Securities Mosaic® Blogwatch
April 28, 2014
SEC Settles Five Insider Trading Actions, Cooperation Key
by Tom Gorman

The Commission filed two groups of settled insider trading actions centered on the merger of eBay, Inc. with Pennsylvania based e-commerce company GSI Commerce, Inc., announced on March 28, 2011. The first group traces to Christopher Saridakis as the source of the information, then the CEO of the Marketing Solutions division of GSIC. SEC v. Saridakis, Civil Action 152397 (E.D. Pa. Filed April 25, 2014): In the Matter of Sunken A. Shah, Adm. Proc. File No. 3-15856 (Filed April 25, 2014): In the Matter of Shimul A. Shah, Adm. Admin. Proc. File No. 3-15857 (April 25, 2014). The other traces to the wife of a corporate insider, neither of whom are identified. In the Matter of Oden Gabay, Adm. Proc. File No. 3-15854 (April 25, 2014); In the Matter of Aharon R. Yehuda, Adm. Procc. File No. 3-15855 (April 25, 2014). The Commission was substantially assisted in its investigation by an individual who entered into a non-prosecution agreement, the first with an individual, and others who cooperated.

The Saridakis group

At the end of January 2011 eBay began discussion regarding the possible acquisition of GSIC. By mid-February Mr. Saridakis became aware of those discussion as part of his official duties. On March 11, 2011 he participated in a meeting involving executives of the two companies. The final agreement was completed on the morning of March 28, 2011.

On the evening of March 11, Mr. Saridakis had a conversation with Suken Shah, identified as a friend and surgeon who lives in Delaware. Suken Shah, who is named as a Respondent in a separate administrative proceeding, began purchasing shares of GSIC on March 14, 2014. After the deal announcement he had trading profits of $9,838. He also tipped his brother, Shimul Shah, and two others, one of whom traded. Shimul Shah, named in a separate administrative proceeding, traded and had profits of $11,209. The two unidentified individuals he tipped had profits totaling $34,680.

Subsequently, Mr. Saridakis is alleged to have tipped Jules Gardner. He has been friends with Mr. Gardner since 2003. Mr. Gardner is named as a defendant in the Saridakis case. Over the years the two men spoke periodically and exchanged text messages.

Starting on March 20, 2011 the two friends exchanged 23 text messages, according to the complaint. One of those asked if Mr. Gardner owned shares of GSIC and, when the response was negative, drew a reply which stated "you should." Two days later Mr. Gardner purchased 25,000 shares of GSIC stock. He had not previously purchased shares in the company. After the deal announcement he had trading profits of $259,054. Mr. Gardner also tipped two unidentified individuals who traded. They had trading profits which totaled $380,175.

Finally, unidentified members of Mr. Saridakis' family also became aware of the pending transaction based on conversations with him. Those persons traded, making profits totaling $41,060 after the deal announcement.

During a FINRA inquiry Mr. Saridakis failed to identify Suken Shah. The complaint against Messrs. Saridakis and Gardner alleges violations of Exchange Act Section 10(b). The Orders in the administrative proceedings are based on the same Section.

To resolve the civil injunctive action Mr. Saridakis consented to the entry of an officer director bar and agreed to pay a penalty of $664,822 which is twice the amount of his tippees' profits. He was also named as a defendant in a parallel criminal case. Mr. Gardner agreed to a cooperation with the agency as well as to disgorge his trading profits of $259,054.

Suken Shah agreed to resolve the administrative proceeding in which he was named, consenting to the entry of a cease and desist order based on Exchange Act Section 10(b). A also agreed to an undertaking to cooperate in future proceedings and to pay disgorgement of $10,446, prejudgment interest and a penalty of $65,965. His penalty is three times the amount of his and his tippees' trading profits. The Commission considered the undertaking in determining to accept the settlement. Mr. Shah's brother, Shimul, settled on similar terms, agreeing to cooperate and to the entry of a cease and desist order. He also agreed to pay disgorgement of $11,209.22, prejudgment interest and a civil penalty of $22,418,44. His penalty is twice the amount of his trading profits. The Commission considered the undertaking in determining to accept the offer.

The individual who entered into the non-prosecution agreement with the SEC also agreed to disgorge his trading profits of $31,777 along with prejudgment interest. The Commission entered into the agreement based on his early and extraordinary cooperation.

