February 12, 2011
Chinese "CFIUS process"
Reuters reports on China's announcement that China will begin subjecting inbound M&A activity to national security reviews - its own version of the US CFIUS process. Although the US security review system entails a voluntary filing, I suspect the Chinese version that they are currently envisioning will be slightly more intrusive. Here's the official goverrnmenent announcement (translated by the Google machine):
In order to guide foreign investors and orderly development of the domestic enterprise, safeguard national security, by the State Council, is to establish a foreign investor acquires a domestic enterprise security review (hereinafter referred to as M & A security review) system in the matter are as follows:
First, the scope of M & Security Review
(A) safety review of the range of M & A: Foreign investors, supporting the takeover of a domestic defense industry and military enterprises, key, sensitive military installations around the business, and relationships with other units of national security; foreign investor acquires a domestic national security of the important agricultural products, it is important energy and resources, critical infrastructure, an important transportation services, key technologies and major equipment manufacturing and other enterprises, and the actual control may be achieved by foreign investors.
(B) a foreign investor acquires a domestic enterprise, is the following:
1 foreign investor purchases shares of enterprises with foreign investment or subscribe for capital increase domestic non-foreign-invested enterprises, domestic enterprises to make the change into a foreign-invested enterprises.
2 foreign investment in a foreign investor purchases the equities of Chinese enterprises, or enterprises with foreign investment capital increase subscription.
3 foreign investors to establish foreign-invested enterprises and enterprises with foreign investment agreement through the purchase of a domestic enterprise assets and operates its assets, or through the foreign-invested enterprises to purchase shares of domestic enterprises.
4 the territory of foreign investors to buy corporate assets, and invest the assets of the foreign-invested enterprises operating assets.
(C) to obtain effective control over foreign investors, foreign investors means a domestic enterprise through the acquisition of a controlling shareholder or actual controller. Include the following:
1 foreign investors and its parent holding company, subsidiary after the acquisition of the total shares held by more than 50%.
2 several foreign investors in the acquisition of shares held after the combined total of more than 50%.
3 foreign investors in the acquisition of shares held after the total amount of less than 50%, but according to their holdings enough to enjoy the right to vote, or the shareholders meeting of shareholders, resolution of the board have a significant impact.
4 other decision-making led to a domestic enterprise, finance, personnel, technology transfer of effective control over the situation to foreign investors.
Second, the contents of M & Security Review
(A) of the M & A transaction on national security, including the defense needs of the domestic production capacity, the domestic services capacity and the impact on equipment and facilities.
(B) of the M & A transactions on the stable operation of the national economy.
(C) of the M & A transactions on the impact of basic social order of life.
(D) M & A transactions involving national security, the impact of key technology R & D capabilities.
Third, M & A security review mechanism
(A) the establishment of a foreign investor acquires a domestic enterprise security review of the Inter-Ministerial Joint Conference (hereinafter referred to as joint) system, the specific commitment to the safety review of mergers and acquisitions.
(B) under the leadership of the joint meeting of the State Council, the Development and Reform Commission, Ministry of Commerce take the lead, according to foreign capital industries and sectors involved, together with relevant departments to carry out M & Security Review.
(C) of the joint meeting of the main responsibilities are: analysis of a foreign investor acquires a domestic enterprise to national security; research, coordination of the foreign investor acquires a domestic enterprise security review of the major issues; on the need for safety review of the foreign investor business transactions within the safety review and decision.
Fourth, M & A security review process
(A) a foreign investor acquires a domestic enterprise, shall be in accordance with the provisions of this notice by the investor to the Ministry of Commerce to apply. That fall within the scope of the safety review of mergers and acquisitions, the Ministry of Commerce should be brought to within 5 working days to review the joint meeting.
(B) a foreign investor acquires a domestic enterprise, relevant State Council departments, national trade associations, industry enterprises and downstream enterprises that require acquisition of security review, conducted by the Ministry of Commerce security review of the proposed merger. Joint acquisitions deemed necessary by the safety review, may decide to conduct the review.
