Europe: Transformational M&A and Restructuring Deals on Horizon

With our "Implementing the New Cross-Border Rules" webcast coming up, I thought it was worth repeating this survey summary issued as part of yesterday's "Directors & Boards" e-Briefing:

The financial and economic crisis may spur large and potentially transformational acquisitions that could radically alter the corporate landscape, according to a survey of more than 160 CEOs and senior managers of publicly listed companies in Europe - believed to be the first study of its kind.

Conducted by UBS Investment Bank and The Boston Consulting Group (BCG) during one of the most challenging financial periods in living memory--within six weeks of the collapse of Lehman Brothers - the UBS-BCG CEO/Senior Management M&A Survey reveals a remarkably resilient attitude to mergers and acquisitions given the current capital market constraints and economic outlook.

Nevertheless, it won’t be easy for companies to realize the undoubted opportunities that the current crisis presents. More than half of the firms surveyed face internal and external obstacles to executing a larger deal, including the need to focus on profitability, rather than growth, as well as funding limitations.

Key findings from the survey include:

- Nearly one third of firms (29 percent) expect to make a sizable acquisition over the next year and 21 percent of companies intend to make a large transaction.
- More significantly, 43 percent of companies believe there will be deals that will transform the shape of their respective industries, echoing the experiences of previous crises such as the 1930s and 1970s.
- In addition, 58 percent of firms expect the number of restructuring transactions to increase, potentially leading to a substantial rise in the number of divestitures and closures of business units.
- 73 percent of companies have either stuck to their M&A plans (51 percent) or increased their level of planned deal activity (22 percent) over the last 12 months.
- Only 15 percent of firms believe it is too risky to do an M&A at the moment.

DOJ's Antitrust Division Issues New Guidelines for Criminal Leniency Program

From Womble Carlyle:

The Antitrust Division (“AD”) of the Department of Justice recently issued revised model conditional leniency letters for companies seeking to avoid criminal prosecution for antitrust violations in the wake of a U.S. Court of Appeals decision to dismiss an indictment against a company the AD removed from the Leniency Program. The AD has now made it easier to revoke a company’s amnesty if it determines that there was a significant gap in time between when the company first discovered the anticompetitive activity and when it ultimately terminated its involvement in the alleged antitrust scheme.

The Stolt-Nielsen Case

Stolt-Nielsen Transportation Group, Ltd., an international shipping company, disclosed to the AD its involvement in an illegal market-division plan and obtained an amnesty agreement for all of its behavior prior to the date of the agreement. After conducting its own investigation, however, the AD alleged that Stolt-Nielsen continued to engage in the customer-allocation conspiracy months after the scheme was first discovered by the company’s general counsel.

For the first time in the leniency program’s thirty-year history, the AD revoked Stolt-Nielsen’s amnesty and indicted Stolt-Nielsen and its two subsidiaries (even after a federal district court had ruled that Stolt-Nielsen substantially performed its end of the amnesty agreement). After the Court of Appeals for the Third Circuit had ruled that the lower court could not enjoin the AD from issuing an indictment, on remand Stolt still succeeded in securing dismissal of the indictment on breach-of-contract grounds.

The DOJ’s Leniency Program After Stolt-Nielsen

The three fundamental aspects of the leniency program are not affected by the AD’s recent revisions to the conditional leniency letter: (1) amnesty is automatic if there is no pre-existing investigation; (2) amnesty may still be available even if cooperation begins after the DOJ’s investigation is underway; and (3) all officers, directors, and employees who cooperate are protected from criminal prosecution.

By the addition of footnote two to the model conditional leniency letter, however, the AD has effectively shifted the burden to the company seeking amnesty to prove that it promptly terminated the anticompetitive activity after the company’s general counsel or board of directors discovers the activity.

Because the AD grants amnesty only to the first company that reports the illegal activity, the revised leniency policy now provides a marker system to compensate for the tension between being the first to disclose and the necessity of approaching the AD with freshly cleaned hands. Under this approach, the AD will hold a leniency applicant’s place in the front of the line for a finite period in order for the applicant to perform the due diligence necessary to perfect its application.

