This year, the practice of activist hedge funds engaged in proxy contests offering special compensation schemes to their dissident director nominees has increased and become even more egregious. While the terms of these schemes vary, the general thrust is that, if elected, the dissident directors would receive large payments, in some cases in the millions of dollars, if the activist’s desired goals are met within the specified near-term deadlines.

These special compensation arrangements pose a number of threats, including:

…continue reading: Bylaw Protection against Dissident Director Conflict/Enrichment Schemes

The topic of this outline is mergers and acquisitions where the target company is “distressed.” Distress for these purposes generally means that a company is having difficulty dealing with its liabilities—whether in making required payments on borrowed money, obtaining or paying down trade credit, addressing debt covenant breaches, or raising additional debt to address funding needs.

Distressed companies can represent attractive acquisition targets. Their stock and their debt often trade at prices reflecting the difficulties they face, and they may be under pressure to sell assets or securities quickly to raise capital or pay down debt. Accordingly, prospective acquirors may have an opportunity to acquire attractive assets or securities at a discount. This outline considers how best to acquire a distressed company from every possible point of entry, whether that consists of buying existing or newly-issued stock, merging with the target, buying assets, or buying existing debt in the hope that it converts into ownership.

Some modestly distressed companies require a mere “band-aid” (such as a temporary waiver of a financial maintenance covenant when the macroeconomy has led to a temporary decline in earnings, but the company is able to meet all of its obligations as they come due). Others require “major surgery” (as where the company is fundamentally over-levered and must radically reduce debt).

…continue reading: Dealmaking in a Distressed Environment

Last week, the European Commission announced proposed amendments to the notification forms that companies must complete to report mergers subject to antitrust review in the EU, with the stated intention of reducing burdens on filing parties. If adopted, the proposed changes would reduce the amount of information parties must provide in transactions that are unlikely to raise competitive concerns.

The EC proposes to expand the categories of mergers that are eligible for review under a simplified procedure that allows companies to file “short form” notifications with more limited information requirements. Under the proposed changes, the simplified procedure would apply to all mergers that result in the combined firm holding a market share of less than 20% in any market in which both parties are active, up from the current threshold of 15%. In addition, at the EC’s discretion, filing parties would be permitted to use the “short form” when a merger results in a small market share increase, even if the combined firm’s market share exceeds 20%. For vertical mergers, the market share threshold for the simplified procedure would increase from 25% to 30%. The EC estimates that, as a result of these changes, an additional 10% of all reportable mergers could be reviewed under the simplified procedure, with significant benefits—in terms of both time and costs—for companies no longer required to complete the full notification.

…continue reading: European Commission Proposes Amendments to Premerger Notification Regime

In 2013 we’ve seen the welcome return of healthy, growing community banks acting decisively to become regional players through transformative mergers. History has demonstrated the most successful banks have been built through thoughtful stock-for-stock mergers that pair two strong firms in a deal and governance structure that acknowledges the culture and contributions of each.

Today’s smaller and midsized banks that are poised to grow have recognized that current business and regulatory challenges weigh more heavily on smaller institutions, and that jointly realizing cost savings and revenue synergies can create significant value for each company’s shareholders. In a disciplined pricing environment, sellers and acquirers alike are more focused on essential factors like cultural and geographic fit, shared values and business practices and a commitment to serve the communities where they operate. And in announcing these stock deals there is a shared interest in pricing terms (including in the important area of tangible book value dilution) that will be well received by the market, recognizing the pairing is a long term decision creating significant scarcity value.

…continue reading: Traditional Strategic Mergers Building Next Generation of Regional Bank Powerhouses

With the proxy season just getting underway, we thought it might be useful to summarize some initial observations to aid those in the midst of the season’s challenges.

Results. According to Institutional Shareholder Services’ (ISS) 2013 Say on Pay Snapshot released April 8, 2013, ISS has recommended against 10 percent of issuers so far this proxy season. While ISS’s study represents a relatively small sample size (473 companies), a “no” recommendation from ISS against 10 percent of companies represents a decrease in “no” recommendations of over 20 percent from last year (12.2 percent).

Reasons for Failure. The single largest reason that companies have received “no” recommendations from ISS continues to be a so-called pay-for-performance disconnect. In addition, ISS has recommended against an increased number of companies on the basis of a so-called lack of compensation committee communications and effectiveness. A lack of effectiveness often arises where ISS has determined that the company has not provided disclosure about actions it has taken in light of a low say on pay vote for the previous year.

…continue reading: Say on Pay So Far – 2013

In a memorandum issued recently by the law firm Wachtell, Lipton, Rosen & Katz (WLRK), WLRK co-founder Martin Lipton criticized me for supporting shareholder activism that allegedly has detrimental effects in the long term. The memorandum followed two earlier, strongly-worded WLRK memoranda signed by Lipton and several other prominent corporate partners at the firm, titled “The Shareholder Rights Project is Wrong” and “The Shareholder Rights Project is Still Wrong“. Those memoranda criticized the work of a program I direct, the Shareholder Rights Project (SRP), for destroying long-term value by contributing to numerous board declassifications.

