More is better – or so it’s said.  That’s bad news for Dell stockholders, as the Blackstone Group has dropped its bid for the company.  Blackstone had not formally announced an offer to compete with the $13.65 per share Michael Dell hopes will take the company private.  Through the due diligence process, Blackstone became unsatisfied with the world’s third-largest PC maker’s rapidly-atrophying marketshare—notably including a 14% decline in PC volume during 2013 Q1.  With Blackstone out, the activist investor Carl Icahn is the only likely competitor.  Mr. Icahn has preliminarily discussed a $15-per-share offer, but has not yet put it on the table.  For more, see NYTimes and Business Insider.

AIG v. BAC is headed to New York state court.  American International Group’s $10 billion lawsuit against Bank of America, filed in August 2011, alleges “fraudulent misrepresentations” regarding $28 billion in residential MBSs (mortgage-backed securities) which resulted in heavy losses for the insurer.  The merits of the case have been stalled as each side has jockeyed for jurisdictional advantage.  The Second Circuit Court of Appeal ruled this morning that the lower court had improperly denied AIG’s motion the case to state court.  For more, see Reuters.

[Editor's Note:  This post is a Latham & Watkins Client Advisory.  The Network has further coverage in another post.]

On March 21, 2013, the Staff of the Division of Trading and Markets of the US Securities and Exchange Commission published guidance in the form of Frequently Asked Questions on Rule 15a-6 under the Securities Exchange Act of 1934.

The FAQs resulted from the efforts of a Task Force assembled by the Trading and Markets Subcommittee of the American Bar Association to discuss and seek clarification from the Staff with respect to certain recurring issues regarding Rule 15a-6.  This clarification was requested in the form of published FAQs to provide greater transparency to the industry and to resolve certain inconsistencies created by, among other things, Staff turnover and general confusion by the industry and other regulators as to the proper application of the Rule’s rather complex provisions to a marketplace that has become markedly more global and technologically advanced in the nearly 25 years since the Rule’s adoption.

In the FAQs, the Staff affirms the general applicability of certain previously issued interpretive guidance and addresses certain aspects of the operation of Rule 15a-6, primarily with respect to issues concerning solicitation, the dissemination of research reports, recordkeeping requirements and chaperoning arrangements between foreign broker-dealers and SEC-registered broker-dealers. Although necessarily limited in scope, the FAQs provide much welcome guidance at a time when cross-border transactions have become an integral part of the securities markets.

Background

Rule 15a-6 permits foreign broker-dealers to conduct certain limited activities in the United States and with US persons without having to register as a broker or dealer under the Exchange Act. Under Rule 15a-6, foreign broker-dealers may (i) effect “unsolicited” transactions with any person; (ii) solicit and effect securities transactions with SEC-registered broker-dealers, US banks acting in compliance with certain exceptions from the definitions of “broker” and “dealer”, certain supranational organizations, foreign persons temporarily present in the United States, US citizens resident abroad and foreign branches and agencies of US persons; and (iii) subject to a number of conditions, provide research to and effect resulting securities transactions with certain types of large institutional investors.  Rule 15a-6 also provides that a foreign broker-dealer may engage in a broader scope of activities, including soliciting and entering into transactions with specified categories of institutional investors, with the assistance or intermediation of an SEC registered broker-dealer (the establishment of such an arrangement is typically referred to as a “chaperoning arrangement” and the SEC-registered broker-dealer is often referred to as the “chaperoning broker-dealer”).

To read the rest of this Client Advisory, please click here and search the Advisory number “1495.”

In Levitt v. J.P. Morgan Sec., Inc., 10-4596-CV, 2013 WL 1007678 (2d Cir. Mar. 15, 2013), the Second Circuit reversed a district court’s grant of class certification to a group of plaintiffs who alleged that Bear Sterns (subsequently bought by J.P. Morgan) had violated its duty to disclose when it did not notify investors of a fraudulent scheme by Sterling Foster, a now-defunct brokerage firm.

