M & A Law Prof Blog

Editor: Brian JM Quinn
Boston College Law School

Friday, December 7, 2012

Cash isn't always king

Over at Fox Business News there's a nice article on the considerations that boards must take into account when weighing offers, including the ultimate apples-to-oranges comparison: cash vs stock.  For those students out there (not mine, you've taken your exam already) who are still looking to review issues before your corporations exam, read this short article when you are thinking about Revlon!

Happy exam season.   Now I disappear into my cave to grade a pile of exams.


December 7, 2012 | Permalink | Comments (0) | TrackBack (0)

Thursday, December 6, 2012

Reuters: Bain loves dividend recaps...

So, I guess they are living up to the stereotype...  A report by Reuters states that Bain Capital has been the most active in dividend recaps since 2003.  Reuters looked at dividend recaps transactions over the period 2003 to 2012 and Bain came out as the most active amongst its competitors.  Here's a summary chart:

   Private equity firm         Number of deals         Total value of deals
                                       involving firm                   
       Bain Capital                    12                        $11.89 billion
       TPG                               6                          $7.15 billion
       Blackstone                      6                          $4.56 billion
       T. H. Lee Partners            3                          $3.82 billion
       Apollo Inv. Corp.              8                          $3.76 billion
       KKR & Co LP                    6                          $3.33 billion


December 6, 2012 in Private Equity | Permalink | Comments (0) | TrackBack (0)

Lining up like Jets and Sharks

This post is not about football, though I will admit to being amused by the circus that presently calls itself the NY Jets.  No, it's about an article by David Marcus who points out how Vice Chancellor Laster has lined up with Chancellor Strine on the other side of Chief Justice Myron Steele and the Delaware Supreme Court over the issue of default fiduciary duties in LLCs.   It's really not about the issue at hand -- whether managers in an LLC are subject to fiduciary duties by default -- but a larger issue that relates to sometimes tense relationship between the Chancery Court and the Supreme Court.  The default fiduciary duty issue is an interesting one with some important ramifications (e.g. can you have federal insider trading liability in a publicly-traded LLC where managers don't have fiduciary duties?, etc), but I'll leave that for another day.

In a per curiam decision last month in Gatz Properties LLC v Auriga Capital, the Supreme Court attempted to put Chancellor Strine back on a short leash: 

The opinion suggests that “a judicial eradication of the explicit equity overlay in the LLC Act could tend to erode our state’s credibility with investors in Delaware entities.” Such statements migh be interpreted to suggest (hubristically) that once the Court of Chancery has decided an issue, and because practitioners rely on that court’s decisions, this Court should  not judicially “excise” the Court of Chancery’s statutory interpretation, even if incorrect. That was the interpretation gleaned by Auriga’s counsel. During oral argument before this Court, counsel understood the trial court opinion to mean that “because the Court of Chancery has repeatedly decided an issue one way, . . . and practitioners have accepted it, that this Court, when it finally gets its hands on the issue, somehow ought to be constrained because people have been conforming their conduct to” comply with the Court of Chancery’s decisions. It is axiomatic, and we recognize, that once a trial judge decides an issue, other trial judges on that court are entitled to rely on that decision as stare decisis. Needless to say, as an appellate tribunal and the court of last resort in this State, we are not so constrained.

It seems that too many people are forgetting that the Chancery Court is a trial court and not an appellate court, the Supreme Court is reminding us, and practitioners, and the Chancery.  OK, got it.  Oh, and then the court adds this:  

Fifth, and finally, the court’s excursus on this issue strayed beyond the proper purview and function of a judicial opinion. “Delaware law requires that a justiciable controversy exist before a court can adjudicate properly a dispute brought before it.” We remind Delaware judges that the obligation to write judicial opinions on the issues presented is not a license to use those opinions as a platform from which to propagate their individual world views on issues not presented. A judge’s duty is to resolve the issues that the parties present in a clear and concise manner. To the extent Delaware judges wish to stray beyond those issues and, without making any definitive pronouncements, ruminate on what the proper direction of Delaware law should be, there are appropriate platforms, such as law review articles, the classroom, continuing legal education presentations, and keynote speeches.

