Thursday, March 28, 2013
Acording to Dan Primack at Fortune, Dell's independent directors agreed to reimburse Blackstone the cost of its bid as part of the go-shop process. This is a real positive, and I am surprised that more sellers with go-shop provisions don't do this as a matter of course. With an incumbent bidder in place, there are real disincentives for a second bidder to make the transaction specific investments required to put together a competing bid.
This is especially true given the fact that the incumbent bidder has more time to digest the information related to the target and almost always has a matching right in place. Rational second bidders fear that they will invest resources into making a bid only to have lose it to the incumbent - or worse overpay when the incumbent walks away. (Aside, my matching rights paper is here for those who might be interested.)
By agreeing to reimburse second bidders if they enter into a go-shop process, the independent directors lower the bars to generating second bids and increase the likelihood that the go-shop will be more than just window dressing. That's a good thing. Smart counsel for independent directors will be looking at Dell and fighting hard for reimbursement provisions in future deals.
Wednesday, March 27, 2013
- Summly never had many users or any revenues. Yahoo is shutting the app down. Yahoo is saying the point of the deal is to have Summly's CEO help lead the company in mobile.
- But Summly's CEO lives in London, where he is staying to finish school
- The CEO has only promised to stay at Yahoo for the next 18 months.
- The CEO is 17-years-old. We don't buy that he's going to be able to lead or inspire adult Yahoo engineers and designers.
If that's not bad enough:
Sirer writes: "Summly licensed its core technology from SRI, which, previously, spun out Siri and sold it to Apple.
Whaddya!? Somehow, somewhere, there is arrare waste claim brewing in connection with this transaction...
Friday, March 22, 2013
Sounds like the judicial fireworks are flying in Tulane (note to self: go next year). At a panel discussion Chief Justice Myron Steele apparently continued his crusade to get the Chancery Court to shut up (via WSJ Deal Journal:
“Every time they open their mouth they make the law,” Steele said Thursday, discussing how he would love to get that idea into the heads of judges. Steele said it was inappropriate to force lawyers to read transcripts in order to determine the law.
Steele didn’t name names.
But we know. It's funny. The Supreme Court would like the Chancery Court to say less and only speak through its opinions and only on issues that are directly before the court. All of this other stuff is just dicta. It forces lawyers to read transcript hearings and search speeches for hints at what the law is. As an aside - if the court were really worried about closing off access to knowledge of the state of the law, it would reconsider its Chancery Arbitration procedures. Just saying.
Anyway, those things that Steele thinks are bugs, are considered features by the Chancery Court. In a paper (forthcoming in W&L Law Review) by Vice Chancellor Donald Parsons and his former clerk Jason Tyler, the authors point to dicta and judicial asides as an important component of the law making/dealmaking function of Delaware law:
To give just one small example of the organic nature of this process, in December 2011, Vice Chancellor Laster issued an opinion in In re Compellent Technologies. In dicta, he questioned the wording of a provision of a merger agreement requiring the target company’s board to give notice to the acquirer if any subsequent, superior offers arose. The Vice Chancellor did not question the general validity of this relatively common information rights provision, just the particular verbiage used to express it in the merger agreement at issue in that case. Less than two months later, another case—In re Micromet—challenged a merger agreement containing a nearly identical provision, except for a revision in the language the court had questioned in Compellent. The court in Micromet found the revised provision unobjectionable. More important than the outcomes of those two cases, however, is what one reasonably can infer from their facts and sequence. Apparently, within a matter of weeks, transactional attorneys had read the Compellent opinion and advised their clients accordingly in connection with a later transaction that, when challenged, survived judicial scrutiny.
So, it's a bit of a judicial tug of war that will no doubt continue to play out.
