From a Paul Weiss alert: President Barack Obama has announced his nomination of Christine Varney to serve as assistant attorney general in charge of the Antitrust Division of the Department of Justice. President Obama has promised that his administration will “reinvigorate antitrust enforcement.” What this means as a practical matter remains to be seen. But some broad changes in antitrust enforcement policy – especially in the areas of merger review and civil nonmerger enforcement – can be anticipated under the new administration.
As noted by Cleary Gottlieb: “The year-end purchase of IndyMac by a PE/hedge fund consortium headlined some key elements for failed and troubled bank sales in the coming year, absent a major shift in policy by the Obama administration, including:
– Regulatory flexibility to pre-clear acquirors (through OCC shelf charters or OTS preliminary clearance) as appropriate purchasers of failed institutions.
– Renewed reliance on loss sharing to create appropriate incentives for private-party acquirors to manage assets to a least-cost result.
– Ownership structures that fit PE/hedge fund needs for reasonable liability boundaries and appropriate control levers. A number of workable structures have emerged, including Doral-type consortia, siloed funds, and individual control persons.”
We have posted a number of memos in our “Bank M&A” Practice Area that outline key implications for PE and hedge fund investors thinking about a failed or troubled bank deal.
Close enough to getting them out by the end of the year as promised, Corp Fin issued two sets of new Compliance & Disclosure Interpretations yesterday – a ’33 Act set and a “going private” transaction set.
The ’33 Act set includes new interps as well as revised interps that were published just a few months ago. The going private set is the first update in that area since ’01. The bracketed date following each interp in both sets is the latest date of publication or revision.
This January-February issue of the Deal Lawyers print newsletter was just sent to the printer and includes articles on:
– Time to Install a Pill? Dealing With Rights Plans in a Down Market
– How the New Accounting Standards Will Impact M&A
– Lessons from the Meltdown: MAE Clauses
– Increasing Use of – and Great Opportunities – for Exchange Offers
– Portfolio Company Debt: “Loan to Own” to “Buying Your Own”
– The In-House Perspective: What We Want from Outside Counsel
– A 2008 Review: M&A and Proxy Fights
As all subscriptions are on a calendar-year basis, please renew now to receive this issue. If you’re not yet a subscriber, try a 2009 no-risk trial to get a non-blurred version of this issue for free.
Merrill Lynch’s catastrophic fourth quarter performance and Bank of America’s decision to close the Merrill deal notwithstanding those results have resulted in the filing of a class action lawsuit against Bank of America and certain of its and Merrill’s executives. The complaint alleges that the defendants violated the anti-fraud provisions of the proxy rules by failing “to update, amend or correct the proxy statement to reflect, among other things, the risk or existence of Merrill Lynch’s fourth quarter losses, prior to the December 5, 2008 vote by Bank of America shareholders to approve the Merger.”
The plaintiffs complaint raises a disclosure issue that’s concerned M&A and capital markets lawyers for a long time – when must a company issuing securities or seeking shareholder approval of a deal disclose information in its possession about an incomplete quarter that suggests that results for the quarter are going to be worse than expected?
This is an issue that has been addressed by several courts in the context of public offerings of securities, and this Wilson Sonsini article provides a good overview of the different ways in which courts have approached it. These cases tend to be very fact intensive, and I think nothing illustrates that point quite like two First Circuit cases decided less than three months apart.
In Shaw v. Digital Equipment, 82 F.3d 119 (1st Cir. 1996), the First Circuit held that disclosure of interim information about a substantially completed quarter could be required in a registration statement. However, the court limited that obligation to situations in which the information indicates that the quarter in progress “will be an extreme departure from the range of results which could be anticipated based on currently available information.” In Shaw, the offering in question took place less than two weeks before the end of the quarters, and the results for that quarter reflected, in the court’s words, “more than a minor business fluctuation.”
In contrast, the same court found only a few months later that, under somewhat different circumstances, information about an incomplete quarter could not be regarded as material. In Glassman v. Computervision, 90 F.3d 617 (1st Cir. 1996), the plaintiffs alleged that the issuer should have disclosed in its prospectus interim financial information for the first seven weeks of an incomplete quarter that called into question the viability of the issuer’s internal projections. The court disagreed. Citing its decision in the Shaw case, the court stated that “when the allegedly undisclosed information… is more remote in time and causation from the ultimate events of which it supposedly forewarns, a nondisclosure claim becomes “indistinguishable from a claim that the issuer should have divulged its internal predictions about what would have come of the undisclosed information.” Consequently, the court held that this information was not required to be disclosed.
Obviously, a critical factual question in this case will be “what did the parties know about the fourth quarter and when did they know it?” But the cases that have addressed disclosure of information about an incomplete quarter suggest that even if BofA and/or Merrill were aware of potential fourth quarter problems in advance of the shareholders meeting, that information would not necessarily be “material” for securities law purposes.
