SEC Adopts New Rules to Facilitate Director Nominations by Shareholders

By Final Rule adopted August 25 and to be effective 60 days after publication in the Federal Register, companies will be required to include a shareholder nominee for director in company proxy materials if the nominating shareholder or shareholders acting together own at least 3% of the voting power of securities that are entitled to vote and the shares have been continuously held for at least three years.  Shareholders may not use the rule for the purpose of changing control of the company or in an attempt to obtain a number of seats on the board that exceeds that number allowable under new Exchange Act Rule 14a-11.

The rule applies to all Exchange Act reporting companies, including investment companies, other than companies whose only public securities are debt securities.  "Smaller reporting companies" are subject to the rule, but it does not apply to them until after a three-year phase-in period.  Foreign companies that come within the definition of "foreign private issuer" are not currently subject to the SEC's proxy rules and would not be subject to these new rules. Foreign companies that do not qualify as foreign private issuers would be subject to the rules.

Companies Prepare for Dodd-Frank Clawback Provisions

Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Sections 201 et seq.) establishes a mechanism for the orderly liquidation of large, failing financial institutions that threaten U.S. financial stability.  Section 210(s) of the Dodd-Frank Act authorizes the FDIC to recoup compensation from senior executives and directors who were responsible for the failure of the covered financial company.  The FDIC has yet to promulgate regulations to implement the requirements of this subsection.

Argo Group International Holdings, Ltd. executed an employment agreement with its president and CEO on August 10 which includes a clawback provision that explicitly references the requirements of the Dodd-Frank Act.  Section 23 of the agreement provides that the payments and benefits provided under the agreement shall be subject to a clawback to the extent necessary to comply with the requirements of Dodd-Frank or any Securities and Exchange Commission rule. The executive employment agreement is filed as Exhibit 10.1 to the Form 8-K filed on August 13 (file no. 001-15259).

In Item 11 Executive Compensation disclosure of the Form 10-K Amendment filed by ADPT Corp. on July 28 (SEC file no. 000-15071), ADPT notes that the compensation committee of the board of directors will be re-evaluating its compensation policies going forward and plans to consider the potential merits of early implementation of a clawback policy, consistent with Dodd-Frank provisions.

Employment Offer Letters filed with Dell's Cash Tender Offer for 3Par Inc.

Pursuant to an Agreement and Plan of Merger dated August 15, Dell Inc. is offering to purchase for cash all outstanding common shares of 3Par at $18 per share, or an aggregate of approximately $1.14 billion.  On the same day that Dell filed its formal tender offer, Hewlett-Packard Co. (HP) announced an unsolicited proposal to acquire 3PAR for $24 per share in cash pursuant to a tender offer followed by a merger.  The Dell and HP Schedule TO filings on August 23 bear SEC file no. 005-83579. 

Dell and each of twelve executive or other officers of 3PAR have entered into offer letters describing the terms and conditions of their employment following the completion of Dell’s prospective acquisition of 3PAR. The offer letters state the job title to be held by each individual upon completion of the merger, as well as the annual base salary, annual target bonus (expressed as a percentage of base salary), and value of projected Dell long-term incentive grants expected to be granted in March 2012 (as applicable).  In addition, Dell has promised to grant seven executives new Dell restricted stock units upon the closing of the merger, and to grant five executives cash awards upon closing.

Each of the offer letters is included as an exhibit to Dell's Schedule TO, as well as a form of employment agreement that all employees of Dell sign regardless of position.  The form employment agreement includes a number of acknowledgments by the transferred employee regarding (among other things) (i) at-will employment status, (ii) obligations regarding the use and development of intellectual property, inventions and copyrightable materials and (iii) responsibilities relating to the non-disclosure of confidential information, proprietary information and controlled technology and software.

BHP Billiton Launches $40 Billion Hostile Takeover Bid for Potash Corp.

