Wednesday, September 8, 2010
I don't know how this one slipped by me. Early in July, Vice Chancellor Laster certified an interlocutory appeal by the defendants in the In re CNX Gas Corporation Shareholders Litigation (May 25, 2010 memo opinion) case. At issue was VC Laster's application of VC Strine's "unified standard" in the context of a controlling shareholder's unilateral freeze-out of the minority. VC Chancellor Laster certified the following question: "[A]re voluntary non-coercive tender offers made with full disclosure by controlling stockholders of Delaware corporations subject to entire fairness review?"
In his memo opinion in May, VC Laster suggested that the issue of the standard of review was ripe for resolution by the Supreme Court and practically invited the defendants to appeal. They did. He certified their interlocutory appeal and it went to the Delaware Supreme Court. The court promptly refused to hear the case ... well, not promptly, they waited two days.
While the Supreme Court refused to resolve the ambiguities in the law, I guess the good news is that the the decision leaves VC Laster's opinion and application of the "Cox Communications" test in place. That test says "if a first-step tender offer is both (i) recommended by a duly empowered special committee of independent directors and (ii) conditioned on the affirmative tender of a majority of the minority shares, then the business judgment standard of review presumptively applies. If either requirement is not met, then the transaction is reviewed for entire fairness."
In short, if practitioners begin to incorporate the Cox Communications test into their transaction planning, it suggests that controlling shareholders should be able to structure going private transactions around many non-meritorious lawsuits.
Tuesday, September 7, 2010
I'm of the mind that the answer to that question is likely no. In his Stanford Law Review paper of a few years ago (Professorial Bear Hug), Vice Chancellor Strine made it clear that ... well ... it wasn't clear. Of course we professors would like a court to rule once and for all on the question of whether a classified board can simply sit on its poison pill in the face of an unsolicited offer. The courts, I think, are happy with this constructive ambiguity as it relates to the limits of the uses of a pill. For example, the Federal District Court in Delaware suggested in Moore v Wallace (persuasive, but not precedent) that a Delaware state court might permit the defense. Vice Chancellor Allen in Interco, on the other hand, made it clear that there were limits to such a defense and employed a Unocal analysis with respect to 'threats' facing the corporation. Allen understood threats to be of only of two types: threats to voluntariness and the threat of a inadequate price. In context of a single-tier, all-cash bid, there is no threat to voluntariness, there is just the threat that the bid is inadequate. In any event, the Supreme Court rejected that analysis in Paramount v Time leaving us really at sea as to the limits of a 'just say no' defense. The 'just say no' defense really lies at the heart of the most crucial discussion in the corporate law - who should make the decision about the fundamental future of the corporation: the board or the stockholders. You'd think it would eventually get litigated once and for all.
A few months ago it looked like we might have a chance to see it happen. Air Products launched an all cash tender offer for Airgas. Airgas just sat on its pill and said 'no.' Air Products then filed suit. Here's a copy of the complaint. I came to the realization last week that this case would never get before a chancellor. It's scheduled in the Chancery Court for October 1, but that it turns out is just creative scheduling. In fact, it will likely never get that far.
Airgas' shareholder's meeting at which shareholders will likely decide the fate of Air Products' offer is scheduled for September 15. Over the weekend, Air Products upped its offer to $65.50, a whopping 50% premium over the prebid price for Airgas. Air Products also announced that if it is unsuccessful in its proxy contest, it will walk away and not pursue Airgas further. And just like that, the challenge to the 'just say no' defense will go away. Litigating this issue will likely have to wait for another day, unless of course Air Products succeeds in the proxy contest and elects three of its own directors and the remaining directors continue to fight.
Thursday, September 2, 2010
HP’s $33-a-share offer values 3Par at 325 times the company’s earnings before interest, taxes, depreciation and amortization during the past year. In 21 computer-services deals in the past five years, acquirers paid a median 16 times trailing Ebitda, according to Bloomberg data.
Believe me, there's no way they are popping Champagne corks over at HP's Palo Alto headquarters.
Yesterday, the SEC settled insider trading charges against James Self and Stephen Goldfield. Self was director of Business Development at Merck and Goldfield, Self's classmate at the Wharton School (UPenn), was a hedge fund manager. According to the complaint, Self disclosed confidential inside information about Merck's pending acquisition of MedImmune to Goldfield. Goldfield traded on that information and according to the complaint made approximately $14 million in profits.
Here's the thing. Self didn't make any money on this deal. In fact, he didn't "profit" at all. Rather, he provided the information for reasons that most facebookers will readily recognize. According to the SEC,
"Self divulged the confidential information to Goldfield in order to boost his reputation in Goldfield's eyes and to show Goldfield that he was working on important matters"
Hey, I get it. Your buddy got out of Wharton and immediately joined a hedge fund. As near as you can tell, he's making a gazillion dollars a year, has houses in three cities, and leads a glamorous life-style. You? Well, you were smart, but you decided to work for Big Pharma. You might not be rolling in cash, but you're doing important work. There's a natural inclination to let others know that you, too, are important, that you, too, are a big deal. Like I said, I get it.
But ... get over it. Before you start first day at that fancy law firm. Here's some advice - it's time to learn to be discreet. You may not brag to hedge fundies you know from law school about deals you are working on. (Who would be that stupid?) But you may do other things. I know everyone always has to have a status update on their facebook page or gchat that lets everyone what exactly they are up to. If you're not careful, these could get you into trouble. How about this possible facebook status update for example:
"On my way to a board meeting at MedImmune. Who wants to buy a cheap biotech company?!"
Definitely a career killer if you posted something like that. Now might be a good time to start weening yourself off of many of the social media sites. Less is more.
Wednesday, September 1, 2010
So while we sit and wait for Dell to decide whether it wants to bid a penny more for 3Par, I think it's interesting to note that HP announced a stock buy-back over the weekend. In this case, HP committed an additional $10 billion to its ongoing stock repurchase program. Remember that before going into the 3Par bidding war, HP had something like $15 billion in cash. Now, it's decided to give away most of that in the form of a stock repurchase.
Why companies think a stock repurchase is better than simply announcing a dividend is a tricky question. The stock repurchase does somethings that are attractive for managers. First and foremost, the repurchase allows managers to shrink the number of outstanding shares in its capitalization. Once you have shrunk the denominator, presto the stock price goes up (for a day or so). Or, it should. For managers who might have bonuses and other compensation tied to stock price, getting the stock price to rise is a good thing. On the other hand, a one time special dividend doesn't have the same kick on the stock price. So it depends on what one is trying to accomplish with the buy-back.
A share repurchase can also have a strong signalling function. That's to say, when insiders think the market is undervaluing shares, goes the theory, they authorize a share repurchase. OK, I guess. But that's not what is happening with respect to HP. What's happening here is that shareholders are unhappy with HP's decision to take its excess cash and engage in a bidding war that it will likely lose (even if it wins) with Dell. Committing $10 billion of its $15 billion to a share repurchase credibly signals to investors that HP won't be engaging in more of these kinds of game - mostly because it can't any more.
That's a good thing I suppose.