Wednesday, October 31, 2007
Affiliated Computer Services has admirably filed today on a Form 8-K the letter it received from Cerberus. ACS had no other comment. Obviously, there is a back story here which will come out over the next few weeks. In any event, here it is (and I wish my exes had been as nice to me when we broke up)
Special Committee of the Board of Directors
Affiliated Computer Services, Inc.
We are very impressed with the management, business and opportunities of Affiliated Computer Services, Inc. (the “Company”) and continue to believe that the Company represents an attractive investment opportunity. We regret that we must withdraw our offer to acquire the Company due to the continuation of poor conditions in the debt financing markets. We are very focused on our ability to complete transactions that we initiate. From March 20, 2007, the date of our first offer letter, to the date hereof, Cerberus Capital Management, L.P. (“Cerberus”) and its affiliated funds have completed a significant number of transactions, including our acquisition of Chrysler LLC.
We believe that our proposal was in the best interests of the Company’s shareholders and that, had our proposal been put to a shareholder vote, it would have received approval by an overwhelming majority of the Company’s unaffiliated shareholders. Had the Special Committee engaged with Cerberus and Mr. Darwin Deason on the schedule we proposed in our offer letter, we are confident that our acquisition of the Company would have been approved and closed, and unaffliated shareholders would have been paid a substantial premium for their shares, some months ago. If market conditions change, we may consider proposing another transaction with the Company.
Very truly yours, CERBERUS CAPITAL MANAGEMENT, L.P.
I just finished listening to the Harman conference call last week (access the transcript here). I was hoping that it would answer some of my still remaining questions. These include the exact internal pricing on the issued bonds to KKR et al., the propriety of a KKR board member now sitting on the Harman board, the intentions of Harman with respect to this KKR et al. investment, and the validity of settling the dispute in this manner. The number of actual analysts questions with respect to any of this? None. In fact, the analysts did not ask a single question about the settlement, the dispute or the underlying financial causes of it. That is a shame, because if I was investing in Harman these are some of the first things I would like to know. I realize it is not easy being an analyst these days, but still, you would think they would have the gumption to ask the hard questions and let Harman decide whether to respond.
Maxim Integrate Products has problems. Due to an options back-dating investigation, the company has not filed its financial reports with the SEC since May 2006. This internal investigation ultimately concluded that stock option grants to employees and directors had been either back-dated or otherwise manipulated for a seven year period starting in 2000. Then on Oct. 2, Nasdaq delisted Maxim for seven "deficiencies," including delinquent reports for three quarters, two missing annual reports, a late proxy filing and failure to hold its annual shareholder meeting. The company now trades on the Pink Sheets. It expects to restate and file its past due reports in the first quarter of 2008, when it has stated it will seek relisting in the Nasdaq.
So, it was with a bit of surprise that I ran across this tidbit from a Form 8-K filed by Maxim earlier this month:
Maxim Integrated Products, Inc. suspended stock option exercises starting September 23, 2006 . . . . The Company will continue to prohibit the exercise of stock options until the Company completes its financial restatement and becomes current in its reporting obligations with the Commission. During the period which the exercise of stock options has been and will be suspended, stock options held by current and former employees have expired and will expire due to the expiration of their 10-year terms. The Company has implemented a program to provide cash payments to individuals who hold options granted from September 1996 through March 1998 that expire due to their maximum 10-year terms. . . . . . Approximately 525 individuals will be eligible for this program, and the aggregate payments are expected to total approximately $98 million . . . . .
So, does everyone get this? Maxim is making whole employees who cannot exercise their about to expire options due to the imposed black-out period. Maxim lists out the main beneficiaries of this program in this 8-K. This includes, surprise, a $5.21 million dollar payment to the current CEO of Maxim Tunç Doluca who is actually the largest beneficiary of the program. Now, I'm not against making whole employees who were not at fault or otherwise involved in this back-dating scandal. This could be a reasonable and justified business expense. But, to make-whole the CEO at a time when the failure to exit the black-out period is due to a restatement process he is driving and ultimately responsible for simply sends the wrong message. I realize that Mr Doluca replaced the old CEO of Maxim who left allegedly in connection with this scandal. But he is the one who now has responsibility to clean up this mess. He should be penalized for his failure to do so on a timely basis -- as his shareholders have been. Not made whole.
So, it is not M&A, but I thought I would put my two cents in on this one.
