Tuesday, June 30, 2009
Recent reports suggest that Tengzhong Heavy Industrial Machinery is in discussions with the Chinese government over its proposed acquisition of the Hummer brand, dealership contracts and AM General production contract (for the H1/H2 model). Since GM recently announced it will be closing the Shreveport plant that produces the H3 model, I'm assuming those facilities aren't going to be part of the package.
Monday, June 29, 2009
In their article The Delaware Supreme Court Puts to Rest the Conflation of Bad Faith and Due Care Arising Out of Ryan v. Lyondell Chemical Co., just published in Securities Litigation Report, my good friend Eric Waxman and his co-author Virginia Milstead conclude that: In unequivocally declaring that “there is a vast difference between an inadequate or flawed effort to carry out fiduciary duties and a conscious disregard for those duties,” the Delaware Supreme Court’s reversal of Lyondell should put the lid back on a Pandora’s Box of potential personal liability for directors and ensure that they retain the flexibility necessary to respond appropriately in considering change of control transactions. You can read the whole thing here. MAW
In their article The Delaware Supreme Court Puts to Rest the Conflation of Bad Faith and Due Care Arising Out of Ryan v. Lyondell Chemical Co., just published in Securities Litigation Report, my good friend Eric Waxman and his co-author Virginia Milstead conclude that:
In unequivocally declaring that “there is a vast difference between an inadequate or flawed effort to carry out fiduciary duties and a conscious disregard for those duties,” the Delaware Supreme Court’s reversal of Lyondell should put the lid back on a Pandora’s Box of potential personal liability for directors and ensure that they retain the flexibility necessary to respond appropriately in considering change of control transactions.
You can read the whole thing here.
Saturday, June 27, 2009
I received a couple of questions offline about Lewis’ “MAC-attack” and whether a MAC claim would have plausible (who knew we had readers in Europe?!). The strength of a potential MAC claim by BAC was well covered by Steven a couple of weeks ago at the Deal Professor (Assessing a MAC Claim: The Lewis Ostrich Defense). I’d like to address Lewis’ concern. He apparently told Paulson/Bernanke that he feared shareholders would sue him for not claiming a MAC. It’s hard to imagine that this was anything other than a threat to get the Fed/Treasury to put up more cash. Why? Well, the lawsuit he suggests is one that wouldn’t go very far.
Alvarez’ assessment of a potential lawsuit was correct. Any suit for failure to claim a MAC would start with the BAC board enjoying the protection of the business judgment rule, which we all remember is a presumption that “the directors of [the] corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company. Thus, the party attacking a board decision as uninformed must rebut the presumption that its business judgment was an informed one.”
That means that any challenge to BAC decision not to invoke a MAC in the agreement would have had to fight a very steep uphill battle. To succeed, plaintiffs would have had to make the case the BAC board was uninformed/unreasonable. Since proving a MAC is extremely difficult to do in any event, it’s not clear at all that a board having discussed and considered the circumstances – which it appears clear from the abundance of the e-mails was happening -- would have made an unreasonable or uninformed decision by not attempting to claim a MAC. Basically, plaintiffs would have to make the case that finding a MAC would have been a “no-brainer” for a court looking at the facts and that the board was somehow absent when it neglected to reach the same conclusion in order to come close to winning on a claim against BAC’s board. I’m pretty confident that a court would pretty quickly dismiss such a suit.
So, what was Lewis afraid of beyond the
inconvenience/embarrassment of a lawsuit?
Who knows, but he’s got all the inconvenience you can imagine by having
to appear in front of Congress on a near regular basis these days. More likely, the threat of being forced into calling a MAC because of "shareholder pressure" and a potential lawsuit was just a negotiating tactic to get more support from the Fed.
Friday, June 26, 2009
The internal e-mail disclosed as part of the House Oversight Committee's hearings on the BAC/Merrill deal make for some interesting reading. In the exchange below Scott Alvarez, General Counsel for the Federal Reserve Board, lays out the major legal issues surrounding the last minute "MAC-attack" by Lewis. He correctly identifies the disclosure issue with respect ML's losses as the real hot button legal problem for Lewis.
