This September-October issue of the Deal Lawyers print newsletter was just sent to the printer and includes articles on:
– Dealing With Activist Hedge Funds
– A Year-End Rush for the Exit? Tax Uncertainty and Transactional Planning
– Shareholder Activism Via Board Control Often Requires Long Range View
– The Nuts & Bolts of NDAs
– Asset Acquisition Due Diligence: Search for Hidden Unclaimed Property Liabilities Required
If you’re not yet a subscriber, try a “Free for Rest of ’12” no-risk trial to get a non-blurred version of this issue on a complimentary basis.
Here’s a Wachtell Lipton memo I received while I was out on vacation:
On Wednesday, Forest Laboratories’ shareholders reelected nine out of ten incumbent director nominees, while rejecting three out of dissident Carl Icahn’s slate of four directors, despite ISS’s recommendation in favor of two of Icahn’s nominees. These results, along with the recent victory by AOL against Starboard (see our memo, AOL Shareholders Reject ISS Supported Activist Hedge Fund), represent an important reminder that companies under attack by dissidents have a chance to defend themselves with a well-crafted message that articulates a strategy for long-term success, notwithstanding strong activist pressure with backing from ISS.
This week’s contest was round two between Forest and Carl Icahn, who owns nearly 10% of the pharmaceutical company. In 2011, Icahn sought to place four directors on Forest’s board, but was rebuffed by shareholders, who elected all ten of the Company’s nominees instead. Icahn promoted a short slate again this year, attacking the Company for what he perceived to be failures in governance practices and performance. In response, the Company made a compelling case for its business strategy and recent governance reforms. In addition, the Company pointed out that two of Icahn’s nominees suffered from potential conflicts: in one case, an unusual contractual arrangement based upon Icahn’s profits, which incentivized the nominee to “swing for the fences” during a 30 month period; and in the second case, a contingent value right related to one of Forest’s products, which could lead that nominee to favor just a single product. Notably, Glass Lewis supported Forest’s slate and explicitly noted these potential conflicts. And while ISS decided to recommend two (but not four) of Icahn’s nominees, it did not support either of the two candidates with potential conflicts, both of whom were defeated. Moreover, Forest argued that a third Icahn nominee, who is an Icahn senior executive, could not be expected to represent the interests of all shareholders and that he was “overboarded.” He too was defeated, despite an ISS recommendation in favor. Forest also resisted Icahn’s broad books and records request under Delaware § 220, substantial parts of which were refused in court.
The results at the Forest meeting hold important lessons. First, in many cases a company can overcome even a contrary ISS recommendation with a resolute defense of its governance story and long-term plans. The best defense will be made directly to its shareholders with the participation of independent directors and will be most likely to succeed when there has been an ongoing dialogue on key issues long before any activists surface. Second, companies may resist overly broad fishing expeditions into corporate records, even if it means going through litigation. Finally, the identity and incentives of the dissident slate does matter. In the case of Forest, the Company was able to argue that two of the four nominees had potential conflicts, and that a third was overly close to Icahn and served on too many other boards. In the end, the only dissident nominee elected by shareholders was an independent outsider without prior ties to Icahn.
John Grossbauer of Potter Anderson notes: In re Synthes, Inc. Shareholder Litigation, Chancellor Strine dismissed with prejudice claims challenging the sale of Synthes to Johnson & Johnson. The plaintiffs had alleged that the controlling stockholder was conflicted due to his desire for liquidity, and that the directors of Synthes were similarly responsible for an alleged flawed sales process and for allegedly permitting the controlling stockholder to block consideration of a possibly more favorable private equity bid that would have required the controller to roll over a “substantial” portion of his shares. There is a great deal of interesting discussion of the duties of controlling stockholders in the context of a sale. Among other things, the Chancellor states that a controlling stockholder who takes the same consideration as other stockholders is afforded a “safe harbor” from loyalty claims.
The Chancellor also discusses in a lengthy footnote the Supreme Court’s McMullin decision, and posits the types of circumstances in which the controlling stockholder’s preference for cash might rise to the level of a breach of duty. The Chancellor also discusses Revlon, finding it inapplicable here because the consideration paid was 65% stock, citing In re Sante Fe as binding precedent on the issue. He declined to rely on “transcript dictum” to apply Revlon because the deal was an “end stage” transaction. The Chancellor also cited his Lear opinion for the proposition that enterprise value may be an appropriate metric to use in evaluating the preclusive affect of a termination fee on a competing bidder.
Keith Bishop gives us the news that the result of California Department of Corporations ‘s fairness hearing yesterday regarding Facebook’s purchase of Instagram was favorable for the social media giant.
Here’s news from Gibson Dunn’s “Securities Monitor Blog“:
The SEC’s Division of Corporation Finance recently granted no-action relief to Sonic Automotive, Inc., allowing Sonic to utilize “Day 20” pricing in its recent exchange offer wherein the company offered to exchange common stock and cash for its outstanding convertible debt securities.
The exchange offer employed a VWAP formula pricing mechanism with the final price becoming fixed and publicly announced at 4:30 p.m. on the same day the offer was scheduled to expire at midnight. In addition, the exchange offer incorporated a fixed minimum and maximum purchase price where the company agreed to extend the offer by two business days should the formula result in a purchase price at the maximum amount specified.