Tuesday, October 30, 2007
It is a bit odd, but it doesn't appear that Icahn has filed his complaint yet in Delaware Chancery Court. At least it is not showing up on Lexis as being filed. I say, odd, because I have a copy of it in my hands as we speak. So, I'm not going to post it yet, but can report the following. The complaint is rather summary, and in it, Icahn asks for two major grounds of relief:
- First, that BEAS be ordered to hold its annual meeting no later than November 30, 2007.
- Second, Icahn requests that BEAS be:
- Temporarily, preliminarily and permanently enjoining defendants and all those acting in concert with them from taking any action to (1) issue shares of the Company's stock, (2) to sell any material assets of the Company, (3) interfere with a proper sale of the Company, or (4) take any other action that would have the effect of interfering. with a full, fair and free vote by the Company's shareholders at the annual meeting without first obtaining approval by the Company's shareholders . . . .
The second request is clearly a placeholder. The Delaware courts are unlikely to grant such broad relief without a specified transaction pending which violates Blasius or one of the other standards of review under Delaware law (Blasius is the most likely standard applying here with respect to shareholder votes -- for an explanation of the Blasius standard see here).
But there is one interesting statement in the complaint on this:
It appears that the Company's management wants neither a bid much less the prospect that nominees of the Icahn Group sit around the board table with them. Plaintiffs have reason to believe that to fend off such Wanted oversight, the Company will place new blocks of stock in friendly hands before any stockholders' meeting can be scheduled or to conduct a "strategic transaction" that would entrench management in place.
Can it be true? Is BEAS really contemplating issuing a "sweet-heart" preferred? We haven't seen this type of share placement since the late eighties/early nineties. And it has fallen out of disfavor because it is viewed as inappropriately influencing the takeover process and entrenching management. Nonetheless, in Shamrock Holdings, Inc. v. Polaroid Corp., 559 A.2d 257, 269- 70 (Del.Ch.1989) and other cases the Delaware courts have taken a lenient approach in enjoining or otherwise prohibiting such action. So, perhaps BEAS management is willing to take the shareholder heat in order to preserve their jobs. Stranger things have happened.
For those following this litigation here is a copy of Genesco's answer to Finish Line's counter-claim. Nothing particularly new in it, though there are ten Genesco attorneys named on the filing. That is a lot of people to review one document.
Washington Group International today announced that it had postponed its shareholder meeting from today until November 9, 2007. The meeting is being held to vote on the proposed acquisition of Washington Group by URS Corporation. In WGI's words, "[t]he meeting has been postponed to allow for the solicitation of additional votes in favor of the transaction in light of the fact that the transaction has, to date, received insufficient votes for approval."
We've now seen at least two postponements of shareholder meetings (Topps and here) since Strine's recent decision in Mercier, et al. v. Inter-Tel. Inter-tel permitted a board to to post-pone its shareholder meeting itself in order to gain time for stockholders to approve a proposed takeover transaction. Strine permitted this postponement despite the almost certain defeat of the takeover proposal if the meeting were not postponed (for a more thorough explanation of Inter-tel and its meaning for Blasius review see my post here). In both Topps and the Inter-tel deals the maneuver was ultimately successful and the deals approved. I expect it to be the same here. And again the proxy advisory firms are split -- Glass Lewis, Proxy Governance, and Egan-Jones -- have recommended that in favor of the transaction. Institutional Shareholder Services* -- has recommended against. Someone would write a paper on this phenomenon and the reasons for it.
NB. The post-ponement here is different than the successful strategies used by Bioenvision and OSI to gain approval of their takeovers -- to instead adjourn the shareholder meeting. For an explanation of the two different strategies and the pros and cons of each see my post here.
I've been meaning to jot down a few of my thoughts on possible lessons learned from the failed Cablevision take-private.
- Gabelli's 13D Filings. Mario Gabelli's funds eschew 13G filings and always file their holdings on 13Ds. The reason is obvious -- it provides significantly more latitude to an institutional investor to influence management and lobby against takeover transactions. These days, this is something almost every institutional investor should allow for. And, in the case of Cablevision, it was a successful strategy -- Gabelli's activist position and use of the 13D amendment process to disclose its opposition to the deal facilitated its defeat. Given this, most institutional investors should strongly consider adopting a similar policy and filing 13Ds instead of a 13G for passive holders. It is clearly a hassle because you need to constantly amend it for changed information, but a 13D provides much wider latitude to act. It can also avoid possible future SEC trouble for a failure by the filer to convert from a 13G to a 13D when influencing activity is taking place. This is particularly important since the Wall Street Journal Deal Journal noted last week that the SEC is investigating a number of 13G filers for failing to act as passive investors and taking 13D like "activities".
