Tuesday, December 31, 2013
What better way to ring out the old year than with some M&A news... According to Reuters:
An eccentric Chinese recycling magnate said on Tuesday he was preparing to open negotiations to buy the New York Times Co..
Chen Guangbiao, a well-known philanthropist, is something of a celebrity in China. During a particularly murky bout of pollution in January, the ebullient and tireless self-promoter handed out free cans of "fresh air".
But Chen says he is perfectly serious in his bid to buy the Times, which he said he had been contemplating for more than two years. He said he expected to discuss the matter on January 5, when he is due to meet a "leading shareholder" in New York.
"There's nothing that can't be bought for the right price," Chen told Reuters.
That's true. Everything has its price, I suppose. But, for all my recent M&A students who are still recovering from their exam - believe me, I'm still recovering from grading it - does the Times have to sell itself? It's not a trick question.
Happy New Year!
Friday, December 20, 2013
In Staggered Boards and Firm Value, Revisited, Cremers et al consider the effect of staggered boards 0n firm value. The question of the staggered board has been central to many recent debates about the proper role of shareholders in corporate governance and takeovers. The conventional academic wisdom has been that staggered boards lower firm value because the increase the likelihood of entrenchment of directors. Now, Cremers and his co-authors are mixing it up a bit. They look at the data and reach a different conclusion -- staggered boards are associated with an increase in firm value. Here's the abstract:
This paper revisits the association between firm value (as proxied by Tobin’s Q) and whether the firm has a staggered board. As is well known, in the cross-section firms with a staggered board tend to have a lower value. Using a comprehensive sample for 1978-2011, we show an opposite result in the time series: firms that adopt a staggered board increase in firm value, while de-staggering is associated with a decrease in firm value. We further show that the decision to adopt a staggered board seems endogenous, and related to an ex ante lower firm value, which helps reconciling the existing cross-sectional results to our novel time series results. To explain our new results, we explore potential incentive problems in the shareholder-manager relationship. Short-term oriented shareholders may generate myopic incentives for the firm to underinvest in risky long-term projects. In this case, a staggered board may helpfully insulate the board from opportunistic shareholder pressure. Consistent with this, we find that the adoption of a staggered board has a stronger positive association with firm value for firms where such incentive problems are likely more severe: firms with more R&D, more intangible assets, more innovative and larger and thus likely more complex firms.
Thursday, December 19, 2013
I took advantage of the brief time between exams and the holidays to hop down to Delaware to sit in on the appellate arguments in MFW Shareholder Litigation. You'll remember that in MFW Chancellor Strine was presented with a question - in a controlling shareholder transaction which is conditioned on both negotiation and approval by an independent, special committee and a fully-informed, uncoerced vote of the majority of the minority what is the proper standard of review. Chancellor Strine held that the proper strandard of review for a transaction in which the controller essentially disables itself is business judgment.
[If you don't need any of this background and just want a quick summary of the argument, feel free to skip down.]
Since Weinberger, entire fairness has been the standard for transactions involving controlling shareholders. In Kahn v Lynch, the Supreme Court provided a gloss on Weinberger's entire fairness standard for controlling shareholder transaction. Where the controller does the transaction in reliance on either a special committee or a vote of the majority of the minority, the burden shifts from the controller to plaintiff to prove that the transaction was not entirely fair. But, as Chancellor Strine noted in Cox Communications, the decision by the Supreme Court to keep the entire fairness standard in play made it impossible to get even weak complaints dismissed at an early stage. In no small part, Kahn v Lynch was a contributor to the 'litigation industrial complex' - generating almost guaranteed valuable settlement opportunities at the mere announcement of a controlling shareholder transaction no matter how valuable the underlying transaction for minority shareholders.
In MFW, Chancellor Strine had an opportunity to directly address the question of the proper standard of review in a controlling shareholder transaction where the controller conditioned the deal on robust procedural protections that essentially disabled the controller. The question for the corut was whether additional protections should give the board any credit - perhaps even sufficient credit to get weak claims dismissed early. Chancellor Strine put the 'credit' problem this way:
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.
Plaintiffs in MFW improvidently decided not to settle, rather seeking the option of going for post-closing damages. Their mistake. That gave Chancellor Strine the opportunity to address the question that eluded him in Cox. In MFW, Chancellor Strine announced that where a transaction with a controller is conditioned on both negotiation and approval by an independent, special committee and a fully-informed, uncoerced vote of the majority of the minority that business judgment is the proper standard of review.
