Delaware Supreme Court: CA/AFSCME Certification Accepted and on Fast Track

Yesterday, the Delaware Supreme Court accepted the questions certified to it by the SEC relating to the battle between CA and AFSCME over the proponent's binding bylaw proposal seeking reimbursement for third-party solicitations. The Court sure didn't lose any time taking the case - and look at the quick briefing and argument schedule they have set (given CA's mailing date is July 17th, this was necessary): briefs are due on Monday, July 7; oral argument is scheduled for July 9. We will have a guest blogger giving us news live from the hearing.

We have posted the Supreme Court's order in the "Shareholder Proposal" Practice Area on TheCorporateCounsel.net.

Corp Fin No-Action Relief for Busted Merger/Reorganization

Last week, Corp Fin posted this no-action letter - Barclays (Netherlands)(available 6/26/08) - which seems to be well within the line of "abandoned offering" 12h-3 letters. Usually they are for a busted IPO, but this one is for a busted merger/reorganization.

In both cases, the facts are pretty much the same - a registration statement goes effective but the offer is never completed. Therefore it make no sense for the registrants to have to file a Form 10-K/20-F to satisfy the Section 15(d) obligation since no one is holding the securities from the originally contemplated IPO/merger.

Duty Of Disclosure: Delaware Chancellor Further Limits Availability of Damages

From Travis Laster: Last week, Delaware Chancellor Chandler - in In re Transkaryotic Therapies, Inc. - granted summary judgment in favor of three directors who were alleged to have breached their fiduciary duties by supporting and voting in favor of the acquisition of Transkaryotic Therapies by Shire Pharmaceuticals. Here is a copy of the opinion.

Much of the opinion consists of the Chancellor's rulings on the plaintiffs' allegations of bad faith and disloyalty. From a doctrinal and practitioner perspective, the more important discussion focuses on the duty of disclosure (pages 17-28).

In summary, the Chancellor characterizes the duty of disclosure as a doctrine designed for pre-vote adjudication, leaving very little room for any post-closing remedy. In his words, "the Court grants injunctive relief to prevent a vote from taking place where there is a credible threat that shareholders will be asked to vote without such complete and accurate information. The corollary to this point, however, is that once this irreparable harm has occurred --i.e. when shareholders have voted without complete and accurate information--it is, by definition, too late to remedy the harm" (page 25).

Based on this principle, the Chancellor granted summary judgment for the defendant directors: "I hold that this Court cannot grant monetary or injunctive relief for disclosure violations in connection with a proxy solicitation in favor of a merger three years after that merger has been consummated and where there is no evidence of a breach of the duty of loyalty or good faith by the directors who authorized the disclosures" (page 27).

As a practical matter, the Transkaryotic decision obviously favors defendant directors, and it should increase their settlement leverage in cases where plaintiffs primarily assert disclosure claims but do not pursue injunctive relief. In other words, the cost of a post-deal clean-up settlement involving disclosure claims should go down. The logical response from the plaintiffs' bar, however, should be to pursue more pre-closing disclosure-based injunction applications, since that is now the only real avenue available for a meaningful disclosure remedy and a commensurate fee award. In the long run, therefore, the Transkaryotic decision may result in more injunction applications and more disclosure litigation.

Two other points deserve brief mention. First, the Chancellor granted summary judgment on the claim that a director breached his fiduciary duties by soliciting so-called "empty votes" from stockholders who owned shares on the record date then sold them. The Court found that the director's efforts to support the merger was "consistent with - rather than at odds with - his fiduciary duties" (page 39).

Second, the Chancellor permitted the plaintiffs to proceed with a challenge to the statutory validity of the merger, based on their assertion that the merger had not received sufficient votes. This challenge rested in part on testimony to the effect that the inspectors of election tallied the vote very quickly, yet the plaintiffs produced evidence of over-vote situations that would have taken additional time to resolve. Notwithstanding the passage of three years since the merger closed, the Court permitted the challenge to go forward. This holding emphasizes the need for care when tallying merger votes and counsels in favor of hiring a reputable outside firm, such as IVS, to act as the inspector for close votes.

I've been saying that companies should hire independent inspectors for a long time - and since you sometimes don't know if your vote will be close until the last minute - you need to line up the inspector well in advance because they are in short supply!

Shareholder Rights Plans: Adding Derivatives to "Beneficial Ownership"

As noted in this WSJ article, at least two companies - Louisiana-Pacific Corp. (see related Form 8-K) and Micrel Inc. (see related Form 8-K) - have changed their shareholder-rights plans in recent months to include derivatives when calculating levels of "beneficial ownership" that would trigger their poison pill. The companies likely took this action to thwart the use of derivatives in activist plays.

A Different Perspective on CSX/TCI: Should Courts Reject a Private Right of Action Under Section 13(d)?