Being the second to disclose can - and has - cost companies tens of millions of dollars and resulted in prison sentences for their top executives. A “reform first, repent later” approach can therefore be extremely counter-productive. Timing is thus more important than ever under the AD’s revised leniency program.

FASB Issues Proposed FSP FAS 141(R)-a

On Monday, the FASB released its proposed FASB Staff Position on FAS 141R standards regarding recognition of contingencies acquired or assumed in a business combination - it's called "FSP FAS 141(R)-a." As previously blogged, this FSP will to a large extent restore the accounting for litigation contingencies under the prior standard, FAS 141. In particular, it will eliminate the requirement that "non-contractual" contingencies be recorded at fair value if it is more likely than not that a liability has been incurred. The FASB has requested comments on the proposal, which are due January 15th.

Her Majesty's Government: Corp Fin Grants Schedule 13D Relief for UK's Investment in the Banking Sector

Last week, Corp Fin issued this no-action letter entitled "Her Majesty's Government." Is that the coolest name for a government response or what? It's so "James Bond."

Corp Fin's relief allows the United Kingdom to file an "Alternative" Schedule 13D when the UK Treasury takes ownership interests in the UK banks that is taking place due to the recapitalization of the UK banking industry, a recap "scheme" blessed by the Bank of England and the UK Financial Services Authority. For example, the UK Treasury is acquiring a 57.9% interest in the Royal Bank of Scotland's holding company.

The "Alternative" Schedule 13D is intended to dovetail with the notification required to be filed with the FSA under DTR 5.1.2R (this is in Chapter 5 of the FSA's "Disclosure & Transparency Rules"). Under Corp Fin's relief, this alternative 13D will consist of a cover page, the UK notification and the 13D signature page. A form of the alternative Schedule 13D is attached as Annex I of the incoming letter of the no-action request - and here is the alternative Schedule 13D filed by the Royal Bank of Scotland.

Why Hasn't the US Treasury or Fed Filed Any Schedule 13Ds?

What about Schedule 13Ds filed by the US Treasury or the Federal Reserve for their investments in AIG, Fannie, Freddie, etc.? We looked pretty hard for Schedule 13Ds filed by the US government and didn’t find any. We aren't the only ones wondering where these filings are - Professor Davidoff mused about this also a while back.

Just like the Professor, at first, the only rationale I could think of was that the Treasury figures nobody is going to sue it for not meeting filing requirements. But then I remembered Section 3(c) of the Exchange Act, which provides an exemption from the provisions of the Exchange Act for “any executive department or independent establishment of the United States, or any lending agency which is wholly owned, directly or indirectly, by the United States, or any officer, agent, or employee of any such department, establishment, or agency, acting in the course of his official duty as such….” Depending on the nature of the entity making the investment, it may be able to rely on Section 3(c) to avoid filing beneficial ownership reports. So that may be what is being relied upon...

National City: Interesting Fairness Opinion

- by John Jenkins, Calfee, Halter & Griswold LLP

While people often think that fairness opinions consist of nothing but boilerplate, that’s not the case when the one of the parties is facing particularly challenging circumstances. Goldman Sachs’ fairness opinion in the PNC/National City deal is a classic example of this point (here is the proxy statement). The pending sale of Cleveland-based National City Corporation to Pittsburgh’s PNC has raised a lot of concern here in Northeast Ohio, and has engendered controversy on Capitol Hill as well.

As a result, National City’s story is fairly well known. Goldman Sachs served as National City’s financial advisor in the PNC transaction - and rendered a fairness opinion to the company’s Board of Directors. While that opinion contains all of the standard assumptions, qualifications and disclaimers that we’ve come to expect in bankers’ opinions, it also contained several deal-specific provisions that are pretty interesting.

For example, in addition to the usual disclaimers typically found in most fairness opinions, Goldman’s opinion specifically notes National City’s expectation that absent a deal like the one proposed with PNC, it would not have the liquidity to meet its obligations, and “would face additional regulatory actions, including intervention by the United States federal banking regulators, and/or be required to seek protection under applicable bankruptcy laws in the very near future.”

