Ulf Axelson, Tim Jenkinson, Per Stromberg, and I have released Leverage and Pricing in Buyouts: An Empirical Analysis, a study of the financings of 153 large buyouts. The Article gathers a sample of large recent buyouts and considers the impact of a number of factors on their pricing and structure. The paper presents our findings with respect to the factors that drive buyout dynamics.
We find, for example, that the availability of leverage seems to be an important determinant of prices in buyouts. In other words, as financial markets have become more lax, historical prices of buyouts have gone up, potentially leading to the boom in buyouts of the last 2 or 3 years. This finding suggests that, given the crash in the bond market last month, there would be fewer buyouts–and those that do occur will be at lower prices than before. All of those predictions are consistent with what we are seeing in financial markets now.
Another finding of interest is that “club” deals occur, if anything, at higher prices than otherwise-similar deals that are sponsored by a single private-equity house. This finding is in contrast to allegations that a reason for “club” deals is to collude on prices.
Following up on Monday’s blog, here is more analysis from Travis Laster: On Tuesday, August 14, Vice Chancellor Leo E. Strine, Jr. issued his ruling in Mercier v. Inter-Tel (Delaware), Inc. This very significant opinion upheld a special committee’s decision to postpone a stockholder meeting on the day of the meeting so that the company could solicit more support for a pending merger. At the time the special committee acted, the directors knew with mathematical certainty that the merger otherwise would have been voted down.
As a doctrinal matter, Inter-Tel will stir much debate. VC Strine holds that the reasonableness standard from Unocal should be the sole standard of review for M&A and meeting issues and that Blasius is unnecessary, ill-suited and should be limited to director elections. VC Strine previously suggested this approach in Chesapeake v. Shore, and then outlined it in the article he co-wrote with Chancellor William T. Allen and now Justice Jack Jacobs. Applying Unocal, VC Strine held that the directors’ actions were “reasonable in relation” to a “legitimate corporate objective.”
After conducting his Unocal-style analysis, VC Strine also found a “compelling justification” under Blasius: “compelling circumstances are presented when independent directors believe that: (1) stockholders are about to reject a third-party merger proposal that the independent directors believe is in their best interests; (2) information useful to the stockholders’ decision-making process has not been considered adequately or not yet been publicly disclosed; and (3) if the stockholders vote no… the opportunity to receive the bid will be irretrievably lost.”
The larger Unocal vs. Blasius debate is too grand for this quick update. Here are some other highlights of the opinion that focus on more mundane issues:
1. VC Strine did not appear troubled by and did not comment on the fact that the Board “postponed” the meeting (i.e. moved the date without convening the meeting) rather than convening the meeting for the sole purpose of adjournment. The DGCL speaks only of adjournment, not of postponement. It has nevertheless been the widespread practice that a meeting can also be “postponed” without being convened and adjourned. Inter-Tel supports this approach.
2. Inter-Tel does not resolve whether for notice purposes, the “postponed” meeting must be treated as a new meeting for purposes of the notice to stockholders required under the DGCL. For a merger vote under Section 251, notice must be given at least 20 days in advance of the meeting. For an adjourned meeting, a new notice is not required if the date of the meeting is moved in a single adjournment by less than 30 days. The issue of sufficient notice for the postponement may have been raised by the parties but mooted when the Board again reset the date of the meeting so there would be enough time to satisfy a 20 day minimum notice requirement. The argument that a “postponed” meeting should be treated as an “adjourned” meeting for purposes of notice therefore remains unaddressed.
3. Consistent with SEC guidance, the proxy included a proposal seeking stockholder authority to “adjourn or postpone the special meeting” to solicit more proxies. A majority of the proxies voted had not granted authority for this issue. VC Strine had no trouble permitting the board to postpone the meeting, although he noted that the issue had not been challenged.
4. In a footnote, VC Strine observed that “[i]f the special meeting had actually been convened, Inter-Tel’s bylaws would seem to have required stockholder consent to adjourn.” Section 2.8 of Inter-Tel’s bylaws contains standard language providing that “The stockholders entitled to vote at the meeting, present in person or represented by proxy, shall have the power to adjourn the meeting form time to time.” The bylaws did not give the meeting chair the specific power to adjourn a meeting without a vote of stockholders. While Inter-Tel’s comment is dictum, it may now be more difficult to assert that the chair of a meeting has inherent authority to adjourn without a vote of stockholders. Corporations who wish to preserve the power of the chair to adjourn a meeting without a vote of stockholders should make that authority express in their bylaws.
5. VC Strine recognized that directors are entitled to take steps to promote and obtain approval of the matters they recommend, such as the merger. “Here’s a news flash: directors are not supposed to be neutral with regard to matters they propose for stockholder action.”
