M & A Law Prof Blog

Robinhood goes public

Robinhood just filed its S-1, proposing to raise $2 bn on a $35 bn valuation. Robinhood is continuing what has become de rigueur by now - a dual class structure that ensures the founders will control the company once it goes public. OK, I guess I'm board with that. I mean, it's definitely not the first time, and by now markets seem nonplussed by founder-led companies going public this way.  I won't quibble. But I don't understand is why Robinhood - like other founder-led companies with dual class stock - has opted for a classified board structure. I mean, what's that about. A classified board will obviously be necessary for purposes of preventing a takeover by combining it with a pill. But, this company has a dual-class structure. It's basically immune from a hostile takeover. It won't ever need a pill.

Then, there's this. They've entered into a Founder's Voting Agreement by which each of the founders agrees to vote for the other for the board: 

Founder Voting Agreement

In connection with this offering, our founders and certain of their respective related entities will enter into a voting agreement, which will become effective prior to the completion of this offering (the “Founder Voting Agreement”), to which we will also be a party. Pursuant to the Founder Voting Agreement, each founder and certain of their respective entities (including estate planning vehicles) party to the Founder Voting Agreement (the “Founder Affiliates”) will agree, upon the terms and subject to the conditions set forth therein, to, among other things, (i) vote all of the shares of our common stock held by such founder or Founder Affiliate for the election of each founder to, and against the removal of each founder from, our board of directors and (ii) vote together in the election of other directors generally, subject to deferring to the decision of the nominating and corporate governance committee in the event of any disagreement between the founders. In addition, under the Founder Voting Agreement, certain of the Founder Affiliates will grant, effective upon completion of this offering, to the other, unrelated founder, an irrevocable voting proxy with respect to shares of our common stock owned by such Founder Affiliate. Also pursuant to the Founder Voting Agreement, each founder will grant, effective upon such founder’s death or permanent and total disability, a voting proxy to the other founder with respect to shares of our common stock held by such founder and over which such founder was entitled to vote (or direct the voting of) immediately prior to such founder’s death or permanent and total disability. Moreover, the Founder Voting Agreement will grant to each founder and its respective Founder Affiliates a right of first offer in the event the other founder or any of its respective Founder Affiliates proposes to transfer any shares of Class B common stock in a transaction that would cause such shares of Class B common stock to convert to Class A common stock pursuant to our Charter. The Founder Voting Agreement will be in effect until the Final Conversion Date

 I guess that's prudent planning, since both of the founders together hold over 50% of the vote. This will ensure that they vote for each other, even if they no longer want to. Bound together until the bitter end.

-bjmq

The Shadow Pill is a Powerful Thing

You've likely seen that Xerox is has been making sounds about acquiring HP. Last week HP rejected Xerox's unsolicited $33 billion to acquire it in a letter that characterized the offer as significantly undervaluing the company. While it left the door open to a possible deal, the letter suggested that a deal (if any) would likely involve HP acquiring Xerox and not the other way around. That letter was followed up by a second letter from the HP board to Xerox making it clear that the answer is "no" (not even a 'no, thank you'). Both letters go quite a way to pointing out the deficiencies of Xerox as a transaction partner, paving the way for Unocal should it come to that. 

Well today, Xerox responded with a "Chip & Enrique" letter of its own reiterating its offer and threatening to engage directly with HP shareholders. The Xerox board stopped short of saying to would actually launch a hostile tender offer for HP. Why? Because the shadow poison pill is a powerful thing.

John Coates pointed out over a decade ago that every company has a "shadow pill". A poison pill can be adopted by a board very quickly with no requirement that they get stockholder approval. Consequently, even though HP doesn't have a pill in place now, it could have one in 15 minutes. Xerox knows that, so no hostile offer is forthcoming. Rather, by engaging with HP shareholders they are hoping to get HP to come to the table to negotiate a deal on Xerox's terms.  Market pressure to take the deal will, they hope get this across the finish line. Goshen and Hannes argued in a paper last Spring that these kinds of market forces are, by now, more powerful in terms of corporate governance than the law.  Of course, they still have the option of launching an old-fashioned proxy fight, but it shouldn't actually be necessary if HP's institutional shareholders think the deal is one worth pursuing.

