Friday, June 28, 2013
No surprise really. File this under "miscellaneous regulatory review (a.k.a. politics)". The Senate Agriculture Committee will hold hearings on July 10 to review the acquisition of Smithfield. On what basis? Who knows. Who cares, really. Here's the text of a letter a bi-partisan group of Seantors sent to Treasury Secretary Lew asking that acquisitions of food companies be submitted for national security review:
We are writing with regard to the proposed purchase of Smithfield Foods, the world's largest producer and processor of pork, by the Shuanghui Group. Although the Committee has not reached any conclusions with respect to this particular acquisition, it has raised a number of questions about how the foreign purchase of a major agriculture or food company is reviewed by the United States Government.
It has been publicly reported that the parties to this transaction are submitting it to the Committee on Foreign Investment in the United States (CFIUS) for review. The President has delegated to you the authority to add "the heads of any other executive department, agency, or office" that you deem appropriate to CFIUS on a case by case basis, and to designate a "lead agency or agencies" to "have primary responsibility" for that review.
We believe that our food supply is critical infrastructure that should be included in any reasonable person's definition of national security. As such, we strongly encourage you to include the Department of Agriculture and the Food and Drug Administration in any CFIUS review of this transaction, and consider designating the Department of Agriculture as one of its lead agencies. Further, any CFIUS review of this transaction should look beyond any direct impact on government agencies and operations to the broader issues of food security, food safety, and biosecurity.
Considering the potential for other foreign acquisitions of American food and agriculture companies, we also have a number of broader questions about how these transactions are reviewed and whether the appropriate authorities are evaluating potential risks and proposing sufficient mitigation measures to protect American interests. For instance, what measures should be considered to ensure that a company will maintain operations that comply with stringent American food safety and biosecurity standards? What measures should be considered to ensure that taxpayer supported research and development and any resulting intellectual property are properly safeguarded? Should trends in foreign acquisitions also be monitored to ensure the ongoing integrity of key components of the American food supply?
The United States has the safest, most efficient and reliable food supply in the world. It is one of our nation's great strengths, and we must ensure that it is preserved and protected. The Committee on Agriculture, Nutrition, and Forestry will further examine how this transaction is reviewed and how these transactions should be reviewed in the future. We look forward to your cooperation in that important effort.
"Biosecurity"... sounds scary. Strikes me that this is decidedly not a transaction that should be subject to CFIUS review.
The DOJ recently announced a $720,000 civil penalty against Macandrews & Forbes Holdings for violating premerger notice and waiting requirements under the Hart-Scott Rodino Act related to its acquisition of Scientific Games in June 2012. This is the second time in as many weeks that MAF has settled up penalties with the feds.
Tuesday, June 25, 2013
So, I'm already on record about what I think is next. So, forum selection bylaws that restrict litigation to the state of incorporation are helpful for managing the issue of multiforum litigation, which in recent years has become a real waste of resources. But, it's a very tricky - and perhaps impossible - balance.
The hard part of the balance involves arbitration. I'm already on record with respect to my opinions on the Delaware arbitration procedure (here and here), which I think goes too far. The forum selection bylaw, I think, may further open the door to widespread adoption of arbitration provisions in bylaws. If widespread adoption of arbitration includes confidential resolution of disputes and a restriction on the ability of shareholders to bring class actions, then that may be the beginning of the end of Delaware's position as corporate law leader - the end of Delaware's franchise. Seem extreme? Well certainly it won't happen overnight. It will be a long-term degradation of Delaware's competitive position and lowering barriers to entry for other states.
We'll see in 10 years. I've put down my marker.
Strine hands down a ruling upholding forum selection bylaws in Boilermakers Local 154 v Chevron. Surprised? Shouldn't be. The big issue will be whether courts of other states agree with Delaware's interpretation and enforce forum selection bylaws adopted by a board. I'm more confident about forum selection provisions in certificates of incorporation.
In this facial challenge to the exclusive forum bylaws, Chancellor Strine ruled that adopting such bylaws are well within the power of the board. First, they deal only with adjudicating the rights of shareholders as shareholders (internal affairs doctrine) and not any other rights. Shareholders who, for example, have tort claims against the corporation are not obligated in any way by the forum bylaws. Second, the unilateral adoption of a bylaw that regulates the manner in which the shareholder may interact with the board and the corporation is entirely within the power of the board. For example, the board may unilaterally adopt bylaws with respect to advance notice provisions. Third, the bylaw provision, though unilaterally adopted is part of the corporate contract. The question of contractual assent is a more flexible than the plaintiffs would have the court decide. When shareholders contract with the corporation, they assent with notice that the board may adopt new bylaws consistent with the law.
