Friday, August 31, 2007
Today's Friday M&A culture is pure candy/beach reading and the story of one of the seminal ''80s takeovers, Three Plus One Equals Billions: The Bendix-Martin Marietta War by Allan Sloan. Pac-man anyone? Enjoy your labor day weekend; and rest up for what should be an active Fall.
Another potential Material Adverse Change dispute popped up yesterday in the pending $1.5 billion acquisition of Genesco by The Finish Line for $54.50 per share in cash. Yesterday Genesco reported second quarter earnings. The earnings were disappointing but do not appear to be catastrophic. Genesco reported a $4.17 million loss and declining sales at stores open more than a year which it blamed on "the combination of a later start to back-to-school, later sales tax holidays in Texas and Florida and a generally challenging retail environment, especially in footwear."
But Finish Line promptly issued this statement:
The Company is disappointed with Genesco's second quarter fiscal 2008 financial results. Consistent with its responsibilities to The Finish Line's shareholders, the Company is evaluating its options in accordance with the terms of the merger agreement. The Company does not intend to make further comments at this time.
As background here, Finish Line may have buyer's remorse. According to one report, "the deal had come under heavy fire from analysts and investors, who said Finish Line had offered too high a price and was taking on too much debt." Nonetheless, Finish Line appears to be raising the issue that Genesco's second quarter earnings arise to the level of a MAC under the merger agreement. The agreement defines a MAC as:
any event, circumstance, change or effect that, individually or in the aggregate, is materially adverse to the business, condition (financial or otherwise), assets, liabilities or results of operations of the Company and the Company Subsidiaries, taken as a whole; provided, however, that none of the following shall constitute, or shall be considered in determining whether there has occurred, and no event, circumstance, change or effect resulting from or arising out of any of the following shall constitute, a Company Material Adverse Effect: (A) the announcement of the execution of this Agreement or the pendency of consummation of the Merger (including the threatened or actual impact on relationships of the Company and the Company Subsidiaries with customers, vendors, suppliers, distributors, landlords or employees (including the threatened or actual termination, suspension, modification or reduction of such relationships)); (B) changes in the national or world economy or financial markets as a whole or changes in general economic conditions that affect the industries in which the Company and the Company Subsidiaries conduct their business, so long as such changes or conditions do not adversely affect the Company and the Company Subsidiaries, taken as a whole, in a materially disproportionate manner relative to other similarly situated participants in the industries or markets in which they operate; (C) any change in applicable Law, rule or regulation or GAAP or interpretation thereof after the date hereof, so long as such changes do not adversely affect the Company and the Company Subsidiaries, taken as a whole, in a materially disproportionate manner relative to other similarly situated participants in the industries or markets in which they operate; (D) the failure, in and of itself, of the Company to meet any published or internally prepared estimates of revenues, earnings or other financial projections, performance measures or operating statistics; provided, however, that the facts and circumstances underlying any such failure may, except as may be provided in subsection (A), (B), (C), (E), (F) and (G) of this definition, be considered in determining whether a Company Material Adverse Effect has occurred; (E) a decline in the price, or a change in the trading volume, of the Company Common Stock on the New York Stock Exchange (“NYSE”) or the Chicago Stock Exchange (“CHX”); (F) compliance with the terms of, and taking any action required by, this Agreement, or taking or not taking any actions at the request of, or with the consent of, Parent; and (G) acts or omissions of Parent or Merger Sub after the date of this Agreement (other than actions or omissions specifically contemplated by this Agreement).
The carve-outs on this MAC are standard and plentiful, and the carve-out for failure to meet projections which I have highlighted above would appear to exclude much of what happened with Genesco in its second quarter earnings, although the underlying facts could still establish a MAC. I emphasize appear, because we do not know all of the private facts here. But, as I have stated before, Delaware places a high burden on the party asserting a MAC clause: they need to prove that the adverse change consisted of "unknown events that substantially threaten the overall earnings potential of the target in a durationally-significant manner. A short-term hiccup in earnings should not suffice; rather the Material Adverse Effect should be material when viewed from the longer-term perspective of a reasonable acquiror." In re IBP, Inc. Shareholders Litigation (“IBP”), 789 A.2d 14 (Del. Ch. 2001). Here, based on the facts available, under Delaware law it does not appear that this threshold is met. Finish Line's rush to issue this press release is therefore surprising, though this may just be Finish Line's last ditch attempt to renegotiate the transaction for a price more satisfactory to its investors.
There is an alternative explanation answer though. The Genesco merger agreement is governed not by Delaware law but by Tennessee law and has a Nashville, Tennessee forum selection clause. Anyone care to tell me what the law on MACs as applicable to acquisition transactions is in the State of Tennessee? Yeah, that is what I thought you would say -- there is none. Finish Line may be taking a flyer on this uncertainty, although it should be careful as Tennessee is Genesco's home state. This is the second time this week, I have highlighted the importance of choice of law and forum selection clauses in acquisition agreements. Too often they are the product of political negotiations among the parties when they should be negotiating for certainty of law and adjudication. I hate to be a shill for Delaware or New York here, but the alternative result is situations like this.
Last night Lone Star delivered a letter to the board of Accredited Home Lenders offering up a compromise to resolve their material adverse change litigation. In the letter Lone Star offered to amend their merger agreement to lower the consideration being paid to $8.50 a share, a 44% cut from the $15.10 it has agreed to pay but well above the closing price of Lone Star yesterday, $6.31. If AHL agrees to this proposed amendment Lone Star stated that it would waive all breaches of the agreement that it claimed occurred prior to the date of amendment, including the MAC event that is the subject of the litigation. In connection with the agreement, Lone Star also offered up a go-shop to permit AHL to solicit and entertain acquisition proposals from third parties.
First the easy part, the go-shop. Don't read too much into this. Given the poor state of AHL's business, the stock price of AHL today is not a piece of equity in a functioning business but rather almost wholly a potential claim to receive Lone Star's offered price. Given this, no third party bidder is likely to emerge and Lone Star is probably offering this up for cosmetics more than anything else.
Second, one can surmise that Lone Star sent this letter for one of two reasons:
1. Lone Star has now come to the realization that it has a shaky MAC case and is trying to compromise to cut its losses. (For more on this see my prior post here)
2. Lone Star has always known that it had a shaky MAC case and this letter is part of its strategy to cut its losses.
The Lone Star people are smart money, so I'd prefer to think that they are following option two. If so, they are making the best of a bad hand. By asserting a MAC and permitting the stock to free-fall, their new offer looks like a god-send to many shareholders. Moreover, given that AHL has admitted it might not be able to continue as an operating business it has a real incentive to bring Lone Star to the table. Litigation is always uncertain and so both AHL and Lone Star also have an additional incentive to compromise. Thus, I would expect the parties to now agree at a figure in between Lone Star's offer and the previous offer price. But by asserting a MAC in this way Lone Star has effected the course of the negotiation to a large extent; a move that will likely save it millions if not hundreds of millions of dollars. Other acquirers in a similar position should take note.
