Tuesday, May 13, 2014
OK, I guess we are closing in on SkyNet territory. A VC firm in Hong Kong just named an algorithim to its board of directors:
How does the algorithm work?
VITAL makes its decisions by scanning prospective companies' financing, clinical trials, intellectual property and previous funding rounds.
Groome says it has already helped approved two investment decisions (though has not yet cast its first vote), both of which resemble its own function: In Silico Medicine, which develops computer-assisted methods for drug discovery in aging research; and In Silico's partner firm Pathway Pharmaceuticals, which employs a platform called OncoFinder to select and rate personalized cancer therapies.
On the plus side, VITAL won't demand a corporate jet or fancy meetings at the Four Seasons with golf. On the negative side, well ... billables for lawyers advising VITAL are going down ...
Tuesday, April 22, 2014
If it wasn't already obvious to you we live in a global economy in which almost all deals of any significant size will have global regulatory implications. Take for example, Microsoft's pending acquisition of the Nokia handset business announced last fall. It's expected to close this week after facing significant and real opposition from both the Korea Fair Trade Commission and China's MOFCOM:
Aware of a possible backlash from local companies, the Chinese Ministry of Commerce approved Microsoft’s purchase of Nokia on April 8, with certain conditions, saying, “Microsoft and Nokia’s patents could limit competition in the local smartphone market.” In light of the Chinese government’s decision, the Korean regulatory body is more likely to follow suit. In fact, the body is said to be considering granting conditional approval to the business consolidation, and finalizing its standards for approval.
Think about that - an American company buys a division of a Finnish company and the Korean as well as Chinese regulators (among many others) weigh in. Again, for those who are paying attention - sure that's the world we live in. But, it's another reminder about how any real M&A lawyer has to be about much more than just the document. You have to be aware of how the deal will play out at 35,000 feet, not just in the home market but in other markets as well.
Thursday, January 23, 2014
An announcement today that Lenovo has agreed to acquire the low-power server business of IBM reminds me that CFIUS just relased its Annual Report for 2012. OK, it's 2014! But remember, CFIUS is an ad-hoc committee without even a building in DC. We can give them a break for being a little slow on the reporting side.
The big news from this most recent report is that China is moving on up to the big time. Previously, the countries with the largest number of CFIUS filings were France and the UK. Now, they have been replaced by Chinese filings. Of course, the total number of transactions covered under the CFIUS regime remains small, but as the Lenovo/IBM deal suggests, these deals are in potentially critical technology areas.
Thursday, May 30, 2013
File this one under miscellaneous regulatory approval. It's likely that the Smithfield acquisition by Shuanghui International is going to get pretty intensive review by a Congress. No big surprise there. Congress has regularly used large Chinese acquisitions to make political hay. This one, though, is a little different. What's the hook? National security - "Gawd, they're taking our ham!" Seems like weak tea. Heidi Moore suggests a different national security hook - concern that the lack of effective food standards at the Chinese parent could bleed down into Smithfield and adversely affect the US food supply. That's interesting and might be compelling, but we'll see how it plays out. Hey, maybe the result will be to increase the FDA's budget. OK, probably not...
Monday, April 29, 2013
I'll be the first the first to admit that the whole reverse merger situation with Chinese corporations really reveals the most cynical aspects of our capital markets. For those of you who haven't been paying attention to this issue, towards the end of the credit bubble and early on during the financial crisis there were a large of number of reverse mergers in the US involving Chinese corporations. The reverse merger is a back door way to take a company public. A privately held foreign company, in this case Chinese, acquires a publicly listed, but thinly traded, US corporation, usually a Delaware corporation through a reverse merger (the acquirer is the disappearing corporation and the target is the surviving corporation). The suriving corporation then changes its name to the Chinese corporation and presto, you have a publicy traded Chinese corporation incorporated in Delaware.
OK, so far so good. The next step is where things start to get 'hinky'. The newly public Chinese corporation then raises additional equity on US markets through a public offering. The money is transfered back to China and then ... it disappears. Surprised? There are lots of people who you might point a finger at in this exercise. The lawyers and investment bankers who arrange the reverse merger, the lawyers, investment bankers, and accountants who sign off on the public offering, the analysts who recommend shareholders buy shares in these companies. The list is very long. Now add to that list, the independent directors, usually US persons, who are required to sit on the boards of these companies (pursuant to the listing rules).
