November 19, 2013
Snapchat, call back Mark Zuckerberg. Now.
Posted by Usha Rodrigues

Readers, you know I'm not technologically savvy.  The first I heard of Snapchat was last week when its 23-year old founder Evan Spiegel rejected a Facebook acquisition offer of almost $3 billionSnapchat, for you old fogeys out there, allows users to send messages and pictures that disappear after a few minutes.  I can see the use in that.  Of course, the company has no revenue as of yet.  Then came word of a "snapchat sexting scandal."  Ah, I thought, some clever computer programmer has found away around the self-destruct feature. 

Then I read on.

Montreal police arrested 10 teenage boys Thursday on child-porn charges for passing around pictures of girls ages 13 to 15 in sexual poses or performing sexual acts. The boys allegedly coaxed their female friends into posing for the pictures and sending them using SnapChat.

The girls thought the pictures would vanish within seconds. Instead, the boys found ways to get around the time limit. Those can include taking screen shots of the phone, finding hidden files on the device or taking a picture of the phone with another phone.

That's right.  Screen shots, or plain old taking a picture of the screen.

So let's get this straight.  No revenue.  Supposedly transitory feature easily evaded even by the likes of me.  No-revenue or low-revenue businesses getting sky-high valuations (I'm looking at you, Pinterest).  It's beginning to look a lot like 1999. 

If I was Evan Speigel's mom, I'd be smacking him upside the head right about now.

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September 11, 2013
Of Boards and Special Committees
Posted by Usha Rodrigues

Today's WSJ brings news of behind-the-scenes drama at the Dish Network, and it sounds way fishy to me.  Dish's founder and controlling stockholder, Charlie Ergen, bought up the debt of competitor LightSquared on the cheap while the company was in bankruptcy.  Then Dish cast its acquisitive eye on LightSquared.  Prudently, it formed a special committee consisting of Stephen Goodbarn and Gary Howard, two of Dish's independent directors, because of the conflict of interest the situation posed.  A Dish bid could net Ergen millions, after all.  (The WSJ describes these 2 as the only independent directors out of the 8 member board, but that seems unlikely, given that the audit committee is required to be composed of 3 independents.  The company's last proxy lists Tom A. Ortolf as the last audit committee member; presumably he is independent). Then things get interesting...

So here's the basic timeline:  Ergen buys up LightSquared debt (unclear when).  In July, a special committee consisting of Goodbarn and Howard is formed to consider a Dish bid for LightSquared. The special committee recommends a bid. But the members "expected the committee to have an ongoing role in the deal discussions." July 21, in a surprise move, the board disbands the committee.  July 23, Dish bids $2.2 billion for LightSquared.  July 25, independent director (and late special committee member) Howard resigns, without citing any specific reason for his departure.

What's left out of this account is what else was going on at Dish at the time.  In June the company was fighting with Sprint to acquire Clearwire, and bowed out June 26th.  And in June Dish also gave up on a bid for Sprint to SoftBank.

So, to review, Dish gives up on two major acquisitions in June. The next month it decides to buy a company Ergen owns a significant interest in. The acquisitions are of vastly different orders of magnitude, admittedly, but one possible inference is that Ergen wanted to have cash on hand to buy out a company that would enrich him personally.  These negative inferences are just why it is wise to employ a special committee in these types of negotiations.

So why disband the special committee so quickly?  One of the WSJ's sources explains "Mr Ergen stood to profit even if another company ended up buying LightSquared, which meant he wasn't motivated to force a Dish bid for personal gain."  Um, yeah, that doesn't make any sense at all.  There's no evidence that there were or are other companies sniffing around LightSquared, or at least willing to pay this much, so Ergen's motive for forcing a bid seems pretty potent.  Even if the only effect of the Dish bid is to scare up a competing, higher bid, that's still good for Ergen.   Particularly in light of the June happenings, these events just seem questionable.

Situations like these highlight how important the role of the board is and should be in conflict situations.  The board shouldn't have the power to dissolve a committee; indeed, the role of the whole board should be to focus on these conflict-of-interest type situations.

