Friday, July 13, 2007
Today's Friday Culture is the movie Other People's Money. Danny DeVito stars as "Larry the Liquidator", a corporate raider in classic '80s style who threatens a hostile take-over of New England Wire & Cable. Larry, a leveraged buy-out artist, likes this target because it is debt-free and has lots of cash on hand, a company he can easily strip down and liquidate for a quick profit. But, this being Hollywood (or perhaps Dow Jones?), he is challenged by the family of the company's founders who wish to preserve the company's traditions and support of the local community. The climax occurs appropriately at a shareholder's meeting inside the company's factory. The movie also contains one of the classic deal-lawyer quotes of all time. When Larry is asked whether they should bring in lawyers to knock out a transaction agreement, he declines, saying, "Lawyers are like atom bombs. Each side has them because the other side does. But you don't want to use them because they just really muck up the place." Enjoy your weekend!
Today the Dutch Supreme Court overturned the provisional injunction imposed by the Dutch Enterprise Chamber on May 3, 2007 restraining ABN AMRO from completing the sale of LaSalle to Bank of America without approval of its shareholders (read ABN Amro's reaction here). The decision means that the sale will almost now certainly proceed. This transaction was generally viewed at the time as a crown-jewel sale implemented to deter other bidders from interfering in Barclay plc's recommended takeover of ABN Amro. As such, the decision and likely sale are a setback for the European consortium of banks (Royal Bank of Scotland Group Plc, Fortis Group and Banco Santander) who have tabled a competing bid for both LaSalle Bank and ABN Amro. The RBS consortium's current offer is 79% cash and is valued at $97.78 billion while Barclays's all-stock offer currently values ABN at €63.24 billion.
The ruling is not a complete surprise. Last month the legal adviser to the Supreme Court, the advocate general, had opined that Dutch law didn't require a shareholder vote. Still the equities of the situation spell a different result -- ABN Amro has done everything in its power to tilt this bidding contest towards its chosen suitor, Barclays, to the detriment of its shareholders. Today is not a winning day for shareholder rights advocates.
NB. The result would likely be the same in the United States. ABN Amro's merger with Barclays is a stock one and there does not appear to be any change of control. Accordingly, ABN Amro's boards' decision to merger would be reviewed by a Delaware court under the business judgment rule and "Revlon duties" would not apply. And there would likely be no required vote on the LaSalle Bank sale as it does not appear to constitute "all or substantially all" of ABN Amro's assets, the prerequisite for such a vote under Delaware law. Nonetheless, the Delaware courts, of late, have been willing to step in to halt inequitable practices in M&A transactions (e.g., Hollinger Inc. v. Hollinger International Inc).
Thursday, July 12, 2007
The big story today is the illicit postings made over a period of seven years by Whole Foods CEO and co-founder John Mackey on the Yahoo chat board for Wild Oats. Apparently, he used the handle Rahodeb (his wife Deborah's name backwards) to make posts bad-mouthing Wild Oats and talking up Whole Foods. You can't make this stuff up. I haven't read all of the posts, but Mackey as CEO of Whole Foods has potential liability exposure under the anti-fraud provisions of the Exchange Act for the postings. To defend himself against these claims, he will likely claim that, among other things, the posts come under the puffery exception and otherwise it would have been unreasonable to rely upon them. Fair enough -- these days it may be patently unreasonable for anyone to rely on a chat board posting for their trades.
In the end, the Whole Foods-Wild Oats saga highlights for attorneys the problems of head-strong clients/CEOs who likely do not take advice well, as well as the perils of second requests. But just because you have a dumb CEO still doesn't justify the FTC actions here challenging Whole Foods' proposed acquisition of Wild Oats. As far as I know, there is no stupidity provision in the antitrust laws though some may argue there should be one in the law generally.
Addendum: read the posts here.
