Monthly Archives: March 2013

March 21, 2013

Activist Fights Draw More Attention

This recent WSJ article bears reading:

Activist investors have been called raiders, distractions and dissidents. Now, they are getting a new label: “asset class.” In recent years, this once-fringe investing approach has matured, with activists honing their techniques and seeking bigger corporate prey. In the process, an industry is growing up around them, with big investors pouring money into activist funds, researchers tracking the investors’ moves and bankers jockeying for work defending companies against activists. Even giant Apple Inc. sought advice from Goldman Sachs Group Inc. when it came under fire this year from activist hedge-fund manager David Einhorn, who has been pushing the company to return more cash to shareholders, according to people familiar with the matter. Apple declined to comment but Chief Executive Tim Cook has said several times recently that the company is looking at ways to return cash to shareholders.

Activist investors snap up stakes in companies and press for changes such as a sale or stock buyback, often throwing public barbs in the process. Lately, activist William Ackman has been waging a campaign against nutritional-supplements company Herbalife Ltd., calling it a pyramid scheme, which the company denies. Meanwhile, Paul Singer’s Elliott Management has pressed for change at oil producer Hess Corp., calling for the company to shed assets and split in two. Hess recently said it would seek to sell some businesses, but not because of Elliott’s demands.

The old-style “corporate raiders”–investors such as Carl Icahn, Kirk Kerkorian and the late Saul Steinberg–were often reviled on Wall Street as self-interested agitators out to make a quick buck during the category’s first heyday in the 1980s. By scooping up stock of undervalued companies, these investors used their power to unseat boards and forced firms to sell off assets or even go into bankruptcy–often giving an immediate boost to share prices.

After some big failures–and corporations developing countermeasures like so-called poison pills–activists accepted a lower profile, only to blossom again lately in a modified form. The new style of activism, with more emphasis on research, collaboration and a push for changes that investors argue make sense long term, is attracting a broader base of followers.

A rush of money came into these funds before falling off amid the financial crisis, and flows in the past two years are robust again. The $65.5 billion that U.S. activist funds had under management at the end of last year is the highest in a decade; in 2003, activist funds had $11.8 billion, according to data from HFR Inc., which tracks the hedge-fund industry. On average, HFR’s activist index has performed more than three percentage points higher than its weighted composite index for all hedge funds for the past four years. “As long as activism can generate return above stocks in general and is seen as being analytically based and thoughtful, institutions are going to increasingly invest in activism as an asset class,” said Gregg Feinstein, co-head of the mergers group at Houlihan Lokey, an investment bank that has recently ramped up its activist advisory practice.

Many activist investors produce extensive research papers that aim to illustrate how a company could boost returns. Sometimes they poll a company’s shareholder base to assess how much support they would have before making a move. “On balance, activism has been good for corporations,” Robert Kindler, mergers chief at Morgan Stanley, said at a conference last year.

Activists are also stalking bigger companies: Of the 241 activist campaigns aimed at boosting a company’s financial returns or securing board seats last year, 21% targeted companies with market values of over $1 billion, according to FactSet SharkWatch. That is up from 7% in 2009.

Earlier this year, the California State Teachers Retirement System pension fund, the country’s second-largest public pension fund, publicly supported activist Relational Investors LLC in urging Timken Co., a $5.6 billion industrial conglomerate, to separate its steel and bearings businesses. “If you team up with a company like Relational, they can…get a little more influence,” said Anne Sheehan, director of corporate governance for the pension fund. Calstrs also invests with activist Nelson Peltz’s Trian Fund Management LP, according to the pension fund. Timken has said it “carefully evaluated” input and continues to believe the company is better as a whole.

Not every activist campaign ends up a success. Mr. Ackman, for example, has seen the value of his stake in J.C. Penney Co. decline after he invested with much fanfare in 2010. And Mr. Kindler said in his remarks last year that companies remain wary of activists, noting that “it’s frustrating when activists just get it wrong.” As a result, bankers said, more companies are studying whether there are ways to improve their businesses before activists knock on their door. That has created a new opportunity for Wall Street banks. Winning a role on a company’s defense effort against an activist can often lead to additional business, such as an advisory role if the company decides to spin off or sell an asset.

