Cliff Neimeth of Greenberg Traurig notes: One thing we didn’t get a chance to mention on our webcast last week is that drafters of rights agreements should consider footnote 244 in VC Strine’s Yucaipa decision. He suggests that in an NOL rights agreement (where the pill trigger is 4.99%) the definition of “beneficial ownership” should be drafted more narrowly than the expansive “13D definition” commonly used in traditional pills.
He suggests that only economic ownership (outright purchases of the company’s stock) and not voting agreements and arrangements should determine “beneficial ownership” because the NOL pill is designed for a very narrow and specific purpose – the preservation of a material corporate asset – the loss of which is measured, for Internal Revenue Code purposes, by actual purchases and sales among 5%(+) holders for purposes of IRC section 382. Whereas, a traditional pill is designed to protect the company from a broader array of change-in-control threats that may be occassioned by more garden variety 13D group type acquisition activities, and the traditional pill trigger customarily will be set at the 20% (i.e., ISS recommended) 15% level. Strine, in fact, suggests a dual definition of beneficial ownership where an NOL pill feature is combined with a traditional pill in the rights agreement.
In that Selectica is on appeal to the Delaware Supreme Court it will be interesting to see if Strine’s message is acknowledged. In any case, it signals the Delaware Court of Chancery’s thinking on the subject and should not be ignored by drafters of future NOL pills.
Tune in tomorrow for the webcast – “Dissecting the Modern Poison Pill” – to hear Rick Alexander of Morris Nichols, David Katz of Wachtell Lipton and Cliff Neimeth of Greenberg Traurig examine the use of poison pills and how they are constructed in the wake of Selectica, Yucaipa and Barnes & Noble, including factors you should consider when devising a pill. If you are not yet a member, try a 2011 no-risk trial and get the rest of 2010 for free (including access to this program).
Courtesy of The Deal, here is a podcast wtih Phillip Mills of Davis Polk regarding how reverse termination fees have increased in size since the financial crisis, the different types of present-day reverse termination fees, and the adaptability of private equity buyers in today’s changed environment.
Here is news culled from this Gibson Dunn memo:
In-house counsel in the EU will continue to be denied the protection of legal professional privilege after the Court of Justice of the European Union (‘ECJ’) unambiguously reaffirmed the limited scope of the doctrine under EU law. The appeal arose from an action for the annulment of a European Commission decision to seize documents during a “dawn raid” on the offices of a subsidiary of Akzo Nobel under competition enforcement powers. Akzo Nobel disputed the finding of the Commission (upheld on appeal to the EU’s General Court) that the seized documents were not protected by legal privilege since they were prepared by in-house lawyers.
On September 14th, in Case C-550/07 P, Akzo Nobel Chemicals Ltd and Akcros Chemicals Ltd v. European Commission, the ECJ reaffirmed the criteria for legal privilege laid down in 1982 in Case 155/79, AM&S Europe Ltd. v. Commission. As such, the European Courts have accepted the existence of privilege only with respect to documents which, firstly, have been prepared for the purposes and in the interests of a client’s rights of defence and, secondly, which have been prepared by an independent lawyer who is a member of an EU Bar Association.
The appeal in Akzo Nobel turned on whether in-house counsel can be deemed to be independent, though they are bound to their clients by a contract of employment. In rejecting the appeal, the ECJ held that in-house lawyers’ economic dependence and their close ties with their employers mean that they cannot attain a level of independence comparable with that of an external lawyer, even though they may be regulated members of a Bar Association of a European Union Member State. The Court rejected the claim that the changed “landscape” of EU competition law, in particular with the passage of Regulation 1/2003 and the accession of new Member States, warranted a departure from the strict position laid down in the AM&S jurisprudence.
The ECJ judgment adheres closely to Advocate General Kokott’s Opinion of 3 May 2010 in its emphatic rejection of privilege protection for advice from in-house counsel. It, nonetheless, importantly differs in its silence on the status of non-EU qualified lawyers. Advocate General Kokott had expressed her view that the extension of privilege to lawyers who are members of a Bar or Law Society in a third country “would not under any circumstances be justified”. Despite this, and despite the intervention of several European and international Bar Associations, the ECJ declined to rule explicitly on the question. This leaves the pre-existing position unchanged, meaning that advice from lawyers qualified outside of the European Union cannot be assumed to benefit from legal professional privilege.
