As a follow-up to the excellent piece by John Jenkins, I thought the following point worth noting:
Under Pure Resources, any shareholder of Genentech should be able to get Roche’s tender offer enjoined until Genentech publicly discloses a summary of the financial analyses of Goldman Sachs underlying Goldman Sach’s inadequacy opinion on which the Genentech special committee relied in recommending that shareholders not tender their shares into the Roche offer.
That result was intended by the Pure Resources court to force the Pure Resources special committee to disclose the valuation ranges indicated by its financial advisors’ analyses so that shareholders could make an independent decision based on that analysis whether to tender or not. The Pure Resources court argued that because the special committee failed to obtain the right to implement a poison pill (just imagine the likelihood that Roche’s representatives on the Genentech board would authorize an independent special committee of Genentech directors to implement a pill), the special committee had no negotiating leverage and forcing the special committee to disclose its reserve price would not have adverse consequences, as shareholders were being left to their own devices and it was their reserve price that mattered.
The Pure Resources court’s ruling was problematic for a number of reasons including, among other things, that the court, rather than mandating that the special committee disclose a summary of its financial advisors’ valuation analyses, enjoined the offer, essentially playing into the hands of a spec. comm. recommending against the offer by giving them the ultimate defensive device, a judicial injunction.
So long as the Genentech special committee is not satisfied with the price offered by Roche, it should refuse to disclose a summary of GS’s financial analyses and welcome shareholder suits seeking to enjoin the offer on the basis of inadequate disclosure. For additional – and more detailed – criticisms of the Pure Resources decision, see my article.
Recently, I blogged about the potential demise of the deal cubes and asked people for their stories (as well as conducted a deal toy poll, which is still ongoing if you want to vote). My own tale to tell is a woman I know who took a bunch of cubes to tile her bathroom walls. It actually looked pretty cool.
Here is a story from Bob Dow of Arnall Golden Gregory: As an associate in 1995 worked on an IPO for Moovies, a video chain, sort of mini-Blockbuster. Interesting deal cube, actually it was shaped like an old fashioned movie reel. Only the problem was, of course, even in 1995 no one was still handling the old reel-to-reel movies anymore, they were all video tapes. Fortunately when we did the secondary the next year, the underwriters (Needham) updated and gave us a deal toy in the shape of a VCR tape.
Here are some thoughts from a member who wished to remain anonymous: When I was a new associate, it was nice to receive one at the conclusion of a deal. Whatever it looked like (whether it had moving parts or just a tombstone in lucite), it felt good (to believe) that I was being acknowledged (by the powers that be) as a contributor to the team that closed the deal.
For me, after receiving a number of deal toys, the desire to receive more quickly vanished. Although a number of the toys were quite a novelty, they took up precious space in my office that was better served more practically. I’d much rather occupy the space with good precedent documents, and even better, receive leather bound volumes (another practice that has ebbed) for the transaction documents, which I could refer to for precedents. [Of course today, we can keep thousands of precedents on a thumb drive.]
Today, junior associates are still fascinated by deal toys – like opening presents on Christmas Day. It’s a subject of conversation with their fellow associates, and even a perceived badge of achievement. What I believe they really want is some recognition – from the partner or client – as being part of the team and for a job well done. Cubes seem a less than satisfactory method of serving this function (but maybe no different that a retirement watch). Closing dinners are a bit better but practically more difficult to organize (and certainly more costly).
Partners have even more deal toys in their offices – some collected since their first year as an associate (carried with them as a lateral from another firm). It serves a purpose for the partners: reminding them of their past conquests (when they were younger); reminding other people (including clients and potential clients) that “you’ve stepped into the office of a ‘dealmaker’; giving associates something to look at or play with while waiting for the partner to get off the phone; and giving employment to the evening cleaning crew to keep the dust off the deal toys (but pity them if they break a piece and raise the ire of the partner).
