DealLawyers.com Blog

We have posted the transcript for our recent webcast: “”The SEC Staff on M&A.”

Here’s news culled from this Jones Day memo, repeated below:

The two U.S. antitrust agencies have been waiting for leadership positions to be filled, which may provide clearer signs on the direction of antitrust enforcement after three years of the Obama Administration. Recent action by the U.S. Senate now has brought a full complement of Commissioners to the Federal Trade Commission, and the Department of Justice will continue with new interim leadership.

There are five Commissioner seats at the FTC. The Commissioners are nominated by the President with consent of the Senate. The FTC has been operating with only four Commissioners since the departure of Commissioner and former Chairman Bill Kovacic, a Republican, who left the FTC and returned to George Washington University in October 2011. As no more than three FTC Commissioners may belong to the same political party, the President had nominated Maureen Ohlhausen, a Republican, to fill Kovacic’s seat. She served as the FTC’s Director of the Office of Policy Planning from 2004 to 2008 and before that in other FTC positions. Commissioner Ohlhausen has experience in antitrust, privacy, and cybersecurity, and she should bring a strong voice to FTC decisionmaking in both competition and consumer protection matters. The Senate confirmed Ohlhausen’s nomination last week.

The Senate also confirmed FTC Chairman Jon Leibowitz to a second term. A Democrat, he was first appointed to the Commission in 2004 and was designated by President Obama as Chairman in 2009. Under Chairman Leibowitz, the FTC has been an active enforcer in technology, energy, and healthcare matters, and ratcheted up the agency’s efforts to stop “pay-for-delay” patent settlements in the pharmaceutical industry.

The term of Commissioner Thomas Rosch, the other Republican on the Commission, will expire in September 2012. Commissioner Rosch has announced he will remain at the FTC until his successor is confirmed. Given the politics of this election year, it is not likely that a replacement will be nominated until after the November elections and, if there is a change in Administration, this may not happen until well into 2013. Thus, Rosch likely will remain at the FTC beyond his term. Commissioners Edith Ramirez and Julie Brill, both Democrats appointed by President Obama, remain on the Commission.

At the DOJ Antitrust Division, following the departure of Assistant Attorney General Christine Varney, Principal Deputy Sharis Pozen had taken the Acting AAG title, but with a plan to remain at the Antitrust Division only until the end of April. Last week, the Attorney General announced that, upon Pozen’s departure, Deputy AAG Joseph Wayland would take the Acting AAG post. Wayland has served as the Antitrust Division’s Deputy Assistant Attorney General for Litigation since September 2010. He is an experienced commercial litigator and has focused on matters in which DOJ has considered taking antitrust cases to trial, including the challenges to H&R Block’s acquisition of TaxAct and the proposed merger of AT&T and T-Mobile USA.

Wayland may hold the Acting AAG title for some months, due to the same election year politics that have delayed nominee confirmations at the FTC. The President has nominated Bill Baer, a partner with Arnold & Porter, to be the new AAG. Baer is a highly respected antitrust lawyer and former Director of the FTC Bureau of Competition. However, the Senate has not yet scheduled a hearing on his nomination, and again it is possible that the Senate will not act on this nomination until soon after the November election or even later.

Naturally, businesses and their antitrust counsel look forward to learning how the November election may shape the direction of antitrust enforcement. In the interim the U.S. antitrust agencies are quite capable of pursuing investigations and bringing enforcement actions even without a full complement of permanent leadership positions filled. As examples, both agencies have brought litigated merger challenges in the last few months, such as DOJ’s lawsuit to block AT&T’s proposed acquisition of T-Mobile USA and FTC’s action to block the combination of two hospital systems in Illinois, OSF Healthcare and Rockford Health System.

I’ve been blogging daily for weeks on the JOBS Act on TheCorporateCounsel.net – and that’s where we are posting oodles of resources including two upcoming webcasts – but here’s M&A-related info from Davis Polk, repeated below:

On April 5, President Obama signed into law the Jumpstart Our Business Startups Act (the “JOBS Act”), which as we’ve previously noted represents a very significant loosening of restrictions around the IPO process and post-IPO reporting obligations. While most of the commentary on this legislation has thus far focused on its impact on capital markets matters, there are implications for private company mergers and acquisitions as well.

