There has not been much in the way of substantive merger antitrust pronouncements in the past month. While we eagerly await some activity from the courts, the FTC and the DOJ, including an appeal of a significant merger decision from the Western District of Kentucky (U.S. v. Dairy Farmers Association), a likely appeal in an FTC merger case (FTC v. Chicago Bridge & Iron), and some additional guidelines and comments on Merger Policy from both agencies, we have not had the flurry of activity in February that we had in prior months.
That’s not to say that the agencies are not doing anything. There are a number of very significant Second Requests currently percolating at both the FTC and DOJ. No one expects resolution on any of them in the near future (and for that matter, no one is expecting any significant challenges), however, the agencies currently are looking at the proposed mergers between:
• Blockbuster and Hollywood Video.
• Verizon and MCI.
• SBC and AT&T.
The Blockbuster / Hollywood Video proposed transaction is interesting for several reasons: (1) it is a hostile bid, at the moment; (2) the parties have tried to get the deal through the FTC several years ago and failed; and (3) it likely involves some significant market definition issues.
Hostile bids are interesting from an antitrust perspective, and they make the antitrust regulatory process extremely difficult. Usually, the merging parties are fighting to convince, in tandem, that their proposed transaction does not result in too much market concentration. Parties engage the agencies with their documents, expert testimony and substantive briefings, explaining that customers will not see increases in prices following the merger. Imagine, on the other hand, fighting not only the government, but your proposed merger partner as well. As we saw in Oracle/PeopleSoft, hostile bids greatly lengthen the antitrust review process because your purported partner is fighting you at the agencies tooth-and-nail. In Oracle/PeopleSoft, PeopleSoft, primarily through its legal counsel, Gary Reback, engaged in one of the most public displays of merger opposition, going as far as to write substantive white papers decrying the proposed combination from a competitive standpoint (one entitled “A Hostage Taking”), and starting his own weblog trying to undermine Oracle’s bid on antitrust grounds, on an almost daily basis. Even though the court eventually allowed that merger to proceed, there can be no doubt that PeopleSoft’s efforts had something to do with the DOJ’s (and 10 or so state Attorneys General) decision to challenge the merger. It will be interesting to see whether Hollywood engages in a similar offensive.
The ever-evolving arguments that on-line distribution competes vigorously with traditional bricks-and-mortar retailing will be a prevalent theme in the merger investigation (e.g., Netflix vs. in-store rentals), as will the argument that Wal-Mart competes with everyone (here, the parties likely will contend that sale of videos at Wal-Mart competes with rentals at Blockbuster and Hollywood Video).
The two telephone mergers likewise are interesting—not because anyone expects the agencies to challenge the transactions—but because of the enormity of the projects (not to mention the sentimental nature of SBC acquiring its former parent, AT&T). Just to show where we’ve come in merger antitrust review—according to estimates, there will be approximately 1,000 attorneys reviewing documents from both companies, for 70 hours / week, for three months. Go figure the bill out on that one! While there likely will be some relief required (e.g., divestiture of businesses in some markets), in all likelihood, the agencies eventually will allow the mergers to proceed.
I expect March will provide some interesting discussion topics in the area, as we see the stream of these investigations begin to conclude.
As you know, controlled companies are exempt from certain NYSE and NASD board and committee independence requirements pursuant to NYSE Rule 303A.00 and NASD Rule 4350(c)(5). Both the NYSE and NASD have defined a controlled company as “a company in which any individual or group of shareholders control more than 50% of the shares of the company.” But what exactly constitutes a group? The NYSE states in its Frequently Asked Question C.5. that they will look to the concept of “group” as set forth in Section 13(d)(3) of the Exchange Act. Under Rules 13d-3 and 13d-5(b)(1) of the Exchange Act, a “group” is deemed to exist when “two or more persons agree to act together for the purpose of acquiring, holding, voting or disposing of equity securities of an issuer.”
