Tuesday, April 9, 2013
SRZ 2012 PE Buyer/Public Target Deal Study
Schulte Roth & Zabel has released this client alert containing the highlights from its most recent study on private equity buyer acquisitions of U.S. public companies with enterprise values in the $100-$500 million range ("middle market" deals) and greater than $500 million ("large market" deals). During the period from January 2010 to Dec. 31, 2012, SRZ identified a total of 40 middle market deals and 50 large market deals that met these parameters. Here are SRZ's key observations from the study:
1. Volatility in the number and terms of middle market deals makes it more difficult to identify "market practice" in that segment.
2. Overall, middle market deals took significantly longer to get signed than large market deals.
3. "Go-shop" provisions were used more frequently in large market deals, even though, overall, the percentages of middle market and large market deals in which a pre-signing market check was used are comparable.
4. While it is virtually the rule (92% of the time in 2012) in large market deals that the target will have a limited specific performance right against the buyer, the full specific performance remedy is still used quite often (44% of the time in 2012) in middle market deals.
5. While the frequency with which middle market deals use reverse termination fees ("RTFs") has converged on large market practice, the size of RTFs has not.
6. Large market deals are much more likely than middle market deals to limit damages for buyer’s willful breach to the amount of the RTF.
Default fiduciary duties coming for Delaware LLCs
There has been a back and forth between the Chancery Court and the Delaware Supreme Court about whether there are default fiduciary duties for LLCs. The Chancery Court takes the position that there are default fiduciary duties, though you may contract around them. The Supreme Court on the other hand take a more extreme, contractualist position. The Chief Justice's position is that there are no default duties because the LLC form is a creature of contract. If parties to an LLC have not contracted for fiduciary duties, then the Supreme Court will not enforce them upon the parties.
It was over this topic that Chief Justice Steele recently called out Chancellor Strine for straying from the question before the court and moving out of his lane. The judicial dust up got some attention at the recent Tulane gathering.
Now, it looks like the Delaware legislature will be stepping in to resolve this little dust up and guess who is going to win? That's right, sanity prevails. There are going to be default fiduciary duties for LLCs. According to Pepper Hamilton:
On March 20, 2013, legislation proposing to amend the Delaware Limited Liability Company Act, 6 Del. C. §§ 18-101, et. seq. (DLLCA) was submitted to the Corporation Law Section of the Delaware State Bar Association. If the proposed legislation is enacted, the amendments, in addition to implementing certain technical changes, would confirm that LLC managers owe fiduciary duties where the LLC agreement is silent.
Expect to see this legislation enacted by the end of the summer. Advantage Strine.
More empty voting
A recent paper by Ringe, The Telus Saga, provides an additional example of empty-voting. Until now, we have contented ourselves with the Mylan/King transaction.
Abstract: The recent conflict between Canadian telecommunications provider Telus and US-based hedge fund Mason Capital is the most recent illustration of 'empty voting' – a strategy whereby activist investors eliminate their risk exposure to shares in target companies to pursue idiosyncratic motives. As courts are struggling to find adequate solutions, regulators worldwide are called upon to provide reliable tools to this threat to shareholder voting.
Monday, April 8, 2013
Chinese merger review simplified
According to Davis Polk, MOFCOM in China is looking to simplify pre-merger review for a large class of relatively "simple" (read small) transactions.
The draft regulation – which is not dissimilar to draft proposals recently announced by the European Commission – designates as “simple” three (arguably narrow) cases premised upon the merging parties having low market share post-merger:
- Horizontal mergers in which the parties together have under 15% share in a relevant market;
- Vertical mergers in which the parties have (a) a vertical relationship, and (b) under 25% share in the “vertical market”; and
- Mergers where the parties (a) do not have a vertical relationship, and (b) have under 25% share in all markets.
While in the US we use transaction size as the cut-off for initial review, the Chinese will be using market share. Transaction size tests are arguably simpler to enforce and simpler for parties to get their head around. On the other, market share tests will ensure plenty of work for lawyers.