Addendum: Lone Star's move is a bit surprising coming a month before the hearing in Delaware court and the day before Labor Day weekend Friday -- a slow trading day. That it would move this early is perhaps a suggestion that the credit and other markets are stabilizing and Lone Star wants to act before AHL can itself stabilize and demand a higher price.
Thursday, August 30, 2007
Well, this just crossed the wire. I think it speaks for itself (and was expected), but I'll have a little bit of commentary on it tomorrow morning. These are great times to be watching the market from the sidelines.
Accredited Home Lenders Holding Co.
15253 Avenue of Science
San Diego, CA 92128
Attention: Board of Directors
We write regarding the Agreement and Plan of Merger, dated as of June 4, 2007 (as amended by the First Amendment dated as of June 15, 2007) (the "Merger Agreement"), by and among Accredited Home Lenders Holding Co. (the "Company"), LSF5 Accredited Investments, LLC ("Parent") and LSF5 Accredited Merger Co., Inc. ("Purchaser" and, together with Parent and its affiliates, "Lone Star"). All capitalized terms not defined herein shall have the meanings set forth in the Merger Agreement.
As you are aware, Parent and Purchaser recently extended the expiration date for the current Offer until September 12, 2007, our fourth extension. It is very clear to us that the Company is unlikely to be able to satisfy the conditions to the Offer prior to September 12, 2007, and will in all likelihood not be able to meet those conditions even if the Offer is extended beyond that date.
The current impasse between the Company and Lone Star over the completion of the Offer, which is the subject of the litigation in Delaware Chancery Court, ultimately benefits neither Lone Star nor the Company's stockholders. Among other things, we believe, and apparently the Company also believes based on its previous public statements, that under current conditions the Company may suffer further declines in value and have a difficult time surviving as a going concern. It is patently clear that swift action by the Board of Directors is needed to preserve the Company's existing enterprise value.
We believe there is a way forward that would benefit all of the relevant constituencies. Lone Star is prepared, with the consent of the Company, to amend the Offer immediately to change the Offer Price to $8.50 per Company Common Share, which represents a premium of 35% over the closing price of the Company Common Shares on August 30, 2007. As part of the amended Offer, we would modify the conditions to the Offer such that the only substantial condition to the consummation of the Offer would be the Minimum Condition. While we propose also to retain a condition regarding compliance with representations, warranties and covenants in the Merger Agreement, we would waive all breaches that occurred prior to the date of amendment, including those that are the subject of the litigation.
Immediately following the announcement of the amended Offer, each of the Company and Lone Star would obtain a dismissal, with prejudice, of the claims and counterclaims constituting the current litigation in Delaware Chancery Court. We would then extend the Offer for a period of ten business days following the filing of the revised Offer Documents. Upon commencement of the amended Offer, Lone Star would deposit with an escrow bank all of the funds required to pay for tendered Company Common Shares immediately after the minimal conditions to consummation of the Offer have been met. Lone Star would also propose to amend the Merger Agreement so that, during the pendency of the amended Offer, the Board of Directors would be free to solicit and entertain acquisition proposals from third parties and to terminate the Agreement in favor of any offer that the Board determines to be superior, subject to entry into mutual releases of claims and Lone Star's right to match any such offer.
As we are certain you appreciate, time is of the essence, and while we understand that the Board of Directors will have to carefully consider the proposal outlined in this letter, it is essential that we have a prompt response from you. Please note that the text of this letter will be released publicly and filed as an exhibit to our Offer Documents. Nothing contained in this letter should be considered an express or implied consent or waiver with respect to any provision of the Merger Agreement or a waiver of any past or future breach of the Company's obligations and covenants under the Merger Agreement. We expressly reserve all rights, claims, causes of action and prerogatives under the Merger Agreement and applicable law.
Very truly yours,
LSF5 ACCREDITED INVESTMENTS, LLC
By /s/ Marc L. Lipshy
Name: Marc L. Lipshy
Title: Vice President
On Monday, Taiwanese based Acer Inc. announced that it had agreed to acquire Gateway, Inc. Under the agreement, Acer will commence a cash tender offer to purchase all the outstanding shares of Gateway for $1.90 per share, valuing the company at approximately $710 million. For those who bought at $100 a share in 2000, I am very, very sorry. The acquisition is subject to CFIUS review and a finding of no national security issues (more on this at the end).
For language hogs, the merger agreement contains some solid contract language dealing with Gateway's exercise of its right of first refusal to acquire from Lap Shun (John) Hui all of the shares of PB Holding Company, S.ar.l, the parent company for Packard Bell BV. In Section 5.11 (pp. 36-37), Acer agrees to fund the purchase of Packard Bell by Gateway. The interesting stuff is in Section 7.2 which deals with what happens to Packard Bell if the agreement is terminated. In almost all circumstances of termination Gateway is required to on-sell Packard or its right to buy Packard to Acer. The big exception is in the case of a superior proposal. In such circumstance, if the third party bidder elects, Gateway is required to auction off Packard or its right to buy Packard to the highest bidder. According to one report on The Deal Tech Confidential Blog, Lenovo is contemplating an intervening bid for Gateway in order to acquire Packard; their lawyers should take a look at these provisions. In any event, Gateway did not disclose in its public filings that, if the Acer deal fails, it is highly unlikely to remain the owner of Packard Bell if it succeeds in purchasing it.
For those who track such things the deal has a no-solicit and a $21.3 million break fee -- about normal. It is also yet another cash tender offer with a top-up option.
The other interesting thing about this transaction is the Exon Florio condition. The Congress enacted the Exon-Florio Amendment, Section 721 of the Defense Production Act of 1950, as part of the Omnibus Trade and Competitiveness Act of 1988. The statute grants the President authority to block or suspend a merger, acquisition or takeover by a foreign entity if there is “credible evidence” that a “foreign interest exercising control might take action that threatens to impair the national security” and existing provisions of law do not provide “adequate and appropriate authority for the President to protect the national security in the matter before the President."
The Exon-Florio provision is implemented by the Committee on Foreign Investment in the United States ("CFIUS"), an inter-agency committee chaired by the Secretary of Treasury. Exon Florio was amended in July by The National Security Foreign Investment Reform and Strengthened Transparency Act. For a summary of the final legislative provisions, see this client memo by Wiley Rein here. The legislation is Congress's response to the uproar over the acquisition of Peninsular & Oriental Steam by Dubai Ports and the ensuing political brawl and heavy congressional protest which led to Dubai Ports terminating the U.S. component of its acquisition. The dispute was always puzzling: Dubai Ports was acquiring an English company with port operations in the United States and Dubai Ports is headquartered in the United Arab Emirates, one of our strongest allies in the Mid-East. Nonetheless, the controversy has now spawned a change in the CFIUS review process. And on the whole, the measure is fairly benign, endorsed by most business organizations and will not bring any significant change to the national security process. However, the bill does come on the heels of a significant upswing of CFIUS scrutiny of foreign transactions. According to one news report, CFIUS considered 113 transactions in 2006, up 74 percent from the previous year. How this will all ultimately effect the willingness of foreigners to invest in the U.S. is still unclear, though you can make a prediction.
