As noted in the DealBook piece, William Ackman, the well-known hedge fund manager, has teamed up with Valeant, a big health care company, to make a hostile bid for Allergan. Here’s an excerpt from that article:
If successful, the joint bid by a hedge fund and a corporate acquirer could provide a new template for how deals are done in an era of increased activity by activist investors. “This is a harbinger of a much wider range of kinds of deals,” said Ronald J. Gilson, a professor of business law at Stanford Law School. “There are a lot of people with a lot of money who can act very quickly, and they don’t have to do things that look like last week’s deal.”
This article notes that there might have been insider trading leaks ahead of the bid. Here’s a WSJ article on the latest activist investing agenda (buybacks & cost cuts) – and this blog analyzes what is an “activist white paper” (here’s an example of one)…
Yesterday, Corp Fin issued 2 new Compliance & Disclosure Interpretations dealing with social media. The first CDI deals with how to affix legends to tweets & other social media communications. The second CDI deals with retweeting or otherwise repeating another social media communication (ie. company isn’t responsible for third-party retweets). These CDIs apply to the Rule 134 (ie. tombstone ad), Rule 165(c)(1)(ie. business combo) and Rule 433(c)(2)(i)(ie. FWP) contexts.
I sometimes get accused for being a “homer” for Corp Fin. It’s true that I love my alma mater and I wholeheartedly approve most of what the Division does. I particularly like the Office of Mergers & Acquisitions, which played a significant role in developing this guidance. But sometimes I do disagree.
I’m glad that the Staff is getting around to address these issues, but I don’t like the conditions imposed on the first CDI, which blesses the practice of not including a full legend in a tweet (which was an impossible task). In particular, I don’t like that a company must use up valuable Twitter real estate to say a link to a disclaimer is “important.” I don’t agree with the Staff’s concern that someone on Twitter won’t know or appreciate the significance of a hyperlink. Bearing in mind that a tweet is limited to 140 characters – and that the link itself will take up to 10 characters itself (even when shortened) – that doesn’t leave a whole lot of space. Adding a statement that a link is important might use up 10% of your available space. Plus, this is akin to requiring companies – in the paper world – to add a big statement before a disclaimer that says “The following disclaimer is important.” This just doesn’t jibe in an era where folks are talking about minimizing duplicative disclosure.
This CDI does leave open some issues, such as “is affixing an image to a tweet that includes the disclaimer sufficient?” Probably not under this guidance – so Carl Icahn may have to change his tweeting ways (see his March 26th tweet). Another issue is “can the first tweet in a series include the disclaimer rather than including the disclaimer in every single tweet?” This is important to know for live tweeting during earnings calls. Some companies currently have a practice of the first tweet – amidst a series of tweets during an earning call – including a link to the forward-looking safe harbor rather than including the link in each tweet that might have forward-looking information.
At the recent Tulane conference, Michele Anderson, head of Corp Fin’s Office of M&A, noted that the Staff will be watching M&A parties who use social media to see if they are filing with the SEC. She also said that you can’t be cute – if a social media channel allows enough characters to include a full legend – then you must include the full legend and not rely on this guidance to just link to a legend. In other words, you can’t max out a Facebook post with other content to avoid including a legend.
In his blog, Steve Quinlivan jokingly notes that maybe “TIIIITH” (meaning “there is important information in the hyperlink”) will become a well-known acronym as a way to save space…
Who Reads Disclaimers Anyways? The Case to Can Them All
My big beef is with disclaimers in general. To me, this is low-hanging fruit for the SEC’s disclosure reform project. The SEC should change its rules to make all legends and disclaimers optional. I imagine a survey of investors would reveal that no one reads them. And even if a typical investor tried, many are written in a way that makes them hard to understand. In fact, a few of them are required to be in all caps – a style that the SEC’s plain English initiative proved to be difficult to read decades ago. It’s the kind of legalese that is a turn-off for retail investors and is apt to make them decide to chuck their disclosure document in the trash can…
Speaking of fine print, some pretty crazy stuff going on with forced arbitration if a consumer just uses a coupon or “likes” a brand on Facebook. Here’s a list of companies with forced arbitration in their terms of service. Also note that the SEC is not the only federal agency coming to grips with social media – read this alert about the FTC and sweepstakes…
Here’s an excerpt from this Gibson Dunn memo:
On April 8, 2014, Vice Chancellor Laster of the Delaware Court of Chancery issued an opinion addressing the reasonableness of a “market check” as well as required proxy disclosures to stockholders in M&A transactions. In Chen v. Howard-Anderson, the Vice Chancellor held that (i) evidence suggesting that a board of directors favored a potential acquirer by, among other things, failing to engage in a robust market check precluded summary judgment against a non-exculpated director, and (ii) evidence that the board failed to disclose all material facts in its proxy statement precluded summary judgment against all directors. The opinion addresses the appropriate scope of a market check, the necessary disclosure when submitting a transaction to stockholders for approval, the effect of exculpatory provisions in a company’s certificate of incorporation, and the potential conflicts faced by directors who are also fiduciaries of one of the company’s stockholders.
