Wednesday, November 30, 2011
Over the past week, AT&T withdrew its application to the FCC for approval of the T-Mobile transaction, calling into question the prospects that this transaction will go forward. (It won't without FCC approval.) In any event, the FCC report analyzing the public benefits associated with this proposed transaction has since been released. What did the FCC conclude in its draft report on the transaction? Well, that there wasn't much public benefit to be had by doing the transaction:
If AT&T ultimately terminates the merger agreement because of the inability to get government approvals that will trigger the $4 billion reverse termination fee under the merger agreement. AT&T has already started laying the groundwork to do just that.
Monday, November 28, 2011
Kevin La Croix has a very good post on the rise of transaction related litigation. The rise of transaction related litigation is really incredible:
Reported data (refer for example here and here) show that as recently as ten years ago, there were only a handful of M&A related lawsuits filed each year. For example, in 2001, there were only four M&A related lawsuits filed, compared to the 341 filed in 2010 (up from “only” 191 the year prior). Just in the four- year period ending in 2010, the annual number of merger-related lawsuit filings has increased over 600%.
These numbers are even more startling when it is considered that these lawsuit filings are increasing even as the number of merger transactions is declining. The number of merger targeted companies declined in each of the three years from 2008 to 2010, yet the absolute number of merger-related lawsuits increased in each of those three years relative to the prior year. In 2010, there were 214 fewer companies targeted for mergers than there were in 2007, representing a decline of over 37%. Yet the number of merger-related lawsuits filed in 2010 was more than triple the number filed in 2007. Today, one out of every two companies announcing an acquisition is sued, and that is true whether or not the acquisition is friendly or hostile, and even whether or not the board of the target company has accepted or rejected the proposed acquisition.
The reason? La Croix puts the blame on the lawyers:
And in the M&A related litigation, the plaintiffs’ attorneys seem to have found relatively easy money, as these cases often involve a quick resolution (due to the fact that the parties are often highly motivated to complete the underlying transaction) and the payment of plaintiffs’ attorneys’ fees, which average around $400,000 per case. These attributes of M&A related litigation were discussed in an August 27, 2011 Wall Street Journal article, written from the shareholders’ perspective, entitled “Why Merger Lawsuits Don’t Pay” (here) and in a July 12, 2011 Fox Business article entitled “M&A Lawsuits Skyrocket as Fee-Hungry Law Firms Smell Easy Money” (here).
The surest sign that M&A-related litigation represents an attractive proposition for the plaintiffs’ lawyers is the level of lawsuit competition merger transactions increasingly are engendering. Increasingly, the announcement of a merger can trigger multiple separate lawsuits filed by separate plaintiffs’ firms in multiple separate jurisdictions, producing complicated procedural and jurisdictional issues (refer for example here and here) and also adding dramatically to the cost of litigation.
This is an issue that is increasingly troublesome. If every transaction is accompanied by a transaction tax in the form of litigation - put aside all the jurisdictional issues associated with multi-forum litigation - litigation may begin to lose its potency as a constraining device.
Update: David Marcus at The Deal adds his thoughts to this topic:
In 1999, shareholders filed suit on only 12% of deals, according to William Savitt, a litigation partner at Wachtell, Lipton, Rosen & Katz, who helped organize the [Columbia Law School] conference and presented a paper on shareholder litigation. By 2010, the figure was up to 85%. In the 1990s, only large deals or those involving an obvious potential conflict drew litigation, but now there are shareholder suits on mergers worth less than $100 million and on those in which the target has been fully shopped by an independent board that strikes an arms' length agreement with a third party.
Thursday, November 24, 2011
Wednesday, November 23, 2011
More turkey time reading! Ahern and Sosyura have an interesting finance, Who Writes the News? Corporate Press Releases During Merger Negotiations, examing strategies acquires might be using to run up stock prices in the short term before announcement of an acquisition. It's an interesting issue.