Late-stage private companies contemplating an M&A or IPO exit often undertake so-called “dual-track” processes in which they simultaneously file an IPO registration statement with the SEC and hold discussions with prospective acquirors. The IPO side of the process effectively becomes a stalking horse for M&A discussions and tends to force the hand of prospective acquirors that might otherwise not move as quickly as the target would like. The publicly filed registration statement both attracts attention and provides prospective acquirors with a sort of first-stage diligence that theoretically helps encourage bids.

Under the JOBS Act, emerging growth companies or “EGCs” will now have the ability to file their registration statements confidentially, so long as the confidential filings are ultimately released at least 21 days before the road show. Whether confidential filings will become the norm remains to be seen; there are a number of reasons why an IPO candidate might want to continue to use the traditional public filing process, including the publicity, customer and employee-related benefits of having a highly visible registration statement. For many companies, however, these benefits will be outweighed by the competitive advantages of keeping early filings confidential. The optionality that confidential filings create may be hard to resist: A confidential filer can now pull its deal without the stigma associated with withdrawing a publicly filed registration statement.

The ability to file confidentially creates another sort of optionality for a company undertaking a dual-track process, in that it can now conduct both sides of the process outside the public eye. The ability to tell a prospective buyer that the IPO process is already reasonably far along is a powerful tool, and being able to surprise a buyer with a registration statement that has already been through multiple rounds of SEC review will give targets a greater degree of control in dual-track negotiations. Companies pursuing a dual-track process will need to balance these advantages against the alternative approach of making their IPO filings fully visible to prospective acquirors, which could theoretically attract additional bidders or facilitate the process by making their diligence easier. If confidential registration statements become the norm, a non-confidential filing may come to suggest something other than an ordinary IPO process. But a company that files confidentially may also be sending a signal to buyers if it ostensibly starts the 21-day clock by publicly releasing its filings and then fails to begin its road show within a reasonable period of time.

Lastly, the relaxation of restrictions on “test the waters” pre-marketing has implications for private targets regardless of whether they undertake a dual-track process or a standalone M&A process. As we noted in our March 26 memorandum, there is a potential inconsistency in the JOBS Act regarding whether an EGC can engage in such pre-marketing more than 21 days before a public filing. Regardless of how the inconsistency is resolved, however, the EGC’s advisers can engage in pre-marketing to qualified institutional buyers and accredited investors, which provides an additional way to conduct a market check for a company that has an acquisition offer in hand – or for that matter, even one in the midst of price negotiations.

John Grossbauer of Potter Anderson notes: Here is Vice Chancellor Parsons’ opinion in In re Celera Corp., in which he certified a class for settlement purposes and approved the settlement even though the lead plaintiff had sold its shares in the Celera before its merger with a subsidiary of Quest Diagnostics was completed. The Court addressed several issues related to class actions alleging breaches of fiduciary duty, including typicality and adequacy and the effect of the recent United States Supreme Court decision in the case of Wal-Mart Stores, Inc. v. Dukes on certification of classes in such actions. The Court also addressed attorneys’ fees in the context of the settlement presented, which conferred only therapeutic, non-monetary benefits on the proposed class of stockholders, and awarded substantially less than plaintiffs had requested.

The Court was troubled by the stock sale, noting that such a sale creates an appearance of impropriety, which undermines the trust of other shareholders and the Court in the lead plaintiff. Observing that such facts created legitimate criticisms, the Court stated that in the future it might well employ bright-line test declining to certify such holders as class plaintiffs because “Delaware courts have good reason to expect more from those who would serve as lead plaintiffs in representative litigation.”

Recently, the WSJ ran this article:

Goldman Sachs Group Inc. is considering strengthening internal rules on disclosure to clients of bankers’ financial holdings, after being criticized in a recent court opinion because of a deal maker’s potential conflict of interest in a large transaction. Goldman’s review–and similar initiatives by some of its rivals–could provide companies with greater transparency on the financial interests of the bankers they hire to advise on deals. In a statement to The Wall Street Journal, Goldman said it was reviewing its “policies and procedures with the goal of strengthening them.”