[Appeal before Delaware Supreme Court]
OK. So that brings us to today in Dover where the Supreme Court met en banc to hear the plaintiff's appeal. I went down to watch the arguments and seem the wheels of corporate justice turn. Justice Holland sat as acting chief. Judge Jan Jurden sat by designation (Someone trying her out? Just sayin'...).
Justice Holland noted for the plaintiffs benefit that the court decided to hear the case en banc because, well, maybe the court wanted to write a new rule... Was that big enough of a hint that the court is looking to make some new law here? Justice Jacobs made the issue more explicit for the plaintiffs - forget about the particular facts of this case, what is the policy reason why the Supreme Court should accept or reject the Chancellor's reasoning.
Unfortunately, the plaintiffs weren't really up to the task of articulating a good reason why the procedural protections in MFW aren't robust enough to generate the business judgment presumption for a special committee. Plaintiffs asserted that special committees are structurally biased in favor of controllers in almost all circumstances. OK, so I am generally pretty cynical, but I still believe in the court's presumptions. Near as I can tell, special committees still get the presumption of independence until plaintiffs present facts that they aren't. Plaintiffs, it seemed, wanted the court to toss the presumption of independence of special committees altoghether in controlling shareholder transactions. Why? Not sure exactly why. But, if you are proposing to the court that directors shouldn't have the presumption of independence, then one really should have a strong articulated reason why. In any event, it didn't seem like the court was entertaining that notion.
Rather, the court quickly turned to the power of the fully-informed, uncoerced vote of a majority of the minority. Why isn't that powerful enough - together with the special committee - to get the business judgment presumption Justice Jacobs wondered? Well, well, because arbs! Oh, wait. Aren't arbs stockholders? Yes, but they just want to make money. So, shareholder votes shouldn't get credit? Again...the plaintiffs failed to clearly articulate a policy reason why a fully-informed, uncoerced vote of the majority of the minority isn't going to work. In general the plaintiffs struggled to provide the court with any reasons to overturn Chancellor Strine's reasoning.
When counsel for the special committee got their chance, they did a much better job of articulating reasons to uphold Chancellor Strine ruling. Justice Berger asked whether with the procedural safeguards the result of the special committee/majority of minority process was equivalent to an arm's length deal? No, was the response, but for the purposes of judicial review the precedural protections that disable the controller put the special committee in the same place as an independent board that would otherwise get the protection of business judgment. There was some push-back from Justice Berger on that point - particularly that even though the controller disabled itself, it's the controller who is the impetus for the transaction, not the special committee.
If the plaintiffs manage to get the Supreme Court to overturn the Chancery Court's opinion in MFW Justice Berger's point will likely be the reason. While, the special committee and the unaffiliated shareholders can still say no, it's the controller (and only the controller) who always gets the ball rolling. Because only the controller is permitted to 'set the scene' for the sale, the special committee process and the following shareholder votes are irretrievably infected by a structural bias that requires entire fairness to be the standard rather than business judgment. There, I made the plaintiff's argument for them.
As in previous cases, I won't hazard a guess on the actual outcome of this argument. However, I will note the old saying that 'you can't win an appeal at oral argument, but you can lose one.'
Friday, December 13, 2013
This is interesting. This paper by Levi, et al, Director Gender and Mergers and Acquisitions is now appearing in the Journal of Corporate Finance:
Does director gender influence CEO empire building? Does it affect the bid premium paid for target firms? Less overconfident female directors [are] less [likely to] overestimate merger gains. As a result, firms with female directors are less likely to make acquisitions and if they do, pay lower bid premia. Using acquisition bids by S&P 1500 companies during 1997-2009 we find that each additional female director is associated with 7.6 percent fewer bids, and each additional female director on a bidder board reduces the bid premium paid by 15.4 percent. Our findings support the notion that female directors help create shareholder value through their influence on acquisition decisions. We also discuss other possible interpretations of our findings.
Following along the same theme as yesterday - multi-forum litigation, we have a ruling from Chancellor Strine in the Cheap Trick litigation.
In short, Chancellor Strine dismissed the case without prejudice in favor of the parties resolving their issues in front of a Federal judge in Illinois. This litigation is really a pretty garden variety issue at heart -- board members of a corporation with a voting rule that requires unanimous consent of all the members of the board fight with each other about the removal of one member of the board. Deadlocked, they turn to the courts to help them resolve their mess. Or, in other words, "What do mean I'm not in the band anymore?"
From the Delawareonline piece:
In August 2013, band members Richard Nielsen, Thomas Peterson and Robin Zander sued drummer Brad Carlson in Delaware Chancery Court seeking to remove him as a member of the group’s board of directors, claiming he left the band in 2010 by no longer performing with them on tour.
