This Bloomberg article does a nice job providing the backstory behind how 18 law firms came together with the Corp Fin Staff to get this no-action relief on debt tender offers out there. Here’s an excerpt:
Jim Clark, a partner at Cahill Gordon & Reindel LLP, headed the efforts to come up with a workable recommendation to amend Rule 14e-1(a) under the Securities Exchange Act of 1934. His goal was to come up with proposals that would satisfy the lawyers, as well as the investment banks and representatives of the Credit Roundtable, a group of large institutional fixed-income managers, involved.
What they finally agreed on, after months of conference calls and “many, many drafts,” was an eight-page letter to the SEC trying to establish guidelines for short-term debt tender offers in situations that don’t involve a change of control, or a company that is about to go bankrupt or other coercive situations, Clark said.
With the changes included in the SEC’s Jan. 23 no-action letter, many of these tender offers are now subject to a rule requiring them to remain open for only five business days as long as certain conditions are met. The SEC hadn’t addressed the guidelines — including how long a tender offer for debt had to remain open — since the mid-1980s, Clark said. In 1986, the tender-offer period was reduced from 20 business days to seven calendar days for some offers for investment-grade debt, but the application of the guidelines was neither consistent nor had they been updated to reflect the prevalence of high-yield debt, he explained.
I recently asked my good friend Jim Brashear of Zix Corporation this question: “are lawyers are still sending confidential deal documents via unencrypted email?” I asked Jim since he’s an expert in that area (Zix is an email encryption service provider). Here is Jim’s response:
Do I think deal lawyers are still sending confidential docs via email? Yes. It happens all the time. State bar opinions from the 1990’s that allow the use of email are misinterpreted by lawyers who think they allowed carte blanche use of unencrypted email. The law firms try to strike the appropriate balance between data security when transmitting files and personal convenience. However, convenience – for the lawyer – almost universally wins (most lawyers don’t even bother to ask the client). Cost is a factor. There are other considerations too, such as what happens if multiple clients insist the lawyer use client-specified secure communications methods.
A related topic is the indefensible distinction that the state bar opinions make about the use of Cloud services versus email. I’ve blogged about this on our company website: “Lawyer Use of Cloud Services Versus Email – An Ethical Distinction Without a Practical Difference.” Recent ethics opinions ask lawyers to jump through diligence hoops before using Cloud services. No similar mandates exist for email, even though email is a Cloud service and provides essentially the same functionality as file transfer services (internet transmission, remote file storage). Moreover, remember that email is insecure.
Some lawyers misidentify the issue as whether attorney-client privilege is maintained if data security is breached. They justify lax data security by noting that inadvertent disclosure is not necessarily a waiver of privilege. That is, however, a separate issue from the ethical obligation to maintain client confidentiality. The privilege question is essentially limited to a litigation context. A judge can decide, as a matter of evidentiary law, whether or not the privilege is preserved in a particular case where data security was compromised. Confidentiality, on the other hand, is lost once client data is disclosed; and a judge cannot unring that bell.
The ethics opinions actually require lawyers making data security decisions to examine the circumstances and assess the risks. The ethics guidance is that lawyers must take data security measures that are reasonable in the circumstances. Below is a checklist of some relevant factors:
– Client’s instructions
– Degree of sensitivity of the information
– Possible client impact from disclosure
– Data breach laws
– Likelihood of disclosure
– Inherent level of security
– Reasonable steps to increase security
– Cost of additional safeguards
– Urgency of the situation
– Legal ramifications of unauthorized interception, access or use
Nobody (including data security vendors) is saying that every email (or every file shared via Box, Dropbox, etc.) that contains information relating to the representation of a client must be encrypted. And certainly nobody is saying that lawyers must have a separate encryption key for each client or “circumstances” (much less, one committed only to one attorney’s memory). The issue is whether the lawyer’s reliance on a third-party’s data security is reasonable.
On the flip side, however, there is no authority that every email with client information can be sent unencrypted. The ethics opinions are also quite clear that using unencrypted email is not appropriate in some situations. I often recommend that law firms insert into their engagement agreements a paragraph that states something like the following:
“We will typically use email to communicate with you. Unencrypted email is subject to risks of interception by third parties. If you are concerned about those risks in particular circumstances (for example, because of the sensitivity of the information involved or because of an enhanced risk that a third party may gain access to the information), please advise us of those concerns so that we can discuss with you more secure means of communicating.”
