Monthly Archives: June 2006

June 27, 2006

Risk Factors: Contingent Financial Advisory Fees and Prior/Potential Future Relationships of Fairness Opinion Providers

It’s likely that the SEC Staff is issuing some comments suggesting – or insisting – on the inclusion of a risk factor regarding contingent financial advisory fees and prior/potential future relationships of fairness opinion providers.

For example, below is a risk factor from page 22 of the joint proxy/prospectus relating to the acquisition of Albertsons by a consortium led by Supervalu (Albertsons also received a fairness opinion from Houlihan Lokey whose fees were not contingent on the outcome of the transaction):

“Some of the financial advisors to Albertsons and Supervalu have had prior business relationships with one or more of the parties to the transactions and are entitled to contingent fees in connection with the transactions.

Albertsons’ fee arrangements with Goldman Sachs and Blackstone, and Supervalu’s fee arrangements with Lazard, are structured so that certain fees are paid only if certain transactions are completed. The aggregate transaction fee payable by Albertsons to each of Goldman Sachs and Blackstone, the principal portion of which will only be payable upon completion of the transactions contemplated by the merger agreement, is currently estimated to be approximately $24.1 million. Similarly, under the terms of Supervalu’s engagement letter with Lazard, $15.5 million of consideration will be payable to Lazard only at the effective time of the Supervalu merger.

In addition to these contingent fee arrangements, Goldman Sachs has previously provided investment banking services to each of the parties to the transactions and/or their affiliates from time to time. These past services include, among others, acting as a participant in revolving credit facilities of Albertsons and Supervalu and providing financial advisory services to CVS and certain of Cerberus’s affiliates in connection with past acquisitions. Similarly, in the past Lazard has provided investment banking services to Supervalu for which it has received customary fees.

In addition, all of the financial advisors may provide services to the parties to the transactions in the future. For a more detailed description of the fee arrangements and past relationships of the financial advisors, see “Opinion of Albertsons’ Financial Advisors—Opinion of Goldman Sachs” beginning on page 56, “Opinion of Albertsons’ Financial Advisors—Opinion of Blackstone” beginning on page 58, and “Opinion of Supervalu’s Financial Advisor” beginning on page 77.”

June 26, 2006

Cross-Border Acquisitions: A Buyer’s Perspective

The second installment of our M&A Boot Camp for this summer is now available: “Cross-Border Acquisitions: A Buyer’s Perspective.” Join Elizabeth (“Libby”) Kitslaar and Phil Stamatakos of Jones Day as they walk us through the special issues that you will face in a cross-border deal.

If you are not a member, try a no-risk trial as we just launched our half-price “Rest of 2006” rate – believe it or not, a license for a single user is only $100 and there are similar reduced rates for offices with more than one user!

June 21, 2006

FTC and DOJ’s New E-Filing System for HSR Premerger Notification Submissions

Yesterday, the FTC and DOJ announced that they are implementing an electronic filing system that will allow the ultimate parent entities of the acquiring and acquired persons to submit premerger notification filings required by the Hart-Scott-Rodino Act online. This should substantially improve the filing process by eliminating the time and expense of duplicating and submitting hard copies of the forms and attachments required to be filed under the HSR Act and related rules.

Under the new system, filers will have three filing options:

1. complete and submit the Form and all attachments in hard copy;
2. complete the electronic version of the Form and submit the Form and all attachments electronically; or
3. complete the electronic version of the Form and submit it electronically while submitting all attachments in paper.

