M & A Law Prof Blog

Sina and Focus Media Drop Deal and then Issue Stock

The FT is reporting today that two NASDAQ-listed Chinese companies, Sina Corp and Focus Media, are walking away from their proposed $1.7 billion sale of substantially all Focus Media's assets to Sina because the Chinese Ministry of Commerce refused to consider approving their application. In the Form 6-K filed by Sina and the Form 6-K filed by Focus Media yesterday, the respective chairman blame the termination of the agreement on the delay and uncertainty regarding closing.

While they were in the filing mood both companies also announced "private equity" transactions.  Sina announced a $180 million sale of 5.6 millions shares of stock to a BVI entity controlled by Sina's CEO and other members of Sina's management chairman.  The FT notes that the sale was at an 8.8% discount to lat close.  For its part Focus Media announced a $142 million sale of 75 million shares to its executive chairman, an approximate 11% discount of its $10.78 closing price.

I wonder what that's about?  I mean, if following a busted deal, one of the parties issues stock to an insider at a discount to the market price for some reason, then I guess that happens.  Not often ... but hey ... why not?  But, now both parties to a busted deal issue stock to insiders at a discount on the same day immediately following the termination of the deal.  That's a bit much.  So, I wonder what's up.

-bjmq 

No Big Deal: GM & Chrysler

Stephen Lubben at Seton Hall has a new paper, No Big Deal: The GM and Chrysler Cases in Context in which he takes on the critics of the government's intervention into GM and Chrysler.  It's well worth reading.

Abstract: Almost every leading corporate bankruptcy academic has spoken against the automotive bankruptcy cases. And the Chrysler and GM chapter 11 cases have been vilified in every major finance-focused media outlet - by everyone from Ralph Nader to Richard Epstein. In this short paper, originally written for the TARP Congressional Oversight Panel, I address the key academic arguments against the automotive chapter 11 cases and contextualize what happened in these two cases. Stripped of their speculation and 'what ifs,' I show that these arguments are no more persuasive than the loose, unsupported arguments thrown about in the popular press. But first, I show how these cases, and particularly their structure - a quick lender-controlled §363 sale - are entirely within the mainstream of chapter 11 practice for the last decade.

-bjmq

Hummer: The Last Word

September has come and gone and I've decided that I'm tired of waiting for the Hummer "deal".  For reasons I've already stated, I don't think it will ever get done - even if both sides still say they're close to signing.  And if it ever does happen, I'm convinced it will be an awful deal for the buyer.  

Anyway, now comes the final nail in the coffin as far as I'm concerned.  A study in the Chicago journal of Consumer Research found that Hummer buyers make moral statements through their purchase of Hummer vehicles.  Those statements are patriotic and defending America and its frontier lifestyle from anti-American critics and foreigners.  Okay ... so what happens when you sell that brand to the Chinese? Gotta start looking for different customers.

Notwithstanding common sense, this deal continues to take baby-steps toward completion - a $10 million grant to set up an HQ in Michigan. There are also continues protestations from the Chinese partner that it will happen.  For my part, I've decided that I won't be saying any more about it until one of the following things happen:

1) The deal actually happens and then notwithstanding statements to the contrary about the deal saving US jobs Tengzhong Heavy relocates all the Hummer assembly operations to China; or

2) The deal actually happens and Tengzhong Heavy places a large order with AM General for H1 and H2 vehicles on behalf of an important Chinese customer.  Leave out the luxury package.  We'll just take them all in green, thanks.

Moving on.

-bjmq 

CF - Terra - Agrium Saga Continues

The Deal Professor has been following what he aptly calls "The Forever War" more closely than I, but I thought the recent developments worth commenting on, if briefly.

CF Holdings filed a Schedule 13D yesterday announcing that is has acquired 7.0% of the outstanding shares of Terra Industries.  From September 10-25, CF Holdings spent $340 million accumulating this block of stock by making a large series of $35,000 purchases on the open market, resulting in a perceptable increase in market interest in the company's stock.  Here's the Google Finance page, take a look at the volumes in the 1 month back chart to see what I mean).

Now, Terra doesn't have a shareholder rights agreement on file with the SEC, so an accumulation of 7% doesn't trigger a dilution as it might were the board of Terra to have adopted one.  This, of course, raises the question why the board didn't adopt one?  It can be done easily enough and certainly the board must have been aware that someone (guess who) was actively building a bloc.   A pill would have permitted the board to to continue to stave off an unwanted CF Industries bid while conserving cash that it might use in its attempted acquisition of Agrium.  

Instead, it announced a $750 million cash dividend to shareholders.  The dividend will make the company less attractive to CF, but at the cost of sapping the strength that Terra might otherwise need to acquire Agrium.  Oh, and given that CF is now a 7% shareholder, the potential hostile buyer gets a nice dividend of about $7.50 per share for its troubles. 