Here is news from William Savitt and Ryan McLeod of Wachtell Lipton:
The Delaware Court of Chancery last week refused to block a proposed merger in a decision highlighting the importance of careful process in structuring a corporate sale. In re Dollar Thrifty S’holder Litig., C.A. No. 5458-VCS (Del. Ch. Sept. 8, 2010).
From 2007 through 2009, Dollar Thrifty had engaged in unsuccessful negotiations with both Hertz and Avis. Following a turnaround effort led by a new CEO, the Dollar Thrifty board decided to re-engage with Hertz, and, after months of bargaining, Dollar Thrifty agreed to be acquired for $41 per share. This consideration represented a 5.5% premium over Dollar Thrifty’s market price, but the merger agreement also included a robust reverse termination fee and bound Hertz to make substantial divestitures if necessary to secure antitrust approval. Following the announcement, Avis objected that had not been invited to bid and made an offer at a higher dollar value–$46.50–but its offer lacked the deal certainty of the Hertz contract.
Avis did not did sue, but shareholder plaintiffs did, attacking the market premium as insufficient and seeking an order requiring Dollar Thrifty to open discussions with Avis. Beginning with the premise that “when the record reveals no basis to question the board’s good faith desire to attain the proper end, the court will be more likely to defer to the board’s judgment about the means to get there,” the Court of Chancery denied the injunction.
The Court first held that the board’s decision to negotiate only with Hertz was proper, squarely rejecting the claim that a board is required to conduct a pre-signing auction. Vice Chancellor Strine instead credited the board’s well-informed determination that Avis lacked the resources to finance a deal, that a potential deal with Avis was subject to greater antitrust risk, and that Hertz might have withdrawn from the process if it faced “pre-signing competition.”
The Court also refused to accept the argument that a 5.5% market premium is insufficient. Drawing deep into economic theory, the Vice Chancellor held that the board reasonably focused on the “company’s fundamental value” rather than a spot market price in considering a sale of control. Delaware “law does not require a well-motivated board to simply sell the company whenever a high market premium is available (such as selling at a distress sale) or to eschew selling when a sales price is attractive in the board’s view, but the market premium is comparatively low.” Finally, the Court upheld the merger agreement’s 3.9% termination fee, noting that it was neither preclusive nor coercive, as evidenced by the fact that Avis had made a topping bid in excess of the fee and that the shareholders of Dollar Thrifty remained free to reject the Hertz deal without penalty. Indeed, Vice Chancellor Strine lauded the features of this merger agreement, noting that “the deal protections actually encourage an interloper to dig deep and to put on the table a clearly better offer rather than to emerge with pennies more.”
The Dollar Thrifty decision represents another marker in a long line of cases endorsing the primacy of corporate directors’ strategic decisions. The courts remain ready to respect a sales process, even a limited one, that is structured in good faith by an independent and well-informed board.
Here is news from Steven Haas of Hunton & Williams LLP: Yesterday, Chancellor Chandler issued his post-trial opinion in eBay Domestic Holdings, Inc. v. Newmark, addressing a closely watched dispute at privately-held craigslist, Inc. The case posed several novel issues, including the adoption of a poison pill at a privately-held company by its founders.
The court rescinded the rights plan, which it said had been adopted to prevent eBay from purchasing additional shares in the company and to hamper eBay’s ability to sell its 28% ownership bloc to a third party. Among other things, the court found that “[u]ltimately, defendants failed to prove that craigslist possesses a palpable, distinctive, and advantageous culture that sufficiently promotes stockholder value to support the indefinite implementation of a poison pill.”
The court also rescinded a dilutive stock issuance to craigslist’s founders that was aimed at incentivizing eBay to give craigslist a right of first refusal over its shares. It held that the founders breached their duty of loyalty and that the issuance failed the entire fairness test. The court refused to rescind a staggered board structure that had been implemented by the founders, finding that it was protected by the business judgment rule.
This recent memo from Towers Watson – entitled “Are Golden Parachutes Losing Their Luster?” – analyzes how use of golden parachutes has changed pretty dramatically at a hefty 25% of those companies in the Fortune 500 that started the past year with a parachute. Check it out.
Here is news culled from this Wachtell Lipton memo by Michael Segal and Ian Levin:
The Pension Benefit Guaranty Corporation has published a proposed regulation under Section 4062(e) of ERISA which, if adopted, would provide the PBGC with greater opportunities to compel plan sponsors to increase the funded status of their pension plans when engaging in asset sales or restructuring operations.
