M & A Law Prof Blog

Editor: Brian JM Quinn
Boston College Law School

Wednesday, March 31, 2010

Poison Pill Use Declines

A Reuters piece cites FactSet SharkRepellent data to note that the number of shareholder rights plans in effect is at the lowest since 1990.

The number of U.S. incorporated companies with a poison pill in effect hovered at 1,000 on Tuesday, hitting the lowest level since 1990, according to FactSet SharkRepellent. In comparison, the number of poison pills in force at the end of 2001 totaled 2,218.  ...

The drop in poison pills has mirrored a drop in other takeover defenses, such as having a board of directors with staggered election terms. At the end of 2009, only 164 companies in the S&P 500 had a staggered board, down from 294 at the end of 2001, according to FactSet SharkRepellent.

Interesting, but as Prof. Jack Coffee notes in the article, just because a board doesn't have a pill in place, doesn't mean it can't adopt one in about five minutes.   The drop in staggered boards, I think, is more significant.  Without the combination of the pill and the staggered board, the rights plan can delay, but not prevent, a hostile bid that is undertaken in conjunction with a proxy contest.  

On that front SharkRepellent notes on its website that the number of proxy fights has soared recently.

The number of proxy fights against U.S. companies has soared from 42 in 2004 to last year's record total of 133. 


March 31, 2010 in Hostiles, Takeover Defenses | Permalink | Comments (0) | TrackBack (0)

Thursday, March 25, 2010

Looking for a White Knight

The once-venerated fashion label, Emanuel Ungaro, is looking for a white knight to buy the company.  According to both the business press and the NY Post, Lindsay Lohan, Ungaro’s short-lived “artistic adviser” “may have been the straw that broke the fashion house's bank.”  It appears that Ungaro, like many other companies, has took on an enormous amount of debt and now is courting suitors and cutting costs to pay back this debt.  Ungaro’s business problems and its lack of fashion vision, may mean that no white knight will be willing to swoop in and rescue the company. 

Ungaro's problems present just one example of the enormous role that existing debt plays in M&A deals.  In another high profile debt-driven deal, the WSJ reported yesterdaythat the debtors of MGM, the iconic Hollywood studio, have thrown a wrench in the company’s plan to sell itself as part of efforts to pay off the billions of debt that it took on in connection with its 2004 leveraged buyout.  Given the private equity LBO boom of the 2004-2007 period, we are definitely not going to see the last of companies suffering under a heavy debt load and the influence of existing debt holders in acquisition transactions.  Companies may find a white knight, but that knight may need to court not just equity holders, but also existing debt holders.

- AA

March 25, 2010 in Current Events, Leveraged Buy-Outs | Permalink | Comments (0) | TrackBack (0)

UBS Insider Trading Ring

From the SEC's press release alleging that a former director at UBS shared inside information via “coded” e-mails with college friends:

“They thought it was clever to use code words such as frequent flyer miles and wedding registry gifts to conceal their insider trading scheme,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “These words were code for nothing more than ‘we are breaking the law.’”

According to the SEC’s complaint defendants Igor Poteroba, Aleksey Koval, and Alexander Vorobiev attended college together in the 1990s at the University of New Haven in Connecticut.  Poteroba joined UBS and was eventually promoted to Executive Director.  Koval was living in California and Vorobiev in Canada. 

Here's a sample of the coded e-mails the group used to trade ahead of deals that Poteroba knew about from his work (buying ahead of MGI Pharma):

Poteroba: Keep me posted as to how * * * [m]any frequent flier miles you’ve got this far and how many you plan to get by Friday[.] Will be in Boston tomorrow[.] Plans for a trip look fine so far[.] Worst case we can get a refund by Monday, hopefully we do not[.]

Koval: As I mentioned, I just got into this frequent flyer program. I got five thousand of sign-in bonus miles but thinking maybe if I fly often, I will get additional three to five K miles.

Poteroba: On the frequent flyer program topic you mentioned, I think you should sign up for another flight, if you can, since they are providing bonus mileage soon[.]

So creative!  Or, how about this one (ahead of ID Biomedical):

Subject Line: Potatoes

Poteroba: Let me know if you finished your recent harvest arrangements and how many kilos are available for my parents. They are in Turkey now and could use some once they are back.

Koval: This year the potato yield was not as high as the last one. Whatever is collected is now being transported in the warehouse, with special climate conditions, from where it is going to be available for delivery. My estimates are about 6.8 kilo per square yard. …Of course, some potato [sic] need to be left for the next year [sic] seeds [sic] but it should not be a concern since I have a vendor who will provide enough once the spring comes.

These guys are geniuses.  Who could ever see through this code (buying ahead of Molecular Devices)?

