Last week, PricewaterhouseCoopers Transaction Services outlook for the coming year. How did the PwC survey fare this past year – according to their press release:
Strategic Deals and ‘mergers of productivity’ will drive activity in 2010.
Correct. In 2010, companies focused on synergies to enhance productivity and cost-savings. For 2011, PwC contends that a different focus on ‘productivity’ will be a theme as companies look to bolster revenue growth, versus focus on synergies.
We expect to see more IPOs coming to market from private equity.
Correct. Private equity (financial sponsor) backed offerings led the IPO market recovery in 2010, with a total of 115 offerings raising $15.9 billion in the first nine months of 2010, according to PwC’s IPO Watch. “The climate for private equity-backed IPOs in 2010 was robust and we expect this trend to continue,” said PwC’s Hartnett, “however the IPO market is not the only avenue for PE to realize investments, with sales to strategics and dividends also becoming attractive alternatives.”
Financing will be the dominant challenge contributing to the instability of middle market deals.
Partially correct. Debt markets improved in the second half of 2010 as seen in the return of the bank loan market and revival of leveraged finance.
Divestitures will be a factor in fueling deals.
Correct. Divestitures, e.g. carve-outs, were a factor in driving activity, principally in the middle market, as both seller’s valuations and buyer’s access to financing improved. This trend was highlighted by an increase in total divestiture value to $264 billion for year to date November 2010, compared with $241 billion for calendar year 2009, and an increase in divestiture deal value as a percentage of total M&A from 33 percent to 39 percent, an overall increase of 6 percent.
Consumer products, Technology, Energy, Financial Services, Automotive, Healthcare, and Entertainment & Media industry sectors will present opportunities for consolidation.
Partially correct. Financial Services and Healthcare M&A activity was not as strong as expected with a sizeable decrease in both deal value and volume, year on year. Automotive deal activity remained relatively flat in 2010, as companies continued to strengthen their balance sheets before re-entering the deal market.
*The accuracy of the PwC Transaction Services previous forecast does not guarantee future accuracy.
Here is something that Mike Melbinger recently blogged on his CompensationStandards.com’s “Melbinger’s Compensation Blog“:
Public companies all over America are deciding whether to follow the disclosure requirements of the new, proposed rules on “Golden Parachute Compensation,” in order to take advantage of the exemption in the proposed rules from future disclosure and approval in a merger proxy. During the numerous compensation committee and board meetings on Shareholder Say on Pay that I have attended in the last month, I have had the opportunity to gain some useful insight on this issue.
Remember that Dodd-Frank would require a company to disclose, in any proxy in which shareholders are asked to approve an acquisition, merger, consolidation, etc., and seek shareholder approval of any “golden parachute compensation.”* However, Dodd-Frank would not require this approval if shareholders already had approved the company’s golden parachute payments and agreements as part of a regular Shareholder Say on Pay vote. To take advantage of this exception, the company must follow the disclosure requirements of new, proposed rules, including the new “Golden Parachute Compensation” table, rather than the more general, current requirements.
Our first reaction – and that of many others – to the Dodd-Frank exception that would not require separate approval of golden parachute compensation in a merger proxy if shareholders already had approved the company’s golden parachute payments and agreements as part of a regular Shareholder Say on Pay vote, was that it was very useful and most clients should take advantage of it. However, upon further reflection (and the experience of all those compensation committee meetings), we no longer see this exception as a no-brainer.
Here is why.
ISS recently announced that, in cases where the company incorporates the golden parachute vote into its SSOP vote, ISS will evaluate the “say on pay” proposal in accordance with its usual guidelines, “which may give higher weight to that component of the overall evaluation.”
Companies with an excise tax gross-up provision and/or a 3 times multiplier might be better off waiting for a merger proxy to make this disclosure and seek shareholder approval, rather than risking ISS (or other shareholder) disapproval of its entire compensation package. Clearly, for some companies, the benefit of having these arrangements approved in advance may not be worth the additional attention and risk that they may not be approved.
Making disclosure and seeking approval in a merger proxy seems less risky because the request for shareholder approval would be non-binding in any event, and a vote to disapprove would not affect the merger transaction in any way. Additionally, as pointed out in a recent Morrow & Co. update, the announcement of a merger often results in a change in the target company’s shareholder profile, with institutions selling shares and arbitrageurs and hedge funds buying. Thus, the merger proxy voting shareholder profile may be one that has a greater interest in seeing the transaction consummated and is less concerned about matters of compensation
The minimal risk of postponing this disclosure and request for approval until a merger proxy would seem to be that, in very close cases, shareholders might vote against the merger itself if they believe the parachute payments are excessive. Of course, ISS may come to demand this type of full disclosure over time, but they haven’t yet.
