Friday, February 26, 2010
Sandeep Parekh at IIM recently posted a paper that includes a short introduction to takeover regulation in India, Indian Takeover Regulation - Under Reformed and Over Modified. Given the recent increase in cross-border transactions involving India, this paper is worth taking a look at.
Abstract: The takeover of substantial number of shares, voting rights or control in a listed Indian company attracts the provision of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 1997. The regulations have been amended nearly 20 times since inception, though the amendments have mainly concentrated on areas which needed no amendment. At the same time a vast number of obvious problems have not been rectified in the regulations. The large number of amendments have also created requirement of a compulsory tender offer of such unnecessary complexity as to make it virtually unintelligible to even a well qualified professional.
This paper argues that the complexity in the trigger points for disclosure and tender offer introduced over the years lacks a philosophy, and most of the amendments can not only be deleted but a very simple structure can be introduced making compliance of the regulations straight forward and easy to understand by management of listed companies. Certain other areas which need amendments have also been discussed. Chief amongst these are the provisions relating to consolidation of holdings, conditional tender offers, hostility to hostile acquisitions, definitional oddities, payment of control premium in the guise of non compete fees, treatment of differential voting rights, treatment of Global Depository Receipts and disclosure enhancements.
This paper does not try to portray a particular combination of numbers as the best possible set of trigger points and compulsory acquisition numbers but advocates that whatever numbers are adopted should not be changed for several decades. Arguments that state that the changing economic condition requires constant changes with these numbers, it is argued is wrong.
Thursday, February 25, 2010
So it's hardly a surprise to anyone paying attention that GM's deal to seller its Hummer unit to an unknown privately owned company from the interior of China died yesterday. (GM announcement here) GM announced that it would begin to immediately shut down Hummer and its operations.
Though the terms of the proposed deal haven't been made public, I'm assuming the sale agreement included a customary regulatory condition to closing. Such a condition would permit either party to refuse to close and then terminate the transaction in the event the required regulatory approvals were not obtained by the deal's drop dead date. The way these conditions are often written, the parties can then walk away without either party paying a fee.
Wednesday, February 24, 2010
While Delaware does not take a brightline rule approach to limiting the size of termination fees, other do. Last week, I referred to a paper from John Coates comparing Delaware's standards with respect to termination fees with the UK's rule-based approach. Well, last week, the Takeovers Panel in Australia, the Takeover Panel's cousin down under adopted new guidance on termination fees (break fees), limiting their size in most circumstances to no more than 1% of equity value of a transaction.
In its guidance on lock-up devices, the Panel also warned against the potentially anti-competitive effect of what they call no-due-diligence obligations, particularly those that provide initial bidders with information rights in the event a second bidder happens along. I blogged about the potentially anti-competitive effects of this kind of weak-form rights of first refusal before. Delaware, however, is clearly okay with them (see Toys R Us).
One supposes that the announcement of a brightline rule with respect to termination fees in Australia provides a nice opportunity for a natural experiment.
Tuesday, February 23, 2010
It seems there may be some blow-back following Kraft's takeover of Cadbury. Lord Davies, the British Trade Minister and Cadbury's former chairman Roger Carr are suggesting that following Kraft's successful acquisition of British icon Cadbury that the Takeover Panel should make some changes to their rules to ensure this sort of thing doesn't happen again. Specifically, they suggest:
Among its provisions is a rule that deals must be conditional on at least half of a company’s shareholders accepting the offer. In his speech earlier this month, Carr said certain changes to the Code may be needed ‘to make hostile bids more difficult to win’.
He suggested a ‘radical’ change to takeover rules, namely: ‘Raise the acceptance for takeovers above 50%, to dilute the risk of shortterm holders overriding the wishes of a committed longer-term shareholder base by simple majority.’
This threshold could be lifted to 60%, he argued. Alternatively, Carr said shareholders who buy into a company during a bid could be disenfranchised.