Back to the Acer transaction. The tender offer is conditioned on:
the period of time for any applicable review process by the Committee on Foreign Investment in the United States (“CFIUS”) under Exon-Florio (including, if applicable, any investigation commenced thereunder) shall have expired or been terminated, CFIUS shall have provided a written notice to the effect that review of the transactions contemplated by this Agreement has been concluded and that a determination has been made that there are no issues of national security sufficient to warrant investigation under Exon-Florio, or the President shall have made a decision not to block the transaction.
This Exon-Florio condition appears prudent given that Lenovo had to make concessions to clear CFIUS review when it bought IBM's computing division. CFIUS review, though, has a minimum review period of 30 days which is longer than the 20 business day minimum required for a tender offer to remain open. Given this, I'm surprised Acer and Gateway went the tender offer route; typically in these situations you would use a merger structure which allows for a longer time period between signing and closing, but is more certain to get 100% of the shares in a more timely fashion. One likely reason is that they did so because they anticipate clearing Exon-Florio quickly. This, of course, is now in the hands of the U.S. government.
Wednesday, August 29, 2007
Earlier this week Topps announced that it would postpone the special meeting of Topps’ stockholders to consider and vote on the proposed merger agreement with affiliates of The Tornante Company LLC and Madison Dearborn Partners, LLC to Wednesday, September 19, 2007. The meeting was to have been held on August 30. (NB. the postponement is 20 days so as to avoid problems with the Delaware long form merger statute (DGCL 251(c)) which requires twenty days notice prior to the date of the meeting.)
In the press release, Topps disclosed its belief that the merger was likely be voted down if the meeting was held on August 30. Topps also justified delaying the meeting by stating that:
the Executive Committee believes that stockholders should have the opportunity to consider the fact that Upper Deck has very recently withdrawn its tender offer and ceased negotiating with Topps to reach a consensual agreement, and that no other bidder has emerged to acquire Topps. In addition, as a result of the developments with Upper Deck, Topps would like additional time to communicate with investors about the proposed $9.75 all cash merger with Tornante-MDP . . . .Finally, given the recent turmoil in the credit markets and the impact that this turmoil may have on alternatives to the merger (including alternatives proposed by Crescendo Partners), Topps believes stockholders should be provided with additional time to consider whether to vote in favor the transaction.
The postponement was not a surprise. When VC Strine's issued his decision earlier this month in Mercier, et al. v. Inter-Tel, upholding the Inter-Tel's board's decision to postpone a shareholder meeting under certain defeat, I predicted that postponement of the shareholder meeting would now be a tool more extensively utilized by boards to attempt to salvage troubled deals and permit arbitrageurs to exercise greater influence on M&A deals. But, in Topps's case they have kept the record date at August 10, so that arbs will not be able to influence the outcome as much; a practice I hope becomes common in these situations. This is particularly true given the posture of the Topps deal; the stock is now trading well below the price it was when the Upper Deck offer was pending and the prevailing arb position is more likely short because of it (though this is speculation from a lawyer not an arb, if anyone has more concrete information please let me know).
I haven't had time of late to write more generally on the Topps deal. But, it is hard not to blame the Topps board here. The Topps board has been heavily criticized by its shareholders for accepting the Tornante bid and for undue management influence in this process. This made resistance to the Upper Deck bid appear illegitimate in many shareholders eyes, even if Topps was right and Upper Deck's bid was merely an illusory one made by a competitor to obtain confidential information. With the Upper Deck bid withdrawn, the Topps board is now locked in a vicious fight with the Crescendo Partners-led The Committee to Enhance Topps to obtain Topps shareholder approval. But with three proxy advising firms, including ISS, now recommending against the transaction, Topps still has a long way to go. By the way, the proxy letters going back and forth between the parties are fantastic -- check them out here.
The MGIC Investment and Radian Group Inc. merger took an interesting turn this past week. On August 7, MGIC in a public filing disclosed that it believed a material adverse change had occurred with respect to Radian in light of the C-BASS impairment announced that previous week. C-Bass is the subprime loan subsidiary jointly owned by MGIC and Radian; it has been hit hard by the subprime crisis and has experienced greater than $1 billion in losses in the last few months. MGIC further stated that it had requested additional information from Radian and expected to complete its MAC analysis the week of August 13. Radian, not surprisingly, refuted MGIC's assertion in its own filing. At the time, Radian stated that it was "compelled to carefully assess the proprietary nature of the subsequent information requests [of MGIC] to ensure that Radian does not provide MGIC with an unfair competitive advantage in the event that MGIC decides that it does not have an obligation to complete the merger.."
The Radian/MGIC deal raises similar issues as the Lone Star/Accredited Home Lenders deal, and they are both governed by Delaware law. In particular they both raise mixed legal/factual issue of whether any material adverse change is disproportionate to Radian to an extent greater than the adverse changes to the industry generally (see my post on this here; see the MAC clause in the merger agreement at pp. 7-8). Given the similarities between the Lone Star/AHL deal and this one, I expected Radian and MGIC to wait until VC Lamb issues his decision and opinion in the Lone Star/AHL litigation in late September/early October before proceeding. And that appears to be what is happening. On Aug 21, MGIC sued Radian in federal district court in Milwaukee (its home town), to obtain information from Radian it believes is required to be delivered under the merger agreement and it needs to properly assess whether a MAC occurred (see news report here). MGIC is stalling for time through a nice legal maneuver. The deal is now likely on hold for the next month.
The MGIC/Radian litigation also highlights the importance of tight forum selection clauses. Clause 9.11 of the merger agreement stipulates that the parties accept jurisdiction in any suit for specific enforcement of the transactions contemplated by the agreement in any New York court. But this is not mandatory submission to jurisdiction. This may or may not have been the parties bargained for intent in future disputes (i.e., it may have just been a quick negotiation following the form late at night without really thinking through the possibilities of such an agreement). But, whatever the case, by suing for information in a Milwaukee court, Radian has now established home court advantage for any subsequent MAC litigation fight.
Tuesday, August 28, 2007
A federal district court in Arizona has preliminarily enjoined the enforcement of the Arizona business combination statute and control share statute with respect to Roche Holding AG's hostile bid for Ventana Medical Systems Inc. (see the opinion here). This is the first court since the 1980s to hold a state anti-takeover statute invalid under commerce clause grounds (remember CTS and MITE from law school?).