After detailing these considerations, Goldman Sachs addressed their influence on its fairness analysis:

You have advised us that, as a result of the foregoing, the Company and its Board of Directors are faced with a narrow set of alternatives, which, at this time, are limited to a transaction such as the Transaction or intervention by United States banking regulators and eventual liquidation of the Company. Accordingly, we also considered recent instances where concerns regarding the liquidity of a bank or financial institution triggered a rapid deterioration of the institution’s financial condition, necessitating government intervention or bankruptcy protection, and as a result of which the common equity holders of the institution are likely to receive substantially diminished value, if any at all, for their equity. In light of the facts and circumstances, and in reliance on the Liquidation Analysis, we have assumed that if the Company’s banking assets were taken over by the United States federal banking regulators and the Company’s non-banking assets liquidated under applicable bankruptcy laws, the Holders would likely receive no material value for the Shares.

In English, that means that Goldman’s assuming that the only alternatives available to the board are a deal like the one offered by PNC - or a government takeover or bankruptcy filing in which its shareholders would get nothing. This is not pleasant reading if you’re a National City shareholder, but it gets worse. A few paragraphs later, Goldman Sachs tacks on a sentence to one of its standard disclaimer paragraphs that makes sure nobody misses what National City’s dire condition and the unique circumstances confronting it are likely to mean from PNC’s perspective:

We do not express any opinion as to the value of any asset of the Company, whether at current market prices or in the future. We note, however, that, under the ownership of a company with adequate liquidity and capital, such as Parent, the value of the Company and its subsidiaries could substantially improve, resulting in significant returns to Parent if the Transaction is consummated.”

Unfortunately, given the likelihood that survival may well be a driving force in M&A deals over the next several months at least, it’s unlikely that National City’s shareholders are going to be the last ones to receive a message like this one.

Judging the Accuracy: ABA's "2008 Strategic Buyer/Public Company Deal Point Study"

In our "Negotiation Tactics" Practice Area, we have posted the "2008 Strategic Buyer/Public Company Deal Point Study," which was recently compiled by the Market Trends Subcommittee of the ABA's Mergers and Acquisitions Committee. The study tests deal points found in agreements involving public company targets entered into during 2007 with transaction values in excess of $100 million - and
compares those deal points to the Subcommittee's previous studies of agreements in 2004 and 2005/2006. Some of the new deal points evaluated in the Study includes "go-shops" in strategic deals, specific performance clauses and buyer match rights.

As noted by Keith Flaum's entry on Harvard Law School's Corporate Governance Blog:

Among the many interesting findings of the Study is that 48% of the acquisition agreements in the Study sample contained a non-reliance clause—a clause to the effect that the target is not making, and the buyer is not relying on, any representations regarding the target’s business except for the specific representations expressly provided in the acquisition agreement. By comparison, only 18% of the acquisition agreements for deals announced in 2005 and 2006 included a non-reliance clause.

So why the significant increase? One possible explanation might be found in the February 2006 decision of the Delaware Court of Chancery in ABRY Partners, and the extensive discussion of that case by leading M&A practitioners throughout the country. In ABRY Partners, Vice Chancellor Strine underscored the effectiveness of a non-reliance clause in limiting a buyer’s fraud-based remedies in the context of an acquisition of a privately-held company.

Even though ABRY Partners involved a privately-held target, the extensive discussion that followed also focused on the potential usefulness of non-reliance clauses in deals involving publicly-traded target companies. Then, in late 2007, the Tennessee Chancery Court decided Genesco, Inc. v The Finish Line, Inc. In that case, a non-reliance clause in the merger agreement was viewed by the Court as an important element in its determination that Finish Line failed to prove that the publicly traded target company, Genesco, fraudulently induced Finish Line to enter into the merger agreement.

My colleague, Rick Climan, former Chair of the Committee on Mergers & Acquisitions, who acted as special advisor on the Deal Points Studies, points out that some of the targets involved in the 52% of the acquisition agreements in the Study sample that did not include a non-reliance clause may nonetheless have enjoyed the protection afforded by a non-reliance clause, in those cases where such a clause was included in the confidentiality agreement between the buyer and the target. In fact, in Genesco, the Court pointed to non-reliance clauses in both the confidentiality agreement and the merger agreement to support its decision.

