M & A Law Prof Blog

Corwin, not a 'get out of jail free' card

I've seen some hand-wringing among my fellow corporate law scholars that Corwin represents some sort of free pass for bad directors in the context of a sale - a 'get out of jail free' card as it were. Last week before the Thanksgiving holiday, VC Slights gave us a reminder that Corwin may be many things, but it is not that. No 'get out of jail free' cards.

Remember, under Corwin, the Delaware Supreme Court held that "[t]he business judgment rule is invoked as the appropriate standard of review for a post-closing damages action when a merger that is not subject to the entire fairness standard of review has been approved by a fully informed, uncoerced majority of the disinterested stockholders.” 

So, where the litigation involves a challenge to an arm's length sale of the corporation, Corwin is in play, but it requires a fully-informed stockholder vote. In many other situations, including the preliminary injunction phase, courts have shown great deference to the power of an uncoerced, fully-informed stockholder vote to forgive director sins. No difference in the Corwin context. If shareholders know all the facts and accept them by way of an uncoerced 'yes' vote to a deal, courts are loathe to step in and tell shareholders they are wrong. 

That said, there are limits. In Tangoe, the court refused to apply Corwin where the stockholders vote was not fully-informed due to inadequate board disclosures prior to the vote. In Tangoe, the board sought to sell the company following a financial restatement and subsequent delisting by NASDAQ. Shareholders challenged and sought post-closing damages. In refusing the board's motion to dismiss, VC Slights made it clear that getting Corwin protection isn't going to be as easy as all that:

"But, to earn pleading-stage business judgment deference by invoking stockholder approval of a challenged transaction, the directors must demonstrate that they carefully and thoroughly explained all material aspects of the storm to stockholders—how the company sailed into the storm, how the company has been affected by the storm, what alternative courses the company can take to sail out of the storm and the bases for the board’s recommendation that a sale of the company is the best course."

Absent a fully-informed stockholder vote, there is no Corwin protection. And, the burden is going to be on the board to demonstrate that shareholder vote was fully-informed and thus effective. So, fear not. At least for now.

-bjmq 

Law Profs against Comcast/TimeWarnerCable

Last week a number of law professors, led by Dan Sokol, sent a letter to the FCC opposing the Comcast/TimeWarnerCable transaction. You'll remember that this deal requires not only anti-trust approval but also approval of the FCC. In fact, it requires a determination by the FCC that the merger is in the "public interest". The letter takes on a number of Comcast's arguments in favor of the deal, including the "no overlap, no problem" argument, noting that at the extreme this argument leads directly to the conclusion that the FCC should be okay with a single broadband cable provider in the US, which on its face seems absurd.

One thing I had forgotten, but the letter writers correctly focus on:  this tie up (Comcast acquiring TimeWarnerCable) involves exactly the same assets (plus more) of a previous deal (AT&T/MediaOne in 2000). The DOJ stepped in and blocked that transaction and blocked it on antitrust grounds.  One wonders if the competitive landscape has changed so much since then that this deal is okay. Though there have been some changes to the contours of competition in this space, the basic lay of the land is still the same. 

-bjmq

GD&C on Chancellor Strine's rejection of disclosure only settlement of M&A stockholder lawsuit

This client alert from Gibson Dunn discusses Chancellor Strine's bench ruling rejecting a disclosure-only, negotiated settlement of an M&A stockholder lawsuit. According to the authors,

The decision, in In re Transatlantic Holdings Inc. Shareholders Litigation , Case No. 6574-CS, signals that the Chancery Court will carefully scrutinize the terms of negotiated settlements to ensure that named stockholder plaintiffs are adequate class representatives and that the additional disclosures provided some benefit to the purported stockholder class. At the same time, the decision represents an unmistakable warning to plaintiffs’ firms that they cannot continue to count on paydays through the settlement of meritless lawsuits filed in the wake of announced deals.

MAW

Anti-assignment Provisions and Reverse Triangular Mergers

In a recent case in Delaware we get an expected but still important decision in Meso Scale Diagnostics.  This is just blocking-and-tackling. The question for the court was whether a reverse triangular merger constituted an assignment with respect to the surviving corporation.  The court concluded it did not.  In doing so, Vice Chancellor Parsons declined to follow a California case (SQL Solutions) that held that a reverse triangular merger resulted in an assignment by operation of law with respect to the surviving corporation:

Delaware courts have refused to hold that a mere change in the legal ownership of a business results in an assignment by operation of law. SQL Solutions, on the other hand, noted California courts have consistently recognized that an assignment or transfer of rights does occur through a change in the legal form of ownership of a business. The SQL Solutions case, however, provides no further explanation for its apparent holding that any change in ownership, including a reverse triangular merger, is an assignment by operation of law. Both stock acquisitions and reverse triangular mergers involve changes in legal ownership, and the law should reflect parallel results. In order to avoid upsetting Delaware‘s well-settled law regarding stock acquisitions, I refuse to adopt the approach espoused in SQL Solutions.