Other Wall Street banks, including Barclays PLC’s Barclays Capital, Bank of America Merrill Lynch and Citigroup Inc., are also looking at their processes for managing potential conflicts when getting hired on deals, in an effort to err on the side of caution especially given the heightened scrutiny on the issue, said people familiar with the matter. The concerns emerged after a Delaware judge said in a Feb. 29 opinion that the $21.1 billion proposed sale of El Paso Corp. to natural-gas pipeline operator Kinder Morgan Inc., announced last year, was riddled with potential conflicts of interest. Among the conflicts, the judge said, was the $340,000 stake in Kinder Morgan of a main adviser to El Paso, Stephen Daniel, Goldman Sachs’ top energy banker. Goldman Sachs, which was aware of Mr. Daniel’s investments according to a person familiar with the matter, said in its statement: “We regret the El Paso Board wasn’t aware of the investment.” The bank didn’t make Mr. Daniel available for comment and he didn’t respond to requests for comment.

One measure being studied by at least three banks is requiring bankers to disclose all of their stockholdings to companies seeking to hire them on deals.
Many bankers said they consider personal stockholdings a “common-sense” disclosure. As a result, conflicts due to a financial adviser’s personal holdings rarely become a problem, the people added.

But in the wake of the Delaware business court’s opinion, “all the banks are thinking about the very issue,” Kevin Genirs, the general counsel of Barclays Capital’s investment banking division, said at an industry conference last week. “Bankers will now self-disclose if they own any amount of shares,” said a lawyer for a major bank, describing the new attitude as “super-conservative. We’ll disclose anything we find and we’ll pass the ball to the company or its counsel and say, you decide what you want to do.” The focus on banks’ potential conflicts of interest comes at a time of heightened interest in Wall Street’s practices from regulators, politicians and the general public. Goldman in particular has been in the limelight, partly due to an opinion piece this week by a departing employee criticizing its culture. Goldman said the account didn’t reflect the firm’s values or culture.

Law firms too are taking note of the banker conflict issue. One senior banker at a major Wall Street firm said that since the El Paso opinion, lawyers for companies involved in takeover talks have begun requiring that banks reveal, at the time of getting hired, whether deal makers own shares in the company on the other side of the deal. Most major Wall Street banks, such as Bank of America, Barclays, J.P. Morgan Chase & Co. and Morgan Stanley, already have rules or guidelines that forbid senior industry and M&A bankers from directly owning or trading securities of companies in sectors or clients they cover, people familiar with the matter said.
But despite the safeguards at many banks, some employees can end up owning stocks in the sectors they cover because through the course of their careers, they change their firms and coverage areas, ending up with “legacy” holdings, people familiar with the matter said. That is one reason for conflict checks.

Junior bankers at most banks are required to disclose their holdings when they are brought into a deals team to work on a transaction, people familiar with the matter said. If a banker does have a potential conflict, either that banker wouldn’t be allowed to work on the deal, or the matter would be disclosed to clients, the people added.

The El Paso opinion has also prompted some banks to discuss whether they need to adjust how they track bankers’ financial holdings, for example possibly making their information-gathering more frequent or even real time. But doing so, they say, could be logistically challenging. Rather than set disclosure thresholds based on the quantity of stock owned or the seniority of the banker, a few banks are contemplating disclosures of all amounts and at all levels, people familiar with the matter said.

In the El Paso matter, Mr. Daniel of Goldman owned $300,000 of shares in Kinder Morgan Management LLC, a publicly-traded entity related to Kinder Morgan, a person familiar with the matter said. Mr. Daniel has owned the stake since 2003, and Goldman approved it because he focused on the “upstream” or oil exploration and production side of the industry, and Kinder was a pipeline operator in the “midstream” of the industry, the person said. Given this ownership, the outcome of talks between Kinder Morgan and El Paso would have had an effect on Mr. Daniel’s financial interest in Kinder Morgan, the person said.
The remaining $40,000 was in a Goldman’s buyout fund GS Capital Partners. Mr. Daniel had no control over the fund’s choice of investments, the person added.

