With Goldman Sachs canceling its much-anticipated SPACs offering – through Liberty Lane – it looks like the bloom may be off the SPACs, rose (see this WSJ article from yesterday). Today’s WSJ has an article which offers this analysis:
The failure of Goldman Sachs Group Inc.’s first SPAC offering this week has sparked a debate over what brought the deal down and whether any structural changes within the industry could revive this segment of the IPO market.
Expectations for a successful offering had been raised the moment Liberty Lane Acquisition Corp. filed its initial public offering prospectus with the Securities and Exchange Commission in March. As a special purpose acquisition company, or SPAC, Liberty Lane’s offering followed a familiar format: The company began life as an empty shell and planned to raise money through an IPO to finance the acquisition of an operating business within two years, or investors would get their money back.
But alterations to the traditional SPAC structure made this deal a departure from the norm — one that Goldman hoped would draw in a stable base of investors and make potential acquisition targets more amenable to a takeover.
Instead, after two weeks of trying to price, Liberty Lane threw in the towel Wednesday, saying it had decided not to go ahead with the IPO for now. (See related Breakingviews commentary.)
‘State of the Market’
“My personal view is it was probably more the state of the market than the structure of the deal” that stymied Liberty Lane’s launch, said Michael Littenberg, an attorney who works on SPACs for Schulte Roth & Zabel LLP. “This has not been one of the most robust periods for capital markets.”
After a banner year in 2007, in which nearly a quarter of all completed IPOs in the U.S. were SPACs, the demand for these deals in 2008 withered along with the broader IPO market.
Others say Liberty Lane’s altered structure wasn’t appealing enough to investors. The changes Goldman made were aimed at reducing the dilution that SPAC investors and acquisition targets face due to the large amount of stock normally held by most SPAC management teams. But at the same time, it cut the stake that management took in the company, reduced the percentage of investors’ money kept in trust, and trimmed the amount of stock warrants available to investors.
“Obviously, we all know that SPACs in general have not been doing well, but they have had dips before,” says Kristin Angelino, an attorney who represents SPAC issuers and underwriters at Gersten Savage LLP. “If Goldman’s IPO didn’t have such a weak structure, I might say that this reflects a worsening of the market for SPACs.”
Through the new structure, Goldman was intent on placing Liberty Lane’s shares with “fundamental” investors, such as mutual funds, rather than marketing the deal to the typical SPAC buyers, which are hedge funds. Hedge funds in the past have gravitated to SPACs because the deals are sold as a stock-and-warrant unit that eventually splits, with some funds selling off the warrant portion and others purchasing only the warrants, depending on their investment strategies.
Underwriters and SPAC management have long wanted to shift ownership of the deals toward fundamental buyers who would stick with the SPAC throughout its lifespan and be more likely to approve an acquisition than hedge funds, which sometimes vote a deal down as part of their investment strategy. But fundamental buyers didn’t line up as expected.
Coincidentally, as Goldman’s deal was floundering last week, Citigroup Inc. filed an amendment to a SPAC it is underwriting that alters the structure in a different manner than Liberty Lane.
The Citigroup deal, HCM Acquisition Co., splits each IPO unit into two parts: One that contains 80% of a share of stock, another that contains 20% of a share of stock and a warrant that is nondetachable until the day after a business combination is approved. If a deal is voted down, the warrants expire worthless.
By binding the warrant to a portion of stock until an acquisition is completed, HCM is effectively giving warrant holders the ability and incentive to approve a deal. To give HCM a further edge in closing a deal, the company will still go ahead with an acquisition even if up to 40% of the shareholders vote it down – a higher bar than the typical 20% no-vote norm in the SPAC world.
How Companies Can Foil Their Activist Shareholders
I drafted this a while back but forgot to post it – more Tulane Institute notes from the WSJ’s Deal Journal:
The promisingly named “Barbarians at the Ballot-Box” panel here at the Tulane University Corporate Law Institute didn’t disappoint: it was full of good stories and disagreement among the panel members, who included Mackenzie Partners CEO Daniel Burch, PR maven Joele Frank, Roy Katzovicz, general counsel at the hedge fund Pershing Square, and Institutional Shareholders Services executive Chris Young.
The panelists don’t exactly come to blows. Still, it is clear Katzovicz and Young will have to take a lot of heat for the frustrations of people who have problems with activist investors. Katzovizc says hedge funds would rather not wage proxy fights and fight for board seats– they would rather focus solely on profitable investing.
Then quickly the panel seems to shift in to “Dear Abby” mode, advising on how to fight off shareholder activists. Here is a look at some of their advice.
Staggered Boards Don’t Work: It turns out that some of the things that companies think protect them from attacks by activists don’t work. Katzovicz, for instance, disputes that staggered boards–where directors are elected in different years, rather than all at once–help fend off activists. Instead, he says, they make his job much easier.
