Advisory Board

  • Cai Hongbin
  • Peking University Guanghua School of Management
  • Peter Clarke
  • Barry Diller
  • IAC/InterActiveCorp
  • Fu Chengyu
  • China National Petrochemical Corporation (Sinopec Group)
  • Richard J. Gnodde
  • Goldman Sachs International
  • Lodewijk Hijmans van den Bergh
  • De Brauw Blackstone Westbroek N.V.
  • Jiang Jianqing
  • Industrial and Commercial Bank of China, Ltd. (ICBC)
  • Handel Lee
  • King & Wood Mallesons
  • Richard Li
  • PCCW Limited
  • Pacific Century Group
  • Liew Mun Leong
  • CapitaLand Limited
  • Martin Lipton
  • New York University
  • Wachtell, Lipton, Rosen & Katz
  • Liu Mingkang
  • China Banking Regulatory Commission (CBRC)
  • Dinesh C. Paliwal
  • Harman International Industries
  • Leon Pasternak
  • Bank of America Merrill Lynch
  • Tim Payne
  • Brunswick Group
  • Joseph R. Perella
  • Perella Weinberg Partners
  • Baron David de Rothschild
  • N M Rothschild & Sons Limited
  • Dilhan Pillay Sandrasegara
  • Temasek Holdings
  • Shao Ning
  • State-owned Assets Supervision and Administration Commission of the State Council of China (SASAC)
  • John W. Snow
  • Cerberus Capital Management, L.P.
  • Former U.S. Secretary of Treasury
  • Bharat Vasani
  • Tata Group
  • Wang Junfeng
  • King & Wood Mallesons
  • Wang Kejin
  • China Banking Regulatory Commission (CBRC)
  • Wei Jiafu
  • China Ocean Shipping Group Company (COSCO)
  • Yang Chao
  • China Life Insurance Co. Ltd.
  • Zhu Min
  • International Monetary Fund

Legal Roundtable

  • Dimitry Afanasiev
  • Egorov Puginsky Afanasiev and Partners (Moscow)
  • William T. Allen
  • NYU Stern School of Business
  • Wachtell, Lipton, Rosen & Katz (New York)
  • Johan Aalto
  • Hannes Snellman Attorneys Ltd (Finland)
  • Nigel P. G. Boardman
  • Slaughter and May (London)
  • Willem J.L. Calkoen
  • NautaDutilh N.V. (Rotterdam)
  • Peter Callens
  • Loyens & Loeff (Brussels)
  • Bertrand Cardi
  • Darrois Villey Maillot & Brochier (Paris)
  • Santiago Carregal
  • Marval, O’Farrell & Mairal (Buenos Aires)
  • Martín Carrizosa
  • Philippi Prietocarrizosa & Uría (Bogotá)
  • Carlos G. Cordero G.
  • Aleman, Cordero, Galindo & Lee (Panama)
  • Ewen Crouch
  • Allens (Sydney)
  • Adam O. Emmerich
  • Wachtell, Lipton, Rosen & Katz (New York)
  • Rachel Eng
  • WongPartnership (Singapore)
  • Sergio Erede
  • BonelliErede (Milan)
  • Kenichi Fujinawa
  • Nagashima Ohno & Tsunematsu (Tokyo)
  • Manuel Galicia Romero
  • Galicia Abogados (Mexico City)
  • Danny Gilbert
  • Gilbert + Tobin (Sydney)
  • Vladimíra Glatzová
  • Glatzová & Co. (Prague)
  • Juan Miguel Goenechea
  • Uría Menéndez (Madrid)
  • Andrey A. Goltsblat
  • Goltsblat BLP (Moscow)
  • Juan Francisco Gutiérrez I.
  • Philippi Prietocarrizosa & Uría (Santiago)
  • Fang He
  • Jun He Law Offices (Beijing)
  • Christian Herbst
  • Schönherr (Vienna)
  • Lodewijk Hijmans van den Bergh
  • Royal Ahold (Amsterdam)
  • Hein Hooghoudt
  • NautaDutilh N.V. (Amsterdam)
  • Sameer Huda
  • Hadef & Partners (Dubai)
  • Masakazu Iwakura
  • Nishimura & Asahi (Tokyo)
  • Christof Jäckle
  • Hengeler Mueller (Frankfurt)
  • Michael Mervyn Katz
  • Edward Nathan Sonnenbergs (Johannesburg)
  • Handel Lee
  • King & Wood Mallesons (Beijing)
  • Martin Lipton
  • Wachtell, Lipton, Rosen & Katz (New York)
  • Alain Maillot
  • Darrois Villey Maillot Brochier (Paris)
  • Antônio Corrêa Meyer
  • Machado, Meyer, Sendacz e Opice (São Paulo)
  • Sergio Michelsen Jaramillo
  • Brigard & Urrutia (Bogotá)
  • Zia Mody
  • AZB & Partners (Mumbai)
  • Christopher Murray
  • Osler (Toronto)
  • Francisco Antunes Maciel Müssnich
  • Barbosa, Müssnich & Aragão (Rio de Janeiro)
  • I. Berl Nadler
  • Davies Ward Phillips & Vineberg LLP (Toronto)
  • Umberto Nicodano
  • BonelliErede (Milan)
  • Brian O'Gorman
  • Arthur Cox (Dublin)
  • Robin Panovka
  • Wachtell, Lipton, Rosen & Katz (New York)
  • Sang-Yeol Park
  • Park & Partners (Seoul)
  • José Antonio Payet Puccio
  • Payet Rey Cauvi (Lima)
  • Kees Peijster
  • COFRA Holding AG (Zug)
  • Juan Martín Perrotto
  • Uría & Menéndez (Madrid/Beijing)
  • Philip Podzebenko
  • Herbert Smith Freehills (Sydney)
  • Geert Potjewijd
  • De Brauw Blackstone Westbroek (Amsterdam/Beijing)
  • Qi Adam Li
  • Jun He Law Offices (Shanghai)
  • Biörn Riese
  • Mannheimer Swartling (Stockholm)
  • Mark Rigotti
  • Herbert Smith Freehills (Sydney)
  • Rafael Robles Miaja
  • Robles Miaja (Mexico City)
  • Alberto Saravalle
  • BonelliErede (Milan)
  • Maximilian Schiessl
  • Hengeler Mueller (Düsseldorf)
  • Cyril S. Shroff
  • Cyril Amarchand Mangaldas (Mumbai)
  • Shardul S. Shroff
  • Shardul Amarchand Mangaldas & Co.(New Delhi)
  • Klaus Søgaard
  • Gorrissen Federspiel (Denmark)
  • Ezekiel Solomon
  • Allens (Sydney)
  • Emanuel P. Strehle
  • Hengeler Mueller (Munich)
  • David E. Tadmor
  • Tadmor & Co. (Tel Aviv)
  • Kevin J. Thomson
  • Barrick Gold Corporation (Toronto)
  • Yu Wakae
  • Nagashima Ohno & Tsunematsu (Tokyo)
  • Wang Junfeng
  • King & Wood Mallesons (Beijing)
  • Tomasz Wardynski
  • Wardynski & Partners (Warsaw)
  • Rolf Watter
  • Bär & Karrer AG (Zürich)
  • Xiao Wei
  • Jun He Law Offices (Beijing)
  • Xu Ping
  • King & Wood Mallesons (Beijing)
  • Shuji Yanase
  • OK Corporation (Tokyo)
  • Alvin Yeo
  • WongPartnership LLP (Singapore)

