November 03, 2010
The Airgas appeal before the Delaware Supreme Court gets underway in about 30 minutes (care of Courtroom View Network). In the meantime, Lucien Bebchuk and his co-authors put a post on the Harvard Corporate Governance Network blog describing their work on staggered boards that figured so prominently in Ted Mirvis argument before the Chancery Court. They highlight what they concluded, and, importantly, what they didn't conclude.
Back in 30 minutes when the fun starts.
The Supremes...sitting en banc.
Ted Mirvis is now making the argument for Airgas
"For over 100 years everyone has believed that the terms of a staggered board are three years."
Ridgley: Are you arguing that a year term must be exactly 365 days?
Mirvis: No, not exactly 12 months, but if there are situations where it is inadvisable to have a meeting exactly 12 months apart that's okay, but not without limits.
Redgley: But, what is the limit?
Mirvis: Should be worked out on a case by case basis.
Berger: Could directors move the annual meeting date by 6 months for business reasons?
Mirvis: If the directors wanted to do it, there would be no one to complain. Stockholders can't do it if it deprives a director of his/her term because the term is a creature of statute.
Mirvis is arguing that this is a question of statutory interpretation and not necessarily one of interpretation of the charter.
Holland, helping out Mirvis with friendly questions:
Essential Enterprises makes another appearance. You might as well read it.
Bebchuk et al's post gets a shout-out. You should read that, too.
Mirvis is done.
Air Products' counsel making his case:
Per 211, the time and place of the annual meeting should be set per the manner established in the bylaws. Now making a textual argument interpreting the charter in support of his position. If Airgas is right, then none of the words in the charter (contract) don't matter.
Chief Justice Steele:
Discussing the Seitz opinion in Essential Enterprises, again.
Berger asking questions that sound sympathetic to Airgas' position:
Discussions of the meaning of the ABA form book for public company charter docs.
Through all the back and forth, it's not exactly clear where the Supremes are in their thinking - whether they have latched onto Airgas' "it's all about the statute and common understanding" or with Air Products' "we're only doing a plain reading of the charter" argument. Then again ... they let Air Products' counsel make his argument almost unheeded for the last five minutes.
Mirvis is back now for a minute making the same common understanding argument. I think his argument that because Air Products has the same charter language as Airgas that it somehow disqualifies Air Products' interpretation of Airgas' charter isn't all that useful.
... and that's it!
November 02, 2010
Airgas and the Supremes
You'll remember that Airgas lost in the Chancery Court on the question whether or not the terms of its staggered board were for three calendar years or for that period of time required for three shareholder meetings to occur. The two turn out to be different. They've taken that issue to the Delaware Supreme Court where no doubt they will be making another version of the argument that the court should not interpret the plain language of the charter but rather a more ... common understanding. As I noted before, that's not an argument that will likely carry the day. Nevertheless, they are before the court this morning and, thanks to the crew over at Courtroom View Network, I'll be watching live.
Given that the board of Airgas has already begun "discussions" of a sort with Air Products one wonders why they are pursuing this appeal. I suppose if they win, they think they can just walk away from the talks about the talks.
Anyway, oral argument is scheduled for 10:00am.
Update: 10:00am - tomorrow, Nov. 3! That's what happens when you're on leave. The calendar becomes a blur.
October 11, 2010
Airgas to Appeal
Apparently, Airgas has decided to appeal Chancellor Chandler's decision regarding the Air Products' bylaw amendment that pushed up its next annual meeting to January 2011. Honestly, that appeal has almost no chance to win (why? see my previous post: Advantage Air Products). I suppose, though, if you are Airgas' board, fighting for your life, judicial economy goes out the window and there is no expense that you will spare.
update: Over at footnoted.org they observe that it has cost Airgas more than $23 million to date to fend off Air Products.
October 08, 2010
Advantage: Air Products
OK, so I listened to the arguments regarding the Airgas bylaw, courtesy of our friends at Courtroom View Network. While I'm terrible about predictions - especially about the future - I'll venture a guess that Air Products had the better of the arguments today. I mean, if Ted Mirvis is relying on law professors to make his case, he must be leaning on a pretty thin reed.
Really, the reason why I think Air Products got the best of the argument today is that in order for Chandler to rule in favor of Airgas' position, he will have to rule that when Airgas drafted its certificate of incorporation, it did not mean that directors should serve "a term expiring at the annual meeting of stockholders held in the third year following the year of their election" but that they meant 3 years.
Air Products' counsel had the better argument here. Summed up as: " 'Oh c'mon your Honor, you know what we meant' is not a recognized principle of contract or charter interpretation." If Airgas wanted its directors to have a three year term, it would have, as other corporations have, written that explicitly into its charter. But it didn't.
Airgas would like board to read language below and come to the conclusion that X=Y. I don't think the court will. A"term of three years" is not the same as serving until "the annual meeting held in the third year following the year of the their election." It's pretty plain. One might not like it, and I'm sure that plenty of lawyers drafting proxy statements at 3am have happily conflated the two in order to get home before sunrise, but they are still not the same.
I think coming to grips with the implications of this was behind some of Chandler's early discomfort with Air Products' argument. I can imagine that he was going over in his head what the result would be of his ruling in favor of Air Products -- a full employment ruling for corporate law departments around the country as they scurry to tighten the language in the provisions in their charters.
On the other hand, if Chandler were to go with the "typical understanding" of the length of the term of a staggered board rather than a reading of the plain text, then he would do something that he would never do in the context of, for example, interpretation of a merger agreement. I tell my M&A class that Delaware adheres to a "big boy" rule - courts assume counsel is smart enough to bargain for the provisions that they want and courts will not interpret beyond what is in the plain language -- think Alliance Data Systems v Blackstone.
If Chandler were to side with Airgas in their argument that would require him to assume that Airgas did not mean what it wrote in its charter. That's a hard sell and, I suspect, would result in an immediate appeal to the Supreme Court.
Beyond that, the old bylaw provisions permitted Airgas to advance its meeting date so that meetings could be separated by a window as little as seven months showed that, until the litigation, Airgas itself didn't interpret its charter to require an annual meeting occur at least 12 months after the previous meeting. Their current interpretation seems to be one that is convenient given the current litigation.