Uh, ouch.  OK, but Marcus points to a recent opinion, Feely v NHAOCG LLC by Vice Chancellor Laster in which he lines up with Chancellor Strine and takes issue with the Surpreme Court that Chancellor Strine's analysis of default fiduciary duties in the LLC context are "dictum without any precendential value."  He points to the long line of Chancery cases on this issue as persuasive and until such point as the Supreme Court rules on the issue, those cases and Chancellor Strine's analysis of default fiduciary duties will be good enough for him:

The Delaware Supreme Court is of course the final arbiter on matters of Delaware law. The high court indisputably has the power to determine that there are no default fiduciary duties in the LLC context. To date, the Delaware Supreme Court has not made that pronouncement, and Gatz expressly reserved the issue. Until the Delaware Supreme Court speaks, the long line of Court of Chancery precedents and the Chancellor's dictum provide persuasive reasons to apply fiduciary duties by default to the manager of a Delaware LLC. As the managing member of Oculus, AK-Feel starts from a legal baseline of owing fiduciary duties.

Is any of this earth shattering or new?  No, but it's an example of the real tension between the Chancery Court and the Supreme Court as it plays out in the opinions of both courts.  This dynamic has existed for some time now - predating Strine and Laster.  Court watchers - and court anthropoligists - shouldn't be surprised by this.







December 6, 2012 in Delaware, Litigation | Permalink | Comments (0) | TrackBack (0)

Wednesday, December 5, 2012

Corporate Jets and Insider Trading

Jay Carney asks a relevant question -- is it insider trading if all you are doing is tracking corporate jets through public databases


December 5, 2012 | Permalink | Comments (0) | TrackBack (0)

Tuesday, December 4, 2012

Gibson Dunn on "Don't Ask, Don't Waive" Standstill Provision

The typical M&A confidentiality agreement contains a standstill provision, which among other things, prohibits the potential bidder from publicly or privately requesting that the target company waive the terms of the standstill.  The provision is designed to reduce the possibility that the bidder will be able to put the target  "in play" and bypass the terms and spirit of the standstill agreement.

In this client alert, Gibson Dunn discusses a November 27, 2012 bench ruling issued by Vice Chancellor Travis Laster of the Delaware Chancery Court that enjoined the enforcement of a "Don't Ask, Don't Waive" provision in a standstill agreement, at least to the extent the clause prohibits private waiver requests.

As a result, Gibson advises that

until further guidance is given by the Delaware courts, targets entering into a merger agreement should consider the potential effects of any pre-existing Don't Ask, Don't Waive standstill agreements with other parties .  . .. We note in particular that the ruling does not appear to invalidate per se all Don't Ask, Don't Waive standstills, as the opinion only questions their enforceability where a sale agreement with another party has been announced and the target has an obligation to consider competing offers. In addition, the Court expressly acknowledged the permissibility of a provision restricting a bidder from making a public request of a standstill waiver. Therefore, we expect that target boards will continue to seek some variation of Don't Ask, Don't Waive standstills.


December 4, 2012 in Cases, Contracts, Deals, Leveraged Buy-Outs, Litigation, Lock-ups, Merger Agreements, Mergers, State Takeover Laws, Takeover Defenses, Takeovers, Transactions | Permalink | Comments (0) | TrackBack (0)

Gilson and Schwartz on Private Benefits of Control

Ron Gilson and Alanb Schwartz have a new paper on Contracting around the Private Benefits of Control. Their take away - by increasing attention to tairloring of governance mechanisms we can reduce the incentive for controllers to take private benefits. Here's the abstract:  

The separation of control and ownership – the ability of a small group effectively to control a company though holding a minority of its cash flow rights – is common throughout the world, but also is commonly decried. The control group, it is thought, will use its position to acquire pecuniary private benefits – to take money – and this injures minority shareholders in two ways: there is less money and the controllers are not maximizing firm value. To the contrary, we argue here that pecuniary private benefits may compensate the control group for monitoring managers and otherwise exerting effort to implement projects. There is an optimal level of pecuniary private benefit consumption, we show, that maximizes the control group’s profits, induces constrained efficient controller effort levels and compensates public shareholders for funding the firm’s projects. This result assumes that a controlling group can credibly commit not to consume more than these efficient private benefit shares. When potential entrepreneurs cannot solve this credibility problem, some ex ante efficient firms fail to form because their potential principals cannot raise money. The ability of controllers to commit is increasing in the accuracy of judicial review of controlled transactions. Private contracting, we argue, would materially improve judicial accuracy. Our principal normative recommendation therefore is to demote corporate fiduciary law from mandatory to a set of defaults.


December 4, 2012 | Permalink | Comments (0) | TrackBack (0)

Decline of the shareholder value paradigm?

