Friday, October 16, 2009
OK, so here's some more unsolicited advice: don't lie to the Feds. If they're calling you and asking about your trades, there's a reason. That's especially true if you have been engaging in insider trading in connection with a merger that you're working on. The BLT has been faithfully following the story of lawyer Melissa Mahler. It was a civil case, but now comes the criminal complaint. Here is the relevant paragraph from the criminal complaint:
10. On or about November 29, 2004, two attorneys with the SEC’s Division of Enforcement in Washington, D.C. conducted a voluntary telephone interview of MAHLER. Prior to asking MAHLER questions, the SEC attorneys advised MAHLER that it was a federal crime to make false statements to the SEC. The SEC attorney asked MAHLER, among other things, whether MAHLER had placed an order to purchase 10,000 shares of TPCV stock on July 28, 2004, through the broker-dealer in Florida. MAHLER falsely denied that she had placed the order to purchase10,000 shares of TPCV on July 28, 2004, when, in truth and in fact, MAHLER knew that she had placed the order to purchase those shares. …
The false statements act (18 USC Sec. 1001) is very broad in its application, and that makes it relatively easy to prosecute. For example, it doesn't require scienter or all the complexities of whether there was inside information or not. All it requires is that the Fed prove you willfully (1) make a material (2), false statement (3) in a matter within the jurisdiction of the executive branch (4). For prosecutors looking to make a case, it's much easier to prove false statements to investigators than it is to prove insider trading. So, it's a go to charge in cases like this.
Martha Stewart learned this lesson the hard way. It appears that Ms. Mahler is about to as well.
If you are interested in the intricacies of the false statements act, take a look at Steven Morrison's When is Lying Illegal? When Should It Be? A Critical Analysis of the Federal False Statements Act, John Marshall Law Review (2009). Here's the abstract:
First, this article explores the element of section 1001 that requires a false statement. Other articles have accepted the meaning of this element. What is “false,” however, is open to debate. Second, this article explores section 1001 in light of how we communicate. It notes that lying is prevalent in society and especially within the criminal justice system, and also argues that even when we’re not lying, we engage in “purposive communication,” which is a form of deception necessary for effective communication. I also discuss what lies are, and what types of lies there are. I do so to show that the conduct that section 1001 prohibits in a black-and-white way is actually a multicolor phenomenon. Third, I discuss section 1001’s materiality element. No other article has discussed this element in detail, even though, as I show, it is the central controversial element of section 1001 and is the source of the statute’s problems as well as its potential solution. Furthermore, I discuss the varying interpretations of the materiality element among jurisdictions. For example, some circuits have adopted what amounts to an objective reasonable person standard, while others have adopted a subjective standard. As I show, this variation goes to the heart of what section 1001 prohibits. Fourth, I discuss two different versions of the definition of materiality applied by section 1001. One version requires that the false statement be capable of influencing a government agency “to which it is addressed,” and another version need only be capable of influencing some government agency. This is a meaningful difference that hasn’t been explored in other articles or resolved in the courts or Congress. Fifth, I discuss the materiality analysis established in United States v. Gaudin, which may solve the “to which it is addressed” split. Courts have largely ignored Gaudin’s analysis, as have other commentators.
Thursday, October 15, 2009
Wednesday, October 14, 2009
It's a recurring question. We know that an all cash transaction will constitute a change of control and thus require directors attempt to get the highest price reasonably available for the benefit of target shareholders. A stock-for-stock deal where the shareholders of the target remain in the fluid aggregate doesn't constitute a change of control, so directors are free to take into considerations other issues when deciding whether to accept an offer. But what if you are taking a combination of stock and cash - how much cash will result in Revlon duties being triggered?
In In re NYMEX Shareholder Litigation, the chancery court had chance to slap down another data-point to help narrow the band of when Revlon duties might be triggered. In the NYMEX-CME transaction, at the time the board initially approved the transaction, NYMEX shareholders were to receive 36% cash and 64% CME stock. Whether Revlon was triggered by this consideration mix was an issue of some debate between the parties when they were before the court.
Tuesday, October 13, 2009
I think it’s great that Oliver Williamson was awarded the Nobel Prize in Economics with Elinor Ostrom. Williamson’s work in organizational economics and transaction-cost economics goes to the heart of why and how private actors form firms, vertically integrate and pursue acquisition strategies. It’s also the intellectual center of much of what happens in the “Deals” class. Although it’s offered in a law school, the Deals class is not really a “law” class. It’s more like a course in applied organizational economics (for lawyers).
The Nobel Prize citation summarizes some of Williamson’s contributions here:
Although Williamson’s main contribution was to formulate a theory of vertical integration, the broader message is that different kinds of transactions call for different governance structures. More specifically, the optimal choice of governance mechanism is affected by asset specificity. Among the many other applications of this general idea, ranging from theories of marriage (Pollak, 1985) to theories of regulation (Goldberg, 1976), one has turned out to be particularly important, namely corporate finance.