Founding Directors

  • William T. Allen
  • NYU Stern School of Business
  • Wachtell, Lipton, Rosen & Katz
  • Nigel P.G. Boardman
  • Slaughter and May
  • Cai Hongbin
  • Peking University Guanghua School of Management
  • Adam O. Emmerich
  • Wachtell, Lipton, Rosen & Katz
  • Robin Panovka
  • Wachtell, Lipton, Rosen & Katz
  • Peter Williamson
  • Cambridge Judge Business School
  • Franny Yao
  • Ernst & Young

Unsolicited Takeovers

Promoting Long-Term Value Creation – The Launch of the Investor Stewardship Group (ISG) and ISG’s Framework for U.S. Stewardship and Governance

Editors’ Note: This article was co-authored by Martin Lipton, Steven A. Rosenblum, Karessa L. Cain, Sabastian V. Niles and Sara J. Lewis of Wachtell, Lipton, Rosen & Katz.


Executive Summary/Highlights:

A long-running, two-year effort by the senior corporate governance heads of major U.S. investors to develop the first stewardship code for the U.S. market culminated today in the launch of the Investor Stewardship Group (ISG) and ISG’s associated Framework for U.S. Stewardship and Governance. Investor co-founders and signatories include U.S. Asset Managers (BlackRock; MFS; State Street Global Advisors; TIAA Investments; T. Rowe Price; Vanguard; ValueAct Capital; Wellington Management); U.S. Asset Owners (CalSTRS; Florida State Board of Administration (SBA); Washington State Investment Board); and non-U.S. Asset Owners/Managers (GIC Private Limited (Singapore’s Sovereign Wealth Fund); Legal and General Investment Management; MN Netherlands; PGGM; Royal Bank of Canada (Asset Management)).

Focused explicitly on combating short-termism, providing a “framework for promoting long-term value creation for U.S. companies and the broader U.S. economy” and promoting “responsible” engagement, the principles are designed to be independent of proxy advisory firm guidelines and may help disintermediate the proxy advisory firms, traditional activist hedge funds and short-term pressures from dictating corporate governance and corporate strategy.

Importantly, the ISG Framework would operate to hold investors, and not just public companies, to a higher standard, rejecting the scorched-earth activist pressure tactics to which public companies have often been subject, and instead requiring investors to “address and attempt to resolve differences with companies in a constructive and pragmatic manner.” In addition, the ISG Framework emphasizes that asset managers and owners are responsible to their ultimate long-term beneficiaries, especially the millions of individual investors whose retirement and long-term savings are held by these funds, and that proxy voting and engagement guidelines of investors should be designed to protect the interests of these long-term clients and beneficiaries. While the ISG Framework is not intended to be prescriptive or comprehensive in nature, with companies and investors being free to apply it in a manner they deem appropriate, it is intended to provide guidance and clarity as to the expectations that an increasingly large number of investors will have not only of public companies, but also of each other.

Click here to read the full article.

The views expressed herein are solely those of the author and have not been endorsed, confirmed, or approved by XBMA or any of the editors of XBMA Forum, nor by XBMA’s founders, members, contributors, academic partners, advisory board members, or others. No inference to the contrary should be drawn.

The Dutch Corporate Governance Code and The New Paradigm

Editors’ Note: This article was co-authored by Martin Lipton, Steven A. Rosenblum, Karessa L. Cain, Sabastian V. Niles and Sara J. Lewis of Wachtell, Lipton, Rosen & Katz.

Executive Summary/Highlights:

The new Dutch Corporate Governance Code, issued December 8, 2016, provides an interesting analog to The New Paradigm, A Roadmap for an Implicit Corporate Governance Partnership Between Corporations and Investors to Achieve Sustainable Long-Term Investment and Growth, issued September 2, 2016, by the International Business Council of the World Economic Forum. The new Dutch Code is applicable to the typical two-tier Dutch company with a management board and a supervisory board. The similarities between the Dutch Code and the New Paradigm demonstrate that the principles of The New Paradigm, which are to a large extent based on the U.S. and U.K. corporate governance structure with single-tier boards, are relevant and readily adaptable to the European two-tier board structure.