Wednesday, March 20, 2013
According to Richards Layton & Finger, Delaware is in the process of amending the DGCL to add a new Sec. 251(h), the purpose of which will be to eliminate a required shareholder vote in the second step of a two-step acquisition:
Under new subsection 251(h), a vote of the target corporation’s stockholders would not be required to authorize the merger if: (1) the merger agreement expressly provides that the merger shall be governed by this new subsection and shall be effected as soon as practicable following the consummation of the offer described below; (2) a corporation consummates a tender or exchange offer for any and all of the outstanding stock of the target corporation on the terms provided in such merger agreement that would otherwise be entitled to vote on the adoption of the merger agreement; (3) following the consummation of the offer, the consummating corporation owns at least the percentage of the stock of the target corporation that otherwise would be required to adopt the merger agreement; (4) at the time the target corporation’s board of directors approves the merger agreement, no other party to the merger agreement is an “interested stockholder” (as defined in Section 203(c) of the DGCL) of the target corporation; (5) the corporation consummating the offer merges with the target corporation pursuant to such merger agreement; and (6) the outstanding shares of the target corporation not canceled in the merger are converted in the merger into the same amount and kind of consideration paid for shares in the offer.
Given the recent proliferation of top-up options, the back end shareholder vote has lost much of its kick, if it ever had any. Really, by now if a target requires an actual back-end vote it's because it either doesn't have enough shares outstanding to permit a top-up option or there were just really bad lawyers working the deal.
Tuesday, March 19, 2013
This client alert from Gibson Dunn discusses Chancellor Strine's bench ruling rejecting a disclosure-only, negotiated settlement of an M&A stockholder lawsuit. According to the authors,
The decision, in In re Transatlantic Holdings Inc. Shareholders Litigation , Case No. 6574-CS, signals that the Chancery Court will carefully scrutinize the terms of negotiated settlements to ensure that named stockholder plaintiffs are adequate class representatives and that the additional disclosures provided some benefit to the purported stockholder class. At the same time, the decision represents an unmistakable warning to plaintiffs’ firms that they cannot continue to count on paydays through the settlement of meritless lawsuits filed in the wake of announced deals.
As we close in on March 22 and the end of Dell's go-shop period, we're starting to hear rumors that the process might actually produce a second bid in the $15 range. Although H-P and Lenovo are apparently also rummaging through Dell's books, if there is going to be a bid, Bloomberg is reporting that it would come from Blackstone. That would be an interesting development. I wonder if they would be able to bring Michael Dell on board as part of a competing deal. Just a couple more days.
Monday, March 18, 2013
There was news from up North late last week. The Canadians are considering some adjustments in their current approach to the poison pill. Presently, pills are permitted only as temporary devices that be held in place for only so long as to delay a hostile bid so that a target board can educate its shareholders and perhaps put together some sort of alternate strategy or transaction. Let's call the Canadian approach to rights plans the Interco pill. In general, Canadian approaches to takeover defenses are very much in line with Chancellor Allen approach in Interco. That is to say, in the face of an unwanted offer, the board should be motivated to either educate the shareholders of the correctness of the board's position or look to develop an acceptable alternative for shareholders. To the extent boards deploy takeover defenses they should facilitate the ability of the board to engage in either education or in increasing value for shareholders.
The draft amendments (here) to their rules on shareholder rights plans intend to make a number of subtle, but important changes in approach that nudge them closer to a US styled approach to poison pills. The amendment require approval of a majority of the disinterested shareholders withing 90 days of the pill being adopted. Any material amendments to the rights plan will require an additional shareholder vote. Then, in order for a board to keep a pill in place, the board will have to go back to shareholders annually to seek approval. Finally, a majority of disinterested shareholders could vote to terminate the rights plan at any time.
This new draft approach is a step back from the previous Canadian approach, which involved a regulator in the provincial securities regulator making a substantive determination about the reasonableness of director actions to keep a pill in place. Guided by their Interco-like principles, the question for Canadian regulators was not if a pill should remain in place, but when it should be pulled. Now, that may change. Of course, this isn't necessarily a bad thing. Nor should it necessarily be interpreted as moving towards an American (U.S.) styled approach to pills. Up in Canada undere the proposed pill regime, disinterested shareholders will have plenty to say about whether or not a pill is permitted to remain in place. Rather than make arguments to a regulator, boards will be required to make their case directly to the shareholders if they want to keep pills in place. That's not a bad thing.
