Friday, September 12, 2014
Vice Chancellor Laster has posted a 3 page comment titled Evidence Based Corporate Law on SSRN (also appearing in the Del J Corp Law). Here's the abstract:
Abstract: John Maynard Keynes is said to have observed, "When the facts change, I change my mind. What do you do, sir?" In Delaware's Choice, Professor Subramanian argues that the facts underlying the constitutionality of Section 203 have changed. Assuming his facts are correct, and the Professor says that no one has challenged his account to date, then they have implications for more than Section 203. They potentially extend to Delaware's jurisprudence regarding a board's ability to maintain a stockholder rights plan, which becomes a preclusive defense if a bidder cannot wage a proxy contest for control of the target board with a realistic possibility of success. Professor Subramanian's facts may call for rethinking not only the constitutionality of Section 203, but also the extent of a board's ability to maintain a rights plan.
I know a lot of people who would be very interested in the prospect of the Delaware Supreme Court actually revisiting the question of the viability of the poison pill under Unocal.
Wednesday, September 10, 2014
After warning yesterday that they might do it, Dollar General has gone hostile this morning with a tender offer at $80/share subject to the following conditions:
(i) at least a majority of the outstanding shares tender,
(ii) termination of the Amended Dollar Tree merger agreement and the voting support agreements,
(iii) entry into a merger agreement with Dollar General (in form and substance satisfactory to Dollar General in its reasonable discretion), including a second step 251(h) short form merger,
(iv) entry into definitive tender and support agreements by certain Family Dollar shareholders,
(v) approval of the transaction under Section 203,
(vi) redemption of the Family Dollar Board poison pill, and
(vii) approval by antitrust authorities.
All those reasonable questions that the Faily Dollar board has about the Dollar General bid are still out there. Only now, Dollar General is going straight to the shareholders and asking them to make the decision. Family Dollar does not have a staggered board so, in effect, the scheduled Family Dollar shareholder meeting that will be called this fall to vote yes/no on the Dollar Tree offer should be the referendum on the pair of transactions. Between now and then, expect quite a bit of noise on both sides as they each make their case.
The AALS Section on Business Associations is pleased to announce that it is sponsoring a Call for Papers for its program on Sunday, January 4th at the AALS 2015 Annual Meeting in Washington, DC.
The topic of the program and call for papers is “The Future of the Corporate Board.”
How will boards adapt to recent changes and challenges in the business, legal, and social environment in which corporations operate? The recent global financial crisis and the continuing need for many corporations to compete internationally mean that today’s boards face economic pressures that their predecessors did not. This pressure is heightened by the rise of activist investors, many of whom aggressively push for changes to corporate management and governance. On the legal front, new regulations, such as Dodd-Frank, impose heightened compliance and other burdens on many companies and boards. And on the social front, pressures for socially responsible corporate behavior and greater racial and gender diversity on boards continues. Our program seeks to examine the ways in which boards have, and will in the future, respond to these challenges.
Form and length of submission
Eligible law faculty are invited to submit manuscripts or abstracts that address any of the foregoing topics. Abstracts should be comprehensive enough to allow the review committee to meaningfully evaluate the aims and likely content of papers they propose. Papers may be accepted for publication but must not be published prior to the Annual Meeting. Untenured faculty members are particularly encouraged to submit manuscripts or abstracts.
The initial review of the papers will be blind. Accordingly the author should submit a cover letter with the paper. However, the paper itself, including the title page and footnotes must not contain any references identifying the author or the author’s school. The submitting author is responsible for taking any steps necessary to redact self-identifying text or footnotes.
Deadline and submission method
To be considered, papers must be submitted electronically to Kim Krawiec at email@example.com. The deadline for submission is SEPTEMBER 12, 2014.
Papers will be selected after review by members of the section’s Executive Committee. The authors of the selected papers will be notified by September 28, 2014.
The Call for Paper participants will be responsible for paying their annual meeting registration fee and travel expenses.
Full-time faculty members of AALS member law schools are eligible to submit papers. The following are ineligible to submit: foreign, visiting (without a full-time position at an AALS member law school) and adjunct faculty members, graduate students, fellows, non-law school faculty, and faculty at fee-paid non-member schools. Papers co-authored with a person ineligible to submit on their own may be submitted by the eligible co-author.