June 20, 2006

Meeting Notes: The SEC’s Chief of M&A Speaks

Last Friday, Brian Breheny, Chief of Corp Fin’s Office of Mergers and Acquisitions was the guest speaker at a meeting of the Association of the Bar of the City of New York Special Committee on Mergers, Acquisitions and Corporate Control Contests. Brian discussed a number of topics of interest; following is a brief summary of those issues (as is always the case, Brian noted that his views were his own views and not the views of the Commission or his fellow staff members):

1. SEC proposed amendments to the tender offer best-price rule:

– the amendments to the tender offer best-price rule remain the office’s top priority;
– it is unclear as to when the Commission may adopt the final rule amendments, although Brian thought it was possible that the amendments might be adopted this year;
– the staff is in the process of considering the comments received to the proposed amendments;
– Brian noted that it is likely that changes will be made before adoption to address some of the comments;
– he noted that expanding the proposed compensation exemption and compensation committee safe harbor to issuer tender offers was uniformly recommended and that he thought those changes would be consistent with the Commission’s intention for proposing the amendments;
– he also noted, however, that certain of the other proposed changes, such as providing a carve out from the best-price rule for commercial arrangements or a de minimus ownership exemption, were given serious consideration during the proposing stage; and
– finally, Brian noted that he was keenly aware of the concerns raised by commentators about the need for the changes to result in an effective exemption and safe harbor.

2. Study of the cross-border tender offer rules:

– the office of mergers and acquisition continues to study whether recommendations should be made to the Commission to change certain of the cross-border tender offer rules;
– the data provided by bidders to date is that certain of the rules, such as the 30-day look back to determine share ownership levels, are difficult to comply with; and
– the office and, for purposes of Rule 14e-5, the staff of the Division of Market Regulation, is considering whether certain consistent relief granted since the adoption of the cross-border rules could be handled in a global exemptive order.

3. NASD proposed fairness opinion disclosure and policy/procedure rules:

– the staff of the office of mergers and acquisitions and the Division of Market Regulation is considering the comments received by the Commission to the NASD’s proposed Rule 2290;
– the comment period closed in May 2006;
– 7 comments were received;
– certain language changes to the proposed rules may be necessary to address potential inconsistencies in the proposed language of the rule; and
– the ABCNY Committee reiterated concerns regarding requirement for policy/procedure re: differential compensation to officers, directors and other employees.

4. Section 13(d)/ beneficial ownership reporting compliance:

– the staff continues to view compliance with the beneficial ownership reporting rules as a high priority;
– the staff has heard concerns that hedge funds and/or others may knowingly be crossing the line and acting in concert pursuant to an agreement or arrangement without filing a Schedule 13D to reflect the Group’s beneficial ownership and plans, etc.; and
– the staff will aggressively pursue willful violations of Section 13(d) if it becomes a aware of such conduct.

5. Fairness opinion disclosure:

– there may be a need to revisit the disclosure practices related to fairness opinions;
– the ABCNY Committee questioned the staff policy related to including a risk factor regarding contingent financial advisory fees and requesting (in a non Rule 13e-3 transaction) that filers provide the staff on a supplemental basis, copies of board materials not referenced in background section of the proxy/registration statement so that the staff could consider the need to refer to just board materials; and
– Brian and the Committee agreed to maintain a dialogue about these issues.

June 19, 2006

Conducting Due Diligence: Through the Eyes of the Associate

The first installment of our M&A Boot Camp for this summer is now available: “Conducting Due Diligence: Through the Eyes of the Associate.” Join Deborah Bentley Herzog and Mike Woodard of McGuire Woods for an entertaining session that teaches the basics of what you need to know about conducting due diligence, with an emphasis on what issues and traps associates should seek to spot and resolve.

If you are not a member, try a no-risk trial as we just launched our half-price “Rest of 2006” rate – believe it or not, a license for a single user is only $100 and there are similar reduced rates for offices with more than one user!

June 16, 2006

Analysis of Cross-Border SEC No-Action Letter

Earlier this week, the SEC’s Divisions of Market Regulation and Corporation Finance issued this no-action response to AstraZeneca in connection with a cross-border merger. As Jim Moloney notes, the relief granted is pretty standard for a U.K. cross-border deal of this kind.

