January 21, 2006
Triangular Acquisitions After Strine's Opinion in Hollinger, Inc
Until July of 2004 most lawyers assumed that a controlled subs sale of of all its assets needed the vote of the parent corporation but not the parent corporation's shareholders. Strine change all that with dicta in the Hollinger case. He called it a "technical defense." The Delaware legislature attempted to be sympathetic to the holding rather than reject it by statute. This generated a mess. Delaware amended 271 to do two things: declare that a wholly owned and controlled subs assets were considered the parent's assets for application of the "substantially all" voting requirements of D.G.C.L. Sec. 271 and that a parent could drop down "substantially all" its assets into a sub without triggering a shareholder vote. The legislature should have affirmed the opposition on both: a sub is independent unless there are equitable grounds for collapsing structure and that a drop down is a transfer and needs a vote. The result is that the Hollinger dicta may still apply to partially owned subs and to wholly owned subs that merge into third parties (rather than sell their assets). This snake needed to be killed not nurtured. The Hollinger dicta puts into question all triangular acquisitions of whatever type unless it is reversed or strictly limited to asset acquisitions. If limited to asset acquisitions the holding will prefer triangular acquisitions that use statutory mergers over those that use asset acquisitions on an irrational ground.
On the merits, it is not technical if a transfer of substantially all the assets to the sub qualifies for a vote of the parents shareholders. A follow up transfer of the assets by the sub to a third party is a necessary consequence of the original drop down transfer. Moreover, the drop down transfer vote requirement protects both triangular mergers and triangular asset acquisitions. What we now have with the amendments to D.G.C.L. Sec. 271 and the Hollinger dicta is just another confusing complication of Delaware case law on acquisitions. The Delaware judges need to clean this entire area up.
January 19, 2006
The Corporate Laws Committee Report on Shareholder Voting
The Committee on Corporate Laws of the Section of Business Law of the American Bar Association, the body responsible for drafting the Model Business Corporation Act, has issued a report on shareholder voting. Report The Committee would not support default shareholder voting provisions that would require directors to be elected by a majority shareholder vote. It did however support a default bylaw provision that would allow either the board or the shareholders to amend a firm's bylaws to require a majority vote for directors. Currently such a change probably has to be in the articles (proposed by the board and ratified by shareholders). The change would enable shareholders (unless the articles prohibit it), on their own, to put in a majority vote system through a bylaw amendment. It is a sensible proposal and a good start. The problem is, of course, how a shareholder proponent may solicit proxies on the matter. The proposal should make clear the power of shareholders to access firm proxy solicitation materials on the issue.
SEC Proposed Rules on Executive Compensation
The business community has seemingly welcome the new SEC rules on executive compensation. Public statements by business leaders are positive and some companies brag that they have some of the rules in place now. Other companies say they will implement the rules now, before they are formally adopted. The only worry seems to be over the method of valuing executive options. Some worry that they could be "overvalued" by some methods. The question remains, if business leaders are so positive in public about the rule changes, why did it take the SEC so long to put these changes in place? What back room lobbying held them up? And why do more companies not voluntarily have more accurate disclosure systems in place? The obvious answer -- agency problems: executives have long resisted accurate disclosure of their pay packages in their own interest -- in private-- as long as they could; when the matter is the subject of public discussion, executives cannot resist without appearing selfish and greedy.
New Market Indicator Needed?
We have long become accustomed to the odd phenomenon of a high tech company reporting big profits for the last quarter only to see the stock price of the company fall, sometimes dramatically. This week we watch market corrections to earnings dissapointments in the quarterly reports of Intel and Yahoo. Apple Computer and eBay and offering disappointing forecasts of earnings and their stock price has dropped. The market had priced the stock in anticipation of higher profits that those that were reported. What is noteworthy however is a sense of how often the market is overpricing stock in anticipation of profits and when disappointed, how severely the market reacts. A market that is consistently high on predicting high-tech profits and a market that responds dramatically to earnings disappointments is a market that is overcooked. An numerical indicator of the frequency of overpricing and the size of the overpricing would be an indicator of whether the market is overcooked.
January 17, 2006
Truth on the Market Blog
We would like to congratulate former contributing editor to the Business Law Prof Blog, Prof. William Sjostrom and his fellow bloggers for creating another business based blog, Truth on the Market(TM). In its introductory post, Prof. Sjostrom describes Truth on the Market as follows:
We have launched this blog to provide the metaphysical subjective truth on abstract, concrete and invisible markets throughout the civilized world (whatever that means). More specifically, as indicated by our current tagline (we know it’s unoriginal; we hope to come up with something better soon) our blog will provide academic commentary on law, business, economics and more. The “more” will include observations on law school, blogging, being a law prof, smoking bans, payola, legal valuation, football, processed cheese, and calorie counts, among other things.
From the "no-one should put any stock in my views, much less pay attention to them" department: Last year I noted that I was looking for a substantial market correction in the foreseeable future. I still am. The country runs on consumer spending (70% of the economy) and consumers spent more than they saved last year (first time since the depression). Christmas sales were good because people spent their savings. Real estate values are leveling (consumers use real estate value to underwrite spending), oil and gas prices are high and holding, bankrutcy laws are tougher, interest rates inverted (short are higher than long), and the fourth quarter growth of last year (less than 3%) dropped below the average for the past 10 quarters, China and India are coming one line as formidible competitors. Not to mention the existence of several hundred religious zealots with resources and who are attempting to figure out how to injure the citizens of a major American city. All this adds up to trouble.
Roger Babson predicted a downturn in 1927 and repeated his view for two years before he was proved correct in 1927 (then they named a business school after him). Incentives in our economy cause market participants to resist drops in stock value until the last gasp of hype rings hollow and harsh reality is undeniable; then and only then do we get new equilibrium values and it often comes in a rush.
