Friday, May 13, 2011
This week the Competition Commission of India (CCI) released the new M&A regulations. These rules are somewhat softened from the stringent guidelines issued earlier this year (for various commentary see here). For example, deals entered into prior to June 1st have been exempted, and filing fees have been significantly decreased (see this useful Mayer Brown summary).
The rules exempt a host of transactions from the scrutiny of the CCI. For example, if an acquirer has a 50% stake in a firm then further acquisition will not trigger the competition law except where the acquisition leads to transfer from joint control to single control. Moreover a combination taking place entirely outside India with insignificant local nexus and effect on markets in India “need not normally be filed.”
With respect to timing, the regulations provide that within 30 days of submission of the notification form the CCI is to form a prima facie opinion as to whether the combination is likely to cause or has caused an appreciable adverse effect on competition within the relevant market in India. The proposed transaction will then be cleared or subject to a second phase investigation. The regulations provide that the CCI “shall endeavour to pass an order” in a second phase investigation within 180 days from the date of submission of the notification form.
The new regulations still leave some grey areas, such as failing to address pre-merger consultation, although the CCI has indicated that it will issue regulations on consultations. There is also concern about potential conflict between the new rules and the proposed overhaul of the Takeover Code by SEBI.
Mira Ganor has posted a paper, The Power to Issue Stock. She takes on the question of board discretion to issue stock. In particular, she focuses on the top-up option that has attracted recent attention.
Abstract: Studies of management's disregard of the will of the shareholders have focused on combinations of entrenchment mechanisms and special governance structures. However, management's power to issue stock, a fundamental element of the ability of management to control the corporation regardless of the will of the shareholders, has received scarce attention. This Article highlights the significance of the power to issue stock: When managers choose to ignore the will of the majority of the shareholders or when managers choose to circumvent the veto power of the minority shareholders, they often take advantage of their power to issue stock. A top-up option, for example, which is studied in this Article, is contingent upon the managers' ability to issue shares and dilute the voting power of dissenting minority shareholders. The poison pill is also contingent upon the managers' ability to dilute a hostile-bidder by issuing shares to the shareholders. The ability of managers to use new stock issues as a shareholder-circumventing mechanism is particularly important. It plays a key role in the management’s arsenal and it provides an incentive for managers to reserve this unique power and refrain from diminishing it by, for example, replacing equity-based compensation and equity-financing with less efficient choices. This Article explores the key power of managers to issue stock as well as the current and potential limitations on this power. One such limitation is the size of the authorized capital of the corporation, which provides a ceiling for the total number of shares that can be issued. The ratio of authorized non-outstanding shares to the issued and outstanding shares, what I shall call the "excess-ratio", is an indicator of the magnitude of the managers' power to issue stock. A study of the excess-ratio reveals that corporations go public with a high excess-ratio the number of unissued authorized shares is more than threefold the number of issued shares. Further results of the study of the excess-ratio are analyzed in this Article
With respect to the top-up option she writes:
Top-up options ... are a powerful tool that has been increasingly used to dilute the voting power of opposing shareholders in takeovers supported by the board of directors. The grant of a top-up option as part of a take-over may allow for the consummation of a quick short-form merger without a shareholder meeting and despite the opposition of a significant number of the shareholders in excess of the statutory ceiling of ten percent of the shares. The effect of a top-up option is that a management friendly bidder faces only a truncated supply curve at the tender offer. This is because a top-up option lowers the percentage of shares needed to be tendered in order to have a successful outcome. In addition, the speed of the takeover process makes it harder for a competing bidder to launch an opposing bid. Like the poison pill, top-up options are contingent upon the managers‘ ability to issue a nontrivial number of shares and thus dilute the voting power of the dissenting minority shareholders.
Clearly, she disagrees with Vice Chancellor Laster. I suppose he would respond - "If 70% of the shareholders have tendered, and if the merger agreement ensures that any back end consideration would not be subject to dilution, what are minority shareholders losing with a top-up. It's not like the minority could ever win a shareholder vote for a back-end merger."
I tend to agree with the Vice Chancellor, but I'll admit that I'm uneasy about it. There's no reason why an acquirer can't simply tender for 51% of the public shares and then do a back-end statutory merger. If the shareholders can act by written consent, there's no need to even call a meeting. There's no question that controlling shareholder will win the vote following a successful tender offer, so what's at stake? Time? Protection of minority rights? Minority shareholders can rely on their appraisal rights in the backend merger if they are unhappy with the consideration, but, short of fiduciary duty claims, that's about it.
Top-up options are sure to continue to generate discussion. Ganor's article is a valuable contribution to that puzzle.
Thursday, May 12, 2011
Rick Climan walks Vice Chancellor Laster through the legal issues relating to top-up options. If you don't want to watch his talk, you can read the equivalent in Vice Chancellor Laster's opinion in Olson v Ev3.
In the talk, Laster refers to the top-up option in the Hawk/Carlisle transaction as an example of top-up option that has all the "magic language." Here's the top-up option language that Laster liked:
OK, me? Still grading.
Wednesday, May 11, 2011
The Practical Law Company has issued a new study of study of reverse termination fees and specific performance in public merger agreements. The study (which can be accessed here) covers 2010 deals (181 merger agreements with a signing value of at least $100 million). It looks like specific performance remained the dominant contractual remedy for a buyer’s failure to close the transaction due to a breach or financing failure, especially in the case of strategic buyers. Financial-buyer deals, however, were more varied.
Monday, May 9, 2011
Hertz announced this morning that it was giving the acquisition of Dollar Thrifty another go. You'll remember that last year, Dollar terminated its agreement with Hertz after Dollar shareholders voted no on its $50/share offer. The sharehodler vote followed sharehiolder litigation in Delaware to try to get the deal protections in the Hertz-Dollar deal invalidated (In re Dollar Thrifty), resulting in a termination of the merger agreement. Following which Dollar and Avis entered into protracted - and so far unsuccessful = talks amongst themselves and the antitrust authorities about getting a deal done.
Apparently, Hertz has decided enough is enough and has decided to jump back in - hoping that Dollar shareholders will think differently this time around. Here's a summary of the new offer from the Hertz press release:
You may wonder why we are moving forward now after the unsuccessful Dollar Thrifty shareholder vote last fall. First, the vote did not prevent Hertz from re-engaging at any time of our choosing. Additionally, economic conditions continue to improve, creating revenue growth opportunities over the next several years. Moreover, Avis has been trying unsuccessfully for the past 12 months to secure government approval to buy Dollar Thrifty and all they have to show for their year-long efforts are “constructive discussions” with U.S. regulators. We don’t believe Avis can get a deal done and the time is right to resolve this matter once and for all to our and Dollar Thrifty’s satisfaction.
In contrast with Avis, we’ve picked up where we left off with the government last fall and we are confident we can secure its consent to proceed. Unfortunately, that will mean divesting Advantage Rent-a-Car in the U.S., which is not our preference, but it’s clear that a merger with Dollar Thrifty becomes far more difficult if the government opposes the transaction.
For its part, Hertz appears to be taking an aggressive stance towards offering Dollar's shareholders a deal they can't refuse. It's offering an improved bid and is committing to sell its Advantage rental brand (e-mail to Advantage employees)- to help clear the way for regulators to provide clearance to the proposed transaction. We'll see how Doolar II proceeds and whether shareholders have a different view on the transaction given what they've seen over the past few months.
Update: Reuters has a timeline for this deal here.