Business Law Prof Blog

Under Armour IPO Closes Up 94%

Posted by Bill Sjostrom

Under Armour, Inc. completed a successful IPO yesterday of 12,124,000 shares of its Class A common stock.  Of these shares, 9,500,000 were sold by the company, and 2,624,000 were sold by existing shareholders.  The IPO price range was originally, set at $7.50 to $9.50 and then raised on Tuesday to $10.00 to $12.00.  The stock was ultimately priced above the range at $13.00 per share.  Trading in the stock on Nasdaq (symbol “UARM”) opened at $31.00 and closed at $25.30.  This represents the best first-day gain for a U.S. company since the November 2000 Transmeta Corp. IPO. 

According to the prospectus:

Under Armour is a leading developer, marketer and distributor of branded performance products for men, women and youth.  We endeavor to build each and every Under Armour product with superior fabrication and design innovation utilizing a variety of synthetic microfiber fabrications. The broadening consumer demand for our products among professional, collegiate and Olympic teams and athletes, active outdoor enthusiasts, elite tactical professionals and consumers with active lifestyles is evidenced by our rapid net revenues growth from $5.3 million in 2000 to $263.4 million for the 12 months ended September 30, 2005, representing a compound annual growth rate of approximately 127.2%. Our operating income has increased from $0.7 million in 2000 to $32.7 million for the 12 months ended September 30, 2005, representing a compound annual growth rate of approximately 124.1%.

The deal raised approximately $112.5 million in net proceeds for Under Armour.  It intends to use some of the proceeds to redeem preferred stock and repay debt.

Like Chipotle, Google and others, Under Armour’s capitalization includes Class B common stock.  Holders of Class B common stock are entitled to 10 votes per share.  Under Armour’s CEO and founder, Kevin Plank, owns all outstanding shares of Class B common stock.  This ownership represents 83.0% of the combined voting power of Under Armour common stock, i.e., Plank maintains complete control over Under Armour, notwithstanding the IPO.

In Re Cox Comm.: An Emerging Problem in the Delaware Courts?

  I have finally read the full text of Vice Chancellor Strine's opinion in In re Cox Communications (decided June 6, 2005).  The opinion is symptomatic of a developing problem in the Delaware Court, excessive doctrinal proliferation. Let me set the stage...

The motion in the case was a request for attorney's fees in a settled class action.  The Judge had approved the terms of the settlement that involved a challenge to an all cash, all shares tender offer by a parent for its controlled subsidiary.  At issue was the question of whether the lawyers for the plaintiffs had "caused a beneficial" corporate action.  It is a question of fact, specific to the action. 

Vice Chancellor Strine, however, took the opportunity to attack the standard of review established in such actions by the Delaware Supreme Court in its Kahn v Lynch Comm. Systems case (1994).  He detailed the history of the Kahn case (noted with regret that it had overruled a decision by Chancellor Allen, now a Law Professor at NYU), included a reference to his law review article in which he criticized Lynch, discussed Lynch' s relationship to a related line of cases (known as the Siliconix line), discussed several current academic studies on lawyers role in class actions, and took specific issue with a Harvard Law Professor that had supported the plaintiff's claims with an affidavit.  Then Strine narrowed the plaintiff's attorney fee request for $5 million to $1.25 million.  Not finished, Strine concluded with a "Coda on the Jurisprudential Elephant in the Corner," repeated his call for a reversal of Lynch.

In other words, Strine used his problems with the Delaware Supreme Court opinion in Lynch, to narrow a plaintiff's fee request.

There is much to wonder about here:  At the Chancery Court level:  The role of a trial court when it dislikes an opinion in a superior court,  whether a sitting trial judge should write law review articles on opinions of a superior court that she does not like,  whether an attorney's fee request should be the place for criticizing a superior court opinion, and whether an academic discussion of general theory across cases should dominate a specific, fact based finding.  At the Supreme Court level:  The Chancery Court is the accomplished business court, circulating opinions among all the Chancellors for comment;  the Delaware Supreme Court, on the other hand, sitting in panels of three has less discussion and can be dominated by a single Justice.  Two of the sitting Supreme Court Justices have, seemingly, listened to academic critics that decry the Court's open ended doctrines and decided to create more concrete answers.  The result is a growing and bewildering edifice of doctrine that has internal conflicts, conflicts that appear after each new decision comes down.  The Supreme Court decisions have grown in length to reconcile or explain conflicts and three part tests grow to five, with two subparts (or is it a seven part test?).  How do the new tests work? (i.e. the new "good faith" test in the Disney line of cases). We wait for the next hundred page opinion.

