DealLawyers.com Blog

Recently, the SEC settled insider trading charges against a guy, who allegedly learned of Texas Instruments’ pending acquisition of National Semiconductor from his wife, a partner at a law firm working on the deal. Lesson learned.

According to PwC’s 16th Annual CEO Survey released recently, US CEOs are more intent on M&A in 2013 than their global peers, and they’re concentrating on consolidation and expansion in the US market. Among the key US M&A findings of the survey:

– Forty percent of US CEOs consider M&A/joint ventures/strategic alliances to be a top investment priority; and 42% of US CEOs say they’re planning to complete a domestic deal this year (30% completed a domestic deal in 2012)
– Aside from North America, US CEOs’ target regions for M&A/joint venture/strategic alliances include Western Europe (43%), Latin America (28%), and East Asia (26%)
– Divestitures are a critical piece of the US deals market, representing around a third of deal volume in 2012 – and PwC expects them to retain a prominent strategic position in 2013 for US CEOs
– Joint ventures and alliances are also on US CEOs’ agenda with nearly 60% planning a new alliance/JV in 2013
– Some industry specific shifts may drive activity including healthcare reforms that are likely to spur consolidation, and financial services companies pursuing divestitures to bolster capital levels and unlock asset values. The technology and oil & gas sectors also present opportunities for M&A activity in 2013

Tune in tomorrow for the webcast – “Projections, Prospects & Other Crystal Ball Provisions: Colliding with 20/20 Hindsight” – to hear Wilson Chu and Peter Flocos of K&L Gates and Sal Fira of Grant Thornton discuss how a seller’s innocent optimism may become buyer’s basis for fraud and rescission.

Here’s a note from Harvard Professor Lucian Bebchuk:

My latest New York Times DealBook column focuses on an important but overlooked aspect of the debate on whether the SEC should tighten the disclosure requirements of activist blockholders. The column, Don’t Make Poison Pills More Deadly, develops an argument that I made in a Conference Board debate with Martin Lipton.

The column explains that the considered reform may facilitate the adoption of low-threshold poison pills that cap ownership at low levels. Even if the SEC were to decide that tightening disclosure requirements is desirable, it should limit the application of tightened requirements to companies whose charters do not permit the use of low-threshold poison pills. The SEC, I argue, should ensure it does not take any action that would harm investors by facilitating the pernicious use of low-threshold poison pills.

Recently, as noted in this memo, the FTC proposed changed to its premerger notification rules related to the withdrawal of HSR filings. The proposed rules seek to formalize the existing procedures whereby an acquiring person may voluntarily withdraw a pending HSR filing and resubmit within two business days without paying an additional HSR filing fee – and to establish a “bright line” trigger for the automatic withdrawal of an HSR filing that is tied to the SEC’s disclosure requirements. In other words, it would establish a procedure for the automatic withdrawal of an HSR filing when a SEC filing is made announcing that a transaction has been terminated. While the former merely seeks to formalize existing procedures, the latter is an entirely new mechanism that may have negative repercussions for certain filing parties.

Here’s a memo from Wachtell Lipton:

The Stanford Law School Securities Class Action Clearinghouse and Cornerstone Research recently released their analysis of securities class action filings in 2012. They report that 152 new securities class actions were filed last year, a 19 percent decline from the 188 new filings in 2011.

Of particular interest is the observation that only thirteen cases arising from merger and acquisition transactions were filed in federal courts in 2012, as compared to 43 in 2011 and 40 in 2010. “Evidence indicates,” the report states, that merger and acquisition litigation is “now being pursued almost exclusively in state courts after the unusual jump in federal M&A filings in 2010 and 2011.” Though such litigation typically arises under state law, plaintiffs often have the option to frame their claims as violations of the federal securities laws or bring them in federal court by invoking diversity jurisdiction.

The report does not attempt to explain these developments, but our experience suggests several reasons why the plaintiffs’ bar may have come to prefer to pursue certain securities claims in state courts. The reasons include the heightened pleading requirements and the automatic discovery stay pending a motion to dismiss imposed by the Private Securities Litigation Reform Act, and the perception that federal courts impose a more rigorous settlement approval process and are less generous in awarding attorneys’ fees.

