Tune in tomorrow for this DealLawyers.com webcast – “Alternative Fee Arrangements for Deals: Little Less Talk and Lot More Action?” – to hear Wilson Chu of Haynes and Boone; Scott Depta of Dell and Lance Jones of Trilogy talk about how the ways that deal fees are being restructured, a trend hastened by a down economy.

Podcast Series for M&A Practitioners

We recently came across a new resource for M&A practitioners – a series of podcasts by Booz & Company, the management consulting firm that split off last year from Booz Allen.

To date, Booz & Co has posted 24 podcasts on various M&A and restructurings topics – many of them related to books authored by staffers there – including: M&A in China, bank merger integration and mistakes to avoid in financial sector M&A. The latest podcast, called “Velocity and Impatience,” includes a discussion on whether the pace of business has become too fast, the reason deals are closing more quickly today and its implications for merger integration.

Below are some thoughts from William Newman of Sullivan & Worcester on the regulatory regimen in the US for inbound M&A deals – often a significant factor in determining whether a deal will be completed or not – that he recently posted on his firm’s blog:

A lawsuit that could have determined whether a filing made with CFIUS can be considered customary has ended. In May 2009, husband and wife Joseph and Judy Ehrenreich sued 3Com Corporation for damages they allegedly suffered from the loss in value of their 3Com shares. The case was brought under the provision of the federal securities laws that enables purchasers of stock to recover losses arising out of incorrect or incomplete statements made by the issuer of the shares. 3Com is a Massachusetts-based enterprise networking solutions provider.

The Ehrenreichs claimed that the cause of their loss was 3Com’s failure to specify that CFIUS review of its proposed merger with affiliates of Bain Capital was a significant risk. 3Com had published a press release announcing the proposed merger on September 28, 2007. The press release stated that the merger was subject to “customary regulatory approvals.” CFIUS review was not mentioned. The plaintiffs purchased 13,000 shares of 3Com stock after the announcement of the proposed merger.

The basis of the plaintiff’s case was that the proposed merger did truly raise serious national security concerns and that, as a result, CFIUS review was not customary. The plaintiffs interpreted “customary” to mean perfunctory or ministerial. The aspect of the merger that triggered CFIUS review was that, as part of the transaction, affiliates of China’s largest network equipment company, Huawei Technologies, were to acquire an interest in 3Com. Press reports associated Huawei with China’s military and possible links to Chinese cyber warfare efforts against the U.S. and the U.S. military.

Although 3Com disclosed on October 4, 2007 that it intended to make a CFIUS filing, the plaintiffs contended that 3Com’s announcement omitted the reasons for seeking the review and downplayed the risk that CFIUS could block the transaction. Five months later, 3Com withdrew its CFIUS filing. One month later, the parties terminated their merger. The announced reason was that CFIUS intended to prohibit the deal. The price of 3Com stock plummeted from its level at the time of the original announcement.

The complaint claims that the peculiar structure of FINSA – its voluntary and not mandatory filing requirement — gives parties an incentive not to mention the possibility of CFIUS review. It suggests that parties might try to “fly under the radar screen” and not provoke public reaction to a deal.

We will not know from this case whether 3Com’s initial failure to specify CFIUS review and the basis on which CFIUS could review the transaction was an incorrect or incomplete statement. The plaintiffs voluntarily withdrew on June 30, dismissing their case with prejudice. A settlement may have occurred. Even if abandoned at this stage, the case stands as a warning to parties contemplating a CFIUS filing. When communicating to the markets, it’s best to say more about the likelihood of a CFIUS review rather than less. Parties now are on notice that CFIUS review may be more than perfunctory. It’s safer to make that clear if the review leads to an unexpected end to the deal.

Here’s some analysis from Cliff Neimeth of Greenberg Traurig:

As widely anticipated, in an open session of the SEC’s Commissioners last week, they approved (in a 3-2 split-vote) the elimination of NYSE Rule 452. This will end the long-standing practice of broker-dealer discretionary authority to vote “uninstructed client shares” in uncontested director elections.

Under Rule 452, uncontested director elections historically were classified as a “routine matter” enabling brokers to vote as they deemed appropriate in respect of shares for which they did not receive specific client voting instructions prior to the 10th day next preceding the stockholder meeting. Statistically, such shares overwhelmingly were voted “for” director candidates nominated by the issuer.