Monday, February 22, 2010
This morning I opened my email to see news on two multi-billion dollar deals by Indian conglomerates. Bloomberg reported that Reliance Industries Ltd., one of India’s largest companies and owner of the world’s largest oil-refining complex, raised its offer for bankrupt LyondellBasell Industries AF to about $14.5 billion. In addition, India’s Bharti Airtel has been able to line up almost $9 billion in loans for its $10.5 billion bid for Zain’s African assets. These types of large-scale deals generally receive a lot of positive popular press attention in India, some of it with nationalistic sentiments touting the rise of India Inc. Whenever I read these stories they make me wonder about a recent paper by Ole-Kristian Hope, Wayne Thomas and Dushyantkumar Vyas, entitled “The Cost of Pride: Why do Firms from Developing Countries Bid Higher?” which examines whether companies from developing countries bid higher (relative to companies from developed countries) in their quest for international expansion and national glory.
Abstract: Using an extensive panel of cross-border M&A transactions between 1990 and 2007, we find that firms from developing countries (versus those from developed countries) bid higher on average to acquire assets in developed countries. We are interested in why these higher bids occur. We find that bids of firms from developing countries are higher in cases where the transaction displays “national pride” characteristics, where national pride is identified through a manual examination of media articles. These results, which are robust to numerous specifications (including alternative measures of national pride) and control variables, are both statistically and economically significant and highlight a source of pride beyond personal hubris which potentially influences corporate decision makers.
In my opinion, the next stage of this research is to see whether deals with national exuberance create positive wealth effects for the shareholders of the bidding companies.
Although minority shareholders were vocally opposed to the transaction, it succeeded at the ballot box. It's all still a little fizzy what was going on here. The Hong Kong police have since raided Mr. Li's home apparently and sealed up the ballot boxes. At this point, there is no indication that Mr. Li violated any laws. It's an odd situation. It's hard to imagine the police intervening in a US corporate election, but there you have it.Bloomberg reports that the company's offices were searched by police earlier this month, along with those of Fortis Insurance Co. (Asia), a local insurer that was once controlled by Li through his Pacific Century Regional Developments (PCRD).
Hong Kong's Securities and Futures Commission won a court ruling in April, 2009 to block Li’s bid after the regulator alleged that hundreds of people, including Fortis Asia agents, were given shares in the phone carrier to boost support for the deal.Li, the son of Hong Kong's richest man, Li Ka-shing and a billionaire in his own right with a fortune we estimate at $1.1 billion, has not been implicated in any wrongdoing.
Thursday, February 18, 2010
Dear Mr. Burkle:
Wednesday, February 17, 2010
According to this client memo from K&E, recent takeover battles are bringing into question the continued vitality of the “just say no” defense, which allows the board of a target company to refuse to negotiate (and waive structural defenses) to frustrate advances from unwanted suitors.
According to the authors, "just say no" is more properly viewed as a tactic rather than an end, and when viewed this way,
it is apparent that the vitality of the “just say no” defense is not and will not be the subject of a simple “yes or no” answer from the Delaware courts. Instead, the specific facts and circumstances of each case will likely determine the extent to which (and for how long) a court will countenance a target’s board continuing refusal to negotiate with, or waive structural defenses for the benefit of, a hostile suitor.
John Coates' new paper, M&A Break Fees: US Litigation vs. UK Regulation, takes a look at the question ex ante rules vs ex post standards with respect to break fees. One of the numerous results worth noting was that in the US Coates observed an increase in the size of break fees (presumably as parties litigated and searched for a level that courts would accept). In the UK on the other hand, Coates reports that break fees started near the permitted cap and stayed there.
