Friday, May 31, 2013
I received a couple of emails from readers who enjoyed the previous youtube clip of highlighting issues related to sandbagging (Like the cat that ate the canary) in merger agreements. Now, here's another one - consider it free/fun CLE (especially you summer associates!) in which Rick Climan and Keith Flaum walk us through unexpected issues in indemnification provisions.
More specifically, the topic for this clip is the question of whether there should be indemnification for any direct or indirect damages that relate from any direct or indirect breach of any representation or warranty. Hmmm. Word to the wise associate - don't fall for it. Why? Here's the Rube Goldberg hypothetical to explain why:
Thursday, May 30, 2013
NetSpend: Interesting Insights on Revlon Process, “Don’t Ask, Don’t Waive” Standstills & Fairness Opinions
The Delaware Chancery court's recent decision in Koehler v. NetSpend Holdings Inc. is worth a read for deal planners. Vice Chancellor Glasscock criticized the board's Revlon process, stating:
The Plaintiff has demonstrated that a reasonable likelihood exists that the sales process undertaken by the NetSpend Board—which included lack of a pre-agreement market canvass, negotiation with a single potential purchaser, reliance on a weak fairness opinion, agreement to forgo a post-agreement market check, and agreement to deal protection devices including, most significantly, a don’t-ask-don’t-waive provision—was not designed to produce the best price for the stockholders.
Nevertheless, in line with other recent Delaware decisions where the courts have been reluctant to enjoin a deal when there are no other potential bidders, the court denied plaintiff's motion to enjoin the deal. Still, Vice Chancellor Glassock's criticism of the fairness opinion provided by the company's financial advisor and the board's use of a DADW provision should give sellers some guidance for future deals.
For more info, take a look at this memorandum by Sullivan & Cromwell.
File this one under miscellaneous regulatory approval. It's likely that the Smithfield acquisition by Shuanghui International is going to get pretty intensive review by a Congress. No big surprise there. Congress has regularly used large Chinese acquisitions to make political hay. This one, though, is a little different. What's the hook? National security - "Gawd, they're taking our ham!" Seems like weak tea. Heidi Moore suggests a different national security hook - concern that the lack of effective food standards at the Chinese parent could bleed down into Smithfield and adversely affect the US food supply. That's interesting and might be compelling, but we'll see how it plays out. Hey, maybe the result will be to increase the FDA's budget. OK, probably not...
Chancellor Strine broke some new ground with respect to the question of what is the approrpriate standard of review in a going provate transaction with a controller. This issue has been percolating around for for some years and has gone unresolved (In re Cox, In re CNX Gas Corp., among others). In an opinion just handed down in MFW Shareholders Litigation Strine explains why the Supreme Court's Kahn v Lynch jurisprudence with respect to standards of review in going private transactions with controllers is deficient:
The question of what standard of review should apply to a going private merger conditioned upfront by the controlling stockholder on approval by both a properly empowered, independent committee and an informed, uncoerced majority of the minority vote has been a subject of debate for decades now. For various reasons, the question has never been put directly to this court or, more important, to our Supreme Court.
This is in part due to uncertainty arising from a question that has been answered. Almost twenty years ago, in Kahn v. Lynch, our Supreme Court held that the approval by either a special committee or the majority of the noncontrolling stockholders of a merger with a buying controlling stockholder would shift the burden of proof under the entire fairness standard from the defendant to the plaintiff. …
Uncertainty about the answer to a question that had not been put to our Supreme Court thus left controllers with an incentive system all of us who were adolescents (or are now parents or grandparents of adolescents) can understand. Assume you have a teenager with math and English assignments due Monday morning. If you tell the teenager that she can go to the movies Saturday night if she completes her math or English homework Saturday morning, she is unlikely to do both assignments Saturday morning. She is likely to do only that which is necessary to get to go to the movies (i.e. complete one of the assignments) leaving her parents and siblings to endure her stressful last minute scramble to finish the other Sunday night.
For controlling stockholders who knew that they would get a burden shift if they did one of the procedural protections, but who did not know if they would get any additional benefit for taking the certain business risk of assenting to an additional and potent procedural protection for the minority stockholders, the incentive to use both procedural devices and thus replicate the key elements of the arm’s length merger process was therefore minimal to downright discouraging.
