M & A Law Prof Blog

Brexit wrinkle

Here's a wrinkle to keep in mind. If there is a "no deal" Brexit and the UK crashes out of the EU without any sort of backstop in place, deals that previously would have required EU antitrust review and approval will likely have to submit in both the EU as well as in the UK.  Brexit might be a mess, but it's more work for lawyers - even deal lawyers!

-bjmq

Kraft still haunts UK

Kraft's 2012 acquisition of Cadbury is still haunting the UK.  At the time Kraft promised to maintain Cadbury's Somerdale plant in the UK as part of the deal.  After the deal closed, however, Kraft had an epiphany and closed the Somerdale facility.  That left many in the UK with sour feelings - not only for the US candymaker. but for foreign acquirers generally.  

The recent inversion trend, with UK companies as obvious targets, ahem...sorry...acquirers, has some UK regulators nervous.  They are now looking to tighten up pre-transaction promises and removing the "wiggleroom" according to teh UK's Business Secretary:

“We need a last-resort power, such that if there is something very clearly against the national interest – and the loss of our research and development in pharmaceuticals is a very good example – the government can in those circumstances intervene.”   

So, it seems that not only might the recent inversion trend cause some regulatory response in the US, but it might trigger another round of it in the UK as well.

-bjmq

Cadbury Law has teeth

You'll remember that that in the UK they adopted the Cadbury Law in part as a backlash to the acquisition of  that august candy maker by US based Kraft in 2010.   Bloomberg has an excellent piece with an assessment of the law now that we've had some experience with it.   While there were a number of changes in the takeover regime that came with the Cadbury Law, the one that seems to have had the biggest (and most protective) bite is the addition of a hair-trigger to the "put up or shut up" rules:

The so-called Cadbury Law stipulates that any hint of a transaction involving a U.K.-listed target -- unusual stock movement, a news article based on anonymous sources, or even a tabloid market column that cites stock-trader chatter -- can force a company to issue a press release confirming or denying the existence of negotiations and identifying any potential bidder.

At that point, an acquirer has 28 days to “put up or shut up” -- either making a firm, fully financed bid or walking away for six months, unless the target requests an extension. ...

Underscoring how practices have changed, earlier this month Vodafone twice issued press releases confirming media reports on its talks to sell its stake in Verizon Wireless -- even though bids for assets aren’t the focus of the new rules.

The regulations are meant to discourage so-called virtual bids that send stocks on a speculative tear, putting target companies in a defensive position and harming shareholders and employees if the bid never materializes, the Takeover Panel has said.

The effect of the hair-trigger is to force potential acquirers to disclose their interest well before a period where they might actually be comfortable to make a bid.  The consequence is that it puts the power to provide extensions of the 28 day tolling period into the hands of the target.  A hostile target board can use this power to put off a buyer.  

What's interesting about the Cadbury Law and its effects a year or so on is that we (academic types) used to be able to point to the UK as the natural experiment for what a shareholder friendly regime might look like - a regime where target boards had little power to stand between an offeror and shareholders.  Compare that regime to the US where states are extremely deferential to management in tender offer situations.  But now, that balance is shifting.  Boards in UK companies with the hair trigger rules now in effect have the ability through the use of leaks and forcing disclosure to wrest control of the process and insert themselves between offerors and shareholders. 

-bjmq

Dutch poison pill

Carlos Slim's America Movil has threatened to withdraw from its offer to purchase the 70% of the Dutch mobile carrier, Royal KPN NV, that it doesn't already own.  America Movil's change of heart came after Royal KPN deployed it's poison pill to defend against the unwanted offer.

Now, the poison pill deployed by Royal KPN is different from an American poison pill.  Remember, the power of the US-styled poison pill comes from the threat that it might be deployed and the difficulty presented in acquiring control once the pill is deployed.   The defensive power of the Dutch pill comes from an actual transfer of control from public stockholders to a controlled foundation.  The WSJ has a good description of how it works:

In the 1980s and 1990s, many Dutch firms set up defenses to protect themselves against hostile takeovers or activist investors. Although most barriers have been removed, many listed companies still have the possibility to block unsolicited takeover attempts through foundations they created.

Companies grant these foundations (in Dutch: Stichting) a call-option to buy preference shares which, if activated, allows them to take control of the company for a certain period of time.

