M & A Law Prof Blog

Editor: Brian JM Quinn
Boston College Law School

Friday, January 22, 2010

Sunbelt Appraisal Lessons

Chancellor Chandler recently handed down an interesting appraisal case that's worth taking a quick look at - In re Sunbelt Shareholders Litigation.  The case is interesting for a variety of reasons.  In the first instance, the plaintiffs made two claims in the alternative:  1) the plaintiffs made a variety of fiduciary duty claims that the directors cashed them out at an unfair price and the plaintiffs sought partial rescission (in the form of a distribution of some of Sunbelt's assets);  2) if the fiduciary duty claim failed, they sought an appraisal for fair value.

On its face, it seems that the only real question at issue is the price.  If price is the only complaint, then appraisal is the appropriate remedy (Singer v Magnavox, etc.) and not rescission of the transaction.  As you'd expect, Chancellor Chandler appropriately dealt with the alternative claims by simply treating this as an appraisal action and not awarding rescissory damages.  

As an appraisal action there are a number of useful lessons from Sunbelt.  First, the court will give some evidentiary weight to previous appraisals of the same stock.  Chandler said: "the fact that major shareholders … who had the greatest insight into the value of the company, sold their stock … at the same price paid to the remaining shareholders … powerfully implies that the price received was fair.  Additionally, even when provided with the results of expert valuations, a court may find arm’s-length negotiations to be the most persuasive evidence of fair value." 

In the case of Sunbelt, however, the previous stock evaluation was not given weight because the terms of that stock valuation were were controlled by an agreement negotiated and signed
three years prior to the merger.  Only stock valuations that result from negotiations occurring immediately before (or contemporaneously with) the Merger are going to be persuasive evidence of fair value.

Second, when the court uses language like "Penny prepared th[e] [valuation] opinion in one week’s time while simultaneously working on and traveling for another project"  you have to know that the court isn't going to look with favor on the substance of the valuation opinion.  

Third, Delaware courts will accept the use of "comparable transactions analysis" by corporate appraisers to determine fair value.  However, mindful of the effect that careful selection of comparables can have on the outcomes of an analysis, Delaware courts will look closely at which comparables are being used and place the burden of proof on the question whether the comparables are truly comparable lies with the party making that assertion.  In Sunbelt, Chandler ultimately gave no weight to the comparable transactions analysis submitted by the company's expert as the company was unable to overcome the burden of proof that its purported comparables were, in fact, comparable.   Rather, the court relied on the discounted cash flow analysis proposed by the plaintiff.  (HT: AF)



January 22, 2010 in Cases | Permalink | Comments (0) | TrackBack (0)

Corporate Free Speech

“If the First Amendment has any force it prohibits Congress from fining or jailing citizens, or associations of citizens, for simply engaging in political speech.”  Citizens United v FEC.

Interesting.  For a bunch of “strict constructionists” they appear to construe the Constitution quite broadly.  I dare say the imputation of First Amendment rights to corporations on par with speech rights enjoyed by natural persons would be a concept alien to the founding fathers. Indeed, equating corporations with “associations of citizens” is quite a leap itself.  If corporations are anything they are associations of capital and not citizens.  The corporate law imposes no citizenship, or even residence, requirement on stockholders.

The globalization of capital markets ensures that stockholders in any of America’s largest corporations will not be made of up US citizens.  So, while we correctly restrict the ability of non-citizens to participate in US elections, we leave open a large loophole for non-citizens to be very active participants.  Does anyone think Carlos Slim can’t incorporate a Delaware entity named “Elections Are U.S., Inc.” with its stated nature of business reading something like: “The purpose of this corporation is to undertake legal activities to influence the US political process”?  

My objections to this decision are almost entirely rooted in the corporate law.  For example, the biggest mistake of the decision released last night, I think, was an extension of the argument that corporations are and share the same rights as natural people.  Well, they're not.  They're state created and regulated entities granted charters by the stated to serve a public purpose.  States still, near as I can tell, maintain the right to grant and/or revoke charters on such conditions as they see fit.  General incorporation statutes are only a little over a century old.  Oh, I could go on, but I'll get off my soap-box.  


Update:  You know, I've been thinking about it.  I think these rules that dictate how and under what circumstances a corporation can communicate with their shareholders are violations of a corporations free speech rights.  I think maybe we should also abolish the Federal Securities Laws while we're at it as an impermissible restraint on speech. 