Tune in tomorrow for the webcast – “Proxy Solicitation Tactics in M&A” – to hear Okapi Partners’ Chuck Garske, Alliance Advisors’ Waheed Hassan, Managing Director and Innisfree’s Scott Winter discuss the latest techniques used to sway opinion and bring in the vote – including social media – as well as how traditional tactics have evolved.
On Friday, Corp Fin’s Office of Mergers & Acquisitions issued a no-action response as fleshed out by this Gibson Dunn blog by Jim Moloney & Andrew Fabens (we’re posting memos about this in our “Tender Offers” Practice Area):
Today, January 23, 2015, the Division of Corporation Finance (the “Staff”) granted a no-action letter that was submitted on behalf of a consortium of law firms, including Gibson Dunn, whereby the Staff agreed to not recommend Enforcement action when a debt tender offer is held open for as short as 5 business days. This letter builds upon an evolving line of no-action letters granted over the past three decades that have addressed not only the overall duration of debt tender offers (typically the rules require a minimum of 20 business days), but also formula pricing mechanisms (that allow a final price to be announced several days prior to expiration).
Following an extensive dialogue with members of the bar and numerous market participants, including issuers, investment banks and institutional investors that began several years ago, the Staff is now opening up the relief that it previously limited to “investment grade” debt securities. Under the no-action letter, “non-investment” grade debt securities are now eligible to be purchased on an expedited basis. In order to take full advantage of this relief, issuers will need to disseminate their offers in a widespread manner and on an immediate basis. This should enable more security holders to quickly learn about the offer and permit holders to receive the tender consideration in a shorter timeframe. In addition, the abbreviated offering period will allow more issuers to better price their tender offers with less risk posed by fluctuating interest rates and other timing and market concerns related to the offer.
Previously, the Staff limited “abbreviated” debt tender offers (i.e., seven to ten calendar days) to “all-cash” offers seeking to purchase investment grade debt securities where the offering materials were disseminated in hard copy by expedited means such as overnight delivery. The relief granted today enables issuers to conduct their offers for both investment grade and non-investment grade debt securities on a similarly short time-frame (i.e., five business days) so long as the offer is open to “any and all” of a series of non-convertible debt securities and the issuer widely disseminates its offer notice to investors and provides them with immediate access to the offering materials.
More importantly, the letter opens up the door to five business day exchange offers, provided that the offer is exempt from the ’33 Act registration requirements and the securities sought are “Qualified Debt Securities.” This term is generally defined as “non-convertible debt securities that are identical in all material respects . . . to the debt securities that are the subject of the tender offer except for the maturity date, interest payment and record dates, redemption provisions and interest rate.” Such exchange offers would need to be limited to QIBs and/or non-U.S. persons under Regulation S, with non-eligible exchange offer participants concurrently provided with the option of receiving a fixed cash amount that reasonably approximates the value of the Qualified Debt Securities.
While there are a handful of detailed conditions that an issuer must follow in order to qualify for the relief granted today, key amongst the conditions are that all five day offers must be announced by press release through a widely disseminated news or wire service disclosing the basic terms of the offer and an active hyperlink to the instructions or documents relating to the tender of securities. The press release must be issued no later than 10:00 a.m. (Eastern time) on the first business day of the offer. Public reporting companies must furnish the press release in a Form 8-K filed no later than 12:00 p.m. on the first business day of the offer. With respect to fixed spread tender offers that are tied to a benchmark such as Treasury or LIBOR, as well as exchange offers, the exact consideration offered (including the principal amount and interest rate of any Qualified Debt Securities offered) must be disclosed no later than 2:00 p.m. on the last business day of the offer. Also, the offer may expire as early as 5:00 p.m. on the last business day, which is significantly earlier than what prior Staff interpretations allowed, which required an offer to remain open until midnight for that day to count as a full business day.
Of course, some offers are explicitly precluded from taking advantage of the relief. Most notably offers involving a consent solicitation may not be conducted on a five business day time-frame. Similarly, the relief would not extend to, among other things: partial tender offers, third-party tender offers, waterfall debt tender offers, offers made when there is a default or event of default under the indenture or other material credit agreement, when the issuer is the subject of a bankruptcy or insolvency proceeding, or offers made in anticipation of or in response to a change of control or other extraordinary transaction such as a merger or other tender offer.
Here’s an excerpt from this recent Towers Watson memo from Scott Oberstaedt and Mary Chico:
When we dissected the responses to identify retention plan design features and practices that were most effective in enhancing retention, several design trends emerged that may assist acquiring companies:
– Personalized selection: High-retention companies are more likely than others to identify eligible employees for retention based on their ability to affect the success of the transaction (73% for high-retention acquirers versus 33% for low-retention companies).