Abstract: Firms have an incentive to manage media coverage to influence the outcome of important corporate events. We investigate this hypothesis by studying corporate press releases during mergers. Using comprehensive data on media coverage and novel data on merger negotiations, we find that bidders in stock mergers originate substantially more news stories after the start of merger negotiations, but before the public announcement. This strategy generates a short-lived run-up in bidders’ stock prices during the period when the stock exchange ratio is determined. The run-up and reversal in media coverage and stock prices cannot be explained by merger rumors, passive media management, or opportunistic merger timing. Overall, we present the first evidence on active media management in M&A.
Tuesday, November 22, 2011
Our friends at Fordham Law have asked for some help in reaching out to our readers. If you are in NYC and can find time to participate, these are great experiences for students. See below:
Each spring, Fordham University School of Law hosts the Irving R. Kaufman Memorial Securities Law Moot Court Competition. Held in honor of Chief Judge Kaufman, a Fordham Alumnus who served on the United States Court of Appeals for the Second Circuit, the Kaufman Competition has a rich tradition of bringing together complex securities law issues, talented student advocates, and top legal minds.
The year’s Kaufman Competition will take place on March 23, 2012 to March 25, 2012.
Our esteemed final round panel includes Judge Paul J. Kelly, Jr., of the Tenth Circuit; Chief Judge Alex Kozinski, of the Ninth Circuit; Judge Boyce F. Martin, Jr., of the Sixth Circuit; Judge Richard A. Posner, of the Seventh Circuit; Judge Jane Richards Roth, of the Third Circuit; and Commissioner Troy A. Paredes, of the United States Securities and Exchange Commission.
We are currently soliciting practitioners and academics to judge oral argument rounds and grade competition briefs. No securities law experience is required to participate and CLE credit is available.
Information about the Kaufman Competition and an online Judge Registration Form is available on our website, www.law.fordham.edu/kaufman. Please contact Michael A. Kitson, Kaufman Editor, at KaufmanMC@law.fordham.edu or (212) 636-6882 with any questions.
Happy Thanksgiving! Go eat some turkey.
Monday, November 21, 2011
Yesterday’s New York Times carried another in a long line of articles (which go back at least to the 1980’s) complaining that law schools emphasize the theoretical over the useful and, as a result, don’t teach law students how to be lawyers. As is typical, the author concludes that law schools need to increase their emphasis on skills training.
The article starts off with (and seems to rest on) an example that is pretty lame. Apparently, three first year associates at Drinker Biddle didn’t know that you file a certificate of merger with the secretary of state to effectuate a merger.
Let’s assume for arguments sake that this lack of knowledge is representative of the typical law school graduate going into a transactional practice. So what?
As I have discussed before, law schools have a comparative advantage of teaching certain competencies; law firms have a comparative advantage of teaching others. Each should do what they do best.
Among other things, law schools have a comparative advantage over law firms in teaching deep substantive knowledge of complex subjects necessary to practice law. For example, law firms simply cannot teach securities law the way a law school can (if at all). A thorough understanding of complex material like this requires voluminous outside readings and in-class lectures for a concentrated period of time.
On the other hand, you know what law firms can teach pretty quickly? How to call an outside service to file a certificate of merger.
Of course law schools also may have a comparative advantage in teaching certain practical skills. I’m all for courses in contract drafting and negotiation, and I teach a transactional skills course myself. But the issue is a little more complex than the NYT article suggests.
For more of my thoughts on this perennial topic, see What Law Schools Should Teach Future Transactional Lawyers: Perspectives from Practice.
Validus' efforts to acquire Transatlantic Holdings have taken another turn. When we last checked in on this hostile acquisition attempt, we found out that Chancellor Strine is a fan of Hillbilly Handfishin'. Oh, and the Chancellor also ruled on the appropriateness of standstill provisions in confidentiality provisions, deal protections and fiduciary outs (In re Transatlantic Holdings). It's worth reading.
