Saturday, November 28, 2009
Wow. Just got around to watching the arguments before Vice Chancellor Strine in In re Bank of America Shareholders Litigation. On a motion to dismiss, Vice Chancellor Strine didn't appear easily convinced. If you haven't seen it, yet, drop by in between football games. It's available on demand at CourtRoom View here and worth watching.
Among other things, the directors' attorney (Portnoy) argues that the suit should be dismissed because the shareholders refused to make demand and the board is sufficiently disinterested. Strine accepts that and takes one step further - so your argument is that the board was sufficiently ignorant of what was going on that they would be impartial in determining whether or not to pursue the litigation. "A turnip truck I did not fall off of..." Ouch.
Wednesday, November 25, 2009
Monday, November 23, 2009
I have been giving some thought to how jurisdictions other than Delaware deal with the question of intermediate scrutiny. Although Delaware leads the way in the M&A jurisprudence, other states have gone their own way in important respects. One of them is the hesitance of other states to adopt the Unocal, or intermediate scrutiny, doctrine in the context of board responses to takeovers.
I think I understand why and how things developed this way. It's an old story. The 1980s LBO boom was a scourge for management. They used whatever tools at their disposal to prevent an acquisition, lest they be shown the door by new management. The Delaware courts stepped in to put a limit on unreasonable and draconian defenses. In short, the message from the courts was that boards did not have a free hand to put off all takeover attempts. There were limits, albeit not always binding.
In any event, Ohio has what I think is a pretty typical constituency provision (GCL 1701.59):
(E) For purposes of this section, a director, in determining what the director reasonably believes to be in the best interests of the corporation, shall consider the interests of the corporation’s shareholders and, in the director’s discretion, may consider any of the following:
(1) The interests of the corporation’s employees, suppliers, creditors, and customers;
(2) The economy of the state and nation;
(3) Community and societal considerations;
(4) The long-term as well as short-term interests of the corporation and its shareholders, including the possibility that these interests may be best served by the continued independence of the corporation.
Now, that's pretty management friendly language. The interests of shareholders always have to be considered and in the director's discretion other interests can be weighed against that, just in case the interests of the shareholders and other constituencies don't entirely mesh. This isn't inconsistent with the liberty that a Delaware director is given to consider all sorts of factors before the corporation undertakes an action. That's the value of the business judgment presumption.
(5) When evaluating any offer of another party to make a tender or exchange offer for any equity security of the corporation, or any proposal to merge or consolidate the corporation with another corporation or to purchase or otherwise acquire all or substantially all the properties and assets of the corporation, the directors of the corporation may, in determining what they believe to be in the best interests of the corporation, give due consideration to the social, legal and economic effects on employees, customers and suppliers of the corporation and on the communities and geographical areas in which the corporation and its subsidiaries operate, the economy of the state and nation, the long-term as well as short-term interests of the corporation and its shareholders, including the possibility that these interests may be best served by the continued independence of the corporation, and other relevant factors.
Certain judicial decisions in Delaware and other jurisdictions, which might otherwise be looked to for guidance in interpreting Indiana corporate law, including decisions relating to potential change of control transactions that impose a different or higher degree of scrutiny on actions taken by directors in response to a proposed acquisition of control of the corporation, are inconsistent with the proper application of the business judgment rule under this article. Therefore, the general assembly intends:
(2) to protect both directors and the validity of corporate action taken by them in the good faith exercise of their business judgment after reasonable investigation.
Friday, November 20, 2009
eBay announced on Thursday that it closed its sale of Skype.
The buyer, who will control an approximately 70 percent stake, is an investor group led by Silver Lake and includes Joltid Limited and certain affiliated parties, the Canada Pension Plan Investment Board and Andreessen Horowitz.
eBay received approximately $1.9 billion in cash and a note from the buyer in the principal amount of $125 million [valuing the business at 2.75 billion]. The company retained an approximately 30 percent equity investment in Skype. The company also purchased senior debt securities with a face value of $50 million as part of a Skype debt financing.
eBay purchased Skype in September 2005 for $2.6 billion in cash and stock plus the mother-of-all-earnouts (up to $1.5billion). In the end, Skype was a dud for Bay - though personally, I'm a big fan of the technology. It just wasn't right for eBay. Why would you want to talk to people selling stuff on eBay anyway? Also, more generically, the earnout didn't live up to its potential as an incentive device and only about a third of it was reportedly paid out. As we've noted here in the past, earnouts seem like an elegant way to bridge a valuation gap, but they're really, really hard.