 

 

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May 29, 2013
The National Security Okay For The Softbank Sprint Merger
Posted by David Zaring

One of the growth areas in DC firm practice has been representation before CFIUS, a committee of agencies with the power to undo every purchase anyone with an arguably foreign interest could make of an American asset.

Only that's not really what CFIUS does.  I've argued that what it actually does is to require companies to enter into ministerial, cut-and-paste consent decrees, and to serve as a notification service for Congress, so that the legislature can have one of its periodic freakouts when the wrong sort of foreign company buys an American one.  So although some Washington lawyers would like to sell their CFIUS expertise as a target corporation's last takeover defence, I'm unconvinced that national security review poses quite such a threat; what you really want is someone who can get Chuck Schumer's attention.  Which is precisely what the jilted party in the bidding for Sprint has done. 

However, just as antitrust review can require expensive divestment, national security reviews can make acquisitions more costly:

To address the matter of Chinese equipment, SoftBank and Sprint, as part of earlier concessions, pledged to remove Huawei equipment from Clearwire’s network. the task will cost about $1 billion, according to a person briefed on the matter. They also agreed to give the government a say over non-American vendors used by Sprint.

$1 billion isn't nothing, but China is, increasingly, everything to CFIUS, the country that prods action even when it is a Japanese company that is doing the buying of the American one.

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January 02, 2013
Zipcar to Avis
Posted by Gordon Smith

Avis is buying Zipcar for $500 million. That's a hefty premium over Zipcar's current stock price, but a hefty discount on the 2011 IPO price for Zipcar. Way back in 2003, when I first heard about Zipcar, I wrote: "this does not look like it has the potential to be a big business, and it will not survive as a small business." It took 10 years to play out, but I was right.

Now the question turns to this: is car-sharing a viable business for the large car rental companies? While car sharing has a constituency -- "we live in a Zipcar world right now" -- it's still small. The hoped-for synergy in this alliance is that Zipcar and Avis have different usage cycles

Zipcar utilization is low during weekdays but spikes during weekends, resulting in excess fleet vehicles during the week that often aren't used. Avis, meanwhile, has utilization that peaks during the midweek commercial-travel period and has excess capacity on the weekends.

That makes sense, and Avis investors are applauding.

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December 18, 2012
New Techniques In Merger Thwarting: The CFIUS Move
Posted by David Zaring

Appeals to Washington have been a part of takeover defense and merger thwarting for some time, but it used to be that antitrust was the principal vehicle for the complaint.  As I've written, there's a lot of effort to turn national security into another component of that appeal, though it is hard to get CFIUS, the committee that reviews foreign acquisitions, to bite (it is much easier in Canada, which reviews foreign acquisitions of Canadian assets on a broader set of appropriateness metrics).  There's now a full DC bar that can advise you on either side of this process, and they aren't afraid to be very clear about the services they are offering.  We'll outsource the rest to the Blog of The Legal Times:

With a Chinese company moving closer to acquiring most of a bankrupt U.S. battery maker for $256.6 million, a Milwaukee-based auto parts manufacturer that bid for the firm has hired a team of Washington lobbyists from Wiley Rein as part of an effort to thwart the deal.

Johnson Controls Inc. has enlisted Wiley Rein public policy consultant Scott Weaver and former Representative Jim Slattery (D-Kan.), a partner who leads the firm's public policy practice, to educate members of Congress about how the sale of A123 Systems Inc. to Chinese auto parts maker Wanxiang America Inc. would impact U.S. Defense Department contracts, according to lobbying registration paperwork filed with Congress on Friday. Slattery said he's made contacts with congressional offices about the proposed transaction.

"There's concern" on Capitol Hill about the A123 deal, he said.

Although Navitas Systems LLC, based in Woodbridge, Ill., would receive A123's U.S. military contracts for $2.3 million, Republican Senators Chuck Grassley of Iowa and John Thune of South Dakota have been vocal about the potential national security implications related to Wanxiang purchasing a company that has technology used by the Defense Department, and is the recipient of about $250 million in government stimulus grants intended to bolster lithium-ion battery manufacturing.

