Monthly Archives: August 2011

August 29, 2011

Most Companies Receive Wide Support on Severance

From Ted Allen of ISS: The Dodd-Frank Act also requires companies to hold separate shareholder votes on “golden parachute” arrangements when they seek approval for mergers, sales, and other transactions. However, the SEC rules on this mandate did not take effect until April 25, so less than a dozen companies have held parachute votes this year.

As of Aug. 7, seven Russell 3000 companies had reported the results of golden parachute votes, and five earned more than 89 percent support. These results suggest that investors will tend to support a company’s golden parachute payments if they believe that the overall transaction has merit.

There have been two exceptions so far. On July 26, MedCath Corp. received almost unanimous support for two asset sales, but just 82.6 percent support on its severance arrangements. At SAVVIS, the sale of the company to CenturyLink earned nearly unanimous investor approval on July 13, but the severance arrangements received just 70 percent support. It appears that SAVVIS investors had concerns over $3.9 million in potential tax gross-up payments for CEO James Ousley.

Two companies have yet to report vote results, and six more severance votes are scheduled for the next two months.

August 25, 2011

CEO Change-in-Control Cash Multiplies Down in 2011

Equilar has released its latest study, comparing change-in-control strategies in the Fortune 100 between 2008 and 2010. As regulation increases, companies are modifying their change-in-control policies, often making the provisions for payment stricter. Some of our findings:

– Cash multipliers for CEOs are decreasing in size. 2x cash multipliers for F100 CEOs rose in prevalence, from 18.2% in 2008 to 34.9% in 2010, while 3x cash multipliers decreased from 65.9% to 44.2%.

– Over 40% of CEOs receive a cash payment for a change-in-control related termination. 45.3% of F100 CEOs have such a payment in place.

– The majority of terminations require a double trigger. 97.7% of companies that give cash payments upon a termination related to change in control required a double trigger; the remaining 2.3% required a modified trigger.

August 24, 2011

The Problems of Chinese Reverse Mergers

In this podcast, Matt Orsagh of the CFA Institute talks about reverse mergers for some Chinese companies that have implications for investors:

– What has the PCAOB said about Chinese reverse mergers?
– What do you think is the biggest risk for investors in these companies?
– How should investors go about analyzing these companies?

August 23, 2011

Shortcomings in the Drafting of the Google-Motorola Merger Agreement

Here’s a blog from Ken Adams entitled “Shortcomings in the Drafting of the Google-Motorola Merger Agreement” from his “The Koncise Drafter Blog.”

August 22, 2011

Delaware Decision on Restructurings

Here’s news from Potter Anderson’s John Grossbauer: Recently, Delaware Vice Chancellor Parsons delivered this opinion – in Roseton OL, LLC v. Dynegy Holdings – declining to enjoin the restructuring of Dynegy Holdings on the grounds that it violated a transfer restriction in a parent company guarantee in a sale-leaseback transaction or, alternatively, constituted a fraudulent conveyance. The court discusses the narrow scope of the guarantee as drafted, focusing on the language prohibiting transfer by Dynegy of “its” assets, which did not occur in the case of the challenged internal restructuring. Also, because the assets that were transferred were transferred into bankruptcy remote subsidiaries, from which Dynegy would continue to receive dividends, and not outside the Dynegy corporate structure, the court found the applicable fraudulent conveyance tests were not met.

August 19, 2011

A Mock Proxy Battle

In two weeks, check out this “Mock Proxy Battle” Conference being held in DC (co-hosted by the NIRI and Society of Corporate Secretary’s local chapters). The morning session of the conference features the mock proxy battle in which you play the role of a board member of a firm facing a nasty proxy fight. Here’s the letter from the activist shareholder. The afternoon session includes a series of panel discussions that will delve into the key themes surrounding shareholder activism and feature leading experts as well as corporate executives who have been involved in activist campaigns.

August 18, 2011

Capturing the Value of a Corporate Deal

Clearing out from a vaca. Check out this Towers Watson piece about deal value, which includes a video about the topic…

August 4, 2011

FTC Announces Changes to HSR Rules and Form

Recently, the Federal Trade Commission announced significant revisions to the Premerger Notification Form and the Rules governing the HSR form that become effective on August 18th. As noted in this Sullivan & Cromwell memo, although the revisions eliminate some of the information currently required by the HSR form, taken as a whole, these changes will add significantly to the time and expense of preparing an HSR form for many filing parties.

