Monthly Archives: February 2005

February 24, 2005

Brainiac Deal Lawyers

A recent article on right v. left brain executives had me thinking: what makes a good v. great deal lawyer?

As you know, the people with the slightly larger left brain are the cool, calculative folks. The right-brainers are the creative/emotional ones. According to clinical psychologist, Sandy Gluckman, the characteristics of lefties v. righties are:

If your LEFT brain is dominant, you:

Get to know people through sharing facts

Focus on facts and solutions

Are pragmatic and cautious

Perform tasks in a proven and accepted way

Like to know exactly what is expected of you

Prefer a clear, step-by-step process

Tend to overlook giving recognition to others

Need many facts before arriving at a decision and acting

Believe caring and empathetic people are too soft in business

Solve problems by focusing on the way the task is being implemented

On the other hand, you’re RIGHT brain dominant, if you:

Get to know people through sharing feelings

Focus on feelings and the bigger picture

Are creative and open to taking risks

Look for a new and original way of going things

Like to be constantly surprised and challenged

Prefer to experiment as you go along

Give recognition easily and spontaneously

Are action oriented, quick and spontaneous in arriving at decisions

See analytic and logical people as cold and uncaring

Solve problems by focusing on relationships and teamwork

The competent deal lawyer must do all the left-brain things well. But, after reading the right-brain characteristics, could it be that the lawyer who the CEO, CFO, or CDO wants sitting next to them at the table is really the right-brainer? To be part of the strategic team that cooks up the deal, wouldn’t the execs prefer the out-of-the-box-thinking lawyer? Is this the difference between being the lowly scrivener or “The Dealmaker.”

After a certain level of core (left-brain) competency, my guess is that the real go-to, must-have, and can’t-do-a-big-deal-without lawyers tend to be righties – who, of course, a supported by a team of lefties.

(Actually, the left-brain characteristics sound like what you want in your ideal associate; the right-brain list sounds like a recipe for a high-flying I-Banker. Hmmm, I wonder who carts home the bigger check at closing.)

Anyway, I need an aspirin for this splitting headache I suddenly developed…

February 21, 2005

February Investigations

There has not been much in the way of substantive merger antitrust pronouncements in the past month. While we eagerly await some activity from the courts, the FTC and the DOJ, including an appeal of a significant merger decision from the Western District of Kentucky (U.S. v. Dairy Farmers Association), a likely appeal in an FTC merger case (FTC v. Chicago Bridge & Iron), and some additional guidelines and comments on Merger Policy from both agencies, we have not had the flurry of activity in February that we had in prior months.

That’s not to say that the agencies are not doing anything. There are a number of very significant Second Requests currently percolating at both the FTC and DOJ. No one expects resolution on any of them in the near future (and for that matter, no one is expecting any significant challenges), however, the agencies currently are looking at the proposed mergers between:

• Blockbuster and Hollywood Video.

• Verizon and MCI.

• SBC and AT&T.

The Blockbuster / Hollywood Video proposed transaction is interesting for several reasons: (1) it is a hostile bid, at the moment; (2) the parties have tried to get the deal through the FTC several years ago and failed; and (3) it likely involves some significant market definition issues.

Hostile bids are interesting from an antitrust perspective, and they make the antitrust regulatory process extremely difficult. Usually, the merging parties are fighting to convince, in tandem, that their proposed transaction does not result in too much market concentration. Parties engage the agencies with their documents, expert testimony and substantive briefings, explaining that customers will not see increases in prices following the merger. Imagine, on the other hand, fighting not only the government, but your proposed merger partner as well. As we saw in Oracle/PeopleSoft, hostile bids greatly lengthen the antitrust review process because your purported partner is fighting you at the agencies tooth-and-nail. In Oracle/PeopleSoft, PeopleSoft, primarily through its legal counsel, Gary Reback, engaged in one of the most public displays of merger opposition, going as far as to write substantive white papers decrying the proposed combination from a competitive standpoint (one entitled “A Hostage Taking”), and starting his own weblog trying to undermine Oracle’s bid on antitrust grounds, on an almost daily basis. Even though the court eventually allowed that merger to proceed, there can be no doubt that PeopleSoft’s efforts had something to do with the DOJ’s (and 10 or so state Attorneys General) decision to challenge the merger. It will be interesting to see whether Hollywood engages in a similar offensive.

