Today, the SEC adopted long-awaited amendments to the best-price rule, Rule 14d-10, which brings the M&A world back to “normal” in the wake of conflicting decisions among the US Circuit Courts in this area during the past few years. Here is an opening statement from Corp Fin – and here is an opening statement from Chairman Cox.
As expected, the amendments:
– clarify that the rule applies only with respect to the consideration offered and paid for securities tendered in a tender offer
– clearly exclude compensation arrangements, so long as they meet certain requirements
– provide a safe harbor for compensation arrangements that are approved by independent directors
– include an exemption that contains specific substantive standards that must be satisfied
Join two of the SEC Staffers who drafted the rule amendments – as well as two former SEC Staffers who served in Corp Fin’s Office of Mergers & Acquisitions – in this newly announced webcast: “The Evolving ‘Best Price’ Rule.”
On Wednesday, the SEC announced that it will take action on a number of items, including:
– adopting changes to the tender offer best price rule next Wednesday, October 18th
– delaying a proposal to amend Rule 14a-8 from next Wednesday to December 13th (remember this is the AFSCME case response from the SEC)
– proposing guidance on internal controls on December 13th (part of the SEC’s recommended package of 404 relief announced by the SEC a few months ago)
– adopting rules for foreign private issuer deregistration on December 13th
– adopting rules for e-Proxy (i.e., Internet proxy delivery) on December 13th
Based on the SEC’s notice about next week’s “best-price” rule consideration, it appears that the SEC will apply the amendments to both issuer and third-party tender offers and will clarify that the best-price rule (i) does not apply to securities that are not tendered in a tender offer; and (ii) does not apply to consideration paid according to employment compensation, severance or other employee benefit arrangements with securityholders. It does not appear that the amendments will provide similar exemptive relief or a safe harbor with respect to other agreements with securityholders (e.g., commercial arrangements) or that they will include a de minimus exception.
And as the shareholder proposal rule amendment quickly became a political issue – and potentially a 3-2 vote along partisan lines if shareholder access was not included as part of the SEC’s proposal – my guess is that the delay might have been to move it to a post-election date…
M&A Dispute Resolution: Getting Deal Lawyers Into the Game
Next Tuesday, catch Jim Freund, Mediator and former Partner of Skadden Arps Slate, Meagher & Flom LLP – and one of the foremost M&A lawyers of any generation – in our webcast: “M&A Dispute Resolution: Getting Deal Lawyers Into the Game.” Settling the all-too-frequent post-closing disputes spawned by M&A deals is too important to be left solely to the litigators! Transactional lawyers should step up to the plate to help achieve commercially-sound solutions through negotiation or mediation.
Among other topics, Jim will cover:
– Why is resolving disputes such tough work
– How deal lawyers can add real value for their clients in the mediation process
– What are some common pitfalls in M&A disputes – and how to overcome them
– What are the keys to persuading a mediator as to the merits of your cause
And now you can catch this program at no cost if you take advantage of our no-risk trial for 2007 (and get access to DealLawyers.com for the rest of 2006 for free).
From Jim Moloney of Gibson Dunn: Here is a no-action letter that is somewhat novel and recent, Alliance Semiconductor Corporation (9/22/06). In this letter, the SEC Staff granted relief to Alliance Semiconductor under Rule 13e-4 permitting the issuer to do a modified Dutch auction tender offer without specifying the “exact” number of securities sought in the offer.
This requirement was made clear in an old no-action letter issued to Janet Thiele in 1987). Since that time, the Staff’s longstanding position has been that a bidder in an issuer tender offer must specify the exact amount of securities sought in the offer to comply with the disclosure requirements.
In the Dutch auction context. it is fairly standard to specify a range of prices within a narrow bandwidth that stockholders can elect to tender at and that will ultimately be used in determining the number of shares purchased and the price paid. In many cases, issuers have tried to say in their offers that they will purchase “up to” some specified number of securities. In this instance, Alliance was seeking to spend a fixed dollar amount ($30m) without specifying an exact number of shares sought.
Counsel (Paul Hastings) was able to convince the Staff that specifying an exact number of shares is unnecessary and should not be required by the tender offer rules. Rather, if a range of prices is specified and a total dollar amount that the issuer is willing to spend in the offer is disclosed, that should be sufficient for investors to make an informed decision as to whether to tender or not.
