Business Law Prof Blog

New M&A Hornbook - Gevurtz & Sautter

West Academic Publishing has just released a new mergers and acquisitions hornbook co-authored by dear friends and business law prof colleagues Frank Gevurtz and Christina Sautter.  I had known that the book was in the offing, but I just got a note from Frank on Saturday confirming its publication and availability.  Here is the synopsis from West:

Gevurtz & Sautter’s Hornbook on Mergers and Acquisitions provides a comprehensive exploration of this important topic. Written in a casual style designed to engage the reader, the book clarifies and critiques critical doctrine. In addition to covering corporate laws governing mergers and acquisitions, the book explores securities, tax, and antitrust laws, as well as addressing the business, financial, and practical lawyering aspects of mergers and acquisitions.

I know these two to be folks with solid backgrounds and interesting insights in this area.  I have requested my online review copy.  Perhaps some of you will want to do that, too.  And for those without that privilege who want this in their libraries, you can get it by clicking on the West Academic Publishing link at the beginning of this post or purchase it on Amazon here.

Delaware Supreme Court Affirms Triggering of MAE Clause

In Hexion Specialty Chemicals, Inc. v. Huntsman Corp., 965 A.2d 715, 730 (Del. Ch. 2008) – a case I worked on as a judicial clerk – the court wrote, “[m]any commentators have noted that Delaware courts have never found a material adverse effect to have occurred in the context of a merger agreement.”

That statement is no longer true.

Today--in a 3 page opinion--the Delaware Supreme Court affirmed the 240+ page opinion by Vice Chancellor Travis Laster in Akorn, Inc. v. Fresenius Kabi, AG, et al., which held that Akorn triggered the Material Adverse Effect ("MAE") clause of the merger agreement at issue.

As the Chancery Daily reports, and as is clear looking at the recent opinions, the Delaware Supreme Court opinion does not provide much reasoning for its decision to affirm, but the Court of Chancery opinion does provide plenty of guidance. In the first few pages, the Court of Chancery notes that Akorn experienced a "dramatic, unexpected, and company-specific downturn in...business that began in the quarter after signing." The Court of Chancery also notes the importance of whistleblower letters and issues with Akron and the FDA. 

Also of interest, the court notes that this was an expedited case -- a real benefit of the Delaware Court of Chancery. The parties only had 11 weeks leading up to the trial. At the five day trial, there were 54 depositions transcripts lodged, 1,892 exhibits introduced into evidence, and 16 live witnesses (including 7 experts). Those poor lawyers -- and judicial clerks! 

And So, I Brag: Business Law Students with Initiative

I try not to use this space too often to brag on my students--the folks whose quest for knowledge gets me up in the morning.  But three of my students have been co-authors of two separate pieces in the American Bar Association's Business Law Today publication since May.  The initiative and the follow-through that these students (two of whom have graduated and are now in private practice) exhibited is truly extraordinary.  And so, I brag . . . .

Most recently, my current student Samuel Henninger has co-authored an article with a practitioner on preference payments in bankruptcy entitled "I Scream, You Scream, We All Scream at Preference Claims."  Samuel graduates in May 2019. He will clerk for a local bankruptcy court judge next year and then practice with Waller Lansden Dortch & Davis, LLP in Nashville after his clerkship concludes.

Back in May, my former students Brian Adams and Bo Cook co-authored an article together entitled "Limiting the Scope of Post-Closing Actions in Private Mergers & Acquisitions: The Role of Non-Reliance and Integration Clauses in Delaware," delving into enforcement issues in mergers and acquisitions relating to allegations of fraud based on "extra-contractual representations."  Brian and Bo graduated in the spring of this year (2018).  Brian is a newly minted associate at Polsinelli PC in Nashville and Bo holds the same august position at Bass Berry & Sims PLC also in Nashville.

Few students understand the significant contribution that these kinds of articles may make in solving the problems of practicing lawyers and, potentially, the judiciary.  Fewer yet have the chutzpah to think that their article of this kind, if submitted, would make it to publication.  Even fewer students would undertake and complete the tailored research and writing that an article of this kind takes.  These three guys deserve some real credit, in my estimation.  And so, I brag!

Call for Proposals: Organizing, Deploying & Regulating Capital in the U.S.

From our friend and BLPB colleague, Anne Tucker, following is nice workshop opportunity for your consideration: 

Dear Colleagues,

We (Rob Weber & Anne Tucker) are submitting a funding proposal to host a works-in-progress workshop for 4-8 scholars at Georgia State University College of Law, in Atlanta, Georgia in spring 2018 [between April 16^th and May 8^th].  Workshop participants will submit a 10-15 page treatment and read all participant papers prior to attending the workshop.  If our proposal is accepted, we will have funding to sponsor travel and provide meals for participants. Interested parties should email [email protected] on or before November 15^th with a short abstract (no more than 500 words) of your proposed contribution that is responsive to the description below. Please include your name, school, and whether you will require airfare, miles reimbursement and/or hotel. We will notify interested parties in late December regarding the funding of the workshop and acceptance of proposals.  Please direct all inquiries to Rob Weber (mailto:[email protected]) or Anne Tucker ([email protected]).