Wife of unidentified insider

Two administrative proceedings were initiated, naming as Respondents individuals who are alleged to have ultimately obtained inside information from the wife of an unidentified insider. In these proceedings Oded Gabay, a hairdresser in New York City, is alleged to have learned about the proposed merger shortly before its announcement. The information came from his wife who obtained it in confidence from the wife of an insider. Mr. Gabay traded and tipped an unidentified friend who traded. After the deal announcement Mr. Gahay's profits were $23,615 while those of his friend were $20,739.75. Mr. Gabay settled with the Commission, agreeing to cooperate and to pay disgorgement of $23,615 along with prejudgment interest and a civil penalty of $22,177. His penalty was reduced to half the total of his profits and those of Mr. Yehuda based on cooperation.

Mr. Gaby also told his friend Aharon Yehuda, named as a Respondent in a separate administrative proceeding, about the transaction. Mr. Yehada also traded and, after the deal announcement, had profits of $20,739.75. He resolved the proceeding, agreeing to an undertaking to cooperate and to the entry of a cease and desist order based on Exchange Act Section 10(b). Mr. Yehuda also agreed to pay disgorgement of $20,739.75 along with prejudgment interest and a civil penalty of $20,739.75.

April 28, 2014
23 Cool Things About Merck’s ’14 Proxy Statement
by Broc Romanek

In this 2-minute video, I run down 23 great ways that Merck enhances the usability of its 2014 proxy statement.

Corp Fin Revises WKSI Waiver Policy Statement Again

Last week, Corp Fin revised its policy statement concerning when it will grant a waiver of ineligible issuer status for WSKIs for the 2nd time over the past few months. The latest revision provides guidance on what constitutes "a showing of good cause"...

Shareholder Proposals: Fracking Proposal Withdrawn at Exxon In Exchange for Disclosure

As noted in this WSJ article, just weeks after Exxon's agreement to report on climate change and carbon risk, the world's largest publicly traded oil and gas producer has announced that it will provide increased transparency and disclosure about how it manages the environmental and community impacts of its hydraulic fracturing operations - in response to the withdrawal of a shareholder proposal filed by As You Sow, the New York City Pension Funds, and 12 co-filers.

DOJ & FTC: Joint Antitrust Statement Encouraging Companies to Share Cyber Threats

In a joint policy statement issued last week, the DOJ and FTC officially encouraged companies, including direct competitors, to share cyber threat information with one another. While the statement does not represent a significant policy shift, it is interesting because DOJ and FTC are actively encouraging companies to share this type of information.

- Broc Romanek

April 28, 2014
First Conflict Minerals Report Filed
by Celia Taylor

Ahead of the June 2 deadline (technically May 31 but moved to the June 2 as May 31 is a Saturday) the first required filing under the conflict minerals rule was made on Thursday April 24 by Taiwan-based Siliconware Precision Industries Co., Ltd.

The filing is interesting in many ways. First, it is a bit surprising that a report came in so early in view of the recent DC Circuit opinion striking down portions of the rule. (discussed here and  here). We expected issuers to wait for guidance about how to make proper disclosures that would comport with both the rule and the ruling striking down the requirement to disclose if an issuer's products have "not been found to be 'DRC conflict-free.'"

Siliconware ("SPIL") in its report stated that it:

 

  • undertook due diligence to determine the conflict minerals status of the necessary conflict minerals used in its semiconductor packaging services. In conducting its due diligence, SPIL implemented the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas (OECD 2011) ("OECD Framework"), an internationally recognized due diligence framework.

 

SPIL has determined in good faith that for calendar year 2013, its conflict minerals status resulting from its due diligence efforts shows a portion to be "DRC conflict undeterminable" and the remainder to be "DRC conflict free" (terms as defined in the 1934 Act).

The designation of some products to be "DRC conflict undeterminable" is not unexpected. The rule gives large issuers a two year period in which they may use this designation rather than being forced to state that minerals are not conflict free. It is widely expected that many issuers will rely on this provision to gain time to improve their supply chain diligence.

What is more interesting is the inclusion of the "DRC conflict free" label. SPIL in its report states that some of its products are conflict-free but did not conduct an independent private sector analysis ("IPSA"). This appears to be in direct violation of Question 15 of the SEC's Question and Answer on Conflict Minerals which states:

(15) Question:

If an issuer does not obtain an IPSA of its Conflict Minerals Report because one of its products is "DRC conflict undeterminable," may it describe any of its other products as "DRC conflict free" in its Conflict Minerals Report?

