Friday, May 2, 2014
In Canada's Financial Post, Yvan Allaire makes the argument that Canada's approach to merger rules, which are close to exactly the US academic orthodoxy that board of directors should have only a very limited ability to stand in the way of shareholders accepting a tender offer, go too far and should be reconsidered:
Take the recent case of Inmet Mining Corp. and First Quantum Minerals. Inmet’s board was dead set against a takeover by First Quantum. The latter made a bid; no other bidder showed up. Despite the board’s opposition, Quantum simply put its offer to the shareholders. As enough of them handed in their shares the deal has been consummated. Under Canadian regulations, the board members of Inmet had no other recourse; they believed that it was not in the long-term interest of Inmet to be acquired by Quantum at the offered price but were powerless to act. That does not make any sense.
How can anyone defend this dysfunctional regime? How can one pretend that this system is best for stable, long-term shareholders?
In a world of financial derivatives, speed trading, arbitrageurs, momentum players and hedge funds of all sorts, as soon as a takeover offer is made public the shareholder base of the target company is swiftly and radically transformed. To consider these newcomers as the sole “deciders” of a company’s fate, needing the benevolent protection of securities commissions against malevolent, conflicted management, seems like an imaginative scenario of times past.
It's an advertisement to be careful what you wish for I suppose.
Thursday, May 1, 2014
Second Annual Workshop for Corporate & Securities Litigation: Call for Papers
The University of Richmond School of Law and the University of Illinois College of Law invite submissions for the Second Annual Workshop for Corporate & Securities Litigation. This workshop will be held on Friday, October 24 and Saturday, October 25, 2014, in Richmond, Virginia.
This annual workshop brings together scholars focused on corporate and securities litigation to present their works-in-progress. Papers addressing any aspect of corporate and securities litigation or enforcement are eligible. Appropriate topics include, but are not limited to, securities class actions, fiduciary duty litigation, or comparative approaches to business litigation. We welcome scholars working in a variety of methodologies, including empirical analysis, law and economics, law and sociology, and traditional doctrinal analysis. Participants will generally be expected to have drafts completed by the fall, although there will be one or more "incubator" sessions for ideas in a more formative stage.
Authors whose papers are selected will be invited to present their work at a workshop hosted by the University of Richmond School of Law in Richmond, Virginia, on Friday, October 24 and Saturday, October 25, 2014. Hotel costs will be covered. Participants will pay for their own travel and other expenses.
The workshop is designed to maximize discussion and feedback. The author will provide a brief introduction to the paper, but the majority of the individual sessions will be devoted to collective discussion of the paper involved.
If you are interested in participating, please send an abstract of the paper you would like to present to Verity Winship at firstname.lastname@example.org later than Friday, May 30, 2014. Please include your name, current position, and contact information in the e-mail accompanying the submission. Authors of accepted papers will be notified by Friday, June 27.
Wednesday, April 30, 2014
Justice Jacobs has moved up his announced retirement to accomodate the legislature's schedule. So, that pending vacancy looks to be filled well before we hit the dog days of summer. In the meantime, The Metropolitan Corporate Counsel has published a nice interview with Justice Jacobs. Among other things, he comments on the recent turnover in the courts:
Editor: There have been some recent departures from the Delaware courts, and perhaps that represents the highest turnover rate in the history of Delaware. Is there any real significance to that?
Jacobs: I don’t think so. Turnover is inevitable. We have 12-year terms, and some judges step down after one term, although their reappointment is guaranteed if they want to stay on. Bill Allen served for only one term, ending in 1997, and Steve Lamb did the same, stepping down in 2009. Bill Chandler stepped down three years ago after serving 24 years, when he was still a relatively young man. Norman Veasey also served only one term as Chief Justice.
He also shares some of his thoughts on MFW and forum non conveniens:
Editor: There are some recent Delaware cases that were very helpful in terms of providing a sense of how to construct a deal. I thought Kahn v. M&F Worldwide Corp. was very interesting in terms of articulating just exactly what had to be done to assure fairness in going private.
