It looks like Washington Redskins owner Dan Snyder has prevailed in his attempt to wrest three board seats from Six Flags, giving him a mandate to take control of the company. Snyder claims that 57% of Six Flags’ shares supported the Snyder-led plan by written consent to remove three of the company’s seven board members, including its CEO and chairman. Barring dissent from the remaining board members, Snyder is expected to assume the chairman’s role, with former ESPN executive Mark Shapiro becoming the CEO.
The kicker for me is that I started blogging about Snyder’s inclination towards taking control over a year ago, when he first filed a Schedule 13D! I shoulda bought some Six Flags stock – but I just have no faith in my stock picking abilities. The curse of being a lawyer…
In a recent speech, the FTC’s General Counsel, William Blumenthal, provided his perspective on certain gun jumping issues. While reiterating that merging firms are separate entities and may not engage in collective actions that adversely affect competition, Blumenthal expressed concern “that we may have been too successful [in educating the public about violations and discouraging similar conduct] – that our message may have been heard by some in our audience to prohibit conduct beyond what we intended.” In particular, he recognized that due diligence and transition planning “are necessary and, within appropriate limits, unobjectionable from an antitrust enforcement perspective.”
Under Section 1 of the Sherman Act, premerger coordination to protect a transaction is subject to a reasonableness analysis, balancing the potential adverse effects against the justification for the conduct, taking into account available alternatives. Certain types of conduct (e.g., coordination on pricing) will rarely, if ever, be reasonably necessary to protect a transaction.
Under Section 7A, the test is different – whether the arrangement shifts beneficial ownership (from an antitrust perspective, not in a narrower 13D sense) – though he suggested that the analysis yields consistent conclusions. While recognizing that it is common for merger agreements to transfer certain indicia of beneficial ownership (e.g., risk of loss and benefit of gain) through purchase price and capital adjustment provisions as well as limitations on investment discretion, Blumenthal concluded that:
“I don’t mean to suggest that these commonplace provisions, together or in isolation, are problematic – they’re not. Nor are they or other factors dispositive of the Section 7A analysis. My point is that the typical merger begins at the time of the agreement by shifting a number of pebbles on the scale of beneficial ownership. At a certain point, if too many other pebbles have accumulated on the buyer’s tray through indicia such as access to confidential information and control over key decisions, one can reasonably find that the scale has tipped in the direction of the buyer.”
At the end of the speech, Blumenthal focused on three specific areas of concern:
1. Ways to minimize the antitrust issues that will often arise in the context of ordinary due diligence and transition planning – which may include discussions regarding post merger matters including prices, marketing, assignment of customers and accounts to their formerly-separate sales forces, narrowing of product lines, strategy, identity and branding, and capital and investment decisions;
2. Types of questions the staff of the FTC will often ask in assessing the appropriateness of coordinating extraordinary planning decisions that parties often wish to make during the premerger period – e.g., the decision whether or not a party to a merger should proceed with a significant capital project which will not be required if the merger is consummated; and
3. While the joint marketing of products involving the coordination of pricing or allocation of customers or accounts, is not permissible, this prohibition does not generally apply to the joint marketing of the underlying transaction through joint advertisements and press releases.
Here are some background materials that describe six gunjumping cases brought by the FTC alleging excessive coordination. We have posted some law firm memos on this development in our “Antitrust” Practice Area. Thanks to Kevin Miller of Alston & Bird!
Lots of interest in this upcoming DealLawyers.com – “Going Private and Going Dark.” As this article suggests, a surprising number of companies are “going dark” and I believe that the article even understates how many have done so in the past few years. During the webcast, the lawyers and banker on the panel will debunk some of the common myths about going dark.
If you can’t wait for the webcast, we have created a new “Going Dark” Practice Area, which has some articles on going dark – and a partial list of companies that have recently done so.
On the heels of the recent Congressional bill that would require shareholder approval of any golden parachute payments – “The Protection Against Executive Compensation Abuse Act” – CalPERS has voted unanimously to oppose the proposed $8.1 billion merger of UnitedHealth Group and PacifiCare Health Systems Inc., unless the companies bring back the $345 million in executive bonuses that would be paid as a result of the transaction for a separate shareholder vote.
CalPERS said in a press release that its decision came after the release of PacifiCare’s proxy statement that shows the company’s management started merger discussions with UnitedHealth almost six months before PacifiCare’s shareholders were asked to approve “a very favorable compensation package” for management and the board in the event of a change in control of the company. In comparison, ISS has a contrary view on the golden parachutes due to the different way it analyzes parachute payments – see this article on its analysis of the merger.