In the Harvard Law School Corporate Governance Blog, Phillip Goldstein of Bulldog Investors provides a viewpoint different from those coming from management's perspective. It's interesting to read a different viewpoint from the management one.

We have been posting oodles of law firm memos about the case in our "Schedule 13D" Practice Area.

Half of Sovereign-Wealth Fund Deals Involve Majority Stakes

As noted in this recent WSJ article, according to a recent Monitor Group study, half of the investments by sovereign wealth funds since 2000 involved a more than 50% interest. 37% involved stakes between 10% and 50% and only 13% involved investments of less than 10%.

There were 420 deals during this eight-year period - only 14 of them in wealthy nations, worth abut $9.4 billion, involved majority stakes in companies in such politically sensitive areas as energy, utilities, information technology, telecommunications and financial services.

Here is a copy of the study - and here is a quote from this Reuters article: "Heightened national security concerns over strategic investing by sovereign wealth funds appear to be overblown, a new study released on Friday found. The study, conducted by consulting firm Monitor Group, found that the bulk of SWF investing appears to be aimed at furthering the economic development of a host or allied country, not acquiring sensitive strategic or economic assets to advance political aims of a state."

Winning the World Series: Cubs Worth More? Or Less?

Here is a recent WSJ.com interview with an economist about how much more the Chicago Cubs would be worth if they won the World Series this year (they are red hot and it's been 100 years since they last won).

The interview is short and perhaps not complete - but in my opinion, the Cubs would be worth less in the long run if they won. Part of their national mystique is that they are perennial losers. "Maybe next year" is their mantra. As someone who grew up down the street from Wrigley Field at a time when they "had it in the bag" - the late '60s/early '70s - I don't want to see the streak end...

Closing Time: When the Founder is Ready to Sell

We have posted the transcript for the webcast: "Closing Time: When the Founder is Ready to Sell."

Corp Fin's No-Action Letter: Partial Tender Offers Under US and Israeli Law

Here is some analysis from Jim Moloney of Gibson Dunn: This recent no-action letter - Elron Electronics Industries - is unusual in that it relates to a partial tender offer being done under U.S. and Israeli law. Here you have a situation where an Israeli bidder is is making an all-cash tender offer for up to 5% of the outstanding ordinary shares and ADRs in a single offer. It is somewhat more typical to see a dual-offer structure. According to the bidder, a recent record holder list shows a relatively high percentage of shares held by U.S. persons -- approximately 63%. However, the bidder believes the U.S. ownership of the subject company is really closer to 52%.

The Israeli Companies Law requires a 4-day extension of the tender offer period, without a corresponding extension of withdrawal rights (a "subsequent offering period"), once all conditions to the offer have been satisfied. Payment of the tender offer consideration is expected four or more days after the expiration of the subsequent offering period which is apparently permitted under Israeli law.

For reasons not clearly articulated in the letter, the "subsequent offer period" that is permitted under U.S. law (Rule 14d-11) does not work here. Presumably that is because the offer is "partial" and Rule 14d-11 requires that the offer be for "all outstanding" securities of the class sought and the bidder must "accept and promptly pay for all securities" tendered during the initial offering period upon the close of the initial offering period. Therefore, the bidder requested relief from the prompt payment rule (Rule 14e-1(c)) and the rule requiring withdrawal rights (Rule 14d-7(a)(1)), which the staff granted.

The CSX Opinion is In!

Yesterday, in CSX Corp. v. The Children's Investment Fund Management, Judge Lewis Kaplan of US District Court (SDNY) delivered his anxiously awaited opinion finding that the two plaintiff activist funds violated the securities laws by not disclosing their positions and intentions many months before they did.

However, Judge Kaplan also ruled that there was nothing effective that he could do and he didn't bar the funds from voting their shares at CSX's upcoming annual meeting. And in his fine analysis, Professor Steven Davidoff notes that its unlikely the SEC will pursue an enforcement action given the letter submitted to the court from Corp Fin. Here is a NY Times article - and here is a WSJ article.

Here is an additional tidbit - the NY Times' Andrew Ross Sorkin wrote his column Tuesday about how CSX is a case study in how not to respond to a proxy fight...

Disclosure of Internal Financial Projections

From guest blogger Steve Haas of Hunton & Williams:

A hot M&A issue of late has been the need to disclose internal financial projections under Delaware law. In 2002, the Court of Chancery in Pure Resources directed a target corporation to disclose substantive portions of its investment banker's work in responding to a controlling stockholder's tender offer. Many practitioners assumed that Pure Resources was distinguishable from third-party negotiated transactions because, as that court observed, the transaction involved a controlling stockholder who presumably had more knowledge about the company than did the minority stockholders.

