Tune in tomorrow for the DealLawyers.com webcast – “Activist Profiles and Playbooks” – to hear Bruce Goldfarb of Okapi Partners, Dan Katcher of Joele Frank Wilkinson Brimmer Katcher, Chuck Nathan of RLM Finsbury and Damien Park of Hedge Fund Solutions identify who the activists are – and what makes them tick.
Monthly Archives: January 2013
Here’s news from Taketoshi Yoshikawa and John Taylor of ISS’ Japan Proxy Research:
An unsolicited bid by Japan’s second largest golf course operator, PGM, to acquire a majority stake in rival Accordia will, if successful, mark the country’s first successful hostile takeover. In a country that many argue has long lacked a functioning market for corporate control, PGM’s proposal is being watched closely. The bid follows a trend, dating back to the early 2000s, that has seen a number of increasingly credible hostile takeover bids for Japanese companies by hedge funds as well as strategic buyers, though none has been successful.
Acrimony Between the Firms
PGM’s November bid represents the second attempt by Heiwa, PGM’s parent company, to take over Accordia in less than a year. In the first attempt, which failed at Accordia’s annual meeting in June, Heiwa itself launched a proxy contest for control of Accordia’s board after accusing Accordia President Michihiro Chikubu of misappropriating funds.
Heiwa, a pachinko and pachislot (hybrid pinball and slot machine) manufacturer, acquired PGM from Lone Star Funds in October 2011. Accordia’s name as potential acquisition target came to the fore after Heiwa appointed former Accordia executive Arihiro Kanda as PGM President in January 2012. At the time of the acquisition, Heiwa’s move surprised analysts, as its pachinko and pachislot manufacturing business has little apparent overlap with golf course operations. Immediately after Kanda was officially appointed PGM President, Kanda and Heiwa President Yasuhiko Ishibashi, approached Accordia with a plan to integrate PGM and Accordia. Accordia management was not open to Kanda’s proposal from the start. Heiwa proceeded to impugn Accordia’s top management, raising accusations that led to Accordia President Michihiro Chikubu’s resignation amid allegations of fund misappropriation.
At Accordia’s June annual meeting, Heiwa argued for board changes to address what it characterized as “compliance issues.” While Accordia management proposed nine nominees, including five independent outsiders, Heiwa proposed an alternate slate of eight dissident nominees with four outsiders. Heiwa’s four executive director candidates eventually withdrew and none of its eight nominees received majority support. (Masaharu Hino, a former prosecutor and one of the Heiwa-nominated dissidents, received 48.9 percent.)
Both PGM and Accordia originated as vehicles for investment banks to acquire bankrupt golf courses after the collapse of Japan’s massive asset bubble around 1990. PGM was launched by Lone Star in 2004, and Goldman Sachs, where Kanda was an executive, launched Accordia in 2002. Both operators subsequently grew, with PGM now operating 150 golf courses, and Accordia operating 154. Goldman Sachs exited in 2011, selling its stake on the open market, and Lone Star sold PGM to Heiwa the same year.
Tender Offer and Accordia Response
The Heiwa/PGM tender offer to acquire 20 percent to 50.1 percent of Accordia is set at JPY 81,000, a premium of 52 percent based on market prices the day before the announcement. According to PGM, current Accordia shareholders could choose to tender their shares either for cash or for shares in the merged entity.
Although the Heiwa/PGM side has announced its intention to merge the two golf operators, it has not yet announced details. PGM claims that a detailed plan can’t be crafted until after discussions with Accordia management, completion of due diligence, and consideration of legal, accounting and taxation considerations. PGM expects three kinds of integration synergy: (1) increased sales through targeted marketing based on analysis of PGM and Accordia’s combined 2 million client base, (2) capital and other cost synergies and (3) opportunity to acquire additional high profit golf courses by leveraging lower capital cost.
Accordia countered that its financial performance is superior to PGM’s and that the bidder’s offer price of JPY 81,000 per share is insufficient, based on evaluations by its advisers Daiwa Securities and PricewaterhouseCoopers. Both advisers used a discounted cashflow analysis based on the company’s newly announced medium-term management results. Daiwa Securities argued valuation lies between JPY 124,632 to 163,916 and PricewaterhouseCoopers found a valuation of JPY 105,492 to 134,944 per share. Accordia also argued that PGM’s tender offer scheme is a two-tier, coercive takeover plan that does not target all Accordia’s outstanding shares, and seeks integration at a later stage without disclosing plan details or even the share exchange ratio. From Nov. 19, the business day after the PGM tender offer announcement, until Jan. 16, the day before the tender offer closing date, Accordia’s share price ranged from JPY 72,000 to JPY 80,800.
