10 Law Firm Management and Marketing Tips from GCs

At this year's Legal Marketing Association International Conference, several GCs shared tips for winning and maintaining law firm relationships with big business. The panel of general counsel discussed best practices law firms need to implement to get their companies? legal business and foster long-term relations with in-house counsel.

10 Law Firm Management and Marketing Tips from GCs

At this year's Legal Marketing Association International Conference, several GCs shared tips for winning and maintaining law firm relationships with big business. The panel of general counsel discussed best practices law firms need to implement to get their companies? legal business and foster long-term relations with in-house counsel.

DealBook: A Warning Shot on Management Buyouts

Kathy Willens/Associated PressRonald O. Perelman’s attempt to take Revlon private in 2009 resulted in an $850,000 federal penalty and $37 million in settlements of private lawsuits.

The adage “what you don’t know can’t hurt you” does not apply to federal securities laws, as Revlon learned from the Securities and Exchange Commission when the company settled an accusation that it deceived its minority shareholders. The larger question is whether the S.E.C. might actually start to police buyout offers from management and controlling shareholders that are rife with conflicts of interest and usually end up favoring the buyer over the minority shareholders.

The case centers on efforts by MacAndrews & Forbes, the controlling shareholder of Revlon owned by the billionaire Ronald O. Perelman, to arrange a transaction in 2009 in which shareholders would exchange their stock for preferred shares. S.E.C. rules require certain disclosures about the deal before it can go through, and whenever a company speaks, it has to be truthful — or at least not dishonest.

The problem in any transaction designed to squeeze out minority shareholders is that the incentive for the buyer is to pay the lowest price possible, but corporate leaders also have an obligation to protect all shareholders from an unfair transaction. Thus, the controlling shareholder has to try to maintain at least the facade that the deal provides adequate compensation. As the Deal Professor wrote recently, “Time and again, management buyouts have gone awry as executives allegedly used their position to buy companies on the cheap.”

The S.E.C. accused Revlon of failing to disclose to independent directors and shareholders that the exchange offer had been found wanting by an outside financial adviser to its employee 401(k) plan — something anyone would want to know about a deal. To keep shareholders in the dark, however, the company went to great lengths to avoid receiving information that would activate its disclosure obligation. It engaged in something one of its employees called “ring-fencing” to keep information from being delivered so that Revlon did not, in turn, have to disclose it.

S.E.C. rules require a company involved in a buyout like this to disclose any report or opinion it receives about the value of the deal and its fairness. When Revlon learned about the negative evaluation of the offer, it rewrote the rules for the 401(k) plan to keep the trustee from disclosing the financial adviser’s determination so that it could claim ignorance. This all sounds a little bit like the child who says “my eyes are closed, so you can’t see me.”

The S.E.C. usually pursues this type of disclosure case as a violation of Rule 10b-5, the broad antifraud provision reaching any “scheme or artifice to defraud” related to a securities transaction. But the accusation against Revlon is under the rarely used Rule 13e-3(b)(1), which prohibits engaging “in any act, practice or course of business which operates or would operate as a fraud or deceit upon any person” in a going-private transaction.

While the wording of the two rules are similar, there is a crucial difference between them. Rule 13e-3(b)(1) reaches conduct that might not meet all the requirements to prove a fraud, as long as it comes reasonably close to appearing to be deceptive. That lets the S.E.C. pursue cases even if it cannot meet all the technicalities for a fraud case, as would be required under Rule 10b-5.

The S.E.C. also opted to bring the case as an administrative proceeding rather than a complaint in federal court, where it pursues most fraud actions. The Dodd-Frank Act authorized the agency to obtain penalties in this type of proceeding, which means it does not have to run the risk of having a federal judge — perhaps even Judge Jed S. Rakoff in Manhattan — scrutinizing its settlement.

Revlon agreed to pay $850,000 as a penalty to settle the case, along with an order not to violate the law again. In its administrative filing, the S.E.C. noted that the company had paid substantial amounts to settle shareholder class actions, totaling about $37 million.

