Thursday, May 2, 2013
Ghosol and Sokol have recently posted a paper, Compliance, Detection and Mergers & Acquisitions. They argue that buyers and sellers use regulatory compliance as a signal for quality in the market for corporate control. Because regulatory compiance is costly, firms with unobserveable high quality will separate from lemons by demonstrating third party compliance, while low quality firms will not. Here's the abstract:
Abstract: Firms operate under a wide range of rules and regulations. These include, for example, environmental regulations (in which some industries have increased regulatory exposure) and finance and accounting (where all industries have reporting requirements). In other areas, such as antitrust cartels, enforcement is unregulated and antitrust leaves the market as the default tool to police against anti-competitive behavior. In all of these areas, detection of non-compliance by a firm can result in significant penalties. This issue of non-compliance has implications in the merger and acquisitions (M&A) context. In a transaction between an acquiring firm (buyer) and a target firm (seller), there is asymmetric information about the target’s quality. In our framework, we link a target’s quality directly to the strength of its regulatory compliance. In an M&A transaction, an acquirer seeks information about the target’s compliance, as a compliance failure may result in substantial penalties and sanctions, post-acquisition. In the presence of quality (compliance) uncertainty about target firms, low quality targets can masquerade as high quality. This would tend to give rise to a M&A market with Lemons-like characteristics, resulting in low transactions prices and dampening of M&A activity. We examine how M&A transactions in such regulatory areas – environmental, finance and accounting, and antitrust compliance problems – might function to alleviate quality uncertainty.
Thursday, October 4, 2012
I suppose that will happen when a large, influential company with a controlling shareholder finds itself in the middle of a phone hacking scandal. That said, the proposed changes to the FSA listing standards are at first glance a relatively extreme move against the power of controlling shareholders.
The FSA proposes to further strengthen the Listing Regime by adopting greater corporate governance requirements for companies with a dominant shareholder. The FSA will increase the tools available to independent shareholders to influence the governance of the companies in which they have invested. These proposals include:
- introducing the concept of a ‘controlling shareholder’;
- requiring an agreement is put in place to regulate the relationship between such a shareholder and the listed company;
- and ensuring that this agreement is complied with on an ongoing basis. This will ensure that the company is managed independently from that shareholder.
The FSA also recognises the important role that the independent directors play in these circumstances. Therefore it will also insist on a majority of independent directors on the board where a controlling shareholder exists and introduce a new dual voting procedure to allow independent shareholders to have more say in their appointment.
The idea here appears to be to take the "control" out of controlling shareholders and put more power to elect directors in the hands of minority/non-controlling shareholders. That's a pretty big move. By isolating controlling shareholders from the boards of the companies that presumably own, that would change the nature of a control position. I know the phone hacking scandal was bad, but this seems like an over-reaction. So, going forward if you own more than 50% of the stock of a UK listed firm, you'll have scarcely more influence over the direction of the firm than a minority shareholder? I wonder whether, following implementation of these listing standards, control premiums will go down for UK listed companies. Worth following as this develops.
Thursday, July 22, 2010
We at the M&A law prof blog haven’t spent much time addressing the new financial reform bill, but those who are interested should definitely read through the terrific masters forum on the Conglomerate addressing various aspects of the bill. There are also many other useful blogs addressing the bill, but it would take a whole page just to list all of them (although do keep up with the Harvard Corporate Governance Blog and the conglomerate for good links).
For day-to-day M&A deals, the most immediate relevant provision is “say on golden parachutes” which requires that in any proxy or consent solicitation for a meeting of shareholders occurring 6 months after the date of enactment of the Act (i.e. starting in January 2011) where shareholders are asked to approve an M&A transaction, companies must provide their shareholders with a non-binding shareholder vote on whether to approve payments to any named executive officer in connection with such M&A transaction. It’s worth taking a look at this Cleary Gottlieb client alert on what exactly this means for M&A deals and what isn’t clear (as you may guess, there is some lack of clarity!). For others who want more detail, Davis Polk (disclosure: my former employer) has a useful 130 page summary of the bill, plus a set of super nifty regulatory implementation slides which are pretty helpful in understanding what needs to be done next. Of course, you can also read all 2300 pages of the bill…
Monday, May 3, 2010
"Say on pay" measures were on the proxy for DuPont and Johnson & Johnson. In both cases shareholders rejected the measures (DuPont here and J&J here). Don't know if that's typical of all say on pay measures. Though I'll admit to being surprised at the results. Meanwhile, the financial reform package making its way through Congress contains a mandatory say on pay provision. Reticence to move too quickly out in front of the Feds might account for the failure of the question at both DuPont and J&J.
