Monthly Archives: March 2011

CVRs — A Bridge Too Far?

Daniel Wolf is a partner at Kirkland & Ellis LLP focusing on mergers and acquisitions. This post is based on a Kirkland & Ellis M&A Update.

In a recent M&A Update we addressed the practical challenges of using earnouts in private company M&A to bridge the final valuation gap in sale negotiations. An equally daunting set of obstacles applies to the implementation of the public M&A version of earnouts — Contingent Value/Payment Rights (CVRs). We use the term CVRs to refer to a variety of techniques that provide public company target shareholders with valuation protection or additional consideration based on post-closing events. This protection can take several forms:


What Audit Committees Don’t Know

Editor’s Note: Robert Pozen is Chairman of MFS Investment Management and a Senior Lecturer of Business Administration at Harvard Business School.

During the financial crisis, investors learned the hard way about financial liabilities of many institutions that were not previously disclosed. For example, many banks had large contingent liabilities to off balance sheet entities that they had sponsored. The extent of these liabilities surprised investors when the banks were forced in late 2007 and 2008 to take on their books these off balance sheet entities.

Outside directors on the audit committees of these banks were also surprised by the scope and size of these off balance sheet liabilities. To paraphrase Donald Rumsfeld, these directors did not know what they did not know. Their blissful ignorance shows that the SOX reforms for audit committees have not been effective and that a different approach is needed.


Is Carl Icahn Good for Long-Term Shareholders?

The following post comes to us from Subramanian Iyer and Ramesh Rao of the Finance Department at Oklahoma State University, and Vinod Venkiteshwaran of the Finance Department at Texas A&M.

In the paper, Is Carl Icahn Good for Long-Term Shareholders? A Case Study of Shareholder Activism, which was recently published in the Journal of Applied Corporate Finance, we examine the case of Carl Icahn, whose career as a shareholder activist now spans at least three decades. The increase in activist campaigns by entrepreneurial investors and hedge funds in the past decade has raised considerable debate about their benefits for average shareholders. Although critics have longed charged that the proposals for change by such active investors typically do not increase the longer-run efficiency and values of the targeted companies, more recent studies have provided evidence of success, both in terms of increasing the market value of such companies and achieving at least some of the investors’ expressed objectives.


Delaware Court of Chancery Gets Airgas Right

Stanley Keller is partner of Edwards Angell Palmer Dodge LLP. The Airgas case was previously discussed in an op-ed by Professor Lucian Bebchuk, available here, and a paper from the Program on Corporate Governance, available here. 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.

Chancellor Chandler’s decision in Air Products and Chemicals Inc. v. Airgas, Inc. (Del. Ch., CA No. 5249-CC, 2/15/11) upholding the board’s maintenance of the company’s shareholder rights plan in the face of an unfriendly cash tender offer the board determined was inadequate has justifiably received a great deal of attention and analysis.  Despite his reluctance, I believe the Chancellor got it right.  By permitting the Airgas board to keep the rights plan in place under the facts of that case, he upheld the foundational director-centric model for governance of Delaware corporations and recognized the importance of long-term value creation as a critical focus for Delaware corporate enterprises.


Germany to Ban “Stealth Takeover” Strategies

Eduardo Gallardo is a partner focusing on mergers and acquisitions at Gibson, Dunn & Crutcher LLP. This post is based on a Gibson Dunn Client Alert by Philip Martinius.

On February 11, 2011, the German Parliament approved the bill for the so-called “Investor Protection and Capital Markets Improvement Act” (Anlegerschutz- und Funktionsverbesserungsgesetz) which is part of the ongoing legislative activity responding to the financial crisis. The bill is now referred to the second chamber of the Parliament and is expected to enter into force in April.

Apart from dealing with consumer-related issues such as (i) improving the protection of (retail) investors against wrongful advice by bankers and other professionals and (ii) stabilizing open-ended real-estate funds, the bill contains new disclosure obligations for stakeholders in public companies, e.g. holders of cash-settled options.

This highly relevant new disclosure rule is a reaction to the stealth takeover tactics that were, for example, employed by sports car maker Porsche it its attempted takeover of Volkswagen in the fall of 2008, but it may have a broader impact on the way public takeovers are done in Germany.

This alert focuses on the impact of the new bill on investments in and takeovers of public companies in Germany.


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