From Cliff Neimeth of Greenberg Traurig: Here is the merger agreement for the Mar’s pending acquisition of Wrigley. Query whether this is indicative of the new strategic purchaser mindset in mega business combinations – or just a stand-alone deal?
At a minimum, the deal reflected in the attached merger agreement offers an interesting insight into the current (and perhaps offers a more prescient glimpse into the mid-term future?) state of the M&A financing market.
Most uncommonly, the merger agreement providing for Mars’ strategic $23.0 billion acquisition of Wm. Wrigley Jr. Co. contains some of the seller risk allocations and limitations on equitable remedies, financing covenants and reverse break-up fee provisions that sellers tolerated during the 2005-mid-2007 wave (and subsequent “trickle”) of private equity-sponsored buyouts.
Specifically, Wrigley has no general right to seek specific performance of Mars’ performance obligations under the merger agreement; Mars has agreed to pay a $1.0 billion reverse break-up fee to Wrigley (i.e., an absolute cap on its damages, in prescribed circumstances); and a financing covenant that expressly excludes Mars’ obligation to sue its lenders to enforce their commitments. (NB: Warren Buffet’s Berkshire Hathaway is one of Mars’ financing sources).
Time will tell whether this becomes more common in large cap strategic deals…
With a hearty thanks to J.W. Verret, our man on the ground during yesterday’s Delaware Supreme Court hearing about the important issue certified from the SEC regarding AFSCME’s “reimbursement of expenses” binding bylaw proposal. J.W. is a rising star and Assistant Professor at George Mason University School of Law. Here is J.W.’s report:
Background
The American Federation of State, County, and Municipal (“AFSCME”) Employees Pension Plan submitted a shareholder proposal for inclusion in CA’s (formerly known as Computer Associates) proxy materials for their annual meeting scheduled to be held on September 9, 2008. That proposal sought to amend CA’s bylaws to require that the company reimburse the reasonable expenses incurred by a dissident nominating a rival slate of directors, provided that at least one nominee from the dissident slate was victorious. CA sought no-action relief from the SEC permitting it to exclude that proposal under Rule 14a-8 as illegal under Delaware law, and the SEC certified the question to the Delaware Supreme Court a few weeks ago (here is Broc’s blog on that development).
Part of the SEC’s submission read ominously: “[N]o-action requests regarding substantially similar proposals have been submitted in the past….The extent to which the Division can expect to receive future requests to exclude proposals similar to the AFSCME Proposal will necessarily be affected by the outcome (of these proceedings).”
Anticipating that the opinion in this difficult case might make use of dicta guidance, see also my article with Chief Justice Steele on the “Delaware Guidance Function.” Also, a shorter posting on this case is available here.
The Overriding Question
Section 109 of the Delaware General Corporation Law grants shareholders the right to adopt bylaws. Section 141(a) reads that “the business and affairs of every corporation…shall be managed by…a board of directors.” To what extent do shareholder-adopted bylaws conflict with the Board’s discretion under 141? And to what extent does this election bylaw limit that discretion? Indeed, is it really an election bylaw at all?
The Briefing
CA argues that:
1. This bylaw mandates a payment of expenses, rather than relates to an election, and control over corporate expenditures is part of the business and affairs of the corporation described in Section 141 and Paramount v. QVC and JANA v. CNET;
2. Any limits on the board’s authority under 141 must be contained in the Certificate of Incorporation. A bylaw in conflict with the certificate of incorporation is a nullity. Since CA has a provision in its Certificate of Incorporation that mirrors 141, a bylaw in conflict with 141 would therefore be a nullity. The practical result of this argument is that, since CA’s certificate of incorporation provides that it may only be amended by the Board, a common provision, the shareholders have no way to mandate proxy reimbursement;
3. CA distinguishes bylaws that regulate the process by which Boards act, which they argue describe the majority of bylaws constraining directors which the Delaware Courts have upheld, from bylaws mandating a specific policy, which CA argues describes the bylaw at issue;
4. CA argues that since Delaware law permits reimbursement of proxy expenses only where contests benefit all shareholders, rather than a mere subset, mandatory reimbursement may cause directors to violate Delaware law and their fiduciary duties. This is especially likely in short slates, because of their assumption that minority interests would be the only aim of the dissident slate, and thus the Board may be constrained from preventing this threat to the other shareholders;
5. An affirmative decision in this case would lead to a host of new contests, and could lead to corporate waste of assets causing directors to violate their fiduciary duties;
6. CA distinguishes cases cited by AFSCME, such as Unisuper, relating to board-approved limitations on board authority as permitting shareholder limitations, by arguing that contractual and equity principles were applied to board action to justify those self-imposed limitations that make them irrelevant to a determination of whether shareholder approved limitations are permissible.