Tuesday, February 16, 2010
You might remember that the Oracle-Sun deal filed and then pulled its pre-clearance notification in Russia when it ran into difficulties with EU anti-trust authorities. At the time, I was a little mystified. Now, Clifford Chance is setting us all straight. Here's their memo on the Russian merger pre-clearance process and part of their assessment of notification requirements for transactions involving a foreign buyer and seller:
Russian competition law follows the "effects doctrine" and the notification requirements may also apply in case of foreign-to-foreign mergers.Until August 2009, merger clearance in Russia was required if a foreign-to-foreign transaction met both of the following criteria: (1) it resulted in the acquisition of shares or assets of Russian companies, or direct or indirect control over Russian companies; and (2) it results or may result in the restriction of competition in Russia.This structure was, however, reformed as a part of the Second Antimonopoly Package, which turned these two formerly cumulative criteria into alternative requirements. In addition, the second criterion was modified, which is expected to result in broader application of the Russian merger control rules by FAS. It is now sufficient that a transaction "affects" competition in Russia, while, previously, it was required that the transaction "restricts or may restrict" competition.To date FAS has not issued any official clarification as to how it interprets the revised requirement. Based on its current practice, one may, however, surmise that a foreign-to-foreign transaction falls within the Russian merger control regime where the target entity directly or indirectly controls any Russian entities, owns assets located in Russia or has substantial turnover from operations in Russia
Monday, February 15, 2010
Many thanks to the M&A Law Prof Blog for inviting me to be a contributor. A devoted reader, I am very flattered to be among such fabulous company. Hopefully there will be much to blog about in the M&A world. At least according to the March 2010 issue of Bloomberg Markets Magazine, a recent survey of M&A professionals indicates that almost all expect a resurgence in M&A activity in 2010. Of course, no one expects a quick return to the dizzying heights of 2007, but hopefully 2010 will beat the dismal 2009 numbers. Given my interest in comparative law and outbound M&A deals, I was happy to see that the Asia-Pacific region is expected to be the leading hot spot for M&A activity in 2010. Asian companies have been quite active in cross-border M&A activity in this first quarter, see for example the recent $10.5 billion bid by Bharti Airtel, an Indian telecom company, for Zain’s African assets. I think that these types of South-South deals, and their political/legal challenges, will continue to be a major feature of M&A news in 2010. I'll try to keep our readers updated on the legal angles of these and other hot M&A stories.
Sunday, February 14, 2010
I'd like to welcome Afra Afsharipour to the M&A Law Prof blog. Afra will be joining Michael and I as a contributing editor here at the M&A Law Prof blog. Afra is an Acting Professor of Law (in non-UC speak, that's an Assistant Professor of Law) at UC-Davis School of Law. At Davis, Afra teaches corporations, M&A, and antitrust. Prior to taking up her post at Davis, Afra was a transactional attorney at Davis, Polk, & Wardell in both their NYC and Bay Area offices.
Friday, February 12, 2010
Abstract: We find a significant increase in both the number and economic size of cross-border acquisitions conducted by emerging market firms since 1990. The most dramatic turn is that the emerging market firms are becoming increasingly active in acquiring companies in developed countries. The analysis reveals two main growth patterns by emerging markets, either through mega deals (usually involving developed-market targets) or through frequent acquisition of smaller targets (usually involving emerging-market targets). Although the abnormal returns for targets acquired by emerging market firms is always positive, the magnitude more than doubles when the target is from a developed market. More importantly, emerging market acquirers also experience significant positive announcement returns when the target is from a developed market. Overall, we document that in their aim to grow globally emerging market acquirers play a significant role in cross-border acquisitions.
Thursday, February 11, 2010
The SEC is now investigating these trades. Of course they are. I'm continually surprised that there remain people who think that buying options ahead of a major corporate announcement like an acquisition will go unnoticed. Believe me, it's not all that hard to figure out. It's called a database. It's the same way that Walmart knows that men tend to buy beer and diapers when their wives send them shopping.But before the takeover bid was announced, a burst of activity in a few select Airgas call options occurred, fueling suspicion that the news was leaked ahead of time and was used to profit on a potential spike in Airgas' stock.
