May 07, 2013
Takeover defenses in IPO firms
Wilmer Hale has put out its annual M&A report. There are a couple of interesting data points worth looking at. In particular is the table below - Takeover Defenses in IPO Firms. Notice that the basic tendancy to go public with lots of takeover defenses is consistent with findings from Daines and Klausner more than a decade ago (Do IPO Charters Maximize Firm Value?). That much hasn't changed. Indeed, in recent years, there has been a noticeable uptick in tech firms going public with dual-class stock, entrenching entrepreneurs (7% in Wilmer's sample). Also, adoption of exclusive forum provisions in certificates of incorporation appears to be reaching a critical mass - 27% of all IPOs and 44% of all PE backed IPOs. Oh, and don't be fooled by the fact that only 2% of firms go public with poison pills in place. People should stop counting that number. Every board has an implicit pill in place.
It's interesting. Give it a look.
March 18, 2013
Canadians reconsider the pill
There was news from up North late last week. The Canadians are considering some adjustments in their current approach to the poison pill. Presently, pills are permitted only as temporary devices that be held in place for only so long as to delay a hostile bid so that a target board can educate its shareholders and perhaps put together some sort of alternate strategy or transaction. Let's call the Canadian approach to rights plans the Interco pill. In general, Canadian approaches to takeover defenses are very much in line with Chancellor Allen approach in Interco. That is to say, in the face of an unwanted offer, the board should be motivated to either educate the shareholders of the correctness of the board's position or look to develop an acceptable alternative for shareholders. To the extent boards deploy takeover defenses they should facilitate the ability of the board to engage in either education or in increasing value for shareholders.
The draft amendments (here) to their rules on shareholder rights plans intend to make a number of subtle, but important changes in approach that nudge them closer to a US styled approach to poison pills. The amendment require approval of a majority of the disinterested shareholders withing 90 days of the pill being adopted. Any material amendments to the rights plan will require an additional shareholder vote. Then, in order for a board to keep a pill in place, the board will have to go back to shareholders annually to seek approval. Finally, a majority of disinterested shareholders could vote to terminate the rights plan at any time.
This new draft approach is a step back from the previous Canadian approach, which involved a regulator in the provincial securities regulator making a substantive determination about the reasonableness of director actions to keep a pill in place. Guided by their Interco-like principles, the question for Canadian regulators was not if a pill should remain in place, but when it should be pulled. Now, that may change. Of course, this isn't necessarily a bad thing. Nor should it necessarily be interpreted as moving towards an American (U.S.) styled approach to pills. Up in Canada undere the proposed pill regime, disinterested shareholders will have plenty to say about whether or not a pill is permitted to remain in place. Rather than make arguments to a regulator, boards will be required to make their case directly to the shareholders if they want to keep pills in place. That's not a bad thing.
December 04, 2012
Gibson Dunn on "Don't Ask, Don't Waive" Standstill Provision
The typical M&A confidentiality agreement contains a standstill provision, which among other things, prohibits the potential bidder from publicly or privately requesting that the target company waive the terms of the standstill. The provision is designed to reduce the possibility that the bidder will be able to put the target "in play" and bypass the terms and spirit of the standstill agreement.
In this client alert, Gibson Dunn discusses a November 27, 2012 bench ruling issued by Vice Chancellor Travis Laster of the Delaware Chancery Court that enjoined the enforcement of a "Don't Ask, Don't Waive" provision in a standstill agreement, at least to the extent the clause prohibits private waiver requests.
As a result, Gibson advises that
until further guidance is given by the Delaware courts, targets entering into a merger agreement should consider the potential effects of any pre-existing Don't Ask, Don't Waive standstill agreements with other parties . . .. We note in particular that the ruling does not appear to invalidate per se all Don't Ask, Don't Waive standstills, as the opinion only questions their enforceability where a sale agreement with another party has been announced and the target has an obligation to consider competing offers. In addition, the Court expressly acknowledged the permissibility of a provision restricting a bidder from making a public request of a standstill waiver. Therefore, we expect that target boards will continue to seek some variation of Don't Ask, Don't Waive standstills.