BHP, the world’s largest diversified natural resources company, has offered to purchase all outstanding common shares of fertilizer producer Potash Corporation of Saskatchewan Inc. at $130 in cash per share.  The tender offer and circular is the first exhibit to the Schedule TO filed on August 20 (SEC file no. 005-44283).

The offer is conditioned on certain regulatory approvals, waiver or invalidation of the Potash poison pill (shareholders rights plan), and a sufficient number of shares being tendered by the expiration date that enables BHP to obtain control of the issuer.  The offer is not subject to any financing condition.

On August 18, BHP entered into a new multicurrency term and revolving facility and subscription agreement with the original lenders to, among other things, meet the potential funding requirements in relation to the tender offer.  The facility and subscription agreement is included as Exhibit (b)(i) to the Schedule TO. 

The facility agreement is in a form commonly used for loans arranged in the international loan market. It contains representations and warranties, covenants and events of default, each with applicable qualifications or carve-outs. The covenants include requirements relating to the financial indebtedness of Potash Corp. and, among other matters, place certain restrictions on the ability of the BHP Billiton Group to dispose of its assets or incur financial indebtedness in BHP subsidiaries.

Coal Companies Note Increased Exposure to Black Lung Benefit Liabilities

The Patient Protection and Affordable Care Act enacted in March 2010 contained an amendment to the Black Lung Benefits Act (BLBA) which reinstates provisions that had been removed in 1981.  The amendment provides that an eligible miner can be awarded total disability benefits if he can prove he worked 15 or more years in or around coal mines and has a totally disabling respiratory impairment.  In addition, the amendment provides for an automatic survivor benefit to be paid upon the death of a miner with an awarded federal black lung claim without the requirement to prove that the miner’s death was due to black lung disease.

Form 10-Qs filed by mining companies in August to report the fiscal quarter ended June 30 discuss the new legislation in the Risk Factors section, including Patriot Coal Corp. (SEC file no. 001-33466), Westmoreland Coal Co. (001-11155) and James River Coal. Co. (000-51129). 

Patriot Coal states it has evaluated the changes to the BLBA that provide for automatic extension of awarded lifetime benefits to surviving spouses and the changes to the legal criteria used to assess and award claims.  Patriot Coal estimates the impact to its current population of beneficiaries and claimants results in an estimated $11.5 million increase to its benefit obligation.

Westmoreland indicates that through the first three months of the amendment’s effectiveness, it has experienced an increase in black lung claims over similar periods, including the automatic award of certain widow claims that fall under the new provisions. Westmoreland states it has incomplete information to determine whether this increase in claims constitutes a one-time spike or represents a future trend in black lung claims and eventual awards.

James River accrues amounts for benefit obligations based on the present value of expected future costs.  At June 30, an independent actuary estimates James River obligations of $43.9 million for coal workers’ black lung benefits and $60.8 million for workers’ compensation benefits.  These obligations are unfunded and the company notes it could be required to expend greater amounts than anticipated if its assumptions are incorrect.

Arkansas Utility Offers Bonds Secured by Storm Recovery Property

In January 2009, Arkansas was struck by an ice storm which caused widespread damage to infrastructure and power outages throughout Entergy Arkansas Inc.'s service territory.  In response to the damage to the utility infrastructure the Arkansas legislature passed the Arkansas Electric Utility Storm Recovery Securitization Act authorizing the Arkansas Public Service Commission to issue financing orders allowing for the securitization of storm recovery costs. 

Entergy Arkansas Restoration Funding, LLC is issuing $124 million of senior secured storm recovery bonds, with Entergy Arkansas as the seller, initial servicer and sponsor.  The bonds are secured by storm recovery property, which includes the right to a special, irrevocable nonbypassable charge, known as a storm recovery charge, paid by all retail electric customers in the certificated service territory.  Credit enhancement for the bonds will be provided by such statutory true-up mechanism as well as by general, excess funds and capital subaccounts held under the indenture.

