Our firm has recently released a new M&A Commentary providing strategic analysis of the increasingly common phenomenon of shareholder resistance to the terms of proposed acquisitions. The Commentary, entitled Shareholder Pushback on M&A Deals, explains how several high-profile mergers were rebuffed by shareholders in 2007–including Carl Icahn’s attempted purchase of Lear.

The Commentary emphasizes the importance in this environment of obtaining a positive recommendation from ISS, and of the board’s flexibility in the timing of the shareholder merger vote under Mercier v. Inter-Tel. Where those strategies fail, however, the Commentary points out that acquirers may wish to reconsider the once-dominant two-step tender approach. The Commentary concludes:

“Although the risk of shareholder pushback against announced M&A deals may be receding as the M&A market softens, it is not going away. In light of this added execution risk, parties negotiating a merger should structure the transaction to minimize it to the extent feasible. One readily available way to do this is to use a two-step transaction structure consisting of a tender offer followed by a merger, instead of a traditional one-step merger. The two-step transaction was at one time the prevailing deal structure, and it should become so again.”

The full Commentary is available online here.

Recently, in the Mergers, Acquisitions, and Split-Ups course here at Harvard Law, co-taught by Professor Robert Clark and Vice Chancellor Leo Strine, Jr., two expert practitioners shared their insights on the complex cross-border transactions that increasingly define the M&A landscape. While the panelists provided guidance on the economic reasoning underlying cross-border deals, the discussion also featured fascinating perspectives on the social and political considerations that accompany most major international mergers.

The panelists included Richard Hall of Cravath, Swaine & Moore along with Scott V. Simpson of Skadden, Arps, Slate, Meagher & Flom, each of whom have served as counsel on some of the largest cross-border deals ever to close. The panelists took students through case studies of two recent cross-border deals that illustrate the sensitive issues that corporate counselors face in a major international merger: Mittal Steel’s acquisition of Arcelor, and Basell’s acquisition of Huntsman. The panelists offered an insider’s view of the negotiations in both transactions–and the social and political matters that inevitably arise when a foreign acquirer pursues a large target.

A video of the discussion can be accessed online here.

(Editor’s Note: This post comes to us from Jie Cai and Ralph A. Walkling of Drexel University.)

We have recently released a new paper entitled Shareholders’ Say on Pay: Does it Create Value? The paper examines stock returns around the time of the passage of the Say on Pay Bill in the House of Representatives in search of evidence whether the market views the legislation as creating value. The Abstract of the piece follows:

The post Sarbanes-Oxley Act period is associated with several initiatives designed to give shareholders a greater voice in the boardroom. The latest of these initiatives is the Say-on-Pay Bill (H.R. 1257) which passed the House of Representatives on April 20, 2007 by a 2 to 1 margin. This bill does not limit CEO pay but requires an advisory shareholder vote on executive compensation packages. Using the abnormal return of 1,245 firms surrounding the House passage of this bill, we examine whether the market interprets shareholders’ say on executive pay as adding or subtracting firm value. Stocks of firms with positive abnormal CEO compensation react in a significant, positive manner to the Say-on-Pay Bill. The positive market reaction is stronger among the firms with weaker, but not the weakest governance. In addition, abnormal returns are higher in the subset of firms more likely to receive higher disapproval votes from shareholders and firms more likely to implement changes under the pressure of shareholder votes. Thus, the bill has the greatest impact among the subset of firms most likely to benefit and implement changes. Given the uncertainty surrounding passage, implementation and efficacy of this proposed advisory vote, the results are likely to understate the actual impact of Say on Pay legislation. Our findings suggest that the market views this legislation as value-creating for the companies where it is likely to have the most impact. These results provide important evidence for the current debate regarding the Say-on-Pay legislation in Congress and shareholder access to proxy. Our results also shed light on the role of activist investors.

The full Article is available for download here.

Recently, the Mergers, Acquisitions, and Split-Ups course here at Harvard Law School, co-taught by Professor Robert Clark and Vice Chancellor Leo Strine, Jr., hosted a fascinating talk by Martin Lipton of Wachtell, Lipton, Rosen & Katz, entitled The Future of M&A. The audience was treated to a rare glimpse of the events that have shaped mergers for a generation through the eyes of one of the principal architects of modern corporate law.

The talk began with an intimate history of the developments that led to the conception of modern merger defenses. The students were treated to the definitive account of the development of the shareholder rights plan–more widely known as the “poison pill”–as well as the strategy that led to the successful defense of those measures before the Delaware courts. Questions from the audience led to an insightful discussion of changes in modern corporate governance–including shareholder activism, the increased presence of independent directors, and the prominence of private equity–and their effects on merger practice. The talk closed with an insider’s view on recent developments likely to shape merger practice in 2008 and beyond.

