All posts in category Dealpolitik

Dealpolitik: Freeh Penn State Report — Required Reading for Directors

Every director of a public company should read six pages (pp. 97-102) of former FBI Director Louis Freeh’s report on the Penn State sexual abuse scandal. Those pages contain his findings about his own client: the Board of Trustees of Penn State.

He found that that board failed to exercise its oversight and reasonable-inquiry responsibilities. And though most corporate directors will hopefully never confront the abuse of children that is the primary focus of the report, a director’s responsibilities with respect to wrongdoing by corporate employees and a director’s duty to set the tone at the top is no different than that of the Penn State Board of Trustees.

Indeed, in explaining the Penn State Board’s duties, Freeh turned to the two leading Delaware corporate law cases on directors’ obligations with respect to compliance. Both of those cases hold that:

“It is important that the board exercise a good faith judgment that the corporation’s information and reporting system is in concept and design adequate to assure the board that appropriate information will come to its attention in a timely manner as a matter of ordinary operations, so that it may satisfy its responsibility [to reach informed judgments concerning both the corporation’s compliance with law and its business performance].”

Dealpolitik: Duke Boardroom Coup To Chill Mergers-of-Equals Negotiations

Duke Energy and Progress Energy, when they first started talking about a merger almost two years ago, confronted the same fundamental issue any deal that’s close to a proverbial merger of equals faces: who is going to run the combined company? In this deal, their boards and their senior managements understood and agreed to how it would work early in their merger negotiations. Duke CEO Jim Rogers would give up the CEO role and take the more passive role of executive chairman and Progress CEO Bill Johnson would assume the CEO position for the combined company.

But that part of the deal—which was written precisely into the merger agreement of January 2011– lasted for a few hours until Johnson resigned “by mutual agreement” with the combined company’s board.

The story of Duke and Progress will hang heavily over the negotiations of future merger parties and their senior managers. How can they be sure what they agree to will actually happen? The Duke/Progress deal proves there can be no certainty, and that will likely discourage some merger-of-equals deals.

Dealpolitik: Duke Switch and Shareholder Fairness

Corporate lawyers frequently advise clients that “shareholders’ interests come first.” They also tell companies to pursue shareholder approval as quickly as possible after signing a merger agreement. But in a deal between highly regulated companies, the shareholder vote can come a year or more prior to a closing. And sometimes that’s not such a great outcome.

Duke Energy’s merger with Progress Energy forming the largest electric utility in the country may become Exhibit A for letting shareholders have the full picture before being required to vote. Duke and Progress announced the completion of their merger Tuesday morning, 18 months after the deal was first announced.

The shocker in that announcement was that although the merger agreement and many filings since had indicated that William Johnson, the CEO of Progress, would act as the combined company’s CEO, Johnson resigned “by mutual agreement.” Instead, Jim Rogers, the pre-merger CEO of Duke, will step into that role.

Dealpolitik: Best Buy and Yahoo Struggle with Similar Problems

Who would have thought that the real world would imitate the virtual one? Best Buy has a mess on its hands with big shareholder troubles—and in many ways the parallels with the recent struggles of Yahoo are striking.

Both Best Buy and Yahoo are one-time category killers that still remain viable. But technology and even-bigger upstarts have emerged as a threat. Best Buy owned the big-box electronic retailing, business, killing off competitor after competitor until Circuit City succumbed three years ago. But now Amazon.com’s business model reduces the need for expensive stores and allows on-the-spot price comparison that challenges Best Buy’s business model.

Yahoo, though it remains profitable, faces big challenges as well, namely Google. Google came along, built better technology and jumped ahead in scale; then there are other up-and-coming competitors for advertising dollars like Facebook.

And both Best Buy and Yahoo recently had to deal with CEOs in a pickle. In Best Buy’s case, the CEO resigned in March after allegedly having an affair with a subordinate. He hasn’t spoken publicly about the allegations. In the case of Yahoo, its CEO resigned over misstated credentials.

Dealpolitik: Why Navistar’s Poison Pill is Good Medicine

Sometimes when a board says it adopts a “poison pill,” you wonder whether the pill—officially called a “shareholders’ rights plan”—is about protecting shareholders or protecting management. But when Navistar International announced its pill on Tuesday it was a no-brainer and a win for public shareholders. The board had almost no choice. Had the truck maker not adopted the pill, that would have meant that one or more activist investors might be able to take control of Navistar without paying a control premium or even having a shareholder vote.

Here is the situation. Last week, the third of three investors made a regulatory filing indicating that it had acquired 13.6% of the shares outstanding. Recently, Carl Icahn had reported 11.9% and Mario Gabelli funds reported ownership of 6.2% of the shares.

Last week’s filing was by funds controlled by Mark Rachesky, who used to work with Icahn but more recently had a fight with him over Lions Gate. These three investors now own more than 30% of the shares.

Dealpolitik: Parsing Out Why Quest Took the Management Bid

When we last left Quest Software’s independent committee, it seemed to be doing a pretty good job of paving the way for a strategic bidder to bid up the deal even though that mysterious bidder is competing with a buyout group that includes Quest’s chairman and CEO, who has the advantage of having 34% of the votes

The management buyout group, which has been expanded and now includes Vector Capital in addition to Insight Venture Partners, has topped the secret strategic bidder’s $25.50 bid by 25¢ per share. The Quest independent committee took the deal and signed up the management group. But did it do the right thing for shareholders? There are some curious developments in the new deal.