Friday, August 7, 2009
On August 3, 2009, the SEC proposed for comment a new rule under the Investment Advisers Act designed to address alleged “pay to play” practices by investment advisers when seeking to manage assets of government entities.
If adopted in its current form, the new Rule would prohibit investment advisers from
- providing advisory services to a government entity for compensation for two years after the adviser or certain of its associates make a contribution to a government official who can influence the entity’s selection of investment advisers.
- making any payment to a third party to solicit investment advisory business from a government entity.
The proposed Rule will affect virtually all private investment fund managers. It takes aim at alleged “pay to play” abuses in New York and New Mexico and is intended to address policy concerns that such payments (i) can harm government pension plan beneficiaries who may receive inferior services for higher fees and (ii) can create an uneven playing field for advisers that cannot or will not make the same payments.
Tuesday, July 7, 2009
On July 2, the FDIC released a Proposed Policy Statement on Qualifications for Failed Bank Acquisitions. The purpose of the release is to provide private investors, including private equity funds, with guidelines regarding the terms and conditions of investments or acquisitions of assets and liabilities of failed banks or thrifts.
Friday, June 5, 2009
The proposed acquisition of Hummer is a bit of an odd deal. In addition to the (non)issue that Hummer
builds a civilian version of the Humvee, which may cause some US-based political questions –
there is now also the issue of Chinese government approval. The WSJ this morning has a good story
outlining some of the issues (here). Most important, every out-bound investment
from China worth more than $100 million must get a government ok. Where transactions are done by a state-owned
enterprise (like the Rio-Chinalco deal that just went south yesterday - here),
then it’s easy to imagine that Chinese government approval will be forthcoming. The gestation periods are long and many times
the acquisitions are part of a government/industry strategy. Such is not quite the case in the Hummer deal. The
English-language China Daily is now reporting that GM and Tengzhong may “have
jumped the gun” with this deal (here). Even
the people’s daily noted in its story
on the transaction that other recent acquisitions of foreign auto brands had
not gone well for the Chinese acquirers (Ssangyong).
Two issues seem to stand in the way of getting the OK from the Chinese government. First, is China’s recent adoption of greener automotive regulations. Buying Hummer is exactly consistent with that objective. Second, Tengzhong is only a 4 year old company with no experience managing an overseas investment and no experience building anything less than a truck. If you’ve tried to visit the company’s website recently, the first question you have to ask is whether the company is up to the task of managing a 3,000 person manufacturing division in the US. It's easy to imagine a Ssangyong-like ending to this transaction.
In any event, if Tengzhong wants to make this transaction happen it will have to get approval from SAFE, the central bank’s foreign exchange regulator and the Ministry of Commerce. SAFE recently began circulating draft regulations (described here). The Ministry of Commerce recently updated its outbound rules (descriptions here and again here) that would loosen the approval process. But, MOFCOM and SAFE remain the gatekeepers for Tengzhong and it’s not yet clear whether they will give an okay to the deal. However, it's still early since apparently the parties haven't even reached a definitive agreement, yet.
Anyone with a China practice who thinks they know how this deal will go down from a Chinese perspective should feel free to leave comments.
Wednesday, August 1, 2007
The Topps Company, Inc. announced yesterday that it had postponed the special meeting of Topps' stockholders to vote on the proposed merger agreement with Michael Eisner's The Tornante Company LLC and Madison Dearborn Partners, LLC to August 30, 2007. The record date is now August 10, 2007.
