Friday, November 7, 2014
Cain, McKeon, and Solomon have a new piece, Do Takeover Laws Matter? Evidence from Five Decades of Hostile Takeovers. Has it been 5 decades already?! Where does the time go? The paper starts with one of my most favorite hostile takeover vignettes:
The takeover battle for Erie Railroad is legend. In 1868, Cornelius Vanderbilt, the railroad baron, began to build an undisclosed equity position in Erie. When the group controlling Erie discovered this, they quickly acted to their own advantage, issuing a substantial number of additional shares of Erie stock for Vanderbilt to purchase. One of the managers, James Fisk, purportedly said at the time that “if this printing press don’t break down, I’ll be damned if I don’t give the old hog all he wants of Erie.” The parties then arranged for their own bought judges to issue dueling injunctions prohibiting the other from taking action at Erie. The battle climaxed when Erie’s management fled to New Jersey with over $7 million in Erie’s funds. By the time the dust settled, they were still in control and Vanderbilt was out over $1 million.
The world's first poison pill! Sadly, the authors call this story apocryphal. Too bad. In any event, here's the abstract to the paper:
This study evaluates the relation between 16 U.S. takeover laws and hostile takeover activity from 1965 to 2013. Using a hand-collected dataset of largely exogenous legal changes covering 198,845 firm years, we find that certain takeover laws, such as poison pill laws, have had an effect on takeover activity running counter to their original intent, in some instances actually correlating with increased hostile activity. We also provide evidence that our Takeover Index, constructed from the full array of takeover laws, provides a better measure of firms’ governance environment than prior studies that have focused almost exclusively on business combination statutes. We conclude by examining the relation between the Takeover Index, firm value, and takeover premiums, and find a non-linear effect across time vintages.
Thursday, November 6, 2014
Gretchen Morgenson has an interesting article about an initiative being run by NYC's comptroller, Scott Stringer. The Boardroom Accountability Project is planning on pushing for shareholder access to the director nomination process, a laudable goal, at 75 different corporations this nomination season. But a quick look at their proposal raises the question whether the comptroller's effort is serious or just poorly advised. What do I mean? Well, take a look at what they want to put before shareholders:
RESOLVED: Shareholders of the “Company” ask the board of directors (the “Board”) to adopt, and present for shareholder approval, a “proxy access” bylaw. Such a bylaw shall require the Company to include in proxy materials prepared for a shareholder meeting at which directors are to be elected the name, Disclosure and Statement (as defined herein) of any person nominated for election to the board by a shareholder or group (the “Nominator”) that meets the criteria established below. The
Company shall allow shareholders to vote on such nominee on the Company’s proxy card.
The number of shareholder-nominated candidates appearing in proxy materials shall not exceed one quarter of the directors then serving. This bylaw, which shall supplement existing rights under Company bylaws, should provide that a Nominator must:
a) have beneficially owned 3% or more of the Company’s outstanding common stock continuously for at least three years before submitting the nomination;
b) give the Company, within the time period identified in its bylaws, written notice of the information required by the bylaws and any Securities and Exchange Commission rules about (i) the nominee, including consent to being named in the proxy materials and to serving as director if elected; and (ii) the Nominator, including proof it owns the required shares (the “Disclosure”); and
c) certify that (i) it will assume liability stemming from any legal or regulatory violation arising out of the Nominator's communications with the Company shareholders, including the Disclosure and Statement; (ii) it will comply with all applicable laws and regulations if it uses soliciting material other than the Company’s proxy materials; and (c) to the best of its knowledge, the required shares were acquired in the ordinary course of business and not to change or influence control at the Company.
The Nominator may submit with the Disclosure a statement not exceeding 500 words in support of the nominee (the "Statement"). The Board shall adopt procedures for promptly resolving disputes over whether notice of a nomination was timely, whether the Disclosure and Statement satisfy the bylaw and applicable federal regulations, and the priority to be given to multiple nominations exceeding the one-quarter limit.
OK, we are close enough to the end of the semester that this is a fair question - hey, law students, if you were advising the comptroller, what might you tell him about this proposal?
