Wednesday, December 29, 2010
Marty Lipton is widely regarded as the creator of the poison pill. He is interviewed by The Deal and walks through his motivations for developing the poison pill during the hostile takeover boom of the 1980s. Notwithstanding criticism from the academics (especially law professors) his view with respect to the pill was accepted by the Delaware Supreme Court.
Monday, December 27, 2010
A message from Professor Tina Stark:
If you are attending the AALS Meeting, please come to the organizational meeting of the provisional AALS Section on Transactional Law and Skills and sign the petition in favor of creating the new Section. The meeting is being held on Wednesday, January 5th from 2:00 p.m. to 3: 45 p.m. at the Hilton Hotel, Yosemite A, Ballroom Level. We need signatures from at least 50 professors from at least 25 law schools. Please stop by. Signing will just take minute. A copy of the petition: Download Transactional.law.aalspetition.
If you are unable to attend the meeting, you can sign the attached petition and send the original (not a PDF) by snail mail to me for receipt no later than January 15, 2011.
Professor Tina L. Stark
Emory University School of Law
1301 Clifton Road
Atlanta, GA 30322
As the Section will not yet be formed, no official business will be conducted, but we will discuss the purpose of the Section and the process for gaining provisional and then permanent status.
Have a wonderful holiday.
If you read the petition, you will note that I am the Treasurer for the proposed Section. I agree with my colleagues that this would be a wonderful development for teaching and scholarship about transactional lawyering. If you agree, please take a moment to sign the petition.
Friday, December 17, 2010
In a real belt-and-suspenders approach to making sure there isn't another bidding contest, Dell is requiring its most recent target, Compellent, to adopt a shareholder rights plan as a condition of its merger. On Dec. 13, Dell announced that it will be acquiring Compellent for $27.75/share in cash. In a little twist that intended to give more teeth to what is now a relatively standard window shop provision, the merger agreement requires that Compellent adopt a shareholder rights plan:
4.2 Operation of the Company’s Business. ... (e) Promptly (but no later than three days) after the date of this Agreement, the Company shall adopt a stockholder rights plan in the form previously approved by Parent (and otherwise satisfactory in form and substance to Parent). The Company shall not, without Parent’s prior written consent, amend or waive any provision of such rights plan or redeem any of the rights issued under such rights plan; provided, however, that the board of directors of the Company may amend or waive any provision of such rights plan or redeem such rights if: (i) (A) neither any Acquired Corporation nor any Representative of any Acquired Corporation shall have breached or taken any action inconsistent with any of the provisions set forth in Section 4.3, in Section 5.2 or in the Confidentiality Agreement, (B) the Company’s board of directors determines in good faith, after having consulted with the Company’s outside legal counsel, that the failure to amend such rights plan, waive such provision or redeem such rights would constitute a breach by the Company’s board of directors of its fiduciary obligations to the Company’s stockholders under applicable Delaware law, and (C) the Company provides Parent with written notice of the Company’s intent to take such action at least four business days before taking such action; or (ii) a court of competent jurisdiction orders the Company to take such action or issues an injunction mandating such action.
On cue, Compellent's board adopted a rights plan yesterday. The plan is available here. Now, is this rights plan going to stop a topping bid from coming in? No, it's not likely going to stop a motivated bidder. And, since Compellent's board has Revlon obligations (cash consideration for its sale triggered them), they are not going to be able to sit very long on a pill in the face of a plausible topping bid. So, what's it all about? That's a good question. Perhaps Dell is using the adoption of the plan to signal to everyone else that they should stay away. Unlike 3Par, Dell might actually want to buy this company!
-Update: The Deal Prof thinks that the real target of this pill is not potential second bidders, but shareholder activists who might try to jump in to disrupt the sale. That rings very true. Although a board may not use a pill to prevent a topping bid and still comport with their obligations under Revlon, if the bidder were not a "real" bidder but a shareholder activist looking to blow up a deal, courts might not be so amenable to a challenge. It's an interesting question, I'll give it some more thought over the holiday break.
Wednesday, December 15, 2010
Tuesday, December 14, 2010
Over at ProfsBlawg, Matt Bodie (following up on a post by Stephen Bainbridge) comments on a WSJ editorial entitled "Billionaires on the Warpath?" and concludes, among several other things, that a progressive tax code is simply a matter of economics:
One of the basic principles of economics is diminishing marginal utility. Marginal utility represents the change in utility from the increase in consumption of a particular good or service. As you get more and more of a good, your marginal utility with each increment generally decreases. Eventually, you can have so much that an additional increment adds nothing to your overall utility. Money is not a good or service, but it represents the ability to obtain goods and services. And thus one would expect money to have diminishing marginal utility as well. The more money you have, the less utility you get from each addition dollar.