-bjmq

Update: Sorry, I'm always getting the parties in this three-way confused.  Randy (see comments) is correct. Agrium is attempting to acquire CF Industries. So, for my benefit:  Agrium is trying to acquire CF Industries who is trying to acquire Terra.  

  

Plural and Majority Voting

Today's WSJ has a good article on the beauties of plural voting for directors.  The machinations of corporate voting can be hard for normal people to understand.  In fact, when I introduce corporate voting to my introductory corporations classes, I usually have to rely on visual aids involving horses and finish lines.  Frustration with plural voting gave rise to "withhold" campaigns, majority voting policies (example: Sherwin-Williams), majority voting bylaws (Morris, Nichols memo on majority voting bylaws) and then finally the amended sec. 141(b). 

The knock on all of these developments was that even though a majority of shareholders might vote to withhold, that a director could nevertheless still retain her seat.  The WSJ reported Riskmetrics' data on voting at 50 companies.  Ninety-three directors failed to get a majority votes. Directors at two companies that had either majority voting policies or bylaws submitted their resignations as required, but then were promptly reappointed to the board.  Apparently, no directors actually lost their seats following an election in which they received less than 50% of the vote.  So much for shareholder democracy.

I think Webb Crockett, a director at Southwest Airlines who garnered just 46.3% of the vote, sums it up nicely, "I have the grey matter to serve...How many people who voted against me have any knowledge of my expertise about Southwest and the airline industry?" Yummy, cake.

-bjmq

One Year Later: Financial Regulation

Three things worth reading/listening to:  1) Ezra Klein interviews Barney Frank on the future of financial regulation.  2) Last week Roberta Karmel of Brooklyn Law School sat down with Joe Stiglitz and Jesse Eisinger to talk about the future of financial regulation.  The panel was moderated by Theresa Galbaldon of GW Law School.  The audio for the panel - New World of Financial Regulation - can be found at the SEC's Virtual Museum.  3) On the other hand, Gerard Baker provides a counter-view arguing that we should resist the temptation to "do something" here.

-bjmq

Fan and Yu on debt and the market for corporate control

Qiu and Yu's The Market for Corporate Control and the Cost of Debt is appearing in the current Journal of Financial Economics.  Here's the abstract:

Abstract: How do bondholders view the existence of an open market for corporate control? Between 1985 and 1991, 30 states in the U.S. enacted business combination (BC) laws, raising the cost of corporate takeovers. Relying on these exogenous events, we estimate the influence of the market for corporate control on the cost of debt. We identify different channels through which an open market for corporate control can benefit or harm bondholders: a reduction in managerial slack or the “quiet life,” resulting in higher profitability and firm value; a coinsurance effect, in which firms become less risky after being acquired; and an increasing leverage effect, in which bondholder wealth is expropriated through leverage-increasing takeovers. Consistent with the first two mechanisms, we find that the cost of debt rose after the passage of the BC laws; moreover, it rose sharply for firms in non-competitive industries, and for firms rated speculative-grade. In contrast, there is virtually no effect for firms in competitive industries, or firms rated investment-grade.

-bjmq

Perot Systems Employee Charged With Insider Trading

...well, that was quick.  From the SEC's litigation release this morning:

The SEC alleges that [Reza] Saleh made increasingly large purchases of Perot Systems call options contracts based on material, non-public information that he learned in the course of his employment with, or duties for, two Perot-related private companies and Perot Systems. Immediately following the tender offer announcement on Monday, September 21, Saleh sold all of the call option contracts in the accounts and reaped approximately $8.6 million in illicit profits.

Later that same morning, SEC staff with assistance from the Options Regulatory Surveillance Authority identified Saleh as a suspicious trader. Soon after being contacted by SEC staff, Saleh acknowledged to a Perot Systems director that he knew about the impending transaction when he traded.

-bjmq

Update:  Friday's WSJ has a sympathetic profile of Mr. Saleh.  Turns out he led a critical role in Ross Perot's rescue of EDS employees from Iran following the revolution in 1979.  That's too bad.  He'd have been better off if he wasn't so greedy.

Survey of Senior M&A Executives

Key findings of Nixon Peabody's senior executive M&A survey include:

• Mid-market deals under $250 million are expected to dominate over the next 12 months, with the industrial and financial services segments most likely to generate the highest volume of opportunities.
• While strategic buyers are expected to offer higher premiums than private equity buyers, 61 percent of respondents state that private equity firms’ ability to execute transactions quickly makes them more attractive to target companies.
• Financial sponsors are far more likely than their corporate counterparts to explore distressed deals. Accordingly, 56 percent of private equity respondents who have not traditionally focused on distressed opportunities say they plan to do so this year.
• Over the next 12 months, buyers will be focused on targets that complement existing businesses or operating units while sellers primary objectives will be to raise capital and divest non-core assets.
• 72 percent of respondents expect seller financing to be the most popular form of financing in the absence of regularly available debt.
• 58 percent of respondents expect sellers to negotiate higher termination fees over the next 12 months, and their use of MAC clauses and other deal terms reflects their concerns about transactions closing.  

