From Kevin Miller of Alston & Bird, a member of our Advisory Board:
Last Thursday, the Department of Labor proposed regulations that would, if adopted, significantly expand the circumstances in which a person will be treated as a fiduciary under ERISA by reason of providing investment advice for a fee to an employee benefit plan. The proposed regulation was published in the Federal Register on October 22nd – the comment period expires on January 20th.
Specifically, under paragraph (c)(1)(i)(A) of the proposal, the types of advice and recommendations that may result in fiduciary status under ERISA Section 3(21)(A)(ii) are: Advice, appraisals or fairness opinions concerning the value of securities or other property; recommendations as to the advisability of investing in, purchasing, holding, or selling securities or other property; or advice or recommendations as to the management of securities or other property.
While the proposal contains a number of exceptions that may be available in specific circumstances, it otherwise significantly expands the situations in which a financial advisor will be treated as an ERISA fiduciary for providing investment advice to an employee benefit plan, a plan fiduciary or a plan participant – even on a one-off basis and where there is no understanding that the advice will be the primary basis for an investment decision.
Here is news culled from this memo by Wachtell Lipton:
Last week, the UK Panel on Takeovers and Mergers published the conclusions of its review, commenced in June 2010, regarding possible amendments to the UK Takeover Code, which governs the conduct of takeover bids involving UK listed companies. The review, conducted by the Code Committee of the Takeover Panel, was prompted by Panel, investor and governmental criticism of certain takeover practices in recent years, including in a number of highly publicized and controversial takeover situations in the UK market.
While the proposed amendments are not yet published, the tone and direction of the Committee’s paper suggests a significant shift in the approach to hostile bids for UK listed companies. The Code Committee generally concludes that “hostile offerors have, in recent times, been able to obtain a tactical advantage over the offeree company to the detriment of the offeree company and its shareholders.”
Further, in a significant departure from long-accepted UK practice that in a contested situation the target’s board should accept the highest bid with priority to shareholder interests, the Code Committee specifically states that the amendments to the Code will clarify that target boards may “take more account of the position of persons who are affected by takeovers in addition to offeree company shareholders,” primarily employees of the target company. Offeree companies will “not be limited in the factors they may take into account in giving their opinion” on a bid, and the Code will be amended to require disclosure of additional information so that “the offeree company board and all other interested constituencies [can] consider the long term effects of an offer on the merged business in all circumstances.”
The review contains other significant proposals, including: formalizing the “put up or shut up” period, currently discretionary under Rule 2.2, to require that a rumored bidder, within 28 days of the published rumor, either launch a bid, or state that it will not bid and be subject to the 6-month “shut up” period; a strict prohibition on inducement (or break) fees, currently generally capped at 1% of the value of the offeree company; as well as required disclosure of financing arrangements, the offeror’s financial condition pro forma for the bid (even in cash deals), the terms of any financing for the offer (including documentation) and detailed information regarding advisory fees payable to lawyers, bankers, brokers, accountants, public relations and other advisors. These, when taken together with the traditional requirement to have committed certain funds and the new accelerated “put up or shut up” deadline, may increase bidder costs (without reimbursement) and reduce the time that bidders will have to arrange transactions.
The amendments will no doubt spark renewed interest in the strategy and tactics central in any takeover bid, friendly or hostile, for a UK listed company. It remains to be seen whether the proposed changes will result in a more level playing field between hostile bidders and their targets in the UK , but it cannot be doubted that the Code Committee’s recommendations will significantly affect future UK takeover bids. More broadly, and of great significance for market participants in all markets, is whether these fundamental changes in outlook and orientation in the UK will herald an era in which hostile takeovers become more difficult, in which greater deference is given to non-shareholder interests and constituencies, including state interests in preventing or limiting cross-border change in control transactions and transactions that are perceived to have a material impact on domestic employment or product markets.
Recently, Frederic W. Cook & Co. issued this report that examines change-in-control trends over the three year period, 2007-2010. It shows that practices are evolving as multiples come down and double-triggers become more popular, as well as gross-ups going the way of the Dodo…
We have posted the transcript from our recent webcast: “Dissecting the Modern Poison Pill.”
