Tune in today for the webcast – “All the Rage: Tenders Offers” – to hear Alex Gendzier of Jones Day, Josh Korff and Christian Nagler of Kirkland & Ellis and Jim Moloney of Gibson Dunn discuss the latest dynamics – and processes – of conducting tender offers, particularly debt ones…
The Latest on Fairness Opinions
We have posted the transcript for the webcast: “The Latest on Fairness Opinions.”
One of the reasons why retail voter participation has plummeted at companies using e-proxies is the inadequacy of the notice being used to let investors know shareholder materials are available online and that the shareholder can vote. The notices – including the ones sent by email – are too legalistic and not “usable.” They are often too long, a huge turn-off to most and important information is buried “beneath the fold” (as most people read emails on smartphones or in preview pane mode). It’s a topic that bears serious consideration and one of my pet peeves.
Am I off-base? I’ll let you be the judge – below is an email notice for a consent solicitation that I received a few months ago (I’ve obscured a few items like contact info):
You elected to receive shareholder communications and submit voting instructions via the Internet. This e-mail notification contains information specific to your holding(s) in the security identified below. Please read the instructions carefully before proceeding.
Important Notice Regarding the Availability of Proxy Materials
Written Consent Proxy Materials
RECORD DATE: July xx, 2009
CUSIP NUMBER: xxxxxx
ACCOUNT NUMBER: #########
You can enter your voting instructions and view the shareholder material at the following Internet site. If your browser supports secure transactions you will be automatically directed to a secure site.
Note: If your e-mail software supports it, you can simply click on the above link.
Internet voting is accepted up to 11:59 pm (ET) on September xx, 2009.
Please refer to the proxy materials, available via the link(s) below, to confirm if a cut off date applies to this solicitation. In the event of a discrepancy between information contained in this e-mail and the proxy material, the proxy material will prevail.
To view the documents below, you may need Adobe Acrobat Reader. To download the Adobe Reader, click the url address below:
The relevant supporting documentations can also be found at the following Internet site(s):
To cancel or change your enrollment profile, please go to:
There are no charges for this service. There may be costs associated with electronic access, such as usage charges from Internet access providers and telephone companies, which must be borne by the stockholder.
Please do not send any e-mail to xxx@ProxyVote.com. Please REPLY to this e-mail with any comments or questions about proxyvote.com. (Include the original text and subject line of this message for identification purposes.) AOL Users, please highlight the entire message before clicking reply.
If you have any questions regarding your subscription to this service or to request paper copies of this material, please contact Schwab at 1-800-435-4000.
(c) 200x Charles Schwab & Co., Inc. All Rights Reserved Member SIPC
Recently, I interviewed Mark Schlegel of Moxy Vote for a podcast on TheCorporateCounsel.net to better understand this new voting service. This recent BusinessWeek article bolsters the argument that this new social voting platform is here to stay – and may impact the outcome of contested votes. The reporter, David Bogoslaw, really did his homework. Here’s an excerpt from that article:
It’s hard to imagine Google (GOOG) meeting resistance to a proposed acquisition, but that’s what happened in late 2009. Even more surprising, it was a startup Web site that had launched just a month earlier that gave a voice to retail shareholders of the target company, making it easier for them to participate in the proxy vote to oppose the deal.
Because of a campaign by activist shareholders, On2 Technologies (ONT), a provider of video compression software and related services, has yet to secure approval of the merger by shareholders representing more than 50% of its outstanding shares. Angered by management’s acceptance of what they deemed an undervalued offer from Google last August, a group of On2 investors got busy on private message boards and steered fellow shareholders toward MoxyVote.com, a new Web site committed to educating and empowering retail investors by simplifying the complicated proxy voting process and enabling them to vote online.
John Marcoux, an engineer who owns close to 1 million shares of On2, learned about Moxy Vote rather late in his online effort to gather a group of shareholders pushing for a better valuation of On2’s shares. With less than two weeks to go before a special shareholder meeting on Dec. 18 to vote on the merger, Marcoux and other activist shareholders managed to round up several hundred votes representing about 22 million shares, or about 12.3% of On2’s 178.2 million total outstanding shares, to cast ballots on Moxy Vote.