So if you're constructing a tax code, it makes sense to keep this in mind. The lower the income, the higher the utility each dollar represents to that individual. Since the government is indifferent as to which dollar it takes, it makes sense to take more money that has a lower utility to the taxpayer. Doesn't $100 mean something different to someone who makes $30,000, as opposed to someone who make $30,000,000?
But this argument seems a bit of a non sequitur to me.
For the sake of argument, let's assume diminishing marginal utility applies. That still doesn't mean everyone has the same utility curve. $100 might easily mean more to someone who makes $251,000 than it does to someone who makes $30,000. Maybe you think it shouldn't, but that's not an economic argument. So you can't really justify a progressive tax code on the theory that it is just a way to maximize utility in society. Can you?
(By the way, even if you could figure out how to do it, I suspect most people would object rather strongly to a system that taxed people based on who had the lowest marginal utility to the next dollar raised).
Friday, December 10, 2010
I wasn't paying attention. I figured he'd be around forever. This piece on the Delaware Grapevine blog reminds that Vice Chancellor Strine's 12 year term on the Chancery Court recently expired:
His 12-year term expired Nov. 9. A judge is allowed by the state constitution to stay on for another 60 days but emphatically no longer. "In no event," the constitution says.
Strine would be out three days before the General Assembly normally would be back in. The constitution has a remedy. It instructs the governor to summon the Senate to a special session, so that is what Jack Markell, the Democratic governor, did.
A constitution can be so inconvenient.
The senate will be meeting on December 14. Strine's reappointment will be one of the first things on the agenda. Though before dealing with Strine, there is apparently a coup going on with respect to senate leadership. I'll leave that to the Delaware politicos. With all the turmoil, is Strine in jeopardy?
... Strine is expected to glide into his next term. This is not what happened when he was last nominated in 1998 by Tom Carper, the Democratic governor now in the U.S. Senate.
At the time, Strine was the 34-year-old counsel to Carper. Both then and today, Strine was known for his braininess, demolishing wit and little compunction about sandpapering others, no matter if they were state senators with the power of advice and consent or million-dollar lawyers in his courtroom.
Tom Sharp, a Democratic senator when Strine was first considered for the bench, told him, "Maybe the problem is some of us have gotten to know you very well."
We'll check in next Wednesday to make sure Strine is still there!
Thursday, December 9, 2010
Please. If you are going to engage in insider trading, don't quote Wall Street in your coded e-mails. I mean, everybody has seen that movie. It's pathetic. The SEC saw through that ruse and charged a couple of fraternity brothers (complaint). The frat brothers allegedly tipped and then traded on inside information ahead of Sequenom's acquisition of Exact Sciences in January 2009:
The SEC alleges that the patent agent tipped material, non-public information about the EXAS transaction to his brother, who relayed it to his fraternity brother Cohen. For example, the patent agent's brother sent Cohen an e-mail asking, "[a]ny word related to Blu H@rsesh0e? La Jolla says the times are ripe." The movie Wall Street uses the phrase, "Blue Horseshoe loves Anacot Steel," as a code for insider trading. "La Jolla" references the fact that the patent agent lived and worked near La Jolla, Calif.
This blog made a bit of a splash a couple of years ago when first were trying to invoke MACs left and right. Of course, the world seemed like it was about to collapse. If that's not a MAC, then what is? In any event, things have been relatively quiet on the MAC front of late. But that's not to say they aren't still important and not heavily negotiated. Nixon Peabody put some associates to work researching MACs in 345 transactions over the past year and now have a report summarizing their findings. You can find it here.
