Monday, May 21, 2007
GE today announced that it had agreed to sell GE Plastics to Saudi Basic Industries Corporation, the Saudi petrochemicals manufacturer, for $11.6 billion in cash plus assumption of debt. The Saudi government owns approximately 70 percent of Saudi Basic. For those who now wish to invest in Saudi Basic, you're probably locked out -- ownership of its shares is restricted to investors in Saudi Arabia and the five other states of the Gulf Cooperation Council.
The sale is not a significant one for legal purposes, and so GE is not required to make the agreement public. But the sale is almost certainly conditioned on Saudi Basic obtaining effective approval for the transaction under the Exon-Florio Amendment. The Congress enacted the Exon-Florio Amendment, Section 721 of the Defense Production Act of 1950, as part of the Omnibus Trade and Competitiveness Act of 1988. The statute grants the President authority to block or suspend a merger, acquisition or takeover by a foreign entity if there is “credible evidence” that a “foreign interest exercising control might take action that threatens to impair the national security” and existing provisions of law do not provide “adequate and appropriate authority for the President to protect the national security in the matter before the President." Parties can obtain certification of no objection through a filing and review process with the Committee on Foreign Investment in the United States ("CFIUS"), an inter-agency committee chaired by the Secretary of Treasury.
I am not aware if the plastics division does any military or other national security work, but even if not, there may be some controversy. This is particularly true after the recent acquisition of Peninsular & Oriental Steam by Dubai Ports and the ensuing political brawl and congressional outcry which led to Dubai Ports terminating the U.S. component of its acquisition. Since this controversy, CFIUS has been taking a much harder look at Exon-Florio applications (For more on this see the recent article by Ilene Gotts, an antitrust partner at Wachtell Lipton Rosen & Katz and Leon Greenfield, partner at WilmerHale, in Competition Law Report, "Does the U.S. Foster National Champions: Foreign acquisitions and national security"). In addition, on February 28, 2007, the U.S. House of Representatives passed the National Security Foreign Investment Reform and Strengthened Transparency Act of 2007 (H.R. 556) by a vote of 423 to 0. One of the key changes established by H.R. 556 to the CFIUS review process include mandating that CFIUS conduct extended investigations of any transaction wherein the acquiring entity is owned or controlled by a foreign government. The Bill has yet to be enacted, but is likely to be followed in spirit by CFIUS in reviewing this transaction. Nonetheless, despite a thorough review process, even Congress and CFIUS are unlikely to block a takeover which does not directly effect our national security. This appears to be the case here.
A practice note for those who follow such things. Saudi Basic was represented by Shearman & Sterling on a deal team led by Stephen Besen. Besen lateraled from Weil Gotshal in 2001. Shearman, and top M&A lawyer John Marzulli, had regularly represented GE on takeover matters including the failed Honeywell transaction. But Shearman was recently dropped off GE's outside counsel list. So, this is a bit of a turn-the-tables moment for Shearman, particularly since Weil represented GE in this transaction.
On Friday, the Delaware Supreme Court issued a landmark decision on the scope of directors' fiduciary duties to creditors once a Delaware company enters the zone of insolvency or becomes insolvent. The case is North American Catholic Educational Programming Foundation, Inc. v. Gheewalla. In Gheewalla, the Court held that creditors do not have a direct claim against directors for a breach of fiduciary duty once the company enters the zone of insolvency or becomes insolvent. However, with respect to a claim when the company is insolvent, the Court stated that "[c]reditors may nonetheless protect their interest by bringing derivative claims on behalf of the insolvent corporation on any other direct nonfiduciary claim.”
Previously, although it was uncertain, it was generally thought that that directors of a Delaware corporation had some measure of fiduciary duty to creditors once a corporation entered the zone of insolvency. However, the Court here rejected this belief, stating that in the zone of insolvency directors' fiduciary duties run only to the corporation and its shareholders (apparently the Court agrees with Stephen Bainbridge). The Court's holding is likely to have wide-spread implications for bankruptcy and restructuring deals, and I will have more analysis once I have had the opportunity to furhter review the decision. For a bit more of an in-depth analysis of the decision at this time, I refer you to this memo prepared by the well-known, crack Delaware law firm of Richards, Layton & Finger.
Sunday, May 20, 2007
Steven L. Schwarcz, professor at Duke University School of Law, has an article in the spring 2007 issue of the Stanford Journal of Law, Business & Finance highlighting the value of transactional attorneys entitled: Explaining the Value of Transactional Lawyering. Here is the abstract:
This article attempts to explain empirically the value that lawyers add when acting as counsel to parties in business transactions. Contrary to existing scholarship, which is based mostly on theory, this article shows that transactional lawyers add value primarily by reducing regulatory costs, thereby challenging the reigning models of transactional lawyers as "transaction cost engineers" and "reputational intermediaries." This new model not only helps inform contract theory but also reveals a profoundly different vision than those of existing models for the future of legal education and the profession.