With the deadline now a month behind us, only ten comment letters have been submitted on the SEC’s best price rule proposal.
Kevin Miller of Alston & Bird notes that an overarching concern reflected in many of the comments is that the approval by an appropriate committee (as defined somewhat differently in each of the letters) should be sufficient in and of itself for purposes of satisfying the safe harbor and that challenges to any required determinations by such committees (or the independence of committee members) should not affect the availability of the safe harbor. Several comment letters note that permitting such challenges to affect the availability of the safe harbor would significantly undermine its utility by failing to eliminate unwarranted incentives to utilize statutory mergers in lieu of a two step acquisition structure involving a tender offer.
Below are some highlights from a subset of these letters (without summarizing some of the more technical recommendations regarding wording, etc.):
(a) approval of an employment arrangement by a committee of the board of directors of the bidder (if the bidder is a counterparty) or of the subject company (whether or not the subject company is the counterparty) should, in and of itself, satisfy the safe harbor requirements if the members of the committee (an “Independent Committee”) serve on committees subject to SEC approved independence requirements of an SRO such as the NYSE and NASD
(i) Safe harbor approvals/determinations by an Independent Committee and independence of committee members should not be subject to challenge under the best price rule, but only through claims under applicable state law (e.g., for breach of fiduciary duty) or SRO action
(ii) New rules should provide alternative means for foreign private issuers and private companies to satisfy the requirements of the safe harbor
(b) safe harbor and exemption should cover commercial arrangements in addition to employment arrangements.
(c) new rules should apply to issuer tender offers
(d) new rules should contain a de minimus exception for agreements with holders of less than 1% of the class of securities that are the subject of the tender offer
(a) need not define covered employment compensation, severance or other employee benefit arrangements
(b) new rules should apply to commercial arrangements
(c) new rules should apply to agreements with employees and directors of the bidder
(d) new rules should apply to issuer tender offers
(e) clarify that new rules should apply to hostile tender offers
(f) new rules should not require approval of specific arrangements if within category of approved arrangements
(g) if a member of the compensation committee is conflicted, the new rules should permit recusal of the conflicted member, the designation of a separate independent committee or the designation of a subcommittee of the compensation committee excluding the conflicted member
(h) compensation committees should not be able to exclusively rely on the opinion of a compensation consultant
(i) disclosure as to how safe harbor was satisfied should not be required
(j) compensation committee should not be required to review a list of non-exclusive factors in making its determination
(k) new rules should contain a de minimus exception based on the number of securities beneficially owned (as defined in Section 13 of the Securities Exchange Act and the rules promulgated thereunder) by the employees and directors (but excluding their affiliates) with whom the compensation, severance or other employee benefit arrangement is being made
(a) exemption should cover current, former or future employees, directors and consultants
(b) new rules should include a non-exclusive list of employment compensation, severance or other employee benefit arrangements
(c) rule should include a 3% de minimus exclusion for both employment arrangements and any other type of payments, including commercial arrangements
(d) new rules should apply to issuer tender offers
(e) the safe harbor should be satisfied if the arrangement is approved by (i) any standing or ad hoc committee of the board of directors of the relevant party composed solely of independent directors or (ii) by the board of directors of the relevant party if such party is not required to and does not have independent directors
(f) approval by a committee of independent directors of the target should satisfy the safe harbor even if the acquiror is the counterparty to the arrangement
(g) approval by an independent committee (or the board, if applicable) of the acquiror should be effective even if the actual counterparty is the target so long as the acquiror has agreed to assume or “honor” the arrangement
(a) scope of exemption should include commercial arrangements
(b) approval of an employment or commercial arrangement by an independent committee of the board of directors of the acquiror (whether or not the acquiror is the counterparty) should satisfy the safe harbor’s requirements
(c) new rules should also apply to issuer tender offers
(a) committees whose approval should satisfy the requirements of the safe harbor include:
(i) any committee of independent directors of the relevant party (not just compensation committee) and where such party is not a public company or otherwise required by applicable listing regulations to have any independent directors, the board of directors of such party
(ii) a committee of independent directors of the target regardless of whether the target is a counterparty to the arrangement or the bidder has independent directors
(b) clarify that approval of an appropriate committee should be all that is necessary to bring an arrangement into the safe harbor
(c) clarify that approval of an arrangement at any time is sufficient for purposes of the safe harbor and that blanket approvals of all transactions pursuant to specific plans should be sufficient
(d) commercial arrangements should be covered by the exemption and safe harbor
(e) issuer tender offers should be covered by the safe harbor
(f) new rules should include a less than 1% de minimus exclusion
More Analysis on the SEC’s Best Price Rule Proposal
In this podcast, Doron Lipshitz of Stroock & Stroock & Lavan discusses certain aspects the SEC’s proposal to amend the best-price rule, including:
– What is the SEC’s proposal to modify the best price rule?
