John Grossbauer of Potter Anderson notes: Here is Vice Chancellor Parsons’ opinion in In re Celera Corp., in which he certified a class for settlement purposes and approved the settlement even though the lead plaintiff had sold its shares in the Celera before its merger with a subsidiary of Quest Diagnostics was completed. The Court addressed several issues related to class actions alleging breaches of fiduciary duty, including typicality and adequacy and the effect of the recent United States Supreme Court decision in the case of Wal-Mart Stores, Inc. v. Dukes on certification of classes in such actions. The Court also addressed attorneys’ fees in the context of the settlement presented, which conferred only therapeutic, non-monetary benefits on the proposed class of stockholders, and awarded substantially less than plaintiffs had requested.
The Court was troubled by the stock sale, noting that such a sale creates an appearance of impropriety, which undermines the trust of other shareholders and the Court in the lead plaintiff. Observing that such facts created legitimate criticisms, the Court stated that in the future it might well employ bright-line test declining to certify such holders as class plaintiffs because “Delaware courts have good reason to expect more from those who would serve as lead plaintiffs in representative litigation.”
Recently, the WSJ ran this article:
Goldman Sachs Group Inc. is considering strengthening internal rules on disclosure to clients of bankers’ financial holdings, after being criticized in a recent court opinion because of a deal maker’s potential conflict of interest in a large transaction. Goldman’s review–and similar initiatives by some of its rivals–could provide companies with greater transparency on the financial interests of the bankers they hire to advise on deals. In a statement to The Wall Street Journal, Goldman said it was reviewing its “policies and procedures with the goal of strengthening them.”
Other Wall Street banks, including Barclays PLC’s Barclays Capital, Bank of America Merrill Lynch and Citigroup Inc., are also looking at their processes for managing potential conflicts when getting hired on deals, in an effort to err on the side of caution especially given the heightened scrutiny on the issue, said people familiar with the matter. The concerns emerged after a Delaware judge said in a Feb. 29 opinion that the $21.1 billion proposed sale of El Paso Corp. to natural-gas pipeline operator Kinder Morgan Inc., announced last year, was riddled with potential conflicts of interest. Among the conflicts, the judge said, was the $340,000 stake in Kinder Morgan of a main adviser to El Paso, Stephen Daniel, Goldman Sachs’ top energy banker. Goldman Sachs, which was aware of Mr. Daniel’s investments according to a person familiar with the matter, said in its statement: “We regret the El Paso Board wasn’t aware of the investment.” The bank didn’t make Mr. Daniel available for comment and he didn’t respond to requests for comment.
One measure being studied by at least three banks is requiring bankers to disclose all of their stockholdings to companies seeking to hire them on deals.
Many bankers said they consider personal stockholdings a “common-sense” disclosure. As a result, conflicts due to a financial adviser’s personal holdings rarely become a problem, the people added.
But in the wake of the Delaware business court’s opinion, “all the banks are thinking about the very issue,” Kevin Genirs, the general counsel of Barclays Capital’s investment banking division, said at an industry conference last week. “Bankers will now self-disclose if they own any amount of shares,” said a lawyer for a major bank, describing the new attitude as “super-conservative. We’ll disclose anything we find and we’ll pass the ball to the company or its counsel and say, you decide what you want to do.” The focus on banks’ potential conflicts of interest comes at a time of heightened interest in Wall Street’s practices from regulators, politicians and the general public. Goldman in particular has been in the limelight, partly due to an opinion piece this week by a departing employee criticizing its culture. Goldman said the account didn’t reflect the firm’s values or culture.
Law firms too are taking note of the banker conflict issue. One senior banker at a major Wall Street firm said that since the El Paso opinion, lawyers for companies involved in takeover talks have begun requiring that banks reveal, at the time of getting hired, whether deal makers own shares in the company on the other side of the deal. Most major Wall Street banks, such as Bank of America, Barclays, J.P. Morgan Chase & Co. and Morgan Stanley, already have rules or guidelines that forbid senior industry and M&A bankers from directly owning or trading securities of companies in sectors or clients they cover, people familiar with the matter said.
