M & A Law Prof Blog

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.

-bjmq

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.

-bjmq

Update:  Webcast available here.

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. 

-bjmq

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).

-bjmq

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.

-AA