Both the New Paradigm and the Dutch Code fundamentally envision a company as a long-term alliance between its shareholders and other stakeholders. They are both based on the notions that a company should and will be effectively managed for long-term growth and increased value, pursue thoughtful ESG and CSR policies, be transparent, be appropriately responsive to shareholder interests and engage with shareholders and other stakeholders.

Like The New Paradigm, the Dutch Code is fundamentally designed to promote long-term growth and value creation. The management board is tasked with achieving this goal and the supervisory board is tasked with monitoring the management board’s efforts to achieve it.

Click here to read the full article.

The views expressed herein are solely those of the author and have not been endorsed, confirmed, or approved by XBMA or any of the editors of XBMA Forum, nor by XBMA’s founders, members, contributors, academic partners, advisory board members, or others. No inference to the contrary should be drawn.

U.S. UPDATE: A New Paradigm for Corporate Governance

Editor’s Note:  This article was authored by Martin Lipton of Wachtell, Lipton, Rosen & Katz.

Main Article:

Recently, there have been three important studies by prominent economists and law professors, each of which points out serious flaws in the so-called empirical evidence being put forth to justify short-termism, attacks by activist hedge funds and shareholder-centric corporate governance.  These new studies show that the so-called empirical evidence omit important control variables, use improper specifications, contain errors and methodological flaws, suffer from selection bias and lack real evidence of causality.  In addition, these new studies show that the so-called empirical evidence ignore real-world practical experience and other significant empirical studies that reach contrary conclusions.  These new studies are:

For an earlier recognition of these defects in the so-called empirical evidence see, The Bebchuk Syllogism.

These new studies provide solid support for the recent recognition by major institutional investors that while an activist attack on a company might produce an increase in the market price of one portfolio investment, the defensive reaction of the other hundreds of companies in the portfolio, that have been advised to “manage like an activist”, has the potential of lower future profits and market prices for a large percentage of those companies and a net large decrease in the total value of the portfolio over the long term.  Recognition of the Threat to Shareholders and the Economy from Attacks by Activist Hedge Funds and Some Lessons from BlackRock, Vanguard and DuPont—A New Paradigm for Governance

Hopefully these new studies will enable and encourage major institutional investors to recognize that they are the last practical hope in reversing short-termism and taming the activist hedge funds.  Institutional investors should cease outsourcing oversight of their portfolios to activist hedge funds and bring activism in-house.  Short of effective action by institutional investors, it would appear that there is no effective solution short of federal legislation, which runs the risk of the cure being worse than the illness.  For an interesting attempt to legislate institutional investor focus on long-term rather than short-term performance see, European Commission Proposes to Moderate Short-termism and Reduce Activist Attacks.

The views expressed herein are solely those of the author and have not been endorsed, confirmed, or approved by XBMA or any of the editors of XBMA Forum, nor by XBMA’s founders, members, contributors, academic partners, advisory board members, or others. No inference to the contrary should be drawn.

U.S. UPDATE – A New Takeover Threat: Symbiotic Activism

Editor’s Note:  This article was co-authored by Martin Lipton, Adam O. Emmerich, Trevor S. Norwitz and Sabastian V. Niles of Wachtell, Lipton, Rosen & Katz.

Highlights: 

  • Valeant Pharmaceuticals and Pershing Square employed a troubling new tactic in their hostile bid for Allergan.
  • The partnership between an activist hedge fund and a strategic acquirer enables a hostile bidder to establish a large beachhead stake more secretly, quickly and cheaply than before.
  • This lowers the hostile bidder’s cost and enables to hedge fund to catalyze a quick profit-yielding event.
  • This new stratagem premised on a “quick-profit” mentality emphasizes the urgent need for the SEC to revamp its outdated “early-warning” rules.
  • This attack came shortly after Allergan dismantled its takeover defenses in the face of activist and institutional shareholder pressure.

Main Article:

The Pershing Square-Valeant hostile bid for Allergan has captured the imagination.  Other companies are wondering whether they too will wake up one morning to find a raider-activist tag-team wielding a stealth block of their stock.  Serial acquirers are asking whether they should be looking to take advantage of this new maneuver.  Speculation and rumor abound of other raider-activist pairings and other targets.

Questions of legality are also being raised.  Pershing Square and Valeant are loudly proclaiming that they have very cleverly (and profitably) navigated their way through a series of loopholes to create a new template for hostile acquisitions, one in which the strategic bidder cannot lose and the activist greatly increases its odds of catalyzing a quick profit-yielding event, investing and striking deals on both sides of a transaction in advance of a public announcement.

The bidders conspicuously structured their accumulation plan to outflank the SEC’s outdated “early-warning” rules and the Hart-Scott-Rodino Antitrust filing requirements (by taking advantage of Regulation 13D’s 10-day filing window, and using derivatives, for which clearance is only needed to exercise options, not to buy them).  They also took express pains to sidestep Rule 14e-3 which outlaws insider-trading in connection with a tender offer, by styling themselves as co-bidders and not (yet) proceeding towards a tender offer.

This new stratagem emphasizes the crying need for the SEC to bring its early-warning rules into the 21st century, as we have been urging for several years.  The SEC should forthwith move to close the 10-day filing window and the wide loophole opened by ever-more-complex derivative trading schemes.  The only argument that anyone has come up with against fixing these rules is that activist hedge funds need the extra “juice” to excite them enough to shake up corporate America.  Even if this argument had any merit applied to activism designed to “improve” underperforming companies – which we believe it does not – it most certainly should not trump the need for fair and transparent securities markets, with full, prompt disclosure of large block accumulations, direct or derivative.  Moreover it holds absolutely no water when the goal is to give hostile bidders a “leg up” (to the tune of a billion dollar profit in one day on Allergan).

