Yesterday, the Delaware Supreme Court posted video of that day’s oral argument for the appeal of RBC v. Jervis. This is the case seeking to reverse Rural/Metro. Its not a new thing to have oral argument archive available online – but I think it’s typically not available so fast…
Here’s an excerpt from a piece by Finsbury’s Chuck Nathan entitled “Observations on Short-Termism and Long-Terminsm”:
The fourth fallacy in the short-term—long-term debate is that, given every company’s finite resources, choosing a corporate strategy that can be implemented in a relatively short-time period (often a type of so-called “financial engineering”, such as a major stock buyback, a divestiture or spin-off of a business or a sale of the entire company) almost certainly prejudices, if it does not preclude, longer-term more beneficial strategies (such as greater investment in R&D, upgrading productivity of plants and equipment or acquisitions). This formulation of the debate associates activist investors with short-term strategies at the cost to the company and its other shareholders of greater long-term value creation.
But this formulation of the debate simply does not make sense. Activist funds are in business to maximize value creation for their investors (and for their principals who get rich on their carry and their investment in their own funds). Why would any rational activist investor consciously forgo the higher net present value of a long-term company business initiative in favor of the investor’s lower short-term value creating idea? Activist fund managers don’t get paid for ego trips; they get paid for maximizing returns. The same, of course, is true for all actively managed institutional investors. Even index and other quantitative investors should opt for the highest net present value creator if they have the capability of understanding and evaluating the competing proposals. In theory, only short sellers should oppose the highest net present value added program regardless of its duration.
On Thursday, September 17, 2015, in In re Riverbed Technology, Inc. Stockholders Litigation, the Delaware Chancery approved a disclosure-only settlement related to the go-private deal for Riverbed Technology, Inc. Although the court approved the settlement, it expressed serious reservations about the broad releases provided to Riverbed’s directors in exchange for enhanced disclosures that provided little value for shareholders. In re Riverbed is yet another in a line of Delaware cases that have expressed dissatisfaction with the current trend of merger litigation resulting in disclosure-only settlements.
This September-October issue of the Deal Lawyers print newsletter has been posted – & also sent to the printers – and includes articles on:
– Retention Payment Program: Decision Tree
– Earn-Out Covenants
– Spin-Offs & Executive Compensation: Keys to Success
– D&O Insurance: Maximizing Returns In the Face of M&A Lawsuits
– Providing Effective, Practical Counsel Regarding Acquisition Surprises
Remember that – as a “thank you” to those that subscribe to both DealLawyers.com & our Deal Lawyers print newsletter – we are making all issues of the Deal Lawyers print newsletter available online for the first time. There is a big blue tab called “Back Issues” near the top of DealLawyers.com – 2nd from the end of the row of tabs. This tab leads to all of our issues, including the most recent one.
And a bonus is that even if only one person in your firm is a subscriber to the Deal Lawyers print newsletter, anyone who has access to DealLawyers.com will be able to gain access to the Deal Lawyers print newsletter. For example, if your firm has a firmwide license to DealLawyers.com – and only one person subscribes to the print newsletter – everybody in your firm will be able to access the online issues of the print newsletter. That is real value. Here are FAQs about the Deal Lawyers print newsletter including how to access the issues online. Try a “Free for Rest of ’15” no risk trial now!
Tune in tomorrow for the webcast – “Evolution of M&A Executive Pay Arrangements” – to hear Morgan Lewis’ Jeanie Cogill, Sullivan & Cromwell’s Matt Friestedt, Cravath’s Eric Hilfers and Wachtell Lipton’s Andrea Wahlquist cover the latest about executive compensation arrangements in deals.
It turns out that there were some very company specific reasons why Dole in general and Carter in particular were querulous about Delaware’s courts. On August 27, 2015, in a massive 108-page post-trial opinion, Vice Chancellor Travis Laster, held that Dole’s CEO David Murdock, and Carter, whom Laster described as Murdock’s “right-hand man,” breached their fiduciary duties in connection with the November 2013 transaction in which an entity Murdock controlled acquired the 60% of Dole’s shares that Murdock did not already own. Laster’s opinion found that in connection with the process that led to the transaction, Murdock and Carter engaged in “fraud,” that prevented Dole’s shareholder from receiving a fairer price in the transaction. Laster held Murdock and Carter jointly and severally liable for damages of $148.1 million, plus pre- and post-judgment interest.
