M & A Law Prof Blog

Editor: Brian JM Quinn
Boston College Law School

Friday, January 28, 2011

Sara Lee discussing spin-off

Listen in right now.  Sara Lee is discussing its plans to pursue a break up of its business through a spin-off.  It hasn't come up with a name for its "Coffee Co" so I'm sure Sara Lee would appreciate suggestions!


January 28, 2011 | Permalink | Comments (0) | TrackBack (0)

Insider trading still a bad idea

OK, I'll let the allegations in the a couple of early paragraphs of this recent SEC complaint speak for themselves:

Beginning in at least August 2010, defendant Zizhong Fan, a manager at Seattle Genetics, learned confidential information about positive clinical trial results for a cancer drug under  development by the company.  Zizhong Fan tipped this information to a relative in southern  Califoniia, defendant Zishen Fan, who purchased several hundred thousand dollars of Seattle  Genetics stock and options in the U.S. brokerage account of another family member living in  China, relief defendant Junhua Fan.  When Seattle Genetics reported to the public in late  September 2010 that its flagship drug had proven effective in fighting Hodgkin's lymphoma,  the company's stock price jumped nearly 18%.  By trading on inside information learned by  Zizhong, the Fans netted over $803,000 in illicit profits.

Upon being contacted by the staff of the Securities and Exchange Commission ("Commission"), Zizhong Fan denied being related to or even knowing Zishen Fan, despite the fact that they have shared multiple addresses over the years.  Zishen Fan similarly denied to the Commission staff that he knew anyone who worked at Seattle Genetics.  Almost immediately after being contacted by the Commission staff, Zishen Fan contacted his broker and attempted to  transfer several hundred thousand dollars from Junhua Fan's brokerage account to a bank account in China.  While two of these attempts were unsuccessful, as of the date of this Complaint, one such request is still pending with the brokerage. ...

Between August 24 and September 24,2010, Zishen Fan purchased over 2,750 Seattle Genetics option contracts - options which provided the right to purchase Seattle Genetics common stock at a designated price - at a total cost in excess of $360,000.  On many of the days during which the trades were made, Zishen's purchases represented the vast majority of the option trading volume for the entire market.  He purchased these securities in a brokerage account held in the name of Junhua Fan, a relative in Beijing.

The call options purchased by Zishen Fan had an exercise price of$12.50 and an expiration date ofOctober 16,2010.  At the time, Seattle Genetics' stock was trading at around $12 per share.  This meant that the options were "out-of-the-money" and would have value only if some event caused the company's stock price to jump to $12.50 by October 16; if the stock did not rise by that date, the options would expire worthless,and Zishen and Junhua Fan stood to  lose the entire $360,000 investment.

This looks like a run-of-the-mill insider trading case, but there are a couple of important lessons to take from this.  First, trading ahead of major corporate events is always a bad idea.  Regulators -- actually their computers -- regularly comb through trades and try to correlate them with unusual trading patterns.  If you have piling into a stock a week or two before a major announcement, they'll see that.  I guarantee it. 

Second, if you're buying call options ahead of a major corporate event, you might as well turn yourself in right away.  In this case, the SEC alleges that Fan was on many days the largest single purchaser of options in the market.  The option market is really thin and definitely not a place for an insider.

Third, when the feds come knocking, don't lie to them.  Certainly, you have the right not to incriminate yourself, but you don't have the right to lie.  If you do, you just help them make a Martha Stewart-like case against you.  If they can't get you insider trading, they'll get you for obstruction of justice.  The knocked on Zizhong Fan's door because they knew he was related to Zishen Fan.  Why lie about that?  Anyway, better to say nothing than to lie.

Fourth, ...so many lessons...placing trades through a relative's account in another country doesn't make the trades any less visible.  For some reason people that if they place a trade through a brokerage in China or Serbia or wherever that suddenly no one will notice.  Guess what?  They'll notice.  Placing a trade through a brokerage overseas is like playing hide-and-seek by hiding behind a folding chair.  

Fifth, immediately trying to move money out of accounts that you tell the SEC you don't know anything about does help your case.  By the time they are standing on your doorstep, believe me, they already know where most of the money is.  It isn't that hard to track.  Also, don't think your broker is going to protect you. They'll be happy to put a freeze on your ill-gotten gains. 

Sixth, though it's not here in the allegations above, prior to the complaint being filed, one of the defendants told his supervisor that he would have to be out of the office for four weeks to go back to China.  Let me just offer up that it's a pretty good bet that skipping the jurisdiction is not a good idea. Here's the SEC litigation release and there are some write ups in the Seattle Post-Intelligencer (a great paper, by the way).



January 28, 2011 in Insider Trading | Permalink | Comments (0) | TrackBack (0)

Airgas ruling on Feb 8

According to Reuters Legal, Chancellor Chandler will issue his ruling in the Airgas rights plan case on Feb. 8.  So, look for it then.  I don't have any additional insight on the hearing mostly because Courtroom View decided to make the poison pill hearings a "Premium" offering and therefore put them out of my price range.  Everybody has to make a buck I suppose.