From: Scott Alvarez
To: [Ben Bernanke]
Date: 12/23/08, 10:18AM
Shareholder suits against management for decisions like this are more a nuisance than successful. Courts will apply a “business judgment” rule that allows management wide discretion to make reasonable business judgments and seldom holds management liable for decisions that go bad. Witness Bear Stearns. A different question that doesn’t seem to be the one Lewis is focused on is related to disclosure. Management may be exposed if it doesn’t properly disclose information that is material to investors. There are also Sarbanes-Oxley requirements that the management certify the accuracy of various financial reports. Lewis should be able to comply with all those reporting and certification requirements while completing this deal. His potential liability here will be whether he knew (or reasonably should have known) the magnitude of the ML losses when BAC made its disclosure to get the shareholder vote on the ML deal in early December. I’m sure his lawyers were much involved in that set of disclosures and Lewis was clear to us that he didn’t hear about the increase in losses till recently.
All that said, I don’t think it’s necessary or appropriate for us to give Lewis a letter along the lines he asked. First, we didn’t order him to go forward – we simply explained our views on what the market reaction would be and left the decision to him. Second, making hard decisions is what he gets paid for and only he has the full information needed to make the decision – so we shouldn’t take him off the hook by appearing to take the decision our of his hands.
Let me know if you’d like any more information on this.
From: [Ben Bernanke]
To: Scott Alvarez
Date: 12/23/08, 11:08AM
Thanks, Scott. Just to be clear, though we did not order Lewis to go forward, we did indicate that we believed that [not] going forward would detrimental to the health of (safety and soundness) of his company. I think this is remote and so this question may be just academic, but anyway: What would be wrong with a letter, not in advance of litigation but if requested by the defense in the litigation, to the effect that our analysis supported the safety and soundness case for proceeding with the merger and that we communicated that to Lewis?
From Bernanke's response, it's pretty clear that while the Fed didn't order BAC to close the deal, they probably told Lewis that if he decided not to close the deal that the world economy would implode and it would be all his fault. Hmm. Tough choice. Tough choices like these are just examples of the "Big Deal" in action.
On the other hand, to the Chairman's question about preparing a letter to help with Lewis' potential defense in any lawsuit - through the combined wonders of e-mail and discovery, the letter he thinks might be helpful isn't required!
Recap of Bernanke's testimony:
Wednesday, June 24, 2009
So, GM just announced that it will close its Shreveport, LA plant. That's the plant that assembles the Hummer H3. OK, I suppose that means GM and Tengzhong Heavy won't be signing much of a transition services agreement for the assembling of the H3 line. When that line gets shut down, that will leave the Hummer division with no access to any real manufacturing assets. That leaves one to wonder what exactly will be left for GM to sell Tengzhong Heavy. Perhaps GM is planning on selling its rights to the brand and transferring the H1/H2 assembly contract with AM General to Tengzhong Heavy? How will Tengzhong Heavy get from owning a brand and an assembly contract to its next generation "green" Hummer? Looks to me like a deal about to crater.
Commissioner Paredes shared his dissenting view on the new shareholder access proposal in a speech before the Chanber of Commerce yesterday. The text of the speech is here. He argues that states are best able to tailor approaches to the corporate law, in particular that Delaware has an enabling statute intended to provide shareholders with flexibility in designing their relations with management. He points to DGCL new sections 112 and 113 as examples of Delaware's flexibility. One might also point to the new North Dakota Public Company chapter of its corporation code as an example of state flexibility and tailoring. Its section 10-35-08 provides for shareholder access to the corporate proxy on terms largely similar to those proposed by the SEC.