In this case, Ventana was incorporated in Delaware but headquartered in Arizona and had substantial assets in that state. Arizona's third generation anti-takeover law, the Arizona Anti-Takeover Act, purports to cover Ventana since it has a substantial presence in the state. Roche sued in federal district court to have it declared unconstitutional and requested that enforcement of the statute be preliminarily enjoined. In granting this motion, the federal court found Roche to have a substantial likelihood of success on the merits because the statute applied to corporations organized under laws of states other than Arizona. Here the Court found that:
there is strong authority demonstrating that the Arizona statutes violate the Commerce Clause because the burden on interstate commerce “is clearly excessive in relation to the putative local benefits” to Arizona. In this case the burden on interstate commerce created by the broad application of Arizona statues includes the frustration and regulation generated by a tender offer made to a foreign corporation, such as Defendant. While Arizona clearly has an interest in protecting businesses that have significant contacts with Arizona, such as Defendant, Arizona clearly has “no interest in protecting nonresident shareholders of nonresident corporations.” In balancing such competing interests, the interference with interstate commerce created by the regulation of a foreign corporation controls. The instant case, based upon the Arizona statutes and their application to foreign corporations, is no different than the cases presented above as the Arizona statutes, while protecting businesses with significant contacts with Arizona, unreasonably interfere with interstate commerce based upon the regulation of businesses that are not incorporated in Arizona.
(citations omitted). The Court distinguished the Supreme Court's decision in CTS on the following grounds:
In CTS Corp., the Supreme Court upheld the constitutionality of Indiana’s Control Share Acquisition statute, which would impact the voting rights of an acquiring corporation in the event of a takeover of a target corporation, largely because the Indiana statute applied only to corporations organized under the laws of Indiana.
Thus, the difference for the Court here was the situs of incorporation for Ventana outsdie the state of Arizona. This opinion is therefore a strong statement in support of the internal affairs doctrine and should make life easier for M&A lawyers by more strictly confining the application of state takeover laws to companies organized in the state of their origin (although other federal cases from the '80s have held similarly - nice to know we are not going the other way though). And for those who engage in the race-to-the-bottom/race-to-the-top state corporate law debate, the case is a probably a good example of the need for a mediating and trumping federal presence in this debate. Here, I'll relate the historical tidbit that the Arizona Anti-takeover Law was initially proposed in 1987 by officials of Greyhound Corporation who claimed that they were the target of a hostile takeover.
Nonetheless, Ventana still can rely on its Delaware defenses including that state's business combination statute (DGCL 203) and the poison pill it has adopted. To be continued.
Thanks to Steven Haas for informing me of this decision.
Sunday, August 26, 2007
The Wall Street Journal is reporting that Home Depot has agreed to cut the sale of its wholesale supply unit to $8.5 billion, eighteen percent less than the $10.325 billion agreed to a few months earlier. The sale to affiliates of Bain Capital Partners, The Carlyle Group and Clayton, Dubilier & Rice will likely close this week on this basis. The deal is important because it is the first time in this market crisis that private equity firms have relied upon their reverse termination fee "option" to substantially drive down the price of an acquisition. It is also shows how stretched the banks are these days and the lengths that they are going to keep private equity debt off their books.
Like may other private equity agreements, the sale agreement for HD Supply specifically limited the private equity consortium's damages in case it decided not to close the transaction for any reason whatsoever, and specifically excluded the option of specific performance. Here, the agreement limited the consortium's damages of no more than $309,750,000. As I have written before, many private equity deals contain this provision; and in this volatile market and the current credit-squeeze the option like nature of these provisions cannot be ignored. This was the case here as, according to the Journal, the banks who agreed to finance this transaction, including JP Morgan Chase, actually offered at one point to pay this fee on behalf of the private equity consortium if they agreed to walk. This is bad, folks.
That the banks would go these lengths shows how desperate they are to avoid the situation First Boston found itself back in '80s when it got stuck in the "burning bed", unable to redeem hundreds of millions it had lent for the leveraged buyout of Ohio Mattress Company, maker of Sealy mattresses. First Boston only escaped bankruptcy by being acquired by Credit Suisse. In the case of HD Supply, the banks apparently asserted that they were no longer required to comply with their commitment letters to finance the acquisition because of the prior agreed change in the purchase price and the revised market conditions it reflected. The position seems a bit tenuous, but I don't have all the facts, and the letters aren't publicly available. Ultimately, though, it appears the need of all the parties to save reputation in the markets as well as Home Depot's need to finance its share buy-back, pushed them to a deal; according to the Journal, Home Depot is providing guarantees on part of the six billion dollars in bank financing provided in connection with the leveraged buyout deal as well as taking up to 12.5% of the equity, while the private equity firms are putting in more equity.
Of greater significance is the fact that the parties would go to these lengths to renegotiate a deal, and make the threats they have around the reverse termination fee. This doesn't bode well for the many other private equity deals in the market today that have this similar reverse termination fees (e.g., SLM, TXU, Manor Care, etc.). As we move into Fall and the banks begin to sweat their liability exposure, expect more re negotiations and a high chance that the economics of one of these many deals will become so bad that either the private equity firms or their financing banks will blink, taking the reputation hit, walking away from the deal and paying this fee. Food for thought as you chew your hot dog over this upcoming Labor Day weekend.
Final Point. The banks and private equity consortium will spin this as a MAC case, but a review of the definition of MAC on pp. 5-6 of the merger agreement finds a weak case for that (the MAC contains the standard carve-out for changes in the industry generally and markets except for disproportionate impact; it appears to be a tough case to establish here). I believe the banks and buying consortium will claim the MAC in order to publicly cover for the raw negotiating position they have taken by using the reverse termination fee and threatening to walk.
NB. Home Depot's counsel on this transaction was again Wachtell. Interesting, given the criticism Marty Lipton received in advising Nardelli on his infamous "take no questions" shareholder meeting.
It is being reported that LeBoeuf, Lamb, Greene & MacRae LLP and Dewey Ballantine LLP are in advanced merger talks and that a deal could be announced as soon as tomorrow. Last year, Dewey walked away from an agreed combination with San Francisco-based Orrick, Herrington & Sutcliffe LLP.
LeBoeuf is particularly known for its Central European/Russian M&A practice led by Oleg Berger and Mark Banovich. Nonetheless, Dewey has the stronger M&A practice, though it has suffered of late from a number of departures including Michael Aiello to Weil, Gotshal & Manges.
Friday, August 24, 2007
The U.S. Court of Appeals for the District of Columbia yesterday denied the FTC's request for an emergency stay halting Whole Food's acquisition of Wild Oats. In a conclusion which does not bode well for the FTC's ultimate case the Court stated that "[a]lthough the FTC raised some questions about the district court's decision, it has failed to make a strong showing that is it likely to prevail on the merits of its appeal . . . ." As a result, Whole Foods will now proceed to close its tender offer on its next expiration date, 5:00 p.m., Eastern time, on Monday, August 27, 2007.
