Monthly Archives: March 2010

March 24, 2010

Some Thoughts on Pre-IPO Acquisitions

In this podcast, David Westenberg of WilmerHale discusses pre-IPO acquisitions, including:

– What “business” issues arise for a private company when making an acquisition, especially if the acquisition is concurrent with its IPO?
– Can you provide an overview of the unique legal issues that arise when a private company pursues an acquisition?
– What advice do you have for private companies that are contemplating an acquisition?

March 23, 2010

Seller’s Key Issues in 2010: Still a Tough Seller’s Market

Tune in today for the webcast – “Seller’s Key Issues in 2010: Still a Tough Seller’s Market” – to hear Wilson Chu of K&L Gates, Mary Korby of Weil Gotshal and Carl Sanchez of Paul Hastings discuss the latest issues for sellers doing deals.

March 17, 2010

“No Mas” to “Just Say No?”

Recent takeover battles are bringing into question the continued vitality of the “just say no” defense, which allows boards of directors of target companies to combine refusal to negotiate and an unwillingness to waive structural defenses (such as a poison pill or Section 203 of the Delaware corporate code) to frustrate advances from unwanted suitors. Check out this alert for more…

March 15, 2010

All the Rage: Tender Offers

We just posted the transcript for our webcast: “All the Rage: Tender Offers.”

March 11, 2010

March-April Issue: Deal Lawyers Print Newsletter

This March-April issue of the Deal Lawyers print newsletter was just sent to the printer and includes articles on:

– The Deal Lawyer’s Guide to Hidden Employee Benefit Issues
– “Testing the Waters” Ahead of Exchange Offers
– Formula Pricing: “Day 20” Pricing Has Finally Arrived for Debt Tender Offers!
– Competitive Bidding in M&A Transactions: Delaware Enforces Deal Protections and Recognizes Common Law Fraud Claims
– Sealing the Deal: Drafting Contracts Today

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.

March 8, 2010

Proxy Season Preview: Takeover Defenses

Here is something from RiskMetrics’ Ted Allen:

While board declassification and other proposals on takeover defenses typically get less media and investor attention than compensation-related resolutions, these resolutions appear likely to again receive the broadest level of investor support this season.

Last year, the two shareholder proposal topics with the greatest level of average support were those seeking to rescind or reduce supermajority requirements (69.7 percent support at 17 companies) and to declassify the board and require annual elections for all directors (65.6 percent at 63 issuers), according to RiskMetrics Group data. Another takeover defense topic–the right of shareholders to call special meetings–averaged 50.8 percent approval at 61 meetings, and had the fourth-highest average support among U.S. shareholder proposals.

So far this year, investors have filed just 15 declassification proposals, down from 30 at this time last year. One reason for the fewer proposals is that many companies already have adopted this reform. Among S&P 1500 firms, 52 percent now have declassified boards, up from 50 percent in 2008, according to RiskMetrics Group’s forthcoming Board Practices study.

This season’s proponents include state pension funds from California, New York, and Connecticut; the AFL-CIO and the Amalgamated Bank’s LongView funds; and several individual activists. The Connecticut Retirement Plans and Trust Funds filed declassification resolutions at Nabors and Abercrombie & Fitch in an effort to draw more attention to the firms’ pay practices. The companies’ classified board structure makes it more difficult for investors to protest pay decisions by withholding support from compensation committee members, who aren’t up for election every year.

So far, declassification resolutions have been withdrawn at Toll Brothers and Brocade Communications. Brocade plans to put a management proposal on its 2010 ballot to fully declassify the board over three years, while Toll has pledged to offer a management proposal in 2011. Textron also plans to sponsor a 2010 proposal to declassify over a three-year period.

Ball Corp., which is headquartered in Colorado but incorporated in Indiana, won permission to exclude a declassification proposal filed by the California Public Employees’ Retirement System by pointing to a new Indiana law that mandates classified boards unless a company opted out by July 31, 2009. Some activist investors were outraged by the company’s decision not to opt out and then push for exclusion, noting that declassification resolutions have earned majority support at Ball four times in the last five years.

Supermajority Provisions
As of Feb. 15, investors had filed 26 proposals that seek to repeal supermajority requirements to approve bylaws, corporate transactions, and other matters. The primary filers are retail investors affiliated with California-based activist John Chevedden, while the Florida State Board of Administration has filed at Hospitality Properties Trust.

At some firms, supermajority thresholds are as high as 80 percent of outstanding shares. So far, 19 proposals are still pending, while four have been withdrawn. CalPERS withdrew at Brocade after the board pledged to seek shareholder approval this year to rescind its supermajority requirements. Three proposals have been omitted on various grounds, and four other resolutions face no-action challenges.

Instead of submitting a no-action petition to the SEC, Apache sued Chevedden in federal court in an effort to exclude his supermajority proposal. The Houston-based energy company contends that he failed to provide sufficient proof of ownership, while Chevedden points to the agency staff’s rejection of a similar no-action challenge by Hain Celestial in 2008. A federal judge held a Feb. 11 hearing in the case and has directed the parties to file briefs by March 5. Shareholder activists have expressed concern that other companies may take investors to court if Apache is successful.