Call for Proposals: Organizing, Deploying & Regulating Capital in the U.S.

Our topic description is intentionally broad reflecting our different areas of focus, and hoping to draw a diverse group of participants.  Possible topics include, but are not limited to:

• The idea of financial intermediation: regulation of market failures, the continued relevance of the idea of financial intermediation as a framework for thinking about the financial system, and the legitimating role that the intermediation theme-frame plays in the political economy of financial regulation.
• Examining institutional investors as a vehicle for individual investments, block shareholders in the economy, a source of efficiency or inefficiency, an evolving industry with the rise of index funds and ETFs, and targets of SEC liquidity regulations.
• The role and regulation of private equity and hedge funds in U.S. capital markets looking at regulatory efforts, shadow banking concerns, influences in M&A trends, and other sector trends.

This workshop targets works-in-progress and is intended to jump-start your thinking and writing for the 2018 summer.  Our goal is to provide comments, direction, and connections early in the writing and research phase rather than polishing completed or nearly completed pieces.  Bring your early ideas and your next phase projects.  We ask for a 10-15 page treatment of your thesis (three weeks before the workshop) and initial ideas to facilitate feedback, collaboration, and direction from participating in the workshop. Interested parties should email [email protected] on or before November 15th with a short abstract (no more than 500 words) of your proposed contribution that is responsive to the description below. Please include your name, school, and whether you will require airfare, miles reimbursement and/or hotel. We will notify interested parties in late December regarding the funding of the workshop and acceptance of proposals.  Please direct all inquiries to Rob Weber ([email protected]) or Anne Tucker ([email protected]).

Thank you!

Anne & Rob

The University of Alabama School of Law - Professor Positions

From an e-mail I recently received:

---------

The University of Alabama School of Law seeks to fill multiple entry-level/junior-lateral tenure-track positions for the 2018-19 academic year. Candidates must have outstanding academic credentials, including a J.D. from an accredited law school or an equivalent degree (such as a Ph.D. in a related field). Entry-level candidates should demonstrate potential for strong teaching and scholarship; junior-lateral candidates should have an established record of excellent teaching and distinguished scholarship. Positions are not necessarily limited by subject. However, there is a particular need for applicants who study and/or teach business law (corporate finance, mergers & acquisitions, and business planning are of particular interest); criminal law; insurance law; and torts (including products liability). Family law and labor/employment are also areas of interest. We welcome applications from candidates who approach scholarship from a variety of perspectives and methods (including quantitative or qualitative empiricism, formal modeling, or historical or philosophical analysis).

The University embraces diversity in its faculty, students, and staff, and we welcome applications from those who would add to the diversity of our academic community. Interested candidates should apply online at facultyjobs.ua.edu. Salary, benefits, and research support will be nationally competitive. All applications are confidential to the extent permitted by state and federal law; the positions remain open until filled. Questions should be directed to Professor William Brewbaker, Chair of the Faculty Appointments Committee ([email protected]).

IRONMAN Acquires Competitor Group

In August, 2015, Chinese conglomerate, Wanda Group, acquired IRONMAN (primarily known for its long distance triathlon races) from a private equity group for $650 million. 

Last Friday, IRONMAN/Wanda acquired Competitor Group (primarily known for the Rock 'n Roll Marathon and Half-Marathon series) for an undisclosed amount. 

To start, I had no idea organizing endurance sports had become such big business, but given the increasing popularity and the increasing entry fees, perhaps I should have known. 

Personally, I have mixed feelings about big corporations dominating endurance sports, which, previously, had been much less commercial. On one hand, because of their scale, larger corporations like Competitor Group can conduct their events in a very professional manner, produce slick event shirts, measure the courses precisely, host impressive expos before the races and impressive after-parties, maintain plenty of insurance, take proper precautions, and market effectively to bring new participants into the events.

On the other hand, the big corporations often seem focused on a single, financial line. They raise entry fees as high as they can and often seem to spend an incredible amount on marketing. The races organized by big corporations often lack the individual touch of local races. That said locally organized races are a mixed bag. Sometimes they are organized by complete amateurs, and their lack of experience or financial backing shows in things like poorly measured and marked courses. Other times, when organized by devotees of the sport, locally organized races can provide a superior event without the marketing, frills, and shiny gadgets. Perhaps there will be room all types of organizers, especially because the locally organizers are usually nonprofit operations, and therefore are a bit of a different animal.

This strategic acquisition by IRONMAN may be telling regarding the trajectory of races. The long distance races like the IRONMAN (2.4 mile swim, 112 mile bike, 26.2 mile run) had skyrocketed in popularity, but, while those races are still currently popular, I think that many people are starting to realize they don't have the time or the money (the entry fee is often over $500) for that kind of event. Competitor Group brings not only a portfolio of marathons (26.2 miles) to the table, but also half marathons (13.1 miles, which is growing in popularity), 5Ks (3.1 miles), and even 1 mile races. 

