Wednesday, February 29, 2012
Steven Davidoff previously did a very good overview of the issues facing Martin Marietta. I just want to add something to the discussion of the current legal battle in Delaware. Wait a minute ... what's a Maryland company seeking to take over a New Jersey company doing in a Delaware court? Martin Marietta and Vulcan are now before Chancellor Strine in Delaware arguing interpretation of a nondisclosure agreement. Martin Marietta is seeking a declaratory judgment from the Chancery Court that the NDA does not preclude them from undertaking a hostile tender offer for Vulcan. Here are the complaint, the answer, as well as the NDA in question.
Central to the Martin Marietta's argument is that the NDA does not include a standstill agreement. Had the parties, Martin Marietta argues, wanted to ensure that Martin Marietta be precluded from undertaking such a transaction in the event friendly talks fell through, they could have included the provision in the NDA, but they didn't. Martin Marietta is asking the court to give it a declaratory judgment that the NDA does not preclude them from pursing a hostile offer.
On the other hand, Vulcan claims that the confidential information handed over as part of the NDA can only be used in furtherance of the friendly transaction that the parties were contemplating when they signed the agreement. By going hostile, and presumably relying on some of the confidential information and disclosing the earlier talks, Vulcan argues that Martin Marietta is in violation of the NDA. Vulcan is looking for an injunction from the Chancellor to prevent the tender offer from going forward.
Here's the critical paragraph from the NDA:
First, Mets and Yankees? And no one thinks this deal could possibly ever go hostile? Why not call it Yankees and Red Sox? C'mon! Ok, there is no question that this NDA does not include a standstill provision of any sort. It just doesn't. Now the lawyers who negotiated the NDA know how to write standstill provisions. I'd dare say that standstill provisions are probably in their NDA form contracts. For whatever reason, they decided not to include a standstill in this agreement. Why? Who knows. It really doesn't matter, does it?
Now, look at the definition of "Transaction". Vulcan is arguing that they were negotiating a friendly deal and that any use of Vulcan's confidential information for any purpose other than the friendly deal is in violation of the NDA. The NDA defines "Transaction" as "a possible business combination transaction" between Martin Marietta and Vulcan. It doesn't read a friendly merger, a negotiated transction, or the like...just a business combination. I suppose a business combination transaction can be hostile as a well as friendly. The definition of the Transaction in the NDA certainly doesn't make it obvious that the NDA was meant to only cover a friendly, negotiated transaction and no other.
Anyway, Vulcan is asking for Chancellor Strine to read the minds of the parties rather than enforce what the parties have written on paper. It seems like hard argument for Vulcan to win.
Update: Yes, I am aware that I passed on an opportunity to offer up the "Strine engaging in a Vulcan mind meld to figure out the intent of the parties" pun. I'll let him do that in his opinion...
Tuesday, February 28, 2012
The experience with the J Crew going private last year was almost enough to turned me off altogether. It was, to put it mildly, not well done. Last week, Kenneth Cole announced that he intends to take his eponymous company private. In his letter to the board of Kenneth Cole Productions, Mr. Cole gave some suggestions to the board about how to approach thinking about his offer. And, wouldn't you guess, it's almost textbook:
I expect that you will establish a special committee of independent directors to consider this proposal on behalf of the Company’s public stockholders and to make a recommendation to the full Board of Directors. I also expect that the special committee will retain its own independent legal and financial advisors to assist in its review of the proposed transaction. I will not move forward with the transaction unless it is approved by the special committee. Given my extensive history and knowledge of the Company, I am prepared to negotiate a merger agreement with the special committee and its advisors and complete the transaction in an expedited manner. The merger agreement will provide that the transaction will be subject to a non-waivable condition requiring the approval of a majority of the shares of the Company that are not directly or indirectly owned by me.