The tender offer for Biomet closed last night at midnight. According to the acquiring private equity consortium press release, 82.85% of Biomet’s outstanding shares were tendered in the offer. The deal had had a 75% minimum tender condition due to the vagaries of Indiana law where Biomet is organized and which requires a 75% vote to approve a merger. The Biomet merger agreement had a top-up option -- a provision which permits the consortium to now purchase, at a price per share equal to the offer price, a number of newly issued shares that will constitute 90.0005% of the total shares then outstanding. Accordingly, the acquiring group will exercise this option to bring their holdings up to 90% of the company and initiate a short-form merger under Indiana law. This will spare the consortium the shareholder vote and proxy requirements of a long-form merger permitting the deal to close today rather than in another month or two. Practitioners should take note.
The Securities and Exchange Commission yesterday voted unanimously to adopt a new antifraud rule under the Investment Advisers Act. The new rule makes it a fraudulent, deceptive, or manipulative act, practice, or course of business for an investment adviser to a pooled investment vehicle to make false or misleading statements to, or otherwise to defraud, investors or prospective investors in that pool. The rule will apply to all investment advisers to pooled investment vehicles, regardless of whether the adviser is registered under the Advisers Act.
The rule comes on the heels of the D.C. Circuit's decision in Goldstein v. Securities and Exchange Commission, striking down the SEC's attempt to make all hedge fund advisers register under the Investment Advisers Act. But, this new rule is much less ambitious. It is more of a clarification of enforcement powers that the SEC likely previously had than anything else. The SEC has yet to post the final rules release on its website, but the proposing release can be accessed here. And more importantly, the SEC has yet to act on the more ambitious and controversial other rule proposed in that proposing release which would revise the definition of accredited investor under Regulation D to raise the required net worth thresholds for private investors to invest in private equity and hedge funds.
The House of Representatives yesterday passed on a 370-45 vote legislation to revise the national security takeover review process overseen by the Committee on Foreign Investments in the United States (CFIUS). The House voted to adopt the Senate bill. Accordingly, The National Security Foreign Investment Reform and Strengthened Transparency Act will now be sent to the President for almost certain signature. For a summary of the final legislative provisions, see this client memo by Wiley Rein here.
The legislation is Congress's response to the uproar 18 months ago over the acquisition of Peninsular & Oriental Steam by Dubai Ports and the ensuing political brawl and heavy congressional protest which led to Dubai Ports terminating the U.S. component of its acquisition. The dispute was always puzzling: Dubai Ports was acquiring an English company with port operations in the United States and Dubai Ports is headquartered in the United Arab Emirates, one of our strongest allies in the Mid-East. Nonetheless, the controversy has now spawned a change in the CFIUS review process. And on the whole, the measure is fairly benign, endorsed by most business organizations and will not bring any significant change to the national security process.
However, the bill does come on the heels of a significant upswing of CFIUS scrutiny of foreign transactions. According to one news report, CFIUS considered 113 transactions in 2006, up 74 percent from the previous year. CFIUS conducted seven second-stage investigations in 2006, equaling the number of the previous five years combined. And while increased national security review can be a very good thing, one hopes that this heightened scrutiny is not just form over substance -- a development which would likely deter foreign investment in the United States. For more on this see my post The Politics of National Security.
Rio Tinto and Alcan today announced an offer by Rio Tintio to acquire all of Alcan’s outstanding common shares for US$101 per common share in a recommended, all cash transaction. The offer values Alcan's equity at approximately US$38.1 billion, and represents a 32.8% premium to the value of Alcoa’s current offer of U.S.$76.03, based on Alcoa’s closing share price on 11 July 2007. Some commentators still expect Alcoa to continue bidding for Alcan as it has few other viable options for acquisitions in this industry. This is particularly true since Alcoa itself is a rumoured acquisition target and a failed bid for Alcan makes it more vulnerable, although given that Alcoa is organized in Pennsylvania it is still about as bullet-proof against a hostile takeover as you can get.
Rio Tinto and Alcan have entered into a support agreement in connection with the transaction which provides for a break fee of U.S.$1.049 billion payable to Rio Tinto in certain circumstances. The minimum condition on the offer will be tenders of 66 2/3 percent of the outstanding shares and there is no financing condition on the bid. Rio Tinto is also going to some lengths to assuage the cultural concerns of Alcan (always an important and underlooked feature of M&A). In addition to headquartering the combined aluminium product group in Montréal, Rio Tinto will relocate its aluminium smelting technology research and development headquarters to Québec.