Upper Deck's competing, higher bid is still in the HSR Act waiting period being reviewed by the FTC or DOJ. The waiting period under the HSR Act for the Upper Deck bid will expire at 11:59 pm ET on August 3, 2007, unless this period is earlier terminated or extended. Given this, Topps had no choice but to postpone its own shareholder meeting. By the time the Topps shareholder meeting is held, the FTC or DOJ will have decided whether to initiate a second request concerning the Upper Deck acquisition proposal; if a second request is made it would postpone the Upper Deck bid by several months at best. In a few days Topps board and its shareholders will thus be in a better position to assess the Upper Deck bid and choose. But the choice will become much harder if a second request is made forcing Topps shareholders to decide between a lower, certain bid and Upper Deck's less sure and delayed higher one. For more see Upper Deck Tries to Buy Time, Topps and Upper Deck: The Antitrust Risk.
Wednesday, July 18, 2007
I'm quoted in today's TheStreet.com article Dow Jones Deal Still a Shaky Prospect on the legality under the federal securities laws of Dow Jones's refusal to disclose that three of its directors either abstained or refused to vote on the News Corp. deal. Given that there is no final, agreed deal on the table at this time, disclosure of the exact composition of the Dow Jones board vote is likely immaterial and Dow Jones therefore not legally required to make it. Nonetheless, good corporate governance practice would generally militate such disclosure.
Thursday, July 12, 2007
The House of Representatives yesterday passed on a 370-45 vote legislation to revise the national security takeover review process overseen by the Committee on Foreign Investments in the United States (CFIUS). The House voted to adopt the Senate bill. Accordingly, The National Security Foreign Investment Reform and Strengthened Transparency Act will now be sent to the President for almost certain signature. For a summary of the final legislative provisions, see this client memo by Wiley Rein here.
The legislation is Congress's response to the uproar 18 months ago over the acquisition of Peninsular & Oriental Steam by Dubai Ports and the ensuing political brawl and heavy congressional protest which led to Dubai Ports terminating the U.S. component of its acquisition. The dispute was always puzzling: Dubai Ports was acquiring an English company with port operations in the United States and Dubai Ports is headquartered in the United Arab Emirates, one of our strongest allies in the Mid-East. Nonetheless, the controversy has now spawned a change in the CFIUS review process. And on the whole, the measure is fairly benign, endorsed by most business organizations and will not bring any significant change to the national security process.
However, the bill does come on the heels of a significant upswing of CFIUS scrutiny of foreign transactions. According to one news report, CFIUS considered 113 transactions in 2006, up 74 percent from the previous year. CFIUS conducted seven second-stage investigations in 2006, equaling the number of the previous five years combined. And while increased national security review can be a very good thing, one hopes that this heightened scrutiny is not just form over substance -- a development which would likely deter foreign investment in the United States. For more on this see my post The Politics of National Security.
Monday, July 9, 2007
The Topps Company, Inc. today announced that its Board of Directors had unanimously recommended that its stockholders reject the pending, unsolicited Upper Deck tender offer. Upper Deck is offering $10.75 a share or $416 million. In connection with their rejection, the Topps board asserted that the terms of the Upper Deck tender offer are substantially similar to the acquisition proposals submitted by Upper Deck to Topps on April 12, 2007 and May 21, 2007. However, Topps stated that it will continue discussions with Upper Deck to see if a consensual transaction is possible. Topps has currently agreed to be acquired by The Tornante Company LLC and Madison Dearborn Partners, LLC for $9.75 a share in cash, or about $385 million. Topps' board has not changed its recommendation for that transaction.
On July 2, Upper Deck, Topps main competitor in the trading card market, filed with the Federal Trade Commission and the Department of Justice the documentation necessary to commence the initial 15-day antitrust regulatory review period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 with respect to the tender offer. The review period is 15 days and not the normal 30 days because it is a tender offer, and the period is scheduled to expire on July 17, 2007. However, there is a strong chance the FTC or DOJ will issue a second request for this proposed transaction, delaying the process. Until this review is completed, Upper Deck will not be able to close its tender offer.