-bjmq

 

Dual-class stock and staggered boards

Talk about belts and suspenders.  Now, there's a paper from Mira Ganor, Why Do Dual-Class Stock Companies Have Staggered Boards?

Conventional wisdom regards the combination of a staggered board with a dual-class capital structure as superfluous. However, the incidence of this combination in U.S. firms, identified in this Paper, is not trivial. This Paper considers a few possible motivations for this practice and reports the results of empirical studies conducted on dual-class firms with staggered boards. Significantly, even in the universe of dual-class capital structures, effective staggered boards are associated with lower firm value. These findings suggest that entrenchment may not fully explain the correlation between lower value and staggered boards in single-class firms.

I suppose founders who are going public with dual-class stock are looking forward and thinking about how they can maintain control way into the future...but I don't know. Belts and suspenders.

-bjmq

Evidence Based Corporate Law

Vice Chancellor Laster has posted a 3 page comment titled Evidence Based Corporate Law on SSRN (also appearing in the Del J Corp Law). Here's the abstract: 

Abstract: John Maynard Keynes is said to have observed, "When the facts change, I change my mind. What do you do, sir?" In Delaware's Choice, Professor Subramanian argues that the facts underlying the constitutionality of Section 203 have changed. Assuming his facts are correct, and the Professor says that no one has challenged his account to date, then they have implications for more than Section 203. They potentially extend to Delaware's jurisprudence regarding a board's ability to maintain a stockholder rights plan, which becomes a preclusive defense if a bidder cannot wage a proxy contest for control of the target board with a realistic possibility of success. Professor Subramanian's facts may call for rethinking not only the constitutionality of Section 203, but also the extent of a board's ability to maintain a rights plan.

I know a lot of people who would be very interested in the prospect of the Delaware Supreme Court actually revisiting the question of the viability of the poison pill under Unocal.  

-bjmq

American Apparel and the new playbook

Ron Barusch at the WSJ points out some lessons for deploying poison pills following American Apparel's failure to use a pill to keep former CEO/Chairman Dov Charney at bay.

I won't go into the details, but let's just say the board probably felt they had good reason to let him go when they did last month.  The result of the ouster has been a struggle for control of the company with Charney (founder and large bloc stockholder) seeking to fight his way back onto the board and the board resisting.  Not long after being removed from the board, Standard General and Charney entered into a partnership whereby SG lent money to Charney to purchase shares of  American Apparel stock from SG.  Collateral for that purchase was Charney's existing bloc of APP stock.  The long and short of it - SG was able to move into position where it had the ability to control 43% of APP stock.  

After announcement of the partnership, APP adopted a pill.  As Ron notes, that was just too late.  SG and Charney were already in a position and even if they didn't acquire any more shares, they couldn't be touched.  

Yesterday, the board of APP gave in and signed a support agreement with SG. That agreement provides that board will be reconstituted with five of the current seven members, including Charney, stepping down. The new board members will be chosen jointly by SG and the current board.  Charney stays on as a consultant at his present salary with a determination as to what to do with him to be resolved after an ongoing internal investigation.  And then finally a standstill agreement that will prevent SG and Charney from acquiring additional shares. 

So, following the turmoil, Charney is still out (for the timebeing), the current board has been mostly dislodged and SG is suddenly in the cat-bird's seat.  

This past year has been quite a year for activist investors.  It looks like they are writing new playbooks, taking advantage of opportunities as they pop up.  Maybe it's time to reconsider whether simply having a pill on the shelf ready to go is sufficient. Perhaps, boards should be considering adopting pills pre-emptively and taking their ISS lumps.

-bjmq

 

 

Allergan pill suit settled

Late last week Pershing Square settled is suit with Allergan over Alergan's poison pill.  The settlement permits Pershing Square to put together a group of shareholders sufficient to call a special meeting without triggering the pill.  Pershing Square, with 9;7% of Allergan, was worried that if it got the support of the required 25% of shareholders sufficient to call a meeting that it would trigger Allergan's poison pill with its 10% trigger.  The settlement will allow Pershing Square to get the support to call the meeting with triggering the pill. 

You can download the stipulation/settlment agreement here.

