With the dealmaking environment facing unforeseeable challenges – and the SEC making the biggest batch of changes to its cross-border in years, practitioners are grappling with how these deals will now change. Learn from these experts how cross-border deal practices are evolving and how they differ from the past in tomorrow’s webcast, “Implementing the New Cross-Border Rules“:
– Christina Chalk, Senior Special Counsel, Division of Corporation Finance’s Office of Mergers & Acquisitions
– Frank Aquila, Partner, Sullivan & Cromwell LLP
– Peter King, Partner, Weil, Gotshal & Manges LLP
– Alan Klein, Partner, Simpson Thacher & Bartlett LLP
– Greg Wolski, Partner, Ernst & Young LLP
Renew Now: As all memberships are on a calendar-year basis, you need to renew now to access this webcast. If you’re not a member, try a no-risk trial for 2009.
Analysis: Local Ownership and Fund Activism in Europe
From Nelson Seraci, RiskMetrics’ M&A Edge Team as posted in RiskMetrics’ “Risk & Governance Weekly“:
Activist shareholders should study a potential target company’s shareholder registry if they hope to be able to effect change. With an unreceptive shareholder base, even sensible campaigns will be ineffective, wasting significant investments in time and money. Because most activist funds are based in either the United States or the United Kingdom, they face particular challenges when seeking to win the hearts and minds of local shareholders who may have a very divergent philosophical approach to investing.
In some countries, it appears that local institutional investors follow unwritten rules of conduct, which in essence prevent them from supporting outspoken dissident hedge funds. For example, U.K. dissident Algebris attracted less than 4 percent support at Italian insurer Generali in April. U.S. and U.K. investors, who are arguably more open to dissident proposals and willing to be “active,” represented a mere 2.9 percent of the shares outstanding. The fact that asset managers are often owned by banks, and the prevalence of cross shareholdings and cross-directorships make it difficult for hedge funds to achieve traction with local investors.
Many non-U.S. and non-U.K. institutional investors do not vote at shareholder meetings outside of their home countries. In many instances, proxy contests and other shareholder proposals end up being decided by investors from the U.S. and U.K. and local investors. Moreover, the low turnout at some international shareholder meetings (50-70 percent of shares outstanding for most contentious meetings) amplifies the voting importance of U.S. and UK shareholders.
A review of M&A Edge data on proxy fights and shareholder proposals indicates that the level of support achieved by activists in international markets is correlated with the relative percentage of shares owned by the activists and U.S. and U.K. investors. Although local “partnerships” certainly help–Colony Capital’s association with French investor Arnault is an example–U.S. and U.K. ownership appears to be critical in executing a campaign. Otherwise, activists face a delicate balancing act between diluting their proposals to make them more palatable to the local audience, while at the same time ensuring their proposals remain value-creating.
Pursuant to the 2000 Amendments to the HSR Act, annual adjustments to the notification thresholds are made based on an index that is tied to changes in the U.S. gross national product for each fiscal year. Last week, the FTC made their annual adjustment, including increasing the size-of-transaction threshold from $63.1 million to $65.2 million. This change is effective February 12th (although some of the changes are effective February 9th since there were two separate notices in the Federal Register). Until the effective date, the current thresholds will apply. Learn more from memos posted in our “Antitrust” Practice Area.
In a decision entered yesterday – in Young v. Goldman Sachs – the Circuit Court of Cook County, Illinois County Department, Chancery Division, applying New York law, dismissed a putative class action brought by a shareholder of Wm Wrigley Jr. Company against Goldman Sachs & Co. alleging that Goldman Sachs had conflicts of interest which made it unable to render unbiased financial advice and an unbiased fairness opinion because, among other things, the lion’s share of its compensation was contingent upon the consummation of the sale. The complaint also alleged breach of contract, breach of fiduciary duty and aiding and abetting breaches of fiduciary duty by Wrigley’s directors. Here is a copy of the decision.
This decision is important as it assesses the relevance and distinguishes two, somewhat dated, New York Court decisions, Schneider v. Lazard Frères and Wells v. Shearson Lehman, effectively limiting their application to situations where a financial advisor has been engaged to advise a special committee established to advise shareholders and potentially further limiting their application where the financial advisor has explicitly disclaimed a relationship or duty to shareholders:
“What is most important about Schneider and Wells, and what Plaintiff attempts [to] minimize, is the fact that in both cases there had been “special committees” formed to advise the shareholders. In Schneider, the court noted the special committee’s purpose “was to advise the shareholders with respect to a transaction that contemplated RJR’s demise and whose end and aim was to obtain for the shareholders the highest possible price for their stock.” Schneider, 159 A.D.2d at 297. Likewise, in Wells, the officers “created a committee whose purpose was to serve the shareholders by determining the fairness of the buyout. The committee hired Shearson Lehman and Bear Stearns. Anybody hired by the committee, aiding in its endeavor, was actually retained to advise the shareholders.” Wells, 127 A.D.2d at 203. . .
