M & A Law Prof Blog

Sunday Funnies

Money Never Sleeps

You know you've been counting the days.  Well, you won't have to wait much longer.  Here's the trailer for Wall Street: Money Never Sleeps.   Gordon Gecko is free and looking to redeem himself, or at least get a new cell phone ...

-bjmq

Next Up ... the Warriors?

Having just recently closed on its acquisition of Sun, Oracle's Larry Ellison is apparently turning his sights on more interesting prey - the Golden State Warriors.  In response to a question at an Oracle employee event about likelihood that he might try to buy the Warriors, Ellison responded, "I'm trying. I'm trying. Unfortunately you can't have a hostile takeover of a basketball team." 

That's unfortunate, because with the single exception of the 2007-08 season, the Warriors and their poor fans haven't been over .500 (or made the playoffs) since 1993-94.

-bjmq

Envious CEOs

Men are so constituted that every one undertakes what he sees another successful in, whether he has aptitude for it or not. - Goethe

Isn't that the truth?!  In their new paper, Do Envious CEOs Cause Merger Waves? in the Review of Financial Studies, Goel and Thakor start with a simple premise: CEOs have preferences that can be characterized by envy.   Assuming CEOs envy each other and that CEOs of larger firms get paid more, then a merger in the industry that increases firm size for one CEO will cause other envious CEOs to be tempted to undertake similar "value-dissipating but size-enhancing acquisitions."  Theirs is another take on the empire-building story.

Abstract: We develop a theory which shows that merger waves can arise even when the shocks that precipitated the initial mergers in the wave are idiosyncratic. The analysis predicts that the earlier acquisitions produce higher bidder returns, involve smaller targets, and result in higher compensation gains for the acquirer's top management team than the later acquisitions in the wave. We find strong empirical support for these predictions. The model also generates additional predictions, some of which remain to be tested.

-bjmq

Notification thresholds under the HSR Act lowered

In an unprecedented first, effective February 22, 2010, the notification thresholds under the Hart-Scott-Rodino Antitrust Improvements Act will be lowered. The jurisdictional thresholds are adjusted annually under the indexing required by the 2000 amendments to the Act, which require the Federal Trade Commission to revise the thresholds annually based on the change in gross national product.

Here's Proskauer's memo on the new thresholds

MAW

Delaware's New Arbitration Rules

The Chancery Court in Delaware has proposed arbitration rules that go into effect on February 1, 2010 (here).  The proposed rules would permit its members to arbitrate "all business disputes" as long as the dispute is valued at more than $1,000,000 for money claims, involves at least one Delaware entity and the parties agree to the arbitration process.  The proposed process is speedy - potentially huge cost saver - and so there might be a strong incentive for potential litigants to go the arbitration route.  Especially so since the arbitrators will be the same court personnel who would hear the case if it ended going the normal route.  The proposed arbitration rules also guarantee parties confidentiality.  Individual litigants may find the confidentiality aspect appealing as well.  After all, who wants the world the know that their directors stink? 

Here's hoping that Delaware's arbitration process doesn't become too successful.  Why?  Well, much of Delaware's value derives from the positive externalities that come from its corporate law jurisprudence.  If parties increasingly take disputes "private" via the Delaware courts, increased reliance on the confidentiality of the arbitration process might have the effect of degrading the continued development of the Delaware common law.  That's actually something worth paying attention, but difficult to track.  

-bjmq

Ticketmaster-Live Nation Transaction Approved

The DOJ Antitrust Division just announced it has approved the proposed Tickmaster-Live Nation deal.  This transaction was subject to a good deal of controversy -- including vocal opposition from The Boss.  And if Springsteen has an opinion on a transaction, it's got to be a big deal.  From the DOJ press release: 

After a rigorous investigation, we concluded that the transaction, as originally proposed, was anticompetitive. ...  

The relief here is both structural and behavioral. The settlement requires Ticketmaster to divest more ticketing than it will gain through its acquisition of Live Nation. Simultaneously, the licensing solves a second competitive issue by giving AEG, an integrated competitor, the ability and incentive to compete with the combination of Ticketmaster and Live Nation for concert promotion, venue management, and ticketing.

Under the settlement, Ticketmaster will be required to license its ticketing software to AEG, its single largest customer. AEG will now have the opportunity and incentive to compete in primary ticketing, both in its own venues and third-party venues. Under the settlement, AEG will transition from using Ticketmaster for its ticketing needs, which last year involved about ten million tickets, to its own ticketing platform. Thus, the proposed settlement opens the door for AEG to become a vertically integrated competitor with competitive incentives similar to those of the merged company.

In addition, Ticketmaster will divest Paciolan, an established ticketing business that sells tens of millions of tickets annually. Within sixty days, Ticketmaster will divest Paciolan to Comcast-Spectacor, which has already signed a letter of intent, or some other buyer suitable to the Department.

