Wednesday, June 29, 2011
According to the Delaware Law Weekly, Sam Glasscock was unanimously confirmed by the Delaware General Assembly today as Vice Chancellor to fill the vacancy created when Vice Chancellor Strine moved over to take up the position of Chancellor.
The recent In re Del Monte brought to the fore the problem of investment bankers and the conflicts they often carry with them in arranging sales. In the words of Goldman Sachs banker, "Life is full of conflicts, some real, some imagined." Now, there is a paper from Agrawal, et al, The Impact of Common Advisors on M&A that exmaines the effect of having common advisers for the buyer and seller in sales. In short, deals where the investment bank is on both sides of the deal take longer to complete and tend to favor shifting transaction surplus to acquirers.
Abstract: We examine the conflict of interest that an investment bank faces when advising both the target and acquirer in a merger or acquisition (M&A) by investigating how common advisors affect deal outcomes. We compare M&As with common advisors to deals in which targets and acquirers use different advisors and account for the endogenous nature of this choice. We find that (1) deals with common advisors are less likely to be completed and take longer to resolve, and (2) sharing advisors does not affect the wealth gains of shareholders of targets, acquirers or the combined firm and the post-acquisition performance of acquirers. We find some evidence that valuation multiples paid for targets and deal premiums for public targets are significantly lower in transactions with common advisors, suggesting that common advisors tend to favor acquirers over targets, with an eye on future investment banking business from the larger, surviving firm. But most of our results suggest that common M&A advisors lead to neither better deal outcomes by facilitating information flow between targets and acquirers, nor worse deal outcomes by influencing both sides to hasten deal completion.
Tuesday, June 28, 2011
From Susan Rozelle at Stetson:
Tell your colleagues (directly and by forwarding this to other listservs, blogs, etc., if you can) about the Teaching Materials Network, that database of kind souls offering to share syllabi, teaching notes, Power Points, handouts, and other precious gems with fellow law professors who are putting together a new prep.
You can find us at www.law.stetson.edu/teachingmaterialsnetwork
Create an account, and then search the database by course, casebook, and credit hours to find the contact information of a fellow lawprof who has offered to help.
When you have materials of your own to share, log back in and click on the “Add or Update a Course Listing” link to add yourself to the list of folks who want to pay it forward. Please help us make this resource as user-friendly as possible by listing courses and books in their most recognizable form (e.g., "Forensic Evidence" rather than "CSI Law," and "Author's Last Name" rather than "Cases and Materials on X").
And when someone contacts you to ask for your teaching notes, please confirm that person is, in fact, a fellow law professor, and not one of your more enterprising students.
Comments or questions? Contact Susan Rozelle at firstname.lastname@example.org.
Monday, June 27, 2011
When negotiating an acquisition agreement, it often appears that the other side is negotiationg language without any real knowledge of what the law actually is. One area where this is often the case is anti-sandbagging provisions. This article frames the sandbagging/anti-sanbagging issue and provides a useful summary of the law in several of the most relevant jurisdictions:
In Delaware, the buyer is not precluded from recovery based on pre-closing knowledge of the breach because reliance is not an element of a breach of contract claim. The same is true for Massachusetts and, effectively, Illinois (where knowledge is relevant only when the existence of the warranty is in dispute). But in California, the buyer is precluded from recovery because reliance is an element of a breach of warranty claim, and in turn, the buyer must have believed the warranty to be true. New York is less straightforward: reliance is an element of a breach of contract claim, but the buyer does not need to show that it believed the truth of the representation if the court believes the express warranties at issue were bargained-for contractual terms.
In New York, it depends on how and when the buyer came to have knowledge of the breach. If the buyer learned of facts constituting a breach from the seller, the claim is precluded, but the buyer will not be precluded from recovery where the facts were learned by the buyer from a third party (other than an agent of the seller) or the facts were common knowledge.
Given the mixed bag of legal precedent and little published law on the subject, if parties want to ensure a particular outcome, they should be explicit. When the contract is explicit, courts in California, Delaware, Massachusetts and New York have either enforced such provisions or suggested that they would. Presumably Illinois courts would enforce them as well, but there is very little or no case law to rely upon.