In addition, a series of U.S. Supreme Court decisions has sharply limited the availability of the federal securities laws (and, therefore, the federal courts) to private plaintiffs seeking to assert claims against defendants who allegedly aided and abetted the alleged fraud or did not themselves make any false or misleading statements. Moreover, in cases arising out of merger and acquisition transactions, some federal courts are seen by plaintiffs’ lawyers as more likely than non-Delaware state courts to adhere to Delaware precedent deferring to a target board’s business judgment.

The option to choose the forum in which to bring litigation can be significant in shareholder litigation generally. The Supreme Court recently granted certiorari to determine whether investors in CDs issued by an affiliate of R. Allen Stanford can bring their “Ponzi scheme” class action claims in state court. In a decision at odds with holdings in other Circuits, the Fifth Circuit held that such claims were not precluded by the Securities Litigation Uniform Standards Act. Roland v. Green, 675 F.3d 503 (5th Cir. 2012), cert. granted, Jan. 18, 2013. Roland is not a merger case, but, like the movement of merger litigation away from federal courts, it illustrates how federal procedural rules and statutory law may channel securities litigation into state courts. The case will be closely watched by potential defendants who may find themselves facing state-court class claims that could not proceed in a federal court.

Tune in tomorrow for the DealLawyers.com webcast – “Activist Profiles and Playbooks” – to hear Bruce Goldfarb of Okapi Partners, Dan Katcher of Joele Frank Wilkinson Brimmer Katcher, Chuck Nathan of RLM Finsbury and Damien Park of Hedge Fund Solutions identify who the activists are – and what makes them tick.

Here’s news from Taketoshi Yoshikawa and John Taylor of ISS’ Japan Proxy Research:

An unsolicited bid by Japan’s second largest golf course operator, PGM, to acquire a majority stake in rival Accordia will, if successful, mark the country’s first successful hostile takeover. In a country that many argue has long lacked a functioning market for corporate control, PGM’s proposal is being watched closely. The bid follows a trend, dating back to the early 2000s, that has seen a number of increasingly credible hostile takeover bids for Japanese companies by hedge funds as well as strategic buyers, though none has been successful.

Acrimony Between the Firms
PGM’s November bid represents the second attempt by Heiwa, PGM’s parent company, to take over Accordia in less than a year. In the first attempt, which failed at Accordia’s annual meeting in June, Heiwa itself launched a proxy contest for control of Accordia’s board after accusing Accordia President Michihiro Chikubu of misappropriating funds.

Heiwa, a pachinko and pachislot (hybrid pinball and slot machine) manufacturer, acquired PGM from Lone Star Funds in October 2011. Accordia’s name as potential acquisition target came to the fore after Heiwa appointed former Accordia executive Arihiro Kanda as PGM President in January 2012. At the time of the acquisition, Heiwa’s move surprised analysts, as its pachinko and pachislot manufacturing business has little apparent overlap with golf course operations. Immediately after Kanda was officially appointed PGM President, Kanda and Heiwa President Yasuhiko Ishibashi, approached Accordia with a plan to integrate PGM and Accordia. Accordia management was not open to Kanda’s proposal from the start. Heiwa proceeded to impugn Accordia’s top management, raising accusations that led to Accordia President Michihiro Chikubu’s resignation amid allegations of fund misappropriation.

At Accordia’s June annual meeting, Heiwa argued for board changes to address what it characterized as “compliance issues.” While Accordia management proposed nine nominees, including five independent outsiders, Heiwa proposed an alternate slate of eight dissident nominees with four outsiders. Heiwa’s four executive director candidates eventually withdrew and none of its eight nominees received majority support. (Masaharu Hino, a former prosecutor and one of the Heiwa-nominated dissidents, received 48.9 percent.)

