DealLawyers.com Blog

For those not living day to day with corporate tax inversions – but are interested in what is happening now – check out this memo by Squire Patton Boggs about whether Congress or the Administration might act yet in 2014…

Here is an article by Ron Orol of The Deal:

An influential business lobby group may soon press the nation’s securities regulator to speed up the “proxy plumbing” process that occurs in advance of a vote on a major deal, a prospect that has sparked outrage among activist hedge fund managers who argue that the same change will hurt their ability to mobilize support for their dissident campaigns and director candidates.

At issue is the amount of time the Securities and Exchange Commission gives corporations to establish who their shareholders are in advance of an annual meeting or a special meeting, such as when investors vote on a merger or acquisition. Specifically, the agency requires that corporations begin their inquiry with various banks and brokers to determine how many beneficial owners they have 20 business days — four weeks — prior to a “record date” that the company sets in advance of the meeting. Investors who purchase stock prior to this scheduled record date are entitled to vote those shares at the upcoming scheduled annual or special meeting and those who buy shares after that day are not. (The inquiry is made so that companies can determine how many proxy statements to provide to its shareholder base).

Brian Breheny, a partner at Skadden, Arps, Slate, Meagher & Flom LLP in Washington, said that an American Bar Association committee he chairs is debating whether the time has come for the SEC to shorten the mandatory search period. Breheny, a former chief of the SEC’s M&A unit, argued that recent technological advancements have made it easier to collect a list of shareholders, adding that a shorter period would speed up the process of preparing for a vote on a deal or other transaction and allow it to be completed with fewer headaches.

The subcommittee may soon vote to submit a petition asking that the SEC shorten the inquiry period to five days, significantly less than the current four-week investigation period, according to people familiar with the situation. The SEC is not required to follow up on the petition, but the ABA is a major and influential pro-corporate SEC constituent (made up of numerous ex-SEC officials) and agency staffers typically pay close attention to the group’s suggestions.

Backers of a compressed inquiry period insist that it would be helpful in situations where shareholders are voting on transactions, because it would provide more deal certainty and less time for external issues to arise that can lower valuations or dismantle deals — such as third-party bids, poor earnings reports, employee departures or macro-economic problems.

“In a merger transaction speed is important because the parties want to consummate their deal as quickly as possible to avoid any unforeseen, intervening circumstances,” said Sanjay Shirodkar, an attorney at DLA Piper in Washington. “Factors such as the global economic situation … can change between the time a deal is announced and when it closes. People want deal certainty. Shortening this period would serve to increase deal certainty.”

However, activists involved in proxy campaigns to seat dissident directors argue that, depending on when they launch their contests, a shorter broker-banker inquiry period could significantly reduce the amount of time available for other activists or institutional investors sympathetic to their campaign to invest in the stock before the record date hits (thereby removing many passive or pro-management shareholders). Investors who buy securities after the record date aren’t permitted to vote their shares at the meeting and those that sold stock immediately prior to the record date typically have little incentive to vote shares they no longer own. They also raise concerns about the shorter period, arguing that the extra time could be useful if it gives third-party rival corporations a chance to issue their own more shareholder-friendly offer.

“With a shorter inquiry period, a company could try to speed up the record date and the annual meeting to help ensure that pro-activist shareholders don’t rotate into the stock in any size,” said a general counsel at a major dissident investor who launches multiple campaigns a year.

Regulatory observers point out that, in the current 20-business-day system, a corporation’s inquiry to banks and brokers is supposed to be private but word often reaches the activist about when the record date will take place before it is publicly disclosed.

Activists and corporations involved in a proxy contest can only officially solicit votes in favor of their director candidates after the record date passes. As a result, activists are also eager to find out when the record date is set for because they want to be the first one to solicit the investor base to get their votes. Alternatively, the corporation would like to delay that information as much as possible, so they can have a first-strike advantage.

“Activists would have less time to campaign and convince existing investors to back their dissidents,” the general counsel added.

Activist fund manager Phil Goldstein of Bulldog Investors LLC, which has $570 million in assets, said he would prefer that the SEC required corporations to publicly disclose the record date and meeting date when they make their inquiry to identify their investors. That information, he added, would help Bulldog immediately solicit investors to support his dissident candidates after the record date passes. “They [corporations] should publicly disclose the record date and meeting date when they are sending out their search cards,” Goldstein said. “There are times when we don’t know when the record date is until after it passes.”

A managing director at a major proxy solicitor agreed that a shorter inquiry period would be distinctly pro-corporate, adding that corporations faced with proxy contests typically want to have the record date come sooner rather than later so that less stock turns over in advance of the meeting. New investors to the security after a proxy contest is launched typically back the dissident, he added.

People familiar with the SEC’s views say agency officials acknowledge technology has made it easier to establish shareholder lists but are taking dissident investors’ concerns into account as well.

In some cases institutional investors want to vote their securities at an annual meeting or a special meeting called to approve a deal but they have a huge bulk of their shares loaned out. According to an activist manager, these investors prefer the longer 20-business-day period because it gives them enough time to call back loaned shares in time to vote their stake. In other cases, hedge fund managers who have derivatives positions in a target company want sufficient time to acquire stock in the company, as part of an effort to protect their swaps stake, he added.

