M & A Law Prof Blog

Editor: Brian JM Quinn
Boston College Law School

Tuesday, April 30, 2013

SRS 2013 claims study

Shareholder Representative Services has just released a new report, its 2013 M&A Post-Closing Claims Study.  The report is based on a review of claim activity in 420 private company transactions over the past year. Two thirds of deals had post-closing issues to report.  Some of the study's key findings:

  • Earn-out milestones for tech and other deals outside of life sciences were achieved 50% of the time
  • 18% of deals had at least one claim made in the final week of the escrow period.
  • Final escrow releases were delayed due to claims in 30% of deals.
  • 73% of deals with post-closing purchase price adjustment mechanisms saw adjustments, which were more often buyer-favorable than seller-favorable. 27% of adjustments were ultimately modified from the initial amount claimed.
  • 10% of earn-out milestones that were initially claimed as missed eventually resulted in a payout for shareholders.
  • Tax claims became more frequent due to the average target being a more mature taxpayer. In addition, state and local governments have become more aggressive about revenue collection, especially for sales and use taxes.

Give it a download. 


April 30, 2013 in Private Transactions | Permalink | Comments (0) | TrackBack (0)

Sauer Danfoss turns out to be an important case

Thinking about it now, it turns out that the 2011 settlement approval of In re Sauer Danfoss Shareholder Litig is an important case.  Why?  Did it set out any special new points in the law?  No.  But it did one thing of real value for the courts.  In Appendix A to the opinion, it set out a chart of recent settlements with identification of the work accomplished by plaintiffs counsel, the benefit achieved, and the fee approved by the court.  It's a price list. And, like a price list, the Delaware courts are now regularly referring to it when they are reviewing requests for attorneys fees in disclosure only cases.  I suppose that's a good thing.  The downside?  Well, now Vice Chancellor Laster has to remember to update the appendix every now and again!


April 30, 2013 in Delaware, Lawyers, Litigation | Permalink | Comments (0) | TrackBack (0)

Monday, April 29, 2013

Delaware courts and liability of independent directors of Chinese companies

I'll be the first the first to admit that the whole reverse merger situation with Chinese corporations really reveals the most cynical aspects of our capital markets.  For those of you who haven't been paying attention to this issue, towards the end of the credit bubble and early on during the financial crisis there were a large of number of reverse mergers in the US involving Chinese corporations.  The reverse merger is a back door way to take a company public.  A privately held foreign company, in this case Chinese, acquires a publicly listed, but thinly traded, US corporation, usually a Delaware corporation through a reverse merger (the acquirer is the disappearing corporation and the target is the surviving corporation).  The suriving corporation then changes its name to the Chinese corporation and presto, you have a publicy traded Chinese corporation incorporated in Delaware.     

OK, so far so good.  The next step is where things start to get 'hinky'.  The newly public Chinese corporation then raises additional equity on US markets through a public offering.  The money is transfered back to China and then ... it disappears.  Surprised?   There are lots of people who you might point a finger at in this exercise.  The lawyers and investment bankers who arrange the reverse merger, the lawyers, investment bankers, and accountants who sign off on the public offering, the analysts who recommend shareholders buy shares in these companies.  The list is very long.  Now add to that list, the independent directors, usually US persons, who are required to sit on the boards of these companies (pursuant to the listing rules).

Reuters' Tom Hals points us to an opinion handed down late last week by Vice Chancellor Glasscock (Rich v Fuqi):

[Fuqi] listed its shares on Nasdaq through a reverse merger and in 2009 it raised $120 million through a public stock offering. Less than a year later, the company said it found accounting errors and uncovered transfers of cash out of the company totaling more than $130 million to entities that Fuqi has yet to verify were legitimate businesses. Fuqi has said the cash was recovered.

Fuqi's audit committee started to investigate, but its work stalled when management stopped paying the lawyers and accountants hired by the audit committee. The company said the lack of payment stemmed from a dispute with its insurer.

In protest, [independent directors] Brody and Hollander resigned from the board.