In the instant matter, there was no special committee formed and the Engagement Letter clearly indicates there was never the intent for Goldman Sachs to advise the Wrigley stockholders. The Engagement Letter was also very clear that there was no intent to create a duty to the Wrigley Stockholders. Further, although the fairness opinion was included in the Wrigley stockholder’s proxy materials, the introduction to the opinion states very clearly in at least two locations that [the opinion was provided for the information and assistance of the Wrigley board and was not a recommendation to any stockholder on how to vote].[Quotes from Engagement Letter and Proxy Statement omitted]”
Citing numerous cases, including the recent decision of the 7th Circuit in Joyce v. Morgan Stanley, the Illinois Circuit Court concluded that:
– Plaintiff is a Wrigley stockholder an has no privity or relationship with Goldman Sachs.
– Plaintiff is not a party to the Engagement Letter nor is he a third-party beneficiary of the Engagement Letter.
– Any duty on the part of Goldman Sachs ran to the corporation, not to the individual stockholders.
Last week, Professor Steven Davidoff blogged about the remarkable situation unfolding over at Selectica, Inc., a Nasdaq-listed provider of contract management software, where an investor group has apparently intentionally triggered the company’s shareholder rights plan, or “poison pill.”
To make a long story short, Selectica amended its shareholder rights plan (or poison pill) in November 2008 in order to reduce the ownership threshold required to trigger the pill from 14.9% to 4.9%. Although unusual, reducing a pill’s ownership threshold to that level isn’t unprecedented; in fact, as this article notes, other companies have taken similar action over the past few months in order to protect tax assets, which can be lost in the event of changes in ownership by 5% shareholders.
So, on the surface at least, there was nothing remarkable about Selectica’s amendment of its pill — but what happened next was downright unprecedented. On December 22, 2008, a 13D investor group disclosed that it had acquired additional shares and that, as a result, “the reporting persons purportedly became an “Acquiring Person” under the issuer’s Rights Agreement dated as of February 4, 2003, as amended….” On that same day, Selectica filed a lawsuit in the Delaware chancery court seeking a declaratory judgment on the validity of its rights plan.
On January 3rd, Selectica announced that it had ordered the exchange of each outstanding right under its rights plan — other than the rights held by the members of the 13D group — for one share of the Company’s common stock. In other words, Selectica decided to exercise the exchange feature of its rights plan, with the result that the number of its outstanding shares of common stock. This effectively doubled the number of the Company’s shares outstanding, and significantly diluted the ownership position of the 13D group.
However, Selectica didn’t stop there. Instead, it amended its rights plan and declared a new dividend of one preferred share purchase right for each outstanding share of its common stock after the exchange. That means that additional purchases of shares by the 13D group will have the effect of again triggering the plan.
There have been several inadvertent pill triggerings over the years, but according to an Emory University Law Reviewarticle published by Prof. Julian Velasco of Notre Dame Law School, rights plans have been intentionally triggered only twice.
Both of those intentional triggerings occurred when the poison pill was in its infancy, and neither involved a situation in which the acquirer faced dilution through a flip-in provision. Harold Simmons technically triggered the “flip-in” provisions of NL Industries pill in the 1980s, by acquiring 20% of its shares, but that poison pill did not provide that merely crossing the ownership threshold would result in the dilution to the bidder. In 1985, Sir James Goldsmith acquired a controlling position in Crown-Zellerbach, but because that pill contained only a flip-over provision, he was able to avoid dilution by refraining from a second-step transaction.
Pills have been the topic of numerous decisions by the Delaware courts, but there’s no case law involving a situation in which a poison pill has been triggered. While it seems likely that the board’s actions will be subject to heightened scrutiny under Unocal (see, e.g., In re Gaylord Container Corporation Shareholders Litigation, 1996 WL 752356 (Del. Ch. 1996)), it will be interesting to see how the extent to which this novel factual setting affects that analysis.
– by Ted Wallace, Director of Research, The Altman Group
A Special Purpose Acquisition Company (SPAC) is a publicly traded shell (or blank check) company formed for the specific purpose of buying an existing company through, usually in a particular industry. At the IPO, investors purchase units of the SPAC, consisting of a combination of shares and warrants, at a relatively low price. The SPAC then generally has 24 months to find a suitable company to purchase through a reverse-merger.