But that rationale was implicitly called into question last year in Netsmart, where the court ordered disclosure of management's financial projections in connection with a go-private deal with a private equity fund. Subsequent Delaware decisions, however, including CheckFree and Globis Partners, made clear that there is no bright-line common law rule requiring disclosure of management's projections.

It's not clear how to reconcile all of these decisions, and practitioners are left with generalized standards that require disclosure of all "material information" and a "fair summary" of the target's financial analysis, but the required disclosures do not need to enable stockholders to perform their own independent valuation. In assessing these disclosure obligations, the accuracy and reliability of the projections and the extent to which they were relied upon by the target board and its investment bankers seem to be the most important factors.

One Delaware jurist also suggested recently that the presence of target insiders on the buy-side would help tilt the court's analysis in favor of disclosure, since those insiders likely prepared the projections and understand their utility. That rationale supports the positions taken in Pure Resources and Netsmart. Mike Tumas and Michael Reilly at Potter, Anderson & Corroon recently put together a very helpful analysis of these issues in this memo, which originally appeared in Deal Points.

Unsealed: Yahoo's Tin Parachute

The media has had a field day ever since Delaware Chancery Court's Chancellor Chandler unsealed this amended complaint filed against Yahoo, particularly because Carl Icahn is involved as he pressures Yahoo to sell; see this DealBook post which includes Icahn's latest demand letter. The lawsuit charges that Yahoo's directors breached their fiduciary duties by their actions, including failing to negotiate a deal with Microsoft and enacting a broad employee severance plan.

Professor Steven Davidoff describes the tin parachute plan in quite some detail - and analyzes the arrangement, plus links to two other blogs that do the same - in his "DealBook" blog. Here is an excerpt from his blog:

The plan provides that if an employee with Yahoo is terminated by Yahoo without “cause” or by the employee for “good reason” within two years after Microsoft acquires a controlling interest in Yahoo, the employee will receive (among other things):

(1) his or her annual base salary over a designated number of months ranging from four months to 24 months, depending on the employee’s job level; and

(2) accelerated vesting of all stock options, restricted stock units and any other equity-based awards previously granted.

Under the plan, good reason means any “substantial adverse alteration” in an employee’s duties or responsibilities during the two years following the change of control.

As a measure of the market, the argument that this plan is “egregious” seems primarily related to the cash severance component, not the equity acceleration. The latter feature is quite common even on a single-trigger basis (in which the equity is accelerated immediately upon a change of control or on a modified basis, permitting the executive to leave the company after one year and benefit from this provision).

But single-trigger provisions are becoming much less common. And under the Yahoo plan, both these payments have a double trigger: There must be an acquisition by Microsoft and then a subsequent termination of the employee. This is what you would expect for a tin parachute — slang for a change-in-control plan that covers all employees.

Still, it is less common to permit rank-and-file employees to benefit under the plan if they decide to leave the company for “good reason.” Typically, they only get a benefit if they are terminated without “cause.” But here, the definition of “good reason” is narrower than you would typically see for a corporate executive, though it still gives some rights to the employees to walk away. This is the part of the plan that is most aggressive. And the complaint is right that the definition of good reason could provide substantial leeway for Yahoo’s employees to walk.

Disclosing Swaps: SEC Staff Takes a Position in CSX Lawsuit

As the conclusion of one of the more closely-watched cases in recent years in the M&A area draws near (see this IR Magazine article for background), a number of amicus curiae filings were made available last week, including a letter from Corp Fin Deputy Director Brian Breheny (as transmitted by the SEC's General Counsel; this is not a Commission amicus brief). We have posted them in the "M&A Litigation Portal" on DealLawyers.com, as follows:

- SEC General Counsel's Brian Cartwright Transmittal Letter
- SEC Corp Fin Deputy Director's Brian Breheny Letter
- Prof. Bernard Black's Response to SEC Staff Letter
- ISDA/SIFMA Amicus Curiae Brief

Here is some analysis from Cliff Neimeth of Greenberg Traurig: In a pending litigation being watched closely by the public M&A bar, institutional activists and target issuers alike, this past Wednesday, in correspondence submitted by Corp Fin Deputy Director Brian Breheny to U.S. District Court (SDNY) Judge Lewis Kaplan, Brian endorsed the view of activist hedge funds - The Children's Investment Fund ("TCIF") and 3G Capital Partners ("3G") - that they were not required under Regulations 13G or 14A to disclose their approximate 12% economic stake in Jacksonville, Florida-based railroad operator CSX Corp. until months after they entered into these arrangements. The hedge fund defendants previously announced their intention and presently intend to elect a short-slate of their five nominees at CSX' annual meeting scheduled for later this month.