*Also remember that the new definition of “golden parachute compensation” means any type of compensation that relates to a change in control transaction, in any amount. For this purpose, at least, “golden parachute compensation” no longer refers to payments in excess of three times a covered executive’s base annual compensation.
In this podcast, Jonathan Axelrad and Anthony McCusker of Goodwin Procter discuss the latest developments impacting the venture capital community:
– What is the climate for venture capital these days?
– What types of companies are VC investors targeting?
– Are companies being funded outside the US?
This November-December issue of the Deal Lawyers print newsletter was just sent to the printer and includes articles on:
– The 2011 Outlook for Deals & Governance: Back to the Future
– “Clear and Simple”: SEC Proposes Say-on-Golden Parachute and Enhanced Disclosure Rules
– Delaware Supreme Court Upholds Net Operating Loss Poison Pill
– Top-Up Options: Looking Better and Better
– M&A Due Dilgence: The Effect of Restatements
If you’re not yet a subscriber, try a “Rest of ’10 for Free” no-risk trial to get a non-blurred version of this issue on a complimentary basis.
We have posted the transcript of our popular webcast: “The SEC Staff on M&A.”
Here is news from Davis Polk:
Court rules that bylaw amendment to conduct annual meeting in January 2011 would prematurely terminate Airgas directors’ terms and is therefore invalid.
In a practical ruling that explicitly acknowledges the relevance of “[p]ractice and understanding in the real world,” the Delaware Supreme Court last Tuesday invalidated a bylaw amendment adopted by the stockholders of Airgas, Inc. at its September 2010 annual meeting that would have accelerated the date of Airgas’s next annual meeting to January 2011.
The Supreme Court ruling is a setback for Air Products and Chemicals, a hostile bidder that at the Airgas annual meeting in September elected its slate of three directors to the Airgas board and sought to circumvent the defensive structure of the Airgas classified board by proposing this bylaw amendment so that it would have the opportunity to elect three more directors to the board just four months later in January.
The Supreme Court’s reversal of the earlier Chancery Court ruling upholding the bylaw should allay concerns that the lower court decision weakened the defenses of other companies with classified boards.
Expiration of director’s term “in the third year following the year of their election” means director is elected “for a three-year term.”
In language that is fairly typical of the charters of most companies with classified board structures, the relevant section of the Airgas charter provides that:
at each annual meeting of the stockholders of the Corporation, the successors to the class of Directors whose term expires at that meeting shall be elected to hold office for a term expiring at the annual meeting of the stockholders held in the third year following the year of their election. (emphasis added)
Although the Supreme Court found that this provision was facially ambiguous as to whether directors are required to serve three year terms or whether their terms may expire at whatever time the annual meeting is scheduled in the third year following election, it relied on the “overwhelming extrinsic evidence” that established that the Airgas charter was intended to provide that each class of directors serve a three year term. The Court cited “historical understanding,” industry practice, the commentary to the ABA model charter provision, and Delaware cases involving such charter language that all reflected the understanding that directors of staggered boards serve a three year term.
The court noted that neither Delaware code nor the Airgas charter requires that a director’s three year term be measured with “mathematical precision,” but did not define exactly what deviation would still satisfy the three year durational requirement. The Court concluded that the four month duration presented by the bylaw amendment did not qualify as “annual” under any construction of the term, and held that the bylaw amendment therefore impermissibly shortened the relevant Airgas directors’ terms and amounted to a de facto removal of those directors without cause without the 67% supermajority vote required by Airgas’s charter.
We are posting memos regarding this decision in our “Antitakeover” Practice Area.
From Kevin Miller of Alston & Bird, a member of our Advisory Board:
At last Thursday’s M&A session of the PLI Securities Law Institute, VC Laster gave a shout out to the top-up option provision in the merger agreement pursuant to which Carlisle Companies is acquiring Hawk Corp. saying it had everything a properly drafted top up option should have and even an extra feature (i.e., requiring payment of the par value of the top up shares in cash) that, though not essential, created a nice optic.
A top-up option can allow a transaction structured as a two step acquisition (a first step tender offer followed by a second step merger) to close more quickly, getting the merger consideration into the hands of nontendering shareholders faster once the ultimate merger becomes a fait accompli.