"This does not surprise me that regulators would want to find out who was behind the heavier-than-normal call option volume on the last trading day prior to the announcement," said Henry Schwartz, president of Trade Alert.
"In fact, Airgas call volume started to lift on Jan. 29 and continued to be above normal all that week, suggesting that the leak, if there was one, happened about a week in advance of the proposed deal," Schwartz said.
Wednesday, February 10, 2010
Last week Air Products filed a suit in Delaware Chancery Court challenging Airgas' "Just Say No" defense. This has the makings of being an important case if it gets as far as a ruling.
Tuesday, February 9, 2010
Specifically, in April 2007, GOEL obtained Inside Information regarding Intel's earnings announcement for the quarter ending in March 2007 from a colleague who worked at Intel. GOEL provided this Inside Information to RAJARATNAM on Friday, April 13, 2007, at which time Galleon Tech held a short position of approximately 1,150,000 shares of Intel common stock (worth approximately $23.5 million). Intel was scheduled to announce its quarterly earnings on Tuesday, April 17, 2007.
Between April 13 and April 17, 2007, after receiving the Inside Information from GOEL, RAJARATNAM caused Galleon Tech to cover its entire short position in Intel common stock and to purchase approximately 1.72 million additional shares of Intel common stock (worth approximately $36 million). These trades changed Galleon Tech's position in Intel common stock from short approximately $23.5 million to long approximately $36 million -- a swing of approximately $59.5 million -- in the three business days preceding Intel's earnings announcement. In addition, on April 17, 2007, RAJARATNAM also caused Diversified to purchase approximately 250,000 shares of Intel common stock.
Goel also provided Rajaratnam with information related to a
pending Intel joint venture. According
to the complaint
from the SEC, Rajaratnam bought stock on Goel’s behalf and presumably as a payoff for the information that Goel provided.
Galleon is a continuing object lesson for a new generation of
investors and Rajaratnam is fast becoming the Ivan Boeksy of this
generation. Of course, the US attorney
probably got lucky here. Without a
wiretap, both of the charges against Goel could have been hard to make
First, the trading in advance of the announcement of the Intel
joint venture: Rajaratnam received the
information and bought months in advance of the announcement. That’s not the kind of thing that gets easily
noticed and there are plenty ways to explain that away if pressed.
Second, the trading in advance of an earnings release. Well, the timing of earnings releases are like the phase of the moon – they’re highly predictable. And, when pressed it should be relatively easy for an investor like Rajaratnam to make a case that he had been following Intel for some time and could justify a purchase/sale prior to earnings.
On the other hand, if you’re going hand out inside information
business school classmates about the company you’re working for, rest assured that
the SEC knows where you went to school.
Also, if your business school buddy is buying shares of Hilton in your
name and you’ve not sent him a check, it doesn’t take a genius to figure out
what’s going on.
Monday, February 8, 2010
Update: Acquisition announcements generate predictable movements in acquirer stock. For example, post-announcement returns are typically negative for high Tobin’s q acquirers, stock transactions, and foreign targets, but positive for venture capital-backed private targets. Pre-announcement trading of acquirer stock is more likely to be attributable to insider trading when the pre-announcement price changes match the expected post-announcement acquirer returns. Based on a sample of Canadian acquirers and public and private acquisition targets from Canada, the U.S. and 31 other countries over the years 1991-2008, we find evidence consistent with insider trading of acquirer stock. This evidence, however, is limited to specific situations and is far from generalizable to all types of acquisition announcements. The evidence thereby has policy implications for the allocation of surveillance efforts for initiating insider trading investigations.
Thursday, February 4, 2010
given the losses through what it looks like will be November when it closes, given the fact that you have another couple of billion of dollars coming down the road in goodwill impairment, we believe it’s prudent that you might want to consider filing an 8K to let the shareholders, who are voting on this transaction, know about the size of the losses to date.“[the losses] were sizable enough [to] probably warrant disclosure. They were material subsequent events to what occurred at the end of September that would be relevant for parties that were voting …