Friday, May 7, 2010
Investor Ron Burkle has had an ongoing dispute with the Barnes
& Noble board over the shareholder rights plan it put in place recently.
Burkle claims the board adopted it to prevent him from making running a
proxy contest. Let’s leave aside for the moment whether or not the BKS
pill actually prevents a proxy contest from being successful. Now, Burkle
has filed suit in the Delaware Chancery Court (complaint). In his complaint, Burkle alleges that
the Riggio family have used BKS as their “personal piggy bank”, alleging a
series of self-dealing transactions.
In my corporations class I often use the following hypothetical to describe the quintessential self-dealing transaction: The controlling shareholder of the corporation causes the corporation to hire his brother’s transportation company to handle all the transportation needs of the corporation. Wouldn’t you know it, that’s the fourth of a series of self-dealing transaction that Burkle alleges!
In any event, the heart of this suit is Burkle’s challenge to the pill. Burkle plans to run a short slate of three directors at the next annual meeting. In his challenge, he is focused on the language in the rights plan that would trigger it in the event shareholders “cooperate” to influence control of BKS. Burkle’s basic argument is that anyone who might agree to vote with him could be construed as “cooperating” and thus be subject to dilution. The effect he argues would be to dissuade anyone from voting for his short slate for fear that their vote would constitute cooperation.
I took a quick look at the Lions Gate rights plan to get a sense whether the cooperation language is common. That plan extends the dilutive effects of the pill to the Acquiring Person and anyone “acting jointly or in concert with the Acquiring Person.” I don’t know…cooperating…acting in concert…it’s a close call. The argument that Burkle is making is not that the pill will prevent him from running, or even succeeding to win, a proxy contest. The courts have already examined this question (Moran v Household) and found that the pill does not significantly deter a proxy contest from going forward.
In essence, the Rights Agreement provides that the Rights are triggered when someone becomes the “beneficial owner” of 20% or more of Household stock. Although a literal reading of the Rights Agreement definition of “beneficial owner” would seem to include those shares which one has the right to vote, it has long been recognized that the relationship between grantor and recipient of a proxy is one of agency, and the agency is revocable by the grantor at any time. Henn, Corporations § 196, at 518. Therefore, the holder of a proxy is not the “beneficial owner” of the stock. As a result, the mere acquisition of the right to vote 20% of the shares does not trigger the Rights.
Now, it may be that the trigger for the Moran pill did not extend the trigger to persons “cooperating” with a beneficial owner or “acting in concert” with a beneficial owner, but I guess we’ll see.
Thursday, May 6, 2010
Delaware courts and corporate lawyers seem to be paying a lot of attention to the recent paper by John Armour, Bernie Black and Brian Cheffins entitled "Is Delaware Losing its Cases?" We've blogged previously about this paper. Now it looks like some firms may be advising clients to select "the Delaware Court of Chancery as the exclusive forum for the resolution of all intra-corporate disputes including claims asserting breach of fiduciary duty or seeking, under state law, to overturn directors’ business judgments concerning matters ranging from the routine to potential M&A or other transformative transactions." According to a recent memo by Latham and Watkins, the firm is recommending that "Delaware companies consider adopting mandatory Delaware Chancery forum selection provisions in their charter or bylaws in connection with their regular review of governance practices." The Latham memo argues that, given Delaware's substantial expertise in corporate law, mandatory Delaware jurisdiction for intra-corporate suits benefits both public companies and their shareholders. Latham's memo is based in part on dicta by Chancellor Laster in the recent In re Revlon, Inc. Shareholders Litig. Scholar Faith Stevelman in a recent 2009 paper addressed some of the issues with this type of provision.
Are other firms doing the same? And, will there be a backlash by plaintiffs' lawyers outside of Delaware?
Maybe, but so what? The WSJ and Reuters are reporting that Berkshire Hathaway may have run afoul of the Williams Act's early warning disclosure requirements by not filing a timely amendment to its Schedule 13D in connection with its acquisition of Burlington Northern Santa Fe Corp last Fall. Berkshire filed its second amendment to its Schedule 13D in order to report that it had signed a merger agreement with Burlington Northern on November 3, 2009. Rule 13d-2 requires that if there are any material changes to the facts set out in the Schedule 13D that the filer is required to amend the filing. In this case, the original Schedule 13D filed in 2008 noted that the investment was for "investment purposes" and did not disclose any intention to acquire all of BNSF. Reading the rule strictly, the moment Berkshire's purpose for holding the shares turned from investment to acquiring control, Berkshire had an obligation to amend its 13D (within 10 days). Presumably the merger negotiations took longer than 10 days to initiate and complete.
OK, so maybe there was a technical violation. But, there's no NACCO-like fraud allegation or shareholder suit to go along with this violation. There's just discussion of the SEC looking into the matter. Is there any remedy worth pursuing here? I guess the SEC could seek an order to cause Berkshire to come into compliance. But, with its November 3, 2009 filing Berkshire is already in compliance. There isn't much to be done and there's hardly seems a remedy worth pursuing.
