Friday, December 10, 2010
I wasn't paying attention. I figured he'd be around forever. This piece on the Delaware Grapevine blog reminds that Vice Chancellor Strine's 12 year term on the Chancery Court recently expired:
His 12-year term expired Nov. 9. A judge is allowed by the state constitution to stay on for another 60 days but emphatically no longer. "In no event," the constitution says.
Strine would be out three days before the General Assembly normally would be back in. The constitution has a remedy. It instructs the governor to summon the Senate to a special session, so that is what Jack Markell, the Democratic governor, did.
A constitution can be so inconvenient.
The senate will be meeting on December 14. Strine's reappointment will be one of the first things on the agenda. Though before dealing with Strine, there is apparently a coup going on with respect to senate leadership. I'll leave that to the Delaware politicos. With all the turmoil, is Strine in jeopardy?
... Strine is expected to glide into his next term. This is not what happened when he was last nominated in 1998 by Tom Carper, the Democratic governor now in the U.S. Senate.
At the time, Strine was the 34-year-old counsel to Carper. Both then and today, Strine was known for his braininess, demolishing wit and little compunction about sandpapering others, no matter if they were state senators with the power of advice and consent or million-dollar lawyers in his courtroom.
Tom Sharp, a Democratic senator when Strine was first considered for the bench, told him, "Maybe the problem is some of us have gotten to know you very well."
We'll check in next Wednesday to make sure Strine is still there!
Thursday, December 9, 2010
Please. If you are going to engage in insider trading, don't quote Wall Street in your coded e-mails. I mean, everybody has seen that movie. It's pathetic. The SEC saw through that ruse and charged a couple of fraternity brothers (complaint). The frat brothers allegedly tipped and then traded on inside information ahead of Sequenom's acquisition of Exact Sciences in January 2009:
The SEC alleges that the patent agent tipped material, non-public information about the EXAS transaction to his brother, who relayed it to his fraternity brother Cohen. For example, the patent agent's brother sent Cohen an e-mail asking, "[a]ny word related to Blu H@rsesh0e? La Jolla says the times are ripe." The movie Wall Street uses the phrase, "Blue Horseshoe loves Anacot Steel," as a code for insider trading. "La Jolla" references the fact that the patent agent lived and worked near La Jolla, Calif.
This blog made a bit of a splash a couple of years ago when first were trying to invoke MACs left and right. Of course, the world seemed like it was about to collapse. If that's not a MAC, then what is? In any event, things have been relatively quiet on the MAC front of late. But that's not to say they aren't still important and not heavily negotiated. Nixon Peabody put some associates to work researching MACs in 345 transactions over the past year and now have a report summarizing their findings. You can find it here.
Wednesday, December 8, 2010
The J. Crew deal is one where there will no doubt be some legal scrutiny, given the possible deficiencies in the process. Whether those challenges will succeed is of course an entirely different matter. The parties in that transaction included a "go-shop" provision. Presumably the go-shop can help paper over any deficiencies in the sales process. But how should we think about the effect of the go-shop when paired with a rather strong match right? Here's the match right as it appears in the J. Crew merger agreement:
Notwithstanding anything to the contrary herein, prior to the time the Company Stockholder Approval is obtained, but not after, the Board of Directors of the Company may change, qualify, withhold, withdraw or modify, or publicly propose to change, qualify, withhold, withdraw or modify, in a manner adverse to Parent, the Company Board Recommendation (“Change of Recommendation”) if the Board of Directors of the Company (acting upon recommendation of the Special Committee) has determined in good faith, after consultation its financial advisor and outside legal counsel, that failure to take such action could be inconsistent with the directors’ fiduciary duties under applicable Law; provided, however, that such action shall not be in response to a Superior Proposal (which is addressed under Section 5.2(e)) and prior to taking such action, (x) the Board of Directors of the Company has given Parent at least three calendar days’ prior written notice of its intention to take such action and a description of the reasons for taking such action, (y) the Company has negotiated, and has caused its Representatives to negotiate, in good faith with Parent during such notice period, to the extent Parent wishes to negotiate, to enable Parent to revise the terms of this Agreement, the Financing Letters, the Rollover Letter and the Guaranty in such a manner that would obviate the need for taking such action and (z) following the end of such notice period, the Board of Directors of the Company (acting upon recommendation of the Special Committee) shall have considered in good faith any revisions to this Agreement, the Financing Letters, the Rollover Letter and the Guaranty proposed in writing by Parent in a manner that would form a binding contract if accepted by the Company, and shall have determined in good faith, after consultation with its financial advisor and outside legal counsel, that failure to effect a Change of Recommendation could be inconsistent with the directors’ fiduciary duties under applicable Law.
