M & A Law Prof Blog

Editor: Brian JM Quinn
Boston College Law School

Wednesday, July 22, 2009

Empty Voting and 13D Filings

Been off doing summer-like things for the last few days.  Hey, it’s summer!  The WSJ reports today that SEC has fined Perry Corp $150,000 in connection with its failure to file a timely 13D following its acquisition of nearly a 10% position in Mylan stock in 2004.  At the time time, Mylan was in the process of acquiring King Pharmaceuticals.  Carl Icahn acquired a significant stake in Mylan and disclosed his opposition to the transaction.   Perry Corp (an arb) quietly accumulated a block of shares of Mylan similar in size to that of Icahn in order to vote for the transaction and increase the likelihood of its approval.  Perry was able to hedge its position through a series of swaps.  Ultimately, Perry held nearly 10% of Mylan’s voting shares but had successfully left behind any economic exposure.  In effect, Perry was through these transactions to buy votes without the accompanying economic exposure. 

Academics jumped on this transaction as an example of “empty voting” – see papers from Black & Hu and Kahan & Rock.  Delaware responded by making amendments to its corporate law (new Sec. 213) that will make it harder (though not impossible) to accomplish the same series of transaction.  The new Sec 213(a) permits boards to fix two separate record dates – one date for determining those stockholders entitled to notice of a meeting and a second date (closer to the meeting date) for determination of stockholders entitled to vote at the meeting.   The date for determining who may actually vote may be any date, including the date of the meeting. 

Now the SEC has weighed in (Administrative Order In the Matter of Perry Corp).  When Perry undertook its hedges in connection with the Mylan-King transaction it did not file a timely Schedule 13D which would have required it to disclose its position and its intentions.  Perry sought out legal advice of its regular outside counsel.  Apparently Perry’s outside counsel advised Perry that it had to file a 13D because the block was accumulated in “a merger situation.”  Engaging in a bit of legal arbitrage, Perry consulted another lawyer (“Lawyer B”) who provided a different answer – “assuming the purchase of Mylan shares is ordinary course for Perry …, I think you can file a 13G if a filing is necessary.”  Filing a 13G and not a 13D would permit Perry Corp to delay filing so that it would not have to disclose its position to the market during the period before the stockholder vote. 

The SEC has a different opinion. 

When institutional investors acquire, directly or indirectly, the beneficial ownership of securities with the purpose of influencing the management or direction of the issuer or affecting or influencing the outcome of a transaction – such as acquiring securities, or an interest in securities, for the purpose of voting those securities in favor of a merger – the acquisition of those securities cannot be said to be in the “ordinary course of [the institutional investor’s] business” for purposes of relying on Rule 13d-1(b) or making the certification under Item 10 of Schedule 13G.

The lesson here is that empty voting bothers a lot of people, particularly regulators the wrong way.   Delaware is trying to provide boards the tools through the setting of record dates to fight it.  And the SEC will use its disclosure rules to ensure that even if parties are able to structure such transactions that they are required to make timely disclosure to the market.



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