December 4, 2012 in Cases, Contracts, Deals, Leveraged Buy-Outs, Litigation, Lock-ups, Merger Agreements, Mergers, State Takeover Laws, Takeover Defenses, Takeovers, Transactions | Permalink | Comments (0) | TrackBack
October 11, 2012
Better bureaucrats, please ... and Benefit Corporations
Like many other states, Massachusetts has recently passed an amendment to its corporate law that permits the incorporation of "Benefit Corporations" (Chapter 238, Section 52). I have opinions about whether this is anything more than just a marketing effort, but let me put those to the side for the time being. Here, I'd like to focus on the fact that the Secretary of State of the Commonwealth of Massachusetts apparently has a tenuous grasp on what the corporate law of Massachusetts presently is. In the Commonwealth's official notice and FAQ for Benefit Corporations, the Corporations Division describes the need for Benefit Corporations, thusly:
What are benefit corporations?
Benefit corporations are corporations organized under Chapter 156A (the professional corporation statute) or Chapter 156D (the business corporations statute) that have elected to be a benefit corporation in their Articles.
Benefit corporations are similar to traditional for-profit corporations but they differ in one important respect. While directors and officers of traditional for-profit corporations must focus primarily on maximizing financial returns to investors, the directors and officers of benefit corporations are expressly permitted to consider and prioritize the social and environmental impacts of their corporate decision-making.
For example, the directors of a traditional for-profit corporation faced with financial difficulty may opt to build up cash reserves by laying off employees in order to fulfill their fiduciary duty to prioritize returns to investors. A benefit corporation's directors faced with similar economic circumstances could prioritize retaining the corporation's workforce through hard times, opting to dip into cash reserves to do so, in order to pursue the corporation's public benefit goals.
Or ... the board of a for-profit corporation could simply decide to not lay-off employees and not face any repercussions from shareholders for a decision (not to lay-off workers when times are tough) that already is well within their rights.
I've written on this before in the context of state anti-takeover laws. Constituency statutes were adopted here in the Commonwealth during LBO boom to help give directors the power to resist unwanted offers. Currently, the directors of a Massachusetts corporation can put "shareholder maximization" behind the interests of employees, suppliers, creditors, whatever. Here's 156D, Sec. 8.30:
Section 8.30. GENERAL STANDARDS FOR DIRECTORS
(a) A director shall discharge his duties as a director, including his duties as a member of a committee:
(1) in good faith;
(2) with the care that a person in a like position would reasonably believe appropriate under similar circumstances; and
(3) in a manner the director reasonably believes to be in the best interests of the corporation. In determining what the director reasonably believes to be in the best interests of the corporation, a director may consider the interests of the corporation’s employees, suppliers, creditors and customers, the economy of the state, the region and the nation, community and societal considerations, and the long-term and short-term interests of the corporation and its shareholders, including the possibility that these interests may be best served by the continued independence of the corporation.
So ... a director of a MA for-profit corporation is presently under no legal obligation to put the maximization of short-term shareholder value/returns over interests towards constiuencies of the corporation, like employees. It's true that constituency statutes were originally adopted as anti-takeover statutes and they still play that role. But, for a publicly minded corporate board, the constituency statutes in place already provide plenty of legal cover to pursue public benefit in the corporate form.
I'll have more to say on Benefit Corporations later. For now, I am wondering whether Benefit Corporations might be a back door into supercharged state anti-takeover protections for firms that opt in? I don't think it's necessary, but lawyers have been known for pursuing belt-and-suspender defenses.
June 01, 2012
HGS pill suit fails to get TRO
Plaintiffs in the Maryland suit against the HGS board yesterday failed in their bid to get a order to force the board of HGS to pull the pill they put in place last month:
A Montgomery County Circuit Court judge shot down an HGS shareholder’s request for a temporary restraining order to invalidate the “poison pill” the Rockville biotech enacted last month to make it a less attractive acquisition target.
The biotech was sued by shareholder Duane Howell of Baltimore, who claims its management is cheating him, other stockholders and the company itself by rejecting GlaxoSmithKline’s $2.6 billion offer in April, and then instituting the shareholder rights plan, or poison pill. ...
Judge Michael D. Mason said Thursday that HGS had properly accounted for its actions with its shareholders when it issued the poison pill May 16.
