Good news for us American lawyers, U.S. M&A law and practices are taking over the world. This really runs the gamut from acquisition strategies to due diligence to documentation practice.
Now admittedly, the examples that I’m going to cite are Asian-related deals, but you’ve got to look at who is talking.
Japan’s clubby boardrooms are all buzzing lately with odd words like “poison pills,” “greenmail,” and “hostile takeovers.” Check out that crumpled Japanese newspaper in your next sushi takeout and you’ll see stories of a maverick Japanese internet company that’s shaking up the Tokyo, Inc.
How? Looks like this web portal called Livedoor used some stealthy off-hours trading to snatch up one-third of Nippon Broadcasting System. Only problem is that Nippon Broadcasting was in the process of being acquired by its affiliate, Fuji Television Network. After some nasty litigation, Livedoor sold its interest in the target after cutting a sweet deal with Fuji.
This high profile contested deal had Tokyo’s boardrooms wondering if a little “corporate fugu” and other takeover defenses should be on the menu (“fugu”, otherwise known to us burger bubbas as “blowfish”, is that fish that gets the last laugh by poisoning itself as a way to fend off predators; it’s a delicacy in Japan). In fact, Matsushita Electric (the Panasonic people) just adopted a poison pill last week.
But Japan, Inc.’s heartburn really started last year when two unprecedented, at least in Japan, and very American developments occurred in contested acquisition involving three Japanese banks (I’m referring to that $41B UFJ/Mitsubishi/Sumitomo cat fight to create the world’s biggest bank). One involved a no-shop clause and the other one involved a hostile bid. To keep things simple, I’ll refer to the parties as Target, Suitor Number 1 and Suitor Number 2.
Last July, a Tokyo court surprisingly granted an injunction in Suitor Number 1’s favor, enforcing a no-shop, actually a no-talk, clause that barred Target from pursuing its later-announced merger with Suitor Number 2. It was unprecedented – at least in Japan – that someone would sue to enforce a no-shop and even more unprecedented that a Japanese court would enforce it. Such a dispute sounds very American. What is even more interesting is that in the appeals process, one of the parties relied heavily on U.S. law on no-shops as well as related issues as authoritative precedent. Remember this is a purely Japanese deal. But because U.S. M&A law and practice is considered the best developed in the world, it was considered influential authority on how a Japanese court should rule.
As it turned out, Target prevailed in having the lower court’s injunction vacated. (The Tokyo Supreme Court held that the no-shop’s 2-year term was unenforceable, which would be the same conclusion in the US). In response to that move, Suitor Number 2 promptly announced that it was going to launch a hostile bid, yet another unprecedented U.S. oldie but goodie for Japanese banks.
One other example of American M&A tactics is the good old tortious interference claim. A couple years ago, the buyout group Texas Pacific Group sued a Taiwanese conglomerate for tortious interference with TPG’s proposed acquisition of a Chinese bank. It certainly got a lot of people’s attention, especially since TPG played its home town card by filing in Ft. Worth, Texas. As a Dallas lawyer, I can tell you that even we have concerns about being home-towned when we venturing the mere 30 miles to Ft. Worth. So how do you think the Taiwanese guys felt? You’ll also find high penetration of U.S. style M&A practice and documentation throughout the rest of Asia including, obviously, all the former British colonies, Korea and China.
One important caveat, sometimes the non-U.S. lawyers adopting our practice can turn things into a man-bites-dog situation. For example, in a recent deal with one of the top firms in China, I was presented with an opinion request by this Chinese lawyer that “The company’s financial statements are accurate.” So after picking myself off the floor, I did my best to explain no way, no how. To which the Chinese lawyer responded that he gets this requested of him all the time by U.S. lawyers, so why should I refuse? My reply was something along the lines of: if you see a toddler running with scissors, does it mean that it’s a good idea to let your kids do likewise?
Bottom line, globalization of American deal making is a beautiful thing. With any luck (at least for us American deal lawyers), our US M&A laws and practices will continue to follow a Starbucks-ian march around the world. Have passport – and Marty Lipton on Takeovers – in hand, will travel.