AFSCME’s argument:
1. In response to CA, AFSCME argues that the language in 109 which permits shareholder bylaws “not inconsistent with law” would be a redundant phrase if the legislature’s intent were to only permit bylaws authorized by other statutory provisions;
2. The validity of bylaws are not judged based on who adopted them;
3. In response to claims that mandating expenditure of funds would interfere with Director’s authority under Section 141, or may leave the corporation open to payments that flow from fiduciary violations, AFSCME points to prior cases upholding the validity of bylaws requiring indemnification of directors despite the Board’s wish to withhold indemnification. Further, they argue that the mandated payment does not implicate fiduciary concerns precisely because the payment would be mandatory, and thus could not be based on a director or manager’s self-dealing motives;
4. The Blasius, Unitrin, and MM Companies cases also evidence a dim view of attempts to thwart the shareholder franchise, which is the underpinning of the business judgment rule. Also, Harrah’s v. JCC provides that the shareholder franchise includes a meaningful right to nominate an opposing slate, and not simply vote in an election. Thus, AFSCME essentially argues that this amounts to a heightened standard of review, or a presumption in favor of the shareholder, in cases resolving shareholder bylaw validity;
5. AFSCME skillfully leaves a trail for the Court to limit its holding, arguing that even if there is a tension between 141 and 109, and 141 limits the types of bylaws shareholders may adopt (this is the area in which poison pill bylaw fights would come up), that limitation does not extend to election bylaws;
6. They respond to a number of CA’s examples of specific bylaws determined to be inconsistent with the DGCL as irrelevant, because all of them related to Board bylaws, also noting that the Court has never struck down a shareholder adopted bylaw for being inconsistent with the DGCL or restricting the Board’s ability to fulfill their fiduciary duties.
Arguing on behalf of Computer Associates was Robert Guiffra of Sullivan & Cromwell. Arguing on behalf of AFSCME was Michael Barry of Grant & Eisenhofer. The issues from the briefs central to the oral argument were whether this bylaw relates to an election, or control over the corporate treasury, and then whether a mandatory reimbursement requirement could cause directors to violate their fiduciary duties to the company. The mix of questions from the Court during oral argument make any predictions difficult.
The Justices pushed counsel for CA over whether the prospect of reimbursement was inextricably linked to the success of an election, and whether the bylaw would be legal if adopted by the board. The Justices pushed counsel for AFSCME over whether there might be any circumstances under which a bylaw could force inequitable reimbursement and whether the board’s authority to adopt bylaws was co-extensive with that of shareholders.
Interestingly, Justice Berger, when she served as a Vice Chancellor on the Court of Chancery, suggested in dicta that stockholders create a bylaw limiting the board’s power to amend a stockholder adopted by-law in American Int’l Rent a Car, an opinion from 1984, which may indicate her view on whether the right to adopt bylaws is co-extensive. The Court also questioned whether the “reasonable” qualifier in this bylaw left enough room for board discretion not to reimburse wasteful expenses.
One open thread that may not be resolved: If this bylaw is included in the corporation’s proxy, and if it passes, can the board simply amend that bylaw? Meaning the Court could conceivably rule that the bylaw was legal, and thus the SEC would have no basis to allow the company to exclude it, but in a subsequent challenge to the board’s decision to amend the shareholder bylaw would the company get business judgment protection?
Conclusion
This is a particularly controversial and intricate case, and the Delaware Supreme Court has only a week and a half to craft a decision. It is probably best to save substantive practice advice until the opinion is issued. See you then…
In this podcast, Ron Orol, Senior Writer for The Daily Deal, discusses activists, swaps and the SEC in light of the CSX decision, including:
– Can you explain how activist fund managers are attempting to use cash settled swaps to evade SEC reporting?