Both PGM and Accordia originated as vehicles for investment banks to acquire bankrupt golf courses after the collapse of Japan’s massive asset bubble around 1990. PGM was launched by Lone Star in 2004, and Goldman Sachs, where Kanda was an executive, launched Accordia in 2002. Both operators subsequently grew, with PGM now operating 150 golf courses, and Accordia operating 154. Goldman Sachs exited in 2011, selling its stake on the open market, and Lone Star sold PGM to Heiwa the same year.

Tender Offer and Accordia Response
The Heiwa/PGM tender offer to acquire 20 percent to 50.1 percent of Accordia is set at JPY 81,000, a premium of 52 percent based on market prices the day before the announcement. According to PGM, current Accordia shareholders could choose to tender their shares either for cash or for shares in the merged entity.

Although the Heiwa/PGM side has announced its intention to merge the two golf operators, it has not yet announced details. PGM claims that a detailed plan can’t be crafted until after discussions with Accordia management, completion of due diligence, and consideration of legal, accounting and taxation considerations. PGM expects three kinds of integration synergy: (1) increased sales through targeted marketing based on analysis of PGM and Accordia’s combined 2 million client base, (2) capital and other cost synergies and (3) opportunity to acquire additional high profit golf courses by leveraging lower capital cost.

Accordia countered that its financial performance is superior to PGM’s and that the bidder’s offer price of JPY 81,000 per share is insufficient, based on evaluations by its advisers Daiwa Securities and PricewaterhouseCoopers. Both advisers used a discounted cashflow analysis based on the company’s newly announced medium-term management results. Daiwa Securities argued valuation lies between JPY 124,632 to 163,916 and PricewaterhouseCoopers found a valuation of JPY 105,492 to 134,944 per share. Accordia also argued that PGM’s tender offer scheme is a two-tier, coercive takeover plan that does not target all Accordia’s outstanding shares, and seeks integration at a later stage without disclosing plan details or even the share exchange ratio. From Nov. 19, the business day after the PGM tender offer announcement, until Jan. 16, the day before the tender offer closing date, Accordia’s share price ranged from JPY 72,000 to JPY 80,800.

An Unusual Defense
In an unorthodox defensive move, Accordia announced Jan. 4 plans to seek an increased supermajority requirement. It will schedule a special meeting of shareholders in March to amend its articles of incorporation to increase the threshold required for passage of merger or acquisition related proposals from the current two-thirds to three-quarters of votes cast. Accordia claims the amendment is needed in order to protect the interests of minority shareholders in the event PGM acquires majority stake, and to address the “coercive nature” of the tender offer. If the proposal passes, a majority of the minority shareholders (i.e., investors other than PGM) will have to vote in favor of merger or acquisition, in order for the proposal to pass. Accordia did not increase the threshold for appointment or removal of directors, retaining a simple majority standard. Therefore, if PGM succeeds in acquiring a majority stake, it will have the power to propose and pass shareholder proposals to remove or appoint directors of its choice, calling into question the effectiveness of Accordia’s defense strategy.

Third Player Emerges
To complicate the issue further, on Jan. 7, Reno, a hedge fund founded by former associates of the former Murakami Fund, whose aggressive hostile bids stirred considerable controversy in the last decade, disclosed it holds 13.8 percent of Accordia, acquired at an average purchase price of just under JPY 78,000.

Until the Murakami Fund was brought down by insider trading charges in 2006, the activist fund was involved in numerous high-profile Japanese takeover battles, either as a hostile bidder or as a third-party player. On Jan. 15, Reno announced that it further increased its stake to 18.1 percent at an average purchase price of JPY 78,460, and urged Accordia management to accept PGM’s due diligence and to start negotiating with PGM on terms and conditions of an integration. Reno also is urging Accordia to execute share buybacks until the share price recovers to a level where it exceeds book value (JPY 88,443 as of September 2012). On Jan. 16, Accordia responded to Reno, saying it will not rule out negotiation with PGM after the end of the tender offer, and agreeing that share buybacks are on the table as one of the options management is considering, financed potentially through the sale of some of its golf courses.

