June 13, 2013
Civil penalty for Revlon
The SEC has just imposed an $850,000 civil penalty on Revlon for misleading disclosures in the run up to its going-private transaction that were the subject of litigation (2009-2010) before the Chancery Court. Vice Chancellor Laster's opinion in In re Revlon S'holder Litig got a lot of attention - in part because of his tongue-lashing of plaintiff's counsel as well as his approval in dicta of forum selection clauses.
The original Revlon transaction called for MacAndrews & Forbes to acquire 100% of the publicly-traded Class A shares. Public shareholders wouldn't receive cash in the transaction. Rather, they would get new Series A Preferred Stock (unlisted) instead. The board was unable to get Barclays to issue a fairness opinion, prompting a change in the structure. Rather than a merger, the board restructured the transasction to be an exchange offer, thus doing away for the messy necessity of special committees and fairness opinions. Vice Chancellor Laster didn't agree.
Turns out the SEC, which scrutinizes 13e-3 disclosures, didn't either. In its order the SEC laid out what it thought was misleading about Revlon's 13e-3 disclosures:
49. Revlon’s third amended exchange offer filing included a section, prominently displayed in bold, entitled “Position of Revlon as to the Fairness of the Exchange Offer.” As a general matter, Revlon disclosed in this section the view of its Independent Board members concerning the fairness of the transaction.
52. Revlon disclosed: “The Board of Directors approved the Exchange Offer and related transactions based upon the totality of the information presented to and considered by its members.” Second, in a related disclosure, Revlon, in disclosing the positive factors it considered for the exchange offer, noted that “the exchange offer . . . [was] unanimously approved by the Independent Directors . . . who were granted full authority to evaluate and negotiate the Exchange Offer and related transactions.”
53. As represented by Revlon to its minority shareholders, the Board’s process in evaluating and approving the exchange offer was full, fair, and complete. The Board’s process, however, was not full, fair, and complete. In particular, the Board’s process was compromised because Revlon concealed – both from minority shareholders and its Independent Board members – that it had engaged in a course of conduct to “ring-fence” the adequate consideration determination.
54. Accordingly, Revlon’s disclosures about the Board’s evaluation of the exchange offer were materially misleading to minority shareholders. Moreover, Revlon’s “ring-fencing” deprived the Board, and in turn, minority shareholders of the opportunity to receive revised, qualified, or supplemental disclosures, including any that might have informed them of the third party financial adviser’s determination that the transaction consideration to be received by 401(k) members in connection with the transaction was inadequate.
55. Third, Revlon materially misled minority shareholders when it stated that unaffiliated shareholders – which included Revlon’s 401(k) members – could decide whether to voluntarily tender their shares. Revlon cited the voluntary nature of the exchange as a positive factor on which the Board relied in approving the exchange offer.
56. In fact, all minority shareholders – as well as its Independent Board members – were unaware that Revlon’s 401(k) members would not be able to tender their shares if an adviser found that the consideration offered for their shares was inadequate. Moreover, Revlon’s non-401(k) minority shareholders were not on equal footing with Revlon’s 401(k) members because Revlon’s 401(k) members received protection as a result of the adviser’s finding that 401(k) members were not provided adequate consideration.
OK, so that's not very pretty. Although the SEC does give 13e-3 filings extra scrutiny, it's not as often that they come in after a transaction and impose fines, so an administrative proceeding here is uncommon. Plaintiff's counsel in Delaware ultimately settled claims in this case for $9.2 million. Fidelity settled its claims with the company on its own got $19.9 million. Now, tack onto that an addtional $850,000 for the SEC.
November 06, 2012
Disclosure and value creation ... or not
Two interesting papers that raise the question of the true value of disclosure. The first is by Steven Davidoff and Claire Hill, Limits of Disclosure. Disclosure has been a common regulatory device since it was by Louis Brandeis ("Sunlight is said to be the best of disinfectants", Other People's Money). Indeed, our system of securities regulation is built upon this premise. Davidoff and Hill look at just how effective disclosure was in the run up to the financial crisis with respect to retial investors and in regulation of executive compensation. They come away disappointed:
The two examples, taken together, serve to elucidate our broader point: underlying the rationale for disclosure are common sense views about how people make decisions — views that turn out to be importantly incomplete. This does not argue for making considerably less use of disclosure. But it does sound some cautionary notes. The strong allure of the disclosure solution is unfortunate, although perhaps unavoidable. The admittedly nebulous bottom line is this: disclosure is too often a convenient path for policymakers and many others looking to take action and hold onto comforting beliefs in the face of a bad outcome. Disclosure’s limits reveal yet again the need for a nuanced view of human nature that can better inform policy decisions.
