October 8, 2010
Winner: Air Products, or X does not equal Y
Quick follow to my previous post on this.
The only surprise is that Chandler was able to churn out a 40 page (!) opinion in just a couple of hours. Believe me, I type pretty quickly, but I couldn't type 40 pages that quickly if my life depended on it. In the end, it wasn't a close call. The Deal Professor has the low-down straight from the court house steps.
Advantage: Air Products
OK, so I listened to the arguments regarding the Airgas bylaw, courtesy of our friends at Courtroom View Network. While I'm terrible about predictions - especially about the future - I'll venture a guess that Air Products had the better of the arguments today. I mean, if Ted Mirvis is relying on law professors to make his case, he must be leaning on a pretty thin reed.
Really, the reason why I think Air Products got the best of the argument today is that in order for Chandler to rule in favor of Airgas' position, he will have to rule that when Airgas drafted its certificate of incorporation, it did not mean that directors should serve "a term expiring at the annual meeting of stockholders held in the third year following the year of their election" but that they meant 3 years.
Air Products' counsel had the better argument here. Summed up as: " 'Oh c'mon your Honor, you know what we meant' is not a recognized principle of contract or charter interpretation." If Airgas wanted its directors to have a three year term, it would have, as other corporations have, written that explicitly into its charter. But it didn't.
Airgas would like board to read language below and come to the conclusion that X=Y. I don't think the court will. A"term of three years" is not the same as serving until "the annual meeting held in the third year following the year of the their election." It's pretty plain. One might not like it, and I'm sure that plenty of lawyers drafting proxy statements at 3am have happily conflated the two in order to get home before sunrise, but they are still not the same.
I think coming to grips with the implications of this was behind some of Chandler's early discomfort with Air Products' argument. I can imagine that he was going over in his head what the result would be of his ruling in favor of Air Products -- a full employment ruling for corporate law departments around the country as they scurry to tighten the language in the provisions in their charters.
On the other hand, if Chandler were to go with the "typical understanding" of the length of the term of a staggered board rather than a reading of the plain text, then he would do something that he would never do in the context of, for example, interpretation of a merger agreement. I tell my M&A class that Delaware adheres to a "big boy" rule - courts assume counsel is smart enough to bargain for the provisions that they want and courts will not interpret beyond what is in the plain language -- think Alliance Data Systems v Blackstone.
If Chandler were to side with Airgas in their argument that would require him to assume that Airgas did not mean what it wrote in its charter. That's a hard sell and, I suspect, would result in an immediate appeal to the Supreme Court.
Beyond that, the old bylaw provisions permitted Airgas to advance its meeting date so that meetings could be separated by a window as little as seven months showed that, until the litigation, Airgas itself didn't interpret its charter to require an annual meeting occur at least 12 months after the previous meeting. Their current interpretation seems to be one that is convenient given the current litigation.
Anyway, it's going to be tough for Chancellor Chandler. I think he's going to have to rule for Air Products - he may try to hedge a bit, but I don't think he really has any choice.
And, I think that the result will be howls of pain from attorneys all over the place - people will be quoted saying things like "worst since Van Gorkom or Omnicare" but they will be wrong. In the end, though, we'll all survive. Lawyers will be more attentive to their drafting and will specify in their charters that the term for a director on a staggered board is 3 years and not some other term.
But, maybe they should have gone through that exercise the first time around.
Anyway, I guess all this puts me at odds with the conventional wisdom - Airgas' price is down $1 today (I won't get into Fischel's expert opinion this afternoon and the EMH) and Bloomberg seems to suggest it will go the other way.
Ted MIrvis argued before the Chancery Court in the Airgas/Air Products case this morning that countless law professors have gotten tenure by writing articles that assume a staggered board has a term of 3 years. "Can they all have been barking up the wrong tree?!" he asked. Help me! I'm rolling on the floor laughing.
Ted Mirvis pulls a "Miracle on 34th St." moment by dumping a pile of definitions from dictionaries for the word "annual" on Chancellor Chandler's desk. Chuckles all around.
[Sorry - it's academic, corporate-geek humor.]