As most M&A practitioners know, it is relatively easy for two or more shareholders to come together and become a 13(d) group, which has led some companies to claim “controlled company” status whenever there is a group of two or more shareholders with shared voting or dispositive power and the aggregate beneficial ownership of the group exceeds 50% of the company’s outstanding shares. Recently, however, the NYSE has indicated that they are focusing on shared voting power and not shared dispositive power. As a result, those companies who may have thought they were a controlled company, based on shared dispositive power likely do not satisfy the NYSE definition of “controlled company”. According to the NYSE, a 13(d) group will be recognized only when the members share voting power and in fact vote as a block on one or more matters. The NYSE also indicated that it will look at whether members of a 13(d) group have historically voted together as a group in deciding whether to recognize a 13(d) group for controlled company purposes.
This has some NYSE-listed companies second guessing their earlier conclusions regarding the existence of a group and thus their controlled company status. So practitioners should be aware that even if two or more shareholders report their combined beneficial ownership on Schedule 13D or 13G and the members in fact admit 13(d) group status, the group still may not satisfy the NYSE’s definition of “controlled company” under Rule 303A. As a result, companies may want to re-evaluate whether they are a “controlled company” if they are relying on a 13(d) group sharing only dispositive power over the group’s shares.
While the NASD rules track the language of the NYSE rule, they define “group” in Interpretive Material 4350-4 as shareholders that have “publicly filed a notice that they are acting as a group (e.g., a Schedule 13D).” For now, it appears that if shareholders are obligated to file and in fact file a joint 13D or 13G with the SEC, they should be accorded group status for purposes of the NASD controlled company exemption, but it is possible the NASD will follow the NYSE’s lead in this area as they have done on other similar corporate governance issues. Interestingly, for Section 16 purposes a group may not result where the agreement to hold, dispose or vote shares is involuntary or imposed on shareholders by the issuer. For more information on this recent development, see Romeo & Dye’s Section16.net. It is unclear whether the NYSE or NASD would take a similar approach when determining whether to recognize a listed company as a “controlled company”.
So, what’s the bottom line here? If your company has several large shareholders reporting on 13D or 13G and they vote together as a group, they should be accorded “group” status by the NYSE and NASD. But controlled companies relying on 13(d) groups with shared “dispositive” power should really reconsider the basis upon which they claim “controlled company” status. They will need more than just an agreement to hold or sell shares. As for the NYSE, such 13(d) groups will not be recognized. Thanks to Heather Waldbeser for bringing this to our attention. In addition to multiple definitions of “independent director” we now have slightly different definitions of 13(d) “group” applied by the SEC and the SROs.
Officers and Directors are NOT considered “Passive” under Rule 13d-1(c) – So if you are an officer or director reporting your beneficial ownership of company shares on Schedule 13G and you are doing so pursuant to Rule 13d-1(c), it’s probably time to reconsider your eligibility to continue reporting on 13G. On December 15, 2004 the SEC submitted an amicus brief to the 7th Circuit Court of Appeals in the case of Edelson v. Ch’ien et al, No. 04-1299. In its amicus brief the Commission stated its view that senior executive officers are generally not eligible to report their beneficial ownership on Schedule 13G pursuant to Rule 13d-1(c).
Rule 13d-1(c), adopted by the Commission in Release No. 34-39538 (Jan. 12, 1998), permits “passive” investors owning less than 20% of a class of securities to report their holdings on Schedule 13G in lieu of Schedule 13D. However, it is has been the staff’s informal position since the adoption of Rule 13d-1(c) that directors and officers are generally not “passive” due to the very nature of their position at the company. The Commission has now memorialized this position in footnote 18 of its amicus brief stating that it would be “difficult, if not impossible,” for a CEO to certify that his or her shares are “not held for the purpose of or with the effect of changing or influencing the control of the issuer of the securities” (emphasis in original). This view would likely extend to all “executive officers,” (i.e., those who perform “policy making functions”), as well as directors.
Officers and directors should not despair! Instead they should consider whether Rule 13d-1(d) might provide an alternative basis upon which to continue reporting on Schedule 13G. Persons eligible to report on 13G pursuant to Rule 13d-1(d) include those who: (1) acquired their beneficial ownership prior to December 22, 1970, (2) are exempt from filing a Schedule 13D by virtue of Section 13(d)(6)(A) or (B) of the Exchange Act, or (3) are “otherwise . . . not required to file a statement.”