– by George Bason, Joseph Rinaldi, Justine Lee of Davis Polk
The Delaware Chancery Court recently upheld the validity of a bylaw amendment adopted by the stockholders of Airgas, Inc. at its September 2010 annual meeting that accelerates the date of Airgas’s next annual meeting to January 2011, barely four months after its 2010 annual meeting was held. The bylaw amendment was proposed by Air Products and Chemicals, Inc., which is aggressively pursuing a $5.5 billion hostile bid for Airgas. At the September 2010 annual meeting, Air Products successfully obtained all three board seats that were up for election on Airgas’s nine-member classified board. With the bylaw amendment, Airgas will have the opportunity to elect three more directors to the Air Products board much earlier than it otherwise would have been able to.
The decision turns on the fairly typical wording of the annual meeting and staggered board provisions in Airgas’s charter and bylaws. Airgas has appealed the ruling to the Delaware Supreme Court, but unless it is overturned or companies are able to modify their charter or bylaw provisions to address this issue, Chancellor Chandler’s decision may substantially weaken the defenses of a number of companies with classified boards–a practice by which only one third of the members of the board of directors is elected at each annual meeting and directors cannot be removed except for cause.
The significance of the bylaw amendment in Airgas’s situation is accentuated by the fact that the 2010 Airgas meeting was held late in the proxy season, making the proposed January 2011 meeting only four months away. As a practical matter, a similar bylaw amendment would present less of an issue for companies with classified boards that hold their annual meetings in the spring, since an accelerated January annual meeting would still be seven to eight months away, and, applying Chandler’s textual analysis (as discussed below), a court is less likely to uphold an amendment that would cause the company to hold its next annual meeting in the same calendar year.
Annual means “once a year,” not “separated by approximately twelve months”
At the heart of the Airgas dispute is whether the company’s annual meetings must be held one year apart or once a year, and, if once a year, whether that refers to a calendar or fiscal year. Neither “annual” nor “year” is defined in Airgas’s charter or bylaws.
Airgas argued that the bylaw amendment, which received the approval of 51% of the votes cast (representing 45.8% of the shares entitled to vote), was invalidly adopted because it conflicted with the director terms set forth in Article III of the Airgas bylaws and therefore needed the approval of at least 67% of the shares entitled to vote. Article III sets forth the classes and terms of the classified board. It provides that each class of directors shall “hold office for a term expiring at the annual meeting of stockholders held in the third year following the year of their election” (emphasis added). Article III is protected by a supermajority vote provision in the Airgas charter, which requires that any amendment or repeal of Article III, or the adoption any provision inconsistent therewith, must be approved by the affirmative vote of at least 67% of the outstanding shares. Airgas argued that moving up the 2011 annual meeting would impermissibly shorten the terms of the directors up for election and therefore needed such supermajority approval.
Reasoning that “the operative provisions of Airgas’s bylaws and charter in dispute here contain language that may fairly be read to have more than one meaning,” and that he must therefore construe the ambiguous terms “in favor of the shareholder franchise” (i.e., in such a way as to support the shareholder-approved bylaw amendment), Chancellor Chandler interpreted Article III to provide that the class of Airgas directors who were elected in 2008 will have their terms expire in 2011– i.e., in the “third year” following their election and not “three years” after their election.
Chancellor Chandler went on to hold that by defining the director terms by reference to their expiration “in the third year” following their election, the drafters of the charter opted not to specify a 36-month or 3-year term, and that therefore the bylaw amendment did not cut short their respective terms.
In response to Airgas’s argument that the bylaw amendment would require the 2010 and 2011 meetings to occur in the same fiscal year, Chancellor Chandler held that “under the ‘rule of construction in favor of franchise rights,’ I cannot read the word ‘fiscal’ into the charter, and must instead construe the ambiguous terms against the board, which leads to my conclusion that Airgas’s annual meeting cycle can validly run on a calendar year basis and still be consistent with the charter.”