Here's a relatively recent empirical study of insider trading in India in advance of merger announcements, Merger Announcements and Insider Trading in India: An Empirical Investigation. Shorter version: insider trading is rampant. Don't be surprised. It's apparently rampant here. Why shouldn't it be in India as well?
Abstract: Insider trading activity is investigated prior to merger announcement in Indian capital market. An attempt is made to check it out whether trading takes place on the basis of asymmetric and private information. For examining the behaviour of stock prices a modified market model is used to estimate the parameters for the estimation window. These estimates are used to compute average return and cumulative average returns for the event window, which are measures of abnormal returns. Besides price run-ups, it is also common to see unusually high levels of share trading volume before public announcement of merger. Daily trading volume pattern of the target companies is also investigated. The analysis carried out in this study is based on a sample of 42 companies for which merger announcement date was announced during the period of 1996-1999. Based on the analysis for each company individually, we recommend investigation in six companies for existence of possible insider trading.
Thursday, November 19, 2009
On Tuesday the board of Barnes and Noble adopted a shareholder rights plan -- or a poison pill. From the board's announcement:
The Board adopted the Rights Plan in response to the recent rapid accumulation of a significant portion of Barnes & Noble’s outstanding common stock. The Rights Plan is intended to protect the Company and its stockholders from efforts to obtain control of the Company that are inconsistent with the best interests of the Company and its stockholders.
Consistent with Barnes & Noble’s commitment to good corporate governance, the rights will expire in three years and the Company intends to submit the Rights Plan for stockholder ratification within 12 months.Under the terms of the Rights Plan, the rights will expire on November 17, 2012. The rights will be exercisable if a person or group, without Board approval, acquires 20% or more of Barnes & Noble’s common stock or announces a tender offer which results in the ownership of 20% or more of Barnes & Noble’s common stock. The rights also will be exercisable if a person or group that already owns 20% or more of Barnes & Noble common stock, without Board approval, acquires any additional shares (other than pursuant to Barnes & Noble’s compensation or benefit plans). If the rights become exercisable, all rights holders (other than the person triggering the rights) will be entitled to acquire Barnes & Noble’s common stock at a 50% discount.
Finally, this plan was adopted quickly by the board in response to a rapid accumulation of stock by an unidentified buyer in the marketplace. (The WSJ thinks it's Ron Burkle of Yucaipa.) The fact that it was adopted quickly by board resolution in response to changes in the marketplace makes its clear why so many of those finance papers out there that attempt to place a value/cost on a shareholder rights plan are off-base. In too many of them, the researchers download a database and then run regressions on poison pill dummy without realizing that any company can have a pill in place in a few minutes time. The data is therefore meaningless. To top it off, to the extent ISS' corporate governance quotient dings boards for having pills in place, there's a disincentive to keep a shareholder rights plan lying on the books if you don't need it. Consequently, we're left with Just-In-Time pills like the one adopted by Barnes. OK, off my soap-box.
Wednesday, November 18, 2009
Tuesday, November 17, 2009
Abstract: This Article offers a novel idea for governing the tension between majority and minority shareholders: an “internal poison pill.” Borrowing conceptually from the famous shareholder rights plans created in the 1980s to address bullying external bidders, I show how an analogous (though economically distinct) financial instrument might be used by shareholders to navigate the twin internal governance tensions of holdout and expropriation. Two key features of this proposal distinguish it from alternative reforms: (1) It focuses on a privately enacted solution with room for contextual customization; and (2) it uses embedded option theory to construct an intermediate legal entitlement (as opposed to an extreme property or liability rule) for both majority and minority shareholders. If successfully scoped and swallowed, these internal poison pills could facilitate efficient freezeouts, chill coercive ones, supplant the awkward remedy of appraisal, and, ultimately, increase the ex ante value of firms by mitigating agency problems between majority and minority shareholders.