“That was pretty impressive,” he says. Although he hasn’t seen a final count of the Moxy Vote ballots, he knows the vote “was very, very, very strongly opposed [to the merger]. Most of the people who went there to vote were being contacted by [people] opposed to the merger.”
After failing again at a Dec. 23 meeting to get the requisite number of votes, On2 rescheduled the vote for Feb. 17, 2010. In the meantime, on Jan. 7, Google sweetened its offer, adding 15 cents a share in cash to its prior all-stock bid of $106 million, or 0.001 shares of Google for each share of On2, boosting the deal’s value to $133 million. On2 also pushed back the record date for shareholders to be eligible to vote to Jan. 15. Marcoux stops short of giving Moxy Vote most of the credit for Google’s higher offer, but he believes the Web site was part of a combined effort by dissident investors (which included articles in publications such as the Financial Times), to which the revised bid was a response.
While Marcoux and other shareholders feel Google’s offer still undervalues On2’s stock, they’re no longer trying to get shareholders to vote on Moxy Vote due to some “behind-the-scenes” developments he declined to discuss. “I’m grateful that Moxy Vote has a [platform] that let us come together and speak our voice and its role got the attention of Google that this [deal] wasn’t going to pass unless they did something.”
Retail shareholders have historically been a disparate group, difficult to corral and activate, and the On2 merger vote was the first instance of them coming together to form a voting bloc online, says Doug Gates, vice-president of marketing at Moxy Vote. Unlike the experience of most startups, which can spend months and months wondering if anyone will use their service, “this is pretty good validation that we might be onto something,” he says.
Advocates Guide Shareholders
Other Web sites such as www.ShareOwners.org and www.ProxyDemocracy.org are also dedicated to educating individual investors, but Moxy Vote is the only one that actually enables people to vote on corporate actions online. The company doesn’t generate any revenue and its business model is still under consideration.
So far, 21 organizations have signed up as advocates on Moxy Vote, from philanthropic organizations such as The Nathan Cummings Foundation to the International Brotherhood of Teamsters and religious-affiliated investor groups like Christian Brothers Investment Services. Being an advocate means they not only can express their view on a certain shareholder proposal but can serve as guide for shareholders who can automatically align their vote with an advocate they trust.
The average retail shareholder needs both guidance and assistance to overcome his apathy to voting on corporate actions, says Kevin Gates, Doug’s brother and a money manager at TFS Capital in West Chester, Pa., the majority investor in MoxyVote.com. While Gates says he’s interested in shareholder resolutions, he admits that even he tends to throw away most of the proxy ballots that come in the mail for his own portfolio. He likens the proposal summaries available on Moxy Vote to CliffsNotes that condense the information to a digestible size and format that’s more likely to engage his interest.
Shareholders can use the control number on a proxy statement they get in the mail to vote on Moxy Vote on a ballot-by-ballot basis or set it up so that their brokerage will automatically direct ballots on stocks they own to the Web site. A user can search for a company under the ballots and be taken to a page that shows the date of an upcoming shareholders meeting and the dates when online voting starts and ends. It also shows how many shareholder and board proposals are on the ballot, as well as which board members are up for reelection.
Recently, this Milbank Tweed alert by Robert Reder discussed the fact that letters of intent, often used in early stages of corporate transactions to memorialize parties’ basic goals and define parameters of negotiations, may represent legally binding obligations. It reviews a recent case example, Global Asset Capital v. Rubicon US Reit, where the Court’s motioned for a temporarily restraining order against the defendant from taking actions potentially in breach of certain provisions of a letter of interest with the plaintiff.
Below is news of a development from Davis Polk:
On January 21st, the US Department of Justice, Antitrust Division announced that it had settled an action against Smithfield Foods and Premium Standard Farms for an alleged violation of the premerger waiting period requirements of the Hart-Scott-Rodino Act. The DOJ claimed that Smithfield’s exercise of its rights in a merger agreement with Premium Standard to review and consent to what the DOJ considered to be ordinary course contracts to be entered into by Premium Standard was illegal premerger coordination in violation of the HSR Act. The parties agreed, jointly and severally, to pay a $900,000 fine.
