Business Law Prof Blog

Botched Trade Costs Tokyo Brokerage Approximately $225M

Posted by Jason R. Job

Hans Gremiel, a writer for the AP, wrote an article about how the Japanese government has rebuked the Tokyo Stock Exchange and Mizuho Securities Co. over a typographical mistake cost Mizuho Securities over 27 billion yen, which equates to approximately $225 million.  (Article can be found here).

Basically, a trader for Mizuho Securities wanted to sell one (1) share of J-Com Co. on Thursday morning at 610,000 yen.  However, the trader incorrectly typed the trade in to sell 610,000 shares at 1 yen.  J-Com Co., a job recruiting firm, was debuting on the Tokyo Exchange with approximately 15,000 shares being offered.  Nevertheless, the Tokyo Exchange processed the sale of J-Com, even though the sale was approximately 41 times the number of outstanding shares.

According to the article, this sale cost Mizuho Securities at least 27 billion yen, but since it occurred through human error, that amount could easily increase.  Additionally, Mizuho Financial Group, the parent of Mizuho Securities and Japan's second largest bank, stated that they would fully back the losses from the erroneous trades of J-com, which could wipe out Mizuho Securities' first quarter profit of 28 billion yen, or $233 million.

I wonder if this trader was invited back for another day of trading?  Nevertheless, shouldn't the exchange caught this wacky trade?

Going Private: Dave and Buster's

Posted by Jason R. Job

One of my favorite restaurants and places to hang out when I was a law student at the Moritz College of Law at The Ohio State University was Dave and Buster's.  There was nothing like a cold brew, some good food, and a quick 18 holes of Golden Tee to take my mind off of the labors of law school.  So today, I was reading the financial news and noticed that Dave and Buster's (NYSE: DAB) has agreed to be taken private by Wellspring Capital for $18.05 a share.  (Press Release can be found here in .pdf or here in HTML).

What I found most interesting was Chief Executive Officer, Buster Corley's comment regarding Wellspring's proposal to purchase Dave and Busters.  Corley stated, "We believe that this proposal to buy the company offers all of us as shareholders a unique opportunity to realize value at a time when the company has been challenged to perform up to expectations."  For once, an honest CEO, who has decided that maybe it is time to cash in his chips and maximize shareholder value.

Recently, the stock was trading up $2.33 to $17.54 a share.

E-Proxy Proposal

Click here for the SEC's "Internet Availibility of Proxy Materials" proposed rule release (104 pages).

Citigroup Wins Case Versus Disgruntled Investor

Today, a Citigroup spokesman stated that a National Association of Securities Dealers panel rejected a $900 million claim brought by Donald Sturm.  Mr. Sturm, a wealthy Colorado investor, argued that he held onto nearly 21 million WorldCom shares based upon Citigroup analyst Jack Grubman's recommendation.

Citigroup's argument was that Mr. Sturm was a knowledgeable investor and should take responsibility for his decision to hold his shares of WorldCom.  Mr. Sturm attempted to argue a direct link to Mr. Grubman's research and to prove that his research was flawed.

Since arbitration hearings are private and the panel did not disclose the reasons for its ruling, we are left to speculate why it sided with Citigroup.

Reuters article can be found here.

More on Guidant/Johnson & Johnson/Boston Scientific

Posted by Bill Sjostrom

As discussed earlier, on 11/14/05 Johnson & Johnson (JNJ) and Guidant (GDT) entered into a revised merger agreement revising the price of JNJ’s acquisition of GDT down from $76 per share ($30.50 in cash + $45.60 in stock) to $63.43 per share ($33.25 in cash + $30.18 in stock).  Boston Scientific (BSX) has since proposed paying $72 per share for GDT ($36 in cash + $36 in stock.  Note that BSX has not made a binding offer to pay $72.  Its press release makes this clear--the proposal is subject to “completion of a confirmatory due diligence review” and “final approval of our board and shareholders.”  And just to be sure, the release also provides that “there will be no legally binding contract or agreement between us regarding the proposed transaction unless and until a definitive merger agreement is executed.”

As is common, the JNJ/GDT merger agreement contains a “no-shop” provision.  This provision prohibits GDT from negotiating an alternative transaction with someone else, e.g., BSX.  The provision, however, is subject to a “fiduciary out.”  Pursuant to the out, GDT can negotiate with BSX concerning BSX’s proposal if “the Board of Directors of [GDT] reasonably determines (after consultation with outside counsel and a financial advisor of nationally recognized reputation) [that the BSX proposal] constitutes or is reasonably likely to lead to a Superior Proposal . . . .”  A “Superior Proposal” is one which GDT’s Board of Directors determines “to be (i) more favorable to the shareholders of [GDT] from a financial point of view than the [JNJ/GDT] Merger (taking into account all the terms and conditions of such proposal and this Agreement (including any changes to the financial terms of this Agreement proposed by [JNJ] in response to such offer or otherwise)) and (ii) reasonably capable of being completed, taking into account all financial, legal, regulatory and other aspects of such proposal.”