- The Majority of the Minority. The Cablevision deal was one of those rare takeover transactions which was actually voted down by the shareholders. Lear earlier this year was another one. However, while some papers cited this as a victory for institutional shareholders and once again signaling a new age of shareholder activism, I wouldn't make too much of it. This is because, the Cablevision deal was required to be approved by a majority of the minority. The minority here held only 35.4% of Cablevision. This meant only 17.7% of the Cablevision shares needed to vote against the merger for it to be defeated (and Gabelli held 8.25%). This was a much lower threshold than a simple majority and also meant defeat was easier.
- The Stink Stays on a Bad Deal. Given their past bids, the Dolans had significant pre-existing adverse opinion to effect in this third attempt to take Cablevision private. It likely made shareholders more skeptical and less willing to trust that the Dolans were acting fairly here. Their quick settlement of the shareholder litigation for a $30 million increase in the consideration and payment by Cablevision of approximately $30 million in plaintiffs' attorneys fees did not help.
The Applebee's shareholder meeting to vote on its acquisition by IHOP is today at 10:00 a.m. (Kansas time). The meeting will be held at the Doubletree Hotel, 10100 College Blvd., Overland Park, Kansas 66210 for those who wish to attend (pancakes anyone?). The vote is likely to be a close one. Applebee's senior management, which holds about 5.1% of the company's shares, is probably going to vote against the transaction; they previously voted against it on the company's board. Burton "Skip" Sack, Applebee's largest individual shareholder, with about 3.2% of the stock, has also exercised his dissenter's rights and filed for an appraisal proceeding in Delaware Chancery Court if the transaction goes through. Sowing some confusion, the proxy services have split on the deal. Institutional Shareholder Services and Glass, Lewis & Co. favor the deal; Proxy Governance and Egan-Jones Proxy Services are against it.
Sack's exercise of appraisal rights is the third such maneuver in a troubled deal in recent months. Crescendo Partners exercised appraisal rights in the acquisition of Topps by Michael Eisner's Tornante and MDP Partners with respect to 6.9% of the total number of outstanding Topps shares. And Mario Gabelli's GAMCO exercised appraisal rights in the failed Cablevision take-private with respect to 8.25% of the total number of outstanding Cablevision shares.
I would expect these events to happen more often as institutional and other significant investors flex their muscles in troubled deals. In addition, exercising appraisal rights sets up the investor nicely If no one else has exercised appraisal rights. There will now be no free-rider problem or multiple litigants for the dissenter to negotiate with. Instead, it can now negotiate a private one-on-one deal with the buyer as to the purchase price for its shares under the shadow of its appraisal rights litigation. This is a benefit typically unavailable to the average shareholder who cannot afford the litigation expenses and free rider problems of appraisal rights. Of course, this highlights the problems of appraisal rights generally in Delaware.
Note, the Wall Street Journal Deal Journal noted this trend last week in a post and incorrectly attributed it to the recent Delaware decision in In re: Appraisal of Transkaryotic Therapies, Inc. (access the opinion here; see my blog post on it here). This case held that investors who buy target company shares after the record date and own them beneficially rather than of record may assert appraisal rights so long as the aggregate number of shares for which appraisal is being sought is less than the aggregate number of shares held by the record holder that either voted no on the merger or didn’t vote on the merger. As Chancellor Chandler stated:
[a] corporation need not and should not delve into the intricacies of the relationship between the record holder and the beneficial holder and, instead, must rely on its records as the sole determinant of membership in the context of appraisal.
The court ultimately held that since the "actions of the beneficial holders are irrelevant in appraisal matters, the inquiry ends here." [NB. most shareholders own their shares beneficially rather than of record with one or two industry record-holders so this decision will apply to almost all shares held by Applebee's and in fact any other public company]
Post-Transkaryotic a number of academics and practitioners raised the concern that this holding would encourage aggressive investors (read hedge funds) to create post-record date/pre-vote positions in companies in order to assert appraisal rights with respect to their shares. This would be particularly the case where the transaction was one being criticized for a low offered price. [NB. Lawrence Hamermesh, a well-known professor at Widener University School of Law, disagreed with such thoughts on the Harvard Law School Corporate Governance Blog].