Interestingly, it appears that counsel sought and obtained no-action relief during the pendency of the exchange offer. Thus, it seems the 20-day pricing issue may have caught the Staff’s attention during its review. The letter serves as a steady reminder to issuers regarding the need for early consideration of whether to seek no-action relief and consulting with outside counsel before utilizing “Day 20” pricing in a tender offer. We have previously discussed the Staff’s position regarding “Day 20” pricing.
Yesterday, the Delaware Supreme Court affirmed Chancellor Strine’s decision from last year in Southern Peru. Justice Berger filed a brief partial dissent disagreeing with the Chancellor’s attorney’s fee analysis. Here’s analysis from Richards Layton (we are posting memos in our “Minority Shareholders” Practice Area) – and here’s a piece by Alison Frankel.
Here’s some info from Allen Matkin’s Keith Bishop’s blog:
Although California’s General Corporation Law is frequently criticized as overly restrictive, it does have one virtue. It is rationally organized. Thus, it begins with a long series of defined terms, starting with “acknowledged” and ending with “written”. It even provides a definition of “short-form merger”. Cal. Corp. Code § 187.
In California, a short-form merger may either be “upstream” (a merger of the subsidiary into the parent) or “downstream” (a merger of the parent into the subsidiary). Cal. Corp. Code § 1110(a). A short-form merger is only possible if the parent owns at least 90% of the outstanding shares of each class of the subsidiary to be merged. If the parent owns less than all of the outstanding shares, then the board of directors of the subsidiary must also approve the merger. Cal. Corp. Code § 1110(b). In approving the merger, these directors remain subject to their fiduciary duties as directors.
The principal benefit associated with the short-form merger procedure is the lack of any requirement to obtain the approval of the outstanding shares (except in the case of a downstream merger pursuant to Section 1110(c)). However, California does require notice to shareholders when the subsidiary is a domestic corporation and not wholly-owned by the parent. In these cases, the parent corporation must give notice at least 20 days notice before the effective date to the subsidiary’s shareholders that the merger will become effective. Cal. Corp. Code § 1110(h). The notice must contain a copy of the resolution or plan of merger and information concerning dissenters’ rights. The alleged failure to give this notice has engendered litigation. Meadows v. Bicrodyne Corp., 573 F. Supp. 1030 (N.D. Cal. 1983) (finding that the corporation had discharged its obligation to provide notice).
Check out Schulte Roth & Zabel’s new “PE Buyer/Public Target M&A Deal Study: 2012 Mid-Year Update,” whose major findings include:
1. Fewer deals were completed in 1H 2012 and average deal size decreased
2. Deals took longer to get signed up
3. The use of the two-step tender offer/back-end merger structure continues to grow
4. Despite the protracted pre-signing process, fewer targets engaged in pre-signing market checks — which likely resulted in the inclusion of more “go-shop” provisions
5. The limited specific performance remedy against the buyer remains the rule
6. The average size of the target break-up fees and buy¬er reverse termination fees were consistent with the 2011 deals, excluding the unusually low fees in one transaction
7. CEOs of the target companies participated in more buy-out groups than in 2011
Keith Bishop recently blogged this in his “California Corporate & Securities Law” Blog:
Recently, I received a notice from the Delaware Supreme Court informing me that a case in which one of my clients is a party has been called for argument. The notice asked that the enclosed “oral argument scheduling acknowledgment form” be completed and returned. I was immediately struck by the signature block which calls for the signature of the “Argufier or Local Counsel’s Signature”. I must confess that this is the first time in nearly 30 years of legal practice that I’ve come across the word “argufier”. In fact, I could find only one reported decision in any state or federal court that actually uses the word:
My Brothers note that not “a single applicable case” has been cited to the point “that judges performing forming like functions must receive the same salaries.” Here I cannot resist noting — for the amusement and possible enlightenment of readers in other States — that this is a peculiarly hearty old wheeze of Michigan trial courts (Michigan’s magniloquent own, so to speak). True, it is now hoary and shopworn. Yet it remains an occasional favorite of elder argufiers when they have no authority, and no reasoning of their own, with which to impress the wide-eyed attenders of periodic assizes.
Taylor v. Auditor General, 103 N.W.2d 769, 786 (Mich. 1960) (Black, J. Dissenting).
I Do Not Love Thee Dr. Fell
Another word that I sometimes run into is “amote,” which means to remove someone, such as a corporate director, from office. See In Re Burkin, 1 N.Y.2d 570, 572 (1956) (“At common law, stockholders have the traditional inherent power to remove a director for cause which is known as ‘amotion’.”) When I see “amote,” however, I think of love, not the unpleasant business of kicking someone out of office. I think of love because “amote” looks like the etymologically unrelated Latin phrase, “amo te”.
In Latin, “amo te” means “I love you.” Thus, whenever I see the word “amote”, I’m reminded of the story of Dr. Fell who was the Dean of Christ Church, Oxford in the 17th century. The story goes that an errant student had been called into Dr. Fell’s office to face possible expulsion. Dr. Fell offered the student absolution if the student could translate on the spot this epigram from the Roman poet Martial: “Non amo te, Sabidi, nec possum dicere – quare; Hoc tantum possum dicere, non amo te.” The student immediately gained pardon with the following translation:
I do not love thee, Dr Fell,
The reason why I cannot tell;
But this I know, and know full well,
I do not love thee, Dr Fell.
Robert Louis Stevenson makes a brief allusion to Dr. Fell in Chapter 2 of his book, Dr. Jeckyll and Mr. Hyde, and Hannibal Lecter uses the alias “Dr. Fell” in the 2001 film, Hannibal.