M & A Law Prof Blog

Takover Panel to Take Step Backwards?

Last week I noted that there appeared to be some blow-back from Kraft's successful acquisition of Cadbury's.  The former Chairman of Cadbury made a speech in which he called for changes to the rules of the Takeover Panel to ensure that the interests of long-term (read: British) shareholders are not sacrificed to the interests of short-term (read: foreign) shareholders.  The British Trade Minister supplied some supportive words and wouldn't you know it -- the next day, the Takeover Panel announced that it will formally review its rules: 

The Code is not concerned with the financial or commercial advantages or disadvantages of a takeover. These are matters for the company and its shareholders. Nor does the Code deal with issues, such as competition policy, which are the responsibility of government and other bodies.

...however...

In the light of recent commentary and public discussion, and suggestions for consideration from the Secretary of State for Business, Innovation and Skills and others, the Code Committee has decided to initiate a consultation to consider whethercertain Code provisions and the timetable for determining the outcome of offers could usefully be improved.

The situation is not helped at all by Kraft's moving with "indecent haste" to cut jobs in the UK.    This after pledging just a couple of months ago to add jobs to a post-merger Cadbury.  Of course, Kraft isn't all that concerned with the takeover rules it leaves behind once it has accomplished its transaction.  Although they will be dragged before Parliament to explain themselves.

After the Takeover Panel announced its new consultation on proposed rule changes, it also announced that Peter Kiernan, Managing Director of Lazard (London) who was to begin his term as Director General of the Takeover Panel would not do so for the time-being.

The secondment of Peter Kiernan as Director General was due to commence on 1 March. However, pending completion of some ongoing matters, it has been agreed that his appointment as Director General should be deferred.

Might it have anything to do with the fact that Kiernan advised Kraft in its acquisition of Cadbury?  I dunno. Maybe.

It's hard to know which way this will go and what the results of all this movement will be with respect to the Takeover Panel's rules.  It's worth watching, though.

Oh, and not to be forgotten - some of our friends at the Takeovers Panel down-under are taking advantage of this opportunity and the panel's 10th anniversary to urge it to reconsider its own rules.  Keep an eye on that as well.

-bjmq

  

Cash on the Balance Sheet

This morning's WSJ has an article suggesting that goods times are just around the corner for M&A lawyers.  Actually, it's an article about the hole that is presently being burned in the pockets of managers as they sit on increasingly large cash-piles.  

The 382 nonfinancial firms in the Standard & Poor's 500 that have reported results for the fourth quarter of 2009 are now holding $932 billion in cash and short-term investments, according to a Wall Street Journal analysis of data from Capital IQ. That sum is up 8% from the third quarter and up 31% from a year ago.

 At a time of low interest rates, reopened credit markets and growing optimism about the economy, CEOs and their boards seem to be questioning the wisdom of sitting on all that cash. And with the S&P 500 still trading 29% below its October 2007 peak, companies are deciding that cash is their preferred currency for acquisitions—rather than shares they see as undervalued.

This is an old problem - but a good one.  Having too much cash on the balance sheet is unproductive so what to do with it.  My first thought has always been, is that what dividends are for?  Apparently not.  Reminiscent of arguments that lay behind the conglomerate movement of the 1960s, one observer suggests that dividends are bad. 

 "In many cases, if you use cash for share buybacks or dividends you are signaling to the market you don't have a better use for the cash," said Paul Parker, Barclays Capital head of global M&A. "For most CEOs, that message is the last one they want to send."

 As if every manager had an endless font of profitable ideas to pursue... Here's a news flash: they don’t.  There is limit.  There’s always a limit.  That’s one reason why we have a capital market – so that individual investors can allocate capital into portfolios that best meet their needs.  I suppose we could let corporate managers do that, but we’ve been down that road before.   Here's a good read on our previous experience with corporate empire building if you haven't already got it on your shelf: Sobel's The Rise and Fall of the Conglomerate Kings.  

 And it's not like there are all these targets out there just waiting to be bought.  The weakness of the stock market over the past year also means that potential sellers are going to be less willing to sell at current prices.  Boards are going to argue (as they are in AirGas/Air Products) that the market is getting its price wrong and that a sale at present is a bad idea (unless it can be done at a premium of historic highs).  This might be why we are seeing what appear to be an uptick in hostile acquisition activity.  Targets are resisting.

 Against that, we might all be better off if good managers sitting on excess capital turned it back to their shareholders rather than pursue perhaps marginally profitable acquisitions.  If managers took just 10% of the nearly 1 trillion in cash on the balance sheets of non-financial firms and sent it back to stockholders, that would be a $100 billion private sector stimulus that might even help somebody make a payment on their mortgage.  That wouldn't necessarily be a bad thing.  