Now, we have a new turn. Validus has put forward its own directors in a proxy contest. In addition to asking shareholder to vote for its three nominees adn to oust the current directors, Validus is asking for shareholders to vote on an amendment to Transatlantic's bylaws. The bylaw change would permit the shareholders to set the number of directors on the board. By doing so, it would prohibit the incumbent board from increasing the size of the board and thereby maintain control. OK, all well and good.
But, Transatlantic has filed a suit against Validus seeking a declatory ruling from the court that Validus' proposed bylaw amendment is illegal. Specifically, Transatlantic's certificate of incorporation reads:
Article Fifth, para 1: The number of directors of the Corporation shall be such as from time to time shall be fixed solely by the Board of Directors.
The Transatlantic board is arguing that only the board has the right to set the size of the board, and that an effort by shareholders to set the number of directors is contrary to the articles and thus not permisssible. In that regard, the directors have the better argument. Of course, if the incumbent board were simply to increase its size for the sole purpose of thwarting outsiders from obtaining control via a proxy contest, that would raise all sorts of Blasius-related issues. For that reason, this case is an interesting one to start to follow. Here's the complaint in the bylaw litigation.
Sunday, November 20, 2011
Thursday, November 17, 2011
In early October, Chief Justice Myron Steele participated in a session in Canada about shareholder rights plans in the US and Canada. The International Law Office has posted summaries of the panel discussion. Steele's comments are interesting:
The chief justice suggested that the view that Delaware law allows a board of directors to 'just say no' to a hostile offer has been overstated. In the context of appropriate findings of fact that a poison pill is no longer reasonable or that there is no sufficiently articulated long-term strategy that requires protection, he suggested that a case could be made for a mandatory injunction removing a poison pill under Delaware law.
When Gilson and Kraakman wrote their paper, Delaware's Intermediate Standard for Defensive Tactics: Is There Substance to Proportionality Review?, they recommended that the court adopt a stance that would inject substance into proportionality review by requiring boards who wished to adopt and maintain defensive measures against an unwanted, but otherwise noncoercive offer, to articulate a long term strategy that they would have to live with. Could it be that Steele is open to a Gilson/Kraakman like approach to proportionality review? That might breathe new life into Unocal.
But those weren't the only comments made by Steele:
Steele noted that the analysis is determined primarily by the facts found in each decision. Findings of fact made by the Court of Chancery are accepted on review by the Delaware Supreme Court unless they are clearly erroneous. Steele suggested that, with appropriate findings of fact, a pill could be removed under Delaware law. ...
Steele noted that there was a tension between the view, on the one hand, that the board should have power to defeat an inadequate hostile offer and the view, on the other hand, that, once the board has discharged its duty to make clear to shareholders its view of the long-term value of the corporation and there is no likelihood that the poison pill could be used to generate an alternative offer, it should be the shareholders' responsibility to decide whether to accept the board's view of the corporation's value or accept the bidder's offer. Chandler's opinion appeared to show some sympathy for the latter position. However, he described his analysis as "constrained by Delaware Supreme Court precedent".
Steele took issue with the view that the Chancery is constrained in its ability to remove a pill in the appropriate circumstances. He suggested that if the chancellor had found facts that were inconsistent with it being reasonable to keep the pill in place, an injunction against maintaining the pill could be issued under Delaware law. Where there is a battle of valuations, rather than the defence of a long-term strategy, a case can be made for removing the pill and letting the shareholders decide.
OK, so if the question is one about the adequacy of a noncoercive offer, is Steele suggesting that a board could be ordered to pull its pill? That an inadequate offer on its own is not a cognizable threat? Personally, I tend to agree and would be happy with that result. But, I'd be surprised if the Supreme Court was already there intellectually and simply waiting for the Chancery Court to hand up an opinion for appellate review. Could it be that Chandler in Air Products just got it wrong?