In MFW, the board conditioned the transaction on approval by a special committee and approval of a majority of the minority. The question for the court was whether by using both protective devices under these facts, does a board get the additional protection of business judgment review rather than simply a shifting of hte burden under entire fairness review. Granting BJR with additional protective devices would go some way to resolving the "homework" incentives described by Strine.
Strine provides the following guidance for transaction planners:
When a controlling stockholder merger has, from the time of the controller’s first overture, been subject to:
(i) negotiation and approval by a special committee of
independent directors fully empowered to say no, and
(ii) approval by an uncoerced, fully informed vote of a majority of the minority investors,
the business judgment rule standard of review applies.
This result makes sense. If transaction planners are able to replicate in form and substance an arm's length transaction, then they should get the benefit of BJR. To the extent minority shareholders are guaranteed through these procedural protections the right to a fully informed and uncoerced vote, then worries about controllers abusing their position to take companies private at the expense of minority shareholders should be mitigated. Now, we'll see if the Supreme Court decides to jump in and take a side on this question.
Thursday, May 23, 2013
Some of you may have already participated in one of Rick Climan's well known mock negotiations already. If you haven't - or even if you have - Weil has released a number of them with accompanying animations. They are a great resource and entertaining, too! In the one below Rick and his partner, Keith Flaum, negotiate sandbagging provisions in merger agreements. It's well worth the five minutes.
Monday, May 20, 2013
Friday, May 17, 2013
As I noted yesterday, the Delaware Coalition for Open Government and the Chancery Court were before a panel of the Third Circuit arguing the merits of Delaware's arbitration procedure. Tom Hals of Reuters was there and he thinks the Chancery Court scored some points. I've said it before and I still believe it: if the arbitration procedure survives, someone will look back in 10 years or so and shake their head. It's still a bad idea for Delaware and Delaware's franchise.
Thursday, May 16, 2013
The question of the constitutionality of Delaware's Chancery arbitration program is before the Third Circuit today. I think my position on this program is pretty clear -- I'm for openness. See here for past posts on the topic. I've got a paper appearing in Spring 2013 issue of the Cardozo Journal of Conflict Resolution arguing more or less the same thing.
We'll see what the panel thinks.
Wednesday, May 15, 2013
The survey covers 40 sponsor-backed going private transactions with a transaction value (i.e., enterprise value) of at least $100 million announced during calendar 2012. Twenty-four of the transactions involved a target company in the United States, 10 involved a target company in Europe, and 6 involved a target company in Asia-Pacific.
Here are some of the key conclusions Weil draws from the survey:
- The number and size of sponsor-backed going private transactions were each lower in 2012 than in 2011 and 2010; . . . .
- Specific performance "lite" has become the predominant market remedy with respect to allocating financing failure and closing risk . . . . Specific performance lite means that the target is only entitled to specific performance to cause the sponsor to fund its equity commitment and close the transaction in the event that all of the closing conditions are satisfied, the target is ready, willing, and able to close the transaction, and the debt financing is available.
- Reverse termination fees appeared in all debt-financed going private transactions in 2012, . . .with reverse termination fees of roughly double the company termination fee becoming the norm.
- . . . no sponsor-backed going private transaction in 2012 contained a financing out (i.e., a provision that allows the buyer to get out of the deal without the payment of a fee or other recourse in the event debt financing is unavailable).
- Some of the financial-crisis-driven provisions, such as the sponsors’ express contractual requirement to sue their lenders upon a financing failure, have diminished in frequency. However, the majority of deals are silent on this, and such agreements may require the acquiror to use its reasonable best efforts to enforce its rights under the debt commitment letter, which could include suing a lender.
- Go-shops remain a common (albeit not predominant) feature in going private transactions, and are starting to become more specifically tailored to particular deal circumstances.
- Tender offers continue to be used in a minority of going private transactions as a way for targets to shorten the time period between signing and closing.