No surprise here, I suppose. The bigger surprise would have been if the Maryland judge had ignored both Delaware and Maryland law and order the pill pulled. Odd though, Bloomberg reports that the judge in this case qas concerned that only one shareholder, the litigant, was complaining:
After a hearing on Thursday, Montgomery County Circuit Court Judge Michael Mason denied Howell's request, saying only one shareholder had sued the company, according to a report by Bloomberg News.
"This is not a case where a number of disgruntled shareholders have come to court up in arms," the judge said in court, according to the report.
Even under Maryland law, the number of plaintiffs shouldn't matter to the result. Hmm.
February 06, 2012
Marcus on Confis and Hostile Acquisitions
David Marcus at The Deal had an interesting piece over the weekend on the role of confidentiality agreements in the context of hostile acquisitions. He focuses on confidentiality agreements in the Vulcan/Martin Marietta transaction and the Westlake/Georgia Gulf transaction. It's a good read. Marcus also offers up the following chart from Dealogic:
I'm curious as to how Dealogic defines "successful" - I suppose that a deal that starts hostile and then ends up with a negotiated transaction is considered successful. That's one way to think about it. But that does an injustice to the power of the poison pill. I doubt there are any deals on this list of US targets where a hostile bidder has been successful over the continued protests of the target board with a pill in place.
January 12, 2012
Davidoff on Airgas
Steven Davidoff has just posted a nice case study of the Airgas decision forthcoming in the Columbia Business Law Review. Steven had a front-row view of the Airgas hostile offer and subsequent litigation. (Google Deal Prof and Airgas if you don't believe me.) In this paper, Steven revisits the class through the prism of Delaware's judges as strategic actors. The role of Delaware's judiciary is fascinating and this paper - and the Airgas episode - is an important contribution to understanding how and why Delaware's courts decide as they do. It's well worth a read.
Abstract: When is it appropriate for Delaware judges to act strategically? This case study documents and analyzes Air Products’ $5.8 billion unsuccessful, hostile offer for Airgas, reviewing the decisions made by the Delaware courts in adjudicating the most prominent takeover bid of 2010. The three court opinions in Air Products v. Airgas show how Delaware courts strategically decide cases and the effect of this decision-making on the course of Delaware corporate law and Delaware’s constituencies. The Airgas case ultimately provides a useful lesson for when, if ever, strategic considerations should influence the outcome of individual Delaware corporate law disputes.
November 17, 2011
Steele on Pills and the Intermediate Standard
In early October, Chief Justice Myron Steele participated in a session in Canada about shareholder rights plans in the US and Canada. The International Law Office has posted summaries of the panel discussion. Steele's comments are interesting:
The chief justice suggested that the view that Delaware law allows a board of directors to 'just say no' to a hostile offer has been overstated. In the context of appropriate findings of fact that a poison pill is no longer reasonable or that there is no sufficiently articulated long-term strategy that requires protection, he suggested that a case could be made for a mandatory injunction removing a poison pill under Delaware law.
When Gilson and Kraakman wrote their paper, Delaware's Intermediate Standard for Defensive Tactics: Is There Substance to Proportionality Review?, they recommended that the court adopt a stance that would inject substance into proportionality review by requiring boards who wished to adopt and maintain defensive measures against an unwanted, but otherwise noncoercive offer, to articulate a long term strategy that they would have to live with. Could it be that Steele is open to a Gilson/Kraakman like approach to proportionality review? That might breathe new life into Unocal.
But those weren't the only comments made by Steele:
Steele noted that the analysis is determined primarily by the facts found in each decision. Findings of fact made by the Court of Chancery are accepted on review by the Delaware Supreme Court unless they are clearly erroneous. Steele suggested that, with appropriate findings of fact, a pill could be removed under Delaware law. ...
Steele noted that there was a tension between the view, on the one hand, that the board should have power to defeat an inadequate hostile offer and the view, on the other hand, that, once the board has discharged its duty to make clear to shareholders its view of the long-term value of the corporation and there is no likelihood that the poison pill could be used to generate an alternative offer, it should be the shareholders' responsibility to decide whether to accept the board's view of the corporation's value or accept the bidder's offer. Chandler's opinion appeared to show some sympathy for the latter position. However, he described his analysis as "constrained by Delaware Supreme Court precedent".
