Saturday, March 12, 2011
Friday, March 11, 2011
At Fordham Law in NYC there's an interesting book talk on March 30 (5-6:30p). Profs. Sean Griffith (Fordham) and Tom Baker (UPenn) have a new book - Ensuring Corporate Misconduct: How Liability Insurance Undermines Shareholder Litigation. Get more info on the event here. And here's the book squib:
Shareholder litigation and class action suits play a key role in protecting investors and regulating big businesses. But Directors and Officers liability insurance shields corporations and their managers from the financial consequences of many illegal acts, as evidenced by the recent Enron scandal and many of last year’s corporate financial meltdowns. Ensuring Corporate Misconduct demonstrates for the first time how corporations use insurance to avoid responsibility for corporate misconduct, dangerously undermining the impact of securities laws.
Looks like a good read. When's summer?!
The Indian Competition Commission has recently published draft rules on the pre-approval of mergers in India. The draft rules are intended to go into effect this summer (June/July 2011). After they go into effect, India will join the growing list of countries (US, EU, Brazil, China, etc.) that will assert jurisdiction over international transactions where there is a nexus to India. Unlike the 30 day US HSR process for most transactions, the Indian process commits to resolving reviews of applications within 180 days of receiving them, with an outside date of 210 days. Nothing like efficiency!
The Commission is presently taking comments until March 22, 2011. I have an idea for a comment -- how about reducing the review period to say ... 30 days unless there is any reason to undertake a more extensive investigation.
Thursday, March 10, 2011
AIG annoucend yesterday that it had adopted what it calls a "Tax Asset Protection Plan". To the rest of us, that's an NOL pill. The Delaware Supreme Court ruled in the Versata v Selectica case last fall that boards can reasonably adopt these NOL pills to protect corporate assets, like net operating losses. The issue with them at the time was two-fold. First, they are ostensibly not takeover defenses, but intended to protect a corporation ability to access its net operating losses. Second, their trigger is usually set at 5% - above that point and the firm loses its NOLs. The court looked at them in Versata and decided they were a reasonable response to the threat of losing a valuable corporate asset.
NOLs allow companies to reduce their tax liabilities. Under the tax laws, a company may lose access to its NOLs in the event a single shareholder acquires more than 5% of the stock of the corporation. The pill prevents shareholders from accumulating a large enough block to trigger the loss of the NOLs. I suppose the only reason that AIG has any NOLs left on its books is because the largest single stockholder, the US government (92%) doesn't file a tax return...
For your file, here's a copy of AIG's shareholder rights plan Tax Asset Protection Plan.
Update: I've been working my way through Samuel Thompson's 4 volume, Mergers, Acquisitions, and Tender Offers recently. He's got a very nice summary of NOL pills and the state of the law governing their use. If you have a library, they should have this treatise on their shelves. It's timely and have got great coverage.
Wednesday, March 9, 2011
John Armour, Justice Jack Jacobs and Curtis Milphaupt have recently published a comparative article on hostile takeover regimes in developing economies. The piece, The Evolution of Hostile Takeover Regimes in Developed and Emerging Markets: An Analytical Framework, is now appearing in the Harvard Journal of International Law.
Abstract: In each of the three largest economies with dispersed ownership of public companies—the United States, the United Kingdom, and Japan—hostile takeovers emerged under a common set of circumstances. Yet the national regulatory responses to these new market developments diverged substantially. In the United States, the Delaware judiciary became the principal source and enforcer of rules on hostile takeovers. These rules give substantial discretion to target company boards in responding to unsolicited bids. In the United Kingdom, by contrast, a private body consisting of market professionals was formed to adopt and enforce the rules on hostile bids and defenses. In contrast to those of the United States, the U.K. rules give the shareholders primary decisionmaking authority in responding to hostile takeover attempts. The hostile takeover regime in Japan, which developed recently and is still evolving, combines substantive rules with elements drawn from both the United States (Delaware) and the United Kingdom, while adding distinctive elements, including an independent enforcement role for Japan’s stock exchange.
