July 4, 2009
Korea Introducing the “Poison Pill System”
If the interlocking ownership structures that characterize the chaebol system didn’t already make it hard enough for the market for corporate control to operate in Korea, the Ministry of Justice is apparently moving quickly to legalize the use of shareholder rights plans as part of its fight against the economic downturn and provide yet more breathing space for management.
According to today’s Korean Herald:
The government will … introduce the "poison pill system," or the corporate protection measure to curb hostile takeover bids and allow companies to invest their reserve cash in investment activities.
The Korean Times quotes the Minister of Justice as saying:
"The business circle has strongly demanded introduction of measures for managerial rights protection, and the transition committee also demanded considering it. We will push for the introduction of devices that suit global standards after discussion with other ministries.”
Of course, while the domestic Korean business community is thrilled with the “poison pill system” a sample of Korean editorial opinion is less excited about the prospect of building yet more walls to entrench management of Korea’s Chaebol. The Hankyoreh suggests that the answer to Korea’s economic woes might lie in better managers and not more protection for failed managers. The Korea Times is skeptical that more protection of Chaebol control will result in more investment and employment.
To better put the proposed changes in context, it’s worth remembering the Asian Financial Crisis of 1997. Much of the Korean end of that crisis was blamed on poor corporate governance of the Chaebols. Since 1997, Korea has been struggling to find a way forward. Opening up its capital markets and freeing up the market for corporate control has been controversial and not popular locally. Kim’s paper on Corporate Governance in Korea provides a good overview of the issues that are in part motivating the introduction of the “poison pill system.”
July 3, 2009
Can Secured Creditor Foreclose on Substantially All the Assets of a Debtor without Stockholder Approval?
An interesting question appeared in my in-box a few days ago from the ABA’s Private Equity/Venture Capital Listserve. Here is a somewhat edited version (thanks to Peter Sugar for helping me refine the question):
Creditor makes a loan to Debtor. The loan is secured by the stock of a wholly owned subsidiary of Debtor. The stock constitutes substantially all of the assets of Debtor. So, under the terms of the loan, upon a default, Creditor can take 100% of the shares in the subsidiary.
The loan is in default and Creditor plans to exercise its rights to acquire 100% of the shares in the subsidiary. Under the relevant statute, the sale, lease, or exchange of all or substantially all of a company’s assets must be authorized by the affirmative vote of its stockholders.
Here's the question: Should any of this be put to a shareholders' vote?
I asked my partner Steven Weise what he thought (something I do quite often) and he pointed to Sections of the California and Delaware Corp. Codes:
California Corp Code § 1000:
"Any . . . pledge or other hypothecation of all or any part of the corporation's property, real or personal, for the purpose of securing the payment or performance of any contract or obligation may be approved by the board. Unless the articles otherwise provide, no approval of shareholders . . . shall be necessary for such action."
Delaware GCL § 272:
“The authorization or consent of stockholders to the mortgage or pledge of a corporation's property and assets shall not be necessary, except to the extent that the certificate of incorporation otherwise provides."
So if Debtor is a California or Delaware corporation, no stockholder vote is necessary to enter into the loan agreement or pledge the stock of the subsidiary.
He went on to say he thought that the foreclosure by the secured party should not require shareholder consent because such a requirement (i) would make these statutory provisions useless and (ii) a foreclosure is not a sale "by" the corporation.
But what if, instead of foreclosing, the Creditor works out a negotiated settlement with the Debtor pursuant to which the loan is satisfied by the stock of the subsidiary? Could you argue that (i) the right to enforce is inherent in the creation of the security interest and (ii) the reasonable anticipation of the parties when a security interest is created is that the secured loan will be paid and the security interest won't be enforced, so (iii) if there is a default, even in a settlement, it's still "involuntary" because of the threat of foreclosure?
Thoughts in the comments are welcome.
July 2, 2009
Primer on the Tender Offer rules from Morrison Foerster
Can be found here.
DOJ Wakes Up to Antitrust
In a previous post, Mike noted that US antitrust authorities have a adopted a more aggressive enforcement stance following the change of administrations. There's another example of the more vigorous enforcement attitude this morning. According to the WSJ, the DOJ has filed comments with the Department of Transportation objecting to a grant of blanket antitrust immunity with respect to United and Continental's plan to share pricing and scheduling information as part of the "Star Alliance." (Continental is leaving "SkyTeam" to join "Star Alliance." The 58 page comment letter outlining the DOJ's objections is summarized below:
Antitrust enforcement has played a vital role in bringing increased competition and consumer benefits to the deregulated airline industry. Accordingly, any exemptions from the antitrust laws should be strongly disfavored. To overcome the presumption against antitrust immunity, applicants must demonstrate that their collaboration will generate significant public benefits that outweigh any harm to competition, that they cannot achieve those benefits without immunity, and that they have narrowly tailored the requested immunity to achieve the benefits claimed.
For many past applications, the principal public interest benefit furthered by DOT's grant of immunity has been the negotiation of open skies agreements with the home country of the U.S. carriers' alliance partners. In the present matter, open skies agreements have been signed with the home countries of all the foreign applicants, and those foreign carriers will continue to be members of the immunized alliances whatever DOT decides here. Granting immunity for Continental to coordinate with Star ATI Alliance' members on U.S. to Latin American or Pacific routes is not likely to result in further liberalization discussions between the U.S. and countries with which we have not yet negotiated open skies, such as China or Brazil. Therefore, an expansion of immunity offers no open skies benefits for U.S. consumers.
Where an application does not directly promote open skies with its attendant consumer benefits, applicants bear a heavy burden to prove benefits specific to their alliance agreements that justify immunity. Where an application involves the presence of two major domestic competitors, the request for immunity warrants particularly close scrutiny.
July 1, 2009
SEC Considering New Director Rules
According to Bloomberg, the SEC commissioners will meet today to consider proposing "Armstrong celebrity" director rules. The webcast of the meeting, set to start at 10AM (ET), is here. More disclosure about director nominees and their qualifications is probably a good thing - especially as we move toward increased shareholder access to the proxy.
However, I wonder how big a problem this really is. The SEC has been gradually tigtening the screws on director nominations and qualifications. SOX has placed added burdens on directors. If you're a celebrity, why would you want the hassle?
At the same time directorships appear to be a tight club -- take a look at the board of Apple if you don't believe me. If you're not CEO of another large corporation or former VP, then you're probably not going to get on the Apple board, even if you are Lance Armstrong. This does raise the question however, just how effective a monitor can one be if one is also CEO of a large company, like Avon. I'm sure Ms. Jung is a very capable CEO, but she's also on the board of GE as well as that of Apple. I wonder if the SEC might better spend their time thinking about limiting the number of board assignments that full-time CEOs take on. The new CEO job is supposed to be all encompassing, isn't it? How does that leave much time to monitor management and provide strategic advice to another company? Not to mention two or more. It might be worth the SEC giving some consideration to Ron Gilson and Reinier Kraakman's proposal.
June 30, 2009
Hummer: Mark your calendars
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.
June 29, 2009
Waxman on Lyondell
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.