Wednesday, February 22, 2017
Here is a rundown of recent business news headlines:
The Snapchat parent company, SNAP, scheduled blockbuster IPO ($20-23B) is plagued with news that it lost $514.6 million in 2016, there are questions about the sustainability of its user base, and, for the governance folks out there, there is NO VOTING STOCK being offered.
In what is being called a "whopper" of a deal, Restaurant Brands, the owner of Burger King and Tim Hortons, announced earlier this week a deal to acquire Popeye's Louisiana Kitchen, the fried chicken restaurant chain, for $1.8 billion in cash.
Kraft withdrew its $143B takeover offer for Unilever less than 48 hours after the announcement amid political concerns over the merger. While Unilever evaluates its next steps, Kraft is perhaps feeling the effects of its controversial takeover of Britain's beloved Cadbury.
A final item to note, for me personally, is that today is my last regular contribution to the Business Law Professor Blog. I will remain as a contributing editor, but will miss the ritual of a weekly post--a habit now nearly 4 years in the making. Thanks to all of the readers and other editors who gave me great incentive to learn new information each week, think critically, connect with teaching, and generally feel a part of a vibrant and smart community of folks with similar interests.
Tuesday, February 21, 2017
Later this week, I will be on the road to Los Angeles to take one of our teams to a LawMeet Transactional competition. The competition is described as follows:
The National Transactional LawMeet is the premier “moot court” experience for students interested in a transactional practice. The National Transactional LawMeet is a part of the LawMeet family of live, interactive, educational competitions designed to give law students a hands-on experience in developing and honing transactional lawyering skills.
I worked with a team last year that made it to the finals in New York City (their work and talent got them there, to be clear), and it was a great experience. They did the regional on their own last year, so I am hoping I don't get in their way this time around.
I have worked with moot court teams for years, including taking teams to the Evans Moot Court Competition at the University of Wisconsin Law School and the Mardi Gras Moot Court Competition at Tulane Law School, and they were good experiences, I think, for the students. And I have helped with our West Virginia University College of LawNational Energy & Sustainability Moot Court Competition, which I think is both unique and well done (I am not unbiased, I admit, but I am confident I am right.)
Still, it was great to go to a transactional competition. The LawMeet competition was impressive. It's hard to isolate a deal simulation, but the organizers did well. And after their negotiation sessions, the students got reviewed by some incredibly talented people. One of the reviewers was a very big deal M&A partner at a very big deal New York firm. And he was kind, thoughtful, while providing an incisive critique. I disagreed with him on one tactic (I kept my mouth shut), because I was exposed to a different viewpoint for a very big deal partner at a very big deal New York firm some years ago. It wasn't a big point, but it was actually great opportunity to talk about philosophy and tactics with my students (later) using a deal setting as the basis for discussion.
Anyway, I am happy this opportunity is out there for students aren't seeking to litigate, but want to go live (or close to it). Go Business Law!
Wednesday, February 8, 2017
Prominent corporate governance, corporate finance and economics professors face off in opposing amici briefs filed in DFC Global Corp. v. Muirfield Value Partners LP, appeal pending before the Delaware Supreme Court. The Chancery Daily newsletter, described it, in perhaps my favorite phrasing of legal language ever: "By WWE standards it may be a cage match of flyweight proportions, but by Delaware corporate law standards, a can of cerebral whoopass is now deemed open."
Point #1: Master Class in Persuasive Legal Writing: Framing the Issue
Reversal Framing: "This appeal raises the question whether, in appraisal litigation challenging the acquisition price of a company, the Court of Chancery should defer to the transaction price when it was reached as a result of an arm’s-length auction process."
Affirmance Framing: "This appeal raises the question whether, in a judicial appraisal determining the fair value of dissenting stock, the Court of Chancery must automatically award the merger price where the transaction appeared to involve an arm’s length buyer in a public sale."
Point #2: Summary of Brief Supporting Fair Market Valuation: Why the Court of Chancery should defer to the deal price in an arm's length auction
- It would reduce litigation and simply the process.
- The Chancery Court Judges are ill-equipped for the sophisticated cash-flow analysis (ouch, that's a rough point to make).
- Appraisal does not properly incentivize the use of arm's length auctions if they are not sufficiently protected/respected.
- Appraisal seeks the false promise of THE right price, when price in this kind of market (low competition, unique goods) can best be thought of as a range. The inquiry should be whether the transaction price is within the range of a fair price. A subset of this argument (and the point of the whole brief) is that the auction process is the best evidence of fair price.
- Appraisal process is flawed because the court discounted the market price in its final valuation. The argument is that if the transaction price is not THE right price, then it should not be a factor in coming up with THE right price.
- Appraisal process is flawed because the final valuation relies upon expert opinions that are created in a litigation vacuum, sealed-off from market pressure of "real" valuations.
- The volatility in the appraisal market—the outcome of the litigation and the final price—distorts the auction process. Evidence of this is the creation of appraisal closing conditions.
Point #3: Summary of Brief Supporting Appraisal Actions: Why the Court of Chancery should reject a rule that the transaction price—in an arm's length auction—is conclusive evidence of fair price in appraisal proceedings.