The ever-evolving arguments that on-line distribution competes vigorously with traditional bricks-and-mortar retailing will be a prevalent theme in the merger investigation (e.g., Netflix vs. in-store rentals), as will the argument that Wal-Mart competes with everyone (here, the parties likely will contend that sale of videos at Wal-Mart competes with rentals at Blockbuster and Hollywood Video).

The two telephone mergers likewise are interesting—not because anyone expects the agencies to challenge the transactions—but because of the enormity of the projects (not to mention the sentimental nature of SBC acquiring its former parent, AT&T). Just to show where we’ve come in merger antitrust review—according to estimates, there will be approximately 1,000 attorneys reviewing documents from both companies, for 70 hours / week, for three months. Go figure the bill out on that one! While there likely will be some relief required (e.g., divestiture of businesses in some markets), in all likelihood, the agencies eventually will allow the mergers to proceed.

I expect March will provide some interesting discussion topics in the area, as we see the stream of these investigations begin to conclude.

February 18, 2005

Are You Really a “Controlled Company?”

As you know, controlled companies are exempt from certain NYSE and NASD board and committee independence requirements pursuant to NYSE Rule 303A.00 and NASD Rule 4350(c)(5). Both the NYSE and NASD have defined a controlled company as “a company in which any individual or group of shareholders control more than 50% of the shares of the company.” But what exactly constitutes a group? The NYSE states in its Frequently Asked Question C.5. that they will look to the concept of “group” as set forth in Section 13(d)(3) of the Exchange Act. Under Rules 13d-3 and 13d-5(b)(1) of the Exchange Act, a “group” is deemed to exist when “two or more persons agree to act together for the purpose of acquiring, holding, voting or disposing of equity securities of an issuer.”

As most M&A practitioners know, it is relatively easy for two or more shareholders to come together and become a 13(d) group, which has led some companies to claim “controlled company” status whenever there is a group of two or more shareholders with shared voting or dispositive power and the aggregate beneficial ownership of the group exceeds 50% of the company’s outstanding shares. Recently, however, the NYSE has indicated that they are focusing on shared voting power and not shared dispositive power. As a result, those companies who may have thought they were a controlled company, based on shared dispositive power likely do not satisfy the NYSE definition of “controlled company”. According to the NYSE, a 13(d) group will be recognized only when the members share voting power and in fact vote as a block on one or more matters. The NYSE also indicated that it will look at whether members of a 13(d) group have historically voted together as a group in deciding whether to recognize a 13(d) group for controlled company purposes.

This has some NYSE-listed companies second guessing their earlier conclusions regarding the existence of a group and thus their controlled company status. So practitioners should be aware that even if two or more shareholders report their combined beneficial ownership on Schedule 13D or 13G and the members in fact admit 13(d) group status, the group still may not satisfy the NYSE’s definition of “controlled company” under Rule 303A. As a result, companies may want to re-evaluate whether they are a “controlled company” if they are relying on a 13(d) group sharing only dispositive power over the group’s shares.

While the NASD rules track the language of the NYSE rule, they define “group” in Interpretive Material 4350-4 as shareholders that have “publicly filed a notice that they are acting as a group (e.g., a Schedule 13D).” For now, it appears that if shareholders are obligated to file and in fact file a joint 13D or 13G with the SEC, they should be accorded group status for purposes of the NASD controlled company exemption, but it is possible the NASD will follow the NYSE’s lead in this area as they have done on other similar corporate governance issues. Interestingly, for Section 16 purposes a group may not result where the agreement to hold, dispose or vote shares is involuntary or imposed on shareholders by the issuer. For more information on this recent development, see Romeo & Dye’s It is unclear whether the NYSE or NASD would take a similar approach when determining whether to recognize a listed company as a “controlled company”.