Answer:

No.  An issuer is not required, under the rule, to describe any qualifying products as "DRC conflict free" in its Conflict Minerals Report. The Commission stated in the adopting release, however, that an issuer may choose in its Conflict Minerals Report to describe its products with conflict minerals sourced from the DRC or its adjoining countries as "DRC conflict free" if the issuer is able to determine that the conflict minerals in those products did not finance or benefit armed groups in that region based on its due diligence. The rule defines due diligence as including an IPSA of the Conflict Minerals Report. Therefore, to be able to describe qualifying products in its Conflict Minerals Report as "DRC conflict free," an issuer must have obtained an IPSA. 

The eagerness of SPIL to use the conflict-free designation lends support to the view that many issuers will leap to use this designation even though the rule cannot compel them to do so. We fully expect other issuers, such as Intel and Apple, who have touted their conflict-free status to proudly proclaim it in in their filings. On the other side of the equation, no issuer will state that their products are not conflict-free as there is no legal requirement - at present - to do so. 

This raises fascinating issues about the mandatory/voluntary nature of disclosure. Would issuers have moved to disclose their conflict free status absent the rule? Who knows? Public awareness of the situation in the DRC has been growing and investors have been pushing for disclosure for some time. But we will never know for sure. What we do know is that a flawed rule may well produce the results that many were hoping for.

April 27, 2014
Council of Institutional Investors Presses SEC for Guidance on Interim Vote Tallies
by Amy L. Goodman

Editor's Note: Amy Goodman is a partner and co-chair of the Securities Regulation and Corporate Governance practice group at Gibson, Dunn & Crutcher LLP. The following post is based on a Gibson Dunn alert by Ms. Goodman, Elizabeth A. Ising, and James Moloney.

Last May, Broadridge Financial Solutions, Inc., the provider of proxy services for over 90% of public companies and mutual funds in North America ("Broadridge"), decided to end its established practice of providing interim vote tallies (sometimes referred to as "preliminary voting results") to proponents of shareholder proposals. Following this change in practice, the Council of Institutional Investors ("CII") sent a letter to the SEC asking the Commission to reverse Broadridge's change in practice. Later in July, Broadridge reviewed its decision, promising to "continue to monitor developments on th[e] issue" and noting that it is contractually obligated to follow client directions regarding release of interim vote tallies.

In response, shareholder proponents like John Chevedden submitted a number of proposals seeking to restrict issuer access to interim vote tallies. Thus far, the SEC has permitted exclusion of these proposals for a number of issuers, including Amazon, Home Depot, Intel and Southern Company.

In early February of this year Broadridge addressed a similar interim tally issue when it announced that each party engaged in a non-exempt contested solicitation would only receive tallies with respect to votes cast on its own proxy card. Later that month, Broadridge reversed its position, announcing that each side in such opposing solicitation would continue to receive interim vote tallies for votes cast on their own and each other's proxy card.

In the wake of these policy changes, the CII opted to weigh in with another direct appeal to the SEC seeking guidance on the applicable rules governing the disclosure of preliminary vote tallies. In early March, after other efforts had failed to resolve the issues, the CII submitted a second letter to the SEC's Division of Corporation Finance, this time specifically asking the Division to take action "to ensure a level playing field for any participant in an active solicitation." Specifically, the CII requested that the Division clarify the applicability of certain proxy rules and/or act to expand the scope of events which trigger Form 8-K disclosure obligations. Specifically, the CII requested the Division to:

  • Issue interpretive guidance that clarifies Rule 14a-2(a)(1)'s definition of "impartiality" to do one of the following: (a) prohibit the disclosure of interim voting tallies to any party; (b) disclose, to any requesting participant engaged in an active solicitation, only the interim number of shares voted without any detail as to exactly how the shares were voted; or (c) disclose the interim vote tallies on ballot items to any requesting participant engaged in an active solicitation. [Note: Any of these changes would establish, for any participant in an active solicitation, equal access or lack of access to the available vote tally information.]
  • Issue interpretive guidance that clarifies that Rules 14b-1 and 14b-2 do not permit the selective disclosure of interim vote tallies. [Note: These rules are currently silent on the issue, but the CII believes that proxy distributors like Broadridge may be relying on these rules as the basis to engage in selective disclosure.]
  • Expand the category of reportable events on Form 8-K to affirmatively require the disclosure of interim vote tallies. [Note: The CII believes that interim vote tallies may constitute material information to investors and thus such information should be required disclosure on Form 8-K, similar to the current requirement to disclose voting results on Form 8-K following a shareholder meeting.]