Steele took issue with the view that the Chancery is constrained in its ability to remove a pill in the appropriate circumstances. He suggested that if the chancellor had found facts that were inconsistent with it being reasonable to keep the pill in place, an injunction against maintaining the pill could be issued under Delaware law. Where there is a battle of valuations, rather than the defence of a long-term strategy, a case can be made for removing the pill and letting the shareholders decide.
OK, so if the question is one about the adequacy of a noncoercive offer, is Steele suggesting that a board could be ordered to pull its pill? That an inadequate offer on its own is not a cognizable threat? Personally, I tend to agree and would be happy with that result. But, I'd be surprised if the Supreme Court was already there intellectually and simply waiting for the Chancery Court to hand up an opinion for appellate review. Could it be that Chandler in Air Products just got it wrong?
September 19, 2011
Takeover Panel amendments go into effect
The Takeover Panel amendments that were the result of a review in the wake of Kraft's acquisition of cadbury go into effect today. You can find a summary of the changes and transitional arrangements at the Takeover Panel's site. The most important include:
1. The offeree is required to disclose the identities of "any potential offeror with which the offeree company is in talks or from which an approach has been received."
2. After a potential offeror is identified, the offeror has 28 days to "put up or shut up."
3. General prohibition on transaction related inducement fees (termination fees).
4. Improved ability of employees representatives to make their views on the offer known.
The prohibition on termination fees is the most interesting change. Most of the rationalization for termination fees in the US is that termination fees are required in order to assure potential acquirors to invest the resouces needed to put together a bid. Without the termination fees, potential bidders will disappear - not content to invest resources in a bid that might eventually fail. Here, the Takeover Panel is weighing benefits of the compensatory function of the termination fees against the social costs of reduced competition associated with the potentially deterrent effect of termination fees and is erring on the side of increased competition. At some point in the next year, a finance graduate student somewhere should probably do an event study to check to see if elimination of termination fees ends the UK deal world as we know it. My guess is that it will still be there.
September 13, 2011
Craigslist and eBay ... again ...
This is a feud that never ends, I suppose. Reuters is reporting that the US Attorney has "launched a criminal probe into whether eBay Inc employees misappropriated confidential information from classified ad service Craigslist."
You'll remember that Chancellor Chandler in the Delaware Chancery Court ruled that against Craigslist in a rare case ordering a board to remove a poison pill in 2009.
September 12, 2011
Iowa's race to the bottom
Ted Allen at the ISS Corporate Governance Blog highlights a common trend in the corporate law -- the depressing race to the bottom that is characterized by state legislatures responding to management demands for protection from their own shareholders. Iowa has now joined the list of states that now require classified boards of their public companies. (h/t Broc Romanek)
Earlier this year, state lawmakers approved an amendment to the Iowa Business Corporations Act (IBCA) that requires public companies with more than 2,000 shareholders to maintain staggered board terms until Dec. 31, 2014. The law, which took effect March 23, provided a 40-day period during which a company's board could unilaterally vote to opt out of the classification mandate.
It appears that this legislation was passed to help Casey's General Stores, an Iowa-incorporated firm that faced an unsuccessful proxy fight in 2010. Casey's, an S&P 600 small-cap firm, did not opt out of the law and since has adopted a staggered board structure. The company has strong state legislative connections. One Casey board member, Jeffrey M. Lamberti, is an attorney who served in the Iowa Legislature from 1995 to 2006, which included three years as president of the Iowa Senate. His father is Donald Lamberti, the company's founder.
The classified board law was adopted despite the opposition of some Iowa corporate lawyers. In a Feb. 16 memo, the Iowa State Bar Association's Business Law Section Council observed that the legislation "will dramatically reduce the odds" that companies like Casey's would face proxy fights, but warned that it "would eliminate the voice of shareholders [from deciding whether to adopt staggered board terms] and leave that decision solely to management."
Omnicare's litigation with Pharmerica
As part of its hostile effort to acquire Pharmerica, last week Omnicare filed suit against Pharmerica and its board. Here's the Omnicare - Pharmerica complaint. Now, let me state right up front that I don't think this suit falls into the more general category of litigation flotsam that accompanies many merger announcements these days. Although this is acquisition-related litigation, it involves a purported acquirer attempting to have the target's board withdraw its defenses against the offer. This case is more along the lines of the Airgas scenario. In any event, given Airgas, one wonders whether Omnicare thinks it can pull an Omnicare-styled rabbit of the litigation hat. And why not? It happened famously for them once before.
