Friday, August 20, 2010
I've been following developments in the Barnes & Noble/Burkle drama for a few months now. I'll admit I was a little surprised when Burkle and BKS let an opportunity to settle the case fall away last week. I figured that both sides would have been better off without a decision. But, hey, I've been wrong before. So where are we now?
Yesterday, Burkle and BKS both filed proxy materials with the SEC (BKS filing here and Yucaipa filing here) and the contest for the three contested board seats is on. BKS has a staggered board so only one-third of the board is up for a vote at any one time. While Leonard Riggio will run for re-election to the board, Micheal Del Guidice and Lawrence Zilavy will not. Is it any surprise that Del Giudice will not run for re-election? Although teh BKS board won its court case against Yucaipa to keep its shreaholder rights plan in place, Del Giudice was arguably the loser. Although Strine ultimately concluded that Del Giudice acted in good faith, it can't help to have the following description of your Lead Independent Director in the record as you enter a proxy contest:
More controversial is the case of Michael Del Giudice. Del Giudice has had a high-profile career as a key staffer in New York politics. He and Riggio are Democrats, and Del Giudice admits that Riggio has regularly contributed, at Del Giudice’s request, to candidates that Del Giudice suggests. For a political powerbroker, that kind of relationship is valuable. More importantly, Del Giudice’s day job is as the Chairman of Rockland Capital, which co-manages a fund called Midland Cogeneration Venture (“Midland”). Midland is not a huge fund, being around $164 million in size. Riggio has made sizable investments totaling $4.8 million in Midland in the past, and recently committed $20 million over the next three years to another fund that Rockland manages, which is $275 million in size. Although Del Giudice has crafted a contractual provision that supposedly ensures that he does not directly profit personally from the monies attributable to Riggio’s investments, Del Giudice’s main occupation is running Rockland, which depends heavily on funds under management forits revenues. Indeed, it seems to me obvious that it is material to the success of Del Giudice’s fund that wealthy, prominent people like Riggio entrust their capital to it. The funds Riggio invests relative to the size of the Rockland funds, in my view cannot be viewed as immaterial.
What makes Del Giudice notable is that he has been determined by the Barnes & Noble board to be independent under the strict NYSE rules that have existed since the Enron-WorldCom meltdown. I do not lightly ignore that determination, but on the limited record before me I cannot conclude that the business and political ties between Del Giudice and Riggio render Del Giudice independent of Riggio. What also makes this issue more piquant is that Del Giudice was the director selected by his colleagues to be the lead director of the Barnes & Noble board. [citations omitted]
Given the Vice Chancellor's conclusion that Del Giudice was not independent of Riggio, it would be hard for BKS to go into a proxy contest arguing that their Lead Independent Director was independent. Ditto for Zilavy, Riggio's personal financial advisor, but he was admittedly already not an independent director. So out they both go.
Yesterday, they were replaced by two independent nominees, David Wilson and David Golden. BKS' soliciting materials along with Wilson and Golden's bios can be found here. Against them will be the Yucaipa slate, which includes Burkle, Stephen Bollenbach, and Michael McQuary (bios here). Not surprisingly, Yucaipa discloses that should its directors win seats, they will immediately seek to be appointed to a special committee to seek out "strategic alternatives" for BKS - that's code for a sale of the company.
The shareholder meeting is scheduled for Sept 28, so we'll continue to check in on this as it develops.
[Apologies for not linking to the opinion last week when it came out when I posted about Strine's dig at corporate law geeks. I was using Typepad's post-by-email function as I was in an undisclosed overseas location ... okay, on vacation in Spain. Turns out the post-by-email function isn't all that good. Sorry. Below is a link to the opinion, care of Dealbook.]
Thursday, August 19, 2010
I've posted on matching rights in merger agreements before. And, over at The Deal Professor, just yesterday Steven did a nice post on deal making innovations with the observation that matching rights are becoming more and more common. Almost as if on cue, Intel announced its acquisition of McAfee. The merger agreement is loaded with matching rights for Intel that make it extremely difficult to imagine how a third party might justify putting together a competing bid.
For example, in section 6.3 the agreement provides Intel with information rights in the event a Superior Proposal is received by McAfee. That's to say if Symantec were to throw an unsolicited proposal over the transom, McAfee would have to share it with Intel and provide Intel two days notice before it began negotiations with the second bidder. Of course, that gives Intel a leg-up on any brewing bidding contest. But if that were not enough, the merger agreement gives Intel an explicit match. The matching right prevents McAfee's board from changing its recommendation in favor of the Intel transaction in the event it receives a Superior Proposal until it has:
(A) provided to Parent five (5) business days’ prior written notice that it intends to take a such action... (B) during such five (5) business day period, if requested by Parent, engaged in good faith negotiations with Parent to amend this Agreement in such a manner that the Acquisition Proposal that was determined to constitute a Superior Proposal no longer is a Superior Proposal ...
Explicit matching provisions like this have only one purpose - to shut out potential second bidders by ensuring the only way they will win a potential bidding contest is by overpaying. That's not a position a second bidder likes to be in. The presence of such rights thus weakens the power of a post-signing market check. Prior to the Delaware Supreme Court's decision in Lyondell, I might have been worried that by shutting down a post-signing market check and not conducting a pre-signing market check that a board might be in some danger of running afoul of its Revlon obligations. I'm less worried about that now, but am still uneasy that the prevalence of explicit matching rights in merger agreements where board's have Revlon obligations makes it difficult for a board to argue that it took reasonable steps to maximize shareholder value upon a sale for cash.
Monday, August 16, 2010
In this helpful Client Alert Latham & Watkins reviews the accounting and tax issues associated with equity awards to company employees during the months preceding an IPO, and provides a summary of the related concerns of the Staff of the SEC. The alert includes specific, practical guidance on how to avoid cheap stock issues during the SEC Staff’s review of an IPO registration statement.