M & A Law Prof Blog

AG goes after BAC for securities fraud

"I didn't want to be talking [about ML's] losses through a glass wall over a telephone." BAC Treasurer to CFO Joe Price. 

No surprise then that the Attorney General's office in NY yesterday announced a civil suit under the Martin Act against Ken Lewis and Joe Price for securities fraud in connection with Bank of America's acquisition of Merrill Lynch at the height of last year's financial panic.  The AG's complaint is here. 

The basics of the complaint are that first, Ken Lewis allowed BAC shareholders to vote on the transaction, while he not disclosing that ML had incurred losses of more than $16 billion.  The AG believes that when BAC management decided not to disclose these losses to shareholders that they withheld material information.  I guess that charge was to be expected.  I mean, even ML's auditors apparently thought disclosure was warranted.  Deloitte told ML:

given the losses through what it looks like will be November when it closes, given the fact that you have another couple of billion of dollars coming down the road in goodwill impairment, we believe it’s prudent that you might want to consider filing an 8K to let the shareholders, who are voting on this transaction, know about the size of the losses to date.

“[the losses] were sizable enough [to] probably warrant disclosure. They were material subsequent events to what occurred at the end of September that would be relevant for parties that were voting …

OK, I get that argument.  Big losses, material losses have to disclosed to shareholders before they vote.  To their credit, it looks like Wachtell got cut out of the decision-making on this.  

The AG's charge that BAC used a threat to invoke the MAC misled federal regulators in order to receive $20 billion more in taxpayer funds is a little harder to make, I think.  I mean is the essence of the argument that when a party threatens to invoke a MAC to force a renegotiation that they are potentially committing securities fraud?  I suppose the essence of the AG's argument is that if ML's losses weren't material enough to disclose to BAC shareholders then they weren't material enough to support a good faith threat to invoke a MAC.  Lewis says apparently that the losses at ML really took off only after the Dec. 5 shareholder vote.  The AG argues that losses only increased by about $1.4 billion.  Hmm, I don't know.  Sounds like a jury question.

-bjmq

NBC Senate Hearings

It's probably just going to be a re-run of the morning show, but for what it's worth the Comcast-NBC Senate hearings are now underway.  Webcast here.

-bjmq

NBC House Hearings

Comcast-NBC hearings are underway in the House.  Webcast here.

-bjmq

Comcast-NBC FCC Filings

The Comcast-NBC transaction proceeds apace.  Like all transactions of any size, this transaction will be subject to regulatory approval.  This entails, of course, HSR pre-clearance.  But given the high profile nature of any acquisition involving a cable company, there will be hearings on Capitol Hill.  Rep. Boucher and Sen. Kohl have scheduled the first public hearings on Thursday, February 4 (9:30a in the House and 2:30p in the Senate).  The morning hearings will be held in front of the House's Subcommittee on Communications, Technology, and the Internet and in front of the Senate's Subcommittee on Antitrust, Competition Policy, and Consumer Rights.  Info and web-cast for the Senate hearings here.   Info and web-cast for the House hearings here.  These are not statutory hearings, but necessary political events.  

The other clearance required is that of the FCC.  Because this transactions involve media entities, the FCC does its own review.  This review also requires a series of extensive filings.  You can find all the filings here. The FCC approval process gives us a chance to look at the transaction documents.  The Comcast-NBC transaction agreement has already been filed.  It's rather lengthy (150+ pages).  In general, GE will contribute NBC/Universal to a JV with Comcast.  Comcast will contribute a series of programming properties.  The resulting NBC JV will then borrow $9.1 billion and distribute that to GE in the form of a special dividend.  Following the transaction, Comcast will control the new NBC JV with 51% equity.  GE will continue with 49%, but subject to certain redemption provisions that make it possible for Comcast to ulti mately control 100% of NBC over time.   

Apparently a major motivation for doing this deal is the transaction costs associated with making content deals.  From the declaration of Robert Pick, SVP for Corporate Development at Comcast:

A natural question is why these issues cannot be fully addressed through contracts between Comcast and unaffiliated content owners. The simple answer is that we have tried and not always succeeded, certainly not as quickly or robustly as we would have liked. One reason is that it is very difficult to determine how to structure the financial terms of contracts for new and untested distribution technologies. Both sides in the negotiations want certainty and predictability with respect to the revenue-generating capabilities of the assets they are contributing. But given the rapid developments in content and technology in this extremely dynamic environment, it is difficult for either party to develop business models that allow them to achieve the certainty and predictability they need. In addition, it is difficult to write contracts flexible enough to permit the experimentation and learning that both parties need as they develop new technologies and business models.

Comcast contends that it's simply cheaper to vertically integrate than it might be to contract.  This is consistent with Oliver Williamson's view on the topic.  He argued that where transaction costs are high, parties might try to contract around information problems, but that a firm can economize - an not subject itself to threats of opportunism - by vertically integrating.  The Fisher Body case is an example of this principle in action (See Ben Klein's Economic Lessons of Fisher Body).  Here, Comcast is making a similar efficiency argument. 

-bjmq

UMass-Law: Hello World.

According to SouthCoastToday.com:

The state Board of Higher Education this morning voted unanimously to approve plans for a public law school at the University of Massachusetts in Dartmouth.

