It had been months since I’d attended an SVNACD breakfast meetings. Top talent was on hand, both among the panelists and in the audience. The facility at Wilson, Sonsini, Goodrich & Rosati was great. Sorry about photo quality… first time working with a new camera that I may not keep.
As usual, my notes are cryptic, without much of an attempt to thread coherent sentences. I’m tempted to say the following is for entertainment purposes only, but that would be too escapist. Corrections, comments and better photos are welcome.
My purpose is to provide readers with a sense of what was discussed and highlight a few areas. It may help you know what to investigate further and you’ll be that much more incentivised to attend in person to get answers to your concerns.
Lionel M. (Lon) Allan, Chair of the SVNACD got us off to a quick start after a reminder of future programs, such as November 11th’s “Avoiding the Crosshairs: Practical Advice on the Foreign Corrupt Practices Act in the New World of Whistleblowers, Regulators, and Prosecutors.” (Register) Check the SVNACD site and get on their mailing list. It looks like they are also doing some beta testing on Twitter, Facebook and Linkedin. Don’t miss out; be an early adapter… it is Silicon Valley.
The moderator for the session was Russ Bertuccelli, Director of Grant Thornton LLP and a member of the Board of Directors of the SVNACD. Mr. Bertuccelli’s practice at Grant Thornton LLP focuses on valuation and forensic accounting and counseling businesses in the IP and M&A areas. See his podcast interviews.
Greg Davidson, a partner in Gibson, Dunn & Crutcher, Co-Chairs the firm’s Emerging Technologies Practice. Mr. Davidson has extensive experience in M&A, private equity, joint ventures, corporate financings and general business law.
Global deal making is up about 20% from last year. Natural resources showed the most activity, followed by telecom. US activity is up about 11% from 2009. At least there is now a real upward trend. Venture-backed deals are about double 2009 transactions. Large strategic buyers like Cisco, Microsoft, Google, Oracle, HP. IPO window globally is also on an upturn but still a way to go to beat 2006. Healthy pipeline… especially for health-care, information technology – about 1/2 in California. 49 in registration at this point. Only a third were profitable in 2009 but trending upward. Uptick for IPOs here not quite as healthy as globally.
Debt financing has opened up. Big companies are active. (Organic growth won’t get them where they want to be.) Strategic buyers have an edge over private equity. Private equity also has a lot of cash stacked up. (Blackstone, Burger King) Deal volume and valuations up. M&A lagging in Europe. Capital spending still a bit slow.
Dollar Thrifty. Court found the board satisfied its fiduciary duties. No shop provision. After deal announced, Avis put in bid at higher price but didn’t agree to reverse termination fee or include antitrust provisions. Court agreed there was a real risk that Hertz could walk and board could not be confident that Avis would come through. Value is not value if not ultimately payed. The court showed a willingness to grant directors considerable latitude in reasonably managing a corporate sale process where they are not subject to conflicts of interest.
On documentation vs depth. Both are needed. Get input of advisors. Look deeply into pros and cons, document board activity and what transpired. Process is key, but there is no “one-size-fits-all.” Suits are almost now part of the cost of the transaction. Top-up options EV3 case. Concerned how might effect price.
Growing private mergers. CNX Gas. Treatment of preferred stock in mergers – LC Capital. Poison pills, Yucaipa grandfathering in one owner (Barnes and Noble) did not enjoin, Selectica triggering threshold pill appropriate (see also Selectica, the Delaware Supreme Court, and the Effort to Limit Access (Absolutely Not Absolute), theRacetotheBottom.org)
, eBay (Craigslist) court rescinded Craigslist pill – struck down pill. Rights plans may come back in vogue with court backing. Also of possible interest: Delaware Developments by Frederick H. Alexander Morris, Nichols, Arsht & Tunnell LLP; Important Chancery Court Opinion for Corporations with Staggered Boards by Eduardo Gallardo, Gibson, Dunn & Crutcher LLP.
Darin Snyder, a partner in O’Melveny & Myers, is Chair of the IP and Technology litigation practice. Mr. Snyder is experienced in both civil and criminal litigation in both the patent, copyright and trade secret fields.