June 27, 2011 in Asset Transactions, Contracts, Deals, Delaware, Leveraged Buy-Outs, Management Buy-Outs, Merger Agreements, Private Equity, Private Transactions, Transactions | Permalink | Comments (0) | TrackBack (0)
Skype - and its investors - are continuing to get bad press for their repurchase of stock options from employees let go immediately prior to the close of their sale to Microsoft. Here's Techcrunch's take on it. Felix Salmon also weighs in. Turns out that options issued by Skype - and the shares purchased pursuant to those shares - were subject to repurchase rights by the company. That makes them worth ... well ... not very much. I tend to agree with Arrington. Once it becomes common knowledge that private equity invested firms treat options this way, it will make it more expensive for private equity portfolio firms to hire employees. End of story.
Friday, June 24, 2011
As they often do, the folks over at The Conglomerate are running a Corporate Finance Roundtable. It's a great discussion and worth reading. They are dealing with a question dear to my heart - the education of law students in the basics of finance. Drop by.
Thursday, June 23, 2011
Today's WSJ has a good example of why sellers are so focused on deal certainty:
Kirk Brundage opened his first T-Mobile store while he was still in college, added seven more in Idaho and Utah over the next half decade, and contemplated expanding into other states.
But by the end of next week, he'll be out of the wireless business.
Mr. Brundage's plans changed after AT&T Inc. unveiled its $39 billion deal to acquire T-Mobile USA. His business was already struggling, and he had considered getting out of it. But once the merger was announced, he decided it was time to sell quickly rather than try to turn the company around.
You hear this argument all the time and there is a certain amount of salience to it. Once a deal is announced, customers, distributors, suppliers, employees all start doing internal calculations about what the future will hold for them with a combined company. Some will decide that the future won't include them and will leave -- customers won't place orders, employees may look for other employment, and distributors, well, if they're like Mr. Brundage, they may decide that the distributorship isn't very valuable anymore. That's the essence of the 'damaged goods' argument that sellers will use to negotiate for deal certainty and why they are so often focused on getting the deal done once it's announced. Can't blame them.
According to DelawareOnline, Strine was unanimously confirmed by the Delaware Senate yesterday to be the Chancellor of the Chancery Court replacing Chancellor Chandler who has retired and will join Wilson Sonsini. According to the DelawareOnline:
Strine ... is widely known in the legal community as an intelligent and talented jurist who can be both comical and combative in the courtroom.
Tuesday, June 21, 2011
Monday, June 20, 2011
The New Yorker has a very good piece running down the whole Galleon insider trading story. You read the whole thing home, but if you can't, read this. It's got everything in just a couple of paragraphs - wires, prepaid phones, and trading on your own account minutes after getting inside information...
In October, 2009, Rajaratnam and Kumar flew to Trinidad with their wives to attend a wedding. On their way home, they stopped in Miami to spend two days at Rajaratnam’s beachfront condominium. On the evening of October 6th, the men went out in Rajaratnam’s boat, then returned to shore and took a swim. They were lounging on deck chairs, reading and chatting, when Rajaratnam’s phone rang. Excusing himself, he walked down the beach to talk. Five minutes later, he came back, excited. “That was a Cisco executive,” he said. “Cisco is buying Starent”—an information-technology company. Kumar had never heard of Starent, and he wondered which Cisco executive was calling Rajaratnam.
Rajaratnam then gave Kumar a warning: a man named Ali Far, who had worked at Galleon, was rumored to be wearing a wire. “I have to be really careful,” Rajaratnam said. “I can’t believe he’s doing that and betraying me.” He instructed Kumar to start using unregistered prepaid cell phones for their calls. When they returned to the condominium, Kumar opened his laptop, went into his Charles Schwab brokerage account, and bought three hundred shares of Starent, worth about eight thousand dollars. The deal was announced a week later. It was Rajaratnam’s last known inside trade.
So late last week, the FTC granted early termination to Microsoft and Skype for their announced deal. Early termination of the HSR waiting period means that Microsoft and Skype can move towards closing that deal. Now, comes the news from Bloomberg that Skype has fired a number of executives prior to closing:
Skype Technologies SA, the Internet- calling service being bought by Microsoft Corp. (MSFT), is firing senior executives before the deal closes, a move that reduces the value of their payout, according to three people familiar with the matter.
The reasons for the letting go this group of 8 high level Skype execs prior to closing aren't known, but the Skype Journal blog reinforces what is hinted at in the Bloomberg report - that the firings were done in order to reduce the number of stock options that are vested at closing and thus raises the payout to venture investors.
