Tuesday, January 17, 2017
Ok, so revolution is perhaps a bit overblown. But, we are about to undergo a significant change in antitrust enforcement in the context of merger and acquisitions - probably more significant than the change we saw after the transition from Bush to Obama. Under Bush, the DOJ/FTC took a - relatively speaking - hands off/free market approach to enforcement. That approach was generally consistently with the free market principles espoused by traditional Republican administrations. With Obama, the DOJ/FTC became much more active in - again not inconsistent with general Democratic positions.
Well, now, it seems we are in for something completely different.
While generally in line with Republican orthodoxy (see appointment of former FTC commissioner Joshua Wright to head up transition efforts), I doubt that we will be returning to a principled, hands-off approach to merger review.
Take two examples. First, there's AT&T/Time Warner. On the campaign trail, President-elect Drumpf made it clear that he believed such a merger would result in "too much concentration of power" and that his administration would not likely approve the deal. Clearly, CNN (Time Warner asset) attracted attention (negative) of the President-elect. Last week, one day after the press conference in which President-elect Drumpf ripped into CNN ("fake news!"), AT&T's CEO paid a visit to the President-elect at Drumpf Tower. Although he denies it, it's hard to imagine that the pending transaction did not come in conversation or that it wasn't at least obliquely part of the discussion. Clearly, AT&T understands that it has to be on the President-elect's good side if it wants the deal to be approved.
Second, there is the pending Bayer-Monsanto transaction. The $66 bn mega merger which is to create one of the world's largest agriculture conglomerates was announced last September. Since then, it has been subject to regulatory review. Last week, the CEOs of both Bayer and Monsanto made a pilgrimage to Drumpf Tower to discuss the deal with the President-elect. Today comes news that the Bayer and Monsanto are going to promise to create jobs in the US in exchange for regulatory approval.
So we have moved into wholly new territory: regulation by deal. If you want your high profile deal approved, forget what FTC/DOJ have to say, get an audience with President Drumpf and he will bless the transaction in exchange for some jobs or whatever else. It's the kind of move that is more common in the developing world than here or in Europe, but that's the new reality.
Thursday, January 5, 2017
I'd be remiss if I didn't note that F. Ross Johnson recently passed away. Johnson was the real life protagonist of Bryan Burrough and John Helyar's Barbarians at the Gate - the story of the auction of RJR Nabisco and Johnson audacious attempt to lead a management buyout. You can find the official obit here at the NY Times. But, for most of us, we'll always have the HBO treatment of Barbarians at the Gate to remember those times.
Friday, July 29, 2016
From the law school at the University of Richmond:
The University of Richmond School of Law seeks to fill two entry-level tenure-track positions for the 2017-2018 academic year, including one in corporate/transactional law. Candidates should have outstanding academic credentials and show superb promise for top-notch scholarship and teaching. The University of Richmond, an equal opportunity employer, is committed to developing a diverse workforce and student body and to supporting an inclusive campus community. Applications from candidates who will contribute to these goals are strongly encouraged.
Inquiries and requests for additional information may be directed to Professor Jessica Erickson, Chair of Faculty Appointments, at email@example.com.
Thursday, June 23, 2016
So, Elon Musk of both SolarCity and Tesla fame has announced a "no-brainer": the merger of SolarCity and Tesla. you can find a copy of SolarCity's offer to acquire Tesla here. Obviously, with Musk on both sides of this deal, he is conflicted, as is his fellow director Antonio Gracias. But, as we know, being on both sides of a deal isn't necessarily damning. SolarCity's offer lays out a basic strategy for trying to ensure a deal, should it proceed, gets the business judgment presumption (from the offer):
To help ensure that, Tesla is prepared to make the consummation of a combination of our companies subject to the approval of a majority of disinterested stockholders of both SolarCity and Tesla voting on the transaction. In addition, as a result of their overlapping directorships, Elon Musk and Antonio Gracias have recused themselves from voting on this proposal at the Tesla board meeting at which it was approved, and will recuse themselves from voting on this proposal at the SolarCity board as well. We believe that any transaction should be the result of full and fair deliberation and negotiation by both of our boards and the fully-informed consideration of our respective stockholders.
