Yearly Archives: 2011

A Quick Survey of Recent Developments in Public M&A Deal Terms

Posted by David Fox, Kirkland & Ellis LLP, on
Sunday, May 22, 2011
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David Fox is a partner at Kirkland & Ellis LLP, focusing on complex mergers and acquisitions as a member of that firm’s Corporate Group. This post is based on a Kirkland & Ellis M&A Update by Mr. Fox and Daniel Wolf.

With the seeming full return of the public M&A market, we thought it was an opportune moment to reflect briefly on a number of recent trends in deal terms. The non-exhaustive list below is intended more as an observation rather than an analysis or judgment on the propriety of any of the terms. Some of the trends are fully developed, while others are nascent; either way, dealmakers should be aware of these market developments as they consider their upcoming deals:

  • 1. Deal Certainty — As we argued 18 months ago, the unexpected developments in deal certainty provisions for strategic and financial buyers in the immediate aftermath of the credit crisis did not represent a new “market” or “deal paradigm” but rather reflected a more thoughtful and nuanced approach to issues of certainty of closing in light of market conditions. While we have continued to see a blurring of some of the techniques from the pre-crash poles of full specific performance (strategic acquirers) and full optionality for a small reverse termination fee (financial buyers), recent evidence has shown a continuing shift towards a return to the traditional bifurcated deal certainty models described above depending on the identity of the buyer. Again, we believe this reflects economic conditions, particularly in the credit markets, with strategic buyers increasingly willing to offer greater certainty because of renewed confidence in the staying power of the current favorable liquidity environment and sellers willing to accept the inherent optionality in the private equity buyer model, relying on the buoyancy of the debt markets and more sizable reverse termination fees to impose economic discipline on a wavering financial buyer.

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The Relationship Between the Lead Director and the CEO

Posted by Jeffrey Stein, King & Spalding LLP, on
Saturday, May 21, 2011
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This post comes to us from Jeffrey Stein and Bill Baxley of King & Spalding LLP; both Mr. Stein and Mr. Baxley are partners in the Corporate Practice Group at King & Spalding. This post relates to a recent meeting of the Lead Director Network, which is described in more detail here.

A strong, productive relationship between the lead director and a company’s chief executive officer (“CEO”) will support improved corporate performance, as well as a more effective board of directors. Such a relationship between the lead director and the CEO can help a company execute its strategy more effectively, successfully navigate a crisis, complete a major corporate transaction and resolve the multitude of other issues that a company and its board will encounter. However, notwithstanding the increased prevalence of the lead director position and the recent expansion of lead directors’ roles, there is little formal guidance as to what practices and procedures are beneficial, or detrimental, to the relationship between the lead director and CEO.

Against this background, the Lead Director Network (the “LDN”), a group of lead directors, presiding directors and non-executive chairmen from many of America’s leading companies, met on March 1, 2011 to discuss the relationship between the lead director and the CEO. Following this meeting, King & Spalding and Tapestry Networks have published a ViewPoints report here to present highlights of the discussion that occurred at the meeting and to stimulate further consideration of these subjects.

The following provides highlights from the meeting, as described in the ViewPoints report.

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The 2011 Survey of Board Practices

Posted by Matteo Tonello, The Conference Board, on
Friday, May 20, 2011
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Matteo Tonello is Director of Corporate Governance for The Conference Board, Inc. This post relates to a Survey of Board Practices being led by Dr. Tonello; Frank Hatheway, the Chief Economist and Senior Vice President of NASDAQ OMX; and Scott Cutler, Executive Vice President, Co-Head US Listings & Cash Execution, NYSE Euronext. General counsel, corporate secretaries and corporate governance officers of U.S. public companies are invited to participate in the survey; the survey can be completed online by clicking here.

The Conference Board, NASDAQ OMX and NYSE Euronext announced last week a research collaboration to document the state of corporate governance practices among publicly listed corporations in the United States.

The centerpiece of the collaboration is The 2011 Board Practice Survey, which the three organizations are disseminating to their respective memberships. Findings will constitute the basis for a benchmarking tool searchable by company size (measured by revenue and asset value) and 22 industry sectors. In addition, they will be described in the new edition of The Directors’ Compensation and Board Practices Report, scheduled to be released jointly in the fall.

