October 2012

Dual track acquistion structureWhen the private equity firm 3G Capital took Burger King private in 2010, it used an innovative “dual-track” acquisition structure to minimize the amount of time to consummate the acquisition. This involved 3G simultaneously pursuing both a friendly tender offer to Burger King shareholders as well as a traditional merger that would need to be approved by shareholders at a special meeting. Since the Burger King deal, nearly 20 other companies have used this structure. 

In basic terms, a tender offer allows the acquirer to make a direct offer to shareholders to purchase shares of the target company at a specified price. Consummation of the tender offer is usually contingent upon the target shareholders tendering a minimum number of shares so that the acquirer can take advantage of a subsequent short-form merger to squeeze out any non-tendering shareholders thereby resulting in the acquirer being the 100% shareholder of the target company. On the other hand, a traditional merger involves the solicitation of shareholder votes to approve the acquisition by proxy or in person at a special shareholder meeting. 

From a timing perspective, acquirers typically prefer to use tender offers to accomplish acquisitions because it normal takes less time to complete because, among other things, it does not require a special meeting of the shareholders to approve the transaction. Where a traditional merger can take upwards of three to six months to complete (depending on the circumstances), a tender offer can be completed in as few as 20 business days following the date the tender offer is initiated (the minimum period that a tender offer must remain open). However, if shareholders of a target company do not tender the minimum number of shares necessary to consummate the acquisition, the acquirer would be forced to abandon the tender offer and switch over to a traditional merger structure. 

In the Burger King deal, rather than waiting to see whether the tender offer was successful, 3G simultaneously prepared documents and made filings to proceed with a traditional merger concurrently with the tender offer. By doing this, 3G would have a head start on the traditional merger transaction if the tender offer ultimately failed, thereby saving significant time. However, public companies considering this type of approach should be aware that the timing of certain key events when undertaking a dual-track approach could result in an inadvertent violation of the Exchange Act rules. 

Specifically, Rule 14e-5 issued under the Exchange Act prohibits an acquirer from Continue Reading Acquirers beware! New expedited acquisition method could violate the Exchange Act

Penn State Freeh reportMr. Lamm is Assistant General Counsel and Assistant Secretary at Pfizer Inc. and a Gunster alumnus.  The views expressed in this posting are Mr. Lamm’s personal views and should not be attributed to Pfizer Inc. or to Gunster.

While nothing good has come out of the Jerry Sandusky sexual abuse scandal at Penn State, I am not aware of anyone who has focused on the lessons learned, particularly the link between corporate governance and the scandal.  However, in my view, anyone who professes to be interested in corporate governance (or compliance) should read the report prepared by former FBI Director Louis Freeh and give it some thought.  It is comprehensive, well organized, well written and thoughtful; in short, it is an important document, notwithstanding the sordid subject matter and the massive human tragedy involved.

Of course, Penn State is an educational institution rather than a publicly traded company, and the facts of the Sandusky scandal are arguably not likely to be replicated in a public company setting.  However, many of the issues outlined in the Freeh Report apply equally to public companies – or to almost any form of organization – as much as to educational institutions, including the following (just to cover a few):

  • Boards of directors (or trustees, governors, etc.) tend to be blamed when bad things happen, even if they are not given the information they should be given and have no way of knowing that information.  Penn State’s trustees were excoriated in the press and other media for not dealing with the matter early on, despite the fact that they hadn’t been informed about the matter, didn’t even know of its existence and had no reason to know of its existence.  It’s really no different in the corporate world; the media tend to ask “where was the board?” even when the board could not possibly have known what was going on.  For example, was it really the board’s responsibility to review specific derivative trades that resulted in losses to financial institutions – particularly when the managements of the institutions provided information about the trades and assured their boards that the risks were minimal? If – as most corporate practitioners agree – the proper function of the board is to oversee management (rather than to supplant it), why should the board be blamed?
  • Of course, good directors understand that they have an obligation to ask questions, including tough questions, to test what they are being told and to ferret out more than what they’re being told.  Reading the Freeh Report, one gets the impression that Continue Reading GUEST BLOGGER: Lessons learned in corporate governance from the Jerry Sandusky tragedy