A top-up option typically gives the acquiror, upon acceptance of tendered shares which, together with previously acquired shares, exceed the number of shares necessary to approve a long form merger but which, together with those previously acquired shares, is less than the minimum number of shares necessary to effect a short form merger, the right to purchase a number of newly issued shares of the target sufficient to increase the acquiror’s ownership in the target to the minimum number of shares necessary to effect a short form merger.
Though VC Laster doesn’t necessarily speak for other members of the Delaware Court of Chancery, this is as close to the blessing of a specific top up option provision as we have seen. See also VC Parsons’ recent decision addressing top up options, In re Cogent Litigation.
VC Laster highlighted key features of the Carlisle/Hawk top up provision from this SEC filing, including:
– terminates upon termination of the Merger Agreement
– can only purchase the number of additional shares necessary to get to 90% plus one share
– can only be exercised once and only during short window post acceptance
– can only be exercised if own more than 75% and less than 90% [note:
potentially exceeds amount permitted to be issued without shareholder approval under stock exchange listing rules]
– can’t exceed number of authorized and unissued and unreserved
– dilutive impact ignored for purposes of appraisal proceedings
From Kevin Miller of Alston & Bird, a member of our Advisory Board:
Here is the transcript of a September 3rd oral argument on plaintiffs’ motion for a preliminary injunction in Forgo v. Health Grades. Plaintiffs sought to enjoin the pending acquisition of Health Grades by affiliates of Vestar Capital, a private equity firm with portfolio companies in the health care industry, based on alleged violations of the board’s Revlon duties. The question squarely put by plaintiffs was “how little can a board do and still comply with its duties to get the best price under Revlon when it is attempting to sell the company.”
Ultimately, the transcript can be read two ways: (i) for the proposition that the Delaware Court of Chancery will not enjoin a transaction on Revlon grounds absent a topping bid, coercive structure or disclosure violation and (ii) a cautionary tale regarding appropriate process, particularly relating to single private equity bidder negotiations. The Court discusses in detail its concerns regarding the motivations of management in the context of a potential sale to a private equity firm – the risk that management will only negotiate a reasonable but not too aggressive sale price in order to preserve the opportunity to benefit from the increase in value on any rollover or newly granted equity.
In the absence of a topping bid, and despite the Court’s view that the plaintiffs have a reasonable probability of success on the merits of their Revlon claim, the Court declined to issue an injunction based on its assessment of the potential harms of granting the injunction vs. declining to grant the injunction. Given the transcript is 178-pages long, I have included a few noteworthy quotes:
THE COURT: I remain concerned about the extent to which [other ]private equity buyers really do vigorously come in when the management team seems to be happy and that they say “Well, there’s no deals with management.” Well, except management has agreed to vote their stock in favor of the deal — and that’s a pretty good signal of happiness — and they’ve signed the deal and, you know, they seem to be all — all enamored with each other.
THE COURT [addressing Plaintiffs’ counsel]: . . . name some situations where this Court enjoined transactions in a situation where there was no apparent coerciveness to the vote [e.g., a termination fee payable upon naked no vote] or lack of informedness about the vote simply because it found a reasonable probability of success on the merits on the Revlon claim.
PLAINTIFFS’ COUNSEL: We’re moving down the scale. If this is okay — Your Honor knows that this transcript is going to go around the Internet by this afternoon or over the weekend or something, and Your Honor’s decision will be read by everybody.
PLAINTIFFS’ COUNSEL: The investment bankers and the deal counsel who read this are going to say “If we can get away with this, we can get [away] with anything.”
THE COURT: Isn’t one of the things, though, that’s little different here about — in terms of Vestar, to give them some credit, they did offer up closing certainty more typical of a strategic buyer than a traditional private equity buyer; right? . . . I mean, they’re willing to be subject to a specific performance remedy. And there is no — as I understand it, no financing contingencies at all; right? . . . . And, in fact, the target is a third-party beneficiary of the financing commitment papers?
THE COURT: What I’m trying to figure out, you know, how I endorse in some way a model where you now move to basically single-bidder negotiations with private equity firms, because private equity firms, they have such a scary capacity to walk away, that you entrust to someone whose financial interests are tremendously different from the stockholders the primary negotiating role. You allow them to go out and have unsupervised communications. The only expression of interest during the process is not supervised by the independent directors or the financial or legal advisors of the company. And then the Court is supposed to take assurance in a market test that is done at the height of summer vacation season, is only 30 to 40 days long, during a difficult financing period, when all the body language to the strategic — to the private equity marketplace is the Hicks brothers and their pals are very happy with the deal they have. It’s pretty low bar.
