Friday, June 5, 2009
The proposed acquisition of Hummer is a bit of an odd deal. In addition to the (non)issue that Hummer
builds a civilian version of the Humvee, which may cause some US-based political questions –
there is now also the issue of Chinese government approval. The WSJ this morning has a good story
outlining some of the issues (here). Most important, every out-bound investment
from China worth more than $100 million must get a government ok. Where transactions are done by a state-owned
enterprise (like the Rio-Chinalco deal that just went south yesterday - here),
then it’s easy to imagine that Chinese government approval will be forthcoming. The gestation periods are long and many times
the acquisitions are part of a government/industry strategy. Such is not quite the case in the Hummer deal. The
English-language China Daily is now reporting that GM and Tengzhong may “have
jumped the gun” with this deal (here). Even
the people’s daily noted in its story
on the transaction that other recent acquisitions of foreign auto brands had
not gone well for the Chinese acquirers (Ssangyong).
Two issues seem to stand in the way of getting the OK from the Chinese government. First, is China’s recent adoption of greener automotive regulations. Buying Hummer is exactly consistent with that objective. Second, Tengzhong is only a 4 year old company with no experience managing an overseas investment and no experience building anything less than a truck. If you’ve tried to visit the company’s website recently, the first question you have to ask is whether the company is up to the task of managing a 3,000 person manufacturing division in the US. It's easy to imagine a Ssangyong-like ending to this transaction.
In any event, if Tengzhong wants to make this transaction happen it will have to get approval from SAFE, the central bank’s foreign exchange regulator and the Ministry of Commerce. SAFE recently began circulating draft regulations (described here). The Ministry of Commerce recently updated its outbound rules (descriptions here and again here) that would loosen the approval process. But, MOFCOM and SAFE remain the gatekeepers for Tengzhong and it’s not yet clear whether they will give an okay to the deal. However, it's still early since apparently the parties haven't even reached a definitive agreement, yet.
Anyone with a China practice who thinks they know how this deal will go down from a Chinese perspective should feel free to leave comments.
Thursday, June 4, 2009
Buy-side optionality in merger agreements is an area of a lot of interest these days. I know Steven has spent time on this blog and over at The Deal Professor blog thinking about it, particularly in the context of financial buyers. I’ve been giving it some thought as well.
When the Brocade-Foundry transaction was announced (July 2008), it was unusual because it involved a strategic buyer and a reverse termination fee and became part of a discussion of increased optionality in merger agreements. Most of that discussion has focused on optionality that private equity buyers have been able to negotiate. I’ve been building a dataset on of reverse termination fees for a paper I’m writing focused on optionality with respect to strategic buyers. I’ve been surprised, first at the number of transactions in which the buyer agrees to pay a fee to a seller, and second at the relative diversity of provisions providing for a fee to be paid to the seller in the event the buyer seeks to terminate. In blog-like fashion, here’s a quick run down.
In my dataset of transactions with only strategic buyers from 2003 to 2008, approximately 18% of those transactions include a reverse termination fee. Of the transactions with reverse termination fees, the vast majority (71%) simply track the termination fee in terms of size. This probably for no other reason than it simplifies negotiation. Of those transactions in which the fees do not track each other, the reverse termination fees are higher than the termination fees (70%). This makes sense if you think there fiduciary duties that constrain the size of termination fees don’t work the same way on the buy-side. There’s something to that.
In terms of triggers, while termination fees are pretty consistently triggered by some combination of a termination and a competing proposal, reverse termination fees are a little more diverse. Some reverse break fees are triggered by a termination subsequent to a lack of buy-side financing (as in the private equity buyer case). Others are triggered upon a termination subsequent to a competing proposal for the buyer. Terminations for regulatory/anti-trust reasons also can sometimes trigger a reverse termination fee. The extreme case, of course, is triggered when the seller terminates because the buyer refuses to close (all other conditions having been met). This is the ‘pure’ option.