Without much fanfare or press, staffers are being moved “group-by-group” into the SEC’s new headquarters at Station Place — near Union Station on Capitol Hill. The big move was announced earlier this month in Capitol Hill’s Roll Call . I understand the new building will be accessible via underground tunnel from Union Station. The physical task of moving an entire governmental agency across town is estimated to take at least six weeks.
The first wave of personnel to move into Station Place came from the Division of Corporation Finance, including the Office of Mergers & Acquisitions, which moved in this past weekend. Without doubt the transition of employees, files and equipment is likely to cause some unavoidable delay in staff review time of filings as well as some increased difficulty in reaching examiners by telephone.
To assist you, here is OM&A’s new phone number: 202/551-3440. Note the “942” exchange has gone the way of the dinosaur!
The 115 Cardinals’ seclusion in the Sistine Chapel is a reminder to us all that the more things change, the more they remain the same. Namely, even in this age of conference calls, emails, webex meetings, and those prehistoric things called faxes, there’s simply no substitute for face-to-face meetings when there’s a complex deal to be made.
There’s only so much that phone calls and emails can do – and oftentimes, they are fertile media for miscommunication. I don’t know why but conference calls encourage people to posture and grandstand more than if they were performing in person. (Hint: people yelling into speaker phones). Maybe it’s the impersonal nature of just hearing a lot of voices babbling on and on. Emails also have a tendency to be misconstrued without the ability to see that slight gesture that signals that the speaker was just kidding and otherwise not intending to offend anyone.
On the other hand, face-to-face meetings give you the ability to observe body language. More importantly, meetings allow you to observe how the opposing counsel and her client interact. Even more important, face-to-face meetings allow you to build relationships with the other side’s lawyers and business people that are important to creating a collaborative atmosphere. Like that airline commercial said: You just can’t fax a handshake or a look in the eye.
True, conference calls and emails do make the dealmaking process more efficient but you just can’t beat getting all the people into the room and declaring that no one leaves until a deal is cut. Face-to-face meetings tend to force people to make decisions on the spot, obviously, favoring the creative, quick-thinking, and well-prepared types.
Phone calls and emails are not always the money savers that we think they are. Working with different time zones alone will extend turnaround times by days. For example, in a recent deal, we had 3-4 hour daily conference calls for 2 weeks straight but we soon realized that we had to go face-to-face. We accomplished more in a 2-day meeting than during the previous 2 weeks combined.
An in-house friend told me of one deal which was on-going for 18 months before she broke the log-jam by calling a conclave that resulted in a deal being made in less than 2 weeks.
My guess is that 2 weeks of full-time (and usually, overtime) work was more efficient and cost-effective than 18 months of sporadic brushfires. Let’s face it, we all juggle several deals at a time, so can you imagine the inefficiency of gearing up and down for a deal over the course of 18 months?
So, if your deal is stalling, take a lesson from the Cardinals and maybe you too will be seeing a puff of white smoke sooner rather than later.
Last week, the Wall Street Journal criticized FTC Chairman Deborah Majoras for simply “rubber stamping” Staff’s recommendation to challenge the Blockbuster / Hollywood Video proposed merger. WSJ complained that Majoras failed to recognize market realities, and in supporting Staff’s recommendation to challenge the merger, Majoras hurt business. The Journal, in my opinion, is way off the mark in its criticism of Chairman Majoras.
This is the second time in four years that Blockbuster has proposed to acquire Hollywood Video. Four years ago, the five-person Federal Trade Commission voted to block the merger because of its effects on competition, and the likely negative impact that the transaction would have on consumers. Although Blockbuster abandoned its bid before the Commission voted during this last go-round, it seemed apparent that Blockbuster was again going to face a 5-0 vote against its proposed merger. That’s 10 independent votes against the merger, each one made after careful studies of the market, competition and anticipated effects of the transaction. Blockbuster, it seems, is a clear two-time loser. I’m at a loss as to why the WSJ considers Majoras’ decision at all incorrect, or is at all surprised at the decision to challenge.