Now, I have no way of knowing if increasing the payout for investors is in fact true or if the execs that were let go didn't get an equivalent cash payout on their way out the door. My guess is that they did, but I don't know. If on the other hand it's true, then it's pretty cheesy.
The prospect of getting a large cash payout from valuable options after an IPO or a when unvested options are automatically vested coincident with sale is a huge part of the incentive package that keeps talented people working at start-ups. If it's true, and I guess everyone in the Valley will know the truth soon enough, then it means that executives with unvested options will be spending more time than one might like ensuring their positions in the event of a sale rather than risk getting let go just before their big payout.
Friday, June 17, 2011
UK-based Acolyte was sold to 3M in 2007 for consideration that included up to £41m in earnout payments. Acolyte has been developing a diagnostic test for the MSRA superbug. Investors in Acolyte have recently brought suit against 3M for failing to live up to its obligations under the earnout agreement. From the FT:
Written arguments submitted to the High Court by the MoD and Porton state that the sale agreement included 3M making “earn-out payments” of up to £41m dependent on the net sales of Acolyte’s products achieved by 3M in 2009. However, no net sales were achieved in 2009 and no pay-out was made. 3M later made an offer of an earn-out payment of $1.07m.
The government and Porton claim that 3M’s marketing efforts in the UK and Europe “fell well short” of what was required by the sale agreement and that 3M never marketed BacLite at all in the US, Canada or Australia “despite an obvious hunger for the product in those countries ...
3M said in a statement on its website that it discontinued marketing BacLite because, after diligent efforts and spending substantial resources, the company believed the product did not meet performance and customer expectations.
(H/T: The Middle Market)
Thursday, June 16, 2011
The AALS Section on Transactional Law and Skills will hold its inaugural section meeting during the AALS Annual Meeting in Washington, D.C., on Saturday, January 7, 2012 from 3:30-5:15 pm. The topic for the session is “Transactional Law Teaching and Scholarship: Moving Forward.” The Section invites submissions of proposals relating to teaching or scholarship on any aspect of transactional lawyering. Please submit proposals of no longer than two double-spaced pages by August 15, 2011 to:
Eric J. Gouvin
Western New England University School of Law
1215 Wilbraham Road
Springfield MA 01119
Proposals will be reviewed by officers and executive committee members of the Section:
- Chair: Tina L. Stark, Emory University School of Law (through 6/30/11); Boston University School of Law (beginning 7/1/11)
- Chair-elect: Joan MacLeod Heminway, The University of Tennessee College of Law
- Secretary: Eric J. Gouvin, Western New England University School of Law
- Treasurer: Afra Afsharipour, University of California, Davis, School of Law
- Lyman P.Q. Johnson: Washington and Lee University School of Law and University of St. Thomas (Minneapolis) School of Law
- Therese H. Maynard: Loyola Law School Los Angeles
- D. Gordon Smith: Brigham Young University Law School
Please forward this Call for Proposals to any colleagues who may be interested.
Wednesday, June 15, 2011
David Marcus of The Deal discusses an important footnote in Vice Chancellor Strine's opinion in the recent Massey derivative litigation.
During oral argument, I pointed out that Strine referred to Massey shareholders as the least sympathetic victims in response to plaintiff's arguments that the board should be held accountable for the blatant violations of miner health and safety laws at the Upper Big Branch Mine. In the written opinion, Vice Chancellor Strine expands on that view in footnote 185. Given the immediate reaction from plaintiff's counsel to the opinion, it's worth reading and remembering who are the real victims and who benefited from the acts of management:
Footnote 185 The plaintiffs point out that one consequence of the loss of confidence the stock market had in Massey management in the wake of the Upper Big Branch Disaster was a decline in the company’s trading multiple. The plaintiffs argue, with a rational basis, that Massey now trades at a discount to its fundamental earnings potential in comparison to other industry competitors because those competitors are judged to have a more sound approach to operating a coal company in a durably safe and profitable manner than Massey does. PX-94 at 8.
But although this may in fact be a market reality, it seems to me doubtful that this translates into a basis for a future damage award in a derivative case. An entertainment restaurant corporation whose non-executive Chairman is Warren Buffett and whose CEO is Jimmy Buffett might well trade at a higher multiple than its competitors because the market perceives it to be run by financial geniuses who are better than most. Its rivals may trade at lower multiples because they have more ordinary management or even because some have management that is perceived to be poor in quality. Such deviations would not ordinarily provide the basis for any imposition of fiduciary liability.