Laster’s opinion is long but it makes for some very interesting reading. The 91 year-old Murdock does not come off well in Laster’s opinion, at all. Laster describes Murdock as “an old-school, my-way-or-the-highway controller, fixated on his authority and the power and privileges that went with it.” In footnote 6 of the opinion, Laster writes about Murdock that “by dint of his prodigious wealth and power, he has grown accustomed to deference and fallen into the habit of characterizing events however he wants. That habit serves a witness poorly when he faces a skilled cross-examiner who has contrary documents and testimony at his disposal.”
Here’s the intro from this Cooley memo:
While acquisitions of up to 10% of the voting interest in a target that are made “solely for the purpose of investment” are in many circumstances exempt from Hart-Scott-Rodino (HSR) reporting requirements, even when the value of the investment exceeds the $76.3 million HSR “size of transaction” threshold, federal antitrust authorities have long interpreted that “exemption” to be a narrow one.1
The Department of Justice this week sued three affiliated hedge funds and their New York-based management company for acquiring shares in Yahoo! in 2011, in excess of the then applicable HSR threshold, and simultaneously agreed to settle the action, prohibiting future violations, without obtaining any civil penalty. The suit sends a clear message to investors that taking actions other than voting shares likely takes an investment out of the exemption.
The Complaint, which was filed on behalf of a divided Federal Trade Commission, targets actions taken by Third Point LLC in connection with its acquisition of voting securities in Yahoo!. By late August 2011, three Third Point funds each had Yahoo! holdings exceeding the then applicable $66 million size-of-transaction threshold. On September 16, 2011, the three funds each filed a notification and report form under the HSR Act for the voting securities purchased, and the waiting period of those filings expired on October 17, 2011. Notwithstanding this filing, the DOJ alleged that the funds were in violation of the HSR Act from the point in August when they had each acquired shares putting their holdings above $66 million until the expiration of the waiting period in October 2011, given that they engaged in “various actions inconsistent with [qualifying for] an investment-only purpose” exemption.
Here’s an excerpt from this interesting blog from a while back by “The Activist Investor”:
For one of the most-discussed investors these days, we know surprisingly little about Carl Icahn’s activist investing. Numerous magazine and journal articles profile or mention him. But, unlike Warren Buffett or Peter Lynch, we could find only one book, from over twenty years ago, that covers his investment thinking.
Fortunately, we have abundant data about his activist projects. We studied these projects a bit, to see what lessons other activist investors could learn. We found some surprises.
Carl Icahn has a distinct approach. With a couple of notable exceptions, he avoids mega-cap companies, even though he has the assets and profile to tackle just about any company. He achieves his goals, and superior returns, though publicity, his outsized reputation, and financial clout. He follows-through on his threats less frequently, with few proxy contests. That threat alone means he usually settles with a company, accepting some BoD seats or the promise of a restructuring.
And then there’s this more recent blog entitled “Corporate Governance, The Icahn Way” by The Activist Investor…
Here’s something that Randi Morrison blogged on TheCorporateCounsel.net a few days ago: Recently, Deloitte released 2015 M&A Trends Report reveals a booming, wide-reaching M&A environment spanning small, mid-sized and large public and private companies and private equity firms, multiple industry sectors, and domestic and overseas markets. The report reflects the results of an early 2015 survey of more than 2,000 public and private companies and over 400 private equity firms.
Noteworthy findings include:
– Strong interest in overseas expansion. Among private equity respondents, 85% indicated that their deals involve acquiring a company domiciled in a foreign market – up from 73% last year. And 74% of the corporates are investing overseas – up from 59% last year.
– 39% of corporates expect to tap into the robust M&A environment to pursue divestitures – up almost 25% from last year.
– 85% of corporates anticipate acceleration of – or at least sustaining – last year’s M&A pace; only 6% expect deal-making activity to decrease.
– 94% of private equity firms forecast average to very high deal activity – up from 89% last year.
– Private equity firms anticipate ramping up both add-on acquisitions and portfolio exits.
Note that global M&A value in the first half of this year reportedly hit an 8-year high – second only to the all-time record set in 2007.
Deloitte’s report also notes that the vast majority of corporate and private equity respondents said that their deals fell short of financial expectations. See our earlier blog on tips to achieve post-merger integration success.
This NACD interview with Delaware Chief Justice Leo Strine covers a number of topics including certain potential adverse consequences of federal attempts to regulate corporate governance and the Delaware Supreme Court’s decision in Nabors addressing the reasonableness under the circumstances of actions by the buyer’s board where the buyer was giving up control. [Don’t forget our own upcoming webcast: “An M&A Conversation with Myron Steele & Jack Jacobs.”] Here’s an excerpt:
Q. After your first year-plus on the high court, what cases do you feel are most important in terms of their effect on how directors do their jobs on a day-to-day basis?
