Monday, October 31, 2011
Delaware Chancellor Leo Strine on music, reading, and the value of hillbilly handfishin.
Carney and Shepard have a new paper, Lawyers, Ignorance, and the Dominance of Delaware Corporate Law, which seems intuitively correct. One reason why Delaware has been able to maitain its preeminent position with respect to the corporate law is that it's the only law most lawyers who take companies public know. That seems right and suggests that Delaware's lead is as much - or more - a result of status quo bias as it is the underlying quality of the law.
Abstract: Why does Delaware continue to dominate the market for incorporations even though recent research has shown that the quality of Delaware corporate law has declined substantially? We focus on the rational ignorance of lawyers and investors. Using the results of our survey of lawyers involved in initial public offerings (IPOs) as well as our analysis of companies involved in IPOs, we conclude that lawyers recommend Delaware because they are ignorant about other states’ law. Because Delaware is so dominant, law schools focus on Delaware corporate law, and a lawyer rationally learns the corporate law only of Delaware and her home state. Regardless of the quality of the law of other states, lawyers will not recommend it because they are unfamiliar with it. Likewise, lawyers recommend only Delaware law because they believe that investors are ignorant of other states’ law.
Friday, October 28, 2011
Antitrust regulators in the U.S. and the European Union have long cooperated on antitrust matters (see the Antitrust & Competition Policy Blog for excerpts from several recent speeches on Transatlantic cooperation, here and here). Recently, regulators issued an updated set of best practices for coordinating merger review. According to the press release:
"The best practices, originally issued in 2002, provide an advisory framework for interagency cooperation when one of the U.S. agencies and the European Commission’s Competition Directorate review the same merger. The revised U.S.-E.U. best practices:
- Provide more guidance to firms about how to work with the agencies to coordinate and facilitate the reviews of their proposed transactions;
- Recognize that transactions that authorities in the U.S. and Europe review may also be subject to antitrust review in other countries; and
- Place greater emphasis on coordination among the agencies at key stages of their investigations, including the final stage in which agencies consider potential remedies to preserve competition."
For those interested in a summary of the revised best practices, Davis Polk has a useful memorandum setting out the key points.
Thursday, October 27, 2011
Apparently a group of creditors sent a letter to the Eastman Kodak board to remind them that they are required to get "fair value" for any assets they might sell, including the Kodak patent portfolio. In a sale of substantially all the assets of a firm its necessary for a board to ensure that it receives "reasonably equivalent value" for the assets sold. This is, in part, to prevent sellers from using the asset sale as a fraudulent conveyance. The fear from creditors of Kodak is that Kodak might sell its patent portfolio and then file for bankruptcy protection, leaving creditors to take a hit. The creditors are looking to put maximum pressure on Kodak's board before a sale to try to incentivize the Kodak board to get the highest price possible for those assets.
Hear that? That's the sound of the second bird flying away from the bush. The Delaware courts love the "bird in the hand" cliche. In this case, after a year of back and forth and fights between/among Dollar, Avis, and Hertz, it looks like a transaction with Dollar is just not going to happen. Dollar signalled as much earlier this month when it halted the sales process and announced a share buyback plan (here).
Wednesday, October 26, 2011
Raj Gupta was arrested early this morning at his home by FBI agents and has been charged with insider trading as part of the Galleon investigation. He posted $10 million in bail and was released this afternoon. Here's the criminal complaint.
I was cleaning off my desktop and came across an interesting letter opinion in which the Chancery Court deals with the question of selecting a lead plaintiff (SEPTA v Rubin et al). Selecting a lead plaintiff and the problem of multi-jurisdiction litigation in the context of transaction-related litigation is a recent interest of mine. While this can be difficult problem when there is multiple litigation in different jurisdictions, it's less complicated with respect to litigation within a single jurisdiction.
Delaware has long not followed the old "first to file" rule in determining the identity of lead plaintiffs. Rather, it has a two step approach. First, the courts encourage plaintiffs to organize themselves and work it out internally. That's a pretty successful approach. When it fails, however the court has to make a determination as to which of the competing plaintiffs should be the lead plaintiff. The court does does by applying the so-called "Hirt factors":
- the quality of the pleading that appears best able to represent the interests of the shareholder class and derivative plaintiffs;
- the relative economic stakes of the competing litigants in the outcome of the lawsuit (to be accorded great weight);
- the willingness and ability of all the contestants to litigate vigorously on behalf of an entire class of shareholders;
- the absence of any conflict between larger, often institutional, stockholders and smaller stockholders;
- the enthusiasm or vigor with which the various contestants have prosecuted the lawsuit; [and]
- the competence of counsel and their access to the resources necessary to prosecute the claims at issue.