Shareholders sued the directors of Fuqi, including Brody and Hollander, who resigned in protest.  Prior to suing, the shareholders had made demand, but the corporation sat on the shareholders' demand for over two years.  The shareholders argued that notwithstanding the fact that they had previously made demand, it was futile because of the two year delay in responding.  The essence of the shareholders claim was a Caremark oversight claim - that directors failed in the duty to monitor the corporation's activities and permitted more than $130 million to disappear.  Glasscock sided with shareholders. 

Glasscock found:

... lead me to believe that Fuqi had no meaningful controls in place.  The board of directors
may have had
regular meetings, and an Audit Committee may have existed, but there
does not seem to have been any
regulation of the company’s operations in China.

The Vice Chancellor noted that independent directors had ignored several 'red flags' with respect to problems with internal controls and that directors did nothing to ensure that reporting mechanisms were accurate.  The lack of internal controls was so bad that $130 million was transferred out of the company in Novermber 2010, but it wasn't found out by the directors until March 2011.

Also, and this is critically important for independent directors, a strategy of "noisy withdrawal" will not immunize independent directors from liability for bad acts that took place on their watch.  Glasscock's ruling in Fuqi and Chancellor Strine's earlier in re Puda decision  make two things clear:  first, Caremark is alive - although it's a difficult standard to meet, there are facts that will meet that standard; and second, if you are an independent director, remember that it is serious business.  Resigning in protest won't help.  Better stick around and clean up the mess you created by your own inattentiveness.


April 29, 2013 in Asia, Cross-Border | Permalink | Comments (0) | TrackBack (0)

Friday, April 26, 2013

Call for Papers: First Annual Workshop for Corporate & Securities Litigation

Below is the Call for Papers for a new workshop dedicated to bringing together corporate law scholars who write on litigation issues. 

Call for Papers: The University of Illinois College of Law and the University of Richmond School of Law invite submissions for the First Annual Workshop for Corporate & Securities Litigation. This workshop will be held on Friday, November 8, 2013, in Chicago, Illinois.

OVERVIEW: This annual workshop will bring together scholars focused on corporate and securities litigation to present their works-in-progress. Papers addressing any aspect of corporate and securities litigation or enforcement are eligible. Appropriate topics include, but are not limited to, securities litigation, fiduciary duty litigation, or comparative approaches to business litigation. We welcome scholars working in a variety of methodologies, including empirical analysis, law and economics, law and sociology, and traditional doctrinal analysis. Authors whose papers are selected will be invited to present their work at a workshop hosted by the University of Illinois College of Law in Chicago, Illinois, on Friday November 8, 2013. Local costs (lodging and workshop meals) will be covered. Participants are asked to pay for their own travel expenses. The workshop is designed to maximize discussion and feedback. All participants will have read the selected papers. The author will provide a brief introduction to the paper, but the majority of the individual sessions will be devoted to collective discussion of the paper involved.

SUBMISSION PROCEDURE: If you are interested in participating, please send an abstract of the paper you would like to present to Jessica Erickson at jerickso@richmond.edu not later than Friday, May 31, 2013. Please include your name, current position, and contact information in the e-mail accompanying the submission. Authors of accepted papers will be notified by Friday, June 28.

QUESTIONS: Any questions concerning the workshop should be directed to the organizers—Professor Verity Winship (vwinship@illinois.edu) and Professor Jessica Erickson (jerickso@richmond.edu).


April 26, 2013 in Conference Announcements | Permalink | Comments (0) | TrackBack (0)

Wednesday, April 24, 2013

Signaling and risk allocation in merger agreements

Macia and Moeller of TCU have posted their paper, Signaling and Risk Allocation in Merger Agreements. They argue that targets use firm specific MAC carveouts to signal their unobservable quality.  By declining to include firm specific MAC carveouts (e.g. carveouts relating to restatements or CEO retention, etc), high quality firms are able to create a separation from low quality firms that tend to include more firm specific MAC carveouts.  It's an interesting paper.  I will ignore (not really) their subtle finance dig:

[T]here are only few rigorous academic studies about MAC clauses, arguably because of a lack of readily available data. Instead, MAC clauses have been almost exclusively studied by practitioners and legal scholars.

