If Initial Offerings Fall Short, Start Looking for Bulls

The market for initial public offerings has contracted sharply in recent weeks - an indication of investor pessimism that may actually turn out to be bullish for the overall stock market.

Revitalized US Airways Is Creating a Merger Buzz

The surprising early success of US Airways Group, the result of a merger last year, has led to some behind-the-scenes talks among investors and airline executives that could lead to more industry consolidation in the months ahead.

When Management Leads Down the Buyout Path

The list of this year’s management-led buyouts keeps getting longer. Two of the largest targets have included HCA and Kinder Morgan, but several other companies, such as Aramark, NCO Group and Emmis Communications, have also helped to extend the trend.

In some ways, management’s participation in a take-private deal is a positive sign. It suggests that top executives, who are presumably in a good position to gauge a company’s prospects, see the publicly traded business as undervalued.

From the perspective of the public shareholders, however, a management-backed takeover often means leaving money on the table — or, at least, that is what recent data suggest.

Heinz Announces Governance Reforms

Seeking to woo institutional investors, H.J. Heinz Co. has embraced majority voting in board elections and other corporate governance reforms. The company unveiled these policy changes on July 20 as it sought support from state and union pension funds in a proxy contest with billionaire shareholder Nelson Peltz.

Heinz announced these commitments after CEO William Johnson met with representatives from the California Public Employees' Retirement System (CalPERS), the largest U.S. state pension fund. The Pittsburgh-based ketchup maker also detailed these steps during a presentation to the Change to Win labor federation.

Heinz officials have told ISS that the company will adopt a full majority vote standard with a director resignation policy, as Intel, Dell, and more than 30 other firms have done. In addition, Heinz said will ask shareholders to vote to change supermajority voting rules to require only 60 percent approval, rather than 80 percent, to make certain charter and bylaw changes. The company also promised to put any "poison pill" plan to a shareholder vote within a year of adoption.

Topps Announces Compromise Slate of Directors

The bitter yearlong proxy contest at Topps has drawn to a close: the trading card and candy maker and the hedge funds that have hounded it will expand its board of directors and embrace a compromise slate, the two sides said in a press release this afternoon. A vote on the revised list of nominees will be held on Aug. 25.

The agreement between Topps and the two hedge funds, Pembridge Capital Management and Crescendo Partners, will expand the board of directors from nine to 10 positions. Chairman and chief executive Arthur T. Shorin will join the slate of three nominees proposed by the hedge funds, including Pembridge manager Timothy E. Brog.

Reforms May Redraw Battle Lines in Proxy Fights

Even as baseball card maker Topps was squaring off with activist shareholders at its annual meeting on Friday, a prominent law firm was predicting a big shift in the landscape of such proxy contests. “The convergence of three strands of reform appears poised to change the mechanics — and perhaps eventually the results — of shareholder voting in director elections,” lawyers at Wachtell, Lipton, Rosen and Katz, an adviser on many big Wall Street deals, wrote in a recent article that appeared in the New York Law Journal.

Reason No. 1: The New York Stock Exchange has proposed a rule banning broker discretionary voting in director elections. No. 2: The Securities and Exchange Commission may relax rules governing electronic delivery of proxy materials. No. 3: There is “growing momentum” toward a standard of electing directors based on a majority of votes cast rather than a plurality.

“Taken together, these reforms could significantly increase the power of activist shareholders in influencing director elections,” states the report. The upshot, if this theory holds: Expect more proxy fights.

Controversial Big Pharma-Generic Deals Now More Controversial

FBI agents searched the Manhattan office of Bristol-Myers Squibb CEO Peter Dolan as part of a criminal investigation into an agreement the drug company struck to delay the launch of a generic version of blood-thinning drug Plavix, its best-selling product. Here are stories from the NYT and WSJ.

The investigation concerns a March deal struck by Bristol-Myers and Sanofi with generic-drug maker Apotex to settle litigation. (Sanofi markets Plavix outside the U.S.) Apotex had filed a patent infringement lawsuit against Bristol-Myers, challenging its Plavix patents. Bristol-Myers and Sanofi-Aventis reached an agreement with Apotex allowing the two companies to continue selling the drug until 2011 without competition from Apotex. They also planned to pay Apotex a minimum of $40 million and Apotex would drop its litigation.

The legality of these controversial deals between Big Pharma and their generic competitors has become a lightening rod issue inside the Beltway. (For earlier Law Blog posts on the issue, click here and here.) The FTC has said these Big Pharma agreements with low-cost generics are anti-competitive — essentially, they’re payoffs that stymie competition and hurt consumers. It asked the Supreme Court to review a similar deal between Schering Plough and generic rival, to no avail.

Bristol-Myers’s CEO said yesterday there was nothing illegal about the agreement and said the company was cooperating with the investigation.

Venture Capital Moves Out of the Garage

The garage is giving way to the cubicle. Venture capital firms, long synonymous with early-stage investing in entrepreneurs toiling away in their garages, are increasingly emphasizing later-stage deals. Billions of dollars are now going into companies with hundreds of employees and even profits and actual office buildings.

The trend is being driven by several factors, but chief among them is a sluggish market for initial public offerings. That means it is taking longer and costing more for start-ups to go public, making investing in the rawest firms a more expensive proposition. At the same time, limited partners — the institutions and well-heeled individuals who trust venture capitalists to bring them big returns — are providing the industry huge supplies of money. And that money has to go somewhere.