And for those who follow such things, Rio Tinto is being advised by Linklaters LLP and McCarthy Tétrault LLP. Legal counsel for Alcan was Ogilvy Renault LLP and Sullivan & Cromwell LLP. Interestingly, it appears that Linklaters is providing U.S. legal advice for Rio Tinto, a bit of a coup for the U.S. lawyers at this English firm, many of whom are refugees from Shearman & Sterling.
Tuesday, July 10, 2007
Lear Corporation, the automotive seating, electronics and electrical distribution systems manufacturer, yesterday announced that it had agreed to amend its merger agreement with Carl Icahn's American Real Estate Partners, L.P. to increase AREP's offer price for shares of Lear common stock from $36 to $37.25 per share. The $100 million increase in aggregate consideration paid values Lear at approximately $2.9 billion.
The Lear management is participating in the Icahn bid, and have entered into new employment agreements to continue their positions with the post-transaction entity. And the transaction had a go-shop provision which did not result in any other bidders, perhaps due to bidder wariness at this management participation. Nonetheless, shareholders in Lear have been actively opposed to the Icahn bid claiming it significantly undervalues the company. The leader of this charge has been Pzena investment management which yesterday again asserted its opposition to the bid according to Reuters. Pzena maintains that Lear is worth $55-$60 per share. The California State Teachers Retirement System and Institutional Shareholder Services were also opposed to Icahn's $36 offer.
The interesting twist here is that, in connection with the increase, Lear agreed to pay AREP $12.5 million in cash as well as 335,570 shares of Lear common stock (valued at about $12.35 million) if Lear's stockholders do not approve the merger by July 16, 2007. The provision is unusual; bidders are usually lucky to get their expenses in a deal that is not approved by shareholders. And coming on the heels of shareholder opposition and the Delaware court's recent intervention in Lear's sale process in In re Lear Corporation Shareholders Litigation, 2007 WL 1732588 (Del. Ch., June 15, 2007), the move is a bit cheeky (to use the English expression). Still, in a world where the Lear board had conducted the sale process above board this fee would be a legitimate one. It would be justifiable to secure an increase in the consideration paid for a deal that the board reasonably believed would now be approved by its shareholders. The only problem is that these considerations appear absent here.
The tender offer is starting to make a come-back. According to MergerMetrics.com, in the first five months of 2007, 15.5 percent of negotiated transactions were accomplished through tender offers. While that is a low figure, it is more than three times higher than in the same period last year.
The tender offer is likely reemerging due to the SEC's amendments to the best price rules which took effect on December 8, 2006. These amendments clarified that the best-price rule does not cover employee compensation, severance or other employee benefit arrangements. Previously, there was a circuit-split on this issue, and many bidders preferred merger transactions in order to avoid litigation and potential liability over the issue.
But the 15% figure is still a low one. Perhaps one reason why is the increasing use of go-shops in private equity deals. In cash deals, tender offers have a timing advantage over mergers. Tender offers can be consummated in 20 business days from the date of commencement compared to 2-3 months for a merger. However, if a go-shop is utilized the timing advantage of a tender offer is lost due to the need for the 45-60 day go-shop period. Accordingly, in this case a merger is likely a preferable option because it assures that minority shareholders can be entirely squeezed out in the merger provided the necessary number of shareholders (typically 50%) approve the merger. This compares to a tender offer, where if 90% of shareholders do not tender the squeeze-out threshold is not reached, and a back-end merger must still take place making the process longer than a single-step merger.
To address this last issue, transaction participants are adding top-up provisions to tender offers. A top-up provision provides that so long as x% of shareholders tender in the offer, the target will issue the remaining shares to put the acquirer over the 90% threshold. The minimum number of shares triggering the top-up varies but the target share issuance can be no more than 19.9% of the target's outstanding shares due to stock exchange rules. And according to MergerMetrics.com, in 2007 more than two-thirds of negotiated tender offers included a top-up agreement, up from 55.6 percent in 2006 and more than double the number in 2005 and 2004.