The court adopted a similar approach to statutory interpretation in analyzing whether the bylaw amendment violated Delaware law, holding that “the default rules in Delaware do not require waiting a ‘year’ or ‘twelve months’ or any set amount of time from one annual meeting to the next.” Noting that DGCL §211(c) explicitly permits the court to require annual meetings to be held within 13 months of the last annual meeting, Chancellor Chandler emphasized that it does not address whether the annual meeting interval may be shortened by any amount of time.
Companies with classified boards should review the specific wording of their relevant charter and bylaw provisions
We would advise all companies with staggered boards to review closely the text of their charter and bylaw provisions, with a view to assessing their potential exposure on this issue and determining whether revisions to address the decision are possible.
This September-October issue of the Deal Lawyers print newsletter was just sent to the printer and includes articles on:
– Drafting Board Minutes for M&A Transactions: Tips and Pitfalls
– The Lessons Learned: Poison Pills Post-Barnes & Noble
– Ripe for Disclosure? A 1933 and 1934 Act Analysis: Disclosure of Merger Negotiations
– DOJ and FTC Issue Revised Horizontal Merger Guidelines
If you’re not yet a subscriber, try a “Rest of ’10 for Free” no-risk trial to get a non-blurred version of this issue on a complimentary basis.
Here is news from Richards Layton:
Yesterday, the Delaware Supreme Court issued an opinion affirming the Court of Chancery’s decision in Selectica, Inc. v. Versata, Inc., C.A. No. 4241-VCN, 2010 WL 703062 (Feb. 26, 2010), which upheld a board’s adoption of a poison pill rights plan with a 4.99% triggering threshold, designed to protect the usability of the corporation’s net operating losses (“NOLs”), and a special committee’s subsequent decision (following a deliberate trigger of the pill) to deploy the exchange mechanism in the rights plan to dilute the triggering stockholder. The Supreme Court largely affirmed the reasoning employed by the Court of Chancery, and held that the board of directors had met its burden under the Unocal standard. Here is a discussion of the facts of the case.
The Supreme Court upheld the Vice Chancellor’s post-trial rulings that the board of directors had reasonable grounds to believe that the triggering stockholder’s purchases threatened the corporation’s NOLs and that the NOLs were corporate assets worth protecting. The Supreme Court further held that the NOL pill was nonpreclusive and within the range of reasonableness under the circumstances. The Court noted that the preclusion test enunciated in Unitrin, focusing on whether a defensive device renders a bidder’s attempt to wage a proxy contest and gain control “either mathematically impossible or realistically unattainable,” is analytically speaking a single test, because mathematical impossibility is “subsumed within the category of preclusivity described as ‘realistically unattainable.'”
The Court also reiterated that the Unocal review is context-specific, and emphasized that its ruling should not be taken as “generally approving the reasonableness of a 4.99% trigger in the Rights Plan of a corporation with or without NOLs.” The Court also emphasized that a potential future decision by the board to retain the NOL pill in the face of another threat would be subject to fresh evaluation under the Unocal standard at that time.
Cliff Neimeth of Greenberg Traurig notes: One thing we didn’t get a chance to mention on our webcast last week is that drafters of rights agreements should consider footnote 244 in VC Strine’s Yucaipa decision. He suggests that in an NOL rights agreement (where the pill trigger is 4.99%) the definition of “beneficial ownership” should be drafted more narrowly than the expansive “13D definition” commonly used in traditional pills.
He suggests that only economic ownership (outright purchases of the company’s stock) and not voting agreements and arrangements should determine “beneficial ownership” because the NOL pill is designed for a very narrow and specific purpose – the preservation of a material corporate asset – the loss of which is measured, for Internal Revenue Code purposes, by actual purchases and sales among 5%(+) holders for purposes of IRC section 382. Whereas, a traditional pill is designed to protect the company from a broader array of change-in-control threats that may be occassioned by more garden variety 13D group type acquisition activities, and the traditional pill trigger customarily will be set at the 20% (i.e., ISS recommended) 15% level. Strine, in fact, suggests a dual definition of beneficial ownership where an NOL pill feature is combined with a traditional pill in the rights agreement.
In that Selectica is on appeal to the Delaware Supreme Court it will be interesting to see if Strine’s message is acknowledged. In any case, it signals the Delaware Court of Chancery’s thinking on the subject and should not be ignored by drafters of future NOL pills.