– In your view, what are the benefits of the SEC’s proposals to the market?
– How would the SEC’s proposal impact the acquisition process and existing deal practices?
On Monday, the Department of Justice and Federal Trade Commission took the significant step of issuing a joint 60-page commentary on the application of the agencies’ Horizontal Merger Guidelines.
As fleshed out in a Morrison & Foerster memo posted in our “Antitrust” Practice Area, the commentary is important because it signifies a willingness of the Agencies to sacrifice, to a limited extent, enforcement flexibility for greater transparency and predictability in the application of the Guidelines to mergers, acquisitions and joint ventures.
Andrew Sorkin’s column in Sunday’s NY Times discusses the growing trend of including “go shop” provisions in recent merger agreements. Here is an excerpt from that column (and a sample provision and commentary from the “Truth on the Market” Blog):
“Instead of the typical “no shop” term that has long been standard issue in merger deals — to keep sellers from soliciting higher offers after reaching an agreement to be sold — some boards of directors are now taking the opposite tack. Sellers are cutting deals with buyers that allow them to actively seek higher offers after reaching agreement. So, in the case of this week’s deal, Kerzner International, owner of the Atlantis resort, and its advisers literally began an auction for Kerzner the day it agreed to be sold.
If this doesn’t seem to make much sense, don’t worry, it’s complicated — and, in reality, it may not make sense anyway.
Over the last year, about a half-dozen deals have included a go-shop provision. The purpose, ostensibly, is to make sure that companies receive the highest possible price in a sale.
The most prominent example so far was when Maytag agreed last May to be sold to Ripplewood Holdings. But the agreement included a go-shop provision, and Maytag put it to work. After signing up and announcing its deal with Ripplewood, it canvassed more than 100 other bidders and smoked out Whirlpool to make an offer worth $1.36 billion, which it accepted only after a mini-bidding war that pushed the price even higher, to $1.7 billion. (It’s unclear whether that was the right move, because regulators may still try to quash the deal.)
In a perfect world, that is the way a go-shop provision is supposed to work. But in practice, it may be more a disingenuous article that boards are including in deals to protect themselves from angry shareholders who may think that a transaction was a sweetheart deal to a favored bidder. A go-shop gives board members instant cover from their fiduciary duty because it effectively says, “We made this deal, but we’re still open to higher bids.” The buyer effectively acts as a stalking horse. His price provides a floor for other potential buyers and a sense of certainty to shareholders.
The question, though, is why a company wouldn’t hold an open auction to begin with? Sometimes there are valid reasons. In the case of Kerzner, the company’s board took the go-shop approach because management and some major shareholders had already signed on with the consortium of investors, believing that there was only one real bidder. Had the board put the company up for sale, the management could have bolted, creating an enormous amount of uncertainty.
And Kerzner has given its adviser, J. P. Morgan Chase, an incentive by basing the bank’s fee on its ability to find a higher offer. (A question for another column: J. P. Morgan provided a fairness opinion to Kerzner based on the original deal price of $76 a share. If it is able to find a better price, was the first fairness opinion right?)
More often than not, it would seem that an open auction is the best way to go. In fact, the biggest problem with a go-shop provision is that by default, other potential bidders start at a huge disadvantage. Not only do they have to get up to speed quickly — most of these provisions allow only a 45-day period to find a higher offer — but the new buyer has to pay a breakup fee.
IF you’re wondering why the first suitor would ever agree to a go-shop provision, the breakup fee may be part of it. Nobody buys a business to get a breakup fee, but the option does provide buyers with some comfort, covering their costs and then some if they end up losing the deal.
More important, buyers often have no choice. A seller can easily say: either take the deal with a go-shop provision or submit to an open auction. And, of course, there’s no evidence so far that any would-be buyer would choose the auction route.”
