M & A Law Prof Blog

Subcommittee on Proxy Statements and Business Combinations

The ABA's Business Law Section's subcommittee on Proxy Statements and Business Combinations will meet on Monday, August 3, at 9:30 am. Michele Anderson, Chief of M&A in the Division of Corporation Finance of the SEC  is scheduled to discuss various SEC M&A regulatory issues (proposed rules, current comments, enforcement actions, etc), including 

this just announced 13D enforcement action.

MAW

For Sale – One Slightly Used Baseball Team

The New York Times announced in its earnings call yesterday that it expects to sell its 18% stake in New England Sports Ventures, which among things owns the Boston Red Sox by January 2009.  I’m starting a collection. 

-bjmq

As the Engine Turns – VW/Porsche Saga Nears End

Over at post-bankruptcy GM and Chrysler decisions are now being weighed studiously on whether or not shedding this division or that brand contributes to the bottom line and increased efficiency.  It’s all so heartening for those who look at the world for an economic bent.  The pending merger between VW and Porsche?  Uhh, not so much.  This transaction in the making has been a soap opera for quite some time now.  Granted there was that little bit of excitement last fall when we got to watch close up the financial world’s equivalent of the dodo bird – the stock corner.  Although fun and exciting (if you’re not on the wrong end), it’s also now illegal in the US, so don’t expect to see another one soon.

Although Porsche reported large profits on the VW corner last fall the transactions involved left Porsche saddled with debt and vulnerable.  VW, led by Ferdinand Piech, have spent the last year hunting down Porsche, in part I suspect to exact revenge.  Bad blood between Piech and now former Porsche CEO is no secret  apparently.  Had Wiedeking at Porsche succeeded in acquiring VW, Piech no doubt would have been out.  But it’s also more complicated.  Ferdinand Piech is grandson of Ferdinand Porsche (founder) and part of the Porsche family group that controls Porsche.  One wonders whether there are fiduciary concerns here given the role of the Porsche family and Piech, sure, but if the Germans had Thanksgiving, I wonder what the dinner conversation must have been like!

In the end, family controlled Porsche board had two options on the table:  First, accept an infusion of capital from Qatar and leave Porsche CEO Wiedeking in place and maintain the company’s independence or; second, agree to be acquired by VW and permit the Porsche family through Piech and his group to control both VW and Porsche.  It looks like they’ve finally opted for the latter.

A sidenote – after the Porsche board met and decided to go with VW yesterday, CEO Wiedeking was promptly sent packing with a $71 million golden handshake.  The payout is raising hackles in Europe.   To his credit though, Wiedeking has pledged to give half of this amount away to charity.

-bjmq

Earnouts and Private Targets

Surprise! As information asymmetries with respect to valuation of a target increase, parties are more apt to rely on earnouts to bridge the valuation gap.  Contingent Earnouts in Acquisitions of Privately Held Targets by Ragozzino and Reuer is appearing in the most recent Journal of Management.  Here's the abstract.

Abstract: Prior research has devoted significant attention to ownership choices when firms make market entry decisions (e.g., equity alliance versus acquisition). This article emphasizes the importance of studying firms’ contractual choices as well as the potential relationships between their contractual and ownership choices. This study of acquisitions examines the incidence and determinants of contingent earnouts, which are contracts that specify deferred variable payments to the target. The evidence indicates that the usage of such contracts increases with information asymmetries surrounding mergers and acquisitions, in particular when privately held targets are young or possess knowledge bases that are dissimilar from those of the acquirers. The article also presents evidence that firms’ contractual choices (i.e., earnouts) and ownership choices (i.e., equity alliances) can substitute for one another.

Lessons From the Cuban Insider Trading Decision (updated)

Courtesy of Fried, Frank. and Proskauer

MAW

Empty Voting and 13D Filings

Been off doing summer-like things for the last few days.  Hey, it’s summer!  The WSJ reports today that SEC has fined Perry Corp $150,000 in connection with its failure to file a timely 13D following its acquisition of nearly a 10% position in Mylan stock in 2004.  At the time time, Mylan was in the process of acquiring King Pharmaceuticals.  Carl Icahn acquired a significant stake in Mylan and disclosed his opposition to the transaction.   Perry Corp (an arb) quietly accumulated a block of shares of Mylan similar in size to that of Icahn in order to vote for the transaction and increase the likelihood of its approval.  Perry was able to hedge its position through a series of swaps.  Ultimately, Perry held nearly 10% of Mylan’s voting shares but had successfully left behind any economic exposure.  In effect, Perry was through these transactions to buy votes without the accompanying economic exposure. 

Academics jumped on this transaction as an example of “empty voting” – see papers from Black & Hu and Kahan & Rock.  Delaware responded by making amendments to its corporate law (new Sec. 213) that will make it harder (though not impossible) to accomplish the same series of transaction.  The new Sec 213(a) permits boards to fix two separate record dates – one date for determining those stockholders entitled to notice of a meeting and a second date (closer to the meeting date) for determination of stockholders entitled to vote at the meeting.   The date for determining who may actually vote may be any date, including the date of the meeting. 

Now the SEC has weighed in (Administrative Order In the Matter of Perry Corp).  When Perry undertook its hedges in connection with the Mylan-King transaction it did not file a timely Schedule 13D which would have required it to disclose its position and its intentions.  Perry sought out legal advice of its regular outside counsel.  Apparently Perry’s outside counsel advised Perry that it had to file a 13D because the block was accumulated in “a merger situation.”  Engaging in a bit of legal arbitrage, Perry consulted another lawyer (“Lawyer B”) who provided a different answer – “assuming the purchase of Mylan shares is ordinary course for Perry …, I think you can file a 13G if a filing is necessary.”  Filing a 13G and not a 13D would permit Perry Corp to delay filing so that it would not have to disclose its position to the market during the period before the stockholder vote. 

The SEC has a different opinion. 

When institutional investors acquire, directly or indirectly, the beneficial ownership of securities with the purpose of influencing the management or direction of the issuer or affecting or influencing the outcome of a transaction – such as acquiring securities, or an interest in securities, for the purpose of voting those securities in favor of a merger – the acquisition of those securities cannot be said to be in the “ordinary course of [the institutional investor’s] business” for purposes of relying on Rule 13d-1(b) or making the certification under Item 10 of Schedule 13G.

The lesson here is that empty voting bothers a lot of people, particularly regulators the wrong way.   Delaware is trying to provide boards the tools through the setting of record dates to fight it.  And the SEC will use its disclosure rules to ensure that even if parties are able to structure such transactions that they are required to make timely disclosure to the market.

-bjmq