Ahem...ok, temper in check. Here's the abstract:

Acquirers and targets allocate interim risk in merger agreements through Material Adverse Change (MAC) clauses and exclusions [bjmq: e.g. carveouts]. While virtually all acquisitions have MAC clauses, there is broad cross-sectional variation in the number and type of MAC exclusions. Using comprehensive hand-collected data, we find that acquisitions with fewer firm-specific MAC exclusions, i.e., stronger abandonment options for the acquirers, are associated with higher acquirer announcement returns, higher combined surplus gains, higher target announcement returns, and better prior target performance. Fewer firm-specific MAC exclusions appear to be credible signals of higher target quality and are more prevalent when information asymmetries are likely high and signaling is particularly beneficial. In contrast, more market-wide MAC exclusions are not associated with higher acquirer or target gains although acquirers tend to assume the largely exogenous, market-wide interim risk when the expected completion periods are longer.





April 24, 2013 in Material Adverse Change Clauses, Merger Agreements | Permalink | Comments (0) | TrackBack (0)

Monday, April 22, 2013

Shine settlement and News Corp Governance Changes

In 2011, we blogged about the derivative litigation in Delaware challenging News Corp's acquisition of Shine ("I just bought my daughter's company", and "More troubles for Murdoch") and now that case has been settled.  It's not often these days that you get litigation challenging actions by the buyer's boards. Typically, it's sellers' boards who are going to be on the hook.  This case, though, provided a nice opportunity for plaintiffs to chase a big fish while also have the burdens of proof on their side.  

You'll remember, the acquisition of Shine Group Ltd involved the acquisition of Mr. Murdoch's daughter's production company for $675 million.  Sure, why not? Except there are public shareholders.  Oh, them... 

Now, the case has been settled (Settlement MOU).  Here's what the plaintiffs got:

1. a $139 million settlement payment (including attorney fees) 

2. Corporate governance and compliance enhancements as follows, including

    • Creation of a Compliance Steering Committee for the corporation
    • The independent directors will approve the hiring of a Chief Compliance Officer for the corporation
    • Creation of an anonymous whistleblowing hotline
    • Annual public disclosure of direct political contributions made to candidates, parties, or PACs
    • Designation of a lead independent director
    • Reforms to board nomination process
    • Adoption of specific policies with respect to related party transactions [Really?  They didn't have that already!? I'm shocked.]
    • Board appointment of CEO, CFO, COO, and GC

I wonder which of these is going to hurt more?  The cash or the governance changes? One question and I suppose it's already been contemplated by the parties, do they have to disclose the cash equivalent value of FoxNews as a political contribution?  I guess not.



April 22, 2013 in Cases | Permalink | Comments (0) | TrackBack (0)

Saturday, April 20, 2013

What a week

Gawd, what a week.  Wait, the week isn't over.  Today (Sat) is Friday for teaching purposes since yesterday was such a mess around here.  Hopefully, things will settle down into something like a normal routine next week.  


April 20, 2013 in Friday Culture | Permalink | Comments (0) | TrackBack (0)

Wednesday, April 17, 2013

M&A Jargon App

Latham has converted its jargon glossary to an iPhone/iPad app.  There are actually multiple free apps - The Book of M&A Jargon, Global Merger Regimes (antitrust),  The Book of Global Restructuring Jargon.  Get 'em while they're hot!


April 17, 2013 | Permalink | Comments (0) | TrackBack (0)

Additional Call for Papers - National Business Law Scholars

Call for Papers for National Business Law Scholars Conference: Deadline Extended to May 31

We have received an enthusiastic response to the Call for Papers for the National Business Law Scholars Conference, scheduled for June 12-13, at The Ohio State University School of Law.  We will have additional openings for anyone who would like to make a presentation but has not yet responded.  Thus, we have extended the deadline to MAY 31st.  See the Call for Papers, reposted below with the extended deadline date, for details on how to submit:

National Business Law Scholars Conference: Call-for-Papers

The National Business Law Scholars Conference (NBLSC)  will be held on Wednesday, June 12th and Thursday, June 13th at The Ohio State University Michael E. Moritz College of Law in Columbus, Ohio.  This is the fourth annual meeting of the NBLSC, a conference which annually draws together dozens of legal scholars from across the United States and around the world.  We welcome all on-topic submissions and will attempt to provide the opportunity for everyone to actively participate.  Junior scholars and those considering entering the legal academy are especially encouraged to participate.