Buy It, Strip It, Then Flip It

On July 14, less than seven months after the private-equity trio of Clayton, Dubilier & Rice, Carlyle Group, and Merrill Lynch Global Private Equity bought Hertz Corp. from the ailing Ford Motor Co. for $14 billion, the group filed a preliminary prospectus with the Securities & Exchange Commission to sell shares in an initial public offering.

Buyout firms are celebrated for their ability to take on huge debts, buy neglected companies, turn them around over the course of several years, and sell them to public investors for huge profits. Since 2001 they have delivered to their investors annualized returns in excess of 20%, and have attracted record amounts of capital to buy even bigger companies. But the quick "strip and flip" the Hertz buyout firms are pulling off makes them look more like fast-buck artists than thoughtful turnaround specialists.

Investor Class Actions Hit 10-Year Low

According to a study by Stanford University, federal class actions filed by investors during the first half of 2006 are at their lowest level since 1996. The first half of this year saw only 61 class actions filed, compared with 111 in the first six months of 2005, according to the report. The current total is 36 percent lower than the average for the period from 1996 to 2005.

Enough Anger to Make Ketchup Boil

The biggest food fight in Corporate America is about to get a lot messier. In less than three weeks, shareholders of Heinz will vote on whether to back the company's current 12-member board and its management or install Nelson Peltz's 5-member slate. As the date has approached, the proxy contest has become more than just a referendum on the company's leadership. It has become a battle of personalities, culture clashes and frequent attempts at mudslinging.

ISS: Summary of Today's SEC Webcast on the New Executive Compensation Disclosure Package

Investors calls for increased disclosure on executive compensation were answered today as the Securities and Exchange Commission (SEC) adopted an extensive and wide-reaching executive compensation disclosure package. The new rules are intended to advance the interests of shareholders through better disclosure.

The Commission's new rules require new tally sheet disclosure that will provide the first in focus snapshots of the total annual compensation packages paid to senior executives at U.S. companies. Clear and meaningful disclosure in "plain English" is now going to be required in the areas of pensions, deferred compensation, severance and perquisites. The staff also corrected many of the problems that investors had raised concerning the original proposal.

Shareholders called upon the Commission to keep compensation committee members on the hook for their decisions related to pay. The staff neatly accomplished this difficult task by creating a new slimmed-down Compensation Committee Report that will accompany the new beefed-up Compensation Discussion and Analysis (CD&A) section prepared by management. The staff also fixed the most glaring problems with the so-called Katie Couric rules by proposing to limit its application to highly-paid, senior-decision makers. The extended comment period on this provision should provide some additional fine-tuning.

The Commission's new rules are also asking for greater transparency on option grant programs and plans. Essentially, the new rules relating to option grant practices will look at 1) timing practices and, 2) practices involved in establishing exercise practices.

What do these new rules mean for investors? Since companies will be required to present an accurate picture as to why and how compensation decisions are made, investors can now better evaluate the actions of board members and will have access to more sophisticated tools to oversee their investments.

Executive Pay Disclosure Rules Revamped

The vote was unanimous — five in favor, none against — on Wednesday as the Securities and Exchange Commission adopted new rules requiring companies to provide more details on executive compensation. As of Dec. 15, companies’ annual filings will have to include tables with a single figure (with as many zeroes as necessary) representing the total yearly compensation for chief executives, chief financial officers and the next three highest-paid executives. All kinds of non-cash perks, including retirement benefits, will now have to be revealed.

Goldman Finds Investing for Itself Rewarding

Private equity has paid off handsomely for Henry M. Paulson Jr., the former chief executive of Goldman Sachs.

For the last two years, Mr. Paulson, now the Treasury secretary, has banked $24 million in investment returns from lucrative partnerships made available to top Goldman executives. The sudden flowering of these investments — last year, Mr. Paulson’s return was $12.7 million, according to the firm’s 2006 proxy — signals vividly how Goldman’s growing private-equity business has been gushing profits not only for the firm’s executives, but also for the investment bank as a whole.

The rush of investment banks to replicate the Goldman model — using internal private-equity funds as a profit stream and as a means to fertilize its investment banking and asset management businesses — is the latest example of copycat economics on Wall Street.

Fees from the traditional business of advising companies on underwritings and mergers have been squeezed by corporate clients who have become less beholden to their investment bankers.

Private equity, on the other hand, whose essence is investing directly in companies, selling for a profit and inviting select clients along for the ride, has become the most mercenary, and right now the most popular, of Wall Street fads.

S.E.C. Chief Looks to Regain Power Over Hedge Funds

S.E.C. Chairman Christopher Cox called Tuesday for “emergency” steps to reinstate parts of a rule that required hedge funds to register with the agency after an appeals court threw out the rule last month.

Mr. Cox, told a Senate panel on Tuesday that the regulatory framework governing hedge funds was inadequate, but he declined to ask Congress for additional authority to police the industry.

Instead, Mr. Cox told the Senate Banking Committee that he would ask the commission to adopt measures to regain some of the authority it lost a month ago, when a federal appeals court ruled that the S.E.C. could not require hedge funds to register.

Blackstone May Crash the HCA Party, Report Says

Rival private equity firms are turning pea-green with envy over the record-breaking L.B.O. of HCA by Bain Capital and Kohlberg Kravis Roberts. It’s no wonder: What self-respecting P.E. firm would want to be left out of the type of elusive mega deal that has the analysts and industry watchers falling over themselves to predict the future of the industry?