(C) of the joint review of the Ministry of Commerce deals brought to safety, the first general review of the general review of the failed, to conduct a special review. The parties shall deal with the joint safety review, to provide security review required materials, information, and accepted the inquiry.
Review of written comments of general way. Ministry of Commerce received the Joint Security Review deals brought to the application, within 5 working days, the departments concerned to seek a written opinion. After receiving the additional request in writing the relevant departments, should be within 20 working days to submit written observations. Such as the departments concerned that the deal does not affect national security, are no longer conduct a special review by the joint meeting of all the written comments received within 5 working days to review comments, and written notice to the Ministry of Commerce.
M & A transactions, if any departments that may impact on national security, joint written comments should be received within 5 working days after the start the special review process. Start the special review procedures, joint organization of the safety assessment of mergers and acquisitions, combined with assessment of the review of M & A transactions, basically the same comments, review comments made by the joint meeting; there are significant differences, by the joint meeting of the State Council for decision. Joint meeting since the launch of special review procedures within 60 working days to complete special reviews, or to the State Council decision. Review comments in writing by the joint meeting of the Ministry of Commerce.
(D) the safety review process in the acquisition, the applicant may apply to the Ministry of Commerce program to modify or withdraw merger transaction.
(E) acquisition of security review was made by the applicant written notice of the Ministry of Commerce.
(Vi) acts of a foreign investor acquires a domestic enterprise to national security have caused or may cause significant impact on the joint meeting with the relevant departments should be required to terminate the Ministry of Commerce of the transaction parties, or transfer the relevant shares, assets or other effective measures to eliminate the merger and acquisition on national security.
V. Other provisions
(A) the relevant departments and units to establish the overall concept, enhance a sense of responsibility and keeping state secrets and commercial secrets, improve efficiency, expanding opening up and foreign investment to improve standards at the same time, promote the healthy development of foreign capital to safeguard national security.
(B) the acquisition of domestic enterprises involving foreign investors new investment in fixed assets, fixed assets investment by state regulations for project approval.
(C) acquisition of domestic enterprises involving foreign investors to change the state-owned property, the management of state assets by state regulations.
(D) a foreign investor acquires a domestic financial institutions, security review separately.
(E) Hong Kong SAR, Macao Special Administrative Region, Taiwan investors in mergers and acquisitions, with reference to the provisions of this notice.
(Vi) M&A safety review system since the date of the notice issued 30 days after implementation.
Rules for this review process are expected to be released in March.
February 11, 2011
Avoiding change in control provisions
Back in the fall of 2009 Merck acquired Schering-Plough. In order to avoid triggering a change in control provision that would have resulted in Schering-Plough losing its license to sell Remicade- a $3 billion a year drug for them, the parties structured the transaction as a reverse merger and had Schering-Plough acquire Merck, with Schering-Plough as the surviving corporation. Then the changed Schering-Plough's corporate name to Merck. Yeah, it seems too cute by just about half. In any event, J&J challenged the S-P/Remicade license in arbitration arguing that there was a change in control - even if S-P was the surviving corporation and that the whole transaction structure was an artifice intended to avoid the change in control provision. Of course, they're right. But does that matter? Reuters is now reporting that the arbitrator's decision could come down any time now. Here's the story.
James Murray has recently posted a nice over-view of the regulation of Special Purpose Acquisition Vehicles (SPACs). You download it on SSRN - The Regulation and Pricing of Special Purpose Acquisition Corporation IPOs.
Abstract: Special Purpose Acquisition Corporations (SPACs) are large blank check companies formed to acquire operating assets or an existing business. They provide public investors with a private equity style investment with the security of having the majority of their funds returned if an acceptable business combination is not approved within a set time limit. While originally restricted to the OTC market SPACs gained a more prominent role as AMEX began listing them in 2005, followed by the NYSE and NASDAQ in 2008. For firms with such uncertainty about their future prospects there is surprisingly little mispricing evident in their IPOs. Valuing SPACs is complicated by the warrants included in the unit offers. Examination of the stock and warrants in SPAC units suggests that investors may be simply pricing the units based on the offer price or the market price of recent issues, pricing stock at a small discount to liquidation value, and pricing warrants as the residual difference between unit and stock prices.
