With Star Wars mania upon us, I thought it worth highlighting this funny paper entitled “It’s a Trap: Emperor Palpatine’s Poison Pill: The Collapse of the Galactic Economy and How the Empire Actually Won”…
Occasionally, you hear that people have received advice to be especially careful about emails so “don’t put it in an email, give him/her a call.” Often the advice is couched in terms of “avoid putting anything in an email that you would be embarrassed to read about on the front page of the Wall Street Journal. Make a call instead.” That advice is insufficient given what often happens in litigation. According to a recent WSJ article regarding pending M&A litigation, it’s alleged that: “[employee of buyer] later testified that [employee of target’s financial advisor] called him and said “we should not email on this.”
And then consider this quote from a recent Delaware Chancery Court opinion:
“On the evening of March 24, [employee of buyer] summarized the situation in an email [to other employees of the buyer]: I have spoken to a number of bankers on our side (for advice) and theirs (for back-channel feedback). There are definitely two other offers as we suspected, both say they need another week of work but the company’s bankers think it is more like 2-3 weeks. Sounds like both are higher but again not a knock-out, I haven’t been able to get more specific info than that.”
Things to bear in mind include:
1. Any advice, if given by one transaction participant to another participant or their representatives, is discoverable. Even if you don’t disclose it, the other person may – and you should assume likely will.
2. While not necessarily wrongful, there can be lots of innocent and/or perfectly valid reasons for making the suggestion to talk rather than exchange email (e.g., to avoid ambiguity or misinterpretation or because time is of the essence) – plaintiffs will likely allege that the person making the suggestion was trying to hide something damaging.
3. Just because you speak with someone and don’t put it in an email doesn’t ensure that the substance of the conversation will not be memorialized in writing – and be discoverable. Even if you don’t put it in an email, the person you talk to may.
The bottom line is: while it is not always possible to avoid saying, doing or writing things that are potentially vague, ambiguous or subject to misinterpretation, and sometimes back-channel communications are authorized for purposes of seeking a bump in price from the buyer, you should not assume that it’s okay to say something so long as you don’t put it in an email. The better advice is to try to “avoid saying, doing or putting anything in an email that you would be embarrassed to read about on the front page of the Wall Street Journal.”
On the heels of Dole CEO David Murdock, etc. agreeing to a $114 million settlement in the Delaware case in which VC Laster awarded shareholders a total of $148 million for their misleading activity in a buyout (the settlement is not yet finalized), this article notes that a federal class action case against Dole & Murdock has been filed in Delaware. Here’s the new complaint – and a blog about this new lawsuit..
InvestmentBank.com is pretty good for explaining elementary M&A concepts. Here’s the intro from a blog about complementary acquisitions:
Understanding where one is weak can prove to be a strength. This is especially true when the known weaknesses are eventually eliminated. When weaknesses are inherent in a company, it can create risks to the capital invested by shareholders and lenders. One way to overcome such weaknesses and risks is to eliminate them by acquiring complementing strengths. The following items showcase company weaknesses and risks that can effectively be remedied with a little M&A.
Regulatory & Legal Risks
– Companies in nonregulated industries could represent a fine target if a buyer is seeking to assuage some of the existing and burdensome compliance and legal issues. The reverse is also true. A company in a more pristine regulatory environment may be wholly unprepared when seeking acquisitions in a similar, but more regulated vertical.
– Poor union relations can be more easily be offset by acquiring a company in a similar, but less nonunion sector to help offset greater exposure to employee strikes.
– Market concentration risk can be reduced by acquiring a company with a less concentrated industry focus, further diversifying the market risk profile.
– Firms in a higher tax bracket can reduce taxation risk by acquiring a company with legitimate tax advantages. We’ve seen, helped and know of firms that have successfully done this work through the successful acquisition and restructuring of firms with high net operating losses. Other options are also available here.
– Weak intellectual property protection (e.g. trademarks, patents & copyrights) could be offset by acquiring or licensing the necessary patents to avoid later legal conflict over the lack of legal protection.
– When a firm has inferior or insufficient technology, a target acquisition may help to offset the lack thereof.
Here’s the intro from this blog by Cooley’s Cydney Posner:
The recent PWC survey of almost 800 directors of public companies contains some interesting data on directors’ views of communications with hedge fund activist and institutional shareholders, as well as proactive approaches to mitigate the risk of an activist challenge. (For survey results regarding board diversity, see this PubCo post.)
As expected, the level of director communications with institutional shareholders has increased from 2012, up from 62% to 69%. More significant perhaps is the change occurring in the breadth of topics that directors are now willing to discuss. Although it‘s still the case that “shareholder proposals” is the only topic that more directors view to be “very appropriate’’ for discussion (44%) as compared to “somewhat appropriate” (42%), the percentages registered for “very appropriate” increased across all topics.
Similarly, the percentages of directors viewing any of the surveyed topics as “not appropriate” decreased across the board. To unpack the numbers, the survey indicated that, for 2015, 77% of directors believe it is at least “somewhat appropriate” to discuss executive compensation with shareholders compared to just 66% in 2013. Similarly, 66% of directors now believe it is at least “somewhat appropriate” to discuss company strategy development and oversight, compared to only 45% in 2013.
