Generally speaking, 2010 has not been a good year for the M&A market. According to recent data published by Dealogic, global M&A volumes have dropped to their lowest levels in six years, reaching only £785bn in the first six months of the year, a mere 3% increase on the same period last year.1
Of course, there are some obvious factors contributing to this lull – the fear of a double-dip recession, access to credit, and the UK general election, to name but a few. That said, the initial public offering (IPO) market appears to be flourishing, if not actively blooming in 2010, despite the abandoned Merlin Entertainment and New Look floats.
This summer’s floatation of Ocado, Waitrose’s online supermarket delivery service, is one of the most high-profile transactions of the current wave of IPOs. This listing was immediately followed by the announcement that Vallar plc, the mining investment vehicle established by a team including Nat Rothschild, had raised more than $1bn by floating on the London Stock Exchange. Also, Scottish Resources Group, a coal producing company, is reportedly looking to raise more than £200m from its own IPO.
What does this mean
for In-House Lawyers?
Current market conditions are such that, all other things being equal, there is no need to rush a deal through as there might be in a more bullish economic climate. Opinions of commentators can cause ripples of alarm throughout the market. The cautious approach of investors and stakeholders is such that if a company now decides to raise funds through an IPO, it is important that no potentially difficult angle of the deal is overlooked.
This includes carefully managed corporate communications, such as putting into place a strategy for dealing with any media crisis that could slow, weaken or otherwise throw the proposed deal into jeopardy.
Reputation: the overlooked asset?
With limited exceptions, a well-respected brand or reputation takes years to build, and involves a substantial investment of time and capital. Once damaged, that reputation can take a similar amount of time and money to repair. The rise in online publishing and consumer TV programmes means that the effects of an incorrect story can be devastating. While reputation may be difficult to quantify on a balance sheet, it is impossible to argue with the fact that a damaged reputation will have an immediate and potentially long-lasting effect on share price.
Whether featured on TV, in print or via social networking sites, negative coverage can undermine investor confidence in a deal and have an insidious effect on share price.
Such negative coverage can be presented in many forms, from well-reasoned (and perhaps unobjectionable) debate on the true value of a company, to the sensationalist reporting of an impropriety on the part of a senior employee of the company, and to remuneration levels within the organisation. Protecting stakeholder trust in the corporation and its officers is vitally important during an IPO or other deal. The corporation’s relationship with its shareholders and maintaining a steady share price are key to a successful float or deal.
common forms of attack
Potential for personal matters to cloud an IPO
As mentioned above, reporting on the personal lives of senior members of the corporation and/or its CEO can cause concern, and may spook investors. For companies in which the CEO is (or is perceived as being) a barometer for the rest of the firm, business can be personal. Even the largest companies sometimes fail to pay enough attention to how dependent they and their share price are on the services of their top executives and CEO.
It could be said that Elon Musk, the founder of PayPal, SpaceX and Tesla Motors, has recently discovered this.
Tesla Motors is an American manufacturer of electric cars, founded in 2003. It is currently planning an IPO of stock and, simultaneously, developing a new model to add to its existing range, with which it hopes to expand its customer base from what is presently only a single model. As chairman and CEO of Tesla Motors, Musk is at the forefront of this drive to expand the company and push it forward.
At the same time, Musk is currently in the process of divorcing his wife, following their separation in 2008. Though described as a ‘friendly divorce’, some market commentators believe that under Californian law, Musk could lose a significant amount of shares in his companies as a part of the proceedings (possibly leaving him with a minority stake in some of the companies). This worst-case scenario could cause problems for the proposed float of Tesla Motors and has led to much speculation in the US over what the affect of Musk’s divorce (if any) will be on the company in the long term. Considerations include whether it will unsettle the board of directors, many of whom were appointed by Musk, or whether it will have an affect on his commitment to Tesla Motors.
Issues similar to this – which, to a certain extent, can usually be anticipated – must be considered not just by the board but also by the communications and legal teams to work out a strategy to deal with the problem, before it becomes common currency and causes a backlash against the company.
In 2008 Tesco brought a claim in libel and malicious falsehood against the Guardian and its editor relating to two investigative articles headed ‘Tesco’s £1bn tax avoiding plan – move to the Cayman Islands’ and ‘Every little bit helps: tax free pot of gold at end of Tesco’s rainbow’, an editorial piece and a podcast.
The thrust of the Guardian’s articles was that as part of a restructuring effort Tesco had created an elaborate offshore corporate network, with the aim of avoiding paying up to £1bn of corporation tax on several property deals involving some of its UK stores. Tesco alleged that the articles that accused it of using offshore arrangements to avoid income tax were incorrect and the coverage damaged Tesco’s reputation by falsely portraying it as morally culpable.
Tesco Stores Ltd v Guardian News & Media Ltd & anor  was settled with Tesco receiving, among other things, a front-page apology from the Guardian, following claims it was guilty of corporation tax avoidance in the UK. The Guardian accepted that the article was wrong and should not have been published, and that the allegations made were unfounded. The profits generated by the transactions had been, and would be, included in the charge to UK corporation tax.
