Thursday, August 30, 2012
A Federal District Court in Philadelphia just handed down a ruling in the challenge to Delaware's Chanery arbitration procedure, which I wrote about some months ago (November Post: More Thoughts on the Chancery Arbitration Procedure). The court ruled in favor of the Delaware Coalition for Open Government's position that the public has a qualified right of access to proceedings of the public courts. Arbitration conducted before Delaware chancellors pursuant to the Chancery arbitration procedure is sufficiently like a non-jury trial as to implicate that right notwithstanding the legislation creating the procedure and the wishes of the parties.
Short version: the confidential arbitration procedure falls.
Here's the opinion: DCOG v Strine, et al Opinion.
The ABA Journal is generating its annual 100 Best Legal Blogs list. It all starts with a nomination and for some reason, they are opposed to self-nomination. If you are so inclined, please nominate the M&A Law Prof Blog here: Blawg 100 Amici.
You want to know why the HSR guy down the hall sighs and slumps his shoulders every time you burst into his office with the great news that you just signed a deal to acquire a company with big operations in Brazil? This is why:
Under the legislation, the [Brazilian] antitrust authority known as Cade has said it will take no more than 330 days to review a proposed merger. Previously, companies filed requests to review a deal after an accord had already been closed, allowing operations to be integrated before approval from Cade, which took as long as two years in some cases.
Brazil is proposing to revise its premerger notification system to speed up approvals from two years following closing to 330 days. I guess that's better, but still ... ugh. I don't know if this change is necessarily an improvement. Previously, you had to file post-closing and then let it sit for years -- with the risk that antitrust authorities might require you to 'unscramble the eggs' at some point. Now, you will be required to file within 15 days of signing, but then you have to sit for as long as 330 days (240 days, plus an additional 90 days in "complex" cases), not 30 days like in the US (The Economist).
Tuesday, August 28, 2012
The University of Richmond School of Law is looking to fill a tenure-track corporate/transactional law position. Their announcement:
The University of Richmond School of Law is looking to fill a tenure-track position in the area of corporate and transactional law. Entry level candidates should have outstanding academic credentials and show superb promise for top-notch scholarship. Lateral candidates should have a superb record of scholarship and teaching. Applications and inquiries may be directed to Professor Corinna Lain, Chair of Faculty Appointments, at email@example.com.
I have been to Richmond and it is quite a charming city.
Over at Corporate Counsel, they've posted a useful update on the current state of exclusive forum provisions. One change over the past year of note has been the change in stance of ISS with respect to such provisions. They have moved from a qualified vote against recommendation to a "case-by-case" approach shareholder questions with respect to such provisions. Glass Lewis continues to recommend against such provisions. Of interest, CC notes that in 2012 none of the shareholder resolutions against exclusive forum provisions passed notwithstanding recommendations against by both Glass Lewis and ISS.
Jordan Barry and his co-authors weigh in on the question of empty-voting in their new paper, On Derivative Markets and Social Welfare: A Theory of Empty Voting and Hidden Ownership.
Abstract: The prevailing view among many economists is that derivatives markets simply enable financial markets to incorporate information better and faster. Under this view, increasing the size of derivatives markets only increases the efficiency of financial markets.
We present formal economic analysis that contradicts this view. Derivatives allow investors to hold economic interests in a corporation without owning voting rights, or vice versa. This leads to both empty voters — investors whose voting rights in a corporation exceed their economic interests — and hidden owners — investors whose economic interests exceed their voting rights. We show how, when financial markets are opaque, empty voting and hidden ownership can render financial markets unpredictable, unstable, and inefficient. By contrast, we show that when financial markets are transparent, empty voting and hidden ownership have dramatically different effects. They cause financial markets to follow predictable patterns, encourage stable outcomes, and can improve efficiency. Our analysis lends insight into the operation of securities markets in general and derivatives markets in particular. It provides a new justification for a robust mandatory disclosure regime and facilitates analysis of proposed substantive securities regulations.
Friday, August 24, 2012
Peter D. Lyons, David P. Connolly and Zhak S. Cohen of Shearman & Sterling analyze a series of recently decided high-profile cases involving conflicts of interest in change of control transactions and conclude that these cases
have not changed our guidance for handling conflicts: identify them early, disclose them appropriately, determine whether they are disqualifying or can be mitigated and, when mitigation is possible, mitigate them effectively.
You can read the whole thing here.
Byron Eagan of Jackson & Walker's annual Acquisition Agreement Issues is posted at JDSupra. This is a good wrap up of current issues and well worth downloading - especially for junior associates about to start in an M&A practice group. Something to read on your bar trip! I know it's 450 (?!) pages long, but that's why God made Kindles.
Thursday, August 23, 2012
Ok, news for corporate law geeks. The Corporate & Securities Law Blog reports this morning that the Appellate Division of the New York Supreme Court in Yudell v Gilbert has discarded its previous case-by-case approach to determining whether shareholder litigation is direct or derivative. Rather, it held that going forward the test to apply is the test announced in the Tooley v. Donaldson, Lufkin & Jenrette (Delaware Supreme Court). The Tooley test asks a court to consider two things: 1) who suffered the harm in question; 2) to the extent there is a remedy, who will receive it. Where the answers to those questions are "the corporation", then the litigation is derivative. Where the answers are "the shareholder", then the litigation is direct.