Update: Prior to April 7, Airgas had a bylaw that permitted the board to set the date of the annual meeting at anytime up to five months following the end of the fiscal year. That was changed by the board to permit the calling of an annual meeting at any point. That was then changed (by shareholder vote) to set a specific date in January. Hmm.
Chandler: Isn't there a common understanding that a Congressman or Senator will serve a full "term" and that term won't be cut short?
>> Except that unlike Airgas' charter, the US Constitution specifically lays out the length in years of terms for both Congressmen and Senators. It doesn't use mushy talk like "Congressmen will serve until they are replaced" or "Congressman's term will expire in the second year following the year of their election" ...
Why does anyone still have a poison pill?
I occasionally give some thought to the question why any board bothers to adopt a poison pill absent an obvious threat of takeover. I mean, why bother? A well-informed board can adopt a shareholder rights plan in, let's be honest, about five minutes. These plans are by now pretty standardized and if your outside counsel bills you more than a few hours to put one together for your company, you probably should look at your bills a little closer. At the same time, if you carry a pill in the absence of a takeover threat - just in case - you'll get dinged by Riskmetrics and they'll recommend voting against your board. Who wants that?
Hypercom has it about right. They had no pill in place and then when Verifone started sniffing around, the board met, considered and then issued a press release that read:
With that, Hypercom adopted a pill. Now, should a court review the board's decision to adopt the pill, we know that the court will subject it to Unocal intermediate scrutiny. But guess, what? We also know that under Moran, if a board had adopted a pill "under a blue sky", the subsequent decision not to pull the pill in the face of an offer would also be subject to intermediate scrutiny. So ... since everybody knows that anybody can quickly adopt a pill and since Riskmetrics, etc hate the pill for governance reasons, I think everybody should just get rid of them ... until you need them, that is.
OK, it's Friday. Off my soapbox. I'll take up Hypercom's suit against Verifone another day.
October 7, 2010
Annual HSR Report
The FTC's annual report on enforcement of the Hart-Scott-Rodino Act is out now. You can download it now. Some interesting tidbits, including this figure:
In recent days, you've no doubt heard talk of the new merger wave - how business seems to have turned around and the prospect that businesses might be about ready to unleash the $3 billion on their books as a private stimulus. Indeed, the number of deals is up 20% or so this year. Looking at the figure above puts all that talk into some context. We're nowhere near the salad days of the Internet bubble in 2000 or even the height of the credit bubble in 2007. If things are turning around, no one should think those days will be back anytime soon.
What else? Well, there may not be nearly as many deals, but the FTC is busy - enforcement is up, way up:
October 6, 2010
Statutory Fiduciary Duties, Unocal, and Revlon outside Delaware
I've written on this before (and also here, and here). In the 1980s during the great takeover boom and hollowing out of the industrial heartland, many states adopted amendments to their corporate codes that codified directors' fiduciary duties, so-called "constituency statutes". In general, these provisions made it clear that a director need not "maximize shareholder value." Rather, in complying with their fiduciary obligations, directors may take all sorts of things into consideration - the impact of their decisions on various constituencies, including employees, the community, the environment, the color of the sky, whatever.
When these statutes were first passed, they were heralded as way to protect jobs, etc. Earlier this year, Michigan passed one hoping it would protect local jobs from corporate raiders. Lots of other states have similar constituency statutes. For example, Oregon has one (Sec. 60.357). You can find them all over. In general, these statutes reject Unocal and Revlon as binding on directors of corporations in those jurisdictions.
My problem with these statutes is that they strike me as a bit of a head fake. While they certainly give boards the power they need to protect local communities, etc should they so desire, they don't actually require directors to protect those constituencies. In effect, such statutes, simply give directors another fiduciary lever to pull when negotiating with a potential acquirer.
I've said this before, but you know a board might be very concerned about the impact of a potential acquisition on employees and the community when the bid is $69. At $75, the board's concerns about the impact on the community might start to fall away. Why not move the HQ to Paris? It's so much nicer there than Cambridge. At $85? Employees ... we have employees?!
