Here is something from Kevin Wells of RiskMetrics’ U.S. Research Team (as originally noted in RiskMetrics’ blog):
Though not as prevalent as they once were, shareholder rights plans, commonly referred to as “poison pills,” remain a fixture of the corporate governance landscape, according to a new report from RiskMetrics Group (available for purchase in RMG’s bookstore).
As the global economic crisis took a toll across U.S. and international capital markets over the past year, companies continued to adopt pills, albeit with more shareholder-friendly provisions. Indeed, an analysis of regulatory filings, proxy voting trends, and other data finds that companies are incorporating more shareholder-friendly provisions into their pills; moreover, companies are putting such plans to a shareholder vote in greater numbers than ever before.
Perhaps as a consequence of increased management votes to ratify or adopt pills, shareholder activism, as measured by filings of shareholder proposals to terminate or allow shareholders to vote on pills, has declined. However, those shareholder proposals appearing on ballots generally received high levels of support in 2009, winning majority support at Yum Brands and two other firms.
Amid the recent economic turmoil, 2009 has also seen the emergence of NOL (net operating loss) poison pills, which are meant to protect companies’ tax assets rather than to deter acquisition offers. It was an NOL pill, in fact, that became the subject of controversy in Selectica v. Versata, pending in Delaware Chancery Court, which may significantly affect future uses of pills by Delaware-incorporated companies.
Select key findings from the report include:
– Thirty-three S&P 1,500 companies enacted pills between July 1, 2008, and July 1, 2009. Their average term was 7.6 years, and 10 were for terms of three years or less. Four of those were enacted for a period of 12 months or less.
– The number of S&P 1,500 companies that maintained a pill declined again, falling from 34.5 percent in 2008 to 27.5 percent in 2009. In 2007, 42.5 percent of companies maintained a pill.
– In 2009, 69.2 percent of the S&P 1,500 companies that maintained a pill employed a 15 percent trigger. Another 19.6 percent employed a 20 percent trigger, while 7.9 percent employed a 10 percent trigger.
Last week, Tom Ball gave us the basics in broker nonvote math. In this podcast, David Drake and Rhonda Brauer dig further into the math of revised NYSE Rule 452 – here the worksheet you should print out to follow along – and help you explore some possible ways to get out those otherwise lost retail votes.
– by John Jenkins, Calfee Halter & Griswold
Investment banks spend a lot of time tailoring their M&A engagement letters to address the perceived risks involved in advising widely-held public companies. Those engagements are often perceived as presenting greater liability risks than M&A advisory engagements for private companies, and that’s probably true most of the time, but a recent Massachusetts federal court decision provides a sobering reminder to investment banks that this isn’t always the case.
What’s more, the Baker v. Goldman Sachs case – here is the opinion – also shows how some of the provisions of an engagement letter designed to protect bankers in public company deals can under certain circumstances have the opposite effect in a private company transaction.
The Baker case arose out of Goldman’s service as a financial advisor to Dragon Systems, Inc. in connection with its ill-fated sale to Lernout & Hauspie Speech Products, a Nasdaq-listed Belgian company that collapsed in the aftermath of an accounting scandal that surfaced shortly after the deal was completed. L&H acquired Dragon in an all stock deal, and the buyer’s subsequent collapse resulted in a loss to Dragon’s controlling shareholders of approximately $300 million.
Dragon’s two controlling shareholders filed a lawsuit against Goldman Sachs and related entities. The plaintiffs alleged that Goldman Sachs negligently advised Dragon to merge with L & H without adequately investigating the buyer’s value. The plaintiffs made a variety of contractual and other common law claims, including breach of fiduciary duty and negligent misrepresentation, and also alleged that Goldman’s conduct violated the Massachusetts Unfair Trade Practices statute.
With the exception of the novel statutory claim, most of the plaintiffs’ claims were consistent with what you typically see in investment banker liability cases. The most common legal theories used to sue bankers are the tort of negligent misrepresentation, and breach of contract claims premised on agency or third-party beneficiary principles. More recently, breach of fiduciary duty claims have become more prominently featured as well. With some high profile exceptions, investment bankers have generally been pretty successful in defending against these claims.
