Recently, IR Magazine ran this article about tag-along activists, which features a study by Glenn Curtis of Thomson Reuters. Glenn looked at recent campaigns and the buying activity around the time they were launched. Target companies studied were Biogen, Yahoo, Motorola, Target, Wendy’s and TD Ameritrade. Curtis’ advice is to always communicate with activists – and their tag alongs. “If nothing else, it gives an IRO a feel for where the campaign is heading.”
The study notes these lead activists and possible tag alongs:
– Barington Capital – Benchmark, Clinton, DB Zwirn, Ramius
– Carl Icahn -TIAA-Cref, Highfields Capital, JANA Partners, SAC, Sandell
– The Children’s Investment Fund – 3G, Atticus
– JANA Partners – SAC, Third Point
– Pershing Square – Greenlight Capital, Third Point
– Pirate Capital – Steel Partners
– Sandell – JANA Partners
– Third Point – David Knott, Jason Aryeh, JPMorgan Ventures
– Trian – Pershing Square
Thanks to Jim McRitchie and his CorpGov.net for pointing this article and study out!
Over the past few months, we’ve posted a total of five blogs telling stories about deal cubes and deal closings (here’s the latest one). Below is another story from a member about IPO closings (heartening to hear since there’s been a dearth of these deals over the past year):
Who says IPO closings can’t be eventful. On my first IPO (circa 1983 or 84), we were at the closing at Wertheim’s office in the Pan Am Building. The CFO takes a $400 million check from the underwriters (wire transfers were too unreliable back then). He leaves with his commercial banker to deposit the check and the lawyers stay behind to stack up documents.
The CFO returns 10 minutes later, ashen-faced, having lost the check! It was eventually returned a couple hours later – someone had found it on the floor in Grand Central Terminal. In the meantime, we dealt with such questions as to whether we had to call a board meeting to authorize the CFO to give an indemnity for the lost check or whether that was covered by the boilerplate “and such other actions” authority in the board resolutions; and whether a firm partner would give a legal opinion to that effect. Ah, them’s the days.
The recent abandonment of the Endocare Inc./Galil Ltd.merger highlights the potential for antitrust scrutiny of transactions even if they are not subject to Hart-Scott-Rodino pre-merger review. As descrived in this Cahill Gordon memo, Endocare announced in June that it was terminating its proposed merger with Galil – midway through the FTC investigation. Although the transaction was not reportable under HSR, the companies appear to have received subpoenas from the FTC seeking information not unlike that typically sought by a “second request.”
Although it doesn’t happen often, nonreportable transactions can be investigated by the antitrust enforcement agencies if the agencies become aware of the transaction and perceive a potential antitrust concern. This case also highlights the importance of early identification of any antitrust issues, the allocation of antitrust risk among the parties and the negotiation of the terms of the parties’ conduct in response to any investigation or other challenge prior to closing a merger.
Not long after the abandonment of the Endocare/Galil merger, Endocare announced that it had enetered into a merger agreement with HealthTronics. Galil sued Healthronics in the Delaware Chancery Court for tortuous inference of its merger agreement. That litigation was recently settled out of court.
Recently, the FTC fined a CEO $1.4 million for failing to make a filing under the Hart-Scott-Rodino Act after he purchased company stock when he exercised options. Sounds crazy, right?
Apparently, it’s not so crazy – it has long been the position of the FTC that the HSR Act is applicable to any acquisition of voting stock, including an acquisition by an individual, that exceeds the HSR’s jurisdictional thresholds. Below is a summary and analysis of the case by Davis Polk:
The Federal Trade Commission recently fined John C. Malone, CEO and Chairman of Discovery Holding Company, $1.4 million to settle allegations that he violated the Hart-Scott-Rodino Antitrust Improvements Act in connection with acquisitions of Discovery shares in 2005 and 2008. The FTC alleged that Malone failed to file the notice required by the HSR Act in 2005 after making a reportable acquisition of Discovery shares, made a corrective filing in June of 2008, but subsequently acquired, via an exercise of two options, additional Discovery shares before the expiration of the required waiting period which followed the submission of the June 2008 corrective filing. As described below, this case holds several important lessons, including:
Even if a person has lawfully made prior acquisitions of shares of an issuer, the person may have to make an HSR filing before completing additional incremental acquisitions of shares.
The FTC’s informal interpretations of the HSR rules may change over time, and practitioners need to keep informed of these changes.
Depending upon the circumstances, the FTC may object to the use of an escrow account to permit a transaction to close prior to expiration of the HSR waiting period (with shares delivered into escrow). It is strongly advised to consult with the FTC’s Premerger Office before using an escrow arrangement as a means of closing a transaction prior to the expiration of the waiting period.
