Tuesday, November 27, 2012
Marketplace has a story on the transformation of the "corporate raider" from bad guy to good guy "shareholder activist." More than anything, this is probably a sign of how much the market has changed since the 1980s and the rise of effective defenses against hostile bids.
Monday, November 26, 2012
Tuesday, November 20, 2012
Bingham just issued this interesting Legal Alert on Pharos Capital Partners, L.P. v. Deloitte & Touche.
In that case, on Oct. 26, 2012, the United States District Court for the Southern District of Ohio granted summary judgment in favor of Credit Suisse, holding that, under New York or Ohio law, plaintiff Pharos Capital Partners failed to prove it justifiably relied on Credit Suisse in connection with its private equity investment in National Century Financial Enterprises (a business that was later found to be fraudulent) because Pharos expressly disavowed any such reliance in a letter agreement with Credit Suisse.
According to Bingham:
The decision is significant for the financial industry because it enforces a party’s representations in an agreement that it was relying on its own due diligence investigation in connection with its investment, rather than any alleged representations made by a placement agent. Prior to the decision in Pharos, many courts have been reluctant to enforce such agreements to defeat claims for fraud and negligent misrepresentation.
OK, so now that it looks like Hostess has another shot at life - the judge has ordered mediation and private equity buyers like, Sun Capital, are starting to gather, it's worth getting some detailed background on Hostess. For that there's a very good article in Fortune from this summer. This backgrounder reviews the sorry history of Hostess Brands from the 1920s to its bankruptcy in the 2000s to its currenting teetering on the verge holding a $1 billion in debt. OK, it's been a bit of a mess.
Central to its current struggles is the question of the mult-employer pension plan ("MEPP") that is in place for Hostess. Hostess wants rid of it. From the Fortune article:
MEPPs, which grew in popularity back in the union glory days of the 1950s and '60s, were designed for companies within an industry to share pension burdens. There are nearly 1,500 MEPPs in the country, covering more than 10 million workers. These mammoth defined-benefit plans -- employers, not workers, make the contributions -- were especially attractive to unions, as they allowed workers to move easily between companies.
Trouble with MEPPs is, if some employers go out of business, the remaining companies have to pick up the shortfall in funding benefits. When there are too few employers left standing, the fund is in trouble. According to a March research report by Credit Suisse, MEPPs are now underfunded by $369 billion. A third of the 40 MEPPs to which Hostess contributes are among the most underfunded plans in the country.
At the bargaining table, week after week, Hostess and the Teamsters have gone at it over the MEPPs, which Hostess contends are at the heart of its woes. Perella Weinberg's Michael Kramer has squared up against Harry Wilson, the financial adviser retained by the Teamsters. Monarch's Herenstein has been there. So has a representative from Silver Point. Though all are cordial -- somebody once served Hostess snacks -- they've yet to achieve a middle ground.
Now, according to the Dealbook, investors are starting to get interested. If I were a Teamster that would start to get me nervous. Why? Well, one of the potential investors - Sun Capital - looks familiar and Sun is holding a fresh opinion from a Federal district court in Massachusetts that is basically a road-map for shedding unwanted MEPP obligations. The implications of Sun Capital Partners v. New England Teamsters and Trucking Inustry Pension Fund is that private equity funds are essentially immune from liability for withdrawing from a MEPP or for unfunded benefits under a single employer plan. Ugh. Want to sully PE's image further, then let them to do this. In any event, the court in Sun Capital reached this conclusion because it ruled Private Equity funds are not "engaged in a trade or business" and are merely passive investors (okaay...).
So, if the MEPP is in fact the issue keeping Hostess transaction from getting done and if Sun has just entered the room, I think the negotiating ground just shifted.
Be careful when you start thinking like this:
"At the end of the day, the SEC's got to pick their battle because they have a limited number of people and a huge number of investors to go after."