A. The Nabors decision, in a very dynamic M&A environment, is one that directors would probably find noteworthy. It emphasizes that directors are given credit for dealing with the contextual circumstances that they face, that the world is a dynamic place and not every deal is exactly the same, and that there can be unusual situations where boards have to do something innovative, and that as long as they do it with care and good faith, then they get credit under our law.
Q. As you know, the Nabors decision overturned a trial judge who apparently had ordered the board to hold a 30-day auction—which leads me to ask how far the board needs to go to determine that a deal that they have signed off on is the best deal possible for shareholders.
A. One of the things that people say they like is discretion, but then what they really like is to be told exactly what to do. With discretion comes the responsibility to exercise it responsibly. The way our law works is you get credit for exercising good faith judgment. Different deals present different contexts. Nabors was an unusual situation because, remember, the person—the party on the buy side—was giving up control. If you’re a buyer, that affects how you deal with the world, so there’s no simple answer.
The key thing that was reaffirmed in Revlon is a reasonableness test. Directors get credit for acting reasonably under the circumstances, and although there’s heightened scrutiny, the court cannot grant relief unless it has a belief that directors have not acted reason ably under the circumstances.
In terms of what sort of market check is appropriate, that’s contextual, and what directors get credit for is their thoughtful reflection on the particular circumstances facing their company and making reasoned judgments about the best way to obtain the best value for their stockholders.
Q. And so, if that gets called into question, then they just have to demonstrate that they have exhibited reasonableness?
A. Right. If you’re actually going to do something like engage in a change-of-control transaction—which is as important a topic as a board of directors is going to address—the court, plaintiffs, and stockholders are going to ask hard questions like: Did you consider all of the relevant options? Who were the likely strategic buyers? Who were the likely private equity buyers? Were people given an opportunity to look at the situation without the inhibition of deal-protection measures? These are all the things that you would typically expect boards to consider when they face the question of whether they’re going to sell control of the company.
What Nabors makes clear is that in a contextual situation and when a board pursues a reasonable course of action, then they get credit for that. And that has been the law for a long time, and it echoes the iconic decision in QVC.
Q. The passage of Dodd-Frank in 2010 increased the federalization of some corporate governance mandates. How does that affect the courts?
A. The increased federalization has actually probably helped Delaware because we’re a place of stability and dependability compared to the federal environment, where you get crisis-driven and federal responses that seem to have no logical connection to the crisis.
For example, at the federal level, there’s nothing about the banking crisis that’s connected to some of the mandates around activism. It’s actually fairly implausible. Frankly, the risk taking that companies were engaged in was, well, it tended to be favored by the investment community. And so you would think, if anything, the policy response would be to make people focus more on issues of substantial risk and long-term durability. But you get a response that actually, in some ways, makes companies more, not less, accountable to the immediate whims of short-term traders. In Delaware, our law is relatively stable and dependable, and that actually tends to increase people’s desire to at least use Delaware, because they can depend on that element in their governance structure.
I don’t know that it affects the courts directly, but it certainly affects boards of directors. The concern of federalization—and you have to include the increased mandates of the exchange rules as well—in my view is what I call the “more, more, more” problem. It was a pretty bad disco-era song, and it also is a very bad way to run the world.
I tend to analogize. If you have a kid at one of these schools where they give way too much homework—we don’t have a very long school year in the U.S.A., so we tend to compensate by giving a lot of homework—and if the kid already has a full load of math, science, English, history, and a foreign language, there really isn’t any time to do more homework. One of the problems we’ve done with boards of directors is we’ve assumed that we can just list more things for boards to do. When you create checklists of legal requirements, people tend to do the things that they legally need to do first. There isn’t a checklist requirement that says: spend a quarter of your time as a board making sure you have a good business strategy, spend another quarter of your time making sure that you are looking forward to what the key risks are to the business whether legal, financial or any other kind, right?
Q. What troubles you about that?
A. One of the things that troubles me is the assumption that directors have a lot more time to give. My sense is directors are spending more hours than they ever have. That doesn’t necessarily mean that they’re spending them in in the wisest way. And one of the concerns about federalization is the effect on how the board spends its time. One of the things that we need to think about is: What are the most important subjects?
Let’s make sure that any mandates align with that. And if there are things that are less important, take them out of the mandatory category. We have to be careful when we talk about ourselves internationally that we don’t harm ourselves as a nation because sometimes we have debates within our own borders and fail to understand how that might be perceived abroad. We might think that Sarbanes-Oxley or Dodd-Frank went too far—and that may be true—but from an international, comparative perspective, there might still be much more flexibility for American corporate managers to make decisions than there would be in other markets.