In any case, I do wish IRONMAN the best with this acquisition, and I hope they will consider all stakeholders as they move forward. 

Business Headlines

Here is a rundown of recent business news headlines:

The Yahoo/Verizon deal takes a $350M haircut to compensate for Yahoo data security breaches in 2013 and 2014.

The Snapchat parent company, SNAP, scheduled blockbuster IPO ($20-23B) is plagued with news that it lost  $514.6 million in 2016, there are questions about the sustainability of its user base, and, for the governance folks out there, there is NO VOTING STOCK being offered.

In what is being called a "whopper" of a deal, Restaurant Brands, the owner of Burger King and Tim Hortons, announced earlier this week a deal to acquire Popeye's Louisiana Kitchen, the fried chicken restaurant chain, for $1.8 billion in cash. 

Kraft withdrew its $143B takeover offer for Unilever less than 48 hours after the announcement amid political concerns over the merger.  While Unilever evaluates its next steps, Kraft is perhaps feeling the effects of its controversial takeover of Britain's beloved Cadbury. 

A final item to note, for me personally, is that today is my last regular contribution to the Business Law Professor Blog. I will remain as a contributing editor, but will miss the ritual of a weekly post--a habit now nearly 4 years in the making.  Thanks to all of the readers and other editors who gave me great incentive to learn new information each week, think critically, connect with teaching, and generally feel a part of a vibrant and smart community of folks with similar interests. 

With gratitude,

Anne Tucker

Finally -- Moot Court Meets Transactional Law

Later this week, I will be on the road to Los Angeles to take one of our teams to a LawMeet Transactional competition.  The competition is described as follows: 

The National Transactional LawMeet is the premier “moot court” experience for students interested in a transactional practice. The National Transactional LawMeet is a part of the LawMeet family of live, interactive, educational competitions designed to give law students a hands-on experience in developing and honing transactional lawyering skills.

I worked with a team last year that made it to the finals in New York City (their work and talent got them there, to be clear), and it was a great experience. They did the regional on their own last year, so I am hoping I don't get in their way this time around.  

I have worked with moot court teams for years, including taking teams to the Evans Moot Court Competition at the University of Wisconsin Law School and the Mardi Gras Moot Court Competition at Tulane Law School, and they were good experiences, I think, for the students. And I have helped with our West Virginia University College of LawNational Energy & Sustainability Moot Court Competition, which I think is both unique and well done (I am not unbiased, I admit, but I am confident I am right.)

Still, it was great to go to a transactional competition. The LawMeet competition was impressive. It's hard to isolate a deal simulation, but the organizers did well. And after their negotiation sessions, the students got reviewed by some incredibly talented people. One of the reviewers was a very big deal M&A partner at a very big deal New York firm. And he was kind, thoughtful, while providing an incisive critique. I disagreed with him on one tactic (I kept my mouth shut), because I was exposed to a different viewpoint for a very big deal partner at a very big deal New York firm some years ago.  It wasn't a big point, but it was actually great opportunity to talk about philosophy and tactics with my students (later) using a deal setting as the basis for discussion.  

Anyway, I am happy this opportunity is out there for students aren't seeking to litigate, but want to go live (or close to it).  Go Business Law!  

Appraisal Standard Intellectual "Cage Match": DFC Global Corp Amici Briefs

Prominent corporate governance, corporate finance and economics professors face off in opposing amici briefs filed in DFC Global Corp. v.  Muirfield Value Partners LP, appeal pending before the Delaware Supreme Court.   The Chancery Daily newsletter, described it, in perhaps my favorite phrasing of legal language ever:  "By WWE standards it may be a cage match of flyweight proportions, but by Delaware corporate law standards, a can of cerebral whoopass is now deemed open."   

Point #1: Master Class in Persuasive Legal Writing: Framing the Issue

Reversal Framing: "This appeal raises the question whether, in appraisal litigation challenging the acquisition price of a company, the Court of Chancery should defer to the transaction price when it was reached as a result of an arm’s-length auction process."

vs.

Affirmance Framing: "This appeal raises the question whether, in a judicial appraisal determining the fair value of dissenting stock, the Court of Chancery must automatically award the merger price where the transaction appeared to involve an arm’s length buyer in a public sale."