The Conference Board’s annual benchmark series on director compensation was first released in 1939. In the last decade, the database has been expanded to report on a wide array of governance practices, documenting a steady transformation in the role of public companies’ boards and underscoring the increasing importance of directors’ monitoring responsibilities and the growing influence of shareholders.

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The Effect of Short-term Liquidity and Capacity Constraints on Industry Cooperation

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Friday, May 20, 2011
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The following post comes to us from Matthew Gustafson, Ivan Ivanov, and John Ritter of the Finance Department at the University of Rochester.

A central theme in industrial organization is product market cooperation and price collusion, yet there is little empirical work in the area. In our paper, The Effect of Short-term Liquidity and Capacity Constraints on Industry Cooperation, which was recently made publicly available on SSRN, we attempt to bridge this gap. Using a novel dataset on aggregate airfare rate increases, we are the first to provide empirical evidence on the peculiar dynamics of how firms in the airline industry cooperate. More importantly, this unique setting allows us to examine the determinants of the cooperation decision from both the initiator’s and the follower’s perspective. A recent $1.7 billion anti-trust settlement has thrust airline price fixing into the media spotlight. While no major United States air carriers have been accused of any wrongdoing, recent events raise suspicion regarding the legality of recent pricing trends for domestic airfare. Although we cannot rule out collusion, the pricing behavior in our data is most similar to that described by the cooperative model of Salop and Stiglitz (1977). The authors show that in an industry with search costs, the perfectly competitive price will not be an equilibrium since each firm has an incentive to raise price by a small amount. Extending this argument leads to a cycle of price increases since the benefits to search are based only on relative prices. This allows for any number of cooperative pricing outcomes.

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Improving Multi-Jurisdictional, Merger-Related Litigation

Posted by Mark Lebovitch, Bernstein Litowitz Berger & Grossmann LLP, on
Thursday, May 19, 2011
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Mark Lebovitch is a partner at Bernstein Litowitz Berger & Grossmann LLP specializing in corporate governance litigation. This post is based on an article by Mr. Lebovitch, Jerry Silk and Jeremy Friedman. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

In the past two years, the court system has seen a sharp increase in the volume of merger-related class-action lawsuits, particularly (but by no means exclusively) in the Delaware Court of Chancery. See John W. Molka III, Advisen Ltd., Securities Suits Abound in a Harsh 2009: An Advisen Quarterly Report—2009 Review 9–10; John W. Moka III, Advisen Ltd., 2010 a Record Year for Securities Litigation: An Advisen Quarterly Report—2010 Review 3–4 (noting that the number of M&A-related lawsuits filed nationwide increased dramatically from 159 in 2008 to 398 in 2010). The increased case volume has led to unusual behavior by shareholders’ and defense counsel alike, particularly in connection with the organization of parallel actions in different jurisdictions and the appointment of lead class counsel.

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A 12-Step Program to Truly Good Corporate Governance

Posted by Charles M. Nathan, Latham & Watkins LLP, on
Wednesday, May 18, 2011
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Charles Nathan is Of Counsel at Latham & Watkins LLP and is co-chair of the firm’s Corporate Governance Task Force. This post is based on a Latham & Watkins Corporate Governance Commentary.

Good corporate governance is of the moment. It is talked and written about constantly by academics, the corporate governance community working for institutional investors and proxy advisors, boards of directors, corporate executives, corporate lawyers, judges, reporters and, yes, even politicians. Indeed, it is talked about and written about so often and at such length that it often seems to tower above all other aspects of the corporate world. The discourse, moreover, has come to resemble something of a Tower of Babel, where so much is said, from so many points of view, that it seems impossible to make sense of it all.

This essay attempts to bring some coherence to the topic by positing a 12-Step Program that we believe would lead to a useful and effective paradigm for truly good corporate governance.

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Why and How to Design a Contingent Convertible Debt Requirement

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Wednesday, May 18, 2011
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The following post comes to us from Charles Calomiris, the Henry Kaufman Professor of Financial Institutions at Columbia Business School, and Richard J. Herring, the Jacob Safra Professor of International Banking at the Wharton School, University of Pennsylvania.