In a derivative suit, there is no doubt that Massey fiduciaries could face large liability claims. For example, it is plausible for Massey to seek to hold managers culpable if their nonexculpated breaches of fiduciary duty proximately caused the Upper Big Branch Disaster. Such proof could subject them to hundreds of millions of dollars in liability for items such as lost mining profits and the cost of settlements and fines. PX-32 at 8; PX-94 at 14. But the notion that a derivative judgment could be premised on the delta between Massey’s trading multiple under the former fiduciaries and what it would be under non-breaching fiduciaries is not immediately plausible. There are numerous problems with such an adventurous approach, not the least of which is that the only damages that could be awarded would be based on an estimate of the extent to which the defendants’ non-exculpated breaches affected the multiple, not the extent to which the market’s overall assessment of their competence diminished the multiple. That is, to the extent that the market simply viewed the Massey management as grossly negligent or incompetent that would provide no basis for an award, and it would be incredibly difficult to figure out what portion of the delta was attributable to what factors. Not only that, to the extent that the delta was attributable to other more traditional subjects of a damages award, such as lost profits from the Upper Big Branch mine or fines or settlement costs, that would have to be accounted for in order to avoid double counting. Given these factors, I am not convinced that an award of this type could be based on anything other than speculation.
This brings up another mundane, but important reality. The stockholders of Massey had an annual opportunity to elect directors. If the plaintiffs’ rendition is correct — and it has plausibility — it was publicly and widely known that Massey took an adversarial approach to its relation to its regulators and had suffered adverse legal judgments and excessive miner injuries for years. The plaintiffs, as investors, continued to invest in a company they say was well known to treat its workers and the environment poorly and that viewed laws as something to avoid, rather than to comply with in good faith.
The primary protection for stockholders against incompetent management is selecting new directors. It may well be that the corporate law does not make stockholders whole in situations like this when it is alleged that corporate managers skirted laws protecting other constituencies in order to generate higher profits for the stockholders. If that be so, it should be no surprise as any human approach to justice will always fall short of the ideal. It also may be that if stockholders come out a bit worse, then justice is in fact done. Remember that to the extent that Massey kept costs lower and exposed miners and the environment to excess dangers, Massey’s stockholders enjoyed the short-term benefits in the form of higher profits. The very reason for laws protecting other constituencies is that those who own businesses stand to gain more if they can keep the operation’s profits and externalize the costs. Thus, the stockholders of corporations, especially given the short-term nature of holding periods that now predominate in our markets, have poor incentives to monitor corporate compliance with laws protecting society as a whole and may well put strong pressures on corporate management to produce immediate profits. William W. Bratton, Enron and the Dark Side of Shareholder Value, 76 TUL. L. REV. 275, 1284 (2002) (“For equity investors in recent years, the practice of shareholder value maximization has not meant patient investment. Instead, it has meant obsession with short-term performance numbers.”). Stockholder pressure to produce profits might increase the already well-known risk that profit-seeking entities have incentives to take the profits of their operations for themselves and externalize the risk of operations to others, be it to their workers or society as a whole in the form of environmental degradation.
This is not to say that our law does not permit Massey to recoup its proven lost profits and injury if it can link them to non-exculpated breaches of fiduciary duty by its directors and officers. It does. Wood v. Baum, 953 A.2d 136, 141 (Del. 2008) (citing Stone ex rel. AmSouth Bancorporation v. Ritter, 911 A.2d 362, 367 (Del. 2006); Malpiede v. Townson, 780 A.2d 1075 (Del. 2001); Guttman v. Huang, 823 A.2d 492, 501 (Del. Ch. 2003)). But it is to say that to the extent that there is some residual damage to the corporation in a situation like this when the pursuit of profit for stockholders resulted in damage to other constituencies that is not capable of remediation, that might be thought to act as a useful goad to stockholders to give more weight to legal compliance and risk management in making investment decisions and in monitoring corporate performance. In the end, the most sympathetic victims here were not stockholders, they were Massey’s workers and their families, who suffered injuries and lost lives and loved ones, and the communities who have suffered because of environmental degradation due to of the company’s failure to meet its legal responsibilities.
Don't cry for the shareholders. Here are the real victims.