Rather than encourage a race to courthouse, the Hirt factors are intended to create incentives for parties to bring quality claims and to weed out low quality, knee-jerk claims that appear in the wake of many deal announcements.
Tuesday, October 25, 2011
Reuters is reporting that the Delaware Coalition for Open Government has sued the Chancery Court in the federal district court in Delaware for holding "secret hearings." The secret hearings they are worried about are confidential arbitration hearings held pursuant to Delaware's recently adopted arbitration rules. The basic outlines of the Open Government Coalition's argument are that arbitration is okay, but that if it is going to be conducted by sitting chancellors of the Chancery Court, then it must be open to the public. I'll post the complaint when it's available.
Update: Here's the Complaint (Delaware Coalition for Open Govt v. Leo Strine, et al). The essence of the complaint against all the chancellors and the State of Delaware goes as follows:
Pursuant to the First Amendment to the Constitution of the United States (ratified by Delaware on December 7, 1787), the public has a presumptive right of access to judicial proceedings and records, civil and criminal. This right of access is considered to be a right of contemporaneous access, meaning that the public has the right to attend judicial proceedings (as opposed to merely reviewing a transcript at a later time) and to review documents as they are filed with the Court or introduced into evidence.
10 Del. C. §349 and Chancery Court Rules 96, 97 and 98 deny plaintiffs, and the general public, their right of access to judicial proceedings and records. Although the statute and rules call the procedure “arbitration,” it is really litigation under another name. Although procedure may vary slightly, the parties still examine witnesses before and present evidence to the Arbitrator (a sitting judge), who makes findings of fact, interprets the applicable law and applies the law to the facts, and then awards relief which may be enforced as any other court judgment. The only difference is that now these procedures and rulings occur behind closed doors instead of in open court.
Because arbitration proceedings are conducted by judges, presumably in the courthouse, the Open Government Coalition is arguing that they must be public proceedings, notwithstanding the prior agreement of the parties to engage in a confidential arbitration proceeding.
Monday, October 24, 2011
OK, so the votes are in, and it's not pretty. First things first, the board was voted in. Is that any surprise? Of course it isn't. Here's the real surprise: James and Lachlan Murdoch received only 63.5% and 64.6% respectively. Natalie Bancroft received only 64.8%. On the other hand, Rupert Murdoch got a rousing 82.3% votes in favor. Remember, though the Murdochs control 40% of the vote right out of the box, so 60% isn't a rousing vote of confidence from unaffiliated shareholders.
On the question of splitting the Chairman from the CEO role - a common enough corporate governance reform, a surprising 99.7% of shareholders voted against it. While the say-on-pay vote passed with a substantial majority, shareholders decided that they'd like to keep News Corp on a short leash - 96% approved of holding annual, rather than bi- or tri-annual say-on-pay votes.
And that's it from the News Corp shareholder meeting.
Here's the 8-K with the breakdown of the numbers.
Sunday, October 23, 2011
If you haven't already, you should find the time to listen to at least part of the recent News Corp shareholder meeting. You can access the webcast here. I had a couple of impressions while listening to it. First, the number of people who actually ask questions at News Corp meetings is very small - in fact less than a dozen. Second, most of those who asked questions were well known to the board. Indeed, from the back and forth it seems clear that News Corp engages with the questioners outside of the annual meeting.
Third, Murdoch can be a rude character. When a representative of the Church of England stood up to speak in support of the proposal to split the Chairman/CEO positions - by now this is a pretty common corporate governance reform proposal - Murdoch immediately insults the questioner. Interrupting him to say, "You're investments haven't been that good, either." The questioner is a bit taken aback - wait, did he just insult me? - and then Murdoch tells him to let it go and get on with his question. It's pretty incredible how little Murdoch is interested in hearing from the shareholders who are present at the meeting. Or, how little interest he seems to have in being responsive to their concerns -- except when the animal rights activist stands to complain about Australia's live animal export policies. Then Murdoch commits to looking into it and doing something about it. (I can't imagine that's true, given the importance of the export of live sheep to the Islamic world is to Australian farmers.)
In any event, it's clear from the webcast that Murdoch is particularly uninterested in hearing from Tom Watson, the member of Parliament who has been heading up the investigation of the phone hacking scandal in the UK. He turned up at the meeting asked questions intended to either embarrass or at least put Murdoch on the spot. Now that he wasn't before the Parliament and he (Murdoch) was running the meeting, Murdoch wasn't all that interested in hearing from Watson, either. I'd venture a guess that Murdoch is a supporter of Prof. Sjostrom's and Prof. Hammermesh's proposals to reduce the number of annual shareholder meetings.
