Recently, the ABA M&A Committee released its “2009 Strategic Buyer/Public Target Deal Point Study.” This is the latest in the Committee’s “Deal Point Study” series – and addresses deal points in public company transactions announced in 2008 in excess of $100 million in transaction value (ie. 103 transactions). Transactions involving private equity buyers were excluded as they will be covered by a separate study.
A few items to note:
1. The members of the M&A Committee’s “Strategic Buyer/Public Target Working Group” led by Jim Griffin of Fulbright & Jaworski are listed on slide 3 of the Study. I encourage you to reach out to those you know to congratulate them on a job well done. It’s a ton of work.
2. The study tested several new deal points in strategic deals this year, including the “compliance with law” rep, the closing condition regarding target’s covenant compliance, target operating covenant provisions, various new remedies data points (effect of termination, the express right of the target’s stockholders to sue for deal premium, and reverse term fees) and additional data points found in two-step transactions (tender offers).
3. The key to all of these studies is the release date in the lower right hand corner. All those interested in being at the negotiation table with the correct version of a study will be incentivized to maintain active membership in the Committee’s “Market Trends Subcommittee” so they’ll continue to receive Update Alerts.
– What’s the hardest part of writing a book?
– What was your goal in writing the book?
– Did any parts of it change as you conducted research to write it?
– How has private equity influenced deal-making over the years?
– How can the book serve to help deal lawyers in their daily practice?
In his “Delaware Corporate & Commercial Litigation” Blog, Francis Pileggi provides us with this interview with the newest member of the Delaware Court of Chancery, Travis Laster. Good stuff!
The interview, conducted by Francis and Kevin Brady are repeated below:
Blog: Why did you want to make the change from private practice to a member of the judiciary?
VCL: The call to public service is very important to me. My parents were models in this regard. They are both teachers. I always knew that I wanted to do some type of public service, and being on the Court of Chancery was my “dream job”. It includes of course, a public service component.
Blog: Is there any “formal judicial training” scheduled after your investiture before you start hearing cases?
VCL: Although there is no formal training for new members of the Court of Chancery, my extensive experience in practicing before the Court is certainly a form of training. Also, I plan to attend a mediation course to help me serve as a mediator, although I certainly participated in mediations during my 13 years of practice before the Court.
Blog: Will you take over all the cases that had been assigned to former Vice Chancellor Lamb at the time his term ended?
VCL: The 88 cases that Vice Chancellor Lamb had on his docket when his term expired will be “inherited” by me. In addition, recently filed new cases have also been assigned to me. I jokingly wondered if I got the nod because the initials VCL will be used after the case number for cases assigned to me and those are the same letters used for former Vice Chancellor Lamb’s cases.
Blog: What will you look for when you consider candidates for being your law clerk?
VCL: The most important qualifications will be “mental horsepower” and an interest in the topics within the jurisdiction of the Court, as well as the capacity to address complex issues quickly. I am currently using two clerks who were hired for me by Vice Chancellors Parsons and Strine before I was sworn in. They are Matt Levy from Duke and Mike Sirkin from Temple.
Blog: Do you have a “judicial philosophy” in terms of how you plan to deal with your docket of cases?
VCL: The word “balanced” is the best way to describe my approach to cases. As a product of the Delaware Bar, my experience representing both shareholders as well as management over the years allows me to understand the issues from both of those perspectives. It is important to make clear to litigants that they will receive, and they deserve, a fair and respectful hearing, and thoughtful consideration regardless of whether they are a large company or an individual of modest means.
Blog: What are you looking forward to the most in your new job and what do you think will be the most challenging part?
VCL: One of the things that I am looking forward to the most is not needing to fill out time sheets. The most challenging part of my position will be to fill the shoes of my predecessor and live up to the high expectations of the Court. I am following Steve Lamb who was a tremendous judge and known and respected all across the country and that’s a tough act to follow. I am coming onto a court that has been praised as one of the nation’s best and whose colleagues are known for their opinions, insights and scholarship. This Court has a docket where you are deciding very big questions and opinions that get read by corporate practitioners and corporate scholars all across the country. So, it’s an exciting challenge but I am very mindful of those responsibilities and it’s a little bit humbling, but that I think is the most challenging thing for me.
Blog: What do you think you will miss about private practice?
VCL: One thing that I may miss about private practice is the flexibility of having my own firm to decide what resources I will have available as opposed to the more limited resources of the state.
Blog: What changes, positive or otherwise, have you seen in the practice of law in the past ten years?
VCL: The positive changes that I have seen include the greater sophistication of the lawyers and the law. I also view as a positive development the greater democratization of the Delaware bar which now has a more diverse array of lawyers who are respected participants in the corporate litigation area. A negative development is some of the harsher, more aggressive litigation tactics that we have not seen in Delaware. I think it is really important to maintain the traditional professionalism, civility and collegiality that Delaware has traditionally fostered.
Blog: Given the nature of the business disputes that come before the Court of Chancery, what changes do you see in the next five or ten years?
