M & A Law Prof Blog

Editor: Brian JM Quinn
Boston College Law School

Thursday, December 10, 2009

More Bad Lawyers and Galleon

Well ... Galleon claims another lawyer scalp.  The SEC and the US Attorney's Office in the Southern District of NY announced that Brien Santarlas, another former Ropes & Gray attorney has pleaded guilty to criminal insider trading charges.  According to the USAO's criminal complaint

From June 2007 through May 2008, SANTARLAS conspired with others to steal material, nonpublic information ("Inside Information") from the law firm of Ropes & Gray for the purpose of buying and selling securities. In violation of his duty of confidentiality to the law firm and its clients, as well as Ropes & Gray's written policies and procedures, SANTARLAS stole Inside Information about several mergers and acquisitions of public companies for which Ropes & Gray was providing legal services, prior to the public announcements of the deals. Specifically, SANTARLAS stole Inside Information about the acquisitions of 3ComCorporation and Axcan Pharma, Inc., and provided it to his co-conspirators in exchange for thousands of dollars in cash payments. As a result of trading that was based on the Inside Information provided by SANTARLAS and his co-conspirators, other individuals collectively made millions of dollars in illegal profits. 

SANTARLAS, 33, of Hoboken, New Jersey, pleaded guilty today to one count of conspiracy to commit securities fraud and one substantive count of securities fraud. The conspiracy charge carries a maximum sentence of five years in prison and a maximum fine of the greater of $250,000, or twice the gross gain or gross loss from the offense. The securities fraud count carries a maximum sentence of 20 years in prison and a maximum fine of $5 million, or twice the gross gain or loss from the offense.
The SEC's complaint alleges that Santarlas together with Cutillo were part of the same insider trading network.  The SEC alleges that Santarlas stole inside information regarding pending acquisitions by stealing it from Ropes' electronic network.  For his trouble, Santarlas allegedly received $25,000.  Geez, not even enough to pay off his loans from Franklin Pierce.

If you read the SEC's complaint closely, you'll see that the SEC connects Cutillo directly to the trading network by way of phone calls.  Santarlas however is no where to be seen in the wiretaps.  One wonders how the FBI was able to tie Santarlas to the ring?  I have a guess.  When you look at a document on Ropes' document server, I guarantee you that a record is kept of who you are and whether you edited the document or simply viewed it.  It wouldn't be all that hard, if someone was looking at documents on the server to go in ex post and figure who it was.  Notwithstanding the fact that these guys were tech-types, turns out they weren't all that tech savvy.  

Turns out that's not the only way they got their information, according to Bloomberg, they they also eavesdropped on others’ conversations, and questioned unwitting lawyers at the firm to learn details of impending deals: 

- "Whatcha working on?"  
- "Oh, not much.  We're selling 3Com to a PE investor.  Too bad insider trading rules prohibit me from trading on that info."
- "Yeah, too bad."

One important lesson for Ropes I think is that they need to seriously reconsider their training programs.  

Both Cutillo and Santarlas (courtesy of the Way- Back-Machine) were litigation associates in Ropes' IP group.  I wonder whether litigation associates at Ropes are given adequate training with respect to their obligations under the insider trading laws?  I suspect that corporate and transactional associates have it pretty well drilled into them, but are the litigation associates sent to depo training instead of the insider trading sessions?  If so, that's turning out to be a really poor decision.  If everyone in the firms has access to confidential inside information at the tap of a few keys, then everyone ought to be trained the same with respect to how one treats that information.  Just saying.



December 10, 2009 in Insider Trading | Permalink | Comments (1) | TrackBack (0)

Non-Profit Mergers

If you've got students in a transactional clinic, most likely they are working with non-profit organizations.  They may sign up for the clinic hoping to work for big corporate clients, but that's just the way it is.  In any event, non-profits do transactions, too.  In particular, they have been known to merge.  When non-profits merge, the process looks familiar, but it's different in a couple of important respects.  First, no pesky shareholder votes.  You might be required to get the pre-approval of the Attorney General of the state in which the non-profit is incorporated, but not always.  For example, here's California's Not For Profit Public Benefit Corporation act's merger provision.  You'll note that basically it just requires the approval of the respective boards of the constituent non-profits.  

Well, I wish it were that easy.  Non-profits, because of their tax exempt status, must make additional filings with the IRS and there are specific accounting issues.  Bryan and Cave has a summary of some recent changes in this area.  


Update:  A little bit of "local" news related to this subject - this morning by a vote of 14-4 the Board of Trustees of UMass just approved its acquisition of the Southern New England School of Law.  Although the transaction documents are not yet available widely, this transaction is being described as a donation of assets from SNESL to UMass.  So, it's not a non-profit merger.  Call it the equivalent of a non-profit dissolution with the proceeds of the dissolution being handed over to UMass instead of the "stockholders."  Presumably, the Attorney General might also have a role in approving this transaction

December 10, 2009 in Miscellaneous Regulatory Clearances | Permalink | Comments (1) | TrackBack (0)

Wednesday, December 9, 2009

K&E on LOIs

This client alert from K&E offers a timely reminder of potential pitfalls for parties entering into letters of intent or term sheets believing they are merely unenforceable "agreements to agree." It offers the sound advice that, when you enter into a LOI, you should clearly express which provisions are intended to be binding and which are not, and should expect to be held to these commitments.

