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.
Strine nominated for Chancellor; Glasscock nominated for Vice Chancellor
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.
June 8, 2011
Dealing with stock options in merger agreements
For all you summer associates looking at your first merger agreement or perhaps tasked with a real live merger-related diligence assignment, here's what you need to know about stock option plans, care of Mintz-Levin.
June 7, 2011
More on the NYSE-Deutsche Merger
Valiante has posted a 10 page run down of the issues around the NYSE-Deutsche Boerse merger, NYSE Euronext – Deutsche Börse Merger: Let the Dance Go On!.
Abstract: In this new ECMI Policy Brief, Research Fellow Diego Valiante offers his insights into the motivations, potential synergies and implications of the proposed merger between NYSE Euronext and Deutsche Börse, which he sees as a continuation of the intricate series of dances begun two decades ago between various exchanges worldwide and which now escalates at global level in the non-equity business. The author finds that the liberalization process and regulatory changes brought about by the financial crisis have revived this long-term process. Finally, he points at the importance of following a dynamic approach in the merger test, which would induce the Commission to impose rigorous conditions to clear the deal. The author also comments on the merits of the competing bid recently withdrawn by NASDAQ OMX and ICE on NYSE Euronext.
June 6, 2011
Microsoft's matching right for Nvidia
InformationWeek took a look at Nvidia's recent 10-Q and noticed something interesting. Microsoft has hel a matching right Nvidia since 2000. apparently has the ultimate takeover defense in place. Here's the description of the right from Nvidia's recent 10-Q:
On March 5, 2000, we entered into an agreement with Microsoft in which we agreed to develop and sell graphics chips and to license certain technology to Microsoft and its licensees for use in the Xbox. Under the agreement, if an individual or corporation makes an offer to purchase shares equal to or greater than 30% of the outstanding shares of our common stock, Microsoft may have first and last rights of refusal to purchase the stock. The Microsoft provision and the other factors listed above could also delay or prevent a change in control of NVIDIA.
In fact, Nvidia has been making this same disclosure for more than a decade. Here's the original disclosure from their first quarter 10-Q in 2000:
Microsoft Agreement On March 5, 2000, the Company entered into an agreement with Microsoft pursuant to which the Company agreed to develop and sell graphics chips and to license certain technology to Microsoft and its licensees for use in a product under development by Microsoft. In April 2000, Microsoft paid the Company $200 million as an advance against graphics chip purchases. Microsoft may terminate the agreement at any time. If termination occurs prior to offset in full of the advance payments, the Company would be required to return to Microsoft up to $100 million of the prepayment and to convert the remainder into preferred stock of the Company at a 30% premium to the 30-day average trading price of its common stock immediately preceding Microsoft's termination of the agreement. In addition, in the event that an individual or corporation makes an offer to purchase shares equal or greater than thirty percent (30%) of the outstanding shares of the Company's common stock, Microsoft has first and last rights of refusal to purchase the stock. The graphics chip contemplated by the agreement is highly complex, and the development and release of the Microsoft product and its commercial success are dependent upon a number of factors, many of which the Company cannot control. The Company cannot guarantee that it will be successful in developing the graphics chip for use by Microsoft or that the product will be developed or released, or if released, will be commercially successful.
I've checked the 10-Ks and 10-Qs back to 2000 and the Microsoft Agreement hasn't been filed as an exhibit anywhere. I suspect that it's a material contract - Microsoft has a contractual right to basically block any sale of the company - that sounds material. I'm sure a copy of the contract is buried in the filings somewhere.
Say-on-pay for merger-related golden parachutes
While the annual advisory say-on-pay vote has been the subject of quite a bit of discussion, the new requirement for advisory votes on merger-related golden parachutes has not be the subject of much attention. For deal lawyers, though, it is likely going to be an important addition to the deal process. And by "important" I mean - another thing that you better remember and get right, lest you crew up getting your deal approved. The new Rule 14a-21 includes the following language with respect to golden parachutes:
c. If a solicitation is made by a registrant for a meeting of shareholders at which shareholders are asked to approve an acquisition, merger, consolidation or proposed sale or other disposition of all or substantially all the assets of the registrant, the registrant shall include a separate resolution subject to shareholder advisory vote to approve any agreements or understandings and compensation disclosed pursuant to Item 402(t) of Regulation S-K, unless such agreements or understandings have been subject to a shareholder advisory vote under paragraph (a) of this section. Consistent with section 14A(b) of the Exchange Act, any agreements or understandings between an acquiring company and the named executive officers of the registrant, where the registrant is not the acquiring company, are not required to be subject to the separate shareholder advisory vote under this paragraph.
If the golden parachute in question was previously the subject of an annual vote, there is no need to hold a separate advisory vote when seeking approval of the merger. However, if the golden parachute was adopted in conjunction with the merger agreement and not previously voted on, then there is a required vote under 14a-21. These golden parachute votes - like the annual say-on-pay votes - are advisory. Of course, depending on the nature and amounts of deal related compensation, the disclosures may motivate some investors to vote no on transactions that are otherwise in their interests. It's a new complication that deal makers are going to have fit into their calculus.
Update: Steve QUinlivan has a very good post on this issue here.
June 5, 2011
Short-list for Chancery Court
According to the Delaware Grapevine, Delaware Governor Markell now has before him a short-list of potential candidates to replace retiring Chancellor Chandler. It's indeed a short list:
1. Leo Strine Jr., a vice chancellor who could move up to chancellor
2. Sam Glasscock III, already on the chancery court as a special master, and
3. Karen Valihura, a partner in the Wilmington office of Skadden Arps.
A couple of things worth noting. Since Chandler is a Republican, Delaware's court rules require that he be replaced by a Republican. So, if Strine is moved into the role of Chancellor, Markell will have to appoint a Republican Vice Chancellor to replace Strine. Glasscock and Valihure are reportedly Republicans. Also, The Deal reported some info regarding Glasscock last year when Governor Markell was considering a replacement for Vice Chancellor Lamb - that eventually went to now Vice Chancellor Laster. Here was the scuttlebut from last summer:
One theory making the rounds in Wilmington is that Sam Glasscock III will succeed Chandler. Currently a special master in Chancery, Glasscock was born in Erie, Pa., and grew up in Lewes, Del. He graduated from the University of Delaware with a B.A. in history in 1975 and earned a law degree at Duke University in 1983 and a master's in marine policy from the University of Delaware in 1989. Glasscock was a litigation associate at Prickett, Jones, Elliott, Kristol & Schnee, a special discovery master in Delaware's Superior Court and a deputy attorney general in the state's Department of Justice before being appointed a special master, a position in which he hears some of his own cases, especially those involving property and trust disputes, and assists the Chancery judges on discovery and procedural matters.