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The views expressed in this post, as in all of my posts, are mine alone and should not be taken to represent the views of Fasken Martineau DuMoulin LLP or any of my partners or associates.

A little over five years have passed since the U.K. Takeover Code was reformed on September 19, 2011 in order to prohibit deal protection provisions — including lock-ups, “no shop/no talk” covenants and termination or “break” fees — in M&A deals involving the acquisition of publicly-listed U.K. companies.  Seizing upon a rare and valuable opportunity to conduct some natural experiments into the effect on the U.K. M&A market of this regulatory change, a pair of students from Stanford and Harvard recently published a study on the impact of the 2011 Reforms on U.K. deal volumes, the incidence of competing offers, deal premiums and deal completion rates.[i]  The results of their study are both interesting and instructive.

Among other things, they found that:

  • the ratio of U.K. deals to non-U.K. deals[ii] decreased by approximately 50% after the 2011 Reforms;
  • this reduction in deal volume was not offset by any increase in the incidence of competing offers or deal premiums in the U.K.; and
  • as a result, the U.K. M&A market experienced an estimated quarterly loss of approximately US$19.3 billion in deal volume following the 2011 Reforms, implying a quarterly loss, assuming a conservative average deal premium of 20%, of approximately $3.3 billion to shareholders of U.K. public companies since the 2011 Reforms were put in place.

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Seagate Technology’s Unusual Alliance with ValueAct Capital: Is There Method in Seagate’s Madness in Inviting an Activist Wolf into the Fold?

Last month, Seagate Technology plc, an $11 billion company in the data-storage business, announced a secondary block trade in which it facilitated the transfer of roughly 9.5 million ordinary shares, representing an approximate 4%

The views expressed in this post, as in all of my posts, are mine alone and should not be taken to represent the views of Fasken Martineau DuMoulin LLP.

“That’s off market.”

As a deal lawyer, I’ve heard that phrase more times than I care to remember.  It’s supposed to be a knock-down argument.  We’re supposed to pack up our bags and go home, cease and desist from any further discussion of a deal term once our counterparty claims that it differs from what other contracting parties have customarily agreed upon.

Occasionally there’s even an element of rebuke in the claim that a term is “off market”.  The unspoken accusation is that, like neglectful schoolchildren, we simply haven’t done our homework (Tsk. Tsk.).  Basketball fans old enough to remember NBA hall-of-fame centre Dikembe Mutombo may recall the finger wag with which he habitually celebrated blocking a shot.[i]  “That’s off market” is a bit like one of Mutombo’s finger-wagging blocks: not only is the proposed deal term emphatically rejected; we’re encouraged to draw the conclusion that the proposal should never have been attempted. (Get that weak $#!+ outta here.)

I find this confounding.[ii]  Settling a dispute between contracting parties simply by reference to what other contracting parties have agreed upon in the past seems, on its face, a suspect approach to getting the right result.  We’re talking about a trend, right?  A market trend.[iii]  We’re supposed to follow the trend, without question?  I’m tempted to call that approach to contract negotiation “lemming-like”, except I’m afraid that doing so would be unfair to lemmings.[iv]

Of course, those who negotiate contracts by reference to market custom are unlikely to view the practice as mindless crowd-following with potentially undesirable consequences.  On the contrary, the intended significance of market custom is that it serves as a proxy of sorts for reasonableness.  The reasonableness of including or excluding a certain provision (or a certain form of provision) in a contract is supposed to be established by the fact that a whole bunch of other contracting parties in a broad range of circumstances have entered into contracts that include or exclude that provision (or form of provision).  By establishing reasonableness in this manner, market custom arguments tacitly appeal to our intuition that there is strength in numbers.  Surely all of those people could not have gotten things all wrong? If a majority (in some cases, a substantial majority) of other contracting parties have determined that this or that term should be included in a certain type of agreement, that’s probably sufficient evidence that it’s a reasonable result, no?

It all sounds rather plausible at first blush.  A substantial difficulty arises, however, because in attempting to establish reasonableness on the strength of brute numbers, market custom arguments become disconnected from an essential constituent element of reasonableness: namely, reason itself.  To say that X is ‘reasonable’ is to say, as the term itself suggests, that X is able to be justified by reason.  But, perversely, arguments based upon market custom increasingly surrender any supposed claim to reasonableness the more we focus on reasons and how they might influence the inclusion or exclusion of this or that term in a contract.

To see why this is so, it is helpful to remind ourselves that reasonableness depends largely on context.  Taking a crude but ready example, it is generally not reasonable to strike another person, though most would agree that it may be reasonable to do so in self-defence.  Similarly, depending upon context — in other words, depending upon the set of background facts and circumstances against which contractual negotiations take place — what might be considered reasonable in a contract negotiation will change.

Perhaps in the specific negotiation of concern to us, the Buyer (say, of a privately-owned operating gold mine) under an Asset Purchase Agreement is paying a bargain basement purchase price, representing a significant discount to what a DCF analysis would suggest is the fair price.  It would not be unreasonable in those circumstances for the Seller to expect the Buyer — indeed, the Buyer will be economically motivated (given the value it is getting and the reasonable expectation that there would be other interested purchasers at the discounted price) — to content itself with a less comprehensive set of contractual protections than might be customary.  Far from unreasonable, in fact, this makes perfect sense since the risk of value diminution in the asset, which the Buyer might otherwise feel compelled to minimize by contract, has already been minimized by the discounted price being paid (it may even have been accounted for in arriving at the discounted price).