So, what’s the bottom line here? If your company has several large shareholders reporting on 13D or 13G and they vote together as a group, they should be accorded “group” status by the NYSE and NASD. But controlled companies relying on 13(d) groups with shared “dispositive” power should really reconsider the basis upon which they claim “controlled company” status. They will need more than just an agreement to hold or sell shares. As for the NYSE, such 13(d) groups will not be recognized. Thanks to Heather Waldbeser for bringing this to our attention. In addition to multiple definitions of “independent director” we now have slightly different definitions of 13(d) “group” applied by the SEC and the SROs.

February 10, 2005

Here Is A Bittersweet Treat For You This Valentine’s Day!

Officers and Directors are NOT considered “Passive” under Rule 13d-1(c) – So if you are an officer or director reporting your beneficial ownership of company shares on Schedule 13G and you are doing so pursuant to Rule 13d-1(c), it’s probably time to reconsider your eligibility to continue reporting on 13G. On December 15, 2004 the SEC submitted an amicus brief to the 7th Circuit Court of Appeals in the case of Edelson v. Ch’ien et al, No. 04-1299. In its amicus brief the Commission stated its view that senior executive officers are generally not eligible to report their beneficial ownership on Schedule 13G pursuant to Rule 13d-1(c).

Rule 13d-1(c), adopted by the Commission in Release No. 34-39538 (Jan. 12, 1998), permits “passive” investors owning less than 20% of a class of securities to report their holdings on Schedule 13G in lieu of Schedule 13D. However, it is has been the staff’s informal position since the adoption of Rule 13d-1(c) that directors and officers are generally not “passive” due to the very nature of their position at the company. The Commission has now memorialized this position in footnote 18 of its amicus brief stating that it would be “difficult, if not impossible,” for a CEO to certify that his or her shares are “not held for the purpose of or with the effect of changing or influencing the control of the issuer of the securities” (emphasis in original). This view would likely extend to all “executive officers,” (i.e., those who perform “policy making functions”), as well as directors.

Officers and directors should not despair! Instead they should consider whether Rule 13d-1(d) might provide an alternative basis upon which to continue reporting on Schedule 13G. Persons eligible to report on 13G pursuant to Rule 13d-1(d) include those who: (1) acquired their beneficial ownership prior to December 22, 1970, (2) are exempt from filing a Schedule 13D by virtue of Section 13(d)(6)(A) or (B) of the Exchange Act, or (3) are “otherwise . . . not required to file a statement.”

Section 13(d)(6)(A) of the Exchange Act exempts from 13D reporting those persons who became a beneficial owner of more than 5% solely as the result of the issuer’s acquisition of securities pursuant to a registered stock for stock exchange. Unfortunately, the staff has interpreted this exemption as limited solely to the issuer and not third parties. [This exemption does not apply to third-parties confronted with an exchange offer. In other words, if someone goes out and makes a registered “stock-for-stock” exchange offer, and becomes as a result becomes a holder of more than 5% of the securities sought in the offer, they would not have to file an initial Schedule 13D. However, someone who is the recipient of an exchange offer (i.e., third party – not issuer of the securities) gives up existing securities and receives new securities of the issuer, if they were to own more than 5% of the issuer’s securities they would need to file an initial 13D. In short, the exemption applies only to the issuer of securities in a stock-for-stock exchange, not the security holder receiving securities. The legislative history behind this exemption indicates that Congress was comfortable that the disclosure called for in the prospectus would be sufficient to inform shareholders of the accumulation of shares.]

Section 13(d)(6)(B) of the Exchange Act exempts from 13D reporting those persons who accumulate more than 5% of an issuer’s securities without acquiring more than 2% of the class in any single twelve-month period. Note, however, that the staff has indicated that this twelve-month calculation period should be done on a rolling basis, meaning that the twelve-month period is calculated from the date of an acquisition and is not based upon the calendar year. See Exchange Act Release No. 17353, December 4, 1980, SEC Docket, Vol. 21, No. 10 (p. 776). When calculating the 2% limitation, Section 13(d)(6)(B) does not permit the netting of acquisitions and sales, nor does it distinguish between acquisitions of registered and unregistered securities.