And the antitrust risk is clearly in both parties minds, as Topps 14D/9 filed today details that the substance of the parties' negotiations have concerned antitrust issues. Topps is requesting that Upper Deck agree to a $56.5 million reverse termination fee and a modified hell or high water provision (a provision in which Upper Deck would agree to sell or hold separate assets to satisfy governmental antitrust concerns). Upper Deck has resisted these provision, and the parties have agreed to suspend negotiations on the matter until the antitrust risk is clarified through the HSR process.
Topps was scheduled to hold a shareholders meeting to vote on the Tornante acquisition on June 28. But, the Delaware Court of Chancery enjoined the holding of the meeting to permit Upper Deck to commence its tender offer. Topps has yet to announce the new date for the meeting but has set the record date for the close of business on July 3.
For the time being, the deal is in the hands of the antitrust authorities. If and when they clear the transaction, expect the bidding for Topps to continue. In the case of a second request, Topps may try and push forward with the Tornante bid, perhaps with a sweetener from that consortium to hasten the process. At the very least the market agrees with a higher offer, Topps is trading today at $10.42 as I write, above Tornante's current offer price.
Sunday, July 1, 2007
On Friday, the Senate passed the National Security Foreign Investment Reform and Strengthened Transparency Act of 2007 on a voice vote. The proposed legislation would further amend the Exon-Florio Amendment to heighten scrutiny of foreign acquisitions, increase Congressional supervision of these decisions and enhance federal agency input in the process. The House of Representative had previously on February 28, 2007 approved similar legislation by a vote of 423 to 0. For an analysis of the House bill see my prior post, the Politics of National Security. And for an in-depth analysis of the differences between the House and Senate Bills see this detailed client memo published by Wiley Rein. The differences between the House and the Senate bill are only minor, and the speculation is that lawmakers might therefore bypass the usual conference committee procedure to reconcile these differences; instead, the House could approve the Senate's version of the bill and send it to the White House. As I stated before when commenting on the House version of the bill:
The effect of these changes would be to make our country less-welcoming of important foreign investment. While CFIUS review may be necessary in certain circumstances and this bill is one of the more moderate proposals, the bill could still result in increased and undue scrutiny and politicization of foreign takeovers. We are not France (who has protected its yogurt-maker Danone, from outside takeover, by designating it a national champion). Our success today can relate back to British investment in our country in the 19th century. It would be a shame if we hamstrung our continued growth by unduly and irrationally limiting foreign investment.
Tuesday, June 5, 2007
The Federal Trade Commission on a 5-0 vote yesterday authorized its staff to challenge and seek a temporary restraining order and preliminary injunction in federal district court to halt the Whole Foods Market, Inc.’s approximately $670 million acquisition of Wild Oats Markets, Inc. The Commission's action is based on its view that the deal would violate federal antitrust laws, a position itself premised on a narrow view of the market for natural and organic foods. According to the Commission:
In defining the relevant markets, the Commission found that premium natural and organic supermarkets, such as Whole Foods and Wild Oats, are differentiated from conventional retail supermarkets in several critical respects. These include the breadth and quality of their perishables – produce, meats, fish, bakery items, and prepared foods – and the wide array of natural and organic products and services and amenities they offer. In addition, premium natural and organic supermarkets seek a different customer than do traditional grocery stores. Whole Foods’ and Wild Oats’ customers are buying something more than just the food product – they are seeking a shopping “experience,” where environment can matter as much as price.
The Commission's position here is similar to the one it took when it successfully blocked the merger of Staples and Office Depot. I am no antitrust expert but I am bit skeptical of the Commission's view of this market as an "experience" rather than a simple opportunity to buy higher quality natural or organic food which can otherwise be available elsewhere. This is particularly true since it would appear that barriers to entry are low and there are many other prospective and real competitors even in a narrowly defined organic and natural foods market. According to a piece in the Wall Street Journal yesterday:
J.P. Morgan Securities Inc. estimates the size of the natural-foods market last year was $46 billion and Whole Foods had about 12% of that, with sales of $5.61 billion for the fiscal year ended Sept. 24, 2006. It doesn't hold a significant share of food sales in any of the major U.S. food markets measured; its largest share last year was 5.5% of overall food sales in San Francisco. In contrast, Wal-Mart accounts for at least 10% of supermarket sales in 81 of the top 100 markets in the U.S., J.P. Morgan said.