January 22, 2010 | Permalink | Comments (2) | TrackBack (0)

Wednesday, January 20, 2010

Synergies and Target Specific Information

You'll have to excuse me but every time I hear "synergy" in connection with an acquisition, I immediately think of Dilbert running screaming from the conference room at hearing of the word.  OK, I'm a cynic.  But Martin and Shalev have a paper, Target-Specific Information and Expected Synergies in Acquisitions, and they find synergies (in the form of combined stock returns)!  They also find there is real value in diligence as the likelihood of an acquirer withdrawing an offer decreases as the target specific information held by the would-be acquirer increases. 

Abstract:  This study investigates the relation between target’s firm-specific information expected synergies in acquisitions. We find that both combined (acquirer and target) stock returns around acquisition announcement and post acquisition performance of the combined entity positively associate with the pre-acquisition level of target firm-specific information. We also find that this association is driven mainly by cross-industry acquisitions. Further analysis suggests that while acquirer shareholders benefit from target firm-specific information, target shareholder returns around acquisition announcement decrease with target firm-specific information. Finally, we find that the likelihood of an announced acquisition to be withdrawn subsequent to the announcement decreases with target firm-specific information.


January 20, 2010 | Permalink | Comments (0) | TrackBack (0)

Tuesday, January 19, 2010

Japan's Premerger Notification Regime

MoFo has memo on the recent amendments to the Japanese Anti-Monopoly Act that went into effect Jan. 1, 2010 here.


January 19, 2010 in Antitrust, Asia | Permalink | Comments (0) | TrackBack (0)

Transactional Teaching Conference Update

I previously posted on Emory’s Transactional Teaching Conference. I’m now informed that:

[T]here was a problem with the Call for Proposals online submission process. As a result, any proposal that was previously submitted has not been received. The technical team has corrected the problem and the new call for proposals form [is here.]

If you previously submitted a proposal, please resubmit it using the link above. We sincerely apologize for the inconvenience and look forward to your participation in the conference.


January 19, 2010 in Conference Announcements | Permalink | Comments (0) | TrackBack (0)

Keep Cadbury British...

Keep Cadbury Birtish! ... or not.  I suppose everything has its price, even national icons.  In this case, the price is about $19 billion.  Cadbury's board just unanimously recommended Kraft's offer to its shareholders.   Summary of the terms from the Kraft "micro-site" is below:

    • Under the terms of the Final Offer, Cadbury Securityholders will be entitled to receive:
      for each Cadbury Share500 pence in cash
      0.1874 New Kraft Foods Shares
      for each Cadbury ADS2,000 pence in cash

      0.7496 New Kraft Foods Shares
      representing, in aggregate, 840 pence per Cadbury Share and GBP 33.60 per Cadbury ADS. 
    •  In addition, Cadbury Shareholders will be entitled to receive 10 pence per Cadbury share by way of a Special Dividend following the date on which the Final Offer becomes or is declared unconditional.  
You can listen to the Kraft webcast/conference call discussing the transaction here.


Video - Sky breaking the news...

January 19, 2010 in Transactions | Permalink | Comments (0) | TrackBack (0)

Monday, January 18, 2010

A Netutral Approach to Takeover Law

Enriques has a new paper, European Takeover Law: The Case for a Neutral Approach, arguing that the EU should adopt a neutral position towards takeovers (along the lines of the UK's takeover panel) in its current reappraisal of the directive.  A copy of the original EU takeover bid directive from 2004 can be found here.

Abstract:  This paper argues that in revising the Takeover Bid Directive, EU policymakers should adopt a neutral approach toward takeovers, i.e. enact rules that neither hamper nor promote them. The rationale behind this approach is that takeovers can be both value-creating and value-decreasing and there is no way to tell ex ante whether they are of the former or the latter kind. Unfortunately, takeover rules cannot be crafted so as to hinder all the bad takeovers while at the same time promoting the good ones. Further, contestability of control is not cost-free, because it has a negative impact on managers’ and block-holders’ incentives to make firm-specific investments of human capital, which in turn affects firm value. It is thus argued that individual companies should be able to decide how contestable their control should be. After showing that the current EC legal framework for takeovers overall hinders takeover activity in the EU, the paper identifies three rationales for a takeover-neutral intervention of the EC in the area of takeover regulation (preemption of “takeover-hostile,” protectionist national regulations, opt-out rules protecting shareholders vis-à-vis managers’ and dominant shareholders’ opportunism in takeover contexts, and menu rules helping individual companies define their degree of control contestability) and provides examples of rules that may respond to such rationales.


January 18, 2010 in Europe, Takeover Defenses | Permalink | Comments (0) | TrackBack (0)