— Section 13(d)(6)(A) of the Exchange Act exempts from 13D reporting those persons who became a beneficial owner of more than 5% solely as the result of the issuer’s acquisition of securities pursuant to a registered stock for stock exchange. Unfortunately, the staff has interpreted this exemption as limited solely to the issuer and not third parties. [This exemption does not apply to third-parties confronted with an exchange offer. In other words, if someone goes out and makes a registered “stock-for-stock” exchange offer, and becomes as a result becomes a holder of more than 5% of the securities sought in the offer, they would not have to file an initial Schedule 13D. However, someone who is the recipient of an exchange offer (i.e., third party – not issuer of the securities) gives up existing securities and receives new securities of the issuer, if they were to own more than 5% of the issuer’s securities they would need to file an initial 13D. In short, the exemption applies only to the issuer of securities in a stock-for-stock exchange, not the security holder receiving securities. The legislative history behind this exemption indicates that Congress was comfortable that the disclosure called for in the prospectus would be sufficient to inform shareholders of the accumulation of shares.]
— Section 13(d)(6)(B) of the Exchange Act exempts from 13D reporting those persons who accumulate more than 5% of an issuer’s securities without acquiring more than 2% of the class in any single twelve-month period. Note, however, that the staff has indicated that this twelve-month calculation period should be done on a rolling basis, meaning that the twelve-month period is calculated from the date of an acquisition and is not based upon the calendar year. See Exchange Act Release No. 17353, December 4, 1980, SEC Docket, Vol. 21, No. 10 (p. 776). When calculating the 2% limitation, Section 13(d)(6)(B) does not permit the netting of acquisitions and sales, nor does it distinguish between acquisitions of registered and unregistered securities.
— As for the last category, the SEC has taken the position that persons “otherwise . . . not required to file a statement” include those persons who acquired their beneficial ownership when the securities were not registered (i.e., pre-IPO). See Exchange Act Release No. 15348, November 22, 1978, SEC Docket, Vol. 16, No. 4 (p. 230). In addition, persons whose beneficial ownership increased above 5% solely due to a decrease in the total amount of securities outstanding (i.e., an increase in percentage beneficial ownership due to repurchases by the issuer) would fall within this category.
Therefore, officers and directors should be able to continue reporting their beneficial ownership on Schedule 13G under Rule 13d-1(d) instead of Rule 13d-1(c) if they fall into one of the above categories. Given the SEC’s new guidance on this topic, officers and directors should reconsider their ability to continue relying on Rule 13d-1(c) before filing their next 13G amendment which is due for most filers on Monday, February 14th. If ineligible to report on 13G under Rule 13d-1(c), reporting persons can switch to relying on Rule 13d-1(d) by checking the appropriate box on the cover of Schedule 13G.
Now that is what I call a sweet treat from Jeannine Pao at Gibson Dunn. Happy Valentine’s Day!
As the Securities Act Reform Release, or as I like to call it “The Aircraft Carrier Part II”, steams ahead it is a good time to review some of the proposed rules that may disappear in the wake of the Swift Boat. Namely proposed Rule 159!
Before parties sign a merger agreement or engage in a significant business combination transaction legal counsel is often confronted with the dilemma of deciding exactly who can be “locked up” in the deal without violating Section 5 or committing proxy or tender offer “gun jumping”. While there is little guidance out there on this topic, those of you who practice in this area are no doubt familiar with the staff’s position on where the line is drawn. For those of you who don’t know where the line is drawn, read on . . . .
The only official written guidance on this subject is set forth in the SEC’s Current Issues Outline and the Aircraft Carrier release under the title proposed Rule 159 which was supposed to codify the staff’s views on lock-ups. Under proposed Rule 159 parties to a business combination transaction could lock-up prospective purchasers before a registration statement was filed if:
(i) the lock up agreements involved only executive officers, directors, affiliates, founders and their family members, and holders of 5% or more of the equity securities of the target company;
(ii) the persons signing lock-up agreements owned less than 100% of the voting equity securities of the target company; and
(iii) votes are solicited from shareholders of the target company who have not signed lock-up agreements and who would otherwise be ineligible to purchase securities under Section 4(2) or 4(6) of the Securities Act or Rule 506 of Regulation D.