From Travis Laster: Last week, Vice Chancellor Leo Strine issued an opinion in Alliance Data Systems v. Blackstone Capital Partners V – dismissing claims filed by Alliance Data Systems Corporation against Blackstone and its affiliates, seeking to recover for alleged breaches of a merger agreement. The opinion confirms that Delaware courts will apply and enforce the plain language of agreements, as written, and will not readily impute obligations not set forth in the agreements or impose obligations on non-parties.
The ADS merger agreement was a standard, antediluvian go-private agreement in which a private equity holdco and its acquisition sub (Aladdin) agreed to acquire ADS. Blackstone, the private equity sponsor, was not a party to the agreement. In the event Aladdin breached the agreement, ADS could recover a $170 million termination fee, with payment guaranteed by a Blackstone portfolio fund.
The ADS deal foundered when the Office of the Comptroller of the Currency, which had regulatory authority over the deal because ADS owned World Financial, a credit card banking subsidiary, demanded that Blackstone provide unlimited financial support for Worldwide Financial as a condition to regulatory approval. Blackstone declined. Once the drop dead-date passed, Aladdin terminated the merger agreement. ADS then sued to recover the termination fee from Aladdin and Blackstone. The Court dismissed these claims, finding that Blackstone was not a party to the merger agreement and that the plaintiffs had not stated a claim for breach. The Court also dismissed the fallback claim for breach of the implied covenant of good faith and fair dealing.
Here are the highlights:
1. The Court held there was no claim against Blackstone because it was not a signatory to the agreement. Plaintiffs’ sole claim instead was whether Aladdin, the signatory to the merger agreement, was somehow liable under the merger agreement for something Blackstone failed to do.
2. The Court rejected the assertion that Aladdin breached its general covenant to use reasonable best efforts to close because Blackstone failed to agree to the OCC’s demands. The Court noted that the reasonable best efforts covenant only bound Aladdin, not Blackstone: “This is in sharp contrast to what respected authorities advocate that a seller should extract in the acquisition agreement, which is a covenant by the acquirer that its parent will also work toward completion of the transaction.” (26).
3. The Court contrasted the antitrust approval obligations in the agreement with the OCC approval obligations. For antitrust approval, Aladdin was obligated to use its “reasonable best efforts” to obtain antitrust approval and to cause Blackstone to do whatever was necessary to secure approval. For OCC approval, by contrast, Aladdin covenanted only not to take any action that “would reasonably be expected to prevent or materially impair or delay the merger.” Because the OCC was asking for affirmative action from Blackstone, the request fell outside the negative covenant that ADS secured. The Court also noted that the Complaint did not identify any affirmative action by Blackstone that would have breached the covenant.
4. The Court rejected the argument that Aladdin did not use reasonable best efforts itself to comply with the OCC’s demands. Taking the allegations of the Complaint as true, the Court noted that ADS’ only complaint was with Blackstone, not with Aladdin.
5. The Court rejected ADS’ efforts to turn the standard rep that Aladdin had the power and authority to execute and deliver the Agreement and consummate the transactions into a rep that Aladdin had the power to make Blackstone close. For anyone familiar with merger agreements, this is a strained argument from the start, and Vice Chancellor Strine clearly understood that. He similarly rejected the idea that because Steven Schwarzman was the ultimate controller of both Aladdin and Blackstone, Aladdin had the power to cause Blackstone to close. He instead limited the contractual obligation to Aladdin, the actual party to the merger agreement.
The ADS decision demonstrates why counsel and contracting parties are well advised to select not only Delaware law, but also a Delaware forum. Vice Chancellor Strine enforced the plain meaning of the merger agreement, and his opinion reveals a sophisticated understanding of both customary merger agreement provisions and how private equity deals operated. The opinion simply enforces the terms of a buyer-friendly deal structure typical of private equity transactions during the halcyon days of 2007. It is thus a good example of the predictability offered by a Delaware forum.
One of the many aspects of SFAS 141(R) that has caused some angst among dealmakers is the provision governing the accounting treatment of contingent purchase price. Prior to the adoption of SFAS 141(R), GAAP required companies to defer recognition of a contingent payment until the resolution of all uncertainties surrounding that payment. In contrast, the new regime requires contingent purchase consideration to be measured at its fair value and recorded on the purchase date. The real kicker, of course, is that subsequent events that affect the fair value of contingent payment obligations will run through the purchaser’s income statement (unless the contingent payment is classified as an equity instrument).