[Fuqi] listed its shares on Nasdaq through a reverse merger and in 2009 it raised $120 million through a public stock offering. Less than a year later, the company said it found accounting errors and uncovered transfers of cash out of the company totaling more than $130 million to entities that Fuqi has yet to verify were legitimate businesses. Fuqi has said the cash was recovered.
Fuqi's audit committee started to investigate, but its work stalled when management stopped paying the lawyers and accountants hired by the audit committee. The company said the lack of payment stemmed from a dispute with its insurer.
In protest, [independent directors] Brody and Hollander resigned from the board.
Shareholders sued the directors of Fuqi, including Brody and Hollander, who resigned in protest. Prior to suing, the shareholders had made demand, but the corporation sat on the shareholders' demand for over two years. The shareholders argued that notwithstanding the fact that they had previously made demand, it was futile because of the two year delay in responding. The essence of the shareholders claim was a Caremark oversight claim - that directors failed in the duty to monitor the corporation's activities and permitted more than $130 million to disappear. Glasscock sided with shareholders.
... lead me to believe that Fuqi had no meaningful controls in place. The board of directors
may have had regular meetings, and an Audit Committee may have existed, but there
does not seem to have been any regulation of the company’s operations in China.
The Vice Chancellor noted that independent directors had ignored several 'red flags' with respect to problems with internal controls and that directors did nothing to ensure that reporting mechanisms were accurate. The lack of internal controls was so bad that $130 million was transferred out of the company in Novermber 2010, but it wasn't found out by the directors until March 2011.
Also, and this is critically important for independent directors, a strategy of "noisy withdrawal" will not immunize independent directors from liability for bad acts that took place on their watch. Glasscock's ruling in Fuqi and Chancellor Strine's earlier in re Puda decision make two things clear: first, Caremark is alive - although it's a difficult standard to meet, there are facts that will meet that standard; and second, if you are an independent director, remember that it is serious business. Resigning in protest won't help. Better stick around and clean up the mess you created by your own inattentiveness.
Monday, April 8, 2013
According to Davis Polk, MOFCOM in China is looking to simplify pre-merger review for a large class of relatively "simple" (read small) transactions.
The draft regulation – which is not dissimilar to draft proposals recently announced by the European Commission – designates as “simple” three (arguably narrow) cases premised upon the merging parties having low market share post-merger:
- Horizontal mergers in which the parties together have under 15% share in a relevant market;
- Vertical mergers in which the parties have (a) a vertical relationship, and (b) under 25% share in the “vertical market”; and
- Mergers where the parties (a) do not have a vertical relationship, and (b) have under 25% share in all markets.
While in the US we use transaction size as the cut-off for initial review, the Chinese will be using market share. Transaction size tests are arguably simpler to enforce and simpler for parties to get their head around. On the other, market share tests will ensure plenty of work for lawyers.
Wednesday, April 18, 2012
Not two years ago, reverse mergers with little known Chinese firms was all the rage. The reverse merger was a cheap way to get a private Chinese (or any other) company public. Chinese firms took a liking to this backdoor to the US capital markets more than anyone else. So much so that it caused the SEC to investigate the practice and toughen up some of the listing standards in this area.
Now, we are seeing more and more of the following:
Shengtai Pharmaceutical, Inc. (OTC Bulletin Board: SGTI) ("Shengtai" or "the Company" or "We" or "Us"), a manufacturer and distributor in China of glucose and starch as pharmaceutical raw materials and other starch and glucose products, today announced that its Board of Directors has received a preliminary, non-binding proposal from its Chairman and Chief Executive Officer, Mr. Qingtai Liu ("Mr. Liu"), which stated that Mr. Liu intends to acquire all of the outstanding shares of the Company's common stock not currently owned by him and his affiliates in a going private transaction at a proposed price of $1.65 per share in cash.
Of course, Shengtai wasn't always Shengtai Pharmaceuticals. In 2007, it was known as West Coast Car Company. Control was transferred to Shengtai when Chinese investors bought the majority of shares in West Coast Car in 2007.