Chances are, once the SEC picks that up, you'll be next. That's the lesson this group of high school buddies is learning now.
Here's the complaint.
Monday, November 19, 2012
In the private company context, buyers usually deal with the problem of inaccurate representations and warranties through the use of an indmenity or escrow. By setting aside a portion of the consideration for a period of say 18 months after closing, the buyer knows that in the event any of the seller's represenations turn out to be wrong, the buyer can get some of the consideration back. This post-closing true up is one way of giving the seller incentives to be truthful in the deal making process.
In the public company context, buyers can't generally get access to an indemnity or an escrow. I suppose this is where M&A/transactional insurance steps into the void. CFO.com has a piece describing M&A insurance:
Such transactional insurance is “for the event that something the buyer was told turns out to be untrue and the buyer suffers financial loss."...
The coverage pays off if seller representations turn out to be false and the buyer discovers this after closing, Schioppo says. On a $100 million deal, the buyer is typically protected by an indemnity arrangement in which the seller might be “on the hook for two years, [during which] the buyer is allowed to come back if something turns out to be false for up to $10 million.”
Sellers can also buy insurance that covers what they might have to pay buyers that they have misinformed. One example of a covered exposure is if the seller says its “20 major customers were in good standing, but one of them was really in bad standing — [and] a month after closing they were no longer doing business with the company,” says Schioppo.
If M&A insurance - essentially third party warranties for seller reps - becomes prevalent, I wonder what effect that will have on the deal making process. Will it generate less incentives for buyers to investigate carefully what they are buying? Will it push the work of due diligence out to insurers who will take on the burden of certifying seller statements, and thus reduce the lawyer work in that area? Especially if M&A insurance moves beyond a niche market, it raises interesting questions about transaction design. Worth keeping an eye on.
Here is Chubb's M&A Insurance (no endorsement) page for a description of the coverage.
Thursday, November 8, 2012
“Survival of the largest appears to be the message here,” said Scott Turow, Authors Guild president. “Penguin Random House, our first mega-publisher, would have additional negotiating leverage with the bookselling giants, but that leverage would come at a high cost for the literary market and therefore for readers. There are already far too few publishers willing to invest in nonfiction authors, who may require years to research and write histories, biographies, and other works, and in novelists, who may need the help of a substantial publisher to effectively market their books to readers.”
Penguin and Random House are controlled by Pearson and Bertelsmann, respectively. This combination is likely to raise antitrust concerns and that's the obvious target for the Authors Guild message. Of course, consolidation in the book publishing industry is going to happen. There's no standing against that wave. This transaction, though, will present a good test for those who like to define markets. On the one hand, the authors will argue that the market in question is the market for books. Pearson and Bertelsmann will counter that the prevalence of iPad, tablets and eBooks makes a broader market definition a requirement. They're likely to have the winning argument.
Wednesday, November 7, 2012
Hey deal lawyers! Are you fired up and ready to go? Better be. In an interview in Fortune, Bill Lawlor at Dechert thinks it's going to be busy between now and the end of the year now that the election is behind us:
FORTUNE: What do yesterday's election results mean for the M&A markets?
BILL LAWLOR: If Romney had won there would have been an unleashing of animal spirits in M&A that we haven't seen since the Reagan years. But, now that we know its Obama, we expect to see a steadier, flatter arc to increased M&A activity.
Let's break that out a bit. Are you expecting significantly increased in the final weeks of 2012?
Yes, our phones are ringing off the hook. The reason is the expiration of the Bush tax cuts which are, at the margins, pushing deals to get done this year because of expected capital gains tax increases. Not just M&A, but also a rash of dividend recapitalizations in which companies are using cheap debt to borrow and issue massive dividends under the 15% capital gains rates that are now in effect.
Are those dividend recaps mostly coming from private equity-owned companies?
