December 29, 2007
Hard Lesson for Harvey Electronics
Harvey Electronics filed for Chapter 11. The cause of its distress was a failed merger negotiation that led to "distractions" and increased professional fees. As a result of the failed negotiation the credit markets lost confidence in the company and increased its borrowing costs, its stock dropped to below $1 and it lost its NASDAQ listing, and it triggered the default clause in its senior borrowing agreements. The last event forced filing Chapter 11. The lesson: a failed merger negotiation, once publicly announced and far along, can have heavy, heavy costs for a company.
December 28, 2007
Genesco Ordered to Close Finish Line Acquisition
A chancellor in Tennessee has order Genesco to close its buyout agreement with Finish Line. A suit still pending in New York, brought by UBS, Genesco's financing bank, will now determine whether the deal will produce a viable or bankrupt company. UBS is attempting to back out of financing the deal. The Tennessee opinion is interesting in several respects. The judge found a material adverse affect but also found that the MAC clause carved out Finish Line's financial decline (it was caused by general economic conditions). Also of interest is the very quick assertion that legal damages were not an acceptable remedy. Her finding depended on facts that one would find in any busted buyout -- the target was in limbo after a buyer refused to close-- and suggest that the "inadequate" part of the inadequate legal remedy is a very low bar. The Chancellor also held, very carefully parsing the negotiation facts, that Finish Line did not mislead Genesco in the deal negotiations and did not otherwise have a duty to disclose negative information at the closing. There may be an appeal. This was a seller's agreement; the Chancellor figured it out and held the buyer liable on the pro-seller language. Specific performance, however, would not seem to be the right remedy; legal damages would have been sufficient and also mooted the UBS suit (except for contribution perhaps).