Saturday, March 24, 2012
You may remember that in February Navistar and about a dozen other companies that had adopted exclusive forum bylaw provisions were sued by shareholders in the Delaware Chancery Court. The suits challenged the enforceability of the bylaw provisions. A similar bylaw was struck down last year by a Cxalifornia district court in Galaviz v Berg as lacking sufficient indicia of consent. That's probably the right result with respect to bylaw provisions (as compared to exclusive forum provisions in certificates of incorporation).
In any event, one reason why it can be hard to convince clients to adopt such provisions in their bylaws or charters is that it's a pain in the next to be the first ones to do so. You get sued, get an ISS negative vote, etc. It's a real bother. Such a bother that sometime clients just say "to heck with it." Which is apparently what Navistar did the other day. Quietly, it filed a 8-K announcing that it had dropped it exclusive forum provision from its bylaws. AutoNation also did the same thing yesterday:
On March 23, 2012, the Board of Directors (the “Board”) of AutoNation, Inc. (the “Company”) approved an amendment to the Company’s By-Laws (as amended, the “Amended and Restated By-Laws”), effective immediately, to remove Article VIII, in its entirety, from the By-Laws. Prior to the amendment, Article VIII provided that the Court of Chancery for the State of Delaware would be the exclusive forum for certain corporate legal actions and proceedings involving the Company or its directors, officers or employees, including derivative claims, breach of fiduciary duty claims, claims under the General Corporate Law of the State of Delaware, the Company’s Certificate of Incorporate or the Company’s By-Laws, and claims governed by the internal affairs doctrine. As part of the amendment, Article IX of the Company’s By-Laws was renumbered as Article VIII.
No doubt, Navistar and AutoNation will appear in the Chancery Court sometime in the next few days asking to have the case dismissed for mootness. But wait, upon further inspection, these two aren't alone! Superior Energy, Franklin Resources and Curtiss Wright also deleted their provisions. Goodness, it's a wholesale surrender of the exclusive bylaw forces.
Who's left? Solutia (just sold to Eastman), Chevron, SPX, and Danaher. My guess all of those - except Solutia - will be walking away from their bylaws early next week as well. (Update: Tom Hals at Reuters also has the story.)
Friday, March 23, 2012
The Harvard Business Law Review is holding a symposium this afternoon and tomorrow with a super set of papers. I'm looking forward to the first one in particular: Managing M&A Disputes Through Contract by John Coates:
Abstract: An important set of contract terms manages potential disputes. In a detailed, hand-coded sample of mergers and acquisition (M&A) contracts from 2007 and 2008, dispute management provisions correlate strongly with target ownership, state of incorporation, and industry, and with the experience of the parties’ law firms. For Delaware, there is good and bad news. Delaware dominates choice for forum, whereas outside of Delaware, publicly held targets’ states of incorporation are no more likely to be designated for forum than any other court. However, Delaware’s dominance is limited to deals for publicly held targets incorporated in Delaware, Delaware courts are chosen only 20% of the time in deals for private targets incorporated in Delaware, and they are never chosen for private targets incorporated elsewhere, or in asset purchases. A forum goes unspecified in deals involving less experienced law firms. Whole contract arbitration is limited to private targets, is absent only in the largest deals, and is more common in cross-border deals. More focused arbitration – covering price-adjustment clauses – is common even in the largest private target bids. Specific performance clauses – prominently featured in recent high-profile M&A litigation – are less common when inexperienced M&A lawyers involved. These findings suggest (a) Delaware courts’ strengths are unique in, but limited to, corporate law, even in the “corporate” context of M&A contracts; (b) the use of arbitration turns as much on the value of appeals, trust in courts, and value-at-risk as litigation costs; and (c) the quality of lawyering varies significantly, even on the most “legal” aspects of an M&A contract.
I know it's a beautiful Spring day (70 degrees under blue sky in Boston), so what's stopping you from spending the afternoon in a conference room in Cambridge? Nothing! So head over this afternoon if you can.