However, the US ownership level in the target is fairly high (43.7%). Not the highest that Jim has seen – the higher the US ownership, the more reluctant the Staff tends to be in granting relief. The relief basically permits the offer to follow U.K. rules and regulations. The offer also contemplates “loan notes” as consideration for non-U.S. holders, which is fairly common as well.

June 14, 2006

Judge Approves Revised News Corp. Investor Accord

From ISS’ Friday Report: “A Delaware judge has approved a revised settlement to resolve a lawsuit by an international coalition of institutional investors over News Corp.’s “poison pill” takeover defense. Delaware Chancery Judge William B. Chandler III asked the parties to revise the settlement’s limits on future lawsuits over takeover defenses after Liberty Media objected to the wording as “overly broad.” The judge approved the revised agreement June 1, Bloomberg News reported.

The suit by the Australian Council of Super Investors, the Connecticut Retirement Plans and Trust Funds, and U.K. and Dutch pension funds claimed that company officers and directors broke a promise made in 2004 when News Corp. sought shareholder approval to reincorporate from Australia to the U.S. Less than a month after the reincorporation vote, the company adopted a poison pill after Liberty disclosed that it had acquired a 17 percent stake. In August 2005, the board extended the pill for another two years without seeking shareholder approval, prompting the institutional investors to sue.

Under the settlement, News Corp. will ask shareholders to vote on a two-year extension of the pill at the company’s annual meeting in October. If shareholders don’t approve the extension, then the company can either let the pill expire or treat the vote as advisory and continue the litigation.”

June 9, 2006

Fewer Companies Maintain Defenses

From the ISS “Corporate Governance Blog“: “For the first time since the mid-1990s, the proliferation of takeover defense features at major U.S. corporations has begun to slow, and several defenses are now in decline, according to a new study by ISS’ Governance Research Service (GRS).

For example, the study found that active “poison pills” are in place at barely more than half of the surveyed companies. Given this trend, maintaining a pill may soon no longer be considered “standard practice,” along with classified board structures.

The 2006 edition of the Corporate Takeover Defenses (CTD) study surveyed corporate control features at 1,925 public firms as of the end of 2005. As in previous years, the biennial analysis finds that the most prevalent defenses remain blank-check preferred stock, advance notice requirements, golden parachutes, classified boards, and poison pills, each of which is found at a majority of the firms tracked.

Remarkably, though, the proportion of companies with an active poison pill or a classified board declined for the first time in many years, along with several other defenses once thought to be impregnable. The proportion of firms with pills (also known as “shareholder rights” plans) dropped from 55.1 percent two years ago to 51.2 percent.

Although shareholder proposals requesting companies to redeem poison pills or put them up for investor approval routinely receive support from a majority of voting shareholders, companies have traditionally been reluctant to comply with such requests. At least 119 of the companies profiled have taken action to eliminate their poison pills in the last five years, however, and others have amended their pills to institute “shareholder friendly” features such as Three-Year Independent Director Evaluation (TIDE) provisions or qualified offer provisions to assuage shareholder antipathy toward those defenses.

Another of the most effective takeover defenses, staggered election of directors, remains the fourth most popular defense, but the prevalence of classified boards also declined for the first time this decade, from 59.7 percent of the companies (as of the 2004 CTD edition) to 56.4 percent. Growing opposition to staggered board elecÂtions by institutional investors has made it more difficult for corporations to justify them, and requests for the repeal of classified board structures continue to be one of the most numerous and most popular shareholder proposals. In 2005, such proposals received support from an average of 63.2 percent of votes cast.

The last few years have seen sizeable jumps in the number of management proposals seeking repeal of staggered board bylaw or charter provisions. Clearly, investor pressure to eliminate this takeover defense is finally driving real change. Nevertheless, many companies continue to enter the public market with staggered boards, which they assert enhances stability and continuity of the board, and these typically require significant effort to declassify. The supermajority vote requirements often needed to repeal or amend classified board provisions–usually 80 percent of outstanding shares–have hindered some companies from eliminating their staggered board structures. All but one of the 22 such proposals voted on in 2003 in the study universe received enough votes to “pass,” however, as did all but four of the 46 proposals in 2004 and three of 45 proposals in 2005.

