Check out this controversial tidbit from a recent Broc’s Blog (in www.thecorporatecounsel.net) , which is still timely if not scary.
Is the SEC trying to tell us to start filing our (otherwise confidential) acquisition agreement disclosure schedules to keep reps from being misleading? Should we start adding disclaimers to the content of exhibits (or items incorporated by reference) to SEC filings? At the very least, Titan’s otherwise well-intentioned and time-honored efforts to be complete turned into a man-bites-dog nightmare. Check out Titan’s Section 21 Report and various law firm memoranda at www. DealLawyers.com’s practice area “Disclosure.”
Implications of SEC’s Action Against Titan on Mergers
On Wednesday [March 1], the SEC announced a settled enforcement action against Titan Corporation alleging Foreign Corrupt Practices Act violations for funneling approximately $2 million towards the election campaign of Benin’s then-incumbent President. The amount of this settlement – $15.5 million in disgorgement and prejudgment interest and a $13 million penalty – is the highest ever paid for FCPA violations.
However, the most significant aspect of this proceeding is a Section 21(a) Report of Investigation that asserts that representations in an agreement filed as an exhibit can be actionable by the SEC if they are materially false. This assertion relates to a FCPA representation made by Titan in a Merger Agreement with Lockheed Martin (my alma mater!), which was also publicly disclosed in Titan’s proxy statement (since the Merger Agreement was in the proxy statement). It is noteworthy that the Report does not allege a violation by Titan of Sections 10(b) or 14(a) – or Rules 10b-5 and 14a-9 – and that the SEC has not charged Titan with such violations.
The Report recognizes that Titan shareholders were not beneficiaries of the FCPA Representation in the Merger Agreement, but states that the inclusion of the Representation in a disclosure document filed with the SEC, “whether by incorporation by reference or other inclusion, constitutes a disclosure to investors.” The Report goes on to say that disclosures regarding material contractual terms such as representations may be actionable by the Commission. The Commission will consider bringing an enforcement action if it determines that “the subject matter of representations or other contractual provisions is materially misleading to shareholders because material facts necessary to make that disclosure not misleading are omitted.”
Smoking guns emails are nothing new but recent developments are enough to make even prolific emailers want to reach for their spy kits with the disappearing ink.
First, there’s Boeing’s CEO whose brief tenure at the helm was cut short by smoking (and I guess the content was really smokin’) gun emails to his Boeing colleague/paramour. OK, you say, what the heck does this have to do with deal making? Nothing but I couldn’t resist.
One email-bites-man development does involve law and deals. In a suit filed by financier Ronald Perelman against Morgan Stanley, the Florida court last week took the unusual step of shifting the burden of proof to the defendant, Morgan Stanley, to prove to a jury that it didn’t help Sunbeam defraud Perelman. Apparently, the court was PO’ed about MS’s lack of internal controls in producing emails requested in discovery. The judge describes MS’s failures as “gross abuse” of its discovery obligations. As such, the judge decided to level the playing field by shifting the burden of proof.
Ouch! Just two reminders to us all that emails do bounce back – sometimes in your face.
It’s enough to make you wonder why anyone would send emails. Come to thing of it, why would anyone blog? Oops time to stop…
On Friday, March 4, 2005, the Federal Trade Commission filed a motion for declaratory relief and for a temporary restraining order (TRO), seeking to prevent Blockbuster from being able to consummate its tender offer for the shares of its rival, Hollywood Video. The FTC contends that Blockbuster failed to comply with the terms of the FTC’s Request for Information (called a “Second Request”) in connection with the antitrust agency’s investigation into the proposed Blockbuster/Hollywood Video transaction. Viewed in isolation the request for a TRO seems very technical and therefore unimportant, but in effect, the request is quite extraordinary. See
First some background. In connection with every merger investigation, the FTC and Department of Justice (DOJ) have concurrent jurisdiction to review and challenge a transaction. Each agency has particular market expertise, and takes the responsibility for reviewing transactions in its designated industries. The FTC always takes the lead in reviewing transactions in the consumer goods and electronics industries; thus, the FTC was tasked with reviewing the Blockbuster hostile tender.
After its initial review of the transaction, the FTC concluded that questions remained regarding whether the Blockbuster/Hollywood transaction would harm consumers, and the agency issued a Second Request. The Second Request subpoena ostensibly demands nearly all of the documents created by a company over a period of years preceding the transaction (usually 3 – 5 years), and also requires parties to provide detailed pricing, discounting, and costing information. In this particular Second Request, we learn from the FTC’s March 4, 2005 complaint that the agency demanded information from Blockbuster relating to its pricing, specifically with regard to store-by-store rental fee information, so that the agency could conduct an economic analysis to determine who competes for Blockbuster business.
