a contract that is an internal governance arrangement that requires or forbids action on issues that, by statute, fall within the board’s authority will be invalid.

The decision did acknowledge that the same provisions if adopted in the corporation’s charter would not be a violation of Delaware law as the law permits the charter to derogate from the authority granted to the board under law. The charter of a corporation is a publicly available document and including such provisions in the charter requires stockholder approval for amending the charter.

The decision had significant implications for both public and private companies as the fate of several stockholders’ agreements and JV agreements, particularly among investors in privately held companies (including those with a broad base of investors) that have historically contained such provisions was now in question.

In response to this, effective as of August this year, the Delaware legislature adopted a broad amendment allowing Delaware corporations to enter into enforceable contracts with stockholders, including contracts restricting the corporation from taking actions or requiring the approval of any person to take actions.

IRA

The IRA introduced in 2022 included extensive provisions relating to green energy tax incentives. The IRA expanded existing green energy tax incentives such as the investment tax credit (ITC) and the renewable electricity production tax credit (PTC) under the Internal Revenue Code; introduced new green energy tax incentives, including a production tax credit for the production and sale of clean hydrogen and the production and sale of advanced manufacturing components and critical minerals; and provided for bonus ITCs and PTCs for projects that satisfy certain domestic content requirements or that are located in an energy community or low-income community areas.

In addition, the IRA introduced new rules that would reduce the amount of ITCs and PTCs available for projects that commence construction after 28 January 2023, which fail to satisfy prevailing wage and apprenticeship requirements. Finally, the IRA introduced new monetisation strategies for the new and expanded green energy tax incentives, including a direct pay option for certain governmental and tax-exempt entities and taxpayers for a limited universe of tax credits, as well as an option allowing taxable entities to transfer tax credits to third parties for cash.

Amendments to HSR Filing Requirements

On 10 October 2024, the FTC announced its final rules amending HSR filing requirements (the “Final Rules”). The Final Rules do not affect the criteria for submission of HSR filings but focus instead on the information that will need to be included in the filing.

The Final Rules materially increase the amount of information that parties must provide as part of their filings and therefore will increase the time and cost of preparation of the filings. Among the more significant additional information required by the Final Rules are:

• additional transaction-related documents, including exhibits and schedules to the purchase agreement as well as any side letters between the parties in connection with the transaction;
• competition-related documents, including not only those prepared by or for directors or officers, but also documents prepared by or for the supervisory deal team lead, and ordinary course documents prepared within one year prior to the filing that discuss competition for any competing products or services of the parties that were provided to a CEO or board of directors of the parties;
• narrative descriptions about:
1. the transaction rationale;
2. products and services sold by each party, including any that overlap; and
3. top 10 customers for overlapping products or services;
• information about supply relationships between the parties to a transaction;
• list of buyer officers and directors and the other entities that they serve as directors or officers in; and
• list of minority investors in both parties (if they will remain invested following closing).

The Final Rules are expected to be effective by late January or early February 2025.

Due diligence is a critical aspect of any transaction in this industry. Parties typically enter into a confidentiality agreement pursuant to which the buyer and its representatives are provided access to information relating to the target. A buyer typically has the opportunity to request additional information for its due diligence and it is customary for the buyer to participate in calls with the target management as part of their due diligence.

Ultimately, unless certain information is competitively sensitive from an antitrust perspective (in which case a clean team or similar arrangement may be necessary or advisable), the due diligence information that is requested and produced is generally voluntary as determined by the agreement of the buyer and seller.

If the target is a public company, a significant amount of the information required for due diligence is typically publicly available through the company’s filings with the SEC. Similar to private company transactions, subject to entering into a confidentiality agreement with a buyer, a public company will provide a reasonable amount of non-public information for due diligence.

There are no specific limitations on what such public companies are allowed to provide to bidders. Furthermore, there are no affirmative requirements that public companies provide all bidders with the same information. A confidentiality agreement in the context of a public company transaction often includes a standstill provision in which the buyer agrees not to acquire shares of the target or take certain other actions with respect to the target without the target’s consent.

The confidentiality agreement usually also restricts the use of confidential information for anything other than a negotiated transaction with the target.

Privacy laws in the US apply across industries, including the energy and infrastructure sector. They do not outright bar conduct of diligence by a buyer. However, if the target plans on transferring personal information to a buyer for due diligence purposes, the data subjects need to have been provided with an appropriate privacy notice indicating that their personal information may be disclosed as part of an M&A transaction.

In addition, if the seller will provide transition services following closing and will receive access to personal information in this role, the parties will need to enter into an appropriate data processing agreement that restricts the seller’s use of the personal information and requires compliance by the seller with applicable privacy laws in processing this personal information.

If the target is privately held, there are no requirements in the US to disclose a bid to acquire the target or a signed definitive agreement relating to the target unless certain regulatory filings are required to be made in connection with the target, in which case whether or not the transaction becomes public will depend on the applicable regulatory regime. Some examples of such disclosure include:

• publishing in the federal registry of early termination requests under the HSR Act; and
• pre-closing FERC application requirements under the Federal Power Act are extensive, and FERC Section 203 applications must typically set out extensive, public record information concerning parties and targets.

