Monthly Archives: December 2004

December 30, 2004

Option Classes and the All-Holders

As many of you who have been involved in a stock option repricing know, compliance with the “all holders” and “best price” provisions of Rule 13e-4 can be tricky. Fortunately, the SEC issued an exemptive order in March 2001 to provide relief from Rules 13e-4(f)(8)(i) and (ii) of the Exchange Act (the “Global Exemptive Order“) allowing companies to treat option holders differently depending on their individual circumstances.

Although stock option repricings have declined in popularity due to certain accounting rule changes, transactions involving stock options that implicate the tender offer rules are fairly common. In some cases, companies and their counsel have relied upon the Global Exemptive Order and sought their own no-action relief in conducting non-repricing tender offers that discriminate among different groups of option holders.

For example, Martha Stewart Omnimedia offered a deferred cash bonus only for options with strike prices in excess of a certain amount. See SEC No-Action Letter to Martha Stewart Living Omnimedia, Inc. (available November 7, 2003). In a similar transaction, Comcast offered to pay cash only for options held by former Comcast employees. See SEC No-Action Letter to Comcast Corporation (available October 7, 2004). While the Staff has explicitly stated that they will not recommend enforcement action in these instances, practitioners may not realize that outside the context of a straight repricing, satisfaction of the conditions set forth in the Global Exemptive Order in and of itself does not guarantee availability of the exemption from the “all-holders” and “best price” provisions of Rule 13e-4.

Recently, the Staff has reminded practitioners that when limiting offers to only certain option holders or options such differential treatment must be based on objective criteria. Unfortunately, the Global Exemptive Order does not explain the need for creating separate classes of options and why it is critical to compliance with the all-holders rule even where relief is granted.

The answer is that companies can typically avoid implicating the all holders and best price provisions by essentially “creating” different classes of securities. This point, however, may be lost on practitioners working on transactions where only select options or option holders are allowed to participate.

As a basis for its informal position the Staff has analogized to earlier interpretations that stock options are treated as separate classes of securities in both the Section 16 reporting and Section 12 registration contexts. In those instances, the Staff has looked to certain objective criteria, such as grant date, strike price, term and the specific plan(s) under which options are issued, to conclude that options can be divided into separate classes of securities. The staff points to prior no-action letters, such as Kathleen A. Weigand (available March 29, 1991) (Section 16 reporting), General Roofing Services, Inc. (available April 13, 2000) (Section 12 registration) and Kinkos, Inc. (available November 30, 1999) (Section 12 registration), as support for its view that options and option holders can be treated differently if objective criteria are used to essentially create separate classes of options.

Something to consider the next time you are involved in a transaction outside the repricing context and all options or option holders will not be treated alike. Thanks to John Kao of Gibson Dunn for shedding light on this unclear area of the lore!

December 28, 2004

Bitter Pills Vioxx, then Celebrex.

Vioxx, then Celebrex. What’s next? Would it surprise anyone that there’s some dog-piling in the works on the All-American-Safer-than-Aspirin Poison Pill?

First, you have the Wall Street Journal (“How a Judge’s Ruling May Curb “Poison Pill” As Takeover Defense,” December 13, 2004) speculating that Delaware Vice Chancellor Strine may ready to punt PeopleSoft’s pill. The article quoted a 2000 decision by the Vice Chancellor: “If stockholders are presumed competent to buy stock in the first place, why are they not presumed competent to decide when to sell in a tender offer?” Hmmm, that seems to make sense especially if the stockholders are institutional investors like hedge funds who are as bottom line as you can get when talking about “maximizing shareholder value” (hint: that’s fund code for “make my 20% promote even fatter”).

Second, Institutional Shareholder Services ( tweaked its Voting Guidelines for 2005 to recommend withholding votes for directors who adopt or renew pills without shareholder approval:

“Recommend WITHHOLDING votes from all directors (except from new nominees) if the company has adopted or renewed a poison pill without shareholder approval since the company’s last annual meeting, does not put the pill to a vote at the current annual meeting, and there is no requirement to put the pill to shareholder vote within 12 months of its adoption. The policy will be applied prospectively. Pills adopted prior to this policy will not be considered. If a company that triggers this policy commits to putting its pill to a shareholder vote within 12 months of its adoption, we will not recommend a WITHHOLD vote. “

According to ISS, shareholders have expressed strong support for ratification of poison pills by shareholders. Of the 52 shareholders proposals on this issue in 2004, 40 received a majority of the shares cast. ISS believes that shareholders should have a voice in the adoption of a poison pill and its corresponding features.

Interesting times for a director pondering a pill: You have a high-profile Delaware judge gunning for a pill to pull (which, of course, may open you up for a breach of fiduciary duty claims by your friendly, neighborhood strike suit lawyer) AND you have ISS trying to pull your director’s chair from under you if you vote to approve or renew a pill.

With the potential side effects of a poison pill becoming more painful, you would think this situation warrants elevation of the “Director in Crosshairs Advisory System” to Code Red.

