Friday, February 4, 2011
I've been following the proposed Genzyme-Sanofi deal with some interest since Sanofi first made its move since what seems like many months ago. Reports are the parties are getting close to an agreement since they announced that Sanofi had entered into an NDA with Genzyme. From press reports we're hearing that the transaction will be a mix of cash and a contingent value right - earnout in English. The main difference between an earnout as it is commonly understood and the contingent value right is that the CVR must be registered with the SEC. Registering the CVR means that the right can be traded freely. The ability to trade the right is what makes it at all possible to consider accepting deferred payment in the context of a public company seller. [See update below.]
Of course, post-closing pricing adjustments can be extremely troublesome - and lead to all sorts of litigation/disputes over whether the targets were met or not, etc. The challenge with the CVR, I suspect, will be coming up with a target mechanism that is transparent and robust enough to overcome the likelihood of ex post disputes. The more complicated the mechanism, the more likely to result in ligation down the road by some CVR holder (or the shareholders' rep) who perhaps doubts that Sanofi made good on its promises. If the CVR is tied to some measure of profitability of the new Genzyme drug, then all the CVR holders are in trouble. That could be a morass of litigation. Consequently, the parties would be better of picking simple, binary milestones to trigger payments. Anyway, that's my two cents.
Daniel Wolf at Kirkland & Ellis has a memo on the current state of CVRs here.
Update: Turns out that CVRs are not generally transferable. They may generally only be purchased or sold pursuant to a permitted transfer. Here's some language defining permitted transfers as it was used by Ligand in their CVR agreement filed in connection with their acquisition of CyDex Pharmaceutical earlier this year:
"Permitted Transfer” means any transfer which is not in violation of applicable securities laws and in connection with which the transferee has executed and delivered a joinder signature page as to the Shareholders’ Representative Agreement; provided, that in the case of a transfer of Series B CVRs, Series A-1 CVRs or Common CVRs, the transfer must also be in at least one of the following categories for the transfer to be a Permitted Transfer: (i) the transfer of any or all of the CVRs (upon the death of the Holder) by will or intestacy; (ii) transfer by instrument to an inter vivos or testamentary trust in which the CVRs are to be passed to beneficiaries upon the death of the trustee; (iii) transfers made pursuant to a court order of a court of competent jurisdiction (such as in connection with divorce, bankruptcy or liquidation); (iv) if the Holder is a partnership or limited liability company, a distribution by the transferring partnership or limited liability company to its partners or members, as applicable; (v) a transfer made by operation of law (including a consolidation or merger) or in connection with the dissolution, liquidation or termination of any corporation, limited liability company, partnership or other entity; (vi) a transfer from a participant’s account in a tax-qualified employee benefit plan to the participant or to such participant’s account in a different tax-qualified employee benefit plan or to a tax-qualified individual retirement account for the benefit of such participant; (vii) a transfer from a participant in a tax-qualified employee benefit plan, who received the CVRs from such participant’s account in such tax-qualified employee benefit plan, to such participant’s account in a different tax-qualified employee benefit plan or to a tax-qualified individual retirement account for the benefit of such participant; or (viii) any transfer of a CVR by a venture capital firm, private equity firm, or other similarly-situated type of institutional investor that (a) provides to Parent an opinion of legal counsel that such transfer can be effected pursuant to an applicable exemption from the registration requirements of the Securities Act of 1933 and other applicable securities laws that is reasonably acceptable to Parent; and (b) certifies to Parent that it has not received a Quarterly Report dated within six (6) months prior to such transfer.
Capital bank used similarly restrictive language with respect to transfers in the CVR it included in its recent investment in North American Financial Holdings. You can find the CVR agreement here. If Sanofi registers the CVR with the SEC, then it would be tradable. But I suspect that since this is being proposed as a cash deal that they won't pursue registration for the CVRs. Without registration, any proposed CVRs won't be tradable.