Word to the wise: excessive golden parachutes can tank a deal these days – and what is considered excessive these days is less than what it used to be. A similar message was delivered by former DuPont CEO Ed Woolard (and current Chair of the NYSE compensation committee) in this 10-minute video on CompensationStandards.com – essentially, Mr. Woolard doesn’t believe that any CEO should receive any different severance arrangement than any other employee in the company. Learn more about the original purpose of severance payments in this recent issue of The Corporate Counsel.
To learn more about the recent Congressional bill noted above, go to Monday’s entry on the TheCorporateCounsel.net blog (in fact, if this is your first visit to this blog, you should check out TheCorporateCounsel.net blog as well).
An important – and largely unresolved – question in the antitrust law has been answered: whether the acquisition of a partial, non-controlling, ownership interest in a competitor raises serious issues under the Clayton Act. On October 25th, the US Court of Appeals for the Sixth Circuit held in United States v. Dairy Farmers of America, Docket No. 04-6318, that such partial acquisitions may raise substantial antitrust issues. Read more about this case in our “Antitrust” Practice Area.
At last week’s PLI Securities Regulation panel on public company mergers, Brian Breheny, the Chief of the Office of M&A at the SEC indicated that:
1. The Office of M&A’s number one priority is fixing the problems created by the split in the circuits regarding 14d-10. Brian said not to expect the SEC to adopt a brightline test – but reminded the audience that the SEC has consistently taken the view that bona fide compensation arrangements should not raise 14d-10 issues. However, it wasn’t clear how the SEC will propose to solve the problem other than that it has now concluded that a rule amendment is necessary.
2. The SEC is closely studying the NASD’s rule proposal regarding fairness opinions and is also reviewing its own fairness opinion disclosure rules.
Some of you will recall the 2004 decision in Consolidated Edison v. Northeast Utilities by the US District Court for the SDNY holding that former shareholders of the target could bring an action for a lost merger premium as a result of the buyer’s wrongful repudiation of the merger agreement. Because such claim was vested in shareholders as of the date of the repudiation – and not the target or transferees of their shares – the target could not settle such claims (e.g., by amending or revising the terms of the original merger agreement).
Thankfully, the 2nd Circuit has overturned the decision on appeal concluding that, under the terms of the merger agreement between Consolidated Edison and Northeast Utilities, target stockholders become third party beneficiaries – with the right to enforce the buyer’s obligation to pay the contracted merger consideration, only upon consummation of the merger.
This important decision confirms that claims of wrongful repudiation of a typically constructed merger agreement will not deprive the principal parties of the ability to amend – or otherwise settle disputes – by vesting claims in the hands of target shareholders at the time of the breach. Thanks to Kevin Miller of Alston & Bird for the heads up!
The Convergence of Hedge Funds and Its Impact on M&A
We have posted the transcript for the popular webcast: “The Convergence of Hedge Funds and Its Impact on M&A.”
Some thoughts from Kevin Miller of Alston & Bird: A recent Bloomberg.com article highlighted some of the pros – as well as some cons – of stapled financing, but could have paid greater attention to the following points:
In the “Toys ‘R Us” decision, Vice Chancellor Strine – after criticizing the decision of the Toy’s board to allow its financial advisor to finance the winning bidder – noted that: “By stating this, I do not want to be perceived as making a bright-line statement. One can imagine a process when a board decides to sell an entire division or the whole company, and when the board obtains a commitment from its financial advisor to provide a certain amount of financing to any bidder, in order to induce more bidders to take the risk of an acquisition. These and other scenarios might exist when roles on both sides for the investment banker would be wholly consistent with the best interests of the primary client company.”
In addition to inducing more bidders, stapled financing can provide the following additional benefits to a seller:
– speedier consummation of a transaction, because the provider of stapled financing will have completed or nearly completed its financing due diligence and will have obtained or be well advanced in obtaining internal approvals to provide the necessary financing commitments;
– the creation of a financing floor that prevents winning bidders from attempting to renegotiate the purchase price based on a deterioration in the terms of the financing available from their third party sources of financing; and
– greater certainty of consummation as a result of the demonstrated capacity of a select group of investment banks to successfully market and sell the significant amounts of high yield securities necessary to finance leveraged acquisitions, particularly the larger transactions.
Stapled financing is routinely used by financial sponsors, the most sophisticated market participants, when they choose to sell businesses that may be attractive to other financial sponsors.
Investment banks have developed a number of policies to address potential conflicts of interest including:
– refusing to offer stapled financing when representing a special committee evaluating a management buyout; and
– effectively requiring sellers to obtain fairness opinions from unconflicted financial advisors by either refusing to provide fairness opinions when they are offering financing or conditioning the rendering of a fairness opinion on the Seller’s receipt of a fairness opinion from a second financial advisor.