Wednesday, May 5, 2010
There has been a lot of fun merger activity and news lately. Unfortunately for me, I’ve been bogged down in end of the semester exam angst. But there is a deal that has caught my attention (in my prior life, I was a Silicon Valley lawyer): HP’s proposed $1.2 billion acquisition of Palm. HP is certainly no stranger to large tech deals, and it’s no secret that Palm has been trying to find a suitor. There is some speculation about whether now that HP has stepped up other suitors will emerge given Palm’s valuable patent portfolio which some value at approximately $1.4 billion. Of course, the usual crowds have already started investigating whether the Palm board breached its fiduciary duty to its shareholders in agreeing to sell the company to HP. According to one plaintiff’s side firm “the deal is suspicious because it appears from a review of the Company's financial statements that the inherent value of the Company's stock is greater than $5.70 per share, because the share price was as high as $6.29 just this month prior to the announcement of the deal, because the share price has been as high as $13.58 just this year and also because it appears that the Company's Board of Directors failed to shop the Company to other potential buyers to assure that its shareholders would receive the best price possible for their shares.” For those of you familiar with Delaware case law on this type of acquisition, you know well that Palm’s sale to HP is a change of control transaction that implicates Revlon duties. But, this will likely be a tough case to win on fiduciary duty grounds as the Delaware courts have stated that "there are no legally prescribed steps that directors must follow to satisfy their Revlon duties." As we have noted many times on this blog, the Delaware Supreme Court’s recent decision in Lyondell Chemical Company v. Ryan seems to confirm that only an utter failure to attempt to secure maximum value will cause directors to run afoul of their obligations under Revlon. Moreover, the terms of the Palm-HP acquisition agreement give a lot of room for a higher bidder to emerge. The $33 million termination fee is fairly low (approximately 2.75% of the deal value) and Palm’s board has a typical fiduciary out. So will other suitors come knocking at Palm’s door?
One of the most common search terms to find this site in the past week or so has been "What triggers Revlon duties?" Now, this has little to do with the business cycle and much more to do with the cycle of law school exams. It's about this time when students are sitting in the library, looking over their incomprehensible notes, and asking themselves, "What triggers Revlon?" I know. I was in that same situation myself.
Almost as if on cue, the Chancery Court hands down decision in Binks v DSL.net dealing with Revlon duties in the context of the issuance of convertible notes (H/T Morris James). It’s a nice review of the state of the law with a slight twist on the facts. The case involves a transaction between DSL.net and MegaPath. DSL was in financial trouble in 2006 and rather than enter bankruptcy entered into a transaction with MegaPath. MegaPath lent DSL.net $13 million and took convertible notes. A few months after the transaction, MegaPath converted its notes to equity and ended up with more than 90% of DSL's common stock. Shortly thereafter MegaPath effected a short form merger to eliminate the minority stockholders.
Plaintiffs argued at the motion to dismiss stage that issuance of the convertible notes represented a potential "change in control" and that the DSL.net directors had an obligation under Revlon to "obtain the best price reasonably available to shareholders." The Plaintiff didn't argued that the board should have held an auction or that a successful auction was likely. Rather, the plaintiff argued the deal the board made with MegaPath essentially permitted MegaPath to loot DSL and that there were a number of other reasonable alternatives that would have left DSL shareholders better off than the issuance of convertible notes (e.g. DSL.net had $50 million in NOLs that could have been used to engineer a transaction).
First, to the question whether Revlon is the applicable standard in the case at the motion to dismiss stage, the court answers in the affirmative, noting that the issuance of the convertible notes can be interpreted as a change in control:
It is not unreasonable to review the Amended Complaint as alleging that the short-form Merger was an inevitable and foreseeable consequence of the MegaPath Financing Transaction. As the Supreme Court in QVC pointed out, in determining whether the transaction constitutes a "change of control" for Revlon purposes, "the answer must be sought in the specific circumstances surrounding the transaction." Inferring that the relevant events should be collapsed for analytical purposes into a single transaction is also consistent with this Court's earlier consideration of the issue:
I assume for purposes of deciding this case, without deciding, that the granting of immediately exercisable warrants, which, if exercised, would give the holder voting control of the corporation, is a transaction of the type that warrants the imposition of the special duties and special standard of [Revlon].
This assumption arose out of the Court's recognition that Revlon duties may arise when a board, as here, "approves a transaction having a change in control effect ( ... specifically ... where a corporate action plays a necessary part in the formation of a control block where one did not previously exist.)
In applying Revlon, the court finds that the plaintiffs did not offer sufficient evidence to support a finding that the board was not independent and disinterested. The Court also noted that the plaintiff’s complaint was devoid of facts suggesting that the board was not adequately informed. With all that in place, the court laid out its standard for deciding this case under Revlon:
Where a board is found to be independent, disinterested, and adequately informed, the decision to enter into a change in control transaction should be upheld unless the directors “utterly failed to attempt to obtain the best sale price … ‘Because there can be several reasoned ways to try to maximize value, the court cannot find fault so long as the directors a reasoned course of action.’ Here the board’s conclusion that the Megapath Financing Transaction was preferable to bankruptcy was within its business judgment.
