Thursday, June 28, 2012
Kevin LaCroix has notes from Chancellor Strine's talk at the annual Directors College, which tool place at Stanford Law School last week:
The centerpiece of his presentation was a discussion of the lessons for directors based on the cases he has seen over the years. As a preliminary matter, and actually throughout his discussion of these issues, he emphasized that it is very rare that outside directors are actually held individually liable. He pointed out that, for example, cops, teachers and doctors are held liable much more frequently. But even if an outside director’s chance of being held liable is low, the chance of “looking like a chump” or that you have “failed your mission” is very high if you don’t watch out for certain things.
"Don't be a chump" and other nuggets of advice for corporate directors.
Afra's new paper, A Shareholder's Put Option: Counteracting the Acquirer Overpayment Problem is now appearing in the Minnesota Law Review. Here's the abstract:
Acquisition transactions are often the most significant activity undertaken by corporations. Despite the plethora of acquisition transactions, numerous empirical studies find that large-scale acquisition transactions involving public companies result in significant losses for acquiring firms and their shareholders. Finance scholars have attributed these losses to managerial agency costs (such as personal benefits in the form of increased compensation for management) and behavioral biases (such as ego and hubris) of boards and management.
Curiously, corporate law has remained largely silent in the face of this evidence. Acquisition transactions involve fundamental questions pertaining to the allocation of power between managers and shareholders. While corporate law has robust doctrines pertaining to the rights of shareholders of selling firms, it gives little attention to shareholders of acquiring firms. Under current statutory schemes, acquirer shareholders rarely enjoy any decision-making role in acquisitions. Moreover, judicial doctrine’s deferential stance toward the acquirer’s management means that acquirer shareholders are unable to seek any redress through the courts.
The Article proposes a novel solution to alter the stark imbalances in power between managers and shareholders of acquiring firms: a shareholders’ put option. The market pricing and shareholder direct participation contemplated by this proposal offer a referendum and monetary mechanism through which shareholders of acquiring firms could participate in acquisition decisions. The Article also provides a market-oriented incentive and process through which boards of acquiring firms could meaningfully consider whether to acquire another firm and how to properly value it. A diligent board could in fact use the put option to signal a well-valued transaction. Moreover, if exercised, a shareholders’ put option would force the acquirer’s management to internalize the costs of a value-destroying acquisition. If successfully used, a shareholders’ put option may be an optimal way to alter the balance of power in acquisition transactions so as to address the destruction of value suffered by acquirer shareholders.
Download it now!
Wednesday, June 27, 2012
The FTC and Department of Justice have just released their HSR report for 2011.
Mayer Brown has issued a client alert analyzing the report, which notes (among other things), that
- A significant increase in Hart-Scott-Rodino (HSR) filings, continuing a trend from the low point in 2009 after the economic downturn;
- The Obama administration continues to investigate a higher percentage of mergers than did the previous administration; and
- As has been the case since 2009, once a full investigation is opened, there is a high likelihood that the investigation will result in the government challenging the transaction.
Based on the report, Mayer Brown warns that parties considering mergers and acquisitions should expect continued aggressive antitrust enforcement by the Obama administration.
Tuesday, June 26, 2012
With all the bad press law schools have gotten in the press of late, this bit of news out of Texas about Texas A&M acquiring a law school comes as a bit of an eyebrow raiser:
By this time next year, Texas Wesleyan School of Law could have a new name: Texas A&M University School of Law at Texas Wesleyan University.
The deal has been in the works since October 2011. Today both universities, as well as The Texas A&M University System, are announcing they signed a letter of intent for A&M University to pay $20 million to assume ownership and operations of Texas Wesleyan's law school; A&M would pay Texas Wesleyan an additional $5 million within five years of closing, says A&M System spokesman Steve Moore. Texas Wesleyan would remain the owner of the land and facilities and would rent them to A&M.
The deal would transform the Texas Wesleyan law school from a private to a public law school.
Here's the Texas A&M press release.
Monday, June 25, 2012
Apologies for the light blogging. With summer and travel schedules, it's been slipping. Back now. So expect me more often.