At issue, among many other aspects of the litigation, is the fact that TCIF and 3G were parties to elaborate "swap" and cash-settle derivative arrangements with investment bank counterparties, and that the nature of these contracts did (and do) not confer upon TCIF and 3G any shared or sole voting power over the underlying equity securities. Accordingly, in their view, such arrangements fall outside of the ambit of Section 13(d) and Regulation 13D thereunder until such time as these arrangements are converted into beneficial voting positions.

Although TCIF and 3G, on numerous occassions, announced to the investment community and to CSX directly that they were parties to the swaps and, in fact, made H-S-R (pre-merger notification) filings with the FTC, the absence of a detailed Schedule 13D filing (and subsequent amendments) allegedly enabled them to conduct (over a period of months) a broad range of "coordinating activities" with other institutional holders of CSX, to execute various plans, arrangements and understandings relating to control of CSX, and to otherwise engage in undisclosed "group" activities.

Brian Breheny (expressing the Staff's position of the appropriate interpretive legal standard and not the position of the SEC's Commissioners) stated in his letter to Judge Kaplan that "the presence of economic or business incentives that the [swap counterparty] may have to vote the shares as the other party wishes" is insufficient to create the beneficial acquisition of voting power in respect of such shares.

If Judge Kaplan agrees with TCIF's and 3G's (and indirectly, Breheny's amicus) interpretation of the legal standard for disclosure, this would have significant implications for hedge fund activist transaction planners and target companies. If he rules in this direction, it is not unlikely that this may prompt the SEC to accelerate its current assesment of whether Regulation 13D should be amended to broaden its reach to cover these cash-settled (synthetic) arrangements that have become more commonplace over the past several years.

Coupled with the SEC's e-proxy regime, the current slowdown in traditional economic M&A activity, and the recent Delaware Supreme Court and Delaware Chancery Court decisions in Openwave-Harbinger Capital, Jana Partners-CNET, Levitt Corp.-Office Depot and TravelCenters-Brog (with respect to the efficacy of the advance notice by-laws in those cases), this continues to help fuel an unprecedented level of institutional activism and control contest activity for the forseeable future. This also underscores the need for corporate issuers to examine their "shark repellents" and defensive arsenal.

Obama's "Incorporation Transparency Act" and The Shape of Things to Come

From guest blogger J.W. Verret, Assistant Professor, George Mason University School of Law:

The Senate Permanent Investigations Subcommittee is considering a bill introduced a few weeks ago by Senators Barack Obama, Norm Coleman, and Carl Levin, the "Incorporation Transparency and Law Enforcement Assistance Act," requiring states to determine the beneficial ownership of business entities formed under their jurisdiction and make that information available to their the federal government through subpoena.

In support of this bill, the Senators cite a handful of cases investigated by federal agencies that were later dropped because of difficulty determining beneficial ownership in the investigated entities. A proper analysis of the effects, costs, and likely constitutional challenges facing this bill reveals it as little more than a red herring - an empty gesture by a Presidential aspirant and Senators from contested districts meant to generate the appearance of being tough on corporate crime.

Other Alternatives

Legitimate prosecution of business entities engaging in activities that represent a threat to national security or violate tax, banking, or securities laws is a vital element of the federal government's law enforcement mandate. This does not mean that the state governments should be enlisted as subsidiaries of the Department of Justice merely because federal prosecutors find their work difficult or expensive.

There are other ways for the DOJ to determine the beneficial ownership of corporations. For instance, in Delaware, the home to more than half of all business entities, and 60% of the Fortune 500, nearly 2,000 cases are filed annually in Delaware's Court of Chancery against business entities. Delaware's plaintiffs bar skillfully uses the legal discovery process to determine beneficial ownership of those defendants.

Learning from Delaware - and the Costs

Perhaps federal prosecutors could learn something from Delaware lawyers in that regard. Legal discovery is an expensive and difficult process, but the fact that a handful of federal prosecutions have not resulted in successful convictions does not justify the federal government drafting the states into the service of federal agencies.

Indeed, the Constitution prohibits such an approach. In Printz v. U.S., the U.S. Supreme Court invalidated provisions of the Brady Bill that imposed mandatory regulatory requirements on local law enforcement. Justice Scalia articulated the Court's interpretation of state sovereignty succinctly: "The Federal Government may not compel the States to enact or administer a federal regulatory program."

The realities of business ownership, with its complex holding arrangements, make the costs of this bill prohibitive. Holdings are often structured with a network of ownership using flow through entities as well as powerful contractual rights held by non-shareholders. This is done for legitimate tax efficiency planning purposes as well as to sell specific interests to groups of investors or secure specific assets to interested creditors. The ownership structure of the Carlyle group or a typical grocery store franchise share that quality. This bill holds criminally liable any business failing to keep an accurate listing of its "beneficial owners" with the state in which it is registered, thus subjecting the two million businesses that form every year to unreasonable liability for a number of open questions of what being a "beneficial owner" really means in today's business environment.