In any event, I hope to get a version of this paper out by August. If you have come across varieties of reverse termination fee triggers that you think are important that I have left out of this brief taxonomy, please feel free to comment below.
Update: Here's an early draft of my paper, Optionality in Merger Agreements.
Wednesday, June 3, 2009
So maybe you’re a newly minted JD studying for the bar. Have you given any thought to what you might want to read on your now extended bar trip? I mean, when you show up for your first day of work in … January, it would be nice if you had read something useful. For generations past that might have meant James Freund’s Anatomy of a Merger, but that’s out of print and only available in pricey law-library editions. So what to read? Now there’s a nice modern take on the merger anatomy for young associates – William Carney’s Mergers & Acquisitions: The Essentials.
OK, I’ll admit that it lacks some of the folksy stories that made Freund’s book a really enjoyable read. But it makes up for that in being direct and covering a variety of useful topics including logistics of doing a deal, structuring transactions, due diligence and the important provisions in the merger document. However, it’s just the essentials, so don’t think that reading this book will be a better idea than taking an M&A class. But, if you are going to be a first year associate doing M&A and you have time on your hands after the bar (who doesn’t these days?), you should make sure you read this 336 page book before your first day. As I tell my students, it’s always better to know something.
Tuesday, June 2, 2009
OK, so GM went the way of Chrysler and filed for bankruptcy yesterday. Earlier this morning there was an announcement by GM’s management that it had entered into an MOU with a mysterious unidentified potential buyer for its Hummer division. Now, it’s leaked to the NY Times and Bloomberg (and just about everybody else in the world) that the buyer is Sichuan Tengzhong Heavy Industrial Machinery Company Ltd., based in Chengdu. They are offering to take the Hummer Division off GM's hands for $500 million in cash.
Of course, a few years ago sale of an automotive division that produces the civilian version of the military’s Humvee would have likely generated cries of outrage about threats to our national security. Remember Dubai Ports? Or how about Unocal-CNOOC? Well, with GM in bankruptcy those concerns are not likely to carry the day. That said, this transaction is a strong candidate for a voluntary CFIUS filing with the US Treasury. Given the nature of the business (vehicles manufacture with a potential military use) and the nature of the acquirer (News articles are murky about that. They say it's "privately" owned. Maybe.), this is precisely the type of transaction that should seek to make a filing. Worst case for GM would be that they announce this transaction and proceed along a path to closing only to have a Dubai Ports/Unocal-like flare-up kill this transaction.
The real question regarding the shareholder access debate is whether once shareholders have the power to nominate minority directors whether they will use it for good or ill, or at all. Yair Listokin has a paper, “If You Give Shareholders Power, Do They Use It? An Empirical Analysis,” in which suggests the answer might be that they won’t use it at all. Listokin looked at state antitakeover protection statutes that provide shareholders with the opportunity to opt-out through the adoption of shareholder initiated bylaw proposals. He finds that very few companies’ shareholders take advantage of the opportunity to opt-out of these statutes. This finding is consistent with earlier work from Rob Daines and Michael Klausner who looked at customization of incorporation documents and found very little opting out of default provisions (here).
Recently, we started to have experience with shareholder votes relating to ‘say-on-pay’ a hot-button issue (and here) it there ever was one. So far, shareholders who have had the opportunity to vote on pay packages appear reticent to say ‘no.’ The WSJ recently canvassed 15 companies large cap companies with say-on-pay policies that permit shareholders to review executive pay policies (here) and none of questions passed. Given the high degree of emotion that pay questions can generate, the vote results (or lack of them) are pretty amazing. All of this simply provides fuel for the shareholder access debate.