That said, perhaps a "Shareholder Spring" for the UK? It looks like the UK is going to take say-on-pay one step further and is now seeking binding shareholder votes. Vince Cable, the UK's business secretary announced the move last week ago because the government believed that the non-binding votes weren't working. By working, he meant that where shareholders voted "no", there was an expectation that boards would respond by reevaluating pay practices and adjusting downward. In fact, that didn't happen and pay went up. Part of that might be traced to board recalcitrance, but I suspect a larger part can be traced to the fact that in the say-on-pay environment there are many more datapoints with respect to what peers are paid that it the rachet effect sends pay up as even responsible boards strive to pay in the top half of the range of selected peers. From the Guide to Directors Pay:
Experience with the say-on-pay votes in the US has been pretty uniform -- shareholders vote them down. Prof John Coates believes that the fact in the first year or two of implementation that such votes aloready get about 30% opposition is a sign that over time shareholders will turn to negative pay votes as a way to signal discontent to boards. The UK experience suggests that even negative non-binding votes might not be enough for shareholders to really affect and influence board policy. Perhaps binding votes are in our future as well? In that case, best to pay attention to what is happening in the UK now.
Wednesday, June 20, 2012
AALS Section on Transactional Law and Skills
Call for Papers
January 2013 Annual Meeting
The AALS Section on Transactional Law and Skills will meet during the AALS Annual Meeting in New Orleans, Louisiana, from 1:30 pm – 3:15 pm on Saturday, January 5, 2013. Please note this program in your calendar. We hope to see you there.
We are soliciting papers for presentation at the Annual Meeting. The topic for this year’s session is: Researching and Teaching Transactional Law and Skills in an Increasingly Global World.
Two presenters will be chosen on the basis of paper summaries submitted in response to this Call for Papers. The topic encompasses the scholarship and teaching of international and comparative transactional law and cross-border transactions. The Executive Committee encourages submissions on a broad range of transactional law and skills issues related to this year’s topic. Paper proposals focused on the teaching of international and comparative transactional law and skills are welcomed, but the Executive Committee is especially interested in papers that explore international and cross-border transactions from an empirical, doctrinal, or theoretical perspective. The Executive Committee specifically encourages submissions from junior scholars.
If you are interested in presenting a paper, please submit a summary of no more than three double-spaced pages, by e-mail, on or before Monday, July 30, 2012. You also may submit a complete draft of your paper. Send your submission to Joan Heminway at The University of Tennessee College of Law (email@example.com). Papers will be reviewed and selected for presentation at the program by members of the Executive Committee of the Section on Transactional Law and Skills:
Afra Afsharipour, Treasurer (U.C. Davis)
Eric Gouvin, Chair-Elect (Western New England)
Joan Heminway, Chair (Tennessee)
Lyman Johnson (Washington and Lee/St. Thomas)
Therese Maynard (Loyola Los Angeles)
Gordon Smith, Secretary (BYU)
Tina Stark, Past Chair (Boston University)
Authors of accepted papers will be notified by August 31, 2012. Please pass this Call for Papers along to any colleagues who may be interested.
Thursday, June 7, 2012
Looks like some shareholders have sued the board of CVR Energy and are looking for the court to order the board to adopt a poison pill to protect the corporation from Carl Icahn's pending freeze-out of minority shareholders. Here's the Complaint. Here's a summary of the allegations from the complaint:
This case arises from the efforts of Carl Icahn, CVR’s controlling shareholder, to effect a creeping tender
offer that is designed to freeze out the Company’s minority stockholders for inadequate consideration.
After acquiring control of the Company through a Tender Offer (defined below), and replacing CVR’s Board
of Directors, Icahn has now embarked on a plan to acquire 90% of the Company’s outstanding stock
through public purchases at depressed prices as a precursor to a shortform merger that will eliminate any
minority position in the Company without providing them the statutory protections to which they are entitled
as long as the minority stake in the Company exceeds 10%. The CVR Board, comprised entirely of Icahn
loyalists, is facilitating Icahn’s unlawful scheme.
If the Icahn controlled board were ordered by the court to adopt a poison pill, then this would end Icahn's creeping freeze-out. There are two issues: First, these facts fall into the uncomfortable Siliconix/Lynch divide. Remember in Kahn v Lynch, if a controlling shareholder takes out minority shareholders in a statutory merger, then entire fairness applies and minority shareholders get procedural protections. However, if a controlling shareholder decides to take out the minority via a tender offer, then there is no entire fairness review (Siliconix). Chancellor Strine tried to make sense of the differing standards in Cox Communications. Vice Chancellor Laster adopted Strine's approach to tender offer squeeze outs in CNX Gas Corporation and invited the Delaware Supreme Court to weigh in:
Likewise under the Cox Communications framework, if a first-step tender offer is both (i) negotiated and recommended by a special committee of independent directors and (ii) conditioned on the affirmative tender of a majority of the minority shares, then the business judgment standard of review presumptively applies to the freeze-out transaction. [...] As with a merger, if both requirements are not met, then the transaction is reviewed for entire fairness.