Perhaps the most novel (and, from corporate America’s perspective, disturbing) aspect of this new stratagem is the partnership between an activist hedge fund and a strategic acquirer to establish a bigger beachhead more quickly and cheaply than had previously been thought possible.  Under current rules, strategic bidders do not need an activist to pursue this tactic.  They could on their own buy options up to 4.9% in the target, and then scoop up as many more as they can in the ten days after crossing the 5% threshold before having to unmask themselves.  The activist however brings several favors to the party, in addition to some financing.  One is the questionable hope that it can legally close on the options and thus control 10% of the target’s stock (and votes) sooner than its strategic partner could.  A second is a large megaphone, and the willingness to wield it in ways that a public company likely would not, to press the case for their deal.  A third is that the activist hedge fund specializes in covert accumulations, a skill set that a strategic buyer would have to master.  But the most important thing it brings to the team is its willingness to bet billions of dollars without performing any due diligence beyond a basic review of the target’s public documents.  This is easier for an activist hedge-fund given its incentive compensation structure than for a public company.

This then is the true danger of the new Valeant-Pershing Square tactic: it is premised on a short-term “quick-profit” mentality and reliant on an inherent conflict-of-interest.  Pershing Square is betting billions of dollars that it can “knock over” Allergan.  It doesn’t care much who buys the target: it would apparently like Valeant to win, but it makes a fortune if someone else pays a higher price.  Valeant of course cares if it wins, but the cunning of the structure is that it also stands to make a tidy profit if a competitor takes its prize, unlike most failed bids where even the profit on a toehold investment would likely not cover the bidder’s costs.  In any case, Valeant is taking very little risk for its sizable “leg up” on its competition (by keeping its investment below the $76 million antitrust filing threshold).  Pershing Square’s risk is that Allergan manages to fight off the hostile bid and stay independent, which may well lead to a fizzling out of the takeover froth (a point they emphasize at every opportunity to induce Allergan shareholder support).

The structure is crafty, and good for Valeant and Pershing Square (as long as no bad facts emerge, such as undisclosed arrangements, that could get them in trouble).  But is it good for the American economy and society?  Allergan spends 17% of its revenue on research and development, compared to Valeant’s 3%, and Valeant has said it plans to cut around 20% of the combined companies’ 28,000 jobs in the merger.  We do not believe that this is the sort of economic activity that policy-makers should be actively encouraging in their rule-making (or foot-dragging).  Indeed, it appears that express statements in speeches and other forums from top officials in government, including the Chair of the SEC, have given activists encouragement that their behavior, however aggressive and self-interested, is favored in the corridors of power as well as the halls of ivy.

It is also not a coincidence that this attack comes shortly after Allergan dismantled its takeover defenses in the face of activist and institutional shareholder pressure.  Shareholder governance activists and responsible institutional investors also need to take a good look at themselves and ask whether their insistence that American companies render themselves more vulnerable to hostile takeover bids like this one has increased the true value of their portfolios and improved our Nation’s economy and its prospects, upon which the interests of investors ultimately depend.

The views expressed herein are solely those of the author and have not been endorsed, confirmed, or approved by XBMA or any of the editors of XBMA Forum, nor by XBMA’s founders, members, contributors, academic partners, advisory board members, or others. No inference to the contrary should be drawn.

U.S. UPDATE: Corporate Governance Update: Shareholder Activism in the M&A Context

Editor’s Note: David A. Katz is a partner at Wachtell, Lipton, Rosen & Katz specializing in the areas of mergers and acquisitions and complex securities transactions.  The attached article by Mr. Katz and Laura A. McIntosh was first published in the New York Law Journal on March 27, 2014; the full article, including footnotes, is available here.

Highlights:

  • In 2013, activism in the M&A context grew in scope and ambition. Activists were often successful in obtaining board seats and forcing increases in deal consideration.
  • One source estimates that the percentage of activist attacks that were successful in either raising deal price or terminating a deal was a stunning 71 percent through November of 2013, an overwhelming increase from 25 percent in 2012 and 19 percent in 2011.
  • While the traditional areas of board representation and deal price no doubt will remain the highest value targets in M&A activism, appraisal rights litigation and arbitrage became a more common tactic pursued by activists in 2013.
  • One formidable barrier to these suits’ ever becoming prohibitive in M&A deals is that, in order for dissenters to have rights at all, a merger must first be consummated, however, there is a possibility that Delaware courts might entertain a cause of action known as “quasi-appraisal rights.”
  • Notably, revisions to Delaware law in 2013 may have an impact on appraisal claims.  The new law eliminates the need for top-up provisions in two-step merger agreements; these provisions enabled an acquirer to purchase newly issued shares from the target, if necessary, in order to reach the 90 percent threshold required to effect a short-form merger.  Under the new provision, shareholders now can be required by Delaware companies to make any demands for appraisal no later than the closing of the first-step offer.

Main Article:

With M&A activity expected to increase in 2014, shareholder activism is an important factor to be considered in the planning, negotiation, and consummation of corporate transactions.  In 2013, a year of relatively low deal activity,[1] it became clear that activism in the M&A context was growing in scope and ambition.  Last year activists were often successful in obtaining board seats and forcing increases in deal consideration, results that may fuel increased efforts going forward.  A recent survey of M&A professionals and corporate executives found that the current environment is viewed as favorable for deal-making, with executives citing an improved economy, decreased economic uncertainty, and a backlogged appetite for transactions.[2]  There is no doubt that companies pursuing deals in 2014—whether as a buyer or as a seller—will have to contend with activism on a variety of fronts, and advance preparation will be important.

