Good news from Saturday’s WSJ: “It wasn’t a sure thing after the destruction and despair of Hurricane Katrina, but with a big dose of civic bonhomie, they’re going to make it happen: Bankers, lawyers, judges, proxy solicitors and others who make their living doing, dealing with or adjudicating mergers and acquisitions will meet in New Orleans in late March for the 18th Tulane University Corporate Law Institute.
The confabbing crew is committed to the city’s rebirth — and Tulane could use a show of support, too, as the school recently said it’s cutting 230 faculty jobs and paring $100 million from its annual budget. Slated to speak are Texas Pacific Group chief David Bonderman, a gaggle of Delaware corporate jurists, and some keen legal minds. Among the topics: conflicts between shareholders and directors, scrutiny of investment banking and the future of private equity.”
Tulane’s campus will open next month for business – the 18th Annual Corporate Law Institute is set for March 23-24th at the New Orleans Wyndham Canal Place Hotel. Good to hear that Hurricane Katrina didn’t kill this fine event!
In this podcast, Vipal Monga, a senior writer for The Deal, describes what its like to write about M&A, including:
– What are the most popular sections of The Deal’s website and its magazine?
– What is a typical day like for you? how do you get story ideas?
– What has been your favorite article to write so far?
– How do The Deal’s reporters get the scoop on moves among dealmakers?
Best Price Proposing Release Posted
Today, the SEC posted the proposing release for the best price rule amendments.
Today, the SEC proposed amendments to the best-price rule, which requires that the consideration paid to any security holder in a tender offer is the highest consideration paid to any other security holder in the offer. As you may recall, these amendments were proposed due to a split among federal circuit courts as to whether the best-price rule applies to arrangements, usually compensatory in nature, entered into by a bidder in a tender offer and the employees or directors of the target company in contemplation of the acquisition.
As noted in this press release, the SEC voted to propose revisions that would reinforce the original premise of the tender offer best-price rule – ensuring that all shareholders who tender their securities in an offer are paid the same consideration. The proposed revisions also would allow bidders and target companies to proceed with a tender offer with greater certainty as to the manner in which the best-price rule will be applied to employment and severance arrangements.
The proposed amendments would revise the best-price rule as follows:
– Clarify the application of the tender offer best-price rule – The issuer and third-party best-price rules would be revised to clarify that the best-price rule applies only with respect to the consideration paid for securities tendered in an issuer or third-party tender offer. The best-price rules also would be revised to make clear that there is not a time restriction on its application.
– Exempt certain compensation, severance or employee benefit arrangements from the tender offer best-price rule – The third-party best-price rule would be revised to add a specific exemption from the rule for the negotiation, execution or amendment of an employment compensation, severance or other employee benefit arrangement, so long as the amount payable under the arrangement relates solely to past services performed, future services to be rendered or refrained from rendering and is not based on the number of shares the employee or director owns or tenders.
– Provide a safe harbor for the exemption from the tender offer best-price rule for certain compensation, severance or employee benefit arrangements – The third-party best-price rule would be revised to include a safe harbor provision that would allow the independent compensation committee or a committee of the target’s or bidder’s board of directors – depending on whether the target or the bidder is the party to the arrangement – to approve an employment compensation, severance or other employee benefit arrangement and thereby have it deemed to be such an arrangement within the meaning of the exemption.
Last Thursday, the Federal Energy Regulatory Commission adopted new rules governing how the agency will conduct utility merger reviews. These new rules were required when PUHCA was repealed this summer – and they improve on the FERC’s initially proposed rules which were maligned because they would have applied to all utility holding companies, thereby expanding the reach of PUHCA’s costly regulations (such as book and records requirements).
Congress’ energy bill from August required the FERC to issue new rules by December 8th and stipulated that the rules take effect on February 8th, 2006. Congress’ law no longer bars outside investors – and it replaced the SEC as the primary regulatory gatekeeper in utility M&A.
The new rules grant the FERC access to the books and records of holding companies – but some entities will be able to rely on exemptions from having to turn over books and records. The FERC will grant other exemptions and waivers on a case-by-case basis. Those that are not exempted will have until January 1, 2007 to comply with FERC’s new record-retention requirements and accounting requirements. Here is a law firm memo on the new rules.
Last week, Corp Fin posted this no-action letter that grants relief to a fund that seeks to conduct an exchange tender offer. It’s not a letter that has widespread application, as it’s a very narrow fact pattern and of limited utility to most C-corps.
But it is good to see that the SEC Staff is granting some exemptions to the all-holders, best-price rule. Something that will no doubt increase after the SEC adopts rules on the subject.
From GMI’s News Updates: The EU’s European Commission is continuing its efforts to fight hurdles to takeovers of banks and insurance companies. On November 8, the commission presented a proposal to restrict the power of national insurance and securities regulators to block takeovers. The proposal aims to overcome what the commission calls one of the chief hurdles to cross-border deals: the power of national regulators. The EU’s own banking law of 1999 gives supervisors authority to block mergers in order to guard the safety and soundness of banks and the financial system. The new proposal would require a regulator to disclose specific justification for any such veto, and it would be expanded to include insurance companies and other market deals.