Our long, national deal-nightmare is over. AOL amended its Form 10 again, inserting dates into all the agreements. The record date for the spin off is now set for November 27, 2009. Here's the letter to Time Warner shareholders:
We are pleased to inform you that on November 16, 2009, the board of directors of Time Warner Inc. approved the spin-off of AOL Holdings LLC, a wholly owned subsidiary of Time Warner, which will be converted into a corporation and renamed AOL Inc. prior to the spin-off. Upon completion of the spin-off, Time Warner shareholders will own 100% of the outstanding shares of common stock of AOL. We believe that this separation into two independent, publicly-traded companies is in the best interests of both Time Warner and AOL.
The spin-off will be completed by way of a pro rata dividend of AOL shares held by Time Warner to our shareholders of record as of 5:00 p.m., New York City time, on November 27, 2009, the spin-off record date. Time Warner shareholders will be entitled to receive one share of AOL common stock for every eleven shares of Time Warner common stock they hold on the record date. The dividend will be issued in book-entry form only, which means that no physical stock certificates will be issued. No fractional shares of AOL common stock will be issued. If you would have been entitled to a fractional share of AOL common stock in the distribution, you will receive the net cash proceeds of such fractional share instead.
The distribution date for the shareholders of record will be on December 9, 2009 according to the Time Warner press release:
Shares of Time Warner common stock will continue to trade "regular way" on the New York Stock Exchange ("NYSE") under the symbol "TWX" through the distribution date of December 9, 2009, and thereafter. Any holders of shares of Time Warner common stock who sell Time Warner shares regular way on or before December 9, 2009, will also be selling their right to receive shares of AOL common stock. Investors are encouraged to consult with their financial advisers regarding the specific implications of buying or selling Time Warner common stock on or before the distribution date.
AOL common stock will begin trading on a "when-issued" basis on the NYSE under the symbol "AOL WI" beginning on November 24, 2009. On December 10, 2009, when-issued trading of AOL common stock will end and "regular-way" trading under the symbol "AOL" will begin. The CUSIP number for the AOL common stock will be 00184X 105 when regular-way trading begins.
You know what they say ... it's not a real deal unless there's a lawsuit. Well, the 3Com/HP deal has its first lawsuit. The $2.7 billion all cash deal was announced last week. Here's the merger agreement. Given that it's an all cash deal, the complaint alleges that the board failed to meet its fiduciary duties by not getting the highest price reasonably available to shareholders when it agreed to sell the company to HP. That's a Revlon complaint. I used to think that meant something, but following Lyondell, I now know that unless there's a claim of fraud or misrepresentation, short of an "utter failure" by the board to attempt to meet its duties, this kind of complaint is going nowhere. Since the only question is price, then it appears the only available remedy for those who think the company got sold for less than its fair value is appraisal under Sec 262 of the DGCL.
(c) Statutory Rights of Appraisal.(i) Notwithstanding anything to the contrary set forth in this Agreement, all shares of Company Common Stock that are issued and outstanding immediately prior to the Effective Time and held by Company Stockholders who shall have neither voted in favor of the Merger nor consented thereto in writing and who shall have properly and validly perfected their statutory rights of appraisal in respect of such shares of Company Common Stock in accordance with Section 262 of the DGCL (collectively, “Dissenting Company Shares”) shall not be converted into, or represent the right to receive, the Per Share Price pursuant to Section 2.7(a). Such Company Stockholders shall be entitled to receive payment of the consideration that is deemed to be due for such Dissenting Company Shares in accordance with the provisions of Section 262 of the DGCL, except that all Dissenting Company Shares held by Company Stockholders who shall have failed to perfect or who shall have effectively withdrawn or lost their rights to appraisal of such Dissenting Company Shares under such Section 262 of the DGCL shall no longer be considered to be Dissenting Shares and shall thereupon be deemed to have been converted into, and to have become exchangeable for, as of the Effective Time, the right to receive the Per Share Price, without interest thereon, upon surrender of the certificate or certificates that formerly evidenced such shares of Company Common Stock in the manner provided in Section 2.8.(ii) The Company shall give Parent (A) prompt notice of any demands for appraisal received by the Company, withdrawals of such demands, and any other instruments received by the Company in respect of Dissenting Company Shares and (B) the opportunity to control all negotiations and proceedings with respect to demands for appraisal in respect of Dissenting Company Shares. The Company shall not, except with the prior written consent of Parent, voluntarily make any payment with respect to any demands for appraisal, or settle or offer to settle any such demands for payment, in respect of Dissenting Company Shares.