Blockbuster “complied” with the terms of the Second Request in early February 2005. In late February, the FTC realized that the detailed pricing information provided by the company was in large part incorrect. According to the FTC complaint, Blockbuster acknowledged and corrected the deficiencies, subsequently submitting correct information sometime later that month.
The FTC is on a tight time clock to complete its review of a transaction after the parties comply with the terms of a Second Request. Here, Blockbuster certified its compliance in early February, and under the HSR Act, the FTC has only 30 days from the time of that certification to approve or challenge the deal. Thus, without a decision to challenge the proposed tender by early March, Blockbuster technically would be able to close its tender for the shares of Hollywood, without further interference from the FTC. The FTC’s motion for a TRO claims that Blockbuster, however, failed to comply with the terms of the Second Request because it provided faulty pricing data. As a result, the FTC demanded from the court an order stating that Blockbuster’s 30-day clock had not yet started to tick and prohibiting the company from consummating its tender offer until such time did lapse, giving the agency precious additional time to complete its review of the transaction.
This request is quite extraordinary for antitrust practitioners. There have only been two other cases in the last 25 years where there has been a court dispute over whether a party has complied with the terms of the Second Request or not (FTC v. McCormick in 1988 and FTC v. Dana Corp. in 1981). Generally, parties prefer to resolve these compliance disputes informally—usually by reaching some sort of “timing agreement” with the agencies that allow them more than the statutorily provided 30 days to complete their antitrust review, in exchange for an agreement with the agency reviewing the deal not to challenge in court the parties’ compliance with the Second Request. For whatever reason—here, we can only speculate—Blockbuster and the FTC could not reach an agreement as to timing and this dispute proceeded to court.
Why do I think this ended up in court? Glad you asked. With no special inside information, it seems to me that Blockbuster is marching forward with its transaction, and does not care whether it resolves the FTC’s antitrust concerns at the agency level or in court. It appears that Blockbuster has concluded that the FTC will challenge the transaction regardless of how accommodating the company is with regard to timing or other FTC requests, and has decided not to give another inch to the FTC. I can fathom that the FTC has provided some indication of serious concern regarding the transaction to Blockbuster, and has at least informed them of the possibility that the agency will sue to block the transaction, and Blockbuster is resigned to fighting this challenge in court. We shall see. If this deal ends up in court, as I discussed in my last posting, there are extremely interesting questions of market definition and antitrust harm that no doubt a court and the FTC will have to carefully consider.
Has Sarbanes-Oxley increased your company’s or client’s compliance costs significantly (internal and disclosure controls come to mind)? Is management’s time being diverted from operations to ensure such compliance? As some of you may know, there is a “switch” available for companies meeting certain specific SEC requirements that can, in effect, turn off and effectively eliminate these compliance burdens.
For those of you who have not had a chance to read yesterday’s Wall Street Journal Article on Going Dark, a growing number of smaller companies are flipping the compliance switch off by voluntarily delisting from their exchange or market and deregistering their securities from the reporting requirements of the SEC (even though companies would no longer be required to file quarterly and annual reports, certain companies continue to post such results on their websites). Since the beginning of 2004, companies such as Anacomp, Inc., Coast Dental Services, Inc., Kyzen Corp., Quality Products, Inc. and Sport Supply Group, Inc. (to name just a few) have flipped the switch and gone dark even though they are still publicly held. The benefits of “going dark” are that it does not require shareholder approval and it is a swift, simple and relatively inexpensive alternative to engaging in a going private transaction. In addition, companies that go dark are still eligible to have their securities quoted on the pink sheets. Of course, the process of “going dark” requires satisfaction of certain SEC requirements and is not a “one size fits all” solution. A company’s board of directors will therefore need to weigh the costs and benefits of delisting and deregistering prior to making a decision to go dark.
It should be noted that the going dark process is not without its opponents. For example, the Nelson Law Firm LLC, acting on behalf of certain institutional investors, filed a Petition in 2003 (which is currently pending with the SEC), requesting that the SEC amend Rule 12g5-1 under the Exchange Act to include securities held by a beneficial owner in “street name” as securities “held of record.” This change would, in effect, make it less likely that a company would satisfy the record holder conditions of Rule 12h-3 under the Exchange Act in order to go dark. Thus far, the SEC has not acted on this Petition and the switch to go dark currently remains a viable alternative for some companies who satisfy the criteria. By way of background, Rule 12h-3, upon satisfaction of certain other requirements, permits suspension of the duty to file reports under Section 15(d) of the Exchange Act for a class of securities held of record by (i) less than 300 persons, or (ii) less than 500 persons, where the total assets of the issuer have not exceeded $10,000,000 on the last day of each of the issuer’s three most recent fiscal years.
A big thank you to Arash Mostafavipour for en”light”ening us on this often overlooked alternative to going private.