Despite a sluggish year-end, overall deal activity in 2011 was strong, continuing the recovery from the post-crisis slump. In addition to strong overall volume (roughly $70 billion of deals), 2011 was impressive for its range of deals, from large-scale public-to-public mergers in the consolidating industrial and healthcare sectors, to major private-to-public acquisitions as private (often over-levered) assets and companies continued to undergo major ownership changes across many sectors, including distressed hotel and retail portfolios that were over-levered in the last cycle. There was even some leveraged opportunistic buying, at enterprise values much reduced from the peak, with credit windows opening for brief periods on a spot basis depending on the deal and buyer involved.

While the uncertainty caused by the European crisis and other economic conditions has created a wait-and-see attitude in many boardrooms, our sense is that things are warming up and that the conditions that generated impressive deal volume in the first half of 2011 will again drive a healthy volume of deals in 2012. Many boards and CEOs who hit “pause” in the last few months have their fingers hovering over the “play” button, ready for action when the time is right on the lineup of deals that have been percolating for some time. The balance sheets of most of the larger REITs remain strong, dry powder is still plentiful, and opportunities continue to arise, especially given the low supply of new development product, strong investor appetite, and the distressed pools possibly coming on line as the first big wave of pre-financial crisis 2007 debt matures in 2012.

We list below some themes and issues we are keeping an eye on as 2012 begins:

…continue reading: REIT and Real Estate M&A and Restructurings

As we enter 2012 and as the U.S. economy continues to stabilize, there appears to be a growing sense of optimism about further recovery in the M&A market. During the first half of 2011, the M&A market continued a resurgence that began in the latter part of 2010, with higher aggregate deal value than had been seen since before the financial crisis. Though worldwide M&A activity declined in the second half of 2011, reflecting uncertainties regarding the volatile global financial climate, it has continued at a relatively strong pace, and a number of significant transactions have recently been announced, including Kinder Morgan’s $38 billion acquisition of El Paso, United Technologies’ $18 billion acquisition of Goodrich, and Gilead’s $11 billion acquisition of Pharmasset.

…continue reading: Mergers and Acquisitions in 2012

A divided panel of the U.S. Court of Appeals for the Second Circuit has finally issued its opinion in the CSX case in which the District Court addressed whether the long party in a cash-settled total-return equity swap should be considered the beneficial owner of the underlying shares for reporting purposes under Section 13(d) of the Williams Act. (See our memo of June 2008 on the District Court’s decision.) The majority opinion — issued nearly three years after the appeal was argued — declined to resolve the beneficial ownership issue, noting that there was disagreement within the panel on the subject. Instead, the panel considered only whether a “group” had been formed under Section 13(d) as to the shares held outright by the defendant activist funds. The majority opinion also addressed whether and under what circumstances a party should be precluded from voting shares acquired during a period when it was in violation of its disclosure obligations under Section 13(d). CSX Corp. v. The Children’s Inv. Fund Mgmt. (UK) LLP, Docket Nos. 08-2899-cv, 08-3016-cv (2d Cir. July 18, 2011).

…continue reading: CSX Case Highlights Need for SEC Action on Derivatives

In an opinion issued today in the challenge brought by the Business Roundtable and U.S. Chamber of Commerce to the SEC’s adoption of proxy access,  the U.S. Court of Appeals for the D.C. Circuit vacated the entire proxy access regime as an “arbitrary and capricious” exercise of the SEC’s authority.  The opinion, written by Judge Ginsburg, chides the SEC for failing “adequately to assess the economic effects” of  the rules. The court levels particular criticism at the SEC’s analysis of the likely costs associated with, and the frequency of, proxy contests utilizing the access rules, reliance upon “insufficient empirical data” to support a conclusion that proxy access would improve board performance, and failure to address the possibility that unions and pension funds would use the rules as a bargaining chip in unrelated negotiations with issuers.  While noting that these overall defects in the rule render it invalid with respect to all types of issuers, the opinion offers lengthy criticism in particular of the decision to subject investment companies to the proxy access rules, due to the enhanced regulation imposed by the Investment Company Act of 1940.