A video of the discussion can be accessed on the Program on Corporate Governance website here. The materials used in the presentation can be downloaded here.

Unfortunately, my friend Lynn Turner prefers invective to analysis. From his comments, I see no evidence that he has in fact read the Second Circuit’s AFSCME v. AIG decision, Chairman Cox’s statement, or the interpretive rule actually adopted by the Commission on November 28.

Lynn states that Chairman Cox should have “voted with” departing Commissioner Nazareth on November 28. That would have produced a deadlock and resulted in no Commission position at all in response to the Second Circuit panel opinion. While those who love the playground of press releases and posturing, and have no current responsibility to administer the laws, might think such an abdication was just the right thing, Chairman Cox and the Commission majority chose to take their responsibilities seriously.

Lynn and the other constantly carping critics will be eating crow next Spring when Cox, with two new Democratic Commissioners in place, puts proxy access back on the agenda and again seeks consensus. If Lynn and other vocal activists really wanted proxy access, they would begin working with Chairman Cox and Corporation Finance Director White now to develop a proposal that could garner majority Commission support.

It appears that instead the critics and their academic enablers prefer to glorify those who have left the field and aim demagogic attacks at the Chairman. Great press . . . but no proxy access for another two proxy seasons. That’s nothing to brag about.

The Program on Corporate Governance has recently issued as a discussion paper my piece, co-authored with Zvika Neeman, entitled Investor Protection and Interest Group Politics. We develop in this paper a framework for analyzing how interest group politics influence investor protection levels. Our analysis identifies factors that impede desirable corporate governance reforms, and can help explain the ways in which investor protection levels vary around the world and over time. The abstract of the paper is as follows:

We model how lobbying by interest groups affects the level of investor protection. In our model, insiders in existing public companies, institutional investors (financial intermediaries), and entrepreneurs who plan to take companies public in the future, compete for influence over the politicians setting the level of investor protection. We identify conditions under which this lobbying game has an inefficiently low equilibrium level of investor protection. Factors that operate to reduce investor protection below its efficient level include the ability of corporate insiders to use the corporate assets they control to influence politicians, as well as the inability of institutional investors to capture the full value that efficient investor protection would produce for outside investors. The interest that entrepreneurs (and existing public firms) have in raising equity capital in the future reduces but does not eliminate the distortions arising from insiders’ interest in extracting rents from the capital public firms already have. Our analysis generates testable predictions, and can explain existing empirical evidence, regarding the way in which investor protection varies over time and around the world.

The full paper is available for download here.

It appears Mr. Olson is sadly uninformed when–in my opinion–he inappropriately labels former Securities and Exchange Commissioner Roel Campos as a “villain” for his role in the SEC rulemaking on proxy access.

Indeed, after the Second Circuit’s decision in AIG, it was Commissioner Campos who brought various parties together in an attempt to bridge the gap that existed between investors and management. Unfortunately, this issue had taken on an emotional, almost fundamentalist tone driven more by political ideals than by common sense. When battle lines were drawn and after the SEC proposed two different rules last summer, I attended a conference at which Commissioner Campos publicly spoke out against both proposals, a stance most investors agreed with. It was a view expressed constantly in thousands of comment letters investors sent to the SEC, only to find their voices falling on deaf ears and their views ignored. Campos also urged the SEC to leave things as they stood after the Second Circuit’s decision, as that was truly best for both sides in this heated debate.

By passing the non-access rule, three of the four current Commissioners have only served to increase the likelihood of open warfare, and perhaps litigation, between shareholders and management. As Chairman, Christopher Cox had the simple choice whether to bring proxy access to a vote or not, and then he alone had the choice as to how he would vote. Indeed he was very decisive when he chose to bring the issue to a vote, and then voted for non-access. He unequivocally made his views on shareholder access very clear. While he speaks of favoring access for investors, his actions speak much louder than any spoken words, and show that he truly opposes shareholders receiving equal rights and access with management to the proxy. Even if Roel Campos had continued as Commissioner, the end result under the current Commission would not have changed. Cox had the chance to vote with Commissioner Nazareth and made his own decision not to. That is a fact beyond argument.

…continue reading: Heroes and Villains

(Editor’s Note: A version of this article appears in the current issue of Directorship.)

We deal here with one of the more challenging provisions of the Sarbanes-Oxley Act of 2002, referred to by some as “SarbOx.” Specifically, section 407 of that Act requires public companies to disclose in their annual reports to the Securities and Exchange Commission, pursuant to an implementing SEC regulation, whether their audit committees include a financial expert–and if not, why not.