In general, Section 4062(e) of ERISA requires a company that sponsors a single-employer defined benefit pension plan to notify the PBGC within 60 days if the company ceases operations at a facility in any location and, as a result, more than 20 percent of the company’s employees participating in the pension plan separate from employment (referred to as a “Section 4062(e) Event”). If a Section 4062(e) Event occurs, the PBGC has discretion to require the company to either provide an escrow for a pro-rata portion of the plan’s underfunding (generally, as if the entire plan had been terminated) or purchase a bond for up to 150% of such amount for five years to protect the plan in the event that it terminates during such period. The escrow is returned after five years if the plan has not been terminated, but without interest, and the bond can be expensive to purchase. Section 4062(e) has been interpreted and applied by the PBGC narrowly, but with more frequency in recent years. In those limited situations, the PBGC has used the threat of the escrow or bond to force plan sponsors to increase the funding of their pension plan in excess of legal requirements.
Under the proposed regulation, the definition of a Section 4062(e) Event would be greatly expanded to include more events, many of which occur in the ordinary course of business, such as the cessation of a single operation at a location even if the company continues other operations at the same location (e.g., discontinuance of one type of manufacturing or administrative operation at a location) and the relocation of an operation from one facility to another. In addition, a Section 4062(e) Event would include an asset transaction in which 20 percent or more of the employees participating in the selling company’s pension plan terminate employment — regardless of whether affected employees are hired by the buyer, all or a portion of the plan is transferred to the buyer, the funding status of the plan or the financial strength of the selling employer. The PBGC may permit the Section 4062(e) liability to be satisfied by the buyer’s hiring of the affected separated employees and maintaining all or a portion of the seller’s plan attributable to those employees.
If the PBGC’s proposed regulation is adopted, companies will have greater risk of incurring a Section 4062(e) Event in the ordinary course of business and becoming subject to the financial burdens of Section 4062(e) or a negotiated settlement with the PBGC that increases the funding requirements otherwise applicable to the affected plans. Any company contemplating a sale of assets involving a significant number of employees or a restructuring of its operations should consider whether a Section 4062(e) Event may occur and its possible ramifications. Companies should also review their credit agreements, which may reference Section 4062(e) in representations and warranties, covenants, notice requirements and default events, to ensure that a Section 4062(e) Event will not cause unintended and adverse consequences.
From Kevin Miller of Alston & Bird: In this transcript of a hearing on a motion to expedite discovery and the scheduling of a preliminary injunction hearing in Steamfitters v. , Delaware Chancellor Chandler concluded that, based on the parties’ briefings and arguments, he did not believe that the disclosure of the target’s free cash flows would meaningfully alter the total mix of information that is available through the definitive merger proxy.
In so doing, Chancellor Chandler distinguished the facts presented from the facts in Vice Chancellor Strine’s recent Maric decision and earlier Netsmart decision, but expressed an appreciation and understanding of the plaintiff’s arguments “that Delaware law ought to require as a per se rule that free cash flow estimates going out into the future be provided, disclosed” and invited the plaintiff to file an interlocutory appeal to the Delaware Supreme Court:
I would be, in the interests of clarification of Delaware law, and in the interests of perhaps leading to the creation of a bright-line rule in disclosure, which I think would be a good thing in some ways — I would be happy, Mr. Liebesman [plaintiff’s counsel], to sign, today, an order certifying an interlocutory appeal to the Delaware Supreme Court on this question.
The spectrum of views expressed by the Delaware Courts creating the present uncertainty include:
A. Disclosure of projections is not generally required:
– Skeen (Del. Sup. Ct. 2000) (in which the Delaware Supreme Court considered and rejected a claim that the Board of House of Fabrics breached its fiduciary duties by failing to disclose (i) management’s projections and (ii) a summary of the methodologies used and the ranges of values generated by the financial analyses performed by its financial advisor):
Appellants are advocating a new disclosure standard in cases where appraisal is an option. They suggest that stockholders should be given all the financial data they would need if they were making an independent determination of fair value. Appellants offer no authority for their position and we see no reason to depart from our traditional standard.
[plaintiffs] say, in essence, that the settled law governing disclosure requirements for mergers does not apply, and that far more valuation data must be disclosed where, as here, the merger decision has been made and the only decision for the minority is whether to seek appraisal. We hold that there is no different standard for appraisal decisions.
