Business Law Prof Blog

SEC Committee to Discuss SOX 404 Exemption

Posted by Bill Sjostrom

The SEC Advisory Committee on Smaller Public Companies is meeting tomorrow at 9am EST.  According to this article, the committee, among other things, will be discussing a proposed small company exemption from oft-maligned Sarbanes-Oxley Section 404.  Click here for the meeting agenda, including a link for the live audio webcast of the meeting.

Large Investors Not Done With Wendy's

Posted by Jason R. Job

Today, Billionaire Investor Nelson Peltz told Wendy's International (NYSE: WEN) that he believes that the shares are undervalued.  In a Schedule 13D filed by Peltz's investment vehicle Trian Fund Management, Peltz notes that the purpose of his approximate 5.5% stake in Wendy's is as follows:

"The Filing Persons acquired the Shares and Options because they believe that the Shares are currently undervalued in the market place and represent an attractive investment opportunity. In early December 2005, a representative of the Filing Persons attempted to contact John T. Schuessler, the Chairman of the Board and Chief Executive Officer of the Issuer, several times. After leaving several messages for Mr. Schuessler, the representative of the Filing Persons was contacted by Mr. John Barker, Senior Vice President, Investor Relations and Financial Communications of the Issuer. The representative of the Filing Persons told Mr. Barker that “we come in peace” and that the Filing Persons had established a significant stake in the Issuer, just below the Schedule 13D 5% filing threshold. The representative of the Filing Persons requested a meeting with Mr. Schuessler, at a convenient time and location, to discuss the Filing Persons’ value creation plan, which includes (i) the immediate commencement of a 100% tax-free spinoff of Tim Hortons, (ii) the sale of the Issuer’s ancillary brands, (iii) the reevaluation of certain components of the Issuer’s previously announced strategic initiatives and (iv) a significant reduction in costs at the Issuer’s Wendy’s Old Fashioned Hamburgers business. The representative of the Filing Persons advised Mr. Barker that if the Filing Persons’ value creation plan was discussed and agreed to, the Filing Persons would possibly maintain their ownership level below 5% (and not file a Schedule 13D) since the intention of the Filing Persons was not to wage a battle in the press. On December 6, 2005, Mr. Barker informed the representative of the Filing Persons that Mr. Schuessler was currently too busy “managing the brand” to meet with representatives of the Filing Persons. A paper prepared by the Filing Persons that sets forth “A Recipe for Successful Value Creation” at the Issuer is attached hereto as Exhibit 3, and incorporated herein by reference.

The Filing Persons do not have any present plan or proposal that would relate to or result in any of the matters set forth in subparagraphs (a) – (j) of Item 4 of Schedule 13D except as set forth herein or such as would occur upon completion of any of the actions discussed above. The Filing Persons intend to review their investment in the Issuer on a continuing basis. Depending on various factors including, without limitation, the Issuer’s financial position and strategic direction, the Issuer’s response to the actions suggested by the Filing Persons, price levels of the Shares, conditions in the securities market and general economic and industry conditions, the Filing Persons may in the future take such actions with respect to their investment in the Issuer as they deem appropriate including, but not limited to, purchasing additional Issuer Securities or selling some or all of their Issuer Securities, communicating with the Issuer or other investors or conducting a proxy solicitation with respect to a minority of the Board of Directors of the Issuer at the Issuer’s next annual meeting, at which one-third of the Board of Directors of the Issuer may be elected. The Filing Persons have no intention, either alone or in concert with another person, to acquire or exercise control of the Issuer." 

The full version of the Schedule 13D filing can be found here.  A Reuters article can be found here.

This is the second time this year that a large shareholder has went after Wendy's stating that its shares are undervalued.  As described in the post An Example of The New Strategy of Hedge Funds: Wendy's, Pershing Square Capital Management pushed Wendy's to spin off a portion of its Tim Hortons business.  Pershing Square has also purchased a large stake in McDonalds, which is described in the post Will Ronald McDonald Put on His Smiley Face for the Hedge Funds.

In morning trading, Wendy's is up $1.50 to $52.87 or approximately 3%.