The defense is barely used, however. Experts say it is a measure of last resort that deters investors in ordinary shares and only buys time to look for alternative strategic options.

In KPN’s case, the Foundation Preference Shares B KPN were set up in 1994 following the privatization of Koninklijke PTT Nederland NV, the former mother company of KPN. Its board comprises lawyers and former top executives at other Dutch companies, some of whom also sit on the boards of other foundations.

By deploying the pill, control is temporarily transferred from public stockholders to the foundation forcing a potential acquirer to negotiate with the foundation if the acquirer wants to gain control.  The effect is the same as with the US-styled pill - putting the board (in this case the foundation board) in between the tender offeror and the shareholders.   However, because the preference shares issued to the foundation are time limited, unlike the standard US poison pill, the Dutch pill is only a temporary defense.  It's not a 'just say never' defense, just a 'not right now' defense.

-bjmq

 

Gilson on unbiased takeover laws

Gilson, Enriques, and Pacces have a new paper in which they propose a neutral takeover regime for the EU.  Rather than adopt a director centered approach (as in Delaware) or a shareholder centered approach (as in the UK), Gilson and his co-authors try to split the difference by adopting default rules and menus that permit firms to opt into the approach of their choice.  Interesting, though I suspect that the challenge to a private ordering approach will be collective action problems that appears to make it difficult for shareholders to influence private ordering solutions at the IPO stage here in the US.   Here's the abstract:

Abstract: Takeover regulation should neither hamper nor promote takeovers, but instead allow individual companies to decide the contestability of their control. Based on this premise, we advocate a takeover law exclusively made of default and menu rules supporting an effective choice of the takeover regime at the company level. For reasons of political economy bearing on the reform process, we argue that different default rules should apply to newly public companies and companies that are already public when the new regime is introduced. The first group should be governed by default rules crafted against the interest of management and of controlling shareholders, because these are more efficient on average and/or easier to opt out of when they are or become inefficient for the particular company. The second set of companies should instead be governed by default rules matching the status quo even if this favors the incumbents. This regulatory dualism strategy is intended to overcome the resistance of vested interests towards efficient regulatory change. Appropriate menu rules should be available to both groups of companies in order to ease opt-out of unfit defaults. Finally, we argue that European takeover law should be reshaped along these lines. Particularly, the board neutrality rule and the mandatory bid rule should become defaults that only individual companies, rather than member states, can opt out of. The overhauled Takeover Directive should also include menu rules, for instance a poison pill defense and a time-based breakthrough rule. Existing companies would continue to be governed by the status quo until incumbents decide to opt into the new regime.

-bjmq

EU officially blocks TNT acquisition

Today, the EU officially blocked the acquisition of TNT by UPS.  Here's the press conference announcing the commission's decision:

UPS and the EU tried - unsuccessfully - to work through the issues:

To address the Commission's concerns, UPS proposed to divest TNT's subsidiaries in the 15 relevant Member States, plus – under certain conditions - TNT's subsidiaries in Spain and Portugal, to further increase the volume of small package express deliveries that would be transferred to the purchaser. UPS also offered access to its air network for 5 years, should the purchaser not be a so-called "integrator".

However, to provide intra-EEA express deliveries from the 17 countries covered by the remedy package, the purchaser would have needed suitable networks or partners in these other countries. This requirement alone severely limited the number of potentially suitable purchasers, casting doubt over the effectiveness of the remedies. To dispel this uncertainty, UPS would have needed to sign a binding agreement with a suitable purchaser before the concentration was implemented. However, UPS did not propose this to the Commission and its last minute attempt to sign such an agreement before the end of the Commission's investigation did not materialise.

Moreover, the Commission had serious doubts as to the ability of the very few potential purchasers that expressed their interest to exercise a sufficient competitive constraint on the merged entity in intra-EEA express delivery markets on the basis of the remedies offered. In particular, a buyer that is not already an integrator would need the ability and incentive to invest in its own air transport solution and to upgrade its ground network in order to become a sufficient competitive threat on the merged entity. Without sufficient volume in express deliveries it is doubtful that such an incentive would exist.