This Article provides an analytical framework for business law development to explain the diversity in hostile takeover regimes in these three countries. The framework identifies a range of supply and demand dynamics that drives the evolution of business law in response to new market developments. It emphasizes the common role of subordinate lawmakers in filling the vacuum left by legislative inaction, and it highlights the prevalence of “preemptive lawmaking” to avoid legislation that may be contrary to the interests of important corporate governance players.
Extrapolating from the analysis of developed economies, the framework also illuminates the current stateand plausible future trajectory of hostile takeover regulation in the important emerging markets of China, India, and Brazil. A noteworthy pattern that the analysis reveals is the ostensible adoption—and adaptation—of “best practices” for hostile takeover regulation derived from Delaware and the United Kingdom in ways that protect important interests within each emerging market’s national corporate governance system.
Tuesday, March 8, 2011
I've written about top-up options before. Now, if you're considering including a top-up option in your next deal, remember to read Olson v Ev3 before you get started. It provides a very good review of the issues related to the use of top-up options and how acquirers can structure them so that they withstand litigation challenges. The court notes just how ubiquitous top-up options have become in recent years:
Not surprisingly, given these advantages, top-up options have become ubiquitous in two-step acquisitions. They appeared in more than 93% of two-step deals during 2007, 100% of two-step deals during 2008, and more than 91% of two-step deals during 2009. [citing Mergermetrics]
The trigger to exercise the top-up option in the Ev3 transaction was 75%. That's a pretty modest - as things go these day - trigger for top-up option. The target might not have had enough authorized stock to allow them to go any lower.
According to Bloomberg, Raj Rajaratnam just pulled Judge Richard Howell for his insider trading case. You'll remember that Judge Howell came down hard on Eugene Plotkin, a former Goldman Sachs banker whose international insider trading scam should be taught to all investment bankers and young lawyers as examples of hubris and doing all the wrong things. It's got all the elements of a bad movie - hiring a guy to steal advance copies of Business Week, trading ahead of client deals, funneling trades through an aunt's account in Croatia. You couldn't ask for more. Anyway, Judge Howell came down hard on Plotkin, calling him a person "with no moral compass" before he sentenced him to 57 months. Rajaratnam is probably hoping things will go better.
Monday, March 7, 2011
If you're on the deal team and you trade in the target's stock ... well ... it goes without saying that you're a bad lawyer. The latest to learn this lesson? Todd Leslie Treadway, a former employee benefits and executive comp associate at Dewey & LeBouef's New York office. Here's the litigation release from the SEC:
The Commission today charged attorney Todd Leslie Treadway with insider trading in advance of two separate tender offer announcements during 2007 and 2008. According to the complaint, while employed as an attorney in the New York office of Dewey & LeBoeuf, LLP, Treadway provided advice on, among other things, the employee benefit and executive compensation consequences of mergers and acquisitions and had access to material nonpublic information concerning contemplated corporate acquisitions. The SEC alleges that in 2007, and again in 2008, Treadway used material, non-public information he obtained through his position at D&L to purchase stock in two separate companies prior to the announcement of the acquisition: In June 2007, Treadway purchased securities in Accredited Home Lenders Holding Company, and in May 2008 Treadway purchased securities in CNET Networks, Inc. According to the complaint, Treadway’s illegal trading resulted in profits of approximately $27,000.
The Commission’s complaint charges Treadway with violations of Sections 10(b) and 14(e) of the Securities and Exchange Act of 1934 and Rules 10b-5 and 14e-3 thereunder. The Commission is seeking permanent injunctive relief, disgorgement of illicit profits with prejudgment interest, and monetary penalties against Treadway.
The Commission acknowledges the assistance of FINRA.
See that little bit there - at the bottom -- that thanks FINRA for its assistance? My guess is that FINRA popped up Mr. Treadway's trades as anamolous trades and then compared the insider lists it got from the companies to the list of people making trades. Seems like a pretty easy case to make. You'd think that Dewey would instruct its associates not to be so stupid.
Update: The Am Law Daily has posted the complaint. Here's what you need to know about the trading alleged by the SEC:
On June 1, 2007 - the same day he reviewed a draft of the merger agreement -Treadway purchased 290 shares of Accredited common stock at $13.76 per share for a total purchase price of $3,990.40. Treadway purchased the shares through an online brokerage account from his office computer at D&L. Treadway used all of the available cash in the account to purchase the Accredited stock. ...