Anyway, it's going to be tough for Chancellor Chandler. I think he's going to have to rule for Air Products - he may try to hedge a bit, but I don't think he really has any choice.
And, I think that the result will be howls of pain from attorneys all over the place - people will be quoted saying things like "worst since Van Gorkom or Omnicare" but they will be wrong. In the end, though, we'll all survive. Lawyers will be more attentive to their drafting and will specify in their charters that the term for a director on a staggered board is 3 years and not some other term.
But, maybe they should have gone through that exercise the first time around.
Anyway, I guess all this puts me at odds with the conventional wisdom - Airgas' price is down $1 today (I won't get into Fischel's expert opinion this afternoon and the EMH) and Bloomberg seems to suggest it will go the other way.
August 25, 2010
TRO Hearing in DE re Hertz
Thanks to Courtroom View, I'm watching the arguments in the challenge to Hertz's acquisition of Dollar. The Dealbook has helpfully posted a copy of the plaintiff's brief requesting a TRO to hold up the deal.
Things aren't looking all that good for the plaintiffs so far. Vice Chancellor Strine is interested in hearing about improper motives and the plaintiffs really can't come up with any. Strine is suggesting that if shareholders let this deal go, they could get nothing - as in Lear. Apparently, the plaintiffs are relying on the same financial expert as the plaintiffs in Lear did and that didn't end up well for the shareholders.
In any event, Strine has already dropped one Snooki reference.
'Counseling services are available for those of you who are shocked by the fact that bankers have relationships with management...'
'It's possible that Dollar shareholders could end up with an Elvis Costello song.' [ed note: Less than Zero.]
'Why didn't they offer up a go-shop? You know, this could be like "Shaq v." Come on, bring it on.'
Def Counsel: 'Your Honor, the board of Dollar has lots of experience on other boards, including GM, Chrysler, United Airlines..."
VCS: "So, you're saying they have lots of experience with bankruptcy."
'I have Austin Power or I have awesome power?'
'Remember the Honeywell deal? The shareholders of Honeywell are really enjoying the benefits of that deal with GE. Oh, that's right? That deal didn't happen.' [On the importance of a deal actually getting done.]
'You want me to enjoin this deal so that Avis can be told in crayon something that they obviously already know?'
'If Avis can't figure this out, then maybe I don't want to rent a car from them. They might forget the number of tires on the car or to screw bolts on.'
Plaintiffs seem to be arguing that the board had an obligation under Revlon to reach out to Avis and invite them to make another bid - essentially to generate an auction. Strine disagrees and reminds him that Revlon is not about a duty to affirmatively reach out to another bidder. It's about treating fairly someone who has expressed an interest in the target.
Do strategic buyers sign deals with go-shops? Strine thinks not. He's generally correct. They don't. All this to the question of whether or the lack of a go-shop in the merger agreement was at all nefarious.
My best guess:
I suspect that Strine will deny this motion for an injunction. Strine has been consistently skeptical of plaintiff's arguments all morning long. The issue in order to get an injunction is that by letting the Hertz deal move forward, the shareholders are going to be irreparably harmed. Plaintiffs have been arguing that an injunction would create time for Avis to pursue its bid and that would benefit shareholders. It's a "why not" argument. Strine doesn't seem to have bought that argument. Irreparable harm is not a "why not" argument.
August 20, 2010
Next Steps in BKS Drama
I've been following developments in the Barnes & Noble/Burkle drama for a few months now. I'll admit I was a little surprised when Burkle and BKS let an opportunity to settle the case fall away last week. I figured that both sides would have been better off without a decision. But, hey, I've been wrong before. So where are we now?
Yesterday, Burkle and BKS both filed proxy materials with the SEC (BKS filing here and Yucaipa filing here) and the contest for the three contested board seats is on. BKS has a staggered board so only one-third of the board is up for a vote at any one time. While Leonard Riggio will run for re-election to the board, Micheal Del Guidice and Lawrence Zilavy will not. Is it any surprise that Del Giudice will not run for re-election? Although teh BKS board won its court case against Yucaipa to keep its shreaholder rights plan in place, Del Giudice was arguably the loser. Although Strine ultimately concluded that Del Giudice acted in good faith, it can't help to have the following description of your Lead Independent Director in the record as you enter a proxy contest:
More controversial is the case of Michael Del Giudice. Del Giudice has had a high-profile career as a key staffer in New York politics. He and Riggio are Democrats, and Del Giudice admits that Riggio has regularly contributed, at Del Giudice’s request, to candidates that Del Giudice suggests. For a political powerbroker, that kind of relationship is valuable. More importantly, Del Giudice’s day job is as the Chairman of Rockland Capital, which co-manages a fund called Midland Cogeneration Venture (“Midland”). Midland is not a huge fund, being around $164 million in size. Riggio has made sizable investments totaling $4.8 million in Midland in the past, and recently committed $20 million over the next three years to another fund that Rockland manages, which is $275 million in size. Although Del Giudice has crafted a contractual provision that supposedly ensures that he does not directly profit personally from the monies attributable to Riggio’s investments, Del Giudice’s main occupation is running Rockland, which depends heavily on funds under management forits revenues. Indeed, it seems to me obvious that it is material to the success of Del Giudice’s fund that wealthy, prominent people like Riggio entrust their capital to it. The funds Riggio invests relative to the size of the Rockland funds, in my view cannot be viewed as immaterial.
What makes Del Giudice notable is that he has been determined by the Barnes & Noble board to be independent under the strict NYSE rules that have existed since the Enron-WorldCom meltdown. I do not lightly ignore that determination, but on the limited record before me I cannot conclude that the business and political ties between Del Giudice and Riggio render Del Giudice independent of Riggio. What also makes this issue more piquant is that Del Giudice was the director selected by his colleagues to be the lead director of the Barnes & Noble board. [citations omitted]
Given the Vice Chancellor's conclusion that Del Giudice was not independent of Riggio, it would be hard for BKS to go into a proxy contest arguing that their Lead Independent Director was independent. Ditto for Zilavy, Riggio's personal financial advisor, but he was admittedly already not an independent director. So out they both go.