But despite the safeguards at many banks, some employees can end up owning stocks in the sectors they cover because through the course of their careers, they change their firms and coverage areas, ending up with “legacy” holdings, people familiar with the matter said. That is one reason for conflict checks.
Junior bankers at most banks are required to disclose their holdings when they are brought into a deals team to work on a transaction, people familiar with the matter said. If a banker does have a potential conflict, either that banker wouldn’t be allowed to work on the deal, or the matter would be disclosed to clients, the people added.
The El Paso opinion has also prompted some banks to discuss whether they need to adjust how they track bankers’ financial holdings, for example possibly making their information-gathering more frequent or even real time. But doing so, they say, could be logistically challenging. Rather than set disclosure thresholds based on the quantity of stock owned or the seniority of the banker, a few banks are contemplating disclosures of all amounts and at all levels, people familiar with the matter said.
In the El Paso matter, Mr. Daniel of Goldman owned $300,000 of shares in Kinder Morgan Management LLC, a publicly-traded entity related to Kinder Morgan, a person familiar with the matter said. Mr. Daniel has owned the stake since 2003, and Goldman approved it because he focused on the “upstream” or oil exploration and production side of the industry, and Kinder was a pipeline operator in the “midstream” of the industry, the person said. Given this ownership, the outcome of talks between Kinder Morgan and El Paso would have had an effect on Mr. Daniel’s financial interest in Kinder Morgan, the person said.
The remaining $40,000 was in a Goldman’s buyout fund GS Capital Partners. Mr. Daniel had no control over the fund’s choice of investments, the person added.
This March-April issue of the Deal Lawyers print newsletter was just sent to the printer and includes articles on:
- Assessing the Locked Box Approach to Purchase Price Adjustments
- Just Enough To Be Dangerous: An Overview of M&A Tax Basics
- Shareholder Approval of Small Private Acquisitions: Has Omnicare Been Rendered a Farce?
- Boilerplate Matters: Giving Notice
If you’re not yet a subscriber, try a no-risk trial to get a non-blurred version of this issue on a complimentary basis.
Here are thoughts from legendary deal lawyer Marty Lipton that he recently penned in this memo:
I’m frequently asked to explain merger activity and to predict the level of future merger activity. In part in response to these requests and in part as the consequence of a long career of advising as to mergers, I’ve identified many of the factors that determine merger activity, but a complete catalog is beyond me and I am not able to predict even near-term levels of activity. I’ve written and lectured extensively on this and the history of merger waves since the 1880s. In preparation for work on a revision of my merger waves studies, I made an outline of the factors that I believe are the most significant that affect mergers. I thought it might be interesting to share a condensed version and that as an ancillary benefit of doing so, readers might favor me with comments and suggestions.
First, it is recognized that mergers are an integral part of market capitalism, including the types that are practiced in China, India and Russia. Mergers are an agent of the Schumpeterian creation and destruction that characterizes market capitalism.
Second, the autogenous factors, not in the order of importance, are relatively few and straight forward:
- Increasing revenue by product or geographic expansion or by increasing market power.
- Reducing costs by eliminating excess capacity and/or labor.
- Confidence of the management and the board of directors of the acquiring company that it can effectively integrate the acquired business.
- Ego and the desire for size and diversity without regard to profitability.
- Sense of responsibility to all stakeholders, i.e., employees, customers, suppliers, creditors, and communities, as well as shareholders.
Third, the exogenous factors, not in the order of importance, are:
- Availability of accounting conventions (principally those relating to depreciation and amortization) that enhance, or at least do not detract from, profitability.
- Pressure from activist hedge funds and lack of support from institutional investors to remain an independent public company seeking long-term creation of value.
- Government antitrust and competition policies.
- Availability of arbitrage to facilitate liquidity for securities that result from mergers.