For a public company, a transaction is generally only required to be publicly disclosed when the parties sign a definitive agreement with respect to the transaction. However, both buyers and targets may disclose that a transaction is being negotiated before such an agreement is signed, particularly in response to a leak regarding a potential transaction.

If the target is privately held, any securities issued by a buyer as consideration in an acquisition or as part of a rollover transaction are typically issued pursuant to an exemption under federal securities laws and therefore not required to be registered or listed on any exchange.

In a public company acquisition, any stock offered as consideration will typically be required to be registered with the SEC and the acquirer will be required to deliver a registration statement and prospectus.

In a transaction involving a privately held target, parties are not subject to any requirements to produce financial statements. If the selling equity holders are receiving a material amount of stock consideration in the transaction, they will likely ask to review the buyer’s financial statements. In addition, in a transaction where no third-party financing is being obtained, the seller may request to review the buyer’s balance sheet to satisfy itself of the buyer’s ability to fund the acquisition at closing.

If the target and/or acquirer is a publicly listed company, special rules will apply. Production of bidder financial statements is a complex determination under US securities laws and can vary greatly depending on the transaction structure, the type of consideration used and the financial status and resources of the bidder.

However, as a general matter, a bidder does not typically need to disclose its financial statements in all-cash transactions, particularly if the bidder is creditworthy or the bidder has committed equity and/or debt financing in respect of the transaction. Where the bidder’s financial condition is material to the target’s stockholders, such as in a transaction where the bidder’s stock is a material component of the consideration payable, the bidder will be required to disclose audited financial statements for the last three fiscal years and unaudited financial statements for the most recent interim period.

The bidder’s financial statements are required to be presented in accordance with the US Generally Accepted Accounting Principles or International Financial Reporting Standards. Where the bidder’s financial statements are not prepared under either of these standards, the bidder will be required to provide a reconciliation to one of those standards.

If the target is privately held, there are no requirements in the US to file transaction documents governing the acquisition unless required as part of certain regulatory filings required for the transaction (in which case the applicable regulatory regime will govern). For example, the CFIUS may request a copy of the transaction documents in connection with its review of the transaction, although the disclosure is non-public and confidential and, when applicable, the FERC typically requires key transaction documents to be filed for review, although non-public agreements can sometimes be afforded protection from general public release.

In a public company acquisition, as a general matter, the target will need to file a copy of any material definitive agreement with the SEC within four business days following the signing of the deal.

Under Delaware law, directors (for corporations), managers or managing members (for LLCs) and general partners (for limited partnerships) generally owe two primary duties to the entity and its stockholders, members or limited partners (as the case may be): the duty of care and the duty of loyalty. The duty of care focuses on the process by which decisions are made, requiring good faith and informed decisions.

The duty of loyalty requires that decisions be made in the best interests of the entity and not on the basis of self-interest or self-dealing. Within the context of LLCs and limited partnerships, Delaware law provides flexibility to restrict or eliminate these duties (although the implied contractual covenant of good faith and fair dealing cannot be eliminated).

Fiduciary duties are typically only owed to the entity and its stockholders, members or limited partners (as the case may be), although if the entity is insolvent, the duties may be owed to the entity and its creditors.

In most energy and infrastructure transactions, typically being acquisitions of privately held companies, it is not common or necessary for the board of the target to establish a special committee to review the transaction. However, in the context of infrastructure funds, if the fund sponsor expects the fund to enter into a cross-trade or other transaction with another advisory client account or affiliate of the sponsor (eg, in connection with the establishment of a continuation vehicle managed by the sponsor to acquire an existing investment from the fund), consent of the investors (or an advisory committee comprised of certain investors) may be required by the fund documents and/or the Investment Advisers Act of 1940.

In a corporation, a special committee comprising entirely of independent and disinterested directors is typically established by the board of a public company to review a transaction where a majority of the board is conflicted or that involves a controlling stockholder (either as a buyer or because the controller will receive a non-rateable benefit in the transaction).

In the US, the board of directors, managers or general partners (or an investment committee of individuals appointed thereby to whom decision-making has been delegated), as applicable, are involved throughout the course of the negotiation of the transaction as part of their fiduciary duties and generally retain final decision-making authority for material transactions. The authority to approve transactions that are not material may be delegated to one or more officers meanwhile.

Stockholder litigation is common in acquisitions of public companies in the US, particularly transactions involving a controlling stockholder or an interested board of directors and may result in an appraisal proceeding. Litigation brought by investors in infrastructure funds is much less common.

A board of directors, manager or general partner of a target typically engages independent legal and financial advisors in connection with a change of control transaction. It is not customary in the context of private transactions to obtain a fairness opinion, but in the context of public transactions the considerations regarding whether to obtain a fairness opinion are consistent with other industries.