Due to the potential earnings volatility associated with this change, I think many people expect to see a lot fewer deals that involve contingent consideration as a result of the implementation of SFAS 141(R). That’s why the terms of Endo Pharmaceuticals’ pending deal to acquire Indevus are kind of interesting. Even though this $370 million deal is not a small transaction from Endo’s perspective, it was willing to include a significant component of contingent consideration in the transaction, despite the new accounting regime. Here is Endo’s Offer to Purchase and other documentation relating to the transaction.
The deal, which is structured as a front-end tender offer followed by a merger, provides for Indevus shareholders to receive $4.50 per share in cash, together with the contractual right to receive up to an additional $3.00 per share in contingent cash consideration payments. The contingent consideration depends on the performance of two new drugs for which Indevus intends to file new drug applications with the FDA. Payment of the contingent consideration for each drug is conditioned upon the receipt of FDA approval. A portion of the contingent consideration payable with respect to one of the drugs also depends on the sales levels of that drug, if the FDA requires the company to include a so-called “boxed warning” label in its packaging.
With the dealmaking environment facing unforeseeable challenges – and the SEC making the biggest batch of changes to its cross-border in years, practitioners are grappling with how these deals will now change. Learn from these experts how cross-border deal practices are evolving and how they differ from the past in tomorrow’s webcast, “Implementing the New Cross-Border Rules“:
– Christina Chalk, Senior Special Counsel, Division of Corporation Finance’s Office of Mergers & Acquisitions
– Frank Aquila, Partner, Sullivan & Cromwell LLP
– Peter King, Partner, Weil, Gotshal & Manges LLP
– Alan Klein, Partner, Simpson Thacher & Bartlett LLP
– Greg Wolski, Partner, Ernst & Young LLP
Renew Now: As all memberships are on a calendar-year basis, you need to renew now to access this webcast. If you’re not a member, try a no-risk trial for 2009.
Analysis: Local Ownership and Fund Activism in Europe
Activist shareholders should study a potential target company’s shareholder registry if they hope to be able to effect change. With an unreceptive shareholder base, even sensible campaigns will be ineffective, wasting significant investments in time and money. Because most activist funds are based in either the United States or the United Kingdom, they face particular challenges when seeking to win the hearts and minds of local shareholders who may have a very divergent philosophical approach to investing.
In some countries, it appears that local institutional investors follow unwritten rules of conduct, which in essence prevent them from supporting outspoken dissident hedge funds. For example, U.K. dissident Algebris attracted less than 4 percent support at Italian insurer Generali in April. U.S. and U.K. investors, who are arguably more open to dissident proposals and willing to be “active,” represented a mere 2.9 percent of the shares outstanding. The fact that asset managers are often owned by banks, and the prevalence of cross shareholdings and cross-directorships make it difficult for hedge funds to achieve traction with local investors.
Many non-U.S. and non-U.K. institutional investors do not vote at shareholder meetings outside of their home countries. In many instances, proxy contests and other shareholder proposals end up being decided by investors from the U.S. and U.K. and local investors. Moreover, the low turnout at some international shareholder meetings (50-70 percent of shares outstanding for most contentious meetings) amplifies the voting importance of U.S. and UK shareholders.
A review of M&A Edge data on proxy fights and shareholder proposals indicates that the level of support achieved by activists in international markets is correlated with the relative percentage of shares owned by the activists and U.S. and U.K. investors. Although local “partnerships” certainly help–Colony Capital’s association with French investor Arnault is an example–U.S. and U.K. ownership appears to be critical in executing a campaign. Otherwise, activists face a delicate balancing act between diluting their proposals to make them more palatable to the local audience, while at the same time ensuring their proposals remain value-creating.
Pursuant to the 2000 Amendments to the HSR Act, annual adjustments to the notification thresholds are made based on an index that is tied to changes in the U.S. gross national product for each fiscal year. Last week, the FTC made their annual adjustment, including increasing the size-of-transaction threshold from $63.1 million to $65.2 million. This change is effective February 12th (although some of the changes are effective February 9th since there were two separate notices in the Federal Register). Until the effective date, the current thresholds will apply. Learn more from memos posted in our “Antitrust” Practice Area.
In a decision entered yesterday – in Young v. Goldman Sachs – the Circuit Court of Cook County, Illinois County Department, Chancery Division, applying New York law, dismissed a putative class action brought by a shareholder of Wm Wrigley Jr. Company against Goldman Sachs & Co. alleging that Goldman Sachs had conflicts of interest which made it unable to render unbiased financial advice and an unbiased fairness opinion because, among other things, the lion’s share of its compensation was contingent upon the consummation of the sale. The complaint also alleged breach of contract, breach of fiduciary duty and aiding and abetting breaches of fiduciary duty by Wrigley’s directors. Here is a copy of the decision.