Thursday, March 14, 2013
The antitrust action in the Federal district court in Massachusetts against the private equity industry is back in the headlines. We looked at this last after the New York Times successful motion to unseal the complaint against the industry. In response to a motion for summary judgment, Judge Edward Harrington permitted the lawsuit to survive the motion in part, but narrowed it in important ways. The case deals with two claims. First, there is a specific claim with respecet to the HCA transaction. In that allegation, the plaintiffs claim that there was an agreement for other PE firm to step down from competing for HCA. In the second claim, plaintiffs allege an industry-wide conspiracy not to compete in post-signing auctions for sellers.
In the 38 page_order (which includes more PE email excerpts), Judge Harrington made some useful observations about the use of deal protections and the private equity industry and the plaintiffs allegations. Judge Harrington summarized the plaintiff's allegations of clubbing in the following way:
Plaintiffs assert the rules to be as follows: First, Defendants formed bidding clubs or consortiums, whereby they would band together to put forth a single bid for a Target Company. The Plaintiffs assert that the purpose of these bidding clubs was to reduce the already limited number of private equity firms who could compete and to allow multiple Defendants to participate in one deal, thereby ensuring that every Defendant got a “piece of the action.” Second, Defendants monitored and enforced their conspiracy through “quid pro quos” (or the exchange of deals) and, in the instances where rules were broken, threatening retaliatory action such as mounting competition against the offending conspirator’s deals. Third, to the extent the Target Company set up an auction, Defendants did their best to manipulate the outcome by agreeing, for example, to give a piece of the company to the losing bidders. Fourth, Defendants refused to “jump” (or compete for) each other’s proprietary deals during the “go shop” period. This gave Defendants the comfort to know they could negotiate their acquisitions without the risk of competitive bidding.
For the most cynical observers in the pile, this is a pretty good description of the way private equity goes about its business and suggests a conspiracy or at least an industry custom of not competing in post-signing auctions. With respect to the HCA transaction, the plaintiffs allegations were enough to survive at this very early stage (which is deferential to the plaintiffs):
While some groups of transactions and Defendants can be connected by “quid pro quo” arrangements, correspondence, or prior working relationships, there is little evidence in the record suggesting that any single interaction was the result of a larger scheme. Furthermore, unlike other cases where an overarching conspiracy was found, here there is no single Defendant that was involved in every transaction or other indication that the transactions were interdependent.
When pressed at the second day of oral argument for the evidence supporting the “larger picture,” the Plaintiffs largely abandoned the above arguments to focus on the following statement by a TPG executive regarding the Freescale transaction, a proprietary deal: “KKR has agreed not to jump our deal since no one in private equity ever jumps an announced deal.” Plaintiffs contend that this statement, in combination with the fact that Defendants never “jumped” a deal during the “go-shop” period, as well other statements such as the Goldman Sachs executive’s observation that “club etiquette prevail[ed],” with respect to the Freescale transaction, provides a permissible inference of an overarching conspiracy.
The statement that “no one in private equity ever jumps an announced deal” and the fact that no announced deals for the propriety transactions at issue were ever “jumped,” tends to show that such conduct was the practice in the industry. On its own, these two pieces of evidence would be insufficient to provide a permissible inference of an overarching conspiracy. They do not tend to exclude the possibility that each Defendant independently decided not to pursue other Defendants’ proprietary deals because, for instance, a pursuit of such deals was generally futile due to matching rights.
When viewed in combination with the Goldman Sachs executive’s statement and in the light most favorable to the Plaintiffs, however, the evidence suggests that the practice was not the result of mere independent conduct. Rather, the term “club etiquette” denotes an accepted code of conduct between the Defendants. Taken together, this evidence suggests that, when KKR “stepped down” on the Freescale transaction, it was adhering to some code agreed to by the Defendants not to “jump” announced deals. The Court holds that this evidence tends to exclude the possibility of independent action. Count One may, therefore, proceed solely on an alleged overarching agreement between the Defendants to refrain from “jumping” each other’s announced proprietary deals.