It's a strong matching right - as opposed to simply an information right - because it includes an obligation to negotiate with the initial bidder before terminating the agreement. The match right ensures that the bidder will always have the last look and the right to match. In effect, the initial bidder will always the opportunity to take the agreement proferred up by a second bidder and sign on the dotted line. There is no circumstance under which the second bidder will be have to walk away with the seller unless the initial bidder has had a reasonable chance to meet the terms. There are pretty good reason to believe that this right can - in some circumstances - deter subsequent bidders from appearing. I've got a short piece on match rights that is appearing in the inaugural edition of the Harvard Business Law Review Online. In it I suggest that courts should not treat match rights as standard terms in merger agreements - as they have recently, but rather subject them to intermediate scrutiny.
Tuesday, December 7, 2010
You know that tech support guy at the office? The one with the pocket-protector who seems totally out to lunch when it comes to anything other than networks and hardware? Yeah, that guy. Well, be careful what information you share with him, cause it's just an act. He's lulling you into suspicion and then he's going to trade on your merger information!
The SEC just announced charges against Jeffrey Temple who worked as an IT and security manager at a Delaware law firm. The SEC alleges that Temple stole confidential information about 22 pending mergers and traded ahead. It was pretty small potatoes as these things go - Temple was alleged to have made about $84,000 in profits on the 22 trades. The law firm is not identified in the complaint, but judging from their client list - it looks like Temple traded on almost every potential transaction that walked through the door- the firm is probably well known to all.
In any event, it appears that this guy opened a brokerage in his own name. According to the complaint, Temple accessed information about pending deals presumably by looking at documents/traffic flowing through his firm's network. Although he apparently knows how easy it would be to track activity over the firm's network that didn't stop him from allegedly snooping around and - when unable to reach his broker - use the firm's email to complain:
Still unable to trade options, at 9:08 am on March 8, 2010, Temple, using his Law Firm email account, sent another email to his brokerage firm complaining: "Can't login to my account and no one is picking up the phone. How do I get my trades done? I'm losing money because of your incompetence!"
Your incompetence is making it impossible for me to trade on inside information! Oh, he was trading call options. I thought we had come to the conclusion that trading in options was clearly a bad thing to do if you are engaged in insider trading? Why not just send an email to the SEC. It would be much more efficient. Clearly, Temple has not been to this site.
In any event, it just goes to show you that at law firms it's not just the lawyers who have to be mindful of their obligations to maintain the confidentiality of client information. Support personnel, including tech support, should also realize how the seriousness of their duties.
I've spent a lot of time recently looking at filings of acquisition-related litigation. And just about the time I start thinking that all these suits are useless pie-dividing exercises, along comes a set of facts like J. Crew that makes me think twice. Maybe a lawsuit here isn't such a bad idea...
Preeta Das and Gina Chon lay out some of the most important facts in their piece on this in the WSJ:
J.Crew Group Inc.'s chief executive Millard "Mickey" Drexler was negotiating a potential sale of the clothing company for nearly seven weeks before he informed the company's board of his talks, according to the latest company securities filings.
Seven weeks?! Wait a minute ... and Drexler is expected to stay on in his position as CEO and get a significant equity piece of the private J. Crew? As any regular reader will recognize ... I don't know much, but I do know this: if you are CEO of a company and you're negotiating to take the company private with you at the helm, you have to tell your board and make the structure of the negotiation resemble an arm's length transaction as much as possible. If not, you're setting yourself up for a well-deserved lawsuit.
In this case, Drexler kept the board in the dark about his negotiations with a private equity buyer for seven weeks. His private discussions weren't just talks over drinks at the country club. Apparently, he brought in executives from the company to give presentations, gave private equity buyers access to earnings estimates and the like. And then when he finally brought the board in the loop on the potential transaction, Drexler made it clear that he had already lined himself up with his preferred buyer - TPG.
Once the board was apprised of the discussions with TPG and formed a special committee on Oct. 15 to evaluate a sale, Mr. Drexler told the committee that if the company were to be sold, he "had significant reservations about the prospect of working for a new boss, but that he had a high comfort level with TPG."
This led the committee to determine that Mr. Drexler, who is credited for J.Crew's success in recent years, would be unwilling to work for any third party other than TPG.
Here's the proxy statement.
OK, sure, the deal includes what is now the standard "go-shop" provision for a going-private transaction. But, if the "go-shop" is used to simply used to paper over earlier failings, then we're going down the wrong road with this provision.
Going-private transactions where management stays on are very tricky deals. Potential conflicts abound and when CEOs fall in love with one bidder over another, they risk running afoul of their Revlon obligations. Granted, the courts are very lenient with boards who fall short of the Revlon standard but yet negotiate in good faith and at an arm's length basis. On the other hand, in MacMillan-like situations, where boards/CEO have closed their eyes to other potential opportunities and focus solely on a preferred bidder, courts give such deals - for good reason - much closer scrutiny.