"While we welcome foreign investment in the United States, we must ensure that national security and taxpayer interests are appropriately addressed," the senators wrote in a November 1 letter to U.S. Treasury Secretary Timothy Geithner.

The deal, which the U.S. Bankruptcy Court for the District of Delaware endorsed on December 11, must also secure the approval of the Committee on Foreign Investment in the United States, which Geithner heads.

Dave Vieau, Chief Executive Officer of A123, said in a written statement after the court's decision that his company is "confident" the Committee on Foreign Investment in the United States will back their plan to sell their assets.

"We believe an acquisition by Wanxiang will provide A123 with the financial support necessary to strengthen our competitive position in the global vehicle electrification, grid energy storage and other markets, and we look forward to completing the sale," Vieau said.

Wanxiang and A123 don't have lobbyists registered to advocate for them, according to congressional records.

But Johnson Controls spent $266,500 on federal lobbying during the first three quarters of this year. For its government affairs work, the company used its own staffers, as well as lobbyists from Dutko Worldwide.

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October 11, 2012
SPACs: The Finance Article (Part 3, Acquisitions)
Posted by Usha Rodrigues

Even the Glom faithful may well have forgotten, but way back in August I promised a 3-part series on SPACs, the fruits of a recent article I co-authored with Mike Stegemoller.  The first post focused on IPO underpricing, and the second on the underwriting discount.  With this post, I'll conclude by shifting to the second phase of a SPAC's lifecycle: the acquisition.

Once the SPAC is up and running, it has a limited amount of time to identify a target and negotiate a deal.  Once that's done, the SPAC announces the proposed acquisition to the market, and SPAC shareholders have a chance to veto the deal or (as the form evolved) exit if they disapprove of the acquisition. 

The finance  literature has focused much attention on the effect of an acquisition announcement on the acquiror's stock, generally trying to answer the question whether acquisitions are positive for the acquiring firm's shareholders or represent something deleterious, like costly empire building.

Generally in an acquisition, where a typical firm buys another typical firm, there's a lot going on that is embedded in the market's reaction to the acquisition announcement.  For example, the change in the acquiring firm's stock price may contain information about overpayment because of hubris (driving the stock price down).  In addition, and pushing in the opposite direction, stock price returns could reflect synergies that make the deal worth doing, even if in the presence of some overbidding.  Further, the synergy value is hard to quantify, as is the question of how much of the synergy value is split between the target and the acquiror. 

Enter the SPAC.  An empty shell, it offers no synergy value to a target.  Empire building should not drive the managers, many of whom will be replaced if and when the deal goes through.  Even if some of the SPAC managers suffer from hubris, the shareholder voice on the ultimate acquisition serves as a corrective.  Given the reduction in potential managerial agency costs, we hypothesized that SPACs overbid for targets less than typical firms.  Thus, if acquirer returns for SPACs are higher than those of traditional acquirers, that finding tells us something about mispricing in typical acquisitions: they tend to contain detrimental components that reduce the value to acquiring shareholders, even given the potential for synergies. 

Our results: SPACs acquirers experience higher returns than traditional acquirors in a time and industry matched sample.  Which suggests that in typical acquisitions, even if there are gains to be had from synergies between the firms, there are also losses that may outweigh those gains. In other words, we offer new evidence that traditional acquirors tend to overbid. 

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May 10, 2011
Skype's New Exit Strategy: Acquisition by Microsoft
Posted by Christine Hurt

Just yesterday I wrote about upcoming technology IPOs and mentioned that Skype's August 2010 registration statement was getting a little stale.  But as of a month or so ago, folks were still waiting for Skype's upcoming IPO.  What a difference a day makes!  Microsoft announced today that it will acquire Skype for $8.5 billion in cash.

So, what factors would delay the Skype IPO but not scare off Microsoft?  Well, Skype could have been waiting for an upturn in the IPO market.  An acquirer would not necessarily care about that and might think they could get a bargain if venture capital wanted a now-ish exit.  But the IPO market seems to be not so cold right now.  And Microsoft doesn't seem to be getting a bargain.  Earlier reports thought Skype would try to get a valuation at IPO of $6-7 billion.  (Pretty good for a company with no clear record of profits.)  $8.5 billion is more.  Can Microsoft add value to the assets it is acquiring?

