June 26, 2017
American Airlines, Qatar, and the NOL Poison Pill
Posted by Christine Hurt

I know most bloggers today are consumed with the June avalanche of Supreme Court opinions and cert grants, but something interesting is afoot in the corporate law world (and more importantly the actual world).  At the end of last week, Qatar Airways announced plans to purchase 10% of American Airlines.  That move is definitely a little more interesting than Berkshire Hathaway reentering the airline sector and poses a lot of political concerns.  What triggered my interest, I'm a little embarassed to say was the note in all the coverage that Qatar was going to purchase 4.75% now because it would need board approval to purchase any more.  That sounds like an NOL poison pill!  (Shamless plug to NOL poison pill paper, The Hostile Poison Pill.)

According to American Airlines Group's latest 10K:  

In addition, to reduce the risk of a potential adverse effect on our ability to use our NOL Carryforwards and certain other tax attributes for federal
income tax purposes, our Certificate of Incorporation contains certain restrictions on the acquisition and disposition of our common stock by
substantial stockholders (generally holders of more than 4.75%).

 The Delaware courts have upheld the use of a 4.99 poison pill to protect a corporate asset (net operating loss carryovers are a deferred tax asset) because under the tax code, if a 5% shareholder (or group of them) increase ownership substantially, it can result in a severe impairment of the ability to use existing NOLs. Unlike many corporations that adopted NOL poison pills, American Airlines not only has a substantial amount of net operating loss carryforwards, but it has been using them the past few years to reduce pre-tax income.:  

In 2016, we recorded a $1.6 billion provision for income taxes at an effective rate of approximately 38%, which was substantially non-cash as
we utilized our NOLs. Substantially all of our income before income taxes is attributable to the United States. At December 31, 2016, we had
approximately $10.5 billion of gross NOLs to reduce future federal taxable income, substantially all of which are expected to be available for use in

Interestingly, the merger with US Airways gave AA most of their NOLs, but the merger was also a Section 382 "ownership change," so those NOLs are subject to a limitation that restricts their use somewhat.  In addition, AA's historical NOLs could have been limited following the company's emergence from bankruptcy under an "ownership change," but 382 is much more generous to bankruptcy debtors:

At December 31, 2016, we had approximately $10.5 billion of gross NOL Carryforwards to reduce future federal taxable income, substantially all of which are expected to be available for use in 2017. The federal NOL Carryforwards will expire beginning in 2022 if unused. We also had approximately $3.7 billion of NOL Carryforwards to reduce future state taxable income at December 31, 2016, which will expire in years 2017 through 2036 if unused. Our ability to deduct our NOL Carryforwards and to utilize certain other available tax attributes can be substantially constrained under the general annual limitation rules of Section 382 where an “ownership change” has occurred. Substantially all of our remaining federal NOL Carryforwards (attributable to US Airways Group) are subject to limitation under Section 382; however, our ability to utilize such NOL Carryforwards is not anticipated to be effectively constrained as a result of such limitation. We elected to be covered by certain special rules for federal income tax purposes that permitted approximately $9.0 billion (with $8.9 billion of unlimited NOL still remaining at December 31, 2016) of our federal NOL Carryforwards to be utilized without regard to the annual limitation generally imposed by Section 382. Similar limitations may apply for state income tax purposes. Our ability to utilize any new NOL Carryforwards arising after the ownership changes is not affected by the annual limitation rules imposed by Section 382 unless another future ownership change occurs. Under the Section 382 limitation, cumulative stock ownership changes among material stockholders exceeding 50% during a rolling three-year period can potentially limit a company’s future use of NOLs and tax credits.

Of course, the important question is how this relates to Qatar.  Perhaps because AA's NOLs are so valuable to them (unlike NOLs to a company that has a low probability of generating sufficient income to ever use them), AA has put transfer restrictions on its publicly-traded shares.  One of these restrictions (Section 6 of its Articles of Incorporation) prohibits shareholders who own over 4.75% of AA stock from engaging in a transfer (sale or purchase) without consent of the Board (given in its sole discretion within 20 business days).  The Board is required to determine whether the transfer will materially threaten the NOLs.  (Note that 4.75% of AA stock is worth about $800 million, so most investors will never run up against this provision.)  The provision is very narrowly-tailored -- the provision expires in either 2021 or when the NOLs are gone.  For comparison, a NOL poison pill is not narrowly tailored and may not protect from NOL impairment.