So, the basic structure will include a requirement that the deal be approved by a majority of disinterested stockholders and also recusals from interested directors - as both directors and stockholders. That's usually enough to ensure business judgment, especially since Musk's position is short of that of a controller (approximately 20% or so of SolarCity and 25% of Tesla). Given that Musk's position will be sterilized through recusal a decision whether this deal turns out to be a no brainer or not will fall on the shoulders of disinterested stockholders. Delaware courts have leaned heavily on this kind of process to remedy defects of transactions involving interested directors/stockholders. Dell followed a similar path in its going private transaction. The process it adopted sought to ensure that Michael Dell would not have a direct effect on vote of stockholders by sterilizing his shares and recusing himself from board deliberations. The deal got done. But, two years plus later, in an appraisal action the court determined the price stockholders received in that deal fell short of a "fair value". That leaves one to wonder whether these procedural safeguards are as effective as the court hopes.
Wednesday, June 15, 2016
Anderson and Manns have posted a draft of a paper they presented at this year's AALS Transactional Law panel in NYC, The Inefficient Evolution of Merger Agreements. This paper is one of a couple of recent papers conducting empirical analyses of merger agreements. It's well worth a read!
Abstract: Transactional law is one of the most economically significant areas of legal practice and accounts for a large percentage of the profits and staffing at most elite law firms. But in spite of its economic importance, there has been almost no empirical work on the legal drafting process and the evolution of transactional documents over time. We have sought to fill this gap by analyzing the evolution of public company merger agreements in a dataset that encompasses 12,000 merger agreements over a 20-year period. Using computer textual analysis, we are able to identify the precedent, an earlier merger agreement, which serves as the template for the drafting of each deal. This approach allows us to construct comprehensive “family trees” of merger agreements, which we use to show how agreements are created and how they change over time.
We use this innovative approach to explore whether transactional drafting is driven by a rational process that minimizes the cost of deal documentation and risk to clients or by an ad hoc process that increases billable hours and risk. We show that a high level of “editorial churning,” ad hoc edits that appear to be cosmetic rather than substantive, takes place in legal drafting. Over half of the text of merger agreements is routinely rewritten during the drafting process even though the substantive provisions of merger agreements have similar features. Significant variation exists among merger agreements even involving the same firm as there is no evidence of firm-specific templates or industry-specific templates in most cases. Lawyers appear to choose earlier merger agreements as deal templates based on familiarity with past deals rather than based on the economic needs of clients or cost mitigation. Our empirical findings provide strong evidence of significant (structural) inefficiency in the drafting process which raises costs and risk to clients.
We argue that this inefficiency calls for an industry-wide solution of creating standardized templates for merger agreements that could be used across firms. The use of standardized documentation would help to minimize the time consuming (and expensive) drafting process of lawyer- and firm-specific edits that do little, if anything, to protect clients or affect the substance of the transaction. Furthermore, deal term standardization would have positive externalities as judicial opinions crystalize the meaning of standardized text. In addition, our analysis suggests that, somewhat counterintuitively, the failure to standardize text actually may stifle true innovation in the transactional context. We argue that by establishing an industry-wide set of “base documents,” lawyers could create the technological platform on which to create truly innovative solutions for clients at lower cost. While lawyers may not have the self-interest to embrace a standardized set of documents on their own, we argue that repeat-player private equity firms or trade associations for the private equity industry may have the economic interest and leverage to push for greater standardization.
Tuesday, June 14, 2016
That was the question a friend asked. Apparently, someone decided Microsoft's proposed acquisition of LinkedIn was just too good to miss and purchased a boatload of call options just before the deal was announced. How much is a "boatload"? This much:
Hmm. Let's see. The average volume of LinkedIn call options back until February looks to be about 6 contracts per day according to this chart. Do you think the SEC would notice if I bought more than 600 contracts the day or two before the transaction is announced?! If I could put 600 in all caps I would have. It's just that ridiculous. Who ever this guy is, he is going to get caught. And you know what? He deserves to get caught. Just another example of someone's greed outpacing their common sense.