- Statutory interpretation requires the result. Delaware Section 262 states that judges will "take into account all factors" in determining appraisal action prices. To require the deal price to be the "fair" price, eviscerates the statutory language and renders it null.
- The Delaware Legislature had an opportunity to revise Section 262—and did so in 2015, narrowing the scope of eligible appraisal transactions and remedies—but left intact the "all factors" language.
- The statutory appraisal remedy is separate from the common law/fiduciary obligations of directors in transactions so a transaction without a conflict of interest and even cured by shareholder vote could still contain fact-specific conditions that would make an appraisal remedy appropriate.
- There are appropriate judicial resources to handle the appraisal actions because of the expertise of the Court of Chancery, which is buttressed by the ability to appoint a neutral economic expert to assist with valuations and to adopt procedures and standards for expert valuations in appraisal cases.
- The threat of the appraisal action creates a powerful ex ante benefit to transaction price because it helps bolster and ensure that the transaction price is fair and without challenge.
- Appraisal actions serve as a proxy for setting a credible reserve in the auction price, which buyers and sellers may be prohibited from doing as a result of their fiduciary duties.
- Any distortion of the THE market by appraisal actions is a feature, not a bug. All legal institutions operate along side markets and exert influences, situations that are acceptable with fraud and torts. Any affect that appraisal actions create have social benefits and are an intended benefit.
- Let corporations organized/formed in Delaware enjoy the benefits of being a Delaware corporation by giving them full access to the process and expertise of the Delaware judiciary.
My thinking in the area more closely aligns with the "keep appraisal action full review" camp on the theory--both policy and economic. Also the language in the supporting/affirmance brief is excellent (they describe the transaction price argument as a judicial straight jacket!). I must admit, however, that I am sympathetic to the resources and procedural criticisms raised by the reversal brief. That there is no way for some corporate transactions, ex ante, to prevent a full scale appraisal action litigation—a process that is costly and time consuming—is a hard pill to swallow. I can imagine the frustration of the lawyers explaining to a BOD that there may be no way to foreclose this outcome. Although I hesitate to put it in these terms, my ultimate conclusion would require more thinking about whether the benefits of appraisal actions outlined in the affirmance brief outweigh the costs to the judiciary and to the parties as outlined in the reversal brief. These are all points that I invite readers to weigh in on the comments--especially those with experience litigating these cases.
I also want to note the rather nuanced observation in the affirmance brief about the distinction between statutory standards and common law/fiduciary duty. This important intellectual distinction about the source of the power and its intent is helpful in appraisal actions, but also in conflict of interest/safe harbor under Delaware law evaluations.
For the professors out there, if anyone covers appraisal actions in an upper-level course or has students writing on the topic-- these two briefs distill the relevant case law and competing theories with considerable force.
Monday, January 23, 2017
Just a quick post today to alert you to a new teaching text that you may want to consider if you teach business planning or another similar offering focusing on transactional business law. My UT Law colleagues George Kuney, Brian Krumm, and Donna Looper are coauthors of the recently released teaching text, A Transactional Matter. The description on amazon.com follows.
A Transactional Matter gives users a summary of a basic transaction from initial choice of entity for a new venture through the harvest of that venture through a sale of substantially all its assets to an acquirer. This book allows students to get a feel for how transactional lawyering actually works―examining client objectives, legal options, client counseling, due dilligence, documentation and implementation.
This book is available in both a print version and electronic version. The e-version has live hyperlinks to the underlying transactional documents and statutes, regs, and cases. The print version will be supported by a website giving access to the same materials. Both the e-book and website of print version will feature extensive hyperlinks to source documents and legal authorities.
The three coauthors bring to this book a wealth of business law experience in a variety of contexts (from bankruptcy to general practice). Overall, the book represents a very accessible set of teaching materials. In fact, a student in my transaction simulation course module (which focuses on bylaw drafting) has already posted an excerpt to our class website, showing the immediate value of the text to my students (and maybe yours . . .). If you use the book, please let me know how and how it worked for you.
[FYI, my colleagues also are coauthors of A Civil Matter, a civil procedure/litigation introduction for 1L students, in case that's more up your alley.]
[Added 1/24/2017: Here is the link to the West Academic page that Jeff Lipshaw mentions in his comment, for those who are interested.]
Wednesday, December 21, 2016
In July, Delaware Chancellor Andre Bouchard found that payday lender DFC Global Corp was sold too cheaply to private equity firm Lone Star Funds in 2014. Chancellor Bouchard held that four DFC shareholders were entitled to $10.21 a share at the time of the deal, or about 7 percent above the $9.50 per share deal price that was approved by a majority of DFC shareholders.
A Gibson Dunn filing related to the DFC case on appeal before the Delaware Supreme Court sheds light on the appraisal process in Delaware. The claim is the Chancellor Bouchard manipulated the calculations to reach the $10.21 prices. The full brief is available here, but this summary might provide easier reading. Reuters reports:
Bouchard made a single clerical error that led him to peg DFC’s fair value at $10.21 per share.
