Yesterday, Chancellor Chandler of the Delaware Court of Chancery enjoined any stockholder vote on the pending merger between Caremark and Express Scripts until not earlier than March 9th. The Chancellor issued his decision because of the materiality of supplemental disclosures made by Caremark on February 12th, just 8 days before the stockholder vote scheduled for February 20th. We have posted a copy of the opinion in the “M&A Litigation” Portal.
Here is some analysis from Travis Laster of Abrams & Laster: The 8 days provided by Caremark was definitely towards the short end of the spectrum for supplemental disclosures, but it was not unprecedented. The Chancellor instead appears to have been influenced by the combination of the brief time period and the his view of the significance of the disclosures, which included “the revelation that Caremark has considered, on at least three separate occasions, potential transactions with Express Scripts.”
The Chancellor juxtaposed this disclosure with the Caremark board’s “present protestations that antitrust difficulties loom so large as to prevent the board of directors from even discussing an offer with an admittedly higher dollar value.” (Emphasis in original). The Chancellor also noted the materiality of Caremark’s disclosure that the CVS merger would extinguish stockholder standing to pursue derivative litigation regarding claims for stock option backdating. This statement comes on the heals of the Chancellor’s two recent and quite strong decisions criticizing stock option practices.
At 2 typed pages, the opinion is quite short and worth a first-hand read, particularly for deal counsel and litigators who frequently must consider whether – and when – to make supplemental disclosures.
From ISS’ Friday Report: This year, individual shareholders are taking the lead in filing proposals that target takeover defenses, such as classified boards, “poison pill” plans, supermajority voting rules, and requirements for holding special meetings.
Proposals to declassify corporate boards will be well represented this proxy season. As of Feb. 5, ISS was tracking more than 40 such proposals. Labor pension funds submitted seven resolutions, including a third-time proposal filed at Peabody Energy by the AFL-CIO. Peabody says the proposal was intended to “pressure the company into adopting policies being promoted by union officials that would be detrimental” to the firm, shareholders, and employees.
The Amalgamated Bank’s LongView fund has withdrawn a declassification proposal at Martek Biosciences after the company adopted the proposal. New York City’s pension funds have also filed proposals to declassify boards, as have a number of individual shareholders. In recent years, U.S. companies have become increasingly receptive to this governance reform. A majority of S&P 500 firms now allow for the annual election of all directors, according to an ISS study on boards at S&P “Super 1,500” companies.
Several issuers that have begun the process of declassifying their boards or plan to put the matter to a shareholder vote have asked for “no-action” letters from the Securities and Exchange Commission on the grounds that the proposals have been “substantially implemented.” These companies include Avista, Lear, Piper Jaffrey, and Visteon. Three other proposals to declassify boards have been withdrawn in the face of no-action challenges.
Individual shareholders thus far appear to be the only proponents who have submitted resolutions to limit poison pills, according to ISS records, with a total of 18 filed. Hewlett-Packard sought to exclude a poison pill bylaw proposal filed by investor Nick Rossi, but the SEC staff rejected that request on Dec. 21. Boeing, Home Depot, and Honeywell have asked the SEC for permission to exclude similar proposals. Honeywell argued that it has “substantially implemented” the proposal by adopting a new pill policy in December.
At Walt Disney’s annual meeting on March 8, investors will vote on a bylaw proposal by Harvard Law Professor Lucian Bebchuk that calls for a 75 percent vote by directors to adopt or amend a poison pill plan and would impose a one-year limit on pills that are not ratified by shareholders. Management opposes the proposal, arguing that it would limit the board’s ability to respond to hostile takeover offers and may not be enforceable under Delaware law. The media-and-entertainment company also warns that the 75 percent threshold would allow “a small group of directors” (such as representatives of an acquirer) “to block action that other directors believe is in the best interests of shareholders.”
A similar Bebchuk bylaw proposal received 48.5 percent support at CA last year and prompted the business software company to modify its pill and agree to put the defense to a shareholder vote.
Members of the Chevedden, Rossi, and Steiner families have filed 20 proposals this year seeking to strengthen shareholder rights to call special meetings. The proposal calls for boards to amend bylaws to give “holders of 10 percent of outstanding common stock the power to call a special shareholder meeting.”