Monday, November 16, 2009
HealthSouth Corp. recently announced a policy to reimburse shareholder initiatives relating to shareholder nominations for the election of directors:
Board of Directors has authorized the Company to amend its bylaws to adopt procedures relating to shareholder nominations for the election of directors. At its October 22, 2009 regular meeting, the Board approved the general terms of an amendment to the Company's Bylaws that will provide for reimbursement of shareholder expenses in connection with a proxy solicitation campaign, subject to certain conditions including the Board's determination that reimbursement is consistent with its fiduciary duties. The Board expects to adopt the final form of this Bylaw amendment this week. The final amendment will be included in a Form 8-K to be filed with the Securities and Exchange Commission when approved.
Saturday, November 14, 2009
As you'll remember, Merck structured its recent acquisition of Schering-Plough as a ‘reverse
merger’ in order to prevent a change of control provisions in Schering’s joint
venture with J&J from being triggered and thereby lose control over the
venture’s hit drug Remicade. A ‘reverse
merger’ is a merger in which the acquirer disappears and the target is the surviving
corporation. Steve Davidoff over at the
Deal Professor had a couple of good posts at the time about the likelihood of succeeding on the theory that
the reverse merger wasn’t really a change in control for purposes of the
Remicade joint venture. Anyway, the
whole question of whether the reverse merger constituted a change of control
for the purposes of the Remicade agreement is now in arbitration,
so it will resolve itself one way or the other.
On November 3rd, Merck completed its acquisition of Schering. After the reverse
merger, Schering changed its name to Merck and the old Merck changed its name
to Merck Sharp & Dohme Corp.
Confused? See Schering’s ... I mean ... Merck’s explanation of the name change here. And how about this for confusion – old Merck
shareholders traded in the Merck shares and got … well … they got Merck
shares. That wouldn’t be so bad, except
for most of them they also incurred brokers fees for the privilege! Now they’re complaining.
(HT: Aaron) -bjmq
As you'll remember, Merck structured its recent acquisition of Schering-Plough as a ‘reverse merger’ in order to prevent a change of control provisions in Schering’s joint venture with J&J from being triggered and thereby lose control over the venture’s hit drug Remicade. A ‘reverse merger’ is a merger in which the acquirer disappears and the target is the surviving corporation. Steve Davidoff over at the Deal Professor had a couple of good posts at the time about the likelihood of succeeding on the theory that the reverse merger wasn’t really a change in control for purposes of the Remicade joint venture. Anyway, the whole question of whether the reverse merger constituted a change of control for the purposes of the Remicade agreement is now in arbitration, so it will resolve itself one way or the other.
On November 3rd, Merck completed its acquisition of Schering. After the reverse merger, Schering changed its name to Merck and the old Merck changed its name to Merck Sharp & Dohme Corp. Confused? See Schering’s ... I mean ... Merck’s explanation of the name change here. And how about this for confusion – old Merck shareholders traded in the Merck shares and got … well … they got Merck shares. That wouldn’t be so bad, except for most of them they also incurred brokers fees for the privilege! Now they’re complaining. (HT: Aaron)
Friday, November 13, 2009
In Amirsaleh v. Board of Trade of The City of New York, Inc, Chancellor Chandler takes up the heavy burden of politely explaining the Delaware corporate law to the Supreme Court. I apologize for posting such a long quotation, but it's well worth reading. The issue here is whether in "bad faith" is the same as "not in good faith." The Supreme Court thinks the two are different. The Chancery Court begs to disagree.