There will be more “deal cube chronicles” soon. Keep the stories coming. I’ll keep your identity anonymous if you wish…
In Madden v. Cowen & Co. (C.A.9 (Cal.)) (2/11/09), the Ninth Circuit held the “Delaware carve out” contained in the Securities Litigation Uniform Standards Act of 1998 applied to disclosure claims brought against an investment banking firm that rendered a fairness opinion to the board of a seller’s subsidiary in connection with a merger transaction. The case appears to be the first in which a court has extended the Delaware carve-out to shareholder claims made against persons other than officers or directors of the company in which they owned stock.
SLUSA preempts certain state-law based securities fraud class actions involving “covered securities” under the Private Securities Litigation Reform Act of 1995. Before SLUSA’s enactment, plaintiffs had used state-law based class actions to avoid the heightened pleading requirements and other procedural impediments imposed on federal securities class actions by the PSLRA. Under SLUSA, federal claims are generally the only ones permitted to be made for class actions involving securities traded on a national securities exchange, and federal court is the only forum in which those claims may be brought.
SLUSA contains several important exceptions to its preemption of state law shareholder class actions. These include derivative actions and actions based on the law of the issuer’s state of incorporation. These two exceptions have come to be known as the Delaware carve-out. In order for a non-derivative claim to fall within the scope of the Delaware carve-out, it must involve either:
– the purchase or sale of securities by the issuer or an affiliate of the issuer exclusively from or to holders of equity securities of the issuer; or
– a recommendation, position, or other communication with respect to the sale of the issuer’s securities that is made by or on behalf of the issuer or its affiliate to equity holders, and concerns the equity holders’ decisions with respect to voting their securities, responding to a tender or exchange offer, or exercising dissenters’ or appraisal rights.
The second bulleted exception has been used to preserve state law fiduciary duty of disclosure-based claims against directors. See, e.g, Alessi v. Beracha, 244 F. Supp. 2d 354 (D. Del. 2003). However, courts have traditionally declined to extend the carve-out for disclosures made “by or on behalf of an issuer” to disclosure based claims involving communications from persons other than the corporation or its officers and directors. See e.g. Greaves v. McAuley, 264 F. Supp. 2d 1078, 1083-84 (N.D. Ga. 2003) (holding that fiduciary duty claims by former shareholders against the company and its board members were covered by the Delaware carve-out but that claims against the buyer were not).
In Madden, the Ninth circuit rejected contentions by the investment bank that its communications were not made “on behalf of” the issuer. In making this argument, the bank pointed out that it did not serve as the financial adviser to the company in which the plaintiffs were shareholders. Instead, the bank was retained to render a fairness opinion to the board of directors of that company’s majority-owned subsidiary.
Nevertheless, the court noted that the complaint alleged that investment bank’s fairness opinion “was provided to the shareholders of St. Joseph with Cowen’s consent and that the shareholders relied on the opinion when voting in favor of the merger.” Accordingly, the court held that the complaint sufficiently alleged that the bank’s communication was “on behalf of” St. Joseph for purposes of the Delaware carve-out, regardless of whether Cowen addressed its letter only to the subsidiary’s board.
The continuing saga of Swiss pharmaceutical giant Roche’s efforts to acquire the 44% of Genentech that it does not already own added a chapter on Monday, when Genentech’s special committee unanimously voted to recommend against Roche’s most recent $86.50 per share bid. Last month, Roche broke off negotiations with Genentech’s special committee and withdrew its proposal for a negotiated transaction, opting instead to launch a hostile bid after Genentech balked at its $89 per share offer (the company is asking $112 per share).
At first blush, it is tempting to conclude that this whole process is a bit contrived. After all, didn’t Roche’s decision to launch a unilateral tender offer make things easier on everyone under Delaware law? The Unocal Exploration and Siliconix decisions established that a unilateral tender offer followed by short form merger offered controlling shareholders (and subsidiary boards) a path to freeze out minority shareholders without subjecting the transaction to entire fairness review, so why bother with negotiations? Pure Resources made things a little more complicated and Cox Communications suggested that we’d be better off if Delaware just started over, but Delaware law still provides a roadmap for avoiding the entire fairness review that usually applies to parent/subsidiary mergers, doesn’t it?
