Tulane just held its 31st Annual Corporate Law Institute, and though I was not able to attend the full event, I was there for part of it. Though the panels were very interesting and I took copious notes, as a matter of personal satisfaction, the single most important thing I learned is that it is pronounced Shah-bah-cookie. You’re welcome.
That said, below are some takeaways from the Hot Topics in M&A Practice panel, and to be clear, this isn’t even remotely a comprehensive account of everything interesting; it’s just stuff that I personally hadn’t heard before. (And thus, the exact contours of my ignorance are revealed.)
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Panelists: Eileen Nugent, Skadden, Arps, Slate, Meagher & Flom LLP (Moderator), Chief Justice Leo Strine, Delaware Supreme Court, Meredith Kotler, Cleary Gottlieb Steen & Hamilton LLP, Keith Pagnani, Sullivan & Cromwell LLP, Mark Shafir, Citigroup, Ted Yu, Securities and Exchange Commission
A discussion of the NAI/CBS dispute (which I previously blogged about here) segued into a conversation about dual-class stock in general. On this, Chief Justice Strine characterized it as “whining” if, within a capitalist system, we try to limit the ability of people who found and develop companies from bringing them public with appropriately-disclosed mechanisms for maintaining their control. He argued that our system of securities disclosure, and the fiduciary duties imposed on controllers, coupled with rights of appraisal and the minority shareholders’ entitlement to a pro rata share of the value of the company (thus deterring differential compensation in mergers), have squeezed out most forms of controller self-dealing, and for that reason, we should allow founders to arrange to maintain their control as they’d like.
At the same time, he argued that controllers should be stuck with the corporate governance system they set up, and if corporate boards – on whom Delaware law depends – decide that it’s in the economic interests of the corporation to issue shares that ultimately dilute the controller’s stake, controllers have no right to complain about the authority and arrangements they themselves designed. This is especially so given that noncontrollers often see new issuances dilute their voting power, and that is accepted as an ordinary aspect of the corporate bargain. On this, he was referring not so much to the CBS dispute as to situations like Google and Facebook, where founders go public with control but gradually see their influence eroded as new shares are issued to pay employees or to facilitate mergers.
The suggestion, then, is that Strine would cast a gimlet eye on companies that, like Facebook attempted and Google accomplished, try to recapture founders’ voting control through the creation of new classes of nonvoting stock.
Strine also made a nod to what I think is the real impetus driving the hostility to dual-class stock, namely, the sense that controllers in dual-class companies may exercise too much public power. He mentioned “stupid” controllers – the “stupid” is his word choice, not mine – namely, those who make basic mistakes in organizing their corporations that they come to regret later, and then acknowledged that if you’re a stupid controller and thousands of employees work for you, we may be concerned as a society about other stupid things you do. (Again, his word choice, not mine; I’ll leave the reader to speculate as to which controller he may have had in mind.)
Bringing things back to the NAI/CBS dispute, Ted Yu of the SEC weighed in on the application of Rule 14c-2. That rule requires a shareholder information statement be issued 20 days before any action taken by written consent becomes effective, and one of the arguments made by the CBS board was that Rule 14c-2 prevented NAI’s bylaw limiting directors’ authority to issue new shares from becoming operational (again, background at my blog post). Yu said that the SEC – which looked at the issue for the first time in connection with the NAI/CBS matter – is generally of the view that Rule 14c-2 does not preempt Delaware law and does not prevent a bylaw from taking effect. Companies may run into trouble with the SEC if they fail to file the required information statement, but the SEC plans to exercise discretion with respect to Rule 14c-2 enforcement. So, for example, if the written consents are solicited by a dissident shareholder without the company’s knowledge, obviously, the SEC will not sanction the company for a delayed filing.
Moving away from NAI/CBS, Yu also discussed new guidance issued by the SEC, and there was one development I found fascinating.
Rule 14a-6(g) allows shareholders who are not seeking proxy authority to communicate with other shareholders without filing a proxy statement, but under some circumstances, any holder of more than $5 million of stock must file their written solicitation materials with the SEC.
Apparently, some shareholders who own less than $5 million – and thus are not required to file these materials – have nonetheless discovered that an EDGAR filing means instant publicity and distribution to other shareholders. And so, when they don’t have the resources to conduct a true campaign, they instead use these 14a-6(g) filings as a mechanism for garnering publicity, such as, in connection with a shareholder proposal (where they would be limited to 500 words in the corporate proxy).
In response, the SEC clarified that voluntary filings are permissible, but they must make clear what they are, namely, voluntary notices by shareholders without company sanction. (Cleary Gottlieb describes it all in more detail here).
Finally, Keith Pagnani discussed issues that arise with respect to “mergers of equals,” namely, low or no premium deals in which control is intended to be “shared” among the former shareholders of the combining entities. The backdrop to this discussion was the Duke Energy dispute, in which an agreement was reached that one company’s CEO would run the combined entity, but right after closing, the Board voted to fire him and replace him with the other company’s CEO.
As Pagnani explained, it is precisely because these deals are accomplished with little or no premium that there is such jockeying for post-merger control. Neither side wants to give up control without a premium, and so there are inordinate disputes over how power will be shared. In general, he warned, it is important that there be one source of managerial authority, and that the post-merger company be run as a single entity rather than agree to dynamics that replicate the notion of two-companies-in-one (such as a requirement that each side have designated directors who alone can nominate new directors to fill vacancies).
Among other things, he noted that the Board must have authority to remove bad management even if the merger agreement allocates authority to one person or another, but – to avoid a Duke Energy situation – a supermajority of the Board should have to vote to override the arrangement agreed upon in the merger. He also noted that while co-CEO arrangements create a problem of a lack of clear authority (leading me immediately to wonder whether Oracle’s co-CEO arrangement works because the only true authority in that company is Larry Ellison), arrangements that have more success would be to have one company’s CEO take over as CEO of the combined entity, while the other company’s CEO becomes chair or lead independent director. Arrangements for successive CEOs – one is CEO for 2 years during transition and then the other takes over – will only work if severance packages are appropriately designed to ensure that the outgoing CEO has every incentive to make things as smooth as possible for his/her successor.
In general, though, he noted that we see fewer mergers of equals these days in part because mergers are CEO-driven processes, and CEOs don’t want to have to share their power with the CEO of another company.
And that’s what I’ve got for the panel. In general, though, the CLI is an amazing event and I am so glad I can attend even part of it – and direct my students to attend as well.