Yesterday, they were replaced by two independent nominees, David Wilson and David Golden. BKS' soliciting materials along with Wilson and Golden's bios can be found here. Against them will be the Yucaipa slate, which includes Burkle, Stephen Bollenbach, and Michael McQuary (bios here). Not surprisingly, Yucaipa discloses that should its directors win seats, they will immediately seek to be appointed to a special committee to seek out "strategic alternatives" for BKS - that's code for a sale of the company.
The shareholder meeting is scheduled for Sept 28, so we'll continue to check in on this as it develops.
[Apologies for not linking to the opinion last week when it came out when I posted about Strine's dig at corporate law geeks. I was using Typepad's post-by-email function as I was in an undisclosed overseas location ... okay, on vacation in Spain. Turns out the post-by-email function isn't all that good. Sorry. Below is a link to the opinion, care of Dealbook.]
July 13, 2010
Yucaipa v Barnes & Noble (day 4)
B&N's outside counsel from Cravath, Scott Barshay is back on the stand. Says that the "family transfer provisions" that got Burkle so upset early on weren't the idea of anyone in the company and that it all came from Cravath. Barshay is walking through the process of adoption of the rights plan and its amendments. And very quickly the defense is done.
Barshay is now on cross examination.
- "Mr. Barshay, isn't it a fact that the first time you met any members of the board was five minutes before the pill was adopted?"
Five minutes? Ouch.
Counsel is trying to tag Barshay for immediately considering adoption of a rights plan once Burkle surfaced. There's an objection. Strine steps in to calm the children, noting that considering the adoption of a pill would not be an altogether uncommon response.
Pushing Barshay again on his knowledge of the board before he met them for the first time. It sounds like he had no idea who was going to be in the room or the background of anyone on the board. How is that possible? He certainly didn't give a lot of push back on that line of questioning.
Lots of questions regarding the presentations on the rights plan that Barshay prepared for Daniels (24 pages) and the 2 page presentation for the board. Seems like a pretty standard overview of how pills work. Hope B&N didn't pay too much for it. I could have told them the same for less.
Shoutout for Chuck Nathan! An article by Chuck Nathan gets commended to the viewing audience. I guess that's me. I suppose I should find out which article they are talking about.
"Does the pill as it stands does not prevent Riggio and his family from acquiring more stock. Is that correct?"
Because Riggio's adult children aren't living with him, they are not affiliates and don't trigger the beneficial ownership definition under the pill. Barshay tries to push back by pointing to the 13D group requirements, but concedes the defense's general point. Tries to argue that Burkle's kids could buy stock and not trigger the beneficial ownership rules. Defense counsel corrects him by noting that Burkle's kids live with him so, no. Now working through some pill math. Counsel makes the point that the board can accumulate stock without triggering the rights plan while Yucaipa's acquisition of stock would trigger the plan. Cross examination is done.
On re-direct - discussion of whether or not a pill can impede a proxy contest. Barshay's view is that a pill is not triggered by a proxy contest. Indeed, notes that no pill as ever been triggered by a proxy contest.
Strine asking some questions regarding setting of the trigger for the pill at 20%.
Mr. Barshay is excused. B&N lead director Michael Del Giudice is called.
Lots of questions regarding Del Giudice's background and how he came to the board. Everybody - including Strine - is reliving the unfortunate Dukakis presidential campaign and the "tank" incident for which Del Giudice disclaims any responsibility.
Back from the morning break and the plaintiffs object to agreement that has not been produced. The agreement disclaims Del Giudice's financial interest accruing to Rockland that result from any Riggio investment in Rockland. Strine doesn't appear happy that the document hasn't been produced and rules as such.
OK, back to direct testimony. Discussion of the board meeting at which the pill was adopted. Interesting, but not surprising - Riskmetrics' reaction to a pill adoption was a topic of conversation in the boardroom and that the pill was designed in order to be as "Riskmetrics friendly" as possible.
Now on cross, plaintiff's counsel is all geared up for a "Law & Order" gotcha moment, but technical difficulties screw it up. That, and the fact that Del Giudice immediately offers up that he was wrong in his deposition that mistated that Zivaly was not an independent director. You could almost see plaintiff's counsel say - not so soon! I'm not there yet!
I suspect the next couple of minutes will be anticlimatic.
Why are they dragging up the ghost of the Dukakis campaign again? Do they have to ask whether Dukakis won 10 states? Really, where does that get us? Painting Del Giudice as a political fund raiser and Riggio as one of his "go-to" money guys in NY Democratic circles. Don't think that'll go far. Plaintiff's counsel have moved on to describe the various investments that Riggio has made in Del Giudice's Rockland entities. This might have more legs. Riggio made a $20 million investment in Rockland.
I think plaintiffs might be confusing (or obfuscating) good corporate governance with the corporate law. Plaintiffs seem to be implying that because the B&N board is waiting for the SEC to implement rules with respect to independent compensation consultants before it changes its own policy that there is some sort of conflict. That's a weak argument.
Q: If stockholders got together and voted to pull the pill, would that trigger the pill?
A: If there is an arrangement or understanding to vote against the pill, that would trigger the pill.
That seems like the wrong answer. What good is stockholder approval of the pill if stockholders can't organized to vote against it? This question is better asked of the Cravath lawyer. Del Giudice isn't a legal expert and shouldn't be permitted to provide a legal opinion on the mechanics of the pill. Del Giudice has clearly moved beyond his level of knowledge and he knows it.
Break for lunch.
Back from lunch. Couple of questions about whether a group of stockholders representing 20% of all the shares might be required to pay a premium to vote their shares for a director. I'm not sure what that's supposed to mean, but whatever. Plaintiffs are done.
Del Giudice is now on re-direct. Turns out Riggio's $20 million investment is not yet funded.
Del Giudice is excused and defense rests. Various motions regarding admission of evidence.
Strine is venting (for the benefit of the viewing audience apparently) about the lack of tabs and readability of post-trial briefs.
Look at this thing -- no tabs!