This decision is important as it assesses the relevance and distinguishes two, somewhat dated, New York Court decisions, Schneider v. Lazard Frères and Wells v. Shearson Lehman, effectively limiting their application to situations where a financial advisor has been engaged to advise a special committee established to advise shareholders and potentially further limiting their application where the financial advisor has explicitly disclaimed a relationship or duty to shareholders:
“What is most important about Schneider and Wells, and what Plaintiff attempts [to] minimize, is the fact that in both cases there had been “special committees” formed to advise the shareholders. In Schneider, the court noted the special committee’s purpose “was to advise the shareholders with respect to a transaction that contemplated RJR’s demise and whose end and aim was to obtain for the shareholders the highest possible price for their stock.” Schneider, 159 A.D.2d at 297. Likewise, in Wells, the officers “created a committee whose purpose was to serve the shareholders by determining the fairness of the buyout. The committee hired Shearson Lehman and Bear Stearns. Anybody hired by the committee, aiding in its endeavor, was actually retained to advise the shareholders.” Wells, 127 A.D.2d at 203. . .
In the instant matter, there was no special committee formed and the Engagement Letter clearly indicates there was never the intent for Goldman Sachs to advise the Wrigley stockholders. The Engagement Letter was also very clear that there was no intent to create a duty to the Wrigley Stockholders. Further, although the fairness opinion was included in the Wrigley stockholder’s proxy materials, the introduction to the opinion states very clearly in at least two locations that [the opinion was provided for the information and assistance of the Wrigley board and was not a recommendation to any stockholder on how to vote].[Quotes from Engagement Letter and Proxy Statement omitted]”
Citing numerous cases, including the recent decision of the 7th Circuit in Joyce v. Morgan Stanley, the Illinois Circuit Court concluded that:
– Plaintiff is a Wrigley stockholder an has no privity or relationship with Goldman Sachs.
– Plaintiff is not a party to the Engagement Letter nor is he a third-party beneficiary of the Engagement Letter.
– Any duty on the part of Goldman Sachs ran to the corporation, not to the individual stockholders.
Last week, Professor Steven Davidoff blogged about the remarkable situation unfolding over at Selectica, Inc., a Nasdaq-listed provider of contract management software, where an investor group has apparently intentionally triggered the company’s shareholder rights plan, or “poison pill.”
To make a long story short, Selectica amended its shareholder rights plan (or poison pill) in November 2008 in order to reduce the ownership threshold required to trigger the pill from 14.9% to 4.9%. Although unusual, reducing a pill’s ownership threshold to that level isn’t unprecedented; in fact, as this article notes, other companies have taken similar action over the past few months in order to protect tax assets, which can be lost in the event of changes in ownership by 5% shareholders.
So, on the surface at least, there was nothing remarkable about Selectica’s amendment of its pill — but what happened next was downright unprecedented. On December 22, 2008, a 13D investor group disclosed that it had acquired additional shares and that, as a result, “the reporting persons purportedly became an “Acquiring Person” under the issuer’s Rights Agreement dated as of February 4, 2003, as amended….” On that same day, Selectica filed a lawsuit in the Delaware chancery court seeking a declaratory judgment on the validity of its rights plan.
On January 3rd, Selectica announced that it had ordered the exchange of each outstanding right under its rights plan — other than the rights held by the members of the 13D group — for one share of the Company’s common stock. In other words, Selectica decided to exercise the exchange feature of its rights plan, with the result that the number of its outstanding shares of common stock. This effectively doubled the number of the Company’s shares outstanding, and significantly diluted the ownership position of the 13D group.
However, Selectica didn’t stop there. Instead, it amended its rights plan and declared a new dividend of one preferred share purchase right for each outstanding share of its common stock after the exchange. That means that additional purchases of shares by the 13D group will have the effect of again triggering the plan.
There have been several inadvertent pill triggerings over the years, but according to an Emory University Law Reviewarticle published by Prof. Julian Velasco of Notre Dame Law School, rights plans have been intentionally triggered only twice.
Both of those intentional triggerings occurred when the poison pill was in its infancy, and neither involved a situation in which the acquirer faced dilution through a flip-in provision. Harold Simmons technically triggered the “flip-in” provisions of NL Industries pill in the 1980s, by acquiring 20% of its shares, but that poison pill did not provide that merely crossing the ownership threshold would result in the dilution to the bidder. In 1985, Sir James Goldsmith acquired a controlling position in Crown-Zellerbach, but because that pill contained only a flip-over provision, he was able to avoid dilution by refraining from a second-step transaction.
Pills have been the topic of numerous decisions by the Delaware courts, but there’s no case law involving a situation in which a poison pill has been triggered. While it seems likely that the board’s actions will be subject to heightened scrutiny under Unocal (see, e.g., In re Gaylord Container Corporation Shareholders Litigation, 1996 WL 752356 (Del. Ch. 1996)), it will be interesting to see how the extent to which this novel factual setting affects that analysis.