Please forward this Call for Papers to any eligible faculty who might be interested.
Tuesday, September 9, 2014
Last week Family Dollar received and then rejected an offering from Dollar General opting, rather, to stick with its deal with Dollar Tree. There is, of course, litigation. The stockholders bringing suit are arguing that the FDO board violated its fiduciary duties to the corporation by agreeing to the deal with Dollar Tree and also when they rejected Dollar Genera's competitive bid. Here's the amended complaint.
So, is the board required to chase the nominally higher Dollar General offer? What do their fiduciary duties require? Remember, in QVC, which is probably the best case for laying out how board actions in the context of a sale of control will be reviewed, the Delaware Supreme Court said:
Although an enhanced scrutiny test involves a review of the reasonableness of the substantive merits of a board's actions, a court should not ignore the complexity of the directors' task in a sale of control. There are many business and financial considerations implicated in investigating and selecting the best value reasonably available. The board of directors is the corporate decisionmaking body best equipped to make these judgments. Accordingly, a court applying enhanced judicial scrutiny should be deciding whether the directors made a reasonable decision, not a perfect decision. If a board selected one of several reasonable alternatives, a court should not second-guess that choice even though it might have decided otherwise or subsequent events may have cast doubt on the board's determination. Thus, courts will not substitute their business judgment for that of the directors, but will determine if the directors' decision was, on balance, within a range of reasonableness.
So, if the board has two reasonable alternatives and it chooses one, the court will not second guess. That leaves a lot of discretion in the hands of the board, even when we are in "Revlon mode". So, in the FDO sale, what are the board's choices? And, are they reasonable ones?
The basic outlines of Dollar General's most recent offer are as follows:
- $80 in cash;
- $500 million reverse termination fee payable if the transaction is block by regulators;
- a commitment to divest itself of up to 1,500 stores should the government so require.
OK, that seems pretty good. Against that FDO has a signed amended merger agreement with the following offer:
-$74.50 in cash and stock
- a 'hell or high water' provision that requires Dollar Tree to "propose ... the sale, divestiture, license, holding separate, and other disposition of ... any and all retail stores and any and all assets ... of Parent and its Subsidiaries ... " as required to secure antitrust approval.
Hmm. Not so cut and dry. On the one hand, you have an offer in hand with near on 100% certainty of closing at this point. Sure, it will face regulatory review, but the buyer has taken all that risk. On the other, you have a nominally higher bid, but a lot of the residual risk that antitrust authorities will stop or significantly hamper the deal is left on the shoulders of the FDO stockholders. Sure, the FDO stockholders get compensated for that risk through the higher price and a reverse termination fee, but is that enough? That depends on your estimates of the probabilty of antitrust authorities putting up a stink if you do the Dollar General deal. And here, reasonable people can disagree.
If people can have a reasonable disagreement about the estimate of probabilities of antitrust enforcement against a deal that has not been accepted, well, then any court reviewing the board's decision will give the board plenty of latitude.
Absent other facts, suggesting other motivations to favor Dollar Tree, the FDO board looks on solid ground. Of course, if Dollar General were to offer up a similar 'hell or high water' provision -- and why not? It says it doesn't believe there is any significant antitrust issue -- well, then that might make it difficult for the FDO board to justify its decision to go with the lower offer as reasonable.
Friday, September 5, 2014
Gauntlet thrown, this morning Family Dollar responded to Dollar General's increased offer in the only way it could (if it wants to say no):
Ed Garden, a Family Dollar director and co-founder and Chief Investment Officer at Trian Fund Management, L.P., a large shareholder of the Company, stated, “We are focused on delivering to Family Dollar shareholders the highest value with certainty, and the Dollar Tree transaction does just that. Dollar Tree has taken the antitrust risk off the table by committing to divest as many stores as necessary to obtain antitrust clearance. We remain fully committed to the Dollar Tree transaction.”
Mr. Garden continued, “Dollar General’s revised proposal, on the other hand, does not eliminate regulatory risk for Family Dollar shareholders. Dollar General has repeatedly stated that antitrust is not a risk, yet they have put forth proposals that require Family Dollar shareholders to bear the ultimate risk. Receiving a reverse breakup fee with an after-tax value of less than $3 a share does virtually nothing to compensate the Family Dollar shareholders for assuming that risk.”