Sovereign and Santander Sued by Relational

As discussed earlier (see here), Sovereign's biggest shareholder, Relational Investors, is against Sovereign's proposed acquisition of Community Bank and equity issuance to Santander.  Sovereign carefully structured the three-way deal to avoid a Sovereign shareholder vote.   Relational asked the NYSE to block the deal, but following some deal revisions, it declined (see here).   Relational has now sued Santander and Sovereign in federal court seeking a declaratory judgment that the deal constitutes a "control transaction” under Pennsylvania corporate law (Sovereign is a PA corp.).  Click here for more details.

Monday M&A Activity

For those of you looking for M&A activity, Paramount Pictures has agreed to purchase Dreamworks SKG for $1.6B.  (AP report can be found here).  According to the terms of the deal, Paramount Pictures, a division of Viacom Inc., will purchase Dreamworks SKG for $775M in cash and assume $825M in debt.  Additionally, Paramount Pictures will have the distribution rights to the lucrative Dreamworks Animation SKG Inc., which includes the rights to distribute the "Shrek" franchise.

There are also a couple of rumors hitting the street this morning.

Reuters is reporting that a group of three private equity firms (Bain Capital, The Carlyle Group, and Thomas H. Lee Partners) will announce a deal to purchase Dunkin' Brands for about $2.4B.  (Reuters article can be found here).  Dunkin' Brands, which includes Dunkin' Donuts, Togo's sandwich stores, and Baskin Robbins ice cream, is being sold by French beverage company Pernod Ricard.  Earlier this year, Pernod Ricard along with Fortune Brands purchased British rival Allied Domecq for $14.2B, which previously owned Dunkin' Brands.

The Wall Street Journal online edition reported Sunday that ConocoPhillips (NYSE: COP) is in advanced talks to purchase Burlington Resources (NYSE: BR) for more than $30B.  (Reuters report can be found here).  With the price of natural gas rising, Burlington Resources' natural gas assets are seen to be the major reason for this potential deal.

Due Diligence Defense Piece

Posted by Bill Sjostrom

If you’re looking for some holiday reading, I recently posted a new piece on SSRN entitled “The Due Diligence Defense Under Section 11 of the Securities Act of 1933.”  Click here to download it.  Here's the abstract:

Section 11 of the Securities Act of 1933 imposes civil liability for misstatements or omissions of material facts in a securities offering registration statement. Potential section 11 defendants include the issuer, directors, underwriters and accountants. Although section 11 was designed to have an in terrorem effect on these parties, section 11 liability is not absolute. Among various affirmative defenses available to a defendant (other than the issuer) is the due diligence defense. specifically, a non-issuer defendant avoids liability under section 11 if he can prove as to non-“expertized” portions of the registration statement that “he had, after reasonable investigation, reasonable ground to believe and did believe” there were no misstatements or omissions of material facts in such portions of the registration statement. As to “expertized” portions of the registration statement (such as audited financial statements), a non-issuer defendant avoids liability if he can prove that he “had no reasonable ground to believe and did not believe” that such portions of the registration statement contained misstatements or omissions of material facts. Hence, a reasonable investigation standard applies to non-expertized portions and a reasonable reliance standard applies to expertized portions.

Because the frequency of pre-trial settlements has limited case law on the subject, Escott v. BarChris Construction Corporation remains the leading case on the due diligence defense to section 11 liability even though it was decided nearly 40 years ago. The recent WorldCom Securities Litigation, however, has provided several opinions that address in detail various aspects of the due diligence defense. The article brings the due diligence defense literature up to date through WorldCom. It explores the reasonable investigation standard of the defense as applied to five different types of defendants: inside directors/management, outside directors, lead underwriters, participating underwriters, and accountants. It concludes that the standard varies by defendant type based on a sliding scale which takes into account the defendant’s involvement with the company and the defendant’s involvement with the offering. As for the reasonable reliance standard applicable to expertized portions of the registration statement, the article posits that the current “red flag” approach as applied to publicly available information should be informed by teachings of the efficient capital market hypothesis. It also asserts that a narrower “smoking gun” approach is more appropriate with respect to audited financial statements.