A lot of people—practitioners, business folks and commentators—enjoy criticizing the FTC and DOJ for their antitrust activities. Practitioners complain that Second Requests are too burdensome. Consumer advocate groups complain that the FTC does not spend sufficient time investigating potentially anticompetitive mergers. Industry analysts complain that too many transactions are blocked by the DOJ and FTC; at the same time, Congress complains that too many oil/petroleum mergers are approved. Some complain that the FTC investigates too thoroughly the conduct of certain industries (pharmaceuticals, in particular); others complain of blatantly anticompetitive conduct going unchecked in the industry.
In my years of practice, I have found that it is easy to find someone or some entity that is blaming the FTC or DOJ for just about every decision it makes—for either being too lax in its enforcement decisions or too permissive in allowing industry consolidation. A sure sign that an agency is doing its job, though, is the ability to withstand this criticism and not bend to constituent complaints (often more properly classified as ranting and raving). Here, the FTC and DOJ should not—and I would suspect will not—bow to such pressure.
Specifically with regard to the Blockbuster/Hollywood proposed hostile takeover, it is not that difficult to understand why the FTC had significant concerns with the transaction. The two parties are by far the largest video rental chains in the country, accounting for a great majority of in-store rentals (and in some geographic markets, accounting for the only rental chains at all). Where there is competition, it is not nearly as robust as that offered by the parties—the selections are smaller and the availability of first-run (i.e., “new”) titles is lacking. Blockbuster contended that other market forces—in particular video purchases (from the likes of Walgreens and BestBuy)—would constrain the post-merger entity from raising prices, but the unambiguous evidence demonstrates that first-run movies sell (at stores like Walgreens and BestBuy) for nearly three times the price as they are rented. Such a price differential demonstrates clearly that even if Blockbuster raised the prices of its new movie rentals by 50% that consumers would be unlikely to purchase such selections instead, given the significant price differentials. Finally, other forms of movie rentals, including on-line rentals (from the likes of Netflix), video-on-demand, and pay-per-view, were not sufficiently competitive to have the clout to counter any anticompetitive activity from the merged entity.
So in the end, it is likely that Chairman Majoras did not simply follow the lead of her staff. Instead, it is far more likely that she saw the evidence that the parties presented, evaluated it, and determined that the merger would harm consumers. That Blockbuster and WSJ are unhappy with the decision is not in doubt. Nor, however, is it particularly relevant.
Here is a guest blog from Broc Romanek: On Friday morning at the ABA Spring Meeting, SEC Corp Fin Director Alan Beller spent about 10 minutes discussing the Titan Report and – as Brian Brehney stated during our webcast a few weeks back – reiterated that he believed that the Report was “unremarkable” and only was a clear statement of existing law.
Alan stated that the principal issue to be drawn from Report was whether a reasonable investor could conclude, based on the total mix of information, that the representations in the merger agreement between two companies should be construed as a statement of fact. Alan emphasized that the Report does not say that the SEC believes that an investor is entitled to such a conclusion or that such representations and warranties are for the benefit of investors (although Alan pointed out that there were a few unreported court decisions which made that finding). But Alan noted that the Report categorically rejected the notion that investors can’t even consider the reps & warranties (thus rebuffing the theory that the merger agreement is simply relevant to the contracting parties).
Alan also pointed out that – as part of the SEC settlement – Titan was not found to have violated the FCPA or any other law. So clearly this is an atypical Section 21(a) report on that basis alone, as these types of reports normally require violations to serve as the premise of the report.
Alan warned the audience that it would be problematic if lawyers were to start advising clients to not include their merger agreements in their SEC filings in reaction to the Report.