Point #2:  Summary of Brief Supporting Fair Market Valuation:  Why the Court of Chancery should defer to the deal price in an arm's length auction

• It would reduce litigation and simply the process.
• The Chancery Court Judges are ill-equipped for the sophisticated cash-flow analysis (ouch, that's a rough point to make).
• Appraisal does not properly incentivize the use of arm's length auctions if they are not sufficiently protected/respected.
• Appraisal seeks the false promise of THE right price, when price in this kind of market (low competition, unique goods) can best be thought of as a range.  The inquiry should be whether the transaction price is within the range of a fair price.  A subset of this argument (and the point of the whole brief) is that the auction process is the best evidence of fair price.
• Appraisal process is flawed because the court discounted the market price in its final valuation.  The argument is that if the transaction price is not THE right price, then it should not be a factor in coming up with THE right price.
• Appraisal process is flawed because the final valuation relies upon expert opinions that are created in a litigation vacuum, sealed-off from market pressure of "real" valuations.
• The volatility in the appraisal market—the outcome of the litigation and the final price—distorts the auction process.  Evidence of this is the creation of appraisal closing conditions.

Point #3: Summary of Brief Supporting Appraisal Actions:  Why the Court of Chancery should reject a rule that the transaction price—in an arm's length auction—is conclusive evidence of fair price in appraisal proceedings.

• Statutory interpretation requires the result.  Delaware Section 262 states that judges will "take into account all factors" in determining appraisal action prices.  To require the deal price to be the "fair" price, eviscerates the statutory language and renders it null.  
  • The Delaware Legislature had an opportunity to revise Section 262—and did so in 2015, narrowing the scope of eligible appraisal transactions and remedies—but left intact the "all factors" language.
• The statutory appraisal remedy is separate from the common law/fiduciary obligations of directors in transactions so a transaction without a conflict of interest and even cured by shareholder vote could still contain fact-specific conditions that would make an appraisal remedy appropriate.
• There are appropriate judicial resources to handle the appraisal actions because of the expertise of the Court of Chancery, which is buttressed by the ability to appoint a neutral economic expert to assist with valuations and to adopt procedures and standards for expert valuations in appraisal cases.
• The threat of the appraisal action creates a powerful ex ante benefit to transaction price because it helps bolster and ensure that the transaction price is fair and without challenge.
• Appraisal actions serve as a proxy for setting a credible reserve in the auction price, which buyers and sellers may be prohibited from doing as a result of their fiduciary duties.
• Any distortion of the THE market by appraisal actions is a feature, not a bug.  All legal institutions operate along side markets and exert influences, situations that are acceptable with fraud and torts.  Any affect that appraisal actions create have social benefits and are an intended benefit.
• Let corporations organized/formed in Delaware enjoy the benefits of being a Delaware corporation by giving them full access to the process and expertise of the Delaware judiciary.

Conclusions:

My thinking in the area more closely aligns with the "keep appraisal action full review" camp on the theory--both policy and economic.  Also the language in the supporting/affirmance brief is excellent (they describe the transaction price argument as a judicial straight jacket!).  I must admit, however, that I am sympathetic to the resources and procedural criticisms raised by the reversal brief. That there is no way for some corporate transactions, ex ante, to prevent a full scale appraisal action litigation—a process that is costly and time consuming—is a hard pill to swallow.  I can imagine the frustration of the lawyers explaining to a BOD that there may be no way to foreclose this outcome.  Although I hesitate to put it in these terms, my ultimate conclusion would require more thinking about whether the benefits of appraisal actions outlined in the affirmance brief outweigh the costs to the judiciary and to the parties as outlined in the reversal brief.  These are all points that I invite readers to weigh in on the comments--especially those with experience litigating these cases.

I also want to note the rather nuanced observation in the affirmance brief about the distinction between statutory standards and common law/fiduciary duty.  This important intellectual distinction about the source of the power and its intent is helpful in appraisal actions, but also in conflict of interest/safe harbor under Delaware law evaluations.

For the professors out there, if anyone covers appraisal actions in an upper-level course or has students writing on the topic-- these two briefs distill the relevant case law and competing theories with considerable force.  

-Anne Tucker

A New Resource for Teaching Transactional Business Law

Just a quick post today to alert you to a new teaching text that you may want to consider if you teach business planning or another similar offering focusing on transactional business law.  My UT Law colleagues George Kuney, Brian Krumm, and Donna Looper are coauthors of the recently released teaching text, A Transactional Matter.  The description on amazon.com follows.

A Transactional Matter gives users a summary of a basic transaction from initial choice of entity for a new venture through the harvest of that venture through a sale of substantially all its assets to an acquirer. This book allows students to get a feel for how transactional lawyering actually works―examining client objectives, legal options, client counseling, due dilligence, documentation and implementation.

This book is available in both a print version and electronic version. The e-version has live hyperlinks to the underlying transactional documents and statutes, regs, and cases. The print version will be supported by a website giving access to the same materials. Both the e-book and website of print version will feature extensive hyperlinks to source documents and legal authorities.

The three coauthors bring to this book a wealth of business law experience in a variety of contexts (from bankruptcy to general practice).   Overall, the book represents a very accessible set of teaching materials.  In fact, a student in my transaction simulation course module (which focuses on bylaw drafting) has already posted an excerpt to our class website, showing the immediate value of the text to my students (and maybe yours . . .).  If you use the book, please let me know how and how it worked for you.