Plaintiffs relying on negligent misrepresentation or contract law principles premise their claims on allegations that they were intended beneficiaries of the contractual relationship between the banker and the company, and were thus entitled to rely upon the banker’s efforts. Since these claims depend on the contractual relationship between the bank and its client, investment bankers’ engagement letters have played a prominent role in their efforts to fend off such claims. Those letters typically include very specific statements about the parties to whom the investment bank is providing its services, together with broad disclaimers of liability to corporate shareholders or other third parties.
Interestingly, Goldman’s engagement letter with Dragon included customary language intended to accomplish this objective. The letter explicitly stated that “any written or oral advice provided by Goldman Sachs in connection with our engagement is exclusively for the information of the Board of Directors and senior management of the Company.” What’s even more interesting, however, is that the plaintiffs were able to use this language as the basis for their third party beneficiary and negligent misrepresentation claims.
What the plaintiffs did was to simply point out to the court that one of the two controlling shareholder-plaintiffs was a member of the Board, and was thus within the group entitled to the benefits of the agreement. Goldman argued that in using the quoted language, it was referring to the board in its representative capacity. However, the court looked at some other potentially ambiguous phrasing in the engagement letter, including the fact that the letter was addressed to the shareholder-director and the letter’s use of the personal pronoun “you” instead of “the company” in describing the persons to whom it was providing its services, to justify its conclusion that Goldman appreciated that others aside from the board in its representative capacity would benefit from its advice.
The treatment of the plaintiffs’ fiduciary duty claim is another area where the Company’s closely-held nature appears to have played a significant role in the court’s analysis. While the fact that the engagement letter did not include a disclaimer of fiduciary duties played an important role in the court’s decision not to dismiss these claims, the close contact that Goldman allegedly had with the plaintiffs throughout the course of the engagement was another important factor in leading the court to conclude that the plaintiffs sufficiently alleged that “special circumstances existed to create a fiduciary relationship apart from the terms of the contract.”
It is important to keep in mind that Baker involved a motion to dismiss, so this litigation is at a very preliminary stage and it is inappropriate to draw broad conclusions from it. Nevertheless, the Baker case drives home the point that although the risk profile in engagements involving widely-held public companies may generally be higher than private company engagements, private companies (and public companies with controlling shareholders) present distinct risks of their own that banks may want to take into account in drafting and negotiating engagement letters.
In this recent BusinessWeek article, Frank Aquila of Sullivan & Cromwell does a great job of foretelling our future – and explaining our present – in the world of hostile bids. Just like Lois Herzeca did in this podcast a few weeks back…
Wanna Play 20 Questions? DOJ and FTC Seek Merger Guidelines Comments
Recently, the DOJ and FTC issued these 20 questions to solicit comment on how they should reform their horizontal merger guidelines. As I blogged recently, these agencies seek the first major overhaul of these guidelines in quite some time…
Helping you to gear up for a difficult proxy season, I have decided to start a weekly proxy solicitor podcast series. Each week, a new podcast with cover a hot topic that you may well face soon – with practical guidance from a proxy solicitor to help you navigate troubled waters. Here is the second installment in our series:
In this podcast, Tom Ball of Morrow & Co. explains the basics of the mechanics of counting broker non-votes and it’s implications for companies this proxy season, including:
– What is an example of how the math should be done to determine the impact of the loss of discretionary broker votes on a specific company?
– What type of companies – size, market cap, stock price, industries – may be impacted the most by the loss of broker nonvotes?
Please take a moment to participate in our “Quick Survey on Impact of Loss of Broker Nonvotes for ’10 Proxy Season.”
With the upcoming proxy season promising to shake things up and possibly place more companies in “play” than ever before, I decided to create a “special” issue of the Deal Lawyers print newsletter and rush it out so that you can begin to prepare now. This “Special” November-December issue of the Deal Lawyers print newsletter was just sent to the printer and includes articles on:
– How to Respond to a Stocklist Demand
– How to Scrub Your Bylaws Ahead of Proxy Access: Considerations for Delaware Corporations
– A Practical Primer: How to Tabulate and Report Voting Results
– “Practice Points” on Reporting Voting Results
– An Insider’s Perspective: How to Avoid a Yahoo-Like Tabulation Nightmare
– The Growing Importance of “Just Vote No” Campaigns: Analysis and Takeaways
If you’re not yet a subscriber, try a “no-risk trial to get a non-blurred version of this issue on a complimentary basis. Current subscribers should renew now as this is the last issue since all subscriptions expire at year-end.