But the Wall Street Journal was incorrect to attribute the emergent trend of appraisal rights to Transkaryotic since in the three cases above we are not dealing with an arbitrage or post-record date acquisition exercise of appraisal rights. Here, the exercise of appraisal rights were by long-term shareholders who have not been effected (or even aided) by the Transkaryotic decision.
Still, it will be interesting to see what will happen in the Applebee's transaction and whether the strategy hypothesized in Transkaryotic will come to pass. It didn't happen in either Topps or Cablevision but perhaps we will be third time lucky. Applebee's, after all, is the perfect situation for such an exercise.
Practice Point: Given the rise in appraisal rights, buyers would do well to include an appraisal rights condition in their merger agreement which conditions the closing on no more than x% of the shareholders dissenting from the transaction. Topps and Cablevision had the provision, Applebee's does not. By not including it, IHOP has risked a situation similar to what occurred in Transkaryotic. There approximately 34.6 percent of Transkaryotic shareholders sought appraisal rights. Yikes.
Sunday, October 28, 2007
There have now been four relatively large private equity transactions announced since the August credit/market crisis: 3Com ($2.2 billion), Radiation Therapy Services $(1.1 billion), Goodman Global ($2.65 billion), and Puget Energy ($7.4 billion). Given this growing, yet still small, dataset, I thought it would be a good time to assess how private equity reverse termination fees are being drafted and whether there has been any shift in market practice post-August. So, let's start with the Goodman Global merger agreement which was filed last Thursday and negotiated by attorneys at O'Melveny for Goodman Global and Simpson Thacher for the private equity buyer, Hellman & Friedman.
Section 7.1(e) permits termination:
(e) by the Company by notice to Parent, if (i) Parent shall have breached or failed to perform in any material respect any of its representations, warranties, covenants or other agreements contained in this Agreement, which breach or failure to perform . . . . or (ii) the conditions to closing set forth in Section 6.1 and Section 6.3 (other than the condition set forth in Section 6.3(c)) are satisfied on the final day of the Marketing Period and Parent and Merger Sub have not received the proceeds of the Debt Financing or Equity Financing (other than as a result of failure by the Company to satisfy the condition set forth in Section 6.3(c)) on or prior to the final day of the Marketing Period;
Note the underlined terms in the second prong of the termination right. This provides Goodman Global with a termination right if H&F refuses to close the transaction due to a failure of the debt OR equity financing for any reason whatsoever.
The merger agreement then sets forth in Section 7.2(c) a manner for Goodman Global to receive a $75 million termination fee in such circumstances:
In the event that this Agreement is terminated by the Company pursuant to Section 7.1(e)(ii) and the notice of termination includes a demand, which demand shall be irrevocable, to receive the Parent Termination Fee (a “Parent Termination Fee Notice”), Parent shall pay $75,000,000 (the “Parent Termination Fee”) to the Company no later than two (2) Business Days after such termination. . . .
NB. Under Section 7.2(d) Goodman Global is also entitled in these circumstances to a repayment of fees and expenses up to $5 million.
But this does not end the matter. Section 7.2(e) states:
Anything in this Agreement to the contrary notwithstanding, (i) the maximum aggregate liability of Parent and Merger Sub for all Company Damages shall be limited to $139,200,000 (the “Parent Liability Limitation") . . . .
Section 7.2(e) caps the aggregate liability of H&F to $139,200,000 for any breach of the merger agreement; elsewhere in Section 8.5(a) of the agreement it provides that specific performance is not available to Goodman Global under any circumstances. So, H&F can absolutely walk from the transaction knowing that its maximum liability under any circumstance is $139,200,000.
So, this begs the question -- what is the reverse termination fee here $75 million or $139 million (3% or 5% of the deal value)? By the terms of the agreement it is $75 million if all of the conditions are satisfied and only the financing is unavailable. In such a situation, Goodman Global can terminate and collect the $75 million. In all other circumstances, Goodman will have to sue for failure of H&F to complete and can receive damages up to the $139 million. The agreement specifically excepts out specific performance of the bank/hedge fund commitment letters and nowhere does it permit a suit based on the banks' failure to adhere to their commitment letters. Presumably, although the agreement can be read ambiguously on this point, if the financing is unavailable and Goodman Global can otherwise prove that the conditions to the agreement are not satisfied, it can choose not to terminate the agreement and instead try and collect up to the maximum $139 million. But if Goodman Global decides to choose door number 1 and the $75 million it cannot pursue a greater amount of damages.
