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.”
********
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…
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.