A while back, Nixon Peabody’s issued its “2011 MAC Survey,” which explores trends in the use of material adverse change clauses in M&A deals and reflects insight on a range of issues related to the allocation of risk between transacting parties in mergers and acquisitions.
Monthly Archives: April 2012
John Grossbauer of Potter Anderson notes: Last Friday, Delaware Vice Chancellor Noble granted a motion to expedite a claim by Carl Icahn that the Board of Directors of Amylin Pharmaceuticals breached its fiduciary duties by not waiving an advance notice bylaw to permit stockholders to nominate candidates for election to the board following the Board’s rejection of an unsolicited offer by Bristol Myers. The Vice Chancellor found that Icahn had adequately alleged that the Board “radically changed its outlook for the Company” in a manner that potentially justified reopening the nomination process.
The decision is merely on a motion to expedite, which has a low standard whereby plaintiff need only articulate a “colorable claim” to succeed. Nevertheless, the opinion does suggest an interesting line of attack in instances where a board rejects a hostile bid (or makes some other major strategic decision) after the deadline for nominations has passed. The company’s announcement of a sales process could moot the case, as it appears Icahn may have gotten the result he wanted without running a slate.
With today’s big JOBS Act webcast taking place over on TheCorporateCounsel.net later today, I thought it was appropriate to point out this Gibson Dunn blog entitled “Private Placement of Publicly Traded Equity Securities as Consideration in an M&A Transaction after the JOBS Act.”
Here’s news culled from this recent Wachtell Lipton memo:
The recovering, but still uncertain, economy and real estate markets have led to diverging opinions and concerns over the future value of a target’s assets which might otherwise prevent agreement on transaction pricing. As discussed in prior memos, contingent consideration structures have for years been used to bridge differences between buyers and sellers in uncertain times. With the burgeoning trend of increased M&A activity involving smaller banks, it is important to remember that these structures, while requiring careful thought, can be useful in both small and large deals alike to creatively address pricing challenges.
Capital Bank Financial Corp.’s recently announced agreement to acquire Southern Community Financial Corporation is the third transaction in the last 18 months in which that acquiror has utilized a contingent value right, or CVR, as a portion of the consideration. The CVR provides the opportunity for additional value to Southern Community shareholders if the portfolio performance exceeds a designated benchmark, while allowing Capital Bank to limit its exposure if performance should deteriorate. It has a value determined by the performance of Southern Community’s legacy loan and foreclosed asset portfolio at the end of a five-year period. Payments under the CVR may range from zero to $1.30 per share in addition to the primary merger consideration of $2.875 per share. Any payments would only be made at the end of the five-year measurement period. The CVR was structured so as not to require registration with the SEC, avoiding not only the cost of registration but also the ongoing reporting requirements. Consequently, the CVR is not transferable, does not grant any voting or dividend rights, bears no stated rate of interest, and will not be certificated.
The recent restructuring of BB&T’s agreement to acquire BankAtlantic from BankAtlantic Bancorp is a variation on this theme. Faced with the injunction obtained by the holding company TruPS investors to the original deal, the parties devised a creative structure to make it economically possible for BB&T to assume the TruPS. To compensate BB&T for doing so, the parties agreed that BankAtlantic Bancorp would capitalize, with assets to be retained by it under the original deal, a vehicle in which BB&T would have a 95% preferred interest. BankAtlantic Bancorp (and ultimately its shareholders) will retain a minority preferred interest in the vehicle, as well as the full residual interest. The risk BB&T is assuming is mitigated by careful diligence of the underlying assets as well as the structure of the asset vehicle, which provides BB&T with a preferred return, overcollateralization relative to the TruPS obligation and an additional guaranty from BankAtlantic Bancorp. The BankAtlantic Bancorp shareholders, like those in analogous deals with contingent consideration to target shareholders, retain in this structure significant upside potential from improving economic conditions post-closing, specifically those affecting legacy loan performance.
These transactions are but two recent examples of the art of the possible in bank M&A. Other transactions in recent years including a contingent consideration component include Capital Bank Financial Corp.’s controlling investments in Capital Bank Corporation and Green Bankshares, Inc. and Capital One Financial’s acquisition of Chevy Chase Bank. While often shareholders and other constituencies may prefer a fixed or certain consideration where possible, the two parties to a potential deal may have very different ideas of what that certain consideration should be. With industry conditions still recovering and potentially volatile in the coming months, contingent consideration terms may in some cases be the best way to bridge this gap and strike a deal.
