Monthly Archives: June 2014

June 25, 2014

Activist Funds Dust Off ‘Greenmail’ Playbook

Here’s news from this WSJ article:

More companies are resorting to an old tactic to get rid of activist investors: Pay them to go away.
The practice, which involves buying back shares from activist hedge funds, has raised concerns among some investors because it bears similarities to “greenmail,” a controversial strategy popular in the 1980s. Back then, aggressive investors such as Carl Icahn and the late Saul Steinberg bought company shares and threatened a hostile takeover. Eager to avoid a battle, companies including Walt Disney Co. and Goodyear Tire & Rubber Co. bought back their stakes above market price, giving the activists a quick profit. The practice, widely criticized as corporate blackmail, largely died out by the early 1990s as companies beefed up defenses and lawmakers took steps to discourage it.

But in the past 12 months, at least 10 companies have repurchased blocks of shares from activist investors, including Daniel Loeb and William Ackman, according to FactSet SharkWatch. That is more than in the previous six years combined. The practice differs from greenmail in two crucial aspects. The share buybacks aren’t at a premium to the market but typically at or slightly below the last trading price. They also don’t follow threats of hostile takeovers. Advisers say these deals are likely to continue as activist hedge funds, which have targeted more companies in recent years, look to sell out of holdings.

Since the current wave of activism started in 2010, these investors have launched 1,115 campaigns, according to FactSet, and many are ripe for exits. The buybacks have fueled a common criticism of activist investors: They chase short-term profits at the expense of other shareholders. “You can call it greenish mail,” said Spencer Klein, a lawyer with Morrison & Foerster LLP who advises companies facing activist investors. “These investors are getting an opportunity that others aren’t, and that’s not a terribly popular notion.”

June 23, 2014

Companies Involved in M&A Activity More Likely Targets of Cyberattacks

Here’s news from Cooley’s Cydney Posner:

According to this article in the WSJ, companies involved in M&A activity had better make special efforts with regard to cybersecurity. In the course of the transaction, thieves may try to gain access to internal systems. extract negotiating positions or other information about the transaction, or make off with trade secrets or other inside information.

Apparently, data thieves target companies engaged in M&A deals because, in light of the confusion that often surrounds M&A activity, employees are more vulnerable to cyberattacks. Employees of merged companies do not know who may be sending them emails and are more likely to open them. For example, in one case, cyberthieves went phishing by sending emails to employees of a newly acquired subsidiary announcing the acquisition. That email included malware that allowed the hackers to enter the company’s network and steal proprietary data. Similarly, executives travelling for deal negotiations can also be a prime target for data thieves.

To help address these risks, employees should be advised to be more cautious about opening emails when the company is going through a merger or acquisition. It may also be perilous for travelling executives to use Wi-Fi on mobile devices or plug into free Wi-Fi in hotels and public areas. In addition, companies should also “be careful not to link up their networks until the new network has been tested by the security team to make sure it’s safe.”

June 20, 2014

China Antitrust Authority Blocks Second Transaction in Its History

Here’s news from this Wachtell Lipton memo:

The Anti-Monopoly Bureau of the Ministry of Commerce in China (“MOFCOM”) issued a decision yesterday prohibiting the formation of the P3 Network, a long-term container shipping alliance among A.P. Møller-Maersk, Mediterranean Shipping Company and CMA CGM, which are Danish, Swiss and French companies, respectively. In the six years since the adoption of a pre-merger notification law, MOFCOM had previously imposed restrictive conditions in 23 cases and rejected only one transaction, out of the approximately 800 transactions notified to MOFCOM. In yesterday’s decision, MOFCOM indicates that it blocked the transaction due to insufficient evidence that the P3 Network’s “benefits would outweigh its harm” to competition or that the proposed transaction was “in keeping with the public interest.” According to the decision, the proposed alliance would result in a combined market share in the Asia-Europe routes of approximately 46.7% and would “greatly increase market concentration.” The parties abandoned the plan for the proposed alliance in light of the decision.

The P3 Networks decision occurred on the very last day of a lengthy MOFCOM review. The parties announced their proposed formation of the P3 Network on June 18, 2013. The parties had submitted their draft MOFCOM notification on September 18, 2013, which MOFCOM formally accepted three months later on December 19, 2013. The transaction subsequently entered into an extended Phase II review. MOFCOM does not have the ability to extend further the review period beyond the prescribed 180 days. Thus, in a transaction opposed by MOFCOM, unless the transaction parties withdraw their notification, MOFCOM must either obtain satisfactory commitments from the parties or block the transaction.

Transaction parties in cross-border deals must plan carefully if their deal will require MOFCOM pre-consummation approval. Parties should engage regulatory counsel to assess the substantive antitrust issues as early as possible and, in transactions raising antitrust issues, be prepared for the MOFCOM review process to involve significant time and effort. Parties also must be prepared to address MOFCOM’s questions and concerns quickly to avoid an adverse outcome.