February 10, 2011
While we await the Airgas decision, Steve Pearlstein (who I had the pleasure of meeting once in Saigon) has some thoughts in the Washington Post on the AOL-HuffPost merger. He thinks its the AOL-TimeWarner deal all over again: AOL looking for a route away from dial-up access and into contet. This time, though he thinks it might make more sense. I tend to think that he is right. This deal is more manageable and less grandiose in scale. HuffPost has an active Internet community and content that it can more or less plug right into the AOL suite. That's a far cry from visions on delivering all of Warner's movie catalogue over the Internet to AOL subs. But ... wait a minute ... isn't that basically happening now - 12 years later? Maybe it was too much to soon the first time around and this time will be better. Time will tell. At least Arianna got cash.
February 8, 2011
All you need to know about the AOL - HufPost merger.
Of course, more interesting is the behind scenes corporate law story about who actually owns Huffington Post. Christine Hurt over at The Conglomerate has the complete run-down on the lawsuit and what's at stake.
Airgas will be back in a Delaware court today. I'll be dropping in and out of the proceedings thanks to the good people at CourtroomView Network and updating the blog regularly during the day.
Update: David Marcus reminds us that even if Chandler orders the pill pulled today, that Sec. 203 is still in play.
Air Products is now making the argument that pill has served its purpose and has should now be pulled to permit the shareholders to make a decision whether to accept the offer. The pill is - per Air Products - no longer proportional. Mr. Nachbar is essentially making the Interco argument. It's all about balance. Pills are not outlawed, but they are subject to limitations. The courts have rejected an ulimited use of the pill. Uh-oh...now he's showing a clip from The Deal of a recent interview with Marty Lipton recollecting the invention of the pill (we've previously posted that clip on this site and you can get it again here).
Citing a 1987 Marty Lipton article in the U Penn Law Review - Corporate Governance in the Age of Financial Corporatism - in which Nachbar argues that Lipton recginized there are limits to the valid use of pills and that under certain circumstances courts should require a pill to be redeemed. His quotes from the paper read like they came straight out of Air Products' brief. Ouch. Hey! Who's on trial here?! From the article (p75):
Thus, under conditions that ensure that a bidder is not abusing the tender offer process, the second generation pill allows the target's shareholders to determine the fate of the company after disclosure of all relevant information and with sufficient time to consider and act on such information.
Nachbar has moved on the Interco and Blasius. Back at Lipton again. This time citing his 2002 Chicago Law Review paper - Pills, Polls, and Professors Redux. Nachbar is making the point that all of the caveats in the paper that Lipton noted would be required before a pill should be pulled and the shareholders should be permitted to decide have all been met. He's using Lipton's own written record to argue that the defendants are moving the goal-posts.
Nachbar is giving a shout-out to Lucien Bebchuk's recent Airgas natural experiment paper. Chancellor Chandler wants to know if the Airgas experience is generalizable to all firms and is - playfully - suggesting Prof. Bebchuk write a paper on that topic. I think that was the point of Bebchuk's study, but whatever.
Citing the Shark Repellent data that only 11% of public firms now have pills in place -- presumbably that means that stockholders don't like pills. But, of the firms that don't have pills in place, how many could put one in place in less than 10 minutes during a board meeting? How about all of them. It's not a strong argument.
Wrapping up ... I think. His summary - ruling for Air Products won't end the world. On the other hand, ruling for Airgas means that any firm with a staggered board and a pill will forever be - essentially, if not absolutely - takeover proof. The defensive measures have long since served their purpose. It's time for the shareholders should decide. The board has offered no good reason why the shareholders should not be permitted to decide on an informed basis. The offer is non-coercive, the shareholders are informed, so he argues that Delaware law is "clear" that the continuing use of the pill is not a proportionate response to a non-extistent threat. Now, Nachbar sits and the court takes a 10 minute recess.
