November 14, 2009
Merck Stock Swap Confusion
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)
November 13, 2009
Bad Faith, Not in Good Faith...Tomato, Tomahto
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.”
November 12, 2009
Board Connections and M&A
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.
November 11, 2009
3Com Options Trading...More Insider Trading?
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.
November 10, 2009
Simple Theory of Takovers
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.
Valero adopts Say-on-Pay Policy
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.”
November 9, 2009
Mandatory Rules in the Takeover Market, A Lesson from Down Under
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...
Subramanian, et al on Delaware's Antitakeover Statute
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.
Choice of Forum and State Competition