While the traditional areas of board representation and deal price no doubt will remain the highest value targets in M&A activism, one newer area to watch for activity in 2014 is appraisal rights litigation and arbitrage, which became a more common tactic pursued by activists in 2013.  Shareholder activism is poised to have an even greater impact in the M&A context this year and companies should be aware of and prepared for this possibility if they pursue an M&A transaction.

2013 Trends to Continue

In 2013, the power and influence of activist hedge funds rose to new heights.  In financial terms, hedge fund assets under management ended the year at a new record:  capital invested in the global hedge fund industry was reported to be $2.63 trillion, while U.S. activist hedge funds are now estimated to hold close to $100 billion in assets under management.[3]

Activists have become increasingly ambitious in their selection of targets and inventive in their choice of tactics.  In 2014, as in 2013, large, well-known companies should anticipate being targeted by activist campaigns, and they can expect the activists to be sophisticated not only in their demands but also in their use of media, outside experts, and litigation strategy to achieve their objectives.  Moreover, so far in 2014, smaller companies have increasingly been targeted by activists, many of whom are newly formed activist funds.

In 2013, activists experienced unprecedented success in the outcomes of their campaigns in the M&A context.  One source estimates that the percentage of activist attacks that were successful in either raising deal price or terminating a deal was a stunning 71 percent through November of 2013, an overwhelming increase from 25 percent in 2012 and 19 percent in 2011.[4]  Moreover, activists have had significant success in adding their designees to the boards of target companies.  Institutional Shareholder Services (ISS) estimates that activists won board seats in 68 percent of proxy fights in 2013 (not including cases in which board seats were gained without a fight in a settlement), versus 43 percent in 2012.[5]  At the same time, activists have garnered a degree of legitimacy that they have never before enjoyed.  Traditional investment funds now routinely work with activist hedge funds, and even many independent directors of target companies are more receptive to activist proposals than ever before.  As activist hedge funds become substantial shareholders in many companies, they become an increasingly significant factor for companies considering M&A activity in 2014.

Appraisal Rights: Background

An emerging weapon in the activist arsenal in the M&A context appears to be appraisal rights litigation, or at least the threat of such litigation.  Appraisal rights are a well-known but generally insignificant footnote to cash mergers:  in Delaware, shareholders who object to a cash offer for their shares have the right to dissent and seek a higher price through litigation.[6]  In order to perfect appraisal rights in Delaware, shareholders must either vote against or abstain from voting on the merger; they must also refuse to accept the merger consideration paid to the other shareholders at closing.  After the merger is completed, the dissenters then have the right to file suit in Delaware, asking a court to independently determine the value of their shares as of the merger closing date.  The dissenters have sixty days post-closing in which to pursue appraisal or accept the price paid in the merger.

Historically, appraisal rights litigation has not been significant; in the last two decades, only forty-five appraisal cases have carried through to the issuance of a post-trial opinion.  However, this type of action appears to be emerging as a more prominent feature of the M&A landscape.  Overall, the value of appraisal rights cases brought in Delaware has been rising:  one study found that appraisal claims were brought with respect to 15 percent of takeovers in 2013 and that the value of the claims was $1.5 billion, ten times the value of such claims in 2004.[7]  So far this year, twenty appraisal claims have been filed in Delaware, as compared to thirty-three in all of 2013.[8]

Various factors are contributing to the rise of appraisal rights activism, including legal developments and financial conditions as well as the general aggressiveness and ascendancy of hedge fund activists.  In terms of legal developments, a series of cases regarding appraisal rights have created greater opportunities for appraisal rights arbitrage and mitigated slightly the risks inherent in judicial determination of share value.  Setting the stage for action was a 2007 Delaware Chancery Court opinion that surprised observers by ruling that appraisal rights are available to holders of stock on the date of the merger vote, rather than on the much earlier record date.[9]  This ruling made it possible for investors to analyze a deal and purchase shares at the final hour with the intent of pursuing appraisal.[10]  As noted above, commencing appraisal proceedings then gives shareholders a sixty-day option on the merger consideration while they evaluate the potential upside of appraisal rights litigation.

While appraisal litigation is risky and can be costly, historically, it has been financially worthwhile for the plaintiffs.  One review of Delaware case law found that over 80 percent of appraisal rights cases resulted in a finding of fair value by the court that was higher than the merger price paid.[11]  Indeed, in many cases it was significantly higher, with one analysis finding a median premium of 82 percent over the merger price.[12]  These statistics may only reflect that appraisal proceedings in the past often have been brought in egregious circumstances, but the track record nevertheless appears to be spurring an increase in appraisal demands.  A further catalyst is that the Delaware appraisal statute entitles dissenters to interest, compounded quarterly from the merger closing date until the date that they receive the fair value of their shares, at a very favorable rate set by a recent amendment to the statute:  the Federal Reserve discount rate plus five percent.