Subject Line: Let me know if you’ve started your wedding registry at Macy’s

Poteroba: Happy to talk about sales items and etc. … sale ends soon …so hurry up.

Koval: Yep, I have set it up. Better do it now when they have [a] sale. I could not believe how many things one needs once engaged. Single life was much easier if you ask me. It is always [a] good idea to know about coupons available. I try to follow up on the rebates programs currently in place but often miss many due to lack of time. Thanks for pointing it out to me. … Although wedding day is not yet announced, I hope to get all the important items ahead of time: I even started buying small things that [are] usually not important until you need them.

Poteroba:  Good points…sale ends on Friday…see if you can get registered for as many items as possible…more you get now…more you save…We should start tracking these events more actively.

OK, here’s a little gratuitous advice for young lawyers: don’t trade on your own deals and don’t have your college roommates trade on your deals, either.  A set of anomalous trades pop up on the screen in advance of an announced deal.  All those names get fed through the (commercially available) database and in about 15 seconds the machine spits out a match between the name on the trade and the name of an investment banker at the firm advising on the deal noting that they both went to the University of New Haven in the 1990s.  Please.  It’s not worth it.

Someone asked me recently what I thought was behind the recent upswing in insider trading activity - particularly in the merger space.  In truth it’s really hard to say.  On the one hand, maybe there’s not really an upswing, but rather with a change in administration we have a new set of cops on the beat who might be more interested in sending a message to the marketplace, especially in light of the market collapse, that integrity in the market is important. 

On the other hand, and I know this is the feeling of some regulators, it’s been over two decades since we’ve gone through a major series of insider trading prosecutions.  Maybe the value of deterrence purchased in the 1980s with those prosecutions has worn off on a younger generation.  Indeed, if you look this group, they weren’t even in the US as young people to absorb those lessons.  They probably think that Rudy Giuliani was only the Mayor of New York!  So, no real answer there, but two reasonable hypotheses.

At least this latest ring had no lawyers in the mix!  Small blessings.


March 25, 2010 in Insider Trading | Permalink | Comments (0) | TrackBack (0)

Wednesday, March 24, 2010

K&E on Poison Pill Plumbing

Following the recent uptick in implementation of poison pills, K&E has published this client alert that nicely details the mechanics of various provisions of a shareholders rights plan.


March 24, 2010 in Takeover Defenses, Transaction Defenses | Permalink | Comments (3) | TrackBack (0)

Live Nation - Ticketmaster Analysis

Meese and Richman have a recent paper analyzing the competitive effects of the pending Ticketmaster-Live Nation merger, A Careful Examination of the Live Nation-Ticketmaster Merger.  It's a little long, so pick out your favorite Springsteen album and set your iPod to loop before you start.   If you're interested in this deal and/or antitrust, this paper is worth reading.  

Abstract: As great admirers of The Boss and as fans of live entertainment, we share in the popular dismay over rising ticket prices for live performances. But we have been asked as antitrust scholars to examine the proposed merger of Live Nation and Ticketmaster, and we do so with the objectivity and honesty called for by The Boss’s quotes above. The proposed merger has been the target of aggressive attacks from several industry commentators and popular figures, but the legal and policy question is whether the transaction is at odds with the nation’s antitrust laws. 

One primary source of concern to critics is that Ticketmaster and Live Nation are two leading providers of ticket distribution services, and these critics argue that the merged entity would have a combined market share that is presumptively anticompetitive. We observe, however, that this transaction is taking place within a rapidly changing industry. The spread of Internet technologies has transformed the entertainment industry, and along with it the ticket distribution business such that a reliance on market shares based on historical sales is misleading. A growing number of venues, aided by a competitive bidding process that creates moments of focused competition, can now acquire the requisite capabilities to distribute tickets to their own events and can thus easily forgo reliance upon providers of outsourced distribution services. If self-distribution is an available and attractive option for venues, as it appears to be, then it is unlikely that even a monopolist provider of fully outsourced ticketing services could exercise market power. Ultimately, a proper assessment of the horizontal effects of this merger would have to weigh heavily the emerging role of Internet technologies in this dynamic business and the industry-wide trend towards self-distribution. 

The second category of arguments by critics opposing the merger rests on claims that vertical aspects of the transaction would produce anticompetitive effects. Indeed, Ticketmaster’s and Live Nation’s core businesses are in successive markets, and thus the proposed transaction is primarily a vertical merger, but there is broad agreement among economists and antitrust authorities that vertical mergers rarely introduce competitive concerns and are usually driven by efficiency motivations. This wealth of academic scholarship, which is reflected in current antitrust law, has not - from our vantage point - been properly incorporated into the public dialogue concerning the proposed merger. To the contrary, critics articulate concerns, including the fears that the merger would lead to the leveraging of market power and the foreclosure of downstream competition, that are refuted by accepted scholarship. Moreover, there are a number of specific efficiencies that, consistent with economic and organizational theory, are likely to emerge from a Live Nation-Ticketmaster merger and would be unlikely but for the companies’ integration. For these reasons, we submit this analysis in an effort to inform the debate with current economic and legal scholarship.