In proposing Rule 159, the Commission attempted to draw a circle around the types of persons who could be locked-up prior to the filing of a registration statement without it resulting in a Section 5 violation. Unfortunately, the Commission did not express its views on lock-ups in other contexts such as all-cash mergers or cash tender offers. Rather, the Commission simply asked the question, what should we do about other types of transactions?
Well that has not stopped practitioners from applying the guidance in the Aircraft Carrier to cash tender offers and cash mergers. Of course, in a tender offer there is no vote, so the proxy rules are not implicated. In cash mergers, the parties often look to Rule 14a-2(b)(2) for help — that is the exemption for solicitations of ten persons or less. In registered exchange offers, there is always proposed Rule 159.
But in the Securities Act Reform Release the Commission has replaced old proposed Rule 159 with new proposed Rule 159 which happens to be entirely unrelated to lock-ups. As a result, when the swift boat sails over the finish line it is likely that old proposed Rule 159 will be lost in the sea of SOX legislation and rulemaking. Which makes it an excellent time to review where the line is drawn on lock-ups! For more information on this topic you may want to review:
– Resales of Stock Acquired in Merger Transactions, by L. Borgogni and J. Moloney, Insights, Vol. 18, No. 2 (Feb. 2004);
– SEC Current Issues Outline, Related Public and Private Offerings at Section VIII. A. 9. (Nov. 14, 2000);
– SEC Release No. 33-7606, The Aircraft Carrier, Lock-up Agreements at Section X.C.1.c. (Nov. 3, 1998)
– Metaphysics Status Report, The Corporate Counsel, Vol. XX, No. 2 (March – April 1995).
By now, we’ve all heard about the plight of the falling US dollar (e.g., all-time low against the Euro and decades low against the Yen). With prospects for even higher budget deficits, a further decline in the dollar is looming.
Fear not, my fellow deal lawyers for there’s a silver-lining that may end up lining your pockets. The good news is that the weak dollar makes US goods – and assets – cheaper. So, for the acquisitive European or Asian business, for example, your friendly neighborhood central bankers have just stuck a great, big “ON SALE” sign on those prime US targets that you’ve been salivating over. Talk about “closing the gap” on valuation issues. Who needs an earnout if you have currency that just jumped 50% (psst, earlier this month, the Euro was up more than 50% against the US dollar since 2001)? So, if you’re Alcatel who just last month acquired Spatial Wireless, a US telecom equipment maker, for US$250M, you have a lot of Euros left over for a closing dinner filled with truffles by the bucket and Jeroboams of Cristal Rosé.
To make sure your year is filled with sushi and sake closing dinners, you may want to brush up on possible traps for the unwary foreign buyer (and even unwary US seller) including:
1. Export Controls. First-base for all acquisitions is information about the seller. Care must be taken not to violate US export controls, which includes “technical data.” Better think twice before including that R&D memo in that data room.
2. National Security Review. Under Exon-Florio, the US can block – and even more scary – unwind an acquisition by a foreigner on national security grounds. For example, recent news reports are that the proposed $1.25B sale of IBM’s PC business to China’s Lenovo may be stalled over regulators’ concerns over Chinese industrial espionage. By the way, there’s no definition of “national security” and if you don’t file proper notice, there’s no time limit on when the Government can step in to unwind a deal. (Lenovo/IBM and recent reports of China’s CNOOC attempted $13B takeover of Unocal should be a wake up call on the coming wave of foreign investment by an economic juggernaut called China).
3. Government Contractors. Any restrictions on foreign ownership?
4. Regulated Industries. Telecom, media, defense, insurance, banking, utilities, and airlines may be the source of “burdensome conditions” based on foreign ownership. For example, the FCC rules prohibit a company with more than 25% foreign ownership from holding certain radio licenses.
5. “Fat Lady” Issues. With the likes of Omnicare still looming, foreign buyers may surprised to hear that limitations on fully-locked deals and other deal protections hamper a buyer’s ability to “make that Fat Lady sang (yes, that’s a Texas accent thang).”
6. SOX Issues. If the foreign buyer is listed in the US or intends to list in the US, it’s not out of the SOX woods simple because the US target is private. In fact, a private target that’s woefully SOX non-compliant may be the source of many, many headaches. Foreign buyers whose daily lives don’t revolve around this post-Enron fallout should not have this false sense security for SOX simply because target is a privately-held US business.
