September 28, 2007
Finish Line's MAC Claim?
Earlier this week, Finish Line issued the following press release in response to Genesco's Tennessee lawsuit to force Finish Line to complete its agreed acquisition of Genesco:
The Finish Line has complied with its obligations under the merger agreement, and as previously announced, continues to work on the closing documents. In that regard, The Finish Line has asked Genesco for certain financial and other information as well as access to Genesco's Chief Financial Officer and financial staff. However, to date Genesco has not responded to and has refused to comply with these requests. These failures constitute a breach of the merger agreement, and The Finish Line is today notifying Genesco of same. We regret that Genesco has chosen to initiate litigation. We are reviewing the Genesco lawsuit and will take the necessary steps to protect the interests of The Finish Line and its shareholders. We have no further comment at this time.
Notice anything interesting about the press release? Nowhere does Finish Line mention a material adverse change. Instead, the breach that Finish Line is talking about is a failure to receive relevant information. Here, it is following the lead of UBS which has also been demanding information about Genesco to make a determination if a MAC occurred. It thus appears that Finish Line's response to Genesco's suit is going to be along the lines of: "We think a material adverse change occurred, but we can't tell because Genesco is not giving us the information we need". Most likely this speaks to the current strength of their MAC claim. As I detailed in a previous post, based on public information it does not appear that Finish Line has a strong case here for a MAC. This agreement, though, is governed by Tennessee law and this analysis depends on the Tennessee court adopting a Delaware analysis, something it is likely but not certain to do. There is no case law currently on MACs in Tennessee. Shame on the lawyers for negotiating a choice-of-law clause that provided no certainty on an important issue.
The other interesting thing about this deal is that Finish Line is really stuck between a rock and a hard place right now. There is no financing condition in the deal, so to the extent UBS is also trying to back out of financing this transaction, Finish Line could be left in a really bad position. In fact, Finish Line may be acting right now to make a MAC claim because of UBS's actions more than its own position. Because of this, I expect Finish Line to answer the Genesco complain by attempting to implead UBS (that is, bring them in as a party to the suit). This will allow all of the legal obligations of the unhappy trio to be resolved in one court, and Finish Line to avoid the catastrophy of being forced to close the Genesco deal without financing firmly in place.
Ultimately, both Finish Line and UBS are buying time for the credit markets to firm up and the results of Finish Line (who reported earnings yesterday) and Genesco to improve. While Genesco is talking a strong game, the incentives are to settle a case like this for a lower renegotiated price, as in the Lone Star/Accredited Home Lenders case. A board simply does not want to take the risk of a completely broken deal. And a renegotiation will requires a new Genesco shareholder vote which would push the deal out into January, buying more time for Finish Line and UBS. As with most other MAC cases this is likely to settle.
NB. In Section 8.1(d) of the merger agreement there is a twenty business day cure period for Genesco to the extent it actually is breaching the agreement for failure to provide this information.
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