M & A Law Prof Blog

Insider Trading in India

Here's a relatively recent empirical study of insider trading in India in advance of merger announcements, Merger Announcements and Insider Trading in India: An Empirical Investigation.  Shorter version:  insider trading is rampant.  Don't be surprised.  It's apparently rampant here.  Why shouldn't it be in India as well? 

Abstract: Insider trading activity is investigated prior to merger announcement in Indian capital market. An attempt is made to check it out whether trading takes place on the basis of asymmetric and private information. For examining the behaviour of stock prices a modified market model is used to estimate the parameters for the estimation window. These estimates are used to compute average return and cumulative average returns for the event window, which are measures of abnormal returns. Besides price run-ups, it is also common to see unusually high levels of share trading volume before public announcement of merger. Daily trading volume pattern of the target companies is also investigated. The analysis carried out in this study is based on a sample of 42 companies for which merger announcement date was announced during the period of 1996-1999. Based on the analysis for each company individually, we recommend investigation in six companies for existence of possible insider trading.

-bjmq

PE in Vietnam

Yesterday, the FT carried a piece announcing that TPG would be investing $35 mln in a private Vietnamese company, Masan Group.  I'm noting this for a couple of reasons. First, I have a long-standing personal/professional interest in things that happen in Vietnam.  Second, this investment comes against the backdrop of reports earlier in the month that PE investors had turned off the spigot to new Vietnam country funds.   To be honest, that's not altogether surprising.  It's still a relatively small (85 million people!) place and investments there are hands-on projects that require more spade work than you can probably imagine.  At the same time the past few years have seen an explosion in the growth of PE interest in the country resulting in much more money chasing deals.  That said, the Masan Group is a real company that's enjoyed quite a bit of success with a strong management team. 

Third, you can be sure that this deal will be well documented.  I wouldn't be surprised if a recognizable US- or UK-based law firm did the work.  I can guarantee you though that TPG is holding its breath a bit and hoping it will all work out as it signs up.  TPG would be smart to negotiate a tight deal with an airtight offshore dispute resolution clause.  If not, remember that Masan Group is a Vietnamese company and disputes amongst the stockholders will be resolved by the Vietnamese economic courts.  Let's be charitable and just say that these courts are not quite the Chancery Court of Delaware.  

-bjmq

Pre-Merger Notification in Japan

Jones Day's overview of pre-merger notification rules in Japan.

-bjmq

  

Hostile Takeover Market ... in India?

An article in The Economic Times of India raises that prospect.  But, the takeover market in India is governed by the Securities and Exchange Board of India and is organized along the lines of the UK's Takeover Panel.   So while there may be the prospect of unwelcome offers on the horizon, targets won't have the benefit of the defensive measures that have stymied the hostile acquisition in the US for years.

-bjmq

Sina and Focus Media Drop Deal and then Issue Stock

The FT is reporting today that two NASDAQ-listed Chinese companies, Sina Corp and Focus Media, are walking away from their proposed $1.7 billion sale of substantially all Focus Media's assets to Sina because the Chinese Ministry of Commerce refused to consider approving their application. In the Form 6-K filed by Sina and the Form 6-K filed by Focus Media yesterday, the respective chairman blame the termination of the agreement on the delay and uncertainty regarding closing.

While they were in the filing mood both companies also announced "private equity" transactions.  Sina announced a $180 million sale of 5.6 millions shares of stock to a BVI entity controlled by Sina's CEO and other members of Sina's management chairman.  The FT notes that the sale was at an 8.8% discount to lat close.  For its part Focus Media announced a $142 million sale of 75 million shares to its executive chairman, an approximate 11% discount of its $10.78 closing price.

I wonder what that's about?  I mean, if following a busted deal, one of the parties issues stock to an insider at a discount to the market price for some reason, then I guess that happens.  Not often ... but hey ... why not?  But, now both parties to a busted deal issue stock to insiders at a discount on the same day immediately following the termination of the deal.  That's a bit much.  So, I wonder what's up.

-bjmq 

Hummer: The Last Word

September has come and gone and I've decided that I'm tired of waiting for the Hummer "deal".  For reasons I've already stated, I don't think it will ever get done - even if both sides still say they're close to signing.  And if it ever does happen, I'm convinced it will be an awful deal for the buyer.  

Anyway, now comes the final nail in the coffin as far as I'm concerned.  A study in the Chicago journal of Consumer Research found that Hummer buyers make moral statements through their purchase of Hummer vehicles.  Those statements are patriotic and defending America and its frontier lifestyle from anti-American critics and foreigners.  Okay ... so what happens when you sell that brand to the Chinese? Gotta start looking for different customers.