The HSR Act requires that parties to a proposed merger that meet certain thresholds file premerger notification with the DOJ and the U.S. Federal Trade Commission, and observe a waiting period, prior to consummating the transaction. Merging parties can violate the HSR Act when the acquiring party “jumps the gun” by taking steps which have the effect of transferring beneficial ownership of the target business prior to the expiration (or early termination) of the waiting period.
The DOJ’s Allegations
According to the DOJ complaint, Smithfield, “the largest pork packer and processor and the largest hog producer in the United States,” agreed in September 2006 to acquire Premium Standard, “the sixth-largest pork packer and processor . . . and the second-largest hog producer in the United States,” for a total purchase price of approximately $810 million. Premerger notification was originally filed in October 2006, followed by a “second request” from the DOJ for further information. The DOJ’s investigation of the transaction focused on the procurement of hogs from independent hog suppliers. The HSR waiting period expired on March 7, 2007.
The complaint alleged that, beginning on September 20, 2006, Premium Standard submitted to Smithfield, for its review and consent, each of the three multi-year purchase contracts for hog purchases from an independent hog producer which arose during the waiting period. One of the contracts accounted for less than one percent of Premium Standard’s slaughter capacity. Together, the three contracts obligated Premium Standard to purchase, on an annual basis, between 400,000 and 475,000 hogs at a total cost ranging from approximately $57 million to $67 million.
The complaint alleged that these contracts were “necessary to Premium Standard’s ongoing business and entered into in the ordinary course.” As a result of exercising consent rights to those contracts, the DOJ asserted, Smithfield obtained operational control, and thus beneficial ownership, of that portion of Premium Standard’s business, prior to expiration of the HSR waiting period.
The DOJ did not find issue with “customary interim conduct of business” provisions which “protect[ed] Smithfield’s legitimate interests in maintaining Premium Standard’s value without impairing [its] independence.” These included provisions regarding “rights to assume new debt or financing, issue new voting securities and sell assets, as well as requirements that Premium Standard carry on its business in the ordinary course consistent with past practice.”
This case is important for several reasons:
– Many transactions include interim operating covenants that limit a target’s ability to enter into “material” contracts without the consent of the acquirer. Though the three contracts at issue were considered “ordinary course” by the DOJ, they were all long-term commitments extending substantially beyond the anticipated closing date. Parties should exercise care in defining “material” when considering whether and how to seek consent rights over material contracts.
– The parties were direct competitors throughout the United States, but nothing in the complaint suggested that the conduct at issue violates antitrust law only when the parties to the transaction are competitors. Parties should be careful to avoid restricting the ability of the target business to operate in the ordinary course during the HSR waiting period, regardless of whether they are competitors.
– The complaint in this action was filed almost three years after the applicable HSR waiting period expired. Parties should be aware that substantive merger review of a transaction does not preclude a later complaint for an HSR Act “gunjumping” violation, even when the antitrust regulators close an investigation and allow the transaction to proceed.
The DOJ alleged that the parties were in continuous violation of the HSR Act from September 20, 2006, the date on which Premium Standard first submitted its contracts to Smithfield for review and consent, through March 7, 2007, the expiration date of the applicable HSR waiting period. The maximum fine for the alleged violation, under the HSR Act, would have been approximately $1.8 million, twice the settlement amount.
Here is some news from John Grossbauer of Potter Anderson:
Last Tuesday, Delaware Vice Chancellor Laster delivered a potentially important opinion in Kurz v. Holbrook. In it, VC Laster finds valid consents delivered without the consenting party having obtained an omnibus proxy from DTC. The Vice Chancellor held this did not invalidate the consents, because the Cede breakdown is part of the stocklist for Section 219 purposes. In other words, brokers are now “record holders” of Delaware corporations for all purposes. This has potentially significant consequences for consent practice and compliance with notice requirements.
He also invalidates a bylaw that purported to reduce the size of the board and to call a special meeting to elect the single remaining common director, finding this would not comport with any of the valid methods for ending the term of an incumbent director. He does say that a bylaw that would reduce the size of the board at an annual meeting could effectively end the term of directors not reelected at that meeting.