Tuesday, April 2, 2013
Conventional wisdom takes a wrong turn
So it started yesterday with a piece in AllThingsD and then it appeared again this morning in an Andrew Ross Sorkin piece in The Dealbook. I know it can be a cynical business, but perhaps we are letting our cynicism get the best of us. What am I talking about? The developing argument that Dell's agreement to cover Blackstone's bidding expenses during the go-shop period is somehow nothing more than a ruse, a trick to get us all to believe that there really is a bidding contest for Dell. Sorkin characterizes the reimbursement of Blackstone's expenses as "a whopping $25 million." Whopping? On a $20+ billion PE deal? C'mon, it's a fraction of a fraction. Unless they are going to drop it in my bank account, $25 million isn't a lot of money.
First, I totally understand the cynicism. While the Dell transaction is playing itself out, the big PE players have been in court in MA defending against charges that they conspired to fix the acquisition market by not engaging in bidding contests. Although the bigger claim was dismissed, it might help the industry if they could point to the Dell transaction and say, "See, we compete all the time!" I get that. So, it's not like I can really blame anyone for wanting to look closely at Blackstone's motivation for putting together an offer and seeking to get compensated for their time in doing so.
However, until now the cynics (me included) have been on the exact other side of this issue. We have hinted for a long time that go-shops might just be window dressing. Indeed, with a go-shop and matching rights in place, to the extent you believe PE shops look like common value bidders, it's unsurprising that they - by policy - don't engage in bidding contests. It's not a conspiracy, it just wouldn't make economic sense to be too aggressive in jumping bids. Overtime, they would expect to regularly lose to incumbents with more information or overpay for every contest that they won. That's a short road to out-of-business. So, cynics argue, go-shops provide a nice veneer of compliance with Revlon obligations while everyone knows what's really going on. (There's some good work from Guhan Subramanian that suggests we shouldn't be too cynical, but I'm on a roll, so let me go with it.)
How to overcome this problem and inject some life into the go-shop process? Well, if PE bidders share attributes of common value bidders, the only way to get a second bidder to agree to invest the time required to put together a bid that in the end may not win is to pay them to do so. Paying for second bids or covering their expenses makes them indifferent to the prospect of making transaction specific investments that they might ultimately lose because the incumbent bidder has more information. Now, they might still overpay - that's the risk of being in a common value business, but at least they won't risk losing transaction specific investments to incumbents with more information. The result should be more competition for sellers over time. Don't we want that?
Anyway, before this train gets rolling too fast, let's not be too critical of the Dell Special Committee for paying to generate a second bid that certainly would not have appeared without the compensation.
Monday, April 1, 2013
Coupon Settlements and Merger Litigation in TexasNate Raymond guest writing on Alison Frankel's On The Case blog points out that a second Texas appellate court has ruled out attorney fees in disclosure only cases. In August last year, a Texas appellate court in Rocker v Centex ruled that in disclosure only cases, Texas law prohibits attorney from being awarded fees. Citing "section 26.003(b) of the Texas Civil Practice and Remedies Code", which reads
(b) Rules adopted under this chapter must provide that in a class action, if any portion of the benefits recovered for the class are in the form of coupons or other noncash common benefits, the attorney's fees awarded in the action must be in cash and noncash amounts in the same proportion as the recovery for the class.
The court ruled that where the only benefit for shareholders in a settlement is additional disclosure, then attorneys cannot be awarded fees. Now, another Texas court has done it again. This time in Kazman v Frontier Oil the plaintiffs will get nothing following a disclosure settlement. So, if a case if typical merger related flotsam, the plaintiffs might be hoping to get a couple of minor disclosures and/or reduction in a termination fee in exchange for legal fees and giving the board a global release. In Texas, that kind of settlement will no longer result in fees for plaintiffs counsel. That pretty much makes such cases -- or settlements in Texas -- a non-starter from now on.