First things first. This is a precatory proposal asking the board to adopt a bylaw proposal to present to the shareholders. Huh? Hey, I have an idea. DGCL Section 109 gives stockholders the right to amend the bylaws of the corporation without the intermediation of the board:
...After a corporation other than a nonstock corporation has received any payment for any of its stock, the power to adopt, amend or repeal bylaws shall be in the stockholders entitled to vote...
There is no need for a precatory proposal and there is certainly no need to ask the board to adopt and present the proposed bylaw to the stockholders. The stockholders can do that themselves without the board. In fact, DGCL Section 112 specifically provides that a corporation's bylaws may include this kind of bylaw:
§ 112 Access to proxy solicitation materials.
The bylaws may provide that if the corporation solicits proxies with respect to an election of directors, it may be required, to the extent and subject to such procedures or conditions as may be provided in the bylaws, to include in its proxy solicitation materials (including any form of proxy it distributes), in addition to individuals nominated by the board of directors, 1 or more individuals nominated by a stockholder. Such procedures or conditions may include any of the following:
(1) A provision requiring a minimum record or beneficial ownership, or duration of ownership, of shares of the corporation's capital stock, by the nominating stockholder, and defining beneficial ownership to take into account options or other rights in respect of or related to such stock;
(2) A provision requiring the nominating stockholder to submit specified information concerning the stockholder and the stockholder's nominees, including information concerning ownership by such persons of shares of the corporation's capital stock, or options or other rights in respect of or related to such stock;
(3) A provision conditioning eligibility to require inclusion in the corporation's proxy solicitation materials upon the number or proportion of directors nominated by stockholders or whether the stockholder previously sought to require such inclusion;
(4) A provision precluding nominations by any person if such person, any nominee of such person, or any affiliate or associate of such person or nominee, has acquired or publicly proposed to acquire shares constituting a specified percentage of the voting power of the corporation's outstanding voting stock within a specified period before the election of directors;
(5) A provision requiring that the nominating stockholder undertake to indemnify the corporation in respect of any loss arising as a result of any false or misleading information or statement submitted by the nominating stockholder in connection with a nomination; and
(6) Any other lawful condition.
So, what's the comptroller up to? If he were serious, why not simply offer the proposal as a bylaw amendment? I'm pretty sure that most of the corporation's on his list are Delaware corporations. Maybe the strategy is to fail for a few years or even to have these pass and then confront boards that don't present bylaws to the shareholders. So, if the strategy is to make a stink and have something to yell about - and perhaps get an article in the NYTimes - well congratulations. If the strategy is to actually change the bylaws to allow stockholders access to the nomination process then this falls short.
Tuesday, November 4, 2014
In the context of a merger and in the making of other decisions, boards are entitled to rely on advice from experts and advisors. When they do so in good faith, board members are "fully protected" to use the words of 141(e). In the wake of Rural Metro, bankers now seem to feel that the target is on them and that they will forever be liable for bad choices of boards. Not so. Chief Justice Leo Strine has posted a paper that lays out some straightforward advice for legal and financial advisors in the wake of Rural Metro. In short, if you do the right thing by your clients, you won't have anything to fear:
This article addresses what legal and financial advisors can do to conduct an M&A process in a manner that: i) promotes making better decisions; ii) reduces conflicts of interests and addresses those that exist more effectively; iii) accurately records what happened so that advisors and their clients will be able to recount events in approximately the same way; and iv) as a result, reduces the target zone for plaintiffs’ lawyers
Chief Justice Strine sums up the problem facing independent directors in going private transactions in the following way:
The worst of all worlds is for independent directors to wake up one day, and find that they not only cannot rely upon the impartiality of management, but that management has also co-opted the company’s long-standing financial and legal advisors, so all of the
most knowledgeable sources of advice are suspect.
When that happens the independent directors must get the strongest possible outside advisors. But often, this does not happen. Instead of getting the best advisors, they often get second- or third-rate financial and legal advisors, while management (advantaged already by its deep knowledge of the company) arms itself with the best.