Shareholder activist Evelyn Y. Davis has submitted at least 14 proposals calling for cumulative voting. Her targets this year include Aetna, General Electric, IBM, Safeway, and Bank of New York. Other individual investors have filed another 10 proposals. Last season, ISS tracked 23 proposals calling on companies to allow for cumulative voting that went to a vote between Jan. 1, and June 30, 2006. Average support for those proposals amounted to 39.8 percent.
Proposals to eliminate supermajority vote requirements also will be well represented this season, according to ISS records. Thirty such proposals were filed prior to Jan. 1, with slightly more than half by members of the California-based Rossi family. The California Public Employees’ Retirement System also intends to file proposals on the issue, fund officials tell ISS. Proponents intend to capitalize on strong support for such proposals in recent years. Last year, resolutions to eliminate supermajority requirements averaged 67.8 percent support for 19 proposals that came to a vote between Jan. 1 and June 30, according to ISS records.
While labor funds are less focused this year on takeover defense-related measures, they continue to file at companies that have failed to act on past majority votes on shareholder proposals. This year, union funds will be filing proposals asking companies to create committees to respond to cases where a majority of shareholders supported a resolution and the company failed to act.
The International Brotherhood of Electrical Workers (IBEW) filed such a proposal at Genzyme (where an IBEW-filed golden parachute proposal won 57.9 percent of votes cast last year) and at OfficeMax, where a similar IBEW proposal received 53 percent support in 2006.
Companies Take Action
Meanwhile, a number of companies have acted to dismantle takeover defenses. Last year, at least seven firms, including Amgen, Hilton Hotels, Motorola, and Newell Rubbermaid, terminated their poison pills following majority votes for shareholder proposals requesting the redemption or submission for investor approval of any pill.
Last month, the board of McKesson, a San Francisco-based healthcare services firm, amended the company’s poison pill to let it expire on Jan. 31. The board also agreed to ask shareholders to vote to institute annual elections for all directors.
“These actions demonstrate our board’s continuing commitment to strong, stockholder-focused, contemporary corporate governance practices, which we believe are consistent with our goal of creating long-term, sustainable value for McKesson stockholders,” John H. Hammergren, the company’s chairman and chief executive officer, said in a statement.
In December, Schering-Plough said it will rescind its poison pill and accelerate the declassification of its board from 2008 to this year’s annual meeting. The New Jersey-based pharmaceutical company also plans to recommend that shareholders vote to reduce the 80 percent supermajority requirement to simple majority approval for the removal of directors, and for mergers and acquisitions.
Marathon Oil and IBM recently said in regulatory filings that they will ask for shareholder approval at their 2007 annual meetings to eliminate supermajority voting rules. 3M, FedEx, and Lockheed Martin are among other companies that recently lowered their vote requirements, according to The Wall Street Journal.
From today’s WSJ, which includes this blurb from Breakingviews.com: ‘Go shop” provisions have become a common feature of the LBO landscape. These clauses are meant to sound shareholder-friendly because they lock in a bidder while allowing a board to beat the bushes for others. So how to explain the extra $3 billion that EOP extracted for shareholders after agreeing to a “no shop” with Blackstone in November?
As the jargon implies, a “no shop” limits boards from soliciting rival offers. So “go shops” must be better for shareholders, right? Not so fast. Two of the biggest buyouts of the past year, of hospital chain HCA and chip maker Freescale, included “go shop” clauses. And in neither case did competitors emerge.
This is partly why investors regard “go shops” with suspicion. They see it as a form of legal cover for independent directors worried they will be perceived as favoring managers buying out the companies they run on the cheap. But that leaves the question of how EOP, despite a “no shop,” got such a robust battle going between Blackstone and Vornado.
Rather more critical to the outcome was the size of the fee that anyone wanting to top Blackstone’s first bid would have had to pay. At the outset, EOP insisted on just a 1% break fee, well below the industry standard of 3%. As a carrot to Blackstone, EOP ratcheted that up as the private-equity firm raised its offer.
This suggests that what’s more important than the shopping label is the intent of directors to seek the highest price. And an extra low break fee is a better signal that directors are looking out for shareholders.