Italian regulators have recently prevented recent takeover attempts of two Italian banks, and the EU may sue Italy for seeking to shield banks from takeovers by Dutch and Spanish entities. During the past year, Banco Bilbao Vizcaya Argentaria SA of Spain and ABN Amro Holding NV of the Netherlands have tried to buy Italian banks but have met behind-the-scenes resistance from Bank of Italy with their domestic encouragement of counterbids.
Nonetheless, Amro recently won approval for its $9.9B bid to buy Banca Antonveneta SpA, but Banco Bilbao was outbid for Banca Nazionale del Lavoro SpA of Rome by Italian insurer Compagnia Assicuratrice Unipol SpA. The EU has pressed the Bank of Italy since February to answer for its resistance to the foreign banks’ bids. Lawyers are reviewing whether there are grounds to sue Italy in an EU court for going against rules on free movement of capital and freedom of business to establish anywhere within the 25-country EU.
Japan’s TSE Bans Golden Shares, Restricts Poison Pills
From GMI’s News Updates: In November, the Tokyo Stock Exchange (TSE) finalized plans to ban publicly traded firms from adopting veto-wielding golden shares. A corporate law taking effect next year will enable firms to more easily issue golden shares, but TSE sees them as undermining the principle of shareholder equality. The TSE also will not permit the issuance of golden shares by the unlisted subsidiaries of publicly traded holding companies.
However, this ban will not apply to companies where the government holds golden shares for policy reasons. Early in the month, Japan’s Ministry of Economy, Trade and Industry considered allowing the use of golden shares under certain conditions, taking a softer position than the TSE. Under METI’s plan, golden shares would need to be limited-term issues, with a provision that they could be voided through shareholder or board resolutions. However, the TSE decided to propose the ban in order to stem overzealous corporate takeover defenses. The New York Stock Exchange currently bans their issuance by firms that are already listed, while the European Union is considering plans to abolish golden shares entirely.
The TSE is also considering restrictions and disclosure requirements on shareholder rights plan poison pills and other takeover defense provisions. The TSE states that it will not permit anti-takeover frameworks where a poison pill becomes locked in when a potential acquirer replaces even a single board member of the target company. The TSE is expected to require a company to detail its triggering mechanisms and shareholder impact as well as the impact on shareholders.
The SEC just announced that it will hold an open Commission meeting next Wednesday, December 14th at 10 am, to consider (among other things) proposed amendments to the “best-price rule” for issuer and third-party tender offers. According to the Sunshine Act notice, the proposals “would clarify that the best-price rule applies only with respect to the consideration offered and paid for securities tendered in a tender offer and should not apply to consideration offered and paid according to employment compensation, severance or other employee benefit arrangements entered into with employees or directors of the company that is the target of a third-party tender offer.”
The SEC Staff has wanted to bring this project to the Commission for quite some time to settle some inconsistencies in the courts – certain jurisdictions apply the best price rule too broadly to capture severance and compensation arrangements (as further explored in this John Penn interview on the evolution of the best price rule). The proposed changes are not expected to establish a bright line rule.
We have created a new “Conference Notes” Practice Area, which now includes notes covering three panels from the recent PLI Securities Law Institute and from the ABA’s Negotiated Acquisitions Committee’s Fall Meeting.
Special Negotiating Committee Transcript is Up!
We have posted the transcript from our recent webcast: “The Latest on Special Negotiating Committees.”
Just posted an interesting interview with Wayne Elowe and Michael Hollingsworth of Kilpatrick Stockton regarding trends in middle market M&A.
For example, they observe that indemnity survival periods may be somewhat shorter these days, but still tend to cover one or two audit cycles; baskets have been ranging between 1/2-1% of transaction value and caps in the 10% to 50% range. Representations and warranties, if anything, have become more targeted on specific aspects of the seller’s business. With the requirements of Sarbanes-Oxley, buyers are also including representations targeting specific compliance issues. More trends are covered in the interview…
Last Tuesday, it was reported that a proposed – and controversial – transaction by Sovereign Bancorp has been amended so that the NYSE would allow it to proceed without a shareholder vote. Some of Sovereign’s largest shareholders had protested the lack of a shareholder vote (and I had criticized some of Sovereign’s other governance practices in this blog). Sovereign seeks to sell a stake in itself to Banco Santander, a Spanish bank – so that Sovereign can raise the funds to acquire another bank.
In this article, the WSJ reported that the NYSE advised Sovereign how to change the deal to get it through without a shareholder vote and quoted Richard Ketchum, head of NYSE Regulation: “We called it the way we saw it, …. Not everyone will be happy [but] what’s left is a transformed transaction that complies with our standards.” The WSJ article also noted: “Shareholders and corporate-governance experts viewed the NYSE’s decision on the matter as a test of how much regulatory muscle it would flex in a time of increased shareholder activism.”
According to reports, the transaction was revised to eliminate:
(i) Santander’s veto on the termination of Sovereign’s CEO and the requirement that any new CEO be reasonably acceptable to Santander;
(ii) provisions for Sovereign directors to remain on the board for an additional 10 years if Sovereign was bought outright by Santander; and
(iii) Santander’s obligation to vote its Sovereign shares in favor of Sovereign’s board nominees.