It is true that Dollar General went very far to reduce the real risk of antitrust being a block to getting the deal done, but FDO apparently believes it didn't go far enough. Turns out, absent other evidence, that a determination that Dollar General's improved bid and commitment with respect to antitrust isn't enough is still completely within the purview of the Family Dollar board. They looked at the remaining antitrust risk and figured it wasn't worth the $3/share offered in the reverse break up fee. You may disagree. I may disagree. But, it's not for you or I to say. Consistent with their obligations under Revlon, it's for the FDO board to determine. Of course, it's a very close call and the motivations of the board really matter, but the FDO - by sticking to its message that antitrust risk is critical to them - is hoping to be able to either stave off a Dollar General acquisition or maneuver Dollar General into giving up yet more concessions to alleviate the antitrust risk. You may disagree with the decision, but is the decision unreasonable? Probably not.
If Dollar General isn't willing to revisit its offer, I suppose the next step for Dollar General is to head off to court to try to get an injunction to prevent FDO shareholders from voting on the Dollar Tree deal. That's a tough road to hoe, but absent going all in on antitrust or another price increase, it's probably one of the few cards left for Dollar General to play here.
Tuesday, September 2, 2014
The Family Dollar board may have boxed itself in. In July it agreed to a transaction with Dollar Tree for $74.50 in cash and stock. Dollar General - having previously expressed an interest in acquiring Family Dollar - lobbed in a bid for the company for $78.50 in cash and a committment to divest itself of up to 700 stores. At this point, Family Dollar's board actions are all going to be reviewed under Revlon, so it had to be careful in how it treated Dollar General's bid. The board rejected the bid and explained that it did so because of antitrust risk:
In negotiating the merger agreement with Dollar Tree, the Family Dollar Board ensured that the agreement permits the Board, consistent with its fiduciary duties, to negotiate with, provide due diligence materials to, and even terminate the merger agreement to enter into a new agreement with, a competing bidder. However, as is customary, the Board may commence negotiations and due diligence access only if, among other factors, the Board determines that a proposal from a competing bidder is reasonably expected to lead to a superior proposal that “is reasonably likely to be completed on the terms proposed.” The Family Dollar Board, after consultation with its financial and legal advisors who have conducted an extensive antitrust analysis, determined that the Dollar General proposal fails to satisfy this requirement. The Board’s decision follows the unanimous recommendation of a committee of four non-management independent directors that has been overseeing the Company’s consideration and exploration of strategic alternatives since January 2014. This committee consists of Glenn A. Eisenberg; Ed Garden; George R. Mahoney, Jr.; and Harvey Morgan.
Howard R. Levine, Chairman and CEO of Family Dollar, stated, “Our Board of Directors, with the assistance of outside advisors and consultants, has been carefully analyzing the antitrust issues in a potential combination with Dollar General since the beginning of this year, as detailed in the Company’s preliminary proxy statement that was filed by Dollar Tree with the SEC on August 11. Our Board reviewed, with our advisors, all aspects of Dollar General’s proposal and unanimously concluded that it is not reasonably likely to be completed on the terms proposed. Accordingly, our Board rejects Dollar General’s proposal and reaffirms its support for the pending merger with Dollar Tree.”
Mr. Levine continued, “I would also like to note that Dollar General’s letter, sent late last night, contained blatant mischaracterizations and did nothing to address the antitrust issues in Dollar General’s proposal.”
Ball in Dollar General's court. Well, Dollar General just hit the ball back. It raised it's bid to $80 in cash plus a $500 million reverse termination fee payable if the transaction is block by regulators and a commitment to divest itself of up to 1,500 stores should the government so require. In structuring its bid this way, Dollar General appear intent on taking away arguments from the Family Dollar board.
Observers have suggested that the Family Dollar arguments about antitrust were just a pretext and that the real reason for preferring the Dollar Tree offer over any deal with Dollar General was that Family Dollar management wanted to remain in place. Of course, when Revlon is the standard, such considerations are not permissible. So, we shall see what's up as Dollar General tries to smoke out the Family Dollar board.
