In our paper, Does Mandatory Shareholder Voting Prevent Bad Corporate Acquisitions?, which was recently made publicly available as an ECGI and Rock Center Working Paper on SSRN, we examine how much power shareholders should delegate to the board of directors. In practice, there is broad consensus that fundamental changes to the basic corporate contract or decisions that might have large material consequences for shareholder wealth must be taken via an extraordinary shareholder resolution (Rock, Davies, Kanda and Kraakman 2009). Large corporate acquisitions are a notable exception. In the United Kingdom, deals larger than 25% in relative size are subject to a mandatory shareholder vote; in most of continental Europe there is no vote, while in Delaware voting is largely discretionary.
Posts Tagged ‘Acquisitions’
Increasingly, some activist hedge funds are looking to sell their stock positions back to target companies. How should the board respond to hushmail?
The Rise and Fall of Greenmail
During the heyday of takeovers in the 1980s, so-called corporate raiders would often amass a sizable stock position in a target company, and then threaten or commence a hostile offer for the company. In some cases, the bidder would then approach the target and offer to drop the hostile bid if the target bought back its stock at a significant premium to current market prices. Since target companies had fewer available takeover defenses at that time to fend off opportunistic hostile offers and other abusive takeover transactions, the company might agree to repurchase the shares in order to entice the bidder to withdraw. This practice was referred to as “greenmail,” and some corporate raiders found greenmail easier, and more profitable, than the hostile takeover itself.
Schedule 13D Ten-Day Window and Other Issues: Will the Pershing Square/Valeant Accumulation of a 9.7% Stake in Allergan Lead to Regulatory Action?
As widely reported, a vehicle formed by Pershing Square and Valeant Pharmaceuticals acquired just under 5% of Allergan’s shares after Allergan apparently rebuffed confidential efforts by Valeant to get Allergan to negotiate a potential acquisition. The Pershing Square/Valeant vehicle then crossed the 5% threshold and nearly doubled its stake (to 9.7%) over the next ten days, at which point it made the required Schedule 13D disclosures regarding the accumulation and Valeant’s plans to publicly propose an acquisition of Allergan. The acquisition program has raised a number of questions.
Several years ago, the Delaware Supreme Court held, in Revlon v. MacAndrews & Forbes Holdings, that when a “sale” or “break-up” of a company becomes “inevitable,” the duty of the board of directors is not to maintain the independence of the company or otherwise give priority to long-term considerations, but rather to obtain the highest price possible for the shareholders in the transaction (that is, to maximize short-term value). To satisfy that duty, when confronted with these situations, the board is generally supposed to conduct an auction (or, as clarified in subsequent decisions, a “market check”) that ensures that the final buyer is, in fact, the best bidder available. In the words of the court, in this “inevitable” “break-up” or “sale” scenario (which, however, the court did not precisely define), the directors’ duties shift from “defenders of the corporate bastion to auctioneers charged with getting the best price for the stockholders.”
Many factors drive banks toward acquisitions, including increasing efficiency due to size, loan/deposit growth opportunities, or expansion of geographical footprints. However, one consideration is always dominant—improving return on investment, or ROI. Whether short, intermediate, or long-term, ROI is the most critical factor in the M&A decision.
Prior to the recession, bank M&A had settled into a well-established, time-proven approach. Bank management established targets and criteria, while investment bankers, lawyers, and accountants facilitated the M&A structure and process, weighing tax and accounting issues. Accretive to earnings gained acceptance as one of the primary justifications for a transaction.
Following a robust 2012, the financing markets in 2013 continued their hot streak. Syndicated loan issuances topped $2.1 trillion, a new record in the United States. However, as in 2012, financing transactions in the early part of 2013 were devoted mostly to refinancings and debt maturity extensions rather than acquisitions. In fact, new money debt issuances were at record lows during the first half of 2013. The second half of 2013, though, saw an increase in M&A activity generally, and acquisition financing in the fourth quarter and early 2014 increased as a result.