The Delaware Courts are in serious jeopardy of squandering their reputation for superior business decisions, a reputation that is the main reason many American companies incorporate in this state.   More Supreme Court opinions like Smith v VanGorkam,  Paramount v Time, Cede II,Omnicare v NCS Health Care, and Brehm and more Chancery Court opinions like In re Cox and In Re Pure Resources and corporate lawyers should start recommending that their clients look to another jurisdiction for defining case law.       

Ongoing Saga at Sovereign Bancorp

Posted by Bill Sjostrom

Sovereign Bancorp, the nation’s third largest savings and loan, has been under attack from its biggest shareholder, Relational Investors, since last May.  Relational is upset because it believes Sovereign’s stock is underperforming and blames this on Sovereign’s CEO, Jay Sidhu, and its conflicted board.  Last month, Relational launched a proxy fight to replace two board members.  A few days later, Sovereign announced it was acquiring Independence Community Bank, a regional thrift, for $3.6 billion.  To finance the deal, Sovereign is going to sell Sovereign shares equal to a 19.8% stake to Spanish bank Santander.  The deal will thus dilute down the ownership percentage of current Sovereign shareholders, including Relational, and will make Santander, who is presumed to view current Sovereign management favorably, Sovereign’s biggest shareholder.  Because Sovereign is buying Independence for cash and issuing less than a 20% stake to Santander, Sovereign maintains that no shareholder approval is required.  Relational asserts that Sovereign is overpaying for Independence and that Sovereign’s prime motivation for doing the deal is to thwart Relational.

Relational wants the deal submitted to Sovereign shareholders for approval.  Sovereign has refused.  In response, Relational has asked the New York Stock Exchange to require Sovereign to put the deal to a vote.  Sovereign is listed on the NYSE and is thus contractually subject to the NYSE Listed Company Manual.  Rule 312.03 of the manual provides:

. . .
(c) Shareholder approval is required prior to the issuance of common stock, or of securities convertible into or exercisable for common stock, in any transaction or series of related transactions if:

    (1) the common stock has, or will have upon issuance, voting power equal to or in excess of 20 percent of the voting power outstanding before the issuance of such stock or of securities convertible into or exercisable for common stock; or
    (2) the number of shares of common stock to be issued is, or will be upon issuance, equal to or in excess of 20 percent of the number of shares of common stock outstanding before the issuance of the common stock or of securities convertible into or exercisable for common stock.
. . .

(d) Shareholder approval is required prior to an issuance that will result in a change of control of the issuer.

Presumably, Relational has argued that the issuance to Santander falls within both (b) and (c) above.  According to this W$J article (subscription required):

To sell Santander a 19.8% postdeal stake via new shares alone, Sovereign would have to issue additional shares totaling almost 24% of its predeal outstanding-share total. That would have triggered the NYSE shareholder-vote requirement. So instead, Sovereign plans to issue 16.6% in new shares and to give Santander the rest via shares that the company has repurchased -- so-called treasury shares that aren't considered part of a company's outstanding-share count.

The effect is the same: Sovereign is selling the equivalent of almost 24% of its currently outstanding shares. The NYSE has allowed this treasury-share trick for decades, as even lawyers for the dissident shareholders concede, but rarely, if ever, for such a significant portion of a transaction.

There are media reports that say Santander has a right to buy additional shares that can increase its stake to 24.9%, which appears to open up an argument under the “series of related transactions” language in Rule 312.03(c).  These reports, however, are misleading.  I took a quick look at the underlying Investment Agreement, and it doesn’t give Santander any special rights to buy more shares. What it does is prohibits Santander from increasing its stake above 24.99% through open market purchases or otherwise.  Further, the agreement includes a standstill provision which prevents Santander from acquiring anymore Sovereign stock within five years of closing except in limited circumstances.

As for (d), the W$J article referenced above argues as follows:

A company cannot change control of itself without a shareholder vote. Sovereign and Santander say the Spanish bank wouldn't control the Pennsylvania bank once the deal is done. Right. And Spain doesn't control Catalonia either.