The coupon settlement legislation in Texas appears to be having a big impact on the development of merger litigation Texas. One only need to look at Dell. To be honest, I was a little surprised by the low number of Texas suits followed in connection with this transaction. Of the 25 suits filed, only 5 of them were filed in Texas. Of course, coupon settlement legislation is not the answer to multiforum litigation, but it does make Texas uneconomic as a forum for a lot of transaction related litigation.
Thursday, March 28, 2013
Dell paying Blackstone's bills
Acording to Dan Primack at Fortune, Dell's independent directors agreed to reimburse Blackstone the cost of its bid as part of the go-shop process. This is a real positive, and I am surprised that more sellers with go-shop provisions don't do this as a matter of course. With an incumbent bidder in place, there are real disincentives for a second bidder to make the transaction specific investments required to put together a competing bid.
This is especially true given the fact that the incumbent bidder has more time to digest the information related to the target and almost always has a matching right in place. Rational second bidders fear that they will invest resources into making a bid only to have lose it to the incumbent - or worse overpay when the incumbent walks away. (Aside, my matching rights paper is here for those who might be interested.)
By agreeing to reimburse second bidders if they enter into a go-shop process, the independent directors lower the bars to generating second bids and increase the likelihood that the go-shop will be more than just window dressing. That's a good thing. Smart counsel for independent directors will be looking at Dell and fighting hard for reimbursement provisions in future deals.
Wednesday, March 27, 2013
- Summly never had many users or any revenues. Yahoo is shutting the app down. Yahoo is saying the point of the deal is to have Summly's CEO help lead the company in mobile.
- But Summly's CEO lives in London, where he is staying to finish school
- The CEO has only promised to stay at Yahoo for the next 18 months.
- The CEO is 17-years-old. We don't buy that he's going to be able to lead or inspire adult Yahoo engineers and designers.
If that's not bad enough:
Sirer writes: "Summly licensed its core technology from SRI, which, previously, spun out Siri and sold it to Apple.
Whaddya!? Somehow, somewhere, there is arrare waste claim brewing in connection with this transaction...
Friday, March 22, 2013
Live Tweeting Tulane
Morris James is doing yeoman's work live tweeting the Tulane conference for those of us who can't make it to NOLA:
Take it outside boys
Sounds like the judicial fireworks are flying in Tulane (note to self: go next year). At a panel discussion Chief Justice Myron Steele apparently continued his crusade to get the Chancery Court to shut up (via WSJ Deal Journal:
“Every time they open their mouth they make the law,” Steele said Thursday, discussing how he would love to get that idea into the heads of judges. Steele said it was inappropriate to force lawyers to read transcripts in order to determine the law.
Steele didn’t name names.
But we know. It's funny. The Supreme Court would like the Chancery Court to say less and only speak through its opinions and only on issues that are directly before the court. All of this other stuff is just dicta. It forces lawyers to read transcript hearings and search speeches for hints at what the law is. As an aside - if the court were really worried about closing off access to knowledge of the state of the law, it would reconsider its Chancery Arbitration procedures. Just saying.
Anyway, those things that Steele thinks are bugs, are considered features by the Chancery Court. In a paper (forthcoming in W&L Law Review) by Vice Chancellor Donald Parsons and his former clerk Jason Tyler, the authors point to dicta and judicial asides as an important component of the law making/dealmaking function of Delaware law:
To give just one small example of the organic nature of this process, in December 2011, Vice Chancellor Laster issued an opinion in In re Compellent Technologies. In dicta, he questioned the wording of a provision of a merger agreement requiring the target company’s board to give notice to the acquirer if any subsequent, superior offers arose. The Vice Chancellor did not question the general validity of this relatively common information rights provision, just the particular verbiage used to express it in the merger agreement at issue in that case. Less than two months later, another case—In re Micromet—challenged a merger agreement containing a nearly identical provision, except for a revision in the language the court had questioned in Compellent. The court in Micromet found the revised provision unobjectionable. More important than the outcomes of those two cases, however, is what one reasonably can infer from their facts and sequence. Apparently, within a matter of weeks, transactional attorneys had read the Compellent opinion and advised their clients accordingly in connection with a later transaction that, when challenged, survived judicial scrutiny.