In the paper, Do Managers Manipulate Earnings Prior to Management Buyouts?, which was recently made publicly available on SSRN, we investigate accounting manipulation prior to buyout transactions in the UK during the second buyout wave of 1997 to 2007. Prior to management buyouts (MBOs), managers have an incentive to deflate the reported earnings numbers by accounting manipulation in the hope of lowering the subsequent stock price. If they succeed, they will be able to acquire (a large part of) the company on the cheap. It is important to note that accounting manipulation in a buyout transaction may have severe consequences for the shareholders who sell out in the transaction: if the earnings distortion is reflected in the stock price, the stock price decline cannot be undone and the wealth loss of shareholders is irreversible if the company goes private subsequent to the buyout. Mispriced stock and false financial statements are still issues frequently mentioned when MBO transactions are evaluated. The UK’s Financial Services Authority (FSA, 2006) ranks market abuse as one of the highest risks and suggests more intensive supervision of leveraged buyouts (LBOs). The concerns about mispriced buyouts are therefore a motive to test empirically whether earnings numbers are manipulated preceding buyout transactions.
In the past two decades, private equity buyout transactions have grown from a niche phenomenon to a ubiquitous form of corporate ownership (e.g., Strömberg, 2008). Traditionally buyouts have involved private equity funds buying companies or divisions from families or conglomerates: such transactions are known as primary buyouts (PBOs). A major trend accompanying the growth of private equity has been the rise of secondary buyouts (SBOs): transactions in which a private equity fund buys a company from another private equity fund. In our paper, The Performance of Secondary Buyouts, which was recently made publicly available on SSRN, we compare buyer returns in SBOs and PBOs.
In Osram Sylvania Inc. v. Townsend Ventures, LLC, the Delaware Court of Chancery (VC Parsons) declined to dismiss claims by Osram Sylvania Inc. that, in connection with OSI’s purchase of stock of Encelium Holdings, Inc. from the company’s other stockholders (the “Sellers”), Encelium’s failure to meet sales forecasts and manipulation of financial results by the Sellers amounted to a material adverse effect (“MAE”). The decision was issued in the context of post-closing indemnity claims asserted by OSI against the Sellers and not a disputed closing condition.
OSI, a stockholder of Encelium, agreed to purchase the remaining capital stock of Encelium not held by OSI pursuant to a stock purchase agreement executed on the last day of the third quarter of 2011. The $47 million purchase price was agreed based on Encelium’s forecasted sales of $4 million for the third quarter of 2011, as well as Sellers’ representations concerning Encelium’s financial condition, operating results, income, revenue and expenses. Following the closing of the transaction in October 2011, OSI learned that Encelium’s third quarter results were approximately half of its forecast and alleged that Encelium and the Sellers knew about these sales results, but failed to disclose them at closing in violation of a provision in the agreement requiring them to disclose facts that amount to an MAE. OSI also alleged other misconduct by Encelium and the Sellers, including, among other things, that they had manipulated Encelium’s second quarter results to make its business appear more profitable.
In considering the Sellers’ motion to dismiss OSI’s contract and tort-based claims, the court held that:
In the paper, Takeover Defenses as Drivers of Innovation and Value-Creation, forthcoming in the Strategic Management Journal, I analyze the role of anti-takeover provisions in ameliorating agency conflicts of managerial risk aversion in certain types of companies.
The desirability of anti-takeover provisions (ATPs) is a contentious issue. ATPs can lead to shareholder wealth-destruction by insulating managers from disciplinary takeovers and enabling them to engage in empire building. However, without ATPs, managers of hard-to-value (HTV) firms, which might trade at a discount due to valuation-difficulties, are exposed to ‘opportunistic takeovers’ (which aim to take advantage of low stock prices), potentially causing managerial myopia and under-investment in innovative projects. Thus, in HTV firms, ATPs might serve as credible commitments to encourage managers to make value-creating investments, but in easier-to-value firms, they might lead to inefficient governance.