The US Market for Corporate Control

Transcription

1 The US Market for Corporate Control Japan Society of Northern California Corporate Governance Conference October 18, 2013 Michael Mies Beijing Houston Palo Alto Tokyo Boston London Paris Toronto Brussels Los Angeles São Paulo Vienna Chicago Moscow Shanghai Washington, D.C. Frankfurt Munich Singapore Wilmington Hong Kong New York Sydney Market for Corporate Control 1

2 1. The US Market for Corporate Control 2. Control of the Corporation State Statutory Scheme 3. Control of the Corporation Federal Law/Listing Rules 4. Control of the Corporation Role of Activists 5. Deal Litigation a Certainty 6. Squeezeout Transactions Simplified in Delaware 7. Appraisal Rights Market for Corporate Control 2

3 US Market for Corporate Control The conventional view is that the market for corporate control in the United States is well functioning and dynamic According to Dealogic, over 40,000 M&A deals (worth about $2.57 trillion) were announced in 2012, including: 11,307 transactions with US targets 3,294 transactions with Chinese targets 2,529 transactions with Japanese targets Why are there so many deals in the United States? World s largest economy Predictable legal environment Decentralized shareholder base Weak shareholder rights Activists Cultural Aspects (M&A part of the corporate toolkit) Market for Corporate Control 3

4 Control of the Corporation State Statutory Scheme Stockholders Owners of economic interest through equity Election (and removal) of directors Approval required for extraordinary actions Amendment of certificate of incorporation Mergers Sale of all or substantially all assets Board of Directors Elected by stockholders; owe fiduciary duties to corporation and stockholders Responsibility for managing or overseeing affairs of corporation Selecting and compensating senior management Setting corporate policy Oversight of compliance Approval required for extraordinary actions and customary for important actions Management Appointed by and report to Board; owe fiduciary duties to corporation and stockholders Oversee day-to-day management and implementation of policies set by the board of directors Market for Corporate Control 4

5 Control of the Corporation State Statutory Scheme Under state corporations laws (including Delaware law), the business and affairs of the Company are managed by or under direction of the board of directors The board of directors must act without conflict of interest, in good faith and on an informed basis to identify, protect and advance the best interests of the company and its stockholders The basic fiduciary obligations of directors under Delaware law are the duties of due care and loyalty, and directors duties also include good faith (a subset of the duty of loyalty) and candor (sometimes referred to as the duty of disclosure) In change of control transactions, Revlon duties may arise when: A company initiates active bidding process to sell itself or reorganize in a way involving a clear break-up of the company In response to an offer, a company abandons its long-term strategy and seeks an alternative transaction involving break-up of company Transaction approved that would result in a sale or change of control If a decision is made to engage in a sale of control transaction of the company, the board s obligation essentially is to obtain the transaction which provides the best transaction reasonably available for stockholders Market for Corporate Control 5

6 Control of the Corporation Federal Law/Listing Rules United States Federal securities laws and stock exchange listing rules impose certain disclosure requirements and limitations on the scope of corporate governance General Disclosure Extensive. Publicly listed companies are obligated to file with the US Securities and Exchange Commission (the SEC ) annual, quarterly and current reports. The scope of information required to be disclosed is extensive and focused on ensuring that sufficient and up to date information regarding the company is provided to the investing public in order to permit investors to make reasonably informed investment decisions Control over Corporate Control Transactions. The SEC asserts jurisdiction over M&A transactions relating to public companies through regulation of proxy disclosure and tender offer disclosure. Unlike some jurisdictions though, the SEC is not charged with determining the merit of the proposed transaction Corporate Governance Requirements. Listed companies generally are required (subject to exceptions for foreign private issuers and majority controlled companies): To have a majority of independent directors and require regular meetings of non-management or independent directors To institute independent audit, nominating/corporate governance and compensation committees To seek shareholder approval for certain actions (e.g., certain issuances of shares), even if not required under the applicable jurisdiction of incorporation Market for Corporate Control 6

7 Control of the Corporation Role of Activists Activist stockholders are willing to use very aggressive pressure tactics to achieve their goals, including: Open market purchases by the activist fund and supportive investors Strongly worded communications to board and management attacking performance, board and management, poor strategic vision, corporate governance, executive compensation and perks or other vulnerabilities Public relations campaign about same criticisms and issues Providing analyst/financial advisor supporting reports Stirring up other hedge funds/investors Demanding meetings with management/outside directors Contacting customers, suppliers and competitors Threatening or initiating proxy fight to gain board representation and replace incumbent directors Institutions (and proxy advisory firms) have shown an increasing willingness to support a minority slate of hedge fund nominees to allow fund to agitate for change Activists are increasingly putting pressure on merger votes Market for Corporate Control 7

8 Deal Litigation a Certainty In the context of a public company merger transaction, litigation has always been prevalent, but in recent years, it has evolved to almost a certainty In 2012 stockholders challenged 93% of M&A deals valued at over $100 million and 96% of deals valued over $500 million (Source: Cornerstone Research) Disclosure based settlement (adding additional information to the definitive proxy statement) is a common method to address litigation Eliminates the risk of a money judgment, terminates the litigation, reduces cost, and increases the likelihood that the deal is consummated in a timely fashion Multi-forum litigation has become more common as plaintiff attorneys believe that it gives them more leverage Market for Corporate Control 8

9 Squeezeout Transactions Simplified in Delaware In two-step transactions, if the acquiror owns enough shares to approve a merger, the question becomes whether the back-end merger can be accomplished quickly (though the use of a short-form merger) or whether stockholders must wait through the long-form merger process and stockholder meeting Recent changes in Delaware permit in certain circumstances squeezeouts at the +50% level (See new DGCL Section 251(h)) No need for a subsequent offering period to get to a 90% threshold (which is not guaranteed) Eliminates the need for top-up options which were depending on the number of authorized shares (rule of thumb is that for every 1% that an acquiror s stake falls below 90%, an additional 10% of the shares of the target prior to the offer must be issued) Eliminates the need for a dual track structure (combination of tender offer with the possibility of a one-step merger if tender offer fails), which can be costly and time consuming Market for Corporate Control 9

10 SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP A global firm of approximately 1,800 lawyers in 23 offices on five continents, serving clients in every major financial center through a one-firm, team approach. 40 More than practices internationally, advising clients on transactions, litigation/controversy and regulatory issues. Market for Corporate Control 10

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12 Market for Corporate Control 12 & Affiliates