Finally, I was also struck by the presence of religiously-affiliated shareholder representatives at the meeting. Not that they were there, but that there were so many of them.
Anyway, the summaries of the meeting don't do the meeting justice. You should listen to some of it. I'll post the transacript when it becomes available. In the meantime, just to give you more flavor of the meeting there were two exchanges with shareholders that stick out.
In one exchange, a shareholder questioned how Viet Dinh could be an independent director given that he is the godfather of Lachlan Murdoch's son. In response to this challenge, Prof. Dinh emotionally defended his integrity - making it clear that he was behold to no one. I imagine that if the questioner was standing within arm's length of Prof Dinh that Prof Dinh might have been less restrained in his response to the challenge to his independence.
In another exchange, a shareholder complained about the use of share buybacks to entrench Murdoch control over the corporation. I got a sense that Murdoch was willing to benignly ignore this question with a "thanks for your comment, next question," but Sir Rod Eddington, a director, interjected. Something along the lines - I'll have you know we've done $1.8 billion in share buybacks and we haven't purchased a single Class B share! Apparently, he misunderstood the question - or he misunderstands how share repurchases can be used as defensive/entrenchment devices. If everyone other than Murdoch (Class B shares) is selling their shares back to the corporation, that raises Murdoch's control share. Anyway...
Thursday, October 20, 2011
Apparently the various groups of potential bidders (strategics and private equity) for Yahoo! are balking at signing the NDA Yahoo! has offered up to them. According to Reuters, what's causing the consternation is the "no cross-talk" provision that permits potential bidders from engaging with other potential bidders about possibly putting together a collective bid. At $20 billion market cap, the thought is that none of the present potential bidders (save perhaps Microsoft) can pull off the deal on their own and that if a deal is to be done, the bidders will have to get together in some sort of consortium. Of course, from Yahoo's perspective, the more bidders it has out there preparing bids, the better. At some point, however, the board might decide that there is a risk that potential bidders will start walking away. At that point, I expect the board will re-evaluate its decision not to permit cross-talking. Meanwhile, off in the corner, AOL is apparently telling anyone who might listen that it would be happy to be part of a deal or almost any kind with Yahoo.
Wednesday, October 19, 2011
Who's Who Legal has a nice interview with Chief Justice Myron Steele of the Delaware Supreme Court. It's a pretty wide-ranging interview and worth a couple of minutes. Here's a sample:
How has corporate litigation and governance changed since you began practising over 40 years ago?
It’s a significant question, because I think it has changed more since 2002 than in any other decade. We did have a significant decade in the '80s when the takeover business hit its full stride and there was much intellectual debate and litigation that shaped the process for the acquisition business in publicly traded corporations. That was a significant decade. Fiduciary duty law began to be shaped by facts in individual cases to a sharper and more nuanced degree than ever before. Now, this decade has been a phenomenon of a different balance between the authority the board and the board’s accountability to the shareholders. Some people characterise it as the shareholder rights movement, the rise of the importance of the institutional investor as opposed to the individual investor. By institutional investor, I really mean the activist investor – often union pension funds, public employee pension funds, etc. So the debate of the last five to 10 years over perhaps reshaping the relationships between shareholders and the authority of the board is a very significant focus of keeping the right balance between the groups in order to improve performance. Too often, I think the arguments could be phrased as: "We want power," almost as if we should have it as a matter of right, when I think the focus should be: "How do we make adjustments that promote performance that result in not only a better investment for individual or institutional shareholders in a company but that strengthens the market overall?" The focus is not on who can shout the loudest or who has the right answer, but on working to get better performance. Society benefits from the wealth that the corporate world brings to the community.
Oh, and apparently it's no longer a secret: he'll be stepping down when his term expires in 2016.
Tuesday, October 18, 2011
There are a couple of good rundowns of the In re Southern Peru/Grupo Mexico decision out there worth reading. This case has been working its way through the Delaware courts since 2004. That's a long time in coming, but not unusual for cases where parties are not seeking an injunction, but rather a damages remedy. The Sourthern Peru opinion is worth taking a look at because Chancellor Strine issued a $1.2 billion (billion, not million) judgment against the controlling shareholder. Richards Layton & Finger have posted a useful summary of the issues as well as the opinion here. Steven Davidoff at The Deal Professor has a very good summary of the issues at stake in the case as well. You can find it here.
Me? I'm still working my way through the 106 page opinion.