The CII also made clear in its letter that the overall policy on this topic should return to the state of the world before Broadridge's May 2013 decision to terminate its policy of providing interim vote tallies. In doing so, the CII expressed its preference that any interpretive guidance from the Staff be responsive to items 1(c) and 2 above and further acknowledged that other actions may be "too disruptive to the proxy voting process" at this time.

April 26, 2014
Delaware Court Orders Auction of Philadelphia Newspaper Company
by Francis Pileggi

In Re Interstate General Media Holdings, LLC, C.A. No. 9221-VCP (Del. Ch. Apr. 25, 2014).

Why This Decision Is Notable: The Delaware Court of Chancery determined that a private auction was the best method to obtain the highest possible price in connection with the dissolution of an LLC that was the subject of a deadlock between its managers, based on the circumstances of this case. In the absence of controlling precedent, this opinion explains in a businesslike and scholarly manner, characteristic of this court, why a public auction was not likely to generate the highest value in the most efficient and expeditious manner. The entity involved was the parent company of the two major newspapers in the fourth largest city in the U.S.

A prior post highlighted a prior ruling in this case that allowed a union representing employees of the newspaper to intervene, although in the end, the union was not able to find a financial backer to make a bid. (That prior post also linked to another post that made some comparisons and observations about the differences between the neighboring states of Delaware and Pennsylvania, and how those contrasts are much larger than would be suggested by the mere thirty-minute commute that separates Wilmington from Philadelphia.)

Brief Highlights of Decision: Section 18-802 of the Delaware LLC Act allows a court to dissolve an LLC when, in essence, there is a deadlock–though the statutory language is much more nuanced. In this case, however, all the parties agreed that a dissolution was necessary due to the deadlock, and the only serious issue was whether there would be a public auction or a private auction in connection with the dissolution.

The opinion details the troubled recent past of the company that owns The Philadelphia Inquirer and Daily News, and describes how ownership has changed hands many times in the last few years, with each successive wealthy optimist attempting to keep the newspapers afloat during a decline in the industry generally and an enormous reduction in the value of the company over the last ten years.

The applicable law was well established but did not provide much guidance, and there were no prior Delaware decisions that dealt with facts similar to those in this case. The court observed that:

It is settled Delaware law, however, that there is "no single blueprint" for maximizing the value of an entity through a sale. Therefore, determining the value maximizing process by which an entity should be liquidated is both a fact-intensive and fact-specific endeavor that must be tailored to the particular circumstances and realities in which the entity is operating. (footnote omitted.)

The parties could have made provision in their LLC agreement to address how exactly they wanted a dissolution or an auction to occur, but the court found that nothing in the LLC agreement was relevant to determining how the auction should take place. Throughout 42-pages, an average length for a Chancery opinion, the court explained why a private "English-style" open ascending auction, also called an open outcry auction, must be held within 30 days, with the opening minimum bid starting at $77 million in cash.

April 26, 2014
New in Print
by Eric C. Chaffee

The following law review articles relating to securities regulation are now available in paper format:

Tim Bakken, Dodd-Frank's Caveat Emptor: New Criminal Liability for Individuals and Corporations, 48 Wake Forest L. Rev. 1173 (2013).

M. Hampton Foushee, Comment. Eminent Domain, Mortgage Backed Securities, and the Limits of the Takings Clause, 8 N.Y.U. J.L. & Liberty 66 (2013).

Jeffrey D. Hochberg & Michael Ochowski., What Looks the Same May Not be the Same: The Tax Treatment of Securities Reopenings, 67 Tax Law. 143 (2013).

Tammy C. Hsu, Comment, Understanding Bondholders' Right to Sue: When a No-Action Clause Should Be Void, 48 Wake Forest L. Rev. 1367 (2013).

Kevin Levenberg, Comment, Read My Lipsky: Reliance on Consent Orders in Pleadings, 162 U. Pa. L. Rev. 421 (2014).

April 25, 2014
Performance Terms in CEO Compensation Contracts
by R. Christopher Small

Editor's Note: The following post comes to us from David De Angelis of the Finance Area at Rice University and Yaniv Grinstein of the Samuel Curtis Johnson Graduate School of Management at Cornell University.