Well, alright then. That's a nice start to a deal - touching all the right bases to set up a clean transaction. But, what's motivating this tranasction right now? I mean, Mr. Cole controls 89% of the voting shares of KCP. He can basically do what he wishes with the business without too much real interference from minority shareholders. Why take the company private now just as the equity markets are recovering? In the letter to the board, he lays out his stated reasons for the deal:
The proposed transaction will ensure the Company has the flexibility and structure to successfully navigate our market environment in the years to come. Recent market challenges have created a sharply competitive landscape, and I believe it is now more important than ever to embrace a more entrepreneurial perspective where we are all incentivized to grow and develop our Company’s products, brand and business with a longer term perspective. I believe it is increasingly difficult to develop this type of culture in a public company context, where the public markets are increasingly focused on short-term results. I am convinced that private ownership is in the best interests of the business and the organization and that this proposal is in the best interests of the shareholders.
... because I can. I guess that explains the $15 lowball opening offer...
Friday, February 24, 2012
Paul, Weiss just released its 2011 Review of Selected U.S. Strategic M&A Transactions. The report:
- examines the largest 25 such transactions announced during the seventeen-month period from August 1, 2010 through December 31, 2011, and
- compares the 10 largest transactions in calendar 2011 involving non-U.S. acquirors to those involving U.S. acquirors.
Among other things, the firm makes the following observations regarding the 2011 transactions:
- Rising equity prices raised dealmakers’ tolerance for risk
- Private equity-like treatment of financing risk declined substantially
- The strength of credit markets led to cash being used as the exclusive consideration in over half of the surveyed transactions
- Only one of the surveyed transactions was priced as a merger-of-equals ("MOE")—i.e., by offering no premium to either party’s shareholders—but many more included MOE-like post-closing governance provisions
- Despite an increase in cash-only transactions, the use of two-step (i.e., tender offer) structures declined
- The sizes of termination fees and reverse termination fees (in the few cases they were used) declined slightly
- Few non-U.S. acquiror transactions used stock consideration, likely reflecting the regulatory burden of listing securities in the U.S.
- Antitrust and other regulatory issues were less common among non-U.S. acquiror transactions, leading to the more frequent use of tender offer structures than in U.S. acquiror transactions
- None of the non-U.S. acquiror transactions limited the acquiror’s financing risk
- Non-U.S. acquirors gave more flexibility to target boards to change their recommendations
Thursday, February 23, 2012
Wednesday, February 22, 2012
I don't usually troll the Fox Biz sites, but this caught my eye. Apparently, the recent insider trading investigations are far from over. According to Charlie Gasparino, the DOJ/SEC have only just begun:
--They have “scheduled out” cases for the next five years, meaning that the use of wire taps and informants have netted far more cases than they had originally thought.
--Though it’s difficult to predict future case loads, law enforcement officials are in general agreement that “hundreds” of additional people could be charged in the years ahead. “In five years, we can easily see hundreds of people arrested and charged,” another senior law enforcement official told FOX Business.
Scheduled out for years? Wow.
Tuesday, February 21, 2012
Friday, February 17, 2012
TransUnion, of Smith v Van Gorkom fame, is to be sold by the Pritzker family and Madison Dearborn Partners to Advent International and Goldman Sachs for $3 billion. This sale will mark the exit of the Pritzker's from TransUnion.
Somewhere ... a corporate law geek just shed a tear.
Bloomberg has a very good piece on the current state of transaction related litigation. It ends with this gem from Prof. John Coffee:
“If you pay the class counsel a fee in any case, it’s like putting a saucer of milk for a kitten at your back door,” Coffee explained. “Overnight you’ll have 20 cats.”
Coffee's biases are pretty clear. No, seriously it's a good piece, balanced about an issue where there is really no clear right or wrong answer. It also has a quote of Vice Chancellor Laster making a point in Del Monte that I made a couple of years ago in my Bulletproof paper on deal protections, so I like that.
The piece also provides some additional useful information on settlement activity over the past year or so (below).