Nevertheless, corporate lawyers argue that activist concerns are spurious, arguing that insurgent investors can announce that they will nominate dissident directors months in advance of an annual meeting, giving sympathetic investors sufficient time to buy shares before the record date hits, regardless of whether it is expedited or not.

This would not be the first time the SEC changed its inquiry time-period. The SEC first set up a 10-calendar day inquiry period in 1977 but, after hearing from an advisory committee that recommended a longer inquiry period the agency in 1983 changed it to 20-calendar days. In 1986, the commission again extended the required time, this time to 20-business days before the record date. This change was designed to address reported delays and compliance issues. However, corporate lawyers insist that in addition to speeding up deals, a shorter inquiry period would have another benefit: to help expedite plain vanilla annual meetings.

Shirodkar noted that a rapid inquiry process would simplify and speed up the proxy system and reduce complications around SEC reporting deadlines and board schedules. In some cases, he points out, three or four months pass between when an inquiry is made and when a routine annual meeting and vote takes place. “A lot of things can happen in that time,” he said. “Compressing the inquiry timeframe would help the company get to its annual meeting faster.”

Last week, the FTC fined Berkshire Hathaway in the amount of $896,000 to settle allegations for HSR file failures in connection with acquisitions of USG Corporation shares when it converted notes over time. The FTC alleged that Berkshire Hathaway’s incremental acquisition resulted in the company’s aggregate holdings exceeding the $200 million size-of-transaction threshold – with no exemption for filing available. See related memos posted in our “Antitrust” Practice Area.

In this video, Jeff Bell of Morrison & Foerster uses an IP portfolio as an example when explaining how to make that acquisition more valuable by insuring financial stability and lowering the risk of insolvency.

From ISS: The resurgence in proxy contest activism that began in 2012 appeared to have stalled by Q1 of 2014 when only two contested situations went to a shareholder vote, compared to eight in the first quarter of 2013. Both of these contests, however, were resounding dissident routs of incumbent boards. At The Pantry, the dissident won all three contested seats and dissident nominees outpolled management candidates by as much as a 6-to-1 margin. In a repeat consent solicitation to remove the entire board of CommonWealth REIT, more than 81 percent of outstanding shares (up from 70 percent in the first go-around seven months earlier) consented to the removal of all incumbent directors, even though this left the company without a board for as long as two months until a special meeting to elect replacements was convened.

Contested elections rebounded in the second quarter of 2014, however, with 20 contested meetings–significantly more than the 16 which went to a vote in Q2 2013, though still short of the high-watermark of 24 in 2009. Continuing a trend from 2013, moreover, the size of the targets increased. In 1H 2014, a significant number–seven of the 22 total contested elections–had market capitalizations greater than $1 billion, versus eight billion-dollar-sized targets in the same period for 2013. There were, however, considerably fewer pint-sized proxy combatants–only 18 percent of the targets were below $100 million in 1H 2014, versus 50 percent in 1H 2013. The median market cap of targets in 1H 2014 thus grew to $260 million, nearly double the $141 million median for the same period in 2013.

Dissidents continued to win at least one seat, through a vote or last-minute settlement, more often than they lost, but the 1H 2014 “win” rate, at 59 percent, was more in line with the mid-50’s rates in the 2009-2012 time period than insurgent investors’ blistering 68 percent “battling average” in 2013.

Multi-front Campaigns
Fueled by an influx of investment dollars (chasing 2013’s best-in-class hedge fund return) and new entrants drawn to the space, the 2014 season featured a number of hydra-headed activist challenges. Unlike past piling-on efforts where hedge funds were drawn to targets by the blood in the water caused by the initial contact, these multi-dissident situations often featured competing visions for changes in corporate strategic direction at target companies.

Darden Restaurants
At Darden, dissidents Barrington Capital and Starboard each separately urged the company to undertake a number of strategic initiatives, including monetizing the real estate assets of its largest restaurant chains, Red Lobster and Olive Garden, through a sale-leaseback transaction. When the company announced, instead, that it would sell or spin the struggling Red Lobster business–an action which might void the sale-leaseback strategic option–Starboard launched a three-stage activist campaign. First, Starboard sought shareholders’ written consent to call a special meeting. Next, Starboard planned that shareholders would vote on a non-binding proposal requesting that the board not execute a sale or spin off of Red Lobster prior to the 2014 annual meeting unless such a transaction was also ratified by a vote of shareholders. In the third step, Starboard would nominate a dissident slate at the annual meeting.

In April, Starboard delivered written consents from a majority of outstanding shares supporting its request for a special meeting. Several weeks later, however, the board–acting within its legal purview but with clear disregard for the strong mandate shareholders had already provided through the written consent process–announced it had agreed to sell Red Lobster to Golden Gate Capital for $2.1 billion in cash. The transaction would not be subject to a shareholder vote. Starboard announced it would now seek to replace the entire board at the 2014 annual meeting which has historically been held in the fall.