Monday, May 13, 2013
Gilson, Enriques, and Pacces have a new paper in which they propose a neutral takeover regime for the EU. Rather than adopt a director centered approach (as in Delaware) or a shareholder centered approach (as in the UK), Gilson and his co-authors try to split the difference by adopting default rules and menus that permit firms to opt into the approach of their choice. Interesting, though I suspect that the challenge to a private ordering approach will be collective action problems that appears to make it difficult for shareholders to influence private ordering solutions at the IPO stage here in the US. Here's the abstract:
Abstract: Takeover regulation should neither hamper nor promote takeovers, but instead allow individual companies to decide the contestability of their control. Based on this premise, we advocate a takeover law exclusively made of default and menu rules supporting an effective choice of the takeover regime at the company level. For reasons of political economy bearing on the reform process, we argue that different default rules should apply to newly public companies and companies that are already public when the new regime is introduced. The first group should be governed by default rules crafted against the interest of management and of controlling shareholders, because these are more efficient on average and/or easier to opt out of when they are or become inefficient for the particular company. The second set of companies should instead be governed by default rules matching the status quo even if this favors the incumbents. This regulatory dualism strategy is intended to overcome the resistance of vested interests towards efficient regulatory change. Appropriate menu rules should be available to both groups of companies in order to ease opt-out of unfit defaults. Finally, we argue that European takeover law should be reshaped along these lines. Particularly, the board neutrality rule and the mandatory bid rule should become defaults that only individual companies, rather than member states, can opt out of. The overhauled Takeover Directive should also include menu rules, for instance a poison pill defense and a time-based breakthrough rule. Existing companies would continue to be governed by the status quo until incumbents decide to opt into the new regime.
Tuesday, May 7, 2013
Wilmer Hale has put out its annual M&A report. There are a couple of interesting data points worth looking at. In particular is the table below - Takeover Defenses in IPO Firms. Notice that the basic tendancy to go public with lots of takeover defenses is consistent with findings from Daines and Klausner more than a decade ago (Do IPO Charters Maximize Firm Value?). That much hasn't changed. Indeed, in recent years, there has been a noticeable uptick in tech firms going public with dual-class stock, entrenching entrepreneurs (7% in Wilmer's sample). Also, adoption of exclusive forum provisions in certificates of incorporation appears to be reaching a critical mass - 27% of all IPOs and 44% of all PE backed IPOs. Oh, and don't be fooled by the fact that only 2% of firms go public with poison pills in place. People should stop counting that number. Every board has an implicit pill in place.
It's interesting. Give it a look.
Friday, May 3, 2013
Vice Chancellor Laster issued an opinion for In re Wayport Shareholder Litig on Wednesday. This post-trial opinion deals with a number of interesting issues, but it does one thing that is really helpful for people like me who are always looking for cases that students can look at that distill the differences in doctrine and approach. In this case, the Vice Chancellor does a nice summary of the four strains of doctrinal thought that define the Delaware duty of disclosure. I'm reproducing a heavily edited version of that section below (read the opinion for all the internal cites):
The “duty of disclosure is not an independent duty, but derives from the duties of care and loyalty.” The duty of disclosure arises because of “the application in a specific context of the board’s fiduciary duties . . . .” Its scope and requirements depend on context; the duty “does not exist in a vacuum.” When confronting a disclosure claim, a court therefore must engage in a contextual specific analysis to determine the source of the duty, its requirements, and any remedies for breach. Governing principles have been developed for recurring scenarios, four of which are prominent.
The first recurring scenario is classic common law ratification, in which directors seek approval for a transaction that does not otherwise require a stockholder vote under the DGCL. If a director or officer has a personal interest in a transaction that conflicts with the interests of the corporation or its stockholders generally, and if the board of directors asks stockholders to ratify the transaction, then the directors have a duty “to disclose all facts that are material to the stockholders’ consideration of the transaction and that are or can reasonably be obtained through their position as directors.” The failure to disclose material information in this context will eliminate any effect that a favorable stockholder vote otherwise might have for the validity of the transaction or for the applicable standard of review. (“With one exception, the ‘cleansing’ effect of such a ratifying shareholder vote is to subject the challenged director action to business judgment review, as opposed to ‘extinguishing’ the claim altogether (i.e., obviating all judicial review of the challenged action).