Notwithstanding common sense, this deal continues to take baby-steps toward completion - a $10 million grant to set up an HQ in Michigan. There are also continues protestations from the Chinese partner that it will happen.  For my part, I've decided that I won't be saying any more about it until one of the following things happen:

1) The deal actually happens and then notwithstanding statements to the contrary about the deal saving US jobs Tengzhong Heavy relocates all the Hummer assembly operations to China; or

2) The deal actually happens and Tengzhong Heavy places a large order with AM General for H1 and H2 vehicles on behalf of an important Chinese customer.  Leave out the luxury package.  We'll just take them all in green, thanks.

Moving on.

-bjmq 

Hummer fails to get Chinese approval

Believe me, I'm all for the Chinese central bank reducing its huge foreign exchange surplus by permitting Chinese companies to buy esssentially worthless US assets.  That said, I'm not really surprised by this report.

-bjmq

 

China Pre-merger Clearance paper

Mitnick, Yang and Emch have a recent paper assessing China's pre-merger clearance regime, The Dragon Rises: China's Merger Control Regime One Year On.  

Abstract: During the first year of existence of China’s Anti-Monopoly Law, much has been accomplished but much remains to be developed. In particular, draft regulations in the merger clearance field remain to be finalized, and draft regulations implementing non-merger aspects of the AML have only recently been proposed or have not yet been proposed at all. Moreover, early merger clearance decisions appear to rest on familiar antitrust principles, yet the application of those principles by the Ministry of Commerce (MOFCOM) may be out of step with some merger control regimes around the world. For example, MOFCOM relied in part on the theory of 'monopoly leveraging' to block the proposed Coca-Cola/Huiyuan transaction. In contrast, the U.S. Supreme Court has largely repudiated that theory in the Sherman Act context, and it has not been the used to block transactions under the Clayton Act. Nevertheless, in both substance and procedure, the Chinese antitrust regime continues to mature and, in most respects, to converge with the mainstream of worldwide antitrust enforcement programs.

-bjmq

China's Premerger Review Statistics

On July 21, 2009, the Antimonopoly Bureau of China's Ministry of Commerce (MOFCOM) released statistics on their premerger approval work.   The Gerson Lerhman Group has an English language summary with links to the Chinese report is available here.  

Since August 2008 when China's Antimonopoly Law (AML) took effect and through the end of 2009, MOCFOM received 58 merger filings, among them the review of 46 cases had been completed. MOFCOM approved 43 cases without conditions, approved 2 cases with conditions, and rejected 1 case. Pursuant to Article 30 of the AML, MOFCOM had published earlier its decisions on the three cases that were either rejected or approved with conditions. These decisions provide a peek into MOFCOM's thinking in reviewing mergers and acquisitions that might cause anticompetitive concerns in China.

While we're on the topic of China's AML, here's a recent article in China Law Vision on the extraterritoriality of China's AML.  The author suggests that the AML would not reach the Rio Tinto - BHP Biliton transaction.

-bjmq

Chinese Auto News...

According to the China Car News, the NDRC has given Geely, a company that actually makes cars, the go ahead to bid for Ford's Volvo.  No word on Tengzhong Heavy Industrial Machinery's application to buy Hummer. 

-bjmq

M&A in China - Lessons from Rio Tinto?

Prof. Donald Clarke over at the China Law Prof Blog has some thoughts on the Chinese arrests of four Rio Tinto employees for "espionage" following the collapse of the Chinalco/Rio Tinto transction last month.   He thinks its a serious and unusual situation.   I agree, but it also points to an obvious danger.  The espionage/state secrets statutes in China are vague and over-broad, meaning that the kind of information that was easily shared with Rio Tinto when everyone thought its deal with Chinalco was still on suddenly became a "state secret" when Rio Tinto walked away from the transaction.  It's hard to know what exactly is happening as there is not a lot of information.  Who knows, maybe this is just about bribery.    One thing for sure, it's better to tread lightly.   

The WSJ has the Reuters video here:

-bjmq

Korea Introducing the “Poison Pill System”

If the interlocking ownership structures that characterize the chaebol system didn’t already make it hard enough for the market for corporate control to operate in Korea, the Ministry of Justice is apparently moving quickly to legalize the use of shareholder rights plans as part of its fight against the economic downturn and provide yet more breathing space for management. 

According to today’s Korean Herald:

The government will … introduce the "poison pill system," or the corporate protection measure to curb hostile takeover bids and allow companies to invest their reserve cash in investment activities.