March 24, 2010 in Antitrust | Permalink | Comments (0) | TrackBack (0)

Tuesday, March 23, 2010

For Sale: One Slightly Worn Basketball Team

According to multiple press reports (here, here, and here) , the owners of the Golden State Warriors have officially hung out a "for sale" sign.  They're asking $400 million, but the franchise is slightly worn and may need a little paint.  Who knows, maybe they're hot to sell and will come down.  Anyway, Larry Ellison is hanging around looking for a toy.


March 23, 2010 | Permalink | Comments (0) | TrackBack (0)

Kraft as "corporate pillager"?

Things have been percolating across the pond with respect to the official post-mortems of Kraft's acquisition of Cadbury.  In the UK, the acquisition was the source of a good deal of angst -- generating "Keep Cadbury British" campaigns amongst employees who feared the acquisition would be followed by job losses and a moving of production offshore.  Central to Kraft's present challenges are statements made by Kraft that the transaction would in fact not result in a net loss of jobs in the UK and would respect the traditions of the British icon.   According to the Daily Mail, those statements now seem questionable.  

During her pursuit of Cadbury, [Kraft CEO Irene] Rosenfeld stridently declared her 'great respect and admiration for Cadbury, its employees, its leadership and its proud heritage'.

Yet just days after Kraft's purchase, the mask came off. Rosenfeld suddenly ditched repeated pledges to reverse plans for the closure of Cadbury's Somerdale plant near Bristol, putting 400 jobs in jeopardy as production is shifted to Poland.
The promise had been a central plank in the publicity battle fought by Kraft during its pursuit of Cadbury. Now it looks like a piece of disgraceful cynicism.

It has also emerged that Kraft is reviewing Cadbury's final salary scheme - an emblem of its historically caring attitude towards employees - possibly putting current workers on to a less generous scheme, while closing the plan to new members.

This came even after a personal pledge by Rosenfeld in a letter to Cadbury chairman Roger Carr on August 28, 2009 - and in subsequent takeover documentation - that employees' pension rights would be 'fully safeguarded'.

All of this has led to a political uproar in the UK. The Takeover Panel is considering changes to the Takeover Code in light of the reaction to the Cadbury transaction and is in the midst of a consultation with respect to rule changes.  In addition, last week, Parliament called in Kraft to question representatives over the takeover.  Rosenfeld declined an invitation to appear and sent a designated punching bag.  No surprise the session didn't really go well.

Kraft executives have made the extraordinary admission that key elements of their bid for Cadbury were based on information gleaned off Google. ...

This emerged as Marc Firestone, a Kraft executive vice-president, issued his firm's first apology to workers.

He said he was 'terribly sorry' for breaking the promise on Somerdale, adding: 'I do sincerely personally express my apology.'

Keeping Somerdale open was a key pledge made during the controversial £11.9bn bid battle for Cadbury. Kraft reneged on it just days after winning control last month.

The American company insisted it did not know 'tens of millions of pounds' of equipment had been installed in a new Polish factory.

That's the way these things go I suppose.  Rosenfeld is coming under quite a bit of criticism in her UK for dissing the Parliamentary proceedings. Compare Kraft with Toyota -when Toyota was the subject of recent US Congressional hearings, Toyota's CEO found his way to Congress and took his lumps.  Rosenfeld on the other hand didn't bother to show up when the Parliament called.  Of course, Toyota's CEO made the pilgrimage, in part, because Toyota has significant ongoing business interests at stake and wants to ensure that it can keep selling cars in the US market.   Kraft, however, is in a different place.  With its deal done, it's not all that interested in the political wreckage left behind.  If it results in an overhaul of the takeover rules that won't have a material effect on Kraft going forward.  

It's hard to know how this is going to play out over time - whether Parliament is simply venting and does not have a legislative agenda, or whether there is anything that will come out of the Takeover Panel's review.  The talk already is about redefining director fiduciary duties so that directors of UK corporations act more like "stewards" for the long-term interest rather than "auctioneers."

If the result of all of this is that the takeover rules are reworked to provide directors with a more active role in defense of the corporation in the face of a takeover threat that would be a wholesale reversal of a long-standing UK governance principle and put the UK on a footing closer to that of Delaware.  That would be a disappointing development.  I say disappointing mostly because with Delaware on the one side and the Takeover Code on the other, one has a natural experiment.  In the UK we have the embodiment of Ron Gilson's passive approach to director action in the face of a takeover.  While in Delaware we see Marty Lipton's active managers stewarding the corporation through the shoals of takeover threats.