In any event, the first defense that Omnicare would like the court to order withdrawn is Pharmerica's pill. It's hard, given Airgas, to come up with a reasonable justification for the court to order Pharmerica's board to pull its pill. Maybe after a year or trying, but now? Probably not. Omnicare's argument that Pharmerica's board is violating its fiduciary duties by not negotiating with Omnicare is going to fall flat. The requirement is that Pharmerica's board be informed. There is no requirement that it negotiate to sell its company to an unwanted bidder. Of course, this is complicated by the fact that early in the summer, Pharmerica's CEO approaced Omnicare's CEO to discuss a possible combination, but that's just a complication. Omnicare doesn't present any evidence to seriously suggest that Pharmerica's board is uninformed about its decision not to engage with Omnicare.
Second, Omnicare would like the court order Pharmerica's board to adopt resolutions exempting Omnicare from the effects of DGCL 203. Yikes. Omnicare's argument is essentially that Pharmerica's board is violating its fiduciary duties to the corporation by not actively exempting an unwanted bidder from Delaware's antitakeover statute. Absent egregious facts that aren't present in the complaint, I can't imagine a court taking that argument all that seriously.
June 06, 2011
Microsoft's matching right for Nvidia
InformationWeek took a look at Nvidia's recent 10-Q and noticed something interesting. Microsoft has hel a matching right Nvidia since 2000. apparently has the ultimate takeover defense in place. Here's the description of the right from Nvidia's recent 10-Q:
On March 5, 2000, we entered into an agreement with Microsoft in which we agreed to develop and sell graphics chips and to license certain technology to Microsoft and its licensees for use in the Xbox. Under the agreement, if an individual or corporation makes an offer to purchase shares equal to or greater than 30% of the outstanding shares of our common stock, Microsoft may have first and last rights of refusal to purchase the stock. The Microsoft provision and the other factors listed above could also delay or prevent a change in control of NVIDIA.
In fact, Nvidia has been making this same disclosure for more than a decade. Here's the original disclosure from their first quarter 10-Q in 2000:
Microsoft Agreement On March 5, 2000, the Company entered into an agreement with Microsoft pursuant to which the Company agreed to develop and sell graphics chips and to license certain technology to Microsoft and its licensees for use in a product under development by Microsoft. In April 2000, Microsoft paid the Company $200 million as an advance against graphics chip purchases. Microsoft may terminate the agreement at any time. If termination occurs prior to offset in full of the advance payments, the Company would be required to return to Microsoft up to $100 million of the prepayment and to convert the remainder into preferred stock of the Company at a 30% premium to the 30-day average trading price of its common stock immediately preceding Microsoft's termination of the agreement. In addition, in the event that an individual or corporation makes an offer to purchase shares equal or greater than thirty percent (30%) of the outstanding shares of the Company's common stock, Microsoft has first and last rights of refusal to purchase the stock. The graphics chip contemplated by the agreement is highly complex, and the development and release of the Microsoft product and its commercial success are dependent upon a number of factors, many of which the Company cannot control. The Company cannot guarantee that it will be successful in developing the graphics chip for use by Microsoft or that the product will be developed or released, or if released, will be commercially successful.
I've checked the 10-Ks and 10-Qs back to 2000 and the Microsoft Agreement hasn't been filed as an exhibit anywhere. I suspect that it's a material contract - Microsoft has a contractual right to basically block any sale of the company - that sounds material. I'm sure a copy of the contract is buried in the filings somewhere.
June 02, 2011
Poison Pill update
There's been a lot of clarification on the use of the shareholder rights plan over the past year - among others, see Chancellor Chandler's opinions in Air Products v. Airgas and eBay v Newmark, as well as the Surpeme Court's opinion in Versata v Selectica (all now available via the Google), . Bab and Neenan at Debevoise & Plimpton have posted Poison Pills in 2011 to review the current state of pills:
Abstract: Having been buffeted by sustained attacks from activists and proxy voting advisers in past years, the shareholder rights agreement is no longer as prevalent as it once was - a phenomenon that has been documented by many corporate governance observers like The Conference Board. However, the most recent case law confirms the validity of poison pills that are properly structured, adopted, and administered. This report discusses these new trends and provides guidance to boards considering whether to adopt a pill and how to formulate its terms.