 OK, I'll get off my soap box for the rest of the day. 

-bjmq

Historical Perspectives on the Financial Crisis

OK, I'm a sucker for financial history.  Here's a new essay from Frank Partnoy (USD), Historical Perspectives on the Financial Crisis, that ties the "Match King" scandals of the 1920s directly to the Financial Crisis of 2008.  Here's to unintended consequences! 

Abstract:  This Essay discusses two historical parallels between the current financial crisis and the financial crisis of the late 1920s and 1930s. First, financial innovation was at the core of both crises. In particular, the machinations of Ivar Kreuger illuminate how financial innovation tends to outstrip the ability, and perhaps the willingness, of investors and intermediaries to process information. Second, reliance on credit ratings began as a response to the 1929 crash and became a primary cause of the recent crisis. During the 1930s, regulators developed rules based on credit ratings; those rules are the ancestors of today’s widespread regulatory reliance on ratings. Without financial innovation and overreliance on credit ratings, the recent crisis likely would not have occurred, and certainly would not have been as deep.

-bjmq

Astellas Hostile Offer

Astellas Pharma launched a hostile offer for OSI Pharmaceuticals yesterday.  In conjunction with the offer, Astellas filed suit in the Delaware Chancery Court seeking to have the board pull its pill.  Astellas' central claim is that OSI brushed off its offer without considering it.  From the complaint:

The Director Defendants failed to conduct a good faith and reasonable investigation of Astellas Pharma’s offer. Instead, the Director Defendants summarily refused to engage Astellas Pharma in a meaningful dialogue and failed to reasonably inform themselves about Astellas Pharma’s offer. The Director Defendants could not possibly be well informed concerning the offers that they have flatly rejected because they have declined to engage in any meaningful discussion or negotiation with Astellas Pharma, either directly or through their legal and financial advisors, to learn more about Astellas Pharma’s offer. This failure to conduct a good faith and reasonable investigation of Astellas Pharma’s offer is a violation of the Director Defendants’ fiduciary duties.

 Presumably, sometime over the next 10 days the OSI board will meet to review the Schedule TO that's now on file with the SEC and inform themselves about the offer.  Once they do that, it won't leave much for Astellas to complain about.

-bjmq

Selectica NOL Pill Okay'd

Vice Chancellor Noble issued his ruling in Selectica v. Versata (Richards, Layton & Finger posted the opinion) late last week.   This case is worth noting for two reasons.  First, it involves one of the very few cases of a shareholder rights plan being triggered.  Second, Selectica's pill is not what you might consider to be a typical pill.  As originally envisioned, the shareholder rights plan is intended to be a defensive measure to prevent a hostile takeover.  The way it's worked in practice, with an effective pill in place and combined with a staggered board, potential hostile acquirers are forced to deal with the target board or accept the risks involved in a drawn out proxy fight.  

In November 2008, Selectica amended the pill it had in place in order to protect the value of net operating losses (NOLs) that it had on its books.  The purpose of the pill, while the company acknowledged that it had some anti-takeover effects, was to prevent an inadvertent accumulation of stock that might cause the company to lose the right to use its NOLs.  The amendment set the new trigger for the rights at 4.99%, grandfathering in 5% holders subject to limits on their further purchases.

Versata - a 5.1% shareholder and wholly-owned subsidiary of Trilogy, a Selectica competitor - decided to test pill and bought right through its limits.   After Selectica attempted unsuccessfully to enter into a standstill agreement with Trilogy, allowed the pill to trigger - diluting Trilogy.  The Selectica board then sought a declaratory judgment in Delaware in support of its actions.

When Vice Chancellor Noble reviewed Selectica's NOL pill, he made pretty short work of Trilogy's arguments against it.  First, a shareholder rights plan is an appropriate device to protect corporate policy, which includes the protection of NOLs.  Second, "the legitimacy of the poison pill is settled law."  Twenty-five years after Moran v. Household, there is no reason to think that Delaware is reconsidering the validity of the shareholder rights plan.  Third, the dilutive effect of the pill, while expensive for a potential acquirer, is not preclusive.  To be preclusive, the pill would have to make it virtually impossible, if not in fact impossible, for a potential acquirer to succeed. That was just not the case here.   And finally, the board's decision to protect the company's NOLs through the use of a pill was a reasonable response to the threat of losing them in the event a large shareholder developed a position in the company. 