A copy of the DOJ's Competitive Impact Statement filed with the court is here and AEG and Tickmaster's technology agreement - required as part of the settlement is here.

-bjmq

Arsenal Update

What does Stan Kroenke have up his sleeve?  He's 17 shares away from crossing the 30% threshold and then being required to make an offer for all of the outstanding shares of the Arsenal Football Club.  Here's the update.   Might it involve a sale of the St. Louis Rams?  Kroenke has a right of first refusal as well a go-along provision with respect to the Rams.  Kroenke could end up going along with the Rosenblooms when they sell and then use the proceeds to launch on offer for Arsenal.  

-bjmq

Krispy Kreme's Poison Pill

The Krispy Kreme board is doing a little revisiting of its pre-transaction planning.  Last week it adopted a revised shareholder rights plan to replace the expiring plan that it had in place.  The revised plan is similar to the first, with the notable exception that the revised plan expires in three years rather than ten.  The term limitation on shareholder rights plans seems to be a growing trend amongst firms adopting such plans.  On the other hand, KKD shareholders are not being asked to approve the new rights plan.  From the board's announcement:

The new Rights Plan was adopted to deter abusive takeover tactics, but it was not adopted in response to any specific effort to acquire control of the Company.  The Company's current market capitalization makes the Company and its shareholders especially vulnerable to a creeping acquisition of control whereby a person can acquire a substantial percentage of the Company's outstanding stock prior to making any public disclosure regarding its control intent and without paying a control premium. 

The mechanics of the new Rights Plan are similar to the existing Rights Plan. In general terms, and as in the existing Rights Plan, the rights that will be issued under the new Rights Plan are not exercisable until such time as a person or group becomes the beneficial owner of 15 percent or more of the Company's common stock immediately following the expiration of the existing Rights Plan. The rights may cause substantial dilution to a person or group that acquires 15% or more of the Company's common stock unless the rights are first redeemed by the Board of Directors. Unlike the existing Rights Plan (which had a ten-year term), the new Rights Plan only has a three-year term.

You can find a copy of the revised rights plan here.

-bjmq

The Volcker Rule and the End of Private Equity?

Late last week, Obama announced the "Volcker Rule" -- a new era Glass-Steagall.  Prohibiting banks that take deposits from investing in private equity or hedge-funds will likely have a big impact on the position of financial acquirers in the takeover market.  Could it be the end of private equity - and the market for corporate control - as we know it?  That sounds pretty apocalyptic.  It couldn't be that bad, could it?     

Clive Crook over at the FT has thoughts on the "Volcker Rule" as does Felix Salmon.  The "Volcker Rule" proposal is here and video below.

-bjmq

Sunbelt Appraisal Lessons

Chancellor Chandler recently handed down an interesting appraisal case that's worth taking a quick look at - In re Sunbelt Shareholders Litigation.  The case is interesting for a variety of reasons.  In the first instance, the plaintiffs made two claims in the alternative:  1) the plaintiffs made a variety of fiduciary duty claims that the directors cashed them out at an unfair price and the plaintiffs sought partial rescission (in the form of a distribution of some of Sunbelt's assets);  2) if the fiduciary duty claim failed, they sought an appraisal for fair value.

On its face, it seems that the only real question at issue is the price.  If price is the only complaint, then appraisal is the appropriate remedy (Singer v Magnavox, etc.) and not rescission of the transaction.  As you'd expect, Chancellor Chandler appropriately dealt with the alternative claims by simply treating this as an appraisal action and not awarding rescissory damages.  

As an appraisal action there are a number of useful lessons from Sunbelt.  First, the court will give some evidentiary weight to previous appraisals of the same stock.  Chandler said: "the fact that major shareholders … who had the greatest insight into the value of the company, sold their stock … at the same price paid to the remaining shareholders … powerfully implies that the price received was fair.  Additionally, even when provided with the results of expert valuations, a court may find arm’s-length negotiations to be the most persuasive evidence of fair value." 

In the case of Sunbelt, however, the previous stock evaluation was not given weight because the terms of that stock valuation were were controlled by an agreement negotiated and signed three years prior to the merger.  Only stock valuations that result from negotiations occurring immediately before (or contemporaneously with) the Merger are going to be persuasive evidence of fair value.

Second, when the court uses language like "Penny prepared th[e] [valuation] opinion in one week’s time while simultaneously working on and traveling for another project"  you have to know that the court isn't going to look with favor on the substance of the valuation opinion.  