A month earlier Carlson had sued Nielsen, Peterson and Zander in U.S. District Court in Illinois over his removal...
In a bench ruling, Strine dismissed the Delaware action in favor of the earlier filed Illinois action.
Strine said Illinois, where the band formed in the 1970s and where two members still live, was a logical jurisdiction for resolving "garden-variety" questions of contract interpretation, including whether Carlson is still a member of the band.
So, while Delaware may have an institutional interest to keep as much corporate litigation at home as possible, this interest does not prevent Delaware courts from letting go of high-profile litigation when it was clearly filed earlier in another jurisdiction and it doesn't implicate novel issues of Delaware law.
Thursday, December 12, 2013
I have just about fallen down the rabbit hole that is the end of the law school semester and will soon be up to my ears in law school exams. But, before I disappear, here's a new paper from Eric Chiappinelli, The Underappreciated Importance of Personal Jurisdiction in Delaware's Success:
The judges of the Delaware Court of Chancery are aggressively trying to stop stockholder/plaintiffs from filing corporate law cases outside of Delaware. Delaware believes that its position as the center of corporate litigation is in danger because cases are no longer filed exclusively there. If litigation continues to flow away from Delaware, it would jeopardize Delaware’s prominence in corporate law and the large revenues Delaware receives from out of state businesses that are incorporated there.
I argue that scholars and the Delaware judges underappreciate the vital importance of personal jurisdiction over corporate directors in Delaware’s quest to become and remain the center of corporate litigation. I show that Delaware’s dominance in litigation in large part stemmed from, and is now dependent upon, its unique system of personal jurisdiction.
None of Delaware’s attempts to stop cases from flowing out of Delaware will be enduringly successful without addressing the weaknesses in its current personal jurisdiction statute. I argue that Delaware should adopt a new statute that both will remedy the current flaws and will be effective in encouraging stockholder/plaintiffs to litigate in Delaware.
This is a new look on what is a now growing field of research - how to think about multi-jurisdictional litigation.
Wednesday, December 4, 2013
You probably missed the quiet retirement dinner for the Chief Justice at the Wilmington Club last week. Earlier this week, Delaware's Judicial Nominating Committee passed on all four names (Berger, Jurden, Strine, and Vaughn) to the governor for his consideration. For now, Justice Holland is the senior justice on the court and the rest of us await Governor Markell's decision. The Delaware Grapevine has all the inside info here.
OK, so here is the probably the first of what might ultimately be a handful of appraisal pettions filed with the Delaware Chancery Court. This one was was entered at the end of October. OK, so the thing that strikes me immediately is that the petitioner holds only 100 shares. Really?! 100 shares?! Definitely someone was drinking the Icahn appraisal kool-aid. The petitioner looks to get their attorney fees paid for by Dell. I should hope so. With 100 shares at stake, the fees just to file the peition have probably wiped out the economic value of the petitioner's position. The only way this petition makes a lick of sense is if there is a large class of petitioners that this one can join.
Turns out that the class of shareholders who are seeking appraisal is 47,529,513. Here's the list of petitioners (verified list of petitioners). Of those shareholders seeking appraisal, 14% failed to perfect their rights (either by not holding continuously, or by not signing their demand letter, or by submitting the demand letter too late). That leaves almost 41 million shares seeking appraisal. Sounds like a lot!
Actually, it turns out that the 41 million who have perfected their rights represent only 2% of the outstanding shares of Dell. In many states (but not Delaware), the appraisal statutes require that a minimum percentage (typically 5%) of shareholders seek appraisal before the court will entertain an appraisal petition.
Icahn himself held over 156 million shares of Dell. When he decided to take the merger consideration that really took the steam out of appraisal push.
Tuesday, December 3, 2013
OK, so it's that time of year for students all over the country...you're starting to study for exams. I know, I know, if you are my students you have been more than diligent. You've read ahead, you've come to office hours, etc. You can walk through a merger agreement with your eyes closed by now. I'm not worried about you. I'm worried about all those other students... For their edification, here's the latest in Rick Climan's 5 minute series on merger agreements. This one - part 1 of 2 deals with negotiating the Material Adverse Change/Material Adverse Effect clause.
AMR and US Air recently settled the lawsuit brought against them by the DOJ's antitrust division. The DOJ was using litigation to prevent the proposed merger of the two airline giants. As the two sides stood staring across at each other, one side sent a letter offering up a settlement. Here's the tick-tock of how the settlement of that antitrust litigation went down.