Impact on Small Business

Professor Bainbridge of UCLA Law School has also observed that this bill will harm the millions of small businesses exempt from SEC registration trading on the pink sheets. Though the bill exempts entities registered with the SEC, recognizing that when shareholders trade in an active market an accurate list of their beneficial owners would be nearly impossible to maintain, it ignores that the same issue will be worse for smaller firms exempt from SEC registration.

The overriding drawback to this scheme is that only law-abiding businesses will feel its effects. Registrants of business entities used to cover illicit activities, such as money laundering or terrorism financing, would certainly lie on any form the states send them requesting beneficial ownership information. Unreasonable administrative costs are then imposed on state governments and small businesses with little effect on the exceedingly small percentage of businesses actually engaging in illicit activities.

The formation of over two million businesses each year is not something to be maligned by politicians hoping to spin momentary political hay. It is a result of a regulatory environment that has created a business entity formation system envied by developing markets around the world. If economic benefits of small business entities are to be protected, regulatory proposals should be subject to a sincere cost-benefit analysis.

What to Do Now

Most entities are formed in jurisdictions, such as Delaware, that have developed a specialized business court and corporate code to assure directors and officers maintain strict adherence of their fiduciary duty to their shareholders. The Obama/Levin/Coleman Act puts the success of this system in jeopardy.

Corporate counsel involved in the creation of LLC, LLPs, and corporations would be advised to inform their clients about this impending change, as well as the potential liability they face for failing to fully report their "beneficial owners" to the state's that chartered them.

Goldman Sach Cancels a Deal: SPACs in Limbo?

With Goldman Sachs canceling its much-anticipated SPACs offering - through Liberty Lane - it looks like the bloom may be off the SPACs, rose (see this WSJ article from yesterday). Today's WSJ has an article which offers this analysis:

The failure of Goldman Sachs Group Inc.'s first SPAC offering this week has sparked a debate over what brought the deal down and whether any structural changes within the industry could revive this segment of the IPO market.

Expectations for a successful offering had been raised the moment Liberty Lane Acquisition Corp. filed its initial public offering prospectus with the Securities and Exchange Commission in March. As a special purpose acquisition company, or SPAC, Liberty Lane's offering followed a familiar format: The company began life as an empty shell and planned to raise money through an IPO to finance the acquisition of an operating business within two years, or investors would get their money back.

But alterations to the traditional SPAC structure made this deal a departure from the norm -- one that Goldman hoped would draw in a stable base of investors and make potential acquisition targets more amenable to a takeover.

Instead, after two weeks of trying to price, Liberty Lane threw in the towel Wednesday, saying it had decided not to go ahead with the IPO for now. (See related Breakingviews commentary.)

'State of the Market'
"My personal view is it was probably more the state of the market than the structure of the deal" that stymied Liberty Lane's launch, said Michael Littenberg, an attorney who works on SPACs for Schulte Roth & Zabel LLP. "This has not been one of the most robust periods for capital markets."

After a banner year in 2007, in which nearly a quarter of all completed IPOs in the U.S. were SPACs, the demand for these deals in 2008 withered along with the broader IPO market.

Others say Liberty Lane's altered structure wasn't appealing enough to investors. The changes Goldman made were aimed at reducing the dilution that SPAC investors and acquisition targets face due to the large amount of stock normally held by most SPAC management teams. But at the same time, it cut the stake that management took in the company, reduced the percentage of investors' money kept in trust, and trimmed the amount of stock warrants available to investors.

"Obviously, we all know that SPACs in general have not been doing well, but they have had dips before," says Kristin Angelino, an attorney who represents SPAC issuers and underwriters at Gersten Savage LLP. "If Goldman's IPO didn't have such a weak structure, I might say that this reflects a worsening of the market for SPACs."

Through the new structure, Goldman was intent on placing Liberty Lane's shares with "fundamental" investors, such as mutual funds, rather than marketing the deal to the typical SPAC buyers, which are hedge funds. Hedge funds in the past have gravitated to SPACs because the deals are sold as a stock-and-warrant unit that eventually splits, with some funds selling off the warrant portion and others purchasing only the warrants, depending on their investment strategies.

Underwriters and SPAC management have long wanted to shift ownership of the deals toward fundamental buyers who would stick with the SPAC throughout its lifespan and be more likely to approve an acquisition than hedge funds, which sometimes vote a deal down as part of their investment strategy. But fundamental buyers didn't line up as expected.

Citi's Alternative
Coincidentally, as Goldman's deal was floundering last week, Citigroup Inc. filed an amendment to a SPAC it is underwriting that alters the structure in a different manner than Liberty Lane.

The Citigroup deal, HCM Acquisition Co., splits each IPO unit into two parts: One that contains 80% of a share of stock, another that contains 20% of a share of stock and a warrant that is nondetachable until the day after a business combination is approved. If a deal is voted down, the warrants expire worthless.

