Thursday, August 29, 2013
Here's a quick heads up for anyone in the DC area - the ABA's Antitrust Section will be sponsoring a Merger Practice Workshop. Looks like an interesting day. Information and registration link below:
Merger Practice Workshop -- September 12, 2013
George Washington University, Washington, D.C.
What really happens in merger reviews? Find out at the Antitrust Section’s new Merger Practice Workshop in Washington, D.C., on September 12. This is a demonstration-based program, and will take you through the life cycle of a hypothetical merger involving a leading social networking site (“Friendstop”) and a leading local listings website (“Hiplisting”). The one-day program will cover all phases of the merger process, including:
• pre-signing antitrust counseling
• negotiating regulatory deal covenants
• coordinating international competition filings
• second request compliance
• advocacy to competition authorities
• negotiating remedies and consent decrees
The Merger Practice Workshop will be a great opportunity to gain deep practical insights into the merger review process from some of the most experienced practitioners in the government (both FTC and DOJ), corporate and private practice sectors.
For more information and to register, please use this link: http://ambar.org/atmergers
Monday, August 26, 2013
OK, so there is a paper by Lucian Bebchuk et al, The Long Term Effects of Shareholder Activism, making its way around. The paper has already generated an aggressive response from Marty Lipton of Wachtell, Lipton that is going around by way of email. You know you may have hit a nerve when someone throws out the "There are three kinds of lies: lies, damned lies and statistics.” In any event, here is the abstract to the paper:
Abstract: We test the empirical validity of a claim that has been playing a central role in debates on corporate governance – the claim that interventions by activist shareholders, and in particular activist hedge funds, have an adverse effect on the long-term interests of companies and their shareholders. While this “myopic activists” claim has been regularly invoked and has had considerable influence, its supporters have thus far failed to back it up with evidence. This paper presents a comprehensive empirical investigation of this claim and finds that it is not supported by the data.
We study the universe of about 2,000 interventions by activist hedge funds during the period 1994-2007, examining a long time window of five years following the intervention. We find no evidence that interventions are followed by declines in operating performance in the long term; to the contrary, activist interventions are followed by improved operating performance during the five-year period following these interventions. These improvements in long-term performance, we find, are present also when focusing on the two subsets of activist interventions that are most resisted and criticized – first, interventions that lower or constrain long-term investments by enhancing leverage, beefing up shareholder payouts, or reducing investments and, second, adversarial interventions employing hostile tactics.
We also find no evidence that the initial positive stock price spike accompanying activist interventions fails to appreciate their long-term costs and therefore tends to be followed by negative abnormal returns in the long term; the data is consistent with the initial spike reflecting correctly the intervention’s long-term consequences. Similarly, we find no evidence for pump-and-dump patterns in which the exit of an activist is followed by abnormal long-term negative returns. Finally, we find no evidence for concerns that activist interventions during the years preceding the financial crisis rendered companies more vulnerable and that the targeted companies therefore were more adversely affected by the crisis.
Our findings that the considered claims and concerns are not supported by the data have significant implications for ongoing policy debates on corporate governance, corporate law, and capital markets regulation. Policymakers and institutional investors should not accept the validity of the frequent assertions that activist interventions are costly to firms and their long-term shareholders in the long term; they should reject the use of such claims as a basis for limiting the rights and involvement of shareholders.
Well, if nothing else, the contrversy surrounding the paper is generating attention for the work. I wonder if that was Wachtell's initial idea? My guess is no.
Friday, August 23, 2013
What better way to end the summer and ring in a new academic year (just around the corner), than to post another of this great series of transaction videos by Rick Climan. In this end of summer edition, it's the 'hell or high water' deal:
Wednesday, August 21, 2013
There has been a bit of back and forth recently about under what circumstances boards might have some duty to shareholders to carve-out derivative claims to prevent them from being extinguished by a merger (see e.g. Massey and Countrywide). Now Michael Sirkin, a former Laster clerk, has posted a paper, Standing at the Singularity, in which he proposes a way forward. Here's the abstract:
Abstract: This article examines the doctrine of standing as applied to mergers and acquisitions of Delaware corporations with pending derivative claims. Finding the existing framework of overlapping rules and exceptions both structurally and doctrinally unsound, this article proposes a novel reconfiguration of existing Delaware law under which Delaware courts would follow three black-letter rules: (1) stockholders of the target should have standing to sue target directors to challenge a merger directly on the basis that the board failed to achieve adequate value for derivative claims; (2) a merger should eliminate target stockholders’ derivative standing; and (3) stockholders of the acquiror as of the time a merger is announced should be deemed contemporaneous owners of claims acquired in the merger for purposes of derivative standing. Following these rules would restore order to the Delaware law of standing in the merger context and would advance the important public policies served by stockholder litigation in the Delaware courts.
