Tune in tomorrow for the webcast – “Dissecting the Modern Poison Pill” – to hear Rick Alexander of Morris Nichols, David Katz of Wachtell Lipton and Cliff Neimeth of Greenberg Traurig examine the use of poison pills and how they are constructed in the wake of Selectica, Yucaipa and Barnes & Noble, including factors you should consider when devising a pill. If you are not yet a member, try a 2011 no-risk trial and get the rest of 2010 for free (including access to this program).
Monthly Archives: September 2010
Courtesy of The Deal, here is a podcast wtih Phillip Mills of Davis Polk regarding how reverse termination fees have increased in size since the financial crisis, the different types of present-day reverse termination fees, and the adaptability of private equity buyers in today’s changed environment.
Here is news culled from this Gibson Dunn memo:
In-house counsel in the EU will continue to be denied the protection of legal professional privilege after the Court of Justice of the European Union (‘ECJ’) unambiguously reaffirmed the limited scope of the doctrine under EU law. The appeal arose from an action for the annulment of a European Commission decision to seize documents during a “dawn raid” on the offices of a subsidiary of Akzo Nobel under competition enforcement powers. Akzo Nobel disputed the finding of the Commission (upheld on appeal to the EU’s General Court) that the seized documents were not protected by legal privilege since they were prepared by in-house lawyers.
On September 14th, in Case C-550/07 P, Akzo Nobel Chemicals Ltd and Akcros Chemicals Ltd v. European Commission, the ECJ reaffirmed the criteria for legal privilege laid down in 1982 in Case 155/79, AM&S Europe Ltd. v. Commission. As such, the European Courts have accepted the existence of privilege only with respect to documents which, firstly, have been prepared for the purposes and in the interests of a client’s rights of defence and, secondly, which have been prepared by an independent lawyer who is a member of an EU Bar Association.
The appeal in Akzo Nobel turned on whether in-house counsel can be deemed to be independent, though they are bound to their clients by a contract of employment. In rejecting the appeal, the ECJ held that in-house lawyers’ economic dependence and their close ties with their employers mean that they cannot attain a level of independence comparable with that of an external lawyer, even though they may be regulated members of a Bar Association of a European Union Member State. The Court rejected the claim that the changed “landscape” of EU competition law, in particular with the passage of Regulation 1/2003 and the accession of new Member States, warranted a departure from the strict position laid down in the AM&S jurisprudence.
The ECJ judgment adheres closely to Advocate General Kokott’s Opinion of 3 May 2010 in its emphatic rejection of privilege protection for advice from in-house counsel. It, nonetheless, importantly differs in its silence on the status of non-EU qualified lawyers. Advocate General Kokott had expressed her view that the extension of privilege to lawyers who are members of a Bar or Law Society in a third country “would not under any circumstances be justified”. Despite this, and despite the intervention of several European and international Bar Associations, the ECJ declined to rule explicitly on the question. This leaves the pre-existing position unchanged, meaning that advice from lawyers qualified outside of the European Union cannot be assumed to benefit from legal professional privilege.
Here is news from William Savitt and Ryan McLeod of Wachtell Lipton:
The Delaware Court of Chancery last week refused to block a proposed merger in a decision highlighting the importance of careful process in structuring a corporate sale. In re Dollar Thrifty S’holder Litig., C.A. No. 5458-VCS (Del. Ch. Sept. 8, 2010).
From 2007 through 2009, Dollar Thrifty had engaged in unsuccessful negotiations with both Hertz and Avis. Following a turnaround effort led by a new CEO, the Dollar Thrifty board decided to re-engage with Hertz, and, after months of bargaining, Dollar Thrifty agreed to be acquired for $41 per share. This consideration represented a 5.5% premium over Dollar Thrifty’s market price, but the merger agreement also included a robust reverse termination fee and bound Hertz to make substantial divestitures if necessary to secure antitrust approval. Following the announcement, Avis objected that had not been invited to bid and made an offer at a higher dollar value–$46.50–but its offer lacked the deal certainty of the Hertz contract.
Avis did not did sue, but shareholder plaintiffs did, attacking the market premium as insufficient and seeking an order requiring Dollar Thrifty to open discussions with Avis. Beginning with the premise that “when the record reveals no basis to question the board’s good faith desire to attain the proper end, the court will be more likely to defer to the board’s judgment about the means to get there,” the Court of Chancery denied the injunction.
The Court first held that the board’s decision to negotiate only with Hertz was proper, squarely rejecting the claim that a board is required to conduct a pre-signing auction. Vice Chancellor Strine instead credited the board’s well-informed determination that Avis lacked the resources to finance a deal, that a potential deal with Avis was subject to greater antitrust risk, and that Hertz might have withdrawn from the process if it faced “pre-signing competition.”