Scott and Mike provided this table in connection with our recent Conference on the SEC’s new executive compensation rules. The table is key for two reasons. One is that this is not a table for which the SEC provided a template, so it’s very useful to get a head start on drafting your version. Second is that it illustrates how much work creating this table will entail.
Poison Pill Tinkering Not Enough, Some Investors Say
From ISS’s “Corporate Governance Blog“: While more companies are agreeing to submit future “poison pill” plans to a shareholder vote or modifying existing ones to make them more palatable, some individual investors are pressing ahead with shareholder proposals–including binding resolutions seeking bylaw or certificate of incorporation changes–to get companies to submit future defenses to a shareholder vote.
A case in point is the Aug. 21 announcement by Pep Boys, the automotive aftermarket retail and service chain, that it will modify its poison pill after reaching an agreement to resolve a proxy fight with Barington Capital Group, which holds a 9.9 percent stake in the company. As part of the agreement, the dissidents will get four director nominees at the company’s Oct. 19 annual meeting.
Pep Boys said it will amend its anti-takeover plan to include a provision that requires a committee of independent directors to meet every three years to review the plan and determine whether the plan should be terminated or revised. The proposed change also calls for the elimination of the so-called “modified slow-hand provision,” which requires a vote by directors unrelated to a potential acquirer to redeem the pill, and in its place permit the redemption of the plan by the entire board.
“This tinkering with the poison pill plan falls far short of allowing shareholders a vote on this most important topic, especially at an underperforming company such as Pep Boys,” shareholder activist John Chevedden told Governance Weekly. He said his proposal to submit future pills to a shareholder vote will remain on the company’s ballot.
In addition to the more than a dozen companies that have either rescinded their pill or put it up for a shareholder vote this year, a number of companies have promised to do so in the future, including Comerco and Gemcorp in 2007, and OfficeMax in 2008. At News Corp., which was sued by investors last year after it failed to submit a poison pill extension for shareholder approval, management is now seeking such an endorsement at the company’s upcoming annual meeting, tentatively scheduled for Oct. 20.
An unusual poison pill proposal by Harvard Law Professor Lucian Bebchuk is set to come to a vote on Sept. 18 at CA, a large management software company. The measure seeks a binding bylaw amendment that would require all poison pills that have not been endorsed by shareholders to be approved by a unanimous vote of the board of directors, and that these poison pills may not have a life of longer than one year, and must be renewed every year by another unanimous vote of the board.
Bebchuk’s proposal may ultimately help to establish a legal precedent clarifying issues surrounding “binding bylaw” proposals regarding poison pills. The validity of such proposals is largely unsettled in Delaware law. The outcome of Bebchuk’s proposal, and a similar proposal which got 71.2 percent approval by Hilton Hotels shareholders in May, may spur Delaware courts to address the issue.
At the 14 companies where poison pill proposals by investors have come to a vote this year, the average level of support exceeded 50 percent.
A lot of deal lawyers are worried about the recent 5th Circuit case – Halliburton Benefits Committee v. Graves – which allowed retirees to pursue the buyer as a result of a standard employments benefits provision of a merger agreement (even though the agreement had specific “no third party beneficiary” language). We have posted a copy of the opinion in our “M&A Litigation” Portal.
It will be interesting to see if lawyers try to significantly cut back the scope of traditional covenants due to a concern that possibly thousands of employees might now have standing to sue over language interpretations. Thanks to Julie Jones of Ropes & Gray for the heads up and her wisdom!