-bjmq

Valeant pill case expedited

The Valeant/Pershing Square challenge (Complaint and  the (Motion to Expedite) to the Allergan pill just got fast-tracked in the Delaware Chancery Court. The thing to remember and what no doubt the guys over at Third Point will tell you, just because you get your pill case expedited, doesn't mean you are going to win.

-bjmq

 

 

Corporate governance's ring of fire

Ron Gilson and Jeff Gordon weigh in on activist pills and Sotheby's at the Blue Sky Blog:

Delaware corporate governance rests on two conflicting premises:  on the one hand, the board of directors and the management the board selects run the corporation’s business, but on the other the shareholders vote on who the directors are.  The board needs discretion to run the business, but the shareholders decide when the board’s performance is so lacking that it (and management) should be replaced.  All of the most interesting issues in corporate governance arise when these two premises collide – when the board’s assessment of how the company is doing is different than the shareholders’, and each claims that their assessment controls.  These collisions work out within a predictable range when, unexpectedly, new governance initiatives shift the underlying plate tectonics and disequilibrate the settled patterns.  Whether the particular earthquake is caused, as was the case in the 80s, by the emergence of a hostile tender offer or, as now, by activist investors seeking to change management, policy or both through a threatened proxy fight, the underlying question is the same:  when does the board’s discretion end and the shareholders’ power begin?  The boundary is the corporate governance ring of fire.

Gilson and Gordon suggest that the new distribution of share ownership, heavily weighted in favor of institutional ownership, may require a new approach to governance.  This new approach would recognize that institutional shareholders may well need less protecting from threats than would individual shareholders with less information.

-bjmq

Are Pills Preempted by the Williams Act?

Lucian Bebchuk and Robert Jackson think the answer there might be yes.  They have just posted their new paper, "Toward a Constitutional Review of the Poison Pill."

Abstract: In 1968, the Williams Act established a federal regime regulating attempts by outside buyers to acquire control of publicly traded companies through unsolicited tender offers. In the subsequent four decades, however, the states have developed a body of rules that impose additional impediments on such attempts. Recognizing the tension between the Williams Act and these state-law rules, between 1972 and 1985, the federal courts, including the Supreme Court, held some of these rules preempted by the Williams Act. To date, however, federal courts have not examined, and commentators have not analyzed, whether the state-law rules that authorize the use of the poison pill—the most powerful impediment to outside buyers of shares—are also preempted.

 In this Article, we examine this subject and conclude that there is a substantial basis for questioning the continued validity of current state-law rules that authorize broad use of the poison pill. Because these rules enable incumbents to block shareholder consideration of outside tender offers for lengthy periods of time, they may well impose tighter restrictions on unsolicited offers than the state antitakeover regulations that federal courts invalidated on grounds of preemption during the 1970s and 1980s. Indeed, we show that, upon a close examination of the state-law rules governing poison pills, the federal courts are likely to conclude that these rules are preempted.

 Finally, the Article provides a framework for lawmakers seeking to ensure that state-law poison-pill rules are not preempted. We explain that state-law rules that empower directors to block tender offers for long periods of time are least likely to withstand constitutional scrutiny. Thus, we argue, state corporate law that substantially limits the length of time during which a poison pill can be used to delay tender offers would be more likely to survive a preemption challenge. Whether preemption challenges lead to invalidation of existing state-law poison-pill rules or to their substantial modification, we show, these challenges could well have a major impact on the corporate-law landscape.

-bjmq

Staggered Boards and Firm Value, Revisited

In Staggered Boards and Firm Value, Revisited, Cremers et al consider the effect of staggered boards 0n firm value.  The question of the staggered board has been central to many recent debates about the proper role of shareholders in corporate governance and takeovers.  The conventional academic wisdom has been that staggered boards lower firm value because the increase the likelihood of entrenchment of directors.  Now, Cremers and his co-authors are mixing it up a bit.  They look at the data and reach a different conclusion -- staggered boards are associated with an increase in firm value.  Here's the abstract:

This paper revisits the association between firm value (as proxied by Tobin’s Q) and whether the firm has a staggered board. As is well known, in the cross-section firms with a staggered board tend to have a lower value. Using a comprehensive sample for 1978-2011, we show an opposite result in the time series: firms that adopt a staggered board increase in firm value, while de-staggering is associated with a decrease in firm value. We further show that the decision to adopt a staggered board seems endogenous, and related to an ex ante lower firm value, which helps reconciling the existing cross-sectional results to our novel time series results. To explain our new results, we explore potential incentive problems in the shareholder-manager relationship. Short-term oriented shareholders may generate myopic incentives for the firm to underinvest in risky long-term projects. In this case, a staggered board may helpfully insulate the board from opportunistic shareholder pressure. Consistent with this, we find that the adoption of a staggered board has a stronger positive association with firm value for firms where such incentive problems are likely more severe: firms with more R&D, more intangible assets, more innovative and larger and thus likely more complex firms.

-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

 

Takeover defenses in IPO firms

Wilmer Hale has put out its annual M&A report.  There are a couple of interesting data points worth looking at.  In particular is the table below - Takeover Defenses in IPO Firms.   Notice that the basic tendancy to go public with lots of takeover defenses is consistent with findings from Daines and Klausner more than a decade ago (Do IPO Charters Maximize Firm Value?).  That much hasn't changed. Indeed, in recent years, there has been a noticeable uptick in tech firms going public with dual-class stock, entrenching entrepreneurs (7% in Wilmer's sample).  Also, adoption of exclusive forum provisions in certificates of incorporation appears to be reaching a critical mass - 27% of all IPOs and 44% of all PE backed IPOs.  Oh, and don't be fooled by the fact that only 2% of firms go public with poison pills in place.  People should stop counting that number.  Every board has an implicit pill in place.  

It's interesting.  Give it a look.

-bjmq

Canadians reconsider the pill

There was news from up North late last week.  The Canadians are considering some adjustments in their current approach to the poison pill.  Presently, pills are permitted only as temporary devices that be held in place for only so long as to delay a hostile bid so that a target board can educate its shareholders and perhaps put together some sort of alternate strategy or transaction.   Let's call the Canadian approach to rights plans the Interco pill.  In general, Canadian approaches to takeover defenses are very much in line with Chancellor Allen approach in Interco. That is to say, in the face of an unwanted offer, the board should be motivated to either educate the shareholders of the correctness of the board's position or look to develop an acceptable alternative for shareholders.  To the extent boards deploy takeover defenses they should facilitate the ability of the board to engage in either education or in increasing value for shareholders. 

The draft amendments (here) to their rules on shareholder rights plans intend to make a number of subtle, but important changes in approach that nudge them closer to a US styled approach to poison pills. The amendment require approval of a majority of the disinterested shareholders withing 90 days of the pill being adopted.  Any material amendments to the rights plan will require an additional shareholder vote. Then, in order for a board to keep a pill in place, the board will have to go back to shareholders annually to seek approval.  Finally, a majority of disinterested shareholders could vote to terminate the rights plan at any time.

This new draft approach is a step back from the previous Canadian approach, which involved a regulator in the provincial securities regulator making a substantive determination about the reasonableness of director actions to keep a pill in place.  Guided by their Interco-like principles, the question for Canadian regulators was not if a pill should remain in place, but when it should be pulled.  Now, that may change.  Of course, this isn't necessarily a bad thing.  Nor should it necessarily be interpreted as moving towards an American (U.S.) styled approach to pills.  Up in Canada undere the proposed pill regime, disinterested shareholders will have plenty to say about whether or not a pill is permitted to remain in place.  Rather than make arguments to a regulator, boards will be required to make their case directly to the shareholders if they want to keep pills in place.  That's not a bad thing.

-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

Better bureaucrats, please ... and Benefit Corporations

Like many other states, Massachusetts has recently passed an amendment to its corporate law that permits the incorporation of "Benefit Corporations" (Chapter 238, Section 52).  I have opinions about whether this is anything more than just a marketing effort, but let me put those to the side for the time being.  Here, I'd like to focus on the fact that the Secretary of State of the Commonwealth of Massachusetts apparently has a tenuous grasp on what the corporate law of Massachusetts presently is.   In the Commonwealth's official notice and FAQ for Benefit Corporations, the Corporations Division describes the need for Benefit Corporations, thusly: 

What are benefit corporations?

Benefit corporations are corporations organized under Chapter 156A (the professional corporation statute) or Chapter 156D (the business corporations statute) that have elected to be a benefit corporation in their Articles.