This is a DANGER SIGNAL, akin to the one at Niagara about the approaching falls. You don’t guard Dwight Howard with Nate Robinson — however much you enjoyed their teamwork in the NBA slam dunk contest a few years ago. If independent directors get weak advisors, they will screw up. They will not do right by the stockholders, they will get sued, and they may lose or at the very least, get publicly embarrassed.
This paper is well worth reading for a number of reasons, including its forthright advice to directors and their advisors. For example, independent directors are well served by examining red-lined versions of the merger agreement. They are also well served by red-lined versions of the financial advisor's power point presentations where changes can happen, but are often overlooked because they are not highlighted or brought to the attention of independent directors:
I am told that the United States of America’s technology capacity is not sufficient to allow for the production of a legible PowerPoint redline or compare rite version. Count me as patriotic. My law clerks over the years have demonstrated an ability to do a compare rite version of most anything. If this is the only hurdle, I believe our nation is capable of vaulting it. Only someone who does not like hot dogs, hamburgers, cheesesteaks, lobster rolls, clam chowder, shrimp and grits, jambalaya, pit beef sandwiches, brisket, barbecue ribs, Good Humor ice cream bars, spaghetti and meatballs, fish tacos, Kentucky Fried Chicken, or things fried at state fairs could question our nation’s ability to do this; in other words, only someone who despises America itself.
Download it and read it for your clients' sake.
Monday, November 3, 2014
This comes up every now and then. It's the question to whom directors of an insolvent corporation owe fiduciary duties. Creditors argue that in the "zone of insolvency" the directors' fidcuiary duties switch to them rather than the stockholders as residual claimants. That formulation has always been troubling because when might the "zone of insolvency" kick in? Hard to say. For example, are internet companies or other start-ups running losses in the "zone of insolvency"? In any event, in Gheewalla the Delaware Supreme Court ruled "creditors of a Delaware corporation that is either insolvent or in the zone of insolvency have no right... to assert direct claims for breach of fiduciary duty against the corporation's directors."
But this issue continues to appear. In its latest version (Quandrant v Vertin), the directors of an insolvent corporation engaged in highly risky transactions that, if successful, would have paid off handsomely for the controlling shareholder, and, if unsuccessful, would have left the corporation an empty shell. Creditors sought to hold directors liable for making risky decisions that would have benefitted the controller at their expense, they argued. This gave Vice Chancellor Laster an opportunity to put his spin on this issue:
I do not believe it is accurate any longer to say that the directors of an insolvent corporation owe fiduciary duties to creditors. It remains true that insolvency "marks a shift in Delaware law," butthat shift does not refer to an actual shift of duties to creditors (duties do not shift to creditors). Instead, the shift refers primarily to standing: upon a corporation's insolvency, its creditors gain standing to bring derivative actions for breach of fiduciary duty, something they may not do if the corporation is solvent, even if it is in the zone of insolvency (citations omitted) ...
The fiduciary duties that creditors gain derivative standing to enforce are not special duties to creditors, but rather the fiduciary duties that directors owe to the corporation to maximize its value for the benefit of all residual claimants.
That may seem subtle, but it's important. Notice that the vocabulary used here is that directors have obligations to maximize the value of the corporation for the benefit of all residual claimants. Even in insolvency, stockholders remain residual claimaints. At no point do we see some sort of magical shifting of duties from the corporation to the creditors. What happens is that once a corporation is insolvent, creditors may gain standing, but the duties of the board do not change. That means boards of insolvent corporations are under no fiduciary duty to preserve capital and resources for the benefit of creditors.
Thursday, October 30, 2014
Nixon Peabody has just released its annual MAC survey. It's worth downloading to check-in on the latest trends with respect to MACs in merger agreements. The biggest change in recent years appears to be the steady adoption of carveouts for changes in legal regulation that might affect the target. So, in the past deals would be able to point to changes in legal regulations that adversely affect the value of the target as reasons to walk, increasingly that's not an excuse that will work any more as more of that risk is shifted to buyers.