Delaware may provide a roadmap for many such controlling shareholder-subsidiary mergers, but the contractual relationship between Roche and Genentech makes this situation unusual, and far from simple. The two companies have a wide-ranging business relationship, and there are several agreements in place governing various aspects of their relationship. For purposes of Roche’s bid, the most notable of these agreements is an “Affiliation Agreement” that imposes a number of obligations on Roche in connection with any merger involving Genentech.
According to Roche’s offer to purchase, the Affiliation Agreement requires any merger between Genentech and Roche to either:
– receive the favorable vote of a majority of the shares not beneficially owned by Roche and its affiliates (with no person or group entitled to cast more than 5% of the votes cast at the meeting); or
– provide public shareholders with consideration “equal to or greater than the average of the means of the ranges of fair values for the shares as determined by two investment banks of nationally recognized standing appointed by a committee of [Genentech’s] independent directors.”
The Affiliation Agreement also provides that if Roche owns more than 90% of the outstanding shares for more than two months, it must complete a merger in compliance with either of the requirements described above as soon as reasonably practicable. So if Roche completes its tender offer, it will have to obtain shareholder approval of a long-form merger proposal (which would subject the deal to entire fairness review), or complete a short form merger in which it pays a price determined by Genentech’s chosen investment bankers (which is probably not a pleasant prospect given how far apart the two sides are on valuation). That complicates things considerably.
But the complications do not end there. A purported class action lawsuit filed by a group of institutional investors challenges, among other things, the enforceability of these provisions of the Affiliation Agreement. The plaintiffs allege that agreement’s attempt to limit the percentage of shares that can be voted by any person or group to 5% of the votes cast violate Section 212(a) of the Delaware General Corporation Law (which provides that Unless otherwise provided in the certificate of incorporation, each stockholder is entitled to one vote for each share of stock held by such stockholder) and Genentech’s bylaws. They also challenge the alternative “fair price” procedure as being inconsistent with Roche’s (and the Genentech board’s) fiduciary duties. (See Section III of this complaint).
Roche has kept its cards pretty close to its vest in terms of how it intends to navigate the requirements of the Affiliate Agreement subsequent to the completion of a successful tender offer. Its tender offer materials include a Q&A on how the Affiliate Agreement affects the offer and any subsequent merger. In its response to that question, Roche merely points out that the agreement has no affect on its offer, and notes that compliance with its provisions would be required in connection with any subsequent merger.
Exactly how Roche plans to comply with the agreement is unspecified in the tender offer materials, but it seems like the Affiliation Agreement provides Genentech shareholders who decide to hang on to their shares and wait for a back-end merger with an opportunity to exert significant leverage.
And guess what? It looks like the market knows it.
Most analysts reportedly expect that Roche will up its price in response to the Genentech special committee’s rejection of its current offer. That may prove to be a path to a negotiated deal, and the special committee’s endorsement of a deal will clearly put Roche in a much better position to obtain the shareholder approval that it needs under the Affiliation Agreement. Genentech is probably wagering that this endorsement is something that Roche is willing to up the ante in order to receive. That may turn out to be a pretty good bet.
This recent survey finds that a majority of senior executives expect demand for – and scrutiny of – fairness opinions to increase in the US and Europe. Here is a summary of key results from the survey:
– 68% of respondents believe boards have become more concerned with potential shareholder lawsuits over the past five years
– Majority believe fairness opinions can help protect a company and its directors against such shareholder suits
– 72% of US respondents and 78% of European obtain fairness opinions for M&A transactions
– 69% of respondents say they would obtain a fairness opinion for related-party transactions
– 46% would obtain a fairness opinion for restructurings
– 56% of European respondents say they would not feel comfortable relying on a fairness opinion from the deal banker, compared to only 30% of US respondents
– 69% of European respondents compensated their fairness opinion providers with non-contingent fees, compared to 40% of US respondents
Recently, RiskMetrics reported in its “Corporate Governance Blog”: Corporate Japan may have a tougher time deploying “poison pills” as investor opposition to such defenses mounts. In the latest signal that financial market participants have grown wary of the use of pills, shareholders of the Japanese payroll management company Works Applications were able to halt management efforts to install the defense. In September, the company became the first known to RiskMetrics Group to drop a poison pill takeover defense plan from its annual meeting agenda, acknowledging that votes posted in advance of the meeting had “fallen well short of anticipated support” for the measure.