So, the alleged industry etiquette against deal jumping in the specific case of the HCA transaction survives to go to trial. At the same time, the "overarching conspiracy" allegation falls:
Furthermore, the frequent communications, friendly relationships and the “quid pro quo” arrangements between Defendants can be thought of as nothing more than the natural consequences of these partnerships. Defendants that have previously worked together or are currently working together would be expected to communicate with each other and to exchange business opportunities. That is the very nature of a business relationship and a customary practice in any industry. Accordingly, the mere fact that Defendants are bidding together, working together, and communicating with respect to a specific transaction does not tend to exclude the possibility that they are acting independently across the relevant market.
Being friendly with your competitors does not a conspiracy make.
Although it's been narrowed quite a bit, I'm sure this case will continue to generate headlines and attention, especially if more emails come to light.
Update: Ronald Barusch at the WSJ Dealpolitik blog suggests the outcome of the summary judgment motion will push defendants to push hard for a settlement.
Sunday, March 10, 2013
Joe Nocera in the Times today unearths some Goldman emails about the eToys IPO from the dotcom era. eToys raised $164 million in a 1999 IPO and then subsequently failed. The story is familiar by now. The IPO was underpriced and Goldman spun shares off to preferred clients. After the company failed, creditors sued. It's emails produced in connection with that suit that Nocera uncovered. The emails and creditors raise an important question: who was Goldman working for during the IPO?
The plaintiffs charge that Goldman Sachs had a fiduciary duty to maximize eToys’ take from the I.P.O. Instead, Goldman purposely set an artificially low price, so that its real clients, the institutional investors clamoring for the stock, could pocket that first-day run-up. According to the suit, Goldman then demanded that some of those easy profits be kicked back to the firm. Part of their evidence for the calculated underpricing of eToys, according to the plaintiffs’ complaint, was that Lawton Fitt, the Goldman executive who headed the underwriting team and was thus best positioned to gauge the market demand, actually made a bet with several of her colleagues that the price would hit $80 at the opening.
If you are interested in learning more about this kind of thing, Sean Griffith has a good article on the practice of spinning in IPOs that appeared a couple of years in the Brooklyn Law Review.
Friday, March 8, 2013
Carl Icahn has been very busy over the past year. Now, he has moved on to Dell. In a letter to the board (see Sched 14A with lett and board response), Icahn made an offer to the board that he hopes they take - and then threatens to run a proxy contest and start "years of litigation" if they don't:
However, if this Board will not promise to implement our proposal in the event that the Dell shareholders vote down the Going Private Transaction, then we request that the Board announce that it will combine the vote on the Going Private Transaction with an annual meeting to elect a new board of directors. We then intend to run a slate of directors that, if elected, will implement our proposal for a leveraged recapitalization and $9 per share dividend at Dell, as set forth above. In that way shareholders will have a real choice between the Going Private Transaction and our proposal. To assure shareholders of the availability of sufficient funds for the prompt payment of the dividend, if our slate of directors is elected, Icahn Enterprises would provide a $2 billion bridge loan and I would personally provide a $3.25 billion bridge loan to Dell, each on commercially reasonable terms, if that bridge financing is necessary.
Like the “go shop” period provided in the Going Private Transaction, your fiduciary duties as directors require you to call the annual meeting as contemplated above in order to provide shareholders with a true alternative to the Going Private Transaction. As you know, last year’s annual meeting was held on July 13, 2012 (and indeed for the past 20 years Dell’s annual meetings have been held in this time frame) and so it would be appropriate to hold the 2013 annual meeting together with the meeting for the Going Private Transaction, which you have disclosed will be held in June or early July.
If you fail to agree promptly to combine the vote on the Going Private Transaction with the vote on the annual meeting, we anticipate years of litigation will follow challenging the transaction and the actions of those directors that participated in it. The Going Private Transaction is a related party transaction with the largest shareholder of the company and advantaging existing management as well, and as such it will be subject to intense judicial review and potential challenges by shareholders and strike suitors. But you have the opportunity to avoid this situation by following the fair and reasonable path set forth in this letter.