Without EU sign off, UPS had to walk away from the transaction.  UPS will now pay TNT a 200 million euro reverse termination fee due to the fact that the transaction was terminated because of a failure of the antitrust condition. 

-bjmq

 

 

 

FSA hates controlling shareholders

I suppose that will happen when a large, influential company with a controlling shareholder finds itself in the middle of a phone hacking scandal.  That said, the proposed changes to the FSA listing standards are at first glance a relatively extreme move against the power of controlling shareholders.  

The FSA proposes to further strengthen the Listing Regime by adopting greater corporate governance requirements for companies with a dominant shareholder.  The FSA will increase the tools available to independent shareholders to influence the governance of the companies in which they have invested. These proposals include:

•  
  • introducing the concept of a ‘controlling shareholder’;
  • requiring an agreement is put in place to regulate the relationship between such a shareholder and the listed company;
  • and ensuring that this agreement is complied with on an ongoing basis. This will ensure that the company is managed independently from that shareholder.  

The FSA also recognises the important role that the independent directors play in these circumstances. Therefore it will also insist on a majority of independent directors on the board where a controlling shareholder exists and introduce a new dual voting procedure to allow independent shareholders to have more say in their appointment.

The idea here appears to be to take the "control" out of controlling shareholders and put more power to elect directors in the hands of minority/non-controlling shareholders.  That's a pretty big move.  By isolating controlling shareholders from the boards of the companies that presumably own, that would change the nature of a control position.  I know the phone hacking scandal was bad, but this seems like an over-reaction.  So, going forward if you own more than 50% of the stock of a UK listed firm, you'll have scarcely more influence over the direction of the firm than a minority shareholder?  I wonder whether, following implementation of these listing standards, control premiums will go down for UK listed companies.  Worth following as this develops.

-bjmq

UK Takeover Guide

Skadden has just released their annual overview of the UK takeover regime.  It's a good read and at 44 pages is just long enough for the train ride home.  Get it here.

-bjmq

Milken Institute Private Equity Panel

Another interesting panel from the Molken Institute conference:

Speakers:

Leon Black, Founding Partner, Apollo Management, LP

David Bonderman, Founding Partner, TPG Capital

Jonathan Nelson, CEO and Founder, Providence Equity Partners

Jonathan Sokoloff, Managing Partner, Leonard Green & Partners

Scott Sperling, Co-President, Thomas H. Lee Partners, L.P.

 

MAW

U.S. & E.U. Best Practices on Cooperation in Merger Investigations

Antitrust regulators in the U.S. and the European Union have long cooperated on antitrust matters (see the Antitrust & Competition Policy Blog for excerpts from several recent speeches on Transatlantic cooperation, here and here). Recently, regulators issued an updated set of best practices for coordinating merger review.  According to the press release:

"The best practices, originally issued in 2002, provide an advisory framework for interagency cooperation when one of the U.S. agencies and the European Commission’s Competition Directorate review the same merger. The revised U.S.-E.U. best practices:

• Provide more guidance to firms about how to work with the agencies to coordinate and facilitate the reviews of their proposed transactions;

• Recognize that transactions that authorities in the U.S. and Europe review may also be subject to antitrust review in other countries; and

• Place greater emphasis on coordination among the agencies at key stages of their investigations, including the final stage in which agencies consider potential remedies to preserve competition."

For those interested in a summary of the revised best practices, Davis Polk has a useful memorandum setting out the key points.

-AA

Takeover Panel amendments go into effect

The Takeover Panel amendments that were the result of a review in the wake of Kraft's acquisition of cadbury go into effect today. You can find a summary of the changes and transitional arrangements at the Takeover Panel's site.  The most important include:

1. The offeree is required to disclose the identities of "any potential offeror with which the offeree company is in talks or from which an approach has been received."

2. After a potential offeror is identified, the offeror has 28 days to "put up or shut up."

3. General prohibition on transaction related inducement fees (termination fees).

4. Improved ability of employees representatives to make their views on the offer known.

The prohibition on termination fees is the most interesting change.  Most of the rationalization for termination fees in the US is that termination fees are required in order to assure potential acquirors to invest the resouces needed to put together a bid.  Without the termination fees, potential bidders will disappear - not content to invest resources in a bid that might eventually fail.  Here, the Takeover Panel is weighing benefits of the compensatory function of the termination fees against the social costs of reduced competition associated with the potentially deterrent effect of termination fees and is erring on the side of increased competition.  At some point in the next year, a finance graduate student somewhere should probably do an event study to check to see if elimination of termination fees ends the UK deal world as we know it.  My guess is that it will still be there.

