Friday, October 12, 2007
Yesterday, the Chancery Court of Tennessee issued an order order setting a trial date for Dec. 10 in the material adverse change dispute between Finish Line and Genesco. In doing so, the Chancery Court rejected the arguments of UBS [the intervenor] to set the trial for Jan. 7. The Chancery Court stated:
In setting the MAE trial for December 10, 2007, and rejecting the Intervenor's request for a January 7, 2008 trial date, the Court has concluded that the provision of the Merger Agreement that allows Genesco to cure an MAE before December 31, 2007 is not a ripe issue, and, therefore, does not warrant delaying the trial to January 7, 2008. The Court's conclusion is that under the terms of the Merger Agreement, as applied to the circumstances of this case, Genesco's right to assert that it has cured a defect in its performance is not an issue until a defect in performance has been demonstrated.
The Chancery Court's conclusion here appears right. Likely UBS was arguing that the Court should only decide the issue once it was impossible for Genesco to cure the MAC under the merger agreement which has a drop dead date of Dec 31, 2007. Here, the judge I think correctly says that issue is not ripe--if there is no MAC now there is nothing to cure.
Also, it appears that UBS has dropped its objections to being brought into the suit. It was granted intervenor status in the dispute by the Judge pursuant to the order. UBS likely asked for intervenor status in order to preserve its option under its commitment letter with Finish Line to require any litigation between the two to be in a New York court.
Finally, the Judge accepted Genesco's offer to respond to Finish Line's and UBS's information requests and set an Oct 31 hearing to discuss any further information disputes. The Judge in part stated:
Construing and applying the terms of the Merger Agreement, the Court concludes that a 77% drop in second quarter earnings from the previous year is sufficient on its face to trigger Genesco's obligation to respond to the request of the defendants to provide information about the second quarter loss in earnings in connection with the MAE provisions ofthe Merger Agreement.
I wouldn't make to much of the judge's statement about the 77%. If there is such a decline and it is sustained it would likely be MAC to the extent Finish Line was not aware of it at the time of the agreement or it otherwise wasn't excluded from the agreement. All of these are big outs. So, the Judge still has a long ways to go before finding a MAC. In this regard, retail is a highly cyclical business as a whole and the MAC clause in the merger agreement excludes out:
(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;
as well as:
(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
This dispute will now revolve in large part on what Finish Line finds during its information hunt. Even if Finish Line discovers any new information, Genesco will attempt to show that Finish Line already knew of these facts as the deal was reached a good month into the quarter Finish Line is now complaining produced a MAC. Genesco will also argue that any MAC is excluded under the exceptions above. Here, it will rely for publicity on (D) to claim no MAC has occurred. Something to the effect of "how dare you say there was a MAC when we explicitly excluded out failure to meet projections". But this exclusion does not except out the underlying changes which actually did produce the MAC. So, ultimately, to the extent Finish Line can even establish that something materially adverse occurred, Genesco will fall back on (B). In this regard, Finish Line's results were none to great this last quarter either. Bottom Line: There is still a long journey for Finish Line and UBS before they can find the facts to establish a MAC, though I will say the Judge appears open to their arguments. And they will now have the opportunity to find such facts. Ultimately, I think the argument will center on whether any adverse event is excluded by (B).
Though the incentives of the party are still strongly biased towards a settlement shortly before trial, I continue to hope for at least one MAC decision out of all of these cases. If it is a Tennessee one and not Delaware, so be it. For more on the legal arguments see my prior post here.
NB. The Judge's order also likely cures Finish Line's other claim that Genesco breached the merger agreement by failing to provide information to it as required under the merger agreement's terms.
For those who can't get ehough of this dispute click here to access Genesco's brief filed prior to the Judge's order, UBS's motion o be granted intervenor status and UBS's answer to Genesco's complaint.