Here’s news from this Akin Gump alert: In a stark reminder that non-HSR-reportable transactions are fully subject to the antitrust laws–even after they have closed–the FTC, on October 12, 2012, filed a complaint and accompanying consent agreement attacking Magnesium Elektron North America, Inc.’s (MEL) 2007 acquisition of competitor Revere Graphics Worldwide, Inc. The $15 million acquisition was too small to be reportable under the Hart-Scott-Rodino Premerger Notification Act of 1976, as amended (“HSR Act”). While the government’s antitrust authority to challenge already-consummated transactions is unquestioned, it is very unusual for the FTC (or the Justice Department Antitrust Division) to reach back this far in time.
Here is a Reuters article from last week (and here’s DealBook’s take): The outspoken chief judge of Delaware’s Court of Chancery received a rebuke on Wednesday from the state’s Supreme Court, which told him to keep his “world views” out of his legal rulings. Chancellor Leo Strine, whose opinions interpret Delaware’s widely adopted corporate law and help shape Wall Street dealmaking, often contain at least a few colorful comments or observations, and his courtroom asides are legendary. For example, in an opinion in February, Strine said evidence of a phone call by Goldman Sachs Group Inc Chairman Lloyd Blankfein to El Paso Chief Executive Douglas Foshee brought Lionel Richie’s 1980s hit “Hello” to mind.
In a ruling on Wednesday, the Supreme Court took Strine to task not for his decision in a case about Auriga Capital, which the court upheld, but for a 10-page detour on the arcane issue of whether limited liability companies have default fiduciary duties. The Supreme Court wrote that if Strine wanted to “ruminate on what the proper direction of Delaware law should be” he should do so in law review articles and speeches, not in his opinions. “We remind Delaware judges that the obligation to write judicial opinions on the issues presented is not a license to use those opinions as a platform from which to propagate their individual world views on issues not presented,” the Supreme Court wrote.
The Supreme Court dedicated five pages of its 34-page ruling to reining in Strine, saying his analysis was based on a flawed reading of several cases. Strine did not immediately respond to a message left with his chambers seeking comment.
While Wednesday’s ruling was per curiam, or the work of the whole court, it may have its roots in a simmering dispute between Strine and Supreme Court Chief Justice Myron Steele. Steele took issue with the section of Strine’s opinion on fiduciary duties during a hearing on the Auriga Capital case in September. “Why did he go to this whole diatribe, for lack of a better word, of about how ignorant people are who think other than he does about whether the default position is (that) fiduciary duties apply or (do) not apply?” Steele said at the time. As well as his colorful opinions, Strine is also known for his courtroom digressions, which have ranged from discussions of incentives driving investor bankers to the NBC television show “America’s Got Talent” and the mysteries of the Catholic faith.
At a hearing last week, Strine called a dispute between fashion star Tory Burch and her former husband a “drunken WASP-fest,” and spent several minutes discussing where white Anglo-Saxon Protestants can pick up Izod and Polo brand shirts on the cheap. The Chancery case is Auriga Capital Corp v Gatz Properties LLC, No. 4390. The Supreme Court appeal is Gatz Properties LLC v Auriga Capital Corp No. 148, 2012.
In his “D&O Diary,” Kevin LaCroix analyzes this white paper by the U.S. Chamber Institute for Legal Reform entitled “The Trial Lawyers’ New Merger Tax” that takes a comprehensive look at M&A litigation and proposes a number of possible legislative solutions to the problems associated with multi-jurisdiction litigation.
In “The Securities Edge Blog,” Gunster’s Gus Schmidt writes about how when the private equity firm 3G Capital took Burger King private in 2010, it used an innovative “dual-track” acquisition structure to minimize the amount of time to consummate the acquisition. This involved 3G simultaneously pursuing both a friendly tender offer to Burger King shareholders as well as a traditional merger that would need to be approved by shareholders at a special meeting. Since the Burger King deal, nearly 20 other companies have used this structure. Read the blog for more…
Here is a DealBook column entitled “For Whom Golden Parachutes Shine” penned by Harvard Prof. Lucian Bebchuk that explains a recent study. Here is an excerpt:
We confirm that golden parachutes do indeed have a beneficial effect on acquisitions. We find that companies that offer such packages have a higher likelihood of both receiving an acquisition offer and being acquired.
