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Boston College Law School

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Monday, July 16, 2007

Icahn Loses With Lear -- Shareholders Win?

Lear Corporation, yesterday announced that at its Annual Meeting of Stockholders its shareholders failed to approve a merger proposal with Carl Icahn's American Real Estate Partners L.P.  As a result of this vote, Lear's merger agreement with AREP will terminate in accordance with its terms.  The vote is a victory for Lear shareholders who had actively opposed the Icahn bid claiming it significantly undervalued the company.  The leader of this charge had been Pzena investment management which had repeatedly asserted its opposition to the bid. The California State Teachers Retirement System and Institutional Shareholder Services had also actively opposed the transaction.

In a last ditch bid to push the transaction through, Lear on July 10 had agreed to amend its merger agreement with AREP to increase AREP's offer price for shares of Lear common stock from $36 to $37.25 per share.  The $100 million increase in aggregate consideration paid had valued Lear at approximately $2.9 billion.  However, in connection with this increase, Lear had agreed to pay AREP $12.5 million in cash as well as 335,570 shares of Lear common stock (valued at about $12.35 million) if Lear's stockholders did not approve the merger.  The provision was unusual; bidders are usually lucky to get their expenses in a deal that is not approved by shareholders.  The provision, though likely legal, is even more suspect now that Lear shareholders have voted against the transaction. Icahn's AREP will now pocket this sum.

Lear will continue to operate as a stand-alone, publicly-traded company, though its future is now uncertain.  But the Lear shareholder vote is a milestone; it is the first real rejection of a private equity/management initiated leveraged buy-out.  Though activist investors have in other similar transactions such as Clear Channel and OSI Restaurant Partners succeeded in obtaining an increase in the consideration offered, none had resulted in a rejected bid. And according to MergerMetrics, only eight deals have been rejected by shareholders since 2003, out of more than 1,000 deals which required shareholder approval.

The reasons are fairly obvious.  An outright rejection of a management initiated or participating buy-out leaves the company in uncertain hands, and the continued retention of management as well as the direction of the company unclear.  Lear is the first big deal in recent memory where this has occurred. But, if Lear succeeds in its independent direction, it may chart a course for shareholders in similar situations involving management/private equity buy-outs.  Apparently, the market is also optimistic about Lear's future.  Lear's shares yesterday rose 60 cents, or 1.6%, to $37.50, showing that Wall Street, at least, for now agrees with the Lear shareholder decision.  Lucky for the arbs.      

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