Tuesday, February 15, 2011
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!
Wednesday, February 2, 2011
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.
Monday, January 24, 2011
So, tomorrow Chancellor Chandler will take up the question of whether to order the Airgas board to pull its pill. Air Products, you'll remember, has been pursuing Airgas for many months now. Airgas has steadfastly said "No." In the fall Air Products elected three members to the board and got shareholders to vote to approve a new bylaw that would have moved up the next annual meeting to January - thereby cutting short the defense that time provides in the classified board. The Chancery Court upheld the bylaw change. But then, in a little bit of a stunner, the Delaware Supreme Court overruled the Chancery Court's opinion. The Chancellor, I assuming confident that his opinion wouldn't be overruled, had put off the question of whether to order the rights plan pulled to a date just past the accelerated shareholder meeting date. That was a nice way to avoid the question of the pulling the pill -- had the Chancery Court's opinion not been overruled, the shareholders would have met by now, and presumably, voted in a new majority for the board, thus making the question of the pill moot. The Delaware Supreme Court decision ensured that this was not to be.
So, Chancellor Chandler is put in the uncomfortable position of having to consider whether to order a board that has lost the first round in a proxy contest whether it must pull its rights plan. Of course, Chancellor Chandler is not opposed to issuing such an order in the right circumstances. In the Craigslist case he order the board to pull its pill. Craigslist was a bit of a unique case. How many closely-held firms have shareholder rights plans anyway? Probably just Craigslist. The Airgas case is more difficult. Why? Well because it's precisely the kind of case that the Chancery Court has studiously avoided hearing for year. In his 2002 paper, which is a response to a paper from Profs. Bebchuk, Coates, and Subramanian, Vice Chancellor Strine described just this scenario as the "professorial bear hug" intended to forces judges to deal directly with the fiduciary duty issues related to the pill.
The question the authors ask us to decide affirmatively is fundamental: Can control of the corporation be sold over the objections of a disinterested board that believes in good faith that the sale is inadvisable? That is, at bottom, the authors want to force the hand of the Delaware courts to decide, once and for all, that impartial and well-intentioned directors do not have the fiduciary authority to "just say no" for an indefinite--even perpetual--period to a noncoercive tender offer made to their company's shareholders. ...
... When the stockholders of a corporation with an ESB have expressed their desire to receive a fully funded, all-shares tender offer in a fair, noncoercive board election that was preceded by an adequate opportunity for the incumbent board to develop a better strategy and make their case to the target stockholders, does a well-motivated and well- informed majority of independent, incumbent directors who believe that the offer is inadequate have the power to block that tender offer by continuing to deploy a poison pill?
And that, in essence, is what is at stake tomorrow in Chancellor Chandler's courtroom. A couple of months ago, I predicted that we'd never get to see this day. I also predicted that the Del. Supreme Court wouldn't overturn Chancellor Chandler's bylaw decision and that the Pats would beat the Jets (not cover the spread, just beat them). Clearly, I'd be a mess if I had to make my living in Vegas, so I'm making no predictions. Chancellor Chandler has shown himself to be sufficiently peeved at being overruled in his earlier decision that I think most bets are off. I continue to be amazed that the Delaware Supreme Court wasn't able to look ahead to tomorrow and realize that by knocking down the bylaw they set up this Just-Say-No case to come before Chandler, and inevitably them. Why is that a better outcome than letting the bylaw survive? I don't know. Anyway, tune in tomorrow for all the fun.
Friday, January 7, 2011
So says Donald Drapkin. Although the law hasn't moved this far, yet markets and investors just won't let it happen anymore. Drapkin's observation highlights the sea-change that has occurred over the past three decades. During the 1980s target boards sought to keep acquirors away - the hostile acquisition and entrenchment concerns guided the development of the corporate law. Now, times have changed. There are a few boards (Airgas, Genzyme, etc) who fight acquisition attempts. Many more, however, can see the payday. The real question these days is not of the entrenchment of the 1980s, but of management conflicts in the going private or cash out sale (e.g. J. Crew). The law is still developing to deal with those conflicts.
Wednesday, December 29, 2010
Marty Lipton is widely regarded as the creator of the poison pill. He is interviewed by The Deal and walks through his motivations for developing the poison pill during the hostile takeover boom of the 1980s. Notwithstanding criticism from the academics (especially law professors) his view with respect to the pill was accepted by the Delaware Supreme Court.
Tuesday, November 9, 2010
Sanofi and Genzyme have been exchanging letters. In the first one, Sanofi's CEO Christopher Viebacher sent a letter to Genzyme CEO Henri Termeer. In the letter Viebacher makes the following points:
First, you indicated that you believe that the Genzyme Board can, at any time, opt to immediately stagger the terms of its members, extending the terms of two‐thirds of Genzyme's current directors for an additional one to three years. ...