-bjmq

 

Clifford Chance on new antitrust risks for private equity firms

In this client alert, Clifford Chance notes that the European Commission recently targeted a PE firm for potential fines for antitrust breaches allegedly committed by one of its portfolio companies even though there is no allegation that the firm or any of its personnel participated in, or were aware of, the alleged cartel. Thus, if a fine is imposed on the PE firm, it would be solely on the basis of parental liability for the activities of the portfolio company.

According to the alert "this is one of the first instances - and certainly the most high profile - in which a private equity firm has been targeted in this way."

MAW

Global M&A Index 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: 

If you're looking for something to read on the ride home, the report has nice overviews of global M&A and sectoral activity.

-bjmq
 

UK Parliament releases report on Kraft acquisition of Cadbury

The FT has a nice review of Kraft's acquisition of Cadbury one year on.   The initial results of the acquisition appear to be mixed.  On the one hand, 

Speaking to the Financial Times before Monday’s statement from the committee, [Kraft CEO Rosenfeld] said: “We have clearly shown ourselves to be good stewards of the brands, and yet the continued assault has been somewhat surprising.

“I think we’ve done everything possible to address concerns, to respond to issues, and the focus remains on making sure that this integration is successful."

Defectors from Cadbury and politicians beg to differ. They say the speed of the integration, allied to the fact that the hostile nature of the bid precluded due diligence, has made the process more fraught. Ms Rosenfeld’s perceived disdain, for workers as well as parliament, has added to the rancour.

In the wake of the acquisition and what were understood to be broken promises related to the status of the Cadbry plant in Bournville, the UK Takeover Panel revisited its rules and the UK Parliament tasked a Select Committee to undertake an investigation.  The Committee's report, Is Kraft Working for Cadbury?, was released earlier this month. The report - though critical of Kraft in many respects - was guardedly optimistic:

 Our overall conclusion, therefore, is that, while there remain some significant concerns about Kraft takeover of Cadbury, a number of positive signs may be beginning to emerge. Those positive messages would have been considerably more convincing if conveyed directly to bodies such as ourselves from the top of the organisation. As for the future, Kraft's witnesses asked us to judge Kraft on its deeds. We shall.

For the timebeing, that seems to be it from the Parliament and its investigation.  

-bjmq

FT: Takeover Panel set to ban break fees

The Takeover Panel in the UK is moving forward with reforms adopted in the wake of Kraft's acquisition of Cadbury.  One of the reforms is a near ban on termination fees.  

Among the biggest changes will be a tightened “put up or shut up” period, requiring a publicly named bidder to declare its formal intentions within 28 days, from a system where the clock starts ticking at the request of the target company.

Other changes include banning incentives that give special protection to the first bidder, commonly known as break fees.

This move highlights two different directions that regulatory bodies have moved with respect to the question of deal protections.  On the one hand, we have Delaware.  It's reasonableness standard with respect to any ex post review of deal protections is pretty deferential of board action. Absent allegations of loyalty conflicts, a board acting in good faith basically has a green light to grant deal protection measures.  On the other, we have an series of ex ante rules that govern what a board can or cannot do in advance of an acquisition, including setting strict limits on termination fees.  These are two very different ways of looking at the world.  If you were to only read Delaware case law, you'd think that no bidder would ever come forward absent strong deal protection measures.  But, when you look at the UK's takeover market you know that it's just not the case.  There is room for diversity in regulatory approaches.

-bjmq

Irish Merger Control

In keeping with the spirit of the day, why don't you go learn something about merger pre-approvals in Ireland? 

An bhfuil tú ar meisce fós?

-bjmq

Hostile acquisitions in developing countries

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.

-bjmq

Corporate Governance Around the World

I spent some of this week in Washington, D.C. at the XVIIIth International Congress of Comparative Law.  The congress, which is presented by the International Academy of Comparative Law and the American Society of Comparative Law is taking place all of this week and is hosted by three local law schools, American University Washington College of Law, George Washington University Law School and Georgetown University Law Center.  The conference is a wonderful gathering of jurists, lawyers and scholars from around the world.

