Friday, March 8, 2013
Carl Icahn has been very busy over the past year. Now, he has moved on to Dell. In a letter to the board (see Sched 14A with lett and board response), Icahn made an offer to the board that he hopes they take - and then threatens to run a proxy contest and start "years of litigation" if they don't:
However, if this Board will not promise to implement our proposal in the event that the Dell shareholders vote down the Going Private Transaction, then we request that the Board announce that it will combine the vote on the Going Private Transaction with an annual meeting to elect a new board of directors. We then intend to run a slate of directors that, if elected, will implement our proposal for a leveraged recapitalization and $9 per share dividend at Dell, as set forth above. In that way shareholders will have a real choice between the Going Private Transaction and our proposal. To assure shareholders of the availability of sufficient funds for the prompt payment of the dividend, if our slate of directors is elected, Icahn Enterprises would provide a $2 billion bridge loan and I would personally provide a $3.25 billion bridge loan to Dell, each on commercially reasonable terms, if that bridge financing is necessary.
Like the “go shop” period provided in the Going Private Transaction, your fiduciary duties as directors require you to call the annual meeting as contemplated above in order to provide shareholders with a true alternative to the Going Private Transaction. As you know, last year’s annual meeting was held on July 13, 2012 (and indeed for the past 20 years Dell’s annual meetings have been held in this time frame) and so it would be appropriate to hold the 2013 annual meeting together with the meeting for the Going Private Transaction, which you have disclosed will be held in June or early July.
If you fail to agree promptly to combine the vote on the Going Private Transaction with the vote on the annual meeting, we anticipate years of litigation will follow challenging the transaction and the actions of those directors that participated in it. The Going Private Transaction is a related party transaction with the largest shareholder of the company and advantaging existing management as well, and as such it will be subject to intense judicial review and potential challenges by shareholders and strike suitors. But you have the opportunity to avoid this situation by following the fair and reasonable path set forth in this letter.
Now, I think he has a real point here. And that's the special dividend. He proposes the board use $7.4 billion in cash that it has covented to bring back from offshore to finance the going-private transaction as the main source of cash for the dividend. Think about it this way, there is a grand public policy discussion about corporate taxes and how the present structure of corporate taxes causes firms to stockpile cash off-shore. This cash has to be left there - the argument goes - lest it come back and be taxed at punitive rates.
OK, I am not going to take sides in that whole debate, but I will say this. Dell is content to leave it's large pile of cash offshore and away from the shareholders because of the tax issue. However, if the cash is necessary to finance an acquisition of the company by Michael Dell, well then, paying all those taxes to bring the cash back onshore isn't all that big a deal and is well worth the effort.
Icahn is pointing to that and saying in effect, "Hey, wait a minute. Why bring the cash back to finance a going private deal?! If Michael Dell is just buying cash with cash, doesn't that undervalue what's left of the company? Why not bring the cash back to the US, pay the taxes, and then distribute it to shareholders?"
I tend to sympathize with that view. If the taxes are really so onerous that the board has refused to bring the cash back until now, why isn't it a corporate waste to use them to finance a going-private transaction by the founder? The board will have to deal with that question at some point.
Thursday, March 7, 2013
Vice Chancellor Laster will be speaking at Fordham Law this evening (6:30p). The event is open to the public and he is a very good speaker. The topic is the true meaning of the Revlon standard. More info on the event here. So, leave work early and head on over!
Many times my students will ask me, well how bad does director inattentiveness to board duties have to be win on a care claim much less a Caremark claim? There are, of course, multiple levels of answers to that question, but the simplest is, "pretty bad". Now we have a stark example of some facts from a recent Delaware transcript ruling that might get you there - In re Puda Coal (Puda_Coal Transcript_Ruling). In Puda, we have a Chinese coal company incorporate in Delaware and trading on US markets with five directors - 2 inside Chinese directors and 3 outside American directors. OK, so it turns out that the 2 inside directors stole all the corporate assets and appropriated them all for themselves. For two years, the outside directors had no idea. They relied on reports from the CEO and sat in the US all the while assuming there were corporate assets somewhere in China. So, the directors, including the outside directors all get sued. OK, so far so good.
During the course of an internal investigation, all the outside directors realizes what had been going on and quit in response, leaving the inside directors in charge of their own malfeseance. Then outside directors turn up in Chancellor Strine's court as defendants seeking to have the derivative suits dismissed for because demand was not excused. Theory: a majority of the directors were independnet and could well have sought to prosecute this case, had it been presented to them. That didn't go well for them:
A Delaware lawyer is telling me, I think, if I dismiss the case on demand excusal grounds, I dismissed it because control of the lawsuit belongs to the company, therefore the decision to sue the insiders who took the assets belongs to the company. The company might conclude that it's perfectly okay to take the assets, or there's a cost benefit analysis of suing and it's just not worth it. I can't take on to myself in that situation. I can't enter a judgment at the instance of derivative plaintiffs because control of a lawsuit belongs to the board, which is now controlled by the guy who your clients suspect stole the assets out from under them.