– Best Lock (C Chandler 2001):
[T]he plaintiffs contend that the Information Statement contains misrepresentations about the financial data supplied to Piper by the management of the Best Companies and also fails to disclose that data. . . . Delaware courts have held repeatedly that a board need not disclose specific details of the analysis underlying a financial advisor’s opinion. Moreover, even if such facts were required to be disclosed, this information would not have altered significantly the total mix of information available to shareholders. . . . Accordingly, the motion to dismiss with regard to these claims is granted.
B. Projections are per se material and the disclosure of projections is consequently required:
– Netsmart (VC Strine 2007):
It would therefore seem to be a genuinely foolish (and arguably unprincipled and unfair) inconsistency to hold that the best estimate of the company’s future returns, as generated by management and the Special Committee’s investment bank, need not be disclosed when stockholders are being advised to cash out. . . . Indeed, projections of this sort are probably among the most highly prized disclosures by investors. Investors can come up with their own estimates of discount rates or (as already discussed) market multiples. What they cannot hope to replicate are management’s insisted view of the company’s prospects.
– Maric (VC Strine 2010):
in my view, management’s best estimate of the future cash flow of a corporation that is proposed to be sold in a cash merger is clearly material information.
C. Disclosure of projections was not required under the circumstances presented as distinguished from other circumstances addressed by the Chancery Court:
– CheckFree (C Chandler 2007):
Although the Netsmart Court did indeed require additional disclosure of certain management projections . . . the proxy in that case affirmatively disclosed an early version of some of management’s projections. Because management must give materially complete information “[o]nce a board broaches a topic in its disclosures,” the Court held that further disclosure was required. . . . Because [the CheckFree] plaintiffs have failed to establish that management’s projections constitute material omitted information, they have failed to demonstrate a likelihood of success on the merits of their claim and, therefore, I deny their motion for a preliminary injunction on this ground.
– Steamfitters (C Chandler 2010):
But this isn’t a case where free cash flow estimates were deliberately removed or excised from a proxy disclosure. Unlike in Maric, in this case no free cash flow estimates were actually provided to Goldman Sachs. The internal analyses that were approved by management for Goldman’s use in this case didn’t have a line item for free cash flow estimates, and so unlike the Maric decision, there was no deliberate excising of free cash flow numbers. And in addition, this isn’t like Netsmart, where management undertook to disclose certain projections but then disclosed projections that were actually stale and not, therefore, meaningful. The proxy here gave management’s projections that were actually used by Goldman, and those projections included net revenue, net income, EPS and EBITDA estimates for five years.
Here is news from this Gibson Dunn memo: On August 19th, the DOJ and FTC issued revised Horizontal Merger Guidelines. The release of the 2010 Guidelines marks the first major changes to the Guidelines in over 18 years; they will replace the 1992 Guidelines (which were subsequently amended in 1997).
In announcing the release of the 2010 Guidelines, Christine Varney, Assistant Attorney General in charge of the DOJ’s Antitrust Division, explained that the revisions were meant to “provide more clarity and transparency” into how the federal antitrust agencies evaluate the likely competitive impact of mergers and were intended to “provide businesses with an even greater understanding of how [the agencies] review transactions.” The FTC vote approving the 2010 Guidelines was 5-0. Chairman Leibowitz issued a written statement, noting that “the new Guidelines provide a clearer and more accurate explanation to merging parties, courts, and antitrust practitioners of how the agencies review transactions.”
The guidelines explicitly anticipate that revisions will be required “from time to time to reflect changes in enforcement policy or to clarify aspects of existing policy.” There has never been such a long interval between major guidelines updates since they were first issued in 1968. Thus, it came as little surprise when, in September 2009, the DOJ and FTC announced that they would jointly explore whether the guidelines should be revised. A series of workshops followed, and the FTC issued proposed revisions for public comment on April 20, 2010.
Like the prior guidelines, the 2010 Guidelines purport to describe the analytical process that the U.S. antitrust enforcement agencies use to investigate and decide whether to challenge proposed horizontal mergers and acquisitions. As the title denotes, the guidelines address only horizontal mergers (i.e., transactions between competitors or potential competitors). They do not address possible vertical issues, which may arise in mergers between firms that do not compete, but operate at different levels within the same supply chain. Nor do the 2010 Guidelines address or modify potential reporting requirements under the Hart-Scott-Rodino (“HSR”) Act. As was the case with previous versions of the guidelines, the 2010 Guidelines apply regardless of whether the transaction is HSR reportable and whether or not the deal has closed.