Afra Afsharipour recently wrote this in the Conglomerate Blog:
I admit it I was a deal junkie. When I was in practice, I loved doing deals, advising clients, spending days at the printer (although that was in part due to the unlimited supply of Cinnamon Altoids). It was fun; it was exciting; each day there was a new crisis. It was enough to make any fresh-out-of-law-school lawyer feel like important things were getting done by lawyers.
Now that I have stepped away from putting out fires each day, I am beginning to reflect on the days of deal-making. I’ve even looked at old deal documents to try and see if I can catch mistakes or determine why we did things in a certain way. For example, in looking at the merger agreement from an all-cash public/public merger transaction, I noticed that it included a specific performance remedy for both the buyer and the seller. However, there is at least some argument that the seller has an adequate damages remedy at law. I am fairly certain that counsel on either side never marked up this provision or even talked about it. I am just as certain that the clients on either side wouldn’t have cared much about this provision if we brought it to their attention, and may have been very annoyed by the fees we would have racked up negotiating a provision that was in the Miscellaneous section of the agreement.
There is a need for increased academic inquiry into deals and deal structures in part because deal-making is an imperfect process. While working on my recent paper on reverse termination fees (RTFs), two competing themes came to light.. On the one hand, the study of 2008-09 strategic deals demonstrated that there has been considerable innovation in the use of RTFs to provide flexibility and predictability for both sides in an acquisition transaction.
Some of the more sophisticated contracts revealed that parties, as well as their counsel, had noted the lessons of the failure of the private equity option-style RTF structure (if you haven’t read it, see Steven Davidoff’s illuminating article on the failure of private equity). On the other hand, it was abundantly clear that some deals continued to replicate the mistakes that were made during the private equity boom of 2005-2007.
For example, there were a number of transactions where the option-style structure (i.e. where the buyer could walk away for any reason by paying the RTF) was modeled after the private equity structure where the RTF is set at an amount that is identical or nearly identical to the standard termination fee. This was somewhat surprising given that one of the most criticized developments in the wake of many failed private equity deals was the process by which the actual amount of the fee was set and its parity with the standard termination fee even though the two fees addressed vastly different risks. Of course reading hundreds of agreements also revealed other typical problems, such as important defined terms not being defined, provisions that included incorrect cross-references to other sections of the agreement, etc.
Some of these mistake can be attributed to lawyers structuring current deals based on old precedents; some to clients not wanting to pay (or spend the necessary negotiation energy) for innovation; and some to the difficulty of negotiating and drafting complex agreements under severe time pressure (usually at 2 am and after having eaten too many altoids). But hopefully, greater academic study (and criticism) can help deal junkies think about whether their agreements are bungled or even address the risks that they are trying to address.
Professor Steven Davidoff recently wrote this in Harvard’s “Corporate Governance” Blog:
In our paper “Delaware’s Competitive Reach: An Empirical Analysis of Public Company Merger Agreements” recently posted to the SSRN my co-author Matthew Cain of the Notre Dame Mendoza College of Business and I evaluate the selection of governing law and forum clauses in merger agreements between public firms from 2004-2008.
In contrast to prior research, we find that Delaware is the dominant choice among merging parties. During the sample period approximately 66.4% of agreements select Delaware for their governing law and 60% of agreements select Delaware as their choice of forum. This compares to 61.8% of targets during this time that are incorporated in Delaware, and 54.8% of acquirers that are similarly incorporated.
We find that Delaware’s attractiveness has increased in recent years in response to exogenous events, namely the financial crisis and the Second Circuit’s decision in Consolidated Edison, Inc. v. Northeast Utilities. The latter court ruling was perceived by practitioners as creating an unfriendly merger precedent under New York law. We find that the opinion made the Delaware forum a more attractive one vis-à-vis New York.
Delaware’s attractiveness is also evidenced by the fact that top-tier legal advisors, foreign acquirers, transactions surrounded by greater financial uncertainty, and larger transactions tend to select Delaware’s forum over other venues. Our results are robust to controls for simultaneity and endogeneity.
Our results also provide support for the theory that Delaware competes by providing quality governing law, and particularly, adjudicative services. They also highlight the contestability of Delaware’s dominance; parties adjust their choices of law and forum during our sample time period in response to legal and other events.