Tuesday, August 20, 2013
More clarity on under what conditions a transaction involving a controlling shareholder can get business judgment review. In MFW Shareholder Litigation Chancellor Strine laid out guidance about under what conditions a controller can expect business judgment review for a transaction with the corporation. Two weeks ago, Vice Chancellor Noble handed down a decision in SEPTA v Volganau in which he dealt with a related question – under what circumstances is a transaction entitled to business judgment review when that transaction involves a controller and a sale of the corporation to a third party. He also provides some context with a comparison to MRW:
B. A Note on In re MFW Shareholders Litigation As an initial matter, the Court’s recent decision in In re MFW Shareholders Litigation (“MFW”)82 illuminates many of the procedural protections at issue in this case. For the first time, the Court addressed the question whether, and under what conditions, a merger between a controlling stockholder and its subsidiary could be reviewed under the business judgment rule, as opposed to the entire fairness standard. The Court held that the business judgment rule could apply if all of the following conditions were satisfied:(1) the controlling stockholder at the outset conditions the transaction on the approval of both a special committee and a non-waivable vote of a majority of the minority investors; (2) the special committee was independent, (3) fully empowered to negotiate the transaction, or to say no definitively, and to select its own advisors, and (4) satisfied its requisite duty of care; and (5) the stockholders were fully informed and uncoerced.83 In concluding that this structure would benefit minority stockholders, the Court explained:
[S]tockholders get the benefits of independent, empowered negotiating agents to bargain for the best price and say no if the agents believe the deal is not advisable for any proper reason, plus the critical ability to determine for themselves whether to accept any deal that their negotiating agents recommend to them.84
The Court further reasoned that, because these procedural protections had the effect of replicating an arms’ length transaction, they had a “cleansing” effect on the transaction that justified judicial review under the deferential business judgment rule.85 Unlike MFW, which involved a controlling stockholder on both sides of the transaction, this case involves a merger between a third-party and a company with a controlling stockholder. Despite SEPTA’s attempt to show otherwise, Volgenau is not a buyer in this transaction. As a seller, his interest is generally aligned with that of minority stockholders to the extent that he receives equal consideration for his shares. But as this Court has observed before, a controlling stockholder may, even in this context, inappropriately influence the outcome of the sale process:
[I]t is . . . true that [a controlling stockholder] and the minority stockholders [are] in a sense competing for portions of the consideration [that the third-party is] willing to pay to acquire [the company] and that [the controlling stockholder] . . . could effectively veto any transaction. In such a case it is paramount . . . that there be robust procedural protections in place to ensure that the minority stockholders have sufficient bargaining power and the ability to make an informed choice of whether to accept the third-party’s offer for their shares.86
Hammons sets forth the procedural protections necessary for a third-party transaction involving a controlling shareholder to qualify for review under the business judgment rule: (1) the transaction must be recommended by a disinterested and independent special committee, (2) which has “sufficient authority and opportunity to bargain on behalf of minority stockholders,” including the “ability to hire independent legal and financial advisors[;]” (3) the transaction must be approved by stockholders in a non-waivable majority of the minority vote; and (4) the stockholders must be fully informed and free of any coercion.
Monday, August 19, 2013
Vice Chancellor Laster issued a post-trial opinion in the Trados matter on Friday. Can I just say, I like the fact that the Chancery Court is increasingly releasing opinions on the "free to the world" website. In 2009, Trados caused a bit of a stir when Chancellor Chandler denied the defendant's motion to dismiss. The plaintiffs brought a case against the defedant directors after they approved an acquisition by SDL in which the common stockholders of the sellers received nothing. At the MTD stage, the court observed that it is possible for a director to breach her duty of loyalty by favoring the interests of preferred stockholders over those of common stockholders where those interests diverge. The Court therefore refused to dismiss plaintiff’s claim that the board improperly favored the interests of the preferred stockholders by agreeing to a merger in which the common stockholders received no consideration.
The venture capital community was understandably upset -- afterall they bargain for liquidation preferences and now -- at the MTD stage -- a court held directors might well have violated their fiduciary duties by agreeing to a merger agreement in which the liquidation preferences were honored. If the court's opinion was the last word, then well, it might be required for boards to disregard liquidation preferences going forward.