Please take a moment to participate in our “Quick Survey on Impact of Loss of Broker Nonvotes for ’10 Proxy Season.”
Following up on Steven Haas’ blog last week, Kevin Miller of Alston & Bird gives these further thoughts on the transaction:
1. The Relative Fairness Issue – The NY Times’ DealProfessor has suggested that, in order to address the relative fairness issues raised in Chancellor Chandler’s decision in TCI, the special committee of the board of directors of ACS most likely obtained a relative fairness opinion – i.e., with respect to whether the consideration received by the low-vote Class A shareholders was fair to them relative to what the high-vote Class B shareholders received in the merger.
Such opinions are extremely rare. See e.g., definitive proxy statement relating to the acquisition of Penton Media, Inc. by Prism Business Media Holdings. In that transaction, which frankly was not analogous to the ACS/Xerox merger, Allen & Company LLC rendered an opinion that:
“Based upon and subject to the foregoing, it is our opinion as of the date hereof that the Common Stock Per Share Merger Consideration to be paid in connection with the Transaction is fair from a financial point of view to the holders of Company Common Stock, including in relation to the holders of Preferred Stock.” (emphasis added)
See also the merger proxy relating to the acquisition of Hallwood Realty:
“Based upon and subject to the foregoing, we are of the opinion as of the date hereof that, the allocation of the total consideration to be paid by HRPT in the Proposed Transaction between the General Partner and its affiliates, on the one hand, and the Unitholders (other than the General Partner and its affiliates), on the other hand, is reasonable to the Unitholders (other than the General Partner and its affiliates).”
And the merger proxy related to the acquisition of John Q. Hammons Hotels:
” Based upon and subject to the foregoing, we are of the opinion as of the date hereof that, from a financial point of view and from the point of view of the Unaffiliated Stockholders, the allocation of the consideration offered by JQH Acquisition in the Proposed Transaction between the JQH Stockholders, on the one hand, and the Unaffiliated Stockholders, on the other hand, is reasonable to the Unaffiliated Stockholders.”
Though we will have to wait until the ACS merger proxy is filed, it is not clear that the special committee of the board of directors of ACS got a relative fairness opinion from Evercore, the special committee’s financial advisor or that the board of ACS got a relative fairness opinion from Citigroup, the company’s financial advisor. The description of the opinions in the merger agreement appears to indicate that they didn’t:
“(v) Opinion of Financial Advisors. The Special Committee has received the opinion of Evercore Group L.L.C., dated as of the date of this Agreement, to the effect that, as of such date, the Class A Merger Consideration is fair, from a financial point of view, to the holders of the shares of Company Class A Common Stock (other than those holders who also hold shares of Company Class B Common Stock) entitled to receive such Class A Merger Consideration. The Board of Directors of the Company has received the opinion of Citigroup Global Markets Inc., dated as of the date of this Agreement, to the effect that, as of such date, the Class A Merger Consideration is fair, from a financial point of view, to the holders of shares of Company Class A Common Stock (other than those holders who are also holders of Company Class B Common Stock and their Affiliates).”
The recent experience of most practitioners in this area has been that the bulge bracket investment banks have, almost universally, declined to render relative fairness opinions.
For most investment banks the concern is that such opinions require normative judgments that are difficult to support based on traditional financial analyses – e.g., just because many controlling stockholders have declined to seek a control premium for themselves in order to avoid litigation, does not mean that such premiums are inappropriate. Furthermore, comparisons of control premiums on a per share basis are often misleading as it is the aggregate premium that is relevant, not whether it is allocated over a million shares with 10 votes per share or ten shares with a million votes per share.
Turn the situation around and ask yourself how a board of directors gets comfortable concluding that the failure to extract a control premium for the holders of high vote stock is fair to the holders of the high vote stock unless such holders voluntarily determine not to extract such a premium for themselves.