So, cheer up! Your cars, toys, TVs and cups of latte on the Champs-Elysées may be more expensive, but a surge in weak dollar US M&A activity should beef (or is that boeuf?) up your partnership distributions. Thanks to the weak dollar, your dreams of shedding that mild-mannered M&A lawyer image to become an International Man (or Woman) of Mystery may soon come true. GROOVY BABY!
Recently, there have been several instances where Corporation Finance examiners have pushed beyond the line taken in the Staff’s long-standing policy of requesting the deletion of any inappropriate language indicating that shareholders may not rely on a financial advisor’s fairness opinion (e.g., seeking deletion of the “solely to the board” language), or alternatively to provide the basis, including citation to applicable case law, as to why the issuer and its financial advisor believe that shareholders can not rely on the advisor’s opinion.
Traditionally, most issuers and their financial advisors have responded to such comments by simply deleting the language that could be interpreted by the Staff as constituting a disclaimer of sorts on shareholders’ ability to rely on the advisor’s opinion and summary included in the SEC filing. Recently, however, several companies have received comments from the Staff essentially demanding that they state “whether shareholders may rely on the advisor’s fairness opinion”.
This can be viewed as a marked change in the Staff’s position on this issue in that it requires companies to affirmatively state whether shareholders may rely. This differs from the Staff’s longstanding position documented in articles and the Staff’s Current Issues Outline. See Section Task Force Meets with Staff of the SEC, Business Law Today, July/August 1996, at 64; Current Issues and Rulemaking Projects, Division of Corporation Finance, Securities and Exchange Commission, November 14, 2000, at 12.
Savvy legal counsel familiar with this issue, however, would be well-advised to push back on this comment because if they do they will find that the Staff’s position has not actually changed. Instead, the comments are merely the product of a handful of examiners who simply push the envelope with the standard comment by insisting that companies revise their disclosure to state “whether” shareholders may rely on the advisor’s opinions and the summary included in the filing. Special thanks to Erik Greupner of Gibson, Dunn & Crutcher for his assistance in providing this scoop.
On January 5, 2005, the Federal Trade Commission voted 5-0 to unwind the merger of Chicago Bridge & Iron, Inc., and Pitt-Des Moines, Inc., two companies engaged in the manufacture of steel water storage tanks and other steel-enforced structures, concluding that the merger was anticompetitive. This is an extremely important decision.
Interestingly, the deal was reported to the antitrust agencies under the HSR Act and was CLEARED by the FTC. After clearing the deal, and after it closed, the FTC opened a SECOND investigation into the deal, and ultimately required it to be unwound. The relief is expansive, and the portion of the Commission decision concerning relief is extraordinary, especially to those not familiar with the full breadth of the FTC’s power to order relief in merger investigations.
The Commission ordered expansive relief, requiring Chicago Bridge to reorganize its business unit related to the relevant products (water storage tanks) into two separate, stand-alone subsidiaries, and to divest one of those subsidiaries within six months (Imagine That!!). The opinion explains that CB&I is in the “best position[] to know how to create two viable entities from its current business,” and that this approach “will remedy the anticompetitive effects of the merger more quickly than would immediately appointing a divestiture trustee, who would have to learn the business before recommending a divestiture package.”
Among other things, the order requires Chicago Bridge:
* to divide its current customer contracts between the two newly-created subsidiaries (as far as I can tell, this is the first time the FTC required the division of customer contracts by the party being required to divest);
* to facilitate the transfer of employees so that each subsidiary has the technical expertise to complete the customer contracts assigned to it and to bid on and complete new customer contacts;
* to provide incentives for employees to accept offers of employment from the acquirer and remove contractual impediments that would prohibit employees from accepting such offers.
The FTC’s decision in Chicago Bridge was not a “one-off.” The agency has reviewed many closed deals over the last few years, and the recent focus on reviewing and challenging closed transactions raises a host of significant issues that antitrust lawyers have only just begun to consider (see, for example, the decisions regarding MSC.Software, AspenTech, and Evanston Illinois Hospital).