For those keeping score, the FTC's loss comes on the heels of the Justice Department's failure to halt Oracle Corp.’s acquisition of PeopleSoft in 2004, and the FTC's failure to block Western Refining Inc.’s purchase of Giant Industries Inc. earlier this year. The FTC last won an antitrust case in court in 2002, when it stopped Libbey Inc. from buying Anchor Hocking Corp. from Newell Rubbermaid Inc. Now there is food for thought . . . .
Today's Friday culture is Bagehot's Lombard Street: A Description of the Money Market. Lombard Street is a collection of essays written by the famed Bagehot for the Economist during the 1850s. The book is a classic description of the market at that time and an enduring look at market psychology. Highly relevant for our times, Bagehot also analyzes and dissects market crises, offering monetary prescriptions that remain to this day the preferred route for stemming and avoiding financial crises. In particular, his prescriptions for the injection of mass liquidity to stem market panic is, in fact, one that the central banks of the World are following today. Enjoy your weekend!
Thursday, August 23, 2007
Earlier this week Upper Deck withdrew in a huff its competing tender offer for Topps leaving Topps with only a heavily criticized merger agreement with Michael Eisner's Tornante and MDP. I'll write more tomorrow and in-depth on the upcoming Topps shareholder vote on that transaction and the current shareholder opposition. But for now, I thought I would share this amazing letter Topps filed this morning. It's long for a blog post, but I'm going to put most of it up since it is really one of those you have to read (at least for those people who slow down to watch car crashes). I'll also post tomorrow my thoughts on a potential lawsuit by Topps's and their chance at success under the Williams Act and other grounds.
Mr. Richard McWilliam, Chief Executive Officer, The Upper Deck Company
Dear Mr. McWilliam:
We are extremely disappointed for our stockholders that you withdrew your tender offer.
You have misled our Board, our stockholders, the Delaware court and the regulators. As a result, our stock price has gyrated wildly based on your false and misleading statements to the public.
Our Board and management team have been intensely focused on maximizing value and, notwithstanding your self-serving statements to the contrary, we did indeed hope to reach an agreement by which Topps stockholders would receive $10.75 per share. While we negotiated in good faith and used our best efforts to arrive at a transaction with you, given the lame excuses you assert in your letter of August 21 for taking such action, we believe it is now apparent to everyone that your tender offer was illusory. Your conduct has been shameful, indefensible and, in my judgment, manipulative.
Your claim that you could not continue to proceed with your tender offer and finalize a transaction because the due diligence issues could not be resolved is specious. You should have read our letter of August 20 with greater care. In that letter, I stated that the Board was prepared to respond to every diligence request prior to signing a merger agreement, including those received recently.
So that there is no confusion, the letter, which was publicly filed, stated: "we have told you time and again (and reiterate again for the record) that once we conclude a consensual agreement with you (but prior to signing, of course), we will provide you with every missing piece of information you have requested.”
Notwithstanding your additional diligence requests, which we publicly confirmed we would satisfy, a cursory look at your specific requests demonstrates that they would not contain any information that was necessary for you to determine whether to proceed with your tender offer. . . . .
Time and again, Topps provided Upper Deck with a clear roadmap to a definitive agreement. Upper Deck never once indicated a strong desire to get a deal done, other than through its misleading communications to the public. We were stunned that we didn’t hear from you immediately after the HSR waiting period expired. Frankly, we had expected a call at midnight from your advisors suggesting a meeting within a day or so to get a deal done. That call never came (not at midnight, not over the weekend nor even the following week). Instead, our advisors had to reach out to yours to ask when and if we could discuss a merger agreement.
The details of your neglect have already been stated in my last letter so I won’t repeat them again here, but the fact is Topps pushed and pushed and Upper Deck delayed and delayed. Never once did Upper Deck request a meeting to discuss any outstanding business issues. Never once did Upper Deck offer to get in a room with business people and advisors to resolve differences. Never once did you or your business people pick up the phone and call me or anyone else at Topps (other than in response to our calls to you). All of the initiatives came from Topps - we had to send you drafts and then call or email repeatedly to get your advisors to focus. We had to call and email to push the process forward. We wrote letters to try to stimulate some kind of action on the part of Upper Deck. All in all, no one could possibly believe that Upper Deck’s behavior resembled the behavior of a motivated buyer.
All a legitimate buyer would have needed to do was to complete the tender on the terms you stated - buy whatever shares were tendered and then deal with the back-end either through a short-form or long-form merger. You had the requisite regulatory approvals and claimed to have all of the financing. All of the so-called conditions to your offer were, in fact, wholly within your control when you terminated your offer. In any case, if Upper Deck had followed through on its tender offer, it could have acquired a majority of the shares in short order (and, we suspect, would have received overwhelming support for the offer from the stockholders), obtained control of the Board immediately and thereby thwarted any further efforts by any third party to acquire control of Topps or the Board. That’s what a real buyer would have done.
Furthermore, given your lack of experience in the confectionery business, we find it more than curious that during the 5½ months since you have had access to our data room, you only performed a limited review of the hundreds of documents made available on Topps Confectionery, had no follow-up questions on the business, did not ask to speak with the supplier that manufactures most of our confectionery products and did not ask to speak with management to get clarity on the recent softening in performance. We believe that any buyer would want to assess the value of Topps’ Confectionery business regardless of their plans for the business. Topps Confectionery represents approximately half of the Company’s revenues and earnings and is the division that faces the most challenging strategic and financial conditions going forward.
Finally, on August 21, we filed a merger agreement, which we believed our Board was prepared to recommend, subject only to Topps’ obligations under the existing merger agreement with Tornante-MDP. Incredibly, rather than contact us or our advisors to finalize a transaction that would benefit our stockholders, you withdrew your tender offer. It appears that you were using your tender offer as a Trojan horse to gain access to our confidential information, disrupt our business and interfere with our pending merger transaction, the consummation of which could threaten the success of your business.
We intend to hold Upper Deck fully responsible for the damages you have caused Topps and its stockholders, and hope that our stockholders, or representatives acting on their behalf, and appropriate regulators will do likewise.; We will now turn our attention to completing the Tornante – Madison Dearborn Partners transaction.
Allan A. Feder
The redacted opinion in the Whole Foods/Wild Oats transaction has been released (access it here). I haven't analyzed it thoroughly but at first glance Judge Friedman rests much of his decision on a rejection of the FTC's market definition. Judge Friedman defines the market more broadly than the organic supermarket sector; instead, he groups Whole Foods and Wild Oats together with the many other supermarkets selling natural and organic groceries. On this basis, he finds that "[t]he evidence shows that there are many alternatives to which customers could readily take their business if Whole Foods and Wild Oats merged and Whole Foods imposed," price increases. The case now goes before the D.C. Circuit.