August 3, 2011

US Department of Justice Updates Merger Remedies Guidance

Here’s news culled from this Wachtell Lipton memo:

The Antitrust Division of the U.S. Department of Justice has issued an updated version of its internal Policy Guide to Merger Remedies. The new guidance supersedes a version issued in 2004. As with its predecessor, the new guidance is intended to be used by Division attorneys when considering settlements in merger investigations while providing the private sector with insight into the logic behind the Division’s policies. The new guidance has not been jointly issued with the Federal Trade Commission.

While at a high level the updated Policy Guide is substantially similar to the guidance it supersedes, the new document removes considerable detail from the prior version. For example, in the discussion of the need for including intangible assets in divestitures, the new guidance reaffirms that allowing the merged firm to retain intellectual property rights is appropriate in some circumstances, but omits the previously explicit statement that sharing production process patents (via a non-exclusive license) is typically pro-competitive in reducing marginal costs of both the merged firm and divestiture buyer.

There are other examples of previous specificity being eliminated from the new guidance. It remains to be seen whether this reduction is streamlining or represents a move to eliminate language favorable to merging parties in negotiations with the Division and in court if negotiations are unsuccessful.

Recent press reports on the updated guidance highlight the expanded discussion of conduct remedies, i.e., remedies comprised of injunctive proscriptions on behavior as opposed to structural remedies such as divestiture. In our view, any new emphasis on such behavioral remedies likely will continue to be largely limited to vertical cases where the Division has traditionally accepted such remedies–including in transactions in recent years such as Comcast’s acquisition of NBC Universal and the Ticketmaster-Live Nation merger. In fact, the new guidance reiterates the prior version’s acknowledgement–and many years of agency experience–that structural solutions will continue to be pursued in the “vast majority” of horizontal merger remediations.

Following issuance of the guidance, the Division entered into a settlement of its challenge to the $3 million purchase of a Virginia chicken processing plant from Tyson Foods by a local competitor, George’s Inc. In resolving allegations that this horizontal transaction would result in a harmful duopoly in the purchase of broiler chickens in Virginia’s Shenandoah Valley, the Division required only that George’s Inc. commit to make some previously announced improvements to the plant. In our view, the Division’s acceptance of this conduct remedy may derive more from perception of the relative strength of its case and its prospects in court than from any shift in policy, and serves to emphasize the Division’s point in the guidance that mergers are treated uniquely on their own facts.

August 2, 2011

Lehman Decision: Fairness Opinion Providers Can Take Some Comfort

Kevin Miller of Alston & Bird provides this analysis:

While not involving the issuance of a fairness opinion, fairness opinion providers can take some comfort from portions of a recent decision – In re Lehman Brothers Secs. and ERISA Litig. (SDNY July 27, 2011) – of the Federal District Court for the Southern District Court of New York dismissing federal securities law claims against Ernst & Young, Lehman Brothers’ outside auditor.

My Takeaway: In order to state a cause of action against an opinion provider under Section 10 and Rule 10b-5 of the Exchange Act, a complaint must set forth facts sufficient to warrant a finding that the opinion provider did not actually hold the opinion it expressed or that it knew that it had no reasonable basis for holding the opinion. Opinions are not statements fact and so, for purposes of stating a claim under Section 10 and Rule 10b-5, it is insufficient to merely allege that the opinion was objectively wrong.

See also In re Global Crossing, Ltd. Secs. Litig., 313 F. Supp. 2d 189, 210 (S.D.N.Y. 2003) (relying on the US Supreme Court’s decision in Virginia Bankshares, the Court noted that in order for the fairness opinion provider to be liable for false statements regarding its opinion under Section 11, the opinion provider must misrepresent its true opinion – “Materially misleading statements of opinion and belief can be actionable under the securities laws, where the party offering the opinion misrepresents its true belief, that is, where the opinion or belief is not truly held.”)

