DealLawyers.com Blog

Recently, a PricewaterhouseCoopers survey of top U.S. executives found that 69% expect divestiture activity to increase in 2010, with 56% foreseeing domestic corporate buyers as primary players. At the same time, the survey results show that the divestiture process is growing more complex, creating strong headwinds for potential sellers. Of the respondents who have completed transactions in the past 12 months:

– 72% said the divestiture process has taken longer to complete
– Of those, 51% said they had taken at least 20% longer to conclude and an additional 21% said completions had taken at least 10-20% longer than in prior years.

Here are other findings:

– Buyer requirements for more due diligence information were the primary reason cited by 75% of the respondents for the prolonged timeframe.

– 43% reported that potential buyers are asking for some additional information and access, and an additional 32% said buyers were requiring extensive additional information.

– When those who reported divestiture activity in the past 12 months were asked to rate the importance of having audited financial statements available for a divestiture target, 49% said it had become more important now than in previous markets and 27% referred to it as “critical.”

– In general, companies appear to struggle with the divestiture process. When asked to compare their organizations’ acquisition and divestiture processes, 46% of all participants said their acquisitions process was better-defined. In addition, 39% said they had no formal pre-divestiture review process that was performed consistently.

– When asked to identify the most complex part of a divestiture, especially a carve-out, 25% selected finding a buyer, followed by executing the separation of the business (23% ), and producing carve-out financial statements and re-casting historical results (21%).

– Valuations remain a moving target and a significant factor contributing to the stagnant M&A market: 90% placed the value expectation gap between buyers and sellers in 2009 at between zero and four turns of EBITDA. Interestingly, half of the respondents (50%) identified corporate domestic buyers as the predicted source of higher valuations in the coming year.

This news comes from Bernard Amory and Filippo Amato of Jones Day:

Last week, the President of the European Commission, José Manuel Barroso, unveiled the designated team of 26 new Commissioners who, if confirmed by the European Parliament, will serve for the next five years term, until October 2014. Joaquín Almunia, 61 – a Spanish socialist and currently EU Commissioner for economic and monetary affairs – has been designated to be EU Commissioner for Competition Policy and a Vice-President of the Commission.

Mr. Almunia will replace the current EU Competition Commissioner Neelie Kroes, who has been designated to be Commissioner for the “Digital Agenda,” with a portfolio covering telecoms and information and communication technology policies. Working closely with the new commissioner will be Alexander Italianer, who was named as Philip Lowe’s replacement as director general of the Commission’s Directorate General for Competition. Italianer is a Dutch economist and former deputy head of President Barroso’s cabinet.

Mr. Almunia began his career as chief economist for a Spanish trade union and entered the Spanish Parliament in 1979. He studied law and economics in Spain, completed follow-up work in Paris, and studied in the U.S. at the Kennedy School of Government at Harvard University. Mr. Almunia held two ministerial posts in Spain, between 1982 and 1986 as Minister for employment and social security, and between 1986 and 1991 as Minister for public administration. Before joining the Commission in 2004, he was leader of the Spanish socialist party between 1997 and 2000 and candidate for Prime Minister in Spain in 2000.

Commission’s officials who have worked closely with Mr. Almunia say he is a competent and reflective person, who “likes to get into the details of his dossiers” and carefully listens and evaluates pros and cons before making any important decision. Several persons inside the Commission have stated that, due to his solid economic and legal background, he will be able rapidly to familiarize himself with the competition portfolio and gain the confidence of the services that report to him.

In his new job, Mr. Almunia will have to address numerous ongoing matters inherited from his predecessor in the areas of cartels, abuses of dominant position, private enforcement, distribution agreements, mergers and acquisitions, and state aids.

Cartels and abuses of dominance

Commissioner Kroes’ time in office will be remembered for a spiral of ever-higher fines for cartel conduct and abuse of dominant position. In February 2008, Ms. Kroes imposed a €899 million penalty on Microsoft for non-compliance with its obligations under the Commission’s 2004 abuse of dominance decision against the company. Also in 2008, she imposed the highest-ever cartel fine (€896 million) against a single company, Saint Gobain. In May 2009, she levied a record €1.06 billion fine on Intel for abuse of a dominant position by allegedly shutting out rival AMD. Commission officials knew that, when presented with two alternative fines, Ms. Kroes invariably would choose the higher. As Competition Commissioner since 2004, Ms. Kroes has levied more than €9,000,000,000 in cartel penalties against companies from around the world.

