DealLawyers.com Blog

Here’s news from Jones Day:

Although Section 8 of the Clayton Act, 15 U.S.C. § 19, which prohibits competing corporations from sharing directors or officers, is an important concern for the business community, the statute has received surprisingly little attention from government enforcers or judicial opinions in recent years. Therefore, when two of the leading antitrust voices on the federal bench – Judges Easterbrook and Posner of the U.S. Court of Appeals for the Seventh Circuit – offer a perspective on Section 8, it is worth noting.

On June 13, 2012, in a unanimous opinion – Robert F. Booth v. Crowley, No. 10-3285 (7th Cir. June 13, 2012) – authored by Judge Easterbrook (joined by Judges Posner and Bauer), the Seventh Circuit reversed and remanded with instructions to enter judgment for defendants a shareholders’ derivative suit alleging that Sears Roebuck & Co. violated Section 8 by having on its Board of Directors two individuals who also served on the boards of Sears competitors. Specifically, the suit asserted that William C. Crowley served on the boards of AutoNation, Inc. and Auto Zone, Inc. and that Ann N. Reese was a member of the board of Jones Apparel Group, Inc., businesses that allegedly competed with Sears, such that the resulting director interlocks violated Section 8.

In denying a motion to dismiss, the district court had concluded that Section 8 could be enforced through a shareholders’ derivative action even though the alleged coordination with a competitor presumably benefits, rather than harms, the corporation involved. Following this ruling, the shareholder plaintiffs and Sears proposed a settlement under which one of the two contested directors would resign and the plaintiffs’ lawyers would receive up to $925,000 in attorneys’ fees. (As Judge Easterbrook noted, it is not clear how this settlement could resolve the Section 8 issue since one of the director interlocks would remain.) Another Sears investor, Mr. Frank, sought leave to intervene to oppose the settlement and to seek dismissal of the lawsuit.

In ordering dismissal of the derivative suit, Judge Easterbrook reversed the district court and found that neither the plaintiffs (nor any other investor) had suffered the necessary antitrust injury as a result of the alleged Section 8 violation. He also was not persuaded by the argument that the plaintiff shareholders and Sears benefitted from the lawsuit, rejecting their claim that removing the interlocking director from the board eliminated any chance the federal antitrust authorities would file a Section 8 complaint to break up the interlock:

We don’t get it. In order to avoid a risk of antitrust litigation, the company should be put through the litigation wringer (this suit) with certainty? How can replacing a 1% or even a 20% chance of a bad thing with a 100% chance of the same bad thing make investors better off?

Judge Easterbrook then goes on to offer some interesting perspectives about the current state of Section 8 enforcement:

Actually, the chance of a suit by the United States or the FTC is not even 1%. The national government rarely sues under §8. Borg-Warner Corp. v. FTC, 746 F.2d 108 (2d Cir. 1984), which began in 1978, may be the most recent contested case. See ABA Section of Antitrust Law, I Antitrust Law Developments 425-31 (6th ed. 2007). When the Antitrust Division or the FTC concludes that directorships improperly overlap, it notifies the firm and gives it a chance to avoid litigation (or to convince the enforcers that the interlock is lawful). For more than 30 years, this process has enabled antitrust enforcers to resolve §8 issues amicably – either avoiding litigation or entering consent decrees contemporaneous with a suit’s initiation.

Whether the federal antitrust agencies would agree with this assessment is unclear, but Judge Easterbrook’s summary certainly reflects the advice most experienced antitrust attorneys would provide their clients on the risks of Section 8 liability.

Judge Easterbrook summed up his view of the merits of the derivative suit as follows:

The suit serves no goal other than to move money from the corporate treasury to the attorneys’ coffers, while depriving Sears of directors whom its investors freely elected. Directors other than Crowley and Reese would not have violated their fiduciary duty of loyalty by concluding that these two directors benefit the firm. Usually serving on multiple boards demonstrates breadth of experience, which promotes competent and profitable management. If the Antitrust Division or the FTC sees a problem, there will be time enough to work it out. Derivative litigation in the teeth of the demand requirement and the antitrust-injury doctrine is not the way to handle this subject.