In another paper, Jeffrey Manns and Robert Anderson, The Merger Agreement Myth, take on the question of whether M&A lawyers are really creating any value or if they are just haggling over nits that no one cares about. Manns and Anderson conduct an event study to figure out whether there is value to all that drafting. They take advantage of the fact that not all merger agreements are filed with the SEC on the same day they are announced. So, they look for stock price changes that they can attribute to the addition of new information after the market learns about the terms of the merger agreement. If lawyers add value, they hypothesize that prices should rise after the market has learned the terms of the agreement - that's the value attributable to lawyers. It's basically a disclosure argument. If disclosure works, then the market should be able to instantly - or reasonably quickly - absorb new information and have that information reflected in stock prices. Like Davidoff and Hill, Manns and Anderson come away disappointed:
Our analysis shows that there is no economically consequential market reaction to the disclosure of the acquisition agreement. Markets appear to recognize that parties publicly committed to a merger have strong incentives to complete the deal regardless of what legal contingencies are triggered. We argue that the results suggest that M&A lawyers are fixated on the wrong problems by focusing too much on negotiating “contingent closings” that allow clients to call off a deal, rather than “contingent consideration” that compensates clients for closing deals that are less advantageous than expected. This approach can enable M&A lawyers to protect clients against the effects of the clients’ own managerial hubris in pursuing mergers that may (and often do) fall short of expectations.
So, disclosure as a regulatory device, or as a determiner of value, is not that successful and suggests we start looking elsewhere.
April 18, 2012
Is China's love affair with US capital markets over?
Not two years ago, reverse mergers with little known Chinese firms was all the rage. The reverse merger was a cheap way to get a private Chinese (or any other) company public. Chinese firms took a liking to this backdoor to the US capital markets more than anyone else. So much so that it caused the SEC to investigate the practice and toughen up some of the listing standards in this area.
Now, we are seeing more and more of the following:
Shengtai Pharmaceutical, Inc. (OTC Bulletin Board: SGTI) ("Shengtai" or "the Company" or "We" or "Us"), a manufacturer and distributor in China of glucose and starch as pharmaceutical raw materials and other starch and glucose products, today announced that its Board of Directors has received a preliminary, non-binding proposal from its Chairman and Chief Executive Officer, Mr. Qingtai Liu ("Mr. Liu"), which stated that Mr. Liu intends to acquire all of the outstanding shares of the Company's common stock not currently owned by him and his affiliates in a going private transaction at a proposed price of $1.65 per share in cash.
Of course, Shengtai wasn't always Shengtai Pharmaceuticals. In 2007, it was known as West Coast Car Company. Control was transferred to Shengtai when Chinese investors bought the majority of shares in West Coast Car in 2007.
In recent months there has been a growing string of Chinese firms listed in the US going private. Apparently, the US capital markets aren't laid with gold. Listing and disclosures standards make it expensive for a low quality company to stay public, so they go private. That should be a good thing. Of course, we now have the JOBS Act that will reduce the costs of staying public for so-called "emerging companies" so perhaps there will be an incentive for these Chinese rever merger companies to stay public if they can get themselves categorized as "emerging companies."
March 22, 2012
We tend to steer very clear of politics on this site, so I wouldn't usually weigh in on a bill before Congress, but please permit me to vent. Apparently, in a fit of bipartisan insanity, the Congress has decided that the proper lesson to be learned from the Financial Crisis of 2008 and the Dot Com bubble of the previous decade is that we need not protect investors!
Put simply, the proposed JOBS bill is a potential disaster for investors and for the integrity of US capital markets.
The proposed legislation (HR 3606) will exempt "emerging growth companies" from most disclosure requirements for up to five years following their IPOs. Okay, maybe small public companies can't afford the costs of compliance. But wait ... what's this?
The term `emerging growth company' means an issuer that had total annual gross revenues of less than $1,000,000,000 during its most recently completed fiscal year.
$1 billion in revenue is "emerging"?! I've just fallen off my chair. Someone pick me up. Here's a representative list of companies with less than $1 billion in revenue that might potentially fall under this definition. This is really just a license to for low quality firms to go public at the expense of the investing public. If investors really want to invest in crappy small companies, they should go to London's AIM. I don't understand why everyone in Congress is happily racing towards this cliff.