Notably, the company has just 15 percent foreign ownership, underscoring that domestic institutions are joining their foreign counterparts in opposing takeover defenses. Works Applications’ recent retreat received scant media attention in Japan beyond a brief article on Sept. 23 in the Nihon Keizai Shimbun business daily. According to the article, management told shareholders at the company’s Sept. 24 annual meeting that it had decided not to seek renewal of the plan in view of the paucity of shareholder support. According to a statement released on the eve of the meeting, the company said it had “concluded that more careful study of the proposal content [was] required, and that it was resolved to delete these items from [the] annual meeting agenda.”
The move may be the latest manifestation of the growing pushback to the rising prevalence of pills at Japanese companies. According to RiskMetrics data, more than 500 Japanese firms have adopted the defense since 2005 when legal experts deemed the defense to be legitimate under Japanese corporate law.
But by August 2007, Japan’s Ministry of Economy, Trade, and Industry began to publicly voice concerns over the use of pills. In its annual white paper on economic and finance issues, the agency noted “hostile takeovers can boost productivity and corporate value by removing inefficient executives and improving management (the efficiency effect on management).”
The ministry’s pronouncement, coupled with increasing skepticism of pill usage from Japan’s business press and officials at the Tokyo Stock Exchange, has decidedly altered views on defenses and helped dampen a feared explosion of poison pill adoptions during Japan’s 2008 annual meeting season. Although shareholder approval is increasingly treated as a prerequisite, if not legal requirement, for pill deployments, the example of Works Applications would suggest that pill adoptions will decline heading into 2009, and firms may be increasingly reluctant to seek pill renewals.
Implementing the New Cross-Border Rules
We just posted the transcript for our recent webcast: “Implementing the New Cross-Border Rules.”
From Akin Gump: “The recent worldwide financial turmoil and the still-uncertain aftermath of the Emergency Economic Stabilization Act of 2008 have sparked major mergers and acquisitions that need very rapid antitrust regulatory approval in order to calm distressed markets and salvage shareholder value. More such M&A deals are surely coming. Despite the normal 30-day waiting period under the Hart-Scott-Rodino Act, deals can be done much more quickly under the right circumstances.
The HSR Act, Section 7A of the Clayton Act, 15 U.S.C. § 18a. is a “file and wait” statute. Parties to proposed transactions meeting certain size thresholds must file notification with both the FTC and the DOJ. They must also observe a mandatory waiting period prior to closing, generally 30 days – but 15 days in the case of a bankruptcy or cash tender offer. If a transaction raises substantive antitrust issues requiring thorough investigation, a so-called “Second Request” for information may be issued, typically causing the waiting period to be extended by many months.
Critically, however, the mandatory HSR waiting period can also be shortened through the discretionary grant of an “early termination.” § 7A(b)(2).” Learn more from this memo, and this one.
This commentary by Christine Hurt on the “Conglomerate Blog” brought back fond memories regarding my long lost collection of deal toys. Well, not really “lost.” More like “tossed” after a few years passed and I began to realize that those 3000 billable hours per year perhaps weren’t the best days of my life.
I had quite a collection as I worked on an average of one IPO per quarter as issuer’s counsel and one more as underwriters’ counsel. Plus a bunch of secondary offerings and M&A thrown in. So after 5 years, I had over 100 cubes. There I go again, glamorizing my status as a dutiful slave. Anyways, feel free to share your deal cubes stories with me – I’ll keep them confidential. And if you’re feeling sentimental about not receiving any toys lately, you can always look at the pictures…
The “Deal Cube” Poll
Please take a moment to take this anonymous poll; current results are provided after you’ve made a choice:
One impact of the Recovery Act is a reduced tax burden for those companies that restructure or cancel debt, which may complicate tax planning. To learn about this and more, tune in tomorrow for this webcast – “Developments in Debt Restructurings & Debt Tender/Exchange Offers” – featuring:
– Alex Gendzier, Partner, Jones Day
– Jay Goffman, Partner, Skadden Arps
– Richard Truesdell, Partner, Davis Polk
– Casey Fleck, Partner, Skadden, Arps