The case concerned allegations of fraud arising from a September 1996 IPO of ML Direct, a television marketing firm.  Sterling Foster orchestrated the IPO as the introducing broker, with Bear Sterns (subsequently acquired by J.P. Morgan) acting as the clearing broker.  In general, the clearing broker in a transaction owes no duty of disclosure to the customers of the introducing broker.  However, the plaintiffs sought to overcome this hurdle by establishing that Bear Sterns actively participated in the fraudulent scheme.

The district court agreed with the plaintiffs that Bear Sterns’s participation was extensive enough to trigger a duty to disclose.  However, the Second Circuit held that the plaintiffs had failed to allege “sufficiently direct involvement” by Bear Sterns.

The Second Circuit noted that providing “normal clearing services” do not give rise to a duty to disclose, even when the broker providing those services is aware of the introducing broker’s fraudulent intentions.  Rather, to trigger a disclosure duty, the clearing broker would have to actively depart from its normal passive clearing functions and affirmatively exert “direct control” over the introducing broker and the fraudulent trades.  The court found that Bear Sterns, by merely “allowing” such trades to proceed, had not assumed such a level of control.

The plaintiffs’ counsel characterized the ruling as “a sad day for investor protection,” stating that the court had “has for the first time held that a clearing firm has no duty to disclose that it is knowingly participating in market manipulation by its introducing broker.”

The court, however, carefully declined to address the legal implications of “market manipulation itself” on the duty to disclose, confining itself to its factual conclusion that Bear Sterns did not directly engage in such manipulation.  Underscoring the narrowness of the Second Circuit’s ruling, the New York district court refused to apply Levitt to a case where a defendant had made misleading statements, holding that the making of misleading statements constituted direct involvement.  The same district court has also recently observed that the question of market manipulation remains open.

[Editor’s Note:  The following is an Arnold & Porter LLP Client Advisory, written by Robert E. Holton, Lily J. Lu, D. Grant Vingoe, and Lauren R. Bittman.]

SEC official reminds private funds, including contacts private equity funds, that certain fund-raising and marketing activities and fees for “investment banking activities” require broker-dealer registration.

On April 5, 2013, David Blass, Chief Counsel of the Division of Trading and Markets of the Securities and Exchange Commission (SEC), spoke before the Trading and Markets Subcommittee of the American Bar Association on broker-dealer registration issues that arise in the private funds context. In his remarks, Mr. Blass warned that acting as an unregistered broker-dealer is a violation of the Securities Exchange Act of 1934, as amended (the Exchange Act), and can have serious consequences, including sanctions by the SEC and rescission rights, even when no other wrong-doing is found. Mr. Blass also noted that the SEC staff has increased its attention to the issue of broker-dealer registration, and he reminded the audience that compliance by private fund advisers with the requirements of the Investment Advisers Act of 1940, as amended, is not enough. In light of the significant consequences of acting as an unregistered broker-dealer and the SEC staff’s increased attention to this issue and the private fund space in general, private fund advisers should review their fund-raising and marketing activities, policies and procedures and contracts and arrangements with portfolio companies and solicitors to ensure compliance.

Click here to read the entire Arnold & Porter Advisory.

[Editor's Note:  The following post is a Kirkland & Ellis M&A Update, authored by Daniel E.Wolf, Sarkis Jebejian, Joshua M. Zachariah, and David B. Feirstein.]

With valuations stabilizing and the M&A market heating up, a rebirth of stock-for-stock deals, after a long period of dominance for all-cash transactions, may bein the offing.

If this happens, we expect to see renewed use of the term “merger of equals” (MOE) to describe some of these all-equity combinations.  As a starting point, it may be helpful to define what an MOE is and, equally important, what it isn’t.  The term itself lacks legal significance or definition, with no requirements to qualify as an MOE and no specific rules and doctrines applicable as a result of the label.  Rather, the designation is mostly about market perception (and attempts to shape that perception), with the intent of presenting the deal as a combination of two relatively equal enterprises rather than a takeover of one by the other.  That said, MOEs generally share certain common characteristics.  First, a significant percentage of the equity of the surviving company will be received by each party’s shareholders.  Second, a low or no premium to the pre-announcement priceis paid to shareholders of the parties. Finally, there is some meaningful sharing or participation by both parties in “social” aspects of the surviving company.