Between them, Whole Foods and Wild Oats own a bit more than 300 stores in the U.S., Canada and the United Kingdom. By comparison, Kroger, the second-largest supermarket chain behind Wal-Mart, owns about 2,500 grocery stores in 31 states. Wal-Mart, with about 3,000 stores in the U.S. that sell groceries, held a 19% share of overall U.S. retail-food sales last year, according to J.P. Morgan Securities. The world's largest retailer doesn't disclose its natural-foods sales.
At first blush this would appear to establish the foundations of a competitive market -- though maybe not an "experience". And Whole Foods chairman John Mackey echoed my observation in Whole Foods' response to the Commission action:
The FTC has failed to recognize the robust competition in the supermarket industry, which has grown more intense as competitors increase their offerings of natural, organic and fresh products, renovate their stores and open stores with new banners and formats resembling Whole Foods Market.
Thus, although I have little sympathy for Whole Paycheck -- as my friends refer to it -- the Commission action here may be a bit agressive. Moreover, It also appears that the Commission action caught the parties by surprise. Whole Food's acquisition of Wild Oats is structured as a tender offer which likely means that the attorneys thought that they could complete the acquisition in the twenty business day minimum period for a tender offer. If they parties had thought that antitrust review was likely, they would almost certainly have used a merger structure to accommodate the extended time period for such a review. Moreover, a quick scan of the merger agreement shows no unusual provisions dealing with antitrust concerns although the parties do agree therein that Whole Foods will not be required to make any dispositions in connection with using its reasonable best efforts to obtain antitrust clearance. This is a fairly boilerplate provision when no antitrust scrutiny is expected.
Whole Foods announced today that it would challenge the Commission action and its definition of the relevant market, so expect more in the next few days as the federal court considers the Commission's application for a temporary restraining order and preliminary injunction.
Thursday, May 31, 2007
NPR had a nice feature yesterday on the increasing incidence of insider trading and the SEC's detection apparatus. Hint: its related to the private equity/M&A boom. The feature includes commentary by my colleague, noted White Collar Crime expert and White Collar Crime Prof blog editor, Peter Henning. You can listen to the piece here.
Tuesday, May 29, 2007
The N.Y. Times is today reporting that the Federal Trade Commission has opened a preliminary antitrust investigation into Google’s agreed $3.1 billion purchase of DoubleClick, the on-line ad agency. The review only started after the FTC and Justice Department settled a turf war over who could conduct the review. I guess even regulators think Google is hot.
The report is one of a non-event. The FTC review is standard procedure to determine if the agency will initiate a second request. The second request is actually where the FTC will, if it makes one, initiate a more extended review. Still, AT&T, Microsoft and other industry leaders have been lobbying the government for a thorough antitrust review of this deal. And a number of internet non-profits, such as the Electronic Privacy Information Center, a privacy rights group, have been lobbying for government scrutiny based on privacy concerns. The latter is a non-starter for the FTC; the privacy issue is really one for Congress. But still, there has been a flurry of activity in this industry space: WPP has agreed to acquire 24/7 Real Media for $649 million and Microsoft has agreed to acquire aQuantive for $6 billion. I'm no antitrust expert and do not know this market or Google's market-share, but the politics and situation here point towards a second request. I'd also expect Google to try the same thing and turn the tables for Microsoft's aQuantive deal.
Monday, May 28, 2007
My colleague Peter Henning at the White Collar Crime Prof Blog is talking about the mess at Dow Chemicals related to the firing of two senior executives (one also a director) over their alleged unauthorized talks to take the company private. See the post here.