Additionally, on May 6, 2008, from approximately 8:00 p.m. until midnight,Treadway received at least thirteen emails related to the CNET matter, including an email sent to Treadway around 9:00 p.m. that attached a draft of the CBS and CNET merger agreement. The subject line of that email read: "FW: Agreement & Plan ofMerger CNET_v2.DOC." By at least May 6, 2008, Treadway was aware that CNET was D&L's client.
On May 7, 2008 at around 2:36 p.m., Treadway purchased from his computer at D&L 7,079 shares of CNET common stock at prices ranging from $7.49 to $7.56 per share. The total purchase price was $53,499.58. At that time, this was the largest securities purchase Treadway had made in terms of share and dollar amounts. Treadway purchased the CNET stock in four separate online brokerage accounts - three of which Treadway owned. The other was in the name of his fiance. Treadway sold his entire portfolio of stock holdings in each of the four online brokerage accounts to purchase the CNET stock.
Uh ... a couple of things. First, he bought the stock using his office computer?! It's hard to know what to say about that, so I won't say anything. It's just too ridiculous. Second, he apparently used all of his available cash to make the purchases. If you've got a good feeling about a stock, you invest some of your money in it. If you have a REALLY good feeling about a stock, I guess you invest it all. Finally, the guy used his fiance's brokerage account to make some of the purchases. Hint to her - it's not really love. I'd move on.
It's perenial risk. Managers fight off an unwanted suitor with promises that the future will be brighter if the company remains independent and in management's hands. And, then what? A year later, shareholders have yet to see any improvement. Below is Barnes & Noble's stock price over the past year. If you were with management last year when they fought off Yucaipa's proposal share up management and look for options, you might be reconsidering your position about now. Reuters reports that BKS is now trading at a one year low and that it's efforts to generate a sale or going private transaction aren't going anywhere. Oh well.
Saturday, March 5, 2011
Over at WSJ's Law Blog last wek they expressed some good natured surprise at the fact that a lawsuit has been filed in an attempt to block the NYSE - DB merger. They post a link to the complaint filed in a NY court.
Of course, it wouldn't be a merger unless there were multiple suits -- and there are. Bloomberg previously noted that two cases were filed challenging the NYSE - DB merger more than two weeks ago (Feb 16) - one each in NY and Delaware. Well, another one got filed in Delaware last week, so by my quick count there are now at least four complaints challenging this transaction.
I've read these a couple of times, and to be completely honest, there doesn't look like there is much to them. There are vague allegations of violations of fiduciary duties and onerous deal protections. Claims that the directors didn't include a go-shop in the merger agreement in violation of their fiduciary duty. I'm not sure how that is supposed to work, but whatever. Onerous deal protections? They include what looks like a standard no-shop with a fiduciary out; termination fee of 250 million Euros (on a deal worth $10 billion); and a match right. Again, it's hardly a compelling set of facts.
I can't imagine these suits will go anywhere. They are like the litigation flotsam I write about in a draft paper I've got circulating. Rather than be about vindicating shareholder rights in the face of a bad set of facts, these look more like place-holders intended to ensure that litigators keep their place in line in the "filing Olympics."
Friday, March 4, 2011
I have written previously about the increase in outbound M&A activity by Indian firms. As I noted in my article “Rising Multinationals: Law and the Evolution of Outbound Acquisitions by Indian Companies,” changes in India’s regulatory regime have played an important role in the emergence of Indian multinationals. Extensive legal reforms since economic liberalization have set the stage for outbound acquisitions by Indian multinationals. However, I also argue that Indian law continues to impose significant constraints on the ability of Indian firms to engage in outbound acquisitions. Legal constraints limit the size of outbound deals as well as the methods that Indian multinationals use in pursuing outbound acquisitions, including limiting their ability to be creative in undertaking different types of acquisition structures.
It appears that the Confederation of Indian Industry (the CII is India's leading business association) has also turned its attention to these issues (HT: Indian Corporate Law Blog). In a recent press release, the CII points to some of the hurdles for Indian firms. According to the press release, the CII has submitted suggestions to the Department of Industrial Policy and Promotion, Government of India for creating a more “facilitative environment for transnational M & A activity of Indian corporates.” It will be interesting to see how the Indian government responds to the concerns expressed. In the past, the CII has had significant influence over the trajectory of Indian corporate law reforms.
