September 24, 2011
Arbitration for merger agreements
This just popped up on the PR Newswire:
SANTA CLARA, Calif., Sept. 23, 2011 /PRNewswire/ -- Advanced Analogic Technologies, Inc. (the "Company" or "AnalogicTech") (Nasdaq: AATI) today announced that it has filed a Petition for Arbitration in the Delaware Chancery Court (the "Court") seeking specific performance of the Company's merger agreement with Skyworks Solutions, Inc. ("Skyworks") (Nasdaq: SWKS) and to order Skyworks to close the transaction. AnalogicTech is seeking declaratory judgment from the Court that (1) AnalogicTech has not breached the merger agreement, (2) no "material adverse effect" has occurred with respect to AnalogicTech, and (3) Skyworks has breached its obligations under the merger agreement.
When these new aribtration rules were first announced in January, I hoped that it wouldn't be too successful. It looks like parties are starting to take advantage of the arbitration procedures. While that's not the end of the world, it might be cause for concern with respect to a particular aspect of deal litigation - contractual interpretation. In the case of AnalogicTech for example it looks like one of the issues is whether a MAC has been triggered. Now there's still enough ambiguitiy with respect to the MAC issue that it would be beneficial to have additional law on the question. If arbitration becomes more common, then there might be negative spillovers for the maintenance of the corporate law over time and that would be a problem.
This is an issue worth paying attention to, and perhaps re-visiting at some point.
September 23, 2011
First HP lawsuit on file
No surprise. The first derivative suit against HP and its board of directors was filed in the Central District of California. Here's the complaint: Espinoza v. Leo Apotheker et al. It was filed on Wednesday - before Apotheker was fired. So it's more concerned with Apotheker's recent moves than it is with the board's firing of Apotheker. Of course, there's no reference to the revelation that the board may have hired Apotheker without actually meeting him. Look for this complaint to be amended to account for these recent events and revelations. As it is, the complaint alleges violations of fiduciary duties by the directors -- essentially that they were reckless in their pursuit of the corporate strategy. The complaint also makes various allegations of securities law violations. The essence of the complaint is that for almost a year the CEO and the board we are all very optimistic about webOS as the center of the corporate strategy. Then, the board turned on a dime. If the strategy was so bad, why did the board pursue it for so long? Anyway, we'll see. While this is the first suit through the door, I doubt it will be the last.
In related news, new HP CEO Meg Whitman is off to a great start. Yesterday, Bloomberg reported:
“It does not signal a change in the strategy,” Whitman said yesterday of her appointment. “We are behind the actions that were taken on Aug. 18. We are firmly committed to Autonomy.”
Presumably that includes sale of the PC business and moving what's left of H-P to some more akin to SAP, Oracle or IBM. Anyway, today CNBC is reporting that her excutive chairman Ray Lane said, "We have no intention of getting out of the PC business." Seems like they are still a little confused.
Update: Tom Hals at Reuters has a nice piece on the prospects for a suit against H-P's board:
Hewlett-Packard's board certainly has plenty of critics. The board could be most vulnerable to claims that it did not properly vet Apotheker. Reuters reported that the full board did not meet with Apotheker before hiring him.
But Delaware, where Hewlett-Packard is incorporated, protects directors from being liable for poor decisions so long as they can prove they were not consciously trying to harm the business.
That's a pretty high bar. Even not bothering to meet the CEO before hiring him may not be enough to clear that.
September 22, 2011
Was the H-P Board paying attention?
Really? Really?! This was the headline from James Stewart's Business Day article today: Voting to Hire a Chief Without Meeting Him. The article highlights the almost complete lack of attention the full board of H-P gave to the job of hiring a new CEO after firing Mark Hurd.
Among their revelations: when the search committee of four directors narrowed the candidates to three finalists, no one else on the board was willing to interview them. And when the committee finally chose Mr. Apotheker and again suggested that other directors meet him, no one did. Remarkably, when the 12-member board voted to name Mr. Apotheker as the successor to the recently ousted chief executive, Mark Hurd, most board members had never met Mr. Apotheker. ...
Before a final vote on Mr. Apotheker, H.P. search committee members again urged other directors to meet him. No one took them up. At least one director, Ms. Salhany, tried to slow the process, worrying aloud that “no one has ever met him. Are we sure?” But her concerns were brushed aside. “Among the finalists, he was the best of a very unattractive group,” one director said.
Really, I find that revelation - if true - to be an absolutely incredible abdication of responsibility by a board. Short of a merger, hiring a CEO is one of the most important things a board can do. And they can't even bring themselves to have coffee with the guy they are going to hire. How is that possible? Who advised them?
The members of the board should be thankful that Delaware has Sec. 102(b)(7) in the code, otherwise they might be looking at major liability - that's not to say they won't get sued, they just might anyway.
I wonder now how involved the board was with Apotheker's recent shift in corporate strategy away from the PC and tablet business and its generous acquisition of Autonomy (for 10x earnings revenues). The shift took the investment community by surprise. I wonder if the H-P board was surprised, too.