Last week, in In re Answers Corp., Delaware Vice Chancellor Noble refused to dismiss a complaint challenging a merger plaintiffs alleged was entered into hurriedly before very positive results for the target were released that were anticipated to drive up the price of the target stock. VC Noble found the allegations against the outside directors for going along with the rushed process were sufficient to allege bad faith, although it signaled plaintiff was unlikely to prevail on that claim after trial. It also found the aiding and abetting claim against the buyer survived a motion to dismiss, although it also expressed skepticism about the viability of this claim at trial.
The use of blogs and social media in contested battles continues as noted in this DealBook piece:
Daniel S. Loeb is bringing a blog to a Web fight. In his effort to overhaul the board of Yahoo, the head of Third Point has started ValueYahoo.com, his own site, which features information on his coming proxy fight. The site, which went live at 10:30 Monday morning, includes an outline of his agenda, a mission statement and profiles on his slate of proposed directors. Shareholders and other interested readers can also subscribe to the site to get updates on breaking stories or new content.
And yes — in true new Web fashion — you can also “like” Mr. Loeb’s battle for Yahoo’s board by becoming a fan of the site’s Facebook page.
Although investors have used the Web to disseminate information on past proxy contests, Mr. Loeb’s full site is a novel approach. It serves two purposes. For one, it is a central hub of information for Yahoo shareholders considering Mr. Loeb’s proposal. And second, the medium is intended to show investors that Mr. Loeb gets the Web, according to one person close to Third Point, who spoke on the condition of anonymity because of the looming proxy contest. Third Point plans to update the site daily, with frequent contributions from Mr. Loeb himself.
The activist hedge fund investor is locked in a battle with Yahoo’s board, which is trying to stymie his attempts to add four new directors, including himself. Mr. Loeb, who owns a 5.8 percent stake in Yahoo, filed a preliminary proxy filing last month. Although Yahoo has made some overtures, including an offer to add one of Mr. Loeb’s candidates, Harry Wilson, to the board, Mr. Loeb has criticized the board for not taking his demands seriously and failing on several corporate governance issues.
We have posted the transcript for our recent webcast: “”The SEC Staff on M&A.”
Here’s news culled from this Jones Day memo, repeated below:
The two U.S. antitrust agencies have been waiting for leadership positions to be filled, which may provide clearer signs on the direction of antitrust enforcement after three years of the Obama Administration. Recent action by the U.S. Senate now has brought a full complement of Commissioners to the Federal Trade Commission, and the Department of Justice will continue with new interim leadership.
There are five Commissioner seats at the FTC. The Commissioners are nominated by the President with consent of the Senate. The FTC has been operating with only four Commissioners since the departure of Commissioner and former Chairman Bill Kovacic, a Republican, who left the FTC and returned to George Washington University in October 2011. As no more than three FTC Commissioners may belong to the same political party, the President had nominated Maureen Ohlhausen, a Republican, to fill Kovacic’s seat. She served as the FTC’s Director of the Office of Policy Planning from 2004 to 2008 and before that in other FTC positions. Commissioner Ohlhausen has experience in antitrust, privacy, and cybersecurity, and she should bring a strong voice to FTC decisionmaking in both competition and consumer protection matters. The Senate confirmed Ohlhausen’s nomination last week.
The Senate also confirmed FTC Chairman Jon Leibowitz to a second term. A Democrat, he was first appointed to the Commission in 2004 and was designated by President Obama as Chairman in 2009. Under Chairman Leibowitz, the FTC has been an active enforcer in technology, energy, and healthcare matters, and ratcheted up the agency’s efforts to stop “pay-for-delay” patent settlements in the pharmaceutical industry.
The term of Commissioner Thomas Rosch, the other Republican on the Commission, will expire in September 2012. Commissioner Rosch has announced he will remain at the FTC until his successor is confirmed. Given the politics of this election year, it is not likely that a replacement will be nominated until after the November elections and, if there is a change in Administration, this may not happen until well into 2013. Thus, Rosch likely will remain at the FTC beyond his term. Commissioners Edith Ramirez and Julie Brill, both Democrats appointed by President Obama, remain on the Commission.