In recent months there has been a growing string of Chinese firms listed in the US going private. Apparently, the US capital markets aren't laid with gold. Listing and disclosures standards make it expensive for a low quality company to stay public, so they go private. That should be a good thing. Of course, we now have the JOBS Act that will reduce the costs of staying public for so-called "emerging companies" so perhaps there will be an incentive for these Chinese rever merger companies to stay public if they can get themselves categorized as "emerging companies."
Tuesday, January 24, 2012
The Section on Law and South Asian Studies has issued the following call for papers on Legal Education and Legal Reform in South Asia for the AALS' 2013 Annual Meeting in New Orleans:
The Section on Law and South Asian Studies of the AALS seeks outstanding proposals relating to the topic of of legal education as a vehicle for legal reform in South Asia. The selected proposals will be the basis for presentations at the AALS Annual Meeting to be held in New Orleans in early January, 2013. Topics relating to any country within South Asia, including Afghanistan, Bangladesh, Bhutan, Burma, India, Nepal, Pakistan, Sri Lanka, will be appropriate. Possible topics include: curricular reform; regional and comparative legal education reforms; the training of lawyers and judges as actors for social and legal change; the conservative pull of legal education; evolution of clinical legal education; the role of externships in institutional reform; the role of US law school programs in legal change. Please send a 500-1000 word proposal to the chair of the Section, Shubha Ghosh, at firstname.lastname@example.org by February 24, 2012.
While this is not necessarily a transactional program, there are a number of readers of this blog that are interested in legal reform and transactional law in South Asia. Some reforms, such as India's recently proposed (and now stalled) Companies Bill 2011, touch upon important issues related to M&A transactions. It would be interesting to have a better understanding of whether legal education and the training of lawyers and regulators has had any impact on these law reform efforts.
Tuesday, January 17, 2012
According to Reuters, an Olympus shareholder has now sued the board for "damaging trust" due to the accounting scandal there. Of course, the board has already filed suit against itself, so I wonder where this suit stands. I'm no expert in Japanese corporate law, in fact I know almost nothing about it. Any readers from Japan - and we have a number - who wish to comment on how this shareholder suit stands next to the board's suit, please feel free.
Tuesday, January 10, 2012
You'll remember last Fall when the whole Olympus accounting scandal came to light? Olympus was using merger-related transaction fees to hide its nearly 2 decades of accounting shenigans. It was only when Olympus' new CEO Michael Woodford started asking questions about the inexplicably large transaction fees that the whole thing fell apart. Now, Olympus has announced that it has filed suit in the Tokyo District Court against 19 current and past Olympus directors seeking more than 3.6 billion Yen (plus interest) in damages. That's about $45 million. That's not much, given the amount of damage caused to Olympus by the accounting scandal. According to Reuters, the internal investigation panel recommended seeking 90 billion Yen ($1.17 billion) in damages from the directors. Even in Japan I don't think D&O insurance covers accounting fraud.
Olympus expects all the current directors who have been sued to resign at the next shareholder meeting in April 2012.
Wednesday, December 21, 2011
Yahoo? Boohoo is more like it. From Forbes:
The New York Times is reporting that Yahoo tomorrow will consider a proposal to sell its stakes in Yahoo Japan and Alibaba Group, in a transaction that would be worth approximately $17 billion. But here's the thing: Yahoo's entire market cap is just over $18 billion.
So, Yahoo's non-Asian assets are only worth $1 billion. Goodness, how the mighty have fallen, even Groupon has a market cap larger than $10 billion...
Tuesday, November 8, 2011
This has been a weird story. It started rolling out about two weeks ago when the high flying CEO of Olympus, Michael Woodford was abruptly booted from the company after he questioned the $700 million in advisory fees to unknown parties in the Cayman Islands that appeared in conjunction with an aquisition. Woodford conducted an investigation and in the midst of it he was let go. Now, acquisition fees are normal, but relative size of the fees raised a red flag for Woodford - 35% of the acquisition price. If you're not generally paying attention to these things, 35% is huge. Anyway, Woodford got fired for calling BS and went public with what he knew about the odd payments.
Olympus Chairman Tsuyoshi Kikukawa then quit after defending the firing of Woodford. Last night though the dam broke. Olympus President Shuichi Takayama (President) admitted that Olympus has been using takeover advisory fees to cover losses for years. I guess they were a little surprised that Woodford created such a stink about it. I suppose they thought he would just go along. Here's a hint, if you are engaging in a huge accounting fraud, best not to bring in an outspoken outsider to run the show.
