May 16, 2012
More fun with top-up option math
Pursuant to the terms of the Merger Agreement, the Company has granted Purchaser an irrevocable option (the “Top-Up Option”), upon the terms and subject to the conditions set forth in the Merger Agreement (including that the Minimum Condition has been satisfied), to purchase from the Company, at a price per share equal to the Offer Price, an aggregate number of Shares (the “Top-Up Shares”) equal to the number of Shares that, when added to the number of Shares then owned of record by Parent or Purchaser, constitutes one Share more than 90% of the sum of the Shares then outstanding and the Shares the Company may be required to issue on or prior to the Closing (as defined in the Merger Agreement) as a result of vesting, conversion or exercise of the Company’s stock options or other derivative securities, including convertible securities and other rights to acquire the Company’s common stock. However, in no event shall the Top-Up Option be exercisable if the number of Top-Up Shares would exceed the number of authorized but unissued Shares that are not already reserved for issuance as of immediately prior to the issuance of the Top-Up Shares. The Company has approximately 147,698,561 authorized but unissued Shares, after giving effect to all outstanding Options as of March 31, 2012.
According to Comverge’s amended 14d-9, when the tender closed, 65% of the outstanding shares were tendered, or 17,972,755 shares. Now, that’s enough to meet the 50% minimum condition for the tender, but well short of the 90% required to effectuate a 253 short form merger. And that’s where the top-up option comes in handy. But, go ahead and guess how many shares Comverge has to issue to the acquirer pursuant to the top-up option to get to 90%? C’mon, it’s lawyer math -
(17,972,755 tendered shares [corrected] + x option shares) / (27,650,392 outstanding shares + x option shares) = 90%
x = 69,310,020
That’s a lot of stock! Fortunately, Comverge was awash in authorized, but unissued stock. Even though you might get queasy at issuing so much stock in order to avoid a shareholder vote, the courts have ruled on this question and, subject to certain conditions, have okayed it (see Olson v EV3).
More on top-up option math, see an earlier post from a couple of years ago.
May 15, 2012
MoFo's inside view of earnouts
MoFo just released a survey of dealmakers on real deal activity. Probably most interesting are the respondents' views on earnouts:
Respondents had a surprisingly favorable (or at least grudgingly practical) view of earnouts as an acquisition technique. More than 80% said their company (or their client company) included earnout clauses in M&A agreements during the past two years. Among that group, over 30% reported that they've used earn-out clauses in over one-half of their transactions over that period.
A Recipe for Conflict?: Almost three-quarters of those who've used earnouts said such clauses have led to subsequent disputes or litigation; nearly one-fifth of respondents estimated there had been post-deal conflict over earnouts up to half of the time. An unlucky 10% of participants said that the use of earnouts had led to disputes or lawsuits more than 75% of the time.
Earnout Alternatives - Asked which other mechanisms might work for closing valuation gaps, respondents cited joint ventures, licensing agreements, and use of buyer or seller debt as viable alternatives.
One thing seems clear, if you're using an earnout, more likely than not you expect some sort of back-end dispute. Why does anyone want that?
May 14, 2012
Public enforcement of director duties
My colleague, Renee Jones, has posted her new paper, Toward a Public Enforcement Model of Directors' Durty of Oversight. One thing I really like about this paper is its suggestion that plaintiff in care cases should be asking for a different remedy. Renee and her co-author point to bars on directors serving as a remedy. It's potentially a credible sanction for bad director behavior in a world where 102(b)(7) removes monetary damages for care violations and procedural hurdles like Malpiede v Townson. Here's the abstract:
Abstract: This Article proposes a public enforcement model for the fiduciary duties of corporate directors. Under the dominant model of corporate governance, the principal function of the board of directors is to oversee the conduct of senior corporate officials. When directors fail to provide proper oversight, the consequences can be severe for shareholders, creditors, employees, and society at large.
Despite general agreement on the importance of director oversight, courts have yet to develop a coherent doctrine governing director liability for the breach of oversight duties. In Delaware, the dominant state for U.S. corporate law, the courts tout the importance of board oversight in dicta, yet emphasize in holdings that directors cannot be personally liable for oversight failures, absent evidence that they intentionally violated their duties.
We argue that some form of external enforcement mechanism is necessary to ensure optimal conduct from corporate leaders. Unfortunately, the disciplinary force of shareholder litigation has been vitiated by procedural rules and doctrines that make it exceedingly difficult for plaintiffs to prevail in derivative litigation. Because private shareholder litigation no longer fulfills its traditional role, the need exists for alternative mechanisms for director accountability.
We look to Australian corporate law for solutions to the problem of enforcing the duty of oversight. Australian corporate law encompasses a range of enforcement mechanisms for directors’ duties. The Australian Securities and Investments Commission (ASIC) has power to sue to enforce directors’ statutory duties. ASIC can seek a range of penalties for breach of duty, including pecuniary penalties and officer and director bars. ASIC has prevailed in a number of high-profile actions against directors of public companies in recent years. Despite the relative rigor of enforcement in Australia, capable directors continue to serve and its economy has thrived.
The Article explores several possibilities for incorporating public enforcement into the U.S. corporate governance system. We consider SEC enforcement of fiduciary duties and enforcement by states’ attorneys general. We also consider empowering state judges to impose bars on future service, as an alternative to tort-based damages awards. Regardless of the exact model of public enforcement, the reforms advanced here would help provide for greater director accountability and thus better motivate directors to perform their duties responsibly.