Don’t Be Snotty to Your Activist: Frank warned people to pick up the phone very carefully when they see calls from the (203) area code in Greenwich, in hedge-fund heavy Connecticut, because whatever you say to an activist can and will be used against you in a 13D filing to the SEC. The panelists discuss the sad cautionary tale of Embarcadero Technologies, whose chief financial officer once said to activist Robert Chapman, “F*** You!” That gave Chapman a chance to get justifiably huffy that it was “inappropriate and inadvisable” to use such “blasphemy” to a shareholder who owns 9.3% of your company. We quibble with Chapman’s choice of words — a blasphemy is only when you are insulting a deity –but the point is a good one. Young, of ISS, recounts what he considers a horror story of an unresponsive company: one which wouldn’t even meet with T. Rowe Price. “This isn’t an activist! It’s T. Rowe Price!” he said with wonder.
Do Lots of Hand-Holding: Frank advocated keeping good relationships with the media and guiding CEOs through the process. “Most CEOs aren’t used to opposition,” Frank says. She also advocated a quick response to activists: call them early and often. This can apparently diffuse the activist. Katzovicz recalled a story in which Carl Icahn was on the brink of going on the attack at a company he had invested in. He met with the firm’s executives, who told him, “Carl, whatever it is you want, we’ll do it.” Icahn sold all of shares and left the company alone. Kim Rucker talks about the “headline pressure” as executives face the dread of seeing themselves in the paper every morning. That, and exhaustion, can take a toll on management’s decision making, she and Frank agreed.
Accept that You Can’t Control Your Proxy Firm: Frank, who does a lot of hostile defense work, launched this attack toward the end of the panel: “I believe ISS has never seen a slate it doesn’t like from activists. Frank asked with some annoyance if ISS ever goes against an activist slate in toto. Young said the proxy firm does, about 30% of the time. The question to ask, he suggested, isn’t what ISS approves but why activists are getting traction with shareholders. He noted that a few years ago, the directors suggested by hedge funds were the hedge-fund manager and four of his fraternity brothers who worked for him. The activists have wised up since then and suggested better directors, he said. Rather than saying that ISS tends to approve the majority of hedge fund director suggestions, he instead pointed out that ISS discards some of the activists’ suggestions.
Don’t Get too Comfortable: Burch noted that long-term investors won’t necessarily support what you do against activists. Rucker said that if boards and companies are doing the right things and doing their jobs, they can survive all that.
– What is a “sovereign wealth fund”?
– How are they working with activist investors, particularly in a post-Dubai Ports World politically charged environment?
– What about sovereign wealth fund as activists themselves?
– What are regulators in Washington doing regarding sovereign wealth funds?
– M&A Targets Today: Seeking Deal Certainty in an Uncertain Environment
– How to Negotiate an M&A Engagement Letter with Your Investment Banker
– Structuring Portfolio Companies: Director Independence
– Ten Practice Tips for Negotiating the Letter of Intent
– How to Do a Deal Without Shareholder Approval: The “Financial Viability Exception”
– A Moment of Clarity: How to Avoid Ambiguities in Your Advance Notice Bylaws
Try a no-risk trial to get a non-blurred version of this issue for free.
Last week, in this order, the SEC approved the NYSE’s rule changes to make it easier for SPACs to be listed on the exchange. In addition to SPAC listings, the rule changes will impact reverse mergers. It is expected that the Nasdaq’s SPAC proposals will be approved soon too.
Advance Notice Bylaws: Delaware Supreme Court Affirms Jana Partners
Yesterday, the Delaware Supreme Court issued this Order affirming the decision of the Court of Chancery in the CNET/Jana matter.
Recently, I received a question about an old blog about how officers and directors are not considered passive under Rule 13d. Jim Moloney of Gibson Dunn notes that one thing that he and another lawyer at the firm didn’t cover back in that old blog was the SEC Staff’s informal position that if a 13(d) reporting person starts out reporting on Schedule 13D (because they are not eligible to report on Schedule 13G initially), then they can’t later move over to a Schedule 13G in reliance on one of the other categories permitting reporting on Schedule 13G (i.e., Rule 13d-1(b), (c) or (d)) unless such person was initially eligible to report on Schedule 13G and simply filed on 13D voluntarily.
In the opposite situation, where a reporting person starts out reporting on a Schedule 13G, then loses his or her 13G eligiblity because the person is no longer “passive” for example, that person would need to amend onto 13D and stay there until such time as 13G eligibility is re-established (e.g., the reporting person becomes “passive” again). At that time, the reporting person could move back to reporting on Schedule 13G again.