Second, you stated that the Genzyme Board retains the ability to adopt a "poison pill". As you are well aware, if adopted, the poison pill would prevent Sanofi-Aventis from acquiring Genzyme, regardless of your shareholders' support for a transaction.
Third, you indicated that the Genzyme Board may wield the Massachusetts anti-takeover statutes in a manner that would, as a practical matter, prevent Sanofi‐Aventis from acquiring Genzyme without the cooperation of Genzyme's Board, notwithstanding your shareholders' support of a transaction.
Since the stockholders destaggered the Genzyme board in 2006, presumably Genzyme would stagger the board through a bylaw amendment adopted by the board. In his letter, Viebacher suggests that taking these defensive actions would be inconsistent with "maximizing shareholder value." I suppose he wants Termeer to get concerned that he might violate his fiduciary duties as a director of a MA company should he not immediately agree to a sale of Genzyme to Sanofi. Well, Termeer has little to fear. As I've written before, MA companies are very management friendly and have written out of the law any of the pesky obligations put on boards by Delaware decisions like Revlon and Unocal. Just-say-no is alive and well in Massachusetts. Clearly, the Genzyme board is engaged and informed. That's basically going to be enough. The brush off letter from Termeer back to Viebacher seems to indicate that Termeer knows this, too.
Friday, October 8, 2010
OK, so I listened to the arguments regarding the Airgas bylaw, courtesy of our friends at Courtroom View Network. While I'm terrible about predictions - especially about the future - I'll venture a guess that Air Products had the better of the arguments today. I mean, if Ted Mirvis is relying on law professors to make his case, he must be leaning on a pretty thin reed.
Really, the reason why I think Air Products got the best of the argument today is that in order for Chandler to rule in favor of Airgas' position, he will have to rule that when Airgas drafted its certificate of incorporation, it did not mean that directors should serve "a term expiring at the annual meeting of stockholders held in the third year following the year of their election" but that they meant 3 years.
Air Products' counsel had the better argument here. Summed up as: " 'Oh c'mon your Honor, you know what we meant' is not a recognized principle of contract or charter interpretation." If Airgas wanted its directors to have a three year term, it would have, as other corporations have, written that explicitly into its charter. But it didn't.
Airgas would like board to read language below and come to the conclusion that X=Y. I don't think the court will. A"term of three years" is not the same as serving until "the annual meeting held in the third year following the year of the their election." It's pretty plain. One might not like it, and I'm sure that plenty of lawyers drafting proxy statements at 3am have happily conflated the two in order to get home before sunrise, but they are still not the same.
I think coming to grips with the implications of this was behind some of Chandler's early discomfort with Air Products' argument. I can imagine that he was going over in his head what the result would be of his ruling in favor of Air Products -- a full employment ruling for corporate law departments around the country as they scurry to tighten the language in the provisions in their charters.
On the other hand, if Chandler were to go with the "typical understanding" of the length of the term of a staggered board rather than a reading of the plain text, then he would do something that he would never do in the context of, for example, interpretation of a merger agreement. I tell my M&A class that Delaware adheres to a "big boy" rule - courts assume counsel is smart enough to bargain for the provisions that they want and courts will not interpret beyond what is in the plain language -- think Alliance Data Systems v Blackstone.
If Chandler were to side with Airgas in their argument that would require him to assume that Airgas did not mean what it wrote in its charter. That's a hard sell and, I suspect, would result in an immediate appeal to the Supreme Court.
Beyond that, the old bylaw provisions permitted Airgas to advance its meeting date so that meetings could be separated by a window as little as seven months showed that, until the litigation, Airgas itself didn't interpret its charter to require an annual meeting occur at least 12 months after the previous meeting. Their current interpretation seems to be one that is convenient given the current litigation.
Anyway, it's going to be tough for Chancellor Chandler. I think he's going to have to rule for Air Products - he may try to hedge a bit, but I don't think he really has any choice.
And, I think that the result will be howls of pain from attorneys all over the place - people will be quoted saying things like "worst since Van Gorkom or Omnicare" but they will be wrong. In the end, though, we'll all survive. Lawyers will be more attentive to their drafting and will specify in their charters that the term for a director on a staggered board is 3 years and not some other term.
But, maybe they should have gone through that exercise the first time around.
Anyway, I guess all this puts me at odds with the conventional wisdom - Airgas' price is down $1 today (I won't get into Fischel's expert opinion this afternoon and the EMH) and Bloomberg seems to suggest it will go the other way.