Expect the number of cash tender offers to increase as practitioners again become re accustomed to the structure. Also expect exchange offers to reappear. The SEC took steps in the 1999 M&A Release to put stock and cash tender offers on parity by permitting pre-effective commencement of exchange offers. But despite expectations of its widespread use, the exchange offer never caught on in friendly transactions. This was likely due to the same reasons for the decline in cash tender offers (exchange offers are also a terrible amount of work in a very compressed time for M&A lawyers). But with the new SEC rules, this transaction structure is one worth exploring for acquirers who want to quickly consummate friendly stock transactions.
Groupe Danone S.A. yesterday announced its intentions to make a € 55.00 in cash per ordinary share bid for all of the outstanding shares of Royal Numico N.V., a Dutch company listed on Euronext Amsterdam. The Supervisory Board and Executive Board of Numico also announced that it would unanimously recommend that Numico shareholders accept the offer. The price values baby-food maker Numico at $16.8 billion dollars, and is a 44% premium to Numico's average closing price over the last three months.
Analysts were highly critical of the price being paid by Danone. “This is the most expensive large-cap deal in the global consumer space ever,” stated Andrew Wood, an analyst at Sanford C. Bernstein in New York. And many are speculating that the price and large acquisition are an anti-takeover maneuver by Danone to discourage takeover bids. “This is a defensive operation for Danone,” said Chicuong Dang, an analyst at Richelieu Finance. “They are making themselves bigger and less attractive to bidders such as PepsiCo or Coca-Cola.” (quotes as reported by Bloomberg).
Danone and Numico have yet to reach a definitive agreement on the making of the offer. But the parties announced that the offer is expected to commence in August 2007 and would be subject to at least 66 2/3% minimum condition. Interestingly, Numico has agreed to restrictions on its ability to initiate or encourage discussions with third parties in respect of any proposal that may form an alternative to the Offer. And Danone is entitled to a break fee of EUR 50 million in the event (i) the Numico Boards withdraw their recommendation; or (ii) an unsolicited offer is declared unconditional. Though the break-fee is small, these are American style transaction defense provisions that you do not normally see in Dutch deals. But the Dutch government has opted out of the 13th EU Company Law Directive on public takeovers to permit Dutch companies to utilize lock-ups of this nature. As takeover activity increases in the Netherlands, expect Dutch companies to further utilize American-style transaction defenses.
Monday, July 9, 2007
The Topps Company, Inc. today announced that its Board of Directors had unanimously recommended that its stockholders reject the pending, unsolicited Upper Deck tender offer. Upper Deck is offering $10.75 a share or $416 million. In connection with their rejection, the Topps board asserted that the terms of the Upper Deck tender offer are substantially similar to the acquisition proposals submitted by Upper Deck to Topps on April 12, 2007 and May 21, 2007. However, Topps stated that it will continue discussions with Upper Deck to see if a consensual transaction is possible. Topps has currently agreed to be acquired by The Tornante Company LLC and Madison Dearborn Partners, LLC for $9.75 a share in cash, or about $385 million. Topps' board has not changed its recommendation for that transaction.
On July 2, Upper Deck, Topps main competitor in the trading card market, filed with the Federal Trade Commission and the Department of Justice the documentation necessary to commence the initial 15-day antitrust regulatory review period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 with respect to the tender offer. The review period is 15 days and not the normal 30 days because it is a tender offer, and the period is scheduled to expire on July 17, 2007. However, there is a strong chance the FTC or DOJ will issue a second request for this proposed transaction, delaying the process. Until this review is completed, Upper Deck will not be able to close its tender offer.
And the antitrust risk is clearly in both parties minds, as Topps 14D/9 filed today details that the substance of the parties' negotiations have concerned antitrust issues. Topps is requesting that Upper Deck agree to a $56.5 million reverse termination fee and a modified hell or high water provision (a provision in which Upper Deck would agree to sell or hold separate assets to satisfy governmental antitrust concerns). Upper Deck has resisted these provision, and the parties have agreed to suspend negotiations on the matter until the antitrust risk is clarified through the HSR process.