Tuesday, June 14, 2011
As Gordon Smith announced yesterday, under the leadership of Tina Stark, who will be heading the Transactional Law Program at Boston University, an ad hoc committee of transactional lawyering professors proposed a new section on transactional law and skills to the Association of American Law Schools. The AALS has approved the new section, and we will have our first section meeting at the annual meeting in Washington D.C. on Saturday, January 7, 2012 from 3:30-5:15 pm.
Chair: Tina L. Stark, Boston University School of Law
Chair-elect: Joan MacLeod Heminway, The University of Tennessee College of Law
Secretary: Eric J. Gouvin, Western New England University School of Law
Treasurer: Afra Afsharipour, University of California, Davis, School of Law
Lyman P.Q. Johnson: Washington and Lee University School of Law
Therese H. Maynard: Loyola Law School Los Angeles
D. Gordon Smith: Brigham Young University Law School
More information about the annual meeting program will be forthcoming soon.
I think that the formation of this new section offers exciting opportunities for those of us who study transactional lawyering.
Wendy's announced the sale of 80% of its Arbys division yesterday for $180 million plus the assumption of $190 million in debt. Here's the Purchase and Sale Agreement. The transaction isn't structured as a merger, rather it's a stock purchase. Wendy’s/Arby’s Restaurants, LLC owns 100% of the shares of Arby’s Restaurant Group, Inc. It will sell 80% of those shares to Roark, a private equity buyer that is active in the restaurant space.
A couple of things about the agreement. First, there's a carve out for the Arby's Santa Monica location (pictured below). It's must be a good location, because Wendy's doesn't want to let it go:
Another thing worth keeping in mind - this is a division sale. It's not a cash-out sale where Revlon duties apply. That's probably one reason why there is no fiduciary termination right in the sale agreement. Presumably, one could make Omnicare-like arguments that directors are required to include effective fiduciary outs in material corporate transactions, but there is a gray area -- where is the line between a merger or sale that doesn't implicate Revlon and where an effective fiduciary out is required and a division sale where one expects boards to receive the deference of business judgement? It's there somewhere, but where exactly?
Now, Wendy's didn't sell off all of Arbys. It hung onto 20%. Over at the Deal Journal, they call this move "schmuck insurance". Well, it worked for eBay.
Thursday, June 9, 2011
For insights into the challenges faced by the Delaware Chancery Court and how soon to be Chancellor Strine will approach them, you should read One Fundamental Corporate Governance QuestionWe Face: Can Corporations Be Managed for theLong Term Unless Their Powerful ElectoratesAlso Act and Think Long Term?. This paper appear in the November 2010 Business Lawyer. It's reasonably short, but all the footnotes make it look longer. It's definitely worth reading if you haven't already.
He asks a lot of tough questions and isn't shy about making his opinions known. Sometimes, the problem isn't the law. It's us. For example:
Although the focus of the institutional investor community over the last twenty five years on issues like takeover defense and encouraging executive compensationtied to stock price performance is understandable, what is less edifying is the absence of any similar weight given to issues that many end-user investors care more about, such as whether corporations are endangering their solvency by excessively leveraging themselves or skirting the law through financial gimmicks to improve the optics of the company’s balance sheet.
Even after the market debacle involving WorldCom and Enron, the institutional investor community remained preoccupied with issues like takeovers and executive compensation. And before the more recent market crash, important segments of the institutional investor community were demanding to know why more public companies could not operate with the high degree of leverage employed by those owned by private equity firms.
The potency of the institutional investor community is easy to see. When they want something, they tend to get it. Institutional investors demanded and largely got changes to CEO compensation so that it was primarily based on components—such as options—that were tied to raising the corporation’s stockprice. Institutional investors wanted a reduction in takeover defenses and have been highly successful in achieving that objective. In the wake of Delaware’s passage of a so-called majority voting statute in 2006, over 70 percent of the largest public companies have adopted that approach in response to stockholder demands. In response to investor sentiment, corporations levered up, took more risks, and engaged in huge stock buyback programs.
It's going to interesting.
Gov. Markell has nominated Vice Chancellor Leo Strine to replace retiring Chancellor Chandler in the Chancery Court. Here's the press release from the governor's office. With Strine moving to the Chancellor's position, that leaves a vacant Vice Chancellor's slot. Gov. Markell has nominated Sam Glasscock, now a special master on the Chancery Court to fill that slot.