Here is news from Richards Layton & Finger culled from this memo (posted in our “Minority Holders” Practice Area):
Following trial in In re John Q. Hammons Hotels Inc. Shareholder Litigation, the Delaware Court of Chancery ruled in favor of defendants, finding that the merger price was fair value, that controlling stockholder John Q. Hammons did not breach his fiduciary duties, and that the third-party acquirers did not aid and abet a (nonexistent) fiduciary duty breach.
In the Court’s summary judgment opinion in this case, the Court applied the entire fairness standard of review to the merger, which involved the third-party purchase of a corporation with a controlling stockholder who received consideration that was different from the minority. Because the transaction was approved by an independent and disinterested special committee, plaintiffs bore the burden at trial of proving the transaction was unfair. In its post-trial opinion, the Court noted that defendants “may actually have been entitled to business judgment rule protection,” but it analyzed the transaction under the entire fairness standard and found the process and the price to be fair.
The Court found that Mr. Hammons did not breach any fiduciary duties, particularly as he took less per-share consideration than the minority stockholders received. Finally, because no fiduciary duties had been breached, the Court rejected the claim against the acquirers for aiding and abetting.
Here is news culled from this Wachtell Lipton memo:
Last week, Industrial and Commercial Bank of China announced that it had entered into an agreement to purchase 80 percent of the outstanding common stock of the U.S. subsidiary bank of The Bank of East Asia, Limited, a privately held Hong Kong-based bank. Bank of East Asia also has an option to sell to ICBC its remaining 20% interest in the U.S. bank for a period of 10 years following the acquisition. Although relatively small in size, this transaction is a most significant precedent. The ICBC deal would mark the first control acquisition by a mainland Chinese bank of a U.S. bank since Congress passed a law in 1991 substantially tightening the regulation of foreign banks operating in the U.S. following the collapse of BCCI. The transaction could be the start of a very significant new dynamic in U.S. bank M&A.
Chinese banks have tried for years to try to persuade U.S. regulators to permit them to acquire a U.S. bank. The primary regulatory obstacle has been that, by law, the Federal Reserve may not approve an acquisition by a foreign bank of a U.S. bank unless the Federal Reserve determines that the foreign bank is subject to comprehensive supervision or regulation on a consolidated basis by its home country supervisor. To do so, the Federal Reserve must find that the foreign bank is supervised or regulated so that its home country supervisor receives sufficient information on the worldwide operations of the bank, including its relationship to any affiliates, to assess the bank’s overall financial condition and its compliance with law and regulation.
An initial determination by the Federal Reserve that a foreign bank regulator exercises comprehensive consolidated supervision is highly fact dependent and can take years of analysis and deliberation. Here, the analysis is made more challenging by significant factors specific to China, including the unique structure of the Chinese political system, and the extremely rapid pace of change in China’s economy and financial markets. That being said, once the Federal Reserve has determined that a foreign bank regulator meets this standard, the determination becomes much less of an issue in subsequent acquisitions by the same bank or by other banks from that country.
The transaction is subject to regulatory approval, and both the U.S. Committee on Foreign Investment in the U.S. (an interagency committee headed by the Secretary of the Treasury) and the Federal Reserve will certainly give it a close review. However, given the larger political context and the events surrounding the announcement of the deal, it seems likely that the parties have carefully vetted this transaction from all relevant angles.
In a hearing on Monday, upon motion to preliminarily enjoin the acquisition of Occam Networks by Calix, Delaware Vice Chancellor Travis Laster made a number of significant rulings in Steinhardt v. Occam Networks (Del. Ch. Ct.; 1/24/11) , including a ruling that could significantly alter the parameters of when the enhanced scrutiny (application of the Revlon rules generally requiring a board to seek the best price reasonably available) rather than the presumption of the business judgment rule will apply to a stock and cash merger.
According to the September 16th press release of the parties announcing the transaction:
Calix [will] acquire Occam Networks in a stock and cash transaction valued at approximately $171 million, which is approximately $7.75 per outstanding share of Occam Networks stock. . . . each outstanding share of Occam Networks common stock (other than those shares with respect to which appraisal rights are available, properly exercised and not withdrawn) will be converted into the right to receive (a) $3.8337 per share in cash, without interest plus (b) 0.2925 of a validly issued, fully paid and non-assessable share of Calix common stock. After the completion of the acquisition, former Occam Networks stockholders will own between 16.5 percent and 18.9 percent of the outstanding shares of Calix’s common stock based on the number of Calix shares outstanding as of September 15, 2010″ Other published reports noted that the $7.75 per share in consideration represented a 27% premium to the share price of Occam stock prior to the announcement of the transaction.