By the way, using a merger strategy to cover up for an accounting fraud isn't all that new or unique. Anyone remember Worldcom?
Tuesday, September 20, 2011
Chinese firm King & Wood - there's actually no Mr. King or Mr. Wood, but in the Chinese King & Wood are good names ... - anyway they have the run-down on the Provisional Rules of Assessment of Competitive Effects of Concentration of Business Operators (MOFCOM 2011/55). This is another in a series of new rules and regs the Chinese have been rolling out to implement their Anti-Monopoly Law.
Thursday, July 21, 2011
Allen & Overy just released their annual M&A Index. There some interesting bits there. For instance, 2011, they report a 776% increase in value of public hostile acquisitions. That's a big number, but off a small base. It's still less than 2% of all deals in their database. Here's the summary graphic of US deals:
Friday, May 13, 2011
This week the Competition Commission of India (CCI) released the new M&A regulations. These rules are somewhat softened from the stringent guidelines issued earlier this year (for various commentary see here). For example, deals entered into prior to June 1st have been exempted, and filing fees have been significantly decreased (see this useful Mayer Brown summary).
The rules exempt a host of transactions from the scrutiny of the CCI. For example, if an acquirer has a 50% stake in a firm then further acquisition will not trigger the competition law except where the acquisition leads to transfer from joint control to single control. Moreover a combination taking place entirely outside India with insignificant local nexus and effect on markets in India “need not normally be filed.”
With respect to timing, the regulations provide that within 30 days of submission of the notification form the CCI is to form a prima facie opinion as to whether the combination is likely to cause or has caused an appreciable adverse effect on competition within the relevant market in India. The proposed transaction will then be cleared or subject to a second phase investigation. The regulations provide that the CCI “shall endeavour to pass an order” in a second phase investigation within 180 days from the date of submission of the notification form.
The new regulations still leave some grey areas, such as failing to address pre-merger consultation, although the CCI has indicated that it will issue regulations on consultations. There is also concern about potential conflict between the new rules and the proposed overhaul of the Takeover Code by SEBI.
Friday, March 11, 2011
The Indian Competition Commission has recently published draft rules on the pre-approval of mergers in India. The draft rules are intended to go into effect this summer (June/July 2011). After they go into effect, India will join the growing list of countries (US, EU, Brazil, China, etc.) that will assert jurisdiction over international transactions where there is a nexus to India. Unlike the 30 day US HSR process for most transactions, the Indian process commits to resolving reviews of applications within 180 days of receiving them, with an outside date of 210 days. Nothing like efficiency!
The Commission is presently taking comments until March 22, 2011. I have an idea for a comment -- how about reducing the review period to say ... 30 days unless there is any reason to undertake a more extensive investigation.
Wednesday, March 9, 2011
John Armour, Justice Jack Jacobs and Curtis Milphaupt have recently published a comparative article on hostile takeover regimes in developing economies. The piece, The Evolution of Hostile Takeover Regimes in Developed and Emerging Markets: An Analytical Framework, is now appearing in the Harvard Journal of International Law.
Abstract: In each of the three largest economies with dispersed ownership of public companies—the United States, the United Kingdom, and Japan—hostile takeovers emerged under a common set of circumstances. Yet the national regulatory responses to these new market developments diverged substantially. In the United States, the Delaware judiciary became the principal source and enforcer of rules on hostile takeovers. These rules give substantial discretion to target company boards in responding to unsolicited bids. In the United Kingdom, by contrast, a private body consisting of market professionals was formed to adopt and enforce the rules on hostile bids and defenses. In contrast to those of the United States, the U.K. rules give the shareholders primary decisionmaking authority in responding to hostile takeover attempts. The hostile takeover regime in Japan, which developed recently and is still evolving, combines substantive rules with elements drawn from both the United States (Delaware) and the United Kingdom, while adding distinctive elements, including an independent enforcement role for Japan’s stock exchange.
This Article provides an analytical framework for business law development to explain the diversity in hostile takeover regimes in these three countries. The framework identifies a range of supply and demand dynamics that drives the evolution of business law in response to new market developments. It emphasizes the common role of subordinate lawmakers in filling the vacuum left by legislative inaction, and it highlights the prevalence of “preemptive lawmaking” to avoid legislation that may be contrary to the interests of important corporate governance players.