Today GDT's board apparently determined that the BSX proposal constitutes a “Superior Proposal.”  (See AP article).  This is not suprising considering the price disparity. Thus, GDT can now allow BSX to conduct due diligence and can negotiate with BSX  towards a definitive merger agreement.  When and if a merger agreement is signed with BSX, GDT can terminate the JNJ merger agreement pursuant to its terms if after consultation with legal counsel and a financial advisor GDT's board determines that the BSX merger agreement is a “Superior Proposal.”  If the GDT board does so, the ball would then be in JNJ’s court to up its bid or let BSX have the deal.  If JNJ does walk at that point, it would be entitled to a $625 million bust-up fee from GDT. 

Speculation is that JNJ will up its bid to $68 per share and perhaps make it all cash.  While this is still lower than the $72 BSX has proposed, the GDT board could judge it to be superior when taking into account non-price factors such as the form of consideration, regulatory requirements, financing issues, timing, etc.  On the antitrust front, BSX has said it is “prepared to divest Guidant’s vascular intervention and endovascular businesses, while retaining shared rights to Guidant’s drug eluting stent program.”  This adds a complication that is not present in the JNJ deal.

Clark Resigns from Lazard Board

Robert C. Clark resigned from the board of Lazard Ltd. yesterday.  He also sits on the board of Time Warner Inc. and Carl Icahn had hired Lazard to plan a proxy contest for a majority of the seats on the Time Warner board.  A Lazard spokesman, Rich Silverman said that "while there was not and is not any conflict" between the two board positions, they wished Clark well.  Clark himself said that he hope to "eliminate the appearance of a conflict of interest..."  Of course there was a conflict and not just an "appearance of conflict" -- an actual, real conflict.  Clark was on both sides of a proxy contest and a potential deal (settling the contest).  At issue is whether Clark is now an independent director on the Time Warner board.  If not he should refrain from participating in the proxy contest discussions on behalf of Time Warner or, if he cannot, he should also resign from the Time Warner board.  Lazard signed with Icahn to fight the management of Time Warner while Clark was on both boards and there was an actual conflict at that time.  At the time of the signing of the Icahn agreement, Clark had an actual conflict. He had (in theory) access to confidential information on both sides (Icahn & time Warner).  Moreover, at the time of the signing there was a question of whether Lazard would advise Icahn that Clark be unseated in the proxy contest.  This gave him a personal stake on both sides in the contest, his board positions (paying $175,000 a year from Time Warner and $100,000 from Lazard).  Adding to the mix is that Clark has a professional relationship with Wasserstein, the leader of Lazard.  Now that Clark has resigned from Lazard, is the conflict cured?  Lazard must still advise Icahn on whether to keep or attempt to unseat Clark.  And Clark must respond to Lazard's challenge (or olive branch as the case may be), at the board level, in the best interest of the Time Warner shareholders.  The conflict appears to remain or, at minimum "appear" to remain.  The situation points to a a disconnect between the public perception of a conflict and the technical parsing of conflicts by lawyers.  In such situations, the public usually has the correct position.      

New SEC Rules A Bit Tepid

Last week the Securities and Exchange Commission (SEC) has quietly passed two sets of rules on the public sale of securities.  One set of rules is final; the other set is proposed (and highly likely to become final).  The rules attempt to allow companies to take some advantage of the ubiquity of the Internet.  They fall far short.

    On December 1^st, a set of rules went into effect that loosens restrictions on how securities offered to the public may be registered and marketed.  For years companies and their underwriters (investment banks) have operated under severe restrictions on how much and in what form they can communicate with prospective buyers.  No offers before registration with the SEC; no written offers after registration and before SEC clearance (waiting period) other than a form document – the preliminary prospectus; and offers after clearance on with delivery of a final prospectus. 

            The new rules allow more forms of communication, many of which will be on the Internet.  In the waiting period, corporations can use more “free-writing” to offer securities.  The free writing will include various forms of Internet solicitations.  The kind of Internet solicitations a company may use depends on how “seasoned” it is as a public company.  Companies doing IPOs have the least freedom, but they will still have more room than they do now to use Internet ads; the ads will have to link to a full preliminary prospectus.