Charleston is looking to hire some visitors for next year, including one in the business law area:
The Charleston School of Law invites applications from potential visiting faculty members for one or both semesters of the 2011-12 academic year. Subject matter needs are varied but may include Criminal Law and Procedure, Constitutional Law, and commercial/business law subjects. CSOL anticipates that several of these visiting lines will become tenure-track and under CSOL policy visiting faculty are eligible to apply for tenure-track positions. The Charleston School of Law is provisionally approved by the American Bar Association and currently is seeking full ABA approval. The campus is located in the heart of Charleston’s vibrant historic district. Interested individuals should send a resume and application letter to Prof. Constance Anastopoulo, Charleston School of Law, 81 Mary St., Charleston, SC 29403; email: email@example.com.
Thursday, February 3, 2011
OK, here's a little local color. If wasn't already clear enough by its earlier store closings and associated layoffs, BJ's [Wholesale Club] announced today that it is considering "strategic alternatives":
BJ's today announced that its Board of Directors, upon the recommendation of a committee of independent directors, has decided to explore and evaluate strategic alternatives, including a possible sale of the Company. The independent committee has engaged Morgan Stanley & Co. Inc. as its financial advisor to assist in this process.
The Company has not made a decision to pursue any specific strategic transaction or other strategic alternative, so there can be no assurance that the exploration of strategic alternatives will result in a sale of the Company or in any other transaction. There is no set timetable for the process. The Company does not intend to provide updates or make any further comment regarding the evaluation of strategic alternatives, unless a specific transaction is recommended by the independent committee and the board, or the process is concluded.
BJ's [Wholesale Club] is a Delaware corp, so it won't have any of the protections of the Massachusetts corporate law that Genzyme has. Presumably, once they decide to sell the corporation, they'll focus on getting the best price reasonably available for stockholders so the lack of a constituency statute providing an additional layer of protection for the board won't matter all that much.
(h/t WSJ Deal Journal)
Update: I've done some editing to the post to make it clear that I'm talking about BJ's Wholesale Club. C'mon people!
Wednesday, February 2, 2011
J Crew has filed a letter with the court in response to the plaintiff's letter. You can download it here. Rather than subvert the MOU, defendants argue in their letter that they have fully complied with the terms of the MOU and that the plaintiffs are just trying to have their cake and eat it, too. The plaintiffs complained that J Crew's board was undermining the terms of the settlement by announcing that they had received no offers by the end of the initial go-shop period. So what, say the defendants (from their letter):
Plaintiffs claim that the January 18 press release undermined the go shop. But that makes no sense. Announcing the results of the initial go-shop would have no effect on the viability of the extended go-shop. If there were additional bidders during the initial go-shop, announcing that fact before extending the go-shop would simply have the effect of continuing an open, public auction, something that would benefit shareholders. And TPG would be forced to compete with any new bidder no matter whether the Company publicly announced it or not. If there were no additional bidders during the initial go-shop, announcing that fact could only encourage bidders who might be on the fence to bid during the extended go-shop because they would perceive less competition. In either event, TPG could not possibly be benefited by knowing whether there were or were not additional bidders during the initial go-shop. Plaintiffs do not provide any explanation as to how the announcement of the results of the go-shop would in any way affect the go-shop process.
Nor could they. The public disclosure of the results of the initial go-shop period simply will not have any meaningful effect on the extended go-shop. Potential new bidders do not care whether someone did or did not bid before (except the fact that there were no bidders means that there potentially is less competition for the Company.) Likewise, TPG cannot do anything with the information it learned from J. Crew’s public disclosure. If there is a new bid, it still will have to compete with that bid.
Looks like this whole thing is landing on Vice Chancellor Strine's lap.
Lucien Bebchuk, Alma Cohen and Charles Wang have just posted a paper on SSRN, Staggered Boards and the Wealth of Shareholders: Evidence from a Natural Experiment. In the paper they test the effect of the recent Airgas decisions - in the Chancery Court as well as in Supreme Court on company valuations. They find that to the extent the Chancery Court weakened the power of staggered board by revealing a chink in the armor, it also increased valuations of firms with staggered boards. On the other hand, when the Supreme Court reversed that decision, the reversal had the effect of reducing valuations. In short, though the courts appear to disagree, the markets believe that staggered boards are value reducing.