Earlier this week, Lone Star filed its answer and counter-claims to Accredited Home Lender's lawsuit which seeks to force Lone Star to complete its pending acquisition of AHL. Lone Star bases its counter-claims on two core assertions 1) AHL has breached its representations and warranties and covenants under the merger agreement, and 2) a Material Adverse Effect (as defined in the merger agreement) has occurred or is reasonably likely to occur. Lone Star asserts that these claims entitle it to terminate the merger agreement and limits its liability in the transaction to no more than the reverse termination fee, or $12 million.
More specifically: Lone Star's claim of breach of the merger agreement by AHL is in part premised upon Section 7.01 of the merger agreement which requires AHL “to conduct its business in the ordinary course and [to] use its commercially reasonable efforts to preserve substantially intact the business organization of the Company and to preserve the current relationships of the Company and the Company Subsidiaries . . . .” Lone Star here claims that AHL breached this agreement by failing to take the necessary steps, including slashing employees and overhead, to preserve its sub-prime lending business. Lone Star also asserts a claim that AHL breached Section 8.02 of the merger agreement, which requires AHL to afford Lone Star access to the “books and records of the Company and the Company Subsidiaries, and all other financial, operating and other data and information as [Lone Star] may reasonably request.” Lone Star also alleges that AHL has:
breached its representations, warranties and covenants by, among other things, its (i) acts and omissions that drastically weakened the financial and operating condition of the Company, (ii) acts and omissions that hastened the Company’s descent into a severe liquidity crisis, (iii) acts and omissions that have, or soon will, restrict the Company’s access to the its revolving loans, (iv) violations of covenants in the Company’s core credit facilities, and (v) misstatements regarding and mismanagement of the failing retail loan origination program.
Finally, Lone Star asserts that AHL has suffered a Material Adverse Effect and therefore is in breach of the merger agreement.
As an initial matter, Lone Star's claims surrounding breach of the representations and warranties and covenants look tough to prove, and though Lone Star does well to dress them up, appear to be just a MAC claim in disguise (and, in fact, any breach of a representation or warranty has to be a MAC to justify termination; the breach of covenant does not require that Lone Star prove a MAC, merely a material breach). Nonetheless, to the extent Lone Star is challenging AHL's business decisions, the court is likely to look at the actions of AHL within the context of the business judgment rule and commercial reasonableness. This is a question of fact, but based on the known facts and given the crisis AHL's actions appear reasonable reactions to the sub-prime lending crisis. Moreover, there is a 60 day cure period in the contract for AHL to cure any breaches. Today, AHL announced that it was taking several restructuring initiatives, including terminating 1,000 employees, closing substantially all of the retail lending business and no longer accepting new U.S. loan applications. AHL is likely to claim that these actions, which Lone Star asserts in its counter-claim that AHL had previously failed to take, are such a cure. In fact, I interpret AHL's actions today as a direct response to this claim by Lone Star, though it likely had no other choice from a business perspective given the market situation.
As for the MAC claim, the question boils down to two issues: 1) what did Lone Star know and when did they know it, and 2) is the MAC in Lone Star's business "disproportionate" to the adverse changes in the sub-prime lending business generally. This is important because the definition of MAC in the merger agreement specifically excludes events resulting from any circumstance or condition existing and known to Lone Star as of the date of the merger agreement as well as those that do not disproportionately affect AHL as compared to other companies operating in the industry in which AHL operates.
Here, AHL attempts to prove lack of knowledge by relying on the issuance of a "going concern" qualification by AHL's auditors and the revision in AHL management’s projections from an estimated loss for the third quarter of $64 million to a $230 million loss for the third quarter. It is hard to assess these claims without full information, but my gut reaction is that Lone Star cannot escape the sub-prime implosion, which unfortunately for Lone Star was in full swing at the time of its agreement. I believe that knowledge is likely to be attributed, but this is now a question of fact that will ultimately be decided by Vice Chancellor Lamb. And even if Lone Star can establish that knowledge was absent, it still must prove the MAC to be "disproportional".
Lone Star thus also goes out of its way to prove dis proportionality citing specific lawsuits against the company and other alleged facts to prove that the events occurring at AHL are either specific to AHL or so disproportionate as to be a MAC. Here, Lone Star again cites the disproportionate effect of the implosion of AHL's retail business which AHL shut today. But again, given the mass industry turmoil -- Lehman today shut its sub-prime unit for example -- dis proportionality is going to be hard to prove even in AHL's catastrophic circumstances. Also -- look for the parties to argue over which industry the disproportionality should be measured against; Lone Star is going to argue it is the broader mortgage lending business -- AHL will argue it is the sub-prime business.
Lone Star's claims of a MAC thus appear at this point to be less than solid. Nonetheless, things will reach more clarity as the facts are disclosed at the hearing before VC Lamb. For now, though, two things appear certain. First, given AHL's moves today to shut down its business, purchasing its stock is, more than ever, essentially the purchase of a litigation claim. And whatever the ultimate outcome, VC Lamb will have an important opportunity in this case to clarify Delaware law on MACs and issue an opinion that could have wider consequences for a number of other pending transactions.
Tuesday, August 21, 2007
On August 14 in Mercier, et al. v. Inter-Tel, Vice Chancellor Strine upheld the decision of a special committee to postpone a shareholder meeting to vote on an acquisition proposal which was made on the day of that meeting. In his opinion, Strine held that postponement was appropriate under the "compelling justification" test of Blasius Industries, Inc. v. Atlas Corp., 564 A.2d 651 (Del. Ch. 1988), since "compelling circumstances are presented when independent directors believe that: (1) stockholders are about to reject a third-party merger proposal that the independent directors believe is in their best interests; (2) information useful to the stockholders' decision-making process has not been considered adequately or not yet been publicly disclosed; and (3) if the stockholders vote no... the opportunity to receive the bid will be irretrievably lost."
The opinion is important for three reasons. First, Strine is the first to hold the "compelling justification" test of Blasius to be met [Ed. Note -- this is actually the second case see the correction below]. Second, this being a Strine opinion, he uses the opportunity presented to attempt a rewrite of the Blasius standard. Third, the opinion provides important guidance for a board wishing to postpone a shareholder meeting on an acquisition proposal. Ultimately, the decision increases a target board's ability to control an acquisition process and influence its outcome.
The summary facts are these: Inter-Tel had agreed to be acquired by Mitel Networks Corporation for $25.60 a share in a cash merger. A competing proposal was put forth for a recapitalization of Inter-Tel by the founder of the company who was also a director. Institutional Shareholder Services and several shareholders also subsequently came out in opposition to the Mitel merger. Faced with certain defeat, the special committee of the board of Inter-Tel voted on the actual day of the meeting to postpone it in order to attempt to persuade sufficient shareholders to change their vote. In the postponed meeting, the shareholders voted to approve the merger based in part on the changed recommendation of ISS and subsequent deteriorated financial condition of Inter-Tel.