While each of the aspects of an MOE deal will fall along a continuum of “equality” for the shareholders of each party, there are a handful of key issues that require special attention in an MOE transaction.  

Click here to read the entire Kirkland & Ellis LLP publication, discussing Social Issues, Change of Control, Shareholder Vote/Fiduciary Issues, Consideration, and Agreements.

[Editor’s note: the following post comes from a recent M&A Alert by Kirkland and Ellis partners Daniel E. Wolf and Sarkis Jebejian.]

With valuations stabilizing and the M&A market heating up, a rebirth of stock-for-stock deals, after a long period of dominance for all-cash transactions, may be in the offing. If this happens, we expect to see renewed use of the term “merger of equals” (MOE) to describe some of these all-equity combinations. As a starting point, it may be helpful to define what an MOE is and, equally important, what it isn’t. The term itself lacks legal significance or definition, with no requirements to qualify as an MOE and no specific rules and doctrines applicable as a result of the label. Rather, the designation is mostly about market perception (and attempts to shape that perception), with the intent of presenting the deal as a combination of two relatively equal enterprises rather than a takeover of one by the other. That said, MOEs generally share certain common characteristics. First, a significant percentage of the equity of the surviving company will be received by each party’s shareholders. Second, a low or no premium to the pre-announcement price is paid to shareholders of the parties. Finally, there is some meaningful sharing or participation by both parties in “social” aspects of the surviving company

While each of the aspects of an MOE deal will fall along a continuum of “equality” for the shareholders of each party, there are a handful of key issues that require special attention in an MOE transaction:

Click Here to read the rest of this entry.

[Editor's note: The following post comes from Kirkland & Ellis's recent M&A Alert by Daniel E. Wolf, David B. Feirstein, and Joshua M. Zachariah.]

The “crown jewel” lock-up, a staple of high-stakes dealmaking technology in the 1980s M&A boom, has been showing some signs of life in the contemporary deal landscape, albeit often in creative new forms. As traditionally conceived, a crown jewel lock-up is an agreement entered into between the target and buyer that gives the buyer an option to acquire key assets of the target (its “crown jewels”) separate and apart from the merger itself. In the event that the merger fails to close, including as a result of a topping bid, the original buyer retains the option to acquire those assets. By agreeing to sell some of the most valuable pieces of the target business to the initial buyer, the traditional crown jewel lock-up can serve as a significant deterrent to competing bidders and, in some circumstances, a poison pill of sorts.

Given the potentially preclusive nature of traditional crown jewel lock-ups, it is not surprising that they did not fare well when challenged in the Delaware courts in the late 1980s. As the Supreme Court opined in the seminal Revlon case, “[W]hile those lock-ups which draw bidders into a battle benefit shareholders, similar measures which end an active auction and foreclose further bidding operate to the shareholders detriment.” Building on the holding in Revlon, the court in Macmillan said that “Even if the lockup is permissible, when it involves ‘crown jewel’ assets careful board scrutiny attends the decision. When the intended effect is to end an active auction, at the very least the independent members of the board must attempt to negotiate alternative bids before granting such a significant concession.” Although crown jewel lock-ups fell out of favor following these rulings, modern and modified versions of the traditional crown jewel lock-up have been finding their way back into the dealmakers’ toolkit.

During the height of the 2008 financial crisis, we saw a crown jewel lock-up in its most traditional form in the JPMorgan rescue acquisition of Bear Stearns. Driven by “life-or-death” urgency, Bear Stearns agreed to an option for JPMorgan to buy its Manhattan headquarters for approximately $1.1 billion, including in circumstances where a topping bid emerged. In the ensuing litigation, the plaintiffs argued that the option to purchase the building constituted an “effective” termination fee because the purchase price under the option was allegedly below fair value. A New York court, applying Delaware law, rejected this argument stating that the record did not substantiate the claim that the price was below fair value. The court, mindful of the extreme circumstances, also noted that the plaintiffs’ criticism of the “effective” termination fee and lock-ups as being excessive or unprecedented was also misplaced because Delaware law does not “presume that all business circumstances are identical or that there is any naturally occurring rate of deal protection, the deficit or excess of which will be less than economically optimal.”