[FYI, my colleagues also are coauthors of A Civil Matter, a civil procedure/litigation introduction for 1L students, in case that's more up your alley.]

[Added 1/24/2017: Here is the link to the West Academic page that Jeff Lipshaw mentions in his comment, for those who are interested.]

Delaware Supreme Court to Rehear Appraisal Action

In July, Delaware Chancellor Andre Bouchard found that payday lender DFC Global Corp was sold too cheaply to private equity firm Lone Star Funds in 2014.  Chancellor Bouchard held that four DFC shareholders were entitled to $10.21 a share at the time of the deal, or about 7 percent above the $9.50 per share deal price that was approved by a majority of DFC shareholders.

A Gibson Dunn filing related to the DFC case on appeal before the Delaware Supreme Court sheds light on the appraisal process in Delaware.  The claim is the Chancellor Bouchard manipulated the calculations to reach the $10.21 prices.  The full brief is available here, but this summary might provide easier reading.  Reuters reports:

Bouchard made a single clerical error that led him to peg DFC’s fair value at $10.21 per share.

DFC’s lawyers at Gibson Dunn & Crutcher spotted the mistake and asked Chancellor Bouchard to fix the erroneous input. If he did, the firm said, he’d come up with a fair value for the company that was actually lower than the price Lone Star paid. The chancellor agreed to recalculate – but in addition to fixing the mistaken input, Bouchard adjusted DFC’s projected long-term growth rate way up, to a number even higher than the top of the range proposed by the plaintiffs’ expert. The offsetting changes brought the recalculated valuation back in line with Chancellor Bouchard’s original, mistaken analysis.

Gibson Dunn is now arguing at the Delaware Supreme Court that the chancellor’s tinkering shows just why appraisal litigation – in which shareholders dissatisfied with buyout prices ask Chancery Court to come up with a fair price for their stock – has become a big problem for companies trying to sell themselves.

Last week The Chancery Daily reported on a December 16th appraisal case, Merion Capital, where Chancellor Laster held that a fair price was paid. The questions remains what is the significance of deal price and what is the significance of expert opinion shifting these technical cases in or outside of fair value?

-Anne Tucker

 

Last Class? Coggins to the Rescue!

Today, I share a quick teaching tip/suggestion.

I taught my last classes of the semester earlier today.  For my Business Associations class, which met at 8:00 am, I was looking for a way to end the class meeting, tying things from the past few classes up in some way.  I settled on using the facts from a case that I used to cover in a former casebook that is not in my current course text:  Coggins  et al. v. New England Patriots Football Club, Inc., et al.  Here are the facts I presented:

• New England Patriots Football Club, Inc. (“NEPFC”), the corporation that owns the New England Patriots, has both voting and nonvoting shares of stock outstanding.
• The former president and owner of all of the voting shares of NEPFC, Sullivan, takes out a personal loan that only can be repaid if he owns all of the NEPFC stock outstanding.
• The board and Sullivan vote to merge NEPFC with and into a new corporation in which Sullivan would own all the shares.
• In the merger, holders of the nonvoting shares receive $15 per share for their common stock cashed out in the merger.

From this, I noted that three legal actions are common when shareholders are discontented with a cash-out merger transaction: appraisal actions, derivative actions for breach of fiduciary duty, and securities fraud actions.  Shareholders in NEPFC brought all three types of action.  (Footnote 9 of the Coggins case and the accompanying text explain that.)  

Having just covered business combinations, including approval and appraisal rights, and wanting to address some new information about the process of derivative litigation, the facts from the case worked well.  I am sure there are other cases or materials that also could have done the job.  (Feel free to leave suggestions in the comments.)  But adding a little football and conflicting interests to the last class seemed like the right idea . . . .

 

 

Ripped from the Headlines: GE & Baker Hughes Proposed Merger

General Electric (GE)  and Baker Hughes (BHI) announced on Monday, October 31st, a proposed merger to combine their oil and gas operations.  GE and Baker Hughes will form a partnership, which will own a publicly-traded company.   GE shareholders will own 62.5% of the "new" partnership, while Baker Hughes shareholders will own 37.5% and receive a one-time cash dividend of $17.50 per share.  The new company will have 9 board of director seats:  5 from GE and 4 from Baker Hughes.  GE CEO Jeff Immelt will be the chairman of the new company and Lorenzo Simonelli,  CEO of GE Oil & Gas, will be CEO. Baker Hughes CEO Martin Craighead will be vice chairman.

Reuters is describing the business synergies between the two companies as leveraging GE's oilfield equipment manufacturing ("supplying blowout preventers, pumps and compressors used in exploration and production") and data process services with Baker Hughes' expertise in " horizontal drilling, chemicals used to frack and other services key to oil production."

Baker Hughes had previously proposed a merger with Halliburton (HAL), which failed in May, 2016, after the Justice Department filed an antitrust suit to block the merger. Early analysis suggests that the proposed GE & Baker Hughes will pass regulatory scrutiny because of the limited business overlap of GE and Baker Hughes.