Travis Laster reports: Here is a case is one that may slip under the radar but which has implications for proxy contests for minority board seats. In FGC Holdings Ltd. v. Teltronics, C.A. No. 883 (Del. Ch. Jan. 22, 2007), Vice Chancellor Parsons held that a director was NOT entitled to indemnification for fees and expenses incurred enforcing his entitlement to be seated as a director. Vice Chancellor Parsons held that for purposes of Section 145(a) and (b) of the General Corporation Law, the plaintiff could not meet the “is or was a director” requirement because he was not yet a director at the time he incurred the fees and expenses.
Vice Chancellor Parsons also denied the request for mandatory indemnification under Section 145(c) for a proceeding in which the director had been “successful on the merits or otherwise” because mandatory indemnification also requires that the individual meet the covered capacity requirements of Section 145(a) and (b).
FGC Holdings was issued in connection with an attempt to enforce the right of a preferred stockholder to seat a director to which they were entitled under a certificate of designations. The same analysis, however, should apply to seated directors’ efforts to obtain indemnification for expenses incurred in successful proxy contests for minority board seats. It will not affect successful proxy contests for board majorities, who can simply vote to reimburse themselves their expenses.
From Morrison & Foerster: Last week, the Federal Trade Commission, the agency charged with administering the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the “HSR Act”) and its filing requirements, approved the new annual HSR Act notification thresholds. The new thresholds, which are expected to be published in the Federal Register by late January 2007 and will become effective 30 days later, are as follows:
– The “size of transaction” threshold will increase from $56.7 million to $59.8 million. No HSR Act notification will be required if the value of voting securities and assets held as a result of the transaction is below this threshold.
– The “size of parties” thresholds of $113.4 million in annual sales and $11.3 million in total assets will increase to $119.6 million and $12.0 million, respectively. For transactions valued at more than $59.8 million, no HSR Act notification will be required if the ultimate parent entities of one or both parties to the transaction do not satisfy the applicable “size of parties” thresholds.
– Transactions valued at more than $239.2 million (previously $226.8 million) will be reportable regardless of the size of the parties, unless an HSR Act exemption applies.
The new HSR Act thresholds also apply to certain other thresholds and exemptions.
The new thresholds do not affect the HSR Act filing fees, but the applicable filing fee will be based on the new thresholds, as follows: $45,000 for transactions valued at less than $119.6 million; $125,000 for transactions valued from $119.6 million up to $597.9 million; and $280,000 for transactions valued at $597.9 million or more.
The HSR Act notification thresholds are adjusted annually to reflect changes in the U.S. gross national product. The new thresholds will remain in effect until the next annual adjustment, expected in the first quarter of 2008.
Mergers and acquisitions worldwide have jumped 30% in 2006 to hit a all time record $3.7 trillion, surpassing the 2000 high of $3.4 trillion, according to data released by Thomson Financial, including:
– The US was the most targeted country for acquisitions, representing over 40% of global M&A activity.
– US M&A volume rose 24% to $1.474 trillion in the year.
– M&A deals in Europe have jumped 33% to reached $1.36 trillion in the year to date, topping the previous record of $1.2 trillion in 1999.
– The UK is the most targeted European country for acquisitions, with $339 billion of cross-border and domestic transactions.
– There were a 157 worldwide hostile acquisitions, with a cumulative value of $498 billion, up 87% from 2005.
– Goldman Sachs was the top global mergers and acquisitions (M&A) advisor of 2006, advising on deals worth over $1 trillion. Citigroup came in second place with over $900 billion of transaction value.
– In Europe, Morgan Stanley claimed the top spot with over $482 billion of M&A advisory fees.
– In terms of total M&A fee income, Goldman Sachs dominated the global, US and European rankings, earning an estimated $2.1 billion, up from $1.7 billion in 2005 in advisory fees.
– Prominent deals during the year included the $16.5 billion takeover of Mellon Financial Corp by Bank of New York Co Inc, and the $8 billion acquisition of YouTube by Google Inc.
In response to so many requests for a practical M&A print newsletter about deal practices, we have created a new newsletter: Deal Lawyers. Just like its sister publication, The Corporate Counsel, Deal Lawyers is tailored for the busy dealmaker, bi-monthly issues that do not overload you with useless information – rather, this newsletter will provide precisely the type of information that you desire: practical and right-to-the-point. As in all our publications, this newsletter will include analysis of timeless “bread and butter” issues that you confront time and again.