Monday, June 13, 2016
Drafting guru Ken Adams now has a print edition available of his ebook, "The Structure of M&A Contracts". I recommend this book to anyone dipping their toe into an M&A practice. Seriously. For many law students now becoming law firm associates, the M&A contract is a lengthy almost incomprehensible document. The usual path is simply to ignore it and slowly absorb the structure of the contract by osmosis over time. That's one approach, or you can take a more active approach to understanding the document and how it gets drafted.
Wednesday, June 1, 2016
The DOJ is pursuing criminal and civil charges against a former Barclays banker for allegedly paying for renovation of his bathroom with insider tips:
According to the complaint, McClatchey began tipping the Long Island-based plumber, a friend, in 2013, enabling him to execute trades ahead of merger announcements involving 11 companies, including Forrest Oil Corp and PetSmart Inc.
In exchange, the plumber made thousands of cash payments to McClatchey, in some instances placing cash in a gym bag that the banker brought with him to a marina in Long Island, and also provided home renovation services.
I think even under Newman free plumbing services is going to count as a personal benefit. Here's the civil complaint. The SEC is alleging that McClatchey received cash as well as bathroom renovation services in exchange for insider tips on upcoming mergers.
Tuesday, May 31, 2016
Well, Carl Icahn said $13.75 for Dell's 2013 going private deal was too low and he encouraged stockholders to seek an appraisal for their shares. While Mr. Icahn wasn't patient enough to hang in there, for those who were, they got a 22% bump in the consideration due to them according to Reuters. Vice Chancellor Laster just handed down an opinion in the Dell appraisal case that set the "fair value" of Dell shares at the time of the going private deal at $17.62. Here's the Dell appraisal opinion. So, according to the court, the special committee negotiated a price that was 22% below what the court believed was a fair value. Remember, the board was subject to Revlon during the going private process - so it was tasked not just with seeking a fair price, but with seeking the highest price reasonably available. One wonders whether how a board can fail to negotiate a fair price while still comporting with its fiduciary duties to seek the highest price available for its stockholders.
Tuesday, April 26, 2016
Two weeks after California recommended approval of the Charter-Time Warner Cable deal, now the DOJ/FCC have also cleared the way for that deal to close - but with conditions.
On April 12, California administrative law judge recommend approval of the deal under the conditions that 1) Charter upgrade all its California customers to high-speed, digital broadband within 30 months, 2) Charter comply with Federal open Internet access regulations, and 3) that for three years Charter not impose data caps on customers.
Then yesterday, the DOJ filed suit and settled an suit against the parties. In the proposed final judgment that has already be agreed to by the parties the government and the combined company agree to a number of conditions:
Based on imposed conditions that will ensure a competitive video marketplace and increase broadband deployment, an order recommending that the Charter/Time Warner Cable/Bright House Networks transaction be approved has circulated to the Commissioners. As proposed, the order outlines a number of conditions in place for seven years that will directly benefit consumers by bringing and protecting competition to the video marketplace and increasing broadband deployment. If the conditions are approved by my colleagues, an additional two million customer locations will have access to a high-speed connection. At least one million of those connections will be in competition with another high-speed broadband provider in the market served, bringing innovation and new choices for consumers, and demonstrate the viability of one broadband provider overbuilding another.
In conjunction with the Department of Justice, specific FCC conditions will focus on removing unfair barriers to video competition. First, New Charter will not be permitted to charge usage based prices or impose data caps. Second, New Charter will be prohibited from charging interconnection fees, including to online video providers, which deliver large volumes of internet traffic to broadband customers. Additionally, the Department of Justice’s settlement with Charter both outlaws video programming terms that could harm OVDs and protects OVDs from retaliation– an outcome fully supported by the order I have circulated today. All three seven-year conditions will help consumers by benefitting OVD competition. The cumulative impact of these conditions will be to provide additional protection for new forms of video programming services offered over the Internet. Thus, we continue our close working relationship with the Department of Justice on this review.
Importantly, we will require an independent monitor to help ensure compliance with these and other proposed conditions. These strong measures will protect consumers, expand high-speed broadband availability, and increase competition.
While this is a big win for network neutrality advocates, it's the kind of settlement that the government typically tries to avoid in the context of antitrust regulation. Typically, the government would go for cleaner divestitures. Here, divestiture isn't in the cards, but more heavy handed regulation of the combined entity is the answer. A similar approach was used to mixed effect a few years ago in the Comcast Universal merger. We'll see how this goes. Me? I've got Fios.