Jacobs: For the benefit of the corporate lawyers who structure these deals, there is now some definitive guidance. Will it solve all the problems? Will all the difficulties go away? Not really. Nevertheless, after many years of uncertainty, it is good to see some progress being made. Kahn is a good example of how Delaware courts can provide needed guidelines about ways that a particular form of transaction can be approved without excessive judicial intrusion.
Editor: Another case that also seems to have clarified the law was Martinez v. E.I. DuPont de Nemours & Co. Inc.
Jacobs: Yes. Forum non conveniens is a doctrine that has been around a long time. In the federal system, the courts have some control over where competing lawsuits can be administered, but in the state system, there is no central mechanism. The states don’t have the equivalent of a Federal Panel on Multidistrict Litigation. Forum non conveniens is one doctrinal tool that the state courts can use to try to solve the multiforum problem. Martinez was a particular application of that doctrinal tool. The case did give the Supreme Court an opportunity to try to clarify the law of forum non conveniens, as to which questions have been raised over the past several years.
Monday, April 28, 2014
Traditionally, the Delaware Supreme Court is known for its unanimity. Unlike the United States Supreme Court, where the norm now seems to be 5:4 decisions, the Delaware Supreme Court tends to err on the side of 5:0. Justice Holland remarked on this phenomenon when he introduced the now-Chief Justice Leo Strine, Jr. to the Supreme Court bench this year. Holland remarked that he expected the new chief justice will fit well with Delaware's "unanimity norm." Over the past 61 years 99% of the court's rulings have been unanimous. Some of the well known exceptions to that norm are also the cases that tend to be decried as the court's worst - Van Gorkom and Omnicare among them.
What's interesting about Delaware and the corporate law jurisprudence is that dissents don't appear necessarily appear at the supreme court level, but bubble up from below. The Chancery Court has always been a source of non-traditional dissent, pushing the court to evaluate and re-evaluate its previous rulings. Last year there was some commotion when then-Chief Justice Steele politely made it known that he thought chancellors should keep their opinions to themselves and stay in their lane. Nothing really new there, just the underlying tensions between the supreme court and the chief source of dissents from the supreme court's opinion. [By "tensions" I don't mean acrimony. I mean different points of view that lead to structural differences in world view.]
In re MFW and the controlling shareholder jurisprudence is a good example of Delaware's non-traditional dissents in action. The Supreme Court's opinion in Kahn v Lynch which established that squeezeout mergers would be subject to entire fairness review with the controller able to shift the burden within entire fairness was unanimous at the Supreme Court level. At the Chancery Court however, Kahn was subject of push-back almost from the very beginning. For example, in Cox Communications then-Vice Chancellor Strine set out his objections to the whole Kahn line of cases. When he had another opportunity to push the ball down the field a little more, he took it in In re MFW. Though not a complete victory for Chancery, when the supreme court was asked to weigh in on its own unanimously adopted Kahn line of cases, it moved towards the Chancery position.
Does the elevation of Strine to the Supreme Court mean that this long-standing tension between the Chancery and the Supreme Court will go away? That's hard to say. The tensions are long-standing and previous elevations of chancellors to the Supreme Court have not assuaged them (e.g. Jacobs and Berger). My guess is that going forward, the Supreme Court will continue to exhibit its unamity norm while relying on the Chancery Court for non-traditional dissents. And that's not necessarily a bad thing.
Friday, April 25, 2014
In January I noted that a federal district court in San Francisco ruled that Bazaarvoice had violated the Clayton Act when it acquired its chief competitor, PowerReviews. At the time, I misinterpreted the ruling and thought it meant that court had held that Bazaarvoice was ordered to divest itself of PowerReviews. I quickly received an email from a PR hack at Bazaarvoice asking me to correct the record, which I did. The January ruling simply found that Bazaarvoice had violated the antitrust laws but did not go so far as to resolve the question of remedy, which could eventually include divestiture of PowerReviews.
OK, so today Bazaarvoice has agreed to divest itself of PowerReviews and pay $222,000 to cover the US government's litigation costs - government lawyers are cheap. Bazaarvoice has to bear its own costs, which I suspect are higher. Here is the proposed stipulation and order and here is the proposed final judgment.