Under the deal, Santander would have the right to buy 5.1% more of the bank immediately. It could buy the rest of Sovereign over the next five years, with rights of first and last refusal. In years four and five, Santander could offer as little as it wants. Meantime, the deal bars Sovereign from considering other offers before it closes.

The NYSE might want to take its cue from federal banking regulators, who must decide bank control issues to determine whom to hold accountable. "The odds are very high that the Federal Reserve Board will determine this transaction constitutes a change of control," Jaret Seiberg of Stanford Washington Research Group said in a report on Monday.

The most egregious aspects of Santander power over Sovereign have to do with Mr. Sidhu, the CEO, and its board.

Santander would get only two of 10 board seats, but the deal would render the others impotent because it would allow Santander to veto any attempt to fire Mr. Sidhu. A board's most important job is overseeing a CEO, which means having the power to get rid of him.

Unless I’m missing something (and I’ll admit, I did not read the entire Investment Agreement), the 5.1% argument is erroneous because of the standstill provision.  The veto power argument is slightly misleading.  The Investment Agreement provides that the board may not remove the CEO without the approval of at least one of the two Santander directors.  These directors, of course, are subject to fiduciary duties in deciding how to vote on the matter.  Hence, I don’t see how this so-called “veto power” amounts to a change of control.

The only argument I find potentially persuasive is that if the Fed finds that the transaction constitutes a change of control so too should the NYSE.  The NYSE, obviously, would not be bound by the Fed’s ruling, but it certainly would be strong persuasive authority.  Does anyone know whether the Fed have specific guidelines as to what constitutes a change of control of a bank?

This Reuter’s article asserts that the NYSE is likely to require Sovereign to put the deal to a shareholder vote or face delisting.  Unless the experts are aware of something I’m not (which very well could be the case), I put the chance at more like 50/50.

For those unfamiliar with M&A law, it is well established that form controls over substance in this area.  Hence, there is nothing inherently wrong with purposely structuring a deal to fall just under a shareholder voting requirement trigger.  Figuring out how to best structure a deal to minimize formalities (shareholder approval, appraisal rights, third party consent, etc.), tax effects, and target liability exposure is a big part of the value an M&A attorney adds to a deal.  That’s why attorneys cook up things like horizontal double dummy structures.

Double Dummy Acquisition Structure

Posted by Bill Sjostrom

Click here for a fairly detailed CFO.com article describing the horizontal double dummy acquisition structure.  This structure is used to achieve favorable tax treatment for the shareholders of the target corporation.  It was used in the AOL/Time Warner, SmithKline Beecham/Glaxo, and Daimler-Benz/Chrysler deals.  It also will be used in the upcoming NYSE/Archipelago and Oracle/Siebel deals. 

Here’s how the double dummy will work in the Oracle/Siebel deal: Oracle formed a new wholly owned subsidiary, Ozark Holding, Inc.  Ozark Holding then formed two new wholly owned subsidiaries, Ozark Merger Sub Inc. and Sierra Merger Sub Inc.  Upon the closing of the deal, Sierra Merger Sub will merge into Siebel, and Ozark Merger Sub will merge into Oracle.  As part of these mergers, Oracle’s shares will be converted into Ozark Holding shares on a one-for-one basis.  Siebel shares will be converted into cash or Ozark Holding stock at the election of the Siebel shareholders, but no more than 30% of the consideration can be stock.  When the dust settles, both Siebel and Oracle with be wholly owned subsidiaries of Ozark Holding.  Ozark Holding will change its name to Oracle Corporation, and its shares will be listed on Nasdaq.

The conversion of both the Oracle and Siebel stock into Ozark Holding stock will qualify for tax free treatment under IRC Section 351. Hence, the deal will not trigger taxes for Oracle shareholders, and Siebel shareholders will only pay taxes on the cash portion of the transaction.  The deal requires shareholder approval by Siebel but not by Oracle because it will be effected through a holding company reorganization pursuant to Section 251(g) of the Delaware General Corporation Law, which provides for the merger of a holding company with and into a direct or indirect wholly-owned subsidiary without stockholder approval.  Click here for the Agreement and Plan of Merger.