Monday, April 25, 2016
I'm happy to announce the publication of a new casebook: Hill, Quinn, and Davidoff Solomon's Mergers and Acquisitions: Law, Theory, and Practice:
Being an M&A practitioner or litigator requires not only a knowledge of the law—the statutes, cases, and regulations—but also the documentation and the practices within the transacting community. This brand new book prepares students for practice. It includes, and explains, deal documentation, and discusses how negotiations proceed, referencing both the relevant law and transacting norms. It covers Federal and State law, as well as other relevant regulatory regimes involving antitrust, national security, FCPA and other issues. It has questions designed to get students to understand the law and the underlying policy, and problems to get students familiar with transaction structuring.
The text covers the latest materials on developments in the transacting world—where the law is going, where practice is going, how each might inform the other. And the book also has significant breadth, including chapters on accounting and valuation that should be accessible even to students with less quantitative facility, as well as shareholder activism and international M&A.
Run out and get yours while you still can!
Wednesday, April 13, 2016
Over at The Chancery Daily, they have observed something interesting. There is has been a decline in letter opinions from the Chancery Court. I'd share some links, but The Chancery Daily is a newsletter, so you'll just have to pay for your own subscription. The Chancery Daily attributes that to the increased reliance by the courts on transcript/bench rulings. For many years the courts have admonished us all not to pay attention to transcript rulings as they do not create precedent. Sure, that makes sense if the rulings are off the cuff rulings from the bench. But as the Daily notes, there appears to be "an increasingly structured approach by the Court in rendering oral rulings, including recitations of underlying facts and explicit citation to legal authorities -- and may even resolve legal questions that are more than simply ministerial, or intended to keep litigation moving forward." So rather than being unstructured off the cuff rulings, these transcript rulings -- likely because the chancellors know that people read them carefully notwithstanding exhortations to the contrary -- are becoming more formalized with, in essence, chancellors reading formalish opinions into the record. The Daily believes the upshot of all of this is a decline in letter opinions. Twenty percent fewer by his guess. Yay for less paper. Or more paper, since it ends up printed in transcript opinions anyway. But, one has to pay for transcripts while letter opinions and memo opinions are free as part of the public record. Also, transcripts don't get hoovered up in many of the electronic legal databases. Interesting. Not entirely sure what to make of this trend, but it's worth keeping in mind.
Monday, April 11, 2016
Nothing happens, nothing happens, and then suddenly everything seems to be happening. Such is the story developing around the sale of Yahoo. The biggest surprise to me at least are the most recent names of potential bidders to pop up: DailyMail.com and Elite Daily. Elite Daily tags itself, "The Voice of Generation Y". What generation is Generation Y exactly? The Daily Mail is ... well ... let's just say one of its highlighted stories right now is Princess Kate's Marilyn Monroe moment in Delhi. Boy, has Yahoo taken a tumble. But here's an operative question for students out there as we approach exam period. Now that Yahoo has started a sale process, is the Yahoo board permitted to consider the fact that one of the bidding groups is an upstart internet site and the British tabloid when it is evaluating which of the various bids to take? Can it say, "We're never selling to that group, we're only selling to a real buyer like a Verizon"? So, not hiding the ball: we're in Revlon-land. Time to start thinking about how the board will maneuver its way through to sale.
Friday, April 8, 2016
The fact that most mergers aren't in fact value enhancers for stockholder's of the acquirer isn't exactly news to people who pay attention to these things. Sure, selling stockholders make out well. As they should. They typically receive a premium to sell their shares. But what about buyer's stockholders? Meh. Robert Bruner summarized a number of studies of the profitability of M&A activity and found:
The mass of research suggests that target shareholders earn sizable positive market-returns, that bidders (with interesting exceptions) earn zero adjusted returns, and that bidders and targets combined earn positive adjusted returns.
Over at Braid, where they play with data, they've recently posted a nice visualization of the same:
It's an interactive visual, so go on over to Braid (link) and play with it. It's really very interesting. And what else are you going to do on a Friday afternoon?