At the DOJ Antitrust Division, following the departure of Assistant Attorney General Christine Varney, Principal Deputy Sharis Pozen had taken the Acting AAG title, but with a plan to remain at the Antitrust Division only until the end of April. Last week, the Attorney General announced that, upon Pozen’s departure, Deputy AAG Joseph Wayland would take the Acting AAG post. Wayland has served as the Antitrust Division’s Deputy Assistant Attorney General for Litigation since September 2010. He is an experienced commercial litigator and has focused on matters in which DOJ has considered taking antitrust cases to trial, including the challenges to H&R Block’s acquisition of TaxAct and the proposed merger of AT&T and T-Mobile USA.
Wayland may hold the Acting AAG title for some months, due to the same election year politics that have delayed nominee confirmations at the FTC. The President has nominated Bill Baer, a partner with Arnold & Porter, to be the new AAG. Baer is a highly respected antitrust lawyer and former Director of the FTC Bureau of Competition. However, the Senate has not yet scheduled a hearing on his nomination, and again it is possible that the Senate will not act on this nomination until soon after the November election or even later.
Naturally, businesses and their antitrust counsel look forward to learning how the November election may shape the direction of antitrust enforcement. In the interim the U.S. antitrust agencies are quite capable of pursuing investigations and bringing enforcement actions even without a full complement of permanent leadership positions filled. As examples, both agencies have brought litigated merger challenges in the last few months, such as DOJ’s lawsuit to block AT&T’s proposed acquisition of T-Mobile USA and FTC’s action to block the combination of two hospital systems in Illinois, OSF Healthcare and Rockford Health System.
I’ve been blogging daily for weeks on the JOBS Act on TheCorporateCounsel.net – and that’s where we are posting oodles of resources including two upcoming webcasts – but here’s M&A-related info from Davis Polk, repeated below:
On April 5, President Obama signed into law the Jumpstart Our Business Startups Act (the “JOBS Act”), which as we’ve previously noted represents a very significant loosening of restrictions around the IPO process and post-IPO reporting obligations. While most of the commentary on this legislation has thus far focused on its impact on capital markets matters, there are implications for private company mergers and acquisitions as well.
Late-stage private companies contemplating an M&A or IPO exit often undertake so-called “dual-track” processes in which they simultaneously file an IPO registration statement with the SEC and hold discussions with prospective acquirors. The IPO side of the process effectively becomes a stalking horse for M&A discussions and tends to force the hand of prospective acquirors that might otherwise not move as quickly as the target would like. The publicly filed registration statement both attracts attention and provides prospective acquirors with a sort of first-stage diligence that theoretically helps encourage bids.
Under the JOBS Act, emerging growth companies or “EGCs” will now have the ability to file their registration statements confidentially, so long as the confidential filings are ultimately released at least 21 days before the road show. Whether confidential filings will become the norm remains to be seen; there are a number of reasons why an IPO candidate might want to continue to use the traditional public filing process, including the publicity, customer and employee-related benefits of having a highly visible registration statement. For many companies, however, these benefits will be outweighed by the competitive advantages of keeping early filings confidential. The optionality that confidential filings create may be hard to resist: A confidential filer can now pull its deal without the stigma associated with withdrawing a publicly filed registration statement.
The ability to file confidentially creates another sort of optionality for a company undertaking a dual-track process, in that it can now conduct both sides of the process outside the public eye. The ability to tell a prospective buyer that the IPO process is already reasonably far along is a powerful tool, and being able to surprise a buyer with a registration statement that has already been through multiple rounds of SEC review will give targets a greater degree of control in dual-track negotiations. Companies pursuing a dual-track process will need to balance these advantages against the alternative approach of making their IPO filings fully visible to prospective acquirors, which could theoretically attract additional bidders or facilitate the process by making their diligence easier. If confidential registration statements become the norm, a non-confidential filing may come to suggest something other than an ordinary IPO process. But a company that files confidentially may also be sending a signal to buyers if it ostensibly starts the 21-day clock by publicly releasing its filings and then fails to begin its road show within a reasonable period of time.
Lastly, the relaxation of restrictions on “test the waters” pre-marketing has implications for private targets regardless of whether they undertake a dual-track process or a standalone M&A process. As we noted in our March 26 memorandum, there is a potential inconsistency in the JOBS Act regarding whether an EGC can engage in such pre-marketing more than 21 days before a public filing. Regardless of how the inconsistency is resolved, however, the EGC’s advisers can engage in pre-marketing to qualified institutional buyers and accredited investors, which provides an additional way to conduct a market check for a company that has an acquisition offer in hand – or for that matter, even one in the midst of price negotiations.