— As for the last category, the SEC has taken the position that persons “otherwise . . . not required to file a statement” include those persons who acquired their beneficial ownership when the securities were not registered (i.e., pre-IPO). See Exchange Act Release No. 15348, November 22, 1978, SEC Docket, Vol. 16, No. 4 (p. 230). In addition, persons whose beneficial ownership increased above 5% solely due to a decrease in the total amount of securities outstanding (i.e., an increase in percentage beneficial ownership due to repurchases by the issuer) would fall within this category.

Therefore, officers and directors should be able to continue reporting their beneficial ownership on Schedule 13G under Rule 13d-1(d) instead of Rule 13d-1(c) if they fall into one of the above categories. Given the SEC’s new guidance on this topic, officers and directors should reconsider their ability to continue relying on Rule 13d-1(c) before filing their next 13G amendment which is due for most filers on Monday, February 14th. If ineligible to report on 13G under Rule 13d-1(c), reporting persons can switch to relying on Rule 13d-1(d) by checking the appropriate box on the cover of Schedule 13G.

Now that is what I call a sweet treat from Jeannine Pao at Gibson Dunn. Happy Valentine’s Day!

February 3, 2005

Lock-Ups — Former Proposed Rule 159

As the Securities Act Reform Release, or as I like to call it “The Aircraft Carrier Part II”, steams ahead it is a good time to review some of the proposed rules that may disappear in the wake of the Swift Boat. Namely proposed Rule 159!

Before parties sign a merger agreement or engage in a significant business combination transaction legal counsel is often confronted with the dilemma of deciding exactly who can be “locked up” in the deal without violating Section 5 or committing proxy or tender offer “gun jumping”. While there is little guidance out there on this topic, those of you who practice in this area are no doubt familiar with the staff’s position on where the line is drawn. For those of you who don’t know where the line is drawn, read on . . . .

The only official written guidance on this subject is set forth in the SEC’s Current Issues Outline and the Aircraft Carrier release under the title proposed Rule 159 which was supposed to codify the staff’s views on lock-ups. Under proposed Rule 159 parties to a business combination transaction could lock-up prospective purchasers before a registration statement was filed if:

(i) the lock up agreements involved only executive officers, directors, affiliates, founders and their family members, and holders of 5% or more of the equity securities of the target company;

(ii) the persons signing lock-up agreements owned less than 100% of the voting equity securities of the target company; and

(iii) votes are solicited from shareholders of the target company who have not signed lock-up agreements and who would otherwise be ineligible to purchase securities under Section 4(2) or 4(6) of the Securities Act or Rule 506 of Regulation D.

In proposing Rule 159, the Commission attempted to draw a circle around the types of persons who could be locked-up prior to the filing of a registration statement without it resulting in a Section 5 violation. Unfortunately, the Commission did not express its views on lock-ups in other contexts such as all-cash mergers or cash tender offers. Rather, the Commission simply asked the question, what should we do about other types of transactions?

Well that has not stopped practitioners from applying the guidance in the Aircraft Carrier to cash tender offers and cash mergers. Of course, in a tender offer there is no vote, so the proxy rules are not implicated. In cash mergers, the parties often look to Rule 14a-2(b)(2) for help — that is the exemption for solicitations of ten persons or less. In registered exchange offers, there is always proposed Rule 159.

But in the Securities Act Reform Release the Commission has replaced old proposed Rule 159 with new proposed Rule 159 which happens to be entirely unrelated to lock-ups. As a result, when the swift boat sails over the finish line it is likely that old proposed Rule 159 will be lost in the sea of SOX legislation and rulemaking. Which makes it an excellent time to review where the line is drawn on lock-ups! For more information on this topic you may want to review:

Resales of Stock Acquired in Merger Transactions, by L. Borgogni and J. Moloney, Insights, Vol. 18, No. 2 (Feb. 2004);

SEC Current Issues Outline, Related Public and Private Offerings at Section VIII. A. 9. (Nov. 14, 2000);

– SEC Release No. 33-7606, The Aircraft Carrier, Lock-up Agreements at Section X.C.1.c. (Nov. 3, 1998)

– Metaphysics Status Report, The Corporate Counsel, Vol. XX, No. 2 (March – April 1995).