Goldman, which built the reputation of its advisory business partly by defending clients against hostile takeovers, was among the first banks to focus on advising companies on activist situations. Other banks, including J.P. Morgan Chase & Co. and Barclays PLC, have taken similar steps. The Barclays team focuses on larger corporate clients who expect their advisers to provide “advice and knowledge on who’s across the table from them,” said Daniel Kerstein, head of the bank’s strategic finance group.

Chris Young, who was hired by Credit Suisse Group AG in 2010 to lead the bank’s takeover-defense unit, says bankers in this role get access to senior executives because of the “existential” threat presented by activists. Credit Suisse several years ago set up a dedicated team to help banks with activists. “It’s a great way to have a dialogue as a bank at that level,” he said. “Competition is fierce.”

March 20, 2013

Canadian Regulators Propose 5% Early Warning & Alternative Monthly Threshold

As noted in this Torys memo: Canadian securities regulators are proposing to change the early warning and alternative monthly reporting regimes to require disclosure of acquisitions of public company securities at the 5% level rather than at the current 10% level. Another key proposal is to require certain derivatives to be included in the securityholding calculation. The objective is to increase transparency about significant holdings of public companies’ equity and voting securities, providing issuers as well as the marketplace generally with better information about major holders, their voting and equity interests and their investment intentions. Comments on the proposals are due by June 12, 1013.

March 19, 2013

A Five-Year European Deal Study

Recently, this CMS study broke down European deal trends after a review of 1,700 deals done between 2007-2012. Some key findings:

– MAC clauses are much more popular in the US (being used in 93% of deals) than in Europe where they only appear in 14%. Another sizeable difference exists in the use of working capital adjustments as a criterion for purchase price adjustment, used in 77% of cases in the US as opposed to just 34% in Europe.The explanation for this may simply be the diversity that one sees in 50 different countries as opposed to 50 different states in one country.
– Earn-out deals are more popular in the US. 38% of US deals had an earn-out component compared with just 16% in Europe in 2012.
– Not only are baskets much more prevalent in the US, but the basis of recovery is different. In the US, 62% of relevant deals are based on ‘excess only’ recovery as opposed to ‘first dollar’ recovery compared with only 29% in Europe in 2012 for ‘excess only’ recovery.
– Basket thresholds tend to be lower in the US with 88% being less than 1% of the purchase price compared with 49% in Europe and that is probably because there is less payback for purchasers because of the prevalence of “excess only” recovery.

March 18, 2013

Canadian Companies Will Be Harder to Acquire Under New Poison Pill Proposals

As noted in this Torys memo: “The Canadian Securities Administrators have released proposed new rules for shareholder rights plans (or “poison pills”). Under the CSA proposal, target boards will be free to deploy a poison pill for a longer period than is currently permitted in the face of an unwanted bid, subject to obtaining shareholder approval. Quebec’s securities regulator, the AMF, is proposing an alternative new regime governing all defensive tactics (not just poison pills) that would give target boards even greater discretion to defend against hostile bids. We expect that only one proposal would be implemented in order to ensure harmonized rules. The CSA and AMF proposals remain open for comment until June 12, 2013. Under either of these proposals, bidders should expect hostile bids to become more challenging because target boards will have broader scope to defend against hostile bids.”

March 14, 2013

Transcript: “Projections, Prospects & Other Crystal Ball Provisions: Colliding with 20/20 Hindsight”

We have posted the transcript for the webcast: “Projections, Prospects & Other Crystal Ball Provisions: Colliding with 20/20 Hindsight.”