Of course, if shareholders want to bring a case and they believe the bylaw is illegal as applied to them, they are still free to bring a case. Alternatively, shareholders still have the ability to amend the bylaw through a vote or to vote out the board.
Get this ... Buzzfeed breaks merger news: Will Shuanghui back out of the Smithfield transaction now that Smithfield has walked away from Paula Deen? For those of you not paying attention, here's all the Paula Deen news you could possibly want. My guess is that Shuanghui is acquiring Smithfield for reasons that have nothing to do with Ms. Deen.
If you take a long term view of the economics driving Shuanghui's acquisition, losing Ms. Deen isn't even a blip on the radar. Given the standard that for a court to determine there has been a material adverse change sufficient to permit a buyer to walk, the event in question has to be one that "substantially threatens the overall earnings potential of the target in a durationally-significant manner." Frankly the loss of Ms. Deen just doesn't meet that standard, especially when one looks at the access Smithfield will have to new export markets in Asia once the aquisition is completed.
Monday, June 24, 2013
No surprise that the FTC is now investigating Google's acquisition of Waze. When Google annoucned the deal two weeks ago it pointedly did not seek HSR clearance - citing an exemption. Of course, just because you may not be required to seek premerger clearance, doesn't mean the antitrust rules don't apply.
Friday, June 14, 2013
Next week (Tuesday) we'll hear arguments in the Google shareholder litigation (Complaint). Shareholders are challenging a recapitalization plan that would have Google issue a new series of shares, Series C, that would have no voting rights. Google intends to use this new series of shares as an acquisition currency and to fund stock option programs. Use of these new shares has the side benefit of not diluting the voting control of Google's founders Larry Page and Sergei Brin. So comes the question: is this entirely fair to non-controlling shareholders. In the joint pre-trial stipulation, the parties agree on certain facts and questions that are at issue in the trial. It's worth reading before you dip your toes too far into the Google water. Some of the most relevant questions for the Chancellor to consider taken from the stipulation are below:
1. Whether the Recapitalization is entirely fair.
2. Whether the Recapitalization is motivated, in whole or in large part, by the desire of the Founders to entrench themselves in office for an extended period of time. ...
5. Whether the Special Committee, and each of its members, was disinterested and independent. ...
8. Whether the Special Committee functioned effectively and bargained at arm’s length, with the best interests of the Class A stockholders in mind. ...
10. Whether the failure of the Special Committee to obtain an opinion concerning the relative fairness of the Recapitalization to the two classes of stock, one of which is owned primarily by a controlling group, is in violation of Delaware law.
11. Whether the Special Committee failed in its duties by failing to bargain for limitations on the Founders’ control based on their performance, the passage of time, or other factors. ...
14. Whether Page took steps to undermine the Special Committee process. ...
18. Whether the Proxy Statement misrepresented certain facts, and omitted others, such that defendants breached their duty of candor. ...
If CVN gets the go-ahead to broadcast the arguments, I'll get the popcorn ready and will be along for the ride.
Thursday, June 13, 2013
OK, Rick and Keith again - this time negotiating use restrictions in confidentiality agreements. In this video, they take up the question that tripped up the parties in Martin Marietta v Vulcan - the limits on the use of confidential information as a backdoor standstill. Is it just me, or does Keith look a little like Ben Franklin?
The SEC has just imposed an $850,000 civil penalty on Revlon for misleading disclosures in the run up to its going-private transaction that were the subject of litigation (2009-2010) before the Chancery Court. Vice Chancellor Laster's opinion in In re Revlon S'holder Litig got a lot of attention - in part because of his tongue-lashing of plaintiff's counsel as well as his approval in dicta of forum selection clauses.
The original Revlon transaction called for MacAndrews & Forbes to acquire 100% of the publicly-traded Class A shares. Public shareholders wouldn't receive cash in the transaction. Rather, they would get new Series A Preferred Stock (unlisted) instead. The board was unable to get Barclays to issue a fairness opinion, prompting a change in the structure. Rather than a merger, the board restructured the transasction to be an exchange offer, thus doing away for the messy necessity of special committees and fairness opinions. Vice Chancellor Laster didn't agree.
Turns out the SEC, which scrutinizes 13e-3 disclosures, didn't either. In its order the SEC laid out what it thought was misleading about Revlon's 13e-3 disclosures:
49. Revlon’s third amended exchange offer filing included a section, prominently displayed in bold, entitled “Position of Revlon as to the Fairness of the Exchange Offer.” As a general matter, Revlon disclosed in this section the view of its Independent Board members concerning the fairness of the transaction.