A fine is the Commission’s only instrument to punish violations and deter antitrust infringements (criminal and personal sanctions not being available under EU competition law). However, Kroes’ tough approach has attracted some criticism towards the end of her mandate. Certain members of the European Parliament have openly stated that high fines are inappropriate in the current economic environment, because they endanger the viability of companies and may have negative effects on the growth and jobs agenda. Another recurrent criticism is that companies do not really get a fair trial in EU antitrust cases, because the Commission alone investigates, prosecutes, and decides cases and fines.

Due to these criticisms, and to his political and trade-unionist background, some commentators believe that Mr. Almunia might be more sensitive than his predecessor to social and job-related concerns in making cartel and abuse of dominant position enforcement decisions.

Private enforcement

Another challenge Mr. Almunia will have to face is in the area of private enforcement. In October 2009, the consideration of Commissioner Kroes’ proposed directive on “collective redress” or “private damages actions” was postponed by President Barroso due to pressure from European Parliament members who considered the new regime excessively burdensome on business without sufficient counterbalancing benefits for consumers. It will have to be seen whether Mr. Almunia will push for the adoption of a similar directive or will make substantial amendments to overcome the European Parliament’s concerns.

Vertical restraints

The current EU regulation establishing “safe harbors” from the application of EU competition law for certain categories of vertical agreements is due to expire in May 2010. Consequently, the adoption of a new regulation in this area will be one of Mr. Almunia’s most delicate and important tasks as new EU Commissioner for competition.

In July 2009, the Commission announced its intention to revise the EU competition rules applicable to vertical restraints and launched a public consultation on a proposed new regulation and a new set of guidelines on vertical restraints. The Commission’s proposed amendments in the area of internet sales have generated a heated debate between online commercial platforms and luxury goods producers. For example, online sellers oppose any safe harbor for restrictions on internet sales (such as suppliers requiring distributors to have a brick-and-mortar shop before engaging in online distribution), and producers advocate greater freedom to set standards for online sales of their luxury branded products.

One of Mr. Almunia’s most difficult task in this area will be to strike the right balance between these opposing interests without losing sight of the ultimate goal of competition policy, the interest of consumers.

Mergers

Former Competition Commissioner Mario Monti will be remembered not only for his decisions to prohibit mergers in high profile cases, such as the proposed merger between U.S. companies General Electric and Honeywell, but also for the number of merger decisions that were annulled by the European courts during his term (such as Schneider/Legrand and Tetra Laval/Sidel). Following this relatively negative record, Ms. Kroes’ approach to mergers has been particularly cautious. Indeed, during her five years term, Ms. Kroes has blocked (so far) only two out of some 60 proposed mergers that raised serious enough concerns to be taken to “phase two” investigations.

As a result of the economic crisis, consolidations are expected to occur over the coming years in various sectors, and “failing firm” and “efficiency” defenses may play an increasingly important role in merger review proceedings.

State aids

During the financial crisis, President Barroso set up a steering group composed of himself, Commissioner Almunia, Commissioner Kroes, and Commissioner McCreevy. Commission sources report that Mr. Almunia played an important role in making sure that EU state aids rules in the banking sector would be applied as flexibly as possible to maintain the EU’s financial stability. It can therefore be expected that he will also pursue this approach in his new capacity.

President Barroso has also announced that the new Competition Commissioner will be responsible for the assessment of state aids in the transport and energy sector, which are currently within the respective portfolios of the Commissioner for Energy and the Commissioner for Transports.

Next steps

The new Commission must be approved by the European Parliament before it takes office. Commissioners-designate will appear in individual hearings before Parliamentary committees from 11-19 January 2010. On this occasion, Mr. Almunia’s agenda as EU Commissioner for competition may become more clear. The vote of consent on the new Commission as a whole is foreseen to take place on 26 January 2010. On the basis of the vote of consent, the Commission shall be appointed by the European Council. Then it will start working.

– by John Jenkins, Calfee Halter & Griswold

English may be the first language of business, but when it comes to M&A, you won’t get very far without a thorough grounding in the unique English dialect known as “Bankerspeak.”

Bankerspeak owes its existence in large part to the most productive jargon generation machine ever invented: the American business school. (Whatever else they’ve accomplished, business schools have been teaching future MBA’s to “proactively leverage synergies” for more than a century!) But Bankerspeak also couldn’t exist without significant contributions from marketing consultants, who’ve helped professionals learn to frost their b-school jargon with a heavy coating of smarminess.

Now, before the bankers in the audience get all huffy, let me concede the obvious point that lawyers take second place to no profession when it comes to generating incomprehensible gibberish. But, our crimes against the English language tend to be in written form, while the bankers’ offenses are almost always verbal.