…continue reading: D.C. Circuit Strikes Down Proxy Access Rules

We have recently witnessed equity accumulations on both sides of the Atlantic that were first announced long after they began and long after the acquiring parties had effectively passed applicable disclosure thresholds.  Here in the U.S., Pershing Square and Vornado earlier this month announced a combined stake of almost 27% in J.C. Penney.  And last weekend French luxury-goods conglomerate LVMH announced that it had amassed a previously undisclosed stake in excess of 14% in Hermès, including through transactions extending over a period of years.  Although the details of both accumulation programs are as yet not fully known, they appear to have been conducted on the assumption that the U.S. and French regulatory regimes requiring prompt and current disclosure of share accumulations can be evaded through derivatives and other synthetic and structured ownership arrangements, even when they involve ownership of actual shares by counterparties, up until the point when such trades are settled by taking options on or physical delivery of the underlying shares.

…continue reading: Synthetic Ownership Arrangements for Ambush Equity Accumulation

The UK Panel on Takeovers and Mergers yesterday published the conclusions of its review, commenced in June 2010, regarding possible amendments to the UK Takeover Code, which governs the conduct of takeover bids involving UK listed companies.  The review, conducted by the Code Committee of the Takeover Panel, was prompted by Panel, investor and governmental criticism of certain takeover practices in recent years, including in a number of highly publicized and controversial takeover situations in the UK market.

…continue reading: UK Takeover Panel Publishes Review of Takeover Rules

The Dodd-Frank Act mandates a variety of changes to the governance, disclosure and compensation practices of all public companies. Many of the provisions of the Act require further SEC rulemaking and interpretation before definitive responses can be implemented, but companies should become familiar with the pending changes and take preparatory steps where possible. The purpose of this memo, which we will periodically update, is to provide a framework for our recommendations by highlighting certain actions companies should consider taking immediately, as well as certain key provisions of the Act which will require responses in the longer term. (Links to our earlier memos are embedded throughout and in the attached index.)

…continue reading: Governance Changes Under Dodd-Frank

As we described in our recent memo, the SEC has adopted rules affording shareholders access to company proxy statements for the nomination of director candidates. The new regime, which includes new access Rule 14a-11 and amendments to Rule 14a-8, is expected to become effective in early November and will be applicable for the 2011 proxy season for most companies. It is now time for companies to take action to prepare for these sweeping changes. We opposed proxy access as an unnecessary and imprudent step. However it is now law and companies need to implement structures and procedures designed to make the proxy access regime work with minimum damage to the ability of boards to build long-term value for all shareholders. This memo highlights some of the major actions companies should consider:

…continue reading: Shareholder Proxy Access: Time To Get Ready

As discussed in our memos of March 16, 2010 and May 13, 2010, RiskMetrics has recently released the guidelines for calculations under its Governance Risk Indicator (GRId) rating system. The GRId instructions include over 50 pages of compensation questions, the answers to which result in a stand-alone Compensation GRId rating.

The Compensation GRId questions and scoring generally reflect the substantive positions in RiskMetrics’ corporate governance policies and proxy voting guidelines, but in some cases are more punitive. For example, the proxy voting guidelines penalize excise tax gross-ups only in new or materially amended agreements, but the Compensation GRId deducts even for existing agreements with gross-ups. More significantly, the rigid scoring system by its nature codifies the level of emphasis on particular issues. While we do not think the one-size-fits-all GRId approach provides a useful picture of governance practices, most public companies will, given the prominence of RiskMetrics, find it useful to familiarize themselves with the GRId guidelines and identify areas where points can be scored with little risk of substantive harm. For example, in a number of cases addressing an issue in the annual proxy statement may increase a company’s score.

…continue reading: Understanding RiskMetrics Compensation “GRId”

As we described in a prior memo, RiskMetrics has replaced its Corporate Governance Quotient (CGQ) with Governance Risk Indicators (GRIds). Using the new GRIds methodology, RiskMetrics will identify the level of concern (low, medium and high) for each company across four categories of corporate governance metrics used by RiskMetrics: Board Structure, Compensation, Audit and Shareholder Rights. Unlike CGQ, the GRIds metrics are both transparent – anyone can calculate a company’s scores by answering specified questions about its governance structure – and absolute – the scores are company-specific and do not depend upon practices of other companies. One of the GRIds metrics, called “Shareholder Rights,” seeks to measure corporate takeover defenses.

…continue reading: Understanding RiskMetrics Shareholder Rights “GRId”