The fine is more of a nuisance than any type of deterrent, but the case may be intended to serve more as a warning to other companies about the S.E.C.’s interest in disclosures in a going-private transaction. The interesting question is whether the S.E.C. will start to use Rule 13e-3(b)(1) to police the conduct of management and controlling shareholders when they try to force out minority shareholders.

Issues related to the inherent conflicts of interest in these transactions have been left for the most part to the state courts because it is usually a question of internal corporate governance regarding the process of evaluating an offer. Delaware is the leading jurisdiction for these transactions, and its courts have struggled to deal with these issues. For the most part, legal rulings push companies to put in place mechanisms to simulate the type of arm’s-length bargaining that would take place in a typical buyout by having independent directors try to negotiate a better price.

Revlon’s efforts to keep important information from its independent directors responsible for evaluating the deal undermined the core of the protection afforded by state law to minority shareholders. If a company is going to deceive its own directors, what hope do shareholders have of receiving a fair deal.

The S.E.C.’s case portrays the company’s conduct as an extreme example of the type of manipulative acts a controlling shareholder can undertake to obtain the deal it wants while giving the appearance of complying with its disclosure obligations under federal securities laws. So if the S.E.C. is only going to pursue cases that involve this type of egregious misconduct, then other companies involved in management buyouts can breath a sigh of relief as long as they do not engage in the type of “ring-fencing” Revlon tried.

But the administrative proceeding could also be seen as a shot across the bow for companies considering this type of transaction. Although shareholder litigation is inevitable in almost any deal, the federal government has largely stayed away from getting involved in going-private transactions — at least until now.

The potential for unfair treatment when a controlling shareholder tries to force out the minority is the type of situation in which the S.E.C.’s mission of protecting investors calls for greater involvement in policing the disclosures. If nothing else, the settlement with Revlon tells companies that their dealings with minority shareholders may be subject to heightened government scrutiny, which can have its own deterrent effect.

DealBook: Talk of Takeover Grows at Health Management Hospital Group

David Albers/Naples Daily NewsPhysicians Regional Medical Center in Naples, Fla., part of Health Management Associates, the third-largest for-profit chain.

Ever since the chief executive of Health Management Associates, the for-profit hospital system, abruptly announced nearly three weeks ago that he would be leaving to lead a religious mission in South America, speculation has mounted about whether the company could be headed for a takeover.

Its stock has soared 36 percent to a six-year high. Its largest shareholder appears eager to play a bigger role in determining the company’s next steps, even if that means taking on the board. And executives from the most likely potential buyer have — without naming names — indicated they could be in the market.

This week, H.M.A., which is based in Naples, Fla., said its board had hired financial advisers to help it consider strategic alternatives but also made clear it would not discuss its plans in any detail.

Pressure is intensifying on the company and its board, particularly its chairman, William J. Schoen, who is viewed by some analysts as less than enthusiastic about selling.

A former chief executive who has shaped and reshaped the company several times over the decades, Mr. Schoen, 77, has been chairman for 27 years.

“He’s certainly someone who’s played a very strong role in forming the company’s strategy,” said Darren Lehrich, an analyst at Deutsche Bank. “There could be some protecting-the-legacy issues there.”

H.M.A. is the nation’s third-largest for-profit hospital chain, by number of beds, with 71 locations. It has struggled in recent months with falling inpatient admissions to its hospitals.

While other hospitals also reported weaker financials in the first few months of this year, the company’s revenue may have also been hurt by an investigation by CBS’s “60 Minutes” that ran late last year, highlighting concern over whether patients were being unnecessarily admitted. In the report, several former employees said the company coerced doctors to admit patients to its hospitals, regardless of medical need, to increase company profits.

H.M.A. has denied the accusations, saying admissions are based solely on what is best for patient care.

Among the myriad government investigations and civil lawsuits that the company discloses in its regulatory filings, H.M.A. has also indicated that United States attorney’s offices in seven states were investigating its physician referrals, including financial arrangements and the “medical necessity of emergency room tests and patient admissions.”

The inquiry appears to be part of a broader look by federal regulators into whether some of the nation’s hospitals are pressing emergency physicians and others to admit patients who could be treated without having to stay overnight in the hospital.