So how would a hedge fund become the target of hedge fund activism? Ask TM Entertainment & Media, Inc. (AMEX: TMI). This SPAC must complete an acquisition before October 17, 2009 or its “corporate existence will cease by operation of law” and its funds and assets will be distributed among its shareholders. This, however, is apparently too long to wait for Phil Goldstein of Bulldog Investors.
On December 17th, Goldstein (d/b/a Opportunity Partners LP) filed preliminary proxy materials to commence a consent solicitation to replace the board of directors with his nominees, who will “promptly dissolve the issuer and cause the cash in the trust account to be distributed to shareholders.” A consent solicitation gives Goldstein the opportunity to end this quickly: in order for his proposals to be deemed “passed” and his directors elected, Goldstein needs the consents of 50% of TMI’s shareholders. Opportunity Partners owns 18.52% of the shares.
Utilizing the ability to act by written consent is different from a “standard” proxy contest. A consent solicitation allows Goldstein to control the timeline: once he has the consents of 50% of TMI’s shareholders, the solicitation is over and his proposals pass. This is balanced, though, by the higher threshold of required votes. Goldstein must acquire the consents of 50% of the outstanding shares, rather than a plurality for each director.
TMI’s management states in its preliminary consent revocation materials that it believes that an acquisition transaction can be completed by October 17, 2009; it cites examples of other SPACs that have recently done so – despite poor market conditions. TMI also states that liquidating early could result in lawsuits from other shareholders – they made an investment and expect TMI to stick to the terms of its incorporation. Here are TMI’s SEC filings.
The Future?
Is TMI a forerunner of a wave of forced-liquidations of SPACs? Or is this just another example for Phil Goldstein’s detractors to cite when they say that he’s only interested in his own pocketbook and doesn’t care how his actions affect value for other shareholders?
It’s obvious that Goldstein wants his money out of TMI – whether because he has better things to do with it, or because he doesn’t believe that TMI will be successful even if a merger is completed. Consent solicitations can be quick and painless or long and drawn out (under state law, Goldstein has 60 days to reach 50%).
I think this will serve as an interesting test-case: if Goldstein is successful early, it may trigger a wave of copy-cat liquidation solicitations (by other hedge funds) at other SPACs. Perhaps, though, “copy-cat” isn’t exactly the right word, because such a wave might be an indicator that Goldstein is in fact representing the feelings of other hedge fund SPAC shareholders – that while the SPAC seemed like a great investment vehicle a year ago, today’s market conditions are just too tough. Hedge funds recently hammered by the market may see this as an easy way to get their cash back.
If Goldstein’s solicitation goes the long and drawn out route, though, it may indicate the opposite – and exactly what TMI is currently saying – that even though it was a year and a half ago, the SPAC’s shareholders made an educated investment decision and expect the shell company to conform to its written mandates. A longer process may indicate more faith in the SPAC setup itself.
For more about SPACs, visit the “SPACs” Practice Area. Here are some interesting Goldstein quotes from his keynote interview at The Deal’s M&A Outlook 2009 conference.
NB: Goldstein is no stranger to the world of SPACs. He has been both an ardent promoter of the investment vehicle and an agitator in the past. In fact, because of Goldstein’s ability to take advantage of loopholes in the SPAC setup, many SPACs now incorporate a “bulldog” provision – preventing any investor (or group) holding more than 10% of the shell company to exercise conversion rights (and thus force the scuttle of an already-approved merger).
Jim Moloney of Gibson Dunn notes: Yesterday, the SEC’s Division of Corporation Finance posted this no-action letter granted to Retalix. In this case, we have a cross-border tender offer transaction involving a bidding group that is making a “partial offer” for the ordinary shares of an Israeli company (target). The offer is structured as one offer designed to comply with both U.S. and Israeli securities laws.
The incoming no-action letter describes the level of U.S. ownership in the Israeli target as less than 40% (i.e., Tier II). In this case the bidding group only seeks to increase its total ownership by 5% to bring their total ownership slightly below 20%. Under the applicable Israeli securities laws a bidder is required to hold its offer open for an additional 4 business days (the additional offering period), without withdrawal rights once all conditions are satisfied and the initial offer expires.
Normally, such an additional offering period would be viewed as a “subsequent offering period” that is permitted under Rule 14d-11. However, Rule 14d-11 requires that the tender offer be for “any and all” outstanding securities. In this case, the offer is a partial one and the bidding group is seeking an additional 5% only. The SEC granted the requested exemption from Rule 14d-7(a)(1) which requires bidders to provide withdrawal rights during the entire offering period to provide for a four day additional offering period without withdrawal rights.