An Unusual Defense
In an unorthodox defensive move, Accordia announced Jan. 4 plans to seek an increased supermajority requirement. It will schedule a special meeting of shareholders in March to amend its articles of incorporation to increase the threshold required for passage of merger or acquisition related proposals from the current two-thirds to three-quarters of votes cast. Accordia claims the amendment is needed in order to protect the interests of minority shareholders in the event PGM acquires majority stake, and to address the “coercive nature” of the tender offer. If the proposal passes, a majority of the minority shareholders (i.e., investors other than PGM) will have to vote in favor of merger or acquisition, in order for the proposal to pass. Accordia did not increase the threshold for appointment or removal of directors, retaining a simple majority standard. Therefore, if PGM succeeds in acquiring a majority stake, it will have the power to propose and pass shareholder proposals to remove or appoint directors of its choice, calling into question the effectiveness of Accordia’s defense strategy.
Third Player Emerges
To complicate the issue further, on Jan. 7, Reno, a hedge fund founded by former associates of the former Murakami Fund, whose aggressive hostile bids stirred considerable controversy in the last decade, disclosed it holds 13.8 percent of Accordia, acquired at an average purchase price of just under JPY 78,000.
Until the Murakami Fund was brought down by insider trading charges in 2006, the activist fund was involved in numerous high-profile Japanese takeover battles, either as a hostile bidder or as a third-party player. On Jan. 15, Reno announced that it further increased its stake to 18.1 percent at an average purchase price of JPY 78,460, and urged Accordia management to accept PGM’s due diligence and to start negotiating with PGM on terms and conditions of an integration. Reno also is urging Accordia to execute share buybacks until the share price recovers to a level where it exceeds book value (JPY 88,443 as of September 2012). On Jan. 16, Accordia responded to Reno, saying it will not rule out negotiation with PGM after the end of the tender offer, and agreeing that share buybacks are on the table as one of the options management is considering, financed potentially through the sale of some of its golf courses.
Initial Tender Offer Fails
On the Jan. 17 tender offer closing date, Bloomberg cited an unconfirmed report that Accordia planned to sell 10 golf courses and raise JPY 15 billion for share buybacks. The market surged on the news to a peak of JPY 83,800 and closed at JPY 81,100, still above the PGM offer of JPY 81,000 a share. The next day, PGM announced the failure of its bid to reach the 20 percent minimum shares tendered. PGM President Kanda cited the Bloomberg report as the main reason for the failure. PGM remains committed to seek integration with Accordia, he said, but it will have to “assess the situation” before deciding the next step.
Potential to Make History
Hostile takeover bids remain far rarer in Japan than in the U.S. and some European capital markets, and, due to cross shareholdings, management-friendly investor blocs, and a variety of other defense mechanisms, no hostile bidder has yet succeeded in securing more than a majority stake in a Japanese target. But PGM and its parent Heiwa may ultimately still be first. Accordia is unusually vulnerable, as almost all its equity is held either by arms-length institutional or individual investors and it has no major management friendly shareholders. And unlike many Japanese firms, it lacks major cross shareholding relationships with other companies.
Moreover, unlike most past Japanese hostile takeover targets, Accordia is not a cash-rich company with a market valuation well below its net asset value. While a relatively strong valuation makes it less attractive or obvious as a target, it complicates any Accordia strategy to find a non-strategic potential buyer, such as a white knight, that has in the past rescued other targets in Japan. Finally, while PGM is backed by Heiwa’s strong balance sheet, any potential white knights for Accordia are other large golf operators, none of whom are more than one-third the size of either PGM or Accordia as golf operators.
Here’s news from this Reuters article:
Goldman Sachs won a sweeping legal victory on Wednesday in the $580 million sale of Dragon Systems to Lernout & Hauspie, as a federal court jury decided that the Wall Street bank was not negligent in arranging a deal that ultimately collapsed 13 years ago. The jury cleared Goldman of claims of negligence, intentional misrepresentation and breach of fiduciary duty and other claims in the civil case, according to the verdict, announced in Federal District Court in Boston.