In sum, Meso could have negotiated for a change of control provision. They did not. Instead, they negotiated for a term that prohibits assignments by operation of law or otherwise. Roche has provided a reasonable interpretation of Section 5.08 that is consistent with the general understanding that a reverse triangular merger is not an assignment by operation of law.

Another reason why the triangular merger structure remains the go-to structure for dealmakers.  

-bjmq

Gibson Dunn's 2012 Survey on No-Shops & Fiduciary Out Provisions

In this client alert, Gibson Dunn details the results of its survey of no-shop and fiduciary-out provisions contained in 59 merger agreements filed with the SEC during 2012 reflecting transactions with an equity value of $1 billion or more.  Among other things, they have compiled data relating to

• a target’s ability to negotiate with an alternative bidder,
• the requirements to be met before a target board can change its recommendation,
• each party’s ability to terminate a merger agreement in connection with the fiduciary out provisions, and
• the consequences of such a termination. 

MAW

Office SNAFU

Fictional Partner to senior associate:  Geez, this merger agreement is just taking longer to get done than we had expected.  There are a pile of issues we have yet to deal with.  I think the timing is going to slip.  

Senior associate: So we won't be announcing it before our earnings release?  I think we had teed things up to the deal to be announced before hand.

Partner:  No, not going to happen.  Hey, thanks for reminding me.  Remember to get that earnings release on file and make sure to revise it!

Senior associate: Done.

...

(next day)

Senior associate to junior:  Get that earnings release on file pronto.

Junior: Done.

...

(15 minutes later)

Senior to junior:  Hey, that earnings release I asked you to get on file.  Which version did you use? Did you use the version that announced the deal, or the other one?

Junior: Uh...version?  

Senior:  Uh oh. Can we pull that filing?!

...

Too late!  Me and about a million other people already pulled it!  For your viewing pleasure, here's the offending paragraph from Office Depot's 8-K that got everyone moving into overdrive this morning:

I guess they'll file the merger agreement when they get it done.

-bjmq

 

Gibson Dunn on "Don't Ask, Don't Waive" Standstill Provision

The typical M&A confidentiality agreement contains a standstill provision, which among other things, prohibits the potential bidder from publicly or privately requesting that the target company waive the terms of the standstill.  The provision is designed to reduce the possibility that the bidder will be able to put the target  "in play" and bypass the terms and spirit of the standstill agreement.

In this client alert, Gibson Dunn discusses a November 27, 2012 bench ruling issued by Vice Chancellor Travis Laster of the Delaware Chancery Court that enjoined the enforcement of a "Don't Ask, Don't Waive" provision in a standstill agreement, at least to the extent the clause prohibits private waiver requests.

As a result, Gibson advises that

until further guidance is given by the Delaware courts, targets entering into a merger agreement should consider the potential effects of any pre-existing Don't Ask, Don't Waive standstill agreements with other parties .  . .. We note in particular that the ruling does not appear to invalidate per se all Don't Ask, Don't Waive standstills, as the opinion only questions their enforceability where a sale agreement with another party has been announced and the target has an obligation to consider competing offers. In addition, the Court expressly acknowledged the permissibility of a provision restricting a bidder from making a public request of a standstill waiver. Therefore, we expect that target boards will continue to seek some variation of Don't Ask, Don't Waive standstills.

MAW

The fog of deal-making

Our friend the Deal Professor had an interesting piece yesterday about the M&A activity heating up among cellphone companies. He warns that

"We’ve seen this story before — in the battle over RJR Nabisco that was made famous by “Barbarians at the Gate” and in deal-making frenzy during the dot-com boom. When faced with a changing competitive landscape, executives spend billions because they believe they have no other choice. The cost to the company — and to shareholders — can be immense. In this world, executive hubris tends to dominate as overconfidence and the need to be the biggest on the block cloud reason.
. . .

The rush to complete deals is an investment banker’s dream.

But the hunt may lead these companies to not only overpay but acquire companies that are underperforming or otherwise don’t fit well. Then they have to find a way to run them profitably."

Investors in these companies, and the people running them, should carefully consider his warnings.

As I explored in a recent paper, various empirical studies on the overall return to acquisitions find that they may lead to destruction of value, particularly for shareholders of the acquiring firm, who suffer significant losses. Finance and legal scholars who have evaluated the roots of bidder overpayment have pointed both to agency problems and to behavioral biases. The paper has a somewhat long overview of recent studies which suggest that, in many transactions, the acquirer’s directors and management benefit significantly from the deal, whether it is through increased power, prestige, or compensation—including bonuses and/or stock options. Other studies confirm a long-held view that managements’ acquisition decisions can be affected by various behavioral biases such as overconfidence about the value of the deal or managements’ overestimation of and over-optimism regarding their ability to execute the deal successfully.