Back. Another Air Products Plaintiff shareholder attorney making an argument - sorry, don't know who she is [ed. Pamela Tikkelis]. In general, all the information is out there. There are no surprises, the offer is at a premium of any potential trading bands. All other options have been considered - LBO, recap, white knight - and rejected by the board. So, what threat is left? Not much. Potentially an injury to an informed minority - she recaps a colloquy between Chandler and McCausland.
OK, now we've moved on the the Airgas defense. Airgas' attorney stands up and says this is an easy case. The cases say that the board can take actions to defeat an offer, to kill it. The board is fully within its rights (and obligations) to use the pill to pursue the long term interests of the corporation. He points out that the Interco argument was specifically rejected in Paramount. The Supreme Court has made it clear that the board is not obliged to abandon a strategy unless there is no basis to sustain the corporate strategy. The corporate plan, he argues, is credible and one that Airgas has been pursuing since before the offer. It's not cooked up as a litigation strategy.
He asks - if the director has a duty to oppose an inadequate offer, how can it be a violation of those same duties when a board determines an offer is inadequate and fights against it. He's now pulling out the Air Products nominees and wielding them against APD. These guys were supposed to be independent and it turns out they were. They weren't puppets of APD and now they are also opposed to APD's offer. The new directors agreed with the incumbent directors. Ouch, again.
Buttering up Chandler by reading back to him the "highest authority" - Chandler's opinion in Unitrin. The three new directors agreed with the incumbents - therefore there is no basis that the board acted outside the realm of reasonableness. Anyway, if the shareholders don't like it, they vote out the entire board with a supermajority vote (citing Unocal and Aronson, 141(k), 211(b)). More buttering up of Chandler by talking approvingly of the Chancery Court opinion in Unitrin.
Now attacking APD's decision to decide to take the company through a strategy of getting control of the board through two annual meetings rather than using the supermajority route to oust the directors. The argument being - the reason that we're here at all is because APD decided to drag the process out, and try to low-ball shareholders. Key to that strategy was to put friendly directors on the board. Well, that didn't work out.
Let's see now going through and rebutting what he calls the plaintiff's campaign slogans. His point-by-point rebuttals are summarized in the slide below:
Going after the arbs: The board does not have a duty to short term stockholders - transient majority. It would be a terrible rule of law if a company must sell because of arbs - that companies must abandon plans and chase bids that are on the table rather than long-term shareholder value. Citing Dollar Thrifty - Delaware law does not require a sale whenever there is an offer on the table.
Ho-ho-ho we're showing video clips from Streetcar Named Desire!! Black and White - no colorized version for you. "Whoever you are...I've always depended on the kindness of strangers..." And the shareholders are supposed to be depending on the kindness of strangers... I get it. OK, that's fine the classroom, but let's keep the video clips out of the courtroom. Lunch? Chandler suggests popcorn. Back at 2pm.
OK, just dropping back into the arguments. Airgas is up arguing that the APD tender offer is coercive because of the involvement of arbs.
Airgas managers are in the best position to determine what is a good offer for shareholders. For example, look at the transformation of APD's directors. When they were on the outside they thought that APD's offer was fair. Once they got inside the tent and got more information than the shareholders they changed their mind.
Chancellor Chandler makign a point about what he meant by "best and final offer" in his communications to the parties.
An aside: They've not spent much time on this issue, yet but there's a question in the comments on 203 (see David Marcus above). Yes, that's still out there. I think this is a harder argument for APD to make. 203 is a statutory power. The language of the statute does not require any reasonableness standard be applied to a board's decision not to waive 203. I assume APD will argue that the court should read into 203 a reasonableness standard, but I think that will be a hard sell. We'll see, though.
.. OK, Airgas is still arguing that the APD best and final offer is not really a best and final offer. It's just a negotiating tactic - notwithstanding what APD has already told the court. It's all about "bester and finaler" offers... if best and final doesn't mean that, then the pill still has a purpose.
Airgas - investors do better when boards resist unwanted bids. Maybe. But, what if the bidder walks? I don't think the data is so uncategorical.
Anyway, Airgas has now moved onto the question of the threat analysis under Unocal. Again with the Chancery Court opinion in Unitrin!