Tuesday, June 23, 2009
In anticipation of a potential hostile approach by Microsoft last year, Yahoo adopted a "tin parachute" severance plan. The "tin parachute" is a company-wide severance plan that makes payments to employees who lose their job following a change in control. If part of the motivation for an acquisition is cost-reduction and if layoffs are part of the post-closing integration plan, then such a plan could be a deal-killer. The Deal Professor discussed Yahoo's tin parachute in a post at the time. In any event, the plan generated a lawsuit that, according to NY Times, was settled today. Here's a copy of the proposed settlement agreement and amended severance plan. The agreement modifies the plan to make it less onerous for a potential acquirer, but doesn't get rid of it altogether. This watered-down plan must stay in place for at least 18 months from the date the settlement plan is approved, thus making it hard for the Yahoo board to lean on it, should Microsoft come knocking again. A new Section 5.1 also permits the board to amend or terminate the plan at any time.
Suppose a buyer is negotiating the terms of a potential acquisition of a family business when the parties encounter an issue over valuation. The seller’s projections show 500% growth over the three years following the sale. However, the buyer doubts these projections and therefore thinks the business is worth only a fraction of the seller’s asking price. This is a classic circumstance in the M&A world.
Often, the parties will bridge this valuation gap through the use of an earnout. Under such an arrangement, the seller gets paid a percentage of the asking price up front, and the parties agree to additional future payments if the company meets specific financial goals. For example, the buyer might agree to pay 75% of the purchase price up front, with another payout contingent on generating a particular amount of cash flow over a three-year period. This contingent payment could be binary, meaning it is paid or not depending on whether the target is hit, or it could be based on a sliding scale. For example, 50% of the contingent payment is made if 50% of the target is hit, 60% is paid if 60% of the target is hit, and so on.
Earn-outs are complex and must be carefully structured. For example, since the ultimate price payable pursuant to an earn-out provision will depend on future performance, the seller generally attempts to retain control of the business during the earn-out period to assure that changes in operations after the sale do not affect the ability to attain the specified target. The buyer, of course, often resists any restriction on its ability to run the business as it sees fit after the closing.
Here’s a recent article from BNA’s Mergers And Acquisitions Law Report highlighting many of the pitfalls to be avoided.
Monday, June 22, 2009
The University of Tennessee College of Law is inviting applications for a one semester visiting faculty position to commence in the Spring Semester of 2010, to teach Business Associations and a business law related course through the Clayton Center for Entrepreneurial Law. Successful applicants must have a strong academic and practice background. Preference may be given to those applicants who are seeking to enter the academy from private practice. Applications, including a letter of intent, resume and the names and contact information of three references, should be sent to:
George W. Kuney
W.P. Toms Distinguished Professor of Law and
Director of the Clayton Center for Entrepreneurial Law
The University of Tennessee College of Law
Knoxville, TN 37996-1810
Friday, June 19, 2009
This digression will be familiar to California lawyers, but maybe a little foreign for others. When doing a deal for stock, it is key that the stock be registered with the SEC so that recipients can freely trade it. This entails the time and expense of filing an S-4 with the SEC and going through rounds of comments before the registration statement becomes effective and the stock can then be traded. That means months of additional delay. But, if the goal is to use stock that can be freely traded the day after the transaction closes, registration isn’t the only option.
Pursuant to Section 3(a)(10) there is a valid exemption from the registration requirement for any securities that have been issued in exchange for other securities where the terms and conditions of such exchange have been approved after a fairness hearing by a court of governmental authority. At such a hearing (which must be open to shareholders), the reviewer must find that the terms and conditions of the exchange are fair (both procedurally and substantively) to those to whom securities will be issued; and must be advised before the hearing that the issuer will rely on the Section 3(a)(10) exemption based on the reviewer’s approval of the transaction. The SEC’s most recent staff interpretation of the rules relating to 3(a)(10) fairness hearings can be found here.
The California Department of Corporations is authorized under California law to conduct fairness hearings (CCC: 25142). Such hearings are conducted by officers of the Department in both San Francisco and Los Angeles. The Department of Corporations reports doing some 423 fairness hearings over the past ten years, with the bulk occurring during the dot com bubble when stock ruled as consideration.