Friday, May 25, 2007
At yesterday's SEC roundtable on proxy voting mechanics, Catherine R. Kinney, president and chief executive officer of Euronext NYSE, announced that the New York Stock Exchange filed a proposal with the SEC the previous day to amend Rule 452 to eliminate broker discretionary voting for the election of directors. Kinney stated "the election of directors is not routine" and therefore should be left to individual shareholders. More controversialy, though, Kinney also announced that the rule would not apply to the election of mutual fund directors but would apply to the election of small company directors. The NYSE said that its decision was made even though its advisory group had "considerable concern and discussion about the potential problems facing smaller issuers as a result of the potential rule change, as well as discussion about the similarities and differences between smaller operating companies and investment companies." The newly proposed rule will now be reviewed by the SEC for publication.
The SEC's roundtable discussions regarding the proxy process concludes today with a panel on proposals of shareholders starting at 9:00 a.m. and ending at noon. I'll update this post with a link to the webcasts for this and yesterday's events once it is posted.
Wednesday, May 23, 2007
The Los Angeles Times is reporting that Oaktree Capital Management LLC, an alternative investment firm with over $40 billion in assets under management, has sold approximately 14% of itself for more than $800 million to less than 50 investors. It was previously reported in the Wall Street Journal that Oaktree was circulating an offering memorandum to sell a 13% interest in itself for $700 million. Oaktree is the latest firm to cash in on the private equity/hedge fund boom and follows in the heels of Fortress Investment Group's successful public offering and Blackstone's pending one.
The Oaktree offering is private and its shares will trade on a new private market developed by Goldman, "GS Tradable Unregistered Equity OTC Market" with the catchy acronym GSTrUE. Information about the market is limited as Goldman has done nothing to publicize it and Oaktree is apparently its first listing. But, according to reports, Goldman is hoping that GSTrUE will become a viable alternative listing market for hedge funds, private equity and operating companies who wish to avoid SEC regulation. Accordingly, the market will be limited to qualifying investment funds with over $100 million in investable assets.
GSTrUE, however, will live under the shadow of U.S. regulation. In order to avoid triggering Exchange Act reporting requirements for any listed company, Goldman and any such listed U.S. entity will need to make sure that the company does not exceed more than 500 shareholders. This will likely place Goldman in the position of forced market maker when the cap is reached. It will also even further reduce liquidity by limiting the number of trading shareholders and shares traded. Moreover, Goldman has not disclosed whether there will be any other market makers for this market, but given the likely low liquidity and shareholder trading limitations, Goldman is likely to set fat spreads on trades. Pricing is also likely to be opaque due to information and analysts' coverage gaps. While Goldman has incentives to maintain lower spreads in order to attract listings, these problems may be why Oaktree's offering values it at only $5.7 billion, a much lower valuation than Fortress and the one mooted for Blackstone. Time will tell if GSTrUE is a success, and it is certainly a worthwhile economic experiment on the validity of private markets, but I believe that GSTrUE's handicaps will likely make it more of a stepping stone for companies on their way to a full public market listing more than anything else.
NB. The L.A. Times is reporting that Oaktree shares are now trading on GSTrUE at $50 a share after being offered at $44. It would be more interesting to know the bid/ask spread.
Friday, May 18, 2007
aQuantive, the owner of RazorFish, today announced it had agreed to be acquired by Microsoft Corp. for $66.50 a share in cash, in a deal valued at approximately $6 billion. aQuantive has already filed the merger agreement for the transaction. Notably, the merger agreement contains a break-up fee of $175 million in cash payable to Microsoft if a higher bid is agreed to by aQuantive. However, if the transaction does not proceed because of a failure to obtain "any required antitrust or competition consent or clearance" Microsoft will be required to pay aQuantive a reverse break-up fee of $500 million in cash. I have no knowledge of the antitrust issues in this purchase, but based solely on the presence of this reverse break-up fee, it appears that aQuantive might have thought there could be an antitrust problem with this transaction. Microsoft is currently challenging Google's $3.1 billion agreement to purchase DoubleClick on antitrust grounds (see the related Dealbreaker post here). If there are antitrust issues with the aQuantive transaction, expect Google to try and turn the tables.
Another week of record M&A transactions, another week of suspected insider trading. This time it involves the announced $3 billion acquisition of Acxiom Corp. by Silver Lake Partners and ValueAct Capital Partners L.P. The experts over at White Collar Crime Prof Blog have the full story.