Last week, the NASD proposed amendments to NASD Rule 2720 that would significantly amend the application of the rule to public offerings in which a participating broker/dealer has a conflict of interest. The more significant proposals are:
– exempt from the filing requirements and the qualified independent underwriter (QIU) requirements of Rule 2720 public offerings with a book-running lead manager or dealer/manager that does not have a conflict of interest and that can meet the disciplinary history requirements for a QIU and public offerings of investment-grade rated debt and securities that have a bona fide public market
– change the definition of “conflict of interest” so that the Rule covers public offerings in which at least five percent of the offering proceeds are directed to a participating member or its affiliates and eliminates ownership of subordinated debt as a basis for a conflict of interest
– modify the Rule’s disclosure requirements so that more information relating to conflicts of interest is prominently disclosed in offering documents
– amend the Rule’s provisions regarding the use of a QIU to focus on the QIU’s due diligence responsibilities and eliminate the requirement that the QIU render a pricing opinion
– amend the QIU qualification requirements to focus on the experience of the firm rather than its board of directors, prohibit a member that would receive more than five percent of the proceeds of an offering from acting as a QIU, and lengthen from five to ten years the amount of time that a person involved in due diligence in a supervisory capacity must have a clean disciplinary history
– eliminate provisions in the Rule that do not apply to public offerings and instead address an issuer’s corporate governance responsibilities
– eliminate a provision that applies certain disclosure requirements to intrastate offerings
From a recent Wachtell Lipton memo: “We have been saying for some time, most recently in our memo from last August, that REITs are not takeover proof, myth and legend notwithstanding. The closing yesterday of Public Storage’s successful takeover of Shurgard makes the case more eloquently – and decisively – and should finally put to rest any lingering misconceptions about whether it is possible to acquire a REIT on an unsolicited basis.
Public Storage had privately approached Shurgard several times to discuss a potential business combination and was repeatedly rebuffed. Most recently, in July 2005, Public Storage proposed a stock-for-stock combination at a significant premium to market prices. Although this proposal was also quickly rejected as inadequate by the Shurgard board, Public Storage did not back down. Public Storage made its proposal public, and pressed its case to the Shurgard shareholders through one-on-one meetings and through press releases and public statements. Ultimately, the resulting shareholder pressure and compelling logic of the combination led the Shurgard board to announce that it was exploring strategic alternatives. In the end, Shurgard’s exploration process culminated in a merger with Public Storage, which valued Shurgard at about $5.5 billion. The transaction provided Shurgard shareholders a 39% premium to Shurgard’s undisturbed stock price plus the opportunity to benefit from the upside potential of the combined company.
The Public Storage/Shurgard transaction is indicative of larger trends in the REIT market. The extraordinary liquidity in the real estate capital markets, combined with the differential between private and public market values and the low interest rate environment, among other factors, have brought an increase in the frequency and seriousness of unsolicited proposals, hedge fund activity, private equity club deals for large targets, and topping bids after announced deals. The attempts to derail the sale of Town & Country, even though unsuccessful, illustrated that even REITs that are committed to announced transactions are not immune to takeover attempts. REITs are increasingly being subjected to the same dynamics and pressures that exist in the broader market for corporate control.
REIT management and boards of directors are well advised to study the market environment in which they now operate, to engage in advance planning and takeover preparedness reviews in order to be able to respond rapidly and appropriately as circumstances may dictate, and to pay careful attention to deal protection measures in friendly transactions.”
The Fall 2006 issue of Directors & Board’s Boardroom Briefing focuses on M&A issues for directors. The Fall issue includes analysis of the survey query: “On balance, mergers and acquisitions destroy more value than they create. Do you agree or disagree?” The survey results were:
“We tend to make judgments about what is visible to us. All we read about are the unsuccessful mergers, so common wisdom is that they destroy value more often then they create value. So, while I believe that mergers destroy value, I recognize the limitations of not approaching the question from an empirical point of view.”
“Surprisingly, the skills to successfully integrate a target are not in the toolbox of most acquiring companies. Having participated in multiple value-creating acquisitions, it’s much like war and a simple process:
1. Control the lines of communication and explain objectives, strategy and how missions are run in your army.
2. Move quickly on personnel decisions, benefits alignment, and culture.
3. Honorably discharge dissenters.
4. Insure early victories and wave the flag.”
“While the new combined assets may be more competitive, the time and energy required to manage a successful transition takes energy away from core businesses. Rarely are the expected synergies able to overcome the premium paid in a takeover.”
“The research shows that it is the rare company that creates sustainable economic value as a result of M&A activity. Successful integration and growth seems to elude most companies.
“Good managements often do great long-term deals that do not look too good in the short term. Since the Street is overly focused on short-term results, the impression we often get is of value destruction. Often this is due to failure to take a legitimate long-term view.”