THE COURT’S RULING: . . . today what I’m being asked to do is to grant a preliminary injunction against the procession of a tender offer. And that makes me have to consider whether there’s a reasonable probability of success on the merits for the plaintiffs, which is essentially what will — what does the record show about what I would likely find as to the merits after trial. Then I have to see whether there would be any irreparable injury from the — if — if the plaintiffs are not granted an injunction; and then I have to weigh the relative balancing of the harms.
. . . so at bottom, my primary basis, I cannot under the balance of the harms in good conscience drop the injunction flag, because, in my view, that would be an act of arrogance in which I take out of the hands of people who really have money at stake the ability to make this determination for themselves. And because there are other remedies [i.e., appraisal], I think that’s the thing.
So I deliver unto the plaintiffs somewhat of a Pyrrhic victory.
Hat tip to Stikeman Elliott for this: You may want to check out this recent article authored by Jim Brau of Brigham Young University’s Marriott School of Management. Professor Brau and two colleagues analyzed 679 recent take-overs, finding that companies sold off in the course of a dual-track process realized 22-26% premiums over companies acquired without a concurrent IPO. Even more interesting, and somewhat surprising, was the BYU study’s additional finding that this premium significantly exceeded the premium realized when a sale followed within 12 months of a completed IPO. In other words, where a dual-track process is underway, a bid received in response to the initiation of an IPO will on average be superior to a bid received after the IPO has been completed.
Below is some analysis taken from this Wachtell Lipton memo by Adam Emmerich and William Savitt:
We have recently witnessed equity accumulations on both sides of the Atlantic that were first announced long after they began and long after the acquiring parties had effectively passed applicable disclosure thresholds. Here in the U.S., Pershing Square and Vornado earlier this month announced a combined stake of almost 27% in J.C. Penney. And last weekend French luxury-goods conglomerate LVMH announced that it had amassed a previously undisclosed stake in excess of 14% in Hermès, including through transactions extending over a period of years. Although the details of both accumulation programs are as yet not fully known, they appear to have been conducted on the assumption that the U.S. and French regulatory regimes requiring prompt and current disclosure of share accumulations can be evaded through derivatives and other synthetic and structured ownership arrangements, even when they involve ownership of actual shares by counterparties, up until the point when such trades are settled by taking options on or physical delivery of the underlying shares.
We have long warned of the dangers that new uses of swaps and other equity derivatives, securities loans, and stock purchases timed around record dates can pose to the fairness and transparency of equity securities markets, the legitimacy of corporate elections, and the appropriate interests of public companies and their shareholders in knowing who their shareholders are and when a significant stake is being accumulated.
Despite a number of widely reported situations in which derivatives and other non-conventional ownership arrangements and control devices have been exposed as manipulative and improper (including the battles for control of CSX in the U.S. and Continental in Germany, Sears Canada, and the Porsche – Volkswagen affair, among others), despite moves by regulators in the U.K., Germany, Australia and elsewhere to tighten the rules governing the nature and timing of beneficial ownership reporting and the inclusion of derivatives and other unconventional ownership arrangements in those reporting regimes, and despite the public recognition by the SEC of the need for additional rulemaking and regulation in this area in the U.S., there has as yet been no substantive change in the U.S. reporting and enforcement environment. The J.C. Penney and Hermès situations demonstrate that the current legal and regulatory environment is not adequate to the task without both renewed focus and reform.
While we believe that abusive and misleading accumulation techniques are not immune from liability under existing rules and precedents dating back to SEC v. First City Financial, we continue to urge regulatory reform to definitively close the door on such techniques. However, unless and until lawmakers and securities regulators in the U.S. adopt disclosure requirements in accord with what is now the global consensus towards full and fair disclosure of equity derivatives and other synthetic and non-standard ownership and control techniques, U.S. corporations are well advised to adopt such self-help measures as are available.
These include appropriate provisions in by-laws, rights plans, and other arrangements with change-in-control protections, to ensure that the purposes served by existing arrangements are not subject to being undermined by non-traditional ownership and corporate control arrangements, and to encourage adequate and timely disclosure of actual and synthetic share accumulations for the benefit of markets, shareholders and corporations.