Wednesday, November 16, 2011
Monday, November 14, 2011
What would you do if Fed Chairman Ben Bernanke and Treasury Secretary Hank Paulson gave you a confidential briefing on the day before the 2008 financial crisis - a briefing in which they said everything was going to hell? Well, if you are Rep. Spencer Bachus (R-AL) the anwer is clear - you rush out and buy Proshares Ultra-Short QQQ the next day.
I suppose insider trading is illegal unless you are congressman. Unfortunately, this isn't even a new story! See papers from Donna Nagy and Stephen Bainbridge on congressional insider trading. Moving on.
Sunday, November 13, 2011
Delawareonline has a very thorough rundown of the proceedings of the Chancery Court Conference at Columbia:
[O]n Friday, Columbia Law Professor John C. Coffee Jr. declared what he hoped was an armistice with Delaware -- on Veterans Day -- by hosting what amounted to a day-long celebration of the Delaware Court of Chancery's prestige and pre-eminence in corporation law, titled "Change and Continuity."
He said the debate about the value of Delaware's court is "dated" and largely over.
On one of the more controversial panels, professor Bernard S. Black of Northwestern School of Law said his analysis shows that Delaware's dominance might be fading. He said the state is starting to "lose cases" to federal courts and other states that have formed business courts, such as Nevada.
He conceded that the number of cases filed in Delaware's Chancery Court remains high and that some cases filed outside Delaware may be "junk," but argued "Delaware's share is not what it once was." He said 10 years ago, nearly 100 percent of certain types of cases went to Delaware and now some significant cases are going elsewhere.
But early in the conference, Gilson spoke for many presenters when he said the day was a bit unusual because he and others would be speaking on the meaning of decisions and actions by Chancery Court judges with the judges themselves in the audience.
He said it was like the scene in the movie "Annie Hall" when Woody Allen is arguing with someone about the work of Marshall McLuhan and pulls McLuhan himself from the crowd to tap the man on the shoulder and tell him he is wrong.
And at lunch, Strine got to play the role of McLuhan by telling the crowd that some of what he heard in morning sessions amounted to "fiction."
Sounds like a fun conference.
Friday, November 11, 2011
... one reason the Delaware courts are in a better position than other courts to legislate or regulate, rather than just deciding incrementally, is that Delaware decisions are subject to extensive commentary from academic bloggers!
If you click through to the photo of Savitt's slide, you'll see the M&A Law Prof Blog banner on the lower left side.
Wednesday, November 9, 2011
Conrad Black thinks Leo Strine is "an opinionated, self-gratified hip-shooter." This from Black's new memoir, Strine as "radical" protector of shareholders:
And his lawyers from S&C were just naifs with respect to the courts in Delaware:
Do you think Lord Black is a fan of Hillbilly Handfishin? I don't. If all this isn't bad enough, Black disses Chancellor Strine in the memoir with his own (somewhat dated) cultural references.
O.J.?! Judge Ito?! That's going below the belt! I guess you can read it all here if you'd like.
Tuesday, November 8, 2011
This has been a weird story. It started rolling out about two weeks ago when the high flying CEO of Olympus, Michael Woodford was abruptly booted from the company after he questioned the $700 million in advisory fees to unknown parties in the Cayman Islands that appeared in conjunction with an aquisition. Woodford conducted an investigation and in the midst of it he was let go. Now, acquisition fees are normal, but relative size of the fees raised a red flag for Woodford - 35% of the acquisition price. If you're not generally paying attention to these things, 35% is huge. Anyway, Woodford got fired for calling BS and went public with what he knew about the odd payments.
Olympus Chairman Tsuyoshi Kikukawa then quit after defending the firing of Woodford. Last night though the dam broke. Olympus President Shuichi Takayama (President) admitted that Olympus has been using takeover advisory fees to cover losses for years. I guess they were a little surprised that Woodford created such a stink about it. I suppose they thought he would just go along. Here's a hint, if you are engaging in a huge accounting fraud, best not to bring in an outspoken outsider to run the show.