To illustrate how Deal Lawyers will provide the same rewarding experience as reading The Corporate Counsel, we have posted the Jan-Feb issue of Deal Lawyers for you to check out at no charge. Feel free to share it with your deal-minded brethren. This issue includes pieces on:
– What the New “Best Price” Rule Means for You
– The New “Best Price” Rule: Financing Issues and Answers
– The New – and Tricky – SEC “Change-in-Control” Disclosures
– What Private Equity Firms Want in a Lender
– The “Sample Language” Corner: Acquiring the California Corporation
Try a no-risk trial today; we have special introductory rates and a further discount for those of you that already subscribe to The Corporate Counsel.
The Evolving ‘Best Price’ Rule
We have posted the transcript of our webcast: “The Evolving ‘Best Price’ Rule.”
Part of the dance to obtain no-action relief for an international deal is ascertaining whether Corp Fin’s OMA has already processed a deal in that country before. For example, in this relatively recent no-action letter from Corp Fin, nothing too exciting emerges as its a basic 14e-5 (prompt payment = 14 days not 3 days; two offers – one in the U.S. and one offshore, etc.) relief granted in connection with Nasdaq’s tender offer for the London Stock Exchange Group. Many deals have been done in the UK, making this request seem easier than most on its face.
What is somewhat novel in this no-action letter is that they received relief for the Dresdner Kleinwort Securities Limited, the broker and its affiliates, so that they could continue a grocery list of market making and other hedging activities in the securities during the offer. This is the same relief that UBS received in connection with their role as advisor to Gas Natural in connection with its bid for Endesa a year ago. At the time, the Staff was not granting such relief and had not done so for many years. Counsel had to work hard (almost 5 months) to get the relief back then. In this instance, it appears counsel requested and received the same relief that was negotiated for in the Gas Natural/Endesa transaction much faster.
I always love this stuff. On Saturday, the WSJ ran this article about the battle to obtain top ranking for Thomson Financial’s all-important league tables regarding deal advisors (and here’s an article from today’s WSJ about the top deals of ’06):
“Citigroup lost a bid Tuesday to win credit for arranging a $30 billion deal in Norway that might have vaulted it to the top of one closely watched list of busiest advisers on European merger-and-acquisition deals. After days of wrangling, Thomson Financial declined to give the banking titan “league table” credit for writing a fairness opinion – a relatively minor role in the merger process – that endorsed Norsk Hydro’s planned $30 billion sale of energy assets to Statoil.
Citigroup was appointed by Norsk Hydro on Dec. 18, the same day the deal was announced. Thomson, whose league tables are cited by investment banks to validate their deal prowess, requires banks to prove they were hired before deals are announced to be granted credit. A Citigroup spokeswoman declined to comment.
Dealogic, a rival to Thomson Financial, on Thursday gave Citigroup credit for the Norsk Hydro assignment. It and Thomson rank the banking titan second behind Goldman Sachs Group Inc. as the top global adviser on mergers.
Citigroup lobbied hard for the Norsk Hydro credit, people close to the company said, because it would have given it dominance in the European league tables. According to Dealogic, the deal vaults Citigroup one notch up in the European rankings to third place. But in Thomson’s rankings, the Norwegian deal would have let Citigroup leapfrog Morgan Stanley to first place as adviser on European deals. Morgan Stanley is credited in the Thomson table with $482 billion of deals, a hair’s breadth ahead of Citigroup’s $473 billion.”
Backdated Options: Consent a Tender Offer? Need to Consider the SEC Staff
As we recently wrote about in the November-December issue of The Corporate Executive, increasing the strike price – or even fixing the exercise date – ordinarily cannot be effected without the consent/agreement of option holders (except, possibly, where there is a strong plan provision allowing the board/administering committee to unilaterally amend outstanding options), even to increase the exercise price, as deemed necessary or advisable to comply with applicable (e.g., tax) laws.
In an apparent effort to offset the foregone compensation, some companies are offering additional new options, restricted stock, or even cash bonuses in exchange for the consent. Under these circumstances, companies, in effect, are offering to buy existing stock options in exchange for materially amended options, etc. and/or cash. The Staff generally takes the position that option holders are presented with an economic investment decision, and not “merely a compensation decision,” if they are asked to consent to an increase in the exercise price of options – or even just adjust the exercise date.