I occasionally give some thought to the question why any board bothers to adopt a poison pill absent an obvious threat of takeover. I mean, why bother? A well-informed board can adopt a shareholder rights plan in, let's be honest, about five minutes. These plans are by now pretty standardized and if your outside counsel bills you more than a few hours to put one together for your company, you probably should look at your bills a little closer. At the same time, if you carry a pill in the absence of a takeover threat - just in case - you'll get dinged by Riskmetrics and they'll recommend voting against your board. Who wants that?
Hypercom has it about right. They had no pill in place and then when Verifone started sniffing around, the board met, considered and then issued a press release that read:
With that, Hypercom adopted a pill. Now, should a court review the board's decision to adopt the pill, we know that the court will subject it to Unocal intermediate scrutiny. But guess, what? We also know that under Moran, if a board had adopted a pill "under a blue sky", the subsequent decision not to pull the pill in the face of an offer would also be subject to intermediate scrutiny. So ... since everybody knows that anybody can quickly adopt a pill and since Riskmetrics, etc hate the pill for governance reasons, I think everybody should just get rid of them ... until you need them, that is.
OK, it's Friday. Off my soapbox. I'll take up Hypercom's suit against Verifone another day.
Wednesday, October 6, 2010
I've written on this before (and also here, and here). In the 1980s during the great takeover boom and hollowing out of the industrial heartland, many states adopted amendments to their corporate codes that codified directors' fiduciary duties, so-called "constituency statutes". In general, these provisions made it clear that a director need not "maximize shareholder value." Rather, in complying with their fiduciary obligations, directors may take all sorts of things into consideration - the impact of their decisions on various constituencies, including employees, the community, the environment, the color of the sky, whatever.
When these statutes were first passed, they were heralded as way to protect jobs, etc. Earlier this year, Michigan passed one hoping it would protect local jobs from corporate raiders. Lots of other states have similar constituency statutes. For example, Oregon has one (Sec. 60.357). You can find them all over. In general, these statutes reject Unocal and Revlon as binding on directors of corporations in those jurisdictions.
My problem with these statutes is that they strike me as a bit of a head fake. While they certainly give boards the power they need to protect local communities, etc should they so desire, they don't actually require directors to protect those constituencies. In effect, such statutes, simply give directors another fiduciary lever to pull when negotiating with a potential acquirer.
I've said this before, but you know a board might be very concerned about the impact of a potential acquisition on employees and the community when the bid is $69. At $75, the board's concerns about the impact on the community might start to fall away. Why not move the HQ to Paris? It's so much nicer there than Cambridge. At $85? Employees ... we have employees?!
There's no requirement that a board share the incremental price increase with those stakeholders who will lose out when a transaction is ultimately done. Does anyone really think that a board, having invoked this provision to say no, will then turnaround a cut a check to the local community the day after it accepts an offer to sell? In the end, the price paid goes to shareholders, not to the employees or the community or the environment. To the extent these statutes get sold to legislators as important tools to protect local companies (and jobs and communities) from outside raiders, they are, in that sense, a bit of a scam. These statutes put all the cards into the hands of directors. And that's fine, if that's what you want to do.
Along those lines, I spent the afternoon in the MA Business Litigation Session yesterday with a couple of students. We went to observe motions being argued in the consolidated case against Genzyme. You'll remember that Genzyme and its directors were sued (8 lawsuits!) after they turned down a friendly merger proposal from French Sanofi (this is before Sanofi went hostile).
In their complaints, the plaintiffs made a variety of allegations of the sort you might expect - by not accepting or negotiating the offer from Sanofi that the board violated is fiduciary duties to "maximize shareholder value" [Revlon], etc. Here's the thing, though. Massachusetts has a constituency statute (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, here come the shareholders with the extremely premature claim that Genzyme's directors somehow violated their fiduciary duties to the corporation because they turned down an unsolicited offer from Sanofi. But, Genzyme is a MA corporation and MA is not Delaware. If the directors act in good faith, and then come to the determination that it's in the best interests of the corporation and the city of Cambridge for Genzyme to stay independent, no court in MA will disagree with them. The plaintiff shareholders simply have no case because (so far) the constituency statute is working exactly as intended.
I think this is interesting, because just as labor, community, etc. have no case to prevent a sale notwithstanding the presence of a constituency statute, neither do shareholders have a voice to push one. The directors call the shots. I often wonder, other than directors, what constituency these constituency statutes serve.
Tuesday, October 5, 2010
The Delaware Supreme court handed down its opinion in Versata v Selectica. You'll remember that Selectica amended its rights plan to protect its NOLs with a 4.99% trigger. The pill was then triggered when Trilogy aggressively bought through the 4.99% limit knowing that it might trigger the pill. Trilogy was looking to get into the courtroom apparently. The court upheld the board's adoption of the shareholder right plan with a 4.99% trigger, and the special committee's subsequent decision to deploy the pill to dilute Versata.