Background
The HSR Act requires parties to mergers and acquisitions that exceed certain jurisdictional thresholds to make filings with the FTC and the Department of Justice (“DOJ”) and to observe a waiting period before closing. In this case, Malone previously held shares of Discovery, but it was the additional acquisitions, when aggregated with current holdings, that gave rise to the filing requirement.
The Commission’s press release, which includes a link to the complaint, can be found here. From the release: “The HSR Act and its filing requirements are well-known to companies and individuals making acquisitions. The significant civil penalties imposed here should reinforce the need to fully comply with the Act, including observing the waiting period,” said Marian Bruno, Deputy Director of the FTC’s Bureau of Competition.
Factual Allegations
As stated in the FTC’s complaint, Malone, in May of 2005, properly filed under the HSR Act for an acquisition of shares of Liberty Media Corporation (“Liberty”), and observed the waiting period prior to that acquisition. Two months later, Discovery was spun off from Liberty, and voting securities of Discovery were distributed pro rata to Liberty shareholders. The receipt of Discovery shares by Malone, as a result of the spin-off, was exempt from HSR Act reporting.
In August 2005, however, Malone purchased additional shares of Discovery on the open market. According to the FTC, a new filing should have been made in connection with this acquisition because (i) Discovery was, at that time, its own “ultimate parent entity,” and (ii) the sum of the value of Discovery shares already held by Malone and the value of the new shares acquired exceeded the initial HSR Act filing threshold (then $53.1 million). No such filing was made. As the FTC alleged, no exemption from filing was available based upon the fact that Malone previously filed for acquiring a minority stake in Discovery’s parent prior to its spin-off. Malone completed that August 2005 Discovery stock acquisition, and continued to make additional acquisitions of Discovery stock through April 2008, without ever filing for an acquisition of such stock.
In June 2008, Malone made a corrective filing for these prior acquisitions of Discovery stock. After making this, but before the waiting period which followed that corrective filing expired, Malone acquired, via two stock options, additional stock of Discovery.
Of particular interest within the FTC’s complaint for the alleged failure to make a timely HSR notification are:
Malone made a prior corrective filing for an “inadvertent” HSR Act filing violation, though that corrective filing was made in May of 1991.
In a letter explaining the reason for the failure to file in August 2005, Malone referenced a 2001 informal interpretation of the Premerger Office of the FTC which appeared to support the view that no filing was required. However, this informal opinion was disavowed in February 2005 by another informal opinion. Malone stated in the letter that neither he nor counsel on his behalf discovered the subsequent opinion. (The subsequent opinion was available only at the FTC’s website.)
Malone attempted to place the shares obtained via the two option exercises in escrow pending expiration of the waiting period following the June 2008 corrective filing. (The options were scheduled to expire before the termination of the HSR waiting period.) In the FTC’s view, however, the escrow arrangement was insufficient to insulate Malone from obtaining beneficial ownership of the shares immediately upon exercise of the options. The complaint further stated that neither Malone nor counsel contacted the Premerger Office to clear the mechanics of the option exercise and escrow arrangement prior to the expiration of the relevant waiting period.
The $1.4 million fine was approximately 1/8th of the maximum amount for his violation of the HSR Act. Specifically, Malone was deemed to be in violation of the HSR Act from August 9, 2005, the day of the first post spin-off open market purchase of Discovery stock, to July 14, 2008, the day on which the waiting period applicable to his June 2008 corrective filing expired. His maximum fine would have been approximately $11.7 million ($11,000 per day).
Leveraged buyouts of companies by private equity consortia – also known as private equity club deals – often capture the headlines and the imagination of the business press. Buyouts that demand substantial equity investments, such as the $900 million injected into the failed Florida lender BankUnited Financial by a private equity group that included WL Ross & Co., the Carlyle Group, and Blackstone, often require several private equity firms to club together to come up with enough capital. Besides the large equity investment required, what distinguishes club deals from garden-variety leveraged buyouts is the need for multiple firms to agree on how the transaction will be managed. In this post, we’ll take a look at some of the chief terms of interim investor agreements among members of a private equity consortium.