So the bottom line is that a person can “re-establish” 13G eligibility and move back to reporting on Schedule 13G, but if the person was never eligible in the first place, and filed an initial 13D, that person can not later move onto 13G simply because they become eligible to report on that form. They would need to sell their position down, below 5%, and then purchase shares crossing the 5% along with the requisite 13G eligibility criteria satisfied and could then file an initial report on Schedule 13G. See Rule 13d-1(h) and footnote 23 and accompanying text in the SEC’s 1998 Adopting Release on 13D/G (adopting Rule 13d-1(c)).
JPMorgan Chase/Bear Stearns: Splicing the Delaware Issues
Yesterday, the SEC posted its 194-page proposing release related to the amendments to the cross-border rules, the first proposed changes to the rules since they were initially adopted in 1999. A departure from recent practice, these proposals were approved by the Commission seriatim rather than in an open Commission meeting.
The proposing release includes many proposed rule changes that would codify existing Staff interpretive positions and exemptive orders – although there are some areas that are proposed to change – as well as some Staff interpretive guidance that the SEC seeks comment on. The SEC’s proposals include:
1. Refinement of the tests for calculating U.S. ownership of the target company for purposes of determining eligibility to rely on the cross-border exemptions in both negotiated and hostile transactions, including changes to:
– Use the date of public announcement of the business combination as the reference point for calculating U.S. ownership;
– Permit the offeror to calculate U.S. ownership as of a date within a 60 day range before announcement;
– Specify when the offeror has reason to know certain information about U.S. ownership that may affect its ability to rely on the presumption of eligibility in non-negotiated tender offers;
2. Expanding relief under Tier I for affiliated transactions subject to Rule 13e-3 for transaction structures not covered under our current cross-border exemptions, such as schemes of arrangement, cash mergers, or compulsory acquisitions for cash;
3. Extending the specific relief afforded under Tier II to tender offers not subject to Sections 13(e) or 14(d) of the Exchange Act;
4. Expanding the relief afforded under Tier II in several ways to eliminate recurring conflicts between U.S. and foreign law and practice, including:
– Allowing more than one offer to be made abroad in conjunction with a U.S. offer;
– Permitting bidders to include foreign security holders in the U.S. offer and U.S. holders in the foreign offer(s);
– Allowing bidders to suspend back-end withdrawal rights while tendered securities are counted;
– Allowing subsequent offering periods to extend beyond 20 U.S. business days;
– Allowing securities tendered during the subsequent offering period to be purchased within 14 business days from the date of tender;
– Allowing bidders to pay interest on securities tendered during a subsequent offering period;
– Allowing separate offset and proration pools for securities tendered during the initial and subsequent offering periods;
5. Codifying existing exemptive orders with respect to the application of Rule 14e-5 for Tier II tender offers;
6. Expanding the availability of early commencement to offers not subject to Section 13(e) or 14(d) of the Exchange Act;
7. Requiring that all Form CBs and the Form F-Xs that accompany them be filed electronically;
8. Modifying the cover pages of certain tender offer schedules and registration statements to list any cross-border exemptions relied upon in conducting the relevant transactions; and
9. Permitting foreign institutions to report on Schedule 13G to the same extent as their U.S. counterparts, without individual no-action relief.
In addition to those proposed rule changes, the Corp Fin Staff provides interpretive guidance or solicit commenters’ views on the following issues:
1. The ability of bidders to terminate an initial offering period or any voluntary extension of that period before a scheduled expiration date;
2. The ability of bidders in tender offers to waive or reduce the minimum tender condition without providing withdrawal rights;
3. The application of the all-holders provisions of our tender offer rules to foreign target security holders;
4. The ability of bidders to exclude U.S. target security holders in cross-border tender offers; and
5. The ability of bidders to use the vendor placement procedure for exchange offers subject to Section 13(e) or 14(d) of the Exchange Act.
If you’re wondering if the lack of an open Commission meeting means that this rulemaking is less important to the SEC, the answer would be “no.” Until a few Chairman ago, most rulemakings were approved seriatim and only the ones that the SEC wanted to get the attention of the mass media were approved at an open meeting. “Seriatim” simply means that each Commissioner signs an order indicating whether they vote in favor of a particular proposing or adopting release.
That trend started to change when Harvey Pitt became Chair (remember all that SOX-forced rulemaking) and it is my hunch that since the open meetings are more “open” now due to the Web, that trend has continued to today. Plus, the SEC likes the publicity. But it’s a production to hold an open meeting, so some rulemakings have to go seriatim to keep the rulemaking machine humming.
Join us tomorrow for the webcast – “2008: The Year of the Hedge Fund Activist” – to learn about the latest strategies and tactics used by hedge fund activists, as well as latest planning tips employed by those that seek to stave off these attacks. The panel includes:
– David Katz, Partner, Wachtell Lipton Rosen & Katz
– Ron Orol, Senior Writer, The Deal and The Daily Deal
– Damien Park, President & CEO, Hedge Fund Solutions, LLC
– Veronica Rendon, Partner, Arnold & Porter LLP
– Professor Randall Thomas, Vanderbilt University Law School
– Christopher Young, Director of M&A Research, RiskMetrics Group
The Death of Contract?