By binding the warrant to a portion of stock until an acquisition is completed, HCM is effectively giving warrant holders the ability and incentive to approve a deal. To give HCM a further edge in closing a deal, the company will still go ahead with an acquisition even if up to 40% of the shareholders vote it down - a higher bar than the typical 20% no-vote norm in the SPAC world.

How Companies Can Foil Their Activist Shareholders

I drafted this a while back but forgot to post it - more Tulane Institute notes from the WSJ's Deal Journal:

The promisingly named “Barbarians at the Ballot-Box” panel here at the Tulane University Corporate Law Institute didn’t disappoint: it was full of good stories and disagreement among the panel members, who included Mackenzie Partners CEO Daniel Burch, PR maven Joele Frank, Roy Katzovicz, general counsel at the hedge fund Pershing Square, and Institutional Shareholders Services executive Chris Young.

The panelists don’t exactly come to blows. Still, it is clear Katzovicz and Young will have to take a lot of heat for the frustrations of people who have problems with activist investors. Katzovizc says hedge funds would rather not wage proxy fights and fight for board seats– they would rather focus solely on profitable investing.

Then quickly the panel seems to shift in to “Dear Abby” mode, advising on how to fight off shareholder activists. Here is a look at some of their advice.

Staggered Boards Don’t Work: It turns out that some of the things that companies think protect them from attacks by activists don’t work. Katzovicz, for instance, disputes that staggered boards–where directors are elected in different years, rather than all at once–help fend off activists. Instead, he says, they make his job much easier.

Don’t Be Snotty to Your Activist: Frank warned people to pick up the phone very carefully when they see calls from the (203) area code in Greenwich, in hedge-fund heavy Connecticut, because whatever you say to an activist can and will be used against you in a 13D filing to the SEC. The panelists discuss the sad cautionary tale of Embarcadero Technologies, whose chief financial officer once said to activist Robert Chapman, “F*** You!” That gave Chapman a chance to get justifiably huffy that it was “inappropriate and inadvisable” to use such “blasphemy” to a shareholder who owns 9.3% of your company. We quibble with Chapman’s choice of words — a blasphemy is only when you are insulting a deity –but the point is a good one. Young, of ISS, recounts what he considers a horror story of an unresponsive company: one which wouldn’t even meet with T. Rowe Price. “This isn’t an activist! It’s T. Rowe Price!” he said with wonder.

Do Lots of Hand-Holding: Frank advocated keeping good relationships with the media and guiding CEOs through the process. “Most CEOs aren’t used to opposition,” Frank says. She also advocated a quick response to activists: call them early and often. This can apparently diffuse the activist. Katzovicz recalled a story in which Carl Icahn was on the brink of going on the attack at a company he had invested in. He met with the firm’s executives, who told him, “Carl, whatever it is you want, we’ll do it.” Icahn sold all of shares and left the company alone. Kim Rucker talks about the “headline pressure” as executives face the dread of seeing themselves in the paper every morning. That, and exhaustion, can take a toll on management’s decision making, she and Frank agreed.

Accept that You Can’t Control Your Proxy Firm: Frank, who does a lot of hostile defense work, launched this attack toward the end of the panel: “I believe ISS has never seen a slate it doesn’t like from activists. Frank asked with some annoyance if ISS ever goes against an activist slate in toto. Young said the proxy firm does, about 30% of the time. The question to ask, he suggested, isn’t what ISS approves but why activists are getting traction with shareholders. He noted that a few years ago, the directors suggested by hedge funds were the hedge-fund manager and four of his fraternity brothers who worked for him. The activists have wised up since then and suggested better directors, he said. Rather than saying that ISS tends to approve the majority of hedge fund director suggestions, he instead pointed out that ISS discards some of the activists’ suggestions.

Don’t Get too Comfortable: Burch noted that long-term investors won’t necessarily support what you do against activists. Rucker said that if boards and companies are doing the right things and doing their jobs, they can survive all that.

2008: The Year of the Hedge Fund Activist

We have just posted the transcript for the webcast: "2008: The Year of the Hedge Fund Activist." Catch the companion webcast - "How to Handle Hedge Fund Activism" - on July 15th.

Sovereign Wealth Funds and Activism

In this podcast, Ron Orol, Senior Writer for The Daily Deal, The Deal and TheDeal.com and author of "Extreme Value Hedging: How Activist Hedge Fund Managers Are Taking on the World,"discusses sovereign wealth funds, including:

- What is a "sovereign wealth fund"?
- How are they working with activist investors, particularly in a post-Dubai Ports World politically charged environment?
- What about sovereign wealth fund as activists themselves?
- What are regulators in Washington doing regarding sovereign wealth funds?