In addition, last year Don Langevoort published a terrific essay in the journal Transactions which explored the behavioral economics of M&A deals. In the same issue, Joan Heminway published a thought-provoking essay which explored whether "fairness opinions, nearly ubiquitous in M&A transactions, can be better used in the M&A transactional process to mitigate or foreclose the negative effects of prevalent adverse behavioral norms." Both essays are worth a read!

-AA

Comparison of One-Step and Two-Step Mergers

Haynes and Boone has a short summary of the pros and cons of each here.

MAW

Shnader on Squeeze-out Mergers in Pennsylvania

Standard learning has long held that a minority shareholder of a Pennsylvania corporation who was deprived of his stock by a "cash-out" or "squeeze-out" merger had no remedy after the merger was completed other than to take what the merger gave or demand statutory appraisal and be paid the "fair value" for his shares. No other post-merger remedy, whether based in statute or common law, was thought to be available to a minority shareholder to address the actions of the majority in a "squeeze-out." Now, after the Pennsylvania Supreme Court’s holding in Mitchell Partners, L.P. v. Irex Corporation, minority shareholders may pursue common law claims on the basis of fraud or fundamental unfairness against the majority shareholders that squeezed them out.

The full client alert can be found here.

MAW

More on Facebook's 3(a)(10) fairness hearing

I noted earlier in the week that Facebook will be issuing 23 million shares as consideration in its acquisition of Instagram pursuant to a 3(a)(10) fairness hearing exemption.  There are lots of good reasons to issue shares pursuant to a 3(a)(10) exemption - cost, timing, etc.  But, remember today is the day 270 million shares hit the market following the expiration of lock-ups, and FB has hit an all time low.  I suspect the market won't be all that happy to absorb 23 million more shares at the end of next week...

If you're at all interested, Facebook's fairness hearing package should published on the CALEASI database.  I just did a quick search and it's not there, yet.  

Oh, I commented for the FT on the Facebook fairness hearing.  I think I said something like "It was worth a billion at signing and now it's down by half, is that fair?"   Since I asked that question, let me answer it.  Uh...yes.  Instagram was a company that sold for $1 billion (30% cash and 70% stock)  despite having no revenue!  Is it fair to shareholders that their revenueless company now gets only $350 million of stock (or some rough equivalent) and $300 million in cash now that Facebook's shares have declined in value?  Sure it is.   Is it the highest price the board could have gotten?  Probably not. In hindsight, taking more of that in cash would have worked out better, but the Instagram board made a reasonable bet -- that FB shares might soar -- that turned out to be wrong.  No penalities for that.

In any event, Instagram has only a handful of shareholders who are all extremely close to management - the CEO of Instagram holds 45% of the shares himself.   I doubt any of them are going to show up at what will otherwise be a non-contentious hearing to demand more for their revenueless company.

-bjmq 

Outlook on M&A

The always interesting Annual Milken Institue Global Conference is happening now.  Here is the panel on the outlook for M&A.

Speakers:

Anthony Armstrong, Co-head, Americas M&A, Credit Suisse

Maria Boyazny, Founder and CEO, MB Global Partners

James Casey, Co-Head of Global Debt Capital Markets, JP Morgan Securities LLC

Tilman Fertitta, Owner, Chairman and CEO, Landry's Inc.

Raymond McGuire, Global Head, Corporate & Investment Banking, Citi

Moderator:

Robert Harteveldt, Global Co-Head of Fixed Income and Global Head of Fixed Income Origination, Jefferies & Co. Inc.

 

MAW

Hedge funds, M&A, and private information

In their new paper, Hedge Funds in M&A Deals, Dai, et al find evidence "consistent with informed abnormal short selling" by hedge funds prior to M&A announcements. The authors observe larger stakes where there is evidence of private information.  I'm shocked. ... Actually I'm not really shocked, given what's come out over the past year or two.

Abstract: This paper investigates recent allegations regarding the misuse of private insider information by hedge funds prior to the public announcement of M&A deals. We analyze this issue by using a unique and comprehensive data set which allows us to analyze the trading pattern of hedge funds around corporate mergers and acquisitions in both the equity and derivatives markets. In general, our results are consistent with hedge funds, with short-term investment horizons (henceforth, short-term hedge funds) taking advantage of private information and engaging in trading based on such information. We show that short-term hedge funds holdings of a target’s shares in the quarter prior to the M&A announcement date are positively related to the profitability of the deal as measured by the target premium. In addition, we also find that the target price run-up before the deal announcement date is significantly greater for deals with greater short term hedge fund holdings. We also find evidence consistent with informed abnormal short selling and put buying in the corresponding acquirer’s stock prior to M&A announcements. This is particularly evident when hedge funds take larger stakes in target firms. In addition, we show that such a strategy is potentially very profitable. We consider alternative explanations for such short term hedge fund holdings in target firms; however our results seem inconsistent with these alternative explanations but rather, seem to be consistent with trading based on insider information. Overall, our results have important implications regarding the recent policy debate on hedge fund regulation.