So, it's a bit of a judicial tug of war that will no doubt continue to play out.
Wednesday, March 20, 2013
New DGCL 251(h) to eliminate vote in 2 step merger
According to Richards Layton & Finger, Delaware is in the process of amending the DGCL to add a new Sec. 251(h), the purpose of which will be to eliminate a required shareholder vote in the second step of a two-step acquisition:
Under new subsection 251(h), a vote of the target corporation’s stockholders would not be required to authorize the merger if: (1) the merger agreement expressly provides that the merger shall be governed by this new subsection and shall be effected as soon as practicable following the consummation of the offer described below; (2) a corporation consummates a tender or exchange offer for any and all of the outstanding stock of the target corporation on the terms provided in such merger agreement that would otherwise be entitled to vote on the adoption of the merger agreement; (3) following the consummation of the offer, the consummating corporation owns at least the percentage of the stock of the target corporation that otherwise would be required to adopt the merger agreement; (4) at the time the target corporation’s board of directors approves the merger agreement, no other party to the merger agreement is an “interested stockholder” (as defined in Section 203(c) of the DGCL) of the target corporation; (5) the corporation consummating the offer merges with the target corporation pursuant to such merger agreement; and (6) the outstanding shares of the target corporation not canceled in the merger are converted in the merger into the same amount and kind of consideration paid for shares in the offer.
Given the recent proliferation of top-up options, the back end shareholder vote has lost much of its kick, if it ever had any. Really, by now if a target requires an actual back-end vote it's because it either doesn't have enough shares outstanding to permit a top-up option or there were just really bad lawyers working the deal.
Tuesday, March 19, 2013
GD&C on Chancellor Strine's rejection of disclosure only settlement of M&A stockholder lawsuit
This client alert from Gibson Dunn discusses Chancellor Strine's bench ruling rejecting a disclosure-only, negotiated settlement of an M&A stockholder lawsuit. According to the authors,
The decision, in In re Transatlantic Holdings Inc. Shareholders Litigation , Case No. 6574-CS, signals that the Chancery Court will carefully scrutinize the terms of negotiated settlements to ensure that named stockholder plaintiffs are adequate class representatives and that the additional disclosures provided some benefit to the purported stockholder class. At the same time, the decision represents an unmistakable warning to plaintiffs’ firms that they cannot continue to count on paydays through the settlement of meritless lawsuits filed in the wake of announced deals.
Dell's go-shop to produce results?
As we close in on March 22 and the end of Dell's go-shop period, we're starting to hear rumors that the process might actually produce a second bid in the $15 range. Although H-P and Lenovo are apparently also rummaging through Dell's books, if there is going to be a bid, Bloomberg is reporting that it would come from Blackstone. That would be an interesting development. I wonder if they would be able to bring Michael Dell on board as part of a competing deal. Just a couple more days.
Monday, March 18, 2013
Canadians reconsider the pill
There was news from up North late last week. The Canadians are considering some adjustments in their current approach to the poison pill. Presently, pills are permitted only as temporary devices that be held in place for only so long as to delay a hostile bid so that a target board can educate its shareholders and perhaps put together some sort of alternate strategy or transaction. Let's call the Canadian approach to rights plans the Interco pill. In general, Canadian approaches to takeover defenses are very much in line with Chancellor Allen approach in Interco. That is to say, in the face of an unwanted offer, the board should be motivated to either educate the shareholders of the correctness of the board's position or look to develop an acceptable alternative for shareholders. To the extent boards deploy takeover defenses they should facilitate the ability of the board to engage in either education or in increasing value for shareholders.
The draft amendments (here) to their rules on shareholder rights plans intend to make a number of subtle, but important changes in approach that nudge them closer to a US styled approach to poison pills. The amendment require approval of a majority of the disinterested shareholders withing 90 days of the pill being adopted. Any material amendments to the rights plan will require an additional shareholder vote. Then, in order for a board to keep a pill in place, the board will have to go back to shareholders annually to seek approval. Finally, a majority of disinterested shareholders could vote to terminate the rights plan at any time.
