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?
Here is something from Kevin Wells of RiskMetrics’ U.S. Research Team (as originally noted in RiskMetrics’ blog):
Though not as prevalent as they once were, shareholder rights plans, commonly referred to as “poison pills,” remain a fixture of the corporate governance landscape, according to a new report from RiskMetrics Group (available for purchase in RMG’s bookstore).
As the global economic crisis took a toll across U.S. and international capital markets over the past year, companies continued to adopt pills, albeit with more shareholder-friendly provisions. Indeed, an analysis of regulatory filings, proxy voting trends, and other data finds that companies are incorporating more shareholder-friendly provisions into their pills; moreover, companies are putting such plans to a shareholder vote in greater numbers than ever before.
Perhaps as a consequence of increased management votes to ratify or adopt pills, shareholder activism, as measured by filings of shareholder proposals to terminate or allow shareholders to vote on pills, has declined. However, those shareholder proposals appearing on ballots generally received high levels of support in 2009, winning majority support at Yum Brands and two other firms.
Amid the recent economic turmoil, 2009 has also seen the emergence of NOL (net operating loss) poison pills, which are meant to protect companies’ tax assets rather than to deter acquisition offers. It was an NOL pill, in fact, that became the subject of controversy in Selectica v. Versata, pending in Delaware Chancery Court, which may significantly affect future uses of pills by Delaware-incorporated companies.
Select key findings from the report include:
– Thirty-three S&P 1,500 companies enacted pills between July 1, 2008, and July 1, 2009. Their average term was 7.6 years, and 10 were for terms of three years or less. Four of those were enacted for a period of 12 months or less.
– The number of S&P 1,500 companies that maintained a pill declined again, falling from 34.5 percent in 2008 to 27.5 percent in 2009. In 2007, 42.5 percent of companies maintained a pill.
– In 2009, 69.2 percent of the S&P 1,500 companies that maintained a pill employed a 15 percent trigger. Another 19.6 percent employed a 20 percent trigger, while 7.9 percent employed a 10 percent trigger.
Last week, Tom Ball gave us the basics in broker nonvote math. In this podcast, David Drake and Rhonda Brauer dig further into the math of revised NYSE Rule 452 – here the worksheet you should print out to follow along – and help you explore some possible ways to get out those otherwise lost retail votes.
Investment banks spend a lot of time tailoring their M&A engagement letters to address the perceived risks involved in advising widely-held public companies. Those engagements are often perceived as presenting greater liability risks than M&A advisory engagements for private companies, and that’s probably true most of the time, but a recent Massachusetts federal court decision provides a sobering reminder to investment banks that this isn’t always the case.
What’s more, the Baker v. Goldman Sachs case – here is the opinion – also shows how some of the provisions of an engagement letter designed to protect bankers in public company deals can under certain circumstances have the opposite effect in a private company transaction.
The Baker case arose out of Goldman’s service as a financial advisor to Dragon Systems, Inc. in connection with its ill-fated sale to Lernout & Hauspie Speech Products, a Nasdaq-listed Belgian company that collapsed in the aftermath of an accounting scandal that surfaced shortly after the deal was completed. L&H acquired Dragon in an all stock deal, and the buyer’s subsequent collapse resulted in a loss to Dragon’s controlling shareholders of approximately $300 million.
Dragon’s two controlling shareholders filed a lawsuit against Goldman Sachs and related entities. The plaintiffs alleged that Goldman Sachs negligently advised Dragon to merge with L & H without adequately investigating the buyer’s value. The plaintiffs made a variety of contractual and other common law claims, including breach of fiduciary duty and negligent misrepresentation, and also alleged that Goldman’s conduct violated the Massachusetts Unfair Trade Practices statute.
With the exception of the novel statutory claim, most of the plaintiffs’ claims were consistent with what you typically see in investment banker liability cases. The most common legal theories used to sue bankers are the tort of negligent misrepresentation, and breach of contract claims premised on agency or third-party beneficiary principles. More recently, breach of fiduciary duty claims have become more prominently featured as well. With some high profile exceptions, investment bankers have generally been pretty successful in defending against these claims.
Plaintiffs relying on negligent misrepresentation or contract law principles premise their claims on allegations that they were intended beneficiaries of the contractual relationship between the banker and the company, and were thus entitled to rely upon the banker’s efforts. Since these claims depend on the contractual relationship between the bank and its client, investment bankers’ engagement letters have played a prominent role in their efforts to fend off such claims. Those letters typically include very specific statements about the parties to whom the investment bank is providing its services, together with broad disclaimers of liability to corporate shareholders or other third parties.
Interestingly, Goldman’s engagement letter with Dragon included customary language intended to accomplish this objective. The letter explicitly stated that “any written or oral advice provided by Goldman Sachs in connection with our engagement is exclusively for the information of the Board of Directors and senior management of the Company.” What’s even more interesting, however, is that the plaintiffs were able to use this language as the basis for their third party beneficiary and negligent misrepresentation claims.
What the plaintiffs did was to simply point out to the court that one of the two controlling shareholder-plaintiffs was a member of the Board, and was thus within the group entitled to the benefits of the agreement. Goldman argued that in using the quoted language, it was referring to the board in its representative capacity. However, the court looked at some other potentially ambiguous phrasing in the engagement letter, including the fact that the letter was addressed to the shareholder-director and the letter’s use of the personal pronoun “you” instead of “the company” in describing the persons to whom it was providing its services, to justify its conclusion that Goldman appreciated that others aside from the board in its representative capacity would benefit from its advice.
The treatment of the plaintiffs’ fiduciary duty claim is another area where the Company’s closely-held nature appears to have played a significant role in the court’s analysis. While the fact that the engagement letter did not include a disclaimer of fiduciary duties played an important role in the court’s decision not to dismiss these claims, the close contact that Goldman allegedly had with the plaintiffs throughout the course of the engagement was another important factor in leading the court to conclude that the plaintiffs sufficiently alleged that “special circumstances existed to create a fiduciary relationship apart from the terms of the contract.”
It is important to keep in mind that Baker involved a motion to dismiss, so this litigation is at a very preliminary stage and it is inappropriate to draw broad conclusions from it. Nevertheless, the Baker case drives home the point that although the risk profile in engagements involving widely-held public companies may generally be higher than private company engagements, private companies (and public companies with controlling shareholders) present distinct risks of their own that banks may want to take into account in drafting and negotiating engagement letters.
In the “Private Equity Law Review” Blog, Steve Vasil has some amusing analysis as he describes the House Financial Services Committee’s hearings on regulating hedge funds, venture capital, and private equity earlier this month. Here is Part II of Steve’s blogging on this topic.
In this recent BusinessWeek article, Frank Aquila of Sullivan & Cromwell does a great job of foretelling our future – and explaining our present – in the world of hostile bids. Just like Lois Herzeca did in this podcast a few weeks back…
Wanna Play 20 Questions? DOJ and FTC Seek Merger Guidelines Comments
Recently, the DOJ and FTC issued these 20 questions to solicit comment on how they should reform their horizontal merger guidelines. As I blogged recently, these agencies seek the first major overhaul of these guidelines in quite some time…