By the way, using a merger strategy to cover up for an accounting fraud isn't all that new or unique. Anyone remember Worldcom?
Friday, November 4, 2011
Well for a private arbitration process, it sure is getting a lot of attention, mostly because the parties themselves can't keep quiet. It started yesterday when Skyworks filed a withdrawal request with the SEC to pull its S-4 filing. According to the letter to the SEC:
The Registrant is currently engaged in an arbitration in the Court of Chancery of the State of Delaware against the other party to the proposed merger, Advanced Analogic Technologies Incorporated (“AATI”). In this arbitration, the Registrant is seeking to be released from its obligations to proceed with the transactions contemplated by the Registration Statement, while AATI is seeking to compel Skyworks to consummate the transactions contemplated by the Merger Agreement. ... Among other things, information has come to the attention of the Registrant that raise questions under Generally Accepted Accounting Principles (“GAAP”) as to AATI’s recording of certain revenue that AATI reported for the quarter ended June 30, 2011 — revenue that is included in financial statements that are set forth in (or incorporated by reference into) the Registration Statement and in pro forma combined financial statements of AATI and the Registrant included in the Registration Statement. Pending a final determination of the issues raised in the ongoing arbitration proceedings (including determination of the proper accounting treatment of the revenue referred to above), the Registrant believes that investors should not rely on the Registration Statement in these circumstances, and that the withdrawal of the Registration Statement in its entirety is therefore consistent with the public interest and the protection of investors.
OK, there you go. Notwithstanding earlier announcements by the parties, it's not a MAC that's at issue. Skyworks is more likely arguing that an AATI representation was not true at signing. But it doesn't stop there. AATI fired back in a press release:
AnalogicTech believes the actions taken by Skyworks today are calculated acts of desperation to advance the interests of Skyworks at the expense of AnalogicTech and its stockholders.
Skyworks' allegations are false, baseless and entirely without merit. AnalogicTech stands behind its financial statements and accounting practices and will continue to defend itself vigorously against Skyworks' spurious claims.
Just a few months ago, Skyworks conducted extensive due diligence on AnalogicTech and entered into a legally binding definitive merger agreement to acquire the Company. We believe that Skyworks' public disclosure of false allegations are in clear violation of the Delaware Chancery Court's rules of arbitration and are just another desperate attempt by Skyworks to renege on its obligations under its merger agreement with AnalogicTech.
He said, she said. The problem with trying to follow a dispute like this from the outside is that nothing is public unless the parties want it to be. So, we end up getting bits and drabs of information here and there. It becomes very difficult for an observer, or the market, to get any idea what the issues are. Welcome to the world of private arbitration.
Tuesday, November 1, 2011
I've been giving some more thought to the recent challenge by the Delaware Open Government Coalition to Delaware's new arbitration procedure. It's a very interesting issue and won that I think Delaware is ultimately going to lose. I don't say that because there is anything necessarily wrong with arbitration, though we can have a discussion about the role of arbitration in a common law system. Rather, the idiosyncratic manner in which Delaware set up its arbitration system puts it a juncture between two competing policy interests and on what I expect will be the losing side when a court is asked to balance the interests.
If you have been reading this blog for long, you'll know that I don't like to predict outcomes in cases (or football games) - mostly because I end up looking foolish when it comes out the other way. And it often does. For example, who could have guessed that the Steelers would have figured out that you only have to throw 50 passes against the Pats' terrible secondary to win? Anyway back to the law. In this case, I'm willing to throw my chips in because though there are two sides to this argument, there really is no other way for this to come out in the end.