Sotheby’s
Sotheby’s also faced a hydra-headed hedge fund challenge. The auction house was first singled out in July 2103 by Mercato Capital, which targeted the company’s cost structure and capital allocation practices. A month later, Dan Loeb’s Third Point filed a 13D. While the company eventually made a number of changes–including naming a new CFO and announcing a special dividend– it was unable to satisfy Third Point that the board had a sufficient sense of urgency about either its cost discipline or the need to adapt its business to new and emerging opportunities.

Marcato, which never “settled” with the company, did not ultimately run a proxy contest. However, Third Point did, highlighting the discrepancy between the board’s defense that 2013 was a “record” year and the evidence of the financial statements. Third Point’s campaign was bolstered by the revelation that directors, in emails unearthed by Third Point’s legal challenge of the company’s discriminatory, two-tiered poison pill, freely admitted to one another that the board had become “too chummy” and the dissidents’ case for change had merit. A settlement days before the shareholder vote added all three dissident nominees to an expanded board.

Near Misses
Many of the season’s most highly anticipated contests failed to materialize as directors and senior managers at target companies sought to short-stop challenges by offering board seats or making other moves to boost stock valuations. The poster dissident for such peaceful settlements was Carl Icahn. By February it was clear once again that Icahn, himself already past the mandatory retirement age set by many boards, still had issues he wanted to discuss publicly with some of them.

At Apple, whose net cash position had grown to more than $150 billion, Icahn announced a proposal that the company return capital more aggressively to shareholders by repurchasing at least $50 billion of its own shares in fiscal 2014. The company had been ramping up its return-of-capital program over the previous two years, initiating a $10.5 billion annual dividend and several repurchase programs; based on its recent history, it appeared on track to repurchase at least $32 billion in 2014 even without Icahn’s help. In mid-February, the company announced it had repurchased $14 billion in shares in response to a share price drop after its 1Q earnings report, bringing its 12-month total repurchases to $40 billion. Icahn, helpfully noting that this left ample cash reserves to “keep going,” announced he would not present his proposal at the annual meeting after all.

Icahn then turned to eBay, announcing he would nominate two candidates and make a non-binding proposal to spin off the PayPal business. He then surfaced a number of governance issues within the board itself, including the many potential conflicts of interest that arose from having directors with significant economic interests in so many other tech companies. In particular, he highlighted eBay’s sale of the Skype business several years earlier to a consortium which included an eBay director, and which quickly resold Skype at a significant profit: the question, Icahn emphasized, was whether directors on the eBay board, and perhaps other tech sector boards, were too conflicted by their own outside business interests to act in the best interest of public shareholders. Then, somewhat inexplicably, peace broke out. On April 10, the two sides announced Icahn was dropping both the proxy contest and the precatory proposal, and the company was adding an additional, mutually-agreed independent director.

I chuckled to see this article from DelawareOnline about the new style of judicial robe that Chief Justice Strine is rocking. Legal fashion is “in” baby! Justice of a different stripe?

Let’s not forget that SCOTUS Chief Justice Rehnquist upped the ante in judicial attire when he became Chief Justice in 1994. A local Gilbert & Sullivan troupe takes credit for the inspiration as a few months before Rehnquist’s duds were introduced as they had judges robes in “Trial by Jury” that were almost identical.

As noted in this press release, PwC found that the first half of 2014 saw deal value surge to $982 billion, its highest level since the first six months of 2007, pre-recession. Almost half of the total value was driven by large transformational deals – each one was valued at $10 billion or more.

PwC provides comprehensive data on the full first half of 2014 with key insights including:

– Transformational deals (valued at $10 billion or more) accounted for 49% of overall deal value for the first 6 months of the year
– Deal value increased to $982 billion in the first half of 2014, up from $570 billion for the same period in 2013
– Private equity transactions represented 11% of deal value and 17% of volume
– Cross border deal value increased significantly to $308 billion in the first half of 2014 from $98 billion in the same period of 2013

We have posted the transcript for the webcast: “Divestitures: Nuts & Bolts.”

Recently, we got the question from a member who was marking up a definitive agreement for the purchase of target company – a manufacturer of metal products – whom they believed to be utilizing conflict minerals. The member asked “Has anyone seen and reps and warranties being given for the use/non-use of conflict minerals in stock purchase agreements and, if so, what is being represented/warranted?”

My response was: These reps are pretty boilerplate. In the first example below, note that Oracle/Micros has a covenant that the seller has undertaken commercially reasonable efforts to eliminate conflict minerals from its supply chain:

– Oracle/Micros (covenant Section 5.23)
– Allergan/MAP Pharmaceuticals (see Section 3.29)
– Valeant/OBAGI Medical (see Section 4.5)
– Met-Pro/CECO Environmental (see Section 4.7(e))
– Citrix Systems/Bytemobile (see Section 2.32)
– Salix Pharmaceuticals/Santarus (see Section 5.26)

In his blog, Stinson Leonard Street’s Steve Quinlivan provides examples from 4 recent deals that used social media…