I've also wondered if practitioners placed much stock in the ABA's popular deal studies. Here is a poll to see what you think:

Upheld: JP Morgan's Purchase of Bear Stearns

Last week, Justice Cahn of the New York State Supreme Court - in In Re: Bear Stearns Litigation - granted summary judgment in dismissing a shareholder challenge to the fairness of JPMorgan’s purchase of Bear Stearns. The decision represents a strong endorsement of the protections that the business judgment rule. In our "M&A Litigation" Portal, we have posted the order denying the motion.

In addition to memos about this decision in our "Fiduciary Duties" Practice Area, you can read analysis in the "D&O Diary" Blog - as well as the Harvard Law School's "Corporate Governance" Blog.

Corp Fin Issues New Written Consent CDI

Recently, Corp Fin issued a new set of "'33 Act Compliance and Disclosure Interpretations." Question 239.13 addresses the application of the '33 Act to written consents by a target company’s shareholders approving a merger or other business combination transaction in which the acquiring company intends to register the transaction securities with the SEC.

In the new CDI, the Staff stated that the approval of such a transaction by written consent in lieu of a meeting of the target company’s shareholders involves a private offering of the acquiror’s securities that will preclude the acquiror from later registering an offering of the securities on Form S-4. Here is a memo from our "Written Consents" Practice Area that discusses the Staff's interpretive position and its application to stock merger transactions.

Corp Fin Issues Compliance Guide for New Cross-Border Rules

Last week, Corp Fin posted a "Compliance Guide" covering the new rules on cross-border business combinations, exchange offers and rights offering, which are effective today.

Despite the “Small Entity” title, the Guide provides a helpful short summary of the new rules that can be used by all companies. The Guide also highlights the rule changes that apply to domestic transactions, including the expanded availability of early commencement to all registered exchange offers, and the elimination of the old 20-day limit on subsequent offering periods for tender offers.

We’ve posted a number of memos on the new rules in our "Cross-Border Deals" Practice Area - and tune in next month to hear the SEC Staffer who wrote the rules (and other experts) in our webcast: "Implementing the New Cross-Border Rules."

Antitrust: Government Sues For Divestiture in $76 Million Deal

Recently, the Federal Trade Commission sought to unwind an M&A transaction completed more than six months ago that was not subject to HSR notification requirements. This is the latest in a string of antitrust challenges to consummated transactions. As recently as 2006, the FTC challenged the Hologic/Fischer transaction, which resulted in the near complete divestiture of the acquired business. Learn more from some memos in our "Antitrust" Practice Area.

Issuing FDIC-Guaranteed Debt under the TLGP

About ten days ago, the FDIC issued its Final Rule regarding its Temporary Liquidity Guarantee Program (known as "TLGP"), which includes the debt guarantee program under which the FDIC is guaranteeing the unsecured senior debt of eligible entities. The TLGP is an opt-out program with an opt-out deadline of December 5th.

In connection with the FDIC's final rule, Corp Fin has issued an interpretive letter clarifying that offerings of TLGP-guaranteed debt don't need to be registered under the '33 Act (since the guaranteed debt will be exempt under Section 3(a)(2)).

The first offerings of debt guaranteed under the program have already been launched - and it has been estimated that as much as $300 billion of debt may ultimately be issued under the TLGP. To help you prepare for this wave, we have just announced a new webcast for TheCorporateCounsel.net members - "How to Issue FDIC-Guaranteed Debt under the TLGP" - to be held on December 17th. With all the big issues being hashed out right now, our panel of Wall Street lawyers will be able to give you the latest developments. This is a "biggie."

If you're not a member of TheCorporateCounsel.net, try a '09 no-risk trial to access this webcast for free. If you are a member, please renew your membership today since all memberships are on a calendar-year basis.

FDIC Allows Non-Banks to Bid for Troubled Institutions

Last week, the FDIC announced a modified bidder qualification process that allows non-banks to bid on failed financial institutions. This new process is important given that the number of failed banks is likely to skyrocket, as noted recently in the "D&O Diary" Blog. We have posted memos on this development in our "Bank M&A" Practice Area.