VCL: Without expecting any drastic changes in the future, depending on what the federal arena brings, one likely trend is the increase in “alternative entity cases” that we are already seeing more of. As for potential federal changes, there has always been a symbiotic relationship between federal and Delaware jurisdiction, and that give and take will likely continue.
Blog: Finally, what would you like people to know about you that you don’t think they already know?
VCL: I want to be known as being “open to feedback.” My grandfather used to say that one should get all of the advice that one can, because some day one might be able to use some of it.
Blog: Thank you very much Your Honor for taking time out of your schedule to talk to us. We wish you the best of luck for a long and healthy tenure on the Court of Chancery.
– Confidence in the U.S. M&A market is starting to improve. In 2008, only 16 percent believed it would be strong in the following year, down from a high of 63 percent of respondents in 2006. This year, 28 percent of respondents predicted a strong market and just 19 percent had a weak outlook.
– Like the U.S. M&A market, confidence in the economy continues to strengthen. In 2005, 51 percent had a positive outlook on the economy, but that number dropped to just eight percent last year. Thirty-five percent of respondents to the 2009 survey have a positive outlook on the U.S. economy in the coming year.
– Respondents are split on the issue of how the federal government’s actions within the past 12 months have impacted the U.S. M&A market. Twenty-seven percent think the federal government has made a positive impact/increased activity, 22 percent think it has made a negative impact/decreased activity, and 50 percent think the government’s actions have made little to no difference.
– Deals are not closing due to financing issues and material adverse changes in business. Forty-nine percent of respondents were involved in a deal that didn’t close, primarily due to financing or a material adverse change in business.
– There is a continued expectation that financial buyers will again decrease their presence in the market more than strategic and foreign buyers. Fifty-four percent predict financial buyers will further decrease their role and 51 percent believe strategic buyers will increase their presence in the M&A market.
Continuing our proxy solicitor podcast series, in this podcast, Rick Grubaugh of D.F. King & Co. provides some insight into issues related to shareholder proposals seeking to allow shareholders the right to call a special meeting – many companies have received passing votes and are faced with tough choices on how to deal with the demand – including:
– What is background of the proposals that seek companies to allow shareholders to call a special meeting?
– What might we expect for the 2010 proxy season regarding this type of proposal?
– What do institutional shareholders believe is the right threshold of share ownership to call a special meeting?
– What options do companies have if they receive a proposal?
I loved Michelle Leder’s title of her footnoted.org blog today entitled “On Black and Decker’s CEO and unicorns…“. Michelle was referring to the Form 8-K filed by Black & Decker which reveals that its CEO would forego $20 million in severance, a sum he would be entitled to under his arrangements with the company as triggered by this week’s announced merger with Stanley Tools. The Washington Post ran this article today noting how this move is perhaps not as generous as it seems.
And here is a response from a member:
I don’t mean to throw stones, but Mr. Archibald is 66 years old. Why is he entitled to three years severance in the first place?
Based on my review of his new three year Executive Chairman Agreement, he is entitled to a base salary of $1.5 million per year, a target bonus of $1.875 million per year and long-term incentives of $6.65 million per year, (of which 50% is in stock options and 50% in restricted stock). Add to that, a 1 million share “sign-on” stock option grant (estimated value $15 million) and a Synergy Bonus Amount of as much as $45 million. All in, he could earn $90 million over the next three years, which would easily make up for his contract waiver if the company performs.
It is also worth noting that his current SERP is worth $35 million as of December 31, 2008, and he retained the right to an enhanced SERP if he is terminated before the end of the new contract term (i.e., he gets additional years of service and his foregone severance is included in the benefit calculation).
While I am glad to see a CEO waiving severance, it looks to me like he is getting it back, and then some.
From Paul Weiss: Here is our recent survey of selected U.S. strategic mergers announced during the period from August 1, 2007 to July 31, 2009. The M&A marketplace during the past few years can be characterized by superlatives on both ends of the spectrum, from the heights of 2007 featuring headlines such as “$100 Billion Merger Monday” (The Wall Street Journal, April 23, 2007) to the depths of 2008 when total global M&A volume had fallen by half from 2007, including these characteristics:
– Certainty was paramount. Among many of the transactions surveyed as deal makers sought to define their respective rights and obligations as specifically as possible in the face of various contingencies. The effort to achieve certainty can be seen in, among other things, the use of reverse termination fees to address the failure of a financing commitment.
– Strategic transactions borrowed pages from the private equity playbook. Some of the surveyed transactions included terms that historically were more typically associated with private equity transactions, including financing outs and reverse termination fees. However, none of the surveyed transactions included “go-shop” provisions.
– In large transactions, cash remained king even as credit tightened. Despite an expectation that the credit crisis would cause acquirors to favor using stock as consideration, cash-only transactions dominated the survey.
– Fixed exchange ratios continued to dominate stock transactions. In transactions in which stock was all or part of the consideration, the parties almost uniformly opted for fixed, rather than floating, exchange ratios.