Finally, it is worth noting that the “Toys” sale process did not involve stapled financing. The term “stapled financing” is generally used to describe prepackaged financing made available to bidders as part of an auction process. In “Toys,” the seller’s financial advisor was not authorized to offer financing until after the auction was over and the winning bidder selected, significantly reducing the risk that the seller’s financial advisor would tilt the playing field in favor of a particular bidder.
In sum, a properly functioning and rational board of directors may conclude that the benefits of stapled financing outweigh the risks.
In yesterday’s NY Times, Andrew Sorkin ran this interesting article in his weekly column: “Among Wall Street’s swashbuckling buyout kings, not many words are off limits. But with private equity firms teaming up to go after bigger prey, one dirty word has become unspeakable. It is collusion.
Virtually any big company that puts itself up for auction these days is deluged with interest from private equity firms, which have too much money and too little time to spend it. Witness the $15 billion sale of Ford’s Hertz rental car unit to a consortium of private equity players including Clayton, Dubilier & Rice Inc., the Carlyle Group and Merrill Lynch Global Private Equity. Or the $11.3 billion sale of SunGard to a supersized group of seven buyout firms led by Silver Lake Partners. What has gone largely unquestioned is whether the formation of these consortiums of firms, or “clubs” in industry parlance, has the potential to artificially depress buyout prices and hurt corporate shareholders.
While no buyout executives will say on the record that the purpose of forming a team is to keep the asking price from going too high, privately, most will concede that reducing the final takeover price is sometimes the result. “You’re not going to get me to say that aloud, but let’s just say that you’re not wrong,” said one legendary private equity investor who then immediately added, “Please don’t quote me by name.”
To be sure, private equity consortiums are being driven in large part by the desire of firms to bag bigger game than they could manage on their own. And by banding together, they can defray some of the risk of an investment going horribly wrong.
Nonetheless, the players obviously remain concerned about the possibility of collusion. In an effort to prevent the strongest buyers from ganging up together, sellers include strict contractual language that keeps the private equity firms from communicating during an auction without the sellers’ permission. It is an open secret that the firms rarely adhere to the rules.
Private equity firms recently have come up with a clever maneuver. Instead of simply getting together, they are now also enlisting Wall Street banks to back their buyouts. These banking arrangements can effectively lock out competitive suitors. A case in point is the latest $16 billion auction for the supermarket company Albertson’s. In that deal, a group of buyout firms led by Kohlberg Kravis Roberts has corralled three of the biggest investment banks, Citigroup, Credit Suisse First Boston and Deutsche Bank, to exclusively lend them money to support their offer. Another team led, by Thomas H. Lee Partners, has done the same with Morgan Stanley, Bank of America and UBS. Several other bidders, including Cerberus, may be forced to drop out if they can’t find financing.
Companies involved in hostile takeovers have long used a strategy of signing up many big investment banks as advisers if only to deprive their opponents of these services. But private equity firms have taken this tactic to a new level.
Sellers may begin to fight back. In recent weeks, bankers and lawyers have been talking about the possibility of signing up as many as a half-dozen banks in advance of auctions to work for the seller and provide preapproved loans to buyers, in what some are describing as a “community staple” – a takeoff on the concept of “staple financing.” (Staple financing is when a seller’s adviser also offers financing to the buyer that is stapled onto the auction material.)
WHILE chief executives of companies thinking of selling are worried about possible collusion, many private equity folk pooh-pooh the issue. As one private equity executive said to me, “As long as two girls show up to the dance, there’s enough competition.”
That may be true. But chew on this scenario: When Kohlberg Kravis Roberts led a group that won a $4.3 billion auction for PanAmSat last year, it beat out a rival consortium led by the Carlyle Group. Several months after the deal had been completed, guess who got an offer from Kohlberg Kravis for an opportunity to buy into the group? Yes, Carlyle.
Some would say this is simply good business. Cynics may be tempted to think that unspeakable word.”
In this podcast, George Casey of Shearman & Sterling discusses the SEC’s Divisions of Corporation Finance and Market Regulation jointly issued no-action and exemptive letter to Axel Springer providing relief under the tender offer rules (Axel Springer, a German stock corporation, made a cash tender offer for another German company), in particular focusing on the following questions:
– What is the significance of the SEC giving a cross-border relief in connection with an offer for a company that does not qualify as a “foreign private issuer”?
– It appears that the bidder would be permitted to pay for the tendered shares with a significant delay after the expiration of the offer period. Why was this relief necessary?
– Is the “prompt payment” relief likely to become recurring in German offers?
– The bidder will give withdrawal rights after the expiration of the offer. Why is this necessary?