SarbOx spells out a complex schema for a financial expert’s qualifications. According to the statute, an expert is expected to have (1) an understanding of (i) generally accepted accounting principles (GAAP), (ii) financial statements, and (iii) audit committee functions, and (2) experience with (i) internal accounting controls, (ii) the preparation or auditing of “generally comparable” issuers’ financial statements, and (iii) applying GAAP to accounting for estimates, accruals and reserves.

A draft SEC regulation implementing this SarbOx provision was put out for comment in October of 2002, while the final rule was adopted in January and became effective in July of 2003. In response to a flood tide of comments on the rule proposal, some ameliorating adjustments were made in the final rule. For example, the “financial expert” term was repositioned as “audit committee financial expert”–ACFE, or “ack-fee”–to distinguish it from the long-familiar expertise concepts embedded in securities regulation.

…continue reading: ACFE Designations Under Sarbanes-Oxley: Directors Beware!

While I have a lot of admiration for SEC Commissioner Annette Nazareth, and certainly respect her views on proxy access, I thought it rather unfair of other Harvard Law blogsters to give so much attention to her statement about the SEC’s supposed “no access” decision at its November 28 meeting–while paying little or no attention to the thoughtful statement of SEC Chairman Christopher Cox on the subject.

It’s a bit sad when we academics surrender to the sloppy sloganeering of interest groups and the press on an issue such as this, and don’t look at what action was actually taken and the reasons behind it. While Cox might have done nothing on November 28, as some advocates strongly urged, the principled position he did take–and the lawyerly analysis he presented–was no surprise. Cox had said numerous times that the course the SEC took was what he thought was the best thing to do in the circumstances, and his reasoning deserves consideration.

Importantly, Cox made clear that he personally supports proxy access, and plans to try again to come up with an approach that will garner majority Commission support next Spring, when presumably two new Democratic Commissioners will be in place. If one supports meaningful proxy access as a matter of policy, then the villain in this little drama is not Chris Cox but former Commissioner Roel Campos who, although supporting proxy access verbally, left the stage hastily before the crucial vote, thus leaving Chairman Cox unable to muster a Commission majority for any action other than the one taken on November 28.

The Court of Chancery’s recent decision in Ryan v. Gifford puts corporate boards and their attorneys on notice that the attorney-client privilege may not protect corporate investigations from discovery in shareholder suits.

A special committee of the board of directors of Maxim Integrated Products, Inc., engaged Orrick Herrington & Sutcliffe LLP to conduct an investigation into alleged options backdating at Maxim. Orrick produced a final report to the special committee, and shared that report with the full board of directors. The plaintiffs in a shareholder derivative suit sought to compel production of the report and all communications concerning the investigation between Orrick and the special committee or Maxim.

Chancellor William B. Chandler, III held that that the special committee could not assert the attorney-client privilege against the shareholder plaintiff under the Garner v. Wolfinbarger theory, which allows shareholders to access their corporation’s privileged information in certain circumstances. In any event, the court held, the committee had waived its attorney-client privilege by sharing its report with the full board of directors of Maxim, some of whom were the subject of the investigation. The court further ruled that the presentation of the report to the full board resulted in a waiver of all other privileged communications relating to the investigation.

The Chancellor’s ruling can be accessed here.

Recently, in the Law, Economics, and Organization Seminar here at the Law School, Robin Greenwood presented his paper, co-authored with Michael Schor, entitled Hedge Fund Investor Activism and Takeovers. Using data derived from 13D filings following stock purchases by shareholder activists, the study examines the effect of activist investors on performance. The abstract of the Article follows:

We examine long-horizon stock returns around investor activism in a comprehensive sample of 13D filings by portfolio investors between 1993 and 2006. Announcement returns and long-term abnormal returns surrounding investor activism are high for the subset of targets that are acquired ex-post, but not detectably different from zero for firms that remain independent a year after the initial filing. Firms that are targeted by activists are more likely to get acquired than those in a control sample. The results suggest that hedge funds’ short investment horizons make them better suited to identifying undervalued targets and prompting a takeover than at fixing corporate strategy or tackling long-term corporate governance issues.

The full Article is available for download here.

Marty Lipton’s Some Thoughts for Boards of Directors in 2008 is a wide-ranging view of the challenges facing boards of directors in the post-Enron world. The principal focus is on the implications of the attack on the director-centric model and the pressures for short-term performance. The Memo’s first page states rather bluntly what is at stake:

“The need to critically evaluate these trends, rather than passively adhering to the shareholder rights and other activist mantras of the post-Enron period, has become grave. The demonstrated genius of the large public corporation has been its ability to harness equity, debt and human resources to invest in large projects with long-term investment horizons, and the success of such ventures has been integral to the remarkable flourishing of the U.S. economy over time. To the extent that boards are increasingly vulnerable to demands for short-term gains, these trends promise to have repercussions not just for the role of the corporate board but for American business more generally.”