ALthough the reliance on fairness hearings has declined recently, the fairness hearing is not entirely a product of the bubble. It was used by Aruba Networks in their acquisition of Airwave last year. The application as well as the hearing transcript are available through the CALEASI database here. The merger agreement is unfortunately not included in the materials made available online.
The hearing took place less than two months after the deal was signed – so about a month faster than an S-4 process. The expense was also likely considerably less – no late nights at the printer and no lengthy comment letters before the hearing. However, there was a hearing and it was more than just a check the box exercise. If you take a look at the transcript of the hearing, you’ll see that the hearing officer spends a lot of time on procedure, but then delves into the substance of the transaction. Here’s a sample of his questioning of the buyer and counsel:
Q: Let’s discuss the economic terms of the merger. What was the purchase price that the parties agreed on?
A: Gross level of 37 million.
Q: Okay, how was that determined?
A: So we went through an economic analysis. We looked at if we were to bring this in-house, where would the revenues come from. So we looked at what revenues could Airwave contribute. We looked at selling the Airwave product with the Aruba product. What that would generate. We looked at selling their technology into our install base; and then the reverse, selling their technology into our install base….
Q: And how is the purchase price going to be paid?
A: It’s a mixture of cash and stock.
Q: Okay, What’s the appropriate mix?
A: So we ended up at 45% cash and 55% stock.
Q: And was the agreement amended to reflect that ratio?
A: Yes, it was. We started at 35% cash and incremented that to 45 as one of the amendments.
Q: Why was that change made?
A: So, there has been a decrease in our share price. Partly just by macroeconomics, partly we’re in a high tech basket. We had downward pressure on it.
and so on...
Although in the current deal environment, there aren’t many transactions getting done for stock at some point when things turn around the fairness hearing may make a come-back. In any event, it’s worth keeping the fairness hearing in one’s tool-kit of potential solutions.
UPDATE: Steven Davidoff at The Deal Professor notes that pursuant to a 1999 staff interpretation that a foreign scheme of arrangement can qualify for the 3(a)(10) exemption.
Thursday, June 18, 2009
Wednesday, June 17, 2009
Last night's Frontline episode gives a blow-by-blow of the BoA/Merrill deal in crisp Frontline style. Watch it over lunch at your desk.
For those of you keeping score at home, the material adverse change language is from the merger agreement is below. Having it in front of you will come in handy at certain points while watching the show.
3.8 Absence of Certain Changes or Events. (a) Since June 27, 2008, no event or events have occurred that have had or would reasonably be expected to have, either individually or in the aggregate, a Material Adverse Effect on Company. As used in this Agreement, the term “Material Adverse Effect” means, with respect to Parent or Company, as the case may be, a material adverse effect on (i) the financial condition, results of operations or business of such party and its Subsidiaries taken as a whole (provided, however, that, with respect to clause (i), a “Material Adverse Effect” shall not be deemed to include effects to the extent resulting from (A) changes, after the date hereof, in GAAP or regulatory accounting requirements applicable generally to companies in the industries in which such party and its Subsidiaries operate, (B) changes, after the date hereof, in laws, rules, regulations or the interpretation of laws, rules or regulations by Governmental Authorities of general applicability to companies in the industries in which such party and its Subsidiaries operate, (C) actions or omissions taken with the prior written consent of the other party or expressly required by this Agreement, (D) changes in global, national or regional political conditions (including acts of terrorism or war) or general business, economic or market conditions, including changes generally in prevailing interest rates, currency exchange rates, credit markets and price levels or trading volumes in the United States or foreign securities markets, in each case generally affecting the industries in which such party or its Subsidiaries operate and including changes to any previously correctly applied asset marks resulting therefrom, (E) the execution of this Agreement or the public disclosure of this Agreement or the transactions contemplated hereby, including acts of competitors or losses of employees to the extent resulting therefrom, (F) failure, in and of itself, to meet earnings projections, but not including any underlying causes thereof or (G) changes in the trading price of a party’s common stock, in and of itself, but not including any underlying causes, except, with respect to clauses (A), (B) and (D), to the extent that the effects of such change are disproportionately adverse to the financial condition, results of operations or business of such party and its Subsidiaries, taken as a whole, as compared to other companies in the industry in which such party and its Subsidiaries operate) or (ii) the ability of such party to timely consummate the transactions contemplated by this Agreement.