Yes, it's mostly in financial sponsor deals at this point -- essentially firms that have decided not to sell right now because the differential in capital gains isn't enough to get a deal done, but who still want to take advantage of the current rates. To be honest, I'm surprised we didn't see more of these over the past couple of years, since cheap debt has been around for a while. We've also got a couple in the hopper involving widely-held public companies.
OK. Nothing but dividend recaps and acquisitions between now and the end of the year. We'll see.
Tuesday, November 6, 2012
Two interesting papers that raise the question of the true value of disclosure. The first is by Steven Davidoff and Claire Hill, Limits of Disclosure. Disclosure has been a common regulatory device since it was by Louis Brandeis ("Sunlight is said to be the best of disinfectants", Other People's Money). Indeed, our system of securities regulation is built upon this premise. Davidoff and Hill look at just how effective disclosure was in the run up to the financial crisis with respect to retial investors and in regulation of executive compensation. They come away disappointed:
The two examples, taken together, serve to elucidate our broader point: underlying the rationale for disclosure are common sense views about how people make decisions — views that turn out to be importantly incomplete. This does not argue for making considerably less use of disclosure. But it does sound some cautionary notes. The strong allure of the disclosure solution is unfortunate, although perhaps unavoidable. The admittedly nebulous bottom line is this: disclosure is too often a convenient path for policymakers and many others looking to take action and hold onto comforting beliefs in the face of a bad outcome. Disclosure’s limits reveal yet again the need for a nuanced view of human nature that can better inform policy decisions.
In another paper, Jeffrey Manns and Robert Anderson, The Merger Agreement Myth, take on the question of whether M&A lawyers are really creating any value or if they are just haggling over nits that no one cares about. Manns and Anderson conduct an event study to figure out whether there is value to all that drafting. They take advantage of the fact that not all merger agreements are filed with the SEC on the same day they are announced. So, they look for stock price changes that they can attribute to the addition of new information after the market learns about the terms of the merger agreement. If lawyers add value, they hypothesize that prices should rise after the market has learned the terms of the agreement - that's the value attributable to lawyers. It's basically a disclosure argument. If disclosure works, then the market should be able to instantly - or reasonably quickly - absorb new information and have that information reflected in stock prices. Like Davidoff and Hill, Manns and Anderson come away disappointed:
Our analysis shows that there is no economically consequential market reaction to the disclosure of the acquisition agreement. Markets appear to recognize that parties publicly committed to a merger have strong incentives to complete the deal regardless of what legal contingencies are triggered. We argue that the results suggest that M&A lawyers are fixated on the wrong problems by focusing too much on negotiating “contingent closings” that allow clients to call off a deal, rather than “contingent consideration” that compensates clients for closing deals that are less advantageous than expected. This approach can enable M&A lawyers to protect clients against the effects of the clients’ own managerial hubris in pursuing mergers that may (and often do) fall short of expectations.
So, disclosure as a regulatory device, or as a determiner of value, is not that successful and suggests we start looking elsewhere.
Monday, November 5, 2012
Chancellor Strine weighs in on "windfall" fees in this week's ABA Journal:
Well, what’s a windfall?” Strine asks. “A windfall is: Someone else bought a [winning] Powerball ticket, and the wind blew it and it fell in someone’s lap.”
A windfall, the judge says, is when companies settle nuisance suits that yield a lot of money to shareholder lawyers and “bubkes, zero, nada, nothing” for their clients. Strine tells Jenkins that he and other defense lawyers “have shaped a world of windfalls.”
“I just actually think there are a lot of actual people who would say, ‘If my lawyer hits a grand slam for me, I’m OK with him getting one or two of the runs,’ ’’ he says.
This is, obviously, a continuation of a previous discussion about how to manage the problem of the proliferation of transaction-related litigation. Strine is staying in his lane, as it were. Bad cases will get little. Good cases will get generous fees, without his feeling any guilt about the size. But, there is only so much one state court can do on their own.
As an aside, the artwork for this article paints Strine in shades of green - literally. Not very flattering.