August 2, 2008
Martin' Conditions on the XM-Sirius Merger
Keven Martin cast the deciding vote at the FCC in favor of the XM-Sirius Merger but imposed conditions. Among other things, Martin insisted on rate freezes, channel sale packages, and set aside channels for "minority" broadcasters and education. In so doing, he followed a long tradition in regulatory industry merger approvals. Whenever either state or federal officials must approve a merger in a regulated industry, they cannot resist sticking their hands in the business to make very personal changes. California officials have demanded charitable payments on the approval of utility mergers. This has got to stop. We need legislation at both state and federal levels to prohibit conditions on regulated mergers that are largely unregulated to the core reasons we need a government official to approve the deal in the first place. Martin's conditions are unrelated to the FCC need to approve satellite mergers, market share monopoly problems.
August 1, 2008
Ryan v Lyondell: Good Faith Reappears
On July 29th, 2008, Vice Chancellor Noble published his opinion in Ryan v Lyondell. The Vice Chancellor denied summary judgment on a claim by shareholders that the management of Lyondell Chemical has sold the company to Basell AF for an inadequate price. The Lyondell shareholders received cash representing a forty-five percent premium to the price before the public knew of the negotiations. The opinion is a shocker. Given the facts I would have expected, absent a duty of loyalty claim (the loyalty claims did not survive summary judgment) that the judge would have applied the business judgment rule to the residual duty of care claims, modified by the 102(b)(7) clause in the charter, to grant the summary judgment absent evidence of reckless or intentional acts by management that injured the company. The judge denied summary judgment on the basis that the board's failure to canvass the market for other buyers and its agreement to sign deal protection measures may have violated the "duty of good faith," which was excepted from the 102(b)(7) clause. I had thought that the Delaware courts had said that good faith was essentially a restatement of the obligation of the duty of loyalty and these claims were not loyalty claims. Under the court's reasoning, any acquisition of one independent company by another can survive a motion for summary judgment based on the simple claim that the price was too low as the result of an inferior market canvass of other potential buyers. Creative plaintiffs lawyers will now be able to get most acquisition cases to trail. The error is compounded by the Court's use of Revlon. Revlon, I had thought, erroneously perhaps, only applies when a board favors one bidder over another and the favored bidder is offering a lower price to shareholders. There were not two bidders in this case--there was one. The existence of the second, disfavored bidder, was necessary to trigger a Unocal type problem (where directors protecting their positions?) and Revlon was a subset of the Unocal doctrine. Now Revlon has jumped outside Unocal and applies to all acquisitions, imposing a duty of good faith that allows plaintiffs to defeat summary judgment motions in ordinary duty of care cases. This case needs to be reconsidered; it has the potential of changing completely the legal analysis of very straightforward acqusitions between independent parties. The case will all go to trial and a judge will decide, de novo, whether she likes the negotiating and approval process of the target board (why not the bidder board as well??). Surely, I am not alone in seeing the mess this makes of Delaware law.
July 28, 2008
KKR Goes Public
KKR, the country's premier private equity fund manager, is going public. Apart from the obvious irony, a firm that made its money taking firms private is going private, there are other lessons here. First, KKR is not using the traditional 33 Act procedure; it is buying a public company, its subsidiary, listed in Amsterdam, in a stock exchange. After the deal, KKR will cross list in the United States. The process is a implicit criticism of the American process and American exchanges. The SEC (and congress) ought to sit up and take note here. The 33 Act process needs a dramatic overhaul in light of new technology. A process designed for a paper process needs to be redesigned for the internet. Second, unlike Blackstone's public offering, KKR's investors are not cashing out; they are buying the sub when its shares are low, not selling the parent when the shares are overpriced. Third, KKR will use the shares as consideration in deals and in pay packages for insiders, a classic set of reasons for going public.
Judges and Foreclosure
The headlines proclaim that the country's judges are showing hostility to home foreclosures. In the body of the story are details of judges demanding technical correctness in proof of mortgagee rights to foreclose. Since many of the banks and the other securitization players were sloppy in gathering and holding paperwork through several transfers of the mortgage paper, the requirement can stymie banks and trustees attempting to foreclose on homes. The lesson for homeowners? Fight foreclosure in court. You can extract serious concessions from lenders and you may win (want a free house?). This is not new news. Even a quick look at foreclosure law in any state will reveal a process that is encumbered with multiple levels of procedural requirements from years, decades of legislative hostility to foreclosure. Consider the effect on banks if the judiciary successfully attacks the attempts of banks to execute on collateral behind loan defaults -- balance sheet write-downs on loan defaults, whatever they have been, will be too optimistic. So Congress gives tax incentives to borrow money to buy homes and courts attack lenders in foreclosure proceedings. The market dips and dives trying to figure out the mess.