Tuesday, June 16, 2009
The proposed shareholder access rules and the debate surrounding the role of shareholder activists got me thinking. Some opposed to increased shareholder power paint pictures of the end of capitalism that will come when shareholders force boards to adopt unwise business positions motivated by political and other interests. Of course, this is not the first time we’ve had this debate. Long before cheap credit fueled the private equity bubble of the past few years and before Mike Milken and the junk bonds made the buyout craze of the 1980’s possible, there were a set a characters who started the modern takeover movement and were the original shareholder activists.
The first corporate raiders of the post-World War II era were Thomas Mellon Evans, Robert Young and Louis Wolfson among others. They were called pirates and financial hooligans for their attacks on the comfortable life of corporate boards that typified the 1950s. The takeover tactics that these raiders developed would later become commonplace. They used cumulative voting to get minority board representation, they successfully challenged staggered boards, they used leverage to increase their influence, and they sought to make the market more efficient by buying up underperformers and turning them around.
I just finished reading Diana Henriques’ White Sharks of Wall Street. White Sharks is a portrait of these raiders and Thomas Evans in particular. Evans, Wolfson, and Young all looked to acquire underperforming “businesses run by boards devoid of any meaningful ownership” and underperforming family-owned businesses where the genetic lottery resulted in an uninterested group of founders’ children trying to manage the business. They bought these businesses and shook them up – sometimes by turning them around and other times by breaking them up and selling them off.
Evans and the other “activists” of the 1950s were the face of the nascent takeover market. They were also a threat to the social and political fabric of the day. By forcing boards to face facts, they undid all the stability of the business in the 1950s. Notwithstanding this threat from activist shareholders, boards and the system stood up reasonably well, adapted and thrived for many years. One wonders what parallels we can learn from that experience that might inform how we think about shareholder access rules.
Monday, June 15, 2009
The proposed amendments to the proxy rules to require companies to include disclosures about shareholder nominees for director in the companies’ proxy materials, under certain circumstances, so long as the shareholders are not seeking a change in control require companies to include shareholder nominees for director in the companies’ proxy materials. This requirement would apply unless state law or a company’s governing documents prohibits shareholders from nominating directors.
Thursday, June 11, 2009
Yesterday, the Deal Book had a story about a study commissioned by the Investor Responsibility Research Center Institute. The story reports the major conclusion of the study is that
buyout firms generally do not establish more shareholder-friendly corporate governance policies at the companies they take over, restructure and then take public. Instead, [these companies] tend to exhibit features that potentially benefit executives at the expense of shareholders, including takeover defenses and boards whose independence may be compromised.
The study is apparently based on a sample of 90 companies that went public from 2004 to 2006. Of these, 48 were backed by private equity funds, and 42 were not.
In addition to being a sample that must be too small to be of any statistical significance (can we really draw any conclusion from the fact that 5 of 48 PE backed companies had poison pills compared to 1 of 42 companies without PE sponsorship?), the study seems to have stolen a base that the DealBook implicitly recognizes.
Since “private equity firms generally keep a large ownership stake in their portfolio companies for years after they take them public” isn’t it at least as likely that the policies in the PE backed companies are ones the PE funds believe are MORE shareholder friendly? After all, why would these funds do anything other than maximize the value of their ultimate exit?
Tuesday, June 9, 2009
First, thanks to Steven Davidoff for the mention on his Deal Professor Blog today. Hopefully, Michael and I will be able to add to the discussion.
Monday, June 8, 2009
IT IS ORDERED that the orders of the Bankruptcy Court for the Southern District of New York, case No. 09-50002, dated May 31 and June 1, 2009, are stayed pending further order of the undersigned or of the Court.