Wednesday, February 27, 2013
Sean Griffith at Fordham and his co-author Alexandra Lahav (UConn) have a new paper forthcoming in the Vanderbilt Law Review on the role of preclusive settlements merger litigation. He argues that people who argue against multi-forum litigation have it all wrong multi-jurisdictional transaction litigation isn't necessarily a threat at all. Here's the abstract:
Abstract: The recent finding that corporate litigation involving Delaware companies very often takes place outside of Delaware has disturbed the long-settled understanding of how merger litigation works. With many, even most, cases being filed and ultimately resolved outside of Delaware, commentators warn that the trend is a threat to shareholders, to Delaware, and to the integrity of corporate law generally. Although the out-of-Delaware trend suggests that litigants are seeking to use the procedural rules of other jurisdictions to their advantage, we argue that the result need not threaten the interests of any of the stakeholders in deal litigation.
We reframe the process of resolving merger litigation as a market for preclusion, in which plaintiffs seek to sell and defendants seek to buy an important element of transactional certainty. Moreover, this market has the potential to efficiently process and price shareholder complaints while also providing benefits to Delaware and to corporate law more generally. We are not blind to reality, however, and also address how a well-functioning market for preclusion can be distorted by the opportunistic conduct of plaintiffs’ and defense attorneys alike.
Greater judicial oversight is necessary to preserve the benefits of this market while preventing the distortions brought on through opportunistic conduct. In order to make this a reality, however, judges in different courts must have a means of communicating and coordinating across state lines. We therefore offer a theory of horizontal comity in which judges build trust and cooperation through communication across jurisdictional boundaries. We use this theory to suggest a set of concrete policy proposals designed to provide for a more efficient market for preclusion.
Give it a read!
Tuesday, February 26, 2013
In this client alert, Gibson Dunn details the results of its survey of no-shop and fiduciary-out provisions contained in 59 merger agreements filed with the SEC during 2012 reflecting transactions with an equity value of $1 billion or more. Among other things, they have compiled data relating to
- a target’s ability to negotiate with an alternative bidder,
- the requirements to be met before a target board can change its recommendation,
- each party’s ability to terminate a merger agreement in connection with the fiduciary out provisions, and
- the consequences of such a termination.
File this under another reason to counsel your clients against taking an earnout. GeekWire describes the issue:
Nearly three years ago, Reston, Virginia-based TNS acquired Cequint in a deal that valued the Seattle caller ID startup for as much as $112.5 million.
At the time, everyone appeared happy. Cequint CEO Rick Hennessey said the acquisition “would accelerate our opportunities and improve the offering to our carrier customers,” while TNS CEO Henry H. Graham Jr. noted in the press release that the combination would create “a very powerful offering.”
But not everything is happy-go-lucky in this post merger world.
TNS’ acquisition of Cequint consisted of about $50 million in upfront cash and stock, with another $62.5 million to be delivered “for the achievement of future performance-based targets.”
$62 million, that's more than half of the total consideration in the transaction. You can bet the acquiror is facing some moral hazard. No surprise that the subsequent lawsuit is claiming that the acquiror intentionally gummed up the works to ensure that Cequint couldn't hit the benchmarks in the deal. From the notice of removal to federal court:
I'm not at all surprised that this kind of dispute pops up in the context of an earnout. What I am surprised about is that it's in court at all! Usually, disputes over enforcement of an earnout are taken care via arbitration baked into the merger agreement. It's a little surprising therefore to see it in court. Of course, I'll take back all of my surprise if the TNS files a motion to dismiss in federal court because of an arbitration provision.
Wednesday, February 20, 2013
Fictional Partner to senior associate: Geez, this merger agreement is just taking longer to get done than we had expected. There are a pile of issues we have yet to deal with. I think the timing is going to slip.
Senior associate: So we won't be announcing it before our earnings release? I think we had teed things up to the deal to be announced before hand.
Partner: No, not going to happen. Hey, thanks for reminding me. Remember to get that earnings release on file and make sure to revise it!
Senior associate: Done.
Senior associate to junior: Get that earnings release on file pronto.
(15 minutes later)
Senior to junior: Hey, that earnings release I asked you to get on file. Which version did you use? Did you use the version that announced the deal, or the other one?
Senior: Uh oh. Can we pull that filing?!
Too late! Me and about a million other people already pulled it! For your viewing pleasure, here's the offending paragraph from Office Depot's 8-K that got everyone moving into overdrive this morning:
I guess they'll file the merger agreement when they get it done.
Friday, February 15, 2013
According to this K&E client memo:
After a long period of dormancy, lock-ups – “crown jewel” or otherwise – have seen a recent creative rebirth with some structural twists. What remains clear is that, absent extreme circumstances (such as Bear Stearns), an old-fashioned “crown jewel” asset lock-up that serves only to end an auction by virtue of its preclusive impact on other bidders will be subject to significant judicial scrutiny under basic Revlon and Unocal principles. However, a small sampling of recent case law, coupled with developing market practice, suggest that in appropriate circumstances there may be room in the dealmaking toolkit for modern and creative variations on traditional lock-up arrangements (more so where there is demonstrable business benefit to one or both parties beyond the resulting deal protection). It goes without saying that these lock-ups, even in their modern iterations, must be handled with care with ample discussion and documentation of the reasoning and justification for their implementation.