This is important. Because of the mechanics and incentives of the parties here, I doubt you will ever have a situation where the private equity firm is unwilling to close in circumstances where the financing is available. Or to again rephrase, if the private equity firm does not want to close, it can collaborate with the financing banks/hedge funds to claim that the financing is unavailable for reasons under the agreement (read, material adverse change, etc.). In such a case, Goodman Global is faced with a choice, terminate and claim that the conditions are satisfied and receive the $75 million. Or sue, and attempt to collect up to the $139 million. Otherwise, the agreement has incentives to push H&F towards payment of the $75 million. For, if H&F's failure to pay the termination fee:
is not the subject of a bona fide dispute, the Company shall be entitled to seek and receive, in addition to the Parent Termination Fee and/or the expense reimbursement pursuant to Section 7.2(d), interest thereon and the Company’s costs and expenses of collection thereof (including reasonable attorneys’ fees and expenses).
Though theoretically the $139 million is available, the above structure creates bargaining incentives which will push Goodman Global to take the $75 million termination option in almost all circumstances. It will want to get past a bad deal, terminate as soon as possible, settle around the $75 million and move onward. The alternative is to be seen as the litigating party, slug through such litigation over the existence of a material adverse effect or some other alleged failure of a condition and try and get a damages claim up to the $139 million. The extra $50 million is not worth it. Conversely, the buyer will be able to claim they settled for the lesser amount against an uncertain case.
And for those who want support that this is what will happen, Acxiom had just such a structure in its agreement and surprise, that was what occurred there (see more here).
Both 3Com and Radiation Therapy also have similar structures (see the merger agreements here and here, respectively). Puget Sound has not filed its merger agreement but is not a useful reference due to the long period between signing and closing for a utility deal. And I think Goodman Global is the best drafted of the three for those looking for precedent.
I'm very surprised that this is the model that is developing. I suppose the higher payment permits the seller to trumpet a higher possible reverse termination fee while not having to agree to a financing condition (note that all of the press releases for these deals did not have the formerly usual statement of "There is no financing condition"). Though, again, the parties will naturally gravitate to the lower threshold. And given the still jumpy credit markets any reverse termination fee creates a higher risk of no completion. So, for lawyers adopting this model I think they would do well to advise their clients of the incentives in this structure and simplify it. The Goodman Global model can be built upon to provide a greater certainty of a higher reverse termination fee for the seller -- here the interplay of the two clauses means that the higher cap is likely to be only illusory. But the additional drafting creates ambiguity. Lawyers who negotiate this model may do well to simplify it with only one slightly higher fee compromising perhaps at 4%.
Final Thought: Only Puget of the four has a go-shop provision. This is an interesting development. Perhaps parties are realizing the issues with these mechanisms and more carefully considering their use. On this note, Christina Sautter has a forthcoming article, Shopping During Extended Store Hours: From No Shops to Go-Shops - the Development, Effectiveness, and Implications of Go-Shop Provisions in Change of Control Transactions. It is an intelligent, thorough look at go-shops and the first of what is likely to be a wave of academic articles on the subject.
On Friday, Carl Icahn disclosed the following letter to the board of BEAS (NB. Caps are his own just in case the Board was reading the letter too quickly and didn't get the point):
October 26, 2007
BEA Systems, Inc.
To The Board Of Directors Of BEA:
I am the largest shareholder of BEA, holding over 58 million shares and equivalents. I am sure that the BEA Board would agree with me that it would be desirable not to have to put BEA through a disruptive proxy fight, a possible consent solicitation and a lawsuit. This can be very simply avoided if BEA will commit to the two following conditions:
BEA SHOULD ALLOW ITS SHAREHOLDERS TO DECIDE THE FATE OF BEA BY CONDUCTING AN AUCTION SALE PROCESS AND ALLOWING THE SHAREHOLDERS TO ACCEPT OR REJECT THE PROPOSAL MADE BY THE HIGHEST BIDDER. BEA should not allow the stalking horse bid from Oracle to disappear (failure to take the Oracle bid as a stalking horse would be a grave dereliction of your fiduciary duty in my view). If a topping bid arises, then all the better. But if no topping bid arises it should be up to the BEA shareholders to decide whether to take the Oracle bid or remain as an independent Company - - not THIS Board, members of which presided over the reprehensible "option" situation at BEA, a Board that has watched while, according to Oracle in its September 20, 2007 conference call, Oracle's Middleware business "grew 129% compared with the decline of 9% for BEA".