The full Memorandum is available here.

(Editor’s Note: We have posted on the SEC’s recent vote on proxy access here and here. Previously we hosted several competing views on the vote, including this post by Lynn Stout on her Wall Street Journal op-ed and this post by Lucian Bebchuk on a comment letter submitted to the SEC by thirty-nine law professors.)

Hunton & Williams has recently released this client alert on the SEC’s recent amendment to the proxy access rules. The alert provides a quick background on the SEC’s decision to reaffirm its longstanding interpretation of Rule 14a-8(i)(8). As we note, however, “[t]he battle over shareholder access to company proxy materials may not be over,” as the SEC’s express willingness to continue its analysis will probably keep it a hot issue in 2008.

The client alert is available for download here.

With his November 30 opinion in Globis Partners v. Plumtree Software, Vice Chancellor Parsons weighs in on the evolving standards for merger-related disclosure of projections, as well as investment bankers’ work and compensation. The opinion also importantly confirms that, even where a complaint invokes Revlon’s reasonableness standard by challenging the directors’ approval of a cash-out merger, it can still be dismissed at the pleading stage if it fails to allege facts sufficient to rebut the presumptions of the business-judgment rule.

…continue reading: Chancery Weighs in on Disclosure of Projections in Merger Votes

Three senior partners at Wachtell, Lipton, Rosen and Katz–Andrew Brownstein, Theodore N. Mirvis, and Paul K. Rowe–spoke last week at the Law School’s Law and Finance Seminar on the case against shareholder interference. The speakers began by posing a series of questions and challenges to those seeking governance reforms–and warned against making significant changes to a governance system that, in their view, has performed remarkably well over a long period of time.

The talk built on several articles and memoranda the speakers have published on corporate governance along with their partners William Savitt, Martin Lipton, Eric S. Robinson, and Mark Gordon. Those pieces include Bebchuk’s “Case For Increasing Shareholder Power”: An Opposition; Private Equity and the Board of Directors; Classified Boards Once Again Prove Their Value to Shareholders in Recent Takeover Battle; Deconstructing American Business, and Deconstructing American Business II.

A video of the panel discussion is available online here. The questions and challenges the speakers set forth at the outset of their talk can be found here.

Recently, the Mergers, Acquisitions, and Split-Ups course here at Harvard Law School, co-taught by Professor Robert Clark and Vice Chancellor Leo Strine, Jr., hosted a panel discussion entitled Private Equity Buyouts.  The candid discussion among the expert practitioners on the panel provided rare insights into the internal dynamics of private equity deals.

The panelists included Louis D’Ambrosio, Chief Executive Officer of Avaya, which was recently taken private by the Texas Pacific Group; Robert L. Friedman, Chief Legal Officer of Blackstone; and Eileen Nugent of Skadden, a leading corporate practitioner with extensive experience in leveraged buyout transactions.  In response to questions from Professor Clark, Vice Chancellor Strine, and the audience, the panel shared its insights on matters including the current deal environment for private equity, a board’s fiduciary duties when evaluating a private equity firm’s buyout offer, and the emergence and relevance of “go-shop” provisions in private equity transactions.

A video of the panel discussion is available for download here.

The Committee on Negotiated Acquisitions of the American Bar Association’s Section of Business Law recently released the 2007 Strategic Buyer/Public Target M&A Deal Points Study. I am the Chair of the Committee’s M&A Market Trends Subcommittee, which compiled the Study.

The Study examines key deal points in acquisitions of publicly traded companies by strategic buyers announced in 2005 and 2006. Among the many interesting findings of the Study is that almost 50% of the acquisition agreements in the sample contained provisions precluding the Board of Directors from changing its recommendation in favor of the acquisition absent a topping bid. (Those provisions are described on pages 47 and 48 of the Study.) This would seem to cut against the views of many practitioners (supported, to some extent, by language in Chancery’s 2005 decision in Frontier Oil v. Holly Corp., as well as comments made publicly in early 2006 by a leading Delaware jurist) that such a limitation could violate the fiduciary duties of the Board of Directors under Delaware law.

My colleague, Rick Climan, former Chair of the Committee on Negotiated Acquisitions, acted as special advisor on this project. Wilson Chu and Larry Glasgow, the former Co-Chairs of the M&A Market Trends Subcommittee, and more than 20 M&A lawyers from major law firms across North America, assisted in its compilation.

The full Study is available for download here.