Business Law Prof Blog

Shareholder Perspective on Hostile Takeover Numbers

The New York Times Dealbook provides a brief excerpt from an article at efinancialnews.com (registration, which I have yet to do, for a free trial is required to access the full article): 

JPMorgan Chase successfully defended clients against hostile takeover approaches 64.4 percent of the time — the best among the top advisory banks, according to an analysis by Financial News. Morgan Stanley, meanwhile, got clients it advised 15.9 percent more in price when hostile takeovers were successful, another best, according to the analysis.

First thought:  How many companies that hire JPMorgan Chase would be better off if the takeover were successful?  That's obviously not JPMorgan's problem, but it is a potential concern for shareholders. 

Second thought:  As a shareholder, based on this report, which firm would I rather see my board hire? Pretty clear for most of us, I suspect:  Morgan Stanley. Most of the time, I'd rather see 15.9% more for my shares in a takeover than see my company's management team stay the course.  Not always, I suppose. But almost.

--JPF

"This deal is essentially a bet on the U.S. [online poker] market opening up."

A couple of weeks ago I commented that a cynic might be tempted to view the recent prosecutions of online poker sites as the first step toward fully regulated online poker in the U.S.:

I have a friend who grew up in Cleveland Heights back in the 60s, and he likes to tell a story about how the cops came in and busted up the local number-running ring because gambling was illegal ... shortly thereafter the state started generating revenue by selling lottery tickets in Cleveland Heights and throughout Ohio. While it is hard to predict with any certainty, my best guess is that we will have some form of federal and/or state regulated online poker in place within the next 18 months. A number of states (as well as the District of Columbia) are already actively pursuing establishing regulated intrastate sites (I believe the potential annual national tax revenue is estimated to be in the billions). I'm not suggesting this is some sort of organized conspiracy. Rather, a confluence of events and opportunity. However, as always, it is ultimately too soon to tell.

Now it appears we have at least some further evidence from the market that this may well be the case.  Casino City Times reports that, "Reno-based IGT has offered $115 million to acquire a Swedish technology company that operates one of the world's largest online poker networks and supplies online gaming products and services to the industry."  The story goes on to quote Roth Capital Partners gaming analyst Todd Eilers as saying that, "This deal is essentially a bet on the U.S. market opening up.... We believe it's only a matter of time before the U.S. market opens up with a push at both the federal and state levels."

Meanwhile, a related story is developing onshore that I can only describe as dripping with irony.  Casino development in Ohio has halted, despite voter support for the projects via a constitutional amendment, because Ohio Governor Kasich (R) wants to increase the taxes on the casinos.  The Cleveland Plain Dealer reports:

Kasich has said often in the last several weeks that th[e previously approved] fees are not enough and the operations should do more to help the financially struggling state. "You like to ask people to step up and help us in tough times," he said last month.

SJP

 

 

Will you vote for the deal if we change the name?

Over at DealBook, Steven Davidoff has a nice breakdown of the on-going battle for the New York Stock Exchange.  Items covered include the relevance of: (1) the record date, (2) currency exchange rates, and (3) post-deal naming commitments ("Expect Deutsche Börse to allow the NYSE name to be preserved in some way to burnish its American-friendly stance.").  The pending vote is scheduled for July 7, and Davidoff writes that:

I am not aware of any significant transaction in which shareholders approved a deal of a company engaging in a strategic combination that was also subject to a hostile bid.... But this could be the one in which shareholders decide to go with the current bid.

SJP

Revlon Duties Are Inapplicable When Control Stays in the Market (But Which Market?)

Steven Davidoff has a nice post up over at DealBook, explaining why the NYSE board likely remains under no duty to sell itself to the highest bidder despite what appears to be an active bidding process between Nasdaq and the Deutsche Borse.  He notes, however, that the particular facts may raise at least one interesting issue under Delaware law:  Does the location of the market matter if a board is relying on the proposition that there is no duty to sell to the highest bidder because, as the Time & QVC courts put it, control stays in "a fluid aggregation of unaffiliated shareholders representing a voting majority—in other words, in the market"?  Notes Davidoff:

[E]ven under current case-law, there is a thread of an argument that the Revlon doctrine should apply to the NYSE/Deutsche Börse transaction. The reason is that the combined NYSE/Deutsche Börse will be incorporated in the Netherlands. In acquisitions involving foreign reincorporations, there is a tendency for “flowback.” American shareholders will sell their shares simply because they do not want to own shares of a foreign company. Shares will flow back to the foreign exchange.