While staggered boards are known to be negatively correlated with firm valuation, such association might be due to staggered boards either bringing about lower firm value or merely being the product of the tendency of low-value firms to have staggered boards. In this paper, we use a natural experiment setting to identify how market participants view the effect of staggered boards on firm value. In particular, we focus on two recent rulings, separated by several weeks, that had opposite effects on the antitakeover force of the staggered boards of affected companies: (i) an October 2010 ruling by the Delaware Chancery Court approving the legality of shareholder-adopted bylaws that weaken the antitakeover force of a staggered board by moving the company’s annual meeting up from later parts of the calendar year to January, and (ii) the subsequent decision by the Delaware Supreme Court to overturn the Chancery Court ruling and invalidate such bylaws.
We find evidence consistent with the hypothesis that the Chancery Court ruling increased the value of companies significantly affected by the rulings –namely, companies with a staggered board and an annual meeting in later parts of the calendar year –and that the Supreme Court ruling produced a reduction in the value of these companies that was of similar magnitude (but opposite sign) to the value increase generated by the Chancery Court ruling. The identified positive and negative effects were most pronounced for firms for which control contests are especially relevant due to low industry-adjusted Tobin’s Q, low industry-adjusted return on assets, or relatively small firm size. Our findings are consistent with market participants’ viewing staggered boards as bringing about a reduction in firm value. The findings are thus consistent with institutional investors’ standard policies of voting in favor of proposals to repeal classified boards, and with the view that the ongoing process of board declassification in public firms will enhance shareholder value.
Tuesday, February 1, 2011
In the most cynical view of the shareholder lawsuit, managers are happy to settle even spurious claims because the global release and settlement generates effectively a 'get out of jail free' card absolving them of any fiduciary failings that may have come before the settlement. That's a pretty cynical view, mind you, but I suppose I can envision facts where it might be true.
Now comes J. Crew. The process employed to take the company private has been ... to put it charitably ... less than perfect. Read about it here and here and here. In any event, the J. Crew board ended up on the receiving end of a well-deserved shareholder lawsuit for their apparent inability to comply with their fiduciary obligations in connection with the going-private transaction. It appeared two weeks ago that the parties were near settlement. In fact, they reached a settlement, but had yet to bring it before Vice Chancellor Strine for approval. According to a letter filed with the court yesterday and reported by Bloomberg this morning, plaintiffs counsel are accusing management of undermining the settlement from almost before the ink was dry (Download JCrew Settlement letter). The plaintiff's letter to Vice Chancellor Strine updating him on the situation reads like the J. Crew board was hoping to use the settlement like a 'get out of jail free' card while they pursued their preferred transaction:
The Special Committee, however, flatly refused to even discuss or respond to Plaintiff's objections on these issues. Defendants took very aggressive positions concerning the terms of the settlement stipulation. For example Defendants' revision to the settlement stipulation included an overly board release that would prevent shareholders from challenging Defendants' future actions related to the sale of J.Crew, inclding any alternative transaction that might arise. Plaintiffs never agreed to release claims related to Defendants' future conduct, and could never do so in good faith, especially in light of Defendants' recent actions, which Plaintiffs believe show a disregard for their fiduciary duties.
A copy of the settlement stipulation was attached to the letter as an exhibit and you can download it here (Download JCrew Settlement MOU). This settlement stipulation has not yet been approved by Vice Chancellor Strine and now looks like it won't be as the plaintiffs are gearing up for a trial.
This case is extremely interesting for those of us thinking about the developing doctrine with respect to transactions involving managers and control persons. Along those lines, The Deal Professor will be sponsoring an important symposium in Delaware on this topic in April. If this case ends up going to trial there might be a nice confluence of events in April that will make Wilmington the place to be somebody this Spring.