Undoubtedly, the FTC has the ability under section 7 to remedy any anticompetitive transaction, regardless of whether it has closed or is pending and whether it was below or above the HSR Act’s reporting thresholds. At any time, the antitrust agencies can intervene and remedy competitive problems that are caused by mergers unduly concentrating a market. Nevertheless, aggressive use of the post-close challenge raises serious legal and practical issues, and may serve to chill business activity, slow innovation, and ultimately harm customers.
There are strong considerations that militate against aggressive post-close review, especially in high-tech markets. First, high-technology industries develop rapidly; as a result, markets and market definitions frequently change. What was a market yesterday is an afterthought today—for example, no one is concerned about whether Wang will dominate the Electronic Word Processor market or IBM the 7.5 (or for that matter 5.25) inch disk drive market—because markets disappear in the blink of an eye.
Historically, regulatory review focused on a static view of relevant markets. Because high-tech markets change dynamically, it is imperative that the agencies carefully consider whether mergers that lead to apparent concentration truly are anticompetitive or instead represent a temporary concentration. As the Court of Appeals for the D.C. Circuit observed in United States v. Microsoft, “[r]apid technological change leads to markets in which firms compete through innovation for temporary market dominance, from which they may be displaced by the next wave of product advancements.”
Post-close review can paralyze markets. If the FTC prevails in its post-close challenges, companies like Chicago Bridge not only stand to lose the valuable assets they acquired, but perhaps more importantly, those companies stand to lose years of independent product development that they would have engaged in but for the futile attempt to acquire a competitor. Especially in high-tech industries, the lost opportunities could be considerable: while they may find themselves in the position they were in prior to the consummation of a merger later challenged, all of their competitors or potential competitors presumably have moved on and continued to develop next-generation products during that time.
I’ll continue to explore these issues as time goes on…..
Todd Rolapp of Bass, Berry & Sims writes this guest blog: Many of our clients have been presented the following provision in lock-up agreements over the last year or so:
“Furthermore, the undersigned agrees that if (i) the Company issues an earnings release or material news or a material event relating to the Company occurs during the last 17 days of the lock-up period, or (ii) prior to the expiration of the lock-up period, the Company announces that it will release earnings results during the 16-day period beginning on the last day of the lock-up period, the restrictions imposed by this letter agreement shall continue to apply until the expiration of the 18-day period beginning on the issuance of the earnings release or the occurrence of the material news or material event.”
Apparently, some underwriters and their counsel are telling companies that the paragraph is standard and that they believe it is also in the best interest of the company. The provision is obviously in response to NYSE Rule 472(f)(4) and NASD Rule 2711(f) which, roughly speaking, prohibit NASD members from publishing research or making recommendations w/in 15 days of the expiration of a lock-up agreement in an offering in which the member is a manager or co-manager.
The Rule has an exception for reports issued under Rule 139 (the report is distributed with reasonable regularity in the normal course of business, etc) if the issuer’s securities are “actively traded” as defined in Reg M ($150 million float and $1 million avg. daily trading volume).
However, in our experience, companies are having little success getting the paragraph removed or altered even if their stock is “actively traded” and the NASD member regularly distributes reports after earnings releases. From the company’s perspective this provision seems to go beyond what these Rules actually require and seems designed to make it so the underwriters do not have to do any hard Rule 139 analysis when they go to issue a report after an earnings release.
I am interested to hear whether anyone out there has had any success in dealing with this issue with underwriters (that is, narrowing or eliminating the provision) or have any ideas that might help companies and their legal advisors combat this provision before it gets “too standardized.” I can be reached at TRolapp@bassberry.com.
As many of you who have been involved in a stock option repricing know, compliance with the “all holders” and “best price” provisions of Rule 13e-4 can be tricky. Fortunately, the SEC issued an exemptive order in March 2001 to provide relief from Rules 13e-4(f)(8)(i) and (ii) of the Exchange Act (the “Global Exemptive Order“) allowing companies to treat option holders differently depending on their individual circumstances.
Although stock option repricings have declined in popularity due to certain accounting rule changes, transactions involving stock options that implicate the tender offer rules are fairly common. In some cases, companies and their counsel have relied upon the Global Exemptive Order and sought their own no-action relief in conducting non-repricing tender offers that discriminate among different groups of option holders.
