Weekly Updates (3-4-2015)
- joshnosal
- Mar 4, 2015
- 6 min read
————— Summary —————
In Re Appraisal of Ancestry.com, Inc. (Jan. 30, 2015)
Michael C. Halpin v. Riverstone National, Inc. (Feb. 26, 2015)
Colonial Blvd., LLC v. Griffin (Feb. 26, 2015)
Have Banks Changed From 2007?
Apple/Samsung Duopoly Will be "Slaughtered" in Five Years
Watch the Bull Market
Strong Dollar, Weak Oil, and Emerging Market Growth
————— Developments in Delaware Law —————
RULE: If parties fail to meet their respective burdens of proof for evaluation, the court may conduct a DCF analysis for its own evaluation. However, such analysis may be ignored if sufficiently close to merger value when merger was conducted in a fair and competitive sale.
In its ruling, the Delaware chancery court upheld the growing practice of appraisal arbitrage, and rendered a valuation decision finding the merger price as the fairest measurement of stockholder value on a going concern basis. Because both sides’ experts presented wildly different valuations, failing to meet their respective burdens of proof, the Court undertook a DCF analysis based on the parties’ conflicting valuations. The Court remained skeptical as to the reliability of the experts’ analyses due to their common practice of reverse engineering a process to arrive at a pre-selected value. In the end, the Court chose to adopt the merger price as the fair valuation and abandon its DCF analysis yielding 21 cents less than the merger price. Its choice of the merger price over the DCF analysis result was primarily a result of the Courts finding of a fair and competitive sales process without any lack of synergies that would indicate a diminished fair market value. As a result, the 21-cent buffer between DCF analysis and merger price was not enough to overcome the presence of a robust sales process.
RULE: If a waiver of appraisal rights is not done so explicitly in a shareholder agreement but rather conditioned on a certain action, that action must be performed as provided for in the shareholder agreement or else the appraisal right has not been waived.
This case dealt with a shareholder agreement (SA) that included a drag-along provision setting forth two obligations upon the proposal of a change-in-control transaction that would waive the minority SHs appraisal right: (1) the tendering of minority shares, requiring 10-days notice; or (2) the vote of approval of the minority SHs, requiring notice before the transaction as required by law. During the course of events, the 91% controlling SH (Riverstone-sub) approved and executed a merger with Riverstone and only after the fact delivered an information statement (IS) to the minority SHs requiring their written approval. The Court found that the IS called upon the obligation of approval vote in the SA without reference to the tender obligation. Because the IS was delivered after the merger was executed, failing to meet the notice requirement for an approval vote under the SA, the Court held that the minority SHs had not waived their appraisal right under the drag-along provision. The Court focused on the specific language of the contract, noting that the drag-along provision did not explicitly waive the appraisal right but instead provided avenues of action that would require the waiver of the appraisal right. Because the corporation failed to take the specified action required to waive the minority’s appraisal rights, it could not now assert that such rights had been waived. Finally, the court determined that covenants of good faith and fair dealing do not waive the minority’s appraisal right under the SA because Roverstone-sub’s written approval of the merger as a controlling SH rendered the requirement of an approval vote after-the-fact a foreseeable circumstance that should have been negotiated for prior to entering the SA.
RULE: An arbitration clause within an LLC agreement will remain effective even after the LLC has been converted into a corporation and will grant arbitral jurisdiction to decide arbitrability of the dispute IF the clause (1) applies to “all disputes under or related to this agreement,” (2) references arbitration rules that give the arbitrator authority to decide jurisdiction, and (3) later contracts do not explicitly replace the arbitration provision.
This case dealt with jurisdiction and the applicability of an arbitration clause included in an LLC agreement when the LLC was later converted to a corporation, against whom the claims were brought. The court recognized that an arbitration agreement continues to bind a relationship unless the arbitration provision is explicitly replaced by a subsequent document. In this case, the court noted that no language of the corporation’s charter explicitly replaced the arbitration provision of the LLC agreement and that both documents maintained their independent existence relating to governance and the LLC, respectively. Furthermore, the court determined that an arbitrator retains jurisdiction to determine arbitrability if (1) the clause “generally provides arbitration of all disputes,” and (2) reference is made to arbitration rules that empower an arbitrator to decide jurisdiction. Finally the court held that the arbitration clause was not invalidated by its mediation element or a discrepancy in arbitral venue.
————— News —————
Recently JP Morgan Chase has had to defend its business model against analysts’ suggesting it should be broken up. Citigroup and Goldman Sachs have also had their own struggles. However, the biggest banks are bigger and more profitable than they ever were in 2007. Since 2007, the top 3 banks’ total assets have increased from 8 Trillion to 10 Trillion from 2007 to 2015, and total revenue of the top 6 has increased from 57 billion to 73 billion. Statistics also indicate that salaries continue to out pace inflation. However, the Banks are still too dependent on short term lending, where there is a gap in federal regulation.
As a result, it is unclear if banks have reversed their trajectory since the 2008 collapse. Fees still remain too high. Although there are more assets, fees should have reduced as a product of an economy of scale, and technology has made it easier than ever to finance efficiently. Additionally, political influence has diminished. But this reduction has been replaced with a cross breeding between commercial and investment banks. In the past, banks remained exclusive in either commercial or investment practice, creating tension that would impede their respective political influences. Now, however, there is a more unified political interest that, without internal tension, may fail to avoid another crisis.
It is predicted that smaller original equipment manufacturers (OEMs) will take over the handset market share in the next 5-years using two tactics. First, turnkey deals allow chip manufacturers to partner with software providers to provide customers with a packaged product giving them permission to use the chips with the software to run them. The second tactic is commoditization of hardware, allowing OEMs to produce cheap handsets with awesome performance. As a result, tier-one OEMs, like Apple and Samsung, will struggle to compete at the lower end of the market. Most lower tier OEMs have seen huge growth in developing markets where there is a higher demand for lower end handsets. Their understanding of these markets gives smaller OEMs a big advantage over the larger players. As a result, it may only be a matter of time until the Apple and Samsung duopoly is toppled, similar to Nokia.
Although the Fed predicts a strong market, it has slowed since the expiration of the latest Fed stimulus last October. Consumer spending, retail sales, consumer confidence, new housing starts, construction spending, auto sales, and overall manufacturing have declined in the past few months. Although market activity has grown based on the presumption that the Fed will not raise interest rates, the monthly job report indicates that a raise may be closer than expected. Yet, the Fed must stop its easy money policies. If continued, they will inevitably lead to a large economic collapse ‘tomorrow’ as opposed to a smaller recession ‘today.’ As a result, the market remains bullish for now, but this depends on if support levels hold.
The strong dollar has resulted in currency tightening in many countries, which in turn results in a balance between economic growth and currency value. With the strong dollar value, the sale of Central Bank dollars sucks up the supply of local currency and reduces liquidity. In response, Banks may either buy back dollars with reserves, resulting in implicit monetary tightening, or sell bonds in exchange for dollars, reducing currency value. In summary, the creation of more local currency stimulates growth by increasing liquidity, whereas the reduction in local currency reduces liquidity thereby restricting growth.
However, depreciated oil prices may solve the problem. By placing more cash in American pockets, the reduced prices, allow for an increase in consumer goods sales, which can in turn, stimulate markets across the developing world.
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