Whether a company adopts an NOL poison pill (poor fit to protect NOLs) or a charter amendment (well designed to protect NOLs), an intended or unintended consequence is that it basically allows a corporate board to pick its shareholders.  Going public usually is a trade-off between liquidity and being able to know that your shareholders are not going to gain a majority without your knowing about it.  With a 4.75% limit, no shareholder, whether Warren Buffett or a pesky hedge fund, can gain access without permission.  This is a great tool against would-be activist shareholders wanting to shake up management (or worse).  And, surprisingly, it can also be a tool against a foreign competitor making one of the stranger power plays against a backdrop of strange political events.  So, AA has to live with Qatar Airways being a 4.75% shareholder, but not any larger.  And, note that federal law prohibits foreign investors from owning more than 24.9% of voting equity securities and 49% of all equity securities of an airline.

Is there any way that Qatar Airways could gain some of that real estate between 4.75% and 24.9% without board approval?  Qatar (as a shareholder) could litigate over the operation of the provision.  It could argue that its purchasing 10% would not pose a threat to the NOLs and that the board refused to grant an exception in bad faith.  The charter states that the board has "sole discretion" to make the determination of whether to grant an exception, but then states that the "good faith determination of the Board" will be conclusive and binding.  Stay tuned!

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February 29, 2016
The Hostile Poison Pill
Posted by Christine Hurt

'Tis the season for article submissions, and I am nothing but a joiner.  Here is my latest piece, hot off of SSRN, "The Hostile Poison Pill":

Whether one ascribes to the agency theory of shareholder primacy or the contractarian theory of director primacy, boards of directors have great discretion in determining whether, when, and how to sell the corporation. Defensive tactics, like poison pills, can be tools in wielding that discretion in the service of creating shareholder value. However, a poison pill either to oppress a minority shareholder, as in eBay v. Newmark, or to minimize the impact of activist shareholders, as in Versata Enterprises, Inc. v. Selectica, Inc., seems to exceed the “maximum dosage” of the pill. The NOL poison pill, while facially plausible as a tool to protect tax assets from impairment caused by a Section 382 “ownership change,” may be a stepping stone to a low-trigger anti-shareholder pill. Instead of warding off uninvited potential acquirers, the pill could ward off shareholder voice. Though the original poison pills were blessed by the Delaware courts to ward off hostile bidders, now boards can use a hostile poison pill to ward off noisy shareholders. With the threat of the 1980s-era hostile bidder behind us, a new threat to board authority has emerged: the activist shareholder. These types of investors, often activist hedge funds, agitate not for control of a corporation, but for access to the board to argue for changes in strategy. Defensive tools used against hostile bidders at first seem inapplicable to these types of nuisances; staggered boards and poison pills with typical 15-20% triggers seem irrelevant. However, a pair of cases decided in Delaware may give managers an idea of how to cope with these aggressive blockholders. One case, Air Products and Chemicals, Inc. v. Airgas, Inc., allowed a company’s board to keep a poison pill in place for over a year even though the bidder did not seem to pose much of a cognizable threat to the corporation. By itself, Airgas does not seem to give much relief to a board dealing with a noisy 5% or 10% shareholder. However, the Delaware Supreme Court the year earlier had blessed a poison pill that would be triggered if a shareholder increased its ownership to 4.99% of the corporation, the lowest ownership threshold to be brought before the court. In Versata Enterprises, Inc. v. Selectica, Inc., the Delaware court upheld the poison pill even though the board did not focus its argument on the threat of a takeover. In this case, the “danger to corporate policy and effectiveness” existed because of the activist shareholder’s creeping purchases would constitute an “ownership change” under existing federal tax law and would lead to the loss of certain tax assets, net operating loss carryovers (NOLs). Because the NOLs were a very large, if unusable, asset to Selectica that would be severely limited under Section 382 of the Internal Revenue Code if the ownership change occurred, the court held that the low-trigger rights plan was reasonable and proportionate against a legitimate threat. Together, these cases seem to suggest a new weapon to be used against activist shareholders: a poison pill with a very low trigger. Unfortunately, the Delaware courts took at face value Selectica’s argument that the creeping acquisition could involuntarily cause the target company to lose a large tax asset. The Unocal test is supposed to require the board to articulate its rationale for implementing a defensive tactic, foreclosing the opportunity for pretextual arguments. However, this analytical technique may not work in the NOL context where the presence of NOLs may give a board of directors cover for keeping blockholders away. This Article attempts to shed some light on the operation of Section 382 to disclose some of the faulty assumptions surrounding both the necessity and efficacy of the NOL poison pill. In addition, this Article uses a dataset of 155 companies that adopted NOL poison pills between 1998 and 2014 to examine what types of firms are using this defensive tactic. A board might argue in good faith or not that an NOL poison pill is necessary to defend itself against a strange and diverse cast of characters: the Hostile Acquirer, the Accidental Bungler and the Bad Faith Saboteur. However, an NOL poison pill necessarily has little or no deterrent effect and no physical effect against any of these actors. In fact, the only shareholder that the NOL poison pill effectively deters is the activist shareholder, suggesting that the use of the poison pill in these cases may be “hostile.”