            The new proposed rules on proxy solicitations are designed to enable publicly-traded corporations to solicit proxies through the Internet.  Shareholder may receive written proxy materials on request, but otherwise an Internet solicitation will suffice.  Those challenging managers may also use the new solicitation rules.

            These are relatively minor relaxations of traditional rules to acknowledge the usefulness of the Internet in corporation governance mechanics.  They have long, long overdue.  Consider also what the SEC is not doing, however.

            The Internet radically reduces sales costs by reducing the need for intermediaries.  One can now buy new and used cars and computers and airline tickets on line.  We enjoy increased transaction speed and lower transaction costs in these products.  We should be able similarly to buy securities online in public distributions (cutting out fees to investment bankers and broker/dealers).  Small firms in particular could raise money with much less cost this way.  And we should be able to vote directly on line in elections of board members (cutting out fees to proxy solicitation firms).  The SEC will not allow either.  The agency believes that open online solicitations will lead to abuse, so we must be content with paying intermediaries.

            Allowing firms to reduce substantially the costs of raising capital and of running shareholder elections is in the national interest and we should ask the SEC to consider seriously the full potential of the Internet.  New protections can be devised to replace old ones (such as the due diligence of investment bankers) in line with new distribution techniques. 

            The old paper system needs to be scrapped, not just relaxed, and a new Internet system devised to replace it.  A bit of creativity is all that is required here.

The Unintended Message

Jack Falvey in today's "Manager's Journal" in the WSJ gives "Socratic Guidance for the Boardroom."  He offers lessons for board members in the aftermath of the Tyco scandal.  His recommendations border on the absurdly obvious "Do your homework,"  "growth is a universal goal," "succession planning is a board duty," and so on.  Why, in the Wall Street Journal, do we need to tell board members this stuff.  What does this say about what board's now do (or did before 2002)?  Do board's fail to do these things and thus need to be reminded?  If so, it is pathetic.  It reminds me of the Sarbanes Oxley provision that requires a corporation to disclose whether or not it has one, one, member of the audit committee that has financial expertise.  Before SOX did no-one on audit committees have any financial expertise?

Hollinger Lawyers Indicted

Federal prosecutors have indicted two in-house lawyers for Holing, along with CEO Conrad Black, for financial fraud.  Peter Atkinson and Mark Kins were in house lawyers for Holing that put information together for the form's audit committee, run by ex-Illinois governor James Thompson.  The indictment alleges that the information to the audit committee was false.  Newspapers have seized on the indictments of the lawyers as noteworthy of special comment.  Article

It is remarkable that so few lawyers have been successfully prosecuted in the 2002 wave of corporate scandals.  CEOs need lawyers and accountants to help them put these elaborate financial scams together.  One would expect in-house lawyers to be more at risk than outside lawyers but even in-house lawyers have largely escaped prosecution.  The prosecution of outside lawyers has been even rarer still.   

Sarbanes-Oxley focused on auditors and accountants and, other than a weak provision on an SEC study of lawyers role in the scandals, did not direct any provisions to the behavior of lawyers.  Lawyers not only escaped the 2002 legislation, they have escaped major SEC rule-making (SEC disqualification was strengthened) and have escaped most of the government prosecutions.  There are four theories:  One, lawyers are clever at covering their tracks;  two, lawyers know the legal boundaries; three, lawyers (prosecutors) do not sue lawyers; and four, lawyers turn state's evidence quickly and receive clemency from prosecutors.  Each is probably true to some extent and explain an given case. 

There is a growing public consensus, however, that professional advisers (accountants and lawyers) are a necessary part of the more elaborate financial frauds -- that CEOs are just not smart enough to understand or implement the details -- and that the advisers should be held accountable.  This case may provide some warning but not until prosecutors start going after outside lawyers will the public recognize that prosecutors are getting serious about regulating the legal profession.      

Boston Scientific Makes Surprise Bid for Guidant

Boston Scientific (BSX) has made a surprise bid to acquire Guidant for $72 per share, a premium of about 14 percent over the revised Johnson & Johnson/Guidant deal of $63.43 per share.  GDT is currently trading at $67.25, up $5.43 from Friday’s close.  Click here for a Reuters article with more details.

Update:  BSX's bid is composed of $36 in cash and $36 in BSX stock.  JNJ's original bid was $30.40 in cash and $45.60 in JNJ stock.  JNJ's revised bid (post recall, etc.) stands at $33.25 in cash and $30.18 in JNJ stock.  Click here for the BSX press release with more details.