This new draft approach is a step back from the previous Canadian approach, which involved a regulator in the provincial securities regulator making a substantive determination about the reasonableness of director actions to keep a pill in place. Guided by their Interco-like principles, the question for Canadian regulators was not if a pill should remain in place, but when it should be pulled. Now, that may change. Of course, this isn't necessarily a bad thing. Nor should it necessarily be interpreted as moving towards an American (U.S.) styled approach to pills. Up in Canada undere the proposed pill regime, disinterested shareholders will have plenty to say about whether or not a pill is permitted to remain in place. Rather than make arguments to a regulator, boards will be required to make their case directly to the shareholders if they want to keep pills in place. That's not a bad thing.
Thursday, March 14, 2013
Clubbing lawsuit survives another day
The antitrust action in the Federal district court in Massachusetts against the private equity industry is back in the headlines. We looked at this last after the New York Times successful motion to unseal the complaint against the industry. In response to a motion for summary judgment, Judge Edward Harrington permitted the lawsuit to survive the motion in part, but narrowed it in important ways. The case deals with two claims. First, there is a specific claim with respecet to the HCA transaction. In that allegation, the plaintiffs claim that there was an agreement for other PE firm to step down from competing for HCA. In the second claim, plaintiffs allege an industry-wide conspiracy not to compete in post-signing auctions for sellers.
In the 38 page_order (which includes more PE email excerpts), Judge Harrington made some useful observations about the use of deal protections and the private equity industry and the plaintiffs allegations. Judge Harrington summarized the plaintiff's allegations of clubbing in the following way:
Plaintiffs assert the rules to be as follows: First, Defendants formed bidding clubs or consortiums, whereby they would band together to put forth a single bid for a Target Company. The Plaintiffs assert that the purpose of these bidding clubs was to reduce the already limited number of private equity firms who could compete and to allow multiple Defendants to participate in one deal, thereby ensuring that every Defendant got a “piece of the action.” Second, Defendants monitored and enforced their conspiracy through “quid pro quos” (or the exchange of deals) and, in the instances where rules were broken, threatening retaliatory action such as mounting competition against the offending conspirator’s deals. Third, to the extent the Target Company set up an auction, Defendants did their best to manipulate the outcome by agreeing, for example, to give a piece of the company to the losing bidders. Fourth, Defendants refused to “jump” (or compete for) each other’s proprietary deals during the “go shop” period. This gave Defendants the comfort to know they could negotiate their acquisitions without the risk of competitive bidding.
For the most cynical observers in the pile, this is a pretty good description of the way private equity goes about its business and suggests a conspiracy or at least an industry custom of not competing in post-signing auctions. With respect to the HCA transaction, the plaintiffs allegations were enough to survive at this very early stage (which is deferential to the plaintiffs):
While some groups of transactions and Defendants can be connected by “quid pro quo” arrangements, correspondence, or prior working relationships, there is little evidence in the record suggesting that any single interaction was the result of a larger scheme. Furthermore, unlike other cases where an overarching conspiracy was found, here there is no single Defendant that was involved in every transaction or other indication that the transactions were interdependent.
When pressed at the second day of oral argument for the evidence supporting the “larger picture,” the Plaintiffs largely abandoned the above arguments to focus on the following statement by a TPG executive regarding the Freescale transaction, a proprietary deal: “KKR has agreed not to jump our deal since no one in private equity ever jumps an announced deal.” Plaintiffs contend that this statement, in combination with the fact that Defendants never “jumped” a deal during the “go-shop” period, as well other statements such as the Goldman Sachs executive’s observation that “club etiquette prevail[ed],” with respect to the Freescale transaction, provides a permissible inference of an overarching conspiracy.
The statement that “no one in private equity ever jumps an announced deal” and the fact that no announced deals for the propriety transactions at issue were ever “jumped,” tends to show that such conduct was the practice in the industry. On its own, these two pieces of evidence would be insufficient to provide a permissible inference of an overarching conspiracy. They do not tend to exclude the possibility that each Defendant independently decided not to pursue other Defendants’ proprietary deals because, for instance, a pursuit of such deals was generally futile due to matching rights.