Last month, The Deal ran this interesting article entitled “Change comes to Chancery.” Sounds like the four out of five of the justices – Chandler, Lamb, Strine and Parsons – may be moving on this year. With big regulatory reform likely coming out of Washington, these changes in Delaware really will make this a big year of change!
The financial and economic crisis may spur large and potentially transformational acquisitions that could radically alter the corporate landscape, according to a survey of more than 160 CEOs and senior managers of publicly listed companies in Europe – believed to be the first study of its kind.
Conducted by UBS Investment Bank and The Boston Consulting Group (BCG) during one of the most challenging financial periods in living memory–within six weeks of the collapse of Lehman Brothers – the UBS-BCG CEO/Senior Management M&A Survey reveals a remarkably resilient attitude to mergers and acquisitions given the current capital market constraints and economic outlook.
Nevertheless, it won’t be easy for companies to realize the undoubted opportunities that the current crisis presents. More than half of the firms surveyed face internal and external obstacles to executing a larger deal, including the need to focus on profitability, rather than growth, as well as funding limitations.
Key findings from the survey include:
– Nearly one third of firms (29 percent) expect to make a sizable acquisition over the next year and 21 percent of companies intend to make a large transaction.
– More significantly, 43 percent of companies believe there will be deals that will transform the shape of their respective industries, echoing the experiences of previous crises such as the 1930s and 1970s.
– In addition, 58 percent of firms expect the number of restructuring transactions to increase, potentially leading to a substantial rise in the number of divestitures and closures of business units.
– 73 percent of companies have either stuck to their M&A plans (51 percent) or increased their level of planned deal activity (22 percent) over the last 12 months.
– Only 15 percent of firms believe it is too risky to do an M&A at the moment.
The Antitrust Division (“AD”) of the Department of Justice recently issued revised model conditional leniency letters for companies seeking to avoid criminal prosecution for antitrust violations in the wake of a U.S. Court of Appeals decision to dismiss an indictment against a company the AD removed from the Leniency Program. The AD has now made it easier to revoke a company’s amnesty if it determines that there was a significant gap in time between when the company first discovered the anticompetitive activity and when it ultimately terminated its involvement in the alleged antitrust scheme.
The Stolt-Nielsen Case
Stolt-Nielsen Transportation Group, Ltd., an international shipping company, disclosed to the AD its involvement in an illegal market-division plan and obtained an amnesty agreement for all of its behavior prior to the date of the agreement. After conducting its own investigation, however, the AD alleged that Stolt-Nielsen continued to engage in the customer-allocation conspiracy months after the scheme was first discovered by the company’s general counsel.
For the first time in the leniency program’s thirty-year history, the AD revoked Stolt-Nielsen’s amnesty and indicted Stolt-Nielsen and its two subsidiaries (even after a federal district court had ruled that Stolt-Nielsen substantially performed its end of the amnesty agreement). After the Court of Appeals for the Third Circuit had ruled that the lower court could not enjoin the AD from issuing an indictment, on remand Stolt still succeeded in securing dismissal of the indictment on breach-of-contract grounds.
The DOJ’s Leniency Program After Stolt-Nielsen
The three fundamental aspects of the leniency program are not affected by the AD’s recent revisions to the conditional leniency letter: (1) amnesty is automatic if there is no pre-existing investigation; (2) amnesty may still be available even if cooperation begins after the DOJ’s investigation is underway; and (3) all officers, directors, and employees who cooperate are protected from criminal prosecution.
By the addition of footnote two to the model conditional leniency letter, however, the AD has effectively shifted the burden to the company seeking amnesty to prove that it promptly terminated the anticompetitive activity after the company’s general counsel or board of directors discovers the activity.
Because the AD grants amnesty only to the first company that reports the illegal activity, the revised leniency policy now provides a marker system to compensate for the tension between being the first to disclose and the necessity of approaching the AD with freshly cleaned hands. Under this approach, the AD will hold a leniency applicant’s place in the front of the line for a finite period in order for the applicant to perform the due diligence necessary to perfect its application.
Being the second to disclose can – and has – cost companies tens of millions of dollars and resulted in prison sentences for their top executives. A “reform first, repent later” approach can therefore be extremely counter-productive. Timing is thus more important than ever under the AD’s revised leniency program.
On Monday, the FASB released its proposed FASB Staff Position on FAS 141R standards regarding recognition of contingencies acquired or assumed in a business combination – it’s called “FSP FAS 141(R)-a.” As previously blogged, this FSP will to a large extent restore the accounting for litigation contingencies under the prior standard, FAS 141. In particular, it will eliminate the requirement that “non-contractual” contingencies be recorded at fair value if it is more likely than not that a liability has been incurred. The FASB has requested comments on the proposal, which are due January 15th.