July 27, 2007
CFIUS Reform Becomes Law
The President yesterday signed into law H.R. 556,The National Security Foreign Investment Reform and Strengthened Transparency Act, which enhanced the review authority of the Committee on Foreign Investment in the United States (CFIUS). For more information on this Bill, see my prior posts:
Happy Birthday to Paul Caron!
July 24, 2007
The M&A Boom and the Return of State Law
As the M&A boom simmers along, one of the most interesting developments has been the reemergence of state law. More specifically, with the rising number of takeovers we are once again witnessing the effect state takeover law other than Delaware can have in deciding takeovers. I say once again, because this was an issue last seen in the 1980s as the debate swirled over the constitutional validity of state anti-takeover laws. Well, the states are back. Here are three different ways state law other than Delaware's has recently acted to effect the course of a takeover battle:
1. Differing Merger Requirements. The course of the recently completed Biomet and Clear Channel takeovers were both heavily influenced by their place of incorporation: Biomet was incorporated in Indiana and Clear Channel in Texas. Indiana law requires a 75% approval vote on a merger while Texas requires a 66 2/3% approval vote. In both instances, acquiring private equity consortium were forced into raising the consideration offered to win over shareholders. Undoubtedly, this pressure was exacerbated by their need to obtain approval from more than the bare majority of holders otherwise required under Delaware law.
2. State Anti-takeover Laws. Acquirers are increasingly finding that fourth generation state anti-takeover laws enacted in the late 1980s in the wake of the Supreme Court's CTS decision and which have been seldom triggered since are now affecting their own takeovers. Perhaps the most prominent example of this is AirTrans's hostile bid for Midwest Air Group. Midwest is incorporated in Wisconsin which has a business combination statute, a control share statute, a fair price statute and a constituency statute. Midwest has recently invoked this constituency statute to justify its refusal to accept the AirTrans bid despite a Midway shareholder vote in which 57% of Midway shareholders elected a short slate of directors nominated by AirTrans (it was a short slate because of Midway's staggered board, showing once again the powerful anti-takeover effects of this device).
3. The Interstate Reach of State Anti-Takeover Laws. Perhaps one of the most interesting aspects of this state resurrection is the effects these state anti-takeover laws are now having on companies incorporated outside their jurisdiction. This is being illustrated aptly with Roche Holding AG's hostile bid for Ventana Medical Systems Inc. Venatana is incorporated in Delaware but headquartered in Arizona. Arizona's anti-takeover law, the Arizona Anti-Takeover Act which includes a business combination statute and a control share statute, purports to cover Ventana since it has a substantial presence in the state. Roche has sued in federal district court to have it declared unconstitutional (though it has a weak case under CTS).
And there are other ways state laws are affecting shareholder rights in takeovers in unexpected ways. For example, Biomet shareholders were denied dissenters' rights in their transaction under Indiana law. Had Biomet been incorporated in Delaware these would have been available.
Thus, state law increasingly matters again in takeovers. This is a development which would certainly warm the heart of Yale law professor Roberta Romano, author of The Genius of American Corporate Law and a leading scholar on the state competition for corporate charters.
July 23, 2007
Law and Society Annual Meeting
I'll be attending the Law and Society Annual Meeting in Berlin for the remainder of the week. There I will be speaking on the panel: Securities Regulation, Corporate Governance, and Corporate Finance: Global Markets, Law, and Culture. I hope to see you there. In the meantime, I will continue to be blogging and will report any noteworthy events from the conference.
Transocean and GlobalSantaFe to Combine
Transocean Inc. and GlobalSantaFe Corporation today announced a merger of equals with an enterprise value of approximately $53 billion. Under the terms of the agreement, Transocean shareholders will receive $33.03 in cash and 0.6996 shares of the combined company for each share of Transocean they own. GlobalSantaFe shareholders will receive $22.46 in cash and 0.4757 shares of the combined company for each share of GlobalSantaFe they own. The transaction will be subject to approval by shareholders of both companies.