To submit a presentation, email Professor Eric C. Chaffee at echaffee1@udayton.edu with an abstract or paper by MAY 31, 2013.  Please title the email “NBLSC Submission – {Name}”.  If you would like to attend, but not present, email Professor Chaffee with an email entitled “NBLSC Attendance”.  Please specify in your email whether you are willing to serve as a commentator or moderator.  A conference schedule will be circulated in late May.

Conference Organizers:

Barbara Black (University of Cincinnati)
Eric C. Chaffee (University of Dayton)
Steven M. Davidoff (The Ohio State University)

April 17, 2013 | Permalink | Comments (0) | TrackBack (0)

Friday, April 12, 2013

Call for Papers:

The AALS Section on Transactional Law and Skills is seeking paper proposals for its session at the 2014 Annual Meeting. 

The topic will be “Value Creation in the 21st Century,” and will feature a mini-symposium on Prof. Ron Gilson’s foundational article on value creation by business lawyers. 

Prof. Gilson has agreed to be one of the panelists.  We are looking for additional presenters pursuant to the call for papers, below:

Call For Papers

AALS Section on Transactional Law and Skills

Value Creation by Business Lawyers in the 21st Century

2014 AALS Annual Meeting

New York, NY

             In 1984, the Yale Law Journal published one of the foundational scholarly articles in the study of transactional law, Professor Ronald Gilson’s “Value Creation by Business Lawyers.”  In the years since its publication the article has fueled a robust debate on the role of business lawyers and the justification for the services they provide.  On the thirtieth anniversary of that influential article this program will re-examine Prof. Gilson’s thesis, evaluate the impact of the article, and discuss the prospects for business lawyers creating value in the 21st Century. 

             We are honored that Prof. Gilson has agreed to participate on the panel.  The other presenters will include invited participants, and authors of scholarly works selected from this call for papers.

             The Section on Transactional Law and Skills invites submissions of proposals for papers germane to the program description provided above.  We welcome any full-time faculty member of an AALS member school who has written an unpublished paper, is working on a paper, or who is interested in writing a paper on this topic to submit a 1 or 2-page proposal to the Chair of the Section by June 7, 2013.  The Executive Committee will review all submissions and select proposals. 

             Please direct all submissions and questions to the Chair of the Section, Eric Gouvin at the address below:

Eric J. Gouvin

Professor of Law and Director,

Center for Innovation & Entrepreneurship

Western New England University School of Law


(413) 796-2031


April 12, 2013 in Conference Announcements | Permalink | Comments (0) | TrackBack (0)

Wednesday, April 10, 2013

Forum selection bylaws in court today

The challenge to Chevron's forum selection bylaw is before Chancellor Strine today.  Here's the complaint.  I've blogged about these challenges before (here).  Although, I have advocated for forum selection provisions in corporate charters, forum selection bylaws are easier to adopt.  In part the ease of adoption exaplains why a number of firms put them in place in recent years. The ease of their adoptino is, however, their biggest weakness.  In a challenge before a federal district court in California (Galaviz v Berg), the judge ruled that forum selection provisions adopted as bylaws lacked "sufficient indicia of consent."  This wouldn't be a problem with forum selection provisions adopted at charter provisions.

Although other boards have dropped their bylaws in the face of legal challenges, Chevron has stuck to its guns.  Today we will get some sense whether the Delaware courts agree with the California federal court about the sufficiency of a bylaw for the purpose of narrowing possible forums.  Looks like the plaintiffs are hoping that the recent Delaware Supreme Court opinion in Pyott v La. Mun. will be enough to keep Chancellor Strine in line.  Maybe. 


April 10, 2013 in Cases, Delaware | Permalink | Comments (0) | TrackBack (0)

Tuesday, April 9, 2013

SRZ 2012 PE Buyer/Public Target Deal Study

Schulte Roth & Zabel has released this client alert containing the highlights from its most recent study on private equity buyer acquisitions of U.S. public companies with enterprise values in the $100-$500 million range ("middle market" deals) and greater than $500 million ("large market" deals). During the period from January 2010 to Dec. 31, 2012, SRZ identified a total of 40 middle market deals and 50 large market deals that met these parameters.  Here are SRZ's key observations from the study:

1.  Volatility in the number and terms of middle market deals makes it more difficult to identify "market practice" in that segment.