DFC’s lawyers at Gibson Dunn & Crutcher spotted the mistake and asked Chancellor Bouchard to fix the erroneous input. If he did, the firm said, he’d come up with a fair value for the company that was actually lower than the price Lone Star paid. The chancellor agreed to recalculate – but in addition to fixing the mistaken input, Bouchard adjusted DFC’s projected long-term growth rate way up, to a number even higher than the top of the range proposed by the plaintiffs’ expert. The offsetting changes brought the recalculated valuation back in line with Chancellor Bouchard’s original, mistaken analysis.
Gibson Dunn is now arguing at the Delaware Supreme Court that the chancellor’s tinkering shows just why appraisal litigation – in which shareholders dissatisfied with buyout prices ask Chancery Court to come up with a fair price for their stock – has become a big problem for companies trying to sell themselves.
Last week The Chancery Daily reported on a December 16th appraisal case, Merion Capital, where Chancellor Laster held that a fair price was paid. The questions remains what is the significance of deal price and what is the significance of expert opinion shifting these technical cases in or outside of fair value?
Monday, November 28, 2016
Today, I share a quick teaching tip/suggestion.
I taught my last classes of the semester earlier today. For my Business Associations class, which met at 8:00 am, I was looking for a way to end the class meeting, tying things from the past few classes up in some way. I settled on using the facts from a case that I used to cover in a former casebook that is not in my current course text: Coggins et al. v. New England Patriots Football Club, Inc., et al. Here are the facts I presented:
- New England Patriots Football Club, Inc. (“NEPFC”), the corporation that owns the New England Patriots, has both voting and nonvoting shares of stock outstanding.
- The former president and owner of all of the voting shares of NEPFC, Sullivan, takes out a personal loan that only can be repaid if he owns all of the NEPFC stock outstanding.
- The board and Sullivan vote to merge NEPFC with and into a new corporation in which Sullivan would own all the shares.
- In the merger, holders of the nonvoting shares receive $15 per share for their common stock cashed out in the merger.
From this, I noted that three legal actions are common when shareholders are discontented with a cash-out merger transaction: appraisal actions, derivative actions for breach of fiduciary duty, and securities fraud actions. Shareholders in NEPFC brought all three types of action. (Footnote 9 of the Coggins case and the accompanying text explain that.)
Having just covered business combinations, including approval and appraisal rights, and wanting to address some new information about the process of derivative litigation, the facts from the case worked well. I am sure there are other cases or materials that also could have done the job. (Feel free to leave suggestions in the comments.) But adding a little football and conflicting interests to the last class seemed like the right idea . . . .
Wednesday, November 2, 2016
General Electric (GE) and Baker Hughes (BHI) announced on Monday, October 31st, a proposed merger to combine their oil and gas operations. GE and Baker Hughes will form a partnership, which will own a publicly-traded company. GE shareholders will own 62.5% of the "new" partnership, while Baker Hughes shareholders will own 37.5% and receive a one-time cash dividend of $17.50 per share. The new company will have 9 board of director seats: 5 from GE and 4 from Baker Hughes. GE CEO Jeff Immelt will be the chairman of the new company and Lorenzo Simonelli, CEO of GE Oil & Gas, will be CEO. Baker Hughes CEO Martin Craighead will be vice chairman.
Reuters is describing the business synergies between the two companies as leveraging GE's oilfield equipment manufacturing ("supplying blowout preventers, pumps and compressors used in exploration and production") and data process services with Baker Hughes' expertise in " horizontal drilling, chemicals used to frack and other services key to oil production."
Baker Hughes had previously proposed a merger with Halliburton (HAL), which failed in May, 2016, after the Justice Department filed an antitrust suit to block the merger. Early analysis suggests that the proposed GE & Baker Hughes will pass regulatory scrutiny because of the limited business overlap of GE and Baker Hughes.
As I plan to tell my corporations students later today: this is real life! A high-profile, late-semester merger of two public companies is a wonderful gift. The proposed GE/Baker Hughes merger illustrates, in real life, concepts we have been discussing (or will be soon) like partnerships, the proxy process, special shareholder meetings, SEC filings, abstain or disclose rules, and, of course, mergers.
Friday, October 28, 2016
Building on Joan’s personal reflection about her time in practice and stemming from a conversation with a student this week, I decided to post (and solicit comments) on the BigLaw practice areas that are most/least conducive to part-time work or work while raising children. While no practice areas in BigLaw are well known for being incredibly flexible, it did appear that certain practice areas were more flexible than others.
In my view, tax appeared to be the most flexible practice group area and M&A (my first practice group area) appeared to be the least flexible. Granted, I never practiced tax law, but as an M&A attorney you solicit comments from many areas within the firm and you get a sense of their schedules.
The advantages of the tax group were a high billing rate (some of the very highest in the firm) and a lot of piecemeal, often not urgent, work. Sure, we “urgently” needed tax comments on most of our deals, and when clients are paying BigLaw rates, they almost always want a prompt response. But in my limited experience, the tax lawyers controlled their timelines more so than any of the other attorneys I worked with. There were few enough excellent tax attorneys that if they said – I will get to that tomorrow or next week – you often did not have much recourse. Perhaps this was just my own perception or simply unique to my firms. That said, I have also seen tax lawyers pull off the “part-time” or "flexible schedule" role better and more often than other areas. Areas like Patent and ERISA may have similar attributes.