52. Revlon disclosed: “The Board of Directors approved the Exchange Offer and related transactions based upon the totality of the information presented to and considered by its members.” Second, in a related disclosure, Revlon, in disclosing the positive factors it considered for the exchange offer, noted that “the exchange offer . . . [was] unanimously approved by the Independent Directors . . . who were granted full authority to evaluate and negotiate the Exchange Offer and related transactions.”
53. As represented by Revlon to its minority shareholders, the Board’s process in evaluating and approving the exchange offer was full, fair, and complete. The Board’s process, however, was not full, fair, and complete. In particular, the Board’s process was compromised because Revlon concealed – both from minority shareholders and its Independent Board members – that it had engaged in a course of conduct to “ring-fence” the adequate consideration determination.
54. Accordingly, Revlon’s disclosures about the Board’s evaluation of the exchange offer were materially misleading to minority shareholders. Moreover, Revlon’s “ring-fencing” deprived the Board, and in turn, minority shareholders of the opportunity to receive revised, qualified, or supplemental disclosures, including any that might have informed them of the third party financial adviser’s determination that the transaction consideration to be received by 401(k) members in connection with the transaction was inadequate.
55. Third, Revlon materially misled minority shareholders when it stated that unaffiliated shareholders – which included Revlon’s 401(k) members – could decide whether to voluntarily tender their shares. Revlon cited the voluntary nature of the exchange as a positive factor on which the Board relied in approving the exchange offer.
56. In fact, all minority shareholders – as well as its Independent Board members – were unaware that Revlon’s 401(k) members would not be able to tender their shares if an adviser found that the consideration offered for their shares was inadequate. Moreover, Revlon’s non-401(k) minority shareholders were not on equal footing with Revlon’s 401(k) members because Revlon’s 401(k) members received protection as a result of the adviser’s finding that 401(k) members were not provided adequate consideration.
OK, so that's not very pretty. Although the SEC does give 13e-3 filings extra scrutiny, it's not as often that they come in after a transaction and impose fines, so an administrative proceeding here is uncommon. Plaintiff's counsel in Delaware ultimately settled claims in this case for $9.2 million. Fidelity settled its claims with the company on its own got $19.9 million. Now, tack onto that an addtional $850,000 for the SEC.
Wednesday, June 12, 2013
Allison Frankel reports on developments in the fight over the mandatory shareholder arbitration bylaw adopted by the board of Commonwealth. She points to a law professor filing in opposition to the bylaw. The 11 law professors argue that access to public courts is critical to the development and maintenance of good corporate governance:
Absent the transparency and visibility provided by legal proceedings in an open courtroom, and the possibility of a rebuke by a judge, fiduciaries would be much less deterred from violating their duties to shareholders...
That's all true. I think the widespread adoption of mandatory shareholder arbitration would lead to the long term dismantling of corporate governance. I've argued as much with respect to Delaware's Chancery sponsored arbitration procedure in a paper now appearing in the Cardozo Journal of Conflict Resolution.
The Corporate Counsel just published an interview with Chancellor Strine. Some of it is Delaware boosterism - no surprise. But, there are a number of useful tidbits. First, Strine gives examples of what he believes are the two most important issues before his court recently. These won't come as a big surprise to those of you paying attention: 1) don't ask-don't waive provisions; and 2) Caremark liability for directors of US incorporated, foreign headquartered firms. He remains shocked (as am I, frankly) that people would agree to be directors at a distance of business in a country where they don't speak the language.
Another interesting comment - and this is full of irony - turns out Chancellor Strine doesn't think very highly of arbitration -- it's expensive and slow!
...Arbitration is increasingly more expensive than litigation, with some arbitrators charging more than leading M&A lawyers. It’s also often as slow. Worst of all are disputes that bounce between the two, where parties can’t resolve underlying issues, such as whether the matter is arbitrable in the first place.
So the principal advantages of being a Delaware entity are access to efficient dispute resolution services and the ability to rely upon guidance from our corporate law and precedent. Both are important, but the first has become increasingly important in light of the priority placed on business relationships.
Yes. I agree. Just go to court...
Tuesday, June 11, 2013
So it looks like David Murdock, Dole's CEO and 40% shareholder, is putting in an offer to take Dole Foods private at $12/share. According to the WSJ, this offer is subject to two conditions: 1) that a najority of the disinterested directors approve it; and 2) that it be approved by a majority of the minority shareholders.