Topps was scheduled to hold a shareholders meeting to vote on the Tornante acquisition on June 28. But, the Delaware Court of Chancery enjoined the holding of the meeting to permit Upper Deck to commence its tender offer. Topps has yet to announce the new date for the meeting but has set the record date for the close of business on July 3.
For the time being, the deal is in the hands of the antitrust authorities. If and when they clear the transaction, expect the bidding for Topps to continue. In the case of a second request, Topps may try and push forward with the Tornante bid, perhaps with a sweetener from that consortium to hasten the process. At the very least the market agrees with a higher offer, Topps is trading today at $10.42 as I write, above Tornante's current offer price.
The Financial Times is reporting that Moody's will today issue a report taking "issue with the argument that private ownership frees companies from the short-term pressures of the equity markets, enabling them to invest and plan for the long term." The report states that:
The current environment does not suggest that private equity firms are investing over a longer-term horizon than do public companies despite not being driven by the pressure to publicly report quarterly earnings.
The report also asserts that private equity's "tendency to increase a portfolio group’s indebtedness to pay themselves large dividends runs counter to their claim of being long-term investors." And it takes issue with private equity's "claim that improvements in companies’ performance are driven by more focused management teams" rather than due to leverage and other financial engineering.
One of the keystone benefits often cited by supporters of private equity is their longer term horizon and ability to limit management agency costs to produce superior returns. Some have argued that these benefits combined with the rapid rise of private equity will result in an eclipse of the public corporation. While this report will give these supporters pause, the jury is still out and more study is needed in this area to truly understand whether the private equity model is indeed superior to the public one, as well as its benefits.
And on a related note, the FT also publishes today the results of a White & Case survey of finance professionals which found that 60 percent of respondents believe that "[t]he European leveraged finance market is an unsustainable bubble."
Google Inc. announced today that it had agreed to acquire Postini. Postini describes itself as "a global leader in on-demand communications security and compliance solutions serving more than 35,000 businesses and 10 million users worldwide." Under the terms of the agreement, Google will acquire Postini for $625 million in cash, subject to working capital and other adjustments. The transaction is Google's third large one in the past year. It agreed to buy DoubleClick Inc. in April for $3.1 billion and in November closed a $1.65 billion purchase of YouTube Inc. Google still has a lot of cash to burn, so expect more acquisitions.
For those who want more, Postini will host two conference calls and webcasts today to discuss the acquisition. The first conference call will be held at 6:30 a.m. Pacific Time (9:30 a.m. Eastern Time). The second conference call will be held at 9:00 a.m. Pacific Time (12:00 p.m. Eastern Time). To access either conference call, dial 800-289-0544 domestic and 913-981-5533 internationally.
Both the Chicago Board of Trade and Chicago Mercantile Exchange put their business combination to a shareholder vote today. The vote comes on the heels of Friday's announced increase in the merger exchange ratio from 0.350 to 0.375 shares of CME Holdings common stock for each share of CBOT Holdings common stock valuing CBOT at $11.9 billion up from an initial October valuation by the parties of $8 billion. All other terms of the merger remain the same. In connection with the increase, Caledonia Investments PYT. Ltd, CBOT's largest shareholder with 7% of the company, announced that it will support the transaction. Over the weekend, rival bidder IntercontinentalExchange Inc. decided that it would not raise its mostly stock offer for CBOT, which is now valued at a roughly equivalent amount as CME's.
The transaction looks likely to now go to CME and CBOT. It also highlights the quirks in Delaware law: how Delaware law permits transaction participants to characterize their stock-for-stock merger as a business combination rather than an acquisition to avoid "Revlon duties" and favor one bidder over another. Here, because the CBOT/CME transaction was mostly stock it was likely not considered to be a change of control transaction under Revlon (which would require the board to obtain the highest price reasonably available), but rather a simple business combination along the lines of Paramount Communications, Inc. v. Time Inc., 571 A.2d 1140 (Del. 1990). There and here, post-transaction control was fluid and there was no change in control that would trigger "Revlon duties". Accordingly, Revlon was not applicable and the CBOT board's decision to combine with CME (and arguably favor it over ICE in the process) reviewable under the business judgment rule. Moreover, while shareholder pressure here did work to increase the consideration, CME's final raise likely knocked ICE out even if ICE had been willing to measurably increase the bid. The arbitrageurs who own CBOT stock earned a significant return with the CME raise and are therefore likely to favor its certainty over a higher ICE bid despite the will of many longer-term shareholders. A similar happening to that in the recent OSI Restaurant Partners going-private. And, it is also likely to win approval of the CME-CBOT transaction today.