First, the fees and expenses payable if the management group is topped have increased from $13.3 million to $37 million, or around 28¢ per share. That sounds like a lot for a 25¢ per share price increase.

But that is a bit of an unfair analysis. The breakup fees and expenses are still only 1.7% of the total price. The original breakup fee was probably unusually low because of management’s participation. Now that a full-fledged auction has started, a higher breakup fee may be justified. In arms-length deals, breakup fees can be as high as 3-4%.

What is more troubling is that a “reverse breakup fee” remains at the extraordinarily low level of $9 million in a deal valued over $2 billion. That means that if the management group cannot come up with its debt financing, it has the right to walk away by paying a $9 million fee—and then only has to pay if Quest can prove that all the conditions to closing were satisfied. That fee, which is less than half of one percent of the market capitalization of Quest, probably would not even compensate Quest for its expenses.

Dealpolitik: Showdown Looms Between Glaxo and Human Genome Sciences

On Friday, Human Genome Sciences told GlaxoSmithKline that it should submit a “final bid” for HGS by July 16. GSK is making a tender offer directly to HGS shareholders to buy HGS for $13 per share. HGS has rejected that bid as too low and has vowed to seek alternatives.

There is a more subtle message to GSK that is implied by HGS’s letter: If GSK doesn’t bid more than any competing bidders there may be by July 16, HGS could sign up a deal with a third party at any price over $13.

That wouldn’t necessarily knock GSK out of the hunt. However, the typical deal protections the third party would likely get for such a competing bid would likely include a 3-4% break up fee (or around $100 million) if GSK later tops the deal. And the new bidder could also get matching rights. The two together mean that if GSK got into a bidding war with someone else who had a signed deal, GSK would start in a $100 million hole and if, after taking into account that disadvantage, the bidding ended in a tie, GSK would lose.

Dealpolitik: Quest Software Brings in Competing Bid Using Clever Corporate Engineering

In a unique twist on the use of deal protections, the independent committee of Quest Software has attracted a new bid of $25.50 per share in cash from an as yet unnamed “strategic bidder.” In March, Quest signed up a deal with a group led by Insight Venture Partners to buy Quest for $23 per share in cash. The Insight buyout group includes Vincent Smith, the Chairman and CEO of Quest, who has voting power over 34% of the company’s outstanding shares.

Such a large stock position is ordinarily a disadvantage to a potential interloper and it can discourage them from making a competing acquisition proposal. But here the independent committee worked out some innovative techniques that appear to increase the mysterious bidder’s chances and to encourage it to bid by protecting it if it fails.

Dealpolitik: Liberty Media Steps Up its Complex Dance with Sirius

John Malone’s Liberty Media is trying to get permission from the Federal Communications Commission to use its near majority ownership of Sirius XM Radio to take control of its board of directors. Since a tussle started in March, Sirius has opposed Liberty at the FCC and so far the FCC has rejected Liberty, basically because Liberty had not announced specific steps on its plans to effect the director election. Last week Liberty asked for reconsideration and announced some of those steps.

There is more to this dance than meets the eye. This is not about your normal struggle to control a company. Liberty has enough shares to effectively control Sirius—once the regulators give their blessing. And earlier this year, a standstill agreement—which prohibited Liberty from trying to get more directors or otherwise control Sirius—expired.

Liberty’s move is probably the opening gambit in a process to harvest for Liberty shareholders the massive gain it has in its investment in Sirius. In return for loaning around half a billion dollars to Sirius when it was in dire straits during the global financial crisis, Liberty was given preferred stock convertible into 40% of the common stock of Sirius, as well as minority representation on the Sirius board.

Based on current market prices, Sirius’s current market capitalization will be almost $12 billion when all those convertible securities are converted. If Liberty sold its shares now, that would be a lot of taxes to pay. And simply spinning off Sirius shares to Liberty shareholders would trigger even more taxes—unless Liberty spent billions of dollars buying a lot more Sirius shares first.

Dealpolitik: Dewey Tragedy: What’s the Essence of a Law Firm?

The collapse of Dewey & LeBoeuf is a massive tragedy for those involved. This will be a setback for many of the Dewey partners, but most of them will land on their feet. The real tragedy will be felt by people like a secretary who has worked for his or her entire career at Dewey or its predecessor firms and is a few years from retirement, or the employee who started in the mailroom a couple of decades ago and has worked his or her way up to a position of responsibility.

The implosion of the law firm partnership offers fascinating insight into what led to the collapse. The members of the office of the chairman have given remarkably candid interviews. Some of the things that seemed to have happened at Dewey over the last few years raise the question of what precisely a law firm partnership is–and what holds a law firm together.

I am no expert on the subject of law firm management or Dewey, but I was a partner at a major firm for almost 25 years. These are my personal observations on what we know so far about Dewey’s rapid demise, shaped by how I viewed being a law firm partner.

High levels of compensation are an important element in the glue that holds law firms together, but compensation is not sufficient. Successful law firms have partners enthusiastic about not only their own practice and compensation, but also about building the institution. Otherwise it all becomes about partners competing with each other for a bigger share of the pie. Some such competition is inevitable, but, with nothing else, a law firm won’t prosper.