Wednesday, April 6, 2016
Yesterday, the Obama administration announced new rules to stem tax inversions. Today, Pfizer announced that it was terminating its merger agreement with Allergan, citing adverse changes in tax laws as the reason. The merger agreement defines Adverse Tax Law Change as:
“Adverse Tax Law Change” shall mean (x) any change in applicable Law (whether or not such change in Law is yet effective) with respect to Section 7874 of the Code (or any other U.S. Tax Law), (y) the issuance of an official interpretation of applicable Law, as set forth in published guidance by the IRS (other than News Releases) (whether or not such change in official interpretation is yet effective), or (z) the passage of a bill or bills that would implement such a change in identical (or substantially identical such that a conference committee is not required prior to submission of such legislation for the President’s approval or veto) form by both the United States House of Representatives and the United States Senate and for which the time period for the President of the United States to sign or veto such bill has not yet elapsed, in each case, that, once effective, in the opinion of a nationally recognized U.S. Tax counsel, would cause Parent to be treated as a United States domestic corporation for United States federal income Tax purposes following completion of the Transactions (it being agreed that, for this purpose, U.S. Tax counsel shall be entitled to make such reasonable assumptions as to the relevant facts and, with respect to notices described in Section 7805(b) of the Code published in the Internal Revenue Bulletin that announce the intention to issue future regulations, the most likely form that such regulations will take).
An Adverse Tax Law Change triggers a mutual right to terminate the merger agreement. Upon a termination, Pfizer agreed to reimburse Allergan's expenses up to $400 million. In the press release Pfizer indicated that the amount to be reimbursed would be $150 million.
According to the WSJ, the Pfizer-Allergan deal was the largest ever deal at $150 billion to be terminated. If the Obama administration was gunning for the Pfizer deal when it announced its new anti-inversion regulations yesterday, it hit its mark.
Tuesday, April 5, 2016
In its ongoing battle to stem the inversion tide, the Treasury Dept has just announced new anti-inversion "temporary regulations." The first of these provides companies with guidance that the Treasury will disregard stock acquired in prior inversions/acquisitions that may have been acquired in order to get around previous inversion rules:
It is not consistent with the purposes of section 7874 to permit a foreign company (including a recent inverter) to increase in its size in order to avoid the inversion threshold under current law for a subsequent acquisition of an American company. For the purposes of computing the ownership percentage when determining if an acquisition is treated as an inversion under current law, today’s action excludes stock of the foreign company attributable to assets acquired from an American company within three years prior to the signing date of the latest acquisition.
So structuring transactions to get around the anti-inversion rules won't work. Strikes me that Treasury is like a little Dutch boy trying plug holes in the dike with his fingers. Or, maybe a better metaphor, it's like Treasury is playing Whack-a-mole. It's hard to imagine Treasury will ever really win this fight. But, it won't be for lack of trying.
The second set of temporary regulations Treasury announced yesterday was a ban on earnings stripping (for some reason, I thought they already did this):
Under current law, following an inversion or foreign takeover, a U.S. subsidiary can issue its own debt to its foreign parent as a dividend distribution. The foreign parent, in turn, can transfer this debt to a low-tax foreign affiliate. The U.S. subsidiary can then deduct the resulting interest expense on its U.S. income tax return at a significantly higher tax rate than is paid on the interest received by the related foreign affiliate. In fact, the related foreign affiliate may use various strategies to avoid paying any tax at all on the associated interest income. When available, these tax savings incentivize foreign-parented firms to load up their U.S. subsidiaries with related-party debt.· Today’s action makes it more difficult for foreign-parented groups to quickly load up their U.S. subsidiaries with related-party debt following an inversion or foreign takeover, by treating as stock the instruments issued to a related corporation in a dividend or a limited class of economically similar transactions. For example, the proposed regulations:o Treat as stock an instrument that might otherwise be considered debt if it is issued by a subsidiary to its foreign parent in a shareholder dividend distribution;o Address a similar “two-step” version of a dividend distribution of debt in which a U.S. subsidiary (1) borrows cash from a related company and (2) pays a cash dividend distribution to its foreign parent; ando Treat as stock an instrument that might otherwise be considered debt if it is issued in connection with certain acquisitions of stock or assets from related corporations in transactions that are economically similar to a dividend distribution.