Thursday, March 22, 2012
We tend to steer very clear of politics on this site, so I wouldn't usually weigh in on a bill before Congress, but please permit me to vent. Apparently, in a fit of bipartisan insanity, the Congress has decided that the proper lesson to be learned from the Financial Crisis of 2008 and the Dot Com bubble of the previous decade is that we need not protect investors!
Put simply, the proposed JOBS bill is a potential disaster for investors and for the integrity of US capital markets.
The proposed legislation (HR 3606) will exempt "emerging growth companies" from most disclosure requirements for up to five years following their IPOs. Okay, maybe small public companies can't afford the costs of compliance. But wait ... what's this?
The term `emerging growth company' means an issuer that had total annual gross revenues of less than $1,000,000,000 during its most recently completed fiscal year.
$1 billion in revenue is "emerging"?! I've just fallen off my chair. Someone pick me up. Here's a representative list of companies with less than $1 billion in revenue that might potentially fall under this definition. This is really just a license to for low quality firms to go public at the expense of the investing public. If investors really want to invest in crappy small companies, they should go to London's AIM. I don't understand why everyone in Congress is happily racing towards this cliff.
One of the biggest criticisms of Sarbanes Oxley after it passed was that it represented "quack corporate governance". There's something to that, but I don't think the best response is to roll it back and replace it with quack deregulation.
Professor John Coates analysis of the various proposals working their way through Congress is well worth a read.
Tuesday, March 20, 2012
Monday, March 19, 2012
The shareholder suit against Berkshire Hathaway's David Sokol (here, here, and here) was dismissed for failure to make demand. You'll remember that Sokol was accused by shareholders of taking a corporate opportunity when he learned about a corporate opportunity for Berkshire and then bought stock before bringing the opportunity to Buffet. Mr. Buffet wasn't too happy about it when he found out. Sokol was shown the door. Shareholders brought suit against Sokol and the Berkshire Hathaway board.
The question before the court today was whether the shareholders should have made demand of the corporation before bringing the derivative lawsuit. For derivative suits, shareholders have to make a demand that the board vindicate the corporation's rights or state why making such a demand would otherwise be futile. The shareholders argued that demand in this case would be futile for three reasons:
1) The fact that the board had not yet sued Sokol was evidence that they had no intention of doing so;
2) The board faced a substantial likelihood of liability such that it would cloud their ability to objectively resolve the question on their own; and finally,
3) That Warren Buffet is such a high-profile person that the board cannot be trusted to exercise their own independent business judgment in assessing the merits of a potential action against Mr. Sokol.
Looking at these questions, the court correctly determined that this is a case where demand should have been made, thus dismissing the case on the board's motion.
Of course, the board has already conducted an investigation into Mr. Sokol's trading and fired him for it. It might still bring a suit, but there is no requirement that it do so. It's well within the board's perogatives to determine what the proper level of "punishment" is for Mr. Sokol's trading. The substantial likelihood factor is unlikely to apply. There's allegation that the board itself did anything wrong. In fact, it appears that once the board found out about Mr. Sokol's trading, it took actions. Finally, I have no doubt that Mr. Buffet has a lot of influence over the Berkshire board. No doubt at all. But, I doubt that Mr. Buffet is all that happy about what Sokol did. He's already demonstrated that he isn't interested in ignoring it or sweeping it under a rug.
Anyway, rightly decided. That's enought corporate litigation review for today.
Wednesday, March 14, 2012
Following close on the heels of the El Paso opinion and the discussion at Tulane last week, one Goldman Sachs employee just had a Jerry Maguire moment- and in a big way - on the New York Times opinion page. Greg Smith, now a former director at Goldman Sachs, authored his own "mission statement" on his way out the door of Goldman. And he didn't hold back:
To put the problem in the simplest terms, the interests of the client continue to be sidelined in the way the firm operates and thinks about making money. ...