Williamson (1988) notes that the choice between equity and debt contracts closely resembles the choice between vertical integration and separation. Shareholders and creditors not only receive different cash flows, but have completely different bundles of rights. For example, consider the relationship between an entrepreneur and different outside investors. One class of investors, creditors, usually do not acquire control rights unless the entrepreneur defaults, whereas another class of investors, stockholders, typically have considerable control rights when the entrepreneur is not in default. Williamson suggests that non-specific assets, which can be redeployed at low cost, are well suited for debt finance. After a default, creditors can simply seize these assets from the entrepreneur. Specific assets on the other hand are less well suited for debt finance, because control rights lose their value if they are redeployed outside the relationship.
Williamson’s work along is critical to thinking about how and why market participants undertake deals and the structures they adopt. In particular, his insights into the importance of asset specificity, opportunism and the hold-up problem to investment decisions is critical to thinking about structuring transactions and private ordering.
His books, Mechanisms of Governance as well as The Economic Institutions of Capitalism, are dog-eared and kept close at hand. In addition, Corporate Finance and Corporate Governance (J. Fin., 1988) is an excellent application of his ideas to corporate finance and the problem of organizing firms.
All in all, good choice.
The BAC-ML legal stew continues to simmer. In the SEC-BAC case, parties are gearing up for trial and BAC has signaled its intention to waive the attorney client privilege. Remember, in the federal case, BAC is arguing, in effect, that it relied on advice from counsel regarding which disclosures were material. Indeed, I think Lewis' defense is something like, "I don't do disclosures. That's lawyer work."
Here's the statement from the SEC:
"We have reached agreement with theon proposed terms of a court order governing disclosure of information previously withheld on the basis of legal privileges. The order is subject to the approval of Judge Jed Rakoff. If entered by the court, the order would result in a broad waiver of the attorney-client and other legal privileges on matters that are the subject of our pending action against the Bank as well as ongoing investigation.
In the BAC-ML shareholder suit in Delaware, Vice Chancellor Strine refused to dismiss the case. The two sides' arguments can be summarized as follows (HT: Bloomberg):
Lawyer Lawrence Portnoy, representing the bank’s directors, told Strine they didn’t act in bad faith toward shareholders, and that Merrill’s distress “was not a secret” and the losses weren’t unexpected.
Investors’ lawyer Robert J. Kriner Jr. told Strine bank directors showed a “lack of care,” and said in court papers that “directors faithlessly subverted the best interest of Bank of America and its stockholders.”
This case is interesting. And if the plaintiff's duty of care argument is going to work, then the case may turn on whether in the face of a known duty to disclose (as told to them by their counsel) the directors chose not to. Myself, I'm waiting for someone at BAC to try to raise a statutory defense (DGCL Sec. 122(12)), but that's just me.
Just finished reading Carmen Reinhart and Kenneth Rogoff's This Time is Different. This book isn't intended to provide the details to answer the question what happened to us last year. Rather, the book is intended to take three steps back and provide the reader with a broader view of crises and point out themes that tie together the the financial crisis of 2008 with previous crises. Looking at the data from 1860 to 2006 they pull together it's pretty clear that that this time is, in fact, not different.
Although we hadn't experience a panic like this in many, many years, it turns out that financial and banking crises are all too common. It's a theme that Martin Wolf also argued in his Fixing Global Finance, though Reinhart and Rogoff are able to draw on much more data (global) and over a longer span of time to make their point.
I put the book down and came away with a couple of important lessons. First, financial liberalization and financial crises seem to go hand in hand. That's not to say that financial repression is a good thing, just that all those who argue this will be better if we "just let financial markets do their thing" are, well, dooming themselves to a never-ending cycle of booms and calamitous busts.
Second, when market participants are able to leverage up to the hilt, they do. Moral hazard usually takes them and the rest of the economy over the cliff. Third, stock market bubbles are better than real estate bubbles - mostly because the recovery periods from the collapse are much faster. Fourth, following a real estate bubble, it's not the bailout costs that will get you, it's the long term collapse of tax revenue associated with lower growth over time. Finally, surprise, surprise, (all) governments can and do default on their sovereign debt eventually.
There's a lot in this book to digest and it's well worth reading.
p.s. for the graduate students out there not interested in actually buying the book, a 124 page paper by the authors that covers the same material from April 2008 is online. But, buy the book.
Sunday, October 11, 2009
Saturday, October 10, 2009
Friday, October 9, 2009
Here's the SEC's complaint.
Yeah, you know what's coming next...