In other words, is the relevant market the global market or just the US market?  Interesting question.  My guess is that if a Delaware court were confronted with the issue, it would rule in favor of finding no meaningful change of control where ownership was effectively transferred from the US public market to some foreign public market--if for no other reason than there does not appear to be anything in the underlying opinions to require such a distinction, and to recognize such a distinction would limit directorial discretion ... something Delaware courts are generally loathe to do absent some compelling necessity.  Not to mention the fact that flowback appears to be more about what shareholders do with their ownership stakes in the new combined entity after the deal is consummated, as opposed to what they are forced to accept in the first instance.  Perhaps most importantly, no wasted control premium appears to be implicated by the current deal.  Then again, a surprising decision in this line of cases would not really be anything new.

SJP

Why Warren Buffett Probably Knew What He Was Doing

Much has been said about David Sokol, until recently a top advisor to Warren Buffett, and the possible insider trading case against him for his acquisition of nearly 100,000 shares of Lubrizol in early January. Not long after Mr. Sokol purchased the roughly $10 million of Lubrizol shares, Mr. Sokol in late January suggested to Warren Buffett that Berkshire Hathaway acquire Lubrizol.  

Now come reports that Mr. Sokol told Mr. Buffett of his ownership in "passing," which is causing some to question Mr. Buffett's role.  According to the New York Times Dealbook:

Mr. Sokol suggested a Lubrizol deal to Mr. Buffett on Jan. 14 or 15, according to Mr. Buffett’s letter. At the time, Mr. Sokol made a “passing remark” about his stake in Lubrizol to Mr. Buffett, who did not ask about “the date of his purchase or the extent of his holdings.”

Some analysts and corporate governance experts have criticized Mr. Buffett for not demanding further details.

“This is damaging to Berkshire’s reputation,” said Greggory Warren, a senior stock analyst at research firm Morningstar. “It brings up questions about Berkshire’s internal controls.”

Francine McKenna at Forbes.com also weighs in:  Sokol Knew; How Could Buffett Have Not?  She says:

Once Sokol had a $10 million stake in Lubrizol, his natural inclination would have been, as traders have told me, to “talk his book” and raise the price Berkshire would pay, not get the best deal for Berkshire. Berkshire agreed to pay a huge premium over the stock’s price in December of 2010 when Sokol first bought shares.

Maybe that's right, but I suspect that the price only would have become a major concern to Mr. Sokol if the purchase was not going to come at a premium, and that was not going to happen. The bigger risk was that Mr. Sokol would push to close a deal at any price.  He is certainly savvy enough to know that if a deal moved forward, it would be at a premium, which would mean a tidy profit for him.  The key to Mr. Sokol profiting, then, was a deal closing. (I have no idea what he was actually thinking, of course. This is just my suspicion.  I can't honestly figure out why he would do this at all, given the risks, so I suppose anything is possible.)

But the question has turned now to what Mr. Buffett knew or should have known.   My read of this is not that Buffett didn't know; it's that he (reasonably) did not care to know. That is, he trusted, without regard to Mr. Sokol's ownership, that Mr. Sokol would not suggest a purchase if Sokol didn't think it was a good idea. Mr. Sokol has a track record with Mr. Buffett that certainly seems to have supported that trust.

Perhaps the assertion that Buffett should care because it raises questions about internal controls is accurate in some instances, but I suspect very few Berkshire investors are worried about Mr. Buffett's ultimate decisionmaking.  And note that Mr. Sokol is no longer employed by Mr. Buffett.  It's not as though the transgression went unnoticed or unaddressed.

Recognizing that there may be some other explanation (and smoking gun e-mail), it seems to me, Mr. Buffett could have acted entirely rationally.  He may simply have trusted one of his top advisors, and didn't feel the need to ask additional questions.  Why? Because history suggested that Mr. Sokol made good decisions for Berkshire, and it was not in Mr. Buffett's interest to follow up on a top advisor like Sokol. This is hardly the sick and drunken Mrs. Pritchard leaving the kids to ransack the company.  In fact, had Mr. Buffett pushed on this, he would have found out about Sokol’s holdings, and he then would have had to deal with it in some other manner; a manner that was likely to cause just as much fallout (or more) for his company.  

Mr. Sokol clearly knows that insider trading rules (or should), and he had every reason to be careful. He chose not be. If this activity was an indication that Mr. Sokol had lost his compass (or business sense), better to let him hang himself than leave Berkshire to clean up the mess and possibly need to explain Sokol’s sudden departure.  Given Mr. Buffett's track record, I'm inclined to think, once again, he knew exactly what he was doing. 

--JPF

 

Let the Regulators Work It Out: AT&T's New Deal Policy?

