December 3, 2010
Chancellor Chandler and Airgas...
I don't know, but I think Chancellor Chandler isn't all that impressed with the Supreme Court reversing his decision in the Airgas case. He sent a letter to the parties yesterday (Letter here) with a number of questions seeking supplemental information relevant to the next part of the case - the redemption of Airgas' pill. To give you a sense of how he is feeling, here's question number 7:
Please identify specific evidence in the record bearing upon the Airgas stockholder profile that suggests that the Airgas stockholders are unable to make a decision for themselves or that suggests that Airgas stockholders are vulnerable to mistakenly rejecting the Airgas board’s advice about the firm’s alleged higher intrinsic value. In other words, what evidence in the record developed during the trial in this case indicates or suggests that Airgas stockholders are likely to accept an inadequate offer?
I recognize that the Delaware Supreme Court apparently has concluded that stockholders may be simultaneously intelligent enough to decide whether to oust directors from office but not intelligent enough to decide whether an offer to purchase their property is in their best economic interest,[...] but exactly what is it about the Airgas stockholders (or about the Airgas business strategy, or about the Air Products tender offer) that would make the Airgas stockholders uniquely incapable of properly making an economic judgment in their own self- interest?
I guess he's not all that impressed with the Supreme Court's opinion. In another question, Chandler suggests asks for arguments why, if the only issue is price, shouldn't shareholders be permitted to decide on their own whether to take the offer, particularly since Airgas hasn't offered them an alternative. Interco anyone? [But see Time.]
OK, OK, I've learned my lesson about prognosticating too much with this case. But, could Chandler, in a pique, order Airgas to pull its pill? I know it's a low probability, OK, a really low probability and highly unlikely, sure. Still ... who predicted that the Supremes would reverse the trial opinion? I'm assuming nothing. But yet, it's another reason to keep paying attention to this case.
Adams on Airgas drafting
I'll second Michael's suggestion that you take a look at Ken Adams' new blog. Here's a good place to start. Ken offers his two cents on the Airgas opinion and contract interpretation:
Generally, year and annual are ambiguous, as it’s unclear whether you’re referring to the 12 months beginning January 1 or the period from any given day (such as the date of a contract) to the same day the following year. (See MSCD 9.42.) But annual meeting adds an extra wrinkle, as it’s universally accepted that an annual meeting doesn’t have to take place on the same day every year. So what does annual meetingmean?
The notion that annual meeting should mean roughly 365 days apart is hopelessly vague: how many days can you add or subtract before your meeting no longer qualifies as annual ? Having a meeting qualify as the 2010 annual meeting if it’s held anytime in 2010 is more sensible, but if you want that meaning to prevail, whether in organizational documents or in a regular contract, you’re going to have to use language that’s clearer than that used in Airgas’s bylaws.
Ever a voice of clarity.
Year end merger reviews
It's December, time for law firm reviews of the deal year that was. Here's Paul Weiss' contribution (24 pages). This study includes a survey of the largest 25 transactions from August 2009 through July 2010 (year 3 in charts below). In general, private equity buyers have continued to stay away, while strategic buyers (with cash) have continued to make acquisitions - albeit at a slower rate. In keeping with this blog's interest in reverse termination fees, the following chart from the report is interesting:
Looks like a significant increase in the size of the reverse termination fees in the past year. That makes sense, because there is no reason for them to be tied to the size of termination fees. It also looks like sellers have decided that it's not worth giving up specific performance as a remedy.
And, how about this:
100% of transactions surveyed in the past year have match rights. It's interesting that sellers seem to have universally given up trying to negotiate match rights out. Have they become boilerplate? I hope not. There are still reasons to believe that in certain circumstances a board might be better advised not to include such rights.
December 2, 2010
The End of an Era
Ken Adams, who has been posting at TheAdamsDrafting Blog since 2006 (over 700 posts served), has packed his bags and moved to The Koncise Drafter, where he will continue to post his thoughts on contract drafting, the contract process and contract automation. Take a look.
December 1, 2010
Sanofi thinks earnout is "interesting"
"A contingent value right would be a way to bridge a gap when different parties have different ideas on valuations," Sanofi Chief Financial Officer Jerome Contamine told Reuters on Wednesday.
"It's an interesting idea in principle," Contamine said, speaking on the sidelines of the FT Global Pharmaceutical and Biotechnology Conference.
Contaime says "CVR," but he means an earnout. He's French so we forgive him. Of course, an earnout should not replace the hard work of coming to agreement on valuation. This should be especially true with respect to Genzyme where there is a lot of public information already out there.
With all the interest in the ongoing Galleon/SAC/expert networks insider trading investigation, this run of the mill scam almost slipped past. Thankfully this one doesn't involve lawyers - just bad accountants and traders. The SEC charged a former Deloitte Tax LLP partner and his wife with repeatedly leaking confidential merger and acquisition information to family members overseas in a multi-million dollar insider trading scheme. Arnold and Annabelle McClellan are alleged to have shared inside information about pending transactions with Anabelle's family in London. This guys were no slouches - the SEC alleges they made $3 million in profits from trades related to pending acquisitions. Here's the complaint.