Tesco obviously saw value in this apology and the record being put straight. The value of such action to a company can, of course, come in many forms: not just in restoring the faith of the market, but also in being able to see off any queries relating to the issue quickly and painlessly, in the event it is raised in any future due diligence exercise, by simply supplying a copy of the apology. If issues such as these are not dealt with at the time, the falsehood remains uncorrected and will cause problems for the company in the future.
Kraft Food’s takeover of Cadbury generated a high level of interest from the mainstream media, which was generally attributed to Cadbury’s image as a very British company and the perception that both sides were slinging mud at each other during the deal process. The subsequent laying off of staff only a short period after the takeover created more bad press.
In the US there is currently a similar situation being created by the American ‘corporate raider’ Carl Icahn, best known for taking very substantial stakes in companies including Viacom, Texaco and Trans World Airlines. Icahn is lining up his latest target: one of Hollywood’s largest independent studios, Lionsgate. His public statements, such as, ‘Lionsgate is racing down the wrong road at breakneck speed towards a precipice’, contained in an open letter to the board of directors, show the battle that the company faces moving forward.
The lawyer’s task in each of these situations is to assess the legal options that are available to the company and/or its board, and to review whether it is necessary and/or appropriate to take legal action in conjunction with the communications team.
Panic room: preparing for a media crisis
The worst-case scenario for a company facing a media crisis during a deal is to have no defined strategy in place. Such a scenario leads to no defined message being given to the media, no points of contact for the media and a lack of understanding of what legal tools can be deployed to the advantage of the company.
Taking these preparatory steps is likely to be inexpensive and take up little time, if any, of the senior board. They include:
- conducting internal audits to compile a list of potential risks to the company (‘the skeletons in the closet’);
- preparing a strategy to deal with each of those risks working alongside the PR and legal teams;
- planning and preparing responses in advance so that time is not wasted when that issue (such as planned acquisitions, bonus payments or redundancies) becomes live; and
- agreeing a hierarchy of command and lines of communication so that, even when time is tight, any media enquiries will be referred to members of the team who are fully briefed and able to respond in a calm and measured manner, providing responses in line with the previously agreed plan and strategy.
The strategic deployment of legal and PR teams will depend on many factors, including:
- the nature of the allegations being made against the company;
- whether they are private and confidential in nature;
- whether those allegations are true or false; and
- the extent to which those allegations are already in the public domain within the jurisdiction.
It is worth mentioning that the use of lawyers in such scenarios is to assist as part of the overall strategy. Any media lawyer worth their salt will have a direct line of communication with the in-house lawyers at the major newspapers, magazines and broadcasters, leaving the communications teams to deal directly with the journalists and editorial teams, preserving their own hard-earned relationships.
In practice, having two open lines of communication is extremely effective. By communicating directly with the publication’s legal team and editor, the lawyer can fulfil their role: to protect the reputation of their client as assertively and, should the occasion call for it, aggressively as necessary. The communications team can then deal with the editorial side.
It is important for the company to understand the full array of options it has at its disposal to deal with the problem so that it can come to an informed decision on strategy. For example, having an established network in different jurisdictions will enable the company’s advisers to carry out necessary steps, such as conflict checks, in advance, so that valuable time is not lost at a later stage.
Tomorrow’s chip papers?
The old adage of ‘today’s news, tomorrow’s chip papers’ has not rung true for some time. Google has been described not as a search engine but as a reputation management system. Internet searches are usually the first port of call for anyone looking for information on a given subject. Uncorrected false stories will have an insidious effect on a company as long as they remain live. At deal times, such stories could carry more weight than under normal circumstances. Rumours circulated in chat rooms and instant messaging services can spook investors and need to be addressed before they gain common currency that they are true.
By Jon Oakley, senior associate, Schillings.
HRH the Prince of Wales v Associated Newspapers Ltd  EWHC 11 (Ch)
Tesco Stores Ltd v Guardian News & Media Ltd & anor  EWHC B14 (QB)
A financial institution releases a briefing memorandum containing confidential information relating to the issue of a class of share. The briefing memorandum is only sent to a very limited class of parties who have agreed in advance that the information in the document would be kept strictly confidential.
A short time after this, the entire contents of several significant pages of the briefing memorandum are placed onto a website such as http://ftalphaville.ft.com. Numerous enquiries about these publications were received by the financial institution from other media groups who said they had also received the briefing memorandum.
What can the company do?
In cases similar to the above scenario, it is expected that the courts will find that whoever leaked the briefing memorandum was in a position to do so because they had received the information in the course of their employment. If their employment contract contained a confidentiality clause, there would be a solid ground of action to have the confidential information removed from the internet and prevent any further dissemination of the information. In this respect, the Court of Appeal decision in HRH the Prince of Wales v Associated Newspapers Ltd  is worth revisiting:
‘There is an important public interest in employees respecting the obligation of confidence that they have assumed. Both the nature of the information and the relationship of confidence under which it was received weigh heavily in the balance in favour of [the claimant].’
The court firstly noted how there could be a public interest for such material to be published, such as where the public was being deceived or being kept from information that they are entitled to know. However, the Court of Appeal found that the other side to this argument is that in a democratic society it is essential that some financial information is protected from premature publication by law.
A court will be prepared to prevent publication, through an injunction, of confidential documents containing sensitive financial information, even where that information has, for a short period of time, been placed in the public domain.