The question of whether shareholder litigation is direct or derivative is a go-to for law professors at exam time. I guess the beginning of a new academic year is the right time to iron our some of the jurisdictional differences in favor of a more "common sense approach" (NY's words).
Wednesday, August 22, 2012
Last week Chancellor Strine handed down In re Synthes S'holder Litig last week. It's an interesting opinion that's getting some attention from Prof. Bainbridge and Larry Hamermesh among others. Prof. Bainbridge looks at the opinion from the perspective of Revlon. Prof. Hamermesh makes important points about the pleadings.
In Sythnes, the controlling shareholder sought to liquidate his position through a sale. His choices were between J&J (for 65% stock and 35% cash) and a PE buyer for cash. The PE buyer required that the controller (and no one else) roll over a portion of his equity into the continuing corporation. Not interested in hanging around longer than necessary, the controller opted to pursue the transaction with J&J. The plaintiff's theory was the in pursuing a transaction with J&J that did not require the controller to participate in the firm post-closing rather than a competing transaction with a PE buyer, which could have brought more for minority shareholders, that the controller violated his fidcuiary duties to the minority. Chancellor Strine ruled that controllers have no fiduciary obligation to pursue transactions that benefit minority shareholders at the expense of the controller and that in accepting an offer that gave the same pro rata consideration to all shareholders the controller had not violated his fiduciary duties to shareholders.
Also, Chancellor Strine observed that a deal in which consideration included 65% stock did not invoke Revlon obligations.
Tuesday, August 21, 2012
If you are a reasonably regular reader of this blog, you'll know that I absolutely love studies that try to relate corporate governance issues to the use of corporate jets. Now, there's a new one! John Coates has posted a paper that is forthcoming in JELS. In Corporate Politics, Governance, and Value Before and After Citizens United, Prof Coates makes a number of interesting observations: first, companies whose CEOs use corporate jets for private travel are more likely to use the corporate machinery to engage in political activity; and second, firms that engage in political acitivity have lower valuations than firms that do not engage in political activity.
Abstract: How did corporate politics, governance and value relate to each other in the S&P 500 before and after Citizens United? In regulated and government-dependent industries, politics is nearly universal, and uncorrelated with shareholder power, agency costs, or value. But 11% of CEOs in 2000 who retired by 2011 obtained political positions after retiring, and in most industries, political activity correlates negatively with measures of shareholder power, positively with signs of agency costs, and negatively with shareholder value. The politics-value relationship interacts with capital expenditures, and is stronger in regressions with firm and time fixed effects, which absorb many omitted variables. After the shock of Citizens United, corporate lobbying and PAC activity jumped, in both frequency and amount, and firms politically active in 2008 had lower value in 2010 than other firms, consistent with politics at least partly causing and not merely correlating with lower value. Overall, the results are inconsistent with politics generally serving shareholder interests, and support proposals to require disclosure of political activity to shareholders.
Monday, August 20, 2012
Saturday, August 18, 2012
Standard learning has long held that a minority shareholder of a Pennsylvania corporation who was deprived of his stock by a "cash-out" or "squeeze-out" merger had no remedy after the merger was completed other than to take what the merger gave or demand statutory appraisal and be paid the "fair value" for his shares. No other post-merger remedy, whether based in statute or common law, was thought to be available to a minority shareholder to address the actions of the majority in a "squeeze-out." Now, after the Pennsylvania Supreme Court’s holding in Mitchell Partners, L.P. v. Irex Corporation, minority shareholders may pursue common law claims on the basis of fraud or fundamental unfairness against the majority shareholders that squeezed them out.
The full client alert can be found here.
Thursday, August 16, 2012
I noted earlier in the week that Facebook will be issuing 23 million shares as consideration in its acquisition of Instagram pursuant to a 3(a)(10) fairness hearing exemption. There are lots of good reasons to issue shares pursuant to a 3(a)(10) exemption - cost, timing, etc. But, remember today is the day 270 million shares hit the market following the expiration of lock-ups, and FB has hit an all time low. I suspect the market won't be all that happy to absorb 23 million more shares at the end of next week...
If you're at all interested, Facebook's fairness hearing package should published on the CALEASI database. I just did a quick search and it's not there, yet.
Oh, I commented for the FT on the Facebook fairness hearing. I think I said something like "It was worth a billion at signing and now it's down by half, is that fair?" Since I asked that question, let me answer it. Uh...yes. Instagram was a company that sold for $1 billion (30% cash and 70% stock) despite having no revenue! Is it fair to shareholders that their revenueless company now gets only $350 million of stock (or some rough equivalent) and $300 million in cash now that Facebook's shares have declined in value? Sure it is. Is it the highest price the board could have gotten? Probably not. In hindsight, taking more of that in cash would have worked out better, but the Instagram board made a reasonable bet -- that FB shares might soar -- that turned out to be wrong. No penalities for that.