– A small number of completed transactions resulted from a hostile approach. Only four transactions of the 50 surveyed were initially rejected by the target’s board of directors after the offers had been made public.
– Tender offer activity increased. Tender offers nearly doubled as a percentage of the surveyed transactions over the two-year period of the survey.
– Broken transactions were infrequent. As of July 31, 2009, all but four of the survey transactions had been completed, an impressive result considering the spate of private equity transactions terminated during the survey period.
– Mergers-of-equals were absent. None of the surveyed transactions were labeled as “mergers-of-equals” by the transacting parties, and none contained all of the traditional attributes of such transactions (such as a “no-premium” offer price for the target’s shares).
The thoughtful analysis below was written a little while back by Nelson Seraci of RiskMetrics’ M&A Edge Research Team:
On September 7th, U.S. food giant Kraft announced a “bear hug” offer for U.K. confectionary company Cadbury. In a typical initial response to an unsolicited offer, Cadbury publicly rejected the offer because it “undervalues the group and its prospects.”
Hostile M&A activity in the United States typically comes down to an argument over whether an unsolicited bid is “fair” enough that target shareholders should get the chance to accept or reject the offer, and whether the target management is seeking to entrench itself, or is deluded in its view of its stand-alone prospects. U.S. takeover battles like Exelon-NRG, Agrium-CF-Terra, and Broadcom-Emulex can end up as proxy fights, with the bidder seeking to take control of the board to dismantle the myriad defenses available to U.S. companies and to nullify state takeover laws that work to prevent shareholder choice.
In the United Kingdom, a target board’s latitude to defend itself against a hostile offer is restricted. Target boards are bound by the “neutrality rule,” which prohibits a board from taking any action that would discourage an unsolicited bid or deny target shareholders the opportunity to decide whether to accept the offer.
There are no poison pills in the U.K., while the thresholds for a shareholder vote on defensive actions like asset disposals or share issuances are quite low. And although the 2006 U.K. Companies Act states that directors must pay regard to the interests of employees, suppliers, consumers and the environment, market practice dictates that such stakeholders’ interests are not typically invoked when rejecting an unsolicited bid.
Unlike in the U.S., where most companies do not allow for shareholders to call a special meeting and many issuers do not allow for the removal of directors without cause, the U.K. Companies Act gives investors the right to call extraordinary meetings with 5 percent or more of the voting share capital and put forward proposals to remove any and all directors. As a result, formal proxy fights at mid- and large-cap U.K. companies extremely rare.
The U.K. Takeover Panel, the government’s takeover watchdog, ensures that the hostile bid process runs smoothly, including issuing upon request a deadline for a bidder to put forth a firm bid or walk away for six months (the so-called “put up or shut up” rule). The Takeover Code does not allow for some conditions present in some U.S. deals (like due diligence or financing conditions) and requires disclosure of all investor holdings (including derivatives) over 1 percent of the outstanding during the takeover period, providing detailed insight into a target’s shareholder base.
The U.K. regulatory system, not surprisingly, leads to a higher probability of a hostile deal closing. Over the 10-year period ending in September 2008, 42 percent of announced unsolicited bids in the U.K. were consummated (40 out of 95), as compared with 33 percent in the U.S. (44 out of 134). This data likely understates the relative impact of the respective regulatory regimes, as it is reasonable to presume that many would-be hostile bidders in the U.S. may be put off from making a bid after private negotiations fail, given the arsenal of defenses available to U.S. targets.
Perhaps U.S. defenses benefit shareholders, however. The median one-day premium paid in completed hostile deals in the U.S. valued over $100 million during the same 10-year period was 38 percent versus 34 percent for hostile U.K. transactions. An open question remains whether this increased average premium in the U.S. offsets forgone transactions due to a more target-friendly regime.
The U.K. regime–by making it clear that a fully financed bid with minimum conditions ultimately will be considered by target shareholders–helps to focus the debate on valuation, rather than on the personal predilections of the target board and management team.
Kraft has not yet made a formal offer for Cadbury, instead opting to issue a bear hug indication of interest, complete with conditions that are unlikely to pass muster with U.K. authorities. At some point, absent a friendly deal, Cadbury is likely to ask the Takeover Panel to force Kraft to submit a formal offer not subject to due diligence or financing conditions. If Kraft fails to submit an offer by the deadline, a cooling-off period will ensue. If Kraft submits a formal offer, the fate of Cadbury will rest in the hands of shareholders.
From our proxy solicitor podcast series, in this podcast, Reid Pearson of The Altman Group provides some insight into option exchange program issues, including:
– Once a company has decided to bring an option exchange program to shareholders, what are some of the first steps they should consider?
– From a proxy voting perspective, what types of issues will institutional investors and the proxy advisory firms (egs. RiskMetrics, Glass Lewis) be looking at when deciding on their vote or recommendation?
– Is it acceptable for an exchange program to recycle the exchanged shares back into the pool of shares available for future grant?
– What kind of fallout would there be if a company does an exchange of underwater stock options, but does not bring the program to shareholders?