Update: A nice piece by Reuters reminds us just how dysfunctional the H-P board has been over the years. Of course, one can start with the rancor over the Compaq acquisition that got H-P into the PC business in the first place. There were accusations that then CEO Fiorina bought DB's votes to get that deal through. And then there was the whole Patricia Dunn/boardroom leaks investigation that led to Tom Perkins' resignation in 2005/2006? And now they're talking about hiring Meg Whitman to take over. Goodness.
September 21, 2011
"You gambled and you lost."
Ten years for Zvi Goffer - Octopussy. By almost any stretch, that's a lengthy sentence for insider trading.
Aggregation and Step-Transaction Doctrines in Asset Sales
Thanks to our friends at CourtroomView I was able to watch the argument last week's arguments before the Delaware Supreme Court in the BNY Mellon v Liberty Media litigation. There weren't many fireworks in the courtroom, but isn't that the way appellate litigation usually is? In any event, the Court just handed down its opinion in the matter affirming the lower court's decision that the spin-offs did not constitute a sale of substantially all the assets.
The issue before the court was whether the series of spin-off transactions undertaken by Liberty Media beginning in 2004 constituted a "series of transactions" for the purposes of determining whether the violated a covenant not to sell substantially all the assets of the corporation. The opinion provides a nice overview of the relevant doctrine that applies to questions of to think about a series of transactions and asset sales.
Applying NY law, the court agreed with the Chancery Court's application of the "aggregation doctrine":
... where asset transactions are not piecemeal components of an otherwise integrated, pre-established plan to liquidate or dispose of nearly all assets, and where each such transaction stands on its own merits without reference to another, courts have declined to aggregate for purposes of a “substantially all” analysis.
Each of Liberty's spin-offs over the years was a transaction that stood on its own merits without reference to any of the previous spin-offs. Thus, the aggregation doctrine counsels that the spin-offs would not constitute a sale of substantially all the assets.
The Chancery Court applied an additional doctrine, the step transaction doctrine to the determination of whether the spin-offs constituted a sale of substantially all the assets. The Supreme Court described the doctrine in the following way:
The Court of Chancery analyzed the facts under the “step-transaction” doctrine, which treats the “steps” in a series of formally separate but related transactions involving the transfer of property as a single transaction, if all the steps are substantially linked. Rather than viewing each step as an isolated incident, the steps are viewed together as components of an overall plan
The step-transaction doctrine applies if the component transactions meet one of three tests. First, under the “end result test,” the doctrine will be invoked “if it appears that a series of separate transactions were prearranged parts of what was a single transaction, cast from the outset to achieve the ultimate result.” Second, under the “interdependence test,” separate transactions will be treated as one if “the steps are so interdependent that the legal relations created by one transaction would have been fruitless without a completion of the series.” The third and “most restrictive alternative is the binding-commitment test under which a series of transactions are combined only if, at the time the first step is entered into, there was a binding commitment to undertake the later steps.”
Though the Supreme Court felt application of the step transaction doctrine wasn't necessary, it's clear that under this test, when Liberty Media adopted a general business strategy of spinning out assets as the opportunity arose that it was not triggering a sale of substantially all the assets under the step transaction doctrine.
Here's Download BNY v Liberty Media.
September 20, 2011
Air Products' bid was $70. Just saying.
Chinese rules on assessment of competitive effects
Chinese firm King & Wood - there's actually no Mr. King or Mr. Wood, but in the Chinese King & Wood are good names ... - anyway they have the run-down on the Provisional Rules of Assessment of Competitive Effects of Concentration of Business Operators (MOFCOM 2011/55). This is another in a series of new rules and regs the Chinese have been rolling out to implement their Anti-Monopoly Law.
September 19, 2011
Takeover Panel amendments go into effect
The Takeover Panel amendments that were the result of a review in the wake of Kraft's acquisition of cadbury go into effect today. You can find a summary of the changes and transitional arrangements at the Takeover Panel's site. The most important include:
1. The offeree is required to disclose the identities of "any potential offeror with which the offeree company is in talks or from which an approach has been received."
2. After a potential offeror is identified, the offeror has 28 days to "put up or shut up."
3. General prohibition on transaction related inducement fees (termination fees).
4. Improved ability of employees representatives to make their views on the offer known.
The prohibition on termination fees is the most interesting change. Most of the rationalization for termination fees in the US is that termination fees are required in order to assure potential acquirors to invest the resouces needed to put together a bid. Without the termination fees, potential bidders will disappear - not content to invest resources in a bid that might eventually fail. Here, the Takeover Panel is weighing benefits of the compensatory function of the termination fees against the social costs of reduced competition associated with the potentially deterrent effect of termination fees and is erring on the side of increased competition. At some point in the next year, a finance graduate student somewhere should probably do an event study to check to see if elimination of termination fees ends the UK deal world as we know it. My guess is that it will still be there.