You can read the opinion here. If you're looking for an overview of the issues at stake, Robert Miller at Villanova Law published a nice little piece a couple of months ago (NOL Pill Reloaded) that's worth reading.
Generally speaking, the court upheld the Chancery Court opinion. Consistent with past practice, the court held that the proper standard of review for challenged board actions taken to defend the corporation or a corporate policy is Unocal. Applying Unocal, the court then largely concurred with Chancery's analysis. Moving on ...
Saturday, September 18, 2010
Over at The Conglomerate, they recently concluded a good forum on the current state of the shareholder rights plan following the eBay v Craigslist litigation. They had contributions from Gordon Smith, Eric Talley, and Christine Hurt with Erik Gerding moderating. Steven Davidoff even made a cameo. It's worth dropping by for a read.
Thursday, September 16, 2010
In yesterday's Airgas shareholders' meeting, Air Products put forward a bylaw amendment (you can find the text of the amendment here, proposal 5 on page 65) that would change the date of the annual meeting to January, 2011 effectively short-circuiting the staggered board/poison pill defense. As I said yesterday, it's intriguing. Now, that bylaw amendment won a bare majority of shareholders present and voting. Airgas' response was to claim that since the proposed amendment did not receive a supermajority of votes from the outstanding shares that the bylaw did not pass. That's odd. I pulled the 1995 Airgas certificate of incorporation and went straight the to language on amendments and this is what it says:
6. By-Law Amendments. The Board of Directors shall have power to make, alter, amend and repeal the By-Laws (except so far as the By-Laws adopted by the stockholders shall otherwise provide.) Any By-Laws made by the Directors under the powers conferred hereby may be altered, amended or repealed by the Directors or by the stockholders. Notwithstanding the foregoing and anything contained in this certificate of incorporation to the contrary, Article III of the By-Laws shall not be altered, amended or repealed and no provision inconsistent therewith shall be adopted without the affirmative vote of the holders of at least 67% of the voting power of all the shares of the Corporation entitled to vote generally in the election of Directors, voting together as a single class.
Looks about right. I suspect if Air Products is unable to 67% of the outstanding shares that the bylaw amendment goes down, notwithstanding the fact that it may have gotten a majority of the quorum in yesterday's meeting. That will leave Air Products with one-third of the board and hanging around until the next annual meeting. That's a mighty uncomfortable position to be in unless it can convince a Delaware court to order the Airgas board to pull the pill. We'll see.
Correction: Strike that, reverse it. The Deal Professor is obviously correct on this point. As has been also pointed out to me by a helpful reader, the "Article III" referenced in the bylaw amendment provision of the certificate (above) points back to bylaw provisions relating to "Directors". The annual meeting is covered under "Article II" of the bylaws (from the bylaws) and they are subject to the following amendment provision:
Article IX, Section 1. Amendments of By-Laws.
Wednesday, September 15, 2010
... your Airgas stock, I mean. The shareholder meeting is today and they have two major issues on the table: 1) a contested director election; and 2) a bylaw amendment to push up the next shareholder meeting. I think the second proposal is intriguing. The deterrent power of the combination of the poison pill and the classified board comes from the lengthy delay that the structure forces upon any potential acquirer. Going through two election cycles before you can take control is a lot to risk - a year can be a long time when you have a lot of money at risk. That's where the bylaw amendment comes in. By having shareholders vote to amend the bylaws to provide for a shareholder meeting in January 2011 Air Products is trying to create its own short-cut and reduce the time/risk involved in holding three seats with a pill in place. Interesting. So remember to get out and vote.
Update: Looks like the Air Products directors have won. Here the press release from Airgas. The outcome of the bylaw amendment is a little uncertain (from the press release):
Airgas continues to believe that Air Products' by-law proposal to require a Meeting of Stockholders be held on January 18, 2011 - only four months after the 2010 Annual Stockholder Meeting - and that all future annual meetings of stockholders be held in January is invalid under both Delaware law and Airgas' Certificate of Incorporation. We also believe that the proposal has not been approved because it received the affirmative vote of less than 67% of the shares entitled to vote generally in the election of directors. As previously announced, Airgas intends to seek an expedited judicial determination on the validity of this by-law.
Friday, September 10, 2010
Chandler handed down his decision in the eBay-Craigslist trial and ruled, mostly, in favor of eBay. According to the Bloomberg report:
The poison pill was enacted “to punish eBay for competing with Craigslist” and not “in response to a reasonably perceived threat or for a proper corporate purpose,” Chandler said in his decision. ...
Trial testimony didn’t establish that Buckmaster and Newmark “acted in good faith and in pursuit of a good corporate purpose when they deployed” the pill, Chandler said. The judge concluded that the pair “resented eBay’s decision to compete with Craigslist” and set up the defense “as a punitive response.”