Interim investor agreements for private equity consortia are by their nature temporary: the agreement terminates either upon the successful closing of the transaction or the deal’s termination in accordance with the share or asset purchase agreement. If the transaction proceeds as planned, an interim agreement details the steps that need to be taken to complete the deal and lays down the groundwork for how the business will be operated after closing. On the other hand, an interim agreement specifies how the consortium’s members will allocate responsibility for transaction costs and other liabilities, such as reverse break-up fees, should the deal founder. The agreement is signed on the same day the private equity funds sign their respective equity commitment letters, the banks issue their debt financing commitment letters, and the consortium’s shell acquisition vehicle, or “Newco,” enters into the purchase agreement with the target company.
A few of the principal matters typically covered in an interim investor agreement include:
Pre-Closing Agreements and Covenants
The members of the private equity consortium agree to cooperate with one another to resolve any outstanding issues with the target company, negotiate definitive loan agreements with the consortium’s lenders, execute employment agreements with the future management of Newco, and nail down any other final terms and conditions. In addition to approving the purchase agreement and other transaction documents, the private equity firms memorialize their consent to the proposed transaction structure, usually by reference to the pre- and post-closing organizational charts of Newco and its subsidiaries prepared by the consortium’s accountants. If the target is a public company, the members promise to comply with all applicable securities laws and to file all necessary documents with governmental authorities, such as filings under the Securities Exchange Act’s Regulation 13D disclosing beneficial ownership interests.
Finally, the private equity firms confirm how Newco will be managed during the period between the signing of the purchase agreement and closing. The interim investor agreement identifies the number of representatives from each of the consortium’s members appointed to Newco’s interim board of directors, usually in proportion to their respective equity investments. Each of the private equity funds indemnifies (on a pro rata basis) and holds harmless Newco’s interim board of directors from any claims or other liabilities arising from any error or omission by a director. Directors appointed to Newco’s interim board are likely to become named defendants in any future lawsuit regarding the transaction, whether the plaintiff is a consortium member, one or more of the financing banks, or the target company or its shareholders.
Definitive Investors’ Agreement
The private equity sponsors agree to negotiate a definitive shareholders’ agreement promptly after the transaction closes and may identify any special tax or ERISA matters (in the case of a public company) that need to be addressed in the definitive agreement. Most important, this section of the interim agreement incorporates by reference the private equity consortium’s investor term sheet, which summarizes the principal terms of the future definitive shareholders’ agreement.
Advisers’ Fees and Transaction Costs
The interim investment agreement also handles the allocation of transaction fees among the private equity firms’ advisory arms and how transaction costs (including liabilities from potential lawsuits) will be handled both in the event the deal closes and in the event the deal is terminated. Upon completion of the deal, the advisory arms of the private equity firms that sourced the deal receive a transaction fee that usually reflects their proportionate ownership interests in Newco.
The agreement also specifies how the consortium’s financial, accounting, legal, and other advisers will be paid. If the deal closes successfully, the interim agreement provides that Newco picks up the private equity consortium’s advisers’ fees and expenses. The way advisers are paid in the event of a failed deal turns on whether or not the consortium is entitled to a break-up fee from the target. If there is no break-up fee in the purchase agreement, the private equity firms will share costs on a pro rata basis. If there is a break-up fee under the purchase agreement, then the amounts received will be applied first to pay the advisers’ fees and expenses and other transaction costs, with the remainder being distributed among the private equity firms. If the deal is terminated because one of the private equity funds fails to finance its equity commitment, the defaulting private equity firm will indemnify the non-defaulting firms and be liable for all transaction fees, expenses, and other liabilities.
A private equity consortium’s interim agreement typically also requires confidentiality and specifies whether disputes will be resolved through arbitration or judicial process. In our next post, we’ll explain how interim investor agreements address the consortium members’ equity syndication procedures.
A recent survey – the Distressed M&A Outlook – by mergermarket, Carl Marks Advisory Group and Pepper Hamilton interviewed 75 investment bankers, private equity practitioners, hedge fund investors and lawyers about their predictions for distressed M&A activity in the upcoming year. The survey found that 92% of the respondents believe that the current economic downturn will offer more discounts on distressed assets than previous downturns – bringing both strategic and financial buyers to the market in the coming months.
Other interesting data points include that the majority of respondents (63%) believe that more distressed deals will take place outside of the bankruptcy court than in the bankruptcy court – and that real estate and financial services are thought to be the two industries offering the most opportunities for distressed deals. For more on distressed deals, see our “Distressed Targets” Practice Area.
Recently, the mass media has been noticing the rising use of automated advocacy calls that companies sometimes use to help bring in the vote (recall the rising use of these calls for political elections over the past decade). For example, see this Forbes’ article. This negative attention illustrates the tightrope that companies – and their proxy solicitors – will walk next year when broker votes disappear and the need for these calls increases by a factor of five.