As for the ability to include disclaimers to warn investors that the reps and warranties in such an agreement should not be taken as a statement of fact, Alan indicated that he did not object if a company believes that it is right to provide such advice to investors in a particular situation. But as noted later in the Negotiated Acquisitions Committee meeting, this approach ultimately might not sit well with the SEC Staff – as a disclaimer could trigger a request by the Staff to submit disclosure schedules as supplemental materials and ultimately include some of that information in the proxy statement. We continue to post law firm analysis of the Titan Report in our “Disclosure” Practice Area.
Check out this controversial tidbit from a recent Broc’s Blog (in www.thecorporatecounsel.net) , which is still timely if not scary.
Is the SEC trying to tell us to start filing our (otherwise confidential) acquisition agreement disclosure schedules to keep reps from being misleading? Should we start adding disclaimers to the content of exhibits (or items incorporated by reference) to SEC filings? At the very least, Titan’s otherwise well-intentioned and time-honored efforts to be complete turned into a man-bites-dog nightmare. Check out Titan’s Section 21 Report and various law firm memoranda at www. DealLawyers.com’s practice area “Disclosure.”
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Implications of SEC’s Action Against Titan on Mergers
On Wednesday [March 1], the SEC announced a settled enforcement action against Titan Corporation alleging Foreign Corrupt Practices Act violations for funneling approximately $2 million towards the election campaign of Benin’s then-incumbent President. The amount of this settlement – $15.5 million in disgorgement and prejudgment interest and a $13 million penalty – is the highest ever paid for FCPA violations.
However, the most significant aspect of this proceeding is a Section 21(a) Report of Investigation that asserts that representations in an agreement filed as an exhibit can be actionable by the SEC if they are materially false. This assertion relates to a FCPA representation made by Titan in a Merger Agreement with Lockheed Martin (my alma mater!), which was also publicly disclosed in Titan’s proxy statement (since the Merger Agreement was in the proxy statement). It is noteworthy that the Report does not allege a violation by Titan of Sections 10(b) or 14(a) – or Rules 10b-5 and 14a-9 – and that the SEC has not charged Titan with such violations.
The Report recognizes that Titan shareholders were not beneficiaries of the FCPA Representation in the Merger Agreement, but states that the inclusion of the Representation in a disclosure document filed with the SEC, “whether by incorporation by reference or other inclusion, constitutes a disclosure to investors.” The Report goes on to say that disclosures regarding material contractual terms such as representations may be actionable by the Commission. The Commission will consider bringing an enforcement action if it determines that “the subject matter of representations or other contractual provisions is materially misleading to shareholders because material facts necessary to make that disclosure not misleading are omitted.”
Smoking guns emails are nothing new but recent developments are enough to make even prolific emailers want to reach for their spy kits with the disappearing ink.
First, there’s Boeing’s CEO whose brief tenure at the helm was cut short by smoking (and I guess the content was really smokin’) gun emails to his Boeing colleague/paramour. OK, you say, what the heck does this have to do with deal making? Nothing but I couldn’t resist.
One email-bites-man development does involve law and deals. In a suit filed by financier Ronald Perelman against Morgan Stanley, the Florida court last week took the unusual step of shifting the burden of proof to the defendant, Morgan Stanley, to prove to a jury that it didn’t help Sunbeam defraud Perelman. Apparently, the court was PO’ed about MS’s lack of internal controls in producing emails requested in discovery. The judge describes MS’s failures as “gross abuse” of its discovery obligations. As such, the judge decided to level the playing field by shifting the burden of proof.
Ouch! Just two reminders to us all that emails do bounce back – sometimes in your face.
It’s enough to make you wonder why anyone would send emails. Come to thing of it, why would anyone blog? Oops time to stop…
On Friday, March 4, 2005, the Federal Trade Commission filed a motion for declaratory relief and for a temporary restraining order (TRO), seeking to prevent Blockbuster from being able to consummate its tender offer for the shares of its rival, Hollywood Video. The FTC contends that Blockbuster failed to comply with the terms of the FTC’s Request for Information (called a “Second Request”) in connection with the antitrust agency’s investigation into the proposed Blockbuster/Hollywood Video transaction. Viewed in isolation the request for a TRO seems very technical and therefore unimportant, but in effect, the request is quite extraordinary. See http://www.ftc.gov/opa/2005/03/blockbuster.htm
First some background. In connection with every merger investigation, the FTC and Department of Justice (DOJ) have concurrent jurisdiction to review and challenge a transaction. Each agency has particular market expertise, and takes the responsibility for reviewing transactions in its designated industries. The FTC always takes the lead in reviewing transactions in the consumer goods and electronics industries; thus, the FTC was tasked with reviewing the Blockbuster hostile tender.