Apparently not Blackstone Group. The Times of London reports that the buyout firm is preparing to gatecrash the world’s biggest leveraged buyout .

McGraw-Hill Chief Sees Froth in Deal Wave

In the market for acquisitions, how does one company compete with the billions of dollars being deployed by packs of private equity funds? One possibility: You don’t. That seems to be the philosophy of Terry McGraw, the chairman, president, and chief executive of publisher McGraw-Hill, who offered an unusually frank assessment of the mergers and acquisitions environment on an earnings conference call on Tuesday.

HCA Buyout: A smelly deal?

In his Business Law Professor Blog today, Dale Oesterle questions the inherent fairness to the public shareholders of a going private deal engineered by management and investment bankers for the corporation (a "MBO"). The professor notes "As executives of a publicly traded company the executives and their advisor had a fiduciary duty to the company to maximize its value for its public shareholders. Now they are buyers and maximizing value for themselves. These MBOs have an inherent off-color odor."
He points out troubling aspects of these deals. " The question in such deals is always the same. Why did the executives not do for the public company what they now propose to do for the company when they are the owners? Are the executives taking personally a corporate opportunity that they discovered as fiduciaries? [And in this case are their advisers also taking advantage of their inside information.] Have the executives of a publicly traded company "dogged it" to set up the buyout opportunity?"
A very interesting perspective.

Rep. Baker revisits hedge funds with help from Frank

Rep. Richard Baker (R-La.) is poised to tackle the red-hot issue of hedge-fund regulation, collaborating with Rep. Barney Frank (D-Mass.) on a revamp of a 1999 bill that put the Federal Reserve in charge of monitoring the sprawling hedge industry.

Baker’s drive to revisit the debate over hedge-fund disclosure that he helped ignite seven years ago comes amid heightened congressional scrutiny of the complex hedging universe. Fearing a market convulsion harmful to investors, lawmakers are still weighing whether to take preemptive action to rein in hedge funds, which rely on creative and risky trades to reap profits under light regulation.

HCA Deal Carries $500 Million Breakup Fee

Should the mammoth buyout of HCA come undone, the hospital company may end up owing a half-billion dollars to its would-be acquirers. Under terms of the merger agreement filed late Monday with regulators, HCA would be required to pay a termination fee of $500 million to the buying group if the deal is cancelled under certain conditions. Though it may seem like a substantial sum, it amounts to 2.4 percent of the $21 billion purchase price, while breakup fees can often come to about 3 percent of the deal price. The ratio for HCA’s breakup fee is even lower if calculated off of a deal value of $31.6 billion, which includes the debt that HCA’s buyers will assume or refinance.

Notably, there is a gentler breakup fee that kicks in if HCA agrees to a better takeover offer from a competing group. Called the “go shop termination fee,” this fee is just $300 million, regulatory filings show.

HCA Buyout Highlights Era of Going Private

HCA's agreement Monday to sell itself to a private equity consortium for more than $30 billion might be the largest leveraged buyout on record, but it also underscores a growing debate about whether the recent string of take-private deals is likely to continue. Some analysts say the surge in these debt-financed transactions is near a peak, with financing conditions expected to worsen. Others, however, predict that the buyout spree will go on, as a slew of big public companies, fed up with scrutiny from investors and regulators, sell themselves to private equity firms.

M&A boom brings more deals, but premiums shrink

PHILADELPHIA (Reuters) - Merger volume set a record in the first half of the year, but dealmakers had become more discriminating shoppers than during other deal booms.

Companies now fetch less in auctions than in the past. The average premium -- the difference between the takeover price and the seller's stock price the day before news of the deal hits -- hovered around 20 percent in the first half of 2006, according to research firm Dealogic.

That's down from 31 percent in the first half of 2000 -- the last M&A peak. In the United States, premiums averaged 24 percent, above the 16 percent for European mergers, Dealogic said.

Defending the American I.P.O.

It has become almost a cliché by now: Selling shares on United States exchanges has become too hard for foreign companies, thanks to, among other things, the harsh legal environment and the complicated, onerous provisions of the Sarbanes-Oxley Act.

It may be true that U.S. listings by foreign companies have declined. But, as The Economist reports in its latest issue, many companies still find that the benefits of listing on American exchanges still outweigh the headaches.

2 Are Charged in Criminal Case on Stock Options

Moving to crack down on what Securities and Exchange Commission chairman Christopher Cox has called a “poisonous” practice, federal prosecutors have handed down the first set of charges in their widening investigations into stock options backdating, charging two former Brocade Communications executives with one count each of securities fraud. A separate civil complaint filed by the S.E.C. names the two and adds a third officer.

George L. Reyes, Brocade’s chief executive until January 2005, and Stephanie Jensen, vice president for human resources until 2004, were accused of doctoring documents, including job offer letters, minutes of meetings, to make it seem as though options ladled out to employees were given earlier and out of the money. The S.E.C.’s complaint also includes Antonio Canova, Brocade’s chief financial officer until December 2005.

Hedge Funds Deregister, SEC Oversight Debate Rages On

Just three weeks after the D.C. Circuit struck down the SEC’s rule requiring hedge-fund registration, 10 managers have filed papers to deregister, reports the WSJ.

It’s not clear why they’re deregistering; in some cases several of the funds are shutting down. Yet, says the Journal, the news “signals that the SEC may need to move quickly lest other managers deregister, further weakening the agency’s grasp on the booming hedge-fund industry.” Or not: Many industry watchers, including some within the SEC, believe that further oversight of hedge funds is unnecessary.