With respect to determining fair value itself, the court has enormous leeway, and trials generally center on expert testimony.  From 2010 through 2013, Delaware courts consistently held that the price paid in the merger would not be given any presumptive weight in the determination of fair value for a dissenter’s shares.  Moreover, these courts reaffirmed a prior holding that the appraisal would be based on the value of the company as a going concern as of the merger date, not as of the offer date.[13]  Therefore, any value added between the closing of the offer period and the consummation of the merger would increase the fair value of the shares.[14]  While a court may choose its valuation methodology, some recent cases have determined fair value based on the discounted cash flow method, which is well-understood and lends itself to principled analysis from a financial risk-benefit standpoint.[15]  Discounted cash flow analyses, however, often produce values in excess of what a buyer would be willing to pay or the value of the company’s stock in the public trading markets.  In two widely-noted 2013 cases that went to trial, the court used the discounted cash flow methodology and determined that the fair value of the shares was significantly higher than the merger price.  In the merger of one Cox Enterprises, subsidiary with another, the court found, valuing the company as a going concern, that the fair value per share was $5.75, as opposed to the offer price of $4.80.[16]  Similarly, in the merger of 3M Company and Cogent, the plaintiffs—including four large hedge funds—won a 3.5 percent premium over the offer price.[17]  Though one case in November 2013 looked to the merger price for guidance rather than relying upon a discounted cash flow analysis, the court noted that in this particular case, the DCF methodology was essentially unavailable due to a lack of reliable projections.[18]

The highest-profile appraisal rights case of last year involved Carl Icahn’s campaign against the Dell going-private transaction.  In February 2013, a buyout group led by Michael Dell entered into an agreement to take the company private in a $24.4 billion transaction.  Icahn, who began acquiring Dell shares after the transaction agreement was announced, joined with Southeastern Asset Management and some other large Dell shareholders to oppose the transaction on the basis that the price was too low.  Icahn presented various alternative leveraged recapitalization plans over the course of several months, but both the Dell board and ISS recommended that shareholders accept the original buyout transaction instead.  Meanwhile, Icahn urged his fellow shareholders to exercise their appraisal rights under Delaware law, primarily as a means to encourage shareholders not to vote for the transaction.  Although the transaction received support from a majority of the total shares outstanding, and a majority of the shares not held by Michael Dell and affiliated parties that voted on the transaction, in the face of the Icahn campaign, the going-private transaction was not able to gain the much higher vote of a majority of the outstanding unaffiliated shares required by the original transaction agreement.  Ultimately, the buyout group increased their offer in exchange for a change in the voting rules so that the separate vote of the unaffiliated shares would be based on shares voting rather than shares outstanding.  In September 2013, the shareholders approved the transaction, and thereafter, Icahn withdrew his appraisal demand.  Whether or not Icahn ever actually intended to pursue appraisal rights litigation, the credible threat of doing so appeared to be one of several factors in his push for a higher buyout price, which he (and the other shareholders) ultimately received.  And although Icahn did not in the end pursue appraisal rights, a number of other former Dell shareholders did exercise appraisal rights.[19]

Appraisal Rights: Looking Ahead

Activists have shown increasing interest in the possibilities of appraisal rights lawsuits.  During the Dell buyout process, the Shareholder Forum, an activist organization, launched a registered trust designed to make dissenting more attractive.[20]  The idea was that dissenting Dell shareholders could trade their shares for trust units, which would be listed on an exchange and theoretically cashed out in the market at any time.  The trust was designed to mitigate one major reason that appraisal rights cases historically have held limited appeal, namely, the fact that dissenting shareholders have their investment tied up for months or years while the lawsuit is adjudicated.  The Shareholder Forum encourages investors to use appraisal rights claims as “practical investments,” particularly when held as marketable and managed holdings in an investment vehicle similar to the one developed for Dell shareholders.[21]  Whether such a market could indeed be generated is, at the moment, an open question.[22]

Similarly, arbitrageurs have picked up on appraisal claims as fertile new ground for activity.[23]  The managed fund market is flush with cash, and hedge funds facing stiff competition for returns are looking for unusual opportunities.[24]  Funds may view these claims as a way to take advantage of Delaware’s favorable interest rate, particularly in the current low interest rate environment.  They may estimate a high likelihood of receiving at least the merger price as fair value for their shares, and possibly much more.  If nothing else, the claims may be valuable as leverage for a lucrative settlement.  Reportedly, some hedge funds have begun to specialize in appraisal rights—one having raised over $1 billion for that purpose—while some very large funds have begun to diversify into this area.[25]

Exemplifying the arbitrageur approach to appraisal claims is the ongoing Dole takeover battle.  Dole shareholders were offered cash in a management buyout, and many shareholders were not satisfied with the offer price.  The deal was approved by a bare majority, and afterwards, about one-quarter of Dole’s shareholders exercised their appraisal rights.  The dissenters included four large hedge funds, all of which purchased shares after the buyout was announced and all of which have filed appraisal actions in other transactions.  The result is that Dole now faces a potential $190 million liability.[26]  Should the hedge funds win a large payout, whether through settlement or adjudication, they and others will no doubt be encouraged to repeat this approach in other cash merger transactions.

The utility of appraisal rights suits to activists and plaintiffs’ attorneys rests not only on the possibility of a large payout but also on the fact that no wrongdoing need be alleged or proven.  The usual class action in the wake of a merger rests on allegations that the board of directors somehow breached its fiduciary duties to the shareholders, a very difficult claim on which to prevail under the business judgment rule, even under the higher judicial standard of enhanced scrutiny.  By contrast, appraisal rights plaintiffs need only hope the court determines that the value of their shares exceeds the price paid in the merger—again, viewing the company as a going concern, and with significant interest component available.

It would appear that one formidable barrier to these suits’ ever becoming prohibitive in M&A deals is that, in order for dissenters to have rights at all, a merger must first be consummated; this obviously requires the majority or supermajority of holders to accept the deal.  However, there is a possibility that Delaware courts might entertain a cause of action known as “quasi-appraisal rights.”  These rights have been recognized when proxy materials were discovered, after the vote, to have contained material errors or omissions that might have influenced a shareholder’s decision to dissent.  All shareholders in quasi-appraisal have the right to pursue appraisal regardless of how they voted and even if they have already accepted cash for their shares, with no risk that they would have to return any merger consideration if the appraised value ends up lower than the paid price per share.  Quasi-appraisal is far from settled doctrine, but it potentially eliminates the significant downsides of both appraisal claims and traditional post-closing class action lawsuits, while threatening a target company with a potentially enormous payout owed to all shareholders.[27]  Delaware courts presumably recognize the significant risk of inviting such disruptive litigation by making this claim available beyond a limited use as equitable remedy, but it remains to be seen if this doctrine will develop further.