As I plan to tell my corporations students later today: this is real life!  A high-profile, late-semester merger of two public companies is a wonderful gift.  The proposed GE/Baker Hughes merger illustrates, in real life, concepts we have been discussing (or will be soon) like partnerships, the proxy process, special shareholder meetings, SEC filings, abstain or disclose rules, and, of course, mergers.

 

Continue reading

Large Firm Practice Areas and Relative Flexibility

Building on Joan’s personal reflection about her time in practice and stemming from a conversation with a student this week, I decided to post (and solicit comments) on the BigLaw practice areas that are most/least conducive to part-time work or work while raising children. While no practice areas in BigLaw are well known for being incredibly flexible, it did appear that certain practice areas were more flexible than others.

In my view, tax appeared to be the most flexible practice group area and M&A (my first practice group area) appeared to be the least flexible. Granted, I never practiced tax law, but as an M&A attorney you solicit comments from many areas within the firm and you get a sense of their schedules.

The advantages of the tax group were a high billing rate (some of the very highest in the firm) and a lot of piecemeal, often not urgent, work. Sure, we “urgently” needed tax comments on most of our deals, and when clients are paying BigLaw rates, they almost always want a prompt response. But in my limited experience, the tax lawyers controlled their timelines more so than any of the other attorneys I worked with. There were few enough excellent tax attorneys that if they said – I will get to that tomorrow or next week – you often did not have much recourse. Perhaps this was just my own perception or simply unique to my firms. That said, I have also seen tax lawyers pull off the “part-time” or "flexible schedule" role better and more often than other areas. Areas like Patent and ERISA may have similar attributes.

In M&A, however, flexible, part-time work was almost impossible to obtain. I’ve witnessed some M&A attorneys try to go part-time, and I have never seen it go very well or last very long. M&A attorneys are the quarterbacks of the deal, so even if you are only assigned to one deal – you have to be involved in all aspects of the deal and have to be on call 24/7 when that deal is moving quickly. And a deal often lasts for months. And there isn’t much piecemeal work that you can just pop in and do without staying intimately involved. After practicing in an M&A/Corporate group for a few years, I moved to a business litigation/corporate governance group. While the litigation/corporate governance group was not necessarily flexible, and you do have to be "all-in" if a case is heading to trial, there seemed to be a lot more room for flexible, part-time research and writing. In M&A there were some opportunities for these sorts of things, but many fewer of them and often they were simply nonbillable client alerts.

Again, maybe this is just my own perception, I’d love to hear thoughts in the comments or via e-mail from readers, as those thoughts could be helpful in advising students. Which practice group area or areas in a large firm offer the most flexibility?

Guest Post: Controlling Shareholders and the Geography of MFW-Land*

 

*The guest post is contributed by Itai Fiegenbaum who teaches corporate law at Tel Aviv University and Ramat Gan College of Law and Business.  

Today's post continues the discussion started by Anne’s informative post regarding the law of controlling stockholders. Anne astutely notes that the MFW “enhanced ratification” framework was rendered in connection with a going private merger. Although I recognize the intuitive appeal, I wish to call into question the impact of MFW’s holding on other manners of controlling shareholder transactions.

Going private transactions differ from going concern transactions in that their successful completion wipes out the minority float. This distinction accelerates stockholders' divergent incentives and raises the possibility for minority stockholder abuse. An unscrupulous controller might structure the transaction in a manner that captures all unlocked value for later private consumption. Going private transactions allow controlling stockholders to shed the restrictions of the public market, thereby evading future retribution by minority stockholders. Policy considerations accordingly call for superior protection of minority stockholders participating in a going private transaction.

Since MFW establishes a procedure for achieving less intrusive judicial review for going private transactions, it stands to reason that this procedure should apply to all transactions involving a controlling stockholder. Indeed, without addressing the distinction between going private and going concern transactions in this context, a fairly recent Chancery Court decision has explicitly opined that the MFW framework applies to all controlling stockholder transactions (In re Ezcorp Inc. Consulting Agreement Derivative Litig., 2016 WL 301245, at *28 (Del. Ch. Jan. 25, 2016)).

In a forthcoming article at the Delaware Journal of Corporate Law, I argue that the borders of "MFW-Land" are not as clear-cut as they appear. The Delaware Supreme Court decision does not create a universally-applicable safe harbor procedure for all manner of controlling stockholder transactions. Two main arguments form the basis of this contention. 

The dual tenets of doctrinal clarity and cohesion underpin the first argument. A careful reading of the MFW decision fails to detect any mention of competing precedent or a general proclamation regarding its applicability to other types of controlling stockholder transactions. MFW is clearly situated on a path of doctrinal evolution of judicial inspection of going private transactions with controlling stockholders. Canons of judicial interpretation counsel against an indirect reversal or modification of established precedent.