New SEC Executive Pay Rules
The SEC meets today to vote on a new set of disclosure rules for executive pay packages. The WSJ broke the story last week but did not have the specific language of the new rules. Today we will have the language of the proposed rules. Executive pay has been a puzzle for government lawmakers.
Studies have shown that total senior executive pay has increased dramatically in relationship to any relevant, studied benchmark -- as compared with firm specific profits, average industry profits, blue collar workers salary, white collar workers' salary, inflation or interest rates, average country wide real wages -- you name the index and senior executive pay has increased in ways that are not explained by the numbers. Either executives were underpaid in the past or they are worth more now than in the past or they are overpaid now. Most believe that executives are overpaid now (there is a respective disssent to this view). So what can we do about it?
A cap on salaries? Too inflexible (even if a pre-set, fixed ratio to something else -- both worker and white collar salaries have been mentioned). A government official appointed to approve all salaries? Too French. A limit on deduction of salaries? Tried it in 1983 and it backfired. The limit ($1 million) became the floor and the loophole (for performance pay) became the norm creating the enormous and obscure options packages that we have today. More accurate disclosure? It is worth a try.
It is nothing short of amazing how the current rules allow corporations to fudge on the disclosure of executive salary. Corporations can use deferred compensation plans, retirement plans, options plans, dividend plans on restricted stock, and perquisites to hide payments of millions in compensation to executives. Indeed, the exploitation of the disclosure loopholes was an important factor in creating the compensation packages. Companies at present must disclose the existence of the plans but can hide the present value of the plans. The SEC aims to force disclosure an easy to understand, present value calculation of the total compensation package.
Increased, more accurate disclosure will go hand in hand with holding boards of directors accountable for granting executives such pay packages. Increased, more accurate disclosure may even add efforts to make shareholder voting for boards of directors more robust. Increased, more accurate disclosure may also enable hedge funds to act on studies that show outrageous pay packages are correlated with poor firm performance -- buy control, change managers (and pay), sell control at a higher price. Increased, more accurate disclosure may be the cornerstone of further, healthy governance changes.
Buyer's Remorse?? Boston Scientific Raises Bid for Guidant to $80 a Share
Posted by Jason R. Job
This morning, Boston Scientific (NYSE: BSX) announced that it has raised its former $73 a share bid for Guidant (NYSE: GDT) to $80 a share in hopes to purchase the company. (Reuters story.) According to the terms of the deal, GDT shareholders would receive $42 in cash and $38 in BSX common stock. Additionally, BSX has increased the bottom of the price collar and if the deal does not close before March 31, 2006, it has offered to increase its bid by $0.0132 per day between April 1, 2006 and the closing day. Further, BSX has added Abbott into the mix. Abbott has agreed to purchase BSX's intervention and endovascular businesses, while agreeing to share rights to Guidant's drug-eluting stent program and has agreed to purchase $1.4 billion in BSX's common stock contingent on the closing of the BSX-GDT acquisition.
As Professor Oesterle has stated many times prior and I completely agree with, there will be some buyer's remorse when GDT finally does sell itself. Johnson & Johnson began this bidding war at $76 and then dropped its price to the mid 60's before BSX stepped in. Since then, I have not noticed any "big news" out of GDT, which would make them more profitable. Basically, this has just become a bidding war between two companies who believe they will be getting the great company to increase potential synergies for their shareholders. However, the big winner in this whole game will be the shareholders of Guidant who have seen their potential buyout jump from $68 to something around $80 a share.
Reuters is reporting that GDT is now seeking a $77 per share offer from JNJ in order to preserve their agreement. As GDT's board meets today to determine whether BSX's $80 bid is superior, JNJ does have 5 days to counter-offer or walk away from the deal and accept the $625 million break-up fee.
January 15, 2006
Executive Salary and Chapter 11
Gretchen Morgenson's column in Sunday's NYT "Gee, Bankruptcy Never Looked So Good" discusses the pay package negotiated for the executives of UAL (the parent of United Airlines) in UAL's Chapter 11 proceedings. If approved by the bankruptcy judge, the top 400 executives will take 8 percent of the equity of the company when it emerges from the reorganization. The CEO will receive, in addition to the equity (in options and restricted shares), an annual base salary and bonus of $1.2 million and a lucrative $4.5 benefits package. The trouble with Ms. Morgenson's outrage is that the salary package is negotiated with a knowledgeable unsecured creditors committee. The negotiation did not suffer from the collection action problem that plagues a diffuse set of shareholders or from the conflict of interest problems that beset most compensation committees heavily influenced by a sitting CEO. The unsecured creditors committee was negotiating in its best interest. The creditors will take equity too and want the company to survive. The equity dilution then was ceded to the executives by creditors in an arm's length bargain. The negotiation is an argument that the executives deserve what they get -- that they are worth the salaries.
Indeed, one can argue that Chapter 11 salaries being similar to non-Chapter 11 salaries is an argument that non-Chapter 11 salaries are legitimate! This, of course, would make Ms. Morgenson -- a long time critic of executive salaries--cringe.
The answer is in the nature of the market for executives. Even companies in Chapter 11 must compete for executives in a market otherwise dominated by publicly-held companies who executives are overpaid due to bargaining defects.
John Noceraro argued in Saturday's NYT that the SEC new rules forcing a more accurate disclosure of salaries would not be enough because CEO that make $20 million a year are "beyond embarrassment." He looks for stronger rules capping salaries. We need to give the new SEC rules a chance to work. It is not the CEO's that disclosure seeks to embarrass -- it is the board of directors that gives CEO's such salaries.