The survey also showed an increase from 46% in 2013 to 66% in 2015 in the percentage of directors that believe direct shareholder communications regarding the use of corporate cash and resources to be at least “somewhat appropriate”; the survey speculates that the increase “may be a response to the concern many activists have expressed about dividends, stock buybacks, and other uses of cash.” Relative to data for 2014, board composition and management performance are two topics that saw significant increases in the percentages of directors who view them as “very appropriate” topics and significant declines in the percentages that view them as “not appropriate.”
As noted in this Moody’s Shareholder Activism report, shareholder activism is set to reach a record high in 2015 – so far, there have been 178 public shareholder activist campaigns as of mid-October, compared with 165 over the same timeframe last year…
Here’s an excerpt from this article by David Marcus in “The Deal” based on a recent speech by Delaware VC Travis Laster about three relatively recent Delaware Supreme Court decisions – all written by Chief Justice Strine:
The Delaware vice chancellor argued that Chief Justice Leo E. Strine Jr.’s opinions in Corwin v. KKR Financial Holdings LLC and the stockholder suits arising from the sales of Cornerstone Therapeutics Inc. and C&J Energy Services Inc. show the state’s high court has adapted to an era in which there is a much more active, effective and sophisticated stockholder electorate than ever before by showing greater deference to an informed stockholder vote. Because stockholders can be expected and relied upon to make decisions for themselves, Laster said, there is less need for judicial involvement. Laster began his analysis with a capsule history of M&A oversight by both Delaware courts and the Securities and Exchange Commission, which first regulated takeovers via the Williams Act in 1968. But the U.S. Supreme Court held in the 1977 case Santa Fe Industries Inc. v. Green that federal regulation of tender offers could not supersede state corporate law.
The Delaware Supreme Court cited Santa Fe in its 1977 decision in Singer v. Magnavox Co., where the court set out the business purpose test, under which a merger could only be done for a valid business purpose. The doctrine lasted only six years, but was in effect replaced by substantive fairness review. In the 1980s, the SEC and the Delaware courts collaborated and competed in regulating M&A. Laster pointed to the Delaware Supreme Court’s 1985 ruling in Revlon Inc. v. MacAndrews & Forbes Holdings Inc., where the court barred Revlon from selling to Forstmann, Little & Co. in the face of a hostile bid from MacAndrews & Forbes. In the Revlon decision, Laster said, the court placed the emphasis on fiduciary principles rather than private contract deal. The court rejected Revlon’s agreement to sell a key asset to Forstmann if that deal fell through and issued “a specific, targeted injunction” with “no grounding in stockholders’ ability to vote down the deal.”
Revlon remained a pillar of Delaware M&A law, which for years thereafter reflected the approach taken in the case even as the SEC largely receded from takeover regulation and left the field to Delaware. “On the whole,” he said, “we see less deference to market forces and primary emphasis on board behavior with respect to the deal at issue. The analysis is driven less by the stockholder vote than by the board’s fulfillment of its fiduciary duty to stockholders.” He said, in the late 1990s and early 2000s, the premise that target stockholders need to be protected began to erode in the Chancery Court. Instead, Laster posited, there was a renewed focus on the buyer’s contractual rights and a renewed interest on the systemic effects of rulings. That change came as the court saw far fewer cases in which a hostile bidder opposed a target board’s decisions and far more in which a target stockholder sued to challenge a friendly deal.
A “key case in this regard,” Laster said, is Strine’s 2005 decision in stockholder litigation arising from the $6.6 billion sale of Toys ‘R’ Us Inc. to KKR, Bain Capital and Vornado Realty Trust. The opinion runs to 88 pages, but Laster noted several key elements of the ruling. Strine rejected a request for a targeted injunction in part based on the contractual rights the buying group gained when it signed a merger agreement with Toys. He declined to reform the merger agreement and emphasized that stockholders could protect themselves by voting the deal down. The Toys case brought Laster back to the three Supreme Court decisions with which he began the speech. C&J Energy, Laster said, “is effectively Toys in a Supreme Court decision” because it emphasizes the contractual rights of the buyer and the ability of the stockholders to vote the deal down. C&J also showed “bigger picture thinking” by considering the systemic effects of the decision rather than focusing on the deal at issue in the case.
We’ve posted the transcript for our recent webcast: “An M&A Conversation with Myron Steele & Jack Jacobs.”
The Delaware Chancery Daily reports that the plaintiff’s in Zale have appealed the Court Chancery’s dismissal (on reconsideration following the Delaware Supreme Court’s opinion in Corwin v KKR) of their aiding and abetting breach of fiduciary duty claims against a financial advisor in In re Zale. The outcome of this appeal will test how broadly or narrowly the Delaware Supreme Court’s opinions in Corwin and Rural/Metro should be read and will have significant implications for pending and future aiding & abetting claims against financial advisors…
We’re posting memos on the Delaware Supreme Court’s Rural/Metro decision in our “Financial Advisors” Practice Area…
On TheCorporateCounsel.net, I’ve updated our “Corp Fin Org Chart” to reflect the coming return of Ted Yu, who will replace Michele Anderson as Chief of Corp Fin’s Office of Mergers & Acquisitions in early January. Michele recently was promoted to Associate Director and oversees that office among others. And Ted had left Corp Fin about 11 months ago to join Skadden…