In our paper, Why and How to Design a Contingent Convertible Debt Requirement, which was recently made publicly available on SSRN, we develop a proposal for a contingent capital (CoCo) requirement. We show that CoCos can play a unique role alongside a standard minimum book value of equity ratio requirement. If properly designed, a CoCo requirement can provide a more effective solution to the “too-big-to-fail” problem, by ensuring adequate capital relative to risk, and it can do so at a lower cost than a simple equity requirement. A proper CoCo requirement can provide strong incentives for the prompt recapitalization of banks after significant losses of equity, or for the proactive raising of equity capital when risk increases. Consequently, it can also provide strong incentives for effective risk governance by regulated banks, and can reduce forbearance (supervisory reluctance to recognize losses).

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The New Face of M&A: How a Trillion Dollars Will Change the Strategic Landscape

Posted by James Woolery, JPMorga, on
Tuesday, May 17, 2011
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James Woolery is Co-Head of North American Mergers & Acquisitions at JPMorgan. This post is based on a JPMorgan report.

1. The Trillion Dollar Question

How would a trillion dollars affect the strategic M&A landscape? By now, virtually everybody who reads the financial press is aware that corporate cash balances are massive. In fact, the largest U.S. firms collectively have in excess of $1 trillion on their balance sheets. These firms have accumulated liquidity during the crisis by cutting back on shareholder distributions, capital expenditures, R&D and acquisitions. Since the crisis, these same firms have delevered by paying down debt and growing their earnings, further enhancing their liquidity positions. As one can see in Figure 1 below, cash balances surged from 5.9% to 10.7% of total assets and from $410bn to $1.1trn, while leverage declined from 3.0x to 2.0x.

As we discussed in several recent reports, the cash-rich environment is ripe for a significant increase in shareholder distributions. [1] Albeit resurging from crisis lows, existing dividend and buyback levels are not nearly enough to consume these firms’ cash flows, let alone put a dent into the record high cash balances. Moreover, distributions do not address the major issue facing large firms today: declining growth rates. The scarcity of organic growth opportunities is perhaps more concerning than any other current corporate issue. Over the last decade, large-cap long-term EPS growth rates declined from 13.2% to 11.2% currently.

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Proxy Advisory Firms and Stock Option Exchanges

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Monday, May 16, 2011
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The following post comes to us from David Larcker, Allan McCall, and Gaizka Ormazabal, all of the Accounting Department at Stanford University.

In our paper, Proxy Advisory Firms and Stock Option Exchanges: The Case of Institutional Shareholder Services, which was recently made publicly available on SSRN, we examine the role of proxy advisors in the specific context of stock option exchanges, where firms replace underwater stock options with new awards of options, restricted stock and/or cash. We restrict our investigation to this specific transaction because it is a relatively simple, one-time transaction where the set of design choices are well defined and can be collected from SEC filings. In addition, the precise criteria used by Institutional Shareholder Services (ISS) in making the voting recommendation are known, and we can observe the degree to which an option exchange follows or deviates from their criteria. Finally, there is considerable variation across the firms in the structure of their exchange programs and the influence of ISS on proxy voting outcomes. This enables us to examine the performance implications of plan design choices and the role of ISS in these transactions.

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SEC Strengthens Shareholders’ Role In Corporate Political Speech Decisions

Posted by Robert J. Jackson, Jr., Columbia Law School, on
Sunday, May 15, 2011
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Robert J. Jackson, Jr. is Associate Professor of Law at Columbia Law School. His paper with Lucian Bebchuk, “Corporate Political Speech: Who Decides?”, is available here, and a previous Forum post discussing the paper is available here.

The Supreme Court’s recent decision in Citizens United v. FEC makes clear that corporations have considerable freedom to spend corporate funds on elections. In an article published in the Harvard Law Review last November, Lucian Bebchuk and I argued that, in the wake of Citizens United, lawmakers should reconsider the corporate-law rules governing who decides how corporations use this freedom. Specifically, we argued that these rules should give shareholders a greater role in corporate political speech decisions. Recently, the Securities Exchange Commission provided important guidance that will strengthen shareholders’ role in deciding whether and how corporations spend on elections.

Under existing corporate-law rules, corporate political speech decisions are subject to the same rules as ordinary business decisions. Thus, political speech decisions can generally be made without input from shareholders, a role for independent directors, or detailed disclosure—the safeguards that corporate-law rules establish for special corporate decisions. In our article, we argued that the rules governing ordinary business decisions are inappropriate for corporate political speech, and proposed rules to strengthen the role of shareholders and independent directors, and mandate special disclosure, when directors and executives seek to spend corporate funds on elections.

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