In M&A, however, flexible, part-time work was almost impossible to obtain. I’ve witnessed some M&A attorneys try to go part-time, and I have never seen it go very well or last very long. M&A attorneys are the quarterbacks of the deal, so even if you are only assigned to one deal – you have to be involved in all aspects of the deal and have to be on call 24/7 when that deal is moving quickly. And a deal often lasts for months. And there isn’t much piecemeal work that you can just pop in and do without staying intimately involved. After practicing in an M&A/Corporate group for a few years, I moved to a business litigation/corporate governance group. While the litigation/corporate governance group was not necessarily flexible, and you do have to be "all-in" if a case is heading to trial, there seemed to be a lot more room for flexible, part-time research and writing. In M&A there were some opportunities for these sorts of things, but many fewer of them and often they were simply nonbillable client alerts.
Again, maybe this is just my own perception, I’d love to hear thoughts in the comments or via e-mail from readers, as those thoughts could be helpful in advising students. Which practice group area or areas in a large firm offer the most flexibility?
Wednesday, October 19, 2016
Today's post continues the discussion started by Anne’s informative post regarding the law of controlling stockholders. Anne astutely notes that the MFW “enhanced ratification” framework was rendered in connection with a going private merger. Although I recognize the intuitive appeal, I wish to call into question the impact of MFW’s holding on other manners of controlling shareholder transactions.
Going private transactions differ from going concern transactions in that their successful completion wipes out the minority float. This distinction accelerates stockholders' divergent incentives and raises the possibility for minority stockholder abuse. An unscrupulous controller might structure the transaction in a manner that captures all unlocked value for later private consumption. Going private transactions allow controlling stockholders to shed the restrictions of the public market, thereby evading future retribution by minority stockholders. Policy considerations accordingly call for superior protection of minority stockholders participating in a going private transaction.
Since MFW establishes a procedure for achieving less intrusive judicial review for going private transactions, it stands to reason that this procedure should apply to all transactions involving a controlling stockholder. Indeed, without addressing the distinction between going private and going concern transactions in this context, a fairly recent Chancery Court decision has explicitly opined that the MFW framework applies to all controlling stockholder transactions (In re Ezcorp Inc. Consulting Agreement Derivative Litig., 2016 WL 301245, at *28 (Del. Ch. Jan. 25, 2016)).
In a forthcoming article at the Delaware Journal of Corporate Law, I argue that the borders of "MFW-Land" are not as clear-cut as they appear. The Delaware Supreme Court decision does not create a universally-applicable safe harbor procedure for all manner of controlling stockholder transactions. Two main arguments form the basis of this contention.
The dual tenets of doctrinal clarity and cohesion underpin the first argument. A careful reading of the MFW decision fails to detect any mention of competing precedent or a general proclamation regarding its applicability to other types of controlling stockholder transactions. MFW is clearly situated on a path of doctrinal evolution of judicial inspection of going private transactions with controlling stockholders. Canons of judicial interpretation counsel against an indirect reversal or modification of established precedent.
Additionally, the theoretical justifications for the MFW decision hold significantly less weight in the going concern context. MFW's doctrinal shift is grounded on the twin pillars representing the competency of independent directors and non-affiliated stockholders. Whatever the validity of these mechanisms in the freeze out context, the legal and financial scholarship does not validate an extension to going concern transactions. Serious flaws hamper the ability of independent directors and non-affiliated stockholders to pass meaningful judgment on going concern transactions. In the final tally, MFW does not produce an all-encompassing framework for all controlling stockholder transactions.
Wednesday, October 12, 2016
I am preparing to teach the doctrine on controlling shareholders in my corporations class tomorrow, and found the recent Delaware opinions on non-controlling shareholder cleansing votes and the BJR to be helpful illustrations of the law in this area.
In summer 2016, the Delaware Court of Chancery dismissed two post-closing actions alleging a breach of fiduciary duty where there was no controlling shareholder in the public companies, where the stockholder cleaning vote was fully informed, and applied the 2015 Corwin business judgment rule standard. The cases are City of Miami General Employees’ & Sanitation Employees’ Retirement Trust v. Comstock, C.A. No. 9980-CB, (Del. Ch. Aug. 24, 2016) (Bouchard, C.) and Larkin v. Shah, C.A. No. 10918-VCS, (Del. Ch. Aug. 25, 2016) (Slights, V.C.), both of which relied upon Corwin v. KKR Financial Holdings, LLC, 125 A.3d 304 (Del. 2015). (Fellow BLPB blogger Ann Lipton has written about Corwin here).