It is not uncommon in merger agreements for acquirers to seek to include appraisal closing conditions, designed to allocate the risk of significant dissent to the seller and its shareholders.  This type of condition states that if the percentage of dissenting shareholders is above a certain threshold—typically five to ten percent of the outstanding shares—the buyer no longer has an obligation to consummate the transaction.  It is possible that these conditions may become more popular as a signal to arbitrageurs and activists that too-vigorous dissent may undermine a transaction completely.  However, appraisal rights closing conditions can have the undesired effect of giving additional leverage to dissenters and should be considered carefully before being proposed by buyers.[28]  In addition, sellers should shy away from accepting such conditions as they effectively transfer the risk of non-consummation back to the seller and may significantly increase the risk that the transaction at issue is not ultimately consummated.

Notably, revisions to Delaware law in 2013 may have an impact on appraisal claims.  A new Section 251(h), designed to facilitate two-step mergers, now permits acquirers who comply with certain conditions to effect a squeeze-out merger without a shareholder vote if, after a tender or exchange offer, the acquirer owns the number of shares that would be needed to approve the merger agreement at a shareholder vote.[29]  The new law eliminates the need for top-up provisions in two-step merger agreements; these provisions enabled an acquirer to purchase newly issued shares from the target, if necessary, in order to reach the 90 percent threshold required to effect a short-form merger.  Under the new provision, shareholders now can be required by Delaware companies to make any demands for appraisal no later than the closing of the first-step offer.  Previously, shareholders had been legally required to wait to exercise their appraisal rights until after the consummation of the second-step merger.  Moreover, appraisal rights are available to target shareholders in all mergers effectuated under Section 251(h), including cashless exchange offers, which, if effectuated outside of the new provisions, do not give rise to appraisal rights.[30]

Preparing for M&A Activism

Hedge fund activists may well be motivated by their recent success and newly acquired mainstream credibility to pursue energetic activity in 2014, particularly if M&A deal volume as a whole increases as predicted.  In essential respects, preparing for shareholder activism in the M&A context is no different from preparing for shareholder activism generally.  Companies should, as always, prioritize clear and frequent communication, meet with significant shareholders to hear and understand their concerns, and consistently articulate the long-term, strategic vision that the board is pursuing.

It may be a useful exercise for management and the board to take a step back and look at any proposed transaction from the perspective of an aggressive activist investor, in order to understand and take steps to minimize any potential vulnerabilities that could be exploited by activists.  Currently, merger parties closely scrutinize the possibility of an interloper and include provisions in the merger agreement to allocate the risk of this possibility between the buyer and the seller.  Potential target companies may want to consider structural takeover defenses in advance of beginning any extraordinary transaction process to ensure as much as possible that the target board maintains control over the transaction from start to finish.  The possibility of activist attacks should be discussed during the negotiation stage of the transaction, so that any affected deal terms can be agreed upon and incorporated into the merger agreement and other documents.  The deal partners should cooperate and work closely with their financial and legal advisors as well their communications teams to plan their response to any activist efforts to derail the transaction.  Potential targets must keep track of any significant stock purchases occurring in the run-up to a deal and consider carefully the identity and goals of such buyers.  In light of the scope and success of activist efforts in 2013, no company pursuing a significant transaction in 2014 should underestimate the potential impact of activist campaigns in the M&A context.

 

_________

[1] Mergermarket reports that deal value in 2013 was $2,215.1 billion, down 3.2 percent from $2.288.8 billion in 2012.  2013 saw the lowest deal value since 2010.  See Mergermarket M&A Trend Report: 2013 (Jan. 3, 2014) available at www.mergermarket.com/pdf/Mergermarket.2013.FinancialAdvisorM&ATrendReport.pdf.

[2] KPMG 2014 M&A Outlook Survey Report at 1, available at www.kpmg.com/IE/en/IssuesAndInsights/ArticlesPublications/Documents/2014-m-a-outlook-survey-report.pdf.

[3] See HFR Global Hedge Fund Industry Report, Jan. 21, 2014 available at www.hedgefundresearch.com/?fuse=products-irglo.

[4] See Alan Klein, “Shareholder Activism in M&A Transactions,” Simpson Thacher & Bartlett Memorandum, Feb. 26, 2014, available at https://blogs.law.harvard.edu/corpgov/2014/02/26/shareholder-activism-in-ma-transactions.

[5] See Stephen Foley, “Activist hedge funds managers get board welcome,” Financial Times, Dec. 23, 2013, available at www.ft.com/cms/s/0/71362352-68e0-11e3-bb3e-00144feabdc0.html#axzz2x0FxobX6.

[6] Del. Gen. Corp. L. § 262, available at delcode.delaware.gov/title8/c001/sc09/.  As discussed below, appraisal rights are now available to target shareholders in exchange offers if the merger is consummated under new Section 251(h) of the Delaware corporation law.  See text accompanying note 30.

[7] See Steven M. Davidoff, “New Form of Shareholder Activism Gains Momentum,” NYTimes.com Dealbook, Mar. 5, 2014 (citing an unpublished paper by Professor Minor Myers and Professor Charles Korsmo), available at dealbook.nytimes.com/2014/03/04/a-new-form-of-shareholder-activism-gains-momentum/?_php=true&_type=blogs&_r=0.

[8] Bloomberg Law Database (search conducted Mar. 18, 2014).

[9] In re Appraisal of Transkaryotic Therapies, Inc., C.A. No. 1554-CC (Del. Ch. May 2, 2007), available at courts.delaware.gov/opinions/(wshozyqwortjg2bswbmuwzbl)/download.aspx?ID=91460.