Additionally, the theoretical justifications for the MFW decision hold significantly less weight in the going concern context. MFW's doctrinal shift is grounded on the twin pillars representing the competency of independent directors and non-affiliated stockholders. Whatever the validity of these mechanisms in the freeze out context, the legal and financial scholarship does not validate an extension to going concern transactions. Serious flaws hamper the ability of independent directors and non-affiliated stockholders to pass meaningful judgment on going concern transactions. In the final tally, MFW does not produce an all-encompassing framework for all controlling stockholder transactions.

 

Stockholder Approval and the BJR in the Absence of a Controlling Shareholder

I am preparing to teach the doctrine on controlling shareholders in my corporations class tomorrow, and found the recent Delaware opinions on non-controlling shareholder cleansing votes and the BJR to be helpful illustrations of the law in this area.

In summer 2016, the Delaware Court of Chancery dismissed two post-closing actions alleging a breach of fiduciary duty where there was no controlling shareholder in the public companies, where the stockholder cleaning vote was fully informed, and applied the 2015 Corwin business judgment rule standard.  The cases are City of Miami General Employees’ & Sanitation Employees’ Retirement Trust v. Comstock, C.A. No. 9980-CB,  (Del. Ch. Aug. 24, 2016) (Bouchard, C.) and Larkin v. Shah, C.A. No. 10918-VCS, (Del. Ch. Aug. 25, 2016) (Slights, V.C.), both of which relied upon  Corwin v. KKR Financial Holdings, LLC, 125 A.3d 304 (Del. 2015).  (Fellow BLPB blogger Ann Lipton has written about Corwin here).

The Larkin case clarified that Corwin applies to duty of loyalty claims and will be subject to the deferential business judgment rule in post-closing actions challenging non-controller transactions where informed stockholders have approved the transaction.   The Larkin opinion states that:

(1) when disinterested, fully informed, uncoerced stockholders approve a transaction absent a looming conflicted controller, the irrebuttable business judgment rule applies; (2) there was no looming conflicted controller in this case; and (3) the challenged merger was properly approved by disinterested, uncoerced Auspex stockholders. Under the circumstances, the business judgment rule, irrebuttable in this context, applies. ....The standard of review that guides the court’s determination of whether those duties have been violated defaults to a deferential standard, the business judgment rule, which directs the court to presume the board of directors “acted on an informed basis, in good faith and in the honest belief that the action was taken in the best interests of the company.” In circumstances where the business judgment rule applies, Delaware courts will not overturn a board’s decision unless that decision 'cannot be attributed to any rational business purpose.' This broadly permissive standard reflects Delaware’s traditional reluctance to second-guess the business judgment of disinterested fiduciaries absent some independent cause for doubt.  Larkin at 21-22 (internal citations omitted).

Two-sided controller transactions (a freeze out merger where a controlling shareholder stands on both sides of the transaction) is covered by the 2014 Kahn v. M & F Worldwide Corp., 88 A.3d 635(Del. 2014) case, which I summarized in an earlier BLPB post here.

To refresh our readers, the controlling shareholder test is a stockholder who owns a majority of stock. Additionally, a stockholder may qualify as a controller if:

Under Delaware law, a stockholder owning less than half of a company’s outstanding shares may nonetheless be deemed a controller where 'the stockholder can exercise actual control over the corporation’s board.'This “actual control” test requires the court to undertake an analysis of whether, despite owning a minority of shares, the alleged controller wields “such formidable voting and managerial power that, as a practical matter, [it is] no differently situated than if [it] had majority voting control.'A controlling stockholder can exist as a sole actor or a control block of “shareholders, each of whom individually cannot exert control over the corporation . . . [but who] are connected in some legally significant way—e.g., by contract, common ownership agreement, or other arrangement—to work together toward a shared goal.' Larkin at 33-34 (internal citations omitted).

Excellent commentary on theLarkin and Comstock cases and their practical implications can be found on the Harvard Law School Forum on Corporate Governance and Financial Regulation, available here.

-Anne Tucker

 

"Business Law" Earn Spot as 2016 Law Job Hiring "Trend"

Increasing business demands are prompting companies to expand into new products and markets. Businesses also are engaging in mergers, acquisitions and joint ventures; issuing  securities; and performing other transactions associated with business growth, which results in larger corporate teams. Many companies have a need for additional in-house legal professionals who are readily available to help manage mounting financial and industry-related regulations. Moreover, corporate legal departments often prefer to handle more routine legal work in-house and retain the services of outside counsel for specialized legal work.

Real estate, IP, health care and compliance were also mentioned along with the noted strong growth in litigation.  The full report/study is available here:  Download Legal_2016_job_salary_guide.

 

-Anne Tucker

Instagram and Valuing Businesses

In the spring of 2012, around the time that Facebook purchased Instagram for roughly $1 billion, I was teaching an M&A class.

At the time, I had difficulty explaining why Facebook would pay that amount of money for a company that was not only not profitable, but also had no revenue. I spoke as someone trained to use multiples EBITDA and as someone who did not (and still does not) have an Instagram account.