Notably, financing for the cash consideration will come from a bridge loan by Goldman, Sachs & Co. and Lehman Brothers Inc. for $15 billion. The bridge loan will be for a term one year. The participants decision to obtain an extended bridge loan rather than going straight to the debt markets is likely due to the current choppy state of the debt market. As was reported ad infinitum last week, many leveraged deals are being post-poned and the market is on edge with the Chrysler financing in particular under pressure. Though Cerberus's $4 billion deal for United Rentals also announced today may shore up confidence in the leveraged loan market. There, Cerberus is putting up about $1.5 billion of equity, with the remainder financed through debt financed from the high-yield and asset-backed securities markets, according to the Wall Street Journal. For those interested in buying, the United Rentals deal also has a short 30-day go-shop.
For those who follow such things, Baker Botts L.L.P. is acting as legal counsel to Transocean, and Skadden, Arps, Slate, Meagher & Flom LLP is acting as legal counsel to GlobalSantaFe.
Barclays Raises (Slightly)
Barclays today announced that it had raised its offer for ABN AMRO. The increased offer is €13.15 in cash and 2.13 Barclays shares for each ABN AMRO share. The increased offer is worth €35.73 per ABN AMRO share based on the July 20 closing price of Barclays. On this basis, the total consideration offered by Barclays is €67.5 billion with approximately 37% in cash. This €2.9 billion increase in offer consideration is still lower than the bid by the Royal Bank of Scotland consortium. That mostly cash bid is offering €71 billion or approximately €38.40 per share. Apparently, Barclays is hoping its share price will increase on the new offer making its bid more attractive to ABN AMRO shareholders.
In connection with the increase, Barclays also announced that China Development Bank and Temasek Holdings will invest €3.6 billion in Barclays. China Development Bank will invest €2.2 billion by buying 201 million Barclays shares at 720 pence a share. Temasek will invest €1.4 billion by buying 135 million shares at 720 pence a share. Contingent upon completion of an acquisition of ABN AMRO, the two parties will invest an additional €7.6 billion in Barclays. Barclays plans to purchase up to €3.6 billion worth of its shares to address the dilution caused by this share issuance.
Needless to say, the twist here is the second large investment by the Chinese government in recent months in a western financial institution. The previous one was the $3 billion invested in Blackstone Group by a financial arm of the Chinese government. According to Barclays, Blackstone also had a role in this purchase, advising the China Development Bank. And, with over $1.2 trillion in foreign reserves, expect more of these investments by the Chinese government.
July 22, 2007
The Redstone Dispute and the Perils of a Minority Shareholder
The newly-public dispute between Sumner Redstone and his daugther Shari Redstone highlights the perils of minority shareholders in privately-held enterprises. The Redstones currently control their investments through the family holding company, National Amusements Inc., a Delaware corporation. It owns controlling interests in Viacom and CBS, Midway Games and the National Amusements theater chain. Sumner Redstone controls 80% of the company and Shari Redstone the remaining 20%.
According to the Wall Street Journal, Shari is asking to be bought out for $1.6 billion, valuing National Amusements at $8 billion. Sumner apparently responded to her request in a public letter to Forbes on Friday:
I am perfectly satisfied to leave the matter as it is. There is no practical difference between me controlling 80% of the stock of National and 100% of the stock of National . . . . If Shari wishes to be bought out I will consider this so long as the price is acceptable.
For Shari, the corporate situs of National Amusements in Delaware is unfortunate for her bargaining position. For partnerships, Delaware follows the strict majority rule and allows no remedy for oppression. National Amusements is a corporation, though, but Delaware also has a strict rule that in a close corporation context as here, there are no specialized fiduciary duties of majority shareholders to minority shareholders (Nixon v. Blackwell, 626 A.2d 1366 (Del. 1993)). Thus, Shari's rights vis-a-vis a buy-out and as a minority shareholder will be determined solely by any shareholder agreement among the parties. It has previously been reported that such an agreement exists and it restricts her from selling her stake except for back to National Amusements at book value, which would be a fraction of its market value. This puts Shari in a tenuous negotiating position; Sumner is absolutely correct that he can just leave her there and run National Amusement and its controlled subsidiaries at his discretion.
If Sumner indeed does follow this route, Shari will likely be left with the only remedy typically available of shareholders in this minority position: be a pest and hope that this will create an incentive for Sumner to buy her out. If she follows this route, expect her to be regularly trooping to Delaware Chancery to challenge the decisions made by National Amusements on any plausible fiduciary grounds available to her, with a focus on any arguably self-dealing transactions between these entities and Sumner as these are subject to heightened scrutiny.