How did we get here? The firm changed the way it thought about leadership. Leadership used to be about ideas, setting an example and doing the right thing. Today, if you make enough money for the firm (and are not currently an ax murderer) you will be promoted into a position of influence.
What are three quick ways to become a leader? a) Execute on the firm’s “axes,” which is Goldman-speak for persuading your clients to invest in the stocks or other products that we are trying to get rid of because they are not seen as having a lot of potential profit. b) “Hunt Elephants.” In English: get your clients — some of whom are sophisticated, and some of whom aren’t — to trade whatever will bring the biggest profit to Goldman. Call me old-fashioned, but I don’t like selling my clients a product that is wrong for them. c) Find yourself sitting in a seat where your job is to trade any illiquid, opaque product with a three-letter acronym. ...
Integrity? It is eroding. I don’t know of any illegal behavior, but will people push the envelope and pitch lucrative and complicated products to clients even if they are not the simplest investments or the ones most directly aligned with the client’s goals? Absolutely. Every day, in fact.
Sounds like the traders have taken over Goldman. But, we knew that, right? Isn't that what 2008 was all about? Anyway, there was a lot of talk last week about Chancellor Strine perhaps going over the line with his rhetoric of shaming in El Paso. After reading this op-ed, it's hard to say he was far off the mark.
Monday, March 12, 2012
Richard Holwell, who presided in Manhattan federal court over the insider trading trial of Galleon Group and now in private practice, spoke to Bloomberg Law and tells us what he thinks about the SEC/FBI's recent push against insider trading. He says that the government decision to employ wiretapping is a "radical decision", a "game changer", using wire taps to pursue the Mafia is one thing, but to go after the business world, is quite another.
Thursday, March 8, 2012
This weekend marks the annual Tulane Law M&A confab. All the cool kids are there. The fact that I'm sitting in Boston as I write this should tell you something ... Anyway, there are already some interesting reports from Steven Davidoff and Michael De La Merced. Check them out.
David Weidner of the WSJ has a good post today asking the question, "Is Leo Strine Serious?" Of course, I'll admit to being a fan of Leo Strine's wit. If you read a lot of case law, which is the punishment for being a law professor, it's a wonderful thing to occasionally read an opinion where the writer's personality comes shining through. That said, Weidner is expressing a frustration that's bigger than simply Chancellor Strine and El Paso. The frustration is with the corporate law itself. Reuter's Allison Frankel puts it this way:
But is this really how we want the court system to work? Strine said he was afraid to enjoin the shareholder vote because Kinder Morgan could then walk away from the proposed acquisition, costing El Paso stockholders billions in lost equity. Does that mean the Delaware courts are unwilling to act against any single-bidder deal, no matter how tainted the process that produced it?
That's a good question. I guess it depends on how smart - or independent - we think shareholders are. If in cases like this one where there is a single bidder offering a premium, do we think shareholders are smart enough to read Strine's opinion and decide for themselves that it's a bad deal and reject it? Remember, the arguments and opinion are all before the shareholder vote. If I were an El Paso shareholder, I'd read the opinion and vote "no". Then, I'd try to find a way to eject Foshee from the board. But I'm not an El Paso shareholder, at least not directly.
but, maybe we think that shareholders are simply fools. Unthinking types who couldn't be bothered to vote "no" - because they are rationally apathetic or because they aren't paying attention. That's possible, too. In which case, shareholders need Chancellor Strine to stand up on their behalf and rule - this goes too far. Maybe.
But, if that's what shareholders are really like - and who's to say they aren't - then why do we spend so much time arguing for increased shareholder access to proxies, majority voting, and a host of other good governance measures that put the shareholders at the center of events? If shareholders are too checked-out to vote down the El Paso transaction following Strine's opinion, why do we think they'll be any better at selecting an attentive board?
I feel Strine's pain. Really, I do. It's a no win. He does his best to shame the executives (Prof Bainbridge on corporate shaming) and make it clear to shareholders that they should vote down the transaction, but without sticking his judicial nose too far in. It's a balance that leaves no one all that happy, especially him.