Strine is now riffing on the European takeover directive and creeping takeovers. The pill here is being used in a somewhat unusual circumstance. Now you have two block-holders and how to do you deal with them? Eichler and Aletheia seems a mystery to Strine. Why do they refuse to vote their shares? He thinks they may have their own fiduciary issues. He's giving hints for post-trial briefs.
There is skepticism factor that Yucaipa will face in a proxy contest because they are unwilling to make an offer or go on the board.
Snooki?! Yes, Snooki is a character on that Jersey show. How did Snooki make an appearance in Strine's comments? Anyway.
The 20% threshold is sticking in his mind - because Riskmetrics will focus on it - that why the board went for that number. What's not sticking in his mind is whether the board considered or should have considered a larger trigger because of the Riggio block already in place.
It's clear that the differential trigger has gotten Strine's attention - and not in a good way.
Yucaipa needs to sharpen what it wants in this trial - do you want to acquire more shares? Do you just want to feel love? Compares Yucaipa to an adolescent who wants to ask a girl out, but only if she will say yes...
And thus ends Strine's rambling. Briefs are due on Friday evening and then answering briefs on Monday evening. Post-trial arguments will occur late next week.
July 12, 2010
Yucaipa v Barnes & Noble (day 3)
Once again thanks to the folks at Courtroom View Network, court in Yucaipa v Barnes & Noble is back in session with VC Strine presiding. Nachbar has some initial objections with respect to demonstratives used with those reports.
Kenneth Nachbar making his objections:
VC Strine sounds like a guy who bet on the Netherlands. Not happy about a demonstrative prepared over the weekend. Oh, no. We're back at 6th grade math. The objection is to a demonstrative prepared by the plaintiff to walk through the 6th grade math that caused Strine to break out in a cold sweat on Friday.
VCS: "It's out. ... Honestly speaking, if it's so simple, you could have gotten [the demonstrative] to them on Saturday."
OK, moving on. Now, Daniel Burch, plaintiff's expert, is back on the stand discussing proxy contests and solicitation of proxies. VC Strine is now questioning Burch regarding how one puts together a proxy contest without triggering a 13D filing. Burch is now on cross. Lot's of challenges to the fact that the first draft of his report was prepared by an associate and that he made subsequent corrections to it.
Colloquy between Strine and Burch:
On re-direct. I'm surprised that actual ownership percentages of B&N are really still in issue. Now some discussion about probable votes in the case of a proxy contests. Here's a demonstrative chart comparing Burch's report and the defendant's expert (Harkin). We'll hear from Harkin later.
Nachbar objects to leading questions. Sustained. But, with a warning - if Nachbar wants to be "persnickety" then Strine will let the plaintiffs be persnickety later. I expect there will be fewer of these objections going forward.
VCS to Burch: You are free to stretch your legs and enjoy the Dunkin Donuts on the subterranean level of the courthouse. Burch is excused.
And that's it for the plaintiff's witnesses.
Defense calls their expert, Peter Harkins. While the plaintiff's experts have tried to make the argument that the shareholder rights plan would make it impossible for a dissident to win a proxy contest, Harkins is making the argument that a dissident can win a proxy contest.
On cross: generating these table and charts just requires math, right? Right. Why are we talking about math, again? VC Strine is quiet this morning...maybe mulling the World Cup.
Breaking for lunch.
Back. Harkins is back on the stand under cross. Lots of questions about Alethia's voting (or no-voting) policy.
Strine interrupts to give both sides a hint about what he's thinking. He wants some help with his "limited mind" in post-trial briefings. Specifically, how or why people on either side think that Alethia might at the same time have a policy not to vote its shares and at the same time help finance a proxy contest. It doesn't make sense to him and he'd like people to think about it and explain it to him in post-trial briefs.
Back to cross. Harkins is dismissed after a brief colloquy with Strine regarding the scope of his expert testimony.
Next up for the defense - Jennifer Daniels, former GC for B&N.
She is testifying about the early stages of B&N's adoption of the pill. The argument that the defense is making here is that Jennifer Daniels, as a good GC, moved on her own to start things moving on the adoption of the pill - it's all good corporate stewardship and nothing to do with Riggiio actively seeking to stop Burkle from running a proxy contest.
On cross -
PL Lawyer: Ms. Daniels, did you think you might be a witness in Delaware on this issue?
JD: I was told I might have to give a deposition, and that a I might be required at trial, but was told at the time that "we're not there yet" ...
VCS: Oh, but now the dream has come true and here you are...
Since Daniels is no longer an employee of B&N (she's at NCR now), she's appearing voluntarily. Plaintiffs appear to be trying to make her look like a tool of Cravath and an incompetent lawyer.
You didn't advise the board that Morgan Stanley had been paid $4 million for its work in the College Books transaction? Morgan Stanley also advised on the rights plan.
Don't know if that will fly. Anyway, she's getting annoyed. Strine injects some more levity and then orders a recess.
Back again. Plaintiffs return to the line of questioning suggesting that hiring MS was a conflicted transaction because Riggio had previously hired MS in the College Books transaction and that Daniels is a bad lawyer because she listened to outside counsel on the issue of MS. The independent directors didn't get their own counsel - separate from company counsel - with respect to the question of adopting the rights plan. This issue is potentially problematic, but will it have legs?
On cross, plaintiff's attorneys are now trying to paint Daniels as being motivated by how to protect Riggio's position when she was having discussions with Cravath. She answers that she was thinking about all the possible questions that she might be asked. I wonder if this impresses Strine. Surely, he's hand plenty of contact with GC's like Daniels. We'll see. He's been quiet.
Ouch. Draft minutes of board meeting are in evidence. OK, you're all on notice - never let a junior lawyer draft minutes of a board meeting cause the other side is going to enter them into evidence. And the plaintiffs are done for the day.
July 09, 2010
Yucaipa v Barnes & Noble (day 2)
Again, courtesy of Courtroom View Network, I'm a fly on the wall of the Barnes & Noble poison pill trial. Greg Taxin is back on the stand and now being questioned by Vice Chancellor Strine. It's more like a conversation between two very informed people than it is a witness examination. Vice Chancellor Strine has already made a reference to Michael Vick getting off. This is going to be fun.