-bjmq

Weil, Gotshal survey of sponsor-backed going private transactions

Weil, Gotshal has just released its fifth annual survey of sponsor-backed going private transactions, analyzing and summarizing the material transaction terms of going private transactions involving a private equity sponsor in the United States, Europe and Asia-Pacific.  Have a look.

MAW

 

Mobility's Change of Control Agreement

Footnoted.com is doing yeoman's work reading lots of corporate filings so you don't have to.  Most recent example is Motorola Mobility's recent filing of a Change of Control Agreement (exhibit to their 10-Q) just a couple of weeks ago in advance of the announcement of transaction.  MMI's CEO stands to do pretty well when the transaction with Google closes. According to Footnoted.com:

Diving into the proxy, the amount that Chairman and CEO Sanjay Jha stands to make is pretty eye-popping: over $90 million, although that number includes a $22 million gross-up for taxes — something that Jha and other Motorola executives apparently agreed to give up earlier this year.

Still, even without the tax gross-up (can I get one of those, please?), $68 million is plenty incentive to get this deal done.  It's worth remembering that Change of Control Agreements are vestiges of the good old days of the hostile takeover movement.  I know it's hard for people to believe this now, but these severance agreements that guarantee huge payouts to managers in the event of a sale were a good governance reform!  They made sense at the time, but things, I think, have changed.  Given the amount of stock and options now used as part of any compensation package, managers are much less likely to have negative knee-jerk responses to acquisition offers.  For the most part, managers probably no longer need the extra kick that many of these severance agreements give - especially given the large amounts of negative attention they can sometime attract.  Remember Home Depot?

-bjmq

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
 

Is this unlawful?

According to this story from Bloomberg, the SEC

sued a Michigan man, claiming he traded on information he learned from a houseguest about the impending acquisition of Brink’s Home Security

Apparently, the

investment banker for Tyco International Inc., the buyer, inadvertently left behind a draft presentation on the deal.

According to the SEC, months later, the homeowner discovered the draft. Another month or so after the discovery, the homeowner intuited from changes in the banker’s travel schedule that the transaction was imminent.

According to the SEC, the homeowner profited from trading in Brink’s stock after the public announcement of the deal caused its price to jump 30 percent.

The homeowner's lawyer said his client has settled the case and will turn over his profits and pay a fine.

Obviously the facts are incomplete, but I wonder if Professor Bainbridge would have advised the homeowner to fight the case.

MAW

K&E Survey of Recent Developments in Public M&A Deal Terms

K&E just published this "survey" of recent developments in public M&A deal terms.  Unlike the broad, quantitative surveys put out by oganizations like the ABA or PLC, this one seems more impressionistic, so it may be biased by the universe of deals the authors were exposed to.  Still, a worthwhile read.

MAW

AT&T and T-Mobile

AT&T announces that is acquiring T-Mobile for $39 billion.  My first thought is that this will take a long time to clear the HSR process.  I haven't given this much thought, yet, but if this transaction doesn't at least go through a 'second request' we should just shut down the FTC altogether.  I mean, there is no question that this transaction will result in AT&T being the single largest wireless carrier by far.  Because this is a telecom deal, the FCC will also have a say in whether this deal can go forward.  The FCC's mandate to ensure that mergers are in the "public interest" has come under some criticism for being too far reaching at times.  The FCC was able to squeeze out of CenturyLink/Qwest commitments to build out low-income broadband access as a condition to approving that merger just last Friday.  I wonder if the FCC can squeeze out of AT&T a commitment not to drop more of my calls? 

In any event, the FCC has recently been talking about reworking its merger approval process, perhaps narrowing its scope.  Jonathan Baker, the Chief Economist over at the FCC posted a couple of days ago to the FCC's official blog on the proposed changes to the FCC's merger approval process. 

AT&T and T-Mobile have a transaction web-site up already:  http://www.mobilizeeverything.com.  Go there for merger docs, etc.

-bjmq

Richards Layton on Freeze-outs

Richards Layton just released this client alert on In re CNX Gas Corp. Shareholders Litigation, in which the Delaware Chancery Court attempts to clarify the standard applicable to controlling stockholder freeze-outs (a first-step tender offer followed by a second-step short-form merger).  In short, the Court held that the presumption of the business judgment rule applies to a controlling stockholder freeze out only if the first-step tender offer is both

(i) negotiated and recommended by a special committee of independent directors and

(ii) conditioned on a majority-of-the-minority tender or vote.

MAW