May-June Issue: Deal Lawyers Print Newsletter

This May-June issue includes articles on:

- M&A Targets Today: Seeking Deal Certainty in an Uncertain Environment
- How to Negotiate an M&A Engagement Letter with Your Investment Banker
- Structuring Portfolio Companies: Director Independence
- Ten Practice Tips for Negotiating the Letter of Intent
- How to Do a Deal Without Shareholder Approval: The "Financial Viability Exception"
- A Moment of Clarity: How to Avoid Ambiguities in Your Advance Notice Bylaws

Try a no-risk trial to get a non-blurred version of this issue for free.

SEC Approves NYSE's New SPAC Listing Standards

Last week, in this order, the SEC approved the NYSE's rule changes to make it easier for SPACs to be listed on the exchange. In addition to SPAC listings, the rule changes will impact reverse mergers. It is expected that the Nasdaq's SPAC proposals will be approved soon too.

Advance Notice Bylaws: Delaware Supreme Court Affirms Jana Partners

Yesterday, the Delaware Supreme Court issued this Order affirming the decision of the Court of Chancery in the CNET/Jana matter.

Officers and Directors Not Considered "Passive" under Rule 13d

Recently, I received a question about an old blog about how officers and directors are not considered passive under Rule 13d. Jim Moloney of Gibson Dunn notes that one thing that he and another lawyer at the firm didn't cover back in that old blog was the SEC Staff's informal position that if a 13(d) reporting person starts out reporting on Schedule 13D (because they are not eligible to report on Schedule 13G initially), then they can't later move over to a Schedule 13G in reliance on one of the other categories permitting reporting on Schedule 13G (i.e., Rule 13d-1(b), (c) or (d)) unless such person was initially eligible to report on Schedule 13G and simply filed on 13D voluntarily.

In the opposite situation, where a reporting person starts out reporting on a Schedule 13G, then loses his or her 13G eligiblity because the person is no longer "passive" for example, that person would need to amend onto 13D and stay there until such time as 13G eligibility is re-established (e.g., the reporting person becomes "passive" again). At that time, the reporting person could move back to reporting on Schedule 13G again.

So the bottom line is that a person can "re-establish" 13G eligibility and move back to reporting on Schedule 13G, but if the person was never eligible in the first place, and filed an initial 13D, that person can not later move onto 13G simply because they become eligible to report on that form. They would need to sell their position down, below 5%, and then purchase shares crossing the 5% along with the requisite 13G eligibility criteria satisfied and could then file an initial report on Schedule 13G. See Rule 13d-1(h) and footnote 23 and accompanying text in the SEC's 1998 Adopting Release on 13D/G (adopting Rule 13d-1(c)).

JPMorgan Chase/Bear Stearns: Splicing the Delaware Issues

Tomorrow, join us for the rescheduled webcast - "JPMorgan Chase/Bear Stearns: Splicing the Delaware Issues" - as Professors Elson, Davidoff and Cunningham analyze a host of novel provisions in the JPMorgan Chase/Bear Stearns merger agreement.

SEC Proposes Changes to Cross-Border Rules

Yesterday, the SEC posted its 194-page proposing release related to the amendments to the cross-border rules, the first proposed changes to the rules since they were initially adopted in 1999. A departure from recent practice, these proposals were approved by the Commission seriatim rather than in an open Commission meeting.

The proposing release includes many proposed rule changes that would codify existing Staff interpretive positions and exemptive orders - although there are some areas that are proposed to change - as well as some Staff interpretive guidance that the SEC seeks comment on. The SEC's proposals include:

1. Refinement of the tests for calculating U.S. ownership of the target company for purposes of determining eligibility to rely on the cross-border exemptions in both negotiated and hostile transactions, including changes to:

- Use the date of public announcement of the business combination as the reference point for calculating U.S. ownership;
- Permit the offeror to calculate U.S. ownership as of a date within a 60 day range before announcement;
- Specify when the offeror has reason to know certain information about U.S. ownership that may affect its ability to rely on the presumption of eligibility in non-negotiated tender offers;

2. Expanding relief under Tier I for affiliated transactions subject to Rule 13e-3 for transaction structures not covered under our current cross-border exemptions, such as schemes of arrangement, cash mergers, or compulsory acquisitions for cash;

3. Extending the specific relief afforded under Tier II to tender offers not subject to Sections 13(e) or 14(d) of the Exchange Act;

4. Expanding the relief afforded under Tier II in several ways to eliminate recurring conflicts between U.S. and foreign law and practice, including:

- Allowing more than one offer to be made abroad in conjunction with a U.S. offer;
- Permitting bidders to include foreign security holders in the U.S. offer and U.S. holders in the foreign offer(s);
- Allowing bidders to suspend back-end withdrawal rights while tendered securities are counted;
- Allowing subsequent offering periods to extend beyond 20 U.S. business days;
- Allowing securities tendered during the subsequent offering period to be purchased within 14 business days from the date of tender;
- Allowing bidders to pay interest on securities tendered during a subsequent offering period;
- Allowing separate offset and proration pools for securities tendered during the initial and subsequent offering periods;