Over on my blog on TheCorporateCounsel.net yesterday, I described a new European Commission proposal that is a revised shareholder rights directive. It’s a biggie that has something in there for everyone, including binding say-on-pay and proxy advisory firm reform.
Here are some thoughts from Marty Lipton that he issued yesterday:
Two articles (among several) in a comprehensive proposal to revise EU corporate governance would have a significant beneficial impact if they were to be adopted in the United States. In large measure they mirror recommendations by Chief Justice Leo E. Strine, Jr., in two essays: Can We do Better by Ordinary Investors? A Pragmatic Reaction to the Dueling Ideological Mythologists of Corporate Law, 114 Columbia Law Review 449 (Mar. 2014) and One Fundamental Corporate Governance Question We Face: Can Corporations Be Managed for the Long Term Unless Their Powerful Electorates Also Act and Think Long Term? 66 Business Lawyer 1 (Nov. 2010).
The first EU proposal deals with the investment policies of institutional investors. It would require institutional investors to disclose how their equity investment strategy is aligned with the profile and duration of their liabilities and how it affects the medium to long-term performance of its assets. Where the institutional investor uses an asset manager, it would also be required to disclose the particulars of the arrangement with the asset manager to assure that the asset manager aligns its investment strategy and decisions with the profile and duration of the investor’s liabilities. Concomitantly, asset managers would be required to disclose to the institutional investors how their investment strategy contributes to the medium and long-term performance of the assets of the institutional investors.
The second EU proposal would require that proxy advisors adopt and implement adequate measures to guarantee that their voting recommendations are accurate and reliable. Proxy advisors would be required to make annual public disclosure of the following in relationship to their voting recommendations:
a) the essential features of the methodologies and models they apply;
b) the main information sources they use;
c) whether and, if so, how they take national market, legal and regulatory conditions into account;
d) whether they have dialogues with the companies which are the object of their voting recommendations, and, if so, the extent and nature thereof;
e) the total number of staff involved in the preparation of the voting recommendations;
f) the total number of voting recommendations provided in the last year.
While adoption of similar requirements here would not eliminate short-termism, they would moderate it and they would reduce the ability of activist hedge funds to mobilize the voting power of institutional investors to support slash and burn attacks that result in long-term damage to the targets.
Yesterday, as noted in this article, the Delaware Senate unanimously confirmed Andre Bouchard as Chancellor of Delaware’s Court of Chancery, replacing Leo Strine who became Chief Justice for Delaware’s Supreme Court…
Here’s news from SRS (also see this Akin Gump blog):
In a recent case in which Shareholder Representative Services is serving as the shareholder representative, the buyer in the underlying M&A transaction attempted to include SRS and the selling stockholders as defendants in a class action suit. Mercury Systems, Inc. v. Shareholder Representative Services LLC, et al., Action No. 13-11962-RGS, Dkt. #34 (D. Mass., February 14, 2014). A defendant class would have exposed individual stockholders to burdensome discovery obligations and added expensive complexity to the case. SRS opposed the inclusion of the stockholders, arguing that SRS was the only proper defendant. The judge quickly and vehemently agreed, calling “the common practice of appointing a shareholder representative…a helpful mechanism for resolving post-closing disputes efficiently and quickly.”
The decision reaffirms that shareholders of a target company can effectively remove the risk of being dragged into any deal-related litigation by not serving as the shareholder representative themselves. This is increasingly important to funds and individuals for a number of strategic reasons. Obviously, nobody wants to be a party to a lawsuit if they can avoid it. It can be time consuming and stressful. In addition, most funds have a strong desire to avoid being named an adverse party to a strategic or financial buyer they might see again on future deals. This is increasingly true as funds become more specialized and the universe of buyers in their industry narrows. Finally, most funds would like to avoid having to disclose any litigation when it comes time for fundraising.