Dragon’s founders, Jim and Janet Baker, pioneers in speech recognition software, accused Goldman investment bankers of being negligent in the 2000 sale of their company to Lernout & Hauspie of Belgium, which collapsed in a huge accounting fraud. The Bakers and two early Dragon employees sought several hundred million dollars in damages. “We are pleased the jury rejected these claims. We fulfilled all our advisory duties to Dragon Systems,” a Goldman spokeswoman, Tiffany Galvin, said. John Donovan, Goldman’s lead lawyer on the case, declined to comment. The Bakers were not available for comment. Before the verdict was read, the couple sat closely together, as they had throughout the 23-day trial.
Their lawyers portrayed Goldman’s investment bankers as a “bottom of the barrel” team that failed to properly vet concerns about Lernout & Hauspie’s claims of soaring sales in Asia.
But lawyers for Goldman said it was not the investment bank’s job to figure out the accounting fraud that ultimately doomed Lernout & Hauspie and made the remaining stock held by the Bakers worthless. In fact, Goldman said Dragon rushed into the sale and brushed aside advice to hire outside accountants to examine Lernout & Hauspie’s books in more detail.
The Bakers owned 51 percent of the company, but were able to sell only a few million dollars’ worth of the Lernout & Hauspie shares they received in the all-stock deal before the company collapsed.
This January-February issue of the Deal Lawyers print newsletter was just sent to the printer and includes articles on:
– Billion Dollar Companies: Not Too Big for Hostile Shareholder Activism
– News from the SEC: Tender Offer Funding Conditions & Dual Track Processes
– Runaway MAC Carve-Outs
– Delaware Enjoins “Don’t Ask, Don’t Waive” Standstill Provision & Holds Not Per Se Unenforceable (But Use & Effect Should Be Disclosed)
If you’re not yet a subscriber, try a 2013 no-risk trial to get a non-blurred version of this issue on a complimentary basis.
Probably old news for many of you, but Delaware created a free ebook version of its Code last year, which can be very useful. The Code is available in both ePub and MOBI formats, for iPad, Kindle and other ebook readers. You can download each title of the Code separately – or download all of them at once.
Last week, the FTC announced the latest annual revision to the size thresholds governing premerger notification requirements under the HSR Act so that transactions will be reportable only if, as a result of such transaction, the acquiring person will hold voting securities, assets, or non-corporate interests of the acquired person valued above $70.9 million, compared to $68.2 million in 2012. The newly adjusted HSR thresholds will apply to all transactions that close on or after the effective date, which is expected to be in mid-February (the exact date will depend on when the changes are published in the Federal Register). We have posted some of the many memos on this change in our “Antitrust” Practice Area.
Following up on Vice Chancellor Laster’s November ruling in Complete Genomics, Chancellor Strine has now weighed in on the legality of “don’t ask/don’t waive” standstill provisions. In In re Ancestry.com, C.A. No. 7988-CC (Del. Ch. Dec. 17, 2012), Chancellor Strine rejected the notion that “don’t ask/don’t waive” provisions are per se unenforceable under Delaware law. He went on to say that such provisions could be used effectively as a “gavel” in running a sale process. In particular, he stated that a “well-motivated seller” could use a “don’t ask/don’t waive” provision to “impress” upon bidders that the sale process is “meaningful,” that “there is really an end to the auction for those who participate,” and “therefore, you should bid your fullest because if you win, you have the confidence of knowing you actually won that auction at least against the other people in the process.”
Nevertheless, based on the preliminary record before the court, Chancellor Strine indicated that the target company’s board of directors may have breached its duty of care. Among other things, the target company’s directors, senior managers, and investment banker may not have understood the “potency” of the “don’t ask/don’t waive” provisions. In addition, Chancellor Strine indicated that, in the circumstances of the case, the target’s board of directors might have waived the standstill provisions prior to entering into a definitive merger agreement because the buyer had not requested an assignment of the target company’s rights to enforce them. Chancellor Strine also ruled that the plaintiffs had a reasonable probability of success in proving a disclosure violation because the company had not previously disclosed the existence of the “don’t ask/don’t waive” provisions to its stockholders. “[T]he electorate,” he wrote, “should know that with respect to the comfort they should take in the ability to [receive] a superior proposal, they should understand that there is a segment of the market … that… cannot take advantage of that.”
It is important to recognize that, like Complete Genomics, Ancestry.com is a bench ruling that lacks the detail and analysis set forth in memorandum opinions. Thus, further word on “don’t ask/don’t waive” provisions will have to come in the future. Nevertheless, target companies should now be prepared to disclose the existence of “don’t ask/don’t waive” provisions. Targets should also expect increased scrutiny in litigation as to how “don’t ask/don’t waive” provisions were used to induce bids and maximize stockholder value. From a process perspective, furthermore, directors will need to understand how “don’t ask/don’t waive” provisions work.