Now, I think he has a real point here. And that's the special dividend. He proposes the board use $7.4 billion in cash that it has covented to bring back from offshore to finance the going-private transaction as the main source of cash for the dividend. Think about it this way, there is a grand public policy discussion about corporate taxes and how the present structure of corporate taxes causes firms to stockpile cash off-shore. This cash has to be left there - the argument goes - lest it come back and be taxed at punitive rates.
OK, I am not going to take sides in that whole debate, but I will say this. Dell is content to leave it's large pile of cash offshore and away from the shareholders because of the tax issue. However, if the cash is necessary to finance an acquisition of the company by Michael Dell, well then, paying all those taxes to bring the cash back onshore isn't all that big a deal and is well worth the effort.
Icahn is pointing to that and saying in effect, "Hey, wait a minute. Why bring the cash back to finance a going private deal?! If Michael Dell is just buying cash with cash, doesn't that undervalue what's left of the company? Why not bring the cash back to the US, pay the taxes, and then distribute it to shareholders?"
I tend to sympathize with that view. If the taxes are really so onerous that the board has refused to bring the cash back until now, why isn't it a corporate waste to use them to finance a going-private transaction by the founder? The board will have to deal with that question at some point.
Thursday, March 7, 2013
Vice Chancellor Laster will be speaking at Fordham Law this evening (6:30p). The event is open to the public and he is a very good speaker. The topic is the true meaning of the Revlon standard. More info on the event here. So, leave work early and head on over!
Many times my students will ask me, well how bad does director inattentiveness to board duties have to be win on a care claim much less a Caremark claim? There are, of course, multiple levels of answers to that question, but the simplest is, "pretty bad". Now we have a stark example of some facts from a recent Delaware transcript ruling that might get you there - In re Puda Coal (Puda_Coal Transcript_Ruling). In Puda, we have a Chinese coal company incorporate in Delaware and trading on US markets with five directors - 2 inside Chinese directors and 3 outside American directors. OK, so it turns out that the 2 inside directors stole all the corporate assets and appropriated them all for themselves. For two years, the outside directors had no idea. They relied on reports from the CEO and sat in the US all the while assuming there were corporate assets somewhere in China. So, the directors, including the outside directors all get sued. OK, so far so good.
During the course of an internal investigation, all the outside directors realizes what had been going on and quit in response, leaving the inside directors in charge of their own malfeseance. Then outside directors turn up in Chancellor Strine's court as defendants seeking to have the derivative suits dismissed for because demand was not excused. Theory: a majority of the directors were independnet and could well have sought to prosecute this case, had it been presented to them. That didn't go well for them:
A Delaware lawyer is telling me, I think, if I dismiss the case on demand excusal grounds, I dismissed it because control of the lawsuit belongs to the company, therefore the decision to sue the insiders who took the assets belongs to the company. The company might conclude that it's perfectly okay to take the assets, or there's a cost benefit analysis of suing and it's just not worth it. I can't take on to myself in that situation. I can't enter a judgment at the instance of derivative plaintiffs because control of a lawsuit belongs to the board, which is now controlled by the guy who your clients suspect stole the assets out from under them.
What stuck in Strine's craw, I think, was the fact that when the outside directors who were a majority realized that the all the assets of the corporation had been sold out from under them that their response was not to sue the bad directors and seek to defend the corporation, but to resign and walk away:
When, as a matter of undisputed reality, when they were faced with knowing in their view that there had been the most extreme sort of fiduciary violation you could imagine, rather than have the company sue, they quit, then come into court and seek to use 23.1 and, frankly, disable the derivative plaintiffs from even going after the bad guys. When I mean bad guys, I'm using your client's own view of these people. I'm trying to understand how my state -- if I were to embrace this -- my state's corporate law would not be justly subject to ridicule.