Morgan Stanley & Co. has agreed to purchase all of the bonds as underwriter.  The prospectus supplement was filed on Form 424B5 filed 8/13/10 (file no. 333-168010).  The underlying registration on Form S-3 includes as exhibits the forms of indenture, storm recovery property servicing agreement, storm recovery property purchase and sale agreement, and the Financing Order issued by the Arkansas PSC. 

IPOs in U.S. Markets Spending Less Time in Registration

The average number of days in registration by companies that have completed initial public offerings on U.S. exchanges or the OTC Bulletin Board through July 2010 has fallen to 125, a sharp drop from the 2009 average of 216 days in registration. The 2009 average was no doubt exaggerated by dire market conditions, but the average over the prior 3-year period ranged from 134 to 140 days in registration.

Fifty-seven of the 81 underwritten deals that made it to market in the first seven months of this year spent over 90 days in the registration mill, roughly in line with the five-year average since 2005 whereby two-thirds of IPO issuers take at least 90 days.

Nine IPO issuers so far this year and ten last year managed to take 30 days or less to move from the initial registration filing to the final Form 424. Sixteen of these 19 companies are headquartered in China. Of the 100 issuers since January 2006 that spent 30 days or less in registration prior to the IPO, only STR Holdings, Inc. is a U.S.-based company.

The information reported herein was gathered using IPO Vital Signs, a Web-based system that includes all SEC registered IPOs, including REITs and those non-U.S. IPO filers seeking to list in the U.S. markets. IPO Vital Signs does not track closed-end funds, best efforts or non-underwritten deals, or IPO offerings for amounts less than $5 million.

Merger Consideration Includes New Class of Non-Voting Shares

Grifols S.A., a foreign private issuer and Spain-based company engaged in the healthcare sector, will issue cash and newly-created, non-voting (Class B) ordinary shares in connection with the proposed merger of a wholly-owned subsidiary with Talecris Biotherapeutics Holdings Corp.  Grifols registered a proposed maximum of $444.59 million of the Cl. B shares on the Form F-4 filed on August 10 (SEC file no. 333-168701). 

It is a condition of the merger agreement that the non-voting shares are admitted to listing on the Spanish Stock Exchanges and are approved for listing on the NASDAQ Stock Market in the form of new American Depositary Shares (ADSs), evidenced by American Depositary Receipts.  Section 8.05 of the merger agreement authorizes the parties to waive compliance with any of the conditions contained therein. 

The joint proxy statement/prospectus warns there is no assurance that a market for the Cl. B shares or for the new ADSs will develop, nor that the trading value or liquidity of those securities will be equivalent or similar to the trading value or liquidity of existing (Class A) ordinary shares or the existing ADSs of Grifols.

Private equity firms Cerberus Capital Management and Ampersand Ventures formed Talecris in 2005 upon the acquisition of the Bayer Plasma Products Business Group, an indirect subsidiary of Bayer AG.  The firms, which took Talecris public in an October 2009 IPO (file no. 333-144941), own 49.7% of the merger target.

ABS Issuers Discuss Impact of Dodd-Frank Financial Reform Act

Prior to July 22, Rule 436(g) under the Securities Act of 1933 provided nationally recognized statistical rating organizations (NRSROs) with an exemption from expert liability under the Securities Act for ratings information included in registration statements.  When the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law on July 21, Section 939G of Dodd-Frank repealed Rule 436(g) of the 1933 Act. 

In the MD&A section of its Form 10-Q filed on August 6, American Express Co. notes this circumstance is of particular significance in offerings of asset-backed securities (ABS), which require ratings disclosure that, subsequent to Dodd-Frank, can be made only with rating agency consent.  Following enactment of Dodd-Frank, the three principal NRSROs announced that they would not consent to the inclusion of their ratings in registered public offerings of securities. 