Wednesday, March 7, 2012
The El Paso transaction is getting uglier. Now that the vote has been delayed for a couple of days and Goldman has been publicly dragged out for criticism in dealing with the conflicts of interest, the focus has turned to the lawyers.
On that count, according to the WSJ, El Paso's lawyers say, don't look at us! We told El Paso to dump Goldman and they didn't listen to us:
Energy company El Paso Corp.'s decision to maintain Goldman Sachs Group Inc. as an adviser last year amid deal negotiations was made over the objections of El Paso's legal counsel, Wachtell, Lipton, Rosen & Katz, people familiar with the matter said.
Wachtell urged El Paso not to retain Goldman because, among other things, the bank had a 19% stake in Kinder Morgan Inc.
El Paso raises a legitimate question about the role of legal counsel in managing risks and conflicts in these kinds of transactions. Of course, it's ultimately up to the client which risks it wants and is willing to bear. It may well be that legal counsel is limited to simply raising issues. But, one lesson of El Paso might also be that legal counsel need to be more assertive in pointing out and managing investment banker conflicts when those conflicts generate risks for their corporate clients. With respect to El Paso, one might well think that El Paso's legal counsel should have been more aggressive in ensuring that when El Paso brought in a second investment bank to cleanse the Goldman conflict that the terms of that engagement created more freedom for the second banker to reject the preferred Goldman transaction and propose an alternative.
Conflicts will forever be with us, but we need to be better about dealing with them. Nothing new there, I suppose.
BTW: Steven Davidoff at The Deal Prof has a very good post on the problem of CEO narcissism. It's a real risk and one that legal counsel need to keep in mind. Just another headache for legal counsel...a client who believes they are morally entitled...
Monday, March 5, 2012
K&L Gates has posted a nice overview of the general issues one needs to consider when negotiating non-disclosure agreements and standstills (here), inclduing the limits on their enforceability. The authors of the memo also point out the hole in the indirect protection argument that Vulcan is attempting to make in front of the Chancery Court when they advise targets not to fall for the indirect protection argument when negotiating standstills:
When negotiating a standstill, the acquiror may argue that the target company does not need a lengthy standstill because it is already indirectly protected by the confidentiality agreement providing that the proprietary information to be provided to the acquiror may only be used in connection with the currently negotiated transaction and not for any other purpose. Targets should resist such argument—the target’s board wants certainty that the acquiror cannot launch a hostile bid and does not want to get into an argument about whether the acquirer is misusing the proprietary information.
If you want a standstill, ask for a standstill.
Friday, March 2, 2012
One wonders why investment bankers get a bad rep? Well, they certainly didn't cover themselves in glory in the El Paso transaction. This from the El Paso opinion describing the fee arrangements - including the fee to pay Morgan Stanley, who was hired to balance Goldman's structural bias in favor of doing a transaction with Kinder Morgan:
Even worse, Goldman tainted the cleansing effect of Morgan Stanley. Goldman clung to its previously obtained contract to make it the exclusive advisor on the spin-off and which promised Goldman $25 million in fees if the spin-off was completed. Despite the reality that Morgan Stanley was retained to address Goldman’s bias toward a suboptimally priced deal with Kinder Morgan and thus Morgan Stanley’s work in evaluating whether the spin-off was a more valuable option was critical to its integrity enforcing role, Goldman refused to concede that Morgan Stanley should be paid anything if the spin-off, rather than the Merger, was consummated. Goldman’s friends in El Paso management – and that is what they seem to have been – easily gave in to Goldman. [..] This resulted in an incentive structure like this for Morgan Stanley:
- Approve deal with Kinder Morgan (the entity of which Goldman owned 19%) – get $35 million; or
- Counsel the Board to go with the spin-off or to pursue another option – get zilch, nada, zero.