SRS has managed more than a thousand indemnification, working capital and earnout claims over the nearly 600 transactions on which we have been engaged. On the vast majority of these, we are able to successfully resolve the issue with buyers without any need for the matter to rise to litigation. However, some claims do not settle and necessitate elevated methods of dispute resolution. To our knowledge SRS is the only professional representative that has been named a litigant on behalf of stockholders, and we’ve taken on this burden in dozens of cases. Any other alternative as a shareholder representative, whether a volunteer or outside source, may be going through the process for the first time,
When engaging SRS, shareholders are able to rid themselves of the risks and burdens of being a shareholder representative without giving up control of the process or any material decisions that need to be made. Our process allows stockholders to have the best of both worlds – control of the issues they care about while ridding themselves of the baggage they don’t want.
Recently, Harvard held a “Roundtable on Activist Interventions” – here are the course materials, freely posted. In particular, here is a piece from McKinsey entitled “Preparing for bigger, bolder shareholder activists” – and the transcript of an interview with McKinsey’s Larry Kanarek on the same topic…
Here’s news from the Delaware Law Weekly (also see this Delaware Online article and this Reuters article):
Delaware Supreme Court Justice Jack B. Jacobs has notified Gov. Jack Markell via a letter that he plans to step down from the bench in July. Jacobs wrote in his March 31 letter, a copy of which was obtained by Delaware Law Weekly, that he will step down July 4, one full year before his term is set to expire. He has served on the Supreme Court for 11 years and was also a Delaware Court of Chancery vice chancellor for 18 years. “No one can or should occupy these positions of trust for too long, however, and in my case, the time has now come to move on to the next phase of my life,” Jacobs said in the letter.
Ahead of our webcast today – “Rural/Metro and Claims for Aiding & Abetting Breaches of Fiduciary Duty” – I thought it would be good to report about how the case was discussed at last week’s M&A conference at Tulane. Here is a WSJ article with a recap:
A recent court ruling that put M&A bankers on high alert was the talk of the town as deal makers gathered in New Orleans this week–and it wasn’t all good talk. Lawyers and bankers spoke warily, and at times critically, of a decision that has landed RBC Capital Markets LLC on the hook for potentially millions of dollars in damages to shareholders of a company it advised on a 2011 buyout. Vice Chancellor J. Travis Laster found earlier this month that RBC’s desire to win fees both advising Rural/Metro Corp. and lending to its buyer, Warburg Pincus LLC, colored its advice to the board and shortchanged investors. RBC has defended its advice to the board and has said it is weighing its options.
The decision echoed loudly in New Orleans, where a few hundred lawyers, bankers, judges and advisers gathered this week at the Tulane Corporate Law Institute. One New York-based lawyer was distributing buttons with “Rural/Metro” encircled in a red “Ghostbusters” sign. On the sidelines, some advisers said quietly they hoped RBC would appeal. In particular, people pointed to the robustness of the auction–26 bidders were contacted; only Warburg submitted a final bid–and Mr. Laster’s decision to exclude from his analysis the fact that Rural/Metro filed for bankruptcy protection after Warburg bought it. “While no one would advocate bad behavior, the decision includes a number of novel applications of law that RBC can raise on appeal and that could result in a reversal,” said Kevin Miller of Alston & Bird LLP. Judges rarely find that boards failed to run a fair sales process. Rarer still is Mr. Laster’s ruling that a bank contributed to–in legal parlance “aided and abetted”–that failure. Because of a quirk of Delaware’s corporate law, directors themselves are typically immune from damages, while advisers can be targeted for millions of dollars.
Particularly troubling to some at Tulane was Mr. Laster’s description of banks in M&A deals as “gatekeepers” that have a duty to make sure boards are running good auctions. In his opinion, Mr. Laster fired a warning shot across the bow of other banks: Stay in bounds, or expect to get sued. “The threat of liability helps incentivize gatekeepers to provide sound advice, monitor clients, and deter client wrongs,” he wrote. “That’s a very striking point,” Paul Choi of Sidley Austin LLP said. “I’ve never read something like that in a Chancery Court opinion.”
Still, some said RBC’s actions as laid out by Mr. Laster were egregious. Last-minute changes to the bank’s fairness opinion had the effect of making Warburg’s offer look more fair, Mr. Laster found. One banker, when the bottom valuation range implied by a so-called discounted cash flow analysis fell above Warburg’s offer, wrote a colleague: “I thought we were going to try to reduce DCF?” “If they’re true, those are bad facts,” said one New-York based M&A lawyer.
They may be costly ones, too. Mr. Laster has not yet ruled on damages, but his opinion and subsequent court filings suggest Warburg may have underpaid by more than $200 million–an amount RBC could owe Rural/Metro’s former shareholders. RBC is likely to argue that the directors and Moelis & Co., which also gave a fairness opinion, are partly responsible, which could reduce RBC’s share of the payout.
And here’s a DealBook article about a Tulane panel on activists…