Thursday, August 28, 2014
The months long battle for control over Market Basket ended this morning with Arthur T. Demoulas, the ousted CEO who had the support of employees, buying the 50.5% of the company that his side of the family did not already own from Arthur S. Demoulas and his side of the family. So, all is well in Tewksbury? Certainly everyone is happy today. Arthur T. is back in place and mangement and employees are all on the same page trying to get the company moving again. Soon enough food will be back on the shelves and everything will get back to normal. Maybe.
Why just maybe? Remember this is a privately held family company. Many of the corporate changes pushed by Arthur S. and his side of the family involved cutting costs and moving the company into a position to put itself up for sale to another large competitor in the grocery space or to a private equity buyer. Those changes enraged workers who liked the fact that the family business treated them like ... family. The changes sought by Arthur S. challenged the corporate culture and understandly generated a backlash.
So, why isn't the return of Arthur T. just great news for Market Basket and its employees? Well, the cost of the acquisition may come back to haunt everyone at Market Basket. To do the deal, Arthur T. had to mortgage all the company's New England real estate and accept a $500 million investment from a private equity firm (Blackstone). All that equity with its "soft edge" that allowed Arthur T. to manage the firm over the past few years as a family business, paying above market wages and demonstrating loyalty to employees in hard times has all been replaced by "hard edged" debt and a private equity investor who will demand a return and probably look at labor costs with more of a gimlet eye.
And the retail grocery business typically operates on tight margins anyway. You wonder why grocery stores have moved into prepared foods? Sure, we're all busy, but prepared foods generate huge margin. Not a lot of that going on at Market Basket.
So celebrate today. But, I expect things will be difficult up in Tewskbury for some time to come.
Wednesday, August 27, 2014
If you haven't already seen this, I highly recommend using Rank and Filed (rankandfiled.com) to access all your EDGAR documents. It's a free search engine and it's really quite good. I'm never going back to the SEC's EDGAR site again... OK, no more gratuitous plugs.
Tuesday, August 26, 2014
Earlier this month I thought perhaps that when Walgreens stepped away from the edge that we had seen the high water mark of the inversion movement. But, I guess I was wrong (not for the first or last time). This morning Burger King announced its acquisition of Canada's Tim Horton and its simultaneous move to Canada. Burger King describes the transaction in the following way:
Upon completion of the transaction, each outstanding common share of Tim Hortons will be converted into the right to receive C$65.50 in cash and 0.8025 of a common share of the new parent company, which is subject to the right of the holders of Tim Hortons common stock to make elections as noted above. Upon completion of the transaction, each outstanding common share of Burger King will be converted into 0.99 of a share of the parent company and 0.01 of a unit of a newly formed Ontario limited partnership controlled by the new parent company, however, holders of shares of Burger King common stock will be given the right to elect to receive only partnership units in lieu of common shares of the new parent company, subject to a limit on the maximum number of partnership units that can be issued.
Shares of the new parent company will be traded on the New York Stock Exchange and the Toronto Stock Exchange and units of the new partnership will be traded on the Toronto Stock Exchange. The partnership units will be convertible on a 1:1 basis into common shares of the new parent company, however, the units may not be exchanged for common shares for the first year following the closing of the transaction. Holders of partnership units will participate in the votes of shareholders of the new parent company on a pro-rata basis as though the units had been converted. 3G Capital has committed to elect to receive only partnership units.
The transaction is expected to be taxable, for U.S. federal income tax purposes, to the shareholders of Burger King, other than with respect to the partnership units received by them in the transaction. The transaction is expected to be taxable to shareholders of Tim Hortons in the U.S and Canada.
3G will be receiving only partnership units in the transaction. The effect of which will be to permit 3G, the controller, to defer capital gains taxes - the inversion penalty - until a later time when the partnership units are converted to stock in the Canadian Burger King entity. Nice trick. Too bad most of the public stockholders aren't going to be able to do that.
Of course, the Burger King folks say the deal isn't about taxes. It's about ... synergy.
Burger King executives say that isn’t the case, and Whopper devotees should take them at their word. Canada’s corporate tax rate is 26.5 percent, which is considerably lower than the 40 percent rate in the U.S. But Burger King only pays an estimated 27 percent. “We don’t expect our tax rate to change materially,” Burger King Chief Executive Daniel Schwartz said in a conference call today. “This transaction is not really about taxes. It’s about growth.”