But it wasn't a complete win for eBay. eBay had challenged Craigslist's staggerd board as a defensive measure and argued that it too should be evaluated under Unocal. Chandler didn't bite. The staggered board was left in place.
I'm still looking for a copy of the opinion in a form that doesn't require me to pay Lexis $50! If anyone has it and is willing to share, I'll read it for you!
BTW: Those of you who took my corporate law final will find the facts in this case oddly familiar.
Update: Thanks to those of you who sent me copies of the opinion - Download EBay v Newmark. Greatly appreciated.
Update: You can always count on Francis Pileggi and the Delaware Litigation Blog. He's got the opinion here. Chandler summarizes the mixed bag opinion in the David v. Goliath case in the following way:
... the battle in Delaware has not been as one-sided a victory for the smaller contender as was the contest between the fabled Israelite and Philistine: more fortunate than Goliath, eBay leaves this field with only a gash across its forehead; less fortunate than David, craigslist leaves this field with something less than total victory.
In applying the Unocal analysis to Craig Newmark and Jim Buckmaster's decision to adopt a rights plan, Chandler focused the threat identified by Jim and Craig (why not Newmark and Buckmaster?). It appears that they identified the "threat" to be the prospect of eBay or some other corporate behemoth one day turning Craigslist into a money making operation. Here's how Chandler dealt with that "threat":
Jim and Craig did prove that they personally believe craigslist should not be about the business of stockholder wealth maximization, now or in the future. As an abstract matter, there is nothing inappropriate about an organization seeking to aid local, national, and global communities by providing a website for online classifieds that is largely devoid of monetized elements. Indeed, I personally appreciate and admire Jim’s and Craig’s desire to be of service to communities.The corporate form in which craigslist operates, however, is not an appropriate vehicle for purely philanthropic ends, at least not when there are other stockholders interested in realizing a return on their investment. Jim and Craig opted to form craigslist, Inc. as a for-profit Delaware corporation and voluntarily accepted millions of dollars from eBay as part of a transaction whereby eBay became a stockholder. Having chosen a for-profit corporate form, the craigslist directors are bound by the fiduciary duties and standards that accompany that form. Those standards include acting to promote the value of the corporation for the benefit of its stockholders. The “Inc.” after the company name has to mean at least that. Thus, I cannot accept as valid for the purposes of implementing the Rights Plan a corporate policy that specifically, clearly, and admittedly seeks not to maximize the economic value of a for-profit Delaware corporation for the benefit of its stockholders—no matter whether those stockholders are individuals of modest means or a corporate titan of online commerce. If Jim and Craig were the only stockholders affected by their decisions, then there would be no one to object. eBay, however, holds a significant stake in craigslist, and Jim and Craig’s actions affect others besides themselves. ...
Directors of a for-profit Delaware corporation cannot deploy a rights plan to defend a business strategy that openly eschews stockholder wealth maximization—at least not consistent with the directors’ fiduciary duties under Delaware law.
Tuesday, September 7, 2010
I'm of the mind that the answer to that question is likely no. In his Stanford Law Review paper of a few years ago (Professorial Bear Hug), Vice Chancellor Strine made it clear that ... well ... it wasn't clear. Of course we professors would like a court to rule once and for all on the question of whether a classified board can simply sit on its poison pill in the face of an unsolicited offer. The courts, I think, are happy with this constructive ambiguity as it relates to the limits of the uses of a pill. For example, the Federal District Court in Delaware suggested in Moore v Wallace (persuasive, but not precedent) that a Delaware state court might permit the defense. Vice Chancellor Allen in Interco, on the other hand, made it clear that there were limits to such a defense and employed a Unocal analysis with respect to 'threats' facing the corporation. Allen understood threats to be of only of two types: threats to voluntariness and the threat of a inadequate price. In context of a single-tier, all-cash bid, there is no threat to voluntariness, there is just the threat that the bid is inadequate. In any event, the Supreme Court rejected that analysis in Paramount v Time leaving us really at sea as to the limits of a 'just say no' defense. The 'just say no' defense really lies at the heart of the most crucial discussion in the corporate law - who should make the decision about the fundamental future of the corporation: the board or the stockholders. You'd think it would eventually get litigated once and for all.
A few months ago it looked like we might have a chance to see it happen. Air Products launched an all cash tender offer for Airgas. Airgas just sat on its pill and said 'no.' Air Products then filed suit. Here's a copy of the complaint. I came to the realization last week that this case would never get before a chancellor. It's scheduled in the Chancery Court for October 1, but that it turns out is just creative scheduling. In fact, it will likely never get that far.