When viewed in combination with the Goldman Sachs executive’s statement and in the light most favorable to the Plaintiffs, however, the evidence suggests that the practice was not the result of mere independent conduct. Rather, the term “club etiquette” denotes an accepted code of conduct between the Defendants. Taken together, this evidence suggests that, when KKR “stepped down” on the Freescale transaction, it was adhering to some code agreed to by the Defendants not to “jump” announced deals. The Court holds that this evidence tends to exclude the possibility of independent action. Count One may, therefore, proceed solely on an alleged overarching agreement between the Defendants to refrain from “jumping” each other’s announced proprietary deals.
So, the alleged industry etiquette against deal jumping in the specific case of the HCA transaction survives to go to trial. At the same time, the "overarching conspiracy" allegation falls:
Furthermore, the frequent communications, friendly relationships and the “quid pro quo” arrangements between Defendants can be thought of as nothing more than the natural consequences of these partnerships. Defendants that have previously worked together or are currently working together would be expected to communicate with each other and to exchange business opportunities. That is the very nature of a business relationship and a customary practice in any industry. Accordingly, the mere fact that Defendants are bidding together, working together, and communicating with respect to a specific transaction does not tend to exclude the possibility that they are acting independently across the relevant market.
Being friendly with your competitors does not a conspiracy make.
Although it's been narrowed quite a bit, I'm sure this case will continue to generate headlines and attention, especially if more emails come to light.
Update: Ronald Barusch at the WSJ Dealpolitik blog suggests the outcome of the summary judgment motion will push defendants to push hard for a settlement.
Sunday, March 10, 2013
eToys and the rigged IPO game
Joe Nocera in the Times today unearths some Goldman emails about the eToys IPO from the dotcom era. eToys raised $164 million in a 1999 IPO and then subsequently failed. The story is familiar by now. The IPO was underpriced and Goldman spun shares off to preferred clients. After the company failed, creditors sued. It's emails produced in connection with that suit that Nocera uncovered. The emails and creditors raise an important question: who was Goldman working for during the IPO?
The plaintiffs charge that Goldman Sachs had a fiduciary duty to maximize eToys’ take from the I.P.O. Instead, Goldman purposely set an artificially low price, so that its real clients, the institutional investors clamoring for the stock, could pocket that first-day run-up. According to the suit, Goldman then demanded that some of those easy profits be kicked back to the firm. Part of their evidence for the calculated underpricing of eToys, according to the plaintiffs’ complaint, was that Lawton Fitt, the Goldman executive who headed the underwriting team and was thus best positioned to gauge the market demand, actually made a bet with several of her colleagues that the price would hit $80 at the opening.
If you are interested in learning more about this kind of thing, Sean Griffith has a good article on the practice of spinning in IPOs that appeared a couple of years in the Brooklyn Law Review.
Friday, March 8, 2013
Icahn throws wrench in Dell works
Carl Icahn has been very busy over the past year. Now, he has moved on to Dell. In a letter to the board (see Sched 14A with lett and board response), Icahn made an offer to the board that he hopes they take - and then threatens to run a proxy contest and start "years of litigation" if they don't:
However, if this Board will not promise to implement our proposal in the event that the Dell shareholders vote down the Going Private Transaction, then we request that the Board announce that it will combine the vote on the Going Private Transaction with an annual meeting to elect a new board of directors. We then intend to run a slate of directors that, if elected, will implement our proposal for a leveraged recapitalization and $9 per share dividend at Dell, as set forth above. In that way shareholders will have a real choice between the Going Private Transaction and our proposal. To assure shareholders of the availability of sufficient funds for the prompt payment of the dividend, if our slate of directors is elected, Icahn Enterprises would provide a $2 billion bridge loan and I would personally provide a $3.25 billion bridge loan to Dell, each on commercially reasonable terms, if that bridge financing is necessary.