In addition to its perspectives on Section 8, this opinion also merits attention for its focus on the role of antitrust injury as a predicate for establishing antitrust liability. It provides a useful reminder of the scrutiny that reviewing courts will apply to antitrust claims and their reluctance to allow such claims to go forward in the absence of a showing that plaintiffs have, in fact, been injured by conduct forbidden by the antitrust laws. In the Section 8 context, this focus on antitrust injury should lower the risk of future derivative actions being brought to challenge direct interlocks.

We have posted the transcript for our recent webcast: “How to Cope with the M&A Litigation Explosion.”

In his “D&O Diary Blog,” Kevin LaCroix is covering Stanford’s Directors College and he has some lengthy notes from the second day of action about the keynote address from Delaware Chancellor Leo Strine.

In his “D&O Diary Blog,” Kevin LaCroix is covering Stanford’s Directors College and he has some good notes from the first day of action. Here is an excerpt based on a keynote from Marc Andreessen:

Today’s sessions began with a Keynote Presentation from Marc Andreessen and Ben Horowitz, the founders and general partners of venture capital firm Andreessen Horowitz. Andreessen is well known as the founder of early Internet browser company Netscape and Horowitz was the co-founder of Opsware (formerly Loudcloud). Their presentation was in a Q&A format, and one question they received provoked a particularly interesting answer.

In response to a question about how a Board should prepare a company for an IPO, Andreessen’s initial response was that the company should first consider every other possibility other than going public. He emphasized that the IPO process and the life for a company post-IPO has changed so much in recent years, that now a company completing an IPO is immediately surrounded by a host of constituencies all of which are prepared to try to extract a “pound of flesh” from the company. If the company has to go public, Andreessen would prefer that the company remains a “controlled” company – that is, subject to control by the founder. He explained that the way for investors to make money on technology investments is for the investors to pick a founder, like a Jeff Bezos, Sergey Brin or Michael Dell, and to make a long-term commitment to them to try to achieve their goals for the enterprise.

He went on to say that a faulty premise has emerged around corporate governance, in that there is now a perception that corporate governance ought to operate on basic principles of democracy, particularly as embodied on the “one man, one vote” principle. From Andreessen’s perspective, democracy is not the correct model. According to Andreessen, the correct analogy is the military, and specifically, war. In a wartime environment, politicians cede control to the military commanders so that they can deploy assets and take initiative necessary to “take the hill.” The objectives are more likely to be met if the founders retain control.

As noted in this Perkins Coie memo, the FTC and DOJ recently published their HSR Annual Report Fiscal Year 2011. The number of HSR filings in fiscal 2011 increased by 24% over the number of filings in 2010 – and the agencies continue to enforce the HSR Act’s notification requirements with respect to acquisitions of company stock by corporate officers and directors, often in an inadvertent “failure to file” situation.

In a review of 1,350 deals done between 2007-2011, CMS’ fourth annual M&A Study highlights some key differences in the legal provisions used in merger & acquisition agreements across Europe and the US including:

– Earn-out deals are more popular in the US. 38% of US deals had an earn-out component compared with just 14% in Europe in 2011. Earn-out clauses quite often give rise to difficult negotiations, and subsequent disputes. In Europe we more often see purchase price gaps being bridged by vendor loans or option arrangements.

– Material Adverse Change (MAC) clauses are much more popular in the US than in Europe where they were used in 93% of the deals compared to just 16% of deals in Europe.

– Not only are baskets much more prevalent in the US, but the basis of recovery is different. In the US, 59% of deals are based on ‘excess only’ recovery as opposed to ‘first dollar’ recovery compared with only 28% in Europe in 2011 for ‘excess only’ recovery.

– Working capital adjustments continue to be by far the most frequently used criteria on a purchase price adjustment in the US, used in 77% of deals as opposed to just 26% in Europe in 2011, where the deal contained a purchase price adjustment.

– Basket thresholds tend to be lower in the US with 88% being less than 1% of the purchase price compared with 55% in Europe.