Monday, June 1, 2009
On Wednesday, June 10, 2009, I'll be speaking at the Conference on Business Associations at the annual AALS Mid–Year Meeting . Here are the details: "Perspectives from Practice 9:00 –10:15 a.m. James D.C. Barrall, Global Chair, Benefits and Compensation Group, Latham & Watkins, Los Angeles, California Allison Danner, Assistant U.S. Attorney, United States Department of Justice, Northern District of California, San Francisco, California Ben Packard, Vice President, Global Responsibility, Starbucks Coffee Company, Seattle, Washington Mei-lan Stark, Senior Vice President, Intellectual Property, Fox Entertainment Group, Los Angeles, California David R. Stickney, Esq., Bernstein Litowitz Berger & Grossman LLP, San Diego, California Michael A. Woronoff, Head of Corporate Securities Practice, Proskauer Rose, Los Angeles, California Steven Ramirez, Loyola University, Chicago, Moderator The distinguished practitioners on this panel will focus on the following question: From the stand-point of preparing students for your practice, what would you like to see law schools doing that they are not doing, and not doing what they are doing?" This is a topic I think about quite a bit. See, e.g. here. Hope to see you there. MAW
On Wednesday, June 10, 2009, I'll be speaking at the Conference on Business Associations at the annual AALS Mid–Year Meeting . Here are the details:
"Perspectives from Practice
9:00 –10:15 a.m.
James D.C. Barrall, Global Chair, Benefits and Compensation Group, Latham & Watkins, Los Angeles, California
Allison Danner, Assistant U.S. Attorney, United States Department of Justice, Northern District of California, San Francisco, California
Ben Packard, Vice President, Global Responsibility, Starbucks Coffee Company, Seattle, Washington
Mei-lan Stark, Senior Vice President, Intellectual Property, Fox Entertainment Group, Los Angeles, California
David R. Stickney, Esq., Bernstein Litowitz Berger & Grossman LLP, San Diego, California
Michael A. Woronoff, Head of Corporate Securities Practice, Proskauer Rose, Los Angeles, California
Steven Ramirez, Loyola University, Chicago, Moderator
The distinguished practitioners on this panel will focus on the following question: From the stand-point of preparing students for your practice, what would you like to see law schools doing that they are not doing, and not doing what they are doing?"
This is a topic I think about quite a bit. See, e.g. here.
Hope to see you there.
Almost lost in the big news of the day that GM has
filed for bankruptcy (bankruptcy petition here)
was the announcement that over the weekend Judge Gonzalez approved the sale of
substantially all the assets of Chrysler in bankruptcy to Fiat for
approximately $2 billion. The judge’s
ruling is here.
The sale will close quickly and New
Chrysler will emerge to try to rebuild the American auto industry. But wait a minute. A sale of substantially all the assets of
Chrysler? Isn’t there supposed to be a
shareholder vote? Well, yes, but no. (For purposes of this example, I’m assuming
Chrysler is a corporation, which it’s not.
It’s an LLC.)
First, there is the issue of Federal preemption by the bankruptcy code. Second, the Delaware corporate code Section 303 recognizes that in bankruptcy a judge may order a sale of assets or a merger and that such a sale/merger occur without further action by directors or stockholders. Any sale or merger ordered in bankruptcy also eliminates appraisal rights to the extent there might have been any. Although a sale of substantially all the assets of Chrysler to Fiat in January (so, pre-bankruptcy) would have required a vote of the Chrysler stockholders. The same transaction in bankruptcy, if approved by the bankruptcy judge go through without a vote, however.
In Chrysler’s case, the issue of a shareholder approval would not likely have been a problem given that it is (was) controlled by Cerberus. However, in a corporate setting where share ownership is more widely distributed the decision whether to do a transaction in or out of bankruptcy may at times turn on questions of shareholder approval.
A second away from M&A to note that it's graduation season at most law schools. Ben Bernanke, chairman of the Federal Reserve, gave the commencement address at this year's graduation here at Boston College Law School. It was a nice talk about the unlikely story of a boy from a small town in South Carolina who by a mixture of luck and hard work came to run the world's largest economy. The text of his talk is here.