Well, it turns out that it wasn't the last word. On Friday, Laster issued issued his post-trial opinion in which the world - from the point of view of the VC community - was set right:
Directors of a Delaware corporation owe fiduciary duties to the corporation and its stockholders which require that they strive prudently and in good faith to maximize the value of the corporation for the benefit of its residual claimants. A court determines whether directors have fulfilled their fiduciary duties by evaluating the challenged decision through the lens of the applicable standard of review. Because a board majority comprised of disinterested and independent directors did not approve the Merger, the defendants had to prove that the transaction was entirely fair.
Despite the directors’ failure to follow a fair process and their creation of a trial record replete with contradictions and less-than-credible testimony, the defendants carried their burden of proof on th[e] issue [fair dealing]. Under Trados‘s business plan, the common stock had no economic value before the Merger, making it fair for its holders to receive in the Merger the substantial equivalent of what they had before. The appraised value of the common stock is likewise zero.
Remember Weinberger -- it's fair price and fair dealing. Not just the one. So, here's an example of unfair dealing, but because the price was fair - and the price was $0 - the transaction was entirely fair to the stockholders.
Friday, August 9, 2013
With all the talk about In re MFW, it's appropriate that Guhan Subramanian and Fernan Restrepo offer a paper on the question of the unified approach to the freezeout and the effect of doctrine on how lawyers structure such deals. Their paper is here: "The Effect of Delaware Doctrine on Freezeout Structure and Outcomes: Evidence on the Unified Approach". Here's the abstract:
Abstract: Historically, Delaware corporate law provided different standards of judicial review for buyouts by controlling shareholders (also known as “freezeouts”) based on what transactional form was used: deferential business judgment review for freezeouts executed as tender offers, and stringent “entire fairness” review for transactions structured as mergers. Subramanian (2005), Subramanian (2007), and Restrepo (2013) provide doctrinal and empirical evidence that transactional planners responded to these differences in standards of judicial review; that these differences in judicial scrutiny created differences in outcomes for the minority shareholders; and that differences in outcomes created a social welfare loss, not just a wealth transfer from minority shareholders to the controlling shareholder. Over the past decade, in a series of important decisions, Delaware law has migrated toward a “unified approach” to freezeouts regardless of transactional form. In this paper we present empirical evidence on all freezeouts of Delaware targets during this period of doctrinal evolution. In general, we find that deal outcomes have converged in the eight years since the Delaware Chancery Court’s decision in Cox Communications, but approximately half of merger freezeouts in the post-Cox era still did not follow the procedural template provided by the unified approach. Our findings suggest that: (1) transactional planners seem to respond to even probabilistic changes in the Delaware case law; (2) the social welfare loss identified in Subramanian (2005) seems to no longer be present; but (3) the Delaware Supreme Court may nevertheless wish to “finish the job” by endorsing the unified approach, in order to ensure adequate procedural protections to minority shareholders.
The Deal Professor has a nice run down of the issues in Monday's motion to expedite hearing in Delaware. I just had some thoughts about three possible outcomes on Monday -- now I'm not necessarily predicting any of these outcomes, I am usually pretty bad at that, but because there are a range of possible outcomes and each of them tells us something about how the court is thinking about the substantive issues in the case. I think the range looks something like this:
Worst Case Scenario for Dell Board/Total Icahn Victory: The court hears the arguments and says,"Mr. Icahn, you are totally correct. It has been more than 13 months since the last annual shareholder meeting. Under Section 211(c) upon application by a shareholder - that's you, Mr. Icahn - I can and hereby do order a meeting. Oh, and let's have that meeting right now. Who's present? What business do you want the corporation to entertain?"
OK, so that's an extremely low likelihood outcome, the court saves the summary proceeding for the worst of the worst boards. It would be really bad for Dell, but I don't think this is going to happen. the Dell board just isn't bad enough to merit a summary proceeding. Best to ensure against this by making sure Michael Dell and the Silver Lake boys are hanging around the DuPont in Wilmington on Monday. And, better make sure some associate packs a pile of proxies, just in case.
More Pain for Dell/Almost Victory for Icahn: The court hears the arguments and says,"OK, so it's been 13 months since your last meeting, so I am going to order a meeting and that such meeting been held coincident with the special meeting of the shareholders. Yes, yes, counsel, I know I am not required to hold the meetings on the same day and that it might be inconvenient for you. But, I relied on the fact that you had built in procedural protections into the merger agreement the last time you were here. I know, counsel, I know, you weren't required under Delaware law to have majority of unaffiliated shareholders vote in favor, I know all of that. But, I am can order the meeting anytime I want, and I want to order it on the same day as the special meeting. If the shareholders with all their knowledge decide that Mr. Icahn is correct, well, they will vote for him. If not, then not. Good day counsel."