For shareholder who wish to attend the meetings today (and get some free food, etc.) here are the addresses: The CME Holdings special meeting is at 3:00 p.m. on July 9, 2007 at UBS Tower—The Conference Center, One North Wacker Drive. The CBOT Holdings special meeting is at 3:00 p.m. on July 9, 2007 and the CBOT special meeting of members will be held at 2:30 p.m. on July 9, 2007, each at Union League Club of Chicago, 65 West Jackson Boulevard.
Sunday, July 8, 2007
I read my first news story on the foreign private issuer delisting wave last Friday in the International Business Times (you can access it here). According to the report, since the SEC's new deregistration rules took effect on June 5, 2007, 35 foreign private issuers have taken steps to dereigster their securities and delist from a U.S. stock market (though some are choosing to remain traded on the Pink Sheets). These include such well-known companies as British Airways, Danone and Imperial Chemical. According to the news report and not surprisingly, many are claiming that they are delisting to escape burdensome U.S. regulation in the form of Sarbanes-Oxley and to escape the spectre of U.S. shareholder litigation. The report also quotes Harvard Law School Professor Hal Scott to support these assertions, he states that "[t]he benefit of coming here has decreased, and the costs have increased with litigation and regulation, so they're making a trade-off to get out of here."
Professor Scott is undoubtedly right that some of these companies are delisting because they no longer perceive a U.S. listing as worth the effort. However, this may not be attributable entirely to current, more stringent SEC regulation. Prior to the SEC rules taking effect, listing in the United States had been analogized to the Hotel California. Once you listed here you could never leave (get it?). But now, under the SEC's new rules if the average daily U.S. trading volume of a foreign issuer is 5 percent or less of its worldwide trading volume it can freely deregister and terminate its Exchange Act reporting requirements. To do so, however, the foreign issuer must also delist its securities from the U.S. stock market (i.e., Nasdaq or NYSE). And, as I predicted in a post on May 30:
[T]he new rules will release pent-up demand of foreign issuers who previously desired to deregister their securities and now do so. Most if not all of these issuers will cite Sarbanes-Oxley to justify the termination of their listing. But don't always believe it. These issuers originally listed in the United States for a variety of reasons, and for many a delisting will simply mean the reasons no longer exist (and probably haven't for a long time). For example, many a foreign high-tech company listed on the Nasdaq during the tech bubble seeking the extraordinary high equity premium accorded Nasdaq-listed tech stocks. Post-crash, many of these foreign companies still exist but are much smaller or have remained locally-based and a foreign listing is no longer appropriate for them.
For those delisting, it may also be short-sighted. True, some studies have found statistically significant declines in equity premiums for cross-listed firms at the time immediately before and after passage of Sarbanes-Oxley. But these declines now appear to be short term at best, according to a new study by Craig Doidge et al., Has New York Become Less Competitive in Global Markets? Evaluating Foreign Listing Choices over Time (June 2007). Doidge and his colleagues have found in a recently published study that the equity premium for cross-listing on a U.S. market "has not fallen significantly in recent years. . . . In contrast, there is no premium for London listings for any year. Cross-listing in the U.S. leads firms to increase their capital-raising activity at home and abroad while a London listing has no such impact. Our evidence is consistent with the theory that an exchange listing in New York has unique governance benefits for foreign firms."
I was quoted in yesterday's San Francisco Chronicle in the article IPO Talk Raises New Questions. The piece is a good primer on those who would like an overview of the issues associated with the rash of private equity and hedge fund adviser initial public offerings. In it I am quoted as stating that I "would avoid these firms 'for a lot of reasons. As a corporate-law professor, I'm offended that you don't have a vote. Second, these are risky investments and people may not be appreciating the risks involved . . . .' Finally, the private equity boom 'is not going to last.'" True enough.