January 28, 2011 | Permalink | Comments (0) | TrackBack (0)

Wednesday, January 26, 2011

HSR Threshholds Raised for 2011

Here are a few law firm memos on the increase:


Dorsey & Whitney




January 26, 2011 | Permalink | Comments (0) | TrackBack (0)

Dynegy gets no takers on its 'go-shop'

According to Reuters Dynegy was not able to coax anyone to make an offer to top Carl Icahn's $665 million offer for the company.  The company updated its 14d-9 to include the following disclosure regarding the go-shop process:

 Of the 54 parties contacted, 48 parties declined to participate in the “go-shop process” or did not respond to repeated contacts from representatives from Greenhill and Goldman Sachs, four parties were given access to confidential information regarding the Company and offered the opportunity to receive a presentation from Company management and two parties indicated that they would perform due diligence on the Company using publicly available information.  ...  Of the four parties given access to confidential information, one party participated in meetings with Company management (another of these parties had previously participated in meetings with Company management under the “go-shop” process conducted in the fall of 2010).   After completing their due diligence, representatives of each of the two large private equity firms that separately devoted substantial efforts to due diligence separately informed representatives from Greenhill and Goldman Sachs that they did not believe they would be able to offer to acquire the Company at a price above the Offer Price and that they would not submit an acquisition proposal. Of the two other parties given access to the data room, one party ...[was] only interested in acquiring certain assets of the Company and needed to partner with another party interested in acquiring the Company as an entirety, and the other party informed representatives [...] that they would not submit an acquisition proposal and subsequently ceased communications [...] regarding their interest in a transaction with the Company [...] .

It sounds like Dynegy's bankers were really burning the mid-night oil trying to come up with alternatives but were unsuccessful.  For those of you out there who have done this -- my sense is that 50+ contacts, yielding 4 or so potential bidders is not unusual in a go-shop process -- but I'm likely wrong.  Feel free to let me know in the comments how many contacts is typical for an i-banker to make as part of a go-shop process. 


January 26, 2011 | Permalink | Comments (0) | TrackBack (0)

Tuesday, January 25, 2011

Hey Sanofi - hire me!

The talks between Genzyme and Sanofi apparently continue with the parties still at odds over a proposed earnout tied to performance of a pipeline drug.  I guess though the talks are still in process, Sanofi is feeling sufficiently comfortable that Reuters is now reporting that it has hired an executive search firm to come up with names of potential directors that it might appoint, or cause to get elected, to a new Genzyme board.   Either that or Sanofi is gearing up for a proxy contest.  Well, if they're looking to fill some board seats, why not hire me?  I'm local so I won't run up big hotel bills!  


January 25, 2011 | Permalink | Comments (0) | TrackBack (0)

Monday, January 24, 2011

Poison pill in Delaware court on Tuesday

So, tomorrow Chancellor Chandler will take up the question of whether to order the Airgas board to pull its pill.  Air Products, you'll remember, has been pursuing Airgas for many months now.   Airgas has steadfastly said "No."  In the fall Air Products elected three members to the board and got shareholders to vote to approve a new bylaw that would have moved up the next annual meeting to January - thereby cutting short the defense that time provides in the classified board.   The Chancery Court upheld the bylaw change.  But then, in a little bit of a stunner, the Delaware Supreme Court overruled the Chancery Court's opinion.  The Chancellor, I assuming confident that his opinion wouldn't be overruled, had put off the question of whether to order the rights plan pulled to a date just past the accelerated shareholder meeting date.   That was a nice way to avoid the question of the pulling the pill -- had the Chancery Court's opinion not been overruled, the shareholders would have met by now, and presumably, voted in a new majority for the board, thus making the question of the pill moot.  The Delaware Supreme Court decision ensured that this was not to be. 

So, Chancellor Chandler is put in the uncomfortable position of having to consider whether to order a board that has lost the first round in a proxy contest whether it must pull its rights plan.   Of course, Chancellor Chandler is not opposed to issuing such an order in the right circumstances.  In the Craigslist case he order the board to pull its pill.  Craigslist was a bit of a unique case.  How many closely-held firms have shareholder rights plans anyway?  Probably just Craigslist.  The Airgas case is more difficult.  Why?  Well because it's precisely the kind of case that the Chancery Court has studiously avoided hearing for year.  In his 2002 paper, which is a response to a paper from Profs. Bebchuk, Coates, and Subramanian, Vice Chancellor Strine described just this scenario as the "professorial bear hug" intended to forces judges to deal directly with the fiduciary duty issues related to the pill.

The question the authors ask us to decide affirmatively is fundamental: Can control of the corporation be sold over the objections of a disinterested board that believes in good faith that the sale is inadvisable? That is, at bottom, the authors want to force the hand of the Delaware courts to decide, once and for all, that impartial and well-intentioned directors do not have the fiduciary authority to "just say no" for an indefinite--even perpetual--period to a noncoercive tender offer made to their company's shareholders. ...

... When the stockholders of  a corporation with an ESB have  expressed their desire to receive  a fully funded, all-shares tender offer  in  a fair, noncoercive  board election  that was  preceded by an adequate opportunity for the incumbent board to develop  a better strategy and make  their  case to the target stockholders, does  a well-motivated  and well- informed majority of independent, incumbent directors who  believe  that the offer  is inadequate have  the power to block  that tender offer by continuing to deploy a poison pill?

And that, in essence, is what is at stake tomorrow in Chancellor Chandler's courtroom.  A couple of months ago, I predicted that we'd never get to see this day.  I also predicted that the Del. Supreme Court wouldn't overturn Chancellor Chandler's bylaw decision and that the Pats would beat the Jets (not cover the spread, just beat them).  Clearly, I'd be a mess if I had to make my living in Vegas, so I'm making no predictions.  Chancellor Chandler has shown himself to be sufficiently peeved at being overruled in his earlier decision that I think most bets are off.   I continue to be amazed that the Delaware Supreme Court wasn't able to look ahead to tomorrow and realize that by knocking down the bylaw they set up this Just-Say-No case to come before Chandler, and inevitably them.  Why is that a better outcome than letting the bylaw survive?  I don't know.  Anyway, tune in tomorrow for all the fun.



January 24, 2011 in Delaware, Hostiles, Takeover Defenses | Permalink | Comments (0) | TrackBack (0)