hacking a computerCybersecurity issues continue to be a hot topic for companies. As discussed in my prior blog posts, “Get ready for increased cybersecurity disclosure requirements” and “SEC pushes for disclosure of hacking incidents”, the SEC continues to focus on cybersecurity and data breach items and has now begun to encourage public companies to disclose them, even in the absence of applicable rules or regulations. The only official guidance from the SEC on cybersecurity disclosure continues to be the disclosure guidelines provided in October, 2011 in CF Disclosure Guidance:  Topic No. 2 – Cybersecurity (the “Release”). 

There has been some important movement on cybersecurity issues outside of the SEC. While this does not directly pertain to disclosure of these items, public companies should pay close attention to these developments since they may provide some valuable guidance in this area. These developments also confirm the importance of cybersecurity issues and support my position that the SEC will probably soon mandate additional disclosure requirements for cybersecurity items. 

On September 19, 2012 Senator John D. Rockefeller IV (D, West Va.) sent a letter to the CEOs of all Fortune 500 companies posing questions about these companies’ cybersecurity policies and related issues. His letter asked these companies to evaluate their roles and responsibilities in connection with cybersecurity legislation and reform and to work with the Federal government to successfully enact cybersecurity legislation. Responses to this letter are voluntary, but it is likely that most of these companies will respond in some fashion. The companies’ responses were requested by October 19, 2012. 

Senator Rockefeller has long been a very strong proponent of cybersecurity legislation, and he is clearly frustrated with the lack of progress in this area. He was instrumental in the introduction of both the Cybersecurity Act of 2010 and the Cybersecurity Act of 2012, both of which failed to gain Senate approval. The proposed Cybersecurity Act of 2012 was defeated by a filibuster in August 2012, and in his letter Senator Rockefeller attributes this filibuster to opposition from business and trade groups, particularly the United States Chamber of Commerce. He has supported President Obama’s proposed use of an executive order to enact cybersecurity protection outside of the legislative process, and he references this in his letter. Based on the language of his letter, however, Continue Reading Cybersecurity issues continue to draw attention

compensation committeesIssuers listed on the NYSE or Nasdaq should pay close attention to the rules proposed by the exchanges last week because the proposed rules will impact compensation committees; however, the impact may be a “tale of two exchanges” because the impact is more significant to Nasdaq-listed companies.  As you may recall, Congress included several provisions in the Dodd-Frank Act to combat perceived public concerns over excessive executive compensation.  One provision, say-on-pay, has been implemented, but other more controversial provisions such as executive compensation clawbacks and executive compensation pay ratios have not been implemented.  Last week, the exchanges proposed rules to implement the independence requirements for compensation committees required under Dodd-Frank. 

As we have mentioned before, Section 952 of the Dodd-Frank Act does not infringe on traditional state corporation law by requiring an issuer to have a compensation committee or to have a compensation committee actually approve executive compensation.  Instead, it directs the exchanges to design and implement their interpretations of corporate governance best practices based on the parameters of Section 952.  The NYSE and Nasdaq proposed rules are different, and I highlight some of the most important aspects of each of the set of rules below.  In general, NYSE-listed companies are impacted significantly less than Nasdaq-listed companies.  

Director Independence  

The SEC rules implementing Section 952 require that the exchanges’ definition of independence consider relevant factors such as (i) the source of the director’s compensation, including any consulting, advisory, or other compensatory fees paid by the listed company and (ii) whether the director has an affiliate relationship with the company.  The two exchanges interpreted the SEC’s rules vastly different.  

The NYSE merely maintains its current definition of “independence” and requires the issuer to consider the two additional factors set out by the SEC.  In practice, it would be highly unlikely that the two additional factors set out by the SEC would impact a board’s assessment of a particular director’s independence.  

Nasdaq’s current definition of “independent director” remains in effect; however, Nasdaq has elected to overlay a separate independence Continue Reading Proposed compensation committee independence rules will impact some issuers more than others