Bab and Neenan focus, correctly, on the importance of the effective staggered board/shareholder rights plan combination. In the chart below they show that the recent trend of destaggering boards and dropping pills has continued. However, it's worth remembering that the ability of boards to adopt a pill very quickly at almost any point makes counting the number of firms with pills currently in place something less than a useful exercise. Best to simply assume that every company has a pill or could have one easily. The focal point for the effective defense is the staggered board. That's harder to implement.
March 10, 2011
AIG adopts an NOL pill
AIG annoucend yesterday that it had adopted what it calls a "Tax Asset Protection Plan". To the rest of us, that's an NOL pill. The Delaware Supreme Court ruled in the Versata v Selectica case last fall that boards can reasonably adopt these NOL pills to protect corporate assets, like net operating losses. The issue with them at the time was two-fold. First, they are ostensibly not takeover defenses, but intended to protect a corporation ability to access its net operating losses. Second, their trigger is usually set at 5% - above that point and the firm loses its NOLs. The court looked at them in Versata and decided they were a reasonable response to the threat of losing a valuable corporate asset.
NOLs allow companies to reduce their tax liabilities. Under the tax laws, a company may lose access to its NOLs in the event a single shareholder acquires more than 5% of the stock of the corporation. The pill prevents shareholders from accumulating a large enough block to trigger the loss of the NOLs. I suppose the only reason that AIG has any NOLs left on its books is because the largest single stockholder, the US government (92%) doesn't file a tax return...
For your file, here's a copy of AIG's shareholder rights plan Tax Asset Protection Plan.
Update: I've been working my way through Samuel Thompson's 4 volume, Mergers, Acquisitions, and Tender Offers recently. He's got a very nice summary of NOL pills and the state of the law governing their use. If you have a library, they should have this treatise on their shelves. It's timely and have got great coverage.
March 03, 2011
Dollar's toothless defense
The ink on the Airgas opinion has barely dried and Family Dollar looks like it's trying to use the Just Say No defense to stave off an offer by Nelson Peltz. Peltz announced his offer to the world in a recent 13d filing:
On February 15, 2011, the Trian Group contacted Howard Levine, Chairman of the Board and Chief Executive Officer of the Issuer, and advised him that it beneficially owned approximately 8% of the outstanding Shares and believed that it was the largest beneficial owner of Shares. The Trian Group also advised Mr. Levine that it proposed that the Trian Group or one of its affiliates acquire the Issuer at a price in the range of $55 to $60 per Share in cash.
The Family Dollar board considered the offer and responded (Form 8-K):
by a unanimous vote of those present, determined that continued implementation of the Company’s strategic plan remains the best way to deliver value to all Family Dollar shareholders. The Board also determined that the unsolicited, conditional proposal from Trian Group to acquire Family Dollar substantially undervalues the Company and that pursuit of a sale of the Company is not in the best interest of shareholders.
The Family Dollar board also adopted a shareholder rights plan. It's an imperfect defense, though. Family Dollar's board is elected annually. It does have a 90 day advance notice provision in its bylaws for nominations, but no classified board. The effectiveness of the rights plan as a defensive measure comes from the combination of the pill and the classified board. Family Dollar is going with just the pill and not the staggered board. I guess we'll soon see how that works for them.
Update: The Deal Professor tweets (Steven Davidoff has a Twitter account - @StevenDavidoff) that the 10% threshold on Family Dollar's pill might be more about keeping away hedge funds than Peltz. He's probably right because without a staggered board the pill isn't doing much else.
February 27, 2011
Barry and Hatfield on takeover defenses
Before Airgas gets too far into your rearview mirror - Jordan Barry and John Hatfield have recently posted a paper, Pills and Partisans: Understanding Takeover Defenses. Although Chancellor Chandler's opinion in Airgas may be the last word on the question for now, that doesn't mean we have to stop asking the questions!