DOCX executives asked Xie in late November 2007 to participate in a meeting with EMC representatives concerning a plan to further extend the pre-existing partnership between EMC and DOCX. DOCX executives asked Xie to compile information about DOCX’s source code and other documents in anticipation of the meeting with EMC. Xie also worked on the project with a due diligence firm hired by EMC.
On December 7, 2007 at a meeting between EMC and DOCX employees in Oakland, Xie made a presentation and answered related questions. After the meeting, Xie asked his DOCX supervisor what would happen if someone were to buy DOCX shares in a time period when they thought something was going to happen to that company. Xie’s supervisor told Xie that would be a bad thing to do, that it could be traced, and that it was prohibited and illegal. As late as December 19, 2007, Xie continued to work with EMC and EMC’s due diligence firm.
Xie began acquiring shares of DOCX common stock prior to the December 7th meeting, while preparing due diligence materials for EMC. These initial purchases of 6,892 shares were made at prices ranging from $8.39 to $8.68. Despite the warning from his supervisor on December 7th, Xie continued to acquire DOCX common stock up to the day before the merger announcement, purchasing an additional 3,607 shares. In total, between December 3, 2007 and December 26, 2007, Xie purchased 10,499 DOCX common shares for prices ranging from $8.10 to $8.81.
In the category of "deals"-like things to read, here's a new paper on social networks and vertical integration in the laundry business - Airing Your Dirty Laundry. I love these kinds of papers mostly because they use a framework that's familiar to anyone who's taken a "Deals" class in analyzing the structure of an industry and why participants in that sector organize themselves the way they do.
Abstract: This article explores the relationship between an ethnic-based social network and vertical integration decisions in the laundry services industry. We find that stores in the social network are significantly less likely to vertically integrate than nonmember stores. This has three primary implications. First, the social network may be lowering the costs of using the market more than facilitating in-house production. This implies better outsourcing opportunities in a social network and may explain a documented relationship between social networks and firm economic performance. Second, institutional details of our example and the estimated relationship suggest a role for opportunism and reputation as determinants of the boundaries of the firm in a setting without asset specificity. Finally, although we provide evidence that better access to credit can increase the likelihood of vertical integration, we show that better outsourcing opportunities have a dominant effect of the social network in this particular setting.
Thursday, October 8, 2009
Apparently, The Boss has fans in the UK. According to the WSJ, the Competition Commission, the UK antitrust regulators, are moving to hold up the Ticketmaster-Live Nation transaction. The Competition Commission issued a statement today ruling against the merger:
Ticketmaster Entertainment, Inc and Live Nation, Inc will limit the development of competition in the market for live music ticket retailing.
In its provisional findings published today, the CC has concluded that the merger could severely inhibit the entry of a major new competitor (CTS Eventim) into the UK ticketing market. Prior to the announcement of the merger, Live Nation had signed an agreement with CTS to provide ticketing services for its live music events and venues in the UK. The CC believes that this agreement with Live Nation would have provided CTS with a foothold in the UK market from which it would have grown, increasing significantly the degree of competition in a market which is currently dominated by Ticketmaster and one other large ticketing agent.The CC believes that, if the merger were to proceed, Live Nation would have the incentive to impede CTS’s entry into the UK ticketing market, in particular by minimizing the supply of its tickets to CTS, and thereby frustrate CTS from becoming an additional effective competitor to Ticketmaster. This could lead to higher net prices (eg due to lower rebates to promoters and venues) and/or lower service quality and/or less innovation in the market than would otherwise be the case.
Wednesday, October 7, 2009
In City of Westmoreland Police & Fire Retirement System v. Axcelis, Inc. the plaintiffs attempted to use a section 220 books and records demand to get Axcelis' board to turn over board minutes and materials relating to the board's decision to turn down an unsolicited acquisition proposal (HT: Morris James, LLP).
This case is interesting for a couple of reasons. First, the Delaware Supreme Court is always encouraging plaintiffs to use the "tools at hand" (i.e. Sec. 220 actions) in conducting pre-suit investigation of suspected mismanagement or corporate waste. So, it's worthwhile looking at a case where the plaintiffs try the avenue that the court recommended to see how successful they are.
Second, this case is an attempt to use the "tools at hand" to gain more information about director deliberations with respect to an unsolicited takeover proposal that the board ultimately decided not to pursue. While that's neither obviously mismanagement nor waste at play here, theirs is a common enough complaint. Following Lyondell though, there isn't much question left how a court will rule on this kind of claim, but the Sec. 220 action keeps the plaintiffs in the game for a little while longer.
Sec. 220(b) defines "proper purpose" as "a purpose reasonably related to such person's interest as a stockholder." In Westmoreland, the court lays out the procedural requirements for securing books and records via Sec. 220, including a discussion of "proper purpose" that adds more gloss to what kind of purpose is reasonably related to a stockholder's interest.