And warm up for Professor Steven Davidoff’s performance in next week’s webcast – “JPMorgan Chase/Bear Stearns: Splicing the Delaware Issues” – (which has been rescheduled to Wednesday, May 14th) by reading Steve’s blog on the NY Time’s DealBook regarding how Bank of America is likely to renegotiate its contract to buy Countrywide. The comments posted about Steve’s analysis are fairly insightful too.
A few months ago, in the wake of the Department of Justice’s inquiry into alleged anti-competitive behavior among private equity firms, a handful of class actions have been filed alleging collusion among private equity firms (here is an example of a complaint from a Massachusetts lawsuit). These complaints generally alleged a conspiracy among private equity firms to rig bids or otherwise collude to suppress the prices paid in going-private transactions.
On February 21st, in what appears to be the first decision to address these issues, a district court dismissed an action – Pennsylvania Avenue Funds v. Edward J. Borey (W.D. Wash) – against two private equity firms that had joined forces in a bidding contest, concluding that the facts alleged did not establish a violation of the Sherman Act. We have posted a bunch of memos analyzing this decision in our “Antitrust” Practice Area.
The Williams Act – 40 Years Later!
On May 21st and 22nd, Georgetown University Law Center will be hosting a conference to commemorate the 40th anniversary of the adoption of the Williams Act takeover regulations. The speakers and panelists will include members of the SEC staff, academics, financial journalists, international takeover regulators, practitioners, bankers, and Delaware judges. It’s free – but you still need to register (here is the agenda). If you have questions, contact Larry Center at email@example.com.
Earlier that week, the SEC’s Division of Corporation Finance will be hosting a meeting of international takeover regulators at the Commission’s headquarters – so representatives from the U.K., Germany, France, Hong Kong, Australia and Japan will be at the conference, lunch and reception if you want to rub elbows with folks from other regulators.
Many thanks to Broc for inviting me to join the blog. I thought I’d use my first post to flag a new case out of Delaware – from the Superior Court, not the Court of Chancery.
In Transched Systems Ltd. v. Versyss Transit Solutions, LLC, 2008 WL 948307 (Del. Super. Ct. Apr. 2, 2008), the court dismissed negligent misrepresentation claims allegedly made by a seller while negotiating an asset purchase agreement. The court had no trouble dismissing the claim in light of the contract’s exclusive remedy provision:
The foregoing indemnification provisions shall constitute the sole and exclusive remedy for monetary damages in respect of any breach of or default under this Agreement by any Party and each Party hereby waives and releases any and all statutory, equitable, or common law remedy for monetary damages any Party may have in respect of any breach of or default under this Agreement.
The court also relied on an integration clause and the following extra-contractual disclaimer:
Except as expressly set forth [herein], Sellers make no representation or warranty, express or implied, at law or in equity, in respect of any of its assets (including, without limitation, the Acquired Assets), or operations, including, without limitation, with respect to the merchantability or fitness for any particular purpose. Buyer hereby acknowledges and agrees that, except to the extent specifically set forth [herein], Buyer is purchasing the Acquired Assets “as-is, where-is.” Without limiting the generality of the foregoing, Seller makes no representation or warranty regarding any assets other than the Acquired Assets or any liabilities other than the Assumed Liabilities, and none shall be implied at law or in equity.
This case is one of many Delaware decisions blessing specific contract language that can limit a party’s remedies to indemnification (except for fraud). It’s also a good reminder for buyers and sellers of the significance of extra-contractual disclaimers.
In yesterday’s fee rate advisory, the SEC announced that filing fees will be going up after October 1st (or whenever Congress approves the SEC’s budget, which historically is significantly later than October 1st) to $55.80 per million from $39.30 per million of securities registered with the SEC.
This is a 42% hike, after a 28% hike last year. Before this period, there had not been a hike for quite some time. Note that there is no mention in the SEC’s press release of a reason for the hike. Actually, the press release doesn’t even mention that this is a hike from last year (but we still remember how Chairman Cox was quite proud of the steep drop in ’06, with a lot of fanfare in that press release). You may recall that the SEC’s fee rates aren’t related to the amount of funding available to the SEC; instead, the money goes to the US Treasury.
Coming Soon: SEC’s Proposal on Cross-Border Rules
I wonder who put the SEC’s Office of Public Affairs up to issuing this odd press release Tuesday to announce that Corp Fin has made its recommendations to the Commission regarding proposals on the cross-border tender, exchange offer and business combination rules? That’s a new one – and I doubt we shall see a press release each time a rulemaking is sent to the 10th floor for consideration.