That seems a bit extreme.  Actually, I doubt that shareholder value, now that it has firmly taken root, will retreat from being the dominant framework for investors and managers.  But, there has been some recent attention to the question of shareholder value as the central organizing theme for the corporation.  In its Schumpeter column, The Economist suggested it was time to focus on long-term shareholder value.  Henry Blodget of the Business Insider noted that the capacity for firms to create wealth has outpaced their capacity (or willingness) to create employment, thus calling into question the vital link between corporate success and social welfare.   In Virtue, Inc., the Boston Globe explored the role that benefit corporations might play in realigning the social contract with the corporation. 

For all their faults, newly public firms like Google and Facebook are using controlling positions by founders and dual-class stock to keep market pressures to chase short-term shareholder value at the expense of long-term value at bay. So,there is a real discussion going on about the proper role of the corporation.  Clearly, there is no legal obligation that existing corporations chase short-term shareholder value.  But there is now a renewed discussion about what the responsibilities corporations can/should have to the communities in which they exist. We'll see where it leads, but it strikes me as a productive discussion to have. 


December 4, 2012 | Permalink | Comments (0) | TrackBack (0)

Monday, December 3, 2012

Everything you ever wanted to know about CVRs

You can find it here -- Wachtell Lipton's 12 page PLI note on CVRs.



December 3, 2012 | Permalink | Comments (0) | TrackBack (0)

Kinder Morgan settlement

The Chancery Court approved a settlement in the El Paso case.  Here's the El Paso Settlement.  Something I thought was interesting - the transaction attracted 22 lawsuits - 13 in Delaware, 8 in Texas, and one in New York.   That's quite a crowd.  Then again, the facts in the case were the type that made it an attractive target for litigation.  In the settlement, El Paso will pay $110 to the class fund and Goldman will give up its $20 million fee.  Plaintiff counsel received $26 million in fees to split amongst all the counsel.


December 3, 2012 in Delaware, Investment Banks, Litigation | Permalink | Comments (0) | TrackBack (0)

Duke-Progress CEO settlement

You may remember last summer there was a bit of a kerfluffle over the post-closing CEO change at the combined Duke Energy-Progress Energy.  When the North Carolina based energy firm announced its merger with Progress, it stated that Progress Energy CEO William Johnson would lead the combined company post-closing.  When the merger closed on July 2, 2012 the board met and immediately fired Johnson and replaced him at CEO with Duke Energy CEO James Rogers.  For those of us on the outside, this whole episode was a little odd, and raised some questions about how much parties in mergers of equals actually have to negotiate post-closing leadership and employment questions.  

However, the quick leadership change also raised questions with state regulators.  Almost immediately after the firing of Johnson, the North Carolina Utilities Commission, which was required to approve the merger, opened an investigation.  Central to that investigation were the statement made to the commission related to the post-closing leadership structure of the combined firm.  The commission was told that Johnson would lead the firm and relied on those statements in order to approve the transaction.  Since that turned out not to be true  almost immediately following closing, the NCUC wanted another look.  The hearings related to the merger were held throughout the summer. The documents and audio files of their hearings can be found here.

Now, Duke and the NCUC have reached a settlement.  And ... well ... it's pretty clear that the NCUC is unhappy with the quick leadership change.  So, they want a couple of scalps.  The settlement includes the resignation of CEO James Rogers.  A new board committee will be set up to search for a replacement CEO.  Duke is required to re-hire the former Progress GC to advise the corporation on North Carolina regulatory issues.  Duke will hire a new GC, so long as that new hire was not involved in any of Duke's representations to the NCUC leading up to the merger.  And, a former Progress manager will take over as head of state-regulated power susidiaries. 

Duke is also required to maintain its corporate headquarters and at least 1,000 employees in North Carolina for at least five years.  There is $25 million in givebacks to North Carolina consumers. And, Duke is required to issue what can only be described as a corporate apology to the NCUC acknowledging to the NCUC that it had fallen short of the NCUC's understanding of Duke's obligations under its "regulatory compact" with the state.

The settlement itself is pretty much a house-cleaning of Duke managers at the very top and an attempt by the NCUC to put Progress employees back in a position to exert some influence.  Lesson here for transaction lawyers - be careful what you say to regulators.  If you don't mean it, it may come back to haunt you.


December 3, 2012 in Miscellaneous Regulatory Clearances | Permalink | Comments (0) | TrackBack (0)