To read the rest of this post, click here

According to a recent Wall Street Journal article, company executives continue to generate significant profits trading company stock, despite the presence of Rule 10b5-1 trading plans designed to prohibit insider trading.  The article, combined with a petition by a group of pension funds urging reform of 10b5-1 trading plans, likely will increase pressure on corporate boards to monitor 10b5-1 trading plans and trades made under such plans. In a recent client alert, Wilson Sonsini explains the 10b5-1 reform proposal. Wilson Sonsini attorneys Steve Bochner and Nicki Locker also will be hosting a webinar focused on managing the risks associated with these developments.

As mentioned previously, FCPA and other corruption-related enforcement of foreign transactions is on the rise. Additionally, while emerging markets often present the best growth opportunities, they also present the greatest corruption risks. In a recent client alert, Skadden explains the substance and scope of the FCPA as applied to international mergers, focusing on those in emerging markets. The alert specifies potential high-risk areas and the role of due diligence and an effective compliance program in uncovering and remedying these risks.

“Institutional Shareholder Services (“ISS”) and Glass, Lewis & Co., Inc. (“Glass Lewis”), the two major proxy advisory firms, recently released updates to their proxy voting policies for the 2013 proxy season. A summary of the updates to the Glass Lewis Guidelines is available here.” Gibson Dunn’s recent client alert “reviews the most significant ISS and Glass Lewis updates and suggested steps for companies to consider in light of these updated proxy voting policies.”

Late last year, the Federal Reserve issued guidance on its new framework for supervising large financial institutions.  The Federal Reserve’s primary objectives will be to increase the resiliency of financial institutions, and to reduce the impact of an institution’s failure on the broader economy.   Changes include a greater emphasis on recovery and orderly resolution planning as required by Dodd-Frank.  In a recent publication, Sullivan & Cromwell reviews the specifics of the recent changes and explains how their implementation may differ from the previous regulatory framework.

The expectation that courts will recognize and enforce the insolvency proceedings of foreign courts is essential to certainty and predictability of cross-border transactions.  This is especially important where the two nations’ bankruptcy laws materially differ.  Three recent decisions in the U.S. and U.K. call into question whether such an expectation is reasonable.  In one of the cases, the Fifth Circuit held unenforceable a $3.4 billion restructuring plan approved by a Mexican court as “manifestly contrary to the public policy of the United States.”  The Fifth Circuit took issue with the Mexican court’s decision that shareholders receive $500 million in value while higher-ranking creditors receive only 40 percent of their claims.  In a recent client alert, DLA Piper explains the implications of these decisions for certainty and predictability of cross-border transactions.

The U.S. District Court for the District of Columbia recently dismissed a lawsuit challenging recent amendments to CFTC Rule 4.5. With limited exceptions, the amendments require registration by investment companies that trade in futures, options, and commodities. The plaintiffs, the Investment Company Institute and the U.S. Chamber of Commerce, argued the amendments were arbitrary and capricious in violation of the Administrative Procedure Act and that the CFTC failed to perform adequate cost-benefit analysis. In rejecting these arguments, the court found that the link between unregulated derivatives and the financial crisis provided an adequate basis for the amendments. In a recent Client Alert, Ropes & Gray explains the court’s reasoning and the decision’s implications for registered investment companies.

Thinking about buying a Volkswagen car? What about buying Volkswagen the company? On November 1^st , BCLBE hosted a talk by Dr. Joachim Rosengarten of Hengeler Mueller, who guided listeners though the process by which a U.S. corporation acquires a German company. Dr. Rosengarten, who had attended Boalt Hall as an LL.M. student, shed light on the patchwork of laws governing international mergers and acquisitions by proposing and then analyzing a hypothetical acquisition of a German company by a U.S. operation.

Dr. Rosengarten’s lesson can be broken down into three rules: know the laws, get the stocks, and get the price right. The first challenge in acquiring a German corporation is to understand the applicable laws that will govern the purchase. German shareholders want the best deal if their company is to be purchased by a foreigner. German law applies to the acquisition, which is overseen by BaFin, the German equivalent of the Securities and Exchange Commission. Moreover, once an investor or corporation owns just a two percent share of a German company, it must disclose its stake to regulators and the public. Read the rest of this entry »