One of the biggest criticisms of Sarbanes Oxley after it passed was that it represented "quack corporate governance". There's something to that, but I don't think the best response is to roll it back and replace it with quack deregulation.
Professor John Coates analysis of the various proposals working their way through Congress is well worth a read.
July 20, 2011
Is this unlawful?
According to this story from Bloomberg, the SEC
sued a Michigan man, claiming he traded on information he learned from a houseguest about the impending acquisition of Brink’s Home Security
investment banker for Tyco International Inc., the buyer, inadvertently left behind a draft presentation on the deal.
According to the SEC, months later, the homeowner discovered the draft. Another month or so after the discovery, the homeowner intuited from changes in the banker’s travel schedule that the transaction was imminent.
According to the SEC, the homeowner profited from trading in Brink’s stock after the public announcement of the deal caused its price to jump 30 percent.
The homeowner's lawyer said his client has settled the case and will turn over his profits and pay a fine.
Obviously the facts are incomplete, but I wonder if Professor Bainbridge would have advised the homeowner to fight the case.
August 16, 2010
Latham & Watkins on Cheap Stock Issues
In this helpful Client Alert Latham & Watkins reviews the accounting and tax issues associated with equity awards to company employees during the months preceding an IPO, and provides a summary of the related concerns of the Staff of the SEC. The alert includes specific, practical guidance on how to avoid cheap stock issues during the SEC Staff’s review of an IPO registration statement.
June 28, 2010
The Supreme Court just handed down its opinion in the PCAOB case. The court ruled along familiar 5-4 lines that the way the accounting board was created in violation of the President's appointment power. From the opinion:
The Government errs in arguing that, even if some constraints on the removal of inferior executive officers might violate the Constitution, the restrictions here do not. There is no construction of the Commission’s good-cause removal power that is broad enough to avoid invalidation. Nor is the Commission’s broad power over Board functions the equivalent of a power to remove Board members. Altering the Board’s budget or powers is not a meaningful way to control an inferior officer; the Commission cannot supervise individual Board members if it must destroy the Board in order to fix it. Moreover, the Commission’s power over the Board is hardly plenary, as the Board may take significant enforcement actions largely independently of the Commission. Enacting new SEC rules through the required notice and comment procedures would be a poor means of micro-managing the Board, and without certain findings, the Act forbids any general rule requiring SEC preapproval of Board actions. Finally, the Sarbanes-Oxley Act is highly unusual in committing substantial executive authority to officers protected by two layers of good-cause removal.
I'll admit it, there's a
I'll admit it, there's alittle too much con law on this blog for me these days.
Update: The Court's ruling that the appointments process used to staff PCAOB is unconstitutional does not mean that the entire Sarbanes-Oxley Act is unconstitutional. The court considered the question severable:
We reject such a broad holding. Instead, we agree with the Government that the unconstitutional tenure provisions are severable from the remainder of the statute. “Generally speaking, when confronting a constitutional flaw in a statute, we try to limit the solution to the problem,” severing any “problematic portions while leaving the remainder intact.” […] Because “[t]he unconstitutionality of a part of an Act does not necessarily defeat or affect the validity of its remaining provisions,” […] the “normal rule” is “that partial, rather than facial, invalidation is the required course,” Putting to one side petitioners’ Appointments Clause challenges (addressed below), the existence of the Board does not violate the separation of powers, but the substantive removal restrictions imposed by §§7211(e)(6) and 7217(d)(3) do.”
The PCAOB Appointments Clause falls. The rest of it stands.
May 06, 2010
Did Buffet's Berkshire Run Afoul of Disclosure Rules?
Maybe, but so what? The WSJ and Reuters are reporting that Berkshire Hathaway may have run afoul of the Williams Act's early warning disclosure requirements by not filing a timely amendment to its Schedule 13D in connection with its acquisition of Burlington Northern Santa Fe Corp last Fall. Berkshire filed its second amendment to its Schedule 13D in order to report that it had signed a merger agreement with Burlington Northern on November 3, 2009. Rule 13d-2 requires that if there are any material changes to the facts set out in the Schedule 13D that the filer is required to amend the filing. In this case, the original Schedule 13D filed in 2008 noted that the investment was for "investment purposes" and did not disclose any intention to acquire all of BNSF. Reading the rule strictly, the moment Berkshire's purpose for holding the shares turned from investment to acquiring control, Berkshire had an obligation to amend its 13D (within 10 days). Presumably the merger negotiations took longer than 10 days to initiate and complete.