Immediately after the vote was announced, more than 250 audience members inside the Large Ballroom at Bridgewater State College erupted in applause, many of them standing.

Now that all the regulatory hurdles have been cleared, this acquisition will move quickly to closing.  Apparently, they will be enrolling their first class this fall.

The Herald News of Fall River provides more details:

The UMass law school, to be created at the Souther New England School of Law, will initially enroll 278 students, slightly higher than its enrollment this year. It will admit more students each year, reaching 559 in 2017-’18, according to the proposal.

The ultimate attraction will be American Bar Association accreditation, which UMass expects to receive provisionally by the academic year 2011-’12. To get there, UMass plans to increase student GPA rates, LSAT scores, student-faculty ratio and rate of students passing the bar exam on their first try. 

The investment in reaching national accreditation will total $13.8 million over a five-year span.  Tuition and fees will be kept thousands of dollars below costs at private schools. In-state students will pay $23,565, and out-of-state students $31,209.

-bjmq

Burkle Challenges BKS' Pill

You might remember that Barnes and Noble adopted a shareholder rights plan last November (here).  Now, investor Ron Burkle (19% holder of BKS stock) has filed an amended Schedule 13D in which he questions the board's decision to adopt the shareholder rights plan and, in particular, its applicability to BKS' Chairman and largest shareholder, Leonard Riggio. In his letter to the board, Burkle writes: 

We believe having over 37% of the Company shares in the hands of the Riggio family and other insiders, coupled with the 20% ownership limitation enforced on other shareholders under the poison pill, has a coercive effect on the Company’s other shareholders and gives the Riggio family a preclusive advantage in any proxy contest.  This has the effect of placing de facto control of the Company in the Riggio’s hands, despite their owning much less than a majority of the Company’s shares.

Coercive?  Preclusive?  That's magic Unocal language!  Now, Delaware is pretty clear.  A shareholder rights plan, adopted under clear skies, is likely to survive a Unocal analysis.  I think Burkle (or his lawyers) knows this.  That's probably why he makes this request: 

In addition, I hereby request the Board to (a) take such action as is necessary to allow me and my affiliated funds to collectively acquire up to 37% of the outstanding shares (including the shares we currently hold) without triggering the poison pill and (b) confirm that the members of the Riggio family cannot individually or collectively acquire any more Company stock without triggering the poison pill.  This will allow us, through the purchase of additional shares, to be on an equal footing with the Riggio family at the Company’s annual shareholder meeting.  Not to grant us such a waiver and interpreting the plan to allow the Riggio family to acquire additional shares would, in effect, create a near insurmountable barrier to us (or any other non-Riggio shareholder) in waging a successful proxy contest, because winning such a contest at the next annual meeting would be either mathematically impossible or realistically unattainable.

Mathematically impossible or realistically unattainable? That's Unitrin language applying the intermediate Unocal standard.  What's Burkle up to?  I don't pretend to know the big picture here, but at a tactical level it's clear that he is trying to push BKS' board into a fiduciary corner.  If the BKS board says no to Burkle's request to increase his equity position or if the BKS board refuses to acknowledge that the Riggio family is prevented by the current shareholder rights plan, then they might as well hang a sign on the front door saying that they are entrenching management.  Delaware courts are generally okay when informed boards rely on shareholder rights plans to defend the corporation "against  danger to corporate policy and effectiveness."  (Cheff v Mathes) But, when boards use the corporate machinery, including a pill, to entrench themselves with defensive measures that are coercive of shareholders or preclusive of shareholder action, then courts are less sanguine.  

-bjmq

Law School Merger News

The pending acquisition of the Southern New England School of Law by UMass-Dartmouth is generating a little bit of political heat.  The local state rep., John Quinn (D-Dartmouth) (no relation) has written to MA Attorney General Martha Coakley to complain about the actions of three private law schools (Suffolk, New England School of Law, and Western New England School of Law) who are attempting to block the proposed deal.  According to the South Coast Today, Rep. Quinn wrote: 

"The leadership of these (private) schools has spent hundreds of thousands of dollars on consultants, lawyers, lobbyists and public relations firms in a joint effort to prevent competition from an affordable, quality law school. This could be a case of alleged competitors joining forces to 'fix' the market."

The Boston Globe has chimed in on the dramatics as well.

The key players are three of our state’s private law schools, who have joined in a holy battle to protect something they hold dear: the right to snuff out a weaker competitor.

For their part, the three law schools in question have called on former MA Attorney General Tom Reilly to help make their case.  Among other things, they argue that financing scheme for the proposed UMass-Dartmouth Law School is unconstitutional.  Here's a video and summary of their argument. 

All of this played out a couple of days ago at a hearing of the MA State Board of Higher Education meeting last week.  The board will vote on the issue on Tuesday (Feb 2).  If it gives its final approval, then UMass-Dartmouth Law could enroll students in the fall.  

Hey -- don't think that MA has cornered the crazy on public law school acquisitions.  Apparently UC San Diego is thinking of acquiring California Western School of Law. The reactions are predictably similar, but with a slightly more laid back surfer tone...

-bjmq

Update:  Decide for yourself.  The entire application, as well as public comments, is available online at the MA Board of Higher's Ed's website.

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