Tuesday, October 28, 2014
Last week a number of law professors, led by Dan Sokol, sent a letter to the FCC opposing the Comcast/TimeWarnerCable transaction. You'll remember that this deal requires not only anti-trust approval but also approval of the FCC. In fact, it requires a determination by the FCC that the merger is in the "public interest". The letter takes on a number of Comcast's arguments in favor of the deal, including the "no overlap, no problem" argument, noting that at the extreme this argument leads directly to the conclusion that the FCC should be okay with a single broadband cable provider in the US, which on its face seems absurd.
One thing I had forgotten, but the letter writers correctly focus on: this tie up (Comcast acquiring TimeWarnerCable) involves exactly the same assets (plus more) of a previous deal (AT&T/MediaOne in 2000). The DOJ stepped in and blocked that transaction and blocked it on antitrust grounds. One wonders if the competitive landscape has changed so much since then that this deal is okay. Though there have been some changes to the contours of competition in this space, the basic lay of the land is still the same.
Thursday, October 23, 2014
Lynn LoPucki has posted a 2014 version of the Readable Delaware Corporate Law. I highly recommend it to students, young lawyers and anyone else trying to work through the statute -- and more so if you are attacking the appraisal provisions!
You can download it here.
Wednesday, October 22, 2014
Rick Climan and Keith Flaum's videos on negotiating the merger agreement have become something of a regular feature on this blog. I think Keith and Rick do a great job teeing up the issues, and the animation is almost on par with dogs hearing arguments at the Supreme Court. In this installment Rick and Keith negotiate specific performance and other remedies:
Tuesday, October 21, 2014
Ken Ahern has posted a new paper, Information Networks: Evidence from Illegal Insider Trading Tips
Abstract: This paper exploits a novel hand collected dataset to provide a comprehensive analysis of the demographics and social relationships behind illegal insider trading networks. I find that the majority of inside traders are connected through family and friendship links and a minority are connected through professional relationships. Traders cluster by age, occupation, gender, and location. Traders earn prodigious returns of about 35% over 21 days, where traders farther from the original source earn lower percentage returns, but higher dollar gains. More broadly, this paper provides some of the first evidence on information networks using direct observations of person-to-person communication.
The paper is really interesting. There's a ton of data. Let's start with the most important for my purposes: more than 51% of all insider trading tips involve M&A announcements. Ahern had access to the LexisNexi Public Records Database (LNPRD) for his work and was able to give us a look at who inside traders - who have been caught - are:
There are 622 people in the data set. Of these, 162 people are tippers only, 249 are tippees only, 152 are both tippees and tippers, and 59 are original information sources who do not tip anyone else. Table IV presents summary statistics of the people. Across the entire sample, the average age of the people in the sample is 44.1 years old and 9.8% of the people are women. The youngest person is 19 years old and the oldest is 80. The large majority of insiders (92%) are married.
On of the most common occupation among inside traders is top executive with 107 people. Of these, 24 are board members and the rest are officers. There are 55 mid-level corporate managers and 59 lower-level employees in the sample, including 8 secretaries, 11 information technology specialists, and a few nurses, waiters, and a kindergarten teacher. There are 61 people who work in the “sell side” of Wall Street including 13 accountants, 24 attorneys, 4 investment bankers, and 3 sell side analysts. I divide the “buy side” into two groups by rank in investment firms: there are 60 portfolio and hedge fund managers and 65 lower-level buy side analysts and traders. Small business owners and real estate professionals account for 39 people in the sample and 38 people have specialized occupations, including 16 consultants, 13 doctors, and 9 engineers. There are 135 people for which I cannot identify an occupation.
As a final set of summary statistics, I compare inside traders to their neighbors. For the 448 inside traders that I can identify in the LNPRD [date set], I randomly pick a neighbor of the same gender as the insider. Neighbors are literally next-door-neighbors, as I choose the person that lives on the same street as the insider with the street number as close to the insider’s street number as possible. ... Choosing a comparison sample from the same neighborhood and of the same gender helps to control for wealth, age, and occupation, and highlights the remaining differences between insiders and non-insiders. ...
Insiders are statistically different than their neighbors in many ways. Insiders have a higher likelihood of owning residential real estate, are more likely to be accountants and attorneys, and significantly less likely to be registered as a Democrat, compared to their neighbors. ... [I]nside traders are less likely to declare bankruptcy, but are about twice as likely to have liens and judgments filed against them, compared to their neighbors. ... [I]nsiders are considerably more likely to have a criminal record compared to their neighbors (53.7% versus 12.8%).