Why would Murdock make it clear in his initial offer to the board that he has those two conditions? Isn't that for the board to decide? Well, it looks like Murdock's lawyers have been up late reading. Remember In re MFW S'holders Litigation from 10 days ago. Chancellor Strine is trying to bring some order to the question of standards of review of transactions involving controlling shareholders. In MFW he provided Murdock and his lawyers the following bit of help:
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.
And that's what Murdock is setting up for here. By relying on robust procedural protections Murdock is hoping to get the deferential business judgement standard to apply to his deal to take Dole private. So will will this get litigated? Well, yes. So, a very quick first test for Chancellor Strine's unified approach.
Thursday, June 6, 2013
This came across the Twitter-machine while I was sitting in the 8th Annual Carroll School Finance Conference this morning:
The Securities and Exchange Commission today announced an emergency court order to freeze the assets of a trader in Bangkok, Thailand, who made more than $3 million in profits by trading in advance of last week's announcement that Smithfield Foods agreed to a multi-billion dollar acquisition by China-based Shuanghui International Holdings.
OK, so this guy is an idiot of huge proportions. Why? Well, because he was asking to get caught. It's really, really awful. OK, so first and foremost. This guy doesn't have a trading account until May 10 when he opened one. It seems he was in quite a hurry to get started trading, too. According to the complaint:
On May 17, 2013, Rungruangnavarat e-mailed Interactive Brokers and inquired whether the account was open. Rungruangnavarat wrote: "Please let me know if the account opening is done, so i can start funding the account. I want to trade US options, so please confirm if my account is readily trad-able [sic]."
R. then funded the account to the tune of $2.92 million. He immediately started trading -- however, only exclusively in Smithfield call options and futures. Nothing else. OK, so he's a little single minded.
And when R. traded, he swamped the market - making up almost 80% or so of all July 29 call options and 99%(!) of all July 30 call option trades cleared in the month of May. What?! That's right, he might as well have put a "kick me" sign on his butt. If that weren't enough, R. also purchases Smithfield futures. There his purchases were 100% of the total cleared market. Ugh. He cornered the market in Smithfield options and futures and made a 3,400% when the acquisition was announced.
OK, so maybe he is just a bright guy sitting in Bangkok with a good idea. Yeah, maybe. The SEC complaint drops this little tidbit:
Rungruangnavarat has a Facebook friend who is a former employee ofthe company where Rungruangnavarat works, and who is an associate director at the Thai investment bank that advised Charoen on its contemplated Smithfield bid.
Bit in the ass by Facebook. Idiot.
Tuesday, June 4, 2013
Paul Hodgson at Forbes questions the Dell board's reasoning behind issuing Michael Dell more stock as part of his new compensation package. He has a point. The reason we might like stock compensation for managers is that we believe that ownership of equity, even substantial blocks of it, increases alignment of the managers' long-term interests with that of stockholders. They rise and fall with us, the regular stockholders. So far, so good. Mostly. Anyway. What about Dell?
Well in its proxy, it disclosed Michael Dell's compensation package for the fiscal year ending just a few days before announcement of the going private transaction. It turns out that last year - during the period in which the board knew or should have known that Dell was negotiating to buy the company - most of his compensation was stock. I guess I would question the wisdom of granting more long-term equity compensation to a CEO when he is in the process of collecting votes to take the company private. At that point, his interests and the interests of the stockholders are no longer in alignment and it doesn't matter how many more shares he is issued, they won't be.
Any of my students from my basic corporations class will tell you that I spend an inordinate amount of time at the beginning of every semester on issues of agency. Agency is a course that has fallen out of fashion in law schools. That's too bad. It's really important. In any event, I use agency because it helps students develop the vocabulary and the intuitions that will become important when we turn to the corporate law. In any event, all of this is to lead into the follow link to Above the Law. Now, much as I enjoy the legal gossip on ATL, I don't link to it much. But, I am happy to break that informal rule today. Why? Well, because there is an exam-worthy example of agency there today: A 3L at Indiana's Mauer School of Law was named "Interim Director of Admissions" or was he? I'm definitely going to use this example in class next year. Who could make these facts up?!
Monday, June 3, 2013
[Updated] Here are a handful of law firm memos on the MFW Shareholders Litigation (in which the Delaware Court of Chancery held that the Business Judgment Rule applied to a freeze-out merger that was conditioned on the approval of both an independent Special Committee and a Majority-of-the-Minority stockholder Vote). Brian discussed the same case here.