Ultimately and in order to prevent these problems, minority shareholders in any private enterprise and their attorneys should before-the-fact bargain for exit and governance rights in the case of a dispute. Unfortunately for Shari, since these shares were reportedly a gift from her father she likely did not have this option.
The Redstone Dispute and Good Corporate Governance
The rift between Sumner Redstone and his daughter Shari very publicly broke on Friday. The Wall Street Journal started it with an article reporting that octogenarian Sumner no longer wished his 53-year-old to succeed him as controlling shareholder and chairman of CBS and Viacom when he dies, and was is in negotiations with her to end her involvement with the companies. Sumner responded by issuing his own letter to the editor of Forbes magazine chastising Sheri. In the letter Sumner stated that while his daughter "talks of good governance, she apparently ignores the cardinal rule that the board of the two public companies, Viacom and CBS, should elect my successor." Sumner had previously fallen out with his son Brent who had sued him -- the suit was settled less than six months ago for about $240 million. Hopefully, this makes us all feel better about the relativity of our own family disputes.
One could also question Sumner's bona-fides in invoking principles of good-governance with respect to Viacom and CBS. He controls each through a dual-class voting stock which over-represents his economic interest in the companies (which is about 12% in each). Moreover, he has not been afraid to exercise this control. According to the Wall Street Journal:
In 1996, he forced Frank Biondi out as CEO and took the reins himself. In 2004, Mel Karmazin quit as president after four years of friction with Mr. Redstone. Last September Mr. Redstone, by then executive chairman of Viacom, ousted CEO Tom Freston and appointed Philippe Dauman, who himself had been forced to leave as deputy chairman in 2000 when Viacom acquired CBS.
Sumner´s inability to cede control of these companies has led to jokes that for each their succession policy is for "Redstone to not die". Hardly the best governance policy. Moreover, according to the Viacom proxy statement and the CBS proxy statement in 2006 Sumner was paid over $16 million by Viacom and $12 million by CBS, respectively. Notably, CBS was up about 30% last year while Viacom's stock went down. Part of good corporate governance is pay for performance. And whether a controlling shareholder should compensate him or herself at all is even questionable -- their reward is embedded in their gain from an increased stock price. If Sumner is indeed adhering to principles of good governance he might want to consider this course.
P.S. M&A lawyers should know that this now puts former Shearman & Sterling M&A partner and current Viacom CEO Philippe Dauman in a more likely position to succeed Sumner. He met Sumner when he was assiged as an associate to prepare a Schedule 13D for one of Sumner's investments.
Orbitz and Private Equity "Quick-Flips"
On Friday, Orbitz Worldwide Inc., the online travel company, had its first day of post-IPO trading opening at $14.90 but falling 50 cents to close at $14.50. This came a day after its IPO had priced at $15 a share below expectations of between $16 and $18. The Orbitz IPO also occurred in a bad week as four of the ten companies making initial offerings (including Orbitz) priced below their offering range and three fell below that range in their first day of trading.
The IPO of Orbitz was unique, though. It had been criticized for impenetrable financial statement disclosure in its prospectus and nominated by one blogger as "The Worst IPO of 2007". Not a great harbinger. Moreover, Orbitz was a "quick-flip". According to the final prospectus, Orbity is owned by Travelport which itself is wholly-owned by a Blackstone-controlled fund. Orbitz sold stock worth $510 million in the offering but remitted all of the proceeds to Travelport which retains a controlling interest in Orbitz. And the quick-flip here was due to the fact that its IPO occured less than a year after Blackstone acquired Orbitz. Blackstone, in particular, has made some spectacular sums with quick-flips. For example, Blackstone scored a tremendous return with Celanese, taking the company public only eleven months after acquiring it; Blackstone has made over 2 billion dollars thus far on its $650 million equity investment.
But quick-flip offerings are not as sweet for investors. In their article, The Performance of Reverse Leveraged Buy-Outs, professors Josh Lerner and Jerry Cao found that quick flips - defined for their purposes as when private equity firms sell off an investment within a year after acquisition - under perform. This compared with private equity-sponsored IPOs generally which the authors found consistently outperformed other IPOs and the stock market as a whole. Investors take note.