Private Equity’s Extreme Makeover

The perception of private equity firms has undergone a radical change over the last fifteen years or so. These investment firms have gone from being seen as pillagers and “barbarians” to being the darlings of Wall Street, writes MarketWatch’s David Weidner.

Basically, if you’re not in a PE fund, selling advisory and financing services to one or building a fund inside your bank, you have missed out on the party, and by party, we mean cash.

Simply put: private equity funds rule Wall Street.

Are Big Buyout Deals in Trouble?

The days when companies could dream of landing deals as big as Kohlberg Kravis Roberts’s legendary $31 billion takeover of RJR Nabisco may have since passed into history, Breakingviews writes. The reason? The fuel needed to power such efforts — cheap financing — has finally dried up.

That has led to failure, like the attempted $18 billion buyout of Tennessee’s HCA, or to deals more expensive than originally imagined, such as Toys R Us having to pay 50 basis points more for its recent loan than it wanted, taking cuts out of its private equity owners’ profits.

European I.P.O.s Get Boost from Sarbanes-Oxley

Initial public offerings of European venture-backed companies rose sharply in the second quarter of this year, as entrepreneurs and investors flocked to exchanges unburdened by the requirements of the U.S. Sarbanes-Oxley Act.

Thirty-one venture capital-backed European companies completed I.P.O.s in the second quarter of 2006, the highest quarterly number since the Internet bubble-era heyday of the fourth quarter of 2000, a period that saw 35. All but two went public on European exchanges.

Investor Engagement on the Rise in Europe

Shareholders are filing a growing number of resolutions at continental European companies, according to an analysis of ISS proxy data.
ISS has tracked a total of 299 shareholder proposals filed at continental European firms through June 30, which traditionally marks the end of the European proxy season. The figure represents a 25 percent increase over the number of proposals tracked during the same period last year. For the entire year, ISS is projecting that the total number of shareholder resolutions will significantly exceed the 384 investor resolutions filed in calendar year 2005.

Vote of confidence

The board of directors at Sherwin-Williams Co. has voted to adopt a new majority voting policy when it comes to electing its directors.
The Cleveland-based coatings company’s new voting policy states that “any director in an uncontested election who receives more ‘withheld’ votes than ‘for’ votes is required to tender his or her resignation to the board's nominating and corporate governance committee.”
From there, the committee will make a recommendation to the board whether it should accept the resignation or take some other action. Board directors are elected annually by the company’s stockholders.

Wal-Mart & the Law

A federal judge has just struck down Maryland’s controversial health-care law targeted at Wal-Mart on the grounds that it’s preempted by federal ERISA law. The Maryland law was enacted in January requiring companies with more than 10,000 employees in Maryland to spend at least 8% of payroll on health care or contribute the difference to the state Medicaid fund.

SEC gets asset freeze in Petco insider trading case

WASHINGTON, July 19 (Reuters) - The U.S. Securities and Exchange Commission said on Wednesday it obtained a court order freezing the assets of certain unknown purchasers who bought call options of Petco Animal Supplies Inc. (PETC.O: Quote, Profile, Research) stock ahead of news that the company would be acquired for $1.8 billion.
The SEC said one or more purchasers engaged in illegal insider trading by buying more than 1,400 call option contracts for Petco in late June and early July 2006.
On July 14, the company announced that it had agreed to be acquired by a company owned by two private equity funds for $29 per share in cash, a 49-percent premium above the price Petco stock closed the previous day.
The options were "out of the money," indicating the investors believed the stock price would rise substantially, and were set to expire within weeks of the purchase date, the SEC said.
The commission said the unknown purchasers received illicit profit of about $862,000 through Swiss and English accounts.
The SEC said it is seeking permanent injunctions, disgorgement of ill-gotten gains and civil penalties.



© Reuters 2006. All Rights Reserved.

Backdating Options

Professor Oesterle (Business Law Prof Blog) says "Journalists continue to misunderstand the crisis -- it is a violation of disclosure requirements and a tax fraud to call "in the money" options "at the market" options." As I blogged earlier today, Oesterle also observes that "Lawyers, who should have sniffed out the practice (or may have even participated), are now cashing in as law firms are racking up the billing hours defending firms that may have undertaken the practice." After equating the current options scandal with "nickel and dime" abuse of their executive perquisites, Oesterle concludes that he has "an inherent distrust for high paid executives that nickel dime their own companies -- these folks are cheaters and are likely to get their companies into trouble on the big stuff. An executive that backdates options should be shown the door, before his cheating heart hurts the company on stuff that matters."

U.S. Senate committee sets hearing on hedge funds

WASHINGTON, July 18 (Reuters) - The U.S. Senate Banking Committee said on Tuesday it will hold a hearing on July 25 to discuss the regulation of hedge funds.

The committee, which oversees the Securities and Exchange Commission, said a list of witnesses for the session would be announced at a later date.

A federal appeals court last month threw out an SEC rule adopted in 2004 that required most U.S. hedge fund advisers to register with the investor protection agency and submit to occasional inspections.

Some Democrats in the House of Representatives have introduced a bill to revive efforts to tighten government oversight of the hedge fund industry.





© Reuters 2006. All Rights Reserved.