March 13, 2013

March-April Issue: Deal Lawyers Print Newsletter

This March-April issue of the Deal Lawyers print newsletter was just sent to the printer and includes articles on:

– Checklist: Deal Confidentiality Pledges & Reminders
– Be Careful What You Wish For: When Drafting Indemnification Clauses, You May Get Exactly (and Only) What You Ask For
– Divisional Acquisitions: A Clean Break?
– “Short Slate” Rules: A Recap
– Crown Jewels: Restoring the Luster to Creative Deal Lock-Ups?

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.

March 12, 2013

Delaware Denies Another Expedited Challenge

John Grossbauer of Potter Anderson notes: In In re Bioclinica, Delaware Vice Chancellor Glasscock denied expedition in a challenge to the proposed sale of Bioclinica. The Vice Chancellor commented on the deal protections at issue here, finding not colorable a claim that standstills that permitted a topping tender offer after an announced deal were preclusive when combined with a poison pill and customary match rights and termination fees, noting the board retained the right to accept a superior proposal and to redeem the pill in that context.

March 11, 2013

Delaware Chancery Court Requires Proxy Put Approval

Here’s news from Greenberg Traurig’s Cliff Neimeth: Notwithstanding the procedural – and to a lesser extent, fact-specific – context of the preliminary injunction decision in the recently decided Kallick v. Sandridge Energy, this is an impact case which, read in conjunction with the Chancery Court’s Amylin Pharmaceuticals decision, counsels that, under certain circumstances, an incumbent board’s failure to prevent the consequences of a “poison put” covenant in an indenture (i.e., by “approving” a majority opposition slate of directors in a pending election contest for purposes of such covenant) could constitute a breach of loyalty.

Chancellor Strine applied Unocal rather than Blasius as the judicial review standard in this context (because it wasn’t apparent that the sole or primary purpose of such provision – which often is inserted at the lenders’ insistence in a credit agreement or arms’-length bargaining with the placement agent/underwriter for note purchasers – was pure entrenchment and the frustration of voting rights) and he makes an interesting distinction between the “poison put'” at issue vis-a-vis change-in-control acceleration provisions in other contexts (e.g., executive parachutes, equity plans and other such provisions in instruments triggered in a hostile acquisition not involving an election contest). The incumbent board’s disclosure ‘flip-flopping” certainly did not help their defense.

From a policy perspective – and in line with precedent decisions – this is not necessarily a surprising result in view of the Delaware judiciary’s respect for the sanctity of the proxy machinery and the uncoerced ability of non-affiliate stockholders to vote their will. The right to vote freely for director candidates is a raw nerve that should be touched rarely, and only with an abundance of novocain, a sharp drill and in a procedure of expedited duration. Interesting lesson when negotiating these provisions in the future.

March 6, 2013

Delaware Disclosure Claims Ruling: Trend Towards Fewer Expedited Proceedings?

Recently, Delaware Chancellor Strine made this ruling in Corwin v. MAPP Pharma on plaintiffs’ motion for expedited proceedings regarding certain disclosure claims that are becoming increasingly more common. While this ruling may reflect a further softening in the Chancellor ‘s views regarding the per se materiality of free cash flows (compare Maric v Plato to Transatlantic to Cox v Guzy), it may more generally be seen as further evidence that members of the Court of Chancery are less inclined to expedite proceedings or grant injunctions regarding “third party transaction in which the plaintiffs make no plausible allegation that the board’s decision to enter the transaction resulted from any favoritism toward the contractual buyer” and where “the plaintiffs’ own allegations admit that other logical buyers were given the chance to buy and make a bid without facing the barriers of deal protections in a signed up deal. . .”

March 5, 2013

Webcast: “Growing Controversies Over Company Valuations Under Delaware Law”

Tune in tomorrow for the webcast – “Growing Controversies Over Company Valuations Under Delaware Law” – to hear Kevin Miller of Alston & Bird, Jennifer Muller of Houlihan Lokey and Kevin Shannon of Potter Anderson discuss whether – despite case law to the contrary – fair value (in appraisal) and fair price (under entire fairness) shouldn’t be viewed as identical. Please print off these two sets of Course Materials in advance – fair value and control premiums.