First, the technical points in the opinion concerning the shareholder meeting postponement:
- The board here "postponed" the meeting rather than adjourning it once it had been convened. The Delaware General Corporation Law does not address this practice, but practitioners have generally believed that this is permissible. Strine's acceptance of this postponement without comment in his opinion implicitly confirms this. This, together with Strine's ultimate holding, opens up a wide technical loop-hole for future boards to "postpone" shareholder meetings when faced with an uncertain vote rather than adjourning them. Given today's market volatility and the uncertainty behind a number of deals, expect this option to be exercised in the near-future (e.g., a likely candidate is Topps).
- Inter-Tel ultimately set the new shareholder meeting date twenty days after the old one. The Delaware long form merger statute (DGCL 251(c)) requires twenty days notice prior to the date of the meeting. The opinion thus leaves the question open whether a postponed meeting is a new one for these purposes such that the full twenty days notice period starts anew.
- Inter-Tel's proxy had included a provision granting the board the power to "adjourn or postpone the special meeting" to solicit more proxies. This provision was included due to informal SEC proxy requirements that shareholders must approve any adjournment. In the case of Inter-Tel there were insufficient votes voting to adjourn the meeting. In footnote 38 of the opinion, Strine stated that "[i]f the special meeting had actually been convened, Inter-Tel's bylaws would seem to have required stockholder consent to adjourn." Section 2.8 of Inter-Tel's By-laws states that "The stockholders entitled to vote at the meeting, present in person or represented by proxy, shall have the power to adjourn the meeting form time to time." Thus, Inter-Tel side-stepped this dilemma through a postponement. Note that a separate by-law would have been required to give the Chair of the meeting power to adjourn the board in the absence of the necessary shareholder vote.
Now for the more interesting part, the doctrinal issues:
In his opinion, Strine first distinguished the holding of In re Mony Group, 853 A.2d 661 (Del.Ch. 2004); there the Delaware Chancery Court applied the business judgment rule to analyze a board decision to postpone a shareholder meeting on an acquisition proposal and set a new record date(NB. I've always thought this decision to be doctrinally problematical). Strine found Mony distinguishable since there the merger was going to be approved; the directors would therefore be removed if the vote went through and so were disinterested and the shareholders still free to accept or reject the merger. Here, Blasius was applicable since the merger would likely not be approved, an event which would keep the directors in office. Strine then proceeded into an analysis of the Blasius standard invoking adjectives such as "bizarre" and "crude" to describe it. He concluded by stating that the Blasius approach should be "reserved largely for director election contests or election contests having consequences for corporate control.” Here, Strine judicially constricted the reach of Blasius from that decision itself and the Delaware Supreme Court's decision in MM Companies, Inc. v. Liquid Audio, Inc., 813 A.2d. 1118 (Del. 2003) which speak of applying the standard to board actions which have "the primary purpose of interfering with or impeding the effective exercise of a shareholder vote." Accordingly, his holding here may not be one the Delaware Supreme Court ultimately agrees with.
Strine then attempted to recast Blaisus as interpreted by Liquid Audio itself:
Although it does not use those precise words, Liquid Audio can be viewed as requiring the directors to show that their actions were reasonably necessary to advance a compelling corporate interest . . . . Consistent with the directional impulse of Liquid Audio, I believe that the standard of review that ought to be employed in this case is a reasonableness standard consistent with the Unocal standard.
Strine pines here for a "legitimate objective" test but ultimately acknowledges that this is a reading that cannot currently be wholly jibed with the "compelling justification" standard of Blasisus/Liquid Audio. So, he concludes by applying this "compelling justification" standard to the facts at hand to find that the following factors were sufficient to justify a same-day meeting postponement: (i) ISS's suggestion that it might change its negative recommendation if it had more time to study recent market events (including the debt market's volatility and the bidder's refusal to increase the consideration), (ii) the founder's competing proxy proposal for a recapitalization that was still being reviewed by the SEC, and (iii) the desire to announce the company's negative second-quarter results. Strine found that the directors acted with "honesty of purpose" and noted that they did not have any entrenchment motive because they would not serve with the surviving entity. Thus, the Blasisus standard was satisfied and the plaintiff's request for a preliminary injunction of the merger denied.
There is obviously more to this opinion and commentators will rush to fit this within the various doctrinal standards of the Delaware courts (hint: start with Strine's own article on the subject). Moreover, the opinion contains the usual Strine nuggets including an aside that we Americans have more words for money than Eskimos for snow. But perhaps the most interesting point in the opinion was Strine's observations on arbitrageurs and their effect on acquisition proposals. Here, the board had specifically based its postponement in part to permit arbitrageurs more time to increase their positions so as to vote in favor of the merger, though, ultimately it appears that they did not effect the vote. Strine addressed this issue by specifically refusing to:
premise an injunction on the notion that some stockholders are 'good' and others are 'bad short-termers . . . . .
And while Strine left open the door for future challenges if arbitrageurs do indeed effect the outcome in such circumstances, the difficulty of proving who are the shareholders voting may open a small gate here for undue influence. Hopefully, this is a gate that the Delaware courts will police thoroughly so as to prevent boards from unduly shifting a shareholder vote.
Thanks and credit for some of the observations on this post to J. Travis Laster & Steven M. Haas of Abrams & Laster LLP who have put together a superb client alert on this opinion.
Correction: Steven M. Haas helpfully wrote to correct a point above: "Strine actually found a compelling justification in Hollinger. There, like Inter-Tel, he found a compelling justification . . . .That reminds me of one of my favorite Strinisms from the ABRY Partners oral argument: "What happens in Dover.... Sometimes gets remanded back to Wilmington...."
Monday, August 20, 2007
RARE Hospitality International, Inc. announced on Friday that it will be acquired by Darden Restaurants, Inc. for $38.15 per share in cash in a transaction valued at approximately $1.4 billion. The acquisition will be effected via tender offer, showing yet again that the cash tender offer is reemerging as a transaction structure (see my post the Return of the Tender Offer). Darden is financing the acquisition through cash and newly committed credit facilities. And the deal is the latest in the super-hot M&A restaurant-chain deal sector.
A perusal of the merger agreement shows a rather standard industry agreement. RARE's main restaurant chain is LoneHorn Steakhouse, and so merger sub is called Surf & Turf Corp. -- the bounds of creativity in M&A. There is a top-up which is also fast becoming a standard procedure in cash tender offers. This top-up provision provides that so long as a majority of RARE’s shares are tendered in the offer, RARE will issue the remaining shares to put Darden over the 90% squeeze-out threshold. RARE's stock issuance here cannot be more than 19.9% of the target's outstanding shares due to stock exchange rules, and cannot exceed the authorized number of outstanding shares in RARE’s certificate of incorporation.