Remember that the PowerReviews acquisition did not trigger an automatic HSR filing, but the lack of a filing requirement does not mean one is exempt from antitrust enforcement. Just ask Bazaarvoice.
Thursday, April 24, 2014
Just in time for final exams, Bill Ackman schools CNBC on insider trading rules and the misappropriation theory while discussing his combined bid with Valeant for Allergan. For those of you who can't do video, here's a write up care of the Times:
“The way the rules work is, you’re actually permitted to trade on inside information as long as you didn’t receive the information from someone who breached a fiduciary duty or a duty of confidentiality, et cetera”
Wednesday, April 23, 2014
Chief Justice Strine's recent article in the Columbia Law Review, Can We Do Better By Ordinary Investors? has gotten a lot of ink recently. For those of you who don't have access to the CLR, you can download a copy of the article on SSRN now. Here's the abstract:
In his essay, The Myth That Insulating Boards Serves Long-Term Value, Professor Lucian Bebchuk draws a stark dichotomy between so-called “insulation advocates” and proponents of shareholder-driven direct democracy. This Essay begins by rejecting this crude divide between “good” and “evil,” and focuses instead on the practical realities surrounding increases in stockholder power in an era where there is a “separation of ownership from ownership.” That separation arises because the direct stockholders of private companies are typically not end-user investors, but instead money managers, such as mutual funds or hedge funds, whose interests as agents are not necessarily aligned with the interests of long-term investors. These practical realities suggest that Bebchuk’s crusade for ever more stockholder power may not actually be beneficial to ordinary investors, and that his contention — that further empowering stockholders with short-term investment horizons will not compromise long-term corporate value — is far from proven. This Essay concludes with some thoughts on improvements that could be made in the system that we have. These suggestions are not radical in either direction and they do not involve rolling back the rights of stockholders. Rather, these suggestions recognize that the fiduciaries who wield direct voting power over corporations should do so in a manner faithful to the best interests of those whose money they control, include proposals to require activist investors to bear some of the costs they impose and to disclose more information about their own incentives so that the electorate can evaluate their motives, and provide incentives that better align the interests of money managers and ordinary investors toward sustainable, sound long-term corporate growth. Taken as a whole, these suggestions would create a more rational accountability system by making all of the fiduciaries for ordinary investors focus more on what really matters for investors, citizens, and our society as a whole — the creation of durable wealth through fundamentally sound economic activity.
Add it to your list!
Tuesday, April 22, 2014
If it wasn't already obvious to you we live in a global economy in which almost all deals of any significant size will have global regulatory implications. Take for example, Microsoft's pending acquisition of the Nokia handset business announced last fall. It's expected to close this week after facing significant and real opposition from both the Korea Fair Trade Commission and China's MOFCOM:
Aware of a possible backlash from local companies, the Chinese Ministry of Commerce approved Microsoft’s purchase of Nokia on April 8, with certain conditions, saying, “Microsoft and Nokia’s patents could limit competition in the local smartphone market.” In light of the Chinese government’s decision, the Korean regulatory body is more likely to follow suit. In fact, the body is said to be considering granting conditional approval to the business consolidation, and finalizing its standards for approval.
Think about that - an American company buys a division of a Finnish company and the Korean as well as Chinese regulators (among many others) weigh in. Again, for those who are paying attention - sure that's the world we live in. But, it's another reminder about how any real M&A lawyer has to be about much more than just the document. You have to be aware of how the deal will play out at 35,000 feet, not just in the home market but in other markets as well.
Friday, April 18, 2014
Many of the cases we study in my M&A course and in Corporations stem from the mid-1980s when the "bust-up deal" was the order of the day. It's often surprising to law students that a corporation might be "worth more dead than alive" (gratuitous reference to Other People's Money). The bust-up might well be a thing of the 1980s and not really on too many agendas these days, but that doesn't mean there aren't real candidates.