OK, so maybe there was a technical violation. But, there's no NACCO-like fraud allegation or shareholder suit to go along with this violation. There's just discussion of the SEC looking into the matter. Is there any remedy worth pursuing here? I guess the SEC could seek an order to cause Berkshire to come into compliance. But, with its November 3, 2009 filing Berkshire is already in compliance. There isn't much to be done and there's hardly seems a remedy worth pursuing.
May 03, 2010
Shareholders Saying "No" to Say on Pay
"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.
November 05, 2009
Schapiro on Shareholder Access
SEC Chair Mary Schapiro's address (yesterday) to the PLI on shareholder voting and proxy access is here. Her thoughts on shareholder access (in part):
I believe that the most effective means of promoting accountability in corporations is to make the shareholders' vote both meaningful and freely exercised. One of the most important matters presented for a shareholder vote is the election of the board of directors. However, in most cases today, shareholders have no choice in who to vote for.
They get a ballot in the mail or electronically. And they are presented with a slate of nominees. Most of the time, it's as many nominees as there are positions to fill. And, the nominees are the individuals whom the board itself has chosen.
Looks like the SEC is also taking on the question of empty voting and over-voting as well. That's quite a full plate.
We'll be asking about ways to ensure accuracy in vote tabulation, given that voting results on many items are becoming increasingly close and many companies have adopted majority voting for directors.
We'll be asking about whether our rules adequately address whether votes are cast by those with an economic interest in the securities. In some cases, for instance, a broker's customers may cast more votes than the broker is actually entitled to vote on their behalf — something called "overvoting". And in other cases, individuals are able to vote shares even though they lack the full economic interest that goes along with share ownership — known as "empty voting."
November 03, 2009
13(d) and 13(g) Staff Interpretations
Question: A husband and wife share the same household. One spouse beneficially owns more than five percent of a voting class of equity securities registered under Section 12 of the Exchange Act. Is the other spouse deemed the beneficial owner of the same securities under Rule 13d-3(a) by virtue of their marital relationship alone?
Answer: No. For purposes of Regulation 13D-G, an analysis of the facts and circumstances is necessary in determining whether a husband, wife or child beneficially owns shares held by another family member sharing the same household. The relationship between family members should be analyzed to determine whether a family member directly or indirectly either has or shares voting and/or dispositive power over the shares held by any other family member living in the same household.
September 06, 2009
Tinker Bell has her Say on SEC Shareholder Access Proposal
On Friday, The Dealbook helpfully linked to some of the comments submitted in response to the SEC's "shareholder access" proposal. There are lots of comments and they cover a wide variety of issues related to the access proposal. A general line of argument submitted by many is one, I think, that makes a lot of sense. While more shareholder access is good, the SEC's proposal may be moving too quickly.
OK, I know that's hard to imagine that an issue like this that has been floating around for years in one form or another is "moving too quickly", but Delaware just amended its code to permit shareholders to adopt bylaws requiring the corporation to include sharheolder nominees on the ballot and bylaws requiring reimbursement of shareholder expenses in connection with such nominations.
The comments from the Delaware Bar Association provide a nice summary of the issues related to DGCL 112 and 113 and the proposed rule 14a-11. As the comments from Wachtell and O'Melveny point out, after 2006 when Delaware adopted amendments permitting the adoption of majority voting proviions, there has been a flood of private ordering in that area. My sense is that while O'Melveny is neutral on that outcome, Wachtell is predictably less happy.
In any event, rather than move forward now on a "one-size-fits-all" shareholder access proposal, why not wait some more and see what the impact of the DGCL amendments is? The response by shareholders following the majority voting amendments has been significant. There's no reason to believe that there won't a similar response by shareholders in the wake of the 2009 DGCL amendments with respect to shareholder access - all that without additional moves by the SEC. If the SEC is serious about allowing shareholders more power, then it seems obvious that they should sit back and wait before adopting 14a-11.
August 07, 2009
Proskauer on Pay to Play
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.
July 22, 2009
Empty Voting and 13D Filings
Been off doing summer-like things for the last few days. Hey, it’s summer! The WSJ reports today that SEC has fined Perry Corp $150,000 in connection with its failure to file a timely 13D following its acquisition of nearly a 10% position in Mylan stock in 2004. At the time time, Mylan was in the process of acquiring King Pharmaceuticals. Carl Icahn acquired a significant stake in Mylan and disclosed his opposition to the transaction. Perry Corp (an arb) quietly accumulated a block of shares of Mylan similar in size to that of Icahn in order to vote for the transaction and increase the likelihood of its approval. Perry was able to hedge its position through a series of swaps. Ultimately, Perry held nearly 10% of Mylan’s voting shares but had successfully left behind any economic exposure. In effect, Perry was through these transactions to buy votes without the accompanying economic exposure.