After its initial review of the transaction, the FTC concluded that questions remained regarding whether the Blockbuster/Hollywood transaction would harm consumers, and the agency issued a Second Request. The Second Request subpoena ostensibly demands nearly all of the documents created by a company over a period of years preceding the transaction (usually 3 – 5 years), and also requires parties to provide detailed pricing, discounting, and costing information. In this particular Second Request, we learn from the FTC’s March 4, 2005 complaint that the agency demanded information from Blockbuster relating to its pricing, specifically with regard to store-by-store rental fee information, so that the agency could conduct an economic analysis to determine who competes for Blockbuster business.
Blockbuster “complied” with the terms of the Second Request in early February 2005. In late February, the FTC realized that the detailed pricing information provided by the company was in large part incorrect. According to the FTC complaint, Blockbuster acknowledged and corrected the deficiencies, subsequently submitting correct information sometime later that month.
The FTC is on a tight time clock to complete its review of a transaction after the parties comply with the terms of a Second Request. Here, Blockbuster certified its compliance in early February, and under the HSR Act, the FTC has only 30 days from the time of that certification to approve or challenge the deal. Thus, without a decision to challenge the proposed tender by early March, Blockbuster technically would be able to close its tender for the shares of Hollywood, without further interference from the FTC. The FTC’s motion for a TRO claims that Blockbuster, however, failed to comply with the terms of the Second Request because it provided faulty pricing data. As a result, the FTC demanded from the court an order stating that Blockbuster’s 30-day clock had not yet started to tick and prohibiting the company from consummating its tender offer until such time did lapse, giving the agency precious additional time to complete its review of the transaction.
This request is quite extraordinary for antitrust practitioners. There have only been two other cases in the last 25 years where there has been a court dispute over whether a party has complied with the terms of the Second Request or not (FTC v. McCormick in 1988 and FTC v. Dana Corp. in 1981). Generally, parties prefer to resolve these compliance disputes informally—usually by reaching some sort of “timing agreement” with the agencies that allow them more than the statutorily provided 30 days to complete their antitrust review, in exchange for an agreement with the agency reviewing the deal not to challenge in court the parties’ compliance with the Second Request. For whatever reason—here, we can only speculate—Blockbuster and the FTC could not reach an agreement as to timing and this dispute proceeded to court.
Why do I think this ended up in court? Glad you asked. With no special inside information, it seems to me that Blockbuster is marching forward with its transaction, and does not care whether it resolves the FTC’s antitrust concerns at the agency level or in court. It appears that Blockbuster has concluded that the FTC will challenge the transaction regardless of how accommodating the company is with regard to timing or other FTC requests, and has decided not to give another inch to the FTC. I can fathom that the FTC has provided some indication of serious concern regarding the transaction to Blockbuster, and has at least informed them of the possibility that the agency will sue to block the transaction, and Blockbuster is resigned to fighting this challenge in court. We shall see. If this deal ends up in court, as I discussed in my last posting, there are extremely interesting questions of market definition and antitrust harm that no doubt a court and the FTC will have to carefully consider.
Has Sarbanes-Oxley increased your company’s or client’s compliance costs significantly (internal and disclosure controls come to mind)? Is management’s time being diverted from operations to ensure such compliance? As some of you may know, there is a “switch” available for companies meeting certain specific SEC requirements that can, in effect, turn off and effectively eliminate these compliance burdens.