I find that many California mergers and acquisition lawyers are more comfortable dealing with Delaware than California corporate law. However, there are still many thousands of California corporations that may be in the market to acquire or be acquired. Below are three common pitfalls California M&A pitfalls.
1. Failing to recognize that the California General Corporation Law applies. The CGCL will, of course, apply to any corporation organized under the CGCL. It may be a surprise to some, however, that Section 2115 makes numerous M&A related provisions of the CGCL applicable to some foreign corporations. These provisions include Sections 1001(d) (limitations on the sale of assets); 1101 (the provisions following subdivision (e)); Chapter 12 (reorganizations); and Chapter 13 (dissenters’ rights). Although Section 2115 imposes these provisions only on corporations that meet specific ownership and business thresholds (and that are not exempted), the point to remember is that it’s possible that California law will apply to parties incorporated in other states. If your thought is to take refuge in Vantagepoint Venture Partners 1996 v. Examen, Inc., 871 A.2d 1108 ( Del. 2005), you may want to remember that the lawsuit may not be filed in Delaware.
2. Failing to understand California M&A taxonomy. When reading the CGCL, it is important to remember that it uses a large number of defined terms. Unfortunately, the fact that terms have statutory definitions is not readily apparent to the casual reader because those terms are not often capitalized or otherwise identified. For example, the CGCL defines “reorganization” in Section 181 as any of three types of transactions: a merger pursuant to Chapter 11; an exchange reorganization, or a sale-of-assets reorganization. The CGCL applies to other types of M&A transactions but those transactions are not reorganizations as defined by the CGCL. For example, a sale of assets for cash is not a sale-of-assets reorganization as defined Section 181, but it is subject the special approval requirements of Section 1001(d). See When a Sale of Assets is not a “Sale-of-Assets Reorganization” . Also, the CGCL imposes special requirements on “share exchange tender offers” as defined in Section 183.5 even though a “share exchange tender offer” can never be an “exchange reorganization” or even a “reorganization”
3. California law imposes unique approval requirements. Under Section 1001(d), for example, when an acquiring party in a sale-of-assets reorganization or an acquisition of all or substantially all of the assets of a corporation that isn’t a sale-of-assets reorganization is in control of or under common control with the disposing corporation, the principal terms of the transaction must, with certain exceptions, be approved by at least 90% of the voting power of the disposing corporation. See Seeing Red And More Than 50% Ownership May Mean A 90% Vote. A similar limitation on cash-out mergers can be found in Section 1101 (the provisions following subdivision (e)). Section 1201(a) also imposes a class vote with respect to the principal terms of a reorganization. This was, in fact, the issue in the Vantagepoint case.
In a piece entitled “Zipcar Makes S.E.C. Filing After Executive’s Twitter Message,” DealBook provides a reminder that deal lawyers need to remain vigilant in the wake of a deal to monitor what executives might be doing on social media channels – since that activity may require filings to be made with the SEC. There is good analysis in this “100 F Street” blog…
Here’s an interesting piece that Allen Matkin’s Keith Bishop recently blogged:
For several years, I taught a law school class covering sales, personal property leases, and documents of title – Uniform Commercial Code Articles 1, 2, 2A, and 7. At one time, the UCC was the big thing in American law. Now it has become workaday area of the law. Nonetheless, it remains an important, and I fear, often overlooked, subject.
I suspect that many lawyers negotiating asset purchase agreements may fail to recognize and address basic UCC issues. For example, they may spend a great deal of time negotiating express warranties while not recognizing that the UCC will impose (if not properly disclaimed) implied and other warranties. (My former students will recognize that under the UCC, there are three types of warranties – express, implied and warranties that are neither express nor implied.) Similarly, an asset purchase agreement may not take into account the risk of loss rules that apply to the sale of goods under the UCC.
Some questions to consider the next time you negotiate an asset purchase agreement:
– Does my agreement involve a transaction in goods subject to the UCC?
– Do I understand how warranties (express, implied and other) are made and disclaimed under the UCC?
– Do I understand the UCC’s risk of loss rules and are those rules properly addressed in the agreement?
– Do I understand the UCC’s remedy provisions and my client’s rights and obligations in the event of a breach or anticipatory repudiation?
A useful housekeeping task for the summer might be to review your form of asset purchase agreement with the UCC in mind. California, like Rudyard Kipling’s cat, walks alone in many respects. We don’t refer to “articles” of the California UCC, we call them “divisions”. Also, there is no Article 2a in the California UCC, it’s Division 10.