5. Codifying existing exemptive orders with respect to the application of Rule 14e-5 for Tier II tender offers;

6. Expanding the availability of early commencement to offers not subject to Section 13(e) or 14(d) of the Exchange Act;

7. Requiring that all Form CBs and the Form F-Xs that accompany them be filed electronically;

8. Modifying the cover pages of certain tender offer schedules and registration statements to list any cross-border exemptions relied upon in conducting the relevant transactions; and

9. Permitting foreign institutions to report on Schedule 13G to the same extent as their U.S. counterparts, without individual no-action relief.

In addition to those proposed rule changes, the Corp Fin Staff provides interpretive guidance or solicit commenters’ views on the following issues:

1. The ability of bidders to terminate an initial offering period or any voluntary extension of that period before a scheduled expiration date;

2. The ability of bidders in tender offers to waive or reduce the minimum tender condition without providing withdrawal rights;

3. The application of the all-holders provisions of our tender offer rules to foreign target security holders;

4. The ability of bidders to exclude U.S. target security holders in cross-border tender offers; and

5. The ability of bidders to use the vendor placement procedure for exchange offers subject to Section 13(e) or 14(d) of the Exchange Act.

If you're wondering if the lack of an open Commission meeting means that this rulemaking is less important to the SEC, the answer would be "no." Until a few Chairman ago, most rulemakings were approved seriatim and only the ones that the SEC wanted to get the attention of the mass media were approved at an open meeting. "Seriatim" simply means that each Commissioner signs an order indicating whether they vote in favor of a particular proposing or adopting release.

That trend started to change when Harvey Pitt became Chair (remember all that SOX-forced rulemaking) and it is my hunch that since the open meetings are more "open" now due to the Web, that trend has continued to today. Plus, the SEC likes the publicity. But it's a production to hold an open meeting, so some rulemakings have to go seriatim to keep the rulemaking machine humming.

2008: The Year of the Hedge Fund Activist

Join us tomorrow for the webcast - "2008: The Year of the Hedge Fund Activist" - to learn about the latest strategies and tactics used by hedge fund activists, as well as latest planning tips employed by those that seek to stave off these attacks. The panel includes:

- David Katz, Partner, Wachtell Lipton Rosen & Katz
- Ron Orol, Senior Writer, The Deal and The Daily Deal
- Damien Park, President & CEO, Hedge Fund Solutions, LLC
- Veronica Rendon, Partner, Arnold & Porter LLP
- Professor Randall Thomas, Vanderbilt University Law School
- Christopher Young, Director of M&A Research, RiskMetrics Group

The Death of Contract?

And warm up for Professor Steven Davidoff's performance in next week's webcast - "JPMorgan Chase/Bear Stearns: Splicing the Delaware Issues" - (which has been rescheduled to Wednesday, May 14th) by reading Steve's blog on the NY Time's DealBook regarding how Bank of America is likely to renegotiate its contract to buy Countrywide. The comments posted about Steve's analysis are fairly insightful too.

Joint Bidding By Private Equity Firms: Federal Court Dismisses Private Antitrust Challenge

A few months ago, in the wake of the Department of Justice's inquiry into alleged anti-competitive behavior among private equity firms, a handful of class actions have been filed alleging collusion among private equity firms (here is an example of a complaint from a Massachusetts lawsuit). These complaints generally alleged a conspiracy among private equity firms to rig bids or otherwise collude to suppress the prices paid in going-private transactions.

On February 21st, in what appears to be the first decision to address these issues, a district court dismissed an action - Pennsylvania Avenue Funds v. Edward J. Borey (W.D. Wash) - against two private equity firms that had joined forces in a bidding contest, concluding that the facts alleged did not establish a violation of the Sherman Act. We have posted a bunch of memos analyzing this decision in our "Antitrust" Practice Area.

The Williams Act - 40 Years Later!

On May 21st and 22nd, Georgetown University Law Center will be hosting a conference to commemorate the 40th anniversary of the adoption of the Williams Act takeover regulations. The speakers and panelists will include members of the SEC staff, academics, financial journalists, international takeover regulators, practitioners, bankers, and Delaware judges. It's free - but you still need to register (here is the agenda). If you have questions, contact Larry Center at center@law.georgetown.edu.

Earlier that week, the SEC's Division of Corporation Finance will be hosting a meeting of international takeover regulators at the Commission’s headquarters - so representatives from the U.K., Germany, France, Hong Kong, Australia and Japan will be at the conference, lunch and reception if you want to rub elbows with folks from other regulators.