6. VC Strine agreed that the following factors were sufficient to justify a same-day meeting postponement at a time when the directors knew the merger would be voted down and had been advised by their proxy advisor that a delay might change the outcome: (i) ISS’s suggestion that it might change its negative recommendation if it had more time to study recent market events (including the debt market’s volatility and the bidder’s refusal to increase the consideration), (ii) a founder’s competing proxy proposal for a recapitalization that was still being reviewed by the SEC, and (iii) the desire to announce the company’s negative second-quarter results. The Court found that the directors acted with “honesty of purpose” and noted that they did not have any entrenchment motive because they would not serve with the surviving entity. It does not appear that the directors stood to receive material amounts from director options or other payments that would vest or accelerate in connection with the merger.
7. The court recognized the possibility that, by setting a new record date, the special committee permitted arbs to purchase more shares and ensure approval of the merger. Noting his reluctance to “premise an injunction on the notion that some stockholders are ‘good’ and others are ‘bad short-termers,’” VC Strine ultimately found that “the reason why the vote came out differently… was not because the stockholders eligible to vote were different, but because stockholder sentiment regarding the advisability of the Merger had changed.” VC Strine left room for future challenges where arbs materially influence the outcome of merger votes when a record date is changed.
8. VC Strine criticized the “coy nature” of the directors’ disclosures surrounding the postponement, which failed to disclose the potential arb-related results from a new record date or that the merger would have been voted down at the original meeting. He nevertheless held that those facts were immaterial to the merits of the merger and/or obvious as a matter of common sense to reasonable investors.
From John Grossbauer: Last week, Vice Chancellor Strine of the Delaware Chancery Court – in Mercier v. Inter-Tel (Delaware) Inc. – declined to enjoin a merger that was approved by stockholders at a rescheduled stockholder meeting. The originally scheduled meeting had been postponed shortly before it was to be convened, and the Court found the board was aware that the merger likely would be voted down when it approved the postponement.
In finding no probability of success on the merits, the Vice Chancellor discusses a proposal for the Blasius standard to be “reformulated”. Nonetheless, the Court, applying the traditional Blasius language, found the directors had a “compelling justification – the protection of the stockholders’ financial interests – for a short postponement to allow more time for deliberation.” It’s the first time a court has found a “compelling justification” in a Blasius case.
In this podcast, Homer Moyer of Miller & Chevalier describes the latest trends in Foreign Corrupt Practices Act investigations, including:
- Why has there been a rise in FCPA investigations?
- How can these investigations impact a merger or acquisition?
- What can a company considering a deal do to minimize the risk from a potential FCPA investigation?
Recently, Corp Fin issued a no-action response to EMC Corporation and VMware, Inc. This no-action letter builds upon a lot of concepts (e.g., formula pricing, stock option repricing exchange offers, etc.), In short, the Staff basically is allowing a company – and its wholly-owned sub – that are going public in an IPO to approach some employees and make an exchange offer for options and restricted stock held by the employees.
The novel aspect of the exchange offer is that the offer is being made in connection with the IPO – and the final pricing will not be known until after the exchange offer expires and the IPO is priced. Very interesting, but this fact pattern will not come up often. Thanks to Jim Moloney for his thoughts on this one!
Increasingly, excessive perks are being used by activists in their battles for corporate control. To illustrate, the following short article from Sunday’s NY Times picks up an item from the insurgent’s proxy statement: “The fight for control of the Ceridian Corporation, the payroll processing company, took a pointed turn in late July with the activist investor William A. Ackman taking a jab at the company’s chairman over his use of the company jet.
Mr. Ackman’s Pershing Square Capital Management, which is Ceridian’s largest shareholder, has been trying to persuade shareholders, who are due to vote Sept. 12, to reject a $5.3 billion buyout offer because it allows managers to keep their jobs and a $27 million sweetener to go along with the deal.
Mr. Ackman, who earlier won changes at McDonald’s and Wendy’s, got up close and personal — accusing the chairman, L. White Matthews III, of using the company plane to ferry him to his vacation lodge in Wyoming. In a letter to Ceridian, he said Mr. Matthews flew to his Jackson Hole home “seven times in one 63-day period during the fly-fishing season last summer.”
Not so, said a Ceridian spokesman, Pete Stoddart, who said the corporate plane “was strictly used for business purposes.”
Peer-to-Peer Generated Governance Changes
From CorpGov.net: Almost half (45%) of portfolio managers and buy-side analysts surveyed by Bigdough think it is beneficial for an activist shareholder to have a seat on a target company’s board. Only 5% say activism is not helpful in unlocking shareowner value. However, Bigdough also found no clear sign that mainstream investors are jumping on the coattails of activists by increasing their existing investments in targeted companies.
A huge number of respondents – 86% – believe activism will keep growing and 85% believe shareowners should have a “say on pay.” (Mainstream investors get behind activism, CrossBoarderGroup.com, 7/13/07)
A few weeks ago – in Lillis v. A T & T Corp., (Del. Chan. Ct., 7/20/07) – the Delaware Court of Chancery decided a case indicating that the ability to cancel out-of-the-money stock options without consideration depends entirely on the provisions of the governing stock option plan – and that less-than-clear language in such plans will not be interpreted against the interests of optionees. While the Court’s holding is based on its interpretation of specific language in the plan in the case, the opinion provides rare guidance on when underwater options may be cancelled – and awards damages to all optionees (including in-the-money holders), based on the “economic value” of the options determined by the Black-Scholes pricing model.