“I personally have never been with a company that made an acquisition be non-accretive, but some have been marginal. I have also gone into companies where previous acquisitions had proved to be a horrible mistake and had to be closed down or sold. It depends on how well the target fits into the strategic goals, the quality of the due diligence, and the attention paid to the integration process.”
“Sadly, from my observations over 25 years as both a senior executive and consultant, it’s probably true that M&A destroys more value than it creates. The rosy growth and synergy forecasts managements use to justify their winning bids in an increasingly competitive M&A market are rarely met. More often than not, the only real winners in a transaction are the sellers who’ve enjoyed a unjustified transfer of wealth/value from the buyers, something the buyers discover (if they are objective enough do a post-mortem) only after struggling mightily, yet failing to deliver, against forecasts they had little confidence in to begin with.”
“The central problem is that mergers and acquisitions today are primarily pushed for the wrong reasons and by the wrong people, usually in their own interests, and against those of the companies and their internal and external constituents.”
“Investment bankers tend to oversell the benefits in a search for fees.”
“A large percentage of M&A transactions are effected to acquire a skill set not possessed by the acquirer better managers, sales, distribution. Those are never more effective than organic growth. Another large percentage is for product extension, and the acquirer generally doesn’t understand the profitability (or not) of the acquired business. KPMG’s study indicated that 80% of M&A transactions destroyed value I think the percentage is coming down, but it’s still more than half.”
From a recent Wachtell Lipton memo: “Last Thursday, President Bush signed into law the Pension Protection Act of 2006. The Act makes it easier for hedge funds to attract capital from benefit plan investors and will facilitate non-control investments by private equity and venture capital funds, in each case without the funds’ underlying assets being subjected to the fiduciary and prohibited transaction rules of ERISA and the Internal Revenue Code.
The assets of a fund whose investors include employee benefit plans that are subject to ERISA may be considered to be “plan assets” that are also subject to ERISA, which means that the actions of the manager must comply with exacting fiduciary standards of ERISA. These requirements are not acceptable to most hedge funds and private equity and venture capital funds, which seek to exempt themselves from the rules by:
– qualifying as venture capital operating companies (“VCOC”) or real estate operating companies (“REOC”), which requires an investor, among other things, to have “management rights” with respect to its initial investment and at least a majority of its investments, valued at cost, thereafter; or
– limiting ownership of their equity ownership by “benefit plan investors,” which includes foreign and governmental plans as well as ERISA-regulated private pension plans, to 25% of the funds’ equity interests.
Because qualifying as a VCOC or REOC requires funds to have management rights with respect to certain investments, it is well-suited to private equity and venture capital funds, which typically make long-term investments and obtain management rights. Hedge funds, which typically make short-term investments and therefore do not obtain such rights, largely elect to comply with the rules by limiting ownership of their equity by benefit plan investors.
The New Rules: The approach taken by most hedge funds has economic limitations because “benefit plan investors” include many of the major sources of investment capital. The Act makes this approach more practical by liberalizing the 25% test in two ways:
– The definition of “benefit plan investors” will now exclude foreign and governmental plans; and
– Where benefit plan investors own equity in a fund that invests in a fund of funds, the proportion of the benefit plan investors’ equity ownership in the fund of funds will now be determined based on the benefit plan investors’ proportionate interest in the fund of funds, whereas the existing regulations treated an investment of a fund that flunked the 25% test as 100% held by benefit plan investors.
Impact on M&A: Hedge funds will welcome changes to the plan asset rules, which will provide them with increased capacity to accept additional capital from benefit plan investors and governmental and foreign plans without running afoul of the 25% test. Moreover, because plan money tends to be “stickier” than other forms of capital, hedge funds could have the ability to pursue more longer-term investments than in the past. The increased size of hedge funds, combined with their potential to pursue longer-term strategies, could both fuel more activism by hedge funds and provide them with increased ability to pursue large scale acquisitions.
In addition, some private equity and venture capital funds that have been avoiding treatment as ERISA fiduciaries by qualifying as VCOCs and REOCs will likely consider whether they can meet the liberalized 25% test so that they have more freedom to structure their investments. This could lead such funds to act more like hedge funds than private equity funds have historically acted.