March 23, 2010 in Cross-Border | Permalink | Comments (0) | TrackBack (0)

Thursday, March 18, 2010

Frequent Filers

Vice Chancellor Laster of the Delaware Chancery Court is apparently not impressed by attorneys who are able to file lawsuits within minutes sometimes of a merger's announcement – “frequent filers.”  I wonder if one can get a concierge card after 100 lawsuits?  In any event, VC Laster recently replaced lead counsel in a case against Revlon and order new counsel to investigate the work of the previous lead counsel.  According to Reuters in doing so VC Laster said: 

"Their advocacy has been non-existent. ... When forced to defend their conduct and leadership role, original plaintiffs' counsel approached the concept of candor to the tribunal as if attempting to sell me a used car."

In replacing the lead counsel, VC Laster is doing something about a problem that people have long talked about.  Although there are many salutary effects of shareholder litigation such as a check on management power and abuse, there are also downsides.  In particular is the tendency for shareholder litigation to fall victim to agency problems when the attorneys drive the litigation without regard to needs of their ostensible principals - the shareholders.  This is an old problem with hardly a simple solution.  

Thompson and Thomas have a good paper on the issue, The New Look of Shareholder Litigation, that appeared some years ago in the Vanderbilt Law Review.  They do an empirical study of merger related litigation.  While they find some abuses, on balance, they come out in favor of shareholder litigation:

Placing our findings in the historical context of the debate over the value of representative shareholder litigation, we believe that the positive management agency cost reducing effects of acquisition-oriented class actions are substantial, while the litigation agency costs they create do not appear excessive. For these suits, we therefore disagree with earlier studies that have claimed that all representative shareholder litigation has little, if any, effect in reducing management agency costs and should be evaluated solely in terms of its litigation agency costs.

The PSLRA included lead counsel provisions to attempt to deal with this problem with some success.  Maybe VC Laster has stumbled on to another avenue for constraining abuses – a more active bench.


March 18, 2010 in Cases | Permalink | Comments (0) | TrackBack (0)

Wednesday, March 17, 2010

Astellas Launches Proxy Battle

You'll remember that Astellas made a hostile offer for OSI Pharmaceuticals earlier in the month.  Along with their offer, they sued in Delaware to get the OSI board to consider the offer.  Well, the board has considered the offer ($52/sh cash, a 40% premium) and has rejected it.  Here's part of their statement:

"After carefully analyzing and considering Astellas' offer, the Board has unanimously concluded that the offer does not fully reflect OSI's fundamental, intrinsic value. We believe that OSI is a unique asset - the only profitable, mid-cap biotech company with a growing, high quality and fully integrated oncology franchise and a strong diabetes and obesity franchise which also has a proven track-record of success. The OSI Board takes its fiduciary duties seriously and will continue to do what's right for OSI stockholders. In that regard, the Board of Directors has instructed OSI management, with the assistance of the Company's financial advisors, to contact appropriate third parties in order to explore the availability of a transaction that reflects the full intrinsic value of the Company.".

The full text of the OSI board's letter to shareholders can be found here.

None too happy with that response, Astellas has now launched a proxy battle at the next annual shareholders meeting of OSI - putting up a slate of 10 director nominees whose jobs it will be to deliver the company to Astellas.  OSI responded this morning by simply stating, "OSI believes the Astellas director nominees’ only mandate is to support Astellas in acquiring OSI at an inadequate price."  OK, so not a full-throated endorsement.

This is starting to have the feel of the 1980s again.  Who said the hostile acquisition was dead?!


March 17, 2010 in Hostiles | Permalink | Comments (1) | TrackBack (0)

Tuesday, March 16, 2010

Sources of Value Destruction in Acquisitions

Harford, Humphrey and Powell have a new paper, Sources of Value Destruction in Acquisitions by Entrenched Managers.  One conclusion is pretty straightforward and consistent with my first impression - if managers have excess cash, they tend not to be careful with it.  Sounds like a reason for a dividend policy over an acquisition strategy when firms are generating excess cash.

AbstractPrior work has established that entrenched managers make value-decreasing acquisitions. Here we ask how exactly they destroy that value. We hypothesize that rising equity values loosen financial constraints, much like free cash flow does, allowing entrenched managers to pursue more acquisitions. We further test whether entrenched managers simply overpay for good targets or actually choose targets with lower synergies. We find support for the latter. Overall, we find that value destruction by entrenched managers comes from a combination of factors. First, they disproportionately avoid private targets, which have been shown to be generally associated with value creation. Second, they are particularly active during times of high equity valuation, even though their own equity is not as highly valued as other bidders’ equity. Finally, they choose targets with low synergies, as shown by combined announcement returns and post-merger operating performance.