Strine and Taxin this morning -
Taxin is making the general argument that the B&N pill is novel because it's intended not to prevent a takeover, but to prevent blockholders or large shareholders from taking collective action (i.e. running a proxy contest). Strine doesn't seem like he's on board with this, yet.VCS: "Blockholders ... it's starting to look like Italy around here without the benefit of the food..."
Taxin is now being questioned regarding an amendment to the beneficial ownership definition and what B&N might have been trying to accomplish with its amendment:
Taxin now under cross examination. Got the assignment to write an expert report in the middle of June and turned around a final report in three days. That's quick.
Trying to make Taxin do math in his head while on the stand. OK, I admit, I'd fail that test. C'mon give the guy a piece of paper.
More math...this time Nachbar has helpfully done it ahead of time and provided it on a piece of paper to Taxin.
OK, now they are arguing 6th grade math ... fractions ... I'm going to go out on a limb and suggest that Taxin is better at 6th grade math than Nachbar. ... Strine breaks out in a "cold sweat" due to the geeky back and forth over numerators and denominators. ... I'm going for a cup of coffee.
Back again ... Taxin is now trying to teach Nachbar why an increase of 1 million shares in the numerator is not the same of an increase of 1 million shares in the denominator ...
Now back and forth - not about the expert report but about whether Taxin understands an institutional investor's deposition testimony to mean that the third party admires Ron Burkle or not. Hmm.
Uh ... is Taxin suggesting that the database he relied on to write his report doesn't include any cases of hostile acquisitions where there was a pill in place and an acquirer ran a proxy contest in conjunction with a tender offer? That's odd. Strine doesn't appear to be impressed.
Nachbar offers up a binding judicial admission on behalf of all the defendants - B&N will not seek to enforce the language of "beneficial ownership" any differently than "beneficial ownership" is interpreted under DGCL 203. Okay, now we're getting somewhere!
Taxin is excused. Leonard Riggio is called ... but he's indisposed. Okay, he's in the men's room. He'll be in soon. Riggio is now on the stand. Going through some background - "Isn't it a fact ..." type questions.
Confusion reigns over binders ... it's time for a break!
July 01, 2010
NOL Pill Arguments Set
The Delaware Supreme Court has set July 7 for arguments in Versata's appeal of Vice Chancellor Noble's ruling in Selectica v Versata. Briefs in the case are available via the Harvard Corporate Governance Blog. (Versata's brief and Selectica's answering brief). The issue at stake is the legality of a shareholder rights plan with a 4.99% trigger adopted to protect Selectica's NOLs. The Chancery Court held that board's adoption of the plan was consistent with their obligations under Unocal. Hopefully the argument will be carried on CVN so we can watch from the luxury home.
June 28, 2010
Supreme Court Narrows Scope of "Honest Services" Prosecution
The U.S. Supreme Court recently vacated the conspiracy conviction (premised on an improper theory of "honest services" wire fraud) of former Enron chief executive officer Jeffrey Skilling. In vacating the conviction, the Court essentially narrowed the scope of the U.S. wire fraud statute. As a result, prosecutors will likely be deterred from bringing mail and wire fraud charges against corporate executives whose alleged acts of disloyalty do not involve the receipt of bribes or kickbacks. Read this alert from Proskauer Rose to learn more about the decision and its ramifications.
May 10, 2010
It doesn't happen often. But, that doesn't mean it doesn't happen. The FTC is now suing Dun & Bradstreet (H/T Main Justice) to unwind a transaction D&B closed last year. According to the complaint, D&B acquired the Quality Education Data (QED), a division of Scholastic, Inc., in an asset purchase and integrated QED with its own Market Data Retrieval unit in February 2009. The FTC sums up the transaction this way:
Market Data Retrieval (“MDR”), a company of D&B, is the leading provider of data for marketing to kindergarten through twelfth-grade teachers, administrators, schools and school districts (“K-12 data”) in the
. K-12 data includes but is not limited to contact, demographic and other information relating to K-12 educators. K-12 data is sold or leased to customers that use the data to market products and services to educators. In early 2009, D&B acquired the assets of QED, MDR’s primary competitor. As a result of the acquisition, MDR now holds over 90% of the relevant market, with only a small fringe consisting of two firms accounting for the remainder. This transaction is in practical effect a merger-to-monopoly and, if allowed to remain, would likely allow MDR unilaterally to exercise market power in various ways, including increasing prices and reducing product quality and services to K-12 data customers. United States
"Merge-to-monopoly"? Acquiring your “primary competitor”? Neither of those sound good. In fact, they’re
not. So, why didn’t the HSR process
catch this transaction? Simply put, the
deal was too small to trigger a required HSR filing. The transaction was valued at $29 million,
well below the $69 million trigger at the time.
It was probably unwise not to file anyway. Certainly, in antitrust sensitive
transactions the FTC will accept a voluntary filing. Here it looks like the parties decided against such a filing. They either
neglected to consult antitrust counsel on the transaction, or they did, and then took
a shot (in Feb 2009) that the somnolent attitude towards enforcement that was a
hallmark of the previous administration would continue going forward. And anyway … unscrambling the eggs post
closing is so expensive and time-consuming, the FTC wouldn’t waste their time
on such a small market. Would they?
"Merge-to-monopoly"? Acquiring your “primary competitor”? Neither of those sound good. In fact, they’re not. So, why didn’t the HSR process catch this transaction? Simply put, the deal was too small to trigger a required HSR filing. The transaction was valued at $29 million, well below the $69 million trigger at the time. It was probably unwise not to file anyway. Certainly, in antitrust sensitive transactions the FTC will accept a voluntary filing. Here it looks like the parties decided against such a filing. They either neglected to consult antitrust counsel on the transaction, or they did, and then took a shot (in Feb 2009) that the somnolent attitude towards enforcement that was a hallmark of the previous administration would continue going forward. And anyway … unscrambling the eggs post closing is so expensive and time-consuming, the FTC wouldn’t waste their time on such a small market. Would they?