The biggest reason for the difference between the professions on this point is the extraordinary efforts that law schools make to transform literate liberal arts graduates into the “legal literati.” If, like most lawyers, you were a liberal arts major, then chances are you were a pretty decent writer when you went to law school. Come to think of it, if you were a liberal arts major, chances are that the ability to write an English sentence was about the only skill you had, which is why you ended up in law school in the first place.

But I digress.

Anyway, if you saw someone get off a bus and cross the street prior to your first legal writing class, you would probably have written the following description of what you saw: “I saw a woman get off the bus and cross the street.” After you took legal writing and joined the legal literati, that description probably looked more like this: “I observed a female (the “Person”) egress the multi-passenger vehicle (sometimes hereinafter referred to as the “Bus”) and traverse the thoroughfare.”

The other reason that Bankerspeak tends to be a spoken dialect is that most bankers wouldn’t be caught dead actually drafting something that didn’t consist almost exclusively of numbers. This is actually okay, because most lawyers can’t do math well enough to balance a checkbook.

At any rate, Bankerspeak is pretty ubiquitous in the transactional world, and those who aren’t fluent in it are at a real disadvantage. So, as a public service, here’s a handy guide to interpreting some commonly used Bankerspeak phrases:

– Bankerspeak: It’s a turnaround scenario, but we’re very high on management.
– English: The business looks like the 21st Century answer to Penn Central, but the CEO plays golf with one of our Managing Directors.

– Bankerspeak:This deal is very time sensitive.
– English: I leave for the Caribbean in two weeks.

– Bankerspeak: We understand your concern, and we’ll leave that as an open issue for now.
– English: No.

– Bankerspeak: At this point, how visible are the assumptions behind your projections?
– English: Seriously, do you have any idea what you’re talking about?

– Bankerspeak: We need you to give some thought to our position on this issue
– English: Think of me as the Voice of God.

– Bankerspeak: The market is a little choppy right now. We may want to wait until things settle down.
– English: Your deal is dead.

– Bankerspeak: We view this as potentially a positive from a marketing standpoint.
– English: Your deal is dead, but we haven’t figured out how to break the news to you yet.

– Bankerspeak: There’s a lot of hair on this deal.
– English: I’m impressed. You must have really worked overtime to screw the company up this badly.

– Bankerspeak: We need to give some thought to the optics of this.
– English: My God, this looks horrible! Your business ethics would make Bernie Madoff blush.

I don’t care what William Shatner says — Bankerspeak is the real “language of the deal!”

Since every company should now consider addressing walkaway numbers in this year’s proxy statements, we have devoted the “Fall ’09 issue of Proxy Disclosure Updates” to analyzing how to draft this type of disclosure. We even provide a model walkaway disclosure in this critical issue.

You will receive this issue, which is posted on CompensationDisclosure.com, by taking advantage of a no-risk trial to Lynn, Borges & Romanek’s “Executive Compensation Service” for 2010 (which includes the 2010 version of Lynn, Borges & Romanek’s “Executive Compensation Disclosure Treatise and Reporting Guide” that we mailed last week to those that ordered the Service).

Act Now: As part of the Lynn, Borges & Romanek’s “Executive Compensation Service,” if you try a no-risk trial now, not only will you receive the walkaway issue described above and the 1000-page plus Executive Compensation Disclosure Treatise, you will also receive the Winter issue of Proxy Disclosure Updates – with important new proxy disclosure guidance – soon after the SEC adopts its new executive compensation rules (which could happen as early as the first weeks of December).

BreakingViews had this interesting article in the NY Times on Wednesday entitled “This Poison Pill Aids Investors.” You may also want to check out this blog entitled “The Wrong Prescription? Revisiting the Justification for Poison Pills” from Mark Lebovitch and Laura Gundersheim of Bernstein Litowitz Berger & Grossmann.

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.

In this podcast, Professor Steve Davidoff discusses his new book “Gods at War: Shotgun Takeovers, Government by Deal and the Private Equity Implosion,” including:

– 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?

Yesterday, Corp Fin’s Office of Mergers & Acquisitions issued these two new Section 5 CDIs:

– New Question 139.29 (registered debt exchange offers and executing lock-up agreement with note holder before filing registration statement)
– New Question 139.30 (negotiated third-party exchange offer and acquiror executing lock-up agreement before filing registration statement)

And there was also activity on this page of outdated/superseded CDIs (one item added and one removed)…

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.

VCL: My pleasure. Thanks for inviting me.

Here are some of the finer points from a recent Dykema “2009 M&A Outlook Survey“:

– 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.