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October 15, 2015
AB InBev Gets Even Bigger
Posted by Matt Bodie

The board at SABMiller PLC has formally accepted (right under the wire) the buyout offer from Anheuser-Busch InBev NV for £44 a share, or about $106 billion.  Aside from having too many names smushed together (will the new company be ABInBevSABM?), the company will be a global giant in beer production, with about a 30% share of world beer sales.  The WSJ has a really nice piece about how the deal finally came together.  A few thoughts:

  • There was a fair amount of intrigue between the first offer and the final agreement, as big SAB shareholder Altria Group came out in favor of a £42.15 deal that the board rejected.  But the board was right -- there was more money to be had from Brito et al.
  • A-B InBev would owe a $3 billion breakup fee if the deal fails to go through.  Is that the highest on record, or am I behind the times?
  • It seems like a foregone conclusion that the new company will have to dump its portion of the MillerCoors joint venture with Molson Coors.  That has to help Molson's bargaining position, no?  The Toronto Star seems to agree.  A good day for the Great White North yesterday!
  • Even if the new company jettisons Milller Lite & Coors Light, will the company still face antitrust scrutiny?  This Fortune article thinks beer drinkers will lose overall on the deal.  And AB InBev is getting scrutiny on another front -- the acquisition of some of their California distributors.  It could mean issues ahead -- anything from small speedbumps to a total roadblock.  I'm interested to see what the folks at the Truth have to say about it.  

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July 30, 2015
Sean Griffith's Deal Tax Clinic
Posted by David Zaring

Fordham's Sean Griffith is putting his motions where his writing is, and taking positions against "deal tax" shareholder settlements.  If you missed it, here's a bit from the Wall Street Journal story on the approach.

Over the past few months, Mr. Griffith says he has bought a small number of shares in about 30 companies following the announcement of a takeover. When the expected shareholder lawsuits are ultimately settled, he plans to use his standing as a shareholder to formally object.

His first salvo came Monday at a Delaware hearing to approve a settlement of litigation over Riverbed Technology Inc.’s sale. Under terms of the settlement, Riverbed, now owned by private-equity firm Thoma Bravo LLC, would pay plaintiffs’ lawyers a $500,000 fee and provide additional details on the buyout process. Riverbed and its new owners also would get immunity from future litigation stemming from the buyout, which closed in April.

Riverbed and Thoma Bravo declined to comment.

Mr. Griffith, who owns 100 shares of Riverbed, said the agreement would enrich plaintiffs’ lawyers while delivering no real benefits to investors, and he asked a judge to reject it.

Matt Levine thinks it is the lord's work.  Bainbridge approves.  And Alison Frankel is interested.  I approve as well - it's nice to see a law professor doing a research based quasi-clinic, and if Sean gets his law students to help out, he'll be following Lucian Bebchuk's very effective model.