They would. Here's a little advice from the FTC's Richard Feinstein, Director of the Bureau of Competition:
They would. Here's a little advice from the FTC's Richard Feinstein, Director of the Bureau of Competition:
Despite its relatively low dollar value, this transaction dramatically decreased competition in the marketplace. When Dun & Bradstreet acquired QED, it bought its closest competitor and created a monopoly. That’s going to get the FTC’s attention every time.
While a voluntary HSR filing would not have created an absolute safe harbor from a subsequent antitrust suit, it might have cleared the ground and allowed the parties to address the government's antitrust concerns earlier on in the process - before there had been any integration work, before there had been any joint marketing, etc. True, making such a filing might have added additional costs and added time to an otherwise small transaction. These are common cost/benefit questions that parties have to consider with antitrust counsel in these kinds of transactions. They can be close calls. In this case, it looks like the parties may have made the wrong call. By avoiding a voluntary pre-closing process, the parties have apparently triggered a worse fate - the potential that the government will come in ex post and undo a deal that closed more than a year ago.
Update: A reader helpfully points out the following:
May 07, 2010
Burkle Sues BKS to Pull Pill
Investor Ron Burkle has had an ongoing dispute with the Barnes
& Noble board over the shareholder rights plan it put in place recently.
Burkle claims the board adopted it to prevent him from making running a
proxy contest. Let’s leave aside for the moment whether or not the BKS
pill actually prevents a proxy contest from being successful. Now, Burkle
has filed suit in the Delaware Chancery Court (complaint). In his complaint, Burkle alleges that
the Riggio family have used BKS as their “personal piggy bank”, alleging a
series of self-dealing transactions.
In my corporations class I often use the following hypothetical to describe the quintessential self-dealing transaction: The controlling shareholder of the corporation causes the corporation to hire his brother’s transportation company to handle all the transportation needs of the corporation. Wouldn’t you know it, that’s the fourth of a series of self-dealing transaction that Burkle alleges!
In any event, the heart of this suit is Burkle’s challenge to the pill. Burkle plans to run a short slate of three directors at the next annual meeting. In his challenge, he is focused on the language in the rights plan that would trigger it in the event shareholders “cooperate” to influence control of BKS. Burkle’s basic argument is that anyone who might agree to vote with him could be construed as “cooperating” and thus be subject to dilution. The effect he argues would be to dissuade anyone from voting for his short slate for fear that their vote would constitute cooperation.
I took a quick look at the Lions Gate rights plan to get a sense whether the cooperation language is common. That plan extends the dilutive effects of the pill to the Acquiring Person and anyone “acting jointly or in concert with the Acquiring Person.” I don’t know…cooperating…acting in concert…it’s a close call. The argument that Burkle is making is not that the pill will prevent him from running, or even succeeding to win, a proxy contest. The courts have already examined this question (Moran v Household) and found that the pill does not significantly deter a proxy contest from going forward.
In essence, the Rights Agreement provides that the Rights are triggered when someone becomes the “beneficial owner” of 20% or more of Household stock. Although a literal reading of the Rights Agreement definition of “beneficial owner” would seem to include those shares which one has the right to vote, it has long been recognized that the relationship between grantor and recipient of a proxy is one of agency, and the agency is revocable by the grantor at any time. Henn, Corporations § 196, at 518. Therefore, the holder of a proxy is not the “beneficial owner” of the stock. As a result, the mere acquisition of the right to vote 20% of the shares does not trigger the Rights.
Now, it may be that the trigger for the Moran pill did not extend the trigger to persons “cooperating” with a beneficial owner or “acting in concert” with a beneficial owner, but I guess we’ll see.
May 05, 2010
Triggering Revlon Duties with Convertible Debt
One of the most common search terms to find this site in the past week or so has been "What triggers Revlon duties?" Now, this has little to do with the business cycle and much more to do with the cycle of law school exams. It's about this time when students are sitting in the library, looking over their incomprehensible notes, and asking themselves, "What triggers Revlon?" I know. I was in that same situation myself.
Almost as if on cue, the Chancery Court hands down decision in Binks v DSL.net dealing with Revlon duties in the context of the issuance of convertible notes (H/T Morris James). It’s a nice review of the state of the law with a slight twist on the facts. The case involves a transaction between DSL.net and MegaPath. DSL was in financial trouble in 2006 and rather than enter bankruptcy entered into a transaction with MegaPath. MegaPath lent DSL.net $13 million and took convertible notes. A few months after the transaction, MegaPath converted its notes to equity and ended up with more than 90% of DSL's common stock. Shortly thereafter MegaPath effected a short form merger to eliminate the minority stockholders.
Plaintiffs argued at the motion to dismiss stage that issuance of the convertible notes represented a potential "change in control" and that the DSL.net directors had an obligation under Revlon to "obtain the best price reasonably available to shareholders." The Plaintiff didn't argued that the board should have held an auction or that a successful auction was likely. Rather, the plaintiff argued the deal the board made with MegaPath essentially permitted MegaPath to loot DSL and that there were a number of other reasonable alternatives that would have left DSL shareholders better off than the issuance of convertible notes (e.g. DSL.net had $50 million in NOLs that could have been used to engineer a transaction).
First, to the question whether Revlon is the applicable standard in the case at the motion to dismiss stage, the court answers in the affirmative, noting that the issuance of the convertible notes can be interpreted as a change in control:
It is not unreasonable to review the Amended Complaint as alleging that the short-form Merger was an inevitable and foreseeable consequence of the MegaPath Financing Transaction. As the Supreme Court in QVC pointed out, in determining whether the transaction constitutes a "change of control" for Revlon purposes, "the answer must be sought in the specific circumstances surrounding the transaction." Inferring that the relevant events should be collapsed for analytical purposes into a single transaction is also consistent with this Court's earlier consideration of the issue:
I assume for purposes of deciding this case, without deciding, that the granting of immediately exercisable warrants, which, if exercised, would give the holder voting control of the corporation, is a transaction of the type that warrants the imposition of the special duties and special standard of [Revlon].
This assumption arose out of the Court's recognition that Revlon duties may arise when a board, as here, "approves a transaction having a change in control effect ( ... specifically ... where a corporate action plays a necessary part in the formation of a control block where one did not previously exist.)