March 16, 2010 | Permalink | Comments (0) | TrackBack (0)

Monday, March 15, 2010

Fiduciary Duties and Illegal Acts

It's a little pet peeve of mine.  I really dislike those law professor hypotheticals that try to get students to rationalize how it might be a director's duty to have the corporation violate the law.  Why?  Well, because the courts are pretty clear that illegal acts are ultra vires and when a director causes the corporation to violate the law the director is not acting in the corporation's best interests and thus violates his/her duty of loyalty to the corporation.  So you can imagine how happy I was to see in the Lehman autopsy this short restatement of that law: 

The business judgment rule does not protect decisions that involve fraud or illegality. See Smith v. Van Gorkom, 488 A.2d at 873; Litt v. Wycoff, C.A. No. 19083‐NC, 2003 WL 1794724, at *6‐7 (Del. Ch. Mar. 28, 2003); In re W. Nat’l Corp. S’holders Litig., Consolidated C.A. No. 15927, 2000 WL 710192, at *26‐27 (Del. Ch. May 22, 2000). Under Delaware law, intentionally causing a corporation to violate the law is a breach of the duties of loyalty and good faith. Gifford, 918 A.2d at 357‐358. “A failure to act in good faith may be shown, for instance, where the fiduciary intentionally acts with a purpose other than that of advancing the best interests of the corporation, where the fiduciary acts with the intent to violate applicable positive law, or where the fiduciary intentionally fails to act in the face of a known duty to act, demonstrating a conscious disregard for his duties.” In re Walt Disney Co. Derivative Litig., 906 A.2d 27, 67 (Del. 2006); see also Desimone v. Barrows, 924 A.2d 908, 934 (Del. Ch. 2007) (“[I]t is utterly inconsistent with one’s duty of fidelity to the corporation to consciously cause the corporation to act unlawfully.”); Metro Commc’n Corp. BVI v. Advanced MobileComm Techs., Inc., 854 A.2d 121, 131 (Del. Ch. 2004) (“Under Delaware law, a fiduciary may not choose to manage an entity in an illegal fashion, even if the fiduciary believes that the illegal activity will result in profits for the entity.”); Guttman v. Huang, 823 A.2d 492, 506 n.34 (Del. Ch. 2003) (“[O]ne cannot act loyally as a corporate director by causing the corporation to violate the positive laws it is obliged to obey.”). Directors “have no authority knowingly to cause the corporation to become a rogue, exposing the corporation to penalties from criminal and civil regulators.” Desimone, 924 A.2d at 934.


March 15, 2010 | Permalink | Comments (0) | TrackBack (0)

Friday, March 12, 2010

Lehman Autopsy

OK, so it's neither a merger nor an acquisition, but the Lehman "autopsy" is a good read.  The entire set (multiple volumes) is available at Jenner & Block's website: here.  I think it will take me quite a while to read - being more than 2,000 pages long - but that's okay I have a good idea how the story ends.  Don't we all?

Anyway, being a little bit of a corporate law geek, I skipped straight to the appendix where Jenner lays its understanding of the law that it applied when reaching its conclusions.  It's a pretty comprehensive overview of the current state of the duties of care, loyalty, good faith, the duty to monitor (Caremark) and the duty of candor, as well as the business judgment rule and its application.  In addition, there is a relatively extensive discussion of Gantler v Stephens and the application of the duty of care to corporate officers.


March 12, 2010 | Permalink | Comments (0) | TrackBack (0)

Thursday, March 11, 2010

More Comcast/NBC Hearings Today

The Senate Commerce Committee is having more hearings on the Comcast/NBC deal today at 10:00am.  Chirstine Varney (head of the DOJ's anti-trust division), Brian Roberts (CEO of Comcast), Prof. Christopher Yoo (UPenn Law) are among those on the witness list.  The webcast will be available here.


March 11, 2010 in Antitrust, Miscellaneous Regulatory Clearances | Permalink | Comments (0) | TrackBack (0)

Wednesday, March 10, 2010

Poor Ben. He Had No Choice...

Poor Ben.  He may have made good ice cream back in the day, but he sure doesn't know the law.  And he probably should have paid for better lawyers - Vermont lawyers, not those fancy ones from NYC.  From a story about balancing corporate social responsibility with duties to shareholders on NPR yesterday:

[Ben & Jerry's] Co-founder Ben Cohen thought the company could better protect its social mission if it stayed independent. But he says the law was on the side of shareholders.