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October 01, 2014
The Five Pathways in Action
Posted by David Orozco

In this post, which follows our earlier discussion of legal strategy, we’ll offer examples of companies situated within each of the five pathways. As Robert and I mentioned in our article, most companies follow the compliance pathway. Such companies insource legal compliance through their in-house legal department, or they may choose to partner with an external compliance verification service. A firm such as ISN, for example, has built a business handling compliance issues for corporations and their subcontractors. According to the Society of Compliance and Corporate Ethics, compliance is a thriving industry due to the increased legal penalties and regulations that companies face in today’s heightened legal environment.

The avoidance pathway is less frequent, given the high stakes and liability attached to this type of strategy. General Motors may have engaged in avoidance if it misled regulators about its faulty ignition switches. Avoidance issues tend to be costly to deal with, given the loss of trust and enhanced penalties that arise from this behavior.

The more interesting and rare pathways involve prevention, value, and transformation. An interesting and controversial prevention legal strategy involves trademark policing, which, in its most egregious form, devolves into the unethical and legally dubious practice of trademark bullying. For example, Chik-fil-A employs an aggressive strategy that targets large and small companies alike and uses the threat of trademark litigation to prevent anyone from encroaching upon its trademarked brands and brand equity. Setting aside the overreaching and legally dubious aspects of this approach, some companies legitimately use a preventive legal strategy that involves cease and desist letters, litigation, and U.S. Patent and Trademark Office administrative oppositions to protect the value of their brands and advertising. The Chik-fil-A case serves as a useful reminder, however, that aggressive legal strategies may push the boundaries of ethical behavior, sound legal argument, and public opinion. 

Two recent examples illustrate how employing a legal strategy in the value pathway can generate positive and tangible financial returns. The first instance involves hedge funds investing in a corporate acquisition target and then filing suit in Delaware to challenge the valuation and seek an appraisal from the court. This legal strategy is referred to as appraisal arbitrage. Many of these cases either settle or result in substantially higher prices for the party seeking the appraisal.

Another value strategy that has been in the headlines recently involves tax inversions. Burger King’s recent decision to acquire Canada’s Tim Horton’s will yield business synergies, but it also exploits a legal maneuver allowed under current tax law permitting a company acquiring a foreign entity to reincorporate in the foreign jurisdiction. By reincorporating in Canada, Burger King will effectively lower its tax rate from 35% to 15%.

The last and rarest of legal strategies is transformation. This occurs when the top executives in a corporation integrate law as a core aspect of the firm’s business model to achieve sustainable competitive advantage. Few companies are able to achieve this strategic pathway, and it’s certainly not for everyone. One company that notoriously used law to achieve abnormally large market share and margins in the ticket processing industry was Ticketmaster. The ticket service provider used venue ticket licensing contracts that included several key provisions such as long term renewable exclusivity terms (up to 5 years), and more infamously, fee sharing provisions. Ticketmaster’s business model was, essentially, to take the bad rap for charging exorbitant convenience fees and sharing those fees with the venue, thus contractually locking them into a highly profitable and exclusive business system. It didn’t hurt that Ticketmaster’s pioneering CEO Fred Rosen was a Wall Street attorney turned impresario.

Another company that is showing signs of attempting to pursue a transformative legal strategy is Tesla Motors. Tesla’s recent announcement to offer open licensing terms for its battery and charging station patents illustrates a pioneering mentality that seeks to build a business ecosystem with other auto manufacturers. By doing so, Tesla has made a major legal bet that giving up patent exclusivity rights in the short term will yield long-term competitive advantage by helping to diffuse electric battery and recharging technology. The other legal strategy Tesla has pursued relates to its pioneering distribution model of direct sales to the consumer, bypassing the traditional dealership model established for conventional automobiles. To achieve this direct-to-customer model, Tesla has engaged state regulators to achieve exemptions from state dealership franchise laws. Tesla is clearly strategizing and innovating along many fronts that involve business, technology and law. It remains to be seen, however, whether these legal strategies will offer Tesla a long-term sustainable competitive advantage.

In our next and last post, we’ll discuss our experience teaching the five pathways of legal strategy to business students and how it has been a valuable resource in the classroom. 

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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:


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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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