Monthly Archives: December 2014

Enforceability of Obligations Against Non-Signatories in Private Mergers

Daniel Wolf is a partner at Kirkland & Ellis focusing on mergers and acquisitions. The following post is based on a Kirkland memorandum by Mr. Wolf, David B. Feirstein, and Joshua M. Zachariah. 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.

A recent Delaware decision in Cigna provides important guidance on simple yet important steps that buyers of private companies using a merger structure can take to more effectively impose certain post-closing obligations on stockholders who do not sign agreements to support the deal.

While a stock purchase involves entering into an agreement with each stockholder of a target company, creating an avenue to bind each selling stockholder to terms such as indemnification obligations, non-compete clauses and general releases, in a merger structure direct contractual relationships are only established with those target stockholders who may sign a written consent or voting agreement to support the merger. This leaves buyers facing the challenge of how to impose these post-closing obligations on stockholders who do not consent or sign a voting agreement (“non-signatory stockholders”).

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Delaware Court Provides Guidance in a Sale-of-Control Situation

The following post comes to us from Jason M. Halper, partner in the Securities Litigation & Regulatory Enforcement Practice Group at Orrick, Herrington & Sutcliffe LLP, and is based on an Orrick publication by Mr. Halper, Penelope A. Graboys Blair, Peter J. Rooney, and Katherine L. Maco. 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.

On November 25, 2014, the Delaware Court of Chancery issued a decision in In Re Comverge, Inc. Shareholders Litigation, which: (1) dismissed claims that the Comverge board of directors conducted a flawed sales process and approved an inadequate merger price in connection with the directors’ approval of a sale of the company to H.I.G. Capital LLC; (2) permitted fiduciary duty claims against the directors to proceed based on allegations related to the deal protection mechanisms in the merger agreement, including termination fees potentially payable to HIG of up to 13% of the equity value of the transaction; and (3) dismissed a claim against HIG for aiding and abetting the board’s breach of fiduciary duty.

The case provides important guidance to directors and their advisors in discharging fiduciary duties in a situation where Revlon applies and in negotiating acceptable deal protection mechanisms. The decision also is the latest in a series of recent opinions addressing and defining the scope of third party aiding and abetting liability.

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Do Long-Term Investors Improve Corporate Decision Making?

The following post comes to us from Jarrad Harford, Professor of Finance at the University of Washington; Ambrus Kecskés of the Schulich School of Business at York University; and Sattar Mansi, Professor of Finance at Virginia Polytechnic Institute & State University.

It is well established that managers of publicly traded firms, left to their own devices, tend to maximize their private benefits of control rather than the value of their shareholders’ stake in the firm. At the same time, imperfectly informed market participants can lead managers to make myopic investment decisions. One of the most important mechanisms that have been proposed to counter this mismanagement problem is longer investor horizons. By spreading both the costs and benefits of ownership over a long period of time, long-term investors can be very effective at monitoring corporate managers.

We explore this subject in our paper entitled Do Long-Term Investors Improve Corporate Decision Making? which was recently made publicly available on SSRN. We ask two questions. First, do long-term investors in publicly traded firms improve corporate behavior? Second, does their influence on managerial decision making improve returns to shareholders of the firm? To answer these questions, we study a wide swath of corporate behaviors.

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“Just Say No”

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 memorandum by Mr. Lipton and Sabastian V. Niles.

On October 22, 2014, Institutional Shareholder Services issued a note to clients entitled “The IRR of ‘No’.” The note argues that shareholders of companies that have successfully “just said no” to hostile takeover bids have incurred “profoundly negative” returns. In a note we issued the same day, we called attention to critical methodological and analytical flaws that completely undermine the ISS conclusion. Others have also rejected the ISS methodology and conclusions; see, for example, the November analysis by Dr. Yvan Allaire’s Institute for Governance of Public and Private Organizations entitled “The Value of ‘Just Say No’” and, more generally, a December paper by James Montier entitled “The World’s Dumbest Idea.” Of course, even putting aside analytical flaws, statistical studies do not provide a basis in individual cases to attack informed board discretion in the face of a dynamic business environment. The debate about “just say no” has been raging for the 35 years since Lipton published “Takeover Bids in the Target’s Boardroom,” 35 Business Lawyer p.101 (1979). This prompts looking at the most prominent 1979 “just say no” rejection of a takeover.

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The Law and Finance of Anti-Takeover Statutes

Marcel Kahan is the George T. Lowy Professor of Law at the New York University School of Law. This post is based on a paper co-authored by Professor Kahan and Emiliano M. Catan at the New York University School of Law.

Over the last 15 years, numerous economics articles, many published in top finance journals, have examined the effect of takeover law on performance, leverage, managerial stock ownership, worker wages, patenting, acquisitions, and other firm actions. These studies have concluded, among other things, that anti-takeover laws are associated with a decline in managerial stock ownership, and increase in wages, and a decline in dividend payout ratios.

From a legal perspective, however, the varying methods that financial economists use to measure the takeover protection afforded by state law make little sense. Economists generally look either at whether (and when) a state adopted a business combination statute; at when a state adopted the first of a set of statutes (typically, business combination statutes, control share acquisition statutes, and fair price statutes); or at how many different types of statutes a state has adopted.