To learn more about automated advocacy calls, I caught up with Tom Ball of Morrow & Co. in this podcast so he could tell us about the latest trends using these voicemails, including asking him:
– What are these automated advocacy calls? How common are they?
– How are the calls best used?
– How much do they cost?
– Who gets hired to do the “voiceovers” for the calls?
I also posted some samples of these voicemails in case you have never heard one: here is one sample voicemail – and here’s another sample).
Yesterday, I blogged about Delaware Vice Chancellor Lamb’s last opinion. As VC Lamb heads to private practice at Paul Weiss, Francis Pileggi does an excellent job of analyzing who may be tapped to replace him in his “Delaware Corporate & Commercial Litigation Blog.” Check it out for the rumors…
Also check this out: Katrina Dewey of Lawdragon writes an interesting piece on three judiciary rock stars – Richard Posner, Leo Strine and Myron Steele – entitled “Delaware’s Art of Judging.”
As one of his last acts before moving on, Delaware Vice Chancellor Lamb issued a noteworthy decision in Louisiana Mun. Police Employees’ Ret. Sys. v. Fertitta, 2009 WL 2263406 (Del. Ch.; 7/28/09), upholding challenges to a special committee’s decision to terminate a merger agreement and not block a CEO’s open-market purchases to acquire control of the company.
Background
Fertitta arose from Landry’s Restaurants’ failed go-private transaction led by its CEO, who owned 39% of the company prior to the deal. After the merger was announced, some of the company’s Texas locations were damaged by a hurricane. The CEO immediately claimed that his lenders would declare an MAE if the transaction was not renegotiated. The company’s special committee agreed and reduced the merger consideration and the reverse termination fee. In exchange, the CEO negotiated with his lenders and obtained their commitment to refinance the company’s existing debt if the merger wasn’t consummated.
After the renegotiation, two key events took place. First, the CEO made open-market purchases of Landry’s stock, increasing his stake from 39% to 56.7%. Second, the SEC requested additional disclosures about the CEO’s acquisition financing. The lenders refused to consent to the disclosures, so the company terminated the merger agreement. The special committee claimed that by terminating the merger agreement, it preserved the lenders’ obligation to refinance the company’s existing debt – though it also relieved the CEO from paying a $15M reverse termination fee under the merger agreement.
Opinion
The Court of Chancery upheld all claims against the CEO and special committee based on the following three factors: “(1) [the CEO’s] negotiation (and the board’s acquiescence to his taking that role) of the refinancing commitment on behalf of the company as part of the amended debt commitment letter; (2) the board’s apparent and inexplicable impotence in the face of [the CEO’s] obvious intention to engage in a creeping takeover; [and] (3) the board’s agreement to terminate the merger agreement, thus allowing [the CEO] to avoid paying the $15 million reverse-termination fee.”
The decision could rest almost exclusively on the CEO’s status as controlling stockholder, which gives rise to a per se rule of entire fairness review because of the potential for undue influence. For purposes of a motion to dismiss, the court viewed the CEO’s management position plus 39% stock ownership sufficient to demonstrate actual control over the corporation. The CEO then obtained true majority control through his stock accumulation by the time Landry’s terminated the merger agreement.
Nevertheless, the court seems to have been particularly struck by the substantive decisions allegedly made by an independent and disinterested special committee. Even if the CEO did not have “controlling stockholder” status, the allegations of disloyal conduct were likely sufficient to rebut the business judgment rule. The “Deal Professor” Blog chronicled problems with this transaction last October in this blog – and again this January in this one.
Upholding the waste claim is particularly unusual and could have been decided differently, by finding that the board exercised its discretion to secure a $400 million refinancing by forgoing a $15M reverse termination fee. This is the second notable waste claim to go forward in Delaware in the past few months (see Citigroup, refusing to dismiss a waste claim challenging an outgoing CEO’s severance package).
The court’s criticism of the CEO’s open-market purchases is more straightforward. The court confirmed there is no per se rule that directors must adopt a particular defensive measure in response to an accumulation of shares. However, this case presented a CEO who obtained majority control without paying a premium. That, along with other allegations of “suspect conduct,” supported a “reasonable inference at the motion to dismiss stage that the board breached its duty of loyalty in permitting the creeping takeover.” It’s unclear whether the special committee spotted this issue before agreeing to the merger agreement, which may have had covenants barring adoption of a rights plan. The ability of stockholders to obtain a control premium later will be a significant damages issue at trial. Earlier this year, in Loral, the court nullified the voting rights of preferred stock that was issued in breach of the board’s fiduciary duties.