What stuck in Strine's craw, I think, was the fact that when the outside directors who were a majority realized that the all the assets of the corporation had been sold out from under them that their response was not to sue the bad directors and seek to defend the corporation, but to resign and walk away:
When, as a matter of undisputed reality, when they were faced with knowing in their view that there had been the most extreme sort of fiduciary violation you could imagine, rather than have the company sue, they quit, then come into court and seek to use 23.1 and, frankly, disable the derivative plaintiffs from even going after the bad guys. When I mean bad guys, I'm using your client's own view of these people. I'm trying to understand how my state -- if I were to embrace this -- my state's corporate law would not be justly subject to ridicule.
And that's when the hearing starts to go really bad for the outside directors. Turns out only one of the outside directors speaks Chinese. Whoops. (Note to self, pick up a Rosetta Stone before taking that directorship in the Mongolian company). Strine then let them have it with this:
I think those of us who actually -- judges in Delaware who participate in corporate law in Delaware take legitimate umbrage when folks say that we don't hold managers accountable for breaches of fiduciary duty in Delaware. I find that claim to be astonishingly outdated and simple-minded, when any review of our corporate law will see -- just out of our statutory corporate law will say that is, frankly, much more pro stockholder and more balanced than any of our other states, most of which have stronger insulations against director liability, many of which allow directors in the context of takeovers to use takeover defenses not permissible in Delaware, and when the major controversies that have come out of Delaware over the last 30 years, some of them have been about things that are anti-stockholder. Many of them are cases like Van Gorkom, Omnicare, Quickturn. Guys like me, El Paso, Southern Peru, Loral, where we've held people accountable in big ways for things. And we take seriously in the derivative suit contest that, frankly, you shouldn't lightly take away from the board of directors the ability to control a lawsuit. But to use doctrinal law in some sort of gotcha way is just not appropriate
Now, he's just venting; he's right, but he's just venting. So by now it's pretty obvious that the defendants made an error is seeking to dismissal on failure to make demand. Then Strine turned to the question of whether a 12(b)(6) motion can survive. Sorry, it's not going to get any better for these defendants. But here, Strine lays out some minimum standards for independent directors of Delaware corporations headquartered abroad, and it's pretty sensible:
Independent directors who step into these situations involving essentially the fiduciary oversight of assets in other parts of the world have a duty not to be dummy directors. I'm not mixing up care in the sense of negligence with loyalty here, in the sense of your duty of loyalty. I'm talking about the loyalty issue of understanding that if the assets are in Russia, if they're in Nigeria, if they're in the Middle East, if they're in China, that you're not going to be able to sit in your home in the U.S. and do a conference call four times a year and discharge your duty of loyalty. That won't cut it. That there will be special challenges that deal with linguistic, cultural and others in terms of the effort that you have to put in to discharge your duty of loyalty. There's no such thing as being a dummy director in Delaware, a shill, someone who just puts themselves up and represents to the investing public that they're a monitor. Because the only reason to have independent directors -- remember, you don't pick them for their industry expertise. You pick them because of their independence and their ability to monitor the people who are managing the company. And a lot of life – I would not serve on -- if I were in the private sector -- not that anybody would want me -- but there are a lot of companies on boards I would not serve because the industry's too complex. So if I can't understand how the company makes money, that's a danger. If it's a situation where, frankly, all the flow of information is in the language that I don't understand, in a culture where there's, frankly, not legal strictures or structures or ethical mores yet that may be advanced to the level where I'm comfortable? It would be very difficult if I didn't know the language, the tools. You better be careful there. You have a duty to think. You can't just go on this and act like this was an S&L regulated by the federal government in Iowa and you live in Iowa.
So on Caremark alone, I have no problem saying that it passes muster under 12(b)(6).
This is a case to watch as it winds its way through the courts. It may well start making its way into case books soon.
Wednesday, March 6, 2013
In a recent case in Delaware we get an expected but still important decision in Meso Scale Diagnostics. This is just blocking-and-tackling. The question for the court was whether a reverse triangular merger constituted an assignment with respect to the surviving corporation. The court concluded it did not. In doing so, Vice Chancellor Parsons declined to follow a California case (SQL Solutions) that held that a reverse triangular merger resulted in an assignment by operation of law with respect to the surviving corporation:
Delaware courts have refused to hold that a mere change in the legal ownership of a business results in an assignment by operation of law. SQL Solutions, on the other hand, noted California courts have consistently recognized that an assignment or transfer of rights does occur through a change in the legal form of ownership of a business. The SQL Solutions case, however, provides no further explanation for its apparent holding that any change in ownership, including a reverse triangular merger, is an assignment by operation of law. Both stock acquisitions and reverse triangular mergers involve changes in legal ownership, and the law should reflect parallel results. In order to avoid upsetting Delaware‘s well-settled law regarding stock acquisitions, I refuse to adopt the approach espoused in SQL Solutions.
In sum, Meso could have negotiated for a change of control provision. They did not. Instead, they negotiated for a term that prohibits assignments by operation of law or otherwise. Roche has provided a reasonable interpretation of Section 5.08 that is consistent with the general understanding that a reverse triangular merger is not an assignment by operation of law.
Another reason why the triangular merger structure remains the go-to structure for dealmakers.