The company’s presentation of the investment decision to the option holder implicates the SEC’s issuer tender offer Rule 13e-4 and requires the company to file a Schedule TO in advance of the offer being presented to the option holders. (Companies contemplating financial restatement may face another problem as tender offers for employee stock options filed on Schedule TO generally must be accompanied by current financial statements.)
It appears some companies might liberally interpret Corp Fin’s limited class 2001 exemptive order on repriced options as authorizing them to “fix” backdated options for (1) previous employees and (2) defer any cash consideration and/or substitute non-cash consideration into a subsequent year in order to avoid the ill tax consequences presented by §409A. These companies should think again because the exemptive order doesn’t say a thing about extending the offer to former employees or relief from “prompt payment.” Nor should these companies necessarily rely on the Clorox’s issuer tender offer that was recently conducted.
Availability of the SEC’s 2001 Exemptive Order
Back in 2001, the SEC adopted a limited class exemptive order to address issues implicated by exchange offers for repriced options. Reliance on the SEC’s exemptive order was conditioned on, among other things:
– the issuer being eligible to use Form S-8;
– the options subject to the exchange offer being issued under an employee benefit plan as defined in Rule 405 under the Securities Act; and
– any substitute securities offered in exchange for existing options being issued under such an employee benefit plan.
The availability of Form S-8 when issuing an option to a former employee of the issuer is based on that employee receiving the option while employed by the issuer and then exercising the option on S-8 after leaving. If the Form S-8 is not available (e.g. because the person is no longer an employee when a replacement option is issued), issuers will need to rely on another exception from the ’33 Act or register the issuance of the new options.
An issue also exists in construing the Rule 405 definition of employee benefit plan, which “means any written purchase, savings, option, bonus, appreciation, profit sharing, thrift, incentive, pension or similar plan or written compensation contract solely for employees, directors, general partners, trustees (where the registrant is a business trust), officers, or consultants […]” If former employees are being issued new options but do not fall into one of the other enumerated categories, new options issued to former employees will not be options issued under an employee benefit plan. Note that when Microsoft employees transferred their options to JP Morgan in late 2003, Microsoft amended its plan to remove the transferred options so that Microsoft would not rupture the 405 definition based on the “solely” requirement.
Prompt Payment Issues
When the exemptive order was issued in 2001, the scope of the order’s relief was limited to Rule 13e-4(f)(8)(i) and (ii), the all-holders and best-price provisions. The repricing offers that gave rise to this exemptive order, however, were generally structured to award substitute options on a deferred 6-month and one day payment schedule if certain conditions were met. This payment schedule was driven by the accounting policies in existence at that time. This payment schedule was also technically in conflict with the prompt payment rules. Based on the accounting requirements, however, the Corp Fin Staff generally did not raise objections to the payment schedule.
§Section 409A appears to require that any cash amounts paid in connection with an option repricing be paid in the year after the option repricing (i.e. offers completed in 2007 would require payment in 2008). If true, this payment schedule could contravene the SEC’s prompt payment rules. In the absence of any Staff relief, therefore, issuer tender offers conducted in accordance with IRS §409A are required to comply with the SEC’s prompt payment rules. Although issuers may have legitimate compensation concerns as to why they may wish to defer payment of tender offer consideration for an extended period, issuers should first consult with the Staff before tender offer payments are deferred.
Today is a National Holiday: SEC is Closed
Remember that today’s national day of mourning for former President Gerald Ford means that the SEC is closed and that any filings otherwise required to be made today will be due instead on January 3rd – as the SEC will treat today just like yesterday (ie. New Year’s Day) for 8-K purposes (ie. not a business day). EDGAR is closed too. And remember this old blog regarding counting days for tender offer purposes…
On Friday, the NY Times ran this article about how busy law firms were doing deals this year. It notes the impact this has had on associate bonuses and quotes one partner on how he recently had to do his first all-nighter. Geez, I did all-nighters pretty regularly when I was at my law firms (and even do them occasionally in this job). My favorite quote was from Peter Lyons: “If you’re an M.& A. lawyer and you’re not busy now, it’s time to find something else to do for a living.”