Monthly Archives: April 2011

More Protectionism and Paternalism at the UK Panel on Takeovers and Mergers

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 Selina Sagayam; a previous post discussing this topic is available here.

Introduction — The Panel Stands Firm

In late November 2010, we published an article on the policy statement of the UK Panel on Takeovers and Mergers (Panel) which set out the ground work for changes to the rules governing the conduct of public takeovers in the UK as embodied in the UK Code on Takeovers and Mergers (Code). [1] Last week, the Panel published a public consultation paper (PCP 2011/1) which sets out the detailed proposed amendments to the Code [2] as trailed in our earlier article. In summary, notwithstanding an outcry from seasoned market participants (in particular the advisory community) on some of the proposed changes which are perceived as having a detrimental impact on the openness of the UK M&A market, disappointingly, the Panel has not shifted from its position as set out late last year on the fundamentals/principles of its new approach on key areas such as the ‘put up shut up’ (PUSU) regime and offeree protection arrangements. We examine below certain critical features of some of these proposed changes.


Internal Control Weakness and Bank Loan Contracting

The following post comes to us from Jeong-Bon Kim, Professor of Accountancy at City University of Hong Kong; Byron Song of the Department of Accounting at Concordia University; and Liandong Zhang of the Department of Accountancy at City University of Hong Kong.

In our paper, Internal Control Weakness and Bank Loan Contracting: Evidence from SOX Section 404 Disclosures, forthcoming in The Accounting Review, we compare various features of loan contracts between firms with ICW and those without ICW. To provide evidence of the impact of ICW on various features of loan contracts, we construct a sample of 3,164 loan facility–years for borrowers that filed SOX 404 disclosures with the SEC during 2005–2009. We then compare various features of loan contracts with ICW borrowers with those with non-ICW borrowers, after controlling for borrower- and loan-specific characteristics deemed to affect the contract terms.


Activists Target Companies with Market Caps over $50 Billion

Martin Lipton is a founding partner of Wachtell, Lipton, Rosen & Katz, specializing in mergers and acquisitions and matters affecting corporate policy and strategy. This post is based on a Wachtell Lipton firm memorandum.

In a speech to the Council of Institutional Investors recently, Nelson Peltz, one of the most successful of the activist investors, said the recent changes in corporate governance would enable him to make investments in the heretofore “untouchables”—companies with market capitalizations over $50 billion. Mr. Peltz noted that the new governance rules give activists more tools with which to pressure companies, noting that larger companies provide bigger profit opportunities than smaller companies.


Renault Case Illustrates Dangers of Misleading Whistleblower Claims

The following post comes to us from Alan Klein, a Partner and member of the Corporate Department at Simpson Thacher & Bartlett LLP, and is based on a Simpson Thacher memorandum.

Earlier this year, following an internal investigation into allegations of industrial espionage, Renault SA (“Renault”), the giant French car maker, fired three senior employees with great public fanfare. But this week, after an inquiry by French officials reportedly found no evidence substantiating Renault’s findings, Renault issued a public apology to these employees and conceded it had made a mistake. Based on published accounts, it appears that Renault might have been the victim of a hoax involving an unfounded whistleblower allegation designed to prompt the car maker to spend money pursuing a wayward internal investigation.


Court Holds No Duty to Include a “Fiduciary Out” in Extra-ordinary Transaction Agreements

Edward Herlihy is a partner and co-chairman of the Executive Committee at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton firm memorandum by Mr. Herlihy and David E. Shapiro.

On March 30, 2011, the California Court of Appeals affirmed a long standing principle of California law that boards of directors of California companies can lawfully bind themselves to complete an extra-ordinary corporate transaction such as a merger or recapitalization without the need for a “fiduciary out” and without an independent shareholder vote. Monty v. Leis, No. B225646 (Cal. Ct. App. March 30, 2011).

Pacific Capital Bancorp (“PCB”), parent of Pacific Capital Bank, suffered losses in the real estate loan market that resulted in a write-down of its assets and was met with a series of banking regulatory orders which required that PCB raise capital. After seeking additional capital from numerous sources, PCB entered into an exclusive investment agreement with the Ford Financial Fund, LP (“Ford”) a fund affiliated with renowned bank investor Gerald Ford. Ford agreed pursuant to the investment agreement to inject $500 million of capital into the bank to allow it to meet regulatory requirements and grow its business. As a result, Ford would own over 80% of PCB’s common stock. PCB relied on the “financial distress” exception to the NASDAQ shareholder vote requirements to issue common and convertible preferred shares to Ford. After issuance, Ford voted the common shares it held to amend the articles of incorporation to authorize additional shares to be used to satisfy the conversion feature in the preferred stock. Two shareholders filed suit seeking to enjoin the transaction on a number of grounds and the trial court denied the injunction.


Early Results from Say on Pay

The following post comes to us from Michael R. Littenberg, a partner at Schulte Roth & Zabel LLP, and is based on Schulte Roth & Zabel client alert by Mr. Littenberg, Farzad F. Damania and Justin M. Neidig.

Beginning on Jan. 21, 2011, most domestic public companies became subject to the SEC’s new “say on pay” and “say on frequency” rules.