In order to facilitate a transition for asset-backed issuers, the SEC Division of Corporation Finance issued a no-action letter on July 22 to temporarily allow ABS issuers to omit the credit rating disclosure required under Regulation AB (see Ford Motor Credit Co., WSB File No. 0726201001).  Items 1103(a)(9) and 1120 of  Reg AB require disclosure of whether an issuance or sale of any class of offered ABS is conditioned on the assignment of a rating by one or more rating agencies.  The disclosure of a rating in a registration statement now requires the consent of a rating agency to be named as an expert.  The no-action position will expire with respect to any registered offerings of ABSs commencing with an initial bona fide offer on or after January 24, 2011.

Ally Financial Inc. (formerly GMAC Inc.) notes in the Risk Factors section of its Form 10-Q filed on August 5 that NRSROs have refused to permit their ratings to be used pending more clarity related to potential legal exposure. Ally also notes it is unclear whether the SEC will extend the six-month period to omit credit ratings from ABS registration statements.  Ally states that if the repeal of Rule 436(g) stands without further action, it would likely be limited to only private securitizations, which could have an adverse impact on its liquidity and cost of funds. American Express also indicates it may have to rely on private offerings to raise funding through its ABS program.

Carlyle Private Equity Firm Sponsors Prospective IPOs

UCI International, Inc. Form S-1 filed on 7/27/10 (SEC file no. 333-168336):
UCI was formed at the direction of The Carlyle Group ("TCG") in 2006 as the holding company of United Components, Inc., a supplier to the vehicle replacement parts market.  United had acquired all of its then-existing operating units in June 2003 for a purchase price of $808 million.  The acquisition was financed through a combination of debt and $260 million in cash contributed through Carlyle limited partnerships.  UCI proposes a $200 million IPO in an underwritten deal led by Merrill Lynch and Deutsche Securities. 

Booz Allen Hamilton Holding Corp. S-1 filed on 6/21/10 (SEC file no. 333-167645):
Booz Allen Hamilton Inc. completed the separation of its U.S. government consulting business from its commercial and international consulting business, the spin off of the commercial and international business, and the sale of 100% of its outstanding common stock to Booz Allen Holding, which was majority owned by Carlyle, in July 2008.  The Registrant is the successor to the government business of Booz Allen Hamilton following the separation.  Following the spin off, Booz Allen Hamilton was indirectly acquired by TCG by merger for total consideration of $1,828 million. The merger and spin-off agreements are Exhibits 2.1 and 2.2, respectively.

Biopharm Co. Offers Tradable CVRs as Part of Merger Package

In connection with a reverse triangular merger whereby Abraxis BioScience, Inc. will become a wholly-owned subsidiary, Celgene Corp. registered common stock and contingent value rights, or CVRs, on a Form S-4 dated July 29 (file no. 333-168369).  Pursuant to the merger agreement, each Abraxis common share will be converted into the right to receive an upfront payment of $58.00 in cash and 0.2617 shares of Celgene common stock. The upfront payment values Abraxis BioScience at approximately $2.9 billion, net of cash. 

Each Abraxis share will also receive one CVR that will entitle its holder to receive additional cash payments if certain U.S. regulatory approval milestones are achieved and/or annual net sales figures are met by certain Abraxis products.  Celgene has agreed to attempt to list the CVRs on The NASDAQ Global Select Market.

The July 2008 merger (333-152690) between Fresenius Kabi Pharmaceuticals and APP Pharmaceuticals, Inc. also included CVRs with merger consideration that was otherwise all cash.  The Fresenius CVRs, which are tied to the “Adjusted EBITDA” of APP, trade on NASDAQ under the symbol “APCVZ”.  The September 2009 merger (333-162238) between Ligand Pharmaceuticals Inc. and Neurogen Corp offered Neurogen shareholders both equity and CVRs as consideration, but the CVRs are not listed on any exchange and are subject to general transfer restrictions.