Or maybe price paid is not the salient feature of our fact scenario, but rather the jurisdiction in which the operating mine is located.  Let’s say it’s located in an especially high-risk political environment, perhaps a country whose government has a history of expropriating assets or enforcing an investor-hostile foreign exchange regime with significant penalties for non-compliance.  In that case, barring a scenario like the one we just considered in which the risk has already been factored into a discounted purchase price (and in many cases the risk, albeit material, may be not be readily quantifiable such that this is not practicable), it would be entirely reasonable for the Buyer to expect, and for the Seller to expect to have to provide, additional contractual protections, over and above those customarily seen in asset purchase transactions, to reflect the amount of political risk the Buyer is prepared to take on, both during the period between signing and closing[v] and during the post-closing period[vi].

As the surrounding context changes, in other words, our reasons for insisting upon/against, or for accepting/rejecting, certain contractual provisions also change.

Arguments based on market custom, however, are typically insensitive to contextual distinctions and the variations they produce in what may be considered reasonable.  They typically tell us, not what other contracting parties in circumstances substantially similar to ours have agreed upon but, what has most commonly been agreed upon by a much larger population of contracting parties, many of which were negotiating in contexts quite different from our own.

“67% of all M&A purchase and sale agreements involving privately owned targets[vii]include (or exclude) such and such a provision.”  Before reacting to that sort of statement (Oh my!  Sounds like a decisive majority…), don’t we first need to know that those agreements were negotiated in circumstances substantially similar to our own such that they reflect a standard of reasonableness appropriate to us?  Of what relevance is it to us that most M&A purchase and sale agreements involving privately owned targets do not include specific indemnities for environmental costs, for example, if most of those agreements do not involve the sale of a mine (or another environmentally taxing asset or business)?

You may wonder at this point whether I’m merely identifying a problem with ‘market’ definition.  Perhaps we can adjust for the context insensitivity of market custom arguments simply by specifying the relevant market with greater precision.  Thus, instead of comparing our Asset Purchase Agreement to all M&A purchase and sale agreements involving a privately-owned target, we might further specify ‘the relevant market’ so that it includes only asset purchase agreements (adding deal structure context) for the purchase and sale of operating mines (adding industry and development stage context) located in high-risk political environments (adding geographic/political context) at a significant discount to fair value (adding pricing context).  That certainly provides a fair amount of context and gives us a higher degree of confidence that the agreements from which we are proposing to take guidance were struck in a set of circumstances comparable to our own.

Unfortunately, however, the addition of context sensitivity to a market custom argument comes at the expense of its persuasiveness, attenuating its claim to reasonableness.  That’s because the increased focus on context has the result of shrinking the relevant market.  There are, logically, fewer asset purchase agreements than M&A purchase agreements of any form whatsoever, and fewer still that relate to the sale of mining assets, and even fewer that relate to the sale of operating mines, and so on.  At some point, the addition of context circumscribes the universe of comparable agreements, or ‘the relevant market’, so tightly that a market custom argument loses much, if not all, of its strength in numbers.  But, of course, such arguments rely upon strength in numbers for their claim to reasonableness and, consequently, their persuasiveness.  Being told that 67% of agreements in the relevant market include (or exclude) this or that provision is far less compelling — it’s far less persuasive; it provides far less evidence of reasonableness — when ‘the relevant market’ comprises only three agreements than when it comprises 50.

This is obviously a quirky result.  It demonstrates that
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A follow up to our ground-breaking 2013 Canadian Proxy Contest Study, our 2014 Update sheds additional light on some of the issues and trends that we previously identified and raises a few new issues for further thought.  Among the highlights of last year’s Canadian market experience in proxy contests were the following:

  1. 2013 witnessed a

This is the second installment of a series of posts in which I will be critically examining a number of arguments made by proponents of the view that the time has come for Canadian securities regulators to “vacate the field” of poison pill regulation, leaving oversight of shareholder rights plans to the courts. Evaluating the soundness of their arguments has become a matter of potentially far-reaching consequence following a proposal to reform poison pill regulation put forth earlier this year by the Canadian securities regulators,[1] in which they effectively propose to adopt — in my view, inappropriately — the recommendation that they “vacate the field” of poison pill regulation. The views expressed in this post, as in all of my posts, are mine alone and should not be taken to represent the views of my partners.

In my last contribution to Timely Disclosure I highlighted the repeated failure by proponents of the “vacate the field” perspective on poison pill regulation to appreciate that Canadian securities regulators have a legitimate basis, firmly rooted in their statutory mandates of investor protection and capital market fairness and efficiency, and quite independent of any basis the courts may have, for regulating poison pills. Their oversight in this regard has spawned a confused belief that, in applying the defensive tactics policy to prevent poison pills from interfering indefinitely with the ability of target company shareholders to respond to an unsolicited takeover bid, Canadian securities regulators have been specifying the contents, and monitoring the observance, of the fiduciary duties of target company directors. Echoes of that confusion reverberate through a number of the arguments made by the “vacate the field” crowd.