OK. So, if it's not about the taxes, can someone explain why the relocation to Canada? Elsewhere, Vic Fleischer weighs in again on the inversion issue.
Friday, August 22, 2014
Berkshire Hathaway reminds us that HSR can be tricky business. They just agreed to pay close to $900k in fines to settle a lawsuit from the DOJ in connection with a transaction in which Berkshire converted some notes before cashing out of a stock. The NY Times describes the transaction:
Behind Berkshire’s violation was an old investment in USG, a producer of construction materials like drywall. In 2006, Mr. Buffett’s company owned about 19 percent of USG. Two years later, Berkshire bought $300 million worth of securities known as convertible notes, which allowed the conglomerate to swap out for common stock in the materials maker at a price of $11.40 a share.
Late last year, USG said it would redeem $325 million worth of convertible notes, and Berkshire took advantage by cashing out its holdings, taking its stake up to 26 percent. Yet Berkshire did not file for Hart-Scott before exercising its right to trade in the convertible notes.
Remember for purposes HSR,covered transactions are defined very broadly. This broad definition can trip up even the most sophisticated investors - like Berkshire Hathaway or even Barry Diller last year.
Tuesday, August 19, 2014
That question is still a bit of a mystery. Still no real answer, but like the SAT test we can start to eliminate the obviously wrong answers. From a paper by Ed Kleinbard, Competitiveness Has Nothing to Do With It (h/t Dealbook), we can eliminate the competitiveness canard. Here's the abstract:
Abstract: The recent wave of corporate tax inversions has triggered interest in what motivates these tax-driven transactions now. Corporate executives have argued that inversions are explained by an "anti-competitive" U.S. tax environment, as evidenced by the federal corporate tax statutory rate, which is high by international standards, and by its "worldwide" tax base. This paper explains why this competitiveness narrative is largely fact-free, in part by using one recent articulation of that narrative (by Emerson Electric Co.’s former vice-chairman) as a case study.
The recent surge in interest in inversion transactions is explained primarily by U.S. based multinational firms’ increasingly desperate efforts to find a use for their stockpiles of offshore cash (now totaling around $1 trillion), and by a desire to "strip" income from the U.S. domestic tax base through intragroup interest payments to a new parent company located in a lower-taxed foreign jurisdiction. These motives play out against a backdrop of corporate existential despair over the political prospects for tax reform, or for a second "repatriation tax holiday" of the sort offered by Congress in 2004.
There are a couple of points worth noting. First, Kleinbard makes the point that is obvious to most tax lawyers - there's a difference between the corporate tax rate of 35% and the effective corporate tax rate. The former is like paying the rack rate for a room at the Four Seasons. The second is like getting that same room on Priceline. Kleinbard relies on SEC filings to estimate the effective tax rate for Mylan:
In 2013, Mylan derived about 57 percent of its worldwide revenues (essentially, gross receipts) from the United States, yet, as just noted, told investors that its worldwide effective tax rate was 16.2 percent. Assume, just by way of illustration, that Mylan’s taxable profits followed its revenues as allocated for financial accounting (and presumptively, management) purposes – admittedly, a heroic assumption, thanks to stateless income planning internationally, and tax expenditures domestically – and that Mylan, through adroit domestic tax planning, incurred a 25 percent effective tax rate in respect of its U.S. income (federal and state taxes combined). This would imply that Mylan’s tax expense in respect of its foreign profits was roughly 4.5 percent.
AbbVie is another recent inverter. What was their effective rate before going offshore? Kleinbard estimate for us:
AbbVie ... reported in its 2013 annual report’s tax footnote an 11.5 percent reduction for 2013 in its global statutory tax rate for “the effect of foreign operations.” (The effect of foreign operations was a much greater number in 2011 and 2012.) Again, this means that AbbVie is telling investors and its own managers that it does not operate in a 35 percent tax rate environment at all; to the contrary, AbbVie’s effective global tax rate for 2013 (again, including U.S. taxes on its U.S. domestic income, where permanently reinvested earnings are irrelevant), after some smaller permanent differences in both directions, was 22.6 percent. This is a “permanent” tax discount of about one-third off the headline federal rate, insofar as AbbVie’s investors and management are concerned.
