June 20, 2016

How Not to Run a Proxy Contest: Voce Capital Management Demonstrates

Here’s news from this Wachtell Lipton memo:

Yesterday, the entire board of directors of FBR & Co. was overwhelmingly re-elected in the face of a bitter proxy fight waged by Voce Capital Management, an activist hedge fund. Voce committed strategic and tactical errors, costing its investors significant amounts of money, and unwittingly providing valuable lessons on responding to dissident shareholders.

In 2015, Voce and its affiliates purchased approximately 5% of FBR’s outstanding common stock. Consistent with FBR’s commitment to regular dialogue with its shareholders, FBR attempted on several occasions to solicit input from Voce. Voce did not provide any meaningful suggestions for improvements and instead, after a brief series of initial conversations, elected not to engage with the company for a period of almost five months.

After the protracted silence, surprisingly Voce nominated three candidates for election to FBR’s board and commenced a vitriolic and highly-charged proxy campaign. Voce’s campaign was noteworthy for its repeated unsupported attacks which demonstrated a fundamental lack of knowledge of, and sensitivity to, the people-intensive nature of a financial institution. Voce had no concern for the highly skilled professionals whose talents are required to operate an investment banking and broker-dealer business. Despite the lack of merit to its arguments or a coherent business strategy, Voce received the support of ISS and Glass Lewis.

The management and board of FBR wisely elected not to sink to Voce’s level. Voce issued numerous highly inflammatory “fight letters”, planted critical news stories in trade and other publications and provided misleading information as to the state of the voting to shareholders. FBR responded by taking the high road, it did not issue attack letters or commence litigation, rather it professionally and analytically presented its plans to shareholders.

Voce further evidenced its lack of commitment to its position by the fact that none of the Voce nominees or principals of the fund attended the FBR shareholder meeting and Voce’s representatives chose to forego the time allotted to them to address the meeting. The very next day Voce sold its shares of FBR common stock at a significant loss. Voce had purchased its position in FBR at a volume weighted average price of $22.37 per share and sold its shares for $16.40 per share. In addition to the loss on the position, the Voce investors will bear Voce’s fees and expenses.

FBR was successful not only because of Voce’s numerous failings but also because the FBR management team had spent years engaging with its retail and institutional shareholders. As a result when shareholders were presented with a choice between an activist running a destructive campaign and management’s clear strategy, they overwhelmingly supported the current FBR board. This campaign illustrates that careful shareholder engagement over many years can counteract the results of a negative campaign and reflexive ISS and Glass Lewis recommendations of activists.

June 15, 2016

New York’s Highest Court Limits Attorney-Client Privilege in M&A Context

Here’s a teaser from one of the memos posted in our “Attorney-Client Privilege” Practice Area about a new court decision:

In a decision with important consequences for merger and acquisition transactions and the litigation resulting from those transactions, a divided New York Court of Appeals held last week that the common interest doctrine applies only to post-signing, pre-closing communications between parties to a merger agreement if they relate to pending or anticipated litigation. Other communications between separately represented parties to a merger (or other commercial transaction) are not entitled to privilege under New York law.

June 9, 2016

Dell Ruling May Not Be Precedent That Some Fear

Here’s an excerpt from this DealBook column by Steven Davidoff Solomon (we continue to post memos on the decision in our “Appraisal Rights” Practice Area):

The law firm of Wachtell, Lipton, Rosen & Katz has criticized the decision for forcing a buyer to pay a 30 percent higher price in a “fully shopped” deal. According to the law firm, this decision may lead to shareholders’ “losing out” as private equity firms fear to do deals and hedge funds seek to win big on appraisal awards. My DealBook colleague Andrew Ross Sorkin wrote that the decision was “likely to lead to a spate of lawsuits and second-guessing over the price of the next big mergers and acquisitions.” Matt Levine at Bloomberg View criticized the opinion’s methodology for its reliance on Dell being the only one willing to pay this price in the marketplace and moreover willing to take the risk of taking the company private.

Much of the criticism has centered on the fact that the Delaware judge — in deciding that the fair value of Dell shares was $17.62 a share, far above the $13.65 paid by the buyout consortium led by the company’s founder, Michael S. Dell — found that there was no significant fault with the conduct of the company’s directors and that no other bidder had emerged for Dell shares.

So should we be worried that this decision will change buyouts? The answer is probably no, because of the deeply weird nature of appraisal and this case.

June 8, 2016

Study: M&A Legal Bills

According to this “ELM Trends: 2015 Year-End Report,” the largest law firms continue to command the lion’s share of the market for high value M&A work – with M&A fees more than doubled in 2015 with year-over-year increases since 2012.

Here are highlights from the study:

– 99 percent of all M&A matters billed are by the hour. Of those, 72 percent were handled by a large firm. M&A work continues to be partner intensive with a quarter of all transactions handled by a partner since 2011.
– The overall blended rate on M&A matters ($450) is the highest among the study’s matter categories and exhibits one of the largest increases on a three-year basis. At the high end of the M&A billing scale, some partners increased rates by as much as 9% on a three-year CAGR basis.
– A majority of clients (56%) are forgoing hiring outside firms for their legal work. For M&A work just 31 percent of corporate clients willing to hire a new firm for this type of work.
– By contrast, clients are willing to hire new outside firms for just two specific types of legal work—litigation and corporate:
o 57% of companies with significant litigation hired a new firm in 2015 and used more law firms (between five and 27), to handle their litigation matters than any other type of work.
o 46% of companies with significant corporate work also hired new outside firms.
– While AFA use continues to grow modestly, AFAs for commodity work such as Employment and Labor grew from 14.1% to 17.3%.
– Three major cities, in particular, show rate growth of more than 4.0% both over the last year and year-over-year: Boston (8% YOY), Chicago (5.5% YOY and Washington, D.C. (4.3% (YOY).