I know a lot of people have been waiting a long time for the Government Accountability Office’s report on the state of the proxy advisor industry. The GAO report – which had been requested by two members of Congress – was finally released to the public on Monday.
I guess the big surprise from the report is that there really was not much in the way of surprise. It appears that the primary purpose of the report was to hone in on ISS’ conflicts of interest (ie. taking on both investors and issuers as clients). But since ISS fully discloses its conflicts – and investors told GAO that it was comfortable with these conflicts – this proved to not be much of an issue for the report.
Here are some of the GAO’s reports “notables”:
1. There are over 28,000 public companies worldwide that send out proxy statements with over 250,000 separate issues. Nice stats to know. (pg. 6)
2. Footnote 7 neglects to mention that Bob Monks left the Pension Welfare Benefits Administration – after issuing the Avon letter, which created the need for proxy advice – in the early ’90s to establish the precurser to ISS. Brillant move by a regulator! (pg. 7)
3. Most institutional investors report conducting due diligence to obtain reasonable assurance that ISS is independent and free from conflicts. But in many cases, this consists of just reading ISS’ conflict policy. (pg. 11)
4. Other potential conflicts consist of owners that do other business to issuers and investors (and the owners of advisory firms serving on boards of other companies). To me, this is the real conflict risk that exists in the industry. (pg. 11-12)
5. A chart shows how dominant ISS is within the industry, with more clients than the other 4 proxy advisory firms combined. I have to admit I had not heard of Marco Consulting Group before – and its been around nearly 20 years. (pg. 13)
6. Many of the investors that GAO contacted said that they do not vote their proxies; they hire asset managers to do that for them. (pg. 21)
So What Did the GAO’s Proxy Advisor Report Miss?
I would not place much stock in commentary that the GAO report means that ISS’ influence is overblown; if you have any actual experience with shareholder meetings, you know that ISS’ recommendation often is the difference between a controversial matter being approved by shareholders or not. So as many members e-mailed me yesterday, when it comes to ISS’ influence on votes, the report does not ring completely true.
Here are some “beefs” that members have sent me regarding the report:
1. Failure to interview impacted constituents – It appears that the GAO failed to talk to anyone other than investors and regulators. What about other key players? The issuer community? The proxy solicitors? Investor relations personnel?
2. Flying at a “1000 foot” level – One gets a sense that the GAO investigators didn’t really learn much. For example, the report mentions that issuers feel the need to get help from ISS to get a favorable recommendation – but then leaves it at that – without exploring what that means. The report should have clarified that this isn’t a “pay to play” (ie. vote buying) situation – and it also should have explained that the bulk of ISS’ corporate consulting money comes from equity plan design; not helping with governance rating (ie. CGQ) scores.
Given the influence that ISS has on institutional shareholders – coupled with the proprietary equity plan methodology that ISS uses – many issuers feel pressure to sign-up for ISS’ consulting services to make sure their plan will be approved by shareholders.
3. Understating the extent of ISS’ influence – In footnote 14, the GAO cites a recent study that examined the extent to which recommendations can influence vote outcomes and stock prices. But the report didn’t delve further into that important topic. Any proxy solicitor will tell you that ISS’s influence on voting issues can often be as high as 25% of the shares outstanding.
A prime example of ISS’ influence is the bumps felt by recent private equity deals when ISS recommended voting against them (egs. Clear Channel, Biomet). Not that that is a bad thing for shareholders, but it illustrates ISS’ influence.
4. Lack of investigative research – A big flaw in the report was taking at face value that many of these institutional investors said they make independent decisions. Yes, some do. But how many of them, when asked, would be expected to say: “Yep, most of the time I just vote the way they tell me.” Not any of the smart ones, because they have a fiduciary duty to vote.
Remember that most of these investors hold positions in thousands of companies; it would be a monumental task to conduct independent research about each item for each issuer’s ballot. To do so, an investor would have to have a staff along the lines of a proxy advisor to adequately do the job. The reality is that investors are trying to keep their expense ratios down – and even the larger investors typically have only a few employees dedicated to vetting voting issues.
5. Misses the “real” barrier to entry – Although the report talks about barriers to competition, it ignores the real issue connected with that topic: vote execution. No sane institutional investor is going to assume the risk inherent in moving thousands of accounts and ballots from ISS to another provider. The chance that accounts would be lost, not voted, or voted incorrectly is far too great. An ISS competitor has a rough road to try to duplicate the sophisticated vote execution platform that ISS has built over the years.
6. Short shrift to looming conflict issue – One wonders if the conclusions of the GAO report change if the rumors are true that ISS’ parent company, RiskMetrics, goes public?
I don’t blame the GAO for missing the boat; this is a complex area to tackle if you don’t have any “hands on” experience. They did better than the Washington Post, which ran an article yesterday on the GAO report with a picture of the ISS executive team from about six years ago -including Ram Kumar, who was infamously ousted because he had represented himself as a law school graduate to ISS, a degree he did not possess…