Increased attention on enforcement. Intellectual property (IP) infringement is a huge problem. Complaints of online crime up 50% in last two years. Invasion of privacy, ID theft. Trade secret, counterfeiting. Dollar loss has risen dramatically. Recent high profile $100M goods seized in San Francisco (illegally imported from China). Boeing. Employee stealing secrets. Government much more likely to get involved if sensitive technologies involved. eBay – click fraud. Set up robots to generate clicks (fraud). HP unwitting participant with engineer moved to HP from IBM with IBM materials. HP cooperated but got subject to search warrants, unwanted press. Protect not only your own IP but that of others. IP at issue was cost information not the technical designs. Many are less protective of cost information but that can often be the most valuable.
Companies should be able to identify 10,000 files being downloaded in a couple of minutes critical. Education of employees (uncertainty and misconceptions… they think it is OK to take it because they worked on it). Provide them with examples and incidents go down.
Enforcement of patent rights is exclusively civil. Amount is increasing dramatically. No statute to make it criminal, since civil system seems to work. Amounts are increasing. In companies of less than $1B revenue, about 15% involved. Over $1B, 37% involved. Uptick because such suits have attracted interest of plaintiffs bar. They can make money through patent trolls. When economy goes bad people look to IP to hold competitors at bay. Huge amounts of money involved.
Some companies are buying up patent rights solely so they can sue. Non-Practicing Entities. 1 in 5 patent suits are now by NPEs. Nearly all of NPE suits are in information technology, 80-85%. Predicts next wave will be retail. (users of info technology)
Discussed role of defensive patent fund (RPX). Buy to keep it away from troll. Whether or not economical, remains to be seen. Free rider problem.
Also discussed false patent marketing – Patents expire but labeling continues. Can be fined $500 per offense (per article). 2009 22; 2010 430 cases. Solo cups. Ignoring the issue could be very expensive. Statutory reform in Congress for last 8 years but none have passed. (New Industry Springs Up Overnight: Filing Patent Marking Suits Over False Patent Claims, TechDirt)
Also of interest, Data Shows Employee Fraud Incident Reports Declining (Compliance Week, 10/20/2010). “Following a surge of in-house fraud reporting last year, fraud incident reports have returned to nearly the same levels as second quarter of 2008, according to data from the Quarterly Corporate Fraud Index analyzed by The Network Inc. and BDO Consulting.” Could this be the calm before implementation of Dodd-Frank rules?
Patrick Murphy, of Counsel to WilmerHale, is a member of their securities litigation and enforcement practice group. Prior to joining WilmerHale, Mr. Murphy was Branch Chief in the SF Regional Office of the SEC.
Hot topics in enforcement. SEC budget doubling by 20105. Working with the FBI for evaluating and digesting tips.
New enforcement leadership under Robert Khuzami. Reduced management layers. Developing specialized task forces on asset management, market abuse, structures and new products, municipal securities and public pensions, Foreign Corrupt practices Act. Indicator of where new dollars and cases… priority.
Streamlining internal processes. Delegated formal order authority. Quicker recommendations to Commission.
Cooperation Initiative. Last January. Game changer of immunity, deferred prosecution agreements. Enhanced powers under Dodd-Frank includes nationwide service of subpoenas. Allow to seek civil penalties – no discovery. They conduct their discovery during investigation but you don’t get discovery.
Whistleblowers on steroids. Offers monetary incentives of 10 to 30% of sanctions. Includes SEC actions and related actions by DOJ and other regulators. Encourages whistleblowers to contact the SEC directly, rather than going up the company chain.
Take all allegations seriously. Follow compliance and ethical policies. Ensure an effective hotline. Consider incentivizing internal whistleblowing. Promptly and thoroughly investigate all complaints. Quickly decide whether to self-report. Best way is to ensure good compliance program. No retaliation. Might change frequency of self-reporting by companies to government. Do you need to beat the whistleblower to the SEC? Maybe you can, if company self-reports.
Clawbacks even if no personal wrong-doing. Broader under Dodd-Frank. Executive Compensation agreements. Civil penalties not subject to indemnification.
Foreign Corrupt Practices Act. Uptick in cases. Sanctions increasing. Halliburton and Siemens cases exceeding $1B. CEO and CFO charged as control persons even though not directly involved, SEC v Nature’s Sunshine Products (2009). Veraz Networks (2010) improper payments of $40,00 results in a $300,000 penalty. Is DOJ moving beyond the FCPA? The anti-corruption net widens to embrace commercial bribery, DLA Piper memo.
Bigger deals will drive smaller deals. In answer to question: Staggered boards are on the way out. Activist groups are not supportive. Watch a podcast summary.