Now, over four years later, Forbes estimates Instagram's value at $25billion to $50billion. That valuation still requires some creativity, as Instagram had sales of "only" $630 million in 2015. Instagram, however, has added roughly 100 million new users in the last 9 months and is projected to have revenue of $1.5billion this year. While there is reason to be wary of projections, the projected sales for Instagram in 2018 is an impressive $5billion.

This drives home that valuation is as much art as science, and the conventional valuation methods will not work well for every company. In that deal, I imagine Instagram's technology, brand, and the user base were all large value drivers. With the benefit of hindsight, Instagram is looking like a good acquisition for Facebook, even if the current projections end up being a bit optimistic. 

Dell, Dell, Delaware, and More Dell!

If you've been slamming away on a writing deadline then perhaps you've missed the opportunity (like me) to dive into the recent Chancery Court of Delaware Dell appraisal rights opinion (downloadable here).  Have no fear, your summary is here.

Vice Chancellor Laster valued Dell’s common stock at $17.62 per share, reflecting a 28% premium above the $13.75 merger price that was paid to Dell shareholders in October 2014 in a going private transaction lead by company-founder Michael Dell. Dell's going private transaction was opposed by Carl Icahn and this juicy, contentious transaction has its own required reading list.  When conceding defeat, Carl Icahn sent the following letter to Dell Shareholders:

New York, New York, September 9, 2013 

Dear Fellow Dell Inc. Stockholders:

I continue to believe that the price being paid by Michael Dell/Silver Lake to purchase our company greatly undervalues it, among other things, because:

1. Dell is paying a price approximately 70% below its ten-year high of $42.38; and

2. The bid freezes stockholders out of any possibility of realizing Dell’s great potential.

Fast forward nearly 3 years later and it seems Vice Chancellor Laster agrees.  VC Laster reached his undervaluation decision despite no finding of significant fault with the company’s directors' conduct or a competing bidder.  Instead, VC Laster focused on the fall in the company’s stock price, and a failure to determine the intrinsic value of Dell before negotiating the buyout. The business press and law blogs have exploded with articles, a few of which are highlighted below:

• For a good summary of the ruling see this succinct Delaware Chancery Court blog post and Andrew Ross Sorkin's NY Times article.
• For a good discussion of how appraisal remedies were applied in Dell, see Steven Davidoff Solomon's NY Times article here.
• For a discussion of the increase in shareholder appraisal actions and contributing factors (arbitrage) and the future of appraisal rights, see this ABA article.

-Anne Tucker

 

Benefit Corporation M&A - The (In)Sufficiency of Financial Fairness

Well, given that I just spent several hours constructing a somewhat lengthy post that I apparently lost (aargh!), I will keep this relatively short.

This summer, I am working on a benefit corporation project for the Annual Adolf A. Berle Symposium on Corporation, Law and Society (Berle VIII) to be held in Seattle next month.  In that connection, I have been thinking about litigation risk in public benefit corporations, which has led me to consider the specific litigation risks incident to mergers and acquisitions ("M&A").  I find myself wondering whether anyone has yet done a benefit corporation M&A transaction and, if so, whether a checklist might have been created for the transaction that I could look at.  I am especially interested in understanding the board decision-making aspects of a benefit corporation M&A transaction. (Haskell, maybe you know of something on this . . . ?)

Preliminarily, I note that fairness opinions should not carry as much weight in the benefit corporation M&A approval context, since they only speak about fairness "from a financial point of view." Benefit corporation boards of directors must consider not only the pecuniary interests of shareholders in managing the firm, but also the firm's articulated public benefit or benefits (which is/are set forth in its charter).  Will legal counsel pick up the slack and render an opinion that the board's consideration of the public benefit(s) complies with law?  What diligence would be required to give that opinion?  I assume in the absence of interpretive decisional law, any opinion of that kind would have to be qualified.  I also assume that legal counsel will not readily volunteer to give this kind of opinion.

However, even in the absence of an opinion, legal counsel will have to offer advice on the matter, since the board of a benefit corporation has the legal obligation to manage the firm consistent with its public benefit(s) in any case.  Moreover, M&A agreements typically include representations (on transactional consents, approvals, and governance/legal compliance) affirming that the requisite consents and approvals for the transaction have been obtained and that the agreement and consummation of the transactions contemplated by it do not violate the firm's charter or applicable law.  Legal counsel will be responsible for counseling the client on these contractual provisions.

At first blush, the embedded issues strike me as somewhat complex and fact-dependent.  Important facts in this context include the precise language of the applicable statutory requirements, the nature of the firm's public benefit or benefits, the type of M&A transaction at issue and the structure of the transaction (including which entity survives in a merger), and the identity of the other party or parties to the transaction (especially whether, e.g., a merger partner is organized as a public benefit corporation or another form of entity).  As I continue to ponder these and related matters in the benefit corporation M&A setting, I invite your comments on any of this--or on broader aspects of litigation risk in the public benefit corporation environment.