OCC Announces Conditional Approval of First National Bank “Shelf Charter”

From Latham & Watkins: Recently, the Office of the Comptroller of the Currency announced the conditional approval of the first National Bank "shelf charter." This first shelf charter was conditionally approved for Ford Group Bank, National Association. Significantly, the Ford Group Bank application apparently stated that the business plan was to acquire assets and assume liabilities from the FDIC acting as Receiver of a depository institution. The investors behind this application were well known to the bank regulators and experienced in acquiring assets and deposits from the FDIC as well as in operating banks. In this specific first example, the approval noted that the bank will have to apply for membership in the Federal Reserve and that certain of the owners would have to apply to the Federal Reserve System to become bank holding companies.

In effect, the shelf charter creates a new, optional, two-step process for obtaining national bank charters in certain circumstances.­­

1. Apply for a national bank charter and develop a business plan detailing a) the management; b) sources and amount of capital to be committed to the ultimate bank; and c) how the bank is to be operated and what its business is to be. Successful applications will receive preliminary approval from the OCC to charter a national bank. Once approved for such a charter, the charter remains "on the shelf" for 18 months from the date of approval.

2. Become a bidder for purchasing the assets and assuming the liabilities of a bank in FDIC Receivership. If that bid is successful, the shelf charter holders must return to the OCC with the details of the "bank" or assets and liabilities it is acquiring from the FDIC, comply with all the pre-opening requirements of the OCC, and execute a written Operating Agreement with the OCC. The OCC also will require the bank to submit a Comprehensive Business Plan. Written non-objection to the Plan will be essential to the receipt of final approval.

The OCC announced that it believes the shelf charter option will make it easier for investors to bid for and acquire troubled institutions or to purchase assets and assume deposits from the FDIC as Receiver by permitting them to be included in lists of bidders able to review such proposed transactions. With this new approach, the OCC has signaled a willingness to encourage the chartering of shelf institutions which can be used to take advantage of such opportunities.

House Bill Seeks to Prospectively Reverse IRS' Controversial Section 382 Notice

Last week, as noted in this memo, Representative Lloyd Doggett (D-Tex.) introduced a bill which would prospectively reverse controversial Internal Revenue Service Notice 2008-83. As noted in this blog, Notice 2008-83 provides that losses for loans or bad debt deductions recognized by U.S. banks and thrifts after an “ownership change” are not subject to the limitations in Section 382 of the Internal Revenue Code.

The Bill affirms that taxpayers may continue to rely on the notice for transactions completed (i) on or after the date of the issuance of the notice (i.e., September 30th) - but prior to the effective date of the Bill or (ii) pursuant to a binding written contract entered into during that same period.

CFIUS Issues Final Regulations

From Linda DeMelis: Last week, the Department of the Treasury's Committee on Foreign Investment in the United States (known as “CFIUS”) issued final regulations governing national security reviews of foreign investments in US companies. The new regulations – issued to implement amendments adopted by the "Foreign Investment and National Security Act of 2007" – largely track the proposed regulations issued in April - and are the most significant changes to the CFIUS rules since their adoption in ‘91.

The new rules encourage parties to consult with CFIUS in advance of filing formal notification (an existing CFIUS “best practice”). Significantly, the new rules do not define “national security,” or what constitutes “control” by a foreign investor; nor do they provide special rules for sovereign wealth funds. CFIUS retains the flexibility to review each transaction on a case-by-case basis.

We have posted memos analyzing the new regulations on our "National Security Considerations" Practice Area.

November-December Issue: Deal Lawyers Print Newsletter

This November-December issue of the Deal Lawyers print newsletter was just sent to the printer and includes articles on:

- Responding to Liquidity/Capital Constraints: The Joint Venture Decision Tree
- Breaking Up is Hard to Do - and Must Be Done Carefully
- Lessons from the Meltdown: Reverse Termination Fees
- Getting Engaged: When Hiring an M&A Financial Advisor, It’s All About the Contract
- Leveraging a Dealroom: A “How To” Guide
- Expanded Liability for Representations and Warranties: Limiting Survival Provisions
- Liquidity Facilities: The SEC Moves Towards Less Tender Offer Regulation

As all subscriptions are on a calendar-year basis, please renew now to receive the next issue. If you're not yet a subscriber, try a 2009 no-risk trial to get a non-blurred version of this issue (and the rest of '08) for free.