For those of you who have not had a chance to read yesterday’s Wall Street Journal Article on Going Dark, a growing number of smaller companies are flipping the compliance switch off by voluntarily delisting from their exchange or market and deregistering their securities from the reporting requirements of the SEC (even though companies would no longer be required to file quarterly and annual reports, certain companies continue to post such results on their websites). Since the beginning of 2004, companies such as Anacomp, Inc., Coast Dental Services, Inc., Kyzen Corp., Quality Products, Inc. and Sport Supply Group, Inc. (to name just a few) have flipped the switch and gone dark even though they are still publicly held. The benefits of “going dark” are that it does not require shareholder approval and it is a swift, simple and relatively inexpensive alternative to engaging in a going private transaction. In addition, companies that go dark are still eligible to have their securities quoted on the pink sheets. Of course, the process of “going dark” requires satisfaction of certain SEC requirements and is not a “one size fits all” solution. A company’s board of directors will therefore need to weigh the costs and benefits of delisting and deregistering prior to making a decision to go dark.
It should be noted that the going dark process is not without its opponents. For example, the Nelson Law Firm LLC, acting on behalf of certain institutional investors, filed a Petition in 2003 (which is currently pending with the SEC), requesting that the SEC amend Rule 12g5-1 under the Exchange Act to include securities held by a beneficial owner in “street name” as securities “held of record.” This change would, in effect, make it less likely that a company would satisfy the record holder conditions of Rule 12h-3 under the Exchange Act in order to go dark. Thus far, the SEC has not acted on this Petition and the switch to go dark currently remains a viable alternative for some companies who satisfy the criteria. By way of background, Rule 12h-3, upon satisfaction of certain other requirements, permits suspension of the duty to file reports under Section 15(d) of the Exchange Act for a class of securities held of record by (i) less than 300 persons, or (ii) less than 500 persons, where the total assets of the issuer have not exceeded $10,000,000 on the last day of each of the issuer’s three most recent fiscal years.
A big thank you to Arash Mostafavipour for en”light”ening us on this often overlooked alternative to going private.
A recent article on right v. left brain executives had me thinking: what makes a good v. great deal lawyer?
As you know, the people with the slightly larger left brain are the cool, calculative folks. The right-brainers are the creative/emotional ones. According to clinical psychologist, Sandy Gluckman, the characteristics of lefties v. righties are:
If your LEFT brain is dominant, you:
Get to know people through sharing facts
Focus on facts and solutions
Are pragmatic and cautious
Perform tasks in a proven and accepted way
Like to know exactly what is expected of you
Prefer a clear, step-by-step process
Tend to overlook giving recognition to others
Need many facts before arriving at a decision and acting
Believe caring and empathetic people are too soft in business
Solve problems by focusing on the way the task is being implemented
On the other hand, you’re RIGHT brain dominant, if you:
Get to know people through sharing feelings
Focus on feelings and the bigger picture
Are creative and open to taking risks
Look for a new and original way of going things
Like to be constantly surprised and challenged
Prefer to experiment as you go along
Give recognition easily and spontaneously
Are action oriented, quick and spontaneous in arriving at decisions
See analytic and logical people as cold and uncaring
Solve problems by focusing on relationships and teamwork
The competent deal lawyer must do all the left-brain things well. But, after reading the right-brain characteristics, could it be that the lawyer who the CEO, CFO, or CDO wants sitting next to them at the table is really the right-brainer? To be part of the strategic team that cooks up the deal, wouldn’t the execs prefer the out-of-the-box-thinking lawyer? Is this the difference between being the lowly scrivener or “The Dealmaker.”
After a certain level of core (left-brain) competency, my guess is that the real go-to, must-have, and can’t-do-a-big-deal-without lawyers tend to be righties – who, of course, a supported by a team of lefties.
(Actually, the left-brain characteristics sound like what you want in your ideal associate; the right-brain list sounds like a recipe for a high-flying I-Banker. Hmmm, I wonder who carts home the bigger check at closing.)
Anyway, I need an aspirin for this splitting headache I suddenly developed…