In this transcript of the hearing, VC Laster suggests that a transaction in which the target stockholders will only own approximately 15% of the acquiror after giving effect to the transaction is a “final stage transaction” requiring the application of enhanced scrutiny (i.e., the Revlon rules) rather than the presumption of the business judgment rule:
“This is a deal where the consideration was approximately 50 percent cash floating based on the market price. It was priced as up to 19.9 percent of the acquirer’s share plus enough cash to make the total value number. But the problem is it actually doesn’t receive the 19.9 because of their employee options and awards that are rolling, and so the public will end up holding approximately 15 percent of the post-transaction entity after the fact.
We tend to focus, in our juris prudence, on change of control and the change of control test. So there was a lot of debate over whether this, in fact, was sufficient cash to merit a change of control. I think what people need to remember is that the change of control test is ultimately a derivative test. The point is that when enhanced scrutiny applies is when you have a final stage transaction. The reason enhanced scrutiny applies to a change of control is because it’s a constructive final stage transaction. You’re giving up control to a person who could then cash you out because he’s the new controller. This is a situation where the target stockholders are in the end stage in terms of their interest in Occam. This is the only chance they have to have their fiduciaries bargain for a premium for their shares as the holders of equity interests in that entity.
It’s easy to see here in two ways. First, it’s easy to see in terms of the amount of cash. If you want more cash for your shares, this is the only time you have to get it. But it’s also easy to see in terms of the amount of interest you’re going to have in the post-transaction entity. We often talk about, oh, well, but the stockholders can get a future control premium. That’s all well and good for the future entity, but what you’re bargaining over now is how much of that future premium you’re going to get.
So let’s say that Calix is some day sold, and let’s all hope that it does very well and becomes an attractive acquisition target, and that one of the big boys picks it up at some point for a healthy premium. The target stockholders today are bargaining for what their share of that premium will be. They’re going to only get 15 percent, and obviously there could be more acquisitions that dilute everybody, et cetera. I get that. But as between the Calix stockholders and the Occam stockholders, now is the time; when the target fiduciaries are bargaining for how much of that future control premium their folks will get. This is it. This is the end. This is the only opportunity where you can depend upon your fiduciaries to maximize your share of that value.
I think back in 1989, it made sense for people to be worried over the line between Revlon and non-Revlon. It was three years after that landmark case. That case was a Cunian[sic] paradigm shift if there ever was one. We had language in there like “auction duty, radically altered state,” really seemingly heavy duty stuff. We now know it’s a reasonableness standard. There’s no single blueprint. A target board doesn’t have to take the facially higher cash price. It can consider the strength of the currency. It can take a stock deal if it believes that the stock offers better long-term appreciation and more potential synergies.
That’s why I said at the outset in this case it’s just not worth having the dance on the head of a pin as to whether it’s 49 percent cash or percent cash or where the line is. This is the only chance that Occam stockholders have to extract a premium, both in the sense of maximizing cash now, and in the sense of maximizing their relative share of the future entity’s control premium. This is it. So I think it makes complete sense that you would apply a reasonableness review, enhanced scrutiny to this type of transaction.”
The Occam ruling appears to imply that because Occam stockholders will only own 15% of Calix after giving effect to the transaction, they are less likely to get a significant premium if Calix is subsequently acquired, even though Calix does not appear to have a controlling stockholder or group of stockholders.
Historically, the courts and most practitioners have focused on the percentage of the consideration being paid in cash v. the percentage being paid in stock – i.e., the greater the percentage of the consideration paid in stock, the greater the likelihood that target stockholders will be able to obtain a significant premium in a subsequent transaction in addition to the premium, if any, received in the initial transaction. See footnote 27 in Lawrence Hamermesh’s UPenn Law Review article “Premiums in Stock-for-Stock Mergers and Some Consequences in the Law of Director Fiduciary Duties” that says:
See In re Santa Fe Pac. Corp. S’holder Litig., 669 A.2d 59, 70-71 (Del. 1995) holding that a transaction in which thirty-three percent of the company’s shares were acquired for cash was not subject to Revlon duties—the duties of a board of directors, once they have decided to sell control of the company, to gain the best available price for the shareholders of that company); cf. In re Lukens Inc. S’holders Litig., 757 A.2d 720, 732 n.25 (Del. Ch. 1999) (suggesting that a merger in which consideration consisted of sixty-two percent cash and thirty-eight percent stock of the acquirer would likely be subject to Revlon duties).
It is not clear why the Occam Court‘s reasoning would not be equally applicable to a stock for stock merger where the target’s stockholders will only own a small percentage of the pro forma combined entity. See Arnold v. Soc’y for Sav. Bancorp., Inc., 650 A.2d 1270 (Del. 1994) for an example of a pure stock for stock transaction in which the court rejected the notion that Revlon duties were triggered even though the acquiror was many times bigger than the target, focusing instead on the lack of a change in control where control of both corporations remains in a large, fluid, changeable and changing market.