SEC General Counsel Roundtable

Tomorrow at noon eastern SEC Chairman Cox is hosting the General Counsel Roundtable at SEC Headquarters in DC.  It will be webcast live at www.sec.gov.  Panelists include the SEC's general counsel, a PCAOB broad member, and former SEC chairman Harvey Pitt.  Click here for a complete list of panelists and other details.

NYSE Settles

  The NYSE has settled with dissident members who objected to the price negotiated in the Exchange's merger with Archipelago.  Article  The parties agreed to hire an independent expert to appraise the value of the deal for Exchange members before the members' scheduled ratification vote.  After the announcement of the settlement a seat sold on the Exchange for a record $3.25 million.  Seats were trading below $1 million just a few months before the deal was announced.

The run up in the value of exchanges that have gone public should stimulate some soul searching by regulatory authorities.  Were the old trading systems, supported by the regulations of federal agencies for so long, deeply undervalued due to regulatory lock-in?  Or are the new trading systems overvalued due to new regulatory advantages in Reg. NMS?      

Largest Public-to-Private Deal of the Year: Georgia-Pacific Buyout

  Koch Industries, a privately held company, has paid $21.1 billion for Georgia-Pacific, a publicly traded company. Article The acquisition will make Koch the largest privately held company in the United States, surpassing Cargill, Inc.  Koch will pay a whopping 38.5 percent premium over the pre-announcement stock price, $31.2 billion in cash and the rest in the assumption of liabilities.

This is a record setting year for public-to-private acquisitions with the total so far coming in at $62 billion.  The previous largest was the buyout of SunGuard Data Systems for $11 billion by a KKR (Kolbeg, Kravis, & Roberts) syndicate.The ease of running a private company, the ability to make strategic decisions quickly so as to unlock value, and the availability of private financing are spurring the deals. 

The two Koch brothers who run Koch Industries are active politically, founding the Cato Institute and bankrolling Libertarian Party candidates.  One of the brothers has run for Vice President on the Libertarian ticket. The company has a novel method of compensating employees and outside professionals, using a "value added" calculation that it claims makes every employee an "entrepreneur." The company has been dogged by family feuds (two other brothers were eased out the of the company) and lost on claims of environmental damage (the company as originally an oil company) and fraud (oil lease on Indian land). Article

NYSE/Archipelago Merger in Court

A New York state court judge is hearing the complaint of dissident members of the NYSE who are objecting to the negotiated price in the NYSE/Archipelago merger deal, a stock for stock transaction.  The price of Archipelago shares has shot up almost 200 percent since the deal announcement.  The price of NYSE seats has also increased dramatically (to an all time record $3.025 million), but only 87 percent since the deal announcement.  The dissident members argue that the difference in value increase is evidence that the NYSE is not getting a large enough stake in the surviving company.  NYSE members will own 70 percent of the survivor and Archipelago shareholders 30 percent. 

Of interest to outsiders is, however, the huge total increase in value of the constituent companies.  Is the deal, transforming the NYSE from a not-for-profit to a for-profit company, unlocking that much value??  The Chicago Mercantile Exchange went public in 2002 (at $35) and has sharply risen in value ($385).     

The higher value of the post- announcement combined ownership interests NYSE and Archipelago is a reflection of the regulatory privilege given the company under new SEC Regulation NMS, which drove the parties to merge.  Traders have figured out that the NYSE, as a public company, will have a privileged and protection market position under the new regulation as the dominate market for the country's largest publicly traded companies.  The participants in the deal are squabbling to divide the new spoils. 

Dutch Auction Self-Tender Offer

Agilient Technologies has announced a Dutch Auction, Self-Tender offer for over 14 percent of its shares. Press Release It is an unusual method for a stock buy-back, but it makes good business sense.  The firm hopes to repurchase 73 million shares and not over-pay for the stock. 

J&J and Guidant Dancing Partners Again

Posted by Bill Sjostrom

Johnson & Johnson and Guidant agreed to reprice their deal at $63.08 per share down from the original price of $76 per share.   Guidant’s shares jumped over $4 in pre-market trading.  "Our enthusiasm for this agreement and its potential continues," said James Cornelius, chairman of Guidant.  "This agreement makes sense for Guidant shareholders and employees. It amplifies the opportunity for us to do more for patients with cardiovascular disease through a union with Johnson & Johnson."