I looked for any new gloss on the Material Adverse Change clause to address current market conditions. There was nothing that appeared to address the particular situation, although any non-disproportionate "increase in the price of beef" is a MAC-clause trigger; apropos for a steakhouse chain. Finally, for those interested in topping Darden’s bid, the termination fee is $39.6 million. If another bidder makes a superior proposal, then under Section 5.02(b) of the merger agreement, RARE cannot terminate the agreement "unless concurrently with such termination the Company pays to Parent the Termination Fee and the Expenses payable pursuant to Section 6.06(b)". The only problem? Expenses is used repeatedly throughout the Agreement as a defined term everywhere except 6.06(b) -- which makes no references to Expenses or even expenses. In fact, it appears that nowhere does the agreement define Expenses. Transaction expenses can sometimes be 1-2% of additional deal value, a significant amount that any subsequent bidder must account for. So how much should a subsequent bidder budget here? Or to rephrase, what expenses must RARE pay if a higher bid emerges? And how can RARE terminate the deal to enter into an agreement with another bidder if RARE does not know which expenses it is so required to pay? Darden may also want similar certainty as to its reimbursed expenses, if any, in such a paradigm. Lots of questions in this ambiguity. Not the biggest mistake in the world, but Wachtell, attorneys for the buyer, and Alston & Bird, attorneys for the seller, both have incentives to fix this one.
Friday, August 17, 2007
Judge Paul Friedman of the Federal District Court for the District of Columbia, today denied the FTC's request to preliminarily enjoin Whole Food's pending acquisition of Wild Oats. The order is accessible here. The FTC subsequently released a press release stating:
Federal Trade Commission Competition Director Jeffrey Schmidt expressed regret at the federal district court decision announced today in the Whole Foods/Wild Oats case, calling it a loss for both consumers and competition.
We respect the Court’s decision, which we currently are reviewing. We brought this challenge because the evidence before us showed that the merger would most likely result in higher prices and reduced choices for consumers who shop at premium natural and organic supermarkets,” Schmidt said. “We are reviewing our options.”
. . . . The federal district court decision announced today allows the transaction to proceed, pending the FTC’s filing of a request for emergency stay with the district and appellate courts prior to its appeal being heard. The Commission also has authorized the staff to act on its administrative complaint to permanently enjoin the merger.
As I stated when the FTC initially filed this case:
"In defining the relevant markets, the Commission found that premium natural and organic supermarkets, such as Whole Foods and Wild Oats, are differentiated from conventional retail supermarkets in several critical respects. These include the breadth and quality of their perishables – produce, meats, fish, bakery items, and prepared foods – and the wide array of natural and organic products and services and amenities they offer. In addition, premium natural and organic supermarkets seek a different customer than do traditional grocery stores. Whole Foods’ and Wild Oats’ customers are buying something more than just the food product – they are seeking a shopping “experience,” where environment can matter as much as price."
The Commission's position here is similar to the one it took when it successfully blocked the merger of Staples and Office Depot. I am no antitrust expert but I am bit skeptical of the Commission's view of this market as an "experience" rather than a simple opportunity to buy higher quality natural or organic food which can otherwise be available elsewhere. This is particularly true since it would appear that barriers to entry are low and there are many other prospective and real competitors even in a narrowly defined organic and natural foods market.
Once the opinion is disclosed (it was filed under seal), we will be able to ascertain whether or not the Office Depot doctrine is now dead and confined to its particular facts. But the FTC's case here appeared to almost exclusively rely on the actions and statements of Whole Foods co-CEO John Mackey who, among other things, was posting on the Yahoo chat board for Wild Oats using the handle Rahodeb (his wife's name spelled backwards). But as I stated before "just because you have a dumb CEO still doesn't justify the FTC actions here challenging Whole Foods' proposed acquisition of Wild Oats. As far as I know, there is no stupidity provision in the antitrust laws though some may argue there should be one in the law generally."
The FTC will now attempt to raise an emergency appeal up to the D.C. Circuit. Even if the appeal is denied, depending upon the grounds of the opinion, Whole Foods still has a hard decision to make. The FTC indicated in its press release that it will continue to pursue this action. And Whole Foods is not required to complete its tender offer if either of the following conditions exist:
(a) there shall have been any, law, decree, judgment, order or injunction, promulgated, enacted, entered, enforced, issued or amended by any governmental entity that would, directly or indirectly: . . . . (ii) impose material limitations on the ability of WFM, Purchaser or any of their respective subsidiaries or affiliates to acquire or hold, transfer or dispose of, or effectively to exercise all rights of ownership of, some or all of the Shares, including the right to vote the Shares purchased by it pursuant to the Offer on an equal basis with all other Shares on all matters properly presented to the stockholders of Wild Oats. . . .
(b) there shall be pending any action, proceeding or counterclaim by any governmental entity challenging the making or consummation of the Offer or the Merger or seeking, directly or indirectly, to result in any of the consequences referred to in clauses (i) through (iii) of subparagraph (a) of this paragraph 2;
The FTC administrative action, which the FTC asserts will continue no matter the outcome of its appeal, almost certainly meets the second condition. Whole Foods may have significant comfort in the District Court opinion, but the grounds for granting a final judgment and a preliminary injunction are different. Depending upon the basis for the court's decision denying an injunction, Whole Foods still may bear significant risks that the FTC may ultimately win. To the extent this risk exists Whole Foods must decide whether to close the offer and bear it. Hopefully, John Mackey will display better judgment in this decision than in his other actions.
For more on the Whole Foods/Wild Oats deal see my prior posts:
Midwest Air Group yesterday announced that it had agreed to be acquired by an affiliate of TPG Capital, L.P. for $17 per share in cash in a transaction valued at approximately $450 million. The Midwest board unanimously selected this offer over Airtran's cash and stock offer valued at $16.23 at the time of the board decision. For those keeping track, on December 12, 2006, the last trading day before the public announcement of AirTran's interest in acquiring Midwest, Midwest's stock was trading at $9.08.
As I noted before,
[T]he Midwest board still has leeway to prefer the TPG offer. The Midwest board is governed by Wisconsin law, not Delaware and therefore the typical Revlon duties do not apply. In fact, the duties of a board under Wisconsin law in these circumstances have never been fully elaborated. . . . And even if Revlon duties did apply, the Midwest board could make the reasonable judgment that AirTran stock was likely to trade lower in the future, and therefore Airtran's offer was not a higher one than TPG's all-cash bid.
Ultimately, the Midwest board relied upon the the current state of the markets and the uncertainty with AirTran's financing to justify its decision to go with TPG. Given the higher current value of TPG's bid this was wholly justifiable and probably the right one. Cash is once again king, at least until this morning's Fed rate cut. It is only Midwest's previous scorched earth policy vis-a-vis TPG which makes the decision suspect.
Still some questions remain. What is the scope of Northwest's role in the TPG deal and what are the antitrust provisions in the merger agreement? What happens if shareholders vote down the deal: has Midwest agreed to a break fee payable to TPG? And, what arrangements have been made for the current executive officers of Midwest? What is the break fee in the unlikely event AirTran decides to keep bidding? Once the agreements are filed, I'll post more.