Special Meetings
So far this season, companies have been able to exclude 14 of the 57 special meeting proposals filed by Chevedden’s network of retail investors by moving to offer their own management resolutions this year with higher ownership thresholds.

Most of the companies are seeking a 25 percent threshold, although a few issuers have proposed different percentages, such as Honeywell International (20 percent), and Medco Health Solutions (40 percent). In virtually all of these cases, the companies are acting in response to a 2010 shareholder proposal that requests a 10 percent (of outstanding shares) threshold, and/or a similar investor resolution that received majority support in 2009.

Companies have offered various arguments in support of higher thresholds. Some issuers point out that 25 percent is more appropriate for their circumstances because there are several institutions that own more than 5 percent of their shares. The issuers contend that a higher threshold would deter nuisance requests and force a hedge fund to seek broader support before requiring a company to incur the expense of holding a special meeting.

However, most shareholders won’t have an opportunity this year to choose between the competing thresholds because many issuers are obtaining permission from the SEC staff to omit the investor resolutions. In their no-action requests, the companies are successfully citing Rule 14a-8 (i)(9), which bars a shareholder proposal that would directly conflict with a management resolution that the company plans to present at the same meeting.

Among the companies that have successfully used the (i)(9) argument to exclude special meeting proposals are: CVS Caremark, Medco, Goldman Sachs, Honeywell, NiSource, Baker Hughes, Becton Dickinson & Co., Eastman Chemical, Safeway, Dow Chemical, Pfizer, Chevron, Bristol-Myers Squibb, and Time Warner. However, the SEC staff rejected Boeing’s challenge to a special meeting resolution despite the aerospace company’s argument that it violated state law, was vague and misleading, and was beyond the authority of the board to implement.

Solicitation Reimbursement
The American Federation of State, County, and Municipal Employees has expanded its campaign to urge companies to establish policies to reimburse the solicitation expenses incurred by dissidents who run successful short-slate proxy contests. The labor fund has filed that proposal at six issuers this year. Similar proposals received 39.1 percent support at Office Depot and a 35.2 percent vote at Dell in 2009.

AFSCME sees reimbursement as a complement to proxy access, which remains the subject of an ongoing SEC rulemaking process. HealthSouth adopted a reimbursement bylaw in October; one of the company’s directors is Professor Charles Elson of the University of Delaware, who has argued that proxy access would be “an empty right without a corresponding right to shareholder expense reimbursement.”

Other Issues

Chevedden’s network also has filed 15 proposals to permit investors to act by written consent. Within the S&P 500, about 350 companies allow shareholder action by written consent, while the remaining issuers either do not allow such action or impose some restrictions on that right, according to RiskMetrics data.

Virtually all of these resolutions face no-action challenges. The SEC staff has allowed Bank of America, AT&T, Merck, Fortune Brands, Kimberly-Clark, and Pfizer to omit these proposals on the grounds that they would violate state law. However, the investors have revised their written consent proposals to include the qualifying language, “to the fullest extent permitted by law,” and none of those resolutions have been omitted so far, Chevedden said.

Investors continue to file fewer resolutions that ask companies to redeem their poison pills or put those defenses to a shareholder vote. So far, RiskMetrics is tracking just one 2010 proposal, down from eight in 2009, 14 in 2008, and 25 in 2007.

However, labor investors say they plan to oppose Pulte Homes’ bid for shareholder approval for its poison pill. Pulte adopted a pill in March 2009 as a means to protect the future tax treatment of net operating loss (NOL) carry-forwards, but labor investors warn that the company may use such a pill as an entrenchment device. In November, President Obama signed legislation to extend the NOL carry-back period from two to five years so that companies may sell real estate for a loss and recoup the taxes they paid on past profits. Most homebuilders made profits before the subprime mortgage crisis of 2008, and thus are more likely to use their recent losses to recover past taxes.

March 4, 2010

M&A Proxy Disclosures: Another SEC Enforcement Action

Bank of America is not the only company facing the wrath of the SEC’s Enforcement Division for alleged misleading proxy disclosures. Yesterday, the SEC charged an Iowa insurance company and two executives with proxy disclosure violations, alleging that they inadequately disclosed details about the acquisition of another company and the resulting financial boon to the then-CEO. Unlike the more immediate BofA case though, the SEC’s action is based on a proxy disclosure made four years ago. Still, this case is notable as a reminder that the SEC is bringing proxy disclosure cases these days.

Here is an excerpt from the SEC’s press release:

According to the SEC’s complaint, filed in federal court in Des Moines, the company did disclose that immediately prior to its acquisition of a financing company wholly-owned by Noble, he received a $2.5 million distribution from the acquired company. However, the SEC alleges that American Equity did not disclose that the acquired company had a large deficit at the time of the distribution, and that this acquisition of Noble’s company effectively relieved him of substantial potential personal liability for the acquired company’s debts.