California Love

- by John Jenkins, Calfee, Halter & Griswold LLP

Looking for a sophisticated discussion of Delaware law concerning the effect of shareholder ratification on breach of fiduciary duty claims? How about an in-depth analysis of the current state of Delaware law on disclosure of management projections in a merger proxy statement?

If so, then head to California.

Last Monday, the California Court of Appeal rendered its decision in Greenspan v. Intermix Media, No. B196434 (Nov. 10 2008), the latest chapter in ongoing litigation between Bruce Greenspan, the former CEO of Intermix Media, who oversaw the development of MySpace.com, and News Corp., which acquired Intermix in 2005. Mr. Greenspan and the other plaintiffs in the case brought a variety of fiduciary duty and tort claims in connection with News Corp.’s acquisition of Intermix. These claims generally arose out of alleged conflicts of interest among members of the Intermix board and flaws in the sale process that the plaintiffs contended violated the Intermix board’s fiduciary obligations under Delaware law.

The trial court ruled that the shareholders’ ratification of the transaction “vitiated the breach of fiduciary duty claims because there had been adequate disclosure of all material facts.” The Court of Appeal affirmed that ruling. More importantly for M&A lawyers, the court also provided a remarkably cogent discussion of the evolution and scope of Delaware’s shareholder ratification doctrine, as well as an equally impressive analysis and application of the Delaware courts’ take on some of the thorniest disclosure issues confronting M&A practitioners, including disclosure of management’s internal financial projections.

So many of Delaware’s doctrines evolve over time that it is sometimes difficult to piece them all together. Every now and again, it’s nice to see everything laid out in one spot, and the Court of Appeal did an impressive job of doing that in the Intermix case.

Delaware Chancery Rules in Merrill Lynch vs. BofA

Last week, Francis Pileggi covered a recent Delaware Chancery Court decision regarding the merger of Merrill Lynch and Bank of America in his "Corporate & Commercial Litigation" Blog:

In County of York Employees Retirement Plan v. Merrill Lynch & Co., Inc., et al., (Del. Ch., Oct. 28, 2008), this 39-page Chancery Court decision addressed in a cursory but scholarly manner, several preliminary issues related to the recently announced merger of Merrill Lynch and Bank of America.

The opinion is a treasure trove of Delaware corporate law principles and practical corporate litigation tools that directly address the Delaware legal issues that have arisen in connection with the recent economic crisis of historic proportions. One indication of the seismic shifts we are witnessing is the comparatively large "two-inch high headlines" recently seen on the front page of The Wall Street Journal as formerly unthinkable "fire-sales" have been negotiated on more than one occasion "over a weekend" for blue chip companies that were formerly the 800-pound gorillas of industry (e.g., Merrill Lynch).

I am hoping that some of the corporate law professors who have their own blogs will add their scholarly analysis to this case, but for now I only have time to identify a few highlights. The court cursorily reviewed the following claims that were made about the transaction:

- self-interested directors (not a majority)
- duty of care
- deal protection claims
- irreparable harm (in connection with request for expedited proceedings)
- disclosure claims
- financial advisor compensation (and disclosure of same)
- chairman's compensation package (and disclosure of same)

In this preliminary overview of certain issues, the court denied a motion to stay this Delaware case in favor of a related federal case in New York, and Chancery also granted expedited proceedings in this case (and explained why it did so).

The court addressed the criteria that will be applied to decide when an amended complaint will relate back to the date of the original complaint for purposes of determining if it was the "first-filed" complaint compared to a similar suit in another forum. In Delaware, this is known as a "McWane analysis", after the Delaware Supreme Court decision of that name. In this regard, the court noted that if it is a "close call", such as when two suits are filed within a day or so of each other, they may be considered as filed contemporaneously. When that occurs, the court observed as follows:

Under the McWane analysis, a court, in the exercise of its discretion, may stay an action “when there is a prior action pending elsewhere, in a court capable of doing prompt and complete justice, involving the same parties and the same issues.” If the foreign action is not “first-filed,” the Court will pursue an inquiry “akin to a forum non conveniens analysis.”

