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Jan 31, 2009

Best of the best: mastering the puzzle

Corporate Secretary Magazine Awards 2008 'Best corporate secretary or general counsel in an M&A transaction' joint winner NASDAQ OMX

The year 2008 has been a tumultuous one for the audience of Corporate Secretary magazine. It’s been a tumultuous one for everyone, for that matter. But on the evening of November 11, the inaugural Corporate Secretary Magazine Awards was an opportunity to focus on achievement.

This was especially true for Transocean and the NASDAQ OMX Group, joint winners of ‘Best corporate secretary or general counsel in an M&A transaction’, sponsored by DF King. The two companies beat an impressive lineup, including General Motors’ Kimberly Hudolin, FiServ’s Charles Sprague and Honeywell’s Thomas Larkins.

We took the opportunity to speak to Ed Knight, executive vice president and general counsel at NASDAQ OMX Group and discuss a transaction that he likens to a three-dimensional game of chess.

The deal with OMX AB of Sweden closed in late February and resulted in the world’s largest exchange company. As part of the transaction, NASDAQ OMX Group became a 33.3 percent shareholder in DIFX, Dubai’s international financial exchange. Knight says negotiating different jurisdictions and regulatory regimes posed the biggest hurdles. ‘We had US regulators who were focused on what the deal meant for the future of NASDAQ. Because we were selling 19 percent of NASDAQ to an entity related to the government of Dubai, we had to go through a process called CFIUS – the Committee on Foreign Investment in the United States – where transactions involving foreign investment are investigated by a committee of twelve different government agencies on behalf of the President. We had to manage that process while obtaining approval from jurisdictions in Europe where OMX had licenses.’

In the midst of navigating around these issues, explains Knight, ‘we also had to contend with the general complexity of a transaction with many different moving pieces in terms of the structure of the offer for OMX. We had an offer, but so did Bourse Dubai, the parent company of the DIFX. So for us to be successful we had to negotiate a set of agreements with Bourse Dubai then explain them to shareholders of OMX and then execute on those transactions, which required acceptance of Bourse Dubai’s offer.’ He continues, ‘So for a moment in time, Bourse Dubai owned OMX, and they then sold it to us, and we then sold them 19 percent of NASDAQ along with a large amount of cash. We like to say, If it can be done more complicatedly, we will do it.

NASDAQ’s adept handling of the many pieces involved in the M&A didn’t go unnoticed by experts in the field. ‘The complexity of a deal is certainly what you have to consider when considering a successful transaction, along with the legal issues involved, and NASDAQ certainly had both,’ says John Olson, a founding partner of Gibson, Dunn & Crutcher’s Washington, DC office. ‘You also have to factor in time: How tight was the schedule in which the transaction was completed? Was the deal executed on time or were there delays? Did the team get it done in a timely fashion and did they foresee problems and if not, did they address those problems quickly?’

Defining roles
To smooth the success of the merger, it was important to have a strong general counsel/corporate secretary function. As it turned out, certain aspects in the way NASDAQ defined these roles benefited the handling of the transaction. ‘The corporate secretary reports to the general counsel at NASDAQ,’ explains Knight. ‘We work together as partners in serving the board. Between us, we probably have 30 plus years experience working with the boards in question here. So there was an easy working relationship and an ability to anticipate the needs of the boards that I think was critical in laying out our strategy in general and knowing when they would want to be consulted and where their focus would be. So there wasn’t a lot of wasted effort by the legal or corporate secretary team at a time when our resources were limited and we were all very tired. There was a six hour time difference with Sweden, not to mention eleven hours with Dubai. As you often do in these situations, we worked through the night.’

From his personal experience, Knight has some good guidance for general counsel and corporate secretaries who will be engaging in mergers and acquisitions in the coming year. ‘The whole notion of risk management is front and center. The board’s role in overseeing risk management, the need for boards to act independent of management and the need to have the financial resources in terms of the ability to analyze complex financial issues, those are topics many boards are talking about now: Are the right controls in place? Are they devoting time on the correct issues? Are they too involved in compliance and not enough on strategic issues? Do they have enough resources?’

Additionally, says Knight, ‘the fact that M&A occurred in the last few years in the context of a bubble economy, at least in housing, will cause people to be much more skeptical from a financial perspective, and of financial assets in particular. I think that more critical evaluation of risk associated with leverage and financial assets will color M&A going forward.’

One thing’s for sure: much like 2008, 2009 will prove a tough year for companies. Olson foresees an altered landscape that will present challenges that, while not necessarily new, have perhaps been a bit dormant until recently: ‘I see M&A entering a new phase in several respects. The surviving entities will be looking at distressed assets and that involves expertise and diligence that hasn’t been in high use recently. Dealing with someone on the brink of insolvency, protecting against the unknown – those are skills that have not been widely in demand in boom times. To the extent enterprises are receiving funds or making use of credit facilities from the government, that adds complexity as well. If the government has a senior equity position, that’s a different position from the common equity that doesn’t have the same time horizon or preferential rights. If you’re a general counsel or corporate secretary of a company that received substantial federal assistance or guarantees, then you have to pay attention to the contractual obligations that come with that assistance while thinking about the rights of equity holders, and the board has to be advised on its obligations to both constituencies.’

According to Knight, other roles will also be increasingly impinged upon going forward. ‘I think there is no more difficult time to be a director and I think there is a great hunger out there for people to understand what are the lessons from this crisis and what boards are doing. It’s something we’re looking at internally around our listing standards.’

Ian Sax

In addition to living and breathing corporate governance, Ian Sax freelances for a number of publications and writes fiction and stage plays