June 18, 2014

Delaware Supreme Court Justice: Didn’t Like Chief Justice Process

Here’s news from this article in the Delaware Law Weekly entitled “Disappointment in Chief Justice Process Led to Resignation Decision, Berger Says”…

June 17, 2014

Rural Metro: The Appeals Briefs

Here are the documents filed so far in the appeal of the “contribution” issue in the Rural Metro case that was decided in March (here’s the transcript from our webcast analyzing that decision):

RBC Capital Markets’ Reply Brief in Further Support of Its Post-Trial Contribution Brief
RBC Capital Markets’ Post-Trial Contribution Brief
Plaintiff’s Post-Trial Answering Brief on Contribution
Granted Stipulation & Order of Briefing and Oral Argument on Contribution (ie. schedule of appeal process)

June 16, 2014

Comings & Goings on the Delaware Supreme Court

A lot of movement on the Delaware Supreme Court these days. The latest is that Delaware Governor Jack Markell has nominated Skadden’s Karen Valihura to replace Jack Jacobs. Meanwhile, Delaware Supreme Court Justice Carolyn Berger announced that she will retire from the September 1st…

June 12, 2014

Connecting Middle-Market Bankers

In this podcast, Andy Jones, President of PEI Services, discusses his company – an online information services company providing up-to-date & accurate information about financial buyers to the middle market investment banking community and associated M&A service providers, including:

– What is PEI Services generally & who are the intended users?
– Can you describe your research database?
– How do you source your data and ensure data quality?
– Do you license your data for use within internal CRM systems, or as a plug-in to other corporate data systems?

June 10, 2014

Transcript: “Appraisal Rights: A Changing World”

We have posted the transcript for our recent webcast: “Appraisal Rights: A Changing World.”

June 9, 2014

Allergan: A Shareholder “Get Together” Is Still On

Here’s the latest from “The Activist Investor”

Earlier we outlined how Valeant and Pershing Square (PS) planned to convene an unusual ‘meeting’ of Allergan shareholders. They sought to collect votes on a non-binding resolution urging Allergan leadership to negotiate with Valeant and PS on their pending bid to acquire Allergan. In the latest twist in this unique story, Valeant and PS withdrew its proposal for the ‘meeting’. The New York Times reported that Allergan shareholders view the ‘meeting’ as a “distraction” and worry that voting for the proposal would trigger Allergan’s poison pill.

Instead, PS now proposes an official special shareholder meeting. The agenda includes dumping six Allergan directors, and approving six new ones nominated by PS and Valeant. And, it features the exact same non-binding resolution that Valeant and PS originally proposed for the ‘meeting’, urging Allergan to negotiate a deal with Valeant and PS. Also, Valeant and PS boosted their offer for Allergan within days of proferring their original one.

The New York Times and Wall Street Journal think that Valeant and PS acted erratically. From the Times:”Yet in the last week, Valeant and [PS] have turned an already unusual deal into a one of the most confounding takeover attempts in recent memory. Their tactics have often departed from the established playbook, and at times have appeared counterproductive. And after they offered a succession of revised proposals, changed tactics and made public presentations, the fate of Allergan remained no more certain than it was in April, when the process began.” The Journal merely called it “zigging and zagging.”

We rather think Valeant and PS made some shrewd and sensible moves based on candid discussion with other investors. As they disclosed these discussions, it appears they responded to two critical developments:

– Investors signaled what deal structure would win their vote, hence the improved terms in a week’s time.

– Allergan showed zero inclination to respond to a non-binding resolution, even one with significant shareholder support.

It sounds like investors said, “Why bother with the referendum? As long as you respond to our economic needs, we’ll vote for a new BoD, and wait for the protracted special meeting process to work out.” Based only on what PS disclosed, Allergan should come to the table sooner rather than later. Last week, Valeant and PS met with investors representing at least 20% of the outstanding shares, which with their 10% gives them a dominant block. It takes 25% of the outstanding shares to call the special shareholder meeting, which seems very likely to take place.

Seems to us Allergan would almost certainly prefer to negotiate a deal in private, rather than attend a special shareholder meeting in public.

June 5, 2014

Appraisal Rights: Legal Battle May Pose Hurdle

Here’s news from DealBook’s Steven Davidoff:

The hedge fund Merion Capital might have hit a roadblock in its multimillion-dollar appraisal proceedings involving the $1.6 billion buyout of And it’s a roadblock that just might slow the trend toward exercising appraisal rights. Appraisal rights allow shareholders in an acquisition to ask a court to assess the value of their shares. The idea is that if the buyer underpaid for the stock, shareholders have a remedy — namely going to court and having a judge determine the right price for the shares. While appraisal seems like an effective remedy, shareholders have been reluctant to exercise this right because the process can take years, shareholders have to pay legal fees and many state courts, including Delaware’s, can actually award less than the amount paid in the merger.

Enter the hedge funds. Merion is the largest of a number of funds that are now exercising appraisal rights as a business strategy. Merion has reportedly raised more than $1 billion and to date has exercised appraisal rights in nine different actions, including takeovers involving Dole Foods, BMC Software and Airvana. These funds have led to an upsurge in appraisal rights. According to a paper by two law professors, Minor Myers of Brooklyn Law School and Charles Korsmo of Case Western Reserve Law School, the value of appraisal claims was $1.5 billion last year, a tenfold increase from 2004.