What about management?  Skype changed CEOs last Fall.  Perhaps management issues were scaring away the IPO smart money.  An acquisition takes care of management issues.  But, all of this is armchair blogging about an interesting development in social networking!

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April 12, 2011
Could NASDAQ and NYSE Really Merge?
Posted by Christine Hurt

So, we've already blogged about the NYSE announcing two months ago a proposed merger with Deutsche Börse's (Usha's post, my post).  But, there is now a wrinkle.  NASDAQ, together with Intercontinental Exchange, has made an unsolicited offer to acquire NYSE Euronext for 16% more than Deutsche Börse's offer.  This NASDAQ offer, however, was rejected by the NYSE boardHere is NYSE Euronext's press release reaffirming the Deutsche Börse acquisition and rejecting what it calls the proposal "to break up" the company.  I'm hoping for a hostile tender offer, but I'm just funny that way.

So, why did the NYSE reject?  Well, it's pretty far down the road with Deutsche Börse and has already invested a lot in that transaction.   The "Business Combination Agreement" has a No-Shop clause, but it allows NYSE Euronext to negotiate after an unsolicited bona fide acquisition offer if it believes it to be a "superior offer."  The reasons offered by the Board, however, are that the proposed combination is not a superior offer because it would face antitrust regulatory hurdles and would be too highly leveraged. 

Breaking up NYSE Euronext, burdening the pieces with high levels of debt, and destroying its invaluable human capital, would be a strategic mistake in terms of where the global markets are going, and is clearly not in the best interests of our shareholders. The highly conditional break-up proposal from Nasdaq/ICE would also require shareholders to shoulder unacceptable execution risk.
As the article points out, these objections are not ones that are easily remedied by, for example, NASDAQ raising its bid.

So, why now?  In two weeks, NYSE shareholders have their annual meeting, where they will vote for directors and also have the ability to vote on a proposal giving 10% of the shareholder vote the right to call a special shareholder meeting.  Alienating the shareholders on the eve of that meeting may not be in the directors' best interests.  And, rejecting the NASDAQ bid without even meeting with the bidder seems to have done just that.  And, remember that many big players are NYSE shareholders -- people that NASDAQ knows and can go to and chat with.  And many are also NASDAQ shareholders, so NASDAQ management is doing just that.

Fun to watch.

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March 21, 2011
AT & T Plus T-Mobile Equals Merger Guidelines Fun
Posted by Christine Hurt

So, to give you a snapshot of what experts are saying about the announcement that AT & T is buying T-Mobile USA for $39 billion, here is a conversation that took place on Saturday:

ME:    AT & T is buying T-Mobile. 

IN-HOUSE ANTITRUST EXPERT:    No, they're not.

In a nutshell, the deal will have to overcome some regulatory hurdles, including governmental approval from the DOJ/FTC under the merger guidelines.  Though most mergers have sailed through in the past decade, this would be the first chance to see whether the Obama administration will continue the Bush-era hands-off tradition or vigorously scrutinize a transaction that will result in one company having about 130 million U.S. subscribers.  (Yes, more than a third of all potential subscribers, from infants to centenarians.)  The battlefield in merger review usually focuses on identifying the market, and from there regulators decide whether the transaction will result in loss of competition in that market, how much, etc.  Here, AT & T is going to argue for a city-by-city market analysis, not a nationwide analysis, because apparently AT & T doesn't look like a future monopolist in match play. 

Normally, I like to look at the market to see whether investors think the deal will come through.  Here, AT & T is buying T-Mobile USA from Deutsche Telekom.  The parent compoany delisted from the NYSE last year, but trades its American Depositary Shares (DTEGY) on the OTCQX and its own shares in Germany and other OTC exchanges.  The ADS share price is opened up this morning, and the price for T-shares seems to be going down somewhat today.  I'm no event study expert, but I'm assuming it's hard to separate out the transaction from the volatility in the markets over Japan, Libya, etc.