Here's a link to the full 2009 M&A Executive Insight report. 

-bjmq

Adams Analyzes the Oracle/Sun Agreement

Ken Adams makes his case for better drafting of merger agreements, using last Spring's Oracle/Sun transaction as an example.  Here's the agreement so you can follow along.  

-bjmq

  

Travis Laster Confirmation Hearing

From yesterday's confirmation hearing as reported by the Sussex Countian:

   “For the past 13 years the vast majority of my practice has been before the Court of Chancery,” he said, adding that he understands not only the legal precepts that guide the court, but also the procedures and practices under which it operates.

    “What the Court of Chancery does is very different from other courts, the legal questions are of a particular nature,” he said. “There is not a lot of correspondence between other courts and the Court of Chancery.”

    The court, which has jurisdiction over cases involving businesses, contracts, trusts and other financial matters, is often cited as the leading authority on corporate law worldwide.

    In response to a question from Senate President Pro Tem Anthony J. DeLuca, D-Varlano, Laster said he would work to preserve the court’s status as a model, even when its decisions conflict with trends in the federal judiciary.

    Laster told the committee that, even in light of the bad feelings the public and politicians may have towards corporate America and its conduct before and during the recession, the Court of Chancery must hold its ground and remain fair and reasonable. 

    “A lot of people are hurting and are angry, they’ve lost a lot of money, it’s justifiable,” he said. “I think there’s a culture in Washington that says, whatever happens we have to change something.”

    While some are quick to accuse Delaware and the Court of Chancery of leaning on the side of corporate interests, Laster said the court must prove that it is and has always been fair.

    “We have to stick to what got us to a point of preeminence,” he said. “We have to make sure that we’re not labeled a pro-management state, we are a balanced state.”

-bjmq

Travis Laster Confirmed to Chancery Court

Congratulations to Vice Chancellor J. Travis Laster on his confirmation this afternoon. 

-bjmq

Update:  Here are the reports from Bloomberg and the Delaware News Journal.

Perot Systems Option Trading Raises Questions

By way of warning, I tell students in my Acquisitions Workshop that it's always a bad to start your legal career by engaging in insider trading.  Then we launch into a discussion of the David Li (News Corp/WSJ case) and the too-good-for-Hollywood Pacjin case and the Edelman case.  

The key lesson of the discussion is, obviously, that M&A lawyers need to learn discretion when it comes to their clients' confidences and pending transactions. If you have inside information about a pending transaction, of course, you don't trade on it.  Moreover, a discrete lawyer doesn't blab all about the transaction to their seat-mates on flights across the Pacific and certainly doesn't tell their good-for-nothing boyfriend about it.  

The second, less obvious, lesson is that if you are going to trade on inside information, well then, for heaven's sake don't trade options!  

Someone with inside information about the just announced Perot Systems/Dell transaction is going to learn that second lesson the hard way.  Bloomberg is reporting a spike in options trading just prior to announcement of the deal:

Calls volume climbed to 2,539 contracts, or 242 times the four-week average, according to data compiled by Bloomberg. Only 10 puts traded that day, the data show. The shares, which rose 0.1 percent to $17.91 on Sept. 18, surged 65% to $29.62 at 11:03 a.m. New York time today.

Options are usually so thinly traded that anyone greedy enough to try to make money on inside information by trading options ahead of an M&A announcement is just asking for trouble.  I suppose since one can make much more money on an equivalent investment using options rather than stock it's just too much to resist.  Better yet, if you've got inside information, sit on it.  

-bjmq

Massa and Zhang on Cosmetic Mergers

Massa and Zhang's Cosmetic Mergers: The Effect of Style Investing on the Market for Corporate Control is appearing in the current Journal of Financial Economics. Here's the abstract.

Abstract:  We study the impact of “style investing” on the market for corporate control. We argue that the choice of the bidder is influenced by the fact that the merge with a firm that belongs to an investment style more popular with the market may boost the bidder's value. By using data on the flows in mutual funds, we construct a measure of popularity, which relies directly on the identification of sentiment-induced investor demand, rather than being a direct transformation of stock market data. We show that differences in popularity between bidder and target help to explain their pairing. The merger with a more popular target generates a halo effect from the target to the bidder that induces the market to evaluate the assets of the less popular bidder at the (inflated) market value of the more popular target. Both bidder and target premiums are positively related to the difference in popularity between the target and the bidder. However, the target's ability to appropriate the gain is reduced by the fact that its bargaining position is weaker when the bidder's potential for asset appreciation is higher. We document a better short- and medium-term performance of less popular firms taking over more popular firms. The bidder managers engaging in these cosmetic mergers take advantage of the window of opportunity induced by the deal to reduce their stake in the firm under convenient conditions.