Lastly, the decision highlights some ongoing disclosure issues relating to buyer-financing. When the M&A markets return, this may be an area of increased SEC oversight. If so, the ability to invoke legal “outs” to provide information will be important as long as commitment letters are not publicly disclosed. Here, the court was skeptical that the banks could have walked rather than consent to the additional disclosures, noting that “such commitment letters generally contain an exception to any confidentiality clause to the extent disclosure is required by applicable law.”
Kevin Miller’s recent blog on Berger v. Pubco touched on a recurring topic of discussion in the Delaware courts – the extent to which projections need to be disclosed to shareholders in connection with a merger. Delaware courts have spent a lot of time on this issue, but it’s a topic on which their decisions have shed plenty more heat than light.
Questions about projections frequently are raised in connection with claims concerning the overall adequacy of fairness opinion disclosure. It is probably fair to say that Vice Chancellor Strine’s view in Pure Resources that shareholders are entitled to a “fair summary” of the investment banker’s work has been accepted by other members of the Chancery Court, but what a “fair summary” requires in terms of disclosure about projections is an issue that the judges have really struggled to resolve. Their struggles are reflected in a series of opinions that involve a lot of hair-splitting and not much in the way of useful guidance.
Unfortunately, the Delaware courts do not appear to have an easy way out of this messy, ad hoc approach to projection disclosure, and M&A lawyers are likely to struggle with very murky guidance on this topic for quite some time. That raises a question: just exactly how did Delaware get into this situation in the first place?
The roots of Delaware’s projections problem go back to the mid-1980s, and specifically to a case called Weinberger v. Rio Grande Indus., Inc., 519 A.2d 116 (Del. Ch. 1986). In that case, the Chancery Court adopted the Third Circuit’s test for determining whether projections need to be disclosed. In Flynn v. Bass Brothers, 744 F.2d 978, 988 (3d Cir 1984), the Third Circuit held that for purposes of the federal securities laws, the existence of a duty to disclose projections should be determined on a case-by-case basis “by weighing the potential aid such information will give a shareholder against the potential harm, such as undue reliance, if the information is released with a proper cautionary note.”
The Flynn court’s take on disclosure of projections represents a minority position among federal circuit courts. Most appellate courts that have addressed the issue take the position that the federal securities laws do not impose an obligation upon an issuer to disclose projections. See, e.g., Glassman v. Computervision, 90 F.3d 617, 631 (1st Cir. 1996). The Sixth Circuit, which probably continues to reflect the view of most circuit courts that have addressed the issue, has criticized the Third Circuit’s standard, noting that it is “uncertain and unpredictable judicial cost-benefit analysis.” In the Sixth Circuit, soft information is only required to be disclosed if it is “virtually as certain as hard facts.” Starkman v. Marathon, 772 F.2d 231 (6th Cir. 1985).
Obviously, the disclosure gurus among our readers know that I’m painting with a very broad brush here, and there are a number of nuances that can result in exceptions to the “majority view” that disclosure of projections is not required. What’s more, as a practical matter, the SEC Staff will frequently push for disclosure of information about projections if it is not contained in a summary of the fairness opinion including in a merger proxy statement.
My point is only that by adopting the Third Circuit’s position as the starting point, the nation’s most influential state corporate law court has adopted the least influential federal approach to the issue of disclosure of soft information, and the consequences of that decision for M&A litigation have been far reaching. In fact, it seems fair to say that adoption of the facts and circumstances-based Flynn standard made the subsequent unpredictability of Delaware’s case law on projections almost inevitable. What’s more, adoption of that standard also guaranteed that there would be plenty of cases in which disclosure of projections would be at issue.
In order to understand why both of these outcomes were likely, you need to appreciate that disclosure litigation in Delaware offers some real advantages to a plaintiff to begin with. The business judgment rule does not protect against disclosure claims, because a decision about disclosure is not “a decision concerning the management of the business and affairs of the enterprise.” In re Anderson, Clayton Shareholders Litig., 519 A.2d 669 (Del. Ch. 1986). Disclosure claims have proven to be an effective way for plaintiffs to obtain an injunction against a pending merger transaction, which maximizes their potential leverage in negotiating a settlement.
When you add Flynn‘s plaintiff-friendly disclosure standard into the mix with the existing advantages of disclosure litigation, you can see why disclosure of projections is raised as an issue in so many M&A cases. There seems to be no reason to expect that the Delaware courts will see less of these cases in the years to come and, unfortunately, there also seems to be no reason to expect that these new cases will provide clearer guidance on when projections will need to be disclosed or how much will need to be said about them.