Following the announcement of the AT&T merger with T-Mobile, theories abound about the potential value and goals of the proposal.  Over at the Wall Street Journal Deal Journal, it was noted that some believe AT&T may not care if it gets all or most of T-Mobile, as long as they get a sizable chunk: 

Citadel Securities weighed in with a very intriguing notion: Maybe AT&T doesn’t plan to buy all of T-Mobile, after all?

[W]e now believe AT&T’s strategy may not necessarily require getting full (or almost full) approval for the deal – nor do we think AT&T plans to call off the deal and pay the $3B reverse breakup fee. Rather, we think AT&T may simply be intent on acquiring however much of TMobile the regulators allow, and divesting the rest as required…..

Our read of the Stock Purchase Agreement filed Monday suggests AT&T is ready to divest up to 40% of T-Mobile’s subscribers –and we think AT&T may not be opposed to divesting even more in order to get the deal closed.

This is an interesting notion, and it is certainly possible. If so, though, I find it disappointing.   It's one thing to structure a deal you think can work (or hope can work) to see what happens.  It's quite another to just proceed and see what you can get without assessing the regulatory problems.  That is, if the Citadel Securities assessment is correct, AT&T may have just proposed a complete merger to see what it can keep, without assessing for itself what should be permissible and what is not under applicable law and regulations.  If I'm the regulator, and a significant part of the deal is improper (e.g., more than 40% of the deal), I'd be inclined to decline the whole thing. Let AT&T and T-Mobile come back with a plan that is, at least, in the ball park.  

I understand that some people don't like the antitrust laws and other laws and regulations, and it is certainly their right.  But if you are working on a deal with major antitrust implications, it seems to me you should be taking those laws and regulations into account in the proposed structure.  It's not the regulators' job to tell companies what deal will work; it's the regulators' job to determine whether the deal does work.  Unless, of course, you want even bigger, slower government. 

--JPF

AT&T Deal Highlights

Steven M. Davidoff, at the New York Times Dealbook, has a great outline of the AT&T - T-Mobile Deal. It's really worth a read (here). He explains how different the deal is for a private sale.  And, if you are someone new to all of this, it helps provide an explanation for public company complexities.  My favorite part is this:

Regulatory

AT&T and Deutsche Telecom have negotiated an elaborate risk-sharing arrangement with respect to divestiture and other steps AT&T and Deutsche Telekom must take to obtain regulatory clearance of the T-Mobile purchase.

The agreement requires that AT&T take “reasonable best efforts” to obtain regulatory clearance. This is the standard formulation. But as you would expect in this controversial deal, it gets much, much more complicated after that.

See -- I took the "easy" part.

--JPF

I'm Shocked -- Shocked I tell you ....

Apparently, an investment bank has "secretly and selfishly manipulated" a sales process in order to obtain "lucrative" additional fees.

A Delaware judge has delayed a shareholder vote on Del Monte Foods Co.'s planned $4 billion acquisition by a group of private equity firms .... In a ruling dated Monday [Feb. 14], Vice Chancellor J. Travis Laster blasted Del Monte's financial adviser, Barclays Capital, saying the investment bank misled Del Monte's board ....

You can read more here.

Writes Steven Davidoff:

This opinion raises the ghost of the storied Macmillan management buyout. In 1989, the Delaware Supreme Court halted the buyout of the book publisher Macmillan because its management had worked with K.K.R. to take the company private by manipulating the bidding process behind the board’s back. . . .  [W]hile Barclays’s actions appear egregious, this type of conduct has been under scrutiny for years. Investment banks too often try to steer takeover deals to private equity firms that can provide them additional fees.

Now watch this.

SJP

(More) Airgas Commentary

(NOTE: I'm jumping right into the Airgas fray here.  If you want an introduction to the case, go here.)

So, a Delaware corporation's board of directors can effectively "just say no" to a takeover attempt--despite protestations to the contrary.  (Compare Jay Brown ("The court emphatically concluded that it was not validating the 'just say no' approach to tender offers.  But in fact it was.") with Stephen Bainbridge ("[T]he case finally gives us a clear statement of Delaware law to the effect that: 'A board cannot 'just say no' to a tender offer.'").  Stephen Bainbridge has a great summary of the commentary here (including our own Josh Fershee).  In my initial review of what other people are saying, I found the following from Steven Davidoff particularly worth passing on:

Chancellor Chandler asserted that he wanted to order the poison pill redeemed because this contest had lasted more than 16 months, Air Products’ offer was noncoercive, and shareholders could now decide the matter on a fully informed basis. But Delaware Supreme Court jurisprudence did not allow it. . . . The Airgas board was responding to "substantive coercion," a term that refers to what two professors, Ronald J. Gilson and Reinier Kraakman, call “the risk that shareholders will mistakenly accept an underpriced offer because they disbelieve management’s representations of intrinsic value.” . . .  Like the good professors, it appears that the judge thinks that substantive coercion is a straw man, which is too vague to be used and can serve to protect an entrenched board. The lower court opinions he cites support this position.  By citing them, Chancellor Chandler passive-aggressively rebuts the contrary position of the Delaware Supreme Court. The judge contends that when takeover contests reach an end stage, the courts should step in to ensure that there is a sale process.  But the Supreme Court does not agree; instead assessing an undervalued offer is the domain of the board.