Monday, April 4, 2016
As I sit here watching inches and inches of snow pile up outside, I am reminded that it's actually Spring and the academic year is rapidly coming to a close. End of the academic year usually means piling up a few good reads to accompany some writing projects. I enjoy reading business history, so this summer should be fun. I have two books - I haven't read either of them yet, so this is not a review. First, though, is Dear Chairman. It's the story of some of Wall Street's best known activists over the years. I've already read the chapter on Benjamin Graham and it's good enough to keep me around. Second on my list for this summer is Bloodsport. It's a history of the beginnings of our current M&A wave - way back to the LBO buyout era of the 1980s. I suspect it covers a lot of the same ground as Bruce Wasserstein's Big Deal - a book I recommend to everyone. In addition to the stories of the best known deals of the 1980s, Bloodsport has a couple chapters on M&A's most iconic lawyers, including Joe Flom as well as Marty Lipton and the back story to the creation of the poison pill. That should be worth the price of admission.
Friday, April 1, 2016
Earlier this week when Starwood announced that Anbang had upped its bid for the hotelier, they were very careful with their language. The previous weekend when Anbang made its first topping bid, Starwood declared that bid a "superior offer" and started the process to terminate its merger agreement with Marriott:
On March 18, 2016, Starwood notified Marriott that Starwood had received the binding proposal from the Consortium that Starwood’s Board has determined that the Consortium’s proposal constitutes a “Superior Proposal” and that Starwood’s Board intends to terminate the Marriott merger agreement and enter into a definitive agreement with the Consortium. Consistent with the terms of the Marriott merger agreement, Marriott has the right until 11:59 p.m. ET on March 28, 2016 to negotiate revisions to the existing merger agreement between Marriott and Starwood so that the proposal from the Consortium no longer constitutes a “Superior Proposal”. Starwood will negotiate in good faith with Marriott during this period, and the Starwood Board will consider in good faith any changes to the Marriott agreement that Marriott may propose during this period. Starwood is not permitted to terminate the Marriott agreement to enter into the Consortium’s binding agreement unless the Starwood Board has determined that the Consortium’s offer continues to be a “Superior Proposal” once the negotiation period with Marriott has concluded, and taking into account any revisions to the existing Marriott agreement that are proposed by Marriott during this period. The Consortium has confirmed that its offer will remain outstanding until the expiration of Marriott’s negotiation period.
On March 26, 2016, Starwood received a non-binding proposal from the Consortium, under which the Consortium would acquire all of the outstanding shares of Starwood common stock for $81.00 per share in cash. Starwood’s Board of Directors, in consultation with its legal and financial advisors, determined that this proposal is reasonably likely to lead to a Starwood Superior Proposal (as defined in the Merger Agreement), allowing Starwood to engage in discussions with, and provide diligence information to, the Consortium in connection with the Consortium Proposal. Starwood commenced discussions with the Consortium on March 26, 2016 and, in those discussions, the Consortium made a revised proposal with an increased purchase price of $82.75 in cash per share of Starwood common stock. Starwood and the Consortium are continuing to discuss non-price terms related to the Consortium Proposal, and are working to finalize the other terms of a binding proposal from the Consortium, including definitive documentation.
Thursday, March 31, 2016
Apologies for disappearing from the Internet. I've been sucked into law school administration in recent months and ... frankly ... it's a lot of work. Anyway, I have resolved to carve out time and return to the blog. Lots going on ... Starwood, Yahoo, etc. So, lots to think about.
Thursday, December 31, 2015
A new paper suggests they are good for someone , but perhaps not you and me. Here's the abstract for Are Corporate Inversions Good for Shareholders?:
In 2014 alone, U.S. firms worth over half a trillion dollars announced their intention to expatriate to a foreign country -- a corporate inversion -- in order to reduce corporate income taxes. To discourage expatriation, U.S. law requires shareholders of inverting firms to realize a personal capital gains tax liability at the completion of the transaction. Thus, while reduced corporate taxes benefit all shareholders equally, a corporate inversion results in a personal tax cost that depends on the individual investor's tax basis and standing. We develop a model to value the net benefits of inversion and we show that the private returns to investors varies widely across individuals. We find that the benefits of inversion disproportionately accrue to the CEO, foreign shareholders, and short-term investors, while many long-term investors suffer a net loss.