- Foreign exchange fluctuations that make one currency “cheap” and the other more favorable as merger consideration.
- Regulation and deregulation and privatization and nationalization by governments.
- National policies to encourage “global champions” or to discourage foreign investment.
- The availability of experts in merger technology and in the creation of special merger currencies, such as contingent value rights and pay-in-kind debentures.
- Recognition of the legitimacy of hostile takeover bids and proxy fights and the availability of experts in the defense and waging of hostile efforts to achieve a merger.
- Labor unions, government labor policies and the political and popular power of labor generally.
- The existence of private equity funds and the amount of funds that they have available for acquisitions.
- The state of the equity and debt markets and the receptivity of the markets and banks to merger activity.
- Litigation, shareholder and class actions designed to enjoin mergers or increase the cost.
- Taxes, tax policies and potential changes therein.
- Demographic changes.
- General business and political conditions.
- Technological developments, especially breakthroughs.
- Military research, military procurement and military policies with respect to suppliers and contracting.
- Trade treaties and the creation of trade and currency blocs of nations.
Lastly, it is recognized that the interrelation of all or some of these factors creates the permutations and combinations of issues that at any given time make it impossible to predict the level of future merger activity.
Tune in tomorrow for the webcast – “The SEC Staff on M&A” – to hear Michele Anderson, Chief of the SEC’s Office of Mergers and Acquisitions, and former senior SEC Staffers Dennis Garris of Alston & Bird and Jim Moloney of Gibson Dunn discuss the latest rulemakings and interpretations from the SEC.
A few days ago, the SEC charged two financial advisors and three others in their circle of family and friends with insider trading for more than $1.8 million in illicit profits based on confidential information about a Philadelphia-based insurance holding company’s merger negotiations with a Japanese firm. The press has been all over this one given the breach of trust at an Alcoholics Anonymous meeting – see this WSJ article and this CNN Money piece…
We have posted the transcript for our recent webcast: “Transaction Insurance as a M&A Strategic Tool.”
Recently, as noted in this Sullivan & Cromwell memo (other memos are posted in the our “Antitrust” Practice Area), the DOJ and FTC extracted their first publicized penalty for a corporate executive’s failure to make a Hart-Scott-Rodino Act filing before receiving stock of his employer as part of his compensation. As a result, many members have been researching what the typical practice is for HSR filing fees that the corporate executive would have to pay to comply with the HSR filing requirement. To help in that effort, please take a few moments to participate in this anonymous “Quick Survey on HSR & Executives’ Acquisitions from Equity Compensation Plans.“
From John Grossbauer of Potter Anderson: Recently, Delaware Vice Chancellor Laster delivered this opinion in In re BankAtlantic Bancorp, Inc. Litigation. In his opinion, the Vice Chancellor grants a permanent injunction against the sale of BankAtlantic Bancorp’s sale of its federal saving bank subsidiary to BB&T because it would violate covenants in several indentures for Trust Preferred Securities that prohibit the sale of “all or substantially all” of the Bancorp assets unless the purchaser assumed the obligations under the indentures.
BankAtlantic argued that the sale did not meet the “all or substantially all” test under New York law because it was retaining “criticized assets” as the consideration for the sale, and that the value of the retained assets rendering the sold banking subsidiary worth zero at closing. The Court rejected this argument, saying that the retained assets should be considered as part of the value of the subsidiary bank being sold, and that, qualitatively, the sale of the bank subsidiary represented the sale of Bancorp’s only operating asset and would fundamentally change the nature of Bancorp’s business. The Vice Chancellor relied extensively on the American Bar Foundation Commentaries on the Model Debenture Indenture.
Francis Pileggi also blogged about this case.
Here’s some analysis by Kevin Miller of Alston & Bird: In a recent decision – In re Micromet – Delaware Vice Chancellor Parsons denied plaintiffs’ motion to preliminarily enjoin Amgen’s acquisition of Micromet by means of a two-step transaction – an all cash tender offer to be followed by a back end merger at a $11 per share in cash.