In the case of, which was bought by an investor group led by the European private equity firm Permira, Merion bought 1.225 million shares of its stock at the $32 cash buyout price, worth about $39 million. Merion is pursuing appraisal rights to obtain a higher dollar figure. It seems to be a strategy perfect for a hedge fund that is run by experienced lawyers and is designed to take risks. However, perfection may have run into reality in the proceedings, which are taking place in a Delaware court. The combination of hedge funds and appraisal rights is new, and that means that the law governing it is still in flux.

Ancestry is opposing the appraisal rights petition, arguing that the price paid was fair value. Ordinarily this would lead to a trial where the court would determine who was correct. Courts have tended in the past to favor the party seeking appraisal, a fact that is underpinning Merion’s strategy. But Ancestry filed a brief two weeks ago on a novel legal point that may wipe out Merion’s case not only in its proceeding but possibly in others as well.
The issue is that in order to exercise appraisal rights in Delaware, a stockholder must not have “voted in favor” of the transaction. This makes sense, because if you are asking the court to give you more money in a takeover, then you should at least show you opposed the deal at the price you think is too low. It sounds like a simple rule, but it is complicated.

First, there is the issue that most shareholders don’t hold their shares directly in a company. They are merely beneficial owners. Actual record ownership of the shares is held through brokers and then through the share ownership company Cede & Company. Cede votes its shares as all the shareholders direct, but Cede votes these shares in the aggregate and does not allocate shares to each owner. Consequently, it is impossible for a beneficial owner to assert how their shares were voted and to know whether the appraisal requirement to not vote for the deal is met.

Second, for each shareholder vote there is a record date. The record date marks the date when shareholders are counted as eligible to vote. But shareholders can buy shares after that date and exercise appraisal rights. However, such a shareholder never votes on the transaction. Instead, the previous owners who held the shares on the record date may vote their shares for the deal. In this case, what happens if the previous owners voted for the transaction or their votes are unknown? It is this second problem that Merion faces. Merion bought all of its shares after the record date for the shareholder vote on the transaction.

In depositions by Ancestry’s counsel, Samuel Johnson, a portfolio manager at Merion said that he did not know how Merion’s shares were voted because they were bought after the record date. This would seem to doom Merion’s claim. But not entirely. In the case of Transkaryotic Therapies Inc., the court addressed the issue of whether a beneficial holder of shares who acquired shares after the record date was required to show that the previous owner did not vote for the transaction. In that case, the stockholders demanding appraisal had held their shares beneficially with Cede as the record-holder. The court held that in such a case, only the record-holder — Cede — had to show that there was not an affirmative vote. Because Cede had voted sufficient shares as record-holder against the transaction, the appraisal petition was sufficient.

This case made sense because the Delaware statute at the time permitted only a record-holder of stock to exercise appraisal rights. Cede also appears unable to retrace its shares and show how they were voted for its beneficial shareholders. If the court in Transkaryotic had required this, many shareholders would effectively lose their appraisal rights. Merion will no doubt argue this case applies here because it held its shares beneficially and not as record owners.

In the wake of Transkaryotic, however, the Delaware appraisal statute was amended to allow shareholders who own stock beneficially to exercise appraisal rights. Ancestry’s counsel is now arguing that this amendment requires that a beneficial owner show it did not vote in favor of the transaction. In its filing to the Delaware court, Ancestry stated that a “beneficial owner may now bring an appraisal action in its own name, without relying on Cede (or some other nominee) to vindicate its rights indirectly.” The beneficial holder thus now “assumes the statutory obligation to show that the shares it seeks to have appraised were not voted in favor of the merger.”

The case is not completely in favor of Ancestry, though. The section of the appraisal rights statute Ancestry is citing requires that the beneficial owner exercising appraisal rights set forth a statement of “the aggregate number of shares not voted in favor of the merger or consolidation.” But the amended statute does not state whether these shares are required to have not been voted for the transaction. Moreover, the statute itself when it refers to a shareholder defines it as a shareholder of record, meaning that the basis for Transkaryotic appears to remain despite this amendment. In its petition seeking appraisal, Merion said it had not voted in favor of the transaction. When asked at deposition about this, Mr. Johnson said that it was “boilerplate” and that Merion did not know how its shares were voted. In other words, Merion is relying squarely on the Transkaryotic opinion to win.

The question now is whether court views on appraisal rights are changing now that their exercise is more frequent.
Even if Merion wins, it might only be kicking the can down the road. In the appraisal proceedings for Dole, another action Merion is participating in, more shares are exercising appraisal rights than those that voted against the deal or abstained. This means that there are definitely stockholders exercising appraisal rights who hold shares that voted yes. It all means peril not just for hedge funds but for companies as they wait for the law to catch up and see whether their business strategies work. It’s a risky strategy, but then again that is what hedge funds specialize in.