"The laws required the board of directors of Ben & Jerry's to take an offer, to sell the company despite the fact that they did not want to sell the company," Cohen says. "But the laws required them to sell the company to an entity that was offering an amount of money far in excess of what the stock was currently trading at."

That entity was European conglomerate Unilever. Lawyers told the board members that shareholders could sue if they turned Unilever's offer down. Cohen says individual board members were concerned that the company didn't have adequate insurance to cover a lengthy court battle, and that they'd be personally responsible for the legal fees.

"I think most people that are sitting on a board are not willing to lose their house for the privilege of sitting on that board," Cohen says.

And so they sold to the highest bidder. That helped set the stage for today's young, idealistic companies.

First, although it might not have been that obvious in 2000, it was probably still pretty clear that "just saying no" would have been a viable strategy - particularly for a company that had dual-class stock, a classified board, and required 2/3 of shareholders to vote against a director to remove him/her from office.   

Second, notwithstanding what his lawyers said, the record of directors "losing their homes" for turning down an offer when a company is not for sale is somewhat rather less than slim.  In fact, it's non-existent.

Third, what ... didn't the Ben & Jerry's board members have indemnity agreements with the company?!  Just saying.

To top it off, Ben & Jerry's Homemade, Inc. was a Vermont company.  Vermont is one of many states that helpfully defines general standards for director conduct in its statute.   Section 8.30 of the Vermont For-Profit Corporation law reads in relevant part:
a) A director shall discharge his or her duties as a director, including the director's duties as a member of a committee ... (3) in a manner the director reasonably believes to be in the best interests of the corporation. In determining what the director reasonably believes to be in the best interests of the corporation, a director of a corporation ... may, in addition, consider the interests of the corporation's employees, suppliers, creditors and customers, the economy of the state, region and nation, community and societal considerations, including those of any community in which any offices or facilities of the corporation are located, and any other factors the director in his or her discretion reasonably considers appropriate in determining what he or she reasonably believes to be in the best interests of the corporation, and the long-term and short-term interests of the corporation and its stockholders, and including the possibility that these interests may be best served by the continued independence of the corporation ... 
So ... if the board were properly advised in response to an offer from Unilever, they  would have been perfectly within their rights to say something like the following:
Thanks for the offer, Unilever.  We've considered it carefully.  However, consistent with our fiduciary obligations under Vermont law as directors we believe that accepting your offer would not be in the best interests of the corporation, the economy of the state, region, or the community.   We believe the best interests of the corporation are best served by Ben Jerry's remaining an independent corporation with a soul.  So, thanks, but no thanks. 
Poor Ben.  Just think, he could have kept his company rather than sell it to Unilever.  Too bad he didn't have a Vermont lawyer to advise him.  Or, maybe he did.  Maybe Unilever's offer was so good that he felt this was his chance to cash out.  Hey, I don't blame him. 


March 10, 2010 | Permalink | Comments (0) | TrackBack (0)

Tuesday, March 9, 2010

More on Earnouts

More on why earnouts are a bad idea - a new paper by Libby Weber, The Right Frame of Mind for M&A.  One quibble - although earnout targets or benchmarks are often not meant, this doesn't mean that they are not paid out.  Indeed, if the personnel are valuable to the acquisition, it's important to keep them properly motivated.  And there's nothing less motivating than being told that although you and your team have been working hard that you missed the earnout target and aren't going to get paid.  This is exacerbated by choosing poorly fitting earnout targets that might be out of the control of most of the earnout recipients, a common problem with earnouts.  So it shouldn't be surprising that many buyers will pay earnouts even though they aren't earned.  Of course, my knowledge on this score is anecdotal.  It strikes me as almost unknowable empirically.  Actually, I take that back.  It is knowable, it just takes a lot of work to put the data together!  I guess that's why we have summers.  Just another project to add to the list. 
Abstract: According to agency theory, including performance-based consideration (earnout clauses) in the merger contract should align parent and retained target management incentives, leading to better merger performance. Yet, earnouts are frequently not paid out because retained target management fail to reach the performance milestones specified in the contingent provision. So, why does incentive alignment fail? The decision-making literature offers a possible explanation for the inconsistency. Prospect theory suggests that the performance contingent consideration in an earnout clause may be framed as a potential loss or gain, leading retained target management to display risk-seeking or risk-averse behavior. Risk-seeking or risk-averse behavior may positively or negatively impact merger outcomes, depending on the merger characteristics. In this paper, I examine whether specific merger characteristics, including parent’s customer strategy and characteristics of the target’s technology, impact if the M&A deal value is framed in terms of total consideration (earnout is perceived as a potential loss) or guaranteed consideration (earnout is perceived as a potential gain).