2. Overall, middle market deals took significantly longer to get signed than large market deals.

3. "Go-shop" provisions were used more frequently in large market deals, even though, overall, the percentages of middle market and large market deals in which a pre-signing market check was used are comparable.

4.  While it is virtually the rule (92% of the time in 2012) in large market deals that the target will have a limited specific performance right against the buyer, the full specific performance remedy is still used quite often (44% of the time in 2012) in middle market deals.

5.  While the frequency with which middle market deals use reverse termination fees ("RTFs") has converged on large market practice, the size of RTFs has not.

6.  Large market deals are much more likely than middle market deals to limit damages for buyer’s willful breach to the amount of the RTF.


April 9, 2013 in Break Fees, Deals, Private Equity, Transactions | Permalink | Comments (0) | TrackBack (0)

Default fiduciary duties coming for Delaware LLCs

There has been a back and forth between the Chancery Court and the Delaware Supreme Court about whether there are default fiduciary duties for LLCs.  The Chancery Court takes the position that there are default fiduciary duties, though you may contract around them.  The Supreme Court on the other hand take a more extreme, contractualist position.  The Chief Justice's position is that there are no default duties because the LLC form is a creature of contract.  If parties to an LLC have not contracted for fiduciary duties, then the Supreme Court will not enforce them upon the parties.  

It was over this topic that Chief Justice Steele recently called out Chancellor Strine for straying from the question before the court and moving out of his lane.  The judicial dust up got some attention at the recent Tulane gathering.

Now, it looks like the Delaware legislature will be stepping in to resolve this little dust up and guess who is going to win?  That's right, sanity prevails.  There are going to be default fiduciary duties for LLCs.  According to Pepper Hamilton

On March 20, 2013, legislation proposing to amend the Delaware Limited Liability Company Act, 6 Del. C. §§ 18-101, et. seq. (DLLCA) was submitted to the Corporation Law Section of the Delaware State Bar Association. If the proposed legislation is enacted, the amendments, in addition to implementing certain technical changes, would confirm that LLC managers owe fiduciary duties where the LLC agreement is silent.

Expect to see this legislation enacted by the end of the summer.  Advantage Strine.


April 9, 2013 in Delaware | Permalink | Comments (0) | TrackBack (0)

More empty voting

A recent paper by Ringe, The Telus Saga, provides an additional example of empty-voting.  Until now, we have contented ourselves with the Mylan/King transaction.

Abstract: The recent conflict between Canadian telecommunications provider Telus and US-based hedge fund Mason Capital is the most recent illustration of 'empty voting' – a strategy whereby activist investors eliminate their risk exposure to shares in target companies to pursue idiosyncratic motives. As courts are struggling to find adequate solutions, regulators worldwide are called upon to provide reliable tools to this threat to shareholder voting.



April 9, 2013 | Permalink | Comments (0) | TrackBack (0)

Monday, April 8, 2013

Chinese merger review simplified

According to Davis Polk, MOFCOM in China is looking to simplify pre-merger review for a large class of relatively "simple" (read small) transactions.

The draft regulation – which is not dissimilar to draft proposals recently announced by the European Commission – designates as “simple” three (arguably narrow) cases premised upon the merging parties having low market share post-merger:

    • Horizontal mergers in which the parties together have under 15% share in a relevant market;
    • Vertical mergers in which the parties have (a) a vertical relationship, and (b) under 25% share in the “vertical market”; and
    • Mergers where the parties (a) do not have a vertical relationship, and (b) have under 25% share in all markets.

While in the US we use transaction size as the cut-off for initial review, the Chinese will be using market share.  Transaction size tests are arguably simpler to enforce and simpler for parties to get their head around.  On the other, market share tests will ensure plenty of work for lawyers.


