In the recent case of Steinhardt v. Howard-Anderson, discussed previously on this site with respect to the court’s position regarding certain proxy disclosures, Vice Chancellor Laster offered a new insight into the application of the enhanced Revlon review to a transaction where the consideration was a combination of cash and stock. The court enjoined the acquisition of Occam Networks, Inc. by Calix, Inc. pending additional disclosures regarding certain actions of Occam’s financial advisor. However, the plaintiff in the case had also argued for an injunction on process grounds. The court rejected that argument, but expressed its belief that Revlon applied.
In this deal, the Occam shareholders were to receive approximately 50% cash and 50% stock, with the stock portion perhaps ending up at just over the 50% measure. Immediately following the merger, the former Occam shareholders would own approximately 15% of the surviving corporation. Vice Chancellor Laster appeared persuaded that, because the shareholders would only hold a 15% minority stake in the surviving corporation, they would not likely be in a position to negotiate the size of the premium in any subsequent sale of Calix, making the present merger a “final stage transaction.” He explained: “The reason enhanced scrutiny applies to a change of control is because it’s a constructive final stage transaction. You’re giving up control to a person who could then cash you out because he’s the new controller. This is a situation where the target stockholders are in the end stage in terms of their interest in Occam. This is the only chance they have to have their fiduciaries bargain for a premium for their shares as the holders of equity interests in that entity.”
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On January 25, 2011, the SEC adopted final rules implementing Section 951 of the Dodd-Frank Act. These rules include requirements related to disclosure of golden parachute arrangements and shareholder advisory votes on such arrangements, as related to change in control transactions. The rules will be effective for change in control proxy statements and similar forms filed on or after April 25, 2011.
With respect to disclosure, the final rules require that proxy materials for a shareholder meeting to approve a change in control transaction must include both tabular and narrative disclosure of named executive officers’ golden parachute arrangements. The current disclosure required by Item 402(j) of Regulation S-K does not satisfy the new requirements, and there is no exclusion of de minimis amounts. The disclosure is required regardless of whether the company is required to include a “Say on Parachutes Vote,” as discussed below.
With respect to shareholder advisory votes, the final rules require a nonbinding shareholder vote on golden parachute arrangements in connection with any change in control transaction. However, this requirement does not apply to golden parachute arrangements between the acquiring company and the named executive officers of the target, or to compensation that has been subjected to a prior “Say on Pay” vote.
For further information, see the Client Advisory prepared by Alston & Bird’s Employee Benefits and Executive Compensation Group.
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On October 18, 2010, the SEC issued its proposed rules implementing certain portions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), including the shareholder advisory voting requirements on severance arrangements in the context of change in control transactions. Comments on the rules are due November 18, 2010. In addition to requiring certain non-binding shareholder advisory votes on change in control severance arrangements (so called “say-on-golden-parachute” votes), the proposed rules would also require both a narrative and tabular disclosure of change in control compensation and would require companies to distinguish among the sources or form of the compensation, for example cash versus acceleration of options. This heightened focus on change in control compensation arrives in a market increasingly eager to temper such arrangements.
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As discussed in this blog recently, Barnes & Noble is at the center of a proxy fight between Ron Burkle, billionaire owner of the Yucaipa group of funds that owns approximately 18.7% of B&N common stock, and Leonard Riggio, Chairman of B&N, who controls approximately 29.9% of the equity. Riggio disclosed yesterday that he had exercised options to acquire 990,740 shares, which will enable him to vote all of his stock holdings. The exercise price for the shares was $16.96 per share, exceeding yesterday’s market price for the shares, which closed at $15.35 per share. Burkle has announced that he will seek to replace the three B&N directors who are up for re-election at the September 28, 2010 stockholder meeting, including Chairman Riggio.
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In a decision rendered on August 12, 2010, Yucaipa American Alliance Fund II, L.P. v. Leonard Riggio, the Delaware Chancery Court upheld Barnes & Noble’s poison pill against a challenge from the company’s second largest stockholder, several funds (the “Yucaipa” funds) run by bilionaire Ron Burkle. The opinion establishes that the court is willing to find a poison pill to be a reasonable defense to threatened proxy contests for the election of new directors, and not just to threats of hostile takeovers. The opinion also includes in dicta the view that a poison pill may be unacceptibly preclusive if it does not leave the insurgent stockholder with a fair chance of success. This view is contrary to a view set out in the court’s recent decision in Selectica, Inc. v. Versata Enterprises, Inc., in which the court said a pill is not preclusive unless it “render[s] a successful proxy contest a near impossibility or else utterly moot.”
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On July 15, 2010, final Congressional approval of the Dodd-Frank Wall Street Reform and Consumer Protection Act occurred, when the Senate passed the bill by a vote of 60 to 39. President Obama is expected to sign the legislation next week. Embedded in the over 2,200-page Dodd-Frank Act are a number of provisions addressing executive compensation and corporate governance reforms. These provisions appear in Title IX of the Act, which may be cited separately as the Investor Protection and Securities Reform Act of 2010. Below is a brief summary of the executive compensation and corporate governance provisions in the Act that are applicable to all public companies. (Certain other provisions of the Act relate specifically to the governance of financial institutions.) A more detailed discussion, including observations regarding effects of the Act, can be found here.
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On June 10, 2010, the IRS issued Notice 2010-50, which provides importance guidance on net operating loss limitations in the context of ownership changes.
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In Binks v. DSL.net, Inc., the Delaware Chancery Court found that the defendant’s board acted consistent with its fiduciary duties under Revlon when, facing no other alternatives to bankruptcy, it approved a financing transaction that ultimately led to the sale of the company in a short form merger. The court found that the board acted in good faith, that a majority of its members were disinterested and that it was well-informed by an independent advisor.
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In LC Capital Master Fund, Ltd. (Quadramed) v. James, the Delaware Court of Chancery ruled that the merger target’s board of directors was entitled to favor the interests of the common stockholders with respect to allocating merger consideration, once the board had satisfied the contractual obligations owed to the preferred holders as set forth in the stock designation.
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