The client alert notes that, in a recent Delaware bench decision, newly appointed VC Laster cited a number of key factors that merit consideration by parties negotiating LOIs.  These include (quoting the alert):

  • Delaware does not recognize an inherent fiduciary out in every contract if one is not negotiated by a party. A seller that agrees to exclusivity with a potential buyer should not expect that it can later violate that agreement based on an implicit back-door exit from that commitment grounded in its fiduciary duties.

  • An exclusivity or no-shop provision is a unique right, the breach of which is not "readily remedied after the fact by money damages." As such, injunctive relief is an appropriate judicial remedy to enforce the benefits bargained for by the potential buyer.

  • When an LOI requires the parties to negotiate or to enter into an agreement, this creates an affirmative obligation on the parties to in fact engage and negotiate in good faith notwithstanding the fact that there are still material issues to be hashed out and other pieces to fall into place. The court stated that "radio silence is not negotiating in good faith."

  • The court briefly noted that parties can protect themselves against unexpected obligations by expressly stating that the relevant terms of the LOI are non-binding.


  • December 9, 2009 | Permalink | Comments (0) | TrackBack (0)

    Tuesday, December 8, 2009

    Conference on Teaching of Transactional Law and Skills

    Emory University School of Law’s Center for Transactional Law and Practice recently announced its second biennial conference on the teaching of transactional law and skills, Transactional Education:  What’s Next?  The conference will be held at Emory on Friday, June 4, and Saturday, June 5, 2010.

    The Steering Committee is an impressive group that has been thinking for quite some time about the issues facing those of us who train people to practice transactional law.  Its members include:

    Tina L. Stark, Chair, Emory University School of Law,
    Danny Bogart, Chapman University School of Law,
    Deborah Burand, University of Michigan Law School,
    Joan MacLeod Heminway, The University of Tennessee College of Law,
    Jeffrey Lipshaw, Suffolk University Law School, and
    Jane Scott, St. John’s University School of Law

    I attended this conference the last time it was held and found it very valuable.  The Tennessee Journal of Business Law published what is essentially a transcript of the conference, which is available on-line here.

    The Steering Committee is accepting proposals now through February 1, 2010 on any subject of interest to current or potential teachers of transactional law and skill

    Click here to find out more information about the conference or how to submit a proposal.



    December 8, 2009 in Conference Announcements | Permalink | Comments (0) | TrackBack (0)

    Merger Pricing

    Baker, Pan, and Wurgler have a new paper, A Reference Point Theory for Mergers and Acquisitions.  They suggest that initial offering prices are important for determining the ultimate success of an offer.  In particular, they point to the 52-week high heuristic.  If an offer price is close to the target's 52-week high (notwithstanding the fact that past prices, don't say much about the future, synergies, whatever), the offer is more likely to be successful.  They find a 10% increase in the 52-week high is associated with as much as a 3% increase in the likelihood that a target will accept the offer.  in the offer premium.  That's an interesting, and totally reasonable, observation.  Of course, you can imagine how making an offer close to the highest price range over the past year (the reference point) will set the table for friendly negotiations.  Boards and managers are also able to easily access the value of the 52-week high, so it makes for a convenient reference point when evaluating initial offers.

    Abstract: The use of judgmental anchors or reference points in valuing corporations affects several basic aspects of merger and acquisition activity including offer prices, deal success, market reaction, and merger waves. Offer prices are biased towards the 52-week high, a highly salient but largely irrelevant past price, and the modal offer price is exactly that reference price. An offer's probability of acceptance discontinuously increases when the offer exceeds the 52-week high; conversely, bidder shareholders react increasingly negatively as the offer price is pulled upward toward that price. Merger waves occur when high recent returns on the stock market and on likely targets make it easier for bidders to offer the 52-week high.


    December 8, 2009 | Permalink | Comments (0) | TrackBack (0)

    Monday, December 7, 2009

    Destroying Value through Mega-Mergers

    The bigger and more complicated the deal, the more likely it is to fail.  Sometimes empire building and confusing luck for ability result in disastrous decisions.  This definitely comports with one’s ex ante sense of how things should work.   AOL-TimeWarner is the obvious example.  Bayazitova, Kahl and Valkanov have a new paper, Which Mergers Destroy Value? Only Mega-Mergers, that confirms this thinking.

    Abstract: We argue that the transaction size determines which mergers create and which destroy value. In particular, mega-mergers, the top 1% of mergers in terms of absolute transaction value, destroy value, while non-mega-mergers create value. Mega-mergers are particularly important, because 43% of all money spent on acquisitions is spent on mega-mergers. Average acquirer short-term announcement returns are strongly negative (-3.2%) in mega-mergers but positive (1.5%) in non-mega-mergers. This result is robust to the known determinants of acquirer announcement returns, including acquirer size and the target’s public status. Using three different approaches, we show that for both mega- and non-mega-mergers, the acquirer returns are directly due to the merger and not due to a revaluation of the acquirer’s stand-alone value. We find evidence that mega-mergers are driven by managerial motives and weak corporate governance. We conclude that most mergers are driven by value-maximizing motives, but mega-mergers are driven by managerial objectives or hubris.


    December 7, 2009 | Permalink | Comments (0) | TrackBack (0)