Like the “go shop” period provided in the Going Private Transaction, your fiduciary duties as directors require you to call the annual meeting as contemplated above in order to provide shareholders with a true alternative to the Going Private Transaction. As you know, last year’s annual meeting was held on July 13, 2012 (and indeed for the past 20 years Dell’s annual meetings have been held in this time frame) and so it would be appropriate to hold the 2013 annual meeting together with the meeting for the Going Private Transaction, which you have disclosed will be held in June or early July.
If you fail to agree promptly to combine the vote on the Going Private Transaction with the vote on the annual meeting, we anticipate years of litigation will follow challenging the transaction and the actions of those directors that participated in it. The Going Private Transaction is a related party transaction with the largest shareholder of the company and advantaging existing management as well, and as such it will be subject to intense judicial review and potential challenges by shareholders and strike suitors. But you have the opportunity to avoid this situation by following the fair and reasonable path set forth in this letter.
Now, I think he has a real point here. And that's the special dividend. He proposes the board use $7.4 billion in cash that it has covented to bring back from offshore to finance the going-private transaction as the main source of cash for the dividend. Think about it this way, there is a grand public policy discussion about corporate taxes and how the present structure of corporate taxes causes firms to stockpile cash off-shore. This cash has to be left there - the argument goes - lest it come back and be taxed at punitive rates.
OK, I am not going to take sides in that whole debate, but I will say this. Dell is content to leave it's large pile of cash offshore and away from the shareholders because of the tax issue. However, if the cash is necessary to finance an acquisition of the company by Michael Dell, well then, paying all those taxes to bring the cash back onshore isn't all that big a deal and is well worth the effort.
Icahn is pointing to that and saying in effect, "Hey, wait a minute. Why bring the cash back to finance a going private deal?! If Michael Dell is just buying cash with cash, doesn't that undervalue what's left of the company? Why not bring the cash back to the US, pay the taxes, and then distribute it to shareholders?"
I tend to sympathize with that view. If the taxes are really so onerous that the board has refused to bring the cash back until now, why isn't it a corporate waste to use them to finance a going-private transaction by the founder? The board will have to deal with that question at some point.
Corporate Geek Humor
Did you hear the one about AOL wanting to buy Time now that it's being spun off by Time-Warner? Hahaha!!
Wait. What? That's true!? HAHAHA!
Thursday, March 7, 2013
Laster on Revlon
Vice Chancellor Laster will be speaking at Fordham Law this evening (6:30p). The event is open to the public and he is a very good speaker. The topic is the true meaning of the Revlon standard. More info on the event here. So, leave work early and head on over!
Puda, Caremark, and Director Engagement
Many times my students will ask me, well how bad does director inattentiveness to board duties have to be win on a care claim much less a Caremark claim? There are, of course, multiple levels of answers to that question, but the simplest is, "pretty bad". Now we have a stark example of some facts from a recent Delaware transcript ruling that might get you there - In re Puda Coal (Puda_Coal Transcript_Ruling). In Puda, we have a Chinese coal company incorporate in Delaware and trading on US markets with five directors - 2 inside Chinese directors and 3 outside American directors. OK, so it turns out that the 2 inside directors stole all the corporate assets and appropriated them all for themselves. For two years, the outside directors had no idea. They relied on reports from the CEO and sat in the US all the while assuming there were corporate assets somewhere in China. So, the directors, including the outside directors all get sued. OK, so far so good.
During the course of an internal investigation, all the outside directors realizes what had been going on and quit in response, leaving the inside directors in charge of their own malfeseance. Then outside directors turn up in Chancellor Strine's court as defendants seeking to have the derivative suits dismissed for because demand was not excused. Theory: a majority of the directors were independnet and could well have sought to prosecute this case, had it been presented to them. That didn't go well for them:
A Delaware lawyer is telling me, I think, if I dismiss the case on demand excusal grounds, I dismissed it because control of the lawsuit belongs to the company, therefore the decision to sue the insiders who took the assets belongs to the company. The company might conclude that it's perfectly okay to take the assets, or there's a cost benefit analysis of suing and it's just not worth it. I can't take on to myself in that situation. I can't enter a judgment at the instance of derivative plaintiffs because control of a lawsuit belongs to the board, which is now controlled by the guy who your clients suspect stole the assets out from under them.