And then, there's this: an analysis of the ethnic surnames of the tipper/tippees. The message? Inside traders like to keep their tips within their ethnic group or as currency to buy their way into the dominant 'inside' group.
Very interesting paper. Download it now!
Thursday, October 16, 2014
VC Laster handed down an opinion on damages in the Rural Metro case. You'll remember in Rural Metro, RBC was found liable for aiding and abetting director violations of their fiduciary duties in connection with the sale of the corporation to Warburg Pincus. RBC worked hard to structure the deal so that it might be able to benefit from providing financing to eventual buyer. Worst case for RBC - it didn't get the financing business and its shenanigans later came to light in a courtroom. Not a good look.
The recent opinion set damages at $91 million and assigned $76 million in damages to RBC. The opinion is interesting for those of us who have forgotten that remedies class all those years ago. RBC sought to reduce its potential liability by arguing that others should bear more of the cots of the damages and that RBC should be liable for only its pro rata share. The opinion reminds us that tort feasors are jointly and severally liable for damages.
In this case that means that RBC is on the hook for the entire damages amount with the right to seek contribution from other co-defendants. However, that's not enough. Merely being jointly culpable as other defendant directors were is not sufficient, in order to seek contribution, those co-defendants must also be joint liable.
That's where section 102(b)(7) wreaked havoc on RBC's argument. The exculpated directors were not jointly liable, so damages cannot be reduced by the amount of their potential liability. That left the damages to be shared among RBC and the three non-exculpated directors.
For advisors who might be held liable for aiding and abetting director violations of their fiduciary duties, this point about joint liability and the right to contribution is important because where 102(b)(7) is in the mix, advisers may find themselves all alone when it's time to pay.
Wednesday, October 15, 2014
Another high profile inversion deal may be heading towards termination. The AbbVie board is apparently reconsidering whether to continue its inversion deal with Shire now that Treasury has reduced the economic incentives to do the deal. That's good news for Treasury. This is precisely what Treasury hoped would happen when they announced their new rules. Of course, it's not over, yet. Shire is urging the AbbVie board not to give up. From their statement:
The Board of Shire believes that AbbVie should proceed with the recommended offer on the agreed terms in accordance with the Cooperation Agreement.
The Board will meet to consider the current situation and a further announcement will be made in due course.
The Board of Shire notes that, in the event that the AbbVie Board adversely changes its recommendation and AbbVie stockholder approval is not obtained (or another triggering event occurs), a break fee of approximately $1.635 billion would be payable by AbbVie to Shire.
Wednesday, October 8, 2014
Delaware's state senate is scheduled to convene this afternoon to confirm the nomination of James Vaughn to the Supreme Court. My guess is that - if it's anything like other recent confirmation hearings - it will be a quick affair with perfunctory questions followed by a rapid confirmation vote.
Tuesday, October 7, 2014
The EU Competition Commission approved Facebook's acquisition of WhatsApp last week,m and yesterday Facebook closed the deal:
On October 6, 2014, Facebook, Inc. (the "Company") completed its previously announced acquisition of WhatsApp Inc., a Delaware corporation ("WhatsApp"), pursuant to the terms of an Agreement and Plan of Merger and Reorganization (as amended, the "Merger Agreement") dated as of February 19, 2014, with Rhodium Acquisition Sub II, Inc., a Delaware corporation and wholly owned (in part directly and in part indirectly) subsidiary of the Company ("Acquirer"), Rhodium Merger Sub, Inc., a Delaware corporation, a direct wholly owned subsidiary of Acquirer ("Merger Sub"), WhatsApp, and Fortis Advisors LLC, as the stockholders' agent.The acquisition was accomplished by the merger of Merger Sub with and into WhatsApp (the "First Merger"), and upon consummation of the First Merger, Merger Sub ceased to exist and WhatsApp became a wholly owned subsidiary of Acquirer. The surviving corporation of the First Merger then merged with and into Acquirer, which will continue to exist as a wholly owned (in part directly and in part indirectly) subsidiary of the Company. At the closing, all outstanding shares of WhatsApp capital stock and options to purchase WhatsApp capital stock were cancelled in exchange for an aggregate of 177,760,669 shares of the Company's Class A common stock and approximately $4.59 billion in cash to existing WhatsApp securityholders. A portion of the aggregate consideration is being held in escrow to secure the indemnification obligations of the WhatsApp securityholders. In addition, the Company awarded 45,941,775 restricted stock units ("RSUs") to WhatsApp employees. On the closing date, Jan Koum, WhatsApp's co-founder and CEO, became a member of the Company's Board of Directors (the "Board").