Saudi prince criticizes rising costs at Citigroup

Saudi Prince Alwaleed bin Talal, the largest shareholder in Citigroup Inc., said shareholder patience is wearing thin over rising costs at the largest U.S. bank.

"The results are positive but they are not able to get the costs under control," Alwaleed told Reuters on Tuesday referring to Citigroup. "We have to take draconian, and I say draconian, measures to control the costs,"

Prince Alwaleed, the nephew of King Abdullah, has been ranked by Forbes magazine as the world's fifth-richest person. His estimated fortune of $23.7 billion makes him the wealthiest Muslim businessman

Renaming ATLA: The Contest Continues

The WSJ editorial page pens an item on the imminent renaming of the Association of Trial Lawyers of America, which votes today on changing the moniker of the plaintiffs’ bar organization. The editorial says it looks like they’re going to go with “the impressively unspecific and high-minded ‘American Association for Justice.’”

“Driving this switcheroo,” the editorial reads, “is ATLA’s concern that more and more Americans are under the impression that trial lawyers are less interested in justice than they are in generating frivolous lawsuits that pad their own bank accounts.”

Backdating: Lawyers’ Latest Full Employment Act

For public companies, investigations of possible stock-option backdating have become a huge headache. But for big law firms, they’re the latest full employment act, generating hour after billable hour of work across practice areas, from tax and executive compensation to securities and white-collar defense. Here’s the story from today’s Wall Street Journal by Peter Lattman (i.e., the Law Blog).

Big Buyout Deal for HCA Is Derailed, Report Says

A massive leveraged buyout deal for hospital operator HCA has fallen apart, The Wall Street Journal reported. The deal, which was in the final stages of negotiation, would have been among the largest in history, according to the report.

The company convened a special board committee to study the offer for a buyout by a group of private-equity firms, but its debt load of $11 billion made it difficult for lending banks and prospective buyers to offer a price that was high enough to satisfy the company.

The bidding consortium included Bain Capital, Kohlberg Kravis Roberts, Merrill Lynch Private Equity and the family of U.S. Senate Majority Leader Bill Frist, whose father and brother founded HCA.

Proxy Firm Backs Hedge Fund in Topps Feud

Hedge funds trying to shake up the board at baseball card maker Topps got a boost on Tuesday when Institutional Shareholder Services, an influential proxy advisory firm, came out in support of the funds’ nominees for director. Despite Topps’ repeated assertions that the candidates are not qualified, the proxy firm has recommended that Topps’ shareholders vote for the rival slate at the company’s annual meeting later this month.
ISS issued a report that said in part that “the presence of the dissidents on the Topps’ board would likely prove beneficial to long-term shareholder value. The long-term financial and operational performance of the company and the dissidents’ skill sets and track record established both the need for change and the dissidents’ ability to effect change.”

Venture funds' big rebound

Fundraising by venture capital firms and their big cousins, buyout firms, is on track to hit new records, which could pump more money into Silicon Valley companies and start-ups.

In the second quarter ended June 30, 50 venture capital firms raised $11.2 billion, the most since the first quarter of 2001 and well beyond the $6.8 billion raised in the first quarter of 2006, according to a report released Monday by Thomson Financial and the National Venture Capital Association.

Buyout firms raised $30.8 billion for the quarter, setting a record for the most money raised during the first half of a year: $53 billion.

Study Finds Backdating of Options Widespread

More than 2,000 companies appear to have used backdated stock options to sweeten their top executives’ pay packages, according to a new study that suggests the practice is far more widespread than previously disclosed.

The new statistical analysis, which comes amid a broadening federal inquiry of the practice of timing options to the stock market, estimates that 29.2 percent of companies have used backdated options and 13.6 percent of options granted to top executives from 1996 to 2005 were backdated or otherwise manipulated.

So far, more than 60 companies have disclosed that they are the targets of government investigations, are the subject of investor lawsuits or have conducted internal audits involving the practice, in which options are backdated to days when the company’s shares trade at low prices.

Legislation to Spur Majority Vote

Lawmakers in Delaware, where most U.S. companies are incorporated, have amended the state's General Corporation Law (DCGL) to facilitate majority voting in director elections, but they stopped short of switching the law's default standard from plurality to majority.
The legislation, which goes into effect Aug. 1, makes clear that director resignation policies--which have been adopted by pharmaceutical giant Pfizer and more than 100 other firms--are enforceable under Delaware law. The new law also mandates that directors cannot overturn or alter shareholder-approved bylaw amendments that spell out vote requirements in director elections.
While investors advocating for majority voting welcome the amendments, the legislation falls short of their demands to change the default standard in uncontested board elections. Moreover, some governance analysts question the overall efficacy of the amendments to give shareholders a greater say in the boardroom.
With Delaware behind them, proponents of majority voting are now focusing on legislative efforts in Sacramento to create a default majority vote standard. A bill to do just that for all companies incorporated in California is now moving ahead in that state's legislature.
ABA Model Act Revision Endorses Resignations
Last month, the American Bar Association officially amended the Model Business Corporation Act, which is the basis for the corporate laws in most U.S. states, to include a provision for ousting a director in 90 days or fewer if he or she receives more than a 50 percent withhold vote. That provision is similar to the resignation policies in place at Pfizer and other firms, but it standardizes the 90-day window for replacing directors.
The moves by the ABA and Delaware lawmakers won't stop activists from pushing for deeper board election reforms, governance analysts say, leading many to predict growing investor support for such proposals later this year and next.