Now it's hard to imagine what McClellan was thinking. This guy was a tax partner at Deloitte in their M&A group. He clearly knew that information about targets in pending transactions was material inside information. Buy yet ... he is alleged to have passed it on to his wife and her family in London anyway:
On March 11, 2007, Arnold McClellan participated via his cell phone in a two hour call with H&F [investment bank] to discuss Deloitte's report on Kronos. Less than one hour later, there was a 19 minute call from the same cell phone to Annabel's mother's home in France, where James and Miranda Sanders were staying at the time.
On March 12, 2007, James Sanders purchased additional spread bet contracts on Kronos. That day, Blue Index [James Sanders' firm] circulated a "client pitch" on Kronos to its traders, noting that Kronos could be an opportunity to make a huge amount of money for their clients.
Oh, and you think that you're brother-in-law is a smart guy who won't be so stupid as to give you up? Guess again:
On March 16, 2007, James Sanders told his father in a recorded telephone conversation specific information about the timing and pricing of the Kronos acquisition. James Sanders identified Annabel McClellan as the source of this information and told his father that he had arranged to split half the profits of the trading with Annabel.
On March 19, 2007, H&F and two other firms submitted bids for Kronos. That day, James Sanders recommended to a close friend that he set up a spread bet account and buy Kronos contracts. James Sanders described the tip to his friend as "a bit cloak and dagger." He added that the deal was 98 percent certain and that Blue Index stood to double its money under management from the deal.
A recorded phone call! This guy was so arrogant that he figured no one would pay attention to his scheme that he made a call to his father from his work number at his specialist brokerage! Even I can tell you that brokerages routinely record calls. You'd think he'd know -- afterall he was co-owner and director!!
In any event, it's worth noting that McClellan is fighting the charges:
Attorneys for Arnold McClellan said their client was "a conscientious, law-abiding professional with a 23-year unblemished track record of client service at Deloitte" and would fight the charges.
"He did not trade on insider information, and there will be no evidence that he passed along any confidential information to anyone," said his lawyers, Elliot Peters and Christopher Kearney of the law firm Keker & Van Nest LLP.
As these things go, this case is pretty plain vanilla. I am continually amazed at how little regard people appear to have for the SEC's enforcement capabilities and how arrogant initial success in these schemes seem to make people feel. Word to the wise: Don't let this be you.
November 30, 2010
Bartlett and Poulsen on LBO returns
Robert Bartlett and Annette Poulsen have posted their paper, Determinants of Buyout Returns: Does Transaction Strategy Matter, on SSRN. They make some interesting observations and conclusions about various LBO strategies - they put some useful color on the traditional understanding of the LBO and its role in improving efficient operation of firms.
Abstract: This paper reexamines one of the most studied questions in the scholarship of leveraged buyouts (LBOs): how do LBO sponsors create value for their investors in take-private acquisitions? In so doing, the paper makes two significant contributions to our understanding of LBOs. Most importantly, the paper provides the first-ever analysis of the equity returns to LBO sponsors. Due to data limitations, prior studies have traditionally relied on total returns to an LBO (that is, returns to both debt and equity investors) to analyze the source of LBO value creation. Drawing on a unique database of LBO transactions, this paper examines instead the actual internal rates of return (IRRs) realized by LBO sponsors on a deal-by-deal basis, thereby permitting a direct analysis of how LBO sponsors create value for their investors in leveraged buyouts. Second, the paper demonstrates how the traditional approach to examining the determinants of LBO returns overlooks a number of important LBO transaction strategies that are used to enhance a sponsor’s equity returns. In particular, the paper demonstrates that a significant component of LBO sponsor returns stems not from operating performance changes but from timing tactics that LBO sponsors use to accelerate the liquidation of their investments and thereby increase their IRRs. Among other things, this latter finding helps explain the gradual bias of private equity firms away from IPOs as an exit strategy for their portfolio investments and towards cash acquisitions.
November 29, 2010
Airgas: Potato, potahto.
The Deal Prof has a run-down on the Airgas decision. He has it about right:
The signal this reversal sends is that it basically says don’t worry about the language of your contracts so long as everybody “knows” what it means.
Potato, potahto, tomato, tomahto. Let's call the whole thing off ... But you know, for the life of me, I can't figure out what motivated the court to take this path with the decision.
Termeer interview in Le Figaro
Genzyme's CEO Henri Termeer gave an interview to Le Figaro in which he discussed the possible sale of Genzyme to Sanofi as well as the prospects of employing an earnout. You can read it here. I'd suggest the Google translate function which is surprisingly good. In any event:
Le Figaro. - Are you opposed to a takeover of Genzyme?
Henri Termeer. - The Board of Genzyme has been very clear. We do not absolutely opposed to this process, natural for a listed company, and we are looking to maximize corporate value for shareholders. But Genzyme is not for sale. Our company is recovering from its production problems and it is changing. It's never a good time to complete a transaction. And at $ 18.5 billion, or $ 69 per share, Genzyme is still not in a sales process.
Your refusal to enter into discussions with Sanofi is it just about price?
Yes. The price of 69 dollars per share is not acceptable to the Board of Genzyme. Today we have no starting point, nothing that allows us to begin discussions.
Would you like Sanofi in its offer has a clause that allows your shareholders to receive, under certain conditions, a surcharge?
It is a means commonly used in the pharmaceutical industry when companies fail to agree on a price. This is part of alternatives that could be explored. We are thinking about the molecule of Campath. This could be used for Sanofi and other companies with which we are discussing.
Are you proposing this solution to Sanofi?
It is not for us to do.