The Court also refused to accept the argument that a 5.5% market premium is insufficient. Drawing deep into economic theory, the Vice Chancellor held that the board reasonably focused on the “company’s fundamental value” rather than a spot market price in considering a sale of control. Delaware “law does not require a well-motivated board to simply sell the company whenever a high market premium is available (such as selling at a distress sale) or to eschew selling when a sales price is attractive in the board’s view, but the market premium is comparatively low.” Finally, the Court upheld the merger agreement’s 3.9% termination fee, noting that it was neither preclusive nor coercive, as evidenced by the fact that Avis had made a topping bid in excess of the fee and that the shareholders of Dollar Thrifty remained free to reject the Hertz deal without penalty. Indeed, Vice Chancellor Strine lauded the features of this merger agreement, noting that “the deal protections actually encourage an interloper to dig deep and to put on the table a clearly better offer rather than to emerge with pennies more.”
The Dollar Thrifty decision represents another marker in a long line of cases endorsing the primacy of corporate directors’ strategic decisions. The courts remain ready to respect a sales process, even a limited one, that is structured in good faith by an independent and well-informed board.
Here is news from Steven Haas of Hunton & Williams LLP: Yesterday, Chancellor Chandler issued his post-trial opinion in eBay Domestic Holdings, Inc. v. Newmark, addressing a closely watched dispute at privately-held craigslist, Inc. The case posed several novel issues, including the adoption of a poison pill at a privately-held company by its founders.
The court rescinded the rights plan, which it said had been adopted to prevent eBay from purchasing additional shares in the company and to hamper eBay’s ability to sell its 28% ownership bloc to a third party. Among other things, the court found that “[u]ltimately, defendants failed to prove that craigslist possesses a palpable, distinctive, and advantageous culture that sufficiently promotes stockholder value to support the indefinite implementation of a poison pill.”
The court also rescinded a dilutive stock issuance to craigslist’s founders that was aimed at incentivizing eBay to give craigslist a right of first refusal over its shares. It held that the founders breached their duty of loyalty and that the issuance failed the entire fairness test. The court refused to rescind a staggered board structure that had been implemented by the founders, finding that it was protected by the business judgment rule.
This recent memo from Towers Watson – entitled “Are Golden Parachutes Losing Their Luster?” – analyzes how use of golden parachutes has changed pretty dramatically at a hefty 25% of those companies in the Fortune 500 that started the past year with a parachute. Check it out.
Here is news culled from this Wachtell Lipton memo by Michael Segal and Ian Levin:
The Pension Benefit Guaranty Corporation has published a proposed regulation under Section 4062(e) of ERISA which, if adopted, would provide the PBGC with greater opportunities to compel plan sponsors to increase the funded status of their pension plans when engaging in asset sales or restructuring operations.
In general, Section 4062(e) of ERISA requires a company that sponsors a single-employer defined benefit pension plan to notify the PBGC within 60 days if the company ceases operations at a facility in any location and, as a result, more than 20 percent of the company’s employees participating in the pension plan separate from employment (referred to as a “Section 4062(e) Event”). If a Section 4062(e) Event occurs, the PBGC has discretion to require the company to either provide an escrow for a pro-rata portion of the plan’s underfunding (generally, as if the entire plan had been terminated) or purchase a bond for up to 150% of such amount for five years to protect the plan in the event that it terminates during such period. The escrow is returned after five years if the plan has not been terminated, but without interest, and the bond can be expensive to purchase. Section 4062(e) has been interpreted and applied by the PBGC narrowly, but with more frequency in recent years. In those limited situations, the PBGC has used the threat of the escrow or bond to force plan sponsors to increase the funding of their pension plan in excess of legal requirements.
Under the proposed regulation, the definition of a Section 4062(e) Event would be greatly expanded to include more events, many of which occur in the ordinary course of business, such as the cessation of a single operation at a location even if the company continues other operations at the same location (e.g., discontinuance of one type of manufacturing or administrative operation at a location) and the relocation of an operation from one facility to another. In addition, a Section 4062(e) Event would include an asset transaction in which 20 percent or more of the employees participating in the selling company’s pension plan terminate employment — regardless of whether affected employees are hired by the buyer, all or a portion of the plan is transferred to the buyer, the funding status of the plan or the financial strength of the selling employer. The PBGC may permit the Section 4062(e) liability to be satisfied by the buyer’s hiring of the affected separated employees and maintaining all or a portion of the seller’s plan attributable to those employees.
If the PBGC’s proposed regulation is adopted, companies will have greater risk of incurring a Section 4062(e) Event in the ordinary course of business and becoming subject to the financial burdens of Section 4062(e) or a negotiated settlement with the PBGC that increases the funding requirements otherwise applicable to the affected plans. Any company contemplating a sale of assets involving a significant number of employees or a restructuring of its operations should consider whether a Section 4062(e) Event may occur and its possible ramifications. Companies should also review their credit agreements, which may reference Section 4062(e) in representations and warranties, covenants, notice requirements and default events, to ensure that a Section 4062(e) Event will not cause unintended and adverse consequences.