Benefit corporations are similar to traditional for-profit corporations but they differ in one important respect. While directors and officers of traditional for-profit corporations must focus primarily on maximizing financial returns to investors, the directors and officers of benefit corporations are expressly permitted to consider and prioritize the social and environmental impacts of their corporate decision-making.

For example, the directors of a traditional for-profit corporation faced with financial difficulty may opt to build up cash reserves by laying off employees in order to fulfill their fiduciary duty to prioritize returns to investors. A benefit corporation's directors faced with similar economic circumstances could prioritize retaining the corporation's workforce through hard times, opting to dip into cash reserves to do so, in order to pursue the corporation's public benefit goals. 

Or ... the board of a for-profit corporation could simply decide to not lay-off employees and not face any repercussions from shareholders for a decision (not to lay-off workers when times are tough) that already is well within their rights.  

I've written on this before in the context of state anti-takeover laws.  Constituency statutes were adopted here in the Commonwealth during LBO boom to help give directors the power to resist unwanted offers.  Currently, the directors of a Massachusetts corporation can put "shareholder maximization" behind the interests of employees, suppliers, creditors, whatever.  Here's 156D, Sec. 8.30:

Section 8.30. GENERAL STANDARDS FOR DIRECTORS

(a) A director shall discharge his duties as a director, including his duties as a member of a committee:

(1) in good faith;

(2) with the care that a person in a like position would reasonably believe appropriate under similar circumstances; and

(3) in a manner the director reasonably believes to be in the best interests of the corporation. In determining what the director reasonably believes to be in the best interests of the corporation, a director may consider the interests of the corporation’s employees, suppliers, creditors and customers, the economy of the state, the region and the nation, community and societal considerations, and the long-term and short-term interests of the corporation and its shareholders, including the possibility that these interests may be best served by the continued independence of the corporation.

So ... a director of a MA for-profit corporation is presently under no legal obligation to put the maximization of short-term shareholder value/returns over interests towards constiuencies of the corporation, like employees.  It's true that constituency statutes were originally adopted as anti-takeover statutes and they still play that role.  But, for a publicly minded corporate board, the constituency statutes in place already provide plenty of legal cover to pursue public benefit in the corporate form.  

I'll have more to say on Benefit Corporations later.  For now, I am wondering whether Benefit Corporations might be a back door into supercharged state anti-takeover protections for firms that opt in?  I don't think it's necessary, but lawyers have been known for pursuing belt-and-suspender defenses. 

-bjmq

 

HGS pill suit fails to get TRO

Plaintiffs in the Maryland suit against the HGS board yesterday failed in their bid to get a order to force the board of HGS to pull the pill they put in place last month:

A Montgomery County Circuit Court judge shot down an HGS shareholder’s request for a temporary restraining order to invalidate the “poison pill” the Rockville biotech enacted last month to make it a less attractive acquisition target.

The biotech was sued by shareholder Duane Howell of Baltimore, who claims its management is cheating him, other stockholders and the company itself by rejecting GlaxoSmithKline’s $2.6 billion offer in April, and then instituting the shareholder rights plan, or poison pill. ...

Judge Michael D. Mason said Thursday that HGS had properly accounted for its actions with its shareholders when it issued the poison pill May 16.

No surprise here, I suppose.  The bigger surprise would have been if the Maryland judge had ignored both Delaware and Maryland law and order the pill pulled. Odd though, Bloomberg reports that the judge in this case qas concerned that only one shareholder, the litigant, was complaining:

After a hearing on Thursday, Montgomery County Circuit Court Judge Michael Mason denied Howell's request, saying only one shareholder had sued the company, according to a report by Bloomberg News.

"This is not a case where a number of disgruntled shareholders have come to court up in arms," the judge said in court, according to the report.

Even under Maryland law, the number of plaintiffs shouldn't matter to the result.  Hmm.