What’s more, these changes are occurring in a fairly robust mergers and acquisitions market, which began to rise again after 2002. Despite some evidence that growth through mergers often fails to deliver higher returns, acquisitions–both friendly and hostile–remain a key component of many companies’ growth strategies. Institutional activists and value investors continue to utilize shareholder proposals and proxy fights to inspire change at under-performing companies, and recently hedge funds have emerged as new players in instigating governance changes through often hostile advances. Proposed Securities and Exchange Commission rules that would permit companies to post proxy statements on the Internet, rather than requiring them to mail the statement to shareholders, are expected to boost the incidence of proxy fights, since costs to provide proxies would drop for dissidents as well as issuers.

Several other defenses that were popularized in the 1980s continue to lose ground, the study found. The ratio of companies with fair price provisions, for example, peaked at 33.2 percent in 1993, but has continued to fall since and now stands at just 19.2 percent (compared with 19.8 percent at the end of 2003). Similarly, the proportion of companies requiring supermajority vote requirements to approve mergers, which peaked at 18.1 percent in 1993, shrank to 14.9 percent as of 1997. Prevalence of this provision reached 15.5 percent at the end of 2001, but then dropped to 14.6 percent by the end of 2005.

Other Defenses Are Less Common

Meanwhile, the pace at which companies are erecting barriers against proxy contests and enacting rules to maintain tight rein over shareholder meetings has slowed to a crawl. The percentage of companies that have adopted provisions to limit shareholders’ right to call special meetings, which doubled in little more than 10 years, from about 24 percent in 1990 to 49.5 percent as of the end of 2001, stands only slightly higher, at 49.7 percent, as of the end of 2005.

By the same token, the proportion of companies that restrict shareholders’ right to act by written consent in lieu of a special meeting–which increased dramatically from about 35 to nearly 44 percent between 2000 and 2002 and rose another 3 percentage points by 2004–increased just 1.4 percentage points in the last two years to 48.2 percent. Typically, proposals to change these shareholder rights are put forth in bundled resolutions with a merger, reincorporation, or restructuring, which shareholders are more likely to approve than stand-alone restrictive resolutions, so it appears that fewer companies are now requesting these changes.

Another provison that remains on the rise, though its proliferation has slowed, requires shareholders to give advance notice of an intention to present director nominations or other motions from the floor. This feature, virtually unheard of in the early 1990s, has become the second most prevalent defense; nearly 81 percent of firms now have advance notice provisions, up from 77 percent two years ago. As of 1995 (the first year they were tracked), these notice requirements were present at only about 44 percent of the companies examined.

Executive Protections Continue to Spread
Golden parachutes–executive severance arrangements contingent on a change in corporate control–have been a popular management retention tool for many years, and their prevalence increased significantly in the past two years from 73.4 percent to 77.6 percent. The terms of these typically generous severance agreements vary considerably, but most of those packages provide for payments based on three years’ salary and bonus, acceleration of stock options, and sometimes other incentive compensation and extra pension credit. Because most companies now consider golden parachutes to be critical components of compensation packages, and shareholder approval of them is not required, these arrangements have continued to spread. This trend has occurred despite the fact that investor activists concerned about excessive severance payments, sometime dubbed “pay for failure,” have made anti-golden parachute proposals a cornerstone of their proxy season campaigns, with increasing success.

While most companies continue to maintain strong defenses against hostile shareholder action and to guard against perceived unfair and abusive actions by dissident groups, the findings in this year’s study signal that the most potent defenses have peaked for the time being.