For example, Martha Stewart Omnimedia offered a deferred cash bonus only for options with strike prices in excess of a certain amount. See SEC No-Action Letter to Martha Stewart Living Omnimedia, Inc. (available November 7, 2003). In a similar transaction, Comcast offered to pay cash only for options held by former Comcast employees. See SEC No-Action Letter to Comcast Corporation (available October 7, 2004). While the Staff has explicitly stated that they will not recommend enforcement action in these instances, practitioners may not realize that outside the context of a straight repricing, satisfaction of the conditions set forth in the Global Exemptive Order in and of itself does not guarantee availability of the exemption from the “all-holders” and “best price” provisions of Rule 13e-4.
Recently, the Staff has reminded practitioners that when limiting offers to only certain option holders or options such differential treatment must be based on objective criteria. Unfortunately, the Global Exemptive Order does not explain the need for creating separate classes of options and why it is critical to compliance with the all-holders rule even where relief is granted.
The answer is that companies can typically avoid implicating the all holders and best price provisions by essentially “creating” different classes of securities. This point, however, may be lost on practitioners working on transactions where only select options or option holders are allowed to participate.
As a basis for its informal position the Staff has analogized to earlier interpretations that stock options are treated as separate classes of securities in both the Section 16 reporting and Section 12 registration contexts. In those instances, the Staff has looked to certain objective criteria, such as grant date, strike price, term and the specific plan(s) under which options are issued, to conclude that options can be divided into separate classes of securities. The staff points to prior no-action letters, such as Kathleen A. Weigand (available March 29, 1991) (Section 16 reporting), General Roofing Services, Inc. (available April 13, 2000) (Section 12 registration) and Kinkos, Inc. (available November 30, 1999) (Section 12 registration), as support for its view that options and option holders can be treated differently if objective criteria are used to essentially create separate classes of options.
Something to consider the next time you are involved in a transaction outside the repricing context and all options or option holders will not be treated alike. Thanks to John Kao of Gibson Dunn for shedding light on this unclear area of the lore!
Vioxx, then Celebrex. What’s next? Would it surprise anyone that there’s some dog-piling in the works on the All-American-Safer-than-Aspirin Poison Pill?
First, you have the Wall Street Journal (“How a Judge’s Ruling May Curb “Poison Pill” As Takeover Defense,” December 13, 2004) speculating that Delaware Vice Chancellor Strine may ready to punt PeopleSoft’s pill. The article quoted a 2000 decision by the Vice Chancellor: “If stockholders are presumed competent to buy stock in the first place, why are they not presumed competent to decide when to sell in a tender offer?” Hmmm, that seems to make sense especially if the stockholders are institutional investors like hedge funds who are as bottom line as you can get when talking about “maximizing shareholder value” (hint: that’s fund code for “make my 20% promote even fatter”).
Second, Institutional Shareholder Services (www.issproxy.org) tweaked its Voting Guidelines for 2005 to recommend withholding votes for directors who adopt or renew pills without shareholder approval:
“Recommend WITHHOLDING votes from all directors (except from new nominees) if the company has adopted or renewed a poison pill without shareholder approval since the company’s last annual meeting, does not put the pill to a vote at the current annual meeting, and there is no requirement to put the pill to shareholder vote within 12 months of its adoption. The policy will be applied prospectively. Pills adopted prior to this policy will not be considered. If a company that triggers this policy commits to putting its pill to a shareholder vote within 12 months of its adoption, we will not recommend a WITHHOLD vote. “
According to ISS, shareholders have expressed strong support for ratification of poison pills by shareholders. Of the 52 shareholders proposals on this issue in 2004, 40 received a majority of the shares cast. ISS believes that shareholders should have a voice in the adoption of a poison pill and its corresponding features.
Interesting times for a director pondering a pill: You have a high-profile Delaware judge gunning for a pill to pull (which, of course, may open you up for a breach of fiduciary duty claims by your friendly, neighborhood strike suit lawyer) AND you have ISS trying to pull your director’s chair from under you if you vote to approve or renew a pill.
With the potential side effects of a poison pill becoming more painful, you would think this situation warrants elevation of the “Director in Crosshairs Advisory System” to Code Red.
Under the wrong circumstances, even a spoonful of sugar may not be of much help…