The Larkin case clarified that Corwin applies to duty of loyalty claims and will be subject to the deferential business judgment rule in post-closing actions challenging non-controller transactions where informed stockholders have approved the transaction. The Larkin opinion states that:
(1) when disinterested, fully informed, uncoerced stockholders approve a transaction absent a looming conflicted controller, the irrebuttable business judgment rule applies; (2) there was no looming conflicted controller in this case; and (3) the challenged merger was properly approved by disinterested, uncoerced Auspex stockholders. Under the circumstances, the business judgment rule, irrebuttable in this context, applies. ....The standard of review that guides the court’s determination of whether those duties have been violated defaults to a deferential standard, the business judgment rule, which directs the court to presume the board of directors “acted on an informed basis, in good faith and in the honest belief that the action was taken in the best interests of the company.” In circumstances where the business judgment rule applies, Delaware courts will not overturn a board’s decision unless that decision 'cannot be attributed to any rational business purpose.' This broadly permissive standard reflects Delaware’s traditional reluctance to second-guess the business judgment of disinterested fiduciaries absent some independent cause for doubt. Larkin at 21-22 (internal citations omitted).
Two-sided controller transactions (a freeze out merger where a controlling shareholder stands on both sides of the transaction) is covered by the 2014 Kahn v. M & F Worldwide Corp., 88 A.3d 635(Del. 2014) case, which I summarized in an earlier BLPB post here.
To refresh our readers, the controlling shareholder test is a stockholder who owns a majority of stock. Additionally, a stockholder may qualify as a controller if:
Under Delaware law, a stockholder owning less than half of a company’s outstanding shares may nonetheless be deemed a controller where 'the stockholder can exercise actual control over the corporation’s board.'This “actual control” test requires the court to undertake an analysis of whether, despite owning a minority of shares, the alleged controller wields “such formidable voting and managerial power that, as a practical matter, [it is] no differently situated than if [it] had majority voting control.'A controlling stockholder can exist as a sole actor or a control block of “shareholders, each of whom individually cannot exert control over the corporation . . . [but who] are connected in some legally significant way—e.g., by contract, common ownership agreement, or other arrangement—to work together toward a shared goal.' Larkin at 33-34 (internal citations omitted).
Excellent commentary on theLarkin and Comstock cases and their practical implications can be found on the Harvard Law School Forum on Corporate Governance and Financial Regulation, available here.
Wednesday, August 24, 2016
Increasing business demands are prompting companies to expand into new products and markets. Businesses also are engaging in mergers, acquisitions and joint ventures; issuing securities; and performing other transactions associated with business growth, which results in larger corporate teams. Many companies have a need for additional in-house legal professionals who are readily available to help manage mounting financial and industry-related regulations. Moreover, corporate legal departments often prefer to handle more routine legal work in-house and retain the services of outside counsel for specialized legal work.
Real estate, IP, health care and compliance were also mentioned along with the noted strong growth in litigation. The full report/study is available here: Download Legal_2016_job_salary_guide.
Friday, August 12, 2016
In the spring of 2012, around the time that Facebook purchased Instagram for roughly $1 billion, I was teaching an M&A class.
At the time, I had difficulty explaining why Facebook would pay that amount of money for a company that was not only not profitable, but also had no revenue. I spoke as someone trained to use multiples EBITDA and as someone who did not (and still does not) have an Instagram account.
Now, over four years later, Forbes estimates Instagram's value at $25billion to $50billion. That valuation still requires some creativity, as Instagram had sales of "only" $630 million in 2015. Instagram, however, has added roughly 100 million new users in the last 9 months and is projected to have revenue of $1.5billion this year. While there is reason to be wary of projections, the projected sales for Instagram in 2018 is an impressive $5billion.
This drives home that valuation is as much art as science, and the conventional valuation methods will not work well for every company. In that deal, I imagine Instagram's technology, brand, and the user base were all large value drivers. With the benefit of hindsight, Instagram is looking like a good acquisition for Facebook, even if the current projections end up being a bit optimistic.
Wednesday, June 8, 2016
If you've been slamming away on a writing deadline then perhaps you've missed the opportunity (like me) to dive into the recent Chancery Court of Delaware Dell appraisal rights opinion (downloadable here). Have no fear, your summary is here.
Vice Chancellor Laster valued Dell’s common stock at $17.62 per share, reflecting a 28% premium above the $13.75 merger price that was paid to Dell shareholders in October 2014 in a going private transaction lead by company-founder Michael Dell. Dell's going private transaction was opposed by Carl Icahn and this juicy, contentious transaction has its own required reading list. When conceding defeat, Carl Icahn sent the following letter to Dell Shareholders:
New York, New York, September 9, 2013
Dear Fellow Dell Inc. Stockholders:
I continue to believe that the price being paid by Michael Dell/Silver Lake to purchase our company greatly undervalues it, among other things, because:
1. Dell is paying a price approximately 70% below its ten-year high of $42.38; and
2. The bid freezes stockholders out of any possibility of realizing Dell’s great potential.
Fast forward nearly 3 years later and it seems Vice Chancellor Laster agrees. VC Laster reached his undervaluation decision despite no finding of significant fault with the company’s directors' conduct or a competing bidder. Instead, VC Laster focused on the fall in the company’s stock price, and a failure to determine the intrinsic value of Dell before negotiating the buyout. The business press and law blogs have exploded with articles, a few of which are highlighted below:
- For a good summary of the ruling see this succinct Delaware Chancery Court blog post and Andrew Ross Sorkin's NY Times article.
