In yesterday’s WSJ, there was an interesting opinion column from the former Dean of George Mason University, Henry Manne. Henry believes that executive compensation has gotten out of control (he ain’t alone there) – and he believes new SEC Chair Cox should tackle that issue not by disclosure, but by returning to something like the pre-Williams-Act market for corporate control. He believes the market can be relied upon to check pay excesses if there were a greater ability for management teams to be ousted by hostile takeovers. This seems like a variant of the growing majority vote movement.
In this podcast, in light of the fact that more and more accountants are being used to serve as independent arbitrators in post-acquisition disputes, Jeffrey Katz, a director in the BDO Seidman Litigation and Fraud Investigation Practice, provides guidance on how attorneys might pose their arguments based on the accounting principles underlying a transaction, including:
– Why are generally accepted accounting principles (GAAP) so often at the center of post-acquisition disputes?
– What is the key to presenting persuasive evidence to an accounting arbitrator?
– What is the distinction between an arguable position and a position that is compelling to accounting principles?
– How can changes in GAAP be used to plant doubt in the mind of the arbitrator?
Last week, the SEC’s Divisions of Corporation Finance and Market Regulation jointly issued this no-action letter to Axel Springer providing exemptive relief under Rule 14e-5. Axel Springer, a German stock corporation, has made a cash tender offer for another German company.
This letter is notable because it was granted to a company that is not a “foreign private issuer” – which is significant in the world of SEC no-action/exemptive relief in cross-border transactions. There are other notable aspects of the letter that will be addressed in an upcoming podcast with George Casey of Shearman & Sterling.
Here is some nice analysis on MACs from Cliff Neimeth of Greenberg Traurig: Capital One reaffirmed last week its planned business combination with New Orleans, LA-based Hibernia. The original $33 cash and stock transaction received shareholder approval by a whopping 94% of total votes cast at the shareholder meeting in August. The transaction was scheduled to close last week and was delayed because of the Katrina catastrophe. Hibernia’s headquarters (are) in New Orleans.
Reportedly, 33% (or some 107) of Hibernia’s 321 branch banks sustained damage due to Katrina. Many branches remain closed, and of only the 47 that reopened, approximately 20% suffered “significant damage”
While the overall earnings prospects, loan portfolio impact, and potential for capital withdrawals and credit transaction cancellations is still being assesed, Capital One reported that it remains committed to the long-term strategic value of the business combination and the parties have agreed to reprice the transaction at $30.49 per share (in cash and stock). This represents a 7.6% (or $350mm) purchase price reduction from the previously approved deal.
Revised proxy materials will be distributed to shareholders and a new record date for a “revote” has not yet been announced.
A few initial observations from Cliff:
* Capital One’s decision to complete the deal underscores the long-term perspective of a strategic purchaser in a transaction that has been styled to the marketplace and to each shareholder constituency as a true business combination. Thus, the importance of not rushing into a deal (whether it be a straight sale of control or a strategic “Time-Warner”- like combination) without having a very well considered, documented and developed rationale for the transaction that is properly communicated and strategized.
* The fact that the original deal won overwhelming shareholder support certainly was an influential factor in moving forward. (Query whether the considerations would have been different if the vote was at the margins or if the Katrina disaster occurred earlier in the post-sign/pre-close period and, in any case, prior to the shareholder vote?)
* The agreement contained a very “plain vanilla” MAC clause and as most recently confirmed in the IBP (NY law) and Frontier Oil (Delaware law) decisions, short-term “hiccups” in stock price or temporary earnings interruptions will not satisfy a “standard” MAC clause threshold. We’ve seen more fine tuning and negotiation of MAC clauses in public deals post-9/11 and perhaps Katrina will cause some to revisit these provisions in certain circumstances.
* The speed at which the deal price was reset (and the metrics used therefor) is interesting in that the parties admit that, given the magnitude and uncertainty surrounding Katrina, including the availability of insurance, degree of physical asset damage, loss of capital, credit transaction cancellations etc., is reasonably speculative at the present time. Somehow this translated into a very precise $350mm price and valuation impact?
* Will the shareholder approval response be the same (or as overwhelmingly favorable) this time around?
* it’s important to remember that fairness opinions (buy and sale side) speak as of their delivery date (I.e., the date the Board approves and signs up the deal), and unless (in the infrequent case) a reissuance (or true “bringdown”) is requested as a condition to closing, the more usual requirement is that the original opinion shall not have been withdrawn. (Don’t confuse this with republication requirements). Here, the target value certainly was diminished as a result of post-sign (and post-shareholder approval) changed (presumably unforseeable) circumstances outside of the parties’ control.
* Although not applicable in the Capital One-Hibernia transaction because of the unique timing of the events, Katrina disaster generally underscores the importance of the target Board’s ability to withdraw its deal recommendation for reasons unrelated to a “Superior Proposal” if, “upon the advice and after consultation with counsel, the Board in good faith concludes that the failure to do so is [reasonably likely to] [would] result in a violation of the Board’s fiduciary duties under applicable law” (or one of the many permutations of the foregoing that is typically heavily negotiated, including the interplay with bust-up fees).
The Six Flags plot thickens with Wallace R. Weitz & Company filing a Schedule 13D on September 6th addressing, among other things, (a) an increase in its Six Flags ownership of common stock to 10.6% and (b) the possibility of conferring with Six Flags’ management, other shareholders and third parties in connection with its investment. In addition, on September 9th, Six Flags filed a revised preliminary consent revocation statement that included this possible Red Zone poker tell (Red Zone is the Washington Redskin owner, Dan Snyder’s investment vehicle):
“On August 25, 2005, the Company received notification from the Federal Trade Commission (the “FTC”) that it had received a Notification and Report Form which indicates that Red Zone intends to acquire certain voting securities issued by Six Flags. On September 6, 2005, the Company filed a Premerger Notification and Report form with the FTC and the Antitrust Division of the Department of Justice.”
The only question that may exist right now may be the strength of the “flush” that Dan Snyder is seeking.
From the FASB: The FASB and the IASB will hold public roundtable discussions with respondents to their June 30, 2005 Exposure Drafts, Business Combinations, and Consolidated Financial Statements, Including Accounting and Reporting of Noncontrolling Interests in Subsidiaries. Those discussions are scheduled for Thursday, October 27, 2005, in Norwalk, Connecticut, and Wednesday, November 9, 2005, in London, England. All FASB members and certain IASB Board members are expected to participate in the Norwalk roundtables. All IASB members and certain FASB members are expected to participate in the London roundtables.
Individuals or organizations interested in participating in the roundtable discussions should submit a request to participate via email to firstname.lastname@example.org by September 15, 2005. That request must specify the date and location of the preferred roundtable and the name, title, affiliation, telephone number, and email address of the individual that will participate. Due to space limitations, participation is limited to one individual per organization. Organizations wishing to participate in both roundtables may request to do so and, depending on space availability, may be invited to participate in both discussions.
Individuals and organizations that want to participate in the roundtable discussions are required to submit their comment letter on the Exposure Drafts or a summary of key issues that will be raised in their comment letter by September 23, 2005. We will use the draft comments and summaries solely for the purposes of the roundtable and selecting participants.
The FASB will notify individuals about their selection status by September 30, 2005.