Maybe AT & T should just show the FTC Verizon's ad campaign, which seems to suggest that AT & T is not a threat to anyone:

Verizonvs.att 

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February 11, 2011
Shareholder Suit in Pride/ENSCO Merger
Posted by Christine Hurt

A couple of days ago I mentioned in passing that two very large deepwater drilling companies were merging:  Houston-based Pride International and ENSCO.  Now, a shareholder suit has been filed against Pride alleging breach of fiduciary duties.  Specifically, the price ($41.60 a share, representing a premium of 21%) is too low and the process (no-shop clause, $260 million termination fee) is unfair because it ties the board's hands.  Remember, the total price tag for Pride is $7.3 billion.  So, we'll see!  (The complaint is available at plaintiff's counsel's website.)  For those of you keeping score at home, Pride did file a copy of a Shareholder's Rights Plan with the SEC on September 28, 2001, which was amended in April 2008.  I have not found a filing terminating or amending the plan since then, but it's Friday and I'm sloppy.  (ADDED:  With the merger announcement filing, Pride referenced the rights plan and amended it to not apply to ENSCO, so there you go.)

I feel very odd blogging about this because my first Houston law firm, Baker Botts, represents Pride.  In fact, Pride was one of the first client matters I worked on in 1994.  What's even more interesting, in that "wow, Houston sure is a small town" sort of way, is that the plaintiff's counsel, Ahmad, Zavitzanos & Anaipakos, was started by an attorney who left B&B in 1993.  And, there are many other ties between the firms.  Most Fridays, I'm pretty glad not to be at the law firm.  Today, I'm sort of missing out!

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February 10, 2011
The Big Board is on the Block: Frankfurt Stock Exchange Plus NYSE
Posted by Christine Hurt

The New York Stock Exchange is in advanced merger talks with Frankfurt Stock Exchange to be purchased by the FSE.  Wow!  That just feels un-American to just type that sentence.  But, apparently we're experiencing a consolidation of the industry -- London Stock Exchange and Toronto Stock Exchange have already sealed a merger deal.  Remember when the NYSE was a not-for-profit, then we all got mad because Dick Grasso made so much money as the CEO?  Well, now it's for-profit, and it's going to be owned by Europeans.  There you go.

One interesting aspect of the merger may be the future of U.S. corporate governance.  We tend to think of corporate governance as a state law issue, and more and more recently a securities law issue, but the NYSE's listing standards are the source of many corporate governance rules that don't appear anywhere in the state statutes.  These listing standards are even sometimes a step ahead of the SEC as well, which then catches up to them with their own rulemaking.  (e.g., NYSE's one-share-one-vote rule, which led to 19c-4 debacle; NYSE's requirement of independent directors on compensation committees, adopted under Dodd-Frank).  From what I read from the comparative corporate law scholars, corporate governance rules and norms are a little different in Germany than in the U.S.  Will these governance rules make their way into the NYSE listing standards?

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January 04, 2011
The 2010 Deal League Tables
Posted by David Zaring

Are below, if you haven't seen them, and the discussion is here.

 

20110104_dealbook_FINADVISERS_table-articleLarge

And here is the legal adviser table:

20110104_dealbook_LEGALADVISERS_table-articleLarge

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November 04, 2010
The Death of BHP-Potash and the Rise of Go-To-The-Government Poison Pills
Posted by David Zaring

The industry minister of Canada, invoking its Investment Canada Act, just scotched the Australian bid for Potash, which was, for a brief pre crash period, the most valuable company in the world.  The statute requires that foreign investment in the country be a net benefit to Canada - which, though I don't know this area, seems like a statute that would come close to violating TRIPs and Canada's BITs (which usually include provisions that foreign investors must be treated the same way domestic ones are ... Canada would need to establish that it does something like "good for Canada" reviews for domestic M&A as well, I would think).

