Golden leashes – compensation arrangements between activists and their nominees to target boards – have emerged as the latest advance (or atrocity, depending on your point of view) in the long running battle between activists and defenders of the long-term investor faith. Just exactly what are we worried about?

With average holding periods for U.S. equity investors having shriveled from five years in the 1980s to nine months or less today, the defenders of “long-termism” would seem to have lost the war, though perhaps not the argument. After all, if the average shareholder is only sticking around for nine months, and if directors owe their duties to their shareholders (average or otherwise), then at best a director on average will have nine months to maximize the value of those shares. Starting now. Or maybe starting nine months ago.

But this assumes that the directors of any particular company have a real idea of just how long their particular set of “average” shareholders will stick around, and it also assumes that the directors owe duties primarily to their average shareholders, and not to their Warren Buffett investors (on one hand) or their high speed traders (on the other). So, in the absence of any real information about how long any then-current set of shareholders will invest for on average, and in the absence of any rational analytical framework to decide which subset(s) of shareholders they should be acting for, what is a director to do?

Here is what I think directors do, in one form or fashion or another:

…continue reading: Incentive Schemes for Nominees of Activist Investors

The definition of “material adverse change” plays a critical role in public company merger agreements, effectively defining the situations in which a buyer may walk away from the transaction. There is significant case law defining what is (or, much more commonly, what is not) a material adverse change, but the case law only serves to interpret the agreed definitions. The agreed definitions, in turn, are typically very vague in defining what is a material adverse change (leaving lots of scope for judges), but explicit in listing the types of changes that may not be considered in evaluating whether a material adverse change has occurred. The use of these carve-outs to limit what may be considered a material adverse change has expanded significantly in recent years — arguably to a point where it may make sense for the pendulum to start to swing back.

It has been traditional for adverse effects attributable to changes in general economic conditions to be excluded in considering whether a material adverse effect has occurred, such that e.g., a loss of sales attributable to the great recession, no matter how severe, would not give buyer the right to terminate a merger agreement. This carve-out from the material adverse change definition can be grouped with others, such as carve-outs for downturns in the target industry, changes in law or accounting policies, acts of war, etc. — all of which shift to buyer the risks associated with the environment in which the target operates. What is notable is that over the last several years, not only has the percentage of deals that shift these “environmental” risks to buyer increased significantly, but MAC carve-outs that shift to buyer the risk of the deal, and (anecdotally at least) even the risk of running the business, have also increased markedly.

…continue reading: Runaway MAC Carve-outs

“But, upon a close review of these model [confidentiality] agreements and other leading treatises, I cannot conclude that the use of a standard structure has led to a corresponding lack of ambiguity about important issues.” Martin Marietta Materials, Inc., v. Vulcan Materials Company. [1]

On December 12, 2011, Martin Marietta Materials, Inc. sued Vulcan Materials Company in Delaware Chancery Court, seeking declaratory judgment that the non-disclosure agreement between them (the “NDA”) did not prohibit Martin Marietta from making a hostile offer for the shares of Vulcan. The initial reaction of many deal professionals at the time was – well, if the parties wanted to agree to a standstill preventing a hostile offer, the firms involved certainly knew how to draft one. [2] However, it seems as if the idea of a standstill was not even discussed by the parties – leading perhaps to the several ambiguities found by the court in its opinion. The ambiguities, of course, required that the court resort to extrinsic evidence to determine the intent of the contracting parties. The court found that virtually all of the extrinsic evidence supported Vulcan’s contention that the parties intended the NDA to serve as a back-door standstill.

The two most significant questions examined by the court, both resulting from contractual ambiguities, were the following:

• 1. Whether restricting the use of confidential information to evaluation of a “Transaction” effectively prohibited the use of the confidential information for the purpose of evaluating an unsolicited transaction?
• 2. Whether the exception to confidentiality, permitting the disclosure of confidential information as “legally required,” permitted disclosure of confidential information “legally required” to be disclosed solely as a result of Martin Marietta’s own decision to launch a hostile offer?

…continue reading: Using Confidential Information in a Hostile Offer