Finally, it is most likely an overstatement to suggest that such opinions are required under Delaware law:
“6. Specific Impact and Relative Fairness. The Delaware Supreme Court’s decision rendered in connection with a proposed recapitalization of The Reader’s Digest Association, Inc. required the TCI special committee to examine the specific impact on the holders of low-vote stock of the premium paid for the high-vote stock. The TCI court interpreted that to mean the TCI special committee was required to examine the fairness of the premium paid for the high-vote stock relative to the value of the consideration received by the holders of low-vote stock, apparently by obtaining an opinion from a financial advisor as to the fairness of the high-vote premium to the holders of the low-vote stock…
4. Relative Fairness Opinions. The TCI court’s interpretation of the Reader’s Digest decision to apparently require the TCI special committee to obtain a fairness opinion was particularly surprising as no Delaware court had previously held that a board or special committee was required to obtain a fairness opinion, much less a so-called “relative fairness” opinion. In fact, many financial advisors believe that such normative judgments are beyond the scope of a professional opinion, particularly an opinion expressed “from a financial point of view,” that typically focuses on the absolute or relative value of businesses and the consideration being paid or received in exchange therefore.
Relative fairness opinions require normative judgments generally not susceptible to the types of valuation and other financial analyses performed by financial advisors. Financial advisors render fairness opinions based on analyses with respect to the value of a business taken as a whole and almost always avoid rendering judgments with respect to the appropriate allocation of the aggregate consideration among multiple equity constituencies with competing claims. They can (as TCI’s financial advisors did), when pressed, separately analyze the intrinsic value of a class of capital stock and express an appropriately qualified opinion with respect to the fairness of the consideration to be received by holders of that class in exchange for their capital stock independent of the consideration to be received by holders of any other class of capital stock, but most opinion providers will include express language in their opinions to the effect that their opinions do not address the allocation of the aggregate consideration among competing equity classes. What financial advisors can and should do is provide special committees with all of the relevant financial analyses and information special committees need to make required normative determinations. After all, the views of financial advisors with respect to the financial aspects of transactions have never been viewed as a substitute for the judgment directors must apply in determining whether a transaction is advisable and in the best interests of shareholders.
5. The Reader’s Digest Decision. The facts in the Reader’s Digest case are distinguishable from the facts of TCI. While Reader’s Digest involved a $100 million reduction in the equity value of Reader’s Digest to the detriment of holders of Reader’s Digest non-voting stock without their consent, TCI involved the allocation of a control premium being paid by a third party to which the holders of TCI low-vote stock were arguably not entitled. In the Reader’s Digest decision, the Delaware Supreme Court took issue with the Reader’s Digest special committee for its apparent failure to focus on the specific impact upon the holders of low-vote stock of a $100 million payment to holders of high-vote stock, particular given Reader’s Digest’s tenuous financial condition.
In the case of TCI, nothing was taken away from the holders of TCI low-vote stock. The only question was the extent to which they would be permitted to share in a control premium even though they had little or no ability to control the outcome of the transaction. By voluntarily limiting the high-vote premium to 10 percent and not seeking the full amount of the premium to which a control block may legally be entitled, the holders of TCI high-vote stock permitted the holders of low-vote stock to receive a 37 percent premium upon a change-in-control, a premium that they could not reasonably have expected to receive when they bought shares of low-vote stock in a company controlled by one or a relatively small number of holders of high-vote stock. That would appear pretty generous, particularly given that had the holders of TCI high-vote stock not voluntarily limited the size of their premium, it may have been difficult for the TCI board or special committee to have concluded that a mere 10 percent premium was fair to them. The indirect impact of the high-vote premium on the value received by holders of low-vote stock was negligible.
As noted by the TCI court, “the impact of the [high-vote stock] premium on the holders of [low-vote stock] was not large; effectively, the [high-vote stock] premium only lowered the price paid to the holders of [low-vote stock] by approximately 1.2%, from $67.19 to $66.37.” Given the foregoing, it is not surprising that the TCI special committee’s principal negotiator viewed a 10 percent premium for shares of high-vote stock as a “pinhole part of the transaction” and worried that belaboring the point could threaten the deal. Such analyses and information would appear much more relevant to a decision whether or not to recommend a transaction involving a premium for high-vote shares than historical trading premium and the number of precedent transactions not involving a premium.”