Kleinbard also takes on the idea that inversions are being caused by "trapped cash" off shore. That's the argument that directors are unwilling to bring foreign profits back to the US because they are unwilling to pay US taxes to make that happen. Some directors say their fiduciary duties prevent them from bringing that cash back. I disagree. In any event, he discounts that the "trapped cash" argument as real.
Finally, he takes on the competitiveness fable. He calls the competitiveness claim a claim without fact. It's worth reading.
In the meantime, I'm still looking for an answer.
Friday, August 15, 2014
For those of you not from the Boston area, the whole Market Basket saga has not been a part of your summer. Around here, it's been a huge story. The ten cent version: Market Basket is a regional grocery chain that happens to be family owned. Here's the problem, the family is divided by bad blood over control of the business. Until recently, the business was run by Arthur T. Demoulas. He was popular with employees and by all account did well by them. That was until he was ousted by his cousin, Arthus S. Arthur S. and his group trimmed costs and seemed to be preparing the company for a sale. There's been a public fight over control since then. Managers have walked out, store shelves have been left bare. Today, employees are facing a return to work or be fired ultimatum.
To get a sense of the dysfunction at the company, the Boston Globe just published minutes of some board meetings. How dysfunctional is the board at this point? Well...their minutes take the form of a transcript taken by a professional stenographer. Sheesh. It's pretty clear that when you roll in the stenographer, no one trusts anyone in the room. But it's thanks to the stenographer, that we can enjoy the board room repartee that goes on at Market Basket:
In October 2011, [Nabil] El-Hage asked Arthur T. whether he thought he had unlimited spending authority as chief executive.
“I do not know of any restriction that’s out there, and I do not care to have any restriction, quite frankly,” Arthur T. said.
“You’re not Catholic, are you, Arthur?” El-Hage said. “That’s a serious question. You’re Greek, so you practice Greek Orthodox.”
“Right,” Arthur T. replied.
El-Hage zeroed in on his point: “That explains it, because in my religion we believe only the pope is infallible.”
Yikes. This is the board room culture at Market Basket. It's a pretty good bet that this company will be sold at some point in the near future. When it is, it's going to take a lot of TLC to put it back together again.
Thursday, August 7, 2014
Vic Fleischer's got his take on how to deal with inversions up at the Times site. He calls it, aptly, a dispute between law and politics. That's about right. There's also a link to a video of Obama on the inversion issue.
It's starting to feel like there may be some movement to close the escape hatch without Congress getting involved. In that case, Richard Beales has a reminder for why those left behind shouldn't worry so much. You get a lot for being a US corporation.
Wednesday, August 6, 2014
Walgreens had been working on and considering an inversion for some time, but today it dropped plans to relocate to the UK and announced that it would purchase all of the shares of Alliance Boots (UK) that it did not already own. Does Walgreens' decision to step away from the inversion edge mark the crest of the inversion wave we've been experiencing this summer? Well, yes and no.
Let's start with the no. So long as differential tax rates create opportunities for firms to arbitrage tax rates, there will always be an incentive for firms to pursue inversions. For that reason, any response to the inversion wave that is primarily focused on lowering effective corporate tax rates is a long-term loser. Why? Because until you get to zero, there will always be a jurisdiction with a lower rate. There is will always be an economic incentive to pursue tax arbitrage. My take? Any effort to compete on lower tax rates is a fool's errands. US rates are relatively higher than other jurisdictions, but the effective corporate rate in the US - let's be honest - isn't all that high. So, the incentive to do these deals is likely here to stay.
How about the yes? Well, it's one thing if Mylan does an inversion, most people don't know what that company is. When politicians rail against Mylan for fleeing the US, it doesn't really resonate. But, Walgreens is a different story. There is a Walgreens in almost every town in Massachusetts and they are front and center in many people's lives around the country. My guess is that if Walgreens were to relocate outside the US, the political salience of the inversion question would be sky-high. Perhaps the board saw that coming and decided discretion was the better part of valor.
Friday, August 1, 2014
The WSJ points out the untidy fact that although corporate inversions may have the effect of permitting firms to elect to move to lower tax jurisdictions, they do so through taxable transactions for stockholders of the US firm seeking to expatriate. Remember, the US firm in these deals is theoretically the seller. And, because the consideration used in these transactions is stock rather than cash, stockholders will have to come up with cash to pay the tax necessary to do the deal. Ugh.