Third, Delaware courts will accept the use of "comparable transactions analysis" by corporate appraisers to determine fair value.  However, mindful of the effect that careful selection of comparables can have on the outcomes of an analysis, Delaware courts will look closely at which comparables are being used and place the burden of proof on the question whether the comparables are truly comparable lies with the party making that assertion.  In Sunbelt, Chandler ultimately gave no weight to the comparable transactions analysis submitted by the company's expert as the company was unable to overcome the burden of proof that its purported comparables were, in fact, comparable.   Rather, the court relied on the discounted cash flow analysis proposed by the plaintiff.  (HT: AF)

-bjmq

  

Corporate Free Speech

“If the First Amendment has any force it prohibits Congress from fining or jailing citizens, or associations of citizens, for simply engaging in political speech.”  Citizens United v FEC.

Interesting.  For a bunch of “strict constructionists” they appear to construe the Constitution quite broadly.  I dare say the imputation of First Amendment rights to corporations on par with speech rights enjoyed by natural persons would be a concept alien to the founding fathers. Indeed, equating corporations with “associations of citizens” is quite a leap itself.  If corporations are anything they are associations of capital and not citizens.  The corporate law imposes no citizenship, or even residence, requirement on stockholders.

The globalization of capital markets ensures that stockholders in any of America’s largest corporations will not be made of up US citizens.  So, while we correctly restrict the ability of non-citizens to participate in US elections, we leave open a large loophole for non-citizens to be very active participants.  Does anyone think Carlos Slim can’t incorporate a Delaware entity named “Elections Are U.S., Inc.” with its stated nature of business reading something like: “The purpose of this corporation is to undertake legal activities to influence the US political process”?  

My objections to this decision are almost entirely rooted in the corporate law.  For example, the biggest mistake of the decision released last night, I think, was an extension of the argument that corporations are and share the same rights as natural people.  Well, they're not.  They're state created and regulated entities granted charters by the stated to serve a public purpose.  States still, near as I can tell, maintain the right to grant and/or revoke charters on such conditions as they see fit.  General incorporation statutes are only a little over a century old.  Oh, I could go on, but I'll get off my soap-box.  

-bjmq

Update:  You know, I've been thinking about it.  I think these rules that dictate how and under what circumstances a corporation can communicate with their shareholders are violations of a corporations free speech rights.  I think maybe we should also abolish the Federal Securities Laws while we're at it as an impermissible restraint on speech. 

Synergies and Target Specific Information

You'll have to excuse me but every time I hear "synergy" in connection with an acquisition, I immediately think of Dilbert running screaming from the conference room at hearing of the word.  OK, I'm a cynic.  But Martin and Shalev have a paper, Target-Specific Information and Expected Synergies in Acquisitions, and they find synergies (in the form of combined stock returns)!  They also find there is real value in diligence as the likelihood of an acquirer withdrawing an offer decreases as the target specific information held by the would-be acquirer increases. 

Abstract:  This study investigates the relation between target’s firm-specific information expected synergies in acquisitions. We find that both combined (acquirer and target) stock returns around acquisition announcement and post acquisition performance of the combined entity positively associate with the pre-acquisition level of target firm-specific information. We also find that this association is driven mainly by cross-industry acquisitions. Further analysis suggests that while acquirer shareholders benefit from target firm-specific information, target shareholder returns around acquisition announcement decrease with target firm-specific information. Finally, we find that the likelihood of an announced acquisition to be withdrawn subsequent to the announcement decreases with target firm-specific information.

-bjmq

Japan's Premerger Notification Regime

MoFo has memo on the recent amendments to the Japanese Anti-Monopoly Act that went into effect Jan. 1, 2010 here.

-bjmq

Transactional Teaching Conference Update

I previously posted on Emory’s Transactional Teaching Conference. I’m now informed that:

[T]here was a problem with the Call for Proposals online submission process. As a result, any proposal that was previously submitted has not been received. The technical team has corrected the problem and the new call for proposals form [is here.]

If you previously submitted a proposal, please resubmit it using the link above. We sincerely apologize for the inconvenience and look forward to your participation in the conference.

MAW

Keep Cadbury British...

Keep Cadbury Birtish! ... or not.  I suppose everything has its price, even national icons.  In this case, the price is about $19 billion.  Cadbury's board just unanimously recommended Kraft's offer to its shareholders.   Summary of the terms from the Kraft "micro-site" is below:

• Under the terms of the Final Offer, Cadbury Securityholders will be entitled to receive:
  

  for each Cadbury Share	500 pence in cash and 0.1874 New Kraft Foods Shares
  for each Cadbury ADS	2,000 pence in cash and 0.7496 New Kraft Foods Shares

  representing, in aggregate, 840 pence per Cadbury Share and GBP 33.60 per Cadbury ADS.  

•  In addition, Cadbury Shareholders will be entitled to receive 10 pence per Cadbury share by way of a Special Dividend following the date on which the Final Offer becomes or is declared unconditional.  