There's no requirement that a board share the incremental price increase with those stakeholders who will lose out when a transaction is ultimately done. Does anyone really think that a board, having invoked this provision to say no, will then turnaround a cut a check to the local community the day after it accepts an offer to sell? In the end, the price paid goes to shareholders, not to the employees or the community or the environment. To the extent these statutes get sold to legislators as important tools to protect local companies (and jobs and communities) from outside raiders, they are, in that sense, a bit of a scam. These statutes put all the cards into the hands of directors. And that's fine, if that's what you want to do.
Along those lines, I spent the afternoon in the MA Business Litigation Session yesterday with a couple of students. We went to observe motions being argued in the consolidated case against Genzyme. You'll remember that Genzyme and its directors were sued (8 lawsuits!) after they turned down a friendly merger proposal from French Sanofi (this is before Sanofi went hostile).
In their complaints, the plaintiffs made a variety of allegations of the sort you might expect - by not accepting or negotiating the offer from Sanofi that the board violated is fiduciary duties to "maximize shareholder value" [Revlon], etc. Here's the thing, though. Massachusetts has a constituency statute (156D, Sec. 8.30).
Section 8.30. GENERAL STANDARDS FOR DIRECTORS
(a) A director shall discharge his duties as a director, including his duties as a member of a committee:
(1) in good faith;
(2) with the care that a person in a like position would reasonably believe appropriate under similar circumstances; and
(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 may consider the interests of the corporation’s employees, suppliers, creditors and customers, the economy of the state, the region and the nation, community and societal considerations, and the long-term and short-term interests of the corporation and its shareholders, including the possibility that these interests may be best served by the continued independence of the corporation.
So, here come the shareholders with the extremely premature claim that Genzyme's directors somehow violated their fiduciary duties to the corporation because they turned down an unsolicited offer from Sanofi. But, Genzyme is a MA corporation and MA is not Delaware. If the directors act in good faith, and then come to the determination that it's in the best interests of the corporation and the city of Cambridge for Genzyme to stay independent, no court in MA will disagree with them. The plaintiff shareholders simply have no case because (so far) the constituency statute is working exactly as intended.
I think this is interesting, because just as labor, community, etc. have no case to prevent a sale notwithstanding the presence of a constituency statute, neither do shareholders have a voice to push one. The directors call the shots. I often wonder, other than directors, what constituency these constituency statutes serve.
October 5, 2010
Selectica NOL Pill Okay'd
The Delaware Supreme court handed down its opinion in Versata v Selectica. You'll remember that Selectica amended its rights plan to protect its NOLs with a 4.99% trigger. The pill was then triggered when Trilogy aggressively bought through the 4.99% limit knowing that it might trigger the pill. Trilogy was looking to get into the courtroom apparently. The court upheld the board's adoption of the shareholder right plan with a 4.99% trigger, and the special committee's subsequent decision to deploy the pill to dilute Versata.
You can read the opinion here. If you're looking for an overview of the issues at stake, Robert Miller at Villanova Law published a nice little piece a couple of months ago (NOL Pill Reloaded) that's worth reading.
Generally speaking, the court upheld the Chancery Court opinion. Consistent with past practice, the court held that the proper standard of review for challenged board actions taken to defend the corporation or a corporate policy is Unocal. Applying Unocal, the court then largely concurred with Chancery's analysis. Moving on ...
October 4, 2010
Airgas Courtroom Sealed
I'm very sad. I wanted to following the Airgas/Air Products proceedings via the Courtroom View Network feed, but the parties and Chancellor Chandler had other ideas (Reuters).
Almost as soon as the trial began, judge William Chandler sealed the courtroom as requested by Air Products' lawyer, Thomas Rafferty, of the law firm Cravath, Swaine & Moore.
The move cut off a live video stream of the trial and forced into the hallway a crowd of lawyers who were not part of the immediate litigation teams, as well as analysts and journalists.
Rafferty made the request as he started questioning the first witness, Air Products' Chief Financial Officer Paul Huck, about the logic for combining the two companies.
If any of our readers are around the courtroom and have updates on the arguments, feel free to leave comments.