A Quiet Windfall for US Banks

Last week, the Washington Post ran this front-page article entitled "A Quiet Windfall for US Banks." The article discussed Notice 2008-83 that the IRS issued back on September 30th. This Notice allows more effective use of unrealized losses in loans held by a bank following a change in ownership of the bank. Specifically, the Notice effectively suspends certain limitations that otherwise would apply under Section 382 of the Code. The Notice is not limited to government takeovers but also applies to changes in ownership arising from private investments.

As the article notes, this is groundbreaking - and surprising - stuff as the Notice may be significant not only in evaluating bank acquisitions but also in determining the consequences of new issuances of stock, either alone or when combined with other shifts in ownership. We have posted memos on this development in our "Tax" Practice Area.

Fundamentals of Investing in Public Companies

Tune in Wednesday for this DealLawyers.com half-day video webconference: “Fundamentals of Investing in Public Companies.” Thanks to Kirkland & Ellis, we are providing this conference to DealLawyers.com members so that they can learn the basics – as well as some advanced – practice pointers about investing in public companies.

Kirkland spends a lot of time preparing for this conference and it's a "high value" proposition. You’ll want to print the slides/course materials for each panel before you watch.

Act Now: Try a no-risk trial for 2009 and get access to DealLawyers.com for the “rest of ‘08” at no charge. Or since all memberships are on a calendar-year basis, renew for '09 today.

The Wachovia Shareholder Suit

- by John Jenkins, Calfee, Halter & Griswold LLP

There is some interesting shareholder litigation in North Carolina’s Superior Court over Wells Fargo’s pending acquisition of Wachovia Corporation. In Ehrenhaus v. Baker, 2008 WL 4787584 (N.C. Super. 2008), the plaintiff alleges that the Wachovia directors breached their fiduciary duties by entering into a merger agreement that did not contain an adequate fiduciary out clause, and by entering a lock-up agreement involving the issuance to Wells Fargo of shares representing almost 40% of the corporation’s voting power.

The plaintiff contends, among other things, that the merger agreement’s “fiduciary out” clause was inadequate because it merely permitted the board to change its recommendation, and did not give the board the right to terminate the merger agreement and accept a superior proposal. In addition, the plaintiff alleges that the share exchange agreement under which Wells Fargo obtained preferred stock representing approximately 39.9% of Wachovia’s voting power was a “draconian and unlawful” deal protection that rendered the shareholder vote on the merger essentially meaningless.

This is a fact pattern that the Delaware courts have dealt with quite extensively over the past decade. A series of cases beginning in 1999 culminated in the Delaware Supreme Court’s controversial decision in Omnicare v. NCS Healthcare, 818 A.2d 914 (Del. 2003). In that case, the court held that voting agreements covering shares representing a majority of the total voting power of the corporation were impermissible when combined with a merger agreement provisions that did not permit the target’s board to terminate the deal and accept a superior proposal. Unlike Omnicare, Wells Fargo’s stake in Wachovia is not sufficient to guarantee approval of the merger absent an effective fiduciary out, it is certainly large enough to raise concerns about its potentially preclusive effect. See, for example, ACE Limited v. Capital Re, C.A. No. 17488 (Del. Ch. Oct. 25, 1999).

However, Delaware’s deal protection cases may ultimately prove to be of little relevance to the resolution of this case. That’s because, as Professor Steven Davidoff noted in a recent blog entry, the standard of review for deal protections in North Carolina appears to be very different - and much more director friendly - than the Unocal standard that applies in Delaware.

While Unocal places the burden on the board to establish that a defensive measure is reasonable and proportionate, North Carolina precedent suggests that the burden remains on the plaintiff to rebut the business judgment rule, and that “the court should not intervene unless the shareholder can rebut that presumption by clear and convincing evidence that the deal protection provisions were actionably coercive, or that the deal protection provisions prevented the directors from performing their statutory duties.” First Union Corp. v. SunTrust Bank (N.C. Super. 2001).

In ruling on the plaintiff’s motions for expedited discovery and expedited resolution of his motion for a preliminary injunction against the transaction, the court acknowledged that the plaintiff has alleged colorable claims concerning possible breaches of fiduciary duties. However, at the same time, the court noted that the plaintiff “may well be unable to overcome the high hurdle imposed upon him here by the business judgment rule.” In support of that statement, the court noted the board’s assertion that it needed to act quickly in order to avoid a liquidation of the company by its regulators, as well as the absence of a competing bid.