How the confusion underpinning the “vacate the field” perspective undermines the argument that poison pill regulation by the Canadian securities regulators is ultra vires

The most straight-forward version of the “vacate the field” argument, and the one that most obviously suffers from the confusion at issue, invites us to conclude, based upon little more than the observation (admittedly correct, so far as it goes) that it is the proper function of courts to interpret and enforce rights and duties that arise under corporate law, that the regulation of poison pills by Canadian securities regulators is, ipso facto, ultra vires and places a “thumb on the scale”[2] of poison pill regulation, generating (perverse) adjudicative outcomes that depart from those one might expect were poison pill regulation left to the courts (as it is in the United States).
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A colleague recently suggested that my last contribution to Timely Disclosure called to mind the more familiar view, which has gained in prominence over the past half-decade or so [1], that the time has come for Canadian securities regulators to “vacate the field” of poison pill regulation, leaving oversight of shareholder rights plans to the courts.  I found his suggestion rather troubling.  Frankly, I do not wish to be associated with that view.

To be sure, there is some superficial similarity between the “vacate the field” perspective on poison pill regulation and my own view that Canadian securities regulators should not in principle be advancing any campaign for legislative reform that aims to limit the power of shareholders on the basis of perceived threats that shareholder activism allegedly poses to corporate North America and the economy as a whole.  Both views call for restraint from securities regulators in deference to other rule-making agencies — the courts, or the legislatures (for purposes of such a general point of comparison, the specifics don’t really matter) — that are better positioned, we claim, to adequately serve the relevant regulatory objectives.

But that’s about where the similarity ends.  Indeed, I happen to think that the “vacate the field” perspective on poison pill regulation makes a version of the mistake that I effectively accused Martin Lipton of making in my last post: it fails to give Canadian securities regulators their proper due.  Mr. Lipton gives to Canadian securities regulators more than they are properly due, implicitly vesting in them the power to legislate in the name of broad policy objectives that far outstrip the scope of their twin policy mandates of investor protection and capital market efficiency and fairness.[2] The “vacate the field” view, in contrast, makes the obverse mistake of giving to Canadian securities regulators less than they are properly due, calling upon them to vacate a field of regulation that they properly occupy by virtue and in furtherance of those mandates.

Let’s pause for a moment on that last statement: Canadian securities regulators, I am claiming, are properly authorized to regulate poison pills by virtue and in furtherance of their twin policy mandates of investor protection and capital market efficiency and fairness.  I would not have thought this to be a particularly controversial claim.  Indeed, I would have thought it rather obvious that a policy mandate of investor protection can ground regulation safeguarding the ability of investors to dispose of their investments without undue restraint and on terms of their own choosing; equally obvious that the objective of fostering fair and efficient capital markets can justify regulating third-party interference in secondary market transactions between otherwise willing buyers and sellers.

But somehow these claims have been anything but obvious to those who have argued that Canadian securities regulators should vacate the field of poison pill regulation.  They have repeatedly misapprehended the basis upon which securities regulators in Canada are competent (in fact, I’d argue duty-bound) to regulate poison pills.  
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Renowned New York corporate lawyer Martin Lipton was in Toronto on October 8 preaching the evils of shareholder activism to anyone listening at the OSC Dialogue, an annual event hosted by the Ontario Securities Commission at which market participants are brought together on issues and trends facing the capital markets.

Mr. Lipton’s message is stark and unsettling: shareholder activists, and activist hedge funds in particular (so he claims) [1], contribute to a malaise of “short-termism” that has infected corporate North America by, among other things, pressuring management of corporations to shift management strategy away from long-term value creation, the “core engine for economic growth, national competitiveness, real innovation and sustained employment,” [2] and towards short-term measures designed to create immediate increases in stock prices.  If he’s right, this is a problem of crisis proportions, posing nothing less than a threat to the national, and arguably global, economy as a whole.

The trouble, or at least part of the trouble, is that it is not at all obvious that he’s right.  Notwithstanding Mr. Lipton’s claim that “there is quality empirical evidence that short-termism and activism have an adverse impact on the long-term prospects of companies generally”[3] the matter is far from being free of controversy.  Among others, Professor Lucian Bebchuk of Harvard Law School, a leading scholar in the field and a long-time intellectual adversary of Mr. Lipton’s, disputes the claim, arguing that it is not supported by the data. [4]

I have no intention of trying to settle the debate here, in part because I’m not sure that it can be settled.  As Mr. Lipton himself has observed in responding to Professor Bebchuk’s position (though seemingly without recognizing the implications of his observation for his own position):[5]

[n]o empirical study…is capable of measuring the damage done to…companies and the…economy by the short-term focus that dominates both investment strategy and business-management strategy today. There is no way to study the parallel universe that would exist, and the value that could be created for shareholders and other constituents, if these pressures and constraints were lifted and companies and their boards and managements were free to invest for the long term.
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