Wednesday, December 8, 2010
The J. Crew deal is one where there will no doubt be some legal scrutiny, given the possible deficiencies in the process. Whether those challenges will succeed is of course an entirely different matter. The parties in that transaction included a "go-shop" provision. Presumably the go-shop can help paper over any deficiencies in the sales process. But how should we think about the effect of the go-shop when paired with a rather strong match right? Here's the match right as it appears in the J. Crew merger agreement:
Notwithstanding anything to the contrary herein, prior to the time the Company Stockholder Approval is obtained, but not after, the Board of Directors of the Company may change, qualify, withhold, withdraw or modify, or publicly propose to change, qualify, withhold, withdraw or modify, in a manner adverse to Parent, the Company Board Recommendation (“Change of Recommendation”) if the Board of Directors of the Company (acting upon recommendation of the Special Committee) has determined in good faith, after consultation its financial advisor and outside legal counsel, that failure to take such action could be inconsistent with the directors’ fiduciary duties under applicable Law; provided, however, that such action shall not be in response to a Superior Proposal (which is addressed under Section 5.2(e)) and prior to taking such action, (x) the Board of Directors of the Company has given Parent at least three calendar days’ prior written notice of its intention to take such action and a description of the reasons for taking such action, (y) the Company has negotiated, and has caused its Representatives to negotiate, in good faith with Parent during such notice period, to the extent Parent wishes to negotiate, to enable Parent to revise the terms of this Agreement, the Financing Letters, the Rollover Letter and the Guaranty in such a manner that would obviate the need for taking such action and (z) following the end of such notice period, the Board of Directors of the Company (acting upon recommendation of the Special Committee) shall have considered in good faith any revisions to this Agreement, the Financing Letters, the Rollover Letter and the Guaranty proposed in writing by Parent in a manner that would form a binding contract if accepted by the Company, and shall have determined in good faith, after consultation with its financial advisor and outside legal counsel, that failure to effect a Change of Recommendation could be inconsistent with the directors’ fiduciary duties under applicable Law.
It's a strong matching right - as opposed to simply an information right - because it includes an obligation to negotiate with the initial bidder before terminating the agreement. The match right ensures that the bidder will always have the last look and the right to match. In effect, the initial bidder will always the opportunity to take the agreement proferred up by a second bidder and sign on the dotted line. There is no circumstance under which the second bidder will be have to walk away with the seller unless the initial bidder has had a reasonable chance to meet the terms. There are pretty good reason to believe that this right can - in some circumstances - deter subsequent bidders from appearing. I've got a short piece on match rights that is appearing in the inaugural edition of the Harvard Business Law Review Online. In it I suggest that courts should not treat match rights as standard terms in merger agreements - as they have recently, but rather subject them to intermediate scrutiny.
Tuesday, December 7, 2010
You know that tech support guy at the office? The one with the pocket-protector who seems totally out to lunch when it comes to anything other than networks and hardware? Yeah, that guy. Well, be careful what information you share with him, cause it's just an act. He's lulling you into suspicion and then he's going to trade on your merger information!
The SEC just announced charges against Jeffrey Temple who worked as an IT and security manager at a Delaware law firm. The SEC alleges that Temple stole confidential information about 22 pending mergers and traded ahead. It was pretty small potatoes as these things go - Temple was alleged to have made about $84,000 in profits on the 22 trades. The law firm is not identified in the complaint, but judging from their client list - it looks like Temple traded on almost every potential transaction that walked through the door- the firm is probably well known to all.
In any event, it appears that this guy opened a brokerage in his own name. According to the complaint, Temple accessed information about pending deals presumably by looking at documents/traffic flowing through his firm's network. Although he apparently knows how easy it would be to track activity over the firm's network that didn't stop him from allegedly snooping around and - when unable to reach his broker - use the firm's email to complain:
Still unable to trade options, at 9:08 am on March 8, 2010, Temple, using his Law Firm email account, sent another email to his brokerage firm complaining: "Can't login to my account and no one is picking up the phone. How do I get my trades done? I'm losing money because of your incompetence!"
Your incompetence is making it impossible for me to trade on inside information! Oh, he was trading call options. I thought we had come to the conclusion that trading in options was clearly a bad thing to do if you are engaged in insider trading? Why not just send an email to the SEC. It would be much more efficient. Clearly, Temple has not been to this site.
In any event, it just goes to show you that at law firms it's not just the lawyers who have to be mindful of their obligations to maintain the confidentiality of client information. Support personnel, including tech support, should also realize how the seriousness of their duties.
I've spent a lot of time recently looking at filings of acquisition-related litigation. And just about the time I start thinking that all these suits are useless pie-dividing exercises, along comes a set of facts like J. Crew that makes me think twice. Maybe a lawsuit here isn't such a bad idea...
Preeta Das and Gina Chon lay out some of the most important facts in their piece on this in the WSJ:
J.Crew Group Inc.'s chief executive Millard "Mickey" Drexler was negotiating a potential sale of the clothing company for nearly seven weeks before he informed the company's board of his talks, according to the latest company securities filings.