Among other things, plaintiffs alleged that the Board breached its fiduciary duties by failing to disclose the fees paid by Micromet to Goldman Sachs over the past two years, as well as Goldman’s interest in Amgen stock and by failing to disclose certain information relating to the financial analyses performed by Goldman Sachs:
“Plaintiffs have made numerous disclosure claims in their Complaint and in the briefing. Having read and considered each of those claims, I find that Plaintiffs have not shown a likelihood of success on any of their disclosure claims.
[. . . ]
Goldman holds approximately $336 million in Amgen stock, most of which it holds on behalf of its clients. Even considering its total position, Goldman’s Amgen holdings equal approximately 0.16% of its overall investment holdings and 3.8% of its healthcare sector investments. Moreover, Goldman owns a substantially larger stake in Company B and a similar stake in another company that was contacted by Goldman as a potential acquirer during the market check.
Furthermore, the Recommendation Statement discloses that Goldman and its affiliates “may at any time make or hold long or short positions and investments, as well as actively trade or effect transactions, in the equity, debt and other securities of both Micromet and Amgen. Given this notice, any investor who desired to know the size of Goldman’s position in Micromet or Amgen as of the last reporting period could find this information in Goldman’s publicly-filed Form 13F. More importantly, Plaintiffs did not present any more detailed evidence from which the Court could reasonably infer that the size and nature of Goldman’s Amgen holdings in this case would be likely to impede its ability effectively and loyally to perform its assignment for Micromet.
As for Plaintiffs’ argument for disclosure of the fees paid to Goldman by the target, Micromet, over the past two years, I note that the Recommendation Statement does disclose Goldman’s contingent interest in the transaction, as well as the fees paid by Amgen to Goldman over the past two years. The Recommendation Statement also discloses that Goldman has performed certain services to Micromet in the past and received compensation for those services. Nevertheless, Plaintiffs claim that this partial disclosure requires supplementation to provide the actual amounts received by Goldman. They fail to provide any persuasive explanation, however, as to why the actual amount of fees paid by Micromet to Goldman would be material to shareholders or to cite any Delaware case law mandating such disclosures. This is not a situation in which Micromet, apart from Amgen, would be a potential source of future business.
[. . .]
Plaintiffs also complain that the Company should have disclosed Goldman’s “Sum of the Parts” discounted cash flow (“DCF”) analysis. The Sum of the Parts analysis was not relied on by Goldman in providing its fairness opinion. There is no dispute that Goldman did prepare such analyses at the request of the Board, buy not all analyses produced by financial advisors and given to the board are required to be disclosed under Delaware law. Instead, “[i]n Delaware only that information that is material must be disclosed.”
Here, the total value range reported under the Sum of the Parts analysis was $7.74 to $10.42 and the ex-corporate valuation range, which excluded the costs of running Micromet, was $8.92 to $11.60. Although the high-end of the ex-corporate range under this Sum of the Parts DCF analysis is slightly higher than the high-end of Goldman’s DCF analysis, the latter analysis yielded a substantially similar valuation range of $7.09 to $11.44. Therefore, I find it unlikely that disclosure of the Sum of the Parts DCF analysis materially would have altered the total mix of information available to shareholders. Accordingly, it did not need to be disclosed.
[. . . ]
Finally, Plaintiffs’ claim regarding Goldman’s use of an historical Ibbotson equity risk premium, rather than a supply-side equity risk premium, is not a disclosure claim. Instead, it is a challenge to the methodology employed by Goldman in conducting its illustrative DCF analysis. Under Delaware law, “a complaint about the accuracy or methodology of a financial advisor’s report is not a disclosure claim.” Plaintiffs claim amounts to nothing more than a “quibble with a financial advisor’s work” arguing that Goldman applied an inappropriate equity risk premium in its analysis This does not state a valid disclosure claim.”
The opinion is worth a close reading as it contains lots of additional guidance on a number of current issues relating to process and other disclosure claims.