– Engagement with acquired company leadership during the selection process: High-retention companies are more likely (66% versus 27%) to tap into the target’s senior leadership for information about which employees to keep. They are also significantly more likely than low-retention companies to include management discretion (that is, the opinion of the target’s leadership) in the retention-agreement selection process (32% versus 8%).
– Simple plan design, focused on cash bonuses: High-retention companies focus on cash bonuses more than other forms of retention awards. Cash bonuses (exclusively or with other forms of compensation) are more likely to be used in retention agreements at high-retention acquirers (80% for senior leadership, 89% for other employees) than at low-retention companies (50% and 55%, respectively). They are also less likely than low-retention companies to adjust the value of retention awards where employees earned some value due to the sale of the company.
– Higher target values: Finally, the high-retention companies offer retention awards with higher target values per employee than low-retention acquirers. For senior leaders, the median value of the retention plan among high-retention companies is 60% of base salary, versus 35% for low-retention companies.
Here’s news from this blog by David Jenson of Stinson Leonard Street:
The Broker-Dealer section of the North American Securities Administrators Association (NASAA) has proposed a model uniform state rule (the “Model Rule”) that would exempt parties that act only as deal brokers in M&A transactions from regulation under applicable state broker-dealer laws.
Last January, the SEC released a no-action letter (the “SEC Letter”) in which it outlined circumstances in which it would not recommend enforcement against a party for failing to register as a broker-dealer pursuant to Section 15(a) of the Exchange Act when the party acted as an M&A broker (shopping an M&A transaction, providing relating services, and earning a fee in connection with the closing of a successful transaction) (our prior coverage here). The SEC Letter defined the concept of an “M&A Broker” and provided that it would not seek enforcement action against an M&A Broker that engaged solely in M&A Transactions for privately held companies, subject to several condition and limitations.
The Model Rule would provide exemption from state broker-dealer registration requirements, but not from other provisions, such as anti-fraud measures.
Under the Model Rule, a “Merger and Acquisition Broker” is defined as a broker or person associated with a broker engaged in the business of effecting transactions in securities solely in connection with the transfer in ownership of an “eligible privately held company,” if the broker or person reasonably believes that (i) following the transaction the acquirer will control and be active in the management of the business of the target (or its assets), and (ii) any person receiving securities in exchange for securities or assets of the target will receive or have access to certain financial information of the issuer prior to becoming legally bound to consummate the transaction. An “eligible privately held company” for purposes of the Model Rule is a company that (i) does not have securities registered under the Exchange Act and is not required to file periodic reports under the Exchange Act, and (ii) in its prior fiscal year had revenue of less than $250 million and EBITDA of less than $25 million.
A Merger and Acquisition Broker is only eligible for the exemption under the Model Rule if it avoids engaging in certain “Excluded Activities” and is not subject to certain final orders or disqualifications under the federal securities laws. The Excluded Activities consist of (i) having custody or control of the funds or securities that are the subject of the transaction, (ii) engaging in any public offering, and (iii) engaging in a transaction involving a shell company.
Although the Model Rule generally tracks the SEC Letter closely, there are conditions that were of note to the SEC but that are not present in the Model Rule, such as:
– The requirement that an M&A broker not have the ability to bind a party to an M&A transaction
– The requirement that the M&A broker not provide direct or indirect financing to any party for an M&A transaction
– Certain disclosure requirements if the M&A broker will represent both buyers and sellers in a transaction
– The requirement that the M&A broker cannot have assisted in the formation of a buying group in an M&A transaction.
The NASAA is requesting comment on the Model Rule, including comments on a set of specific questions included with the rule, until February 16, 2015.
Here’s a set of league tables from MergerMarket listing the law firms that most often represent companies in deals, broken out on a global and regional basis…
As noted in this memo, the thresholds set forth in the HSR Act have been revised ― as they are annually―based on the change in gross national product. The minimum size of transaction has been raised from $75.9 million to $76.3 million effective thirty days after the notice is published in the Federal Register. The notice is expected to be published next week.
This January-February issue of the Deal Lawyers print newsletter includes articles on:
– Retention Awards at Acquired Companies
– Delaware Chart: Determining the Likely Standard of Review for Board Decisions
– Respecting Boilerplate: Liability, Party & Enforcement Provisions
– More on “Anatomy of a Proxy Contest: Process, Tactics & Strategies”
If you’re not yet a subscriber, try a 2015 no-risk trial to get a non-blurred version of this issue on a complimentary basis.