A second and quite different scenario involves a request for stockholder action. When directors submit to the stockholders a transaction that requires stockholder approval (such as a merger, sale of assets, or charter amendment) or which requires a stockholder investment decision (such as tendering shares or making an appraisal election), but which is not otherwise an interested transaction, the directors have a duty to “exercise reasonable care to disclose all facts that are material to the stockholders’ consideration of the transaction or matter and that are or can reasonably be obtained through their position as directors.” A failure to disclose material information in this context may warrant an injunction against, or rescission of, the transaction, but will not provide a basis for damages from defendant directors absent proof of (i) a culpable state of mind or nonexculpated gross negligence, (ii) reliance by the stockholders on the information that was not disclosed, and (iii) damages proximately caused by that failure.
A third scenario involves a corporate fiduciary who speaks outside of the context of soliciting or recommending stockholder action, such as through “public statements made to the market,” “statements informing shareholders about the affairs of the corporation,” or public filings required by the federal securities laws. In that context, directors owe a duty to stockholders not to speak falsely:
Whenever directors communicate publicly or directly with shareholders about the corporation’s affairs, with or without a request for shareholder action, directors have a fiduciary duty to shareholders to exercise due care, good faith and loyalty. It follows a fortiori that when directors communicate publicly or directly with shareholders about corporate matters the sine qua non of directors’ fiduciary duty to shareholders is honesty.
“[D]irectors who knowingly disseminate false information that results in corporate injury or damage to an individual stockholder violate their fiduciary duty, and may be held accountable in a manner appropriate to the circumstances.” (“When the directors are not seeking shareholder action, but are deliberately misinforming shareholders about the business of the corporation, either directly or by a public statement, there is a violation of fiduciary duty.”). Breach “may result in a derivative claim on behalf of the corporation,” “a cause of action for damages,” or “equitable relief . . . .”
The fourth scenario arises when a corporate fiduciary buys shares directly from or sells shares directly to an existing outside stockholder. Under the “special facts doctrine” adopted by the Delaware Supreme Court in Lank v. Steiner, a director has a fiduciary duty to disclose information in the context of a private stock sale “only when a director is possessed of special knowledge of future plans or secret resources and deliberately misleads a stockholder who is ignorant of them.” If this standard is met, a duty to speak exists, and the director’s failure to disclose material information is evaluated within the framework of common law fraud. If the standard is not met, then the director does not have a duty to speak and is liable only to the same degree as a non-fiduciary would be. It bears emphasizing that the duties that exist in this context do not apply to purchases or sales in impersonal secondary markets.
Thursday, May 2, 2013
...or the lack of it. In a live-chat with Warren Buffet at the University of Nebraska, Omaha, Buffet dropped this bit of golden Buffet wisdom. How to get directors to do a good job? Well...don't give them D&O insurance. They'll pay attention for sure.
Swimming against the tide has worked for him.
Ghosol and Sokol have recently posted a paper, Compliance, Detection and Mergers & Acquisitions. They argue that buyers and sellers use regulatory compliance as a signal for quality in the market for corporate control. Because regulatory compiance is costly, firms with unobserveable high quality will separate from lemons by demonstrating third party compliance, while low quality firms will not. Here's the abstract:
Abstract: Firms operate under a wide range of rules and regulations. These include, for example, environmental regulations (in which some industries have increased regulatory exposure) and finance and accounting (where all industries have reporting requirements). In other areas, such as antitrust cartels, enforcement is unregulated and antitrust leaves the market as the default tool to police against anti-competitive behavior. In all of these areas, detection of non-compliance by a firm can result in significant penalties. This issue of non-compliance has implications in the merger and acquisitions (M&A) context. In a transaction between an acquiring firm (buyer) and a target firm (seller), there is asymmetric information about the target’s quality. In our framework, we link a target’s quality directly to the strength of its regulatory compliance. In an M&A transaction, an acquirer seeks information about the target’s compliance, as a compliance failure may result in substantial penalties and sanctions, post-acquisition. In the presence of quality (compliance) uncertainty about target firms, low quality targets can masquerade as high quality. This would tend to give rise to a M&A market with Lemons-like characteristics, resulting in low transactions prices and dampening of M&A activity. We examine how M&A transactions in such regulatory areas – environmental, finance and accounting, and antitrust compliance problems – might function to alleviate quality uncertainty.
Penny Pritzker was just nominated to be Secretary of Commerce. I post this for the corporate geeks amongst my readers (Smith v van Gorkom; Pritzker family tree; 2006 Marmon Group breakup; ). The rest of you can move along.