Anyway, there's few economists who think that "good for X" government reviews of M&A are actually good for anything.  But it is the bleeding edge of takeover defense.  In China, antitrust is the mechanism through which this sort of vetting is done, as Anu Bradford can tell you.  In Canada, it is the ICA.  And in the US, it is national security, which is an intensely scrutinized way to kill, say, Chinese bids for American tech and gold mine companies (the two most recent times it has been used).  Anyway, I've got an article on the American national security review process in the S.Cal.L.Rev., and if you're interested, you can have a look here.

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October 13, 2010
Liverpool As An Example of Corporate Litigation, UK Style
Posted by David Zaring

For those unfamiliar with batttles for corporate control in the UK, the efforts of the lenders to Liverpool FC to seize the company and sell it to the owners of the Red Sox has been extremely educational as well as entertaining.  That all of this is being done over the objections of the owners, including private equity slickster Tom Hicks, make it look somewhat similar to the way that insolvency litigation works here - you've got the business loaded up with debt, missed payments by the owners, and the easily victimized lenders trying to pull the trigger.  Enter the lawyers.  As is de rigeur in English football, you've also got a late, rich bid for the team by someone from Asia.  And the particular mechanism of the suit - the lenders told the board to proceed with a sale, so the owners replaced two board members with loyalists, allegedly in breach of an agreement with the lenders to leave the board alone - sounds vaguely Delaware.

Anyway, the Guardian liveblog of yesterday is absolutely worth your time, and the best place to go for this story (of course, it's the best place to go for everything soccer).  You'll find it most engaging if Liverpool is the team you've followed since you were seven, but if you haven't (and I'm sorry for you if that's not the case), you'll still enjoy it.  The video of the supporters breaking into "You'll Never Walk Alone" outside the high court once the verdict was announced brought a tear to my eye ... but then, so did the video of long-time Liverpool supporter Chris "The Lady In Red" DeBurgh.  Here's a taste of the legal analysis:

Andrew Nixon, Associate at Thomas Eggar LLP, said:

This ruling means that there will be no need for Mr Broughton and the board to bring their own declaratory proceedings seeking an Order that they are entitled to push ahead with the deal.

Hicks and Gillett do have a right to appeal the ruling against them and given the amount of cash they are set to lose on a sale to NESV, they are likely to do so. Should they decide to take that option, then there will be further delay. If an appeal is launched then RBS may extend the loan deadline. Regardless of Justice Floyd's assertion in this morning's judgment that it would be "inappropriate" to appeal it seems likely that there is still considerable mileage in this case.

Gerald Krasner, Partner at insolvency and recovery specialist Begbies Traynor and former Chairman of Leeds United Football Club (before selling to Ken Bates in 2005), said:

This morning's announcement means that the possibility of Administration is now highly unlikely and the smart money is on the deal with NESV now going through. Even though there are obviously other parties now looking to muscle in, the chances of them being able to usurp John Henry's bid are remote although, if Hicks and Gillett look to appeal against today's ruling, that will delay things somewhat.

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September 14, 2010
Poison Pill Forum: The Revival of Interco?
Posted by Gordon Smith

City Capital Associates Ltd. Partnership v. Interco Inc. 551 A.2d 787 (Del.Ch. 1988) is one of my favorite Delaware opinions. Written by Chancellor Allen in 1988, Interco was the case in which Unocal was famously labelled "the most innovative and promising case in our recent corporation law." Ironically, Interco earned a red flag in Westlaw when the Delaware Supreme Court described the case as a "narrow and rigid construction of Unocal" and "reject[ed] such approach as not in keeping with a proper Unocal analysis." See Paramount Communications, Inc. v. Time Inc., 571 A.2d 1140, 1153 (Del.,1989). Now, over 20 years after Interco's apparent demise, Steve Davidoff suggests that Delaware's recent poison pill jurisprudence may be making room for Interco again. I agree.