According to plaintiff, all that need be shown is an absence of good faith. I must note that, in support of plaintiff’s argument, there are two known instances where the Delaware Supreme Court has suggested that there may be a difference between “bad faith” and “conduct not in good faith” in the context of the implied covenant [of good faith].
The first suggestion was made in Dunlap v. State Farm Fire and Casualty Insurance Co.when the Supreme Court stated “the case law frequently (and unfortunately) equates a lack of good faith with the presence of bad faith . . . .” But in the same case the Supreme Court explains that “[d]espite its evolution, the term ‘good faith’ has no set meaning, serving only to exclude a wide range of heterogeneous forms of bad faith.” This latter statement teaches that a party fulfills its obligation to act in “good faith” when it does not engage in any of the heterogeneous forms of “bad faith.” Put another way, “good faith” conduct can only be understood by reference to “bad faith” conduct. If no stand-alone definition of “good faith” exists, I admit my inability to understand how the phrase “a lack of good faith” has any ascertainable meaning. How can the plaintiff prove the absence of something that is undefined? In the Dunlap opinion the Supreme Court does not develop its suggestion that there might be a substantive difference between “a lack of good faith” and “bad faith.” Moreover, it does not appear to base its decision in Dunlap on that distinction (i.e., it did not find that the defendant’s actions “lacked good faith” without rising to the level of “bad faith”). Accordingly, I conclude that the Dunlap opinion did not hold that a breach of the implied covenant can be established by “a lack of good faith.”
The second suggestion was made in 25 Massachusetts Avenue Property L.L.C. v. Liberty Property Ltd. Partnership when the Supreme Court stated “[a]lthough the Vice Chancellor determined that Republic did not act in bad faith, he did not expressly address [defendant’s] liability for breach of the implied duty of good faith and fair dealing . . . . The two concepts—bad faith and conduct not in good faith are not necessarily identical. Accordingly, we must remand for the Court of Chancery to consider this claimed breach . . . .” On remand, Vice Chancellor Strine could not find a meaningful distinction between the two concepts and declined to reverse his previous ruling because he had already found that the defendant did not act in bad. Analyzing whether there was any meaningful distinction between the concepts, the Vice Chancellor observed: “Given the longstanding use of the concept of good faith to articulate the state of mind appropriate for various actors . . . and the use of the concept of bad faith to label someone whose state of mind is violative of the appropriate standard, one would think this concept of ‘neutral faith’ would have been embraced in American law before now if it had any logic or utility. I do note that in our corporate law, this court has firmly rejected the notion that the words ‘not in good faith’ means something different than ‘bad faith,’ and has done so on sensible policy, logical, and linguistic grounds.”
Based on all of the foregoing, I agree with Vice Chancellor Strine that there is no meaningful difference between “a lack of good faith” and “bad faith.” Accordingly, to prove a breach of the implied covenant plaintiff must demonstrate that defendants acted in “bad faith.”
Thursday, November 12, 2009
Abstract: This paper examines M&A transactions between firms with current board connections and shows that such transactions generate better merger performance. We find that acquirers obtain significantly higher announcement returns in transactions between connected firms. This result is striking considering such deals involve larger acquirers, public targets, and are more likely to be diversifying acquisitions, three factors shown by earlier research to affect acquirer returns negatively. We also find that acquirers pay significantly lower takeover premiums in connected transactions, consistent with the view that board connections help acquirers avoid overpaying for target firms. In addition, financial advisory fees paid to investment banks are lower in connected acquisitions. Board connections are also positively related to the operating performance of the new firm and negatively related to the probability of forced CEO turnover, suggesting that connected transactions generate better performance in the long run. Finally, we present evidence that the existence of a board connection between two firms has a positive impact on the probability of a subsequent M&A transaction between them. Overall, our results are consistent with the hypotheses that board connections are related to higher quality M&A transactions and that they reduce the degree of asymmetric information between the acquirer and the target about the other’s value.