The court granted plaintiff’s request to rule on its motion on an expedited basis, and established a hearing date of November 24, 2008. It will be interesting to see how the court grapples with these issues in an analytical framework that employs a business judgment rule approach instead of Unocal.

NJ Court Applying Delaware Law Denies Motion for Preliminary Injunction

On October 28th, the Superior Court of New Jersey - in In re: Datascope Shareholders Litigation - denied plaintiffs motion to preliminarily enjoin the closing of a first step tender offer pending, among other things, corrective disclosure in a Schedule 14D-9. We have posted the decision in our "M&A Litigation" Portal.

Plaintiffs alleged that Datascope's 14D-9 was materially misleading because, among other things, it failed to fully and fairly disclose:

- Datascope's management's financial projections;

- The calculations used by Datascope's financial advisor to compare the proposed transaction to other deals and to compare Datascope's value to that of other companies; and

- The extent of Datascope's financial advisor's fee conflict.

Defendants noted that the price being offered was an all-time high for Datascope stock and that since the June 4th announcement of the transaction, the stock market had plummeted and credit availability had diminished - thus, absent the presence of a competing/topping bid, the imposition of a preliminary injunction posed greater threat of irreparable harm to shareholders.

Defendants also asserted that plaintiffs failed to demonstrate a probability of success on the merits because the auction process was exemplary and the diligence and loyalty of the directors had not been called into question. Among other things, the defendants noted the reluctance of Delaware courts to enjoin a cash merger offering a premium in the absence of a competing bid.

Under the circumstances presented, the Court agreed: "Also, considering the current economic crisis the Court is naturally hesitant to preliminarily enjoin a tender offer at a such a premium price. It is not without precedent that a court takes into account the current economic climate in making its decision, as the Delaware Chancery court recently declined to preliminarily enjoin a merger, considering the "decidedly unstable market.'" [citing Wayne County Employees" Ret. Sys. v. Corti (Del. Ch. 2008)].

1. With regard to defendants' failure to disclose management's projections, the Court followed CheckFree rather than Netsmart, distinguishing Netsmart on the basis that the Netsmart proxy disclosed an early version of management's projections while in Datascope "the topic of projections was never "broached" [in the Schedule 14D-9]."

2. Similarly, with respect to the disclosure regarding the analyses of Datascope's financial advisor, the court was equally skeptical.

Among other things, the Court noted that: "The discussion of [the financial advisor]'s opinion (pages 12 to 18) consumes seven pages [of the 14D-9] and, among other things, summarizes each of the five lines of analysis undertaken by the investment bank." Then the Court concluded that "the law is unsettled on [the board's duty to disclose its financial advisor's "black box" calculations]. . . . Accordingly, the Plaintiffs have failed to clearly and convincingly demonstrate a likelihood of success on the merits as to this aspect of their claim."

Finally, with respect to Plaintiffs' claim that the board violated its duty of disclosure by failing to disclose the amount of fees payable to its financial advisor contingent upon the consummation of the transaction, the Court noted that the 14D-9 disclosed the aggregate amount of the fees payable to the financial advisor [$6.9 million] and that a substantial portion of the fee was contingent upon completion of the proposed transaction. The Court found that such disclosure was adequate to inform shareholders of any attendant bias a shareholder might elect to infer.

Note that Schedule 14D-9 does not require long form disclosure of the analyses underlying a fairness opinion" and, despite the Delaware Chancery Court's decision in Pure Resources, it is highly debatable that Delaware law (as held by the Delaware Supreme Court in Skeen) requires such disclosure.

A New Chapter in the CSX Dispute

As noted in this WSJ article, a Section 16(b) claim has been filed against the two hedge funds that were locked in a dispute with CSX Corp. earlier this year. A CSX shareholder has filed suit against The Children’s Investment Fund Management and 3G Capital Partners, seeking to recover (on behalf of CSX and its shareholders) alleged short swing profits arising from the funds’ transactions in CSX securities and derivatives. This could be a very interesting case, as was the earlier litigation, which focused attention on the funds’ use of derivatives in the contest for control of CSX. In his Section16.net Blog, Alan Dye provides further thoughts on this development.