Sunday, September 16, 2007
The Genesco material adverse change dispute is starting to heat up in advance of the Genesco special meeting to vote on the transaction today. On Friday, The Finish Line, Inc. announced that it had received two letters from UBS which it helpfully forwarded to Genesco Inc. The Finish Line did not disclose the full text of the letters, but did disclose a portion. According to The Finish Line, UBS stated in one letter:
[O]ur agreement to perform under the Commitment Letter may be terminated if a Material Adverse Effect has occurred with respect to Genesco. As of today, we are not yet satisfied that Genesco has not experienced a Material Adverse Effect. ... Based on the foregoing, we ask that you cause Genesco and its representatives and advisors to provide all financial and other information that we request so that we may conclude whether a Material Adverse Effect has occurred.
You get the idea. It appears that UBS and Finish Line are now attempting to follow the strategy played out in the Home Depot supply business sale renegotiation. UBS and Finish Line, together with Finish Line's newly hired uber-banker Ken Moelis, are trying to tag-team in order to renegotiate or terminate the Genesco deal based on claims of a material adverse change. This is a strategy that we will likely see often this Fall as banks and private equity buyers attempt to renegotiate deals that are no longer as financially attractive. The Finish Line and UBS also appear to be following the successful strategy used by MGIC to terminate its deal with Radian based on a similar MAC claim. Essentially, UBS (I believe likely at Finish Line's behest) are claiming that more information is needed in order to buy time to renegotiate the transaction or otherwise obtain Genesco's agreement to terminate the deal. UBS is asking for "all financial and other information that we request", hardly a narrow request. This maneuver permits them to avoid litigation for the moment, buy time and appear to be the good guys here.
The strategy doesn't appear to be working. Genesco responded to these letters after market close with its own press release which stated:
In response to The Finish Line's announcement, Genesco Inc. reiterates that no "material adverse effect" under the previously announced merger agreement with Finish Line has occurred with respect to Genesco.
In a previous post I outlined why, based on public information, it appears that The Finish Line has a weak case to claim a MAC, at least under Delaware law. The MAC clause in the financing commitment letter for The Finish Line issued by UBS is identical to the one in the merger agreement with one critical exception. The commitment letter is governed by New York law, the Genesco/Finish Line merger agreement by Tennessee law. I previously criticized the lawyers in this deal for selecting the law of a state with no defined case law on merger agreements, particularly MACS. Their choice has now raised the prospect of a court in New York finding a MAC while a court in Tennessee finds the opposite. Now that would be fun (at least from my perspective). This is unlikely from a practical perspective -- who could see courts consciously reaching this result? -- still M&A lawyers in the future would do well to avoid this difficulty.
The Genesco shareholder meeting will be held at 11:00 a.m., local time, at Genesco's executive offices, located at Genesco Park, 1415 Murfreesboro Road, Nashville, Tennessee. I encourage any Genesco shareholders in the area to attend, not only for the free food, but for the interesting situation a yea vote will create. If the merger is approved, all of the conditions to the merger in the merger agreement would now presumably be satisfied (assuming no MAC -- see Article 7 of the agreement). But what Genesco will do is uncertain and likely depend upon the non-public information they have as to whether a MAC occurred. If they are confident in their position, a quick injunctive suit in Tennessee would do them well in order to gain first mover advantage and position them to consolidate in Tennessee a New York lawsuit brought by UBS which could over-shadow their own litigation. Such a suit would also likely be a good move even if they are not as confident in order to establish a firm bargaining position. More to come.