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

– Assessing the Locked Box Approach to Purchase Price Adjustments
– Just Enough To Be Dangerous: An Overview of M&A Tax Basics
– Shareholder Approval of Small Private Acquisitions: Has Omnicare Been Rendered a Farce?
– Boilerplate Matters: Giving Notice

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

Here are thoughts from legendary deal lawyer Marty Lipton that he recently penned in this memo:

I’m frequently asked to explain merger activity and to predict the level of future merger activity. In part in response to these requests and in part as the consequence of a long career of advising as to mergers, I’ve identified many of the factors that determine merger activity, but a complete catalog is beyond me and I am not able to predict even near-term levels of activity. I’ve written and lectured extensively on this and the history of merger waves since the 1880s. In preparation for work on a revision of my merger waves studies, I made an outline of the factors that I believe are the most significant that affect mergers. I thought it might be interesting to share a condensed version and that as an ancillary benefit of doing so, readers might favor me with comments and suggestions.

First, it is recognized that mergers are an integral part of market capitalism, including the types that are practiced in China, India and Russia. Mergers are an agent of the Schumpeterian creation and destruction that characterizes market capitalism.

Second, the autogenous factors, not in the order of importance, are relatively few and straight forward:

– Increasing revenue by product or geographic expansion or by increasing market power.
– Reducing costs by eliminating excess capacity and/or labor.
– Confidence of the management and the board of directors of the acquiring company that it can effectively integrate the acquired business.
– Ego and the desire for size and diversity without regard to profitability.
– Sense of responsibility to all stakeholders, i.e., employees, customers, suppliers, creditors, and communities, as well as shareholders.

Third, the exogenous factors, not in the order of importance, are:

– Availability of accounting conventions (principally those relating to depreciation and amortization) that enhance, or at least do not detract from, profitability.
– Pressure from activist hedge funds and lack of support from institutional investors to remain an independent public company seeking long-term creation of value.
– Government antitrust and competition policies.
– Availability of arbitrage to facilitate liquidity for securities that result from mergers.
– Foreign exchange fluctuations that make one currency “cheap” and the other more favorable as merger consideration.
– Regulation and deregulation and privatization and nationalization by governments.
– National policies to encourage “global champions” or to discourage foreign investment.
– The availability of experts in merger technology and in the creation of special merger currencies, such as contingent value rights and pay-in-kind debentures.
– Recognition of the legitimacy of hostile takeover bids and proxy fights and the availability of experts in the defense and waging of hostile efforts to achieve a merger.
– Labor unions, government labor policies and the political and popular power of labor generally.
– The existence of private equity funds and the amount of funds that they have available for acquisitions.
– The state of the equity and debt markets and the receptivity of the markets and banks to merger activity.
– Litigation, shareholder and class actions designed to enjoin mergers or increase the cost.
– Taxes, tax policies and potential changes therein.
– Demographic changes.
– General business and political conditions.
– Technological developments, especially breakthroughs.
– Military research, military procurement and military policies with respect to suppliers and contracting.
– Trade treaties and the creation of trade and currency blocs of nations.

Lastly, it is recognized that the interrelation of all or some of these factors creates the permutations and combinations of issues that at any given time make it impossible to predict the level of future merger activity.

Tune in tomorrow for the webcast – “The SEC Staff on M&A” – to hear Michele Anderson, Chief of the SEC’s Office of Mergers and Acquisitions, and former senior SEC Staffers Dennis Garris of Alston & Bird and Jim Moloney of Gibson Dunn discuss the latest rulemakings and interpretations from the SEC.

A few days ago, the SEC charged two financial advisors and three others in their circle of family and friends with insider trading for more than $1.8 million in illicit profits based on confidential information about a Philadelphia-based insurance holding company’s merger negotiations with a Japanese firm. The press has been all over this one given the breach of trust at an Alcoholics Anonymous meeting – see this WSJ article and this CNN Money piece…

We have posted the transcript for our recent webcast: “Transaction Insurance as a M&A Strategic Tool.”