What stuck in Strine's craw, I think, was the fact that when the outside directors who were a majority realized that the all the assets of the corporation had been sold out from under them that their response was not to sue the bad directors and seek to defend the corporation, but to resign and walk away:
When, as a matter of undisputed reality, when they were faced with knowing in their view that there had been the most extreme sort of fiduciary violation you could imagine, rather than have the company sue, they quit, then come into court and seek to use 23.1 and, frankly, disable the derivative plaintiffs from even going after the bad guys. When I mean bad guys, I'm using your client's own view of these people. I'm trying to understand how my state -- if I were to embrace this -- my state's corporate law would not be justly subject to ridicule.
And that's when the hearing starts to go really bad for the outside directors. Turns out only one of the outside directors speaks Chinese. Whoops. (Note to self, pick up a Rosetta Stone before taking that directorship in the Mongolian company). Strine then let them have it with this:
I think those of us who actually -- judges in Delaware who participate in corporate law in Delaware take legitimate umbrage when folks say that we don't hold managers accountable for breaches of fiduciary duty in Delaware. I find that claim to be astonishingly outdated and simple-minded, when any review of our corporate law will see -- just out of our statutory corporate law will say that is, frankly, much more pro stockholder and more balanced than any of our other states, most of which have stronger insulations against director liability, many of which allow directors in the context of takeovers to use takeover defenses not permissible in Delaware, and when the major controversies that have come out of Delaware over the last 30 years, some of them have been about things that are anti-stockholder. Many of them are cases like Van Gorkom, Omnicare, Quickturn. Guys like me, El Paso, Southern Peru, Loral, where we've held people accountable in big ways for things. And we take seriously in the derivative suit contest that, frankly, you shouldn't lightly take away from the board of directors the ability to control a lawsuit. But to use doctrinal law in some sort of gotcha way is just not appropriate
Now, he's just venting; he's right, but he's just venting. So by now it's pretty obvious that the defendants made an error is seeking to dismissal on failure to make demand. Then Strine turned to the question of whether a 12(b)(6) motion can survive. Sorry, it's not going to get any better for these defendants. But here, Strine lays out some minimum standards for independent directors of Delaware corporations headquartered abroad, and it's pretty sensible:
Independent directors who step into these situations involving essentially the fiduciary oversight of assets in other parts of the world have a duty not to be dummy directors. I'm not mixing up care in the sense of negligence with loyalty here, in the sense of your duty of loyalty. I'm talking about the loyalty issue of understanding that if the assets are in Russia, if they're in Nigeria, if they're in the Middle East, if they're in China, that you're not going to be able to sit in your home in the U.S. and do a conference call four times a year and discharge your duty of loyalty. That won't cut it. That there will be special challenges that deal with linguistic, cultural and others in terms of the effort that you have to put in to discharge your duty of loyalty. There's no such thing as being a dummy director in Delaware, a shill, someone who just puts themselves up and represents to the investing public that they're a monitor. Because the only reason to have independent directors -- remember, you don't pick them for their industry expertise. You pick them because of their independence and their ability to monitor the people who are managing the company. And a lot of life – I would not serve on -- if I were in the private sector -- not that anybody would want me -- but there are a lot of companies on boards I would not serve because the industry's too complex. So if I can't understand how the company makes money, that's a danger. If it's a situation where, frankly, all the flow of information is in the language that I don't understand, in a culture where there's, frankly, not legal strictures or structures or ethical mores yet that may be advanced to the level where I'm comfortable? It would be very difficult if I didn't know the language, the tools. You better be careful there. You have a duty to think. You can't just go on this and act like this was an S&L regulated by the federal government in Iowa and you live in Iowa.
So on Caremark alone, I have no problem saying that it passes muster under 12(b)(6).
This is a case to watch as it winds its way through the courts. It may well start making its way into case books soon.