Last week, the Federal Trade Commission announced a consent decree settling charges that statements made by Valassis Communications during an earnings conference call amounted to an unlawful invitation to collude. During the call, Valassis announced its intention to maintain – but not grow – its current market share, defend its existing client base, submit bids on expiring competitor contracts at prices above current levels, honor prices quoted in existing bids for a limited time, and then to monitor its competitor’s response to these initiatives.
The FTC alleged that those statements were an invitation to the company’s only competitor to collude on pricing. Without alleging an agreement (an essential element of Section 1 of the Sherman Act), the FTC charged Valassis with a violation of Section 5 of the Federal Trade Commission Act.
Here is an excerpt from a Wilson Sonsoni memo posted in our “Antitrust” Practice Area which analyzes the ramifications of this decision:
“While Valassis’ pointed earnings-call statements can be characterized as an invitation to collude, many might find substantively similar unilateral statements to be commonplace or benign where there is no acceptance or agreement by other competitors.
The FTC presumably recognizes the need to refrain from unduly chilling legitimate corporate speech, not to mention the impracticality of monitoring corporations’ public communications—especially those required by the securities laws. Nevertheless, here the FTC chose to challenge unilateral statements in an earnings call about pricing plans and business strategies, undeterred by the absence of an agreement or even a competitor’s response. The FTC found it important that: (1) Valassis had not provided information of this type to the securities community in the past; (2) analysts had no need for this information and did not report it; and (3) Valassis had no legitimate business justification for the disclosures. It followed, claimed the FTC, that the only purpose behind the statements was to convey an invitation to News America, knowing that News America would be monitoring the call.
With this order, public corporations accountable to their shareholders must tread more delicately in publicly addressing their competitive strategies. As a practical matter, corporations must disclose some strategic planning, and must be sufficiently candid to avoid securities-related lawsuits. This is particularly the case when, as in the Valassis disclosures, the company is changing its strategy. However, the FTC’s order announces antitrust risk in such disclosures, with little guidance on how to minimize the risk. Virtually any statement a business makes implicates strategy or pricing, whether it offers plans to implement discounts, raise prices, enter markets, or roll back certain products. For businesses in concentrated markets, the order is particularly troublesome. Will their statements be received by the FTC as an invitation to competitors to collude or as a signal to raise prices? Are they providing too much detail, and thus risking antitrust scrutiny? Are they providing too little detail, and thus exposing themselves to securities-related risk? If a competitor responds to these disclosures with changed pricing or market strategies, will their response be interpreted as a sign of reciprocation or agreement?
Price-fixing and market-allocation claims usually require evidence of an agreement between two or more competitors. This consent order effectively expands this type of claim to encompass unilateral conduct, at least insofar as liability under Section 5 of the FTC Act goes. One consolation is that Section 5 of the FTC Act does not permit private actions or trebled damages, unlike the Sherman Act. Consequently, unless a conspiracy (that is, something more than an unaccepted offer) can be alleged, the FTC’s invitation-to-collude theory will not give private plaintiffs another antitrust cause of action. Even so, we expect that the FTC’s action here will encourage plaintiffs to advance more expansive arguments that an agreement should be more readily inferred from the existence of similar public statements followed by some parallel action by competitors. In any event, businesses now will have to be even more careful when preparing for earnings calls.”
Last week, the SEC Staff issued a batch of no-action responses, where on reconsideration the Staff said that Bristol Myers (and other companies) could exclude John Chevedden’s poison pill shareholder proposals. The Staff originally took the position that the companies could not exclude the proposals under Rule 14a-8(i)(10), even though the companies had eliminated their poison pills and adopted a policy that any new pill would be put to a stockholder vote. The basis for the Staff’s initial refusal was that the proposal asked for the policy to be “in the bylaws or charter if practicable.” Upon reconsideration by the Commission, the Staff then overturned its earlier refusal and now has allowed exclusion of the proposals. We have posted a copy of the reconsideration responses in our “Poison Pills” Practice Area.
Interestingly, the Staff’s responses in the reconsideration included this commentary:
“We note that there is a substantive distinction between a proposal that seeks a policy and a proposal that seeks a bylaw or charter amendment. In this regard, however, we further note that the action contemplated by the subject proposal is qualified by the phrase `if practicable’ and that the company has otherwise substantially implemented the proposal.”
One possible interpretation of this commentary is that the Staff hung their hat on the “if practicable” language and the Staff believes that there is a substantive distinction between a corporate policy and a bylaw provision.