Prior empirical work on the race-to-the-bottom/race-to-the-top debate has focused on Delaware’s primary product, the public company charter. We posit that Delaware is more than a single-product provider but rather a supermarket offering complementary and differentiated products beyond the public company charter. For example, the law governing, and adjudication of, merger agreements is one such complementary product while the law governing real estate investment trusts is a differentiated one (and one where Delaware does not compete). By studying this former product we hope to further inform the debate over how and when Delaware competes.
Our results ultimately support the conclusion that Delaware competes strongly in other legal products beyond its primary one, the public company charter. They also show that attorneys and their clients are responsive to unfavorable legal rulings and the quality of adjudication.
Here’s some commentary from Kevin Miller of Alston & Bird: A recent Delaware Chancery Court decision – In Re Sunbelt Beverage Corporation Shareholder Litigation – should be of significant interest to investment bankers as well as lawyers because of its detailed analysis of competing discounted cash flow and other valuation analyses as well as comments by the court that the fairness opinion rendered in connection with the transaction was “highly suspect.”
Investment bankers will be particularly interested in the discussions of small-firm risk premium, company specific risk premium and valuation adjustments for an anticipated Subchapter S conversion. Here are some takeaways:
1. Courts often view a discounted cash flow as the most reliable valuation methodology.
2. The prevailing party is often the party that sticks closest to the valuation approach advocated by the valuation literature (e.g., Ibbotson), only advocating variation when it has quantitative analytic support.
3. Company specfic risk premium are often suspect.
Here are some selected key quotes:
1. Fairness opinion
“Before the Merger was authorized, defendants obtained a fairness opinion for the proposed merger consideration of $45.83. Yet that fairness opinion itself is highly suspect. It was produced in approximately one week-during which the lead appraiser was busy working on at least one other matter that included a cross-country site visit and, thus, unable to work extensively and meaningfully with Sunbelt representatives-and just before the Sunbelt
board meeting at which the board voted to issue the Call and to authorize the Merger. The “fairness opinion” was a mere afterthought, pure window dressing intended by defendants to justify the preordained result of a merger at the Formula price of $45.83 per share.”
2. Comparability of other companies and transactions
“I do have doubts about the comparability of the companies included in [Goldrings’ expert’s comparable transaction] analysis. These doubts are driven by the differences in size between the comparables and Sunbelt, as well as the difference across product lines and geography. . . .
Even if the companies themselves were more comparable to Sunbelt than I am willing to find, [Goldrings’ expert] failed to account for important elements of specific transactions that stood to influence the accuracy of his calculations. . . .[Defendant’s expert] relied on his use of the median multiple approach to compensate for any shortcomings related to specific companies or
transactions. . . . I am not willing to rely on the employment of a median multiple approach as a justification for ignoring several known deficiencies in facts and methodologies. . . ”
3. Discounted Cash Flow Analysis – calculation of discount rates
“I prefer the option presented by Goldring and employed by [Goldring’s expert]: follow the strict language Ibbotson used to describe how it adjusted for small-firm premiums in its own publication, and apply a premium of 3.47% for companies in the ninth or tenth deciles. . . .”
4. Company specific risk premium
“[A]s Vice Chancellor Strine explained in one of the cases defendants cited, even though courts may approve the use of these premiums, “[t]o judges, the company specific risk premium often seems like the device experts employ to bring their final results in line with their clients’ objectives, when other valuation inputs fail to do the trick.”
This January-February issue of the Deal Lawyers print newsletter was just sent to the printer and includes articles on:
– Now is the Time for a True Walkaway Number: Model Disclosure for Your CD&A
– Our Model CD&A Walkaway Disclosure
– RiskMetrics Revises Poison Pill Policy; On-the-Shelf Rights Plans on the Rise
– Defining the Rules of the Road for Differential Consideration in M&A Transactions
– SEC Staff’s New Guidance: Facilitating Lock-Up Agreements with Registered Exchange Offers
– Earnouts: A Siren Song?
If you’re not yet a subscriber, try a 2010 no-risk trial to get a non-blurred version of this issue on a complimentary basis.