Hat tip to Francis Pileggi for pointing out this interview with Delaware Supreme Court Chief Justice Myron Steele on the pros of incorporating in Delaware…

Wachtell Lipton put out this memo last night:

AOL’s shareholders delivered a resounding victory today to the Company’s management and board in re-electing the full slate of incumbent director nominees — over ISS recommended dissident directors nominated by activist hedge fund Starboard Value LP. The victory represents a clear and powerful message that a well-developed and well-articulated business strategy for long-term success will be supported by investors notwithstanding activist generated criticism and ISS support.

For several months, Starboard waged a damaging proxy fight to elect its own slate of three directors to the AOL board. The board and management of AOL countered Starboard’s destructive campaign by presenting, and continuing to execute on, their plan for long-term business value. AOL warned that Starboard had no viable business plan and was pursuing a short-term, value-destructive, and self-interested strategy. Nevertheless, ISS chose to cast its support with two of Starboard’s nominees, in part relying on the wrongheaded notion that the dissident nominations posed “little risk”. In doing so, ISS chose to support a dissident fund notwithstanding the fund’s lack of understanding of the Company’s fundamental business model.

Despite Starboard’s relentless campaign and undeterred by ISS’s recommendation, AOL’s management and directors refused to waver from their commitment to a long-term strategy for enhancing shareholder value. With the strong teamwork of management and the board’s lead and other independent directors, AOL’s leadership forcefully presented their case to investors. They delivered investor presentations, participated in public conference calls and issued “fight letters” to combat the campaign of misleading claims spread by Starboard and expose the faulty logic of ISS’s position. They were able to leverage the Company’s strong relationships with key portfolio managers, relationships developed long before Starboard had emerged on the scene.

Today’s results confirm that investors will not blindly follow the recommendation of ISS — when presented with a well-articulated and compelling plan for the long-term success of the Company, they are able to cut through the cacophony of short-sighted gains promised by activist investors touting short-term strategies. AOL’s shareholders showed today that when a Company’s management and directors work together to clearly present a compelling long-term strategy for value, investors will listen.

Tune in today for the webcast – “How to Cope with the M&A Litigation Explosion” – to hear Wilson Sonsini’s Ignacio Salceda, Wachtell Lipton’s David Katz and NERA’s Marcia Kramer Mayer to not only learn of the causes of the M&A litigation maelstrom, but how you can best cope with its consequences – to changes in deal structures to developments in how deals are negotiated. Please print these course materials in advance.

Here’s e-proxy news from this Gibson Dunn blog:

The Division of Corporation Finance of the Securities and Exchange Commission recently issued a letter that for the first time granted no-action relief for the use of notice and access for a proxy statement in a M&A transaction. The no-action letter, SAIC, Inc. (avail. Apr. 27, 2012), involved the upcoming merger of a holding company into its operating subsidiary to eliminate the holding-company structure. The Division has routinely granted no-action relief from various securities law provisions in similar circumstances. For example, the Division has routinely permitted a post-merger company to take into account the pre-merger company’s SEC reporting history in determining its eligibility to use Form S-3.

In SAIC, the Division addressed many of the same provisions of the securities laws that it had addressed in the past, but it also addressed Rule 14a-16, the notice and access rule. This rule allows proxy statements to be distributed electronically by mailing only a Notice of Internet Availability to shareholders. However, Rule 14a-16(m) states that it generally is not available for proxy solicitations that are made in connection with business combination transactions. In SAIC, the company argued that, unlike other types of business combinations, the transaction at hand would involve “no change in the nature of the investment” and that it was “a straightforward corporate action for which the Rule 14a-16 method of delivering proxy material would be completely appropriate.” The Division agreed, stating that the holding company “may comply with the form and manner of delivery of proxy materials described in Rule 14a-16 of the Exchange Act with respect to the proxy materials used to solicit proxies for the approval of the [m]erger by the stockholders of [the holding company].” Thus, it appears that going forward, when a merger transaction does not involve a substantial change to the company’s assets and liabilities (which is often the case with internal reorganizations and restructuring transactions), companies should evaluate whether the notice and access provisions of Rule 14a-16 are available.​