Because golden parachutes make executives more eager to sell, they are also associated with lower premiums in the event of an acquisition. But this effect is sufficiently small so that, over all, golden parachutes are associated with higher expected gains from acquisitions. On average, shareholders in companies with golden parachutes pocket larger benefits from acquisition premiums, and we find evidence that this association is produced by the effect that golden parachutes have on executives’ incentives.
So far, so good. However, when we look beyond acquisitions to examine the relationship between golden parachutes and company value, we find that such packages hardly shine for the shareholders of companies adopting them. Companies that have adopted golden parachutes tend to see their valuations (relative to their industry peers) erode over time. Such companies have lower valuation already before adopting a golden parachute, but their value declines further in the subsequent several years.
We find a similar pattern when analyzing the stock returns of companies with and without a golden parachute during the period of more than 15 years for which we have data. Companies that adopted golden parachutes have lower (risk-adjusted) stock returns relative to those that didn’t – both during the two-year period surrounding the adoption and in the next several years.
What explains this pattern? Why do companies with golden parachutes fail to deliver for their shareholders overall even though they provide them with more benefits in the form of acquisition premiums? This pattern could be at least partly a result of the adverse effect that golden parachutes have on the incentives and performance of executives not facing an acquisition offer.
The market for corporate control benefits shareholders not just by providing the prospect of pocketing an acquisition premium but also by affecting performance more generally. Executives face the possibility that they might be ousted if they underperform. By ensuring executives of a cushy landing in the event of an acquisition, golden parachutes weaken the disciplinary force exerted by the market for corporate control.
Our corporate system provides executives with a significant power to impede or facilitate an acquisition. Golden parachutes are offered as a remedy to the concern that executives will deviate from shareholder interests in exercising this power. But this remedy is a highly imperfect one. While it does lead to more acquisitions, it also carries significant countervailing costs with it. Golden parachutes are not the easy fix for the incentives of executives as some might have hoped.
More work should be done to fully understand the consequences of golden parachutes and how they should be used. In the meantime, however, the evidence suggests that investors should continue to pay close attention to the use — and potential costs — of golden parachutes.
Recently, Schulte Roth released a “Middle Market PE Buyer/Public Target M&A Deal Study” that identifies “market practice” involving private equity buyer acquisitions of U.S. public companies specifically in the middle market for the period from January 2010 to June 30, 2012.
Key observations in the middle market include:
1. Activity in the middle market is down year over year
2. While fewer deals are getting done, it is taking targets less time to get to signing
3. The usage of pre-signing market checks rose in 1H 2012 as compared to 2011, but so did the use of “go-shop” provisions
4. Since 2010, market practice has changed dramatically on two issues — the target’s right to obtain specific performance to force a buyer to close and use of reverse termination fee (“RTF”)
Key observations: middle market vs. large market:
1. In general, market practice is consistent across middle market and large market deals — with a few notable exceptions
2. In 1H 2012, middle market deals were signed up much faster than large market deals
3. “Go-shop” provisions were used less frequently in middle market deals — in particular, where the tar¬get did not conduct a pre-signing market check
4. While RTFs in middle market deals were high¬er than large market deals in 2010, they have since fallen below those of large market deals
A few weeks ago, Chuck Nathan taped this podcast about an interesting situation in a proxy contest in which The Clinton Group sought to remove 6 out of 7 directors through a written consent campaign and replace them with five new directors of Clinton’s choosing. Now, Greg Taxin of the Clinton Group has penned this blog about the results of his winning solicitation.