PricewaterhouseCoopers Forecast: M&A Will Remain Strong Through 2006, But Could Peak Thereafter

Cash remains at record levels and economic numbers are good, but some wonder if the market is ready for a breather

NEW YORK, July 13 /PRNewswire/ -- M&A activity remains at a six year high, according to the Transaction Services group of PricewaterhouseCoopers, buoyed by record cash levels at corporations and private equity firms, plentiful financing and historically low levels of troubled commercial debt.
"Companies need to do something with their excess cash," said Bob Filek, a Transaction Services partner. "They've done a good job making their businesses more efficient, and they've got to put that cash to use somewhere. While many have increased their dividends or bought back stock, the favorite use of cash is still strategic investment, much of which is acquisition-related."
"We still have good economic numbers and robust liquidity markets that make it easy to raise debt," said Greg Peterson, Americas leader of the TS private equity practice. Those two factors alone bode well for the continuation of the wave.
What's different in this M&A market, compared with the late '90s, is private equity's increased involvement, particularly on big, complex transactions. As large funds with big overhangs of uninvested capital perfect consortium bidding, they can do deals of virtually any size.
They're using all available tools and structures to get superior returns for investors, minority investments and step acquisitions as well as full buy-outs.

34 States to Sue Chip Makers, Charging Broad Price Fixing

SAN FRANCISCO, July 13 — At least 34 states are expected to file a lawsuit on Friday against seven semiconductor makers, accusing the companies of overcharging their customers for computer memory chips.
Separately, Elliot Spitzer, the attorney general of New York, filed a lawsuit on Thursday to recover damages for consumers in the state.
The legal cases will open a new chapter in the four-year-old investigation that has already led to large fines for the companies and prison sentences for several executives.
The multistate suit, which is to be filed in Federal District Court in San Francisco, accuses the chip makers of conspiring to fix prices and manipulate supply from 1998 to 2002.
The chip companies expected to be named in the multistate suit include Infineon Technologies, Hynix Semiconductor, Micron Technology, Mosel Vitelic, Nanya Technology, Elpida Memory and NEC Electronics America.

Businessman Sues to Block Newspaper Sale

SAN FRANCISCO -- A prominent businessman who turned the sale of the San Francisco Chronicle into a drawn-out legal drama six years ago is now suing to prevent McClatchy Inc. from completing a $737 million deal to sell three of the newspapers it picked up in its recent acquisition of Knight Ridder Inc.
Clinton Reilly, a millionaire real estate investor, plans to file an antitrust lawsuit Friday that could derail or at least delay McClatchy's plan to unload the San Jose Mercury News, Contra Costa Times and Monterey Herald, according to his lawyer, Joseph A. Alioto.

Winblad says dollars going to private equity 'frightening'

Ann Winblad criticized the amount of money flowing into private equity -- of which venture capital is just a small portion.
"It's a frightening number," she said.
"I don't know how you invest $15 billion. How many (leveraged buyouts) are available out there for the amount of dollars going to private equity," said Winblad, a founding partner of Hummer Winblad Venture Partners, told about 65 people attending a luncheon Thursday for the Financial Women's Association of San Francisco.

Gabelli Will Pay $130 Million in F.C.C. Settlement

Mario Gabelli, one of Wall Street’s highest paid money managers, and affiliates agreed to pay $130 million to settle a civil-fraud lawsuit that alleged they used sham small-business affiliates to fraudulently buy parts of the U.S. cell-phone spectrum, the Department of Justice said Thursday.
The agreement with the Justice Department ends a six-year legal battle that pitted Gabelli, 63, against Rufus Taylor III, a whistleblower who eventually persuaded the government to take over his civil fraud lawsuit. Taylor will receive $32.2 million of the settlement.

