March 12, 2011
March 11, 2011
Book talk on D&O insurance and shareholder litigation
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?!
Merger Pre-approvals in India
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.
March 10, 2011
AIG adopts an NOL pill
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.
March 9, 2011
Hostile acquisitions in developing countries
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.
March 8, 2011
Top-up option guidance
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.
March 7, 2011
Still more bad lawyers
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.