The Korean Times quotes the Minister of Justice as saying:

"The business circle has strongly demanded introduction of measures for managerial rights protection, and the transition committee also demanded considering it. We will push for the introduction of devices that suit global standards after discussion with other ministries.”

Of course, while the domestic Korean business community is thrilled with the “poison pill system” a sample of Korean editorial opinion is less excited about the prospect of building yet more walls to entrench management of Korea’s Chaebol.  The Hankyoreh suggests that the answer to Korea’s economic woes might lie in better managers and not more protection for failed managers.  The  Korea Times is skeptical that more protection of Chaebol control will result in more investment and employment.

To better put the proposed changes in context, it’s worth remembering the Asian Financial Crisis of 1997.  Much of the Korean end of that crisis was blamed on poor corporate governance of the Chaebols.  Since 1997, Korea has been struggling to find a way forward.  Opening up its capital markets and freeing up the market for corporate control has been controversial and not popular locally.  Kim’s paper on Corporate Governance in Korea provides a good overview of the issues that are in part motivating the introduction of the “poison pill system.”

 -bjmq

 

 

What about Chinese approval?

 The proposed acquisition of Hummer is a bit of an odd deal.  In addition to the (non)issue that Hummer builds a civilian version of the Humvee, which may cause some US-based political questions – there is now also the issue of Chinese government approval.  The WSJ this morning has a good story outlining some of the issues (here).  Most important, every out-bound investment from China worth more than $100 million must get a government ok.  Where transactions are done by a state-owned enterprise (like the Rio-Chinalco deal that just went south yesterday - here), then it’s easy to imagine that Chinese government approval will be forthcoming.  The gestation periods are long and many times the acquisitions are part of a government/industry strategy.  Such is not quite the case in the Hummer deal.   The English-language China Daily is now reporting that GM and Tengzhong may “have jumped the gun” with this deal (here).   Even the people’s daily noted in its story on the transaction that other recent acquisitions of foreign auto brands had not gone well for the Chinese acquirers (Ssangyong).

 Two issues seem to stand in the way of getting the OK from the Chinese government.  First, is China’s recent adoption of greener automotive regulations.  Buying Hummer is exactly consistent with that objective.  Second, Tengzhong is only a 4 year old company with no experience managing an overseas investment and no experience building anything less than a truck.  If you’ve tried to visit the company’s website recently, the first question you have to ask is whether the company is up to the task of managing a 3,000 person manufacturing division in the US.  It's easy to imagine a Ssangyong-like ending to this transaction.

In any event, if Tengzhong wants to make this transaction happen it will have to get approval from SAFE, the central bank’s foreign exchange regulator and the Ministry of Commerce.  SAFE recently began circulating draft regulations (described here).  The Ministry of Commerce recently updated its outbound rules (descriptions here and again here) that would loosen the approval process.  But, MOFCOM and SAFE remain the gatekeepers for Tengzhong and it’s not yet clear whether they will give an okay to the deal.  However, it's still early since apparently the parties haven't even reached a definitive agreement, yet.

Anyone with a China practice who thinks they know how this deal will go down from a Chinese perspective should feel free to leave comments.

-bjmq  

CFIUS Filing for Hummer Deal?

OK, so GM went the way of Chrysler and filed for bankruptcy yesterday.  Earlier this morning there was an announcement by GM’s management that it had entered into an MOU with a mysterious unidentified potential buyer for its Hummer division.  Now, it’s leaked to the NY Times and Bloomberg (and just about everybody else in the world) that the buyer is Sichuan Tengzhong Heavy Industrial Machinery Company Ltd., based in Chengdu.  They are offering to take the Hummer Division off GM's hands for $500 million in cash.

Of course, a few years ago sale of an automotive division that produces the civilian version of the military’s Humvee would have likely generated cries of outrage about threats to our national security.  Remember Dubai Ports?  Or how about Unocal-CNOOC? Well, with GM in bankruptcy those concerns are not likely to carry the day.  That said, this transaction is a strong candidate for a voluntary CFIUS filing with the US Treasury.  Given the nature of the business (vehicles manufacture with a potential military use) and the nature of the acquirer (News articles are murky about that.  They say it's "privately" owned.  Maybe.), this is precisely the type of transaction that should seek to make a filing.   Worst case for GM would be that they announce this transaction and proceed along a path to closing only to have a Dubai Ports/Unocal-like flare-up kill this transaction.