Majority Voting in the Election of Directors

Most people would be surprised to learn that the corporation laws of most states, including Ohio, do not require the affirmative vote of a majority of the votes cast for the election of directors. In fact, the plurality system (the nominee with the most votes is elected, even if he runs unopposed and gets only one vote) is embedded in most state corporation laws, including that of Ohio, where the General Corporation Law provides “At all elections of directors, the candidates receiving the greatest number of votes shall be elected” (Section 1701.55(B)). The American Bar Association’s Model Business Corporation Act, which is used by most states to form their laws, also establishes plurality voting as the default standard.
Not surprisingly, the majority voting movement has become a significant issue with shareholder activists seeking to implement corporate governance improvements. Majority voting has become the biggest issue of the 2006 proxy season, with more than 140 corporations faced with shareholder proposals seeking to change the method of electing directors. These proponents believe that the majority vote standard will increase board members’ accountability to the shareholders by enabling them to give unpopular candidates a definitive “thumbs down.”
Those opposing majority voting fear it will destabilize companies, permitting parties with short-term interests (such as hedge funds) to sway board composition to favor their positions. They are also concerned that unexpected changes in board composition could result in unintended complications under state corporate laws, federal regulations, exchange listing standards, or existing employment or severance contracts. Both sides of the debate agree, however, that majority voting represents a change in corporate power dynamics. Since the board hires and fires the CEO and CFO, the majority voting question is ultimately about who runs the corporation.
Notwithstanding the growing momentum of the majority vote movement, corporate America remains split on how to respond. Some, like Pfizer, have taken a step toward majority voting by adopting policies that require directors to offer their resignations if they fail to get a majority of votes. Others, such as Dell and Intel, have gone further and officially changed their bylaws to support majority voting, but the vast majority of U.S. corporations have made no change at all, without publicly revealing their reason for ignoring the issue. In December, 2005, the powerful proxy advisory group and voice in corporate governance matters, Institutional Investors Services, issued a statement saying it would support only “true” majority voting standard policies, thus calling into question policies like Pfizer’s which retain plurality voting as the default.
Plurality voting, introduced in the 1980’s, was designed to prevent failed elections when more than one candidate ran for a single board seat. However, today most board candidates, nominated by management, run uncontested. Proxy fights are expensive, and therefore rare occurrences. Shareholders looking for change have limited options. They can organize a “withhold votes” campaign, but even a majority of withheld votes for a candidate has no legal authority under the plurality standard.
The American Bar Association, after a one-year study of the majority vote issue by its Corporation Laws Committee, concluded that the default plurality voting model should remain unchanged. However, that Committee did propose changes to the Model Business Corporation Act that would make it easier for corporations to institute majority voting, if they so chose, and to strengthen the enforceability of director resignation policies. While the ABA stance may mean that most state corporation laws will remain unchanged, legislation has been introduced in California which would require corporations organized there to have majority voting in uncontested elections. And in Delaware, the State Bar Association’s Corporate Law Section proposed draft legislation that, while not changing the default plurality voting rule, would allow shareholders to introduce an irrevocable change of bylaws for majority voting and require irrevocable resignation of directors who fail to get a majority of votes.
If in fact the Intel model of bylaw amendment becomes the “gold standard” in director voting, it would not be without some justification. When confronted with the issue after shareholder activists filed a majority voting proposal, Intel and the carpenters’ union formed a roundtable group to look at the details of implementing such a provision. Eventually, four unions and fifteen corporations participated in the discussions, following which Intel decided to adopt the bylaws revision. Since Intel’s bylaws are amendable, the company felt if the new voting model does not work as intended, it could amend the bylaws again. And as to the possibility that the new model could result in a failed election if a seat is unfilled, Intel opted not to deal with that issue in its bylaws, deeming it to be a sufficiently unlikely state of affairs.
Following Intel’s decision to adopt a majority vote bylaw in January of this year, there has been a clear upward trend in other companies adopting similar provisions. For example, Motorola, following news of Intel’s decision, changed its previous position to adopt the Pfizer policy approach, and amended its bylaws to adopt majority voting. “Our governance and nominating committee looked at the differences [between the Pfizer and Intel plans], looked at what the shareholder component was interested in and where we thought the vanguard of corporate governance was going,” says Motorola senior corporate counsel Jeffrey Brown. “Where we came out on balance was the Intel model.” Intel’s move, according to Brown, means that there is now a clear model out there from respected major technology companies. Clearly, this model is well on its way to becoming the new “gold standard”, supplanting the Pfizer model, and significantly advancing the interests of shareholders’ rights activists.
The majority voting standard is obviously most applicable in the context of public companies where voting is largely by proxy and the shareholders’ options limited to a “Withhold” or “For” vote on management’s slate of nominees. In the context of closely held private companies, application of majority voting could be more problematic, potentially resulting in failed elections in contests where no nominee achieves a majority of the votes. Thus private companies should consider adoption of majority voting with careful consideration of its implications, both intended and unintended, and then perhaps in conjunction with a carefully crafted shareholders’ voting agreement. This would certainly be the case in Ohio, where the plurality voting provision of the General Corporation Law will require a carefully crafted “work-around” in order to implement majority voting.

Penton for sale

Penton Media Inc., the Cleveland-based publishing, trade show and online media company that has struggled in recent years under the weight of heavy debt, said late this afternoon that it has retained Credit Suisse Securities as its exclusive financial adviser to assist it in exploring various strategic alternatives, including the possible sale of the company.

The SEC Isn't Finished With Hedge Funds

It's closing in on shady practices despite a setback from a federal court.
The hedge fund cops may be down, but they're hardly out. In late June a federal court nixed the Securities & Exchange Commission's new hedge fund registration rule, which required funds to provide the SEC with basic information and subject themselves to random audits. But don't throw a party for the hedgies just yet. During the nearly five months when registrations were taking place, SEC examiners found enough shady practices to keep investigators busy.

Angel groups take wing

The number of angel groups increased nearly 60 percent over the last three years from an estimated 150 in 2002 to 250 last year, according to an analysis by the Angel Capital Education Foundation and the Ewing Marion Kauffman Foundation.
Angel investors, found across the country, have become a key source of early financing as venture capitalists have put their larger cash coffers to work in bigger investments.

Sun Valley Diary: Arrival of the Bigwigs

The action begins today in Sun Valley, Idaho, where the investment bank Allen & Company is holding its annual mogul schmoozathon and (hopefully) dealfest. The A-List began arriving Tuesday night for a pre-conference barbecue, including Berkshire Hathaway’s Warren Buffett (who is giving a speech on Saturday), Ebay chief executive Meg Whitman (who, in contrast to the parade of luxury vehicles before her, pulled up in the passenger seat of a rented Ford Taurus, driven by her husband), Disney chief Bob Iger and his predecessor, Michael Eisner.