Seven weeks?! Wait a minute ... and Drexler is expected to stay on in his position as CEO and get a significant equity piece of the private J. Crew? As any regular reader will recognize ... I don't know much, but I do know this: if you are CEO of a company and you're negotiating to take the company private with you at the helm, you have to tell your board and make the structure of the negotiation resemble an arm's length transaction as much as possible. If not, you're setting yourself up for a well-deserved lawsuit.
In this case, Drexler kept the board in the dark about his negotiations with a private equity buyer for seven weeks. His private discussions weren't just talks over drinks at the country club. Apparently, he brought in executives from the company to give presentations, gave private equity buyers access to earnings estimates and the like. And then when he finally brought the board in the loop on the potential transaction, Drexler made it clear that he had already lined himself up with his preferred buyer - TPG.
Once the board was apprised of the discussions with TPG and formed a special committee on Oct. 15 to evaluate a sale, Mr. Drexler told the committee that if the company were to be sold, he "had significant reservations about the prospect of working for a new boss, but that he had a high comfort level with TPG."
This led the committee to determine that Mr. Drexler, who is credited for J.Crew's success in recent years, would be unwilling to work for any third party other than TPG.
Here's the proxy statement.
OK, sure, the deal includes what is now the standard "go-shop" provision for a going-private transaction. But, if the "go-shop" is used to simply used to paper over earlier failings, then we're going down the wrong road with this provision.
Going-private transactions where management stays on are very tricky deals. Potential conflicts abound and when CEOs fall in love with one bidder over another, they risk running afoul of their Revlon obligations. Granted, the courts are very lenient with boards who fall short of the Revlon standard but yet negotiate in good faith and at an arm's length basis. On the other hand, in MacMillan-like situations, where boards/CEO have closed their eyes to other potential opportunities and focus solely on a preferred bidder, courts give such deals - for good reason - much closer scrutiny.
Friday, December 3, 2010
I don't know, but I think Chancellor Chandler isn't all that impressed with the Supreme Court reversing his decision in the Airgas case. He sent a letter to the parties yesterday (Letter here) with a number of questions seeking supplemental information relevant to the next part of the case - the redemption of Airgas' pill. To give you a sense of how he is feeling, here's question number 7:
Please identify specific evidence in the record bearing upon the Airgas stockholder profile that suggests that the Airgas stockholders are unable to make a decision for themselves or that suggests that Airgas stockholders are vulnerable to mistakenly rejecting the Airgas board’s advice about the firm’s alleged higher intrinsic value. In other words, what evidence in the record developed during the trial in this case indicates or suggests that Airgas stockholders are likely to accept an inadequate offer?
I recognize that the Delaware Supreme Court apparently has concluded that stockholders may be simultaneously intelligent enough to decide whether to oust directors from office but not intelligent enough to decide whether an offer to purchase their property is in their best economic interest,[...] but exactly what is it about the Airgas stockholders (or about the Airgas business strategy, or about the Air Products tender offer) that would make the Airgas stockholders uniquely incapable of properly making an economic judgment in their own self- interest?
I guess he's not all that impressed with the Supreme Court's opinion. In another question, Chandler suggests asks for arguments why, if the only issue is price, shouldn't shareholders be permitted to decide on their own whether to take the offer, particularly since Airgas hasn't offered them an alternative. Interco anyone? [But see Time.]
OK, OK, I've learned my lesson about prognosticating too much with this case. But, could Chandler, in a pique, order Airgas to pull its pill? I know it's a low probability, OK, a really low probability and highly unlikely, sure. Still ... who predicted that the Supremes would reverse the trial opinion? I'm assuming nothing. But yet, it's another reason to keep paying attention to this case.
I'll second Michael's suggestion that you take a look at Ken Adams' new blog. Here's a good place to start. Ken offers his two cents on the Airgas opinion and contract interpretation:
Generally, year and annual are ambiguous, as it’s unclear whether you’re referring to the 12 months beginning January 1 or the period from any given day (such as the date of a contract) to the same day the following year. (See MSCD 9.42.) But annual meeting adds an extra wrinkle, as it’s universally accepted that an annual meeting doesn’t have to take place on the same day every year. So what does annual meetingmean?
The notion that annual meeting should mean roughly 365 days apart is hopelessly vague: how many days can you add or subtract before your meeting no longer qualifies as annual ? Having a meeting qualify as the 2010 annual meeting if it’s held anytime in 2010 is more sensible, but if you want that meaning to prevail, whether in organizational documents or in a regular contract, you’re going to have to use language that’s clearer than that used in Airgas’s bylaws.
Ever a voice of clarity.