As I mentioned earlier, it really was in the best interests of the parties to work something out instead of paying millions in legal fees, so I'm not at all suprised that they did.  It would have been nice, however, to have additional judicial guidance on the definition of "material adverse effect."  Oh well.  Click here for a Reuters article.

Silver Lining in Sarbanes-Oxley?

Posted by Bill Sjostrom

This Business Week article asserts that some companies have found a silver lining in SOX.  In particular, Section 404 “is enabling businesses to cut costs and boost productivity.”  Section 404 requires a public company to include in its annual report various disclosure about internal control over financial reporting, including an attestation from the company's auditor regarding the controls.  The increased auditor work triggered by Section 404 is viewed as one of the most expensive items of SOX compliance.  It makes me wonder whether the article was commissioned by the Big Four accounting firms.  The article mentions later that “94% of top executives at the 217 public companies it polled said the costs of compliance far outstrip any gains.”  Why then is Business Week writing about the 6% or less minority?

I’ve always found it ironic that public accounting firms were at the center of the Enron, WorldCom and other debacles that triggered the enactment of SOX, yet have benefited the most from it.  Audit fees for big companies rose by 55% last year.  Sure SOX reduces the types of non-audit services that an auditor can perform for a client, but it creates huge opportunities for getting business from non-audit clients that otherwise would have gone to the clients’ auditors.  At the same time, it probably means higher fees for these services as synergies from having the same firm perform audit and non-audit services are lost.

NYSE, NASD Consider a Joint SRO

With both the NYSE and NASDAQ in the process of converting to public, for-profit corporations (NASDAQ is well ahead), the parent organizations are trying to figure out how to run a self-regulatory organization for each exchange.  A spin-off of the SRO as a continuing not-for-profit organization is an obvious solution.  Now they have decided that they should merge their SROs into one super-regulatory authority.  Great, we are only one short step away from eliminating the mess; eliminate the SROs completely and give the job to the SEC, the ultimate super-regulatory authority that is not subject to inherent conflicts-of- interest problems.  SROs were a political compromise in 1934 to get the New Deal legislation passed and have long out-lived their usefulness.  The SEC can develop the expertise to regulate the exchanges.  And we will be spared the periodic of show of the SEC investigating an SRO, finding it lax, asking that it tighten up, and, in the end, agreeing with fanfare to tinsel-like SRO new procedures and promises. 

Senator Grassley's Request

Senator Grassley of Iowa has asked the ten largest oil companies to donate 10 percent of the 3rd quarter profits to a fund that would pay the home heating costs of needy Americans.  At issue is whether a corporate board could do so without violating their fiduciary duty to the firm (and the firm's shareholders).  An answer could depend on a company's state of incorporation.  Some states allow consideration of a wider range of constituents than others.  Ohio would allow it; Delaware may not.

In any event, the NYT editorial page today is disgusted by Grassley's request.  We should tax them to fund such a payment, not beg for it screams the text.   Such a tax could also fund mass transit and alternative fuels research the NYT argues.

College President's Salaries: Not-for-Profits Join the Salary Race

Today's NYT reports that College President's salaries increased a whopping 19 percent last year over the year before.  Nine Presidents now earn over $900,000 a year and 50 Presidents earn more than $500,000 a year.  The numbers do not include the benefits of serving on corporate boards and other perks of being a university president.  Add the perks and the salaries are considerably more.  So the salary ratchet upwards for CEOs has now found a home in not-for-profits. 

Shareholders Persuade Knight Ridder

Posted by Jason R. Job

As we discussed in a post entitled Largest Shareholder Pressuring Knight Ridder, two large shareholders of Knight Ridder (NYSE: KRI) urged the Knight Ridder board to pursue the competitive sale of the company.

Today, Knight Ridder, one of the largest newspaper companies in the US, announced in a press release that it was exploring strategic alternatives to enhance shareholder value. (Click here for the press release).  According to the press release, Knight Ridder has begun working with Goldman Sachs in this process.  However, Knight Ridder was cautious about a potential sale stating:

"In making this announcement, the company stated that there can be no assurance that the exploration of strategic alternatives will result in any transaction.  The company does not intend to disclose developments with respect to the exploration of strategic alternatives unless and until its Board of Directors has approved a specific transaction."