Topps Trades Barbs With Hedge Fund

Topps, the venerable purveyor of trading cards and Bazooka chewing gum, remains in a sticky proxy fight with an activist hedge fund shareholder that wants wholesale change at the company.
The latest salvos came Tuesday when Timothy E. Brog, managing partner (and sole employee) of Pembridge Capital Management, released a letter to other shareholders urging them to support his slate of nominees to Topps’ board. The letter argued that Topps, which makes baseball and Pokemon cards, has consistently failed to improve its finances for years, even as it fought off efforts to try new turnaround strategies.
Besides installing himself and two allies on the board, Mr. Brog writes that he will hire an adviser to explore a sale of all or part of the company, as well as consider a share buyback and a special dividend payment. Mr. Brog also promises to slash executive compensation and reduce other costs at the company.

Blackstone Fund Sets New Record

Blackstone Group announced early Tuesday that it has lined up $15.6 billion in commitments for its latest buyout vehicle, forming what it calls the world’s largest private equity fund.
It is hardly coincidence that Blackstone’s announcement comes amid widespread speculation that the fundraising in the private equity sector has crested.

Buffett’s Big Donation Stirs More Talk of a Successor

Mr. Buffett, the world’s second-richest man, fueled succession interest by pledging June 25 to donate Berkshire shares valued at about $37 billion, or 85 percent of his stake in the company, to the Bill & Melinda Gates Foundation and four family charities over time.

For Spitzer and Hedge Funds, Giving Is Mutual

New York attorney general Eliot Spitzer is among the first to point out when financial firms face unseemly conflicts of interest (often while brandishing a lawsuit). In that spirit, The New York Daily News is pointing out a potentially interesting convergence related to Mr. Spitzer: Several donors to his gubernatorial campaign also received millions of dollars in investments from a charity run by Mr. Spitzer and other members of his family.

UBS tops 1st-half global midcap M&A tables

Swiss investment bank UBS AG ranked top globally in the first half of 2006 on advice for mergers and acquisitions smaller than $500 million, according to figures from data provider Thomson Financial.
The bank, which ranked seventh on overall M&A in the first half according to figures released previously by Thomson, advised on more than $20 billion worth of such so-called midcap deals in the six months.

Judge Looks Into Modifying Terms of 2 Phone Mergers

WASHINGTON, July 7 — A federal district judge in Washington is considering the imposition of major modifications to the two largest telephone mergers in history: SBC Communication's acquisition of AT&T and Verizon's purchase of MCI.
In a surprising order issued Friday afternoon, Judge Emmet G. Sullivan raised a series of questions about the Bush administration's review of the two deals that he said should be answered by the Justice Department and the phone companies at a hearing next week.

Clean tech generating buzz with money crowd

Venture capitalists' growing enthusiasm for a broad range of clean technology investments has some talking bubble. But clean tech also has all the hallmarks of a fertile field for venture investing: innovative technology in large markets with the potential to pay off big. The so-called double-bottom line -- doing good while doing well -- is seen by some as merely a bonus.

One Last Peek Through the Hedges?

It is a strange time for people who follow the hedge fund industry. Thousands of these traditionally secretive investment pools were forced to cough up all kinds of information when a new Securities and Exchange Commission rule took effect in February. Then an appeals court tossed out the rule last month, raising the possibility that the stricter registration requirements will vanish, allowing these funds to retreat back into obscurity.
Drawing upon the figures reported to the S.E.C., Private Equity Info, an Austin, Texas-based outfit that runs a database on private equity firms and hedge funds, offers some data points about an industry in which solid numbers can be hard to come by.

I'd rather laugh with the sinners than cry with the saints...

Nathan Myhrvold and his somewhat mysterious company Intellectual Ventures have gotten plenty of attention lately, both in Corporate Dealmaker and BusinessWeek, where Myhrvold was the subject of the July 3 cover story. While the debate is raging in the IP corridors as to whether Nathan is a sinner (“he's nothing but a deep pocketed troll!”) or a saint (“he's the Edison of our age, and has the interest of the true inventor at heart!”), there is little debate that he will have an impact.

Keeping Up with the Blackstones

Pity the strategic investor. There was a time that an operating company — as opposed to a financial investor — had a built-in advantage in corporate auctions: It could afford to pay more because of the potential for cost reductions and economies of scale. But private equity firms, fueled by gobs of money, low interest rates and an increase in operational expertise, appear to have closed the gap, CFO Magazine reports.

Options Scorecard

Here's an updated look at companies that have come under scrutiny in recent months for past stock-option grants.
Updated July 3, 2006 -- RED TEXT indicates most recent updates

Venture-Backed I.P.O.’s Increased in 2nd Quarter

The picture is looking a bit brighter for initial public offerings of venture-capital-backed firms, which showed renewed activity — both in terms of dollar volume and the number of offerings — in the second quarter.
According to a report released Wednesday by Thomson Financial and the National Venture Capital Association, there were 19 venture-backed I.P.O.’s in the second quarter of 2006. That represents a 90 percent increase over the anemic 10 I.P.O.’s during the first three months of the year, as well as the 10 from the second quarter of 2005. This quarter’s venture-backed offerings totaled $2.01 billion, compared to $540.8 million raised in the first quarter of this year and $714.1 raised in the second quarter last year.

M&A TO STEP UP

DEALS COULD BE MARKET DRIVERS IN 2ND HALF OF '06
Federal Reserve Chairman Ben Bernanke not only unleashed a market rally when he hinted about a pause in interest-rate hikes but may have added even more fuel to the red-hot mergers and acquisitions market.
With the market believing the rate environment will be predictable, it will be easier for buyout firms, a major driver of deals, to raise financing, said S&P senior index analyst Howard Silverblatt.