Here’s news about appraisal arbitrage from this Wachtell Lipton memo (and other memos posted in our “Appraisals” Practice Area; and this Reuters article):
The Delaware Court of Chancery today issued its post-trial decision in the appraisal of Ancestry.com, rejecting claims brought by hedge funds seeking an award substantially in excess of the merger price. In re Appraisal of Ancestry.com, Inc., C.A. No. 8173-VCG (Del. Ch. Jan. 30, 2015). The decision confirms that the merger price resulting from a comprehensive, arm’s-length sales process will be accorded substantial weight in Delaware appraisal proceedings.
In recent years, transaction parties have faced an increased level of post-merger appraisal litigation. Much of this litigation has been brought by hedge funds pursuing an investment strategy known as appraisal arbitrage, where the funds take significant share positions following the announcement of a merger solely for the purpose of bringing an appraisal action. The appraisal here followed this pattern. Appraisal arbitrage funds took substantial positions in Ancestry following the announcement of Ancestry’s proposed acquisition by Permira, and brought appraisal proceedings immediately after completion of the transaction. At trial, petitioners presented an expert’s discounted cash flow analysis purporting to show that the value of the company was more than $42 per share, well in excess of the $32 per share merger price.
The Court rejected the opinion of petitioners’ expert and found that the merger price was the best indication of Ancestry’s fair value. The Court noted that Ancestry had conducted a “robust” auction, involving contacts with over a dozen parties, that had produced a “motivated buyer.” The Court concluded that this robust sales process was “unlikely to have left significant stockholder value unaccounted for.” The Court did conduct its own discounted cash flow analysis, which resulted in a value slightly below the merger price, but ultimately concluded that fair value was “best represented by the market price.” The Court’s opinion reflects the understanding that a price set by the market reflects assessments about value by buyers with real money at stake. As the Court explained, “it would be hubristic indeed to advance my estimate of value over that of an entity for which investment represents a real—not merely an academic—risk, by insisting that such entity paid too much.”
The recent arbitrage-fuelled surge in appraisal litigation is likely to continue. But the Court’s decision in Ancestry confirms that the market still matters in appraisal proceedings, sometimes conclusively, and that appraisal arbitrage is not without risk. Appraisal arbitrageurs must tie up substantial capital for long periods and incur substantial litigation costs, but can still end up with nothing more than the deal price.
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.