March 9, 2010 | Permalink | Comments (0) | TrackBack (0)

Monday, March 8, 2010

The century of the (volatile) emerging market?

I’ve been blogging a lot about cross-border M&A, mostly covering Indian conglomerates purchasing firms outside of India.  Emerging markets are not just experiencing outbound deals, there is also a lot of interest by western firms in acquiring targets in these markets.  According to recent data by Thomson Reuters, 34% of deals announced thus far in 2010 involved a target or an acquirer (or both) in an emerging market. For example, just last week Prudential PLC, the British life insurance and asset management company, announced a $35.5 billion deal to purchase AIG’s Asian assets.  The deal would fundamentally transform Prudential, making it a major player in the Asian insurance market

These cross-border deals represent an important shift in deal-making and M&A activity.  This is pretty exciting stuff especially given the overall decrease in M&A activity in the west.  But cross-border M&A deals in emerging economies can also be somewhat thorny for deal makers.  As articulated in this recent article “while optimism toward emerging-market deals is palpable, and the macroeconomic signs are positive, the reality for deal makers may not be so rosy. Deals in emerging markets often run into surprises like onerous government intervention or corporate management that, at the last minute, changes terms or tactics.” 

Cross-border deals involve social, political, cultural and economic sensitivities that require sophisticated deal makers and counsel.  For example, due diligence may involve an investigation into deal risks that are not always common in domestic deals (FX issues, political instability, etc.).  Lawyers advising clients on emerging market M&A deals will need to be nimble and creative in their thinking, and have an understanding of the macro-economic and political environment beyond the typical domestic deal.  Moreover, they must be ready to ask tough questions to which there may not be easy answers.  It is not just the diligence process that is different.  Deal documents will often look quite different from those used in typical domestic deals.  I think some of the interesting questions for scholars and practitioners to investigate are whether, how and why deal documents differ, and to study the extent to which parties entering into acquisition deals in countries that seem to have very different legal rules nevertheless tend to develop roughly similar solutions to the characteristic problems that arise in acquisition transactions.


March 8, 2010 in Asia, Cross-Border | Permalink | Comments (0) | TrackBack (0)

Friday, March 5, 2010

Takover Panel to Take Step Backwards?

Last week I noted that there appeared to be some blow-back from Kraft's successful acquisition of Cadbury's.  The former Chairman of Cadbury made a speech in which he called for changes to the rules of the Takeover Panel to ensure that the interests of long-term (read: British) shareholders are not sacrificed to the interests of short-term (read: foreign) shareholders.  The British Trade Minister supplied some supportive words and wouldn't you know it -- the next day, the Takeover Panel announced that it will formally review its rules: 

The Code is not concerned with the financial or commercial advantages or disadvantages of a takeover. These are matters for the company and its shareholders. Nor does the Code deal with issues, such as competition policy, which are the responsibility of government and other bodies.
In the light of recent commentary and public discussion, and suggestions for consideration from the Secretary of State for Business, Innovation and Skills and others, the Code Committee has decided to initiate a consultation to consider whethercertain Code provisions and the timetable for determining the outcome of offers could usefully be improved.

The situation is not helped at all by Kraft's moving with "indecent haste" to cut jobs in the UK.    This after pledging just a couple of months ago to add jobs to a post-merger Cadbury.  Of course, Kraft isn't all that concerned with the takeover rules it leaves behind once it has accomplished its transaction.  Although they will be dragged before Parliament to explain themselves.

After the Takeover Panel announced its new consultation on proposed rule changes, it also announced that Peter Kiernan, Managing Director of Lazard (London) who was to begin his term as Director General of the Takeover Panel would not do so for the time-being.
The secondment of Peter Kiernan as Director General was due to commence on 1 March. However, pending completion of some ongoing matters, it has been agreed that his appointment as Director General should be deferred.

Might it have anything to do with the fact that Kiernan advised Kraft in its acquisition of Cadbury?  I dunno. Maybe.

It's hard to know which way this will go and what the results of all this movement will be with respect to the Takeover Panel's rules.  It's worth watching, though.

Oh, and not to be forgotten - some of our friends at the Takeovers Panel down-under are taking advantage of this opportunity and the panel's 10th anniversary to urge it to reconsider its own rules.  Keep an eye on that as well.


March 5, 2010 in Europe | Permalink | Comments (0) | TrackBack (0)

Thursday, March 4, 2010

Cash on the Balance Sheet

This morning's WSJ has an article suggesting that goods times are just around the corner for M&A lawyers.  Actually, it's an article about the hole that is presently being burned in the pockets of managers as they sit on increasingly large cash-piles.  