Based on the information in the press release announcing the transaction, it appears that Calix/Occam transaction is a 50% cash/$50% stock deal in which the stockholders of Occam are effectively rolling over half of their investment into shares of Calix and will preserve the opportunity to get the same premium as other Calix stockholders if and when Calix is ultimately sold in addition to the 27% premium received in Occam’s acquisition by Calix.
Last week, the Federal Trade Commission announced the annual adjustment of its HSR thresholds, the ones that dicate which mergers and acquisitions must be reported to the FTC and DOJ. Once the new HSR thresholds go into effect – they will apply to deals closed 30 days after the thresholds are published in the Federal Register – notification will be required if the acquiror holds another person’s assets or voting securities valued in excess of $66.0 million (previously $63.4 million), and
– The transaction involves one party with annual net sales or total assets of $13.2 million or more (previously $12.7 million) and another party with annual net sales or total assets of $131.9 million or more (previously $126.9 million); or
– The acquiring party will hold assets or voting securities of another person valued in excess of $263.8 million (previously $253.7 million).
We have posted memos regarding this development in our “Antitrust” Practice Area.
In their “Tuesday Blog Series,” Horizon Partners – a boutique M&A firm – gives some helpful insight on how a financial advisory firm views certain components of purchase agreements.
Following up on this blog predicting M&A trends for this year, here is a summary of this annual M&A year-end recap and outlook report from Ernst & Young Transaction Advisory Services (the summary is copied from a Directors & Boards E-Briefing):
– It was the year of the PE comeback (global deal value was up over 90%)
– Defined by a two-speed recovery, with momentum building in emerging markets versus limited deal activity in developed markets (BRIC M&A deal value was up more than 46%)
– Companies are nervous to pull the trigger (Only 41% of companies are planning on making an acquisition over the next 6-12 months vs. 57% in April 2010)
– More focus on organic growth ( 75% of companies are more focused on organic growth vs. 66% six months ago)
– Fewer “do-or-die” transactions – more strategic M&A. Bargain-basement deals declining, valuation multiples improving
– One foot on the accelerator, one foot on the brake: Boardrooms are cautious right now, but paradoxically 50% of companies are ready to execute an acquisition at short notice – up from 36% a year ago.
– All the pieces are in place for a resurgence, but confidence and clarity about direction of economic recovery will be crucial
– Lots of pent-up demand – record levels of cash on corporate balance sheets and in PE coffers
– More hostile bids – an indication of early stages of an M&A recovery
– Hot Industries – The sectors that will be ripe for activity include energy, technology, healthcare, and financial services
Below is a summary of Stikeman Elliott’s analysis of M&A Trends for this year, culled from this full report:
As the global financial storm subsides, Canada’s economy is commanding unaccustomed attention and some new-found respect. A solid regulatory system and strong demand for Canadian resources and commodities have kept the country in the business headlines for all the right reasons. In the M&A sector, there is every indication that the rebound experienced in 2010 will continue in 2011, as market players continue to adjust and adapt. We believe that each of the trends identified below will play a part in shaping the market – whether it’s creative methods of financing, more realistic valuation methods, adjustment to deal terms or regulatory developments in the areas of foreign investment, taxation and securities law.
M&A Trends 11 for ’11
1. Investment Canada: Business as usual for foreign investors in 2011
2. Canadian poison pills gain strength: Just saying no may be getting easier
3. The commodities sector: No end in sight to foreign demand
4. Financing and valuation:Techniques for bridging the gaps
5. Hedge funds, pension funds and other pools of capital
6. Growth of a domestic high-yield debt market: A positive result of low interest rates
7. Going with the (cash) flow in valuations
8. Income tax: Recent developments generally positive for M&A
9. Structuring investments in M&A transactions: Bilateral investment treaties
10. Infrastructure: One of the hottest M&A tickets for 2011
11. Deal terms in Canada and the U.S.: Similarities and differences
Here is something that ISS’s Luke Green recently blogged:
Securities Litigation Watch has recently noted that securities class actions related to M&A activity have been skyrocketing since 2009. And, as Advisen’s most recent Q3 report observes, breach of fiduciary suits filed in state court are the “raging bull of the year thus far,” constituting “approximately a third of all new security suit filings in Q3 2010.” Commentators have argued that the growth of M&A breach of fidcuiary suits is largely due to plaintiff’s attorneys seeking new revenue streams as securities class action suits decline. But, a brief analysis of economic conditions relating to M&A activity seems to indicate that other significant factors may be fueling the M&A class action trend.