Meanwhile, shareholders and activists continue to monitor companies and their boards to ensure that takeover defenses are being utilized properly. In the last few years, shareholder proposals to eliminate classified boards and supermajority vote requirements and to eliminate or allow a shareholder vote on poison pills have garnered average support of more than 50 percent at U.S. companies each year, and the message appears to be finally getting through to corporate management and boards.”

June 7, 2006

NYSE’s Proxy Working Group Recommends Elimination of Broker Voting for Director Elections

Last week, the NYSE’s Proxy Working Group unanimously adopted six recommendations embodied in this Final Report and Recommendations. As I blogged last month, the principal recommendation is the one that would amend the NYSE’s Rule 452 (commonly known as the 10-day broker voting rule) to make director elections a non-routine matter. This means that brokers would no longer be permitted to vote the shares of beneficial owners who do not provide specific voting instructions within 10 days of the close of proxy voting. As many of you know, brokers typically side with the board and management when they vote for directors. Here is a related article from BusinessWeek.

Coupled with hedge fund activism, this could mean that directors who are subject to withheld votes will find it much more difficult to obtain a majority vote. Add in the growing majority vote movement and this is a whole new ballgame folks! It is not hard to find director elections this year where directors received a majority vote- but would not have done so if this rule had been effective.

I predicted as much for the recent Home Depot election. Consider how high the level of withhold votes was there without the extended media and Web campaign that took place at Disney a few years ago. Wake up and smell the coffee Mrs. Bueller, the playing field is shifting all around us! The NYSE wants the SEC to approve the rule change so it can be effective for the 2007 proxy season! Better lock in your favorite proxy solicitor now because demand is gonna be sky high!

Thankfully, the Proxy Working Group rejected the idea of totally eliminating broker voting, recognizing that it plays an important role in allowing companies to achieve a quorum for regular meetings.

The six recommendations from the Proxy Working Group are:

1. The elimination of discretionary broker votes for director elections by amending the NYSE’s Rule 452.

2. The SEC’s review of the OBO-NOBO rule to make it easier for companies to communicate with their street-name shareholders.

3. The NYSE’s engagement of an independent party to analyze and make recommendations to the SEC regarding the structure and amount of fees paid to ADP.

4. The SEC’s study of the role of groups like ISS and Glass Lewis that impact the voting decisions over shares in which they have no ownership and no economic interest. The Proxy Working Group believes that there is the potential for conflicts of interest and/or other issues given the multiple roles that such groups play in the proxy season.

5. The NYSE’s taking a lead role in efforts to educate investors about the proxy voting framework.

6. The NYSE’s monitoring of the impact of amending Rule 452 to make director elections a “non-routine” matter.

The NYSE Staff seeks comments by the end of June – it will share these comments with the SEC. After reviewing these comments, the NYSE Board will consider them and any proposed rule changes will then be filed with the SEC so that the SEC can then directly solicit additional public comment. So for those of you worried about the tight window period for commenting now, recognize that the public will have two opportunities to comment. Lots more to come on these groundbreaking recommendations!

Study on Investor Attitudes

As part of the NYSE’s Proxy Working Group process, they had this Investor Attitudes Study prepared by the Opinion Research Corporation to gain a better understanding of investors’ knowledge of the existing proxy voting process.

No surprise that the study results show that investors generally are confused about proxy mechanics since so few of us professionals fully understand how it all works. In fact, I was floored that 25% of the respondents understood that their brokers get to vote in their place if they didn’t respond. My guess is that no more than 5% of shareholders would have understood that…

June 5, 2006

Lies, Damn Lies, and Fraud Claims in M&A Transactions – The ABRY Decision

In this podcast, Todd Lenson and Bruce Schneider of Stroock & Stroock & Lavan provide analysis behind Vice Chancellor Strine’s interesting opinion in ABRY Partners V, L.P. v. F&W Acquisition LLC et. al. (and here is their related article), including :

– What is background of ABRY? What provisions of an agreement are implicated?
– What did Vice Chancellor Strine find in his decision?
– What are the lessons learned for companies?