CEO compensation in U.S. public firms has attracted a great deal of empirical work. Yet our understanding of the contractual terms that govern CEO compensation and especially how the compensation committee ties CEO compensation to performance is still incomplete. The main reason is that CEO compensation contracts are, in general, not observable. For the most part, firms disclose only the realized amounts that their CEOs receive at the end of any given year. The terms by which the board determines these amounts are not fully disclosed.

The fact that the contractual terms are not fully observable has led researchers to doubt that such contracts optimally tie CEO compensation to performance. For example, Bebchuk and Fried (2003) argue that companies have decoupled compensation from performance and camouflaged both the amount and performance-insensitivity of pay. Morse et al. (2011) show both theoretically and empirically that, with lack of transparency of compensation contracts, powerful managers have the ability to rig their performance-pay for their own benefit.

In December 2006, the Securities and Exchange Commission (SEC) issued new disclosure requirements on CEO compensation. These requirements came as a response to investor concerns that in recent years CEO compensation packages have not been properly disclosed or well understood. According to these new requirements, firms now must provide additional information about the contractual terms of their compensation to the CEO. In particular, firms need to disclose the types of performance measures that they use to determine CEO rewards, the performance targets, and the performance horizon.

In our paper, Performance Terms in CEO Compensation Contracts, forthcoming in the Review of Finance, we use this newly available data to examine how firms tie CEO compensation to performance and the extent to which such practices support the predictions of optimal contracting theories. We focus on performance-based awards, since these awards are the ones where full disclosure of the rationale behind the award is available. Nevertheless, we also consider other types of awards in our robustness analysis. We first document the choice across the wide array of performance measures and then we examine the relation between these performance measures and firm characteristics. Our sample consists of firms in the Standard and Poor's (S&P) 500 index in fiscal 2007. We collect information from the proxy statements on the performance measures used in the performance-based awards in fiscal year 2007. We focus on identifying the different types of performance measures and their relative weights. We observe that 90% of our sample firms grant some type of performance-based awards. The average value of these awards is 4.8 million dollars.

In general, firms pre-specify their performance goals over several performance measures. On average, 79% of the estimated value of performance-based awards is based on accounting-performance measures, 13% is based on stock-performance measures (i.e., market-based), and 8% is based on non-financial measures. Firms use a wide array of accounting measures. Firms reward CEOs based on income measures (e.g., earnings-per- share (EPS), net income growth, and earnings before interest and taxes (EBIT)), sales, accounting returns (e.g., return on equity, return on assets), cash flows, margins, cost-reduction measures, and Economic Value Added (EVA)-type measures. On average, 56% of the estimated value of performance-based awards assigned to accounting measures is tied to income measures. A significant portion of the awards is also assigned to sales measures (12%) and accounting returns measures (17%). We find that larger firms and firms with larger growth opportunities tend to rely more heavily on market-based measures, and firms that are more mature tend to rely more heavily on accounting-based measures. In addition, among accounting measures, sales are used by firms with larger growth opportunities and accounting returns are used more heavily by more mature firms with fewer growth opportunities. We also find that firms in similar sectors tend to adopt similar performance measures.

Overall, our findings regarding the relation between firm characteristics and performance measures suggest that firms tend to choose performance measures that are more informative of CEO actions. In growth firms, where CEO optimal actions are improving long-term growth opportunities, end-of-year accounting performance measures are likely to be less informative of optimal CEO actions. For these firms, stock price performance, which captures investors' perception regarding firms' long-term growth opportunities, is a more informative measure. Among accounting measures, growth firms tend to rely on sales growth measures, which again capture CEO actions associated with growth. In contrast, in mature firms, where CEO focus is on maximizing value from existing operations, end-of-year accounting performance measures are more informative of CEO actions. Among accounting measures, firms tend to rely on accounting returns, capturing efficiency in allocation of capital to existing operations. Our evidence is largely consistent with the informativeness principle, which emerges in optimal contracting theories such as Holmstrom (1979).