It's December, time for law firm reviews of the deal year that was. Here's Paul Weiss' contribution (24 pages). This study includes a survey of the largest 25 transactions from August 2009 through July 2010 (year 3 in charts below). In general, private equity buyers have continued to stay away, while strategic buyers (with cash) have continued to make acquisitions - albeit at a slower rate. In keeping with this blog's interest in reverse termination fees, the following chart from the report is interesting:
Looks like a significant increase in the size of the reverse termination fees in the past year. That makes sense, because there is no reason for them to be tied to the size of termination fees. It also looks like sellers have decided that it's not worth giving up specific performance as a remedy.
And, how about this:
100% of transactions surveyed in the past year have match rights. It's interesting that sellers seem to have universally given up trying to negotiate match rights out. Have they become boilerplate? I hope not. There are still reasons to believe that in certain circumstances a board might be better advised not to include such rights.
Thursday, December 2, 2010
Ken Adams, who has been posting at TheAdamsDrafting Blog since 2006 (over 700 posts served), has packed his bags and moved to The Koncise Drafter, where he will continue to post his thoughts on contract drafting, the contract process and contract automation. Take a look.
Wednesday, December 1, 2010
"A contingent value right would be a way to bridge a gap when different parties have different ideas on valuations," Sanofi Chief Financial Officer Jerome Contamine told Reuters on Wednesday.
"It's an interesting idea in principle," Contamine said, speaking on the sidelines of the FT Global Pharmaceutical and Biotechnology Conference.
Contaime says "CVR," but he means an earnout. He's French so we forgive him. Of course, an earnout should not replace the hard work of coming to agreement on valuation. This should be especially true with respect to Genzyme where there is a lot of public information already out there.
With all the interest in the ongoing Galleon/SAC/expert networks insider trading investigation, this run of the mill scam almost slipped past. Thankfully this one doesn't involve lawyers - just bad accountants and traders. The SEC charged a former Deloitte Tax LLP partner and his wife with repeatedly leaking confidential merger and acquisition information to family members overseas in a multi-million dollar insider trading scheme. Arnold and Annabelle McClellan are alleged to have shared inside information about pending transactions with Anabelle's family in London. This guys were no slouches - the SEC alleges they made $3 million in profits from trades related to pending acquisitions. Here's the complaint.
Now it's hard to imagine what McClellan was thinking. This guy was a tax partner at Deloitte in their M&A group. He clearly knew that information about targets in pending transactions was material inside information. Buy yet ... he is alleged to have passed it on to his wife and her family in London anyway:
On March 11, 2007, Arnold McClellan participated via his cell phone in a two hour call with H&F [investment bank] to discuss Deloitte's report on Kronos. Less than one hour later, there was a 19 minute call from the same cell phone to Annabel's mother's home in France, where James and Miranda Sanders were staying at the time.
On March 12, 2007, James Sanders purchased additional spread bet contracts on Kronos. That day, Blue Index [James Sanders' firm] circulated a "client pitch" on Kronos to its traders, noting that Kronos could be an opportunity to make a huge amount of money for their clients.
Oh, and you think that you're brother-in-law is a smart guy who won't be so stupid as to give you up? Guess again:
On March 16, 2007, James Sanders told his father in a recorded telephone conversation specific information about the timing and pricing of the Kronos acquisition. James Sanders identified Annabel McClellan as the source of this information and told his father that he had arranged to split half the profits of the trading with Annabel.
On March 19, 2007, H&F and two other firms submitted bids for Kronos. That day, James Sanders recommended to a close friend that he set up a spread bet account and buy Kronos contracts. James Sanders described the tip to his friend as "a bit cloak and dagger." He added that the deal was 98 percent certain and that Blue Index stood to double its money under management from the deal.
A recorded phone call! This guy was so arrogant that he figured no one would pay attention to his scheme that he made a call to his father from his work number at his specialist brokerage! Even I can tell you that brokerages routinely record calls. You'd think he'd know -- afterall he was co-owner and director!!
In any event, it's worth noting that McClellan is fighting the charges:
Attorneys for Arnold McClellan said their client was "a conscientious, law-abiding professional with a 23-year unblemished track record of client service at Deloitte" and would fight the charges.
"He did not trade on insider information, and there will be no evidence that he passed along any confidential information to anyone," said his lawyers, Elliot Peters and Christopher Kearney of the law firm Keker & Van Nest LLP.
As these things go, this case is pretty plain vanilla. I am continually amazed at how little regard people appear to have for the SEC's enforcement capabilities and how arrogant initial success in these schemes seem to make people feel. Word to the wise: Don't let this be you.