SJP

Oil & Gas M&A Increasing -- Utilities Left Out?

Occidental Petroleum is buying $3.2 billion of oil-related assets in North Dakota and Texas. On the same day, it was announced that the company was selling its Argentine oil and gas interests to China Petrochemical Corporation (a/k/a Sinopec) for $2.45 billion. (Dealbook article here.)

M&A activity  is picking up in the oil and gas sector, as oil prices remain relatively high, along with global demand.  (In fact, gas prices are at two-year highs.)  There were similar hopes for an uptick in M&A in the utility industry when the Energy Policy Act of 2005 removed the historic M&A limits of the Public Utility Holding Company Act. The idea was that removing regulatory hurdles would increase investment in the sector, in part via M&A opportunities.

Some of us were skeptical that repealing PUCHA would have much impact (see, e.g., my 2007 article here), and I think history has shown that to be true. Now if electricity prices and demand were both to increase by 20% . . .

--JPF

A Little Perspective on United, Continental and the Outer Continental Shelf

United Airlines and Continental Airlines have agreed to merge into what will be the largest carrier (passing Delta Air Lines, which itself took the top spot after its merger with Northwest Airlines).  The deal apparently involves United’s parent (UAL Corporation) issuing shares worth $3.17 billion in the all-stock deal.  This is a large deal, to be sure, but the most recent cost estimates related to the BP oil disaster in the Gulf Coast make it look rather pedestrian by comparison.  Experts are estimating that the total costs of the disaster could be more than $14 billion. 

Airlines are significant companies to be sure, but energy companies are the real big fish (if you’ll excuse the metaphor in light of recent events). At least there is reason to believe BP has the resources to deal with the enormous costs of this disaster. To put a fine point on it, let’s review a few of the major energy mergers.  Way back in 1998, Exxon and Mobil merged in an $80 billion deal.  The BP-Amoco merger:  $48 billion.  In December 2009, Exxon Mobil completed another deal, acquiring XTO Energy for $41 billion. 

Oh, and while we’re on the topic of money, although we can’t know if it would have worked, that oil well shut-off device my co-blogger Stefan mentioned a short while back costs about $500,000.  

--Josh Fershee

Barzuza on Antitakeover Law

Michal Barzuza has posted The State of State Antitakeover Law on SSRN with the following abstract:

This Article is the first to examine systematically state antitakeover law outside Delaware. It conducts a research of all available cases to find whether states with pill endorsement and other constituency statutes follow Delaware’s enhanced fiduciary duties or replace them with weaker standards. It finds substantial variations from Delaware’s law. Unlike Delaware, most of the states with relatively strong other constituency and pill endorsement statutes do not impose enhanced fiduciary duties on managers in change-of-control situations. Instead, they apply only the ordinary business judgment rule to management’s use of antitakeover tactics.

This Article has implications for antitakeover law, the market for corporate law, and the desirability of federal intervention. In particular, it provides support for adopting Delaware’s enhanced fiduciary duties - Unocal, Revlon, and Blasius - as federally imposed minimum standards. This would not only improve state antitakeover law outside Delaware, but may also result in improvements to Delaware law since Delaware is currently dragged down by other states.

ECC

Canada Gets it Right, Darn

The Canadian Supreme Court, without a written opinion, ruled unanimously in favor of Bell Canada and its buyout group, overruling a lower court that had ruled in favor of bondholders and held up the buyout.  Now the buyers, who are suffering buyer's remorse, have to decided whether to go through with the buyout.  In so doing, the Court upheld the shareholder primacy theory of Anglo-American law for Canada, against the wishes of academics and other members of the left who are pushing a "constituency theory" of board duty.  By deciding sensibly, the Canadians will be more competitive with us than otherwise, darn.