Academics jumped on this transaction as an example of “empty voting” – see papers from Black & Hu and Kahan & Rock. Delaware responded by making amendments to its corporate law (new Sec. 213) that will make it harder (though not impossible) to accomplish the same series of transaction. The new Sec 213(a) permits boards to fix two separate record dates – one date for determining those stockholders entitled to notice of a meeting and a second date (closer to the meeting date) for determination of stockholders entitled to vote at the meeting. The date for determining who may actually vote may be any date, including the date of the meeting.
Now the SEC has weighed in (Administrative Order In the Matter of Perry Corp). When Perry undertook its hedges in connection with the Mylan-King transaction it did not file a timely Schedule 13D which would have required it to disclose its position and its intentions. Perry sought out legal advice of its regular outside counsel. Apparently Perry’s outside counsel advised Perry that it had to file a 13D because the block was accumulated in “a merger situation.” Engaging in a bit of legal arbitrage, Perry consulted another lawyer (“Lawyer B”) who provided a different answer – “assuming the purchase of Mylan shares is ordinary course for Perry …, I think you can file a 13G if a filing is necessary.” Filing a 13G and not a 13D would permit Perry Corp to delay filing so that it would not have to disclose its position to the market during the period before the stockholder vote.
The SEC has a different opinion.
When institutional investors acquire, directly or indirectly, the beneficial ownership of securities with the purpose of influencing the management or direction of the issuer or affecting or influencing the outcome of a transaction – such as acquiring securities, or an interest in securities, for the purpose of voting those securities in favor of a merger – the acquisition of those securities cannot be said to be in the “ordinary course of [the institutional investor’s] business” for purposes of relying on Rule 13d-1(b) or making the certification under Item 10 of Schedule 13G.
The lesson here is that empty voting bothers a lot of people, particularly regulators the wrong way. Delaware is trying to provide boards the tools through the setting of record dates to fight it. And the SEC will use its disclosure rules to ensure that even if parties are able to structure such transactions that they are required to make timely disclosure to the market.
July 01, 2009
SEC Considering New Director Rules
According to Bloomberg, the SEC commissioners will meet today to consider proposing "Armstrong celebrity" director rules. The webcast of the meeting, set to start at 10AM (ET), is here. More disclosure about director nominees and their qualifications is probably a good thing - especially as we move toward increased shareholder access to the proxy.
However, I wonder how big a problem this really is. The SEC has been gradually tigtening the screws on director nominations and qualifications. SOX has placed added burdens on directors. If you're a celebrity, why would you want the hassle?
At the same time directorships appear to be a tight club -- take a look at the board of Apple if you don't believe me. If you're not CEO of another large corporation or former VP, then you're probably not going to get on the Apple board, even if you are Lance Armstrong. This does raise the question however, just how effective a monitor can one be if one is also CEO of a large company, like Avon. I'm sure Ms. Jung is a very capable CEO, but she's also on the board of GE as well as that of Apple. I wonder if the SEC might better spend their time thinking about limiting the number of board assignments that full-time CEOs take on. The new CEO job is supposed to be all encompassing, isn't it? How does that leave much time to monitor management and provide strategic advice to another company? Not to mention two or more. It might be worth the SEC giving some consideration to Ron Gilson and Reinier Kraakman's proposal.
June 24, 2009
SEC Commissioner Paredes' View on Shareholder Access
Commissioner Paredes shared his dissenting view on the new shareholder access proposal in a speech before the Chanber of Commerce yesterday. The text of the speech is here. He argues that states are best able to tailor approaches to the corporate law, in particular that Delaware has an enabling statute intended to provide shareholders with flexibility in designing their relations with management. He points to DGCL new sections 112 and 113 as examples of Delaware's flexibility. One might also point to the new North Dakota Public Company chapter of its corporation code as an example of state flexibility and tailoring. Its section 10-35-08 provides for shareholder access to the corporate proxy on terms largely similar to those proposed by the SEC.
June 15, 2009
Proposed Shareholder Access Rules Available for Comment
The proposed amendments to the proxy rules to require companies to include disclosures about shareholder nominees for director in the companies’ proxy materials, under certain circumstances, so long as the shareholders are not seeking a change in control require companies to include shareholder nominees for director in the companies’ proxy materials. This requirement would apply unless state law or a company’s governing documents prohibits shareholders from nominating directors.