I am currently carrying out research work that addresses the view held by WLRK and others that investor activism is generally detrimental to the long-term interests of companies and their shareholders. In the meantime, however, the SRP’s recent release of its 2013 results provides an appropriate opportunity to respond to WLRK claims that the SRP’s work, in particular, has contributed to the destruction of long-term value. As I explain below, these results indicate that relevant institutional investors and corporate boards have largely rejected WLRK’s views – and require that WLRK reconsider its position.

…continue reading: Wachtell Lipton Was Wrong About the Shareholder Rights Project

I respectfully take issue with Professor Bebchuk’s analysis and conclusions. Professor Bebchuk’s empirical evidence consists basically of cherry-picked stock market prices and a unanimous vote in favor of shareholder-centric governance by institutional shareholders. Professor Bebchuk’s hyperbole cannot disguise the fact that his shareholder-centric model promotes short-termism and that it is this short-term focus on capital allocation and other business decisions that has led to the decline of the American economy and greater unemployment. When one attempts to parse his syllogism, it doesn’t hold-together. Apparently, Professor Bebchuk believes that classified boards can’t be bad unless directors are bad, or else they would have all committed ritual suicide rather than ever agree to declassification.

The Delaware Supreme Court held that the Court of Chancery erred by failing to give preclusive effect to an earlier with-prejudice dismissal of a parallel derivative suit in another state, and by creating a presumption that all plaintiffs who file derivative suits without first conducting books-and-records inspections are inadequate representatives. Pyott v. La. Mun. Police Emps.’ Ret. Sys., No. 380, 2012 (Del. Apr. 4, 2013). The decision stresses the importance of interstate comity and the need to give full faith and credit to the decisions of other courts.

Allergan is a drug company that incurred losses in resolving civil and criminal investigations of off-label drug marketing. Derivative suits were filed in both federal court in California and the Court of Chancery alleging that Allergan’s directors were liable for the losses because they failed to properly monitor the company’s marketing practices. The Delaware shareholder plaintiff obtained documents through a books-and-records inspection under 8 Del. C. § 220 before filing suit. The California plaintiffs did not, but later amended their complaints when the Delaware plaintiff shared the documents. Defendants moved to dismiss in both jurisdictions. The California federal court ruled first, dismissing with prejudice for failure to establish demand futility. The Court of Chancery refused to give preclusive effect to that ruling, applying Delaware law to the preclusion question. Turning to the merits, Chancery disagreed with the federal court, holding that demand was futile and that the case should proceed.

…continue reading: Delaware Court Limits Non-Delaware Dismissal

The Delaware bar has recently proposed an amendment to the Delaware General Corporation Law that is likely to facilitate the use of tender offer structures, especially in private equity deals. The new proposed Section 251(h), which is expected to be approved by the legislature and governor with an effective date of August 1, would permit inclusion of a provision in a merger agreement eliminating the need for a stockholder meeting to approve a second-step merger following a tender offer, so long as the buyer acquires sufficient shares in the tender offer to approve the merger (i.e., 50% of the outstanding shares, unless the company’s charter provides a higher threshold).

…continue reading: Proposed Amendments to Delaware Law Would Facilitate Tender Offer Structures

The widespread use of social media in today’s global marketplace presents opportunities and challenges for all financial market participants, including boards of directors, investors and regulators. While social media outlets provide unprecedented pathways for companies to engage actively with investors, both large and small, as well as with reporters, analysts, customers, suppliers and other members of the corporate community, there are regulatory restrictions that public companies need to heed. Releasing information via Twitter, Facebook, and similar channels must be done with caution to avoid violating Securities and Exchange Commission (SEC) Regulation FD as it currently stands. Moreover, companies are vulnerable to negative publicity that can be quickly and widely disseminated over social media networks, even if they are not active participants in such channels.

As public companies increasingly use and rely upon the new avenues of communication provided by social media, it is correspondingly important for directors to be aware of the manner and extent of their companies’ use of social media and have a basic understanding of the risks and benefits of corporate participation. At the same time, it may be incumbent upon the SEC to revisit Regulation FD. The immediacy and availability of communications made through social media suit the purpose of Regulation FD far better than anything available at the time of its passage in 2000; by failing to update Regulation FD, the SEC may find that the rule is impeding rather than furthering its stated goals. Fundamentally, the interests of all market participants are aligned when it comes to encouraging companies to use social media consistently, effectively, and legally, as enhanced transparency and increased engagement generally benefit the market as a whole.

…continue reading: The Board, Social Media and Regulation FD