Thursday, March 3, 2011
The ink on the Airgas opinion has barely dried and Family Dollar looks like it's trying to use the Just Say No defense to stave off an offer by Nelson Peltz. Peltz announced his offer to the world in a recent 13d filing:
On February 15, 2011, the Trian Group contacted Howard Levine, Chairman of the Board and Chief Executive Officer of the Issuer, and advised him that it beneficially owned approximately 8% of the outstanding Shares and believed that it was the largest beneficial owner of Shares. The Trian Group also advised Mr. Levine that it proposed that the Trian Group or one of its affiliates acquire the Issuer at a price in the range of $55 to $60 per Share in cash.
The Family Dollar board considered the offer and responded (Form 8-K):
by a unanimous vote of those present, determined that continued implementation of the Company’s strategic plan remains the best way to deliver value to all Family Dollar shareholders. The Board also determined that the unsolicited, conditional proposal from Trian Group to acquire Family Dollar substantially undervalues the Company and that pursuit of a sale of the Company is not in the best interest of shareholders.
The Family Dollar board also adopted a shareholder rights plan. It's an imperfect defense, though. Family Dollar's board is elected annually. It does have a 90 day advance notice provision in its bylaws for nominations, but no classified board. The effectiveness of the rights plan as a defensive measure comes from the combination of the pill and the classified board. Family Dollar is going with just the pill and not the staggered board. I guess we'll soon see how that works for them.
Update: The Deal Professor tweets (Steven Davidoff has a Twitter account - @StevenDavidoff) that the 10% threshold on Family Dollar's pill might be more about keeping away hedge funds than Peltz. He's probably right because without a staggered board the pill isn't doing much else.
... really? That can't be true. Maybe it is. I don't know, but it's pretty ridiculous. From the SEC's order against Rajat Gupta:
Gupta dialed into the October 23, 2008, Board meeting around the time it was scheduled to start and remained on the call until 4:49 p.m. Just 23 seconds after disconnecting from the call, Gupta called Rajaratnam. The call lasted approximately 13 minutes. The following morning, just as the financial markets opened at 9:30 a.m., Rajaratnam caused the Galleon Tech funds to begin selling their holdings of Goldman Sachs stock. The funds finished selling off their holdings — which had consisted of over 120,000 shares — that same day at prices ranging from $97.74 to $102.17 per share. The same day (October 24, 2008), in discussing trading and market information with another participant in the trading scheme, Rajaratnam explained that Wall Street expects Goldman Sachs to earn $2.50 per share but that Rajaratnam had heard the prior day from a member of the Goldman Sachs Board that the company was actually going to lose $2 per share. As a result of Rajaratnam’s trades based on the material nonpublic information that Gupta provided, the Galleon Tech funds avoided losses of over $3 million.
This is a guy who was the former head of McKinsey, sat on the boards of Goldman and P&G and apparently, still feels the need to show how important he is buy sharing inside information with a hedge fund trader.
Tuesday, March 1, 2011
So, despite the flawed process, the useless fairness opinion, the fig-leaf go shop, and the problematic disclosure, the J.Crew MBO was approved by almost 64% of the company's outstanding shares. Looks like many of the large institutional investors in the company voted for the deal, even though ISS recommended that they reject the proposal. At the end of the day, the shareholders' meeting on the deal was typically short (a total of 4 minutes) and undramatic. Not much of a surprise...
Andrew Ross Sorkin notes what others have been suspecting for some time -- that the go-shop is just a fig leaf to insure against potential liability in management-led buyouts. Reminds me of the paper on go-shops by Guhan Subramanian from two years ago, Go-shops vs. No-shops. In part he found:
I also find no post-signing competition in go-shop management buyouts (MBOs), consistent with practitioner wisdom that MBO's give incumbent managers a significant advantage over other potential buyers. Taken as a whole, these findings suggest that the Delaware courts should generally permit go-shops as a means of satisfying a sell-side board's Revlon duties, but should pay close attention to their precise structure, particularly in the context of go-shop MBOs.