Under the wrong circumstances, even a spoonful of sugar may not be of much help…

December 23, 2004

Court of First Instance Affirms Commission’s Microsoft Decision

On December 22, 2004, the President of the Court of First Instance denied Microsoft’s request to delay the implementation of the European Commission’s order that (1) Microsoft offer a version of Windows without Windows Media Player, and (2) Microsoft make availability its interoperability interfaces to server work group competitors, so that they could better compete with Microsoft in the market. According to the Court, Microsoft has not shown that it might suffer serious and irreparable damage as a result of implementation of the contested decision.

In late June 2004, Microsoft asked the Court of First Instance for interim relief from the order of the Commission–in other words, Microsoft asked that the penalties set forth in the Commission’s order be suspended pending final resolution of the Commission’s complaint. Hearings on Microsoft’s request for relief from the Commission decision took place in early October. Yesterday’s decision only concerns that interim relief order.

The Court’s decision, on both the requirement that Microsoft disclose interoperability interfaces to competitors in the work group server market, and offer a version of Windows without its media player tied to it, found that the Commission set forth a “prima facie case” that Microsoft violated EC competition laws. Because the Commission set forth its prima facie case, it was entitled to proceed with its case through final judgment. Because Microsoft could not demonstrate “irreparable” damage by being required to disclose interoperability information to work group server competitors, and could not demonstrate irreparable harm by being required to unbundle Windows from Media Player, the Court concluded that Microsoft MUST IMMEDIATELY comply with the terms of the order.

In other words, the order requires Microsoft to make available the interoperability information to its work group server competitors, and offer a version of Windows without Media Player bundled in with the OS.

Practical Consequences of the Order:

(1) Microsoft still has the right to be heard on both of these issues in Europe through a full hearing on the merits. This is not a final decision from the Court of First Instance that the Commission was right in its conclusions that Microsoft violated the EC’s competition laws. Instead, one could view this just as a procedural loss for Microsoft. Microsoft also has the right to appeal to the Court of Justice (both this approval of the interim order, as well as any final judgment of the Court of First Instance)

However, the loss is significant. Microsoft is going to have to offer an unbundled version of Windows that does not contain its Media Player, and offer the work group server interoperability information to competitors immediately. The work group server information disclosure is likely less serious, as Microsoft already resolved this dispute with Sun, as part of a global settlement with the company last summer. However, the Media Player decision is troubling for Microsoft. Even though the order is confined to the EU, it remains to be seen how and whether Microsoft can offer an unbundled Windows in Europe and not do the same thing in the U.S.

(2) The Court’s language is fairly harsh toward Microsoft and generous to the Commission. Even though this decision is really light on the facts, and a more complete analysis is necessary, I think that this is a very bad sign for Microsoft going forward. I would think that Microsoft must believe that if and when there is a complete ruling from the Court, that it will lose, and may try to mitigate its losses by settling with companies like Real. The barebones analysis provided by the Court seems very favorable toward the Commission.

As a side note, Microsoft issued a press release saying (1) that it intends to immediately comply with the terms of the Commission, and (2) will try to settle this dispute, once and for all, BUT, will continue with its appeal.

I think that Microsoft must see the writing on the wall.

December 17, 2004

Disposition of Assets; Form 8-K;

New Item 2.01 of Form 8-K, similar to the old Form 8-K requirements, provides that when a registrant disposes of a “significant” amount of assets, the company may be required to file pro forma financial information, as required by Article 11 of Regulation S-X. We understand based on conversations we have had with staff members in the Office of the Chief Accountant at the SEC that registrants should file such pro forma financial information within four business days of consummation of the disposition transaction (unless and until the SEC provides guidance otherwise). This is a change from the old Form 8-K requirements which, as explained in the 2000 edition of the SEC’s accountant’s manual, provided a 15-day period after the disposition for registrants to amend their original Form 8-K filings to include pro forma financial information. On a side note, we understand that the staff is working on updating the SEC’s accountant’s manual which will now have a red cover instead of the yellow cover many practitioner’s are familiar with from the 2000 edition.

Federal Holidays not a “Business Day”

As a holiday reminder, practitioners and bidders engaged in year-end tender offers should note that both Friday, December 24, and December 31, 2004 are not considered “business days” for purposes of the SEC tender offer rules. Accordingly, when counting the minimum number of days in a tender offer or subsequent offering period such days would not count toward the twenty and three business day minimum periods for tender offers and subsequent offering periods, respectively.

December 16, 2004

Will the Court of First Instance Untie Microsoft?

Experts expect that the European Court of First Instance will issue its decision whether to uphold the European Commission’s decision concerning Microsoft’s bundling of its Media Player with the Windows Operating System any day. The decision of the Court will be momentous, regardless of whether it affirms or reverses the decision of the EC, and will have a profound effect on Microsoft’s OS-application bundling practices. Let’s recap where we are today, and after the decision is issued, I’ll highlight the Court’s decision and reasoning.