Here’s analysis from Cliff Neimeth of Greenberg Traurig:
In an “under the radar” decision the Delaware Court of Chancery recently denied a TRO seeking to enjoin the operation of Kreisler Manufacturing Corporation’s (“KMC”) advance notice bylaws (“ANBs”). The plaintiff, AB Value Partners LP (“AB Value”), sought to nominate and solicit votes to elect its opposition slate of directors at KMC’s December 18, 2014 annual meeting.
In 2007, KMC adopted fairly “plain vanilla” (older generation) ANBs with a 30-day window period for the submission of insurgent director nominations. To be timely, the notice of nomination was required to be submitted to the Secretary of KMC not earlier than the 90th day nor later than the 60th day prior to the anniversary date of KMC’s 2013 annual meeting (which was held on December 17, 2013). Accordingly, the window period opened on September 18, 2014 and closed on October 18, 2014. AB Value submitted its notice after the October 18, 2014 deadline.
While not disputing that its notice was untimely, AB Value nevertheless sought to have the ANBs set aside because of alleged “material events” that occurred after the window period expired. Namely, AB Value argued that the distribution to four beneficiaries of an approximately 32% KMC voting share block previously held in trust, recently approved compensation increases for KMC’s senior management team, and errors in KMC’s notice of annual meeting, constituted sufficient after the fact “material change” to warrant, in effect, the issuance of a mandatory injunction ordering KMC to waive the ANBs.
AB Value challenged KMC’s use of the ANBs and not their facial validity, relying on the time-tested doctrine announced in Schnell v. Chris-Craft Industries (some 43 years ago) that “inequitable action does not become permissible just because it is legally possible.” Meaning, just because a provision is, for example, authorized under the DGCL or a company’s certificate of incorporation or bylaws, its use in any variety of unfair and inequitable future circumstances, is subject to invalidation as applied.
In AB Value Partners, L.P. v. Kreisler Manufacturing, Vice Chancellor Parsons recognized the decades-long prevalence of ANBs as a valid company defense to ensure the conduct of orderly stockholder meetings (i.e., where insurgent director candidates are sought to be nominated and elected and/or other stockholder business is being proposed) while, at the same time, acknowledging that ANB requirements that “unduly restrict the stockholder franchise or are applied inequitably, . . . will be struck down.” The Vice Chancellor noted that KMC’s ANBs were adopted on a “clear day” and not post hoc in response to a threatened election contest or other threat scenario (which would have animated Unocal, Unitrin and, perhaps, Blasius review).
The Vice Chancellor distinguished two cases (Hubbard v. Hollywood Park Realty Enterprises, Inc. and Icahn Partners LP v. Amylin Pharmaceuticals, Inc.) relied on by the plaintiff where ANBs were enjoined because of the occurrence, after expiration of the advance notice deadline, of material, unanticipated and Board- initiated changes in company circumstances. He noted that those fact-intensive decisions instruct that compelling circumstances must exist before a court exercises the extraordinary remedy of enjoining the operation of an otherwise facially valid ANB. In other words, there must be a “radical shift in position, caused by the directors.” At the end of the day, AB Value did not meet that burden.
It’s important to remember that the ability to freely vote is the most sacrosanct stockholder right in Delaware and practically all states. That said, ANBs do serve the legitimate corporate and policy objective of protecting a company from insurgent ambush with little or no advance warning or information so that a company has a reasonable time to react, vet the situation and inform itself as to any corporate risk implications, and to ensure that stockholders have adequate disclosure of the Board’s assessment and recommendations to fully inform their voting decisions.
Like many things, there is a delicate legal and commercial balancing act here, and provisions that on their face (or as applied) operate inequitably to frustrate or unduly impede the proxy machinery will be highly suspect if challenged. ANB “technology” has evolved quite a bit over the last 10 years and the informational requirements have been expanded significantly since the early generation versions of these bylaws. Borrowing from improvements in rights plan (poison pill) technology , the inclusion in ANBs of requirements to disclose the existence of synthetic securities (and similar derivatives) arrangements is commonplace and, in more rare instances, a few aggressive companies have introduced “wolf pack” disclosure requirements and covenants. Like all organic (or contractual – e.g., rights plans) shark repellents, ambiguities and overreach generally will be construed against the company (most especially because these devices are implemented via unilateral board action). The court reached the correct result.