Take for example Yahoo! It's core business is pretty much worthless:
Yahoo! Inc.’s market value has doubled since Marissa Mayer took over as chief executive officer, which you might think would be cause for celebration. But more than all of those gains can be attributed to the gangbuster growth of Alibaba Group Holding Ltd. and Yahoo Japan Corp., two thriving companies that are part-owned by Yahoo. In other words, the implied market value of the rest of Yahoo has collapsed during Mayer’s tenure, and might even be negative.
Alibaba is valued at about $153 billion, according to analysts surveyed by Bloomberg News. Yahoo itself is worth about $39 billion as of this writing and this includes its ownership of about 24 percent of Alibaba. If you subtract that out you are left with a company that’s worth just a little more than $2 billion -- less than AOL Inc., Groupon Inc., or Zynga Inc.
Yahoo also has a 35 percent stake in Yahoo Japan, a publicly traded company now valued at about $32.3 billion. Subtract out Yahoo’s stake and this means that investors seem to value Yahoo’s own business at less than nothing -- not what you would expect from a profitable enterprise.
All those people, doing all that purple work...for nothing. That can't be true. There must be some value left if one were to liquidate Yahoo's positions in both Alibaba and Yahoo Japan. Of course, all that value will remain trapped. If the hostile bid were really still a viable option, one would think that Yahoo would be an obvious choice. In any event, for young lawyers and law students looking for an example of what potential bust-up targets look like, there's one.
Thursday, April 17, 2014
You may have already seen this story involving the Glencore/Xstrata merger.
The merger of Glencore and Xstrata created the world’s fourth-largest mining company and largest commodities trader when it was finalized last year. But as a condition of the deal, the firms had to secure the blessing of regulators in the major markets in which they operate, including China.
So far, so good. A large merger like this is likely to have antitrust implications in China, so no surprise that the 20-odd people in MOFCOM assigned to pre-merger review and approval would give this transaction a look before it closes. The odd part? What happened next. According to multiple sources, the transaction was approved conditioned on the divesture of the Las Bambas copper mine in Peru. The purchaser was China Minmetals:
Sunday's acquisition is the largest Chinese purchase of an overseas mining asset since state-owned Aluminum Corp. of China, or Chinalco, took a 12% stake in Anglo-Australian mining company Rio Tinto PLC for $14 billion in 2008, according to Dealogic.
Like that purchase, this latest deal gives China greater control of the raw materials its industries crave. The country Like that purchase, this latest deal gives greater control of the raw materials its industries crave. The country accounts for roughly 40% of global copper demand. Las Bambas is expected to produce 460,000 metric tons of copper concentrate annually over the next 10 years, according to projections by Glencore.
Sure, the price for the asset was high. So, shareholders of Glencore/Xstrata don't really have much to complain about, but what is disconcerting is that China's pre-merger approval process would be used not just to address antitrust problems brought on by the deal, but to also advance other national priorities - like securing access to raw materials. To the extent China finds antitrust review to be a convenient tool for this kind of thing, it reduces confidence in the regulatory process -- hey, stop laughing in the back row, I'm trying to make a point -- and without that confidence, it's hard to imagine developing a robust regulatory structure when it is serving multiple masters.
Thursday, April 10, 2014
Yesterday, the Delaware Senate confirmed Andre Bouchard as the next Chancellor to replace Leo Strine who is now Chief Justice of the Delaware Supreme Court. Next up on the Delaware judicial merry go round, nominating a replacement for Justice Jacobs who will retire in July.
Wednesday, April 9, 2014
Comcast-TWC filed their application and public interest statement for review by the FCC yesterday. Let me summarize for you - "Everything is awesome!"
Comcast assures us that competition has increased in recent years. That's funny, because I am pretty sure that in recent years my cable bill hasn't ever decreased! Oh well. Color me skeptical that this is really good for consumers.
You've heard of the acqui-hire -- the acquisition where the real goal is not to buy the company or its products but to get access to its real value, its people. But, but...what if your company gets acqui-hired and everyone gets a job, except you?
That's the secret shame of the unaquired:
"Google was interested in buying my 5 person company for our team. They hired everyone but me." ...