On the one side we have a statutory preference for arbitration pursuant to the Federal Arbitration Act ("FAA") to resolve contractual disputes that preempts state law prohibitions against arbitration. This has been endorsed by the US Supreme Court (Southland Corp v Keating):
In enacting § 2 of the federal Act, Congress declared a national policy favoring arbitration and withdrew the power of the states to require a judicial forum for the resolution of claims which the contracting parties agreed to resolve by arbitration. ... Congress has thus mandated the enforcement of arbitration agreements.
We discern only two limitations on the enforceability of arbitration provisions governed by the FAA: they must be part of a written maritime contract or a contract "evidencing a transaction involving commerce" and such clauses may be revoked upon "grounds as exist at law or in equity for the revocation of any contract." We see nothing in the Act indicating that the broad principle of enforceability is subject to any additional limitations under state law. (emp. added)
Since Southland, the application of arbitration provisions has expanded beyond maritime contracts and they are now common in commercial contracting. The 3rd Circuit (which includes Delaware) is on board with this preference to pursue contractual disputes in arbitration should the parties so decide (Great Western Mortg Corp v Peacock):
Under the FAA the district court must be satisfied that the parties entered into a valid arbitration agreement. In conducting this inquiry the district court decides only whether there was an agreement to arbitrate, and if so, whether the agreement is valid. 9 U.S.C. § 2. In so deciding, the district court is not to consider the merits of the claims giving rise to the controversy, but is only to determine, as we have stated, whether there is a valid agreement to arbitrate. Once such an agreement is found, the merits of the controversy are left for disposition to the arbitrator. Moreover, there is a strong presumption in favor of arbitration, and doubts " concerning the scope of arbitrable issues should be resolved in favor of arbitration." (emp. added)
It's pretty clear that federal law supports policies that encourage private parties to adopt and/or pursue arbitration of access to a more formal judicial forum.
On the other side of this argument we have the long-standing Constitutional policy under the First Amendment in favor of open courts and access to trials, both criminal and civil. In Richmond Newspapers v Virginia, the US Supreme Court addressed the question of public access to criminal trials:
... without more, agreement of the trial judge and the parties cannot constitutionally close a trial to the public. Historically and functionally, open trials have been closely associated with the development of the fundamental procedure of trial by jury, and trial access assumes structural importance in this Nation's government of laws by assuring the public that procedural rights are respected and that justice is afforded equally, by serving as an effective restraint on possible abuse of judicial power, and by aiding the accuracy of the trial factfinding process.
This right of the public, especially the press, to access criminal trials has been accepted at the Circuit level, including the 3rd Circuit, to extend to civil trials as well. In determing whether the public has qualified right of access under the First Amendment the court applies a two factor test (Press Enterprise v Superior Court). The first factor "consider[s] whether the place and process have historically been open to the press and general public." "The experience factor considers whether there is a 'tradition of accessibility' attendant to a given place and process." The second factor is the "logic" factor, which "asks whether public access plays a significant positive role in the functioning of the particular process in question." To the extent there are restrictions to the public's right of access those restrictions need to be narrowly tailored to serve a compelling interest.
In Delaware, the arbitration procedure adopted is one that occurs using court personel and in the courthouse. The nature of the matters to be resolved is similar to the matters that have been traditionally resolved by the chancery courts over the years. I think it's pretty clear that in applying the experience factor to the arbitration proceedings that the experience has been that procedings of a similar nature in the courts have been public. The logic factor similarly weighs in favor of public access - to the extent formal judicial resolution results in common law precedents, public access plays a significant positive role in the process.
And now to the conflicts between arbitration and openness. As between a Congressional preference for arbitration and a qualified Constitutional right public access to trials, the Constitutional right should trump every time.
Does that mean that one can't arbitrate merger agreements in Delaware? No. One can do that - feel free to call the local AAA office and hire a retired chancellor to hear your dispute. But, it does suggest you can't expect to get confidential treatment of arbitration proceedings where the arbitrator is a sitting judge in the local courthouse in a procedure sponsored by the state.
OK, so now I'm sitting on a limb.