H.M.A. said it was cooperating with regulators.

Some Wall Street analysts say those various investigations and lawsuits could turn off potential buyers.

“Buying H.M.A. means dealing with its troubled operations plus escalating risks from burgeoning legal issues that could prove prohibitively expensive,” Vicki Bryan, an analyst at the bond research firm Gimme Credit, wrote in a note to clients earlier this month.

Others note that since a wave of acquisitions several years ago by private equity, most of the deal activity among public hospital systems has been for single hospitals or smaller deals.

“There are a lot of smaller, not-for-profit hospitals that are looking for financial partners,” said Dean Diaz, a senior credit officer at the Moody’s Corporation. “There are a lot of potential targets out there that can be done without necessarily looking for a big transformational deal.”

A series of curious moves kindled the recent speculation around the company.

In early May, Glenview Capital Management, the hedge fund founded by Lawrence M. Robbins, signaled in a regulatory filing that it had increased its stake and now held more than 37 million shares, or 14.6 percent of H.M.A.’s outstanding shares. The filing allowed it to make direct recommendations to the board.

The company’s stock hardly budged on the news. But the filing drew a much sharper, defensive response from the board.

More than two weeks later, at a board meeting, the company adopted a so-called poison pill to thwart any hostile takeover by a large investor. The pill goes into effect if any investor tries to buy 15 percent or more of the company.

Within a few days Glenview issued a clarification that said it had no interest in acquiring the company.

Investors were then surprised in late May when the company announced that its chief executive, Gary D. Newsome, 55, would retire at the end of July to take over as president of the Uruguay-Montevideo Mission in South America.

Mr. Newsome, who became chief executive in 2008, earned nearly $22 million in total compensation over the last three years, according to regulatory filings. Mr. Newsome had been a senior executive at Community Health Systems, another for-profit hospital system.

Gary Newsome is leaving as C.E.O. of the hospital chain.

This week, Glenview raised the stakes when it asked the board to remove or change the poison pill in a way that would allow investors to acquire a bigger stake without activating it, according to the regulatory filing.

The letter added that Glenview was evaluating whether to formulate a proposal to make changes “to all or a portion” of the company’s board.

That’s an unusually aggressive and public stance for Mr. Robbins, who observers say prefers to exert his influence on companies in a more friendly, behind-the-scenes way.

Mr. Robbins has been eager for hospital stocks for more than a year, talking them up at a New York investor conference a year ago. Glenview owns stakes in several publicly traded for-profit hospital systems.

The list of potential buyers for H.M.A. isn’t long, with many pointing to Community Health as the most likely candidate.

Citing the company’s success in its $6.8 billion takeover of Triad Hospitals in 2007, an executive for Community Health told investors at a conference in late May that it was “open to doing that again.”

But the executive emphasized that any potential deal would have to be done on friendly terms. Community Health learned that lesson the hard way after its unsuccessful unsolicited bid for Tenet Healthcare in 2010 wound up in an ugly mix of lawsuits and accusations of fraud and wrongdoing between the two hospital systems.

Community Health has disclosed it is also under investigation by the Justice Department, which is seeking information “about our relationships with emergency department physicians, including financial arrangements.” Community said it was cooperating with government officials. The company declined to comment further on the investigation and its potential interest in H.M.A.

The question many are asking is whether H.M.A.’s directors, particularly Mr. Schoen, would welcome even a friendly bid.

In its statement on Wednesday, the board said it had engaged Morgan Stanley and Weil, Gotshal & Manges to consider “strategic alternatives and opportunities available to H.M.A.”

While Mr. Schoen has spurned efforts by others to acquire H.M.A. in recent years, he is certainly no stranger to deal-making. The chairman of a small bank in Naples that he had started, Mr. Schoen joined H.M.A.’s board in 1983. Less than two years later, after setting the company on its course of acquiring rural hospitals, he was named co-chief executive.

Later, in 1988, Mr. Schoen took H.M.A. private and then public again in 1991.