To understand where we are today in terms of the surging numbers of M&A class actions it may help to start first with an analysis of the supply and demand forces at play during the credit crisis. Throughout 2008 strong companies became increasingly pessimistic as the U.S. sunk into the depths of recession. Faced with a frozen credit market and plummeting consumer spending, these companies were incentivized to change their growth strategy from horizontal and vertical integration to organic growth based on their core strengths, or to rightsizing their cost structures in anticipation of reduced economic activities. Honest corporate executives aspired to make their quarterly numbers by applying traditional conservative growth strategies: efficiency through lean production and reduced staffing, focusing resources on core competencies, and cutting costs. While these companies turned their attention inward they also began storing up cash reserves and planning for the worst.
As a result, not only did a panicked lending industry freeze credit, corporate buying dwindled resulting into an all but non-existent M&A market. Private equity firms, which account for a significant portion of M&A in a normal market, generally withdrew from the deal market as well. Meanwhile, on the M&A supply side, the ranks of the less fortunate swelled as reduced revenues and lack of credit exposed weaknesses in companies that otherwise prospered during better times. Because of the broad nature of the recession, buyers were few and far between for the mounting number of distressed companies. But, even if there were potential buyers for these companies, sellers were reluctant to sell for fear of being underpriced in a hyper distressed stock market.
Fast forward to November 2010. What has changed? The aching back of a deep recession is still all too familiar. And, times are still tough for many. But, there are signs of positive change. Christopher Lisle of Acclaro Growth Partners reports that, as of September 2010, GPD growth has averaged 3.5% since mid-2009. During the same time period half a million private sector jobs were created. Furthermore, credit markets are beginning to thaw. Lisle estimates that private equity firms have as much as $450 billion in cash sitting on the sidelines that they stored up during the boom years but now must use before they have to give it back to investors. Buyer confidence in corporate stability appears to be on the rise as well. Jeremy Gaunt of Thompson Reuters reports that the price for investment grade corporate bonds is on the rise while the cost of insuring U.S. and European investment grade debt is going down. Typically, the accelerated purchase of these securities indicates investor confidence that companies will not be damaged by what Gaunt refers to as “U.S. slowdown and contagion elsewhere.”
The link between increased M&A activity and thawing credit markets, cash-rich U.S. corporations and increased investor confidence appears compelling. Thompson Reuters reports that worldwide M&A deals reached $267 billion in August, which was the most active August since 1999. The StarTribune reports that the first half of 2010 is the best half for M&A since 2007 with a 49% increase in the first half of 2010 from the same period in 2009.
With credit available to those who qualify at pre-2008 prices, companies with the ability to buy are in a position for strategic growth. And, as the economy has stabilized, buyer confidence has risen as reliable economic forecasts are becoming more realistic. In addition, many of these companies toned their infrastructure and core businesses during the darkest parts of the recession while storing up cash reserves along the way. For these fortunate shoppers the M&A store shelves are stocked with candy. Many companies suffered more than they could bear during the recession and have not yet fully recovered. Others are drawing ever closer to insolvency (Advisen observes that bankruptcies in Q1 2010 jumped significantly from the already high numbers in Q1 2009). Thus, these weaker companies are looking for an exit strategy. M&A, while not always the most attractive option, is at least an option. Now that both buyers and sellers are more confident that available credit can ensure that M&A deals will close, the scales are tipping in favor of M&A.
M&A activity seems to be surging on the coattails of a recovering economy. M&A related securities class actions are also surging. Are these trends cause and effect? It appears very likely that the same forces driving M&A activity in general are also driving M&A securities class actions. Most of the M&A suits are breach of fiduciary duty suits (Advisen reports that they accounted for 33% of all securities suits filed through the first three quarters in 2010). More often than not these types of suits involve shareholders who are upset that their board is selling at depressed prices. Allegations often include self dealing on the part of the board, especially where change in management incentives and compensation are involved. So, companies hard hit by the recession are looking for a way out. Boards and executives who have little hope of improving their numbers any time soon are looking for a way out. With limited options, M&A is an alternative, albeit one that investors whose stocks have taken a severe beating are reluctant to embrace. It is the perfect storm for breach of fiduciary suits.
The trend toward increased M&A activity and an increasing number of M&A securities class actions appears likely to continue. The rebound from low transaction volumes seems to be in full swing as credit markets improve and management/board confidence remains positive and stable. But, the true longevity of the trend is anyone’s guess. A relapse into recession would demoralize investors and restrict credit flows again, which would almost certainly tighten the noose on M&A activity. For the time being, however, slow and steady economic growth out of an economic trough seems to be the recipe for rising M&A securities class actions.
Thanks to The Deal, here is a three-minute video featuring Marty Lipton, who explains the reasons why he invented the poison pill a few decades ago:
Why Martin Lipton invented the poison pill from TheDeal TV on Vimeo.