The revised deal also includes a “fiduciary out” to the no-shop provisions that otherwise prevent Sovereign from responding to acquisition proposals from third parties and a $200 million breakup fee.
Dissecting the Shareholder Approval Issue
Unless familiar with the views of the NYSE from prior dealings, many reading the NYSE’s rules would not have thought that the NYSE could interpret them to require Sovereign to obtain shareholder approval in connection with the issuance of shares representing less than 20% of its outstanding common stock to Banco Santander.
On their face, the NYSE’s shareholder approval requirements would not seem to require shareholder approval of Sovereign’s proposed transaction with Santander:
– Sections 312.03(a) and (b) don’t apply as they relate to equity compensation and related party transactions;
– Section 312.03(c) doesn’t appear to apply because the proposed transaction doesn’t involve the issuance of shares representing 20% of Sovereign’s outstanding common stock; and
– Section 312.03(d) shouldn’t apply because, notwithstanding the board representation and veto and other rights being granted Santander, the transaction doesn’t fit the normal concept of a “change in control” (e.g., in a “Revlon” sense).
Nevertheless, Sovereign’s unhappy shareholders at least partially succeeded in making a case that the proposed transaction triggered the shareholder approval requirement of 312.03(d) because it would result in a “change in control.” According to this WSJ article, these shareholders are unhappy with the NYSE’s decision and are considering an appeal to the SEC or banking regulators.
The NYSE’s Trap for the Unwary?
This situation highlights a potential trap for the unwary under the NYSE’s shareholder approval rules for transactions resulting in a purported change of control. In the Sovereign deal, we’re not talking true control (e.g., majority ownership) or even effective control (e.g., presumably somewhere north of 35% or 40% ownership, since that will often convey control given the percentage of shares typically voted at shareholder meetings) – but something much less – even below 20% – with a couple of directors and some veto rights.
I certainly agree with the outcome here (and even think the NYSE should have required a shareholder vote) as Sovereign’s governance practices are among the worst I have seen – but, as a matter of public policy, the NYSE should file proposed amendments to its rules with the SEC, solicit comments and obtain SEC approval rather than foster controversy by unilaterally interpreting “change of control” so broadly. I’m not a big fan of stealth regulation and, at a minimum, more formal guidance would seem appropriate. This would only help the NYSE as then it would be more difficult for folks to cry “foul” when they make determinations like this.
The Use of Treasury Shares or Cash to Avoid Shareholder Approval
It’s also worth noting that no one seems to blink an eye when parties structure transactions to avoid the shareholder approval requirements of 312.03(c) by using treasury shares (which are already listed) or cash to avoid having to list shares that would constitute 20% or more of the issuer’s outstanding common stock. Sometimes the amount of cash or treasury shares used as transaction consideration is just enough to cause the newly issued and listed shares to fall below 20% of the issuer’s outstanding shares. As noted in his blog, Professor Sjostrom notes that form prevails over substance in these circumstances.
On numerous occasions, I believe the NYSE has confirmed that the use of treasury shares works under these types of circumstances, as the NYSE rule only applies if you want to newly list shares that represent 20% or more of the issuer’s outstanding shares. For example, if someone can use treasury shares equal to 2% of the outstanding combined with newly listed 19%, they don’t need to obtain shareholder approval even though the reality is that they are issuing 21% of the outstanding.
[Loyal readers of The Corporate Counsel will recall that using treasury shares doesn’t work on Nasdaq. The Nasdaq’s rules generally require shareholder approval whenever shares representing 20% of the current outstanding are to be issued, whether or not they are treasury shares. So the approach described above wouldn’t work on Nasdaq.]
With respect to cash, take a look at SBC’s recent acquisition of AT&T. By effectively paying $1 billion in cash (through an AT&T special dividend), SBC reduced the number of shares it would have had to issue in an “all stock” deal to slightly below 20%. This seems to have allowed SBC to avoid the need for an SBC shareholder vote on a fairly material transaction that seems to have diluted the rights and interests of existing shareholders.
A Final Thought on State Law vs. SRO Regulation
One final thought: The real shareholder claim here appears to be that the Sovereign board is breaching its fiduciary duties by taking extraordinary actions to entrench itself (to the potential detriment of Sovereign shareholders) rather than engaging in a transaction effecting a change in control in breach of NYSE regulations.
So it is under state law – rather than the rules of an SRO that apply to only a small percentage of companies – that seems like the more appropriate avenue to address concerns regarding the lack of shareholder suffrage for transactions of this nature. Delaware law – and the laws of many other states – generally require shareholder approval only for statutory mergers and similar business combinations and sales of all (or substantially all) of a corporation’s assets not for investments representing less than 20% of a company’s outstanding common stock.
However, it is tough to win a breach of fiduciary duty lawsuit, so the large shareholders likely decided that appealing to the NYSE had a higher likelihood of success (and was perhaps quicker than going to court) – and they can always pursue a state law claim later.
Many thanks to Kevin Miller of Alston & Bird for his contributions to this lengthy blog!