It looks like the Galleon investigations and trials are wrapping up. Raj Rajaratnam was sentenced last week to 11 years. Danielle Chiesi just started her 30 month sentance at "Camp Cupcake". Octopussy got 10 years, and his fellow small fish (Cutillo, Goldfarb, etc) got prison terms ranging from 2.5 to 3 years. The prosecutors wanted to send a message about insider trading and it's fair to say that ... well ... message sent. With the help of data collected by the WSJ, I generated the sentencing chart below:
It seems pretty clear that the sentences generated in the Galleon cases while not outrageous, are stiffer than the norm since 1992. It's worth noting the other 10 year insider trading sentence handed out went to Hasif Naseem who orchestrated a ring with friends overseas to trade ahead of pending merger announcements in the following transactions: TXU Corp., Hydril Company, Trammell Crow Co., John Harland Col, Energy Partners Ltd., Veritas DGC Inc., Jacuzzi Brands, Caremark Rx, Inc., and Northwestern Corporation. So, the Rajaratnam sentence, though heavy, may not be entirely at odds with sentences handed out in similar cases in recent years.
Schneider and Spalt post a paper, Acquisitions as Lotteries: Do Managerial Gambling Attitudes Influence Takeover Decisions? The paper suggests that acquisitive CEOs might share some attributes with gamblers playing with other people's money.
Abstract: This paper analyzes takeover announcements for public US targets from 1987 to 2008. Consistent with the hypothesis that gambling attitudes matter for takeover decisions, both acquiror announcement returns and expected synergies are lower in acquisitions where the target's stock has characteristics similar to those of attractive gambles. Offer price premium and target announcement returns are higher in these deals. The effects are stronger in companies where managers are more entrenched, where the disciplining force of product market competition is lower, where recent acquiror performance has been poor, during economic downturns, for younger CEOs in the acquiring firm, and for acquirors headquartered in areas in which local gambling propensity is higher. Targets with lottery features are more likely to receive takeover bids and direct evidence from synergy disclosure data shows that the market reacts less favorably to higher synergy forecasts if they are issued in the context of a lottery acquisition. Overall, our results suggest that corporate acquisitions are influenced by managerial gambling attitudes and that value destruction for acquirors in gambling-related transactions is substantial.
Wednesday, October 12, 2011
Here's a tidbit from the ongoing Skyworks/AATI arbitration:
A preliminary hearing was held before Chancellor Leo Strine of the Delaware Court of Chancery on October 7, 2011 on the petitions for arbitration filed on September 26, 2011 by Skyworks Solutions, Inc., a Delaware corporation, against Advanced Analogic Technologies Incorporated and the petition for arbitration filed on September 23, 2011 by AATI against Skyworks in the Delaware Court of Chancery in connection with the parties' May 26, 2011 Merger Agreement. At the preliminary hearing, Chancellor Strine ordered the two petitions consolidated for all purposes of the arbitration proceedings, and ordered that the arbitration hearing take place on November 28, 29 and 30 and, if additional time is needed, one or more days during the week of December 5.
OK, that's ten weeks from filing to hearing. Although the results will be confidential, both parties have obligations to file something under the securities rules, so we'll presumably be able to find out the outcome of the arbitration hearing. What won't happen is that the result of the hearing will not become part of the Delaware common law. So, if for example the court were to find that there was a MAC, no one else can rely on the decision, or its reasoning, to plan transactions or counsel clients about how future courts might decide.
Monday, October 10, 2011
According to Reuters, Innkeepers and Cerberus are now in settlement talks:
Innkeepers USA Trust is in talks to resolve litigation over the collapse of a planned $1.12 billion asset sale to Cerberus Capital Management Chatham Lodging Trust .
Innkeepers Chief Restructuring Officer Marc Beilinson said in a statement that the two sides were negotiating on Monday, but no agreement had been reached.
You'll remember that Cerberus tried to get Innkeepers to renegotiate its transaction before calling a MAC. Although Cerberus' MAC claim seemed weak, the strategy seems to nevertheless have worked. Presumably settlement negotiations will lead to a repricing of the transaction before it goes forward.
A source close to the talks told Reuters discussions began over the weekend and that the sides had exchanged proposals and were far along in the process. The deal would feature a reduction in the purchase price, said this person, who spoke anonymously on details of a possible settlement because the talks are private.
Sunday, October 9, 2011
File this under shameless self-promotion. It looks like this blog has been nominated to the Top 25 Business Law Blogs of 2011. If you have the time and inclination, drop by the LexisNexis site and comment/vote on the M&A Law Prof Blog. Each comment is counted as a vote for the blog - here's the link.
Thanks to all for reading and supporting this blog.