– How did The Children’s Investment Fund use swaps with respect to CSX and what was the impact?
– Do you expect the CSX decision to have any effect on the SEC’s rules or interpretations?
By the way, Gibson Dunn recently held a webcast on the CSX decision and has posted this archive.
Yesterday, the Delaware Supreme Court accepted the questions certified to it by the SEC relating to the battle between CA and AFSCME over the proponent’s binding bylaw proposal seeking reimbursement for third-party solicitations. The Court sure didn’t lose any time taking the case – and look at the quick briefing and argument schedule they have set (given CA’s mailing date is July 17th, this was necessary): briefs are due on Monday, July 7; oral argument is scheduled for July 9. We will have a guest blogger giving us news live from the hearing.
Last week, Corp Fin posted this no-action letter – Barclays (Netherlands)(available 6/26/08) – which seems to be well within the line of “abandoned offering” 12h-3 letters. Usually they are for a busted IPO, but this one is for a busted merger/reorganization.
In both cases, the facts are pretty much the same – a registration statement goes effective but the offer is never completed. Therefore it make no sense for the registrants to have to file a Form 10-K/20-F to satisfy the Section 15(d) obligation since no one is holding the securities from the originally contemplated IPO/merger.
From Travis Laster: Last week, Delaware Chancellor Chandler – in In re Transkaryotic Therapies, Inc. – granted summary judgment in favor of three directors who were alleged to have breached their fiduciary duties by supporting and voting in favor of the acquisition of Transkaryotic Therapies by Shire Pharmaceuticals. Here is a copy of the opinion.
Much of the opinion consists of the Chancellor’s rulings on the plaintiffs’ allegations of bad faith and disloyalty. From a doctrinal and practitioner perspective, the more important discussion focuses on the duty of disclosure (pages 17-28).
In summary, the Chancellor characterizes the duty of disclosure as a doctrine designed for pre-vote adjudication, leaving very little room for any post-closing remedy. In his words, “the Court grants injunctive relief to prevent a vote from taking place where there is a credible threat that shareholders will be asked to vote without such complete and accurate information. The corollary to this point, however, is that once this irreparable harm has occurred –i.e. when shareholders have voted without complete and accurate information–it is, by definition, too late to remedy the harm” (page 25).
Based on this principle, the Chancellor granted summary judgment for the defendant directors: “I hold that this Court cannot grant monetary or injunctive relief for disclosure violations in connection with a proxy solicitation in favor of a merger three years after that merger has been consummated and where there is no evidence of a breach of the duty of loyalty or good faith by the directors who authorized the disclosures” (page 27).
As a practical matter, the Transkaryotic decision obviously favors defendant directors, and it should increase their settlement leverage in cases where plaintiffs primarily assert disclosure claims but do not pursue injunctive relief. In other words, the cost of a post-deal clean-up settlement involving disclosure claims should go down. The logical response from the plaintiffs’ bar, however, should be to pursue more pre-closing disclosure-based injunction applications, since that is now the only real avenue available for a meaningful disclosure remedy and a commensurate fee award. In the long run, therefore, the Transkaryotic decision may result in more injunction applications and more disclosure litigation.
Two other points deserve brief mention. First, the Chancellor granted summary judgment on the claim that a director breached his fiduciary duties by soliciting so-called “empty votes” from stockholders who owned shares on the record date then sold them. The Court found that the director’s efforts to support the merger was “consistent with – rather than at odds with – his fiduciary duties” (page 39).
Second, the Chancellor permitted the plaintiffs to proceed with a challenge to the statutory validity of the merger, based on their assertion that the merger had not received sufficient votes. This challenge rested in part on testimony to the effect that the inspectors of election tallied the vote very quickly, yet the plaintiffs produced evidence of over-vote situations that would have taken additional time to resolve. Notwithstanding the passage of three years since the merger closed, the Court permitted the challenge to go forward. This holding emphasizes the need for care when tallying merger votes and counsels in favor of hiring a reputable outside firm, such as IVS, to act as the inspector for close votes.
I’ve been saying that companies should hire independent inspectors for a long time – and since you sometimes don’t know if your vote will be close until the last minute – you need to line up the inspector well in advance because they are in short supply!