 -bjmq

The Japanese Poison Pill (Redux)

The Wall Street Journal is reporting that the Japanese Supreme Court has upheld a landmark lower-court ruling affirming the use of a poison pill defense by Bull-Dog Sauce Co.   The lower court had held that Bull Dog, a Japenese condiment maker, could employ the defense to fend off an unsolicited offer to be acquired from Steel Partners Japan Strategic Fund (Offshore) LP, a U.S. fund.   Steel Partners is offering Yen 1,700 per share, a 25.8% premium to Bull Dogs's 12-month average closing share price.  Steel Partners is one of the best-known takeover funds in Japan and is seen as a symbol of shareholder activism in that country.

Steel Partners had sued Bull-Dog alleging that the poison pill was discriminatory and therefore in violation of Japanese law.  On June 24, 2007, 80% of Bull Dog's shareholders had voted to approve the issuance of stock acquisition rights underlying the poison pill at its annual general meeting of shareholders.  Both the lower court and the Supreme Court apparently relied heavily on this vote to find that the poison pill was not discriminatory because the company's shareholders had approved it.  According to the Journal:

Bull-Dog's defensive scheme gives all shareholders three equity warrants for each Bull-Dog share they own.  But the firm bars Steel Partners from exercising its warrants, instead granting it 396 yen ($3.33) for each warrant -- a 2.3 billion yen ($19.3 million) payout for Steel Partners -- but making it impossible for the U.S. fund to take control of the Japanese company.

A prior Journal report also calculated that the poison pill will dilute the fund's holdings to less than 3% from more than 10% if exercised.  Bull-Dog is now scheduled to redeem the warrants on Aug. 9.  This is a clear loss for Steel Partners.  But, as I stated in an earlier post on the lower court ruling: 

The decision is a bit of a surprise since in at least two other cases the Japanese courts had invalidated the use of a poison pill.  But the big difference here appears to be the shareholder vote.  Poison pills are often decried as denying shareholders the right to make their own decisions concerning a sale of their company.  Yet in this instance there was a vote which overwhelmingly validated use of this mechanism.  And Bull Dog's pill is a relatively mild one providing for limited dilutive effect.  The case can therefore be distinguished on these grounds and likely confined to justifying the use of a pill to fend off unsolicited bids in Japan in those instances where shareholders overwhelmingly oppose the transaction. 

For U.S. purposes, the decision also highlights a more democratic use of the pill.  One where shareholders get a say on its use to deter unsolicited offers.  This is a path which many activists in the United States have called for.   And it is one which permits shareholders a say in the important takeover decision, one they are today often deprived of.  For more, see Ronald J. Gilson, The Poison Pill in Japan:  The Missing Infrastructure. 

The Japanese Poison Pill

The Wall Street Journal is reporting that yesterday a Tokyo court issued a landmark ruling upholding the use of a poison pill defense by Bull-Dog Sauce Co.   The court held that Bull Dog, a condiment maker, could employ the defense to fend off an unsolicited offer to be acquired from Steel Partners Japan Strategic Fund (Offshore) LP, a U.S. fund.   Steel Partners is offering Yen 1,700 per share, a 25.8% premium to Bull Dogs's 12-month average closing share price.  Steel Partners is one of the best-known takeover funds in Japan and is seen as a symbol of shareholder activism in that country.

Steel Partners had sued Bull-Dog alleging that the poison pill was discriminatory and therefore in violation of Japanese law.  Last Sunday, 80% of Bull Dog's shareholders had voted to approve the issuance of stock acquisition rights underlying the poison pill at its annual general meeting of shareholders.  The Tokyo District Court relied heavily on this vote to find that the poison pill was not discriminatory because the company's shareholders had approved it.   According to the Journal, the poison pill will dilute the fund's holdings to less than 3% from more than 10% if triggered. 

The decision is a bit of a surprise since in at least two other cases the Japanese courts had invalidated the use of a poison pill.  But the big difference here appears to be the shareholder vote.  Poison pills are often decried as denying shareholders the right to make their own decisions concerning a sale of their company.  Yet here there was a shareholder vote which overwhelmingly validated use of this mechanism.  And Bull Dog's pill is a relatively mild one providing for limited dilutive effect.  The case can therefore be distinguished on these grounds and likely confined to justifying the use of a pill to fend off unsolicited bids in Japan in those instances where shareholders overwhelmingly oppose the transaction. 

For U.S. purposes, the decision also highlights a more democratic use of the pill.  One where shareholders get a say on its use to deter unsolicited offers.  This is a path which many activists in the United States have called for.   And it is one which permits shareholders a say in the important takeover decision, one they are today often deprived of.  For more, see Ronald J. Gilson, The Poison Pill in Japan:  The Missing Infrastructure.