Though Interco is still well known among corporate lawyers as a case in which Chancellor Allen ordered the redemption of a poison pill under Unocal, the case expresses some concern about Unocal's implications:

The danger that [Unocal] poses is, of course, that courts--in exercising some element of substantive judgment--will too readily seek to assert the primacy of their own view on a question upon which reasonable, completely disinterested minds might differ. Thus, inartfully applied, the Unocal form of analysis could permit an unraveling of the well-made fabric of the business judgment rule in this important context. Accordingly, whenever, as in this case, this court is required to apply the Unocal form of review, it should do so cautiously, with a clear appreciation for the risks and special responsibility this approach entails.

In retrospect, this hand wringing seems quaint, as the Delaware courts (particularly the Delaware Supreme Court) have routinely deferred to defensive actions by target directors. Indeed, after Unitrin modified the Unocal standard in 1995, it was hard to imagine a defensive measure that would be invalidated. The Delaware Supreme Court seemed so deferential to target boards that Bob Thompson and I declared Unocal a "dead letter" in 2001, though the Court of Chancery had invalidated a "dead hand" pill and a "no hand" pill a few years earlier. Our point was simply that defensive measures had to be extreme -- "show stoppers" in the parlance of the Delaware courts -- before they would be invalidated. Anything short of that extreme -- even a pill that makes a hostile takeover substantially harder, such as the 5% pill in Selectica, Inc. v. Versata Enterprises, Inc. -- would be approved as a proportionate response to almost any cognizable threat.

Interco offered a more nuanced interpretation of Unocal than the one developed in the subsequent Delaware Supreme Court cases. According to Chancellor Allen, "in the setting of a noncoercive offer, absent unusual facts, there may come a time when a board's fiduciary duty will require it to redeem the rights and to permit the shareholders to choose." 

Note that the premise for redemption in Interco is a noncoercive offer. As Professor Davidoff observes, Vice Chancellor Strine seems to invoke the spirit of Interco in Yucaipa American Alliance Fund II, L.P. v. Riggio, decided last month, when he writes: "there is a plausible argument that a rights plan could be considered preclusive, based on an examination of real world market considerations, when a bidder who makes an all shares, structurally non-coercive offer has: (1) won a proxy contest for a third of the seats of a classified board; (2) is not able to proceed with its tender offer for another year because the incumbent board majority will not redeem the rights as to the offer; and (3) is required to take all the various economic risks that would come with maintaining the bid for another year."

The bigger point that I would like to make in this post, however, is that Interco was animated by a sophisticated analysis of the threat prong under Unocal. Where the threat is relatively mild (e.g., "in the setting of a noncoercive offer"), the response should be accordingly muted. The Court of Chancery has been more attentive to this sort of analysis in recent years, and all three recent poison pill cases have something interesting to say on this issue.

  • In Selectica the target board of directors was attempting to "prevent the inadvertent fortfeiture of potentially valuable assets, not to proteact against hostile takeover attempts." Vice Chancellor Noble reasoned, "the protection of corporate assets against an outside threat is arguably a more important concern of the Board than restricting who the owners of the Company might be." Given the elevated threat, a more severe defensive action was considered reasonable. (For an argument that the Delaware courts have gone too far, see the latest by Paul Edelman and Randall Thomas.)
  • In Yucaipa, Vice Chancellor Strine identified the "threat that the corporation's stockholders would relinquish control through a creeping acquisition without the benefit of receiving a control premium." This does not seem like a terribly severe threat, given the existence of 13D filings that would place the market on alert for creeping acquisitions. Nevertheless, the defensive action in this case was not severe. Yucaipa conceded that the Rights Plan was not preclusive, which left only the issue of whether the Rights Plan fell within the "range of reasonableness" -- a business judgment rule-like inquiry that target boards rarely fail to satisfy.
  • In eBay v. Newmark, as noted in my earlier post, Chancellor Chandler held that the target directors did not reasonably perceive a threat to the corporation's policy and effectiveness. Thus, the poison pill was unjustified.

While we might debate the correctness of any of these decisions, I applaud the Court of Chancery for continuing to develop its Unocal jurisprudence. Like Chancellor Allen, I have long thought that Unocal has great potential to calibrate the actions of incumbent directors. The question remains: will the Delaware Supreme Court embrace this more nuanced analysis?

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