On March 24, 2004, the EC announced that it concluded its five-year investigation into Microsoft’s business practices. Among other things, the EC concluded that Microsoft abused its position of dominance in the OS market, in violation of Article 82, by tying WMP to the OS. The Commission fined Microsoft €497 million, and ordered Microsoft to sell a version of its Windows OS without WMP within 90 days of the issuance of the decision.

In the EC’s decision, the Commission decided that under a rule-of-reason analysis, the forced bundling of WMP with the Windows OS was illegal, balancing the procompetitive justifications proffered by Microsoft for its practice against its negative effects on the media player market, in a manner similar to that set forth by the D.C. Circuit in its Microsoft case. The EC analyzed Microsoft’s conduct and reached its decision to condemn Microsoft’s bundling practice
Microsoft’s bundling practice has been dubbed “technology tying” in antitrust parlance, and has been treated leniently under U.S. antitrust laws (in fact, the same practice condemned by the EC has been generally okayed here in the States).

The development of the law of technology ties are likely to have a profound effect on the development of future operating systems and the long-term viability of many independent application providers who offer products that function in such OS’s. With dominant OS providers like Microsoft reaching further into the application world—through the development and/or acquisition of applications that function on their dominant OS environments—OS providers increasingly are becoming competitors to independent application providers, while at the same time providing the industry-standard OS on which these applications run.

The ability to technologically tie a dominant OS to an application raises some significant antitrust issues. On one hand, the ability to bundle a dominant OS with an application may provide some technological benefit to consumers with more seamless integration, reduced transaction costs, and the ability to provide application interfaces to content developers. On the other hand, such bundling may foreclose independent application providers from space on the OS, significantly diminishing their ability to compete, and as a result, limiting consumer choice. Moreover, with the ability to tie applications to their OS’s, companies like Microsoft may have a reduced incentive to develop premier applications for their OS’s, since they know that most OEMs and customers will simply accept an inferior bundled product, rather than spend the additional money to purchase an independent application, even if superior to the bundled one. Especially in the computer industry, where margins for OEMs are already razor thin, the temptation for OEMs will be to accept free, forced bundles to the exclusion of separate applications that must be installed, and potentially maintained and serviced by the OEMs. The end result is a potential threat to competition and to consumers as well.

Next time, we’ll look to see how the Court of First Instance comes down on the technology tying issue and analyze what the decision means for OS providers like Microsoft as well as the law of tying in general.

December 15, 2004

Attention SOX Frenzy Whippers Loving

Loving a good debate and an “open dialogue” I was pleased to receive an important reaction to my recent posting about directors retaining separate counsel to conduct separate due diligence during an acquisition. The response came from a senior west coast based executive who suggested that separate due diligence counsel “might reaffirm a suspicion in some minds that much of the Sturm und Drang surrounding Sarbanes-Oxley is being whipped up by the service providers in their own interests without verifiable commensurate value to the stockholders… [and] I do get bombarded with stuff, and my Board members do too, that sometimes makes me want to pull my hair out. For many of us on the business side, there is a sense of piling on…. [but] outside of this one small lapse, I always enjoy yours and Wilson’s insights. Thanks!”

Is he merely saying what we’re all thinking?

December 8, 2004

Formula Pricing Update

For those of you who may have been busy over the past year with the many SOX-related developments coming out of the SEC and SROs, you may have missed two recent no-action letters issued by the Office of Mergers & Acquisitions on the subject of “formula pricing”. By way of background, M&A practitioners are likely familiar with the landmark no-action letter issued to Lazard Freres & Co. (August 11, 1995) which allowed a third-party bidder in an exchange offer to determine the final offer price based upon a pre-disclosed formula, hence the term “formula pricing”.

In Lazard, the staff provided relief from Rule 14e-1(b) and allowed the bidder’s final offer price or ratio to be “fixed” as late as two business days prior to the expiration of the offer. Two years later the staff issued a no-action letter to AB Volvo (May 16, 1997) which expanded the relief for formula pricing mechanisms to include offers where one of the subject securities sought in the offer was only listed on the Stockholm Stock Exchange and not a national securities exchange or Nasdaq in the U.S.

This past year the staff issued letters to Epicor Software Corporation (May 13, 2004) and TXU Corporation (Sept. 13, 2004) which further expanded and clarified the staff’s relief in the context of: (i) a third party exchange offer where the trading prices for the subject securities were publicly available only on the Euronext and Euronext Amsterdam in the Netherlands (Epicor) and (ii) an issuer tender offer where the formula pricing was based on the subject company’s common stock price instead of the trading price of the securities actually sought in the offers (i.e., convertible debt and similar derivative securities) (TXU).

In both cases, the final price was determined using a fixed formula that was disclosed in the offering materials and the final price was announced by means of a press release issued before the opening of the market on the second business day preceding the expiration date (i.e., before the opening of the market on the 19th day in a 20-day offer).