As noted in this WSJ article, at least two companies – Louisiana-Pacific Corp. (see related Form 8-K) and Micrel Inc. (see related Form 8-K) – have changed their shareholder-rights plans in recent months to include derivatives when calculating levels of “beneficial ownership” that would trigger their poison pill. The companies likely took this action to thwart the use of derivatives in activist plays.
A Different Perspective on CSX/TCI: Should Courts Reject a Private Right of Action Under Section 13(d)?
In the Harvard Law School Corporate Governance Blog, Phillip Goldstein of Bulldog Investors provides a viewpoint different from those coming from management’s perspective. It’s interesting to read a different viewpoint from the management one.
As noted in this recent WSJ article, according to a recent Monitor Group study, half of the investments by sovereign wealth funds since 2000 involved a more than 50% interest. 37% involved stakes between 10% and 50% and only 13% involved investments of less than 10%.
There were 420 deals during this eight-year period – only 14 of them in wealthy nations, worth abut $9.4 billion, involved majority stakes in companies in such politically sensitive areas as energy, utilities, information technology, telecommunications and financial services.
Here is a copy of the study – and here is a quote from this Reuters article: “Heightened national security concerns over strategic investing by sovereign wealth funds appear to be overblown, a new study released on Friday found. The study, conducted by consulting firm Monitor Group, found that the bulk of SWF investing appears to be aimed at furthering the economic development of a host or allied country, not acquiring sensitive strategic or economic assets to advance political aims of a state.”
Winning the World Series: Cubs Worth More? Or Less?
Here is a recent WSJ.com interview with an economist about how much more the Chicago Cubs would be worth if they won the World Series this year (they are red hot and it’s been 100 years since they last won).
The interview is short and perhaps not complete – but in my opinion, the Cubs would be worth less in the long run if they won. Part of their national mystique is that they are perennial losers. “Maybe next year” is their mantra. As someone who grew up down the street from Wrigley Field at a time when they “had it in the bag” – the late ’60s/early ’70s – I don’t want to see the streak end…
Closing Time: When the Founder is Ready to Sell
We have posted the transcript for the webcast: “Closing Time: When the Founder is Ready to Sell.”
Here is some analysis from Jim Moloney of Gibson Dunn: This recent no-action letter – Elron Electronics Industries – is unusual in that it relates to a partial tender offer being done under U.S. and Israeli law. Here you have a situation where an Israeli bidder is is making an all-cash tender offer for up to 5% of the outstanding ordinary shares and ADRs in a single offer. It is somewhat more typical to see a dual-offer structure. According to the bidder, a recent record holder list shows a relatively high percentage of shares held by U.S. persons — approximately 63%. However, the bidder believes the U.S. ownership of the subject company is really closer to 52%.
The Israeli Companies Law requires a 4-day extension of the tender offer period, without a corresponding extension of withdrawal rights (a “subsequent offering period”), once all conditions to the offer have been satisfied. Payment of the tender offer consideration is expected four or more days after the expiration of the subsequent offering period which is apparently permitted under Israeli law.
For reasons not clearly articulated in the letter, the “subsequent offer period” that is permitted under U.S. law (Rule 14d-11) does not work here. Presumably that is because the offer is “partial” and Rule 14d-11 requires that the offer be for “all outstanding” securities of the class sought and the bidder must “accept and promptly pay for all securities” tendered during the initial offering period upon the close of the initial offering period. Therefore, the bidder requested relief from the prompt payment rule (Rule 14e-1(c)) and the rule requiring withdrawal rights (Rule 14d-7(a)(1)), which the staff granted.
Yesterday, in CSX Corp. v. The Children’s Investment Fund Management, Judge Lewis Kaplan of US District Court (SDNY) delivered his anxiously awaited opinion finding that the two plaintiff activist funds violated the securities laws by not disclosing their positions and intentions many months before they did.
However, Judge Kaplan also ruled that there was nothing effective that he could do and he didn’t bar the funds from voting their shares at CSX’s upcoming annual meeting. And in his fine analysis, Professor Steven Davidoff notes that its unlikely the SEC will pursue an enforcement action given the letter submitted to the court from Corp Fin. Here is a NY Times article – and here is a WSJ article.
Here is an additional tidbit – the NY Times’ Andrew Ross Sorkin wrote his column Tuesday about how CSX is a case study in how not to respond to a proxy fight…