In applying Revlon, the court finds that the plaintiffs did not offer sufficient evidence to support a finding that the board was not independent and disinterested. The Court also noted that the plaintiff’s complaint was devoid of facts suggesting that the board was not adequately informed. With all that in place, the court laid out its standard for deciding this case under Revlon:
Where a board is found to be independent, disinterested, and adequately informed, the decision to enter into a change in control transaction should be upheld unless the directors “utterly failed to attempt to obtain the best sale price … ‘Because there can be several reasoned ways to try to maximize value, the court cannot find fault so long as the directors a reasoned course of action.’ Here the board’s conclusion that the Megapath Financing Transaction was preferable to bankruptcy was within its business judgment.
The Court reiterates the basic holding in Lyondell, that good faith claims (essentially a claim that attempts to convert a care violation into a loyalty violation) are very hard to win and require extreme facts – facts that suggest “utter failure”. These days when even the last kid on the bench of the last place team gets a trophy, it’s hard to imagine what “utter failure” might look like in the corporate context.
May 03, 2010
Still No Duty to Disclose Merger Negotiations
Last month the second circuit affirmed the district court's opinion in Thesling v Bioenvision - holding that issuers have no duty to disclose merger negotiations. Whether and when one has a duty to disclose merger negotiations is a regular question that comes up with students. Bioenvision provides a succinct summary of the law on this question.
The plaintiffs claimed that when Bioenvision failed to disclose that it was engaging in merger negotiation with Genzyme that this failure to disclose caused several other statements to be materially misleading. The court's opinion is very short and reads in relevant part:
Thus, it is by now axiomatic that "a corporation is not required to disclose a fact merely because a reasonable investor would very much like to know that fact." In re Time Warner Inc. Sec. Litig., 9 F.3d 259, 267 (2d Cir. 1993). As the district court correctly observed, however, no express duty requires the disclosure of merger negotiations, as opposed to a definitive merger agreement. Moreover, "[s]ilence, absent a duty to disclose, is not misleading . . . ." Basic Inc. v. Levinson, 485
224, 239 n.17 (1988). For substantially similar reasons to those stated by the district court, we hold that plaintiff has not identified any part of the seven challenged statements that were rendered materially misleading by the alleged omissions relating to Bioenvision's merger negotiations. This pleading deficiency is sufficient to warrant the affirmance of the entire portion of the district court's decision that is challenged in this appeal, including the dismissal of plaintiff's claims against defendants-appellees for control-person liability. See ATSI Commc'ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 108 (2d Cir. 2007). U.S.
April 26, 2010
BAC-ML Case Study
Robert Rhee has posted a Case Study of the Bank of America and Merrill Lynch Merger. It has a nice tick-tock of events and could be a useful teaching tool, bringing together questions of corporate law and ethics. I'd only quibble with one conclusion he draws that BAC's decision to acquire ML was not informed and thus a violation of the BAC board's duty of care. While there are issues with respect to the transaction, I don't think a care violation on the part of the BAC board is one of them. The courts are highly sensitive to facts and circumstances analysis. The process adopted when the world is in crisis is not going to be the same when directors believe they have all the time in the world. I doubt that a court would or should go so far as to pin care violation on the BAC board.
March 18, 2010
Vice Chancellor Laster of the Delaware Chancery Court is
apparently not impressed by attorneys who are able to file lawsuits within
minutes sometimes of a merger's announcement – “frequent filers.” I wonder if one can get a concierge card
after 100 lawsuits? In any event, VC
Laster recently replaced lead counsel in a case against Revlon and order new
counsel to investigate the work of the previous lead counsel. According to Reuters in doing so VC Laster
Vice Chancellor Laster of the Delaware Chancery Court is apparently not impressed by attorneys who are able to file lawsuits within minutes sometimes of a merger's announcement – “frequent filers.” I wonder if one can get a concierge card after 100 lawsuits? In any event, VC Laster recently replaced lead counsel in a case against Revlon and order new counsel to investigate the work of the previous lead counsel. According to Reuters in doing so VC Laster said:
"Their advocacy has been non-existent. ... When forced to defend their conduct and leadership role, original plaintiffs' counsel approached the concept of candor to the tribunal as if attempting to sell me a used car."
In replacing the lead counsel, VC Laster is doing something
about a problem that people have long talked about. Although there are
many salutary effects of shareholder litigation such as a check on
management power and abuse, there are also downsides. In particular is
the tendency for shareholder litigation to fall victim to agency problems when
the attorneys drive the litigation without regard to needs of their ostensible
principals - the shareholders. This is an old problem with hardly a simple solution. Thompson and Thomas have a good paper on the issue, The New Look of
Shareholder Litigation, that appeared some years ago in the
Vanderbilt Law Review. They do an empirical study of merger related
litigation. While they find some abuses, on balance, they come out in
favor of shareholder litigation:
In replacing the lead counsel, VC Laster is doing something about a problem that people have long talked about. Although there are many salutary effects of shareholder litigation such as a check on management power and abuse, there are also downsides. In particular is the tendency for shareholder litigation to fall victim to agency problems when the attorneys drive the litigation without regard to needs of their ostensible principals - the shareholders. This is an old problem with hardly a simple solution.
Thompson and Thomas have a good paper on the issue, The New Look of Shareholder Litigation, that appeared some years ago in the Vanderbilt Law Review. They do an empirical study of merger related litigation. While they find some abuses, on balance, they come out in favor of shareholder litigation:
Placing our findings in the historical context of the debate over the value of representative shareholder litigation, we believe that the positive management agency cost reducing effects of acquisition-oriented class actions are substantial, while the litigation agency costs they create do not appear excessive. For these suits, we therefore disagree with earlier studies that have claimed that all representative shareholder litigation has little, if any, effect in reducing management agency costs and should be evaluated solely in terms of its litigation agency costs.
The PSLRA included lead counsel provisions to attempt to deal with this problem with some success. Maybe VC Laster has stumbled on to another avenue for constraining abuses – a more active bench.