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Determining the Likely Standard of Review in Delaware M&A Transactions

The following post comes to us from Robert B. Little, partner in the Mergers and Acquisitions practice at Gibson, Dunn & Crutcher LLP, and is based on a Gibson Dunn client alert by Mr. Little, Chris Babcock, Michael Q. Cannon, and Katherine Cournoyer; the complete publication, including footnotes, is 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.

M&A practitioners are well aware of the several standards of review applied by Delaware courts in evaluating whether directors have complied with their fiduciary duties in the context of M&A transactions. Because the standard applied will often have a significant effect on the outcome of such evaluation, establishing processes to secure a more favorable standard of review is a significant part of Delaware M&A practice. The chart below identifies fact patterns common to Delaware M&A and provides a preliminary assessment of the likely standard of review applicable to transactions fitting such fact patterns. However, because the Delaware courts evaluate each transaction in light of the transaction’s particular set of facts and circumstances, and due to the evolving nature of the law in this area, this chart should not be treated as a definitive statement of the standard of review applicable to any particular transaction.

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A Crisis of Banks as Liquidity Providers

The following post comes to us from Nada Mora, Senior Economist at the Federal Reserve Bank of Kansas City, and Viral Acharya, Professor of Finance at NYU.

In our paper, A Crisis of Banks as Liquidity Providers, forthcoming in the Journal of Finance, we investigate whether the onset of the 2007-09 crisis was, in effect, a crisis of banks as liquidity providers, which may have led to reductions in credit and increased the fragility of the financial system. The starting point of our analysis is the widely accepted notion that banks have a natural advantage in providing liquidity to businesses through credit lines and other commitments established during normal times. By combining deposit taking and commitment lending, banks conserve on liquid asset buffers to meet both liquidity demands, provided deposit withdrawals and commitment drawdowns are not too highly correlated. Evidence from previous crises supports this view. In fact, banks experienced plenty of deposit inflows to meet the higher and synchronized drawdowns that occurred during episodes of market stress (Gatev and Strahan (2006)). The reason is that depositors sought a safe haven due to deposit insurance as well as due to the regular occurrence of crises outside the banking system (e.g., the fall of 1998 following the Russian default and LTCM hedge fund failure; the 2001 Enron accounting crisis).

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Delaware Court Preliminarily Enjoins Merger Due to Flawed Sales Process

The following post comes to us from Jason M. Halper, partner in the Securities Litigation & Regulatory Enforcement Practice Group at Orrick, Herrington & Sutcliffe LLP, and is based on an Orrick publication by Mr. Halper, Peter J. Rooney, Christin Joy Hill, and Christine M. Smith. 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.

On November 24, 2014, the Delaware Court of Chancery preliminarily enjoined for thirty days a vote by C&J Energy Services stockholders on a merger with Nabors Red Lion Limited, to allow time for C&J’s board of directors to explore alternative transactions. In a bench ruling in the case, City of Miami General Employees’ & Sanitation Employees’ Retirement Trust v. C&J Energy Services, Inc., Vice Chancellor Noble concluded that “it is not so clear that the [C&J] board approached this transaction as a sale,” with the attendant “engagement that one would expect from a board in the sales process.” Interestingly, the Court called the issue a “very close call,” and indicated it would certify the question to the Delaware Supreme Court at the request of either of the parties (at this time it does not appear either party has made a request). The decision provides guidance regarding appropriate board decision-making in merger transactions, particularly where one merger party is assuming minority status in the combined entity yet also acquiring management and board control.

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International Banking Regulators Reinforce Board Responsibilities for Risk Oversight and Governance Culture

Holly J. Gregory is a partner and co-global coordinator of the Corporate Governance and Executive Compensation group at Sidley Austin LLP. The following post is based on a Sidley update authored by Ms. Gregory, George W. Madison, and Connie M. Friesen; the complete publication, including footnotes, is available here.

In October 2014, the Basel Committee on Banking Supervision of the Bank for International Settlements issued its consultative Guidelines [on] Corporate governance principles for banks (the “2014 Principles”). The 2014 Principles revise the Committee’s 2010 Principles for enhancing corporate governance (the “2010 Principles”), in which the Committee reflected on the lessons learned by many central banks and national bank supervisors from the global financial crisis of 2008-09, in particular with regard to risk governance practices and supervisory oversight at banks. The 2014 Principles also incorporate corporate governance developments in the financial services industry since the 2010 Principles, including the Financial Stability Board’s 2013 series of peer reviews and resulting peer review recommendations. The comment period for the 2014 Principles expires on January 9, 2015.

This post highlights certain themes in the 2014 Principles and identifies recent comments by U.S. banking regulators that indicate that supervised financial institutions can expect new regulations to address some of these themes.

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2014 Director Compensation Report

The following post comes to us from Eva Gencheva, executive compensation consultant at Frederic W. Cook & Co., Inc., and is based on the summary of a FW Cook report; the complete report is available here.

Frederic W. Cook & Co. Inc.’s 2014 Director Compensation Report indicates that non-employee director compensation increased modestly since last year, with increases ranging from 4% to 7%. Although no new design trends were observed, the streamlining of director compensation continues through (1) replacing meeting fees with higher cash retainers implying that director attendance is a prerequisite of board service, (2) denominating equity grants as a dollar value rather than as a number of shares to mitigate year-over-year valuation changes, and (3) shifting from stock options to full-value shares to strengthen the alignment of directors’ and shareholders’ interests.

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