In any event, Instagram has only a handful of shareholders who are all extremely close to management - the CEO of Instagram holds 45% of the shares himself. I doubt any of them are going to show up at what will otherwise be a non-contentious hearing to demand more for their revenueless company.
Wednesday, August 15, 2012
In a letter to the FTC, Senators Herb Kohl (D-WI) and Mike Lee (R-UT) come to the defense of audiophiles everywhere. Their letter summarized findings of a hearing by the Subcommittee on Antitrust, Competition Policy, and Consumer Rights on the proposed acquisition of EMI by Universal. They point to the rapid shift in the structure of the music distribution market from CDs to online distribution and caution that the acquisition could potentially be anticompetitive - a combined Universal/EMI controls over 40% of US market share by revenue (and 51 of the 2011 Billboard 100). Sens. Kohl and Lee argue that the strength of a combined Universal/EMI's catalogue could form a bottle-neck in any online distribution and create market power for the combined entity, stifling potential competition and efficiency.
For its part, Universal's CEO told the committee that it would be "insane not to license, develop, make available through as many platforms through as many retailers as possible." I don't know...I seem to remember a time not long ago when all the major record labels were "insane" in precisely that way.
In any event, here's the full text of the letter to the FTC. The ball is in the FTC's court.
Tuesday, August 14, 2012
For those of you paying attention during this hot (possibly hottest ever?!) summer, the California Department of Corporations has just scheduled a 3(a)(10) fairness hearing to pass on the fairness of the Facebook stock to be issued in connectin with Facebook's acquisition of Instagram.
The fairness hearing process has fallen out of fashion, but it hasn't gone away altogether. You'll remember that the 3(a)(10) fairness hearing, which was very popular during the height of the dot com bubble is an avenue for getting an exemption from registration of securities. You can find a description of the fairness hearing process at the Dept of Corporations website here.
Tuesday, August 7, 2012
Becher, Juergens, and Vogel have a paper, Do Acquirer CEO Incentives Impact Mergers?, examining the effect of CEO stock ownership and stock options on CEO acquisition decisions. One observation, stock ownership matters. CEOs with large amounts of stock are less likely to pursue value reducing acquisitions. Stock options, on the other hand, aren't as good at incentivizing value enhancing acquisitions. More and more the evidence continues to pile up across a number of governance areas - stock options aren't all they were hoped to be incentive-wise.
Abstract: This paper examines the mechanisms by which CEOs are incentivized and their impact on merger decisions. We argue that CEO ownership and incentive-based (option) holdings are not interchangeable and have differing effects on the choice to undertake a merger, the structure of mergers conditional on a firm undertaking a merger, and ultimately the performance of a deal. Results suggest that CEO ownership aligns incentives, enabling CEOs to make decisions around mergers that maximize shareholder value. CEOs with higher levels of ownership are less likely to take on mergers or hire advisors, more likely to use cash financing, pay lower premiums, and have better post-merger performance. CEO incentive-based holdings on the other hand are associated with higher incidence of undertaking a merger or hiring an advisor, lower probability of using cash financing, and pay higher premiums. In some tests, increased incentive-based wealth leads to lower post-merger performance. These results suggest that CEOs with high option holdings may be motivated more by agency conflicts than acting in shareholder interests.
Monday, August 6, 2012
Schulte Roth has just released the 2012 mid-year update to its PE Buyer/Public Target M&A deal study. Key observations (based on a very small sample size) include:
- Fewer deals were completed in the first half of 2012, and average deal size decreased.
- Deals took longer to get signed up.
- The use of the two-step tender offer/back-end merger structure continues to grow.
- Despite the protracted pre-signing process, fewer targets engaged in pre-signing market checks, which likely resulted in the inclusion of more "go-shop" provisions.
- The limited specific performance remedy against the buyer remains the rule.
- The average size of the target break-up fees and buyer reverse termination fees were consistent with the 2011 deals, excluding the unusually low fees in one transaction.
- CEOs of the target companies participated in more buy-out groups than in 2011.
The whole study is available here.
Thursday, August 2, 2012
OK ... I know I've said that if you are going to trade on inside information that you should trade in call options, cause you're just going to swamp the market and put a target on your back. But, here's a tip I thought I wouldn't have to give you. If you are going to trade on inside information, please don't use your work computer to do the following searches:
"can option be traced to purchaser?"
"can stock option be traced to purchase inside trading"
"how to detect can stock option be traced to purchase inside trading"
"insider trading options"
"insider trading options trace"
"illegal insider trading options trace"
"insider trading options trace illegal"
Can you say "scienter"?
You'd think it would go without saying, but apparently not everyone is smart enough to simply not trade on inside information. In fact, some people are stupid enough to do internet research from the office computers before doing the deed. You think I'm kidding? Well, the SEC has just charged a Bristol-Meyers-Squib executive with trading on inside information in advance of a series of acquisitions.
Just don't do it.