This makes more questionable some of the tactical advice given by Morgan Stanley and some of its valuation advice, which can be viewed as stretching to make Kinder Morgan’s offers more favorable than other available options. Then, despite saying that it did not advise on the Merger – a claim that the record does not bear out in large measure – Goldman asked for a $20 million fee for its work on the Merger. Of course, by the same logic it used to shut out Morgan Stanley from receiving any fee for the spin-off, Goldman should have been foreclosed from getting fees for working on the Merger when it supposedly was walled off from advising on that deal. But, Goldman’s affectionate clients, more wed to Goldman than to logical consistency, quickly assented to this demand.
Here's the El Paso opinion. Of course, it wasn't just them. El Paso CEO Foshee doesn't come across as someone you'd trust to hold your wallet, either. Anyway, where might this go from here? That's a good question. As Strine notes, Foshee and Goldman's actions in connection with this sale still make out a reasonably good claim for a loyalty violation:
At a time when Foshee’s and the Board’s duty was to squeeze the last drop of the lemon out for El Paso’s stockholders, Foshee had a motive to keep juice in the lemon that he could use to make a financial Collins for himself and his fellow managers interested inpursuing an MBO of the E&P business. The defendants defend this by calling Foshee’sactions and motivations immaterial and frivolous. It may turn out after trial that Foshee is the type of person who entertains and thendismisses multi-billion dollar transactions at whim. Perhaps his interest in an MBO was really more of a passing fancy, a casual thought that he could have mentioned to Kinderover canapés and forgotten about the next day.
It could be.
Or it could be that Foshee is a very smart man, and very financially savvy. He did not tell anyone but his management confreres that he was contemplating an MBO because he knew that would have posed all kinds of questions about the negotiations with Kinder Morgan and how they were to be conducted. Thus, he decided to keep quiet about it and approach his negotiating counterpart Rich Kinder late in the process – after the basic deal terms were set – to maximize the chance that Kinder would be receptive.
Hmm. So there may be a case against Foshee, but the court recognized that monetary damages against Foshee may be an imperfect remedy - damages might be upwards of $500 million and Foshee, as well off as he might be, simply isn't worth that much. Also, aiding and abetting against Goldman is tough to prove. So what to do? Absent a competing offer on the table, Strine opted to let shareholders - who one presumes are autonomous and smart enough to determine what's in their best interests - decide for themselves whether they want to accept this tainted premium offer.
It's an imperfect result, but it may be all that's possible.
Thursday, March 1, 2012
Yesterday Chancellor Leo Strine "reluctantly" declined to issue an injunction to prevent a vote of El Paso's shareholders on proposed merger with Kinder Morgan. Goldman Sachs owns 19% of Kinder Morgan, and Goldman Sachs was El Paso's financial advisor on the transaction. In any normal world, that would raise loyalty concerns and trigger an entire fairness review. Here, not so much:
“I reluctantly deny the plaintiffs’ motion for a preliminary injunction, concluding that the El Paso stockholders should not be deprived of the chance to decide for themselves about the merger, despite the disturbing nature of some of the behavior leading to its terms[.]”
How conflicted is Goldman in this transaction? Well, the lower the buyout price, the higher the relative return for Goldman as a Kinder Morgan investor. That's pretty conflicted, especially if El Paso was relying on Goldman to play a central role in negotiating a price and issue a fairness opinion. In any event, Goldman held the position that it was transparent with everyone, recusing themselves from board discussions and disclosing their interests. El Paso also hired a second financial advisor to double source the advice it was getting.
Given that all the information about Goldman's conflict has been disclosed to shareholders in advance of the vote and that shareholders are still capable of saying no, Strine is letting it go to them. Anyone familiar with the Delaware code will remember that under Section 144, a fully informed stockholder vote can cleanse a transaction where there are director conflicts. Strine is allowing the deal to move forward on the basis that a fully informed shareholder vote may be capable of cleansing the Goldman conflict in this deal.
As an aside, The American Lawyer has a lengthy piece on the Chancery Court under Chancellor Strine. It's a good read.