Bloomberg News

Skyworks-AnalogicTech Deal May Test Delaware Arbitration Rules

September 30, 2011

Sept. 30 (Bloomberg) -- Skyworks Solutions Inc., a semiconductor maker, said in May that it would buy Advanced Analogic Technologies Inc., heralding the $260 million deal as a means of expanding into the consumer electronics, communications and computing markets.

Two months later, the deal showed signs of unraveling and by Sept. 16, Skyworks Chief Executive Officer David Aldrich was trying to delay or terminate it, according to a regulatory filing with the Securities and Exchange Commission.

Skyworks said in the filing that AnalogicTech had breached its agreement “to act and carry on its business in the usual, regular and ordinary course” and to “use commercially reasonable best efforts, consistent with past practices, to maintain and preserve” its assets and relationships with its customers.

AnalogicTech, a Santa Clara, California-based chipmaker, said in a statement that it hadn't breached the merger agreement and had filed a petition for arbitration with Delaware’s Chancery Court to force the deal. Woburn, Massachusetts-based Skyworks filed its own petition Sept. 26, seeking to cancel the deal.

The dueling petitions are among the first to test the Chancery Court’s 2010 adoption of its own arbitration process, in which one of the five chancery judges can preside over arbitrations. The unusual system may streamline litigation in Delaware, though it has caused some legal experts to question its lack of transparency.

Fortune 500

The Chancery Court in Wilmington has jurisdiction over the majority of Fortune 500 companies, as most are incorporated in Delaware. As a result, disputes involving those firms often result in lawsuits filed in the state. The new arbitration system may eventually lessen the burden such litigation places on the state’s courts.

Unlike a lawsuit, arbitration severely limits discovery, or the exchange of evidence between parties, and can be kept confidential. Under the Chancery rules, the petition seeking arbitration is itself kept under seal.

The cost of pursuing a lawsuit typically dwarfs arbitration, and the cost of a Chancery arbitration is likely to be much less than using private arbitrators, said Kenneth Nachbar, a partner with Morris, Nichols Arsht & Tunnell in Wilmington. The fees for a Chancery arbitration are $12,000 for the first day, which, lawyers said may be less than an outside arbitration panel.

Costs Vary

Arbitration costs can vary widely depending on the arbitrator’s hourly rates of as well as the complexity of the dispute, lawyers said. Based on International Chamber of Commerce rules, a three-person panel deciding a $1 million dispute would cost an average of $130,455, according to a website calculator provided by the Wolf Theiss law firm in Vienna.

According to Kenneth Lagowski, a chancery administrator, the new system is “a way to try to stay ahead of other courts -- and to provide less expensive ways to litigate” without paying for a full-length trial.

And, while it may be less expensive for the litigants, the arbitration system is “designed to be a money-maker for the Chancery Court,” said Charles Elson, a finance professor at the University of Delaware who runs the school’s Weinberg Center for Corporate Governance.

Delaware Judiciary

The budget for the entire Delaware judiciary for fiscal year 2012, according to the state’s website, is $91.3 million with $3.1 million earmarked for the Chancery Court. According to the 2010 annual report for the Delaware judiciary, the Chancery Court generated $664,700 in fees, costs and interest last year.

The new court-sponsored system has gained some opponents because of the participation of judges in the process.

“Having active judges hearing these arbitrations should cause them to be disclosed publicly,” John Flaherty, president of the Delaware Coalition for Open Government, said in a phone interview. “The Delaware Chancery Court is recognized as the preeminent business court in the U.S., in part because of the transparency of its operations.”

The Chancery Court is a top forum for litigating business disputes because more than 60 percent of Fortune 500 companies are incorporated in Delaware, according to legal experts such as University of Pennsylvania law professor Jill Fisch.

Corporate Finance

Brian Quinn, a professor at Boston College Law School who specializes in corporate finance and transactions, said that arbitration will shield disputes -- and in particular, contract interpretation -- from becoming part of the “general body of Delaware law.”

Quinn, who writes about deals in the M&A Law Prof Blog, acknowledged the confidentiality of arbitration may be not be absolute since public companies must disclose material disputes in securities filings.

Both AnalogicTech’s and Skyworks’ petitions came to light through regulatory filings with the SEC. Neither Rod Howard, a lawyer at Wilmer Cutler Pickering Hale & Dorr LLP who represents Skyworks, nor Marc Reinstra, a lawyer at Wilson Sonsini Goodrich & Rosati PC who represents AnalogicTech, returned calls seeking comment about the petitions for arbitration.

Pilar Barrigas, a Skyworks spokeswoman, didn’t return a call seeking comment on the arbitration. Andrew Siegel, an AnalogicTech spokesman, declined to comment on it.

Currently, arbitration clauses are rarely used because of a fear that an arbitrator will “cut the baby in half” when ruling on a dispute, said Ethan Klingsberg, a mergers-and- acquisitions partner in the New York office of Cleary Gottlieb Steen & Hamilton LLP.

While only five petitions for arbitration have been filed under the new Delaware system according to Lagowski, the number may increase dramatically,

Since Chancery rules allow for the arbitrators to compel performance by a party in addition to permitting confidentiality, Klingsberg said, Delaware arbitration may hold a greater appeal to merger candidates.

--With assistance from Jef Feeley and Dawn McCarty in Wilmington, Delaware. Editors: Andrew Dunn, David E. Rovella

To contact the reporters on this story: Ellen Rosen in New York at ereosen14@bloomberg.net; Phil Milford in Wilmington, Delaware, at pmilford@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net


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