Our study contributes to the existing literature in several ways. First, the disclosure rule allows us to document the large array of performance measures that are used in CEO compensation contracts and to examine firms' choices across the different measures. With the new data, we are able to directly examine the choice of different performance measures in CEO compensation contracts and relate it to contracting theory. Past studies could not observe the choice of performance measures across the different components of compensation contracts because this data was not available. As a result, most studies have estimated the choice of performance measures from observed compensation outcomes. Few previous empirical studies had access to more precise data regarding the terms of the contracts, but even then, the data was available only for particular components of the contract. Second, the rich information on the variety of performance measures allows us to shed new light on the relation between contractual choices and firm characteristics and to tie our findings to existing theories.

Our focus in this study is on awards whose performance terms are pre-specified. But we note that not all types of CEO awards are pre-specified. For example, firms can give discretionary end-of-year bonuses and they can decide to award CEOs with options or stocks at their discretion. Unfortunately, we cannot identify the reasons behind these awards and therefore we exclude them from the main analysis. This is a limitation of our study. However, we do examine whether these discretionary awards are complements or substitutes to the pre-specified performance-based award. We do not find any significant relation between discretionary awards and pre-specified performance awards. This means that this portion of compensation is given for reasons other than performance, (e.g., retention purposes).

Our study produces two interesting findings that require further examination. First, a large portion of CEO awards is given at the discretion of the board. How exactly this portion of the awards is determined is an interesting topic for future research. Second, we find that CEO shareholdings have little association with the level of market-based awards in the CEO contract. This result is puzzling because we expect CEO shareholdings to act as a substitute to the market based awards. We believe that further investigation of this result is another fruitful area for future research.

The full paper is available for download here.

April 25, 2014
Wachtell Lipton discusses A New Takeover Threat: Symbiotic Activism
by Martin Lipton

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

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

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

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

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

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

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

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

April 25, 2014
Delaware Supreme Court Hears Appeal of Confidentiality Issue in Al Jazeera Suit
by Francis Pileggi

The Delaware Supreme Court heard oral argument a few days ago on whether parts of the various pleadings filed with the Court of Chancery in a dispute involving the Al Jazeera network and AT & T should be kept from the public based on an interpretation of the relatively recently adopted Court of Chancery Rule 5.1 which provides the standard that will be applied to determine what parts, if any, of a document filed with the court in connection with a lawsuit may be redacted or withheld from public view.
A prior post highlighted the Chancery rulings in this case.

Frank Reynolds of Thomson Reuters provides a helpful summary of the oral argument before the Delaware Supreme Court in this matter.

April 25, 2014
Report from FINRA's April 2014 Board of Governors Meeting
by Joel Beck

FINRA's Board of Governors met this week.  According to a report from the regulatory organization to firms, some new rulemaking items are on tap.

FINRA reported that the BOG authorized the staff to file a proposed rule amendment with the SEC relating to background investigations for registered representative applicants. According to the notice, firms would be required to "adopt written procedures that are reasonably designed to verify the accuracy and completeness of information contained in the applicant's Form U4... including, at a minimum procedures to conduct a search of reasonably available public records to verify the accuracy and completeness of the information."

Many firms already conduct some type of background review of applicants, but this proposed rule may take things a few steps father. We'll have to wait and see the text of the proposed rule once it is filed with the SEC.

Other reported action from the BOG meeting can be found in FINRA's communication to firms - click the link above.

View today's posts

4/28/2014 posts

SEC Actions Blog: SEC Settles Five Insider Trading Actions, Cooperation Key
CorporateCounsel.net Blog: 23 Cool Things About Merck’s ’14 Proxy Statement
Race to the Bottom: First Conflict Minerals Report Filed
The Harvard Law School Forum on Corporate Governance and Financial Regulation: Council of Institutional Investors Presses SEC for Guidance on Interim Vote Tallies
Delaware Corporate and Commercial Litigation Blog: Delaware Court Orders Auction of Philadelphia Newspaper Company
Securities Law Prof Blog: New in Print
The Harvard Law School Forum on Corporate Governance and Financial Regulation: Performance Terms in CEO Compensation Contracts
CLS Blue Sky Blog: Wachtell Lipton discusses A New Takeover Threat: Symbiotic Activism
Delaware Corporate and Commercial Litigation Blog: Delaware Supreme Court Hears Appeal of Confidentiality Issue in Al Jazeera Suit
The Beck Law Firm, LLC Blog: Report from FINRA's April 2014 Board of Governors Meeting

Blog posts are subject to copyrights held by the authors and are republished here with permission. Views expressed are those of the authors alone. Infringement Notification.