The 382 nonfinancial firms in the Standard & Poor's 500 that have reported results for the fourth quarter of 2009 are now holding $932 billion in cash and short-term investments, according to a Wall Street Journal analysis of data from Capital IQ. That sum is up 8% from the third quarter and up 31% from a year ago.

 At a time of low interest rates, reopened credit markets and growing optimism about the economy, CEOs and their boards seem to be questioning the wisdom of sitting on all that cash. And with the S&P 500 still trading 29% below its October 2007 peak, companies are deciding that cash is their preferred currency for acquisitions—rather than shares they see as undervalued.

This is an old problem - but a good one.  Having too much cash on the balance sheet is unproductive so what to do with it.  My first thought has always been, is that what dividends are for?  Apparently not.  Reminiscent of arguments that lay behind the conglomerate movement of the 1960s, one observer suggests that dividends are bad. 

 "In many cases, if you use cash for share buybacks or dividends you are signaling to the market you don't have a better use for the cash," said Paul Parker, Barclays Capital head of global M&A. "For most CEOs, that message is the last one they want to send."

 As if every manager had an endless font of profitable ideas to pursue... Here's a news flash: they don’t.  There is limit.  There’s always a limit.  That’s one reason why we have a capital market – so that individual investors can allocate capital into portfolios that best meet their needs.  I suppose we could let corporate managers do that, but we’ve been down that road before.   Here's a good read on our previous experience with corporate empire building if you haven't already got it on your shelf: Sobel's The Rise and Fall of the Conglomerate Kings.  

 And it's not like there are all these targets out there just waiting to be bought.  The weakness of the stock market over the past year also means that potential sellers are going to be less willing to sell at current prices.  Boards are going to argue (as they are in AirGas/Air Products) that the market is getting its price wrong and that a sale at present is a bad idea (unless it can be done at a premium of historic highs).  This might be why we are seeing what appear to be an uptick in hostile acquisition activity.  Targets are resisting.

 Against that, we might all be better off if good managers sitting on excess capital turned it back to their shareholders rather than pursue perhaps marginally profitable acquisitions.  If managers took just 10% of the nearly 1 trillion in cash on the balance sheets of non-financial firms and sent it back to stockholders, that would be a $100 billion private sector stimulus that might even help somebody make a payment on their mortgage.  That wouldn't necessarily be a bad thing.  

 OK, I'll get off my soap box for the rest of the day. 


March 4, 2010 | Permalink | Comments (0) | TrackBack (0)

Wednesday, March 3, 2010

Historical Perspectives on the Financial Crisis

OK, I'm a sucker for financial history.  Here's a new essay from Frank Partnoy (USD), Historical Perspectives on the Financial Crisis, that ties the "Match King" scandals of the 1920s directly to the Financial Crisis of 2008.  Here's to unintended consequences! 

Abstract:  This Essay discusses two historical parallels between the current financial crisis and the financial crisis of the late 1920s and 1930s. First, financial innovation was at the core of both crises. In particular, the machinations of Ivar Kreuger illuminate how financial innovation tends to outstrip the ability, and perhaps the willingness, of investors and intermediaries to process information. Second, reliance on credit ratings began as a response to the 1929 crash and became a primary cause of the recent crisis. During the 1930s, regulators developed rules based on credit ratings; those rules are the ancestors of today’s widespread regulatory reliance on ratings. Without financial innovation and overreliance on credit ratings, the recent crisis likely would not have occurred, and certainly would not have been as deep.


March 3, 2010 | Permalink | Comments (0) | TrackBack (0)

Astellas Hostile Offer

Astellas Pharma launched a hostile offer for OSI Pharmaceuticals yesterday.  In conjunction with the offer, Astellas filed suit in the Delaware Chancery Court seeking to have the board pull its pill.  Astellas' central claim is that OSI brushed off its offer without considering it.  From the complaint:

The Director Defendants failed to conduct a good faith and reasonable investigation of Astellas Pharma’s offer. Instead, the Director Defendants summarily refused to engage Astellas Pharma in a meaningful dialogue and failed to reasonably inform themselves about Astellas Pharma’s offer. The Director Defendants could not possibly be well informed concerning the offers that they have flatly rejected because they have declined to engage in any meaningful discussion or negotiation with Astellas Pharma, either directly or through their legal and financial advisors, to learn more about Astellas Pharma’s offer. This failure to conduct a good faith and reasonable investigation of Astellas Pharma’s offer is a violation of the Director Defendants’ fiduciary duties.

 Presumably, sometime over the next 10 days the OSI board will meet to review the Schedule TO that's now on file with the SEC and inform themselves about the offer.  Once they do that, it won't leave much for Astellas to complain about.


March 3, 2010 in Cases, Takeover Defenses | Permalink | Comments (0) | TrackBack (0)