Wednesday, November 11, 2009
OK, it's almost too much to bear. Someone stop the madness. Bloomberg is reporting that 3Com options were trading at records volumes and a 26-month high just prior to today's announcement of 3Com's acquisition by HP.
Almost 4,000 of the November $5 calls and 3,300 December $5 calls traded today, with almost all of the transactions occurring at noon. That compares with a total of six puts giving the right to sell 3Com shares. Hewlett-Packard, the world’s largest personal-computer maker, agreed to pay $7.90 a share in cash for 3Com, a 39 percent premium to today’s closing price.
“I don’t believe in that much luck,” said Steve Claussen, chief investment strategist at OptionsHouse LLC, the Chicago- based online brokerage unit of options trading firm PEAK6 Investments LP, and a former market maker at the Chicago Board Options Exchange. “If you’re on the other side of someone buying calls and a takeover is announced, it’s like someone held you up at gunpoint. It’s like you’ve been robbed and you feel violated.”
More than 8,000 3Com calls changed hands yesterday, 17 times the four-week average. The most active were contracts conveying the right to purchase 3Com for $5 through Nov. 20, followed by December $5 calls. The shares rose 5.2 percent, the most since Sept. 28, to $5.68 in Nasdaq Stock Market composite trading prior to the announcement.
Tuesday, November 10, 2009
Continuing the theme of comparative takeover regulation: here's a new paper, A Simple Theory of Takeover Regulation in the United States and Europe, from Ferrarini and Miller forthcoming in the Cornell International Law Journal investigating a federal approach to takeover regulation in teh US and Europe.
It's officially a trend! In response to a say-on-pay campaign Valero announced yesterday that it was adopting a 'say-on-pay' policy joining Pfizer. Apparently shareholders at more than 110 companies are considering say-on-pay resolutions this proxy season.
The say on pay proposals, which have increased in number and support since they were first introduced in 2006, are fueled by public outrage over executives who got big bonuses “at the same time their companies were losing lots of money,” said Tim Brennan, chief financial officer of the Boston-based Unitarian Universalist Association, which sponsored the say on pay resolution that Valero shareholders approved in April.
“Valero wasn't selected because we thought there was something egregious about their structure,” Brennan said. “But as a big, visible company, it's a company that could set an example in best practices in corporate governance.”
Monday, November 9, 2009
The UK-styled approach to takeover regulation relies heavily (although not exclusively) on brightline rules for delimiting what is permitted in the context of an offer and a response to an offer. The upside of this structure is that it leaves the decision whether to accept or reject an offer in the hands of the shareholders.
Contrast this approach with Delaware where the corporate code and the courts leave directors with a high degree of discretion whether to accept or reject offers. To the sometimes chagrin of academics (myself included) Delaware courts are loathe to set out brightline rules governing the takeover process. One of the selling points of the Delaware approach is that the fact-intensive approach allows for directors and courts reviewing directors actions to recognize that there may not be a one-size-fits-all solution and to take into account the specific issues in every case.
In Australia today we have an example why Delaware might be right to eschew many mandatory rules. Australia's Takeovers Panel is modeled on the UK Takeover Panel. EWC, a private Australian company in the process of going public, announced a bid for NewSat, publicly-traded Australian company. The details of the back-and-forth between the two companies can by found here care of The Brisbane Times newspaper. In any event, the talk of a take-over triggered a required Bidder's Statement to be filed by EWC. After some delay, EWC just filed its statement along with a surprising recommendation:
On behalf of the directors of EWC Payments Pty Ltd (EWC), I am pleased to enclose an offer by EWC to acquire all of your shares in NewSat Ltd (NewSat).However, in light of unexpected action taken by the Commonwealth Bank AFTER the Takeover Offer was made, and which the Commonwealth Bank set aside prior to a Court Hearing, I very sadly recommend that your do NOT accept this offer from EWC ...
While this is certainly a very good reason for NewSat shareholders to reject the EWC offer, there are many other equally good reasons...
Academic empirical legal analysis, when not coupled with a clear understanding of both fundamental corporate law principles and practical takeover market dynamics, can lead to meaningless data and misleading conclusions.