Abstract: Corporate takeover defenses have long been a focal point of academic and popular attention. However, no consensus exists on such fundamental questions as why different corporations adopt varying levels of defenses and whether defenses benefit or harm target corporations' shareholders or society generally. Much of the disagreement surrounding takeover defenses stems from the lack of a fully developed formal analytical framework for considering their effects. Our Article presents several formal models built upon a common core of assumptions that together create such a theoretical framework. These models incorporate the reality that target corporate insiders have superior information about the target but are imperfect agents of its shareholders. They suggest that modern defenses enable target shareholders to extract value from acquirers by empowering corporate insiders, but that takeover defenses do not benefit society as a whole. They also suggest why corporations with different characteristics may choose to adopt varying levels of takeover defenses. Our findings have implications for the longstanding debate about who is best served by state-level control of corporate law and the desirability of increased federal involvement in corporate law.
February 18, 2011
Skadden on Airgas
Skadden's client memo on Airgas is here.
Gibson Dunn has their own long client memo on Airgas here.
February 15, 2011
158 page Airgas opinion
Download it, get a cup of coffee, close the door, and start reading this primer on the pill, Unocal, and "just say no" defense. Spoiler alert: Airgas wins and Air Products drops its bid and moves on. So, looks like no appeal in the works.
This opinion is a very thorough primer on the Unocal and takeover defenses. I expect it will quickly make its way into casebooks. Chandler makes it clear early on that he doesn't believe inadequate price is a threat, but that the Supreme Court in its wisdom has decided that inadequate price is a legally cognizable threat, so there isn't much more he can do.
There's a whole other post to be written on what Kraakman and Gilson really meant by "substantive coercion" in their paper on the Unocal intermediate standard and what half lessons the Delaware Supreme Court took from that paper, but I'll leave that for another day. For the time being, substantive coercion - my stockholders are too stupid to know what's good for them - survives. And Interco, well, Interco remains bypassed like an intellectually interesting sideshow.
Anyway, Chandler notes that "Just Say No" isn't "Just Say Never". It's just "Just Say No" for a really long time. I'll have to give this a longer more detailed read and will likely post more later. In the meantime, download and enjoy!
February 02, 2011
Airgas - a natural experiment
Lucien Bebchuk, Alma Cohen and Charles Wang have just posted a paper on SSRN, Staggered Boards and the Wealth of Shareholders: Evidence from a Natural Experiment. In the paper they test the effect of the recent Airgas decisions - in the Chancery Court as well as in Supreme Court on company valuations. They find that to the extent the Chancery Court weakened the power of staggered board by revealing a chink in the armor, it also increased valuations of firms with staggered boards. On the other hand, when the Supreme Court reversed that decision, the reversal had the effect of reducing valuations. In short, though the courts appear to disagree, the markets believe that staggered boards are value reducing.
While staggered boards are known to be negatively correlated with firm valuation, such association might be due to staggered boards either bringing about lower firm value or merely being the product of the tendency of low-value firms to have staggered boards. In this paper, we use a natural experiment setting to identify how market participants view the effect of staggered boards on firm value. In particular, we focus on two recent rulings, separated by several weeks, that had opposite effects on the antitakeover force of the staggered boards of affected companies: (i) an October 2010 ruling by the Delaware Chancery Court approving the legality of shareholder-adopted bylaws that weaken the antitakeover force of a staggered board by moving the company’s annual meeting up from later parts of the calendar year to January, and (ii) the subsequent decision by the Delaware Supreme Court to overturn the Chancery Court ruling and invalidate such bylaws.
We find evidence consistent with the hypothesis that the Chancery Court ruling increased the value of companies significantly affected by the rulings –namely, companies with a staggered board and an annual meeting in later parts of the calendar year –and that the Supreme Court ruling produced a reduction in the value of these companies that was of similar magnitude (but opposite sign) to the value increase generated by the Chancery Court ruling. The identified positive and negative effects were most pronounced for firms for which control contests are especially relevant due to low industry-adjusted Tobin’s Q, low industry-adjusted return on assets, or relatively small firm size. Our findings are consistent with market participants’ viewing staggered boards as bringing about a reduction in firm value. The findings are thus consistent with institutional investors’ standard policies of voting in favor of proposals to repeal classified boards, and with the view that the ongoing process of board declassification in public firms will enhance shareholder value.