If this is outcome, well then it's pretty clear that the whole changing of the voting rules didn't go over well with Strine who might have felt had because he leaned on all the procedural protections the last time Icahn was in front of him looking for a motion to expedite.
Total Victory Dell/Icahn Loss: The court hears arguments and says,"Why, Mr. Icahn, in all my years of judging, I have never heard a more lucid and compelling argument. You are absolutely correct. I can't help but agree. I am hereby ordering that an annual meeting of the shareholders be held on a date not later than three days after the previously scheduled special shareholder meeting. Is that convenient for you, counsel for Dell?"
"Uh..yes your honor. Very convenient."
"Then, so ordered."
Scheduling the shareholder meeting after the special meeting would bascially be the end of the road for Icahn. Delaware does this kind of thing a lot - hand out Pyhrric victories. If it does so in this case, then it's pretty clear that Strine wasn't all that concerned with the voting changes and the adjournments. It was business judgment all the way, so absent compelling facts or a bona fide comepting bid, let's just get this thing going.
So...we'll see on Monday.
Thursday, August 8, 2013
Minor Myers at Brooklyn Law wades into the multi-forum litigation waters with a sensible solution. Here's the abstract of his paper forthcoming in the Illinois Law Review:
Abstract: Shareholder litigation in the United States is systematically malfunctioning. This Article presents new empirical evidence demonstrating that serious intra-corporate disputes at public companies now attract lawsuits in multiple fora. No existing mechanism can reliably coordinate shareholder litigation in different court systems, and the resulting disorder generates uniformly negative consequences for shareholders. The multi-forum character of shareholder litigation can undermine its deterrent effect by aggravating the disjunction between settlement values and merit. At the same time, the multi-forum pattern can diminish the quality of U.S. corporate law over time by depriving incorporation states of important cases.
This Article proposes to fix multi-forum shareholder litigation by creating a clear and simple mechanism for coordinating similar cases in different court systems. This proposal would require federal courts to stay proceedings in shareholder litigation before them when a similar case is pending in the state of incorporation. It would also allow suits filed in states other than the state of incorporation to be removed to federal court, where they would be subject to the same stay of proceedings. Such a system would neutralize the ability of any plaintiff to file a case that could compete for settlement with a case in the incorporation state. The result is an ordered solution to the problem of multi-forum shareholder litigation that prioritizes the state of incorporation when suits are filed in competing fora but otherwise does nothing to restrict the venue options of shareholders.
Tuesday, August 6, 2013
Just like that. It's gone. The top-up option has gone the way of the dodo bird. The handwriting has been on the wall for some time (since at least VC Laster's opinion in Olson v EV3), so it's not a surprise. Vice Chancellor Laster described the role of the top-up option in the following way:
The top-up option is a stock option designed to allow the holder to increase its stock ownership to at least 90 percent, the threshold needed to effect a short-form merger under Section 253 of the Delaware General Corporation Law (the “DGCL”), 8 Del. C. § 253. A top-up option typically is granted to the acquirer to facilitate a two-step acquisition in which the acquirer agrees first to commence a tender offer for at least a majority of the target corporation’s common stock, then to consummate a back-end merger at the tender offer price if the tender is successful…
The top-up option speeds deal closure if a majority of the target’s stockholders have endorsed the acquisition by tendering their shares. Once the acquirer closes the first-step tender offer, it owns sufficient shares to approve a long-form merger pursuant to Section 251 of the DGCL, 8 Del. C. § 251. Under the merger agreement governing the two-step acquisition, the parties contractually commit to complete the second-step merger. A long-form merger, however, requires a board resolution and recommendation and a subsequent stockholder vote, among other steps. See id. § 251(b) & (c). When the deal involves a public company, holding the stockholder vote requires preparing a proxy or information statement in compliance with the federal securities law and clearing the Securities and Exchange Commission.
The top-up option accelerates closing by facilitating a short-form merger. Pursuant to Section 253, a parent corporation owning at least 90% of the outstanding shares of each class of stock of the subsidiary entitled to vote may consummate a short form merger by a resolution of the parent board and subsequent filing of a certificate of ownership and merger with the Delaware Secretary of State. See 8 Del. C. § 253(a). This simplified process requires neither subsidiary board action nor a stockholder vote.