Airgas' shareholder's meeting at which shareholders will likely decide the fate of Air Products' offer is scheduled for September 15. Over the weekend, Air Products upped its offer to $65.50, a whopping 50% premium over the prebid price for Airgas. Air Products also announced that if it is unsuccessful in its proxy contest, it will walk away and not pursue Airgas further. And just like that, the challenge to the 'just say no' defense will go away. Litigating this issue will likely have to wait for another day, unless of course Air Products succeeds in the proxy contest and elects three of its own directors and the remaining directors continue to fight.
Tuesday, July 13, 2010
B&N's outside counsel from Cravath, Scott Barshay is back on the stand. Says that the "family transfer provisions" that got Burkle so upset early on weren't the idea of anyone in the company and that it all came from Cravath. Barshay is walking through the process of adoption of the rights plan and its amendments. And very quickly the defense is done.
Barshay is now on cross examination.
- "Mr. Barshay, isn't it a fact that the first time you met any members of the board was five minutes before the pill was adopted?"
Five minutes? Ouch.
Counsel is trying to tag Barshay for immediately considering adoption of a rights plan once Burkle surfaced. There's an objection. Strine steps in to calm the children, noting that considering the adoption of a pill would not be an altogether uncommon response.
Pushing Barshay again on his knowledge of the board before he met them for the first time. It sounds like he had no idea who was going to be in the room or the background of anyone on the board. How is that possible? He certainly didn't give a lot of push back on that line of questioning.
Lots of questions regarding the presentations on the rights plan that Barshay prepared for Daniels (24 pages) and the 2 page presentation for the board. Seems like a pretty standard overview of how pills work. Hope B&N didn't pay too much for it. I could have told them the same for less.
Shoutout for Chuck Nathan! An article by Chuck Nathan gets commended to the viewing audience. I guess that's me. I suppose I should find out which article they are talking about.
"Does the pill as it stands does not prevent Riggio and his family from acquiring more stock. Is that correct?"
Because Riggio's adult children aren't living with him, they are not affiliates and don't trigger the beneficial ownership definition under the pill. Barshay tries to push back by pointing to the 13D group requirements, but concedes the defense's general point. Tries to argue that Burkle's kids could buy stock and not trigger the beneficial ownership rules. Defense counsel corrects him by noting that Burkle's kids live with him so, no. Now working through some pill math. Counsel makes the point that the board can accumulate stock without triggering the rights plan while Yucaipa's acquisition of stock would trigger the plan. Cross examination is done.
On re-direct - discussion of whether or not a pill can impede a proxy contest. Barshay's view is that a pill is not triggered by a proxy contest. Indeed, notes that no pill as ever been triggered by a proxy contest.
Strine asking some questions regarding setting of the trigger for the pill at 20%.
Mr. Barshay is excused. B&N lead director Michael Del Giudice is called.
Lots of questions regarding Del Giudice's background and how he came to the board. Everybody - including Strine - is reliving the unfortunate Dukakis presidential campaign and the "tank" incident for which Del Giudice disclaims any responsibility.
Back from the morning break and the plaintiffs object to agreement that has not been produced. The agreement disclaims Del Giudice's financial interest accruing to Rockland that result from any Riggio investment in Rockland. Strine doesn't appear happy that the document hasn't been produced and rules as such.
OK, back to direct testimony. Discussion of the board meeting at which the pill was adopted. Interesting, but not surprising - Riskmetrics' reaction to a pill adoption was a topic of conversation in the boardroom and that the pill was designed in order to be as "Riskmetrics friendly" as possible.
Now on cross, plaintiff's counsel is all geared up for a "Law & Order" gotcha moment, but technical difficulties screw it up. That, and the fact that Del Giudice immediately offers up that he was wrong in his deposition that mistated that Zivaly was not an independent director. You could almost see plaintiff's counsel say - not so soon! I'm not there yet!
I suspect the next couple of minutes will be anticlimatic.
Why are they dragging up the ghost of the Dukakis campaign again? Do they have to ask whether Dukakis won 10 states? Really, where does that get us? Painting Del Giudice as a political fund raiser and Riggio as one of his "go-to" money guys in NY Democratic circles. Don't think that'll go far. Plaintiff's counsel have moved on to describe the various investments that Riggio has made in Del Giudice's Rockland entities. This might have more legs. Riggio made a $20 million investment in Rockland.
I think plaintiffs might be confusing (or obfuscating) good corporate governance with the corporate law. Plaintiffs seem to be implying that because the B&N board is waiting for the SEC to implement rules with respect to independent compensation consultants before it changes its own policy that there is some sort of conflict. That's a weak argument.
Q: If stockholders got together and voted to pull the pill, would that trigger the pill?
A: If there is an arrangement or understanding to vote against the pill, that would trigger the pill.