So the third annual Transactional Lawyering Meet sponsored by Prof. Karl Okamoto and the folks at Drexel is underway. This time, it's bigger and better than ever. Demand for the meet was so high that it has been organized into preliminary regional rounds to be followed by a national competition. I'm here at the Western New England University School of Law in Springfield, MA for the regional round with a group of students from BC Law. It looks like it's going to be a great day for the event. Eric Gouvin and the folks here at WNEC have done a great job organizing this round. Best of luck to all participants.
Thursday, February 16, 2012
In Tokyo, police and prosecutors have arrested seven former executives of Olympus, including ex-President Tsuyoshi Kikukawa, in connection with the M&A related accounting fraud that went there for over decade. You'll remember that former CEO Micheal Woodford blew the lid off the fraud when he started asking questions about large merger-related advisory fees that were used to hide accounting losses.
Tuesday, February 14, 2012
Justice Scalia demonstrated how out of touch he is with the current marketplace when he recently lectured law students to do what he did coming up:
On Monday, speaking to an audience of University of Chicago Law School students, Scalia returned to the theme. He told the students to think about practicing law in a way that “enables you to maintain a human existence… time for your family, your church or synagogue, community… boy scouts, little league,” according to the Chicago Sun-Times. Scalia also noted that he began his own law practice in Cleveland, Ohio (Jones, Day). “You should look for a place like that. I’m sure they’re still out there. Maybe you have to go to Cleveland.”
I don't think it's too out of school to note that Jones Day, like its peers, probably has a billing requirement for associates near 1,950 hours - even in Cleveland.
Former Vice Chancellor Stephen Lamb and his partners at Paul Weiss recently published a short article on the quasi-appraisal remedy. Although the quasi-appraisal began as a particular remedy in response to the facts in Weinberger, over time quasi-appraisal has been more widely applied. The article is worth a read to help think about how quasi-appraisal remedies fit into the current merger litigation landscape.
Friday, February 10, 2012
The challenge to Delaware's arbtration procedure got its day in court yesterday in Philadelphia.
"You have a judge, a Chancery Court judge, paid for by taxpayers in a closed courtroom dealing with these things," said U.S. District Judge Mary A. McLaughlin, where the proceedings, paperwork and often the resolution are under seal. "It's difficult for me," she said.
One bit of information from the hearing - until now there have been 6 different cases heard via this procedure. Previously only the Skyworks case had been publicly known. Apparently there were a few others.
In any event, the following exchange -- all the constitutional issues aside -- really summarizes what's really at stake:
Andre Bouchard, a private attorney representing the Chancery Court, argued the secret arbitration make the court more efficient and generates revenue for the state. He said that if the law is overturned, businesses would instead seek private arbitration elsewhere that could be kept secret.
"What public good comes from opening up a proceeding if nobody's going to use it?" he asked.
But Finger said the fact that the state makes money off the secret arbitrations is no reason to infringe on the rights of citizens.
Judge McLaughlin indicated that she would have a ruling within 90 days.
Thursday, February 9, 2012
OK, I'll admit it. I enjoy Chancellor Strine. He's got some freakin' interesting opinions that he's not freakin' afraid to share with you. And, whoa, when he freakin' lets his hair down (sorry), watch out. Evidence? He gave a freakin' talk to law students at York University recently and shared his views:
Chancellor Strine is blunt, witty and opinionated. He is by his own admission a left-winger on the U.S. political spectrum. He believes that the financial crisis was the product of too little regulation, that the U.S. tax system goes too easy on speculation, and that independent directors need to "show some spine" and stand up to financial "gimmicks" engineered by aggressive corporate controllers.
Salt those observations with a liberal use of the adjective "freakin'" and you pretty much capture his entire chat. Listening to him is part Harvard lecture and part pregame tailgate party.
The job of the corporate lawyer, he told students, is to help clients follow the better angels of their nature and resist actions that might provide immediate benefits in the short term, but cause greater harm in the long term. ...