Amy was heartbroken. Since joining the company, she had been paid a salary of $60,000, half what her male colleagues made. Under the terms of Google's offer, Amy's start-up received enough money to pay back its original investors, plus about $10,000 in cash for each employee. Amy's CEO was hired as a mid-level manager, and her engineering colleagues were given offers from Google that came with $250,000 salaries and significant signing bonuses. She was left jobless, with only $10,000 and a bunch of worthless stock.
Tuesday, April 1, 2014
Delaware Justice Jack Jacobs has today announced his retirement effective July. There are two obvious potential candidates, James Vaughn and Jan Jurden. Both had applied to replace Chief Justice Steele. The Judicial Nominating Committee sent their names along with Chief Justice Strine's name to the governor, who ultimately selected Strine. Jurden, however, has come under some scrutiny in the past few days for her sentencing of an heir to the duPont family fortune. It's the kind of thing that, while not disabling, will require a lot of explaining. If you're explaining, you're losing. My uninformed guess is that she gets passed over for now.
Monday, March 24, 2014
Today we will get a decision on Delaware's petition to the US Supreme Court that the court hear an appeal in the Delaware Chancery arbitration case. For those of you looking for a quick 'get up to speed' on what's going on, there's a nice interview with Brian Farkas in the NY Commercial Litigator Insider (reg. req'd, but it's worth it).
Thursday, March 20, 2014
Governor Markel has nominated Andre Bouchard (a Boston College alum, '83) to be the next Chancellor the Delaware Chancery Court. According the governor's statement:
In nearly 30 years practicing law in Delaware, Andy Bouchard has demonstrated a remarkable ability to dissect complex legal issues and vigorously represent his clients. He is well recognized for his professionalism and ability to think quickly on his feet in the courtroom,” said Markell. “His experience establishing and growing his own small business as founder of his law firm, as well as his long career before the Court of Chancery, will give him a special appreciation for the work of the court and the many and varied litigants who would appear before him in his new role.”
WDDE has all the details here.
Wednesday, March 19, 2014
So, if you find yourself standing in the middle of Grand Central Station eating Post-It notes in order to destroy evidence, I have a life tip for you. Something has gone terribly wrong and you should reconsider what you're doing.
That bit of million dollar advice alas comes a little too late for three characters involved in the latest insider trading shenanigans to be uncovered by the SEC. As alleged by the SEC:
The SEC alleges that Vladimir Eydelman and Steven Metro were linked through a mutual friend who acted as a middleman in the illegal trading scheme. Metro, who works at Simpson Thacher & Bartlett in New York, obtained material nonpublic information about corporate clients involved in pending deals by accessing confidential documents in the law firm’s computer system. Metro typically tipped the middleman during in-person meetings at a New York City coffee shop, and the middleman later met Eydelman, who was his stockbroker, near the clock and information booth in Grand Central Terminal. The middleman tipped Eydelman, who was a registered representative at Oppenheimer and is now at Morgan Stanley, by showing him a post-it note or napkin with the relevant ticker symbol. After the middleman chewed up and sometimes even ate the note or napkin, Eydelman went on to use the illicit tip to illegally trade on his own behalf as well as for family members, the middleman, and other customers. The middleman allocated a portion of his profits for eventual payment back to Metro in exchange for the inside information. Metro also personally traded in advance of at least two deals.
Tuesday, March 18, 2014
On Friday last week, the Delaware Supreme Court handed down an opinion affirming the Chancery Court's opinion in MFW. In the Chancery opinion, (then) Chancellor Strine was attempting to reconcile the frayed strands of jurisprudence around controlling shareholder transactions and - at the same time - trying to reduce incentives to pursue meritless claims in order to seek a settlement. In Cox Communications, a case where he took teh oopportunity to describe the problem with controlling shareholder cases, Strine described the present incentive structure created by the legal rules in the following manner:
Unlike any other transaction one can imagine — even a Revlon deal — it was impossible after Lynch to structure a merger with a controlling stockholder in a way that permitted the defendants to obtain a dismissal of the case on the pleadings. Imagine, for example, a controlled company on the board of which sat Bill Gates and Warren Buffett. Each owned 5% of the company and had no other business dealings with the controller. The controller announced that it was offering a 25% premium to market to buy the rest of the shares. The controlled company's board meets and appoints Gates and Buffett as a special committee. The board also resolves that it will not agree to a merger unless the special committee recommends it and unless the merger is conditioned on approval by two-thirds of the disinterested stockholders. The special committee hires a top five investment bank and top five law firm and negotiates the price up to a 38% premium. The special committee then votes to approve the deal and the full board accepts their recommendation. The disinterested stockholders vote to approve the deal by a huge margin that satisfies the two-thirds Minority Approval Condition.
