M & A Law Prof Blog

Editor: Brian JM Quinn
Boston College Law School

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Saturday, October 10, 2009

Vice Chancellor Laster Interview

Francis Pileggi at the Delaware Corporate and Commercial Litigation blog posted an interview with Vice Chancellor Travis Laster.  Drop by and get to know the new Vice Chancellor. 


-bjmq

October 10, 2009 in Delaware | Permalink | Comments (0) | TrackBack (0)

Friday, October 9, 2009

SEC Charges Insider in EMC-DOCX Deal

Here's the SEC's complaint.

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.

Yeah, you know what's coming next...

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.

Sigh.

-bjmq

October 9, 2009 in Insider Trading | Permalink | Comments (0) | TrackBack (0)

Social Networks and Vertical Integration in the Laundry Business

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.


-bjmq

October 9, 2009 in Deals | Permalink | Comments (0) | TrackBack (0)

Thursday, October 8, 2009

UK Competition Commission Rules Against Ticketmaster-Live Nation Deal

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.
The Commission is now considering possible remedies.  They include, among others, prohibition of the merger, prohibition of the merger of the UK operations, and divestment of the UK operations of either Ticketmaster or Live Nation.  No word, yet, whether Ticketmaster will cry "No Surrender". 

-bjmq

October 8, 2009 in Antitrust, Transactions | Permalink | Comments (0) | TrackBack (0)

Hamermesh and Wachter on Rationalizing Appraisal Standards

Now appearing in the current issue of the Boston College Law Review:

How does one measure the fair value of a corporation when a controlling shareholder squeezes out the minority interest? Professor Lawrence A. Hamermesh, of Widener University, and Professor Michael L. Wachter of University of Pennsylvania Law School, answer that question in "Rationalizing Appraisal Standards in Compulsory Buyouts" by suggesting that the “going concern value” standard—currently adopted by the Delaware courts—is more fair and efficient than other valuation methodologies. Where a merger creates corporate control by aggregating dispersed shares, any increase in corporate value rightly belongs to the controlling shareholder. But where the merger merely squeezes out a minority interest, no aggregation of control takes place and therefore no premium should be awarded. In such situations, if the controlling shareholder fails to present a discounted cash flow analysis to facilitate the valuation of the company, the minority shareholders risk undervaluation of their shares. To guard against this, Professors Hamermesh and Wachter advocate a default presumption based on comparable company valuations. Such a presumption puts the burden on the controlling shareholder to come forward with accurate projections for the future value of the company or risk having the courts award the control value to minority shareholders.

-bjmq


October 8, 2009 in Delaware | Permalink | Comments (0) | TrackBack (0)

Wednesday, October 7, 2009

DGCL 220 Books and Records Action

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.  

While the "credible basis" standard in a Sec. 220 demand is relatively low, it's not nothing.  In Westmoreland, even that low standard proves too high. The plaintiffs unsuccessfully try - through "logic" - to hang their hat on a Blasius-like claim that the board thwarted the will of a majority of the stockholders by following the board policy with respect to board members following their inability to secure more than 50% of the vote in a board election. The court wasn't having any of it.  

I think what this case says is that 220 "tools" aren't really available to all plaintiffs.  plaintiffs with Lyondell-like challenges are going to need more facts going in and can't rely on a 220 to help with discovery - notwithstanding exhortations from the Delaware Supreme Court otherwise.  Even the "tools at hand" aren't going to get plaintiffs very far with these kinds challenges.  

-bjmq

October 7, 2009 in Cases | Permalink | Comments (0) | TrackBack (0)

Tuesday, October 6, 2009

Dealbook Dialogue

If you've not dropped by there yet, the Dealbook Dialogue's discussion of the financial crisis is worth reading this week - Steven Davidoff, Gary Gorton, Vice Chancellor Leo Strine, Howard Marks, so far with more to come.  


-bjmq

October 6, 2009 | Permalink | Comments (0) | TrackBack (0)

Monday, October 5, 2009

World Markets and M&A

Continuing the international M&A theme from last week, here's an interesting new paper from the National Bureau of Economic Research by Isil Erel, Rose C. Liao, and Michael S. Weisbach, World Markets for Mergers and Acquisitions.  Turns out that geography matters (that's a familiar refrain) and that acquirers tend to be from developed countries. Not surprising that currency movements matter -- when a country's currency appreciates, its firms respond by going on acquisition sprees.  Along the same vein - where stock markets are outperforming the average, firms from those markets (likely using their stock like an over-appreciated currency) tend to be net acquirers.

Abstract:  Despite the fact that one-third of worldwide mergers involve firms from different countries, the vast majority of the academic literature on mergers studies domestic mergers. What little has been written about cross-border mergers has focused on public firms, usually from the United States. Yet, the vast majority of cross-border mergers involve private firms that are not from the United States. We provide an analysis of a sample of 56,978 cross-border mergers occurring between 1990 and 2007. We first characterize the patterns of who buys whom: Geography matters, with firms being much more likely to purchase firms in nearby countries than in countries far away. Purchasers are usually but not always from developed countries and they tend to purchase firms in countries with lower investor protection and accounting standards. A significant factor in determining acquisition patterns is currency movements; firms tend to purchase firms from countries relative to which the acquirer’s currency has appreciated. In addition economy-wide factors reflected in the country’s stock market returns lead to acquisitions as well. Both the currency and stock market effect could reflect either misvaluation or wealth explanations. Our evidence is more consistent with the wealth explanation than the misvaluation explanation.

-bjmq

October 5, 2009 | Permalink | Comments (1) | TrackBack (0)

Flip This House: PE Edition

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.  

-bjmq
  

October 5, 2009 in Private Equity | Permalink | Comments (0) | TrackBack (0)

Sunday, October 4, 2009

Federal Judge Reviewing Diebold Sale

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

October 4, 2009 in Antitrust, Transactions | Permalink | Comments (0) | TrackBack (0)