Someone is about to learn this lesson the hard way. Don't use your inside information to trade in options. Why? I know it's a sure fire way to make a lot of money, quickly. But, you're also going to become the focus of an SEC investigation very quickly. Better yet, when you learn inside information from a client about a pending transaction, don't trade on it.
Wednesday, February 13, 2013
I'll admit to being disappointed by the work ethic of the plaintiff's bar -- so far only 6 complaints have been filed against the Dell transaction. My guess was 9. Six, though, is still above average. Steven Davidoff and Matt Cain have released their statistical compendium of transaction-related litigation for 2012 (SSRN: Takeover Litigation in 2012). This is the second iteration of this statistical compilation and it has quickly become a must read for those of us interested in the issue of transaction-related litigation.
We see the steady upwards trend in transaction-related litigation and how it has really exploded since 2005. Now, almost 92% of all transactions are accompanied by litigation of some sort and 50% of that involved multi-forum litigation. Davidoff and Cain also report median attorneys’ fees for settlements of $595,000 in 2012.
Monday, February 11, 2013
Wednesday, February 6, 2013
Apparently, Chancellor Strine's solutions to the multi-forum litigation question that he outlined in a recent paper co-authored with Prof. Larry Hamermesh and Matthew Jennejohn is not sitting well with judges in New York. According to a transcript reviewed by Reuters Justice Shirley Kornreich who is hearing litigation in the pending MYSE merger had the following response when she learned that there was competing litigation in Delaware:
"Who - please tell me it's not Chancellor Strine who has the Delaware cases?"
I guess the judges up in New York aren't fans of Strine's Delaware-first approach to shareholder litigation. Indeed, the Reuters piece by Tom Hals observes that Herman Cahn, now leading the NY case against the meregr, had previously been the NY judge in the 2007 Topps litigation that was the subject of a judicial tug-of-war. Strine ultimately won that match. Cahn is pretty clear that he's with Kornreich as she decides whether or not to put the NY case on hold in favor of the Delaware cases.
Tuesday, February 5, 2013
Christina Sautter has just released a new paper on dont'-ask, don't-waive provisions in standstills and the fiduciary challenges they pose to directors. She's ambivalent. And right to be so:
Abstract: Recent 2011 and 2012 Delaware Court of Chancery rulings, including Chancellor Leo Strine’s December 2012 ruling in In re Ancestry.com Inc., have placed a new spotlight on the use of standstill agreements in mergers & acquisitions and specifically in change of control transactions. In particular, these cases highlight the restrictiveness of some standstills and open up discussion as to how restrictive a standstill may be without violating a target company board of directors’ Revlon duty to maximize stockholder value. Using auction theory and recent cases, this Article examines whether standstills aid in enhancing value maximization. It argues that to the extent standstills provide an entry into the due diligence and auction processes, standstills may help to enhance value.
Moreover, the promise of standstill restrictions continuing post-signing may aid in incentivizing bidders to submit their highest offers during the pre-signing sale process. But, at the same time, a question remains as to whether standstills in which a bidder agrees not to request a waiver and a target board agrees in advance not to waive a standstill, or Don’t Ask, Don’t Waive standstills (DADWS), aid in value maximization and should be upheld. This Article argues that whether a court should uphold a DADWS should turn on whether strategic or financial bidders are involved in the process as well as the process used by the target board. Namely, when strategic bidders (or private value bidders) are involved, more restrictive standstills may be legitimate as a means of further encouraging strategic bidders to submit their highest offers. Because standstills are closely tied to the release of nonpublic information, stronger, more restrictive standstills like DADWS may help to protect the target while at the same time incentivizing the strategic bidder to bid higher. Targets intending to utilize a DADWS should engage in significant pre-signing shopping of the target and provide fully informed notice to all bidders of the rules of the game, including the inability to waive the standstill post-signing. Moreover, a DADWS should be paired with a minimal fiduciary out allowing a bidder to privately request a waiver, and allowing a target to provide a waiver, should the bidder set forth compelling and clearly delineated reasons it seeks to make an over-bid. These reasons should be based on external and intervening factors such as information that has come to light since bidding closed. Finally, this Article proposes that in such circumstances a slightly increased termination fee should be applicable if the target were to ultimately terminate the existing agreement to enter into an agreement with the bidder who was previously subject to a DADWS.
Conversely, more restrictive standstills like a DADWS may not help to extract additional value from financial bidders (or common value bidders) as scholars suggest that financial bidders already abide by gentlemen’s agreements not to overbid another’s executed deal and sometimes do not even participate in an auction if other financial bidders are known to participate. This Article also advocates that in lieu of more restrictive standstill terms, the target and “winning” bidder could include a staggered termination fee pursuant to which a higher termination fee would be applicable to bidders who previously executed a standstill with the target. In adopting such a policy, dealmakers would strike a balance between keeping bidders from becoming foes to the “winning” bidder while at the same time encouraging the maximization of stockholder value.