I think a fairer reading is that the Staff simply changed its mind on this one, but that it still believes that a policy is not as binding as a bylaw. The truth of the matter is that the phrase “as practicable” is pretty subjective – and a company would still have to convince the Staff that it is not practicable to adopt the poison pill change requested by the proposal.
This also crosses paths with the majority vote issue and the position the Staff took that a Pfizer-type policy does not substantially implement a majority vote proposal. Some practitioners believe that it was the “location matters” argument (policy vs. bylaw) that the Staff relied upon for their conclusion in those letters. It seems that Time-Warner and other companies may be testing this theory when they recently adopted a director resignation policy, but put it in their bylaws.
And then you have to consider the complaint in the lawsuit against Hewlett-Packard for repayment of Carly Fiorina’s severance. Some view that as taking the recent News Corp. decision to the next level, arguing that disclosure regarding policies in proxy statements makes them binding contracts.
According to this article in today’s WSJ, proposed Congressional legislation could ease the restrictions imposed in 1997 on Morris Trust deals. Here is an excerpt from the article: “Structuring mergers and other deals to avoid taxes is a longstanding Wall Street game. One part of that exercise may get easier, thanks to a little-noticed bill pending in Congress that’s getting heavy lobbying support from big investment banks.
If enacted, the bill would significantly ease the rules governing so-called Morris Trust transactions, which restrict how certain corporate deals can be structured to avoid taxes.
Wall Street — led by firms including Goldman Sachs Group Inc., Lehman Brothers Holdings Inc., Bear Stearns Cos., and Merrill Lynch & Co. — is hoping that making it easier to do tax-free transactions will spur more deals.
Investment banks “are betting on a substantial increase in deal activity should this legislation be enacted, as companies will have a much easier time shedding units on a tax-efficient basis,” said Robert Willens, a tax accounting specialist at Lehman. “And that increase, of course, will result in a corresponding increase in fees for the [investment] banks.”
The bill’s prospects aren’t clear yet, though its sponsor, Virginia Republican Rep. Eric Cantor, is well-positioned to push it. Rep. Cantor is the House’s chief deputy majority whip and the only member of the Republican leadership on the Ways and Means Committee, which oversees tax legislation. The congressman plans to try to attach his measure to a bill moving through the legislative process, but he hasn’t decided on which one yet, said Rob Collins, his chief of staff.”
“Should dissidents get reimbursed for running proxy contests even if they lose? That’s the premise of a new proposal filed by the American Federation of State, County and Municipal Employees (AFSCME) now expected to go to a vote at three companies. The proposal calls on American Express, Citigroup and Bank of New York, to amend their bylaws to allow “for reimbursement of expenses in proxy contests where a dissident shareholder seeks to elect less than a majority of the board.” Under the proposal dissidents who actually succeed would be fully reimbursed, but even some losers could receive partial reimbursement under a complex sliding scale, though only if the vote exceeds a certain threshold. AFSCME argues that proxy contests have been rare because the costs for drafting and mailing proxies, and for hiring advisors, are high.
Both American Express and the Bank of New York attempted to exclude the proposals on several grounds including that it was in contrast to commission rules requiring security holders to bear the mailing costs associated with proxy solicitations. The companies also sought to exclude the proposal by citing SEC Rule 14a-8, which allows for omission if a shareholder resolution relates to director elections, or deals with matters related to the company’s ordinary business. The SEC rejected the companies’ assertions, so the proposals will now appear on proxy statements beginning next month.
Rich Ferlauto, director of pension and benefit policy at AFSCME, says that, “In lieu of proxy access, reimbursement for solicitation expenses will give shareholders a needed leg up in the board room when it comes to confronting unresponsive and unaccountable boards.”
If the proposal passes–a long shot at best given it’s a first-year proposal, analysts say–will the number of such contests increase?”
We have posted commentary from Brian Breheny, Chief of Corp Fin’s Office of Mergers & Acquisitions, from this weekend’s “SEC Speaks” in the “Conference Notes” Practice Area. The topics include:
– Best price proposal
– NASD Rule 2290
– Beneficial Ownership
– Titan 21(a) Report
– Cross-Border TO and Exchanges
In this podcast, Bob Profusek of Jones Day walks us through the primary issues raised by the recent Delaware Chancery Court decision of Unisuper v. News Corp., including:
– What were the primary issues before Chancellor Chandler in News Corp.?
– What did Chancellor Chandler hold?
– There is a growing trend for companies either redeeming their poison pills or letting them expire without renewing them. How does this case impact that trend?