That seems like the wrong answer. What good is stockholder approval of the pill if stockholders can't organized to vote against it? This question is better asked of the Cravath lawyer. Del Giudice isn't a legal expert and shouldn't be permitted to provide a legal opinion on the mechanics of the pill. Del Giudice has clearly moved beyond his level of knowledge and he knows it.
Break for lunch.
Back from lunch. Couple of questions about whether a group of stockholders representing 20% of all the shares might be required to pay a premium to vote their shares for a director. I'm not sure what that's supposed to mean, but whatever. Plaintiffs are done.
Del Giudice is now on re-direct. Turns out Riggio's $20 million investment is not yet funded.
Del Giudice is excused and defense rests. Various motions regarding admission of evidence.
Strine is venting (for the benefit of the viewing audience apparently) about the lack of tabs and readability of post-trial briefs.
Look at this thing -- no tabs!
Strine is now riffing on the European takeover directive and creeping takeovers. The pill here is being used in a somewhat unusual circumstance. Now you have two block-holders and how to do you deal with them? Eichler and Aletheia seems a mystery to Strine. Why do they refuse to vote their shares? He thinks they may have their own fiduciary issues. He's giving hints for post-trial briefs.
There is skepticism factor that Yucaipa will face in a proxy contest because they are unwilling to make an offer or go on the board.
Snooki?! Yes, Snooki is a character on that Jersey show. How did Snooki make an appearance in Strine's comments? Anyway.
The 20% threshold is sticking in his mind - because Riskmetrics will focus on it - that why the board went for that number. What's not sticking in his mind is whether the board considered or should have considered a larger trigger because of the Riggio block already in place.
It's clear that the differential trigger has gotten Strine's attention - and not in a good way.
Yucaipa needs to sharpen what it wants in this trial - do you want to acquire more shares? Do you just want to feel love? Compares Yucaipa to an adolescent who wants to ask a girl out, but only if she will say yes...
And thus ends Strine's rambling. Briefs are due on Friday evening and then answering briefs on Monday evening. Post-trial arguments will occur late next week.
Monday, July 12, 2010
Once again thanks to the folks at Courtroom View Network, court in Yucaipa v Barnes & Noble is back in session with VC Strine presiding. Nachbar has some initial objections with respect to demonstratives used with those reports.
Kenneth Nachbar making his objections:
VC Strine sounds like a guy who bet on the Netherlands. Not happy about a demonstrative prepared over the weekend. Oh, no. We're back at 6th grade math. The objection is to a demonstrative prepared by the plaintiff to walk through the 6th grade math that caused Strine to break out in a cold sweat on Friday.
VCS: "It's out. ... Honestly speaking, if it's so simple, you could have gotten [the demonstrative] to them on Saturday."
OK, moving on. Now, Daniel Burch, plaintiff's expert, is back on the stand discussing proxy contests and solicitation of proxies. VC Strine is now questioning Burch regarding how one puts together a proxy contest without triggering a 13D filing. Burch is now on cross. Lot's of challenges to the fact that the first draft of his report was prepared by an associate and that he made subsequent corrections to it.
Colloquy between Strine and Burch:
On re-direct. I'm surprised that actual ownership percentages of B&N are really still in issue. Now some discussion about probable votes in the case of a proxy contests. Here's a demonstrative chart comparing Burch's report and the defendant's expert (Harkin). We'll hear from Harkin later.
Nachbar objects to leading questions. Sustained. But, with a warning - if Nachbar wants to be "persnickety" then Strine will let the plaintiffs be persnickety later. I expect there will be fewer of these objections going forward.
VCS to Burch: You are free to stretch your legs and enjoy the Dunkin Donuts on the subterranean level of the courthouse. Burch is excused.
And that's it for the plaintiff's witnesses.
Defense calls their expert, Peter Harkins. While the plaintiff's experts have tried to make the argument that the shareholder rights plan would make it impossible for a dissident to win a proxy contest, Harkins is making the argument that a dissident can win a proxy contest.
On cross: generating these table and charts just requires math, right? Right. Why are we talking about math, again? VC Strine is quiet this morning...maybe mulling the World Cup.
Breaking for lunch.
Back. Harkins is back on the stand under cross. Lots of questions about Alethia's voting (or no-voting) policy.
Strine interrupts to give both sides a hint about what he's thinking. He wants some help with his "limited mind" in post-trial briefings. Specifically, how or why people on either side think that Alethia might at the same time have a policy not to vote its shares and at the same time help finance a proxy contest. It doesn't make sense to him and he'd like people to think about it and explain it to him in post-trial briefs.
Back to cross. Harkins is dismissed after a brief colloquy with Strine regarding the scope of his expert testimony.
Next up for the defense - Jennifer Daniels, former GC for B&N.