In the first 30 days of the new rules, 95 companies (including TARP recipients) held SOP votes and 92 companies held SOF votes. At 93 of the 95 companies, NEO compensation was approved by shareholders, in most cases by an overwhelming percentage of the votes cast. In contrast, frequency recommendations did not receive nearly as much support:


Reform for the Covered Bond Industry on the Horizon

The following post comes to us from Barton Winokur, Chairman and Chief Executive Officer of Dechert LLP, and is based on a Dechert publication by Patrick D. Dolan, Robert H. Ledig, Gordon L. Miller and Kira N. Brereton.

On the heels of the Administration’s recently published report to Congress outlining its objectives for reforming the housing finance market, [1] new legislative action may come that would encourage the issuance of covered bonds. Secretary of the Treasury Timothy Geithner on March 1, 2011 in testimony before the House Committee on Financial Services (“Committee”) stated that the development of a legislative framework for a covered bond market should be included as part of the consideration of new means to provide mortgage credit. [2] Notwithstanding earlier delays in implementing reform for this industry, [3] proposals for legislative action addressing covered bonds are likely to be a focal point for the Committee [4] during this session of Congress. A discussion draft of a bill sponsored by Representative Scott Garrett (R-NJ), which aims to establish standards for covered bond programs and a covered bond regulatory oversight program, has been circulated to members of Congress and securitization market participants. The draft bill, if enacted in its current form, would (i) define the issuers and asset classes that would be subject to the oversight program; (ii) establish a framework for a federal regulatory oversight program for covered bonds; and (iii) implement a default and insolvency resolution process. This memorandum summarizes the February 2011 discussion draft, entitled the “United States Covered Bond Act of 2011” (the “Act”), which is expected to be introduced later this year.


Agency Problems in Public Firms

The following post comes to us from Jesse Edgerton, an economist at the Board of Governors of the Federal Reserve in Washington, D.C. The paper and post express his views only and not necessarily those of the Federal Reserve Board or its staff.

The extent of agency problems in publicly traded firms and the need for reform of executive compensation remain the subject of active debate. In the paper, Agency Problems in Public Firms: Evidence from Corporate Jets in Leveraged Buyouts, recently made available on SSRN, I bring new evidence to this debate by measuring a particular kind of firm behavior where there is potential for managerial abuse—the use of corporate jets.

Motivated by a large literature that finds improvements in efficiency and performance when firms are purchased by a private equity (PE) fund in a leveraged buyout (LBO), I use novel data to compare the fleets of jets operated by publicly traded and privately held firms. In the cross-section of firms from 2008, I find that PE-owned firms average about 40% smaller jet fleets than publicly traded firms, even after controlling for firm size, industry, and location in a variety of flexible ways. One could still worry, however, that these cross-sectional differences do not represent a causal effect of PE ownership due to omitted variables or other factors. Thus, I also measure changes in jet fleets within firms that are taken from public to private by a PE fund in an LBO between 1992 and 2007, and I find fleet reductions of a similar magnitude. Of course, the selection of firms into PE-ownership is not random, and I discuss assumptions under which these comparisons across and within firms provide estimates of lower and upper bounds on the average treatment effect of taking a firm from public to private in an LBO.


Del Monte and the Responsibility of a Board in a Sales Process

David A. Katz is a partner at Wachtell, Lipton, Rosen & Katz specializing in the areas of mergers and acquisitions and complex securities transactions. This post is based on an article by Mr. Katz and Laura A. McIntosh that first appeared in the New York Law Journal. 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.

The acquisition of Del Monte Foods Co. by a group of financial buyers was completed earlier this month. [1] The shareholder vote, which took place in early March, had been delayed for twenty days by the Delaware Court of Chancery because the court found that the financial advisor to Del Monte’s board had failed to disclose important information to the board and had become so conflicted in the transaction that the entire process had become tainted by the financial advisor’s misconduct and the directors’ breach of their fiduciary duties. [2]

The Del Monte transaction highlights important considerations for companies pursuing sale transactions, whether in the context of a going-private transaction or a sale to a strategic acquiror. One set of issues centers around the board’s oversight of its financial advisors, and another concerns the appropriate use of special committees by boards. The opinion of Vice Chancellor Laster in the Del Monte case is a powerful reminder to directors that actions such as hiring advisors and forming special committees—while appropriate and even essential in some circumstances—do not obviate the need for members of the board to be fully engaged in and actively supervising the process of negotiating a significant company transaction.


Dodd-Frank Rulemaking Progress Report

Margaret E. Tahyar is a partner in the Financial Institutions Group at Davis Polk & Wardwell LLP. This post discusses a Davis Polk report which is available here.

This posting, the Davis Polk Dodd-Frank Rulemaking Progress Report, is the first in a new series of Davis Polk presentations that illustrate graphically the progress of the rulemaking work that has been done and is yet to occur under the Dodd-Frank Act. The Progress Report has been prepared by our technology team, led by associate Gabe Rosenberg, as our first empirical data-mining exercise using the Davis Polk Regulatory Tracker™, an online subscription service offered by Davis Polk to help market participants understand the Dodd-Frank Act and follow regulatory developments on a real-time basis.


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