No doubt the fellows over at BKS are studying the court's opinion here and thinking about next steps in that back-and-forth.

-bjmq

Update:  Here's a useful Latham memo from last year after the Selectica NOL pill got triggered.

Dow and Futility

In re Dow, decided last month in the Chancery Court, is a good review of the mechanics of futility pleading since this is an area that students sometimes find confusing, it’s probably worth thinking about this for a few minutes – even though it’s now Spring Break around here.

The defendants in this action are directors of Dow Chemical.  Plaintiffs brought suit alleging a number of nefarious acts, including various violations of the directors’ duties of care and loyalty with respect to Dow’s failed 2008 link up with Rohm & Haas.  In that transaction, Dow agreed to acquire Rohm & Haas for $18 billion.  The merger agreement did not contain a financing contingency.  While the transaction did not include a reverse termination fee and the seller did not give up equitable remedies, the merger agreement did include a “ticking fee” of $3.3 million per day for any delay up to six months following the receipt of regulatory approval.  Not long after the deal was signed as we all remember, the markets went South and deals like this one started to look less and less attractive ex post.

The plaintiff’s primary allegation was that the Dow directors breached their fiduciary duties by entering a merger agreement with Rohm & Haas that did not contain a financing condition.  The plaintiffs are arguing that the Dow board was wrong in not negotiating an effective financing contingency in its merger agreement.  This is not the kind of claim that’s going to win very often – absent an egregious series of facts that aren’t present.

No matter, Chancellor Chandler didn’t let the case get that far.  In their complaint, the plaintiffs argued that demand on the board would have been futile and thus should be excused.  Chancellor Chandler applied the Aronson test.  To satisfy Aronson plaintiffs must plead particularized facts that raise a reasonable doubt either (i) that a majority of the directors who approved the transaction in question were disinterested and independent, or (ii) that the transaction was the product of the board’s good faith, informed business judgment.

The plaintiffs failed to make a showing that any of the directors were “interested.”  Rather, they argued that the majority of the board lacked “independence.”  Seven of the board members, plaintiffs argued, had substantial ties to Liveris, the CEO.  Liveris, the court notes, was not interested in the transaction, however.  Without an interested director, there is nothing to hang a dependent director argument on.  And the argument fails. 

Chancellor Chandler highlights two other common independence arguments and puts them away.  First, a director who is beholden to the corporation for his or her livelihood is does not lose his or her independence for that reason alone.  In such circumstances, the director’s interests are aligned with the corporation so there is no reason to fear (absent other facts) that such a director will be adversely influenced in his or her decision-making.  Second, the mere allegation of outside business relationships among directors will not be sufficient to sustain the “domination and control inquiry” required to show lack of independence.

Next, the Chancellor turns his attention to the second prong of Aronson which requires the “plaintiffs must plead particularized facts sufficient to raise (1) a reason to doubt that the action was taken honestly and in good faith or (2) a reason to doubt that the board was adequately informed in making the decision.”

Chancellor Chandler notes that the plaintiff’s complaint is “devoid” of any allegations that the board was not informed. Rather, the plaintiffs were simply unhappy with the board’s decision.

Simply put, plaintiffs take issue with the substantive decisions of the R&H Transaction, instead of the process the board followed. This Court made clear in Citigroup that substantive second-guessing of the merits of a business decision, like what plaintiffs ask the Court to do here, is precisely the kind of inquiry that the business judgment rule prohibits.

The plaintiffs unsuccessfully argued that certain “bet the company” transactions require a higher standard of care.  To be honest, it’s a loser of an argument.  If it had any chance of succeeding, one would already see it applied to the actions of selling boards in other contexts, but Delaware hasn’t adopted a “bet the company” jurisprudence so we don’t see it on the sell-side where courts are more concerned. 

Chancellor Chandler similarly bats away the plaintiff’s “red flags” argument:

Recently, the Supreme Court clarified the concept of bad faith in Lyondell Chemical Co. v. Ryan, noting that “[i]n the transactional context, [an] extreme set of facts [is] required to sustain a disloyalty claim premised on the notion that disinterested directors were intentionally disregarding their duties.” Plaintiffs must show that defendants completely and “utterly failed” to even attempt to meet their duties.

"Utter failure" is a tough standard that requires a very extreme set of facts, which are not present in Dow.  I'm thinking that plaintiffs' counsel should put that argument away unless there are some real facts to back it up.

In any event, if you are looking for a nice review of the standards for futility and their application, In re Dow is a good place to start and might even be worth reading on a beach during Spring Break! 

 -bjmq