In addition to the announcement of exploring strategic alternatives, the Board also amended the company's by-laws to provide that shareholders may submit proposals for consideration and/or nominations for directors to be elected at Knight Ridder's 2006 Annual Meeting of Shareholders.

It appears that the shareholders are winning with Knight Ridder, unlike the shareholders at McDonald's. (For more discussion about McDonald's check out my post entitled: Pershing Square to McDonald's: Spin Off Restaurants).  Knight Ridder has responded to Private Capital Management LP, who threatened to nominate its own slate of directors if Knight Ridder did not pursue a sale of the company, by allowing PCM to nominate potential directors and propose potential suitors for the business.

I do not personally own any shares of Knight Ridder; however, I do personally own shares of McDonald's.  Also, I am not recommending either stock for purchase or sale.

Workplace Diversity

Today's W$J includes a special section on workplace diversity.   It contains a series of articles describing the ways that companies can respond to diversified workforces.  Click here for a post by Rick Bales at the Workplace Prof Blog that summarizes the articles.

Koch to Acquire Georgia-Pacific

Koch Industries, Inc., a private company specializing in the oil, chemical and mining industries, announced Sunday that it is acquiring Georgia-Pacific Corp. through an all cash tender offer at $48 dollars per share or $13.2 billion. The price represents a 39% premium over Georgia-Pacific’s closing price on Friday. Georgia-Pacific makes Quilted Northern bathroom tissue and Brawny paper towels. Post-deal, Koch will surpass Cargill as the nation’s largest private company in terms of annual sales which should approach $80 billion (click here for a recent Forbes list of the largest private companies). Click here for a Reuters article.

Short Sellers: Should We Fear Them?

Much of the public complaint against hedge funds seems to come down to worry about investors who bet on the short side.  Investors who short stock profit only if the stock goes down in price.  Common methods include borrowing stock (to sell it and then cover the lease in the market by purchasing stock of a lower price), buying a put option on the stock (holding the right to sell the stock for the next 30 to 60  days at current market prices), writing a call option (granting another the right to buy a stock from you for the next 30 to 60  days at current prices), selling a stock future (promising to deliver a stock 30 to 60 days in the future), or taking the selling position in a stock swap (a forward contract that is not traded on a market but negotiated among instititonal players).

Managers and law makers have always distrusted short sellers.

Detractors believe that short sellers frequently will cause stock prices to drop by circulating false rumors about a company.   In other words, short sellers will mis-inform the market in order to make profits.  Not only do opposite side traders lose (the price will bounce back up once the rumors are proved false), but the rumors can do real damage to a company's ability to function.  The rumors may affect a company's ability to secure operational financing.  The false rumors are themselves actionable but we worry that all short sellers will do them (have an incentive to do them) so we attack short sellers rather than short sellers that are acting illegally.

Of course, investors who hold long positions can cause stock prices to rise artificially by falsely touting the stock (false rumors or false trading volume through wash sales or matched sales are some of the methods).  Traders on the opposite side will lose (the price will retreat once the rumors are proved false) but the rumors do less damage to a company's ongoing ability to operate.  We do not attack long positions (nor could we) but only those who act illegally while holding long positions.

I suspect that the real antipathy against short sellers is, however, the simple depressing effect they have on a company's stock price.  Short interest in a stock, by itself, will depress the company's stock price.  Managers do not like "short runs" on their stock.  Yet short interest is adds a stock market in reaching a new price equilibrium on bad news.  The shorts, in addition to those who sell long positions in the stock, reestablish the new price.  The shorts just push the stock to its new lower level quicker.

In any event, there is long held and deep hostility to short sellers.  Regulators have, therefore, put a variety of restrictions on short selling.  Market makers can only short stock on "up-ticks" for example.  Mutual funds are limited in their ability to short stock.  Brokers are discouraged from shorting stock for customer's discretionary accounts. And the list of restraints is long.

There is, therefore, a natural bias in the market in favor of long positions.  Individuals hold long positions; institutional investors holding for individuals hold long positions

Hedge funds make high returns because, among other things, they can and do play the short side of the market. Their short plays are the ones that get the most negative attention.  The old monster fear has re-emerged that the hedge funds will take short positions and cause the stock price to fall by spreading false rumors (or some other illegal maneuver).