- For a good discussion of how appraisal remedies were applied in Dell, see Steven Davidoff Solomon's NY Times article here.
- For a discussion of the increase in shareholder appraisal actions and contributing factors (arbitrage) and the future of appraisal rights, see this ABA article.
Monday, May 23, 2016
Well, given that I just spent several hours constructing a somewhat lengthy post that I apparently lost (aargh!), I will keep this relatively short.
This summer, I am working on a benefit corporation project for the Annual Adolf A. Berle Symposium on Corporation, Law and Society (Berle VIII) to be held in Seattle next month. In that connection, I have been thinking about litigation risk in public benefit corporations, which has led me to consider the specific litigation risks incident to mergers and acquisitions ("M&A"). I find myself wondering whether anyone has yet done a benefit corporation M&A transaction and, if so, whether a checklist might have been created for the transaction that I could look at. I am especially interested in understanding the board decision-making aspects of a benefit corporation M&A transaction. (Haskell, maybe you know of something on this . . . ?)
Preliminarily, I note that fairness opinions should not carry as much weight in the benefit corporation M&A approval context, since they only speak about fairness "from a financial point of view." Benefit corporation boards of directors must consider not only the pecuniary interests of shareholders in managing the firm, but also the firm's articulated public benefit or benefits (which is/are set forth in its charter). Will legal counsel pick up the slack and render an opinion that the board's consideration of the public benefit(s) complies with law? What diligence would be required to give that opinion? I assume in the absence of interpretive decisional law, any opinion of that kind would have to be qualified. I also assume that legal counsel will not readily volunteer to give this kind of opinion.
However, even in the absence of an opinion, legal counsel will have to offer advice on the matter, since the board of a benefit corporation has the legal obligation to manage the firm consistent with its public benefit(s) in any case. Moreover, M&A agreements typically include representations (on transactional consents, approvals, and governance/legal compliance) affirming that the requisite consents and approvals for the transaction have been obtained and that the agreement and consummation of the transactions contemplated by it do not violate the firm's charter or applicable law. Legal counsel will be responsible for counseling the client on these contractual provisions.
At first blush, the embedded issues strike me as somewhat complex and fact-dependent. Important facts in this context include the precise language of the applicable statutory requirements, the nature of the firm's public benefit or benefits, the type of M&A transaction at issue and the structure of the transaction (including which entity survives in a merger), and the identity of the other party or parties to the transaction (especially whether, e.g., a merger partner is organized as a public benefit corporation or another form of entity). As I continue to ponder these and related matters in the benefit corporation M&A setting, I invite your comments on any of this--or on broader aspects of litigation risk in the public benefit corporation environment.
Monday, February 22, 2016
Free Web Seminar: The Opportunities and Pitfalls of Cybersecurity and Data Privacy in Mergers and Acquisitions
One of my two former firms, King & Spalding, is hosting a free interactive web seminar on cybersecurity and M&A on February 25 at 12:30 p.m. Thought the web seminar might be of interest to some of our readers. The description is reproduced below.
An Interactive Web Seminar
The Opportunities and Pitfalls of Cybersecurity and Data Privacy in Mergers and Acquisitions
February 25, 2016
12:30 PM – 1:30 PM
Over the last several years, company after company has been rocked by cybersecurity incidents. Moreover, obligations relating to cybersecurity and data privacy are rapidly evolving, imposing on corporations a complex and challenging legal and regulatory environment. Cybersecurity and data privacy deficiencies, therefore, might pose potentially significant business, legal, and regulatory risks to an acquiring company. For this reason, cybersecurity and data privacy are becoming integral pre-transaction due diligence items.
This e-Learn will analyze the (1) special cybersecurity and data privacy dangers that come with corporate transactions; (2) strategies to mitigate those dangers; and (3) benefits of incorporating cybersecurity and data privacy into due diligence. The panel will zero in on these issues from the vantage point of practitioners in the deal trenches, and from the perspective of a former computer crime prosecutor and a former FBI agent who have dealt with a broad range of cyber risks to public and private corporations. This e-Learn is for managers and attorneys at all levels who are involved at any stage of the M&A process and at any stage of cyber literacy, from the beginner who is just starting to appreciate the complex nature of cyber risks to the expert who has addressed them for years. The discussion will leave you with a better understanding of this critical topic and concrete, practical suggestions to bring back to your M&A team.
Robert Leclerc, King & Spalding’s Corporate Practice Group and experienced deal counsel; Nick Oldham, King & Spalding, and Former Counsel for Cyber Investigations, DOJ's National Security Division; John Hauser, Ernst & Young, and former FBI Special Agent specializing in cyber investigations.
Wednesday, January 13, 2016
This post highlights SIGA Technologies, Inc. v. PharmAthene, Inc., Del. Supr., No. 20, 2015 (Dec. 23, 2015).
At the end of 2015, the Delaware Supreme Court issued an opinion affirming its earlier holding that where parties have agreed to negotiate in good faith, a failure to reach an agreement based upon the bad faith of one party entitles the other party to expectation damages so long as damages can be proven with "reasonable certainty."