Extrapolating from the analysis of developed economies, the framework also illuminates the current stateand plausible future trajectory of hostile takeover regulation in the important emerging markets of China, India, and Brazil. A noteworthy pattern that the analysis reveals is the ostensible adoption—and adaptation—of “best practices” for hostile takeover regulation derived from Delaware and the United Kingdom in ways that protect important interests within each emerging market’s national corporate governance system.
Friday, March 4, 2011
I have written previously about the increase in outbound M&A activity by Indian firms. As I noted in my article “Rising Multinationals: Law and the Evolution of Outbound Acquisitions by Indian Companies,” changes in India’s regulatory regime have played an important role in the emergence of Indian multinationals. Extensive legal reforms since economic liberalization have set the stage for outbound acquisitions by Indian multinationals. However, I also argue that Indian law continues to impose significant constraints on the ability of Indian firms to engage in outbound acquisitions. Legal constraints limit the size of outbound deals as well as the methods that Indian multinationals use in pursuing outbound acquisitions, including limiting their ability to be creative in undertaking different types of acquisition structures.
It appears that the Confederation of Indian Industry (the CII is India's leading business association) has also turned its attention to these issues (HT: Indian Corporate Law Blog). In a recent press release, the CII points to some of the hurdles for Indian firms. According to the press release, the CII has submitted suggestions to the Department of Industrial Policy and Promotion, Government of India for creating a more “facilitative environment for transnational M & A activity of Indian corporates.” It will be interesting to see how the Indian government responds to the concerns expressed. In the past, the CII has had significant influence over the trajectory of Indian corporate law reforms.
Saturday, February 12, 2011
Reuters reports on China's announcement that China will begin subjecting inbound M&A activity to national security reviews - its own version of the US CFIUS process. Although the US security review system entails a voluntary filing, I suspect the Chinese version that they are currently envisioning will be slightly more intrusive. Here's the official goverrnmenent announcement (translated by the Google machine):
In order to guide foreign investors and orderly development of the domestic enterprise, safeguard national security, by the State Council, is to establish a foreign investor acquires a domestic enterprise security review (hereinafter referred to as M & A security review) system in the matter are as follows:
First, the scope of M & Security Review
(A) safety review of the range of M & A: Foreign investors, supporting the takeover of a domestic defense industry and military enterprises, key, sensitive military installations around the business, and relationships with other units of national security; foreign investor acquires a domestic national security of the important agricultural products, it is important energy and resources, critical infrastructure, an important transportation services, key technologies and major equipment manufacturing and other enterprises, and the actual control may be achieved by foreign investors.
(B) a foreign investor acquires a domestic enterprise, is the following:
1 foreign investor purchases shares of enterprises with foreign investment or subscribe for capital increase domestic non-foreign-invested enterprises, domestic enterprises to make the change into a foreign-invested enterprises.
2 foreign investment in a foreign investor purchases the equities of Chinese enterprises, or enterprises with foreign investment capital increase subscription.
3 foreign investors to establish foreign-invested enterprises and enterprises with foreign investment agreement through the purchase of a domestic enterprise assets and operates its assets, or through the foreign-invested enterprises to purchase shares of domestic enterprises.
4 the territory of foreign investors to buy corporate assets, and invest the assets of the foreign-invested enterprises operating assets.
(C) to obtain effective control over foreign investors, foreign investors means a domestic enterprise through the acquisition of a controlling shareholder or actual controller. Include the following:
1 foreign investors and its parent holding company, subsidiary after the acquisition of the total shares held by more than 50%.
2 several foreign investors in the acquisition of shares held after the combined total of more than 50%.
3 foreign investors in the acquisition of shares held after the total amount of less than 50%, but according to their holdings enough to enjoy the right to vote, or the shareholders meeting of shareholders, resolution of the board have a significant impact.
4 other decision-making led to a domestic enterprise, finance, personnel, technology transfer of effective control over the situation to foreign investors.
Second, the contents of M & Security Review
(A) of the M & A transaction on national security, including the defense needs of the domestic production capacity, the domestic services capacity and the impact on equipment and facilities.
(B) of the M & A transactions on the stable operation of the national economy.