The convergence of these investment strategies and the capacity for multi-faceted approaches by activists who can either agitate or finance an acquisition could pose significant challenges for corporations. We continue to advise corporations to engage in the same kind of preparation for attacks from fund activists as from hostile takeover bids. Careful planning and a proactive approach are critical.”
From the ISS “Corporate Governance Blog“: A controversial takeover battle between two of Japan’s largest paper manufacturers may prompt a legal ruling on how and when Japanese companies can deploy poison pill defenses.
The use of pills has grown exponentially in Japan over the past 18 months, but the legality of their use in some circumstances remains questionable, leaving both issuers and shareholders searching for guidance from Japan’s judiciary. A recent takeover attempt pitting bidder Oji Paper against rival Hokuetsu Paper Mills has invited judicial scrutiny because of the target’s adoption of a pill without shareholder approval and subsequent issue of warrants to a “white knight” investor, legal experts say.
The pill, which would remain in effect until the next annual shareholder meeting when it would be put to a shareholder vote, is relatively standard for Japan. The terms include a 20 percent trigger, the establishment of an independent but non-board level committee (composed of three non-executive statutory auditors) to review the terms of any takeover offer and present a non-binding recommendation on whether to deploy the pill, and a commitment to reduce board terms to one year.
Currently, Hokuetsu’s board has no outsiders (nor does Oji’s), and the terms of the pill do not obligate the board of directors to accept the committee’s recommendation, should the committee favor the takeover offer and thus recommend against deploying the pill. Hokuetsu’s independent committee on Aug. 8 recommended to the board that the pill be deployed.
The committee’s independence is one issue the courts will focus on, experts say. The role of the [independent committee] is “to fairly and impartially determine whether the takeover bid will increase the value of the target company,” notes Waseda University’s Tatsuo Uemura in comments made to the Nihon Keizai Shimbun.
Without shareholder approval of the pill, however, Hokuetsu runs the risk of skeptical judicial scrutiny. According to ISS data, at least 60 other Japanese companies have adopted pills without shareholder approval this year, but few have done so in the face of a takeover bid.
A precedent-setting decision last year by the Tokyo District Court, upheld by the Supreme Court, forced process control equipment maker Nireco to withdraw a poison pill passed by the board of directors without shareholder approval. A Ministry of Economy Trade and Industry and Ministry of Justice white paper published in May 2005 appeared to endorse so-called advance warning takeover defenses. However, while prescribing pill-like defense mechanisms, the paper warned that regulations should not permit poison pills to be used simply to hold off a hostile bid or to entrench management.
Moreover, shareholder opposition of poison pills and other takeover-related defenses is on the rise. Influential pension fund associations have adopted more stringent proxy voting policies against such proposals, including the Pension Fund Association’s policy of voting against directors of companies adopting poison pills that are “structured such that the deployment is left to the discretion of the board of directors,” according to a June 29 Nihon Keizai Shimbun article.
A recent survey by the Japan Securities Investment Advisers Association indicated that 50 percent of respondents either voted against or abstained on management proposals, an increase of 11 percent over the previous year. Those proposals typically resulting in a negative vote or abstentions were executive retirement bonus plans and anti-takeover proposals, the Nihon Keizai Shimbun reported.
Hokuetsu’s white knight tactic may compound the risk of a negative judicial ruling. Two days after announcing its implementation of the pill, Hokuetsu’s board entered into an alliance with Mitsubishi Corp. that included the issuance of shares at a discount to the market price, allowing Mitsubishi to acquire up to a 24 percent stake in Hokuetsu.
One issue being debated in legal circles is disclosure. The Knight Ridder wire service reported that the Tokyo Stock Exchange (TSE) was considering disciplinary action against Hokuetsu for its failure to disclose Oji’s bid when discussing with the TSE its intent to adopt a poison pill ahead of the public announcement. The company also failed to disclose Oji’s offer to the market, as it worked out the deal with Mitsubishi.
In the face of a white knight defense, Oji could seek injunctive relief from the courts, although it has not yet made a move in that direction. Last year, Internet marketer Livedoor’s attempted takeover of Nippon Television led the target’s cross-shareholding partner, Fuji Television, to issue a flood of warrants to dilute Livedoor’s stake. The court issued an injunction to block the issue of the warrants. Should a deal go through, the combination of Oji and Hokuetsu would form the world’s fifth-largest paper company.