Monday, October 6, 2014
Facebook announced its acquisition of WhatsApp last February. After a lengthy review process in the EU Competition Commission approved the transaction late last week. In approving the deal, the Commission came to the following conclusion:
The Commission found that Facebook Messenger and WhatsApp are not close competitors. Indeed, despite the fact that Facebook Messenger is a standalone app, the user experience is specific given its integration with the Facebook social network. For WhatsApp, access to the service is provided through phone numbers while for Facebook Messenger, a Facebook profile is required. Users seem to use the two apps in different ways and many of them use the two apps simultaneously on the same mobile handset. Furthermore, this is a very dynamic market with several competing apps available on the market, such as Line, Viber, iMessage, Telegram, WeChat and Google Hangouts.
Interesting how they decided that WhatsApp and Facebook Messenger are in different markets.
In this most recent look at the merger agreement, Rick Climan and Keith Flaum think about the "Key Employee" closing condition. These simulated negotiations are always a great way to think about approaching the merger agreement and Keith and Rick do a great job:
Friday, October 3, 2014
Most of the recent tax inversion deals announced over the past summer include closing conditions that permit parties to walk away - often without paying a termination fee - in the event laws or rules are changed to impede the economic value of the inversion structure. Recently, Treasury adopted rules to reduce the economic incentives to pursue inversion transactions. And now, at least one deal has cratered as a result of that change. According to CNBC:
A planned $2.7 billion deal between pharma companies Salix and Cosmo, motivated in part by the opportunity to do a tax inversion, has fallen through.
"There has been a change in the environment after we struck the deal," Alessandro Della Cha, chief executive of Cosmo, told CNBC in a phone call.
"The (U.S.) administration has taken steps to make inversions more difficult and to make it harder to extract the benefits."
In this case, Salix will pay Cosmo a $25 million termination fee to walk away. All is not lost for Salix, of course. You'll remember that in the Allergan/Valeant saga, Allergan is pursuing Salix in hopes that by acquiring Salix, Allergan can deter Valeant from attempting to acquire the combined corporation.
Wednesday, October 1, 2014
Some insider-ish analysis on what led to the nomination of Jim Vaughn to the Delaware Supreme Court from the Delaware Grapevine and the Delaware Law Weekely. Both sources suggest some old-school geographic politics might be at least partly responsible. Vaughn, you see, is from Kent County and getting a representative from Kent County on the court was apparently important. What's interesting about Delaware and its judiciary, if this bit of Kremlinology is true is just how hard Delaware works to create a representative court -- constitutionally mandated political balance and at least implicit geographic balancing. With a nod to now retired Justice Berger, it's worth noting that the court is still not exactly representative. Lots of work to do, still.
Friday, September 26, 2014
I'm a big fan of sports metaphors. With that, I present Samuel Thompson's New Inversions, the 'Joe Frazier Left Hook,' the IRS Notice, and Pfizer:
Abstract: This article discusses the “New Inversions” many U.S. firms are engaging in, as illustrated by the acquisition by a newly formed Irish holding company of the stock of (1) Endo, a U.S. firm and the real acquirer, and (2) Paladin, a Canadian firm and the real target. The article shows how these transactions are rendering a “Joe Frazier Left Hook” to the Treasury’s “Killer B” regulations even after the issuance by the IRS of Notice 2014-32 on April 25, 2014. The article then explores how “Ali” (a.k.a. Treasury) and the Congress can punch back against these transactions.