April 8, 2013 in Antitrust, Asia | Permalink | Comments (0) | TrackBack (0)

Tuesday, April 2, 2013

Conventional wisdom takes a wrong turn

So it started yesterday with a piece in AllThingsD and then it appeared again this morning in an Andrew Ross Sorkin piece in The Dealbook.  I know it can be a cynical business, but perhaps we are letting our cynicism get the best of us.  What am I talking about? The developing argument that Dell's agreement to cover Blackstone's bidding expenses during the go-shop period is somehow nothing more than a ruse, a trick to get us all to believe that there really is a bidding contest for Dell.  Sorkin characterizes the reimbursement of Blackstone's expenses as "a whopping $25 million."  Whopping?  On a $20+ billion PE deal? C'mon, it's a fraction of a fraction.  Unless they are going to drop it in my bank account, $25 million isn't a lot of money.

First, I totally understand the cynicism.  While the Dell transaction is playing itself out, the big PE players have been in court in MA defending against charges that they conspired to fix the acquisition market by not engaging in bidding contests. Although the bigger claim was dismissed, it might help the industry if they could point to the Dell transaction and say, "See, we compete all the time!"  I get that.  So, it's not like I can really blame anyone for wanting to look closely at Blackstone's motivation for putting together an offer and seeking to get compensated for their time in doing so.

However, until now the cynics (me included) have been on the exact other side of this issue.  We have hinted for a long time that go-shops might just be window dressing.  Indeed, with a go-shop and matching rights in place, to the extent you believe PE shops look like common value bidders, it's unsurprising that they - by policy - don't engage in bidding contests.  It's not a conspiracy, it just wouldn't make economic sense to be too aggressive in jumping bids.  Overtime, they would expect to regularly lose to incumbents with more information or overpay for every contest that they won.  That's a short road to out-of-business. So, cynics argue, go-shops provide a nice veneer of compliance with Revlon obligations while everyone knows what's really going on. (There's some good work from Guhan Subramanian that suggests we shouldn't be too cynical, but I'm on a roll, so let me go with it.)   

How to overcome this problem and inject some life into the go-shop process?  Well, if PE bidders share attributes of common value bidders, the only way to get a second bidder to agree to invest the time required to put together a bid that in the end may not win is to pay them to do so. Paying for second bids or covering their expenses makes them indifferent to the prospect of making transaction specific investments that they might ultimately lose because the incumbent bidder has more information.  Now, they might still overpay - that's the risk of being in a common value business, but at least they won't risk losing transaction specific investments to incumbents with more information.  The result should be more competition for sellers over time.  Don't we want that? 

Anyway, before this train gets rolling too fast, let's not be too critical of the Dell Special Committee for paying to generate a second bid that certainly would not have appeared without the compensation.



April 2, 2013 | Permalink | Comments (1) | TrackBack (0)

Monday, April 1, 2013

Coupon Settlements and Merger Litigation in Texas

Nate Raymond guest writing on Alison Frankel's On The Case blog points out that a second Texas appellate court has ruled out attorney fees in disclosure only cases.  In August last year, a Texas appellate court in Rocker v Centex ruled that in disclosure only cases, Texas law prohibits attorney from being awarded fees.  Citing "section 26.003(b) of the Texas Civil Practice and Remedies Code", which reads
(b) Rules adopted under this chapter must provide that in a class action, if any portion of the benefits recovered for the class are in the form of coupons or other noncash common benefits, the attorney's fees awarded in the action must be in cash and noncash amounts in the same proportion as the recovery for the class.

The court ruled that where the only benefit for shareholders in a settlement is additional disclosure, then attorneys cannot be awarded fees.  Now, another Texas court has done it again.  This time in Kazman v Frontier Oil the plaintiffs will get nothing following a disclosure settlement.   So, if a case if typical merger related flotsam, the plaintiffs might be hoping to get a couple of minor disclosures and/or reduction in a termination fee in exchange for legal fees and giving the board a global release.  In Texas, that kind of settlement will no longer result in fees for plaintiffs counsel.  That pretty much makes such cases -- or settlements in Texas -- a non-starter from now on.

The coupon settlement legislation in Texas appears to be having a big impact on the development of merger litigation Texas.  One only need to look at Dell.  To be honest, I was a little surprised by the low number of Texas suits followed in connection with this transaction.  Of the 25 suits filed, only 5 of them were filed in Texas.  Of course, coupon settlement legislation is not the answer to multiforum litigation, but it does make Texas uneconomic as a forum for a lot of transaction related litigation.


April 1, 2013 in Litigation | Permalink | Comments (0) | TrackBack (0)