Initial Tender Offer Fails
On the Jan. 17 tender offer closing date, Bloomberg cited an unconfirmed report that Accordia planned to sell 10 golf courses and raise JPY 15 billion for share buybacks. The market surged on the news to a peak of JPY 83,800 and closed at JPY 81,100, still above the PGM offer of JPY 81,000 a share. The next day, PGM announced the failure of its bid to reach the 20 percent minimum shares tendered. PGM President Kanda cited the Bloomberg report as the main reason for the failure. PGM remains committed to seek integration with Accordia, he said, but it will have to “assess the situation” before deciding the next step.

Potential to Make History
Hostile takeover bids remain far rarer in Japan than in the U.S. and some European capital markets, and, due to cross shareholdings, management-friendly investor blocs, and a variety of other defense mechanisms, no hostile bidder has yet succeeded in securing more than a majority stake in a Japanese target. But PGM and its parent Heiwa may ultimately still be first. Accordia is unusually vulnerable, as almost all its equity is held either by arms-length institutional or individual investors and it has no major management friendly shareholders. And unlike many Japanese firms, it lacks major cross shareholding relationships with other companies.

Moreover, unlike most past Japanese hostile takeover targets, Accordia is not a cash-rich company with a market valuation well below its net asset value. While a relatively strong valuation makes it less attractive or obvious as a target, it complicates any Accordia strategy to find a non-strategic potential buyer, such as a white knight, that has in the past rescued other targets in Japan. Finally, while PGM is backed by Heiwa’s strong balance sheet, any potential white knights for Accordia are other large golf operators, none of whom are more than one-third the size of either PGM or Accordia as golf operators.

Here’s news from this Reuters article:

Goldman Sachs won a sweeping legal victory on Wednesday in the $580 million sale of Dragon Systems to Lernout & Hauspie, as a federal court jury decided that the Wall Street bank was not negligent in arranging a deal that ultimately collapsed 13 years ago. The jury cleared Goldman of claims of negligence, intentional misrepresentation and breach of fiduciary duty and other claims in the civil case, according to the verdict, announced in Federal District Court in Boston.

Dragon’s founders, Jim and Janet Baker, pioneers in speech recognition software, accused Goldman investment bankers of being negligent in the 2000 sale of their company to Lernout & Hauspie of Belgium, which collapsed in a huge accounting fraud. The Bakers and two early Dragon employees sought several hundred million dollars in damages. “We are pleased the jury rejected these claims. We fulfilled all our advisory duties to Dragon Systems,” a Goldman spokeswoman, Tiffany Galvin, said. John Donovan, Goldman’s lead lawyer on the case, declined to comment. The Bakers were not available for comment. Before the verdict was read, the couple sat closely together, as they had throughout the 23-day trial.

Their lawyers portrayed Goldman’s investment bankers as a “bottom of the barrel” team that failed to properly vet concerns about Lernout & Hauspie’s claims of soaring sales in Asia.
But lawyers for Goldman said it was not the investment bank’s job to figure out the accounting fraud that ultimately doomed Lernout & Hauspie and made the remaining stock held by the Bakers worthless. In fact, Goldman said Dragon rushed into the sale and brushed aside advice to hire outside accountants to examine Lernout & Hauspie’s books in more detail.

The Bakers owned 51 percent of the company, but were able to sell only a few million dollars’ worth of the Lernout & Hauspie shares they received in the all-stock deal before the company collapsed.

This January-February issue of the Deal Lawyers print newsletter was just sent to the printer and includes articles on:

– Billion Dollar Companies: Not Too Big for Hostile Shareholder Activism
– News from the SEC: Tender Offer Funding Conditions & Dual Track Processes
– Runaway MAC Carve-Outs
– Delaware Enjoins “Don’t Ask, Don’t Waive” Standstill Provision & Holds Not Per Se Unenforceable (But Use & Effect Should Be Disclosed)

If you’re not yet a subscriber, try a 2013 no-risk trial to get a non-blurred version of this issue on a complimentary basis.