Our courts have recognized that investigation of suspected wrongdoing on the part of a corporation’s management or board is a proper purpose for inspection of the corporation’s books and records. Yet, a plaintiff must do more than simply state its suspicion of wrongdoing; a Section 220 demand made merely on the basis of suspicion or curiosity is insufficient. Rather, the plaintiff must present “some evidence to suggest a credible basis from which [this Court] can infer that mismanagement, waste, or wrongdoing may have occurred.” This “credible basis” standard has been described as “‘the lowest possible burden of proof’ in Delaware jurisprudence.” The plaintiff may make a credible showing that legitimate issues of wrongdoing might exist “through documents, logic, testimony or otherwise,” and is not required to prove any wrongdoing actually occurred.
Tuesday, October 6, 2009
Monday, October 5, 2009
It's post-bust stories like that of Simmons in today's NY Times that really make one want to rethink how we do things. The CEO walks away from this bankrupt private equity invested company with $40 million in cash, while employees lose their jobs and retirees can't even get the only retirement perk the company apparently offered - a mattress.
Sunday, October 4, 2009
Early last month Diebold announced that it had sold its Premier Election Solutions, Inc. sub to Election Systems & Software (links are to their respective press releases announcing that the transaction had closed). The sale was small - $5 million plus 70% of receivables from sales as of August 31, 2009. Given that the sale was well under the HSR filing thresholds, the parties likely did not seek pre-merger approval from the FTC. Now comes word that ES&S's competitors are seeking an injunction from a federal judge in NJ to "unscramble the eggs" and order ES&S to undo the transaction. McClatchy reports:
A federal judge in Camden, N.J., agreed late Friday to hear a request for an emergency injuction that could halt Election Systems & Software's announced acquisition of Diebold Inc.'s Premier Election Solutions.
The quietly arranged shotgun wedding between the two voting-machine giants would give ES&S control of election systems in use in almost 70 percent of the nation's voting precincts. Federal Judge Robert Kugler agreed to hear Tuesday the request for immediate injunction brought by a small competitorm, Hart InterCivic Inc. The basic contention is that ES&S did a "stealth" transaction - as if by not voluntarily making an HSR filing one might impute some sort of bad faith. That's a tough bet. I wouldn't take it. In any event, it's worth noting that ES&S's competitors - and not local governments (customers) - are the ones seeking the injunction. This might well color the outcome. -bjmq
The quietly arranged shotgun wedding between the two voting-machine giants would give ES&S control of election systems in use in almost 70 percent of the nation's voting precincts. Federal Judge Robert Kugler agreed to hear Tuesday the request for immediate injunction brought by a small competitorm, Hart InterCivic Inc.
The basic contention is that ES&S did a "stealth" transaction - as if by not voluntarily making an HSR filing one might impute some sort of bad faith. That's a tough bet. I wouldn't take it. In any event, it's worth noting that ES&S's competitors - and not local governments (customers) - are the ones seeking the injunction. This might well color the outcome.
Friday, October 2, 2009
An article in The Economic Times of India raises that prospect. But, the takeover market in India is governed by the Securities and Exchange Board of India and is organized along the lines of the UK's Takeover Panel. So while there may be the prospect of unwelcome offers on the horizon, targets won't have the benefit of the defensive measures that have stymied the hostile acquisition in the US for years.
Thursday, October 1, 2009
Nixon Peabody has a summary of a decision just handed down by the Sixth Circuit in Cincom Sys, Inc. v. Novelis Corp. The decision (below) is worth reading, especially if you are a young lawyer buried under a pile of assignment clauses deep in the back of the diligence room - though these days the diligence room is just as likely to be virtual. In any event, the court in Cincom expands the rule in the Sixth Circuit against the assignability of patents to software copyright licenses. So, where a software license is silent on the question of transfer to a third party, the presumption is that no assignment or transfer is permitted without the express permission of the licensor.
The court also interpreted Ohio General Corporation Law Sec. 1701.81 (A)(3) to include a "transfer" for the purposes of determining whether or not a merger is considered a "transfer" under the Ohio code. Notwithstanding the fact that amended code drops the word "transfer" from this provision, the court held that a merger constitutes a transfer by operation of law or otherwise. Here's the amended language that the court looked at:
(3) The surviving or new entity possesses all assets and property of every description, and every interest in the assets and property, wherever located, and the rights, privileges, immunities, powers, franchises, and authority, of a public as well as of a private nature, of each constituent entity, and, subject to the limitations specified in section 2307.97 of the Revised Code, all obligations belonging to or due to each constituent entity, all of which are vested in the surviving or new entity without further act or deed. Title to any real estate or any interest in the real estate vested in any constituent entity shall not revert or in any way be impaired by reason of such merger or consolidation.
If you're sitting in Ohio (or elsewhere in the Sixth Circuit) looking at assignment clauses, it's time to wake up.