Key Quotes from the Case: The Exchange Act claims against E&Y – “The [amended complaint (the “TAC”)] alleges that E&Y’s statements in (1) Lehman’s 2007 10-K concerning its audit and Lehman’s financial statements, and (2) Lehman’s quarterly reports on Form 10-Q for the second and third quarters of 2007 and the first two quarters of 2008 concerning its review of Lehman’s financials were materially false and misleading.”

The Plaintiffs: Plaintiffs mount parallel attacks on E&Y’s statements in the 10-K and the 10-Qs. They allege that the audit, or GAAS, opinion in the 10-K – i.e., the statement that E&Y “conducted [its] audits in accordance with the standards of the Public Company Accounting Oversight Board” – was false because E&Y did not conduct its audits in accordance with those standards. They contend also that the GAAP opinion in the 10-K – i.e., the statement that, in E&Y’s “opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Lehman Brothers Holdings Inc. at November 30, 2007 and 2006, and the consolidated results of its operations and its cash flows for each of the three years in the period ended November 30, 2007, in conformity with U.S. generally accepted accounting principles” – was false because that statement did not conform to GAAP. Similarly, they assert that the statements in the 10-Qs – first that E&Y conducted its “review in accordance with the standards of the “PCAOB and, second, that E&Y, “[b]ased on [its] review, [was] . . . not aware of any material modifications that should be made to the consolidated financial statements referred to above for them to be in conformity with U.S.” GAAP – were false for substantially the same reasons.

The Court: The Court is mindful of the fact that some courts have considered the sufficiency of securities claims against auditors based upon statements as to the compliance of financial statements with GAAP without regard to the significance of the fact that such statements have been couched as opinions and thus without regard to the importance of the fact-opinion distinction. But the distinction is important. E&Y’s statement regarding GAAS compliance inherently was one of opinion. In order for the TAC sufficiently to have alleged that it was false, it had to allege facts that, if true, would permit a conclusion that E&Y either did not in fact hold that opinion or knew that it had no reasonable basis for it.(emphasis added).

The scienter analysis with respect to this claim is substantially the same. As with other defendants, in order to state an Exchange Act claim against an auditor, a complaint must “state with particularity facts giving rise to a strong inference” of scienter. The standard for evaluating assertions of an auditor’s scienter, however, is “demanding.” The complaint must allege that the auditor’s conduct was “‘highly unreasonable,'” representing “‘an extreme departure from the standards of ordinary care'” and “‘approximat[ing] an actual intent to aid in the fraud being perpetrated by the audited company.'” The “accounting judgments which were made [must have been] such that no reasonable accountant would have made the same decisions if confronted with the same facts.” (emphasis added) Plaintiffs’ allegations respecting “red flags” therefore bear not only on whether E&Y violated the pertinent GAAS requirements, but also on whether it did so with the requisite state of mind. For the reasons discussed above, the true sale opinion and netting grid were not red flags, the disregard of which could be called highly reckless. And while E&Y’s alleged failure to follow up on the Lee interview arguably would have been a departure from GAAS, the only subsequent E&Y statement at issue is the report on the interim financials in the 2Q08, which contained no statement of a GAAS-compliant audit. Accordingly, the TAC fails to allege that E&Y made any false or misleading statements with respect to GAAS compliance either in the 2007 10-K
or in any of the subsequent 10-Q’s, much less that it did so with scienter.

The Plaintiffs: Plaintiffs argue also that E&Y’s opinions as to Lehman’s preparation of its financial statements in accordance with GAAP were statements of fact and that they were false because those financial statements in fact did not comply with GAAP.

The Court: “The representation in the auditor’s standard report regarding fair presentation, in all material respects, in conformity with [GAAP] indicates the auditor’s belief that the financial statements, taken as a whole, are not materially misstated.” Thus, allegations that a company violated GAAP in preparing its financial statements are not sufficient, in and of themselves, to state a claim that an auditor’s opinion of GAAP compliance is a factual misstatement. For reasons already discussed, the complaint must allege specific departures from GAAP and, in addition, set forth facts sufficient to warrant a finding that the auditor did not actually hold the opinion it expressed or that it knew that it had no reasonable basis for holding it. (emphasis added).