You can listen to the Kraft webcast/conference call discussing the transaction here.

-bjmq

Video - Sky breaking the news...

A Netutral Approach to Takeover Law

Enriques has a new paper, European Takeover Law: The Case for a Neutral Approach, arguing that the EU should adopt a neutral position towards takeovers (along the lines of the UK's takeover panel) in its current reappraisal of the directive.  A copy of the original EU takeover bid directive from 2004 can be found here.

Abstract:  This paper argues that in revising the Takeover Bid Directive, EU policymakers should adopt a neutral approach toward takeovers, i.e. enact rules that neither hamper nor promote them. The rationale behind this approach is that takeovers can be both value-creating and value-decreasing and there is no way to tell ex ante whether they are of the former or the latter kind. Unfortunately, takeover rules cannot be crafted so as to hinder all the bad takeovers while at the same time promoting the good ones. Further, contestability of control is not cost-free, because it has a negative impact on managers’ and block-holders’ incentives to make firm-specific investments of human capital, which in turn affects firm value. It is thus argued that individual companies should be able to decide how contestable their control should be. After showing that the current EC legal framework for takeovers overall hinders takeover activity in the EU, the paper identifies three rationales for a takeover-neutral intervention of the EC in the area of takeover regulation (preemption of “takeover-hostile,” protectionist national regulations, opt-out rules protecting shareholders vis-à-vis managers’ and dominant shareholders’ opportunism in takeover contexts, and menu rules helping individual companies define their degree of control contestability) and provides examples of rules that may respond to such rationales.

-bjmq

Is it over, yet?

CF Industries announced last night that it was dropping its bid for Terra Industries. Although this is a de-escalation in the fight amongst CF, Terra, and Agrium.  It's not over yet in the "forever war" though.  Agrium's $5.36 billion hostile bid for CF Industries is still on the table. It's not obvious after dropping their bid for Terra that CF is simply going to roll over for Agrium.  It still calls the Agrium offer "less than compelling".  Agrium for its part is gearing up for an old fashioned proxy fight.  It has nominated two candidates for the board of CF Industries and is calling on CF Industries shareholders to force the board to redeem its poison pill.  Wonder if we have any popcorn left?  

-bjmq

More on NACCO Industries from Davis Polk

Brian recently posted about the NACCO Industries case (here), As he reminds us:

NACCO reminds us that if you are going to terminate a merger agreement, you better comply with all its provisions.  If you don't, if you perhaps willfully delay your notice to the buyer about a competing proposal, you might not be able to terminate without breaching.  And, if you breach, your damages will be contract damages and not limited by the termination fee provision.  Remember, you only get the benefit of the termination fee if you terminate in accordance with the terms of the agreement.  Willfully breaching by not providing "prompt notice" potentially leaves a seller exposed for expectancy damages.

Davis Polk has just issued this client alert, drawing a few more lessons from the case.  Here's a sample:

A recent Delaware Chancery Court decision raises the stakes for faulty compliance with Section 13(d) filings, holding that a jilted merger partner in a deal-jump situation may proceed with a common law fraud claim for damages against the topping bidder based on its misleading Schedule 13D disclosures.  NACCO Industries, Inc. v. Applica Inc., No. 2541-VCL (Del. Ch. Dec 22, 2009).  The decision, which holds that NACCO Industries may proceed with numerous claims arising out of its failed 2006 merger with Applica Incorporated, also serves as a cautionary reminder to both buyers and sellers that failure to comply with a "no-shop" provision in a merger agreement not only exposes the target to damages for breach of contract, but in certain circumstances can also open the topping bidder to claims of tortious interference.

MAW

Industry Links in Merger Waves

Ahern and Harford have a new paper, The Importance of Industry Links in Merger Waves, that uses a network approach to understand merger waves.  It seems to be true that industry links were important component of the first great merger wave (late 19th century) and since the early 1990s.  On the other hand, it's less obviously true of the merger wave of the 1920s (stock market bubble), the 1960s (conglomerate era), and the 1980s (de-conglomerate era).  

Abstract: Prior research finds that economic shocks lead to merger waves within an industry. However, industries do not exist in isolation. In this paper, we argue that both intra- and inter-industry merger waves are driven by customer-supplier relations between industries. To test our theory, we construct an industry network using techniques from the social-networking literature, where inter-industry connections are determined by the strength of supplier and customer relations. First, we find that the strength of industry network ties strongly predicts inter-industry merger activity in the cross-section. Second, we show that merger waves propagate across the industry network over time: high levels of merger activity in an industry lead to subsequently higher levels of activity in connected industries. By using a network approach, we provide new insight into understanding why mergers occur in waves.

-bjmq