For many issuers who, in the past few years, have adopted “majority voting” bylaw standards for uncontested director elections (or, at a minimum, have adopted so-called “plurality plus” director resignation requirements), the elimination of Rule 452 adds significant fuel to “withhold authority” campaigns initiated by activist hedge funds and other dissident stockholders to advance agendas not necessarily in the best interests of all stockholders.

Moreover, in view of (i) new Sections 112 and 113 of the DGCL – effective August 1, 2009 – which enable the adoption of binding bylaw provisions permitting direct insurgent access to the issuer’s proxy materials and, in certain circumstances, reimbursement of expenses incurred by dissidents in opposition election contests; (ii) proposed SEC Rule 14a-11 which, if adopted substantially as proposed in time for the 2010 proxy season, will mandate the inclusion in issuer proxy materials of insugent (short-slate) nominees, provided that certain minimum ownership and other procedural requisites are satisfied; (iii) recent Delaware decisions strictly construing the validity and use of certain organic takeover defenses; and (iv) the SEC’s recently adopted “e-proxy” rules and exempt solicitation “stockholder forum” rules, dissident boardroom access is being made increasingly more available to activists and far less less costly.

In turn, unsuspecting (or unprepared) issuers are becoming increasingly vulnerable.

What to Do Now

As you’ve no doubt read on all of these subjects, it is very important to review with your clients their existing advance notice bylaws and other organic and structural takeover defenses (including rights plans, etc.). This is further compounded by the current macroeconomic environment which has been an impetus for operating and financial performance shortfalls across myriad industries, and the sharp decline in straight buyside and sellside deal activity, in each case further giving rise to alternative “liquidity event” agendas and other management displacement and corporate change-in-control campaigns.

Of course, shark repellents that only can be implemented by means of charter amendment (under applicable state law) would require both director approval and stockholder adoption – which may be impractical or untimely in many circumstances.

The need to assess client “targetability” tends to be more pronounced in the case of small cap issuers who tend to be disproportionately more vulnerable to unsolicited assault for a variety of economic, structural, and other reasons.

The SEC also announced yesterday that, in addition to pending Rule 14a-11, it intends to undertake a comprehensive review of all current proxy regulations with a view to “overhaul” them as may be necessary.

Kevin Miller of Alston & Bird notes: In this order on Friday, Delaware Chancellor Chandler granted plaintiff’s motion for expedited proceedings to seek injunctive relief to address a board’s alleged failure to fulfill its Revlon duties.

Highlighting the significance that the procedural posture of a case can have, the Court noted that the Delaware Supreme Court’s recent decision in Lyondell Chemical v. Ryan may preclude an award of monetary damages for a breach of the duty of care where the target company’s charter contains a 102(b)(7) exculpatory provision. But exculpation for monetary damages does not preclude injunctive relief -“[t]hus, in cases such as this one, the shareholders’ only realistic remedy for certain breaches of fiduciary duty in connection with a sale of control transaction may be injunctive relief.”

Background/Allegations (for purposes of motion, the court treats plaintiff’s well plead allegations as true):

– In March 2009, Data Domain began discussions with NetApp regarding a potential business combination

– On May 11, the Data Domain board was informed that EMC was interested in meeting with Data Domain and a meeting was subsequently scheduled for May 27.

– On May 20, Data Domain and NetApp entered into a merger agreement pursuant to which Data Domain would become a wholly owned subsidiary of NetApp and Data Domain’s shareholders would receive $25 in a combination of cash and Net App stock. The merger agreement allegedly contains a number of deal protection provisions including a no-shop clause, a matching right and a termination fee and certain officers and directors of Data Domain entered into an agreement to vote approximately 20% of Data Domains shares in favor of the merger with NetApp.

– On June 1, EMC launched an all cash tender offer for Data Domain at $30 per share.

– On June 3, NetApp increase the cash component of its offer by $5, raising the overall value of its offer to $30 per share. Data Domain agreed to NetApps revised offer and left all the deal protection measures in place.

Plaintiffs alleged that Data Domain’s directors violated their fiduciary duties in the context of a sale of control of the company under Revlon v. MacAndrews & Forbes – i.e., that Data Domain’s directors breached their fiduciary duties by failing to take steps to obtain the best price reasonably available, by granting/permitting preclusive deal protection provisions and by failing to inform themselves.

[Note: where the consideration is cash and stock, Delaware case law is unclear as to whether and when Revlon duties apply. Here it appears a majority of the consideration is cash.]