The relevant question for the court is whether Icahn's open market purchases are akin to a first step-tender offer for purposes of the Cox framework. Applying the standard in Cox and CNX Gas would suggest that before Icahn moved forward with his open market purchases of CVR stock (following the closing of his tender offer and taking control of the board), an independent committee of his controlled board, with the power to say no, must negotiate and recommend the first step of the freeze-out plan - and that this freeze out plan (market purchases plus a short form merger) must be conditioned on a majority of the minority shares. Now, there's no evidence yet that either of these conditions have been met. Therefore, it's likely - absent evidence to the contrary - that entire fairness will be the standard here.
The remedy the plaintiffs are asking for is interesting. This is the "man bites dog" part of the case. The plaintiffs are asking for an order to require the board to adopt a poison pill to stop Icahn from acquiring more shares. Now, these days the typical case that shows up in court involves shareholders asking courts to order boards to pull pills so that a takeover can proceed. For the same reason courts are loathe to order boards to drop pills, they are going to be loathe to order boards to adopt pills.
Monday, June 4, 2012
On May 29, 2012, in RadLAX Gateway Hotel LLC v. Amalgamated Bank,the U.S. Supreme Court unanimously held that a debtor-owner of a hotel encumbered by a mortgage lien securing over $120 million of indebtedness could not obtain confirmation of a chapter 11 plan proposing to sell the hotel free of the lien to a stalking horse bidder offering $55 million cash, or to any bidder offering more, unless the mortgagee were allowed to credit bid up to its full claim.
Justice Scalia called it "an easy case" of statutory construction of Bankruptcy Code section 1129(b)(2)(A).
As this Ropes & Gray client alert notes, "[t]his decision resolves a split among the Circuits that caused uncertainty for lenders and encouraged forum shopping among debtors."
See this Proskauer client alert for some of the implications of the ruling.
Friday, June 1, 2012
The Economist has a piece on the issue of transaction-related litigation that's worth reading (here). It starts with that gem of a Vonnegut quote from God Bless You Mr. Rosewater that Ron Gilson used in the introduction to his article on Value Creation:
In every big transaction, there is a magic moment during which a man has surrendered a treasure, and during which the man who is due to receive it has not yet done so. An alert lawyer will make the moment his own, possessing the treasure for a magic microsecond, taking a little of it, passing it on.
The Economist editors leave out the best part, which comes immediately after:
If the man who is to receive the treasure is unused to wealth, has an inferiority complex and shapeless feelings of guilt, as most people do, the lawyer can often take as much as half the bundle, and still receive the recipient’s blubbering thanks.
Plaintiffs in the Maryland suit against the HGS board yesterday failed in their bid to get a order to force the board of HGS to pull the pill they put in place last month:
A Montgomery County Circuit Court judge shot down an HGS shareholder’s request for a temporary restraining order to invalidate the “poison pill” the Rockville biotech enacted last month to make it a less attractive acquisition target.
The biotech was sued by shareholder Duane Howell of Baltimore, who claims its management is cheating him, other stockholders and the company itself by rejecting GlaxoSmithKline’s $2.6 billion offer in April, and then instituting the shareholder rights plan, or poison pill. ...
Judge Michael D. Mason said Thursday that HGS had properly accounted for its actions with its shareholders when it issued the poison pill May 16.
No surprise here, I suppose. The bigger surprise would have been if the Maryland judge had ignored both Delaware and Maryland law and order the pill pulled. Odd though, Bloomberg reports that the judge in this case qas concerned that only one shareholder, the litigant, was complaining:
After a hearing on Thursday, Montgomery County Circuit Court Judge Michael Mason denied Howell's request, saying only one shareholder had sued the company, according to a report by Bloomberg News.
"This is not a case where a number of disgruntled shareholders have come to court up in arms," the judge said in court, according to the report.
Even under Maryland law, the number of plaintiffs shouldn't matter to the result. Hmm.