And that's when the hearing starts to go really bad for the outside directors. Turns out only one of the outside directors speaks Chinese. Whoops. (Note to self, pick up a Rosetta Stone before taking that directorship in the Mongolian company). Strine then let them have it with this:
I think those of us who actually -- judges in Delaware who participate in corporate law in Delaware take legitimate umbrage when folks say that we don't hold managers accountable for breaches of fiduciary duty in Delaware. I find that claim to be astonishingly outdated and simple-minded, when any review of our corporate law will see -- just out of our statutory corporate law will say that is, frankly, much more pro stockholder and more balanced than any of our other states, most of which have stronger insulations against director liability, many of which allow directors in the context of takeovers to use takeover defenses not permissible in Delaware, and when the major controversies that have come out of Delaware over the last 30 years, some of them have been about things that are anti-stockholder. Many of them are cases like Van Gorkom, Omnicare, Quickturn. Guys like me, El Paso, Southern Peru, Loral, where we've held people accountable in big ways for things. And we take seriously in the derivative suit contest that, frankly, you shouldn't lightly take away from the board of directors the ability to control a lawsuit. But to use doctrinal law in some sort of gotcha way is just not appropriate
Now, he's just venting; he's right, but he's just venting. So by now it's pretty obvious that the defendants made an error is seeking to dismissal on failure to make demand. Then Strine turned to the question of whether a 12(b)(6) motion can survive. Sorry, it's not going to get any better for these defendants. But here, Strine lays out some minimum standards for independent directors of Delaware corporations headquartered abroad, and it's pretty sensible:
Independent directors who step into these situations involving essentially the fiduciary oversight of assets in other parts of the world have a duty not to be dummy directors. I'm not mixing up care in the sense of negligence with loyalty here, in the sense of your duty of loyalty. I'm talking about the loyalty issue of understanding that if the assets are in Russia, if they're in Nigeria, if they're in the Middle East, if they're in China, that you're not going to be able to sit in your home in the U.S. and do a conference call four times a year and discharge your duty of loyalty. That won't cut it. That there will be special challenges that deal with linguistic, cultural and others in terms of the effort that you have to put in to discharge your duty of loyalty. There's no such thing as being a dummy director in Delaware, a shill, someone who just puts themselves up and represents to the investing public that they're a monitor. Because the only reason to have independent directors -- remember, you don't pick them for their industry expertise. You pick them because of their independence and their ability to monitor the people who are managing the company. And a lot of life – I would not serve on -- if I were in the private sector -- not that anybody would want me -- but there are a lot of companies on boards I would not serve because the industry's too complex. So if I can't understand how the company makes money, that's a danger. If it's a situation where, frankly, all the flow of information is in the language that I don't understand, in a culture where there's, frankly, not legal strictures or structures or ethical mores yet that may be advanced to the level where I'm comfortable? It would be very difficult if I didn't know the language, the tools. You better be careful there. You have a duty to think. You can't just go on this and act like this was an S&L regulated by the federal government in Iowa and you live in Iowa.
So on Caremark alone, I have no problem saying that it passes muster under 12(b)(6).
This is a case to watch as it winds its way through the courts. It may well start making its way into case books soon.
Wednesday, March 6, 2013
In a recent case in Delaware we get an expected but still important decision in Meso Scale Diagnostics. This is just blocking-and-tackling. The question for the court was whether a reverse triangular merger constituted an assignment with respect to the surviving corporation. The court concluded it did not. In doing so, Vice Chancellor Parsons declined to follow a California case (SQL Solutions) that held that a reverse triangular merger resulted in an assignment by operation of law with respect to the surviving corporation:
Delaware courts have refused to hold that a mere change in the legal ownership of a business results in an assignment by operation of law. SQL Solutions, on the other hand, noted California courts have consistently recognized that an assignment or transfer of rights does occur through a change in the legal form of ownership of a business. The SQL Solutions case, however, provides no further explanation for its apparent holding that any change in ownership, including a reverse triangular merger, is an assignment by operation of law. Both stock acquisitions and reverse triangular mergers involve changes in legal ownership, and the law should reflect parallel results. In order to avoid upsetting Delaware‘s well-settled law regarding stock acquisitions, I refuse to adopt the approach espoused in SQL Solutions.
In sum, Meso could have negotiated for a change of control provision. They did not. Instead, they negotiated for a term that prohibits assignments by operation of law or otherwise. Roche has provided a reasonable interpretation of Section 5.08 that is consistent with the general understanding that a reverse triangular merger is not an assignment by operation of law.
Another reason why the triangular merger structure remains the go-to structure for dealmakers.