Francis Pileggi, on his excellent Delaware Commercial and Business Litigation blog, provides a succinct summary of the case, available here. The parties to the suit entered into merger negotiations to develop a smallpox antiviral drug. Due to the uncertainty of the merger negotiations, the parties also entered into a non-binding license agreement, the terms of which would be finalized if the merger fell through for whatever reason. While nonbinding, the preliminary license agreement contained detailed financial terms and benchmarks. When the merger was terminated, SIGA proposed terms for a collaboration that departed from the preliminary license agreement. The Delaware Supreme Court affirmed the Court of Chancery finding that SIGA's acted in bad faith. The question of the case became what damages were due from the bad faith breach of a preliminary agreement to "negotiate in good faith,” when all essential terms have not been agreed to by the parties?
The first gem in the opinion, and something I'll be working into my damages lectures for first year contracts this spring, is that:
when a contract is breached, expectation damages can be established as long as the plaintiff can prove the fact of damages with reasonable certainty. The amount of damages can be an estimate.
What constitutes reasonable certainty changes whether the party is establishing damages are due versus the amount of the damages. And here is the second gem: the standard of proof can be lessened where willful wrongdoing contributed to the breach and the uncertainty about the amount of damages.
where the wrongdoer caused uncertainty about the final economics of the transaction by its failure to negotiate in good faith, willfulness is a relevant factor in deciding the quantum of proof required to establish the damages amount.
Tuesday, December 29, 2015
The Pep Boys – Manny, Moe & Jack (NYSE: PBY) merger triangle with Bridgestone Retail Operations LLC and Icahn Enterprises LP is proving to be an exciting bidding war. The price and the pace of competing bids has been escalating since the proposed Pep Boys/Bridgestone agreement was announced on October 16, 2015. Pep Boys stock had been trading around $12/share. Pursuant to the agreement, Bridgestone commenced a tender offer in November for all outstanding shares at $15.
Icahn Enterprises controls Auto Plus, a competitor of Pep Boys, the nation's leading automotive aftermarket service and retail chain. Icahn disclosed an approximately 12% stake in Pep Boys earlier in December and entered into a bidding war with Bridgestone over Pep Boys. The price climbed to $15.50 on December 11th, then $17.00 on December 24th. Icahn Enterprises holds the current winning bid at $18.50/share, which the Pep Boys Board of Directors determined is a superior offer. In the SEC filings, Icahn Enterprises indicated a willingness to increase the bid, but not if Pep Boys agreed to Bridgestone's increased termination fee (from $35M to 39.5M) triggered by actions such as perior proposals by third parties. Icahn challenged such a fee as a serious threat to the auction process.
Regardless of which company ends up claiming control over Pep Boys, this is a excellent example of sale principles in action and also shows the effect of merger announcements (and the promised control premiums) have on stock prices. This will be a great illustration to accompany corporations/business organizations class discussions of mergers and the role of the board of directors. For those teaching unincorporated entities as a separate course or component of the larger bus.org survey course, Icahn Enterprises is a publicly-traded limited partnership formed as a master limited partnership in Delaware-- BONUS! Bridgestone Retail Operations LLC, as in limited liability company, is a wholly-owned subsidiary of Bridgestone Corporation ADR, a publicly traded corporation.
See you all in the New Year! Anne Tucker
EDITED January 4, 2016. Based on the thoughtful observations of fellow BLPB editor Haskell Murray, I removed the inarticulate references to this bidding war as a "Revlon" transaction. As Haskell pointed out, Pep Boys is a Pennsylvania corporation and subject to a constituency statute. The constituency statute modifies directors' "Revlon" duties by authorizing (but not requiring) directors to consider:
The effects of any action upon any or all groups affected by such action, including shareholders, members, employees, suppliers, customers and creditors of the corporation, and upon communities in which offices or other establishments of the corporation are located.
(2) The short-term and long-term interests of the corporation, including benefits that may accrue to the corporation from its long-term plans and the possibility that these interests may be best served by the continued independence of the corporation.....15 Pa. Stat. and Cons. Stat. Ann. § 515 (West)
Thursday, December 10, 2015
A few days ago, co-blogger Steve Bradford posted on law professor complaints about grading under the title Warning: Law Professor Whine Season. OK. I typically am one of those whiners. But today, rather than noting that grading is the only part of the semester I actually need to be paid for (and all that yada yada), I want to briefly extoll one virtue of exam season: the positive things one sees in students as they consciously and appropriately struggle to synthesize the material in a 14-week jam-packed semester.
My Business Associations final exam was administered on Tuesday. Like many other law professors, I gave my students sample questions (with the answers), held a review session, and responded to questions posted to the discussion board on our class course management site. Sometimes, I dread any and all of that post-class madness. This year, I admit that there were few of the thinly veiled (and, by me, expressly discouraged and disdained) "is this on the exam?" or "please re-teach this part of the course . . ." types of questions or requests in any of the forums that I offered for post-class review and learning. That was a relief.