(C) of the M & A transactions on the impact of basic social order of life.
(D) M & A transactions involving national security, the impact of key technology R & D capabilities.
Third, M & A security review mechanism
(A) the establishment of a foreign investor acquires a domestic enterprise security review of the Inter-Ministerial Joint Conference (hereinafter referred to as joint) system, the specific commitment to the safety review of mergers and acquisitions.
(B) under the leadership of the joint meeting of the State Council, the Development and Reform Commission, Ministry of Commerce take the lead, according to foreign capital industries and sectors involved, together with relevant departments to carry out M & Security Review.
(C) of the joint meeting of the main responsibilities are: analysis of a foreign investor acquires a domestic enterprise to national security; research, coordination of the foreign investor acquires a domestic enterprise security review of the major issues; on the need for safety review of the foreign investor business transactions within the safety review and decision.
Fourth, M & A security review process
(A) a foreign investor acquires a domestic enterprise, shall be in accordance with the provisions of this notice by the investor to the Ministry of Commerce to apply. That fall within the scope of the safety review of mergers and acquisitions, the Ministry of Commerce should be brought to within 5 working days to review the joint meeting.
(B) a foreign investor acquires a domestic enterprise, relevant State Council departments, national trade associations, industry enterprises and downstream enterprises that require acquisition of security review, conducted by the Ministry of Commerce security review of the proposed merger. Joint acquisitions deemed necessary by the safety review, may decide to conduct the review.
(C) of the joint review of the Ministry of Commerce deals brought to safety, the first general review of the general review of the failed, to conduct a special review. The parties shall deal with the joint safety review, to provide security review required materials, information, and accepted the inquiry.
Review of written comments of general way. Ministry of Commerce received the Joint Security Review deals brought to the application, within 5 working days, the departments concerned to seek a written opinion. After receiving the additional request in writing the relevant departments, should be within 20 working days to submit written observations. Such as the departments concerned that the deal does not affect national security, are no longer conduct a special review by the joint meeting of all the written comments received within 5 working days to review comments, and written notice to the Ministry of Commerce.
M & A transactions, if any departments that may impact on national security, joint written comments should be received within 5 working days after the start the special review process. Start the special review procedures, joint organization of the safety assessment of mergers and acquisitions, combined with assessment of the review of M & A transactions, basically the same comments, review comments made by the joint meeting; there are significant differences, by the joint meeting of the State Council for decision. Joint meeting since the launch of special review procedures within 60 working days to complete special reviews, or to the State Council decision. Review comments in writing by the joint meeting of the Ministry of Commerce.
(D) the safety review process in the acquisition, the applicant may apply to the Ministry of Commerce program to modify or withdraw merger transaction.
(E) acquisition of security review was made by the applicant written notice of the Ministry of Commerce.
(Vi) acts of a foreign investor acquires a domestic enterprise to national security have caused or may cause significant impact on the joint meeting with the relevant departments should be required to terminate the Ministry of Commerce of the transaction parties, or transfer the relevant shares, assets or other effective measures to eliminate the merger and acquisition on national security.
V. Other provisions
(A) the relevant departments and units to establish the overall concept, enhance a sense of responsibility and keeping state secrets and commercial secrets, improve efficiency, expanding opening up and foreign investment to improve standards at the same time, promote the healthy development of foreign capital to safeguard national security.
(B) the acquisition of domestic enterprises involving foreign investors new investment in fixed assets, fixed assets investment by state regulations for project approval.
(C) acquisition of domestic enterprises involving foreign investors to change the state-owned property, the management of state assets by state regulations.
(D) a foreign investor acquires a domestic financial institutions, security review separately.
(E) Hong Kong SAR, Macao Special Administrative Region, Taiwan investors in mergers and acquisitions, with reference to the provisions of this notice.
(Vi) M&A safety review system since the date of the notice issued 30 days after implementation.
Rules for this review process are expected to be released in March.
Thursday, January 6, 2011
Reuters suggests protectionism could stall Asian M&A - particularly in the resource and financial sectors:
"We have seen increased level of scrutiny and governmental control being applied to cross-border and M&A transactions and there is a more protectionist flavor currently than what we have seen in the past," said Colin Banfield, Citigroup's head of M&A for Asia-Pacific.
I suppose with oil threatening to hit $100/barrel this has to be true.