[10] Transkaryoticat 7-8 (“Respondents raise one policy concern that deserves mentioning. They argue that this decision will ‘pervert the goals of the appraisal statute by allowing it to be used as an investment tool for arbitrageurs as opposed to a statutory safety net for objecting stockholders.’  That is, the result I reach here may, argue respondents, encourage appraisal litigation initiated by arbitrageurs who buy into appraisal suits by free-riding on Cede’s votes on behalf of other beneficial holders—a disfavored outcome.” (footnotes omitted)).

[11] See Jeremy Anderson & Jose P. Sierra, “Unlocking Intrinsic Value Through Appraisal Rights,” Law360, Sept. 10, 2013, available at www.law360.com.

[12] See Lawrence M. Rolnick & Steven M. Hecht, “Del. Weighs in on Fair Value in Appraisal Rights Cases,” Law360, Aug. 7, 2013, available at www.law360.com.

[13] See, e.g., Golden Telecom v. Global GT LP, 11 A.3d 214 (Del. 2010) (rejecting any rule that would require the Court of Chancery to defer to the merger price in an appraisal proceeding); Merion Capital LP v. 3M Cogent Inc., C.A. No. 6247 (Del. Ch. July 8, 2013) (reiterating that the going concern value of the company is the relevant inquiry), available at courts.delaware.gov/opinions/download.aspx?ID=191670.

[14] Cede & Co. v. Technicolor, Inc., 684 A.2d 289, 298 (Del. 1996) (stating that “value added to the going concern by the ‘majority acquirer,’ during the transient period of a two-step merger, accrues to the benefit of all stockholders and must be included in the appraisal process on the date of the merger”).

[15] See, e.g., The Brattle Group, “Recent Guidance from the Delaware Court of Chancery,” Summer 2013, available at www.brattle.com/system/publications/pdfs/000/004/891/original/Recent_Guidance_From_the_Delaware_Court_of_Chancery.pdf?1378903543; Edward M. McNally, “Are Appraisal Cases Coming Back?” Del. Bus. Ct. Insider, July 17, 2013, available at www.morrisjames.com/pp/article-184.pdf.

[16] Towerview LLC v. Cox Radio, Inc., C.A. No. 4809 (Del. Ch. June 28, 2013), available at www.delawarebusinesslitigation.com/uploads/file/towerview%20v%20%20cox%20radio.pdf.

[17] Merion Capital, L.P. v. 3M Cogent, Inc., supra.

[18] Huff Fund Investment Partnership v. CKx, Inc., C.A. No. 6844-VCG (Del. Ch. Nov. 1, 2013), available at courts.delaware.gov/opinions/download.aspx?ID=196960.

[19] Bloomberg Business Week, “T. Rowe to Magnetar Demand Dell Appraisal After Buyout (Correct),” Nov. 28, 2013 (“T. Rowe Price Group Inc. and more than 100 other Dell Inc. shareholders who control a combined 47.5 million shares spurned the company’s buyout offer to seek a potentially higher payout through the Delaware court system”), available at www.businessweek.com/news/2013-11-28/t-dot-rowe-to-magnetar-capital-demand-dell-appraisals-after-buyout; see also M&A Law Prof Blog, “Dell Appraisal,” Nov. 29, 2013, available at lawprofessors.typepad.com/mergers/2013/11/dell-appraisal.html.

[20] See The Shareholder Forum, Dell Valuation Home Page, available at http://www.shareholderforum.com/dell/index.htm.

[21] See The Shareholder Forum, “Appraised Value Rights: A Summary for Investors,” available at http://www.shareholderforum.com/appraisal/Program/20131209_AVR-summary.pdf.

[22] See, e.g., Liz Hoffman, “Dell Buyout Critics Seek New Market for Appraisal Rights,” Law360, June 21, 2013, available at www.law360.com.

[23] See, e.g., William Savitt, “Dissenters Pose Bigger Risks to Corporate Deals,” Nat. L.J., Feb. 10, 2014, available at www.nationallawjournal.com/id=1202642062604/Dissenters-Pose-Bigger-Risks-to-Corporate-Deals?slreturn=20140225205634.

[24] See, e.g., “Activists and Regulators:  A Word from Rodgin Cohen,” 14 M&A J. 7 (Feb. 2014).

[25] See, e.g., Liz Hoffman, “Dole Food Deal Passes by Slim Margin as Hedge Funds Seek Appraisal,” WSJ.com, Oct. 31, 2013, available at blogs.wsj.com/moneybeat/2013/10/31/dole-food-deal-passes-by-slim-margin-as-hedge-funds-seek-appraisal/.

[26] See Davidoff, supra.

[27] For a full discussion of quasi-appraisal case law in Delaware, see Robert B. Schumer et al., “Quasi-Appraisal:  The Unexplored Frontier of Stockholder Litigation?” 12 M&A J. 2 (Jan. 2012).

[28] For a thorough discussion of appraisal closing conditions, see “Appraisal Arbitrage:  Will It Become a New Hedge Fund Strategy?” Latham & Watkins M&A Deal Commentary, May 2007, available at www.lw.com/upload/pubContent/_pdf/pub1883_1.pdf .

[29] Del. Gen. Corp. L. § 251(h). Section 251(h) mergers are not available to “interested stockholders” (holding 15 percent or more of the target shares).

[30] Del. Gen. Corp. L. § 262.

The views expressed herein are solely those of the author and have not been endorsed, confirmed, or approved by XBMA or any of the editors of XBMA Forum, nor by XBMA’s founders, members, contributors, academic partners, advisory board members, or others. No inference to the contrary should be drawn.

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