The Court reiterates the basic holding in Lyondell, that good faith claims (essentially a claim that attempts to convert a care violation into a loyalty violation) are very hard to win and require extreme facts – facts that suggest “utter failure”. These days when even the last kid on the bench of the last place team gets a trophy, it’s hard to imagine what “utter failure” might look like in the corporate context.
Tuesday, May 4, 2010
Apparently, there are limits to the use of poison pills in Canada. As you likely know, Carl Icahn has a tender offer pending for all of the outstanding stock of Lions Gate. In response to Icahn appearing, Lions Gate amended its shareholder rights plan. Icahn then brought an action with the British Columbia Securities Commission seeking to have the plan nullified. Last week, the British Columbia Securities Commission ordered a halt to any trading of securities to be issued to be issued pursuant to Lions Gate's pill. Notwithstanding the order, Lions Gate management is still scheduled to submit the plan to LGF shareholders for approval on May 12, 2010. To that end, management is still recommending shareholders vote in favor.
A couple of things worth noting with respect to shareholder rights plans in Canada. In general, the provincial securities commissions have the right to review such plans. In reviewing such plans, the commissions will apply their own version of intermediate scrutiny. In re Royal Host provides the Canadian framework for thinking about whether or not a board must pull a pill. In re Royal Host entails and examination of relevant factors, including: 1) when the plan was adopted; 2) whether shareholders had approved the plan; 3) whether there is broad support for the continued operation of the plan. This standard has been widely adopted by Canadian regulators - the provincial securities commissions. In a subsequent case, Falconbridge, the Ontario Securities Commission applied the Royal Host approach in nullifying a shareholder rights plan. The BC Securities Commission has also previously applied the Royal Host approach.
Although the Commission did not make its reasons for nullifying the Lions Gate pill known, one can guess that the BCSC applied the Royal Host factors to the facts (pill adopted in response to Icahn appearing; shareholders have not yet approved the plan; and there appears to be shareholder support for the Icahn offer) and decided that on balance, the shareholders would be better off without the pill in place.
Monday, May 3, 2010
"Say on pay" measures were on the proxy for DuPont and Johnson & Johnson. In both cases shareholders rejected the measures (DuPont here and J&J here). Don't know if that's typical of all say on pay measures. Though I'll admit to being surprised at the results. Meanwhile, the financial reform package making its way through Congress contains a mandatory say on pay provision. Reticence to move too quickly out in front of the Feds might account for the failure of the question at both DuPont and J&J.
Last month the second circuit affirmed the district court's opinion in Thesling v Bioenvision - holding that issuers have no duty to disclose merger negotiations. Whether and when one has a duty to disclose merger negotiations is a regular question that comes up with students. Bioenvision provides a succinct summary of the law on this question.
The plaintiffs claimed that when Bioenvision failed to disclose that it was engaging in merger negotiation with Genzyme that this failure to disclose caused several other statements to be materially misleading. The court's opinion is very short and reads in relevant part:
Thus, it is by now axiomatic that "a corporation is not required to disclose a fact merely because a reasonable investor would very much like to know that fact." In re Time Warner Inc. Sec. Litig., 9 F.3d 259, 267 (2d Cir. 1993). As the district court correctly observed, however, no express duty requires the disclosure of merger negotiations, as opposed to a definitive merger agreement. Moreover, "[s]ilence, absent a duty to disclose, is not misleading . . . ." Basic Inc. v. Levinson, 485
224, 239 n.17 (1988). For substantially similar reasons to those stated by the district court, we hold that plaintiff has not identified any part of the seven challenged statements that were rendered materially misleading by the alleged omissions relating to Bioenvision's merger negotiations. This pleading deficiency is sufficient to warrant the affirmance of the entire portion of the district court's decision that is challenged in this appeal, including the dismissal of plaintiff's claims against defendants-appellees for control-person liability. See ATSI Commc'ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 108 (2d Cir. 2007). U.S.
Sunday, May 2, 2010
Who doesn't remember the 1985 Delaware Supreme Court case, Smith v Van Gorkom, from their basic corporations course? That case, which found that directors of TransUnion were grossly negligent in their handling of the sale of the company to Jay Prtizker's Marmon Group. Although highly controversial because directors were held personally liable, it turned out that Van Gorkom was the first of a series of cases in which the courts began to develop a jurisprudence to grapple with the 1980s takeover boom.
Well, late last week, the Pritzker family called it quits and sold their controlling stake in TransUnion LLC to Madison Dearborn, a private equity shop. In the years since the acquisition, TransUnion underwent a thorough rebirth - from lazy railroad car shop to one of three powerhouse credit bureau. Now, with the Pritzker's moving on, there may be no one left there to remember the important role that TransUnion and its board played in developing the law - even if they were grossly negligent! (And there is lots of controversy still about that.)