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Monthly Archives: May 2014

May 7, 2014

New Urgency for Corporate Inversion Transactions

Here’s news from this memo from Cadwalader:

Corporate inversions have constituted an active and successful part of the M&A market in 2013 and early 2014, as acquirors have typically traded up on the date of announcement. However, there is now a new urgency for U.S. corporations seeking to invert to identify merger partners and complete their transactions.

In an inversion transaction, a foreign corporation is interposed between a U.S. corporation and its shareholders, typically to allow the U.S. corporation to distribute the untaxed earnings of its foreign subsidiaries to the shareholders of the new foreign parent, or to reduce its future tax liability through deductible payments to the new foreign parent, each without U.S. tax. For example, in Endo Health Solutions’ 2013 acquisition of Paladin Labs, shareholders of Endo and Paladin exchanged their shares for those of a new holding company incorporated in Ireland, which will own the two companies as subsidiaries. This will allow Endo to reduce its effective tax rate from 28 percent to 20 percent, resulting in $50 million in annual tax savings.

Under the existing tax laws, tax-efficient inversions are possible only if the former shareholders of the U.S. corporation own no more than 80 percent of the combined company after the merger or acquisition.

In March 2014, however, the Treasury Department proposed to amend the anti-inversion rules, effective January 1, 2015, to permit tax efficient inversions only if the former shareholders of the U.S. corporation own no more than 50 percent of the combined company after the merger or acquisition – a change that would significantly reduce the possibility for corporate inversion transactions.

The prospects for the enactment of this proposed legislation in the current year are uncertain at best. But the completion of any inversion transactions by December 31, 2014, would avoid the application of the proposed amendment and any similar amendments that Treasury re-proposes in 2015 or later with the same effective date of January 1, 2015. As a result, inversion transaction activity may well accelerate as we approach the end of the year. For this reason, U.S. corporations seeking to invert should identify potential merger partners and work to complete a transaction before the inversion rules are tightened.

May 6, 2014

Delaware: Sotheby’s Annual Meeting Not Enjoined Due to Poison Pill

Here’s news from Richards Layton (we’ll be posting memos in our “Poison Pills” Practice Area – and here’s a DealBook article on Sotheby’s truce):

In Third Point LLC v. Ruprecht, C.A. No. 9469-VCP (Del. Ch. May 2, 2014), the Delaware Court of Chancery denied preliminary injunctive relief against Sotheby’s annual meeting, scheduled for May 6, 2014. Plaintiffs, including Third Point LLC and other stockholders, claimed that the board had violated its fiduciary duties by (1) adopting a stockholder rights plan with a two-tiered trigger, capping stockholders who file Schedule 13Ds at 10% of the outstanding stock, but permitting passive investors who file Schedule 13Gs to acquire up to 20% of the outstanding stock; and (2) refusing to grant Third Point, the company’s largest stockholder, a waiver enabling it to acquire up to 20% of the outstanding stock. Claiming that the board had acted for the primary purpose of inhibiting Third Point’s ability to wage a successful proxy contest, Third Point asked the Court to apply the Blasius standard, and argued alternatively that the board’s actions were impermissible under the Unocal standard. The board argued, among other things, that Third Point’s accumulation of Sotheby’s stock posed a legally cognizable threat to Sotheby’s and that the board’s actions in response were proportionate to the threat.

The Court held on a preliminary basis that Unocal, rather than Blasius, provides the appropriate framework of analysis. Applying the Unocal standard, the Court held on a preliminary basis that the majority-independent board had shown that it acted reasonably in identifying a legally cognizable threat—that Third Point, alone or with others, might acquire a controlling interest in the company without paying Sotheby’s other stockholders a premium—and that its response to the threat was reasonable. The Court wrote that the issue of the board’s refusal of Third Point’s request for a waiver presented “a much closer question” than the original adoption of the rights plan, but determined that the board made a sufficient showing as to the threat that Third Point might be able to exercise “negative control” if permitted to accumulate up to 20% of the outstanding stock. Accordingly, the Court denied the application for preliminary injunction.

On May 5, 2014, Sotheby’s and Third Point announced a resolution of the dispute, under which Third Point will be allowed to increase its ownership to 15% of the outstanding stock, the board will expand from twelve members to fifteen, and Third Point’s three nominees will be appointed to the board and added to the company’s slate of nominees at the 2014 annual meeting, which will be convened and adjourned to allow updated solicitation materials to be distributed.