-bjmq

Marcus on Confis and Hostile Acquisitions

David Marcus at The Deal had an interesting piece over the weekend on the role of confidentiality agreements in the context of hostile acquisitions.  He focuses on confidentiality agreements in the Vulcan/Martin Marietta transaction and the Westlake/Georgia Gulf transaction.  It's a good read.  Marcus also offers up the following chart from Dealogic:

I'm curious as to how Dealogic defines "successful" - I suppose that a deal that starts hostile and then ends up with a negotiated transaction is considered successful.  That's one way to think about it.  But that does an injustice to the power of the poison pill. I doubt there are any deals on this list of US targets where a hostile bidder has been successful over the continued protests of the target board with a pill in place.

-bjmq

Davidoff on Airgas

Steven Davidoff has just posted a nice case study of the Airgas decision forthcoming in the Columbia Business Law Review.  Steven had a front-row view of the Airgas hostile offer and subsequent litigation. (Google Deal Prof and Airgas if you don't believe me.) In this paper, Steven revisits the class through the prism of Delaware's judges as strategic actors.  The role of Delaware's judiciary is fascinating and this paper - and the Airgas episode - is an important contribution to understanding how and why Delaware's courts decide as they do.  It's well worth a read.

Abstract: When is it appropriate for Delaware judges to act strategically? This case study documents and analyzes Air Products’ $5.8 billion unsuccessful, hostile offer for Airgas, reviewing the decisions made by the Delaware courts in adjudicating the most prominent takeover bid of 2010. The three court opinions in Air Products v. Airgas show how Delaware courts strategically decide cases and the effect of this decision-making on the course of Delaware corporate law and Delaware’s constituencies. The Airgas case ultimately provides a useful lesson for when, if ever, strategic considerations should influence the outcome of individual Delaware corporate law disputes.

-bjmq

Steele on Pills and the Intermediate Standard

In early October, Chief Justice Myron Steele participated in a session in Canada about shareholder rights plans in the US and Canada.  The International Law Office has posted summaries of the panel discussion.  Steele's comments are interesting: 

The chief justice suggested that the view that Delaware law allows a board of directors to 'just say no' to a hostile offer has been overstated. In the context of appropriate findings of fact that a poison pill is no longer reasonable or that there is no sufficiently articulated long-term strategy that requires protection, he suggested that a case could be made for a mandatory injunction removing a poison pill under Delaware law. 

When Gilson and Kraakman wrote their paper, Delaware's Intermediate Standard for Defensive Tactics: Is There Substance to Proportionality Review?, they recommended that the court adopt a stance that would inject substance into proportionality review by requiring boards who wished to adopt and maintain defensive measures against an unwanted, but otherwise noncoercive offer, to articulate a long term strategy that they would have to live with. Could it be that Steele is open to a Gilson/Kraakman like approach to proportionality review? That might breathe new life into Unocal. 

But those weren't the only comments made by Steele:

Steele noted that the analysis is determined primarily by the facts found in each decision. Findings of fact made by the Court of Chancery are accepted on review by the Delaware Supreme Court unless they are clearly erroneous. Steele suggested that, with appropriate findings of fact, a pill could be removed under Delaware law. ...

Steele noted that there was a tension between the view, on the one hand, that the board should have power to defeat an inadequate hostile offer and the view, on the other hand, that, once the board has discharged its duty to make clear to shareholders its view of the long-term value of the corporation and there is no likelihood that the poison pill could be used to generate an alternative offer, it should be the shareholders' responsibility to decide whether to accept the board's view of the corporation's value or accept the bidder's offer. Chandler's opinion appeared to show some sympathy for the latter position. However, he described his analysis as "constrained by Delaware Supreme Court precedent". 

Steele took issue with the view that the Chancery is constrained in its ability to remove a pill in the appropriate circumstances. He suggested that if the chancellor had found facts that were inconsistent with it being reasonable to keep the pill in place, an injunction against maintaining the pill could be issued under Delaware law. Where there is a battle of valuations, rather than the defence of a long-term strategy, a case can be made for removing the pill and letting the shareholders decide. 

OK, so if the question is one about the adequacy of a noncoercive offer, is Steele suggesting that a board could be ordered to pull its pill?  That an inadequate offer on its own is not a cognizable threat?  Personally, I tend to agree and would be happy with that result.  But, I'd be surprised if the Supreme Court was already there intellectually and simply waiting for the Chancery Court to hand up an opinion for appellate review.  Could it be that Chandler in Air Products just got it wrong?

-bjmq