Part of the week’s events involves the delivery of general and national reports on a variety of legal issues.  This year the International Academy of Comparative Law has decided to deal with corporate governance in a session at its 18th International Congress on Comparative Law and has commissioned a general report, as well as various country reports on the matter.  The general report, which is based on 32 country reports, focuses on (i) Corporate Governance: Concepts and General Problems; and (ii) the Board and the Shareholders as the Two Key Actors in Corporate Governance.  There are also links to specific country reports.  For those interested in a broad comparative survey of corporate governance issues, the reports are a useful summary. 

- AA

Pru: Lesson Learned?

UK insurance company, Prudential had a shareholder meeting today in the wake of its failed bid to buy AIA.  Let's just say it wasn't pretty:

Shareholder Anthony Watts summed up the feelings of many when he described the affair as "a shambles from start to finish" and "a disgrace".

"You failed to do your job properly, all of you. All of you are responsible for this failed deal," he told directors, saying they should "do the honourable thing" and resign.

His comments, and many more like them, drew loud applause during a stormy affair that showed just how far the insurer's reputation with its investors has fallen. Directors, who glowered at the assembled band of as many as 300 predominantly small shareholders, were accused of being "smug" and "arrogant" at the meeting, held at the Queen Elizabeth Centre in Westminster.

 It was pretty clear that management had learned its lesson and was appropriately contrite:

 [C]hairman, Harvey McGrath, told shareholders at the annual general meeting in London, where several shareholders expressed their anger over the AIA bid. "One of the lessons we've learnt is that in the post-crisis world we live in, doing large cross-border acquisitions in financial services is going to be very difficult," McGrath said. "I think we'll continue to seek to grow this business organically. You should expect us to look at bolt-on acquisitions."

Buying AIG's Asian unit in the aftermath of the Financial Crisis and AIG's collapse was a bold move.   Had it worked, it might have been a game-changer for Prudential, giving access to markets throughout Asia (though not much in China).    But when bold moves don't pay off, they can be risky for the guy at the top.  This failed transaction cost Prudential approximately $600 million (termination fee and expenses) to walk away from. It also generated a host of shareholder anger that was on display today.  

There's lots of talk that Prudential's CEO, Thiam, may be shown the door for his miscalculation.   I suppose someone should pay for a $600 million mistake. 

-bjmq

Takeover Panel Consultation Paper Released

The Takeover Panel has just released its consultation paper undertaken in the wake of the Kraft acquisition of Cadbury and the ensuing political storm.  You can find it here.  The good news – that although there is pressure on the Panel to adopt a Delaware styled approach, or at least raise barriers to acquisitions, the Panel appears hesitant to move in that direction.

Whilst [the Takeover Panel] seeks to provide an orderly framework in which takeover bids must be made, the Panel does not take, and has never taken, a view on the advantages and disadvantages of takeovers generally or on the commercial or financial merits of particular offers or types of offer. …

However, it’s clear that the Panel is open to the possibility of moving forward on some of the more controversial areas and is seeking additional discussion and comment before making a final determination. 

Given the significance and nature of the issues that have been raised, the Code Committee has chosen to break with its usual practice of setting out specific proposals and proposing drafting amendments to the Code. Instead, on this occasion, the Code Committee is seeking to provide a forum in which suggestions for possible change may be debated.

The Panel’s consultation paper lays out a number of areas in which the Panel wants to continue to receive comment.  And they are:

1)      the 50% plus acceptance condition versus something higher, like 60%;

2)      disenfranchisement of short term shareholders;

3)      reducing the early warning disclosure threshold from 1% to 0.5%

4)      whether buyers should be required to disclosed sources of finance and future plans;

5)      whether shareholders should have access to advice independent of the board with respect to whether or not to accept an offer;

6)      whether to extend the same protections to shareholders of the buyer;

7)      reexamination of the value of the “put up of shut up” regime;

8)      reconsideration of the use of deal protection measures; and

9)      whether safeguards against the substantial acquisition of shares be reintroduced.

The Panel is accepting further comment on these issues until July 27, 2010.

-bjmq