The students' final work product for my Corporate Finance planning and drafting seminar was due Monday. I met with a number of students in the course about that drafting assignment and about the predecessor project in the final weeks before each was due. I watched them work through issues and begin to make decisions, uncomfortable as they might be in doing so, that solve real client problems. Satisfying times . . . .
In fact, there have been a number of moments over the past week in which I was exceedingly proud of the learning that had gone on and was continuing to go on during the post-class exam-and-project-preparation phase of the semester. I offer a few examples here to illustrate my point. They come from both my Business Associations course, for which students take a comprehensive written final examination, and my Corporate Finance planning and drafting seminar, for which students solve a corporate finance problem through planning and drafting and write a review of a fellow student's planning and drafting project.
Saturday, November 28, 2015
A short while ago, some commentators declared that the Treasury had successfully ended corporate inversions. But after several recent corporate migrations, reports of the inversion’s death appear to have been greatly exaggerated.
A corporate inversion is a complicated and costly transaction used by American corporations to avoid particularly burdensome aspects of the U.S. tax code. The United States not only enforces the OECD’s highest corporate tax rate (the tax rate for most U.S. corporations ranges between 35% to 39%) but also worldwide taxation. This latter feature subjects an American corporation’s entire revenue stream to the United States’ extraordinary tax rate, whereas most countries tax only what is earned inside their territorial borders. In simplified terms, a corporation hoping to invert must merge with a foreign corporation—while satisfying some very idiosyncratic conditions—in order to reorganize in the foreign company’s country. After inverting, a company’s foreign generated income becomes subject to more favorable foreign tax rates, though it must still pay U.S. taxes on domestically generated revenue.
The rhetoric surrounding inversions has been heating up since Pfizer announced its intentions to invert into an Irish entity after acquiring Allegran in a $160 billion deal. The chief complaint against inversions is that inverted companies avoid their “fair share” of taxes (the United States likely lost 33.6 billion in tax revenue in 2014 alone). Not only that, the inversion trend perhaps shifts research and development and intellectual property innovation to foreign countries (see this excellent article by Omri Marian). President Obama famously declared that inversions are “unpatriotic,” Jon Stewart warned his viewers of the “Inversion of the Moneysnatchers,” and countless politicians have proposed ending the inversion loophole.
But why should we demonize inverted companies. First, consider an old Learned Hand quote: “[a]nyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose the pattern which best pays the treasury.” And considering that inverted companies must still pay U.S. taxes on U.S. generated income, the process shields only foreign-based revenue with which the United States has limited association. In fact, if the internal affairs doctrine incentivizes companies to incorporate in whichever U.S. state they wish, why should this policy not include foreign countries?
In the end, what to do about inversions presents a number of complex issues. Critics offer very accurate arguments concerning the deleterious effects of inversions. However, in light of previous attempts, it seems quite unlikely that the tax code could be amended to prohibit future companies from inverting. As of a couple days ago the Treasury just added new inversion restrictions with the caveat that there is only so much that the Treasury can do. Indeed either lowering the corporate tax rate or ending worldwide taxation would likely be the most effective anti-inversion policy. Or the United States could take better aim at the income shifting transactions that corporations use to repatriate foreign income into the United States. But probably the best first step is for us to quit viewing inversions normatively; any well-informed policy prescription should avoid the very commonly used rhetoric of “good” guys and “bad” guys. After all, companies are just following incentivizes that the law offers.
For an excellent discussion of inversions, please read this Virginia Law Review article by Eric Talley.
Friday, November 27, 2015
I try to read everything Lyman Johnson writes, so my Thanksgiving break reading is his recent book chapter The Reconfiguring of Revlon. The abstract is below:
Three decades later, an irksome uncertainty still impedes a settled understanding of the Delaware Supreme Court’s landmark ruling in Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc. For such a towering doctrine, Revlon’s underlying rationales remain controversial, its exact contours and demands continue to be surprisingly unclear, and it holds out scant hope for remedial relief. In spite of these troubling features of today’s Revlon jurisprudence, however, Revlon is slowly being worked back into the larger fabric of Delaware’s fiduciary duty law and away from being a gangling, standalone doctrine. The organizing themes of this judicial project are strong deference in the deal context to decisions made by independent directors without regard to deal structure, the substantially reduced likelihood of equitable or monetary remedies in all types of deal-related lawsuits, and a nascent effort at harmonizing Revlon with Delaware’s more general, and ill-defined, doctrine on corporate purpose.
This chapter discusses the original Revlon decision and its rapid expansion before turning to lingering uncertainties surrounding the reach of Revlon, the decline of Revlon’s remedial clout, and where Revlon stands today in relation to Delaware’s overall fiduciary duty law. Revlon’s sharp focus on immediate value maximization was a breakthrough pronouncement on corporate purpose, a subject of longstanding national debate but one on which the Delaware Supreme Court had been strangely silent. However, grave reservations about whether and when corporate directors should be required to pursue short term goals found useful cover in sustained judicial murkiness over the boundaries of Revlon. Only if Delaware courts resolve the underlying issue of corporate purpose more generally will Revlon either be fitted into the larger body of Delaware law or continue to stand uncomfortably to the side as a doctrinal loner of diminished significance.