But a few years ago, in 2007, when H.M.A. engaged in serious discussions about a potential buyout with a group of private equity firms, Mr. Schoen thwarted their efforts. He engineered a deal in which the company borrowed $3.25 billion, loading the company up with debt, to pay shareholders $2.4 billion in dividends.

Sharp Reshuffles Management After Record Loss

TOKYO (AP) — Japanese electronics maker Sharp Corp. named a new president Tuesday, reshuffling its top management to help restore profitability after reporting a record loss.

The Osaka, Japan-based maker of Aquos TVs said that Kozo Takahashi, currently an executive vice president, will become its president and CEO as of June 25. His appointment is part of a business reorganization aimed at returning to the black in the fiscal year ending March 2014 after years of losses.

The company also said it would reduce its capital to help improve its balance sheet and "make a fresh start" by shedding its legacy of cumulative losses.

Sharp's 545.4 billion yen net loss ($5.4 billion) in the fiscal year that ended in March exceeded its forecasts and compared with a 376 billion yen net loss in the previous fiscal year. The company forecasts a slim 5 billion yen net profit this fiscal year on net sales of 2.7 trillion yen ($26.6 billion), up 8.9 percent from the year before.

The company said its net loss in the past year was worsened by costs for restructuring despite improved demand for electronics components such as liquid crystal displays and solar cells. All product groups apart from Sharp's LCD panel business showed improved operating income in the second half of the year, it said.

Sharp has struggled to cut costs and reshape its business, partly because it has invested in expensive plants in Japan that make the panels for TVs and mobile devices and is getting hammered by plunging prices and intense competition. Its main banks have extended 150 billion yen ($1.48 billion) in fresh loans to help it meet a repayment deadline looming in September.

In a business plan issued Tuesday, the company said it planned to beef up its loss-making LCD panel business, which embodies its prized technology, as part of its alliance with South Korea's Samsung Electronics Co.

However, Sharp plans to cut capital investment by 3 percent to 80 billion yen ($789 million) after trimming it by nearly 31 percent in the last fiscal year.

The company has trimmed thousands of jobs as it adjusts its product mix and works to trim its debt.

The new president, Takahashi, comes from the company's product development group and has also been in charge of Sharp's American's division. He replaces Takashi Okuda, who will become Sharp's chairman.

Clifford Chance Accounts Reveal Management Team Pay Hike of 10 Percent

Clifford Chance's management committee received total remuneration of £19 million for the 2011-12 financial year, a 10 percent increase from the previous year's figure.

The figure is contained within the firm's latest limited liability partnership accounts, which show the 16-member board received a total of £17.3 million in 2010-11.

The report also reveals that the average partner headcount at the firm increased 3 percent to 568 in 2011-12, while the number of associates rose 5 percent to 2,325. Total staff costs increased by 5 percent from £537.3 million to £565.7 million.

Profit available for profit share among members rose to £382.5 million in 2011-12, up almost 13 percent from £339.5 million in 2010-11.

Audited revenue for 2011-12 rose 7 percent to £1.303 billion from £1.219 billion in the previous year, the same figure as reported by the firm earlier this year.

Geographically, the Asia-Pacific region saw the most significant growth, with a 28 percent increase on the previous financial year to account for 14 percent of global revenue. The firm's performance in the region was bolstered by its tie-ups with Australian boutiques Chang Pistilli & Simmons and Cochrane Lishman Carson Luscombe during 2011, as well as solid returns from its bases in China, Hong Kong and Singapore.

Capital net contributions made by partnership members also increased significantly over the year, up from £1.9 million in 2010-11 to £8.1 million in 2011-12. The firm attributed this in part to a larger number of partners promoted into the equity over the year as well as a substantial number of senior lateral hires made during the period.

The report also showed that the firm repaid a £2.2 million bank overdraft during the year, with cash at the bank and in hand now standing at £120 million, up from the 2010-11 figure of £66.8 million.

Separately, the accounts note that the closure of its defined benefit pension scheme came into effect from the end of the 2010-11 financial year, stating: "The scheme was closed to future accrual with effect from 30 April 2011, having been closed to members since 2005."