Courts and Mergers, Closed or Not

If one company wants to acquire another or the companies want to merge, the parties must now expect a court hearing and a certification from a judge is required to close.  Now if one party wants to call off a merger, it must seek a court hearing and ask permission.  Hexion wants to call off an acquisition of Huntsman so it filed with the Delaware Chancery Court to ask permission to do so.  Our Courts have become a de facto certification agent for all acquisitions. Those who like courts and distrust corporate executives will cheer; those who wonder about the competency of judges will not.

Buffett for the Insurgents

On Wednesday, Belgian newspaper De Standard reported that Warren Buffett supports InBev in its cash offer for Anheuser-Busch.  Buffett's company, Berkshire Hathaway, has a 35 million share stake in the beer conglomerate, worth approximately 5% of the company. 
The endorsement comes as a bit of a slap in the face for Anheuser CEO August Busch IV and the Missouri politicians.smen.
Shareholders are displeased with the company's performance under Busch IV's leadership and seem happy to have company operated with competent Belgians at the helm.
--

Anheuser-Busch on the Block: What a Difference Fifteen Years Makes

The potential sale of Anheuser Busch to a Belgian company, InBev, has produced the normal local efforts to block the sale from the Missouri governor, the St. Louis mayor, and St. Louis employees.  What is different is the heavy push back in the national financial press supporting the bid.  Anheuser Busch management, top heavy with Busch family members, has been average at best and the family only owns 5 percent of the stock.  The company's staggered board is fully eliminated by the 2009 elections and it has no poison pill in place.  Warren Buffet is a major shareholder, one who trumpets investing in management and often supports incumbents in hostile bids for privileged preferred stock positions.  The bid is thus a litmus paper test of several things:  1) takeover popularity 2) last minute takeover defenses  and 3) the prominence of share price.

Another Hatchet Job By Morgenson

In today's business section of the New York Times, Gretchen Morgenson writes, under her op-ed title "Fair Game", of the buyout by a private equity firm, TPG, of the otherwise failing savings and loan bank Washington Mutual.  It is total hatchet job.  TPG is pumping cash into the bank in exchange for a potential controlling interest (if it exercises all the warrants in the deal) and a board seat.  In the latest quarter the bank lost $1.1 billion and sits on a $10 billion in non-performing mortgage loans, which may increase when interest rate resets hit in less than two weeks.  One wonders what TPG sees in the bank.  It bought the common stock in the package for $8.75 and it is trading today at $6.66.  The strike price on the purchase warrants is $10.65, now well out of the money. Morgenson has found disgruntled shareholders who do not like the "extreme dilution" and feel "forced" to vote for the deal (under NYSE rules).  She also, in typical fashion, chronicles the salary of the CEO.  It took no bonus last year and was paid $1 million in cash, but the year before he took a bonus of $4 million.(and the firm "declined to comment.") Perhaps the board should have negotiated a better deal or perhaps it should have done a "rights offering" that "forced" existing shareholders to exercise in the money options or suffer dilution.

Here is the better story. Washington Mutual is in jeopardy of bankrupt, in which the shareholders get nothing.  They do not have any bargaining power when seeking a cash infusion, which is needed now, not later.  They took the best deal they could get.  A rights offering takes longer and has historically been a declaration of defeat that hammers stock price.  Shareholders should be disappointed and they are not blameless -- they invested in the company and voted in favor of its leaders.  The vote is "forced" because it is a good deal. 

Morgenson mentions "penalties" if the vote fails and suggests the vote is coerced.  Her own analysis makes no sense.  The penalties mentioned are stock dividends to TPG (on the preferred in the package I assume) and a reduction in price in the warrants.  Put if the deal fails a vote TPG cannot get the stock and warrants it intends to purchase -- so how does this penalty work?  I assume the dividend and warrant package is scaled back to less than a 20 percent voting interest, but Morgenson does not say.   

A true hatchet job.    

Microsoft Drives Yahoo into Arms of Google

Microsoft's attempt to buy Yahoo drove Yahoo into an agreement with Google to share ad revenue.  Google is, in essence, a white knight, a party that cuts a deal with a target of a hostile bid to foil the bidder.  White knights do very, very well -- they pick up valuable at a discount.  Warren Buffet's success in the 80s is strong testimony to this.  The losers?  The bidder and the target.

This Bud's for Belgium

American beer giant Anheuser-Busch confirmed Wednesday that it had received a cash offer from Belgium-based InBev for $65 per share.  The buyout sum totals $46B USD, but only 30B euro. The governor of Missouri is in a panic, trying to block the offer.

Employees in Employee Buyout Get Fired

Tribune Co. Chairman, Sam Zell, disclosed Thursday he plans to cut the staffing size of newspapers across the board.  Tribune Co. intends to downsize and sell assets to pay down $13 billion in debt Zell incurred when he took it private last year.