After that occurs, a lawsuit is filed alleging that the price paid is unfair. The filing party can satisfy Rule 11 as to that allegation because financial fairness is a debatable issue and the plaintiff has at least a colorable position. The controller and the special committee go to their respective legal advisors and ask them to get this frivolous lawsuit dismissed. What they will be told is this, "We cannot get the case dismissed. We can attempt to show the plaintiffs that we are willing to beat them on this and persuade them to drop it voluntarily because they will, after great expense, lose. But if they want to fight a motion to dismiss, they will win, see Lynch. At the very least, therefore, if the plaintiffs are willing to fight, it would be rational for you to pay an amount to settle the case that reflects not only the actual out-of-pocket costs of defense to get the case to the summary judgment stage, but the (real but harder to quantify) costs of managerial and directorial time in responding to discovery over a past transaction."
Given the inability to settle on the pleadings - no matter how good the process - meant that any merger with a controlling shareholder became an immediate payday for attorneys. Of course, that's frustrating for everyone involved. It's especially frustrating for the judges who have to oversee the settlement processes.
No surprise, then, that when Strine was given an opportunity to address the issue in MFW that he took a swing. Strine held that in a merger with a controlling stockholder conditioned upfront on a promise that no transaction will proceed without (i) special committee approval, and (ii) the affirmative vote of a majority of the minority stockholders that business judgment and not entire fairness will be the standard of review. This structure is important because by empowering the minority, it attempts to replicate as much as possible an arm's length transaction.
On appeal, the Delaware Supremes upheld the Chancery opinion and gave us the following standard for dealing with controlling shareholder transactions (Kahn v. M F Worldwide Corp.):
[I]n controller buyouts, the business judgment standard of review will be applied if and only if: (i) the controller conditions the procession of the transaction on the approval of both a Special Committee and a majority of the minority stockholders; (ii) the Special Committee is independent; (iii) the Special Committee is empowered to freely select its own advisors and to say no definitively; (iv) the Special Committee meets its duty of care in negotiating a fair price; (v) the vote of the minority is informed; and (vi) there is no coercion of the minority.
Ok, so far so good.
But here's a wrinkle...footnote 14. In footnote 14, the Supreme Court notes that MFW could not have decided on the pleadings and would have survived a motion to dismiss even under the new standard. The pleadings, the court noted were sufficient to require discovery on all the new prerequisiting in the application of the standard...
Ultimately we'll see to what degree footnote 14 matters. But, it does seem a little disconcerting that Strine's project to provide a pathway to early dismissal of these kinds of cases might just move the locus of the argument to the functioning of the special committee.
Sure, that's obviously better, but it's not yet clear that MFW and footnote 14 will dramatically reduce incentives to bring these cases. Perhaps we will just be battling the same fight on new ground. Of course, the Chancery Court is likely to want to find ways to rule on the pleadings and my guess is that now that Chief Justice Strine is in a place to influence how the MFW standard is going to roll out that he won't be looking to increase incentives for plaintiffs to bring these cases.
Cornerstone offers up another report on multi-jurisdictional litigation. Okay, so things you probably already know -- 94% of all mergers overs $100 million are accompanied by litigation. On the brighter side, plaintiffs appear not to 'race to the courthouse' with the same degree of speed as in the past. In 2009, the first suit was filed an average 6.5 days after announcement of a transaction. By 2013, the average delay for the first suit increased to 11.7 days from announcement. Read the report here.