The Chancery Court has consistently ruled that top-up options as described above are permissible because at least in part once the acquirer has sufficient shares to approve a long-form back end merger it's not a question of if the merger will occur, but when. So long as the acquirer merger agreement does not permit the dilution of remaining shares for appraisal purposes, the top-up option is unremarkable. Of course, there was the slightly complicated top-up option math that made top-up options fun for exams and tripping up junior associates (hint - you have to add the newly issued shares into the numerator and the denominator...).
All that is gone now that DGCL Sec 251(h) has gone into effect. Sec. 251(h) eliminates the requirement for a shareholder vote in a back end merger following a tender offer if the acquirer is able to obtain control through the tender offer. Here's the new 251(h):
(h) Notwithstanding the requirements of subsection (c) of this section, unless expressly required by its certificate of incorporation, no vote of stockholders of a constituent corporation whose shares are listed on a national securities exchange or held of record by more than 2,000 holders immediately prior to the execution of the agreement of merger by such constituent corporation shall be necessary to authorize a merger if:
(1) The agreement of merger, which must be entered into on or after August 1, 2013, expressly provides that such merger shall be governed by this subsection and shall be effected as soon as practicable following the consummation of the offer referred to in paragraph (h)(2) of this section;
(2) A corporation consummates a tender or exchange offer for any and all of the outstanding stock of such constituent corporation on the terms provided in such agreement of merger that, absent this subsection, would be entitled to vote on the adoption or rejection of the agreement of merger;
(3) Following the consummation of such offer, the consummating corporation owns at least such percentage of the stock, and of each class or series thereof, of such constituent corporation that, absent this subsection, would be required to adopt the agreement of merger by this chapter and by the certificate of incorporation of such constituent corporation;
(4) At the time such constituent corporation's board of directors approves the agreement of merger, no other party to such agreement is an "interested stockholder" (as defined in § 203(c) of this title) of such constituent corporation;
(5) The corporation consummating the offer described in paragraph (h)(2) of this section merges with or into such constituent corporation pursuant to such agreement; and
(6) The outstanding shares of each class or series of stock of the constituent corporation not to be canceled in the merger are to be converted in such merger into, or into the right to receive, the same amount and kind of cash, property, rights or securities paid for shares of such class or series of stock of such constituent corporation upon consummation of the offer referred to in paragraph (h)(2) of this section.
If an agreement of merger is adopted without the vote of stockholders of a corporation pursuant to this subsection, the secretary or assistant secretary of the surviving corporation shall certify on the agreement that the agreement has been adopted pursuant to this subsection and that the conditions specified in this subsection (other than the condition listed in paragraph (h)(5) of this section) have been satisfied; provided that such certification on the agreement shall not be required if a certificate of merger is filed in lieu of filing the agreement. The agreement so adopted and certified shall then be filed and shall become effective, in accordance with § 103 of this title. Such filing shall constitute a representation by the person who executes the agreement that the facts stated in the certificate remain true immediately prior to such filing.
Oh, sure. It doesn't actually say the top-up option is no more. It doesn't have to. It just makes the top-up irrelevant. Like the dodo bird.
Monday, August 5, 2013
Like any other kid growing up in the 70s, I was convinced that there was a prehistoric beast swimming around in Loch Ness. Why not?! In any event, Peter Ladig reminds us of Nessie's appearance in the corporate law - or lack of appearance - by way of a reference to the mythical creature in Chancellor Allen's opinion in Steiner v Meyerson:
The waste theory represents a theoretical exception... very rarely encountered in the world of real transactions. There surely are cases of fraud; of unfair self-dealing and, much more rarely negligence. But rarest of all-and indeed, like Nessie, possibly non-existent-would be the case of disinterested business people making...
Notice how the Chancellor hedges on the existence of Nessie. In any event, I've seen way too many exams where students go to waste theories first even though I tell them it should be last. Maybe a reminder to the Nessie analogy will be helpful.
Over the weekend it was announced that John Henry, the principle owner of the Red Sox, purchased the Boston Globe from the New York Times Co. for $70 million. This deal really tells you all you need to know about the current state of the publishing industry. The New York Times purchased the Boston Globe about 20 years ago for $1.1 billion. Ugh. And the Times thinks the legal business is in trouble...
In other related news, the Red Sox agreed to a 7 year, $100 million contract extension with second baseman Dustin Pedroia.
Update: As if on cue, the Times publishes a post-mortem on another failed publishing merger - The Daily Beast and Newsweek.
Update: And then, there's this -- Washington Post sold to Amazon's Jeff Bezos. What a day for media deals...