-bjmq

Air Coming Out of Marvel Acquisition?

I hope no one over at Disney was really surprised when Marvel received 45 copyright termination notices from the family of Jack Kirby last Wednesday.  I mean, even I, if prodded, remember that there was bad blood between Marvel and DC Comics and that it stemmed from some sort of dispute between the legendary Stan Lee and his erst-while partner Jack Kirby.  Me? I was always clearly in the Marvel camp growing up.

Anyway, it's just another reason why law school students who might want an M&A practice should take advantage of their time in law school to take a broad array of classes - even in areas where they think they'll never venture, like for example, copyright law.  One shouldn't be surprised by this kind of post-signing issue.  It should have come up in diligence (remember Michael's post on J&J/Elan?) and parties should be prepared to respond quickly and pro-actively. From the IP reps of the merger agreement, it's clear that people were looking backward and thinking of this issue, but it's less clear that they anticipated getting the notices.  

On the other hand, a Disney spokesperson told the LA Times, "The notices involved are an attempt to terminate rights seven to 10 years from now and involve claims that were fully considered in the acquisition."

Of course they were.  But we'll see won't we?  One suspects that Marvel will attempt to negotiate some sort of settlement with the Kirby estate, suggesting that parties anticipated this issue before signing.   On the other hand, if Disney attempts to walk or renegotiate its $4 billion price, they might be showing their hand that they were in fact surprised.

-bjmq

Legal Scholarship and Contractual Complexity

Over at the Conglomerate, guest blogger Afra Afsharipour has a couple of posts (here and here) dealing with the sparseness of legal scholarship on contractual complexity. Prof. Afsharipour, who practiced as a corporate lawyer for seven years before she began teaching in 2007, is "surprised that there is not more scholarship studying in detail complex agreements."  She contends that there is a need for greater scholarly study of existing contractual terms, deals and deal structures, at least in part to help practioners do a better job.

 

I agree with her views. In 2005, Jono Rosen and I published a pair of articles analyzing some common but complex contractual terms.  The first was on various anti-dilution provisions and the circumstances under which they are used.  The second examined the effect various provisions in venture capital contracts have on economic outcomes.  Our goal was to provide a way for practioners and academics to think about these provisions and better understand them.

 

Unfortunately, I believe that she is fighting an uphill battle.  In my (admittedly limited) experience, too many legal scholars believe these inquiries are too practical and therefore don't have much value.  So (with a handful of exceptions) even those who think this is a productive area of inquiry are discouraged from this path.

 

MAW

Business and Tax Law Prof's Wanted - Boston College

BC is hiring!  Here's the ad:

Boston College Law School expects to make faculty appointments in subject areas that are likely to include: business law (corporations, securities regulations, corporate finance, mergers and acquisitions, accounting for lawyers), tax law, and family law.  The appointment will be for a tenure track position.  Applicants must possess a J.D. degree and relevant experience such as practice at an advanced level, challenging government service, or a judicial clerkship. Applicants must show scholarly promise, evidenced by publications or works in progress. In addition, a focus on varying types of pedagogy, including skills and experiential training, is of interest.  Boston College, a Jesuit, Catholic University, is an Affirmative Action and Equal Opportunity Employer and encourages all interested persons to apply.  

Contact: Chair, Appointments Committee, Boston College Law School, 885 Centre Street, Newton, MA 02459.  Deadline: November 1, 2009.

Media Ownership Rules Pop Up as an Issue

With the current state of the economy, creditors are being forced to think about taking equity positions in debtors.  In most sectors that doesn't present a problem, but an article in today's WSJ points to the media sector where this is becoming a surprise issue for unwitting creditors who are taking equity.   The FCC must approve these sales.  While the 2006 ownership rules make cross-ownership and ownership of multiple platforms easier to accomplish, there's still an entire merge approval process at the FCC.  Phil Weiser (formerly of U. Colorado, now of the U.S. Department of Justice Antitrust Division as deputy assistant attorney general for international, policy and appellate matters) has a nice paper that appeared last year in the Federal Communications Law Review on the challenges of the dual merger review regime (DOJ/FTC/FCC).  

-bjmq

Post- Closing Purchase Price Adjustments

Agreements to purchase private companies often include a post-closing purchase price adjustment (generally based on closing working capital versus some agreed upon target). In an effort to ascertain current market practice, White & Case surveyed 87 private company purchase agreements that were publicly filed in 2008 and contained purchase price adjustments.  Full report here.

MAW

Colbert on Corporate Speech

And here's the thing - he's right on Santa Clara County v Southern Pacific Railway!  Hooray for smart corporate/constitutional comedy.

-bjmq