She is testifying about the early stages of B&N's adoption of the pill. The argument that the defense is making here is that Jennifer Daniels, as a good GC, moved on her own to start things moving on the adoption of the pill - it's all good corporate stewardship and nothing to do with Riggiio actively seeking to stop Burkle from running a proxy contest.
On cross -
PL Lawyer: Ms. Daniels, did you think you might be a witness in Delaware on this issue?
JD: I was told I might have to give a deposition, and that a I might be required at trial, but was told at the time that "we're not there yet" ...
VCS: Oh, but now the dream has come true and here you are...
Since Daniels is no longer an employee of B&N (she's at NCR now), she's appearing voluntarily. Plaintiffs appear to be trying to make her look like a tool of Cravath and an incompetent lawyer.
You didn't advise the board that Morgan Stanley had been paid $4 million for its work in the College Books transaction? Morgan Stanley also advised on the rights plan.
Don't know if that will fly. Anyway, she's getting annoyed. Strine injects some more levity and then orders a recess.
Back again. Plaintiffs return to the line of questioning suggesting that hiring MS was a conflicted transaction because Riggio had previously hired MS in the College Books transaction and that Daniels is a bad lawyer because she listened to outside counsel on the issue of MS. The independent directors didn't get their own counsel - separate from company counsel - with respect to the question of adopting the rights plan. This issue is potentially problematic, but will it have legs?
On cross, plaintiff's attorneys are now trying to paint Daniels as being motivated by how to protect Riggio's position when she was having discussions with Cravath. She answers that she was thinking about all the possible questions that she might be asked. I wonder if this impresses Strine. Surely, he's hand plenty of contact with GC's like Daniels. We'll see. He's been quiet.
Ouch. Draft minutes of board meeting are in evidence. OK, you're all on notice - never let a junior lawyer draft minutes of a board meeting cause the other side is going to enter them into evidence. And the plaintiffs are done for the day.
Thursday, July 8, 2010
It's been a busy day in Delaware - thanks to the wonders of the Internet and Courtroom View Network, I've been watching the Versata v Selectica appeal before the Delaware Supreme Court (yesterday) and the Yucaipa v Barnes & Noble trial today. The Yucaipa trial is going on in Vice Chancellor Strine's courtroom right now. It's a four day bench trial.
Investor Ron Burkle has already testified that B&N's pill is "draconian" and confusing. There's now a lot of testimony by board member Patricia HIggins along the lines of the "I don't recall" and "I'm not personally aware" nature right now. I'll be summarizing the proceedings later tonight or tomorrow.
-Update I: In a brief recess right now. Higgins has been testifying in great detail about the process by which the board went about adopting the shareholder rights plan - and in doing so, she's hitting all the Unocal key words - informed, reasonable, threats, etc.
Burkle lawyer: I object.
VC Strine: To what?
Lawyer: That which has not yet been uttered, but may be uttered.
VCS (to witness): Don't utter that, otherwise it will be smote. And bad things can happen when we start striking testimony...
-Update III: Greg Taxin now on the stand testifying as an expert (ex. 764 for those of you with Bloomberg Law). He's testifying on proxy contests, the election of directors, and rights plans. Testifying that there are two provisions that impact one's ability to run a proxy contest: 1) the 20% trigger, while insiders own more than 30%; and 2) the definition of beneficial ownership. Nice charts - illustrating how often dissident proxy contests can win. He's relying on data from SharkRepellent. Dissidents seem to have won 32% of proxy contests over the past decade.
Here's the chart:
Tuesday, July 6, 2010
It's a big week for the shareholder rights plan in Delaware. We've got two high profile cases. The first is the challenge to Barnes & Nobles' shareholder rights plan in the Chancery Court. We've blogged about that saga here already. Second is Versata's challenge to the Selectica NOL pill that will be heard at the Supreme Court. Paul Thomas and Randall Thomas have a new paper on the Selectica NOL pill, Resetting the Triggering on the Poison Pill: Selectica's Unanticipated Consequences. They argue that dropping the trigger level down to less than 5% will have an important, and potentially negative impact on the market for corporate control. This paper is worth reading before dropping in on the arguments later this week.
Thursday, July 1, 2010
The Delaware Supreme Court has set July 7 for arguments in Versata's appeal of Vice Chancellor Noble's ruling in Selectica v Versata. Briefs in the case are available via the Harvard Corporate Governance Blog. (Versata's brief and Selectica's answering brief). The issue at stake is the legality of a shareholder rights plan with a 4.99% trigger adopted to protect Selectica's NOLs. The Chancery Court held that board's adoption of the plan was consistent with their obligations under Unocal. Hopefully the argument will be carried on CVN so we can watch from the luxury home.