June 7, 2016

Proxy Contest Denied Because Dissident Candidates Failed to Complete Questionnaire

Here’s news from this blog by Davis Polk’s Ning Chiu:

A recent case interprets and demonstrates the importance of the requirements in advance notice bylaws. The U.S. District Court in the Northern District of Texas granted a preliminary injunction to Ashford Hospitality Prime that invalidated Sessa Capital’s slate of candidates for Ashford’s annual meeting. Sessa owns more than 8% of Ashford’s stock and notified the company that it intended to nominate five candidates to Ashford’s seven-member board.

Ashford’s bylaws require nominees to fill out a questionnaire, and include all information relating to the nominee that must be disclosed in connection with the solicitation of proxies in a contested election under SEC rules. Those rules direct nominees to “[d]escribe any plans or proposals” that would result in a sale or transfer of material assets, any extraordinary corporate transaction, any other material change to the corporate structure or any similar action.

The Sessa candidates claimed to have no plans for Ashford and refused to provide answers to this question. There was correspondence, however, that revealed discussions at Sessa about amending Ashford’s bylaws, conversations about stopping acquisitions and details of a “gameplan” for selling the company after election. In phone calls, Sessa discussed with its candidates that the goal of maximizing value in today’s environment would mean having a “real and fair sale process.” Internal emails also indicated that Sessa employees believed a “gameplan” is necessary to convince ISS to support its nominees.

The Ashford board determined that the responses to the questionnaires from the Sessa candidates were deficient and offered them a chance to amend their answers, which they refused. Applying Maryland law, given the company’s state of incorporation, the Court reviewed the board’s actions under the business judgment rule.

The Court decided that the board could rationally believe that it is not possible that “a sophisticated hedge fund would engage in expensive litigation and a difficult proxy contest without any plans for the company after it seized control.” The Court found that the board reasonably exercised its business judgment in concluding that the Sessa candidates actually had a plan that they refused to disclose in their questionnaire, which rendered them ineligible under the bylaws.

June 2, 2016

Appraisals: Delaware Finds Dell Buyout Underpriced By 22%

Here’s the intro of this Reuters article:

Michael Dell and Silver Lake Partners underpriced their 2013 $24.9 billion buyout of Dell Inc by about 22 percent and may have to pay tens of millions to investors who opposed the deal for the computer maker, a Delaware judge ruled on Tuesday. The ruling, which applies to about 5.5 million Dell shares, is a victory for the specialized hedge funds that have increasingly tried to squeeze more money from mergers using a type of lawsuit known as appraisal. The lawsuits allow investors who oppose a deal, such as the bitterly contested Dell buyout, to sue and ask a Delaware judge to determine a fair deal price.

Activist investor Carl Icahn urged Dell shareholders to vote down the deal and take their case for fair value to court. Initially appraisal was sought for about 40 million shares, but the bulk was removed for procedural reasons. In Tuesday’s ruling, Vice Chancellor Travis Laster said fair value was $17.62 per share, not the $13.75 per share deal price. With interest, investors who sought appraisal will collect about $20.84 per share. The Dell investors presented evidence that fair value was $28.61 per share, which would have cost Michael Dell and Silver Lake hundreds of millions of dollars. The buyers contended that fair value was $12.68.

June 1, 2016

Projections: Board Found Liable for Not Using Them

Here’s the summary of this Fried Frank memo:

The Delaware Court of Chancery’s decision in Chelsea Therapeutics Stockholder Litigation (May 20, 2016) underscores the benefits of disclosure to stockholders with respect to a board’s decision—in valuing the company in connection with a sales process—to not take into account (or to modify or revise) projections prepared by management. It should be noted that the court’s discussion highlights that, as reflected in the trend of Delaware decisions over the past couple of years, as a practical matter, the only viable path to liability of directors in a post-closing damages action—absent egregious facts—is a claim that the directors were conflicted (i.e., that the directors were not independent and disinterested).

May 26, 2016

Taking Action That Affects The Shareholder Vote? Expect the “Gimlet Eye”

Here’s the intro for this Orrick memo:

On May 19, 2016, the Delaware Chancery Court preliminarily enjoined the directors of Cogentix Medical from reducing the size of the company’s board because, under the facts presented, there was a reasonable probability that the board reduction plan was implemented to defeat insurgent candidates in a contested director election. Pell v. Kill, C.A. No. 12251-VCL (Del. Ch. May 19, 2016). The decision is a reminder that board actions that affect the shareholder vote—particularly decisions that make it more difficult for stockholders to elect directors not supported by management—will be subject to enhanced judicial scrutiny by Delaware courts on the lookout with a “gimlet eye” for conduct having a preclusive or coercive effect on the stockholder vote.