Over the past couple of days, I've heard a couple of narratives about why inversions are now all the rage. In honesty, the one that rings most true is the one about the bankers pitching the next big thing...
Thursday, July 31, 2014
According to a report in the WSJ, yes it's true that M&A activity is up these days, but. But, it looks like 60% of the LBOs are private equity firms buying and selling portfolio firms to each other. That's good for law firms and that's good for PE firms looking to liquidate older funds and get cash back to investors who can invest it in newer funds who are buying the firms from the older funds... But, that's about it...
Tuesday, July 29, 2014
I've been wondering about what is that has given impetus to the recent rush to expatriate firms from the US. I've heard lots of explanations, but nothing that is a really convincing story.
One story I've heard is that inversions are happening because the US corporate tax rate is high relative to other countries and that in order to compete against foreign companies, US companies either have to move or we in the US have to lower the corporate tax rate to meet other countries' -- presumably the lowest out there -- tax rates. I find that unconvincing. The taxes we're talking about here are corporate profits taxes. Taxes on corporate profits don't increase costs. That's to say, when we are talking about competition in the product market, corporate profits taxes are not relevant. Where corporate profits taxes are relevant in the capital market. But nowhere in any rationalization of inversion have I heard that firms in the US are unable to raise capital because non-US firms have cheaper access to capital. In fact, the NYSE hit an all-time high recently. So, if the result of relatively high corporate profits taxes is an anemic capital market, I'm not sure I see the evidence of that.
Another story to explain why this summer is seeing a rash of inversions is that the door on inversions is closing and Congress is going to close the inversion loophole. If you don't go now, you'll never go. Seriously? One of the reasons why I switched to sports radio is because our political system is stuck that nothing happens. I seriously doubt Congress could organize itself to tie its own shoes, let alone close the door on inversions.
A third explanation that I've heard is that the inversion is the only way for US firms to access all that tax free capital they have stored overseas. To that I'll simply say this: there is no fiduciary duty to avoid paying taxes. There simply isn't. Now, boards may not like paying taxes...who does? But, I've heard more directors than I care to admit saying things like they have fiduciary duties to their shareholders to do inversions because their fiduciary duties somehow preclude them from repatriating profits sitting in Ireland. Hmm. These board members need better lawyers. A director is not required by his fiduciary duties to pursue the most tax efficient strategies out there.
Anyway, I am quite positive there is a narrative out there that explains the summer of the inversion, I just haven't stumbled across one yet.
Tuesday, July 22, 2014
I'm not an earnout fan. They're usually more trouble than they are worth. Nevertheless ... Albert Choi has posted a new paper, Facilitating Mergers and Acquisitions with Earnouts and Purchase Price Adjustments. His studies suggests that earnouts are a good response to information problems that naturally appear in acquisition transactions. They permit parties to signal quality and thus avoid the lemons problem. I don't disagree with any of that. Here's the abstract:
This paper examines how post-closing contingent payment (PCP) mechanisms (such as earnouts and purchase price adjustments) can facilitate mergers and acquisitions transactions. By relying on verifiable information that is obtained after closing, PCPs can mitigate the problems of asymmetric information over valuation and, in contrast to the conventional understanding, this benefit applies to both earnouts and purchase price adjustments. When both the acquirer and the target are aware that there is a positive (but uncertain) surplus from the transaction, PCPs function more as an imperfect verification, rather than a signaling, mechanism and a pooling equilibrium is possible, in which all parties adopt a PCP. When the parties are uncertain as to whether a positive surplus exists, on the other hand, PCPs function as a separating device, in which the seller with a positive surplus successfully signals its valuation with a PCP. The paper also addresses the problems of post-closing incentives to maximize (or minimize) the PCP payments. When such a moral hazard is a concern, the paper shows that (1) the PCPs will be structured so as to minimize the deadweight loss and a separating equilibrium is more likely to result; and (2) when the deadweight loss is sufficiently large, the parties will forego using a PCP mechanism altogether.
Wednesday, July 16, 2014
For those of you trying to catch up on the inversion wave that has swamped the deal world this summer, here's a neat video summary of what they are all about. For those of you who don't have access to video in your cubicles, here's Liz Hoffman's short rundown on inversion deals.