"I think there should be a transactional tax that would create some useful friction against speculation," he said. He believes this transactional tax should be imposed internationally, perhaps across the Organization for Economic Co-operation and Development nations, to avoid arbitrage across countries.
He would also adjust the U.S. capital gains tax rate. The U.S. tax system makes a "longterm" rate of 15% available for investors who hold an asset for longer than one year. He suggests five years might make more sense - though he also questioned why capital gains deserve any discounted rate.
"I actually believe there's no reason why, in general, capital gains should be taxed at less than the same rate as sweat."
Strine will be hearing arguments for a preliminary injunction in the In re El Paso case today. I'm in a rush with respect to classes today, so I may not have time to drop in. But, don't wait for me. It'll be available on Courtroom View.
Wednesday, February 8, 2012
Francis Pileggi brings to my attention a number of suits filed in the past two days against Delaware companies with exclusive forum provisions in the bylaws. The exclusive forum bylaws are typically adopted by boards and not shareholders. They purport to restrict any shareholder litigation based on state law claims to the courts of the state of incorporation. Recent interest in such provisions is a result of the recent rapid increase in transaction-related litigation. Steven Davidoff's paper on The Great Game is good background, as is Bernie Black's paper, Is Delaware Losing its Cases? and Randall Thomas & Bob Thompson's paper Litigation in Mergers & Acquisitions.
Here are two of the current complaints: Sutton_vs_AutoNation_Inc and Tejinder_Singh_vs_Navistar_Int. They both attack a bylaw provision that was unilertally adopted by a board - so no shareholder vote. A similar bylaw was struck down last year in Galaviz v Berg as lacking sufficient indicia of consent. These complaints are worth giving a read. There's merit to the argument that unilaterally adopted bylaws shouldn't bind shareholders. But the complainants also raise a number of other interesting questions. I'm already on record supporting exclusive forum provisions in corporate charters, so I'll be following these cases with great interest.
Monday, February 6, 2012
David Marcus at The Deal had an interesting piece over the weekend on the role of confidentiality agreements in the context of hostile acquisitions. He focuses on confidentiality agreements in the Vulcan/Martin Marietta transaction and the Westlake/Georgia Gulf transaction. It's a good read. Marcus also offers up the following chart from Dealogic:
I'm curious as to how Dealogic defines "successful" - I suppose that a deal that starts hostile and then ends up with a negotiated transaction is considered successful. That's one way to think about it. But that does an injustice to the power of the poison pill. I doubt there are any deals on this list of US targets where a hostile bidder has been successful over the continued protests of the target board with a pill in place.
Friday, February 3, 2012
“After consultations with the SEC, Carlyle investors and other interested parties, we have decided to withdraw the proposed arbitration provision,” Christopher Ullman, a Carlyle spokesman, said today in an e-mailed statement. “We first offered the provision because we believed that arbitrating claims would be more efficient, cost effective and beneficial to our unitholders.”
Steven Davidoff didn't think the SEC would ever let Carlyle go public with the arbitration provision intact. Looks like he was rigtht.
The ABA Subcommittee on M&A Market Trends just release their annual Deal Points study. This annual study is a must read for anyone interested in M&A. The Subcommittee has done great work over the years compiling this study. So ... what are you waiting for? Download the 2011 study right now. Given my current interest in earnout provisions, I found the increase in the appearnce of earnouts in private company deals to be a bit of a surprise, especially given the current state of the economy. You'd think that if parties believe that earnout performance may be tied to general economic conditions, you'd expect sellers to eschew them when markets are soft. Apparently, not so. Thirty-eight percent of private company deals in the sample include earnouts. That's a lot.
Wednesday, February 1, 2012
Apparently, it's not only Chinese hackers that we have to worry about. Apparently, we have to worry about hugely popularly S-1 filings! Apparently, interest in the Facebook S-1 filing was so large that it crashed EDGAR. I've been unable to get on so far. Maybe I'll wait til tomorrow.