See this article on TCI for more insight…
2. The ConEd Issue – In ConEd, the Second Circuit effectively held that, under New York law, an acquiror could not be held liable for target shareholders’ lost merger premium if the target shareholders were not intended third-party beneficiaries entitled to such relief. Since ConEd, many practitioners have avoided New York law as the governing law for merger agreements in hopes, partially fueled by dicta or other statements made by certain members of the Delaware Chancery Court, that Delaware courts would reach a different conclusion. Less frequently, parties have addressed ConEd, by including provisions in their merger agreements to address the issue and thereby clarify the intent of the parties. This was the approach taken in the ACS/Xerox merger even though the contract is governed by Delaware law:
“SECTION 8.06. Entire Agreement; Third-Party Beneficiaries. This Agreement (including the Exhibits and Schedules and the Company Disclosure Letter and the Parent Disclosure Letter), the Confidentiality Agreement, the Voting Agreement and any agreements entered into contemporaneously herewith (a) constitute the entire agreement, and supersede all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof and thereof and (b) are not intended to and do not confer upon any person other than the parties hereto any legal or equitable rights or remedies. Notwithstanding the foregoing clause (b):
(i) Following the Effective Time, each holder of Company Common Stock shall be entitled to enforce the provisions of Article II to the extent necessary to receive the consideration to which such holder is entitled pursuant to Article II.
(ii) Prior to the Effective Time, each holder of Company Common Stock shall be a third party beneficiary of this Agreement for the purpose of pursuing claims for damages (including damages based on the loss of the economic benefits of the Merger, including the loss of the premium offered to such holder) under this Agreement in the event of a failure by Parent or Merger Sub to effect the Merger as required by this Agreement or a material breach by Parent or Merger Sub that contributed to a failure of any of the conditions to Closing from being satisfied. The rights granted pursuant to clause (ii) shall be enforceable only by the Company in its sole and absolute discretion, on behalf of the holders of Company Common Stock, and any amounts received by the Company in connection therewith may be retained by the Company.”
See also the proxy relating to Entrust’s acquisition by Thoma Bravo:
“9.6 Third Party Beneficiaries. This Agreement is not intended to, and shall not, confer upon any other Person any rights or remedies hereunder, except (a) as set forth in or contemplated by the terms and provisions of Section 6.11, (b) prior to the Effective Time, for the right of holders of shares of the Company Common Stock to pursue claims for damages (including damages based on loss of the economic benefits of the transaction to Company Stockholders) and other relief (including equitable relief) for any breach of this Agreement by Newco or Merger Sub, whether or not this Agreement has been validly terminated pursuant to Article VIII, which right is hereby expressly acknowledged and agreed by Newco and Merger Sub, and (c) from and after the Effective Time, the rights of holders of shares of the Company Common Stock to receive the merger consideration set forth in Article II. The rights granted pursuant to clause (b) of this Section 9.6 shall only be enforceable on behalf of Company Stockholders by the Company in its sole and absolute discretion, as agent for the Company Stockholders, it being understood and agreed that any and all interests in such claims shall attach to such shares of the Company Common Stock and subsequently transfer therewith and, consequently, any damages, settlements or other amounts recovered or received by the Company with respect to such claims (net of expenses incurred by the Company in connection therewith) may, in the Company’s sole and absolute discretion, be (A) distributed, in whole or in part, by the Company to the holders of shares of Company Common Stock of record as of any date determined by the Company or (B) retained by the Company for the use and benefit of the Company on behalf of its stockholders in any manner the Company deems fit. In addition, the Company hereby agrees that it will only accept the payment of any damages awarded pursuant to claims brought under clause (b) of this Section 9.6 if Newco and Merger Sub are found to be in breach of their respective obligations to consummate the Merger under Article II of this Agreement and a court of competent jurisdiction has declined to specifically enforce the obligations of Newco and Merger Sub to consummate the Merger pursuant to a claim for specific performance brought against Newco and Merger Sub pursuant to Section 9.8(b) and applicable law.”
See this article for a more detailed discussion of these types of provisions, complete with drafting suggestions many of which appear to be reflected in the foregoing.
Helping you to gear up for a difficult proxy season, I have decided to start a weekly proxy solicitor podcast series. Each week, a new podcast with cover a hot topic that you may well face soon – with practical guidance from a proxy solicitor to help you navigate troubled waters. Here is our first installment in the series:
In this podcast, Scott Winter of Innisfree provides some insight into how to handle split voting (i.e., voting for nominees from opposing proxy cards in a contest) and its intersection with the 14a-4 bona fide nominee rule, including:
– What is split voting?
– How often do we see split voting?
– How do shareholders actually split their votes?
– Are there any ways we could make changes to the system which would make split voting easier?
Please take a moment to participate in our “Quick Survey on Impact of Loss of Broker Nonvotes for ’10 Proxy Season.”