March 2, 2010

Delaware Chancery Court Finally Rules in Selectica

Below is news from Steven Haas of Hunton & Williams (we are posting memos analyzing this decision in our “Poison Pills” Practice Area):

On Friday, the Delaware Court of Chancery issued its long-awaited opinion in Selectica v. Versata Enterprises, addressing the first modern triggering of a rights plan. The court provided judicial validation of NOL poison pills, upholding the directors’ adoption and implementation of the rights plan and their subsequent decision to dilute an acquiring person who deliberately crossed the pill’s threshold.

The court delivered a well-reasoned opinion that employed a very straightforward Unocal analysis. It found that the NOLs were a valuable corporate asset and, therefore, an “ownership change” which might jeopardize their value constituted a valid threat to corporate policy and effectiveness. It made clear that because “NOL value is inherently unknowable ex ante, a board may properly conclude that the company’s NOLs are worth protecting where it does so reasonably and in reliance upon expert advice.” Central to the Court’s analysis was the board’s reliance on outside financial, tax, and legal advisors.

The Court then found that the plan, with a 4.9% trigger, was not preclusive or coercive, notwithstanding the acquiring person’s argument that no stockholder would run a proxy contest against Selectica’s staggered board. The Court explained that “[t]o find a measure preclusive…, the measure must render a successful proxy contest a near impossibility or else utterly moot….”

The Court went on to find that the use of the rights plan fell within Unocal‘s “range of reasonableness.” It rejected the acquiring person’s argument that, among other things, the Selectica board should have adopted a more narrowly tailored response. “[O]nce a siege has begun,” the court stated,” the board is not constrained to repel the threat to just beyond the castle walls.” It concluded that “[w]ithin this context, it is not for the Court to second-guess the Board’s efforts to protect Selectica’s NOLs.”

While Selectica is not the Chancery Court’s first foray into the world of poison pills, this opinion marks the first time the Court has upheld a modern pill that has been actually triggered by an acquiror.

March 1, 2010

The Growth of Fixed-Fee Plans for Law Firms

Last summer, we held this popular webcast – “Alternative Fee Arrangements for Deals: Little Less Talk and Lot More Action?” – and based on media reports, like the two ABA Journal articles below, it looks like the trends discussed during that webcast are continuing.

“Mayer Brown and Reed Smith to Roll Out Fixed-Fee Plans for Corporate Clients,” by Martha Neil

In what may be a signpost to the future for other BigLaw firms, two major legal partnerships are planning to implement fixed-fee payment structures for corporate clients. Mayer Brown is working on a plan to offer fixed fees for all transactional work, and Reed Smith has set up a committee to develop a plan to increase the use of fixed and capped fees in transactional matters, reports Legal Week. The changes are in response to client demand for more value and certainty concerning legal bills, which has been exacerbated by the global ecoomic troubles of the past year.

“If we are to build our client relationships, we have to develop pricing structures which meet these priorities,” says executive partner Jeremy Clay of Mayer Brown. “There seems little doubt this type of pricing is an important factor when getting and developing new client relationships.”

– “O’Melveny Aims to Become Fixed-Fee Leader, Leaked Plan Says” by Debra Cassens Weiss

O’Melveny and Myers acknowledges problems with its business model and unveils plans to become a fixed-fee leader for high-end legal services in a confidential five-year strategic plan leaked to a blog.

Above the Law obtained a copy of the plan, released to the firm’s lawyers about a month ago, and published the highlights. A law firm spokeswoman contacted by the ABA Journal did not comment on the report. The aim, according to the plan, is to become “the leader in providing high-end legal services on a fixed fee basis, reducing costs to clients and achieving superior economic performance through practice management oriented toward cost-effective client service.”

The plan outlines the firm’s intention to offer volume discounts and “appropriate alternative fee arrangements,” according to ATL’s account. On the fixed-fee side, the firm plans to adopt a single rate card by fiscal 2012. The plan acknowledges that O’Melveny’s current business model has yielded disappointing financial and practice growth results. The firm’s litigation model “which depended heavily on high charge hours levels by associates, counsel and partners to offset the impact of discounted rates and increased write-offs of expenses and time, has been under pressure for at least three years,” the plan says.

Under the new plan, the firm is seeking to lower associate-to-partner leverage to “as low as 2 to 1 in some practices.” Associate work is being reduced, according to the plan, because document review and production “have been outsourced altogether or client-directed to contract attorneys.” The plan also emphasizes O’Melveny’s core values and commitment to pro bono work and diversity, according to the blog’s summary.

Above the Law calls the plan “an impressively broad overview” of the legal market and the law firm’s position. “This is not a plan designed to allow the firm to merely hang on and weather the economic storm; instead, the firm is taking proactive steps to make itself more competitive into the next decade–and beyond.”