March 03, 2010
Astellas Hostile Offer
Astellas Pharma launched a hostile offer for OSI Pharmaceuticals yesterday. In conjunction with the offer, Astellas filed suit in the Delaware Chancery Court seeking to have the board pull its pill. Astellas' central claim is that OSI brushed off its offer without considering it. From the complaint:
The Director Defendants failed to conduct a good faith and reasonable investigation of Astellas Pharma’s offer. Instead, the Director Defendants summarily refused to engage Astellas Pharma in a meaningful dialogue and failed to reasonably inform themselves about Astellas Pharma’s offer. The Director Defendants could not possibly be well informed concerning the offers that they have flatly rejected because they have declined to engage in any meaningful discussion or negotiation with Astellas Pharma, either directly or through their legal and financial advisors, to learn more about Astellas Pharma’s offer. This failure to conduct a good faith and reasonable investigation of Astellas Pharma’s offer is a violation of the Director Defendants’ fiduciary duties.
Presumably, sometime over the next 10 days the OSI board will meet to review the Schedule TO that's now on file with the SEC and inform themselves about the offer. Once they do that, it won't leave much for Astellas to complain about.
March 02, 2010
Selectica NOL Pill Okay'd
Vice Chancellor Noble issued his ruling in Selectica v. Versata (Richards, Layton & Finger posted the opinion) late last week. This case is worth noting for two reasons. First, it involves one of the very few cases of a shareholder rights plan being triggered. Second, Selectica's pill is not what you might consider to be a typical pill. As originally envisioned, the shareholder rights plan is intended to be a defensive measure to prevent a hostile takeover. The way it's worked in practice, with an effective pill in place and combined with a staggered board, potential hostile acquirers are forced to deal with the target board or accept the risks involved in a drawn out proxy fight.
Versata - a 5.1% shareholder and wholly-owned subsidiary of Trilogy, a Selectica competitor - decided to test pill and bought right through its limits. After Selectica attempted unsuccessfully to enter into a standstill agreement with Trilogy, allowed the pill to trigger - diluting Trilogy. The Selectica board then sought a declaratory judgment in Delaware in support of its actions.
March 01, 2010
Dow and Futility
In re Dow, decided last month in the Chancery Court, is a good review of the mechanics of futility pleading since this is an area that students sometimes find confusing, it’s probably worth thinking about this for a few minutes – even though it’s now Spring Break around here.
The defendants in this action are directors of Dow Chemical. Plaintiffs brought suit alleging a number of nefarious acts, including various violations of the directors’ duties of care and loyalty with respect to Dow’s failed 2008 link up with Rohm & Haas. In that transaction, Dow agreed to acquire Rohm & Haas for $18 billion. The merger agreement did not contain a financing contingency. While the transaction did not include a reverse termination fee and the seller did not give up equitable remedies, the merger agreement did include a “ticking fee” of $3.3 million per day for any delay up to six months following the receipt of regulatory approval. Not long after the deal was signed as we all remember, the markets went South and deals like this one started to look less and less attractive ex post.
The plaintiff’s primary allegation was that the Dow directors breached their fiduciary duties by entering a merger agreement with Rohm & Haas that did not contain a financing condition. The plaintiffs are arguing that the Dow board was wrong in not negotiating an effective financing contingency in its merger agreement. This is not the kind of claim that’s going to win very often – absent an egregious series of facts that aren’t present.
No matter, Chancellor Chandler didn’t let the case get that far. In their complaint, the plaintiffs argued that demand on the board would have been futile and thus should be excused. Chancellor Chandler applied the Aronson test. To satisfy Aronson plaintiffs must plead particularized facts that raise a reasonable doubt either (i) that a majority of the directors who approved the transaction in question were disinterested and independent, or (ii) that the transaction was the product of the board’s good faith, informed business judgment.
The plaintiffs failed to make a showing that any of the directors were “interested.” Rather, they argued that the majority of the board lacked “independence.” Seven of the board members, plaintiffs argued, had substantial ties to Liveris, the CEO. Liveris, the court notes, was not interested in the transaction, however. Without an interested director, there is nothing to hang a dependent director argument on. And the argument fails.
Chancellor Chandler highlights two other common independence arguments and puts them away. First, a director who is beholden to the corporation for his or her livelihood is does not lose his or her independence for that reason alone. In such circumstances, the director’s interests are aligned with the corporation so there is no reason to fear (absent other facts) that such a director will be adversely influenced in his or her decision-making. Second, the mere allegation of outside business relationships among directors will not be sufficient to sustain the “domination and control inquiry” required to show lack of independence.
Next, the Chancellor turns his attention to the second prong of Aronson which requires the “plaintiffs must plead particularized facts sufficient to raise (1) a reason to doubt that the action was taken honestly and in good faith or (2) a reason to doubt that the board was adequately informed in making the decision.”
Chancellor Chandler notes that the plaintiff’s complaint is “devoid” of any allegations that the board was not informed. Rather, the plaintiffs were simply unhappy with the board’s decision.
Simply put, plaintiffs take issue with the substantive decisions of the R&H Transaction, instead of the process the board followed. This Court made clear in Citigroup that substantive second-guessing of the merits of a business decision, like what plaintiffs ask the Court to do here, is precisely the kind of inquiry that the business judgment rule prohibits.
The plaintiffs unsuccessfully argued that certain “bet the company” transactions require a higher standard of care. To be honest, it’s a loser of an argument. If it had any chance of succeeding, one would already see it applied to the actions of selling boards in other contexts, but Delaware hasn’t adopted a “bet the company” jurisprudence so we don’t see it on the sell-side where courts are more concerned.
Chancellor Chandler similarly bats away the plaintiff’s “red flags” argument:
Recently, the Supreme Court clarified the concept of bad faith in Lyondell Chemical Co. v. Ryan, noting that “[i]n the transactional context, [an] extreme set of facts [is] required to sustain a disloyalty claim premised on the notion that disinterested directors were intentionally disregarding their duties.” Plaintiffs must show that defendants completely and “utterly failed” to even attempt to meet their duties.
"Utter failure" is a tough standard that requires a very extreme set of facts, which are not present in Dow. I'm thinking that plaintiffs' counsel should put that argument away unless there are some real facts to back it up.
In any event, if you are looking for a nice review of the standards for futility and their application, In re Dow is a good place to start and might even be worth reading on a beach during Spring Break!