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...