BEA SHOULD AGREE NOT TO TAKE ANY ACTION THAT WOULD DILUTE VOTING BY ISSUING STOCK, ENTRENCH MANAGEMENT OR DERAIL A POTENTIAL SALE OF BEA. We are today commencing a lawsuit in Delaware demanding the holding of the BEA annual shareholder meeting before any scorched earth transactions (such as stock issuances, asset sales, acquisitions or similar occurrences) take place at BEA, other than transactions that are approved by shareholders. AS WE STATED ABOVE, THIS LAWSUIT CAN EASILY BE AVOIDED.
Your recent press releases regarding Oracle's proposal to acquire BEA indicate to me that you intend to find ways to derail a sale and maintain your control of the company. In particular I view your public declaration of a $21 per share "take it or leave it" price as a management entrenchment tactic, not a negotiating technique. BEA is at a critical juncture and it finds itself with a "holdover Board". BEA has not held an annual meeting in over 15 months and has not filed a 10K or 10Q for an accounting period since the quarter ended April 30, 2006. Those failures have arisen out of a situation that occurred under the watch of many of the present Board members. You should have no doubt that I intend to hold each of you personally responsible to act on behalf of BEA's shareholders in full compliance with the high standards that your fiduciary duties require, especially in light of your past record. Responsibility means that SHAREHOLDERS SHOULD HAVE THE CHOICE whether or not to sell BEA. BEA belongs to its shareholders not to you. Very truly yours, /s/ Carl C. Icahn ----------------- Carl C. Icahn
I don't yet have a copy of the complaint. But to the extent Icahn's suit is limited to the prompt holding of the annual meeting he has a very good claim. As I noted in my defensive profile of BEAS, BEAS has not held its annual meeting since July 2006. BEAS is in clear violation of DGCL 211 which requires that such a meeting be held within thirteen months of the past one. Since Schnell v. Chris-Craft, 285 A.2d 437 (Del. 1971), Delaware courts have been vigilant in enforcing this requirement although they have left the door open for a delay in exigent circumstances. See Tweedy, Browne and Knapp v. Cambridge Fund, Inc., 318 A.2d 635 (Del. 1974) (stating that not all delays in holding annual meeting are necessarily inexcusable, and, if there are mitigating circumstances explaining delay or failure to act, they can be considered in fixing time of meeting or by other appropriate order). Here, I suspect BEAS will argue that it cannot hold its annual meeting due to its continuing options back-dating probe. And I suspect the reason why is that BEAS simply cannot correctly fill out the compensation disclosure for their named executives because they just don't know how the options backdating effected it. If the company’s proxy statement says that shares were priced at one level when the options were granted and it turns out that the price was different than disclosed in the proxy statement, the statement would be a material misstatement and create liability under the Exchange Act. Hence the delay.
There are ways around this -- one is to omit the disclosure and obtain SEC no-action relief on the point. The Delaware court may go this route -- forcing BEAS to obtain such relief. But of course, if the court simply orders a date and leaves BEAS to resolve this issue with the SEC, it creates uncertainty over whether the SEC will actually grant such relief (I can't see why they wouldn't, but expect BEAS to argue this). Otherwise, perhaps the Chancery Court can use its nifty new certification option to the SEC to find the answer. Ultimately, Delaware has always been rather strict in requiring the annual meeting to be held within the 13 month deadline -- I expect it to be the case here in some form. Icahn is thus likely to soon get a quick win to gain momentum in this takeover fight. Not to mention the ability to nominate a slate for 1/3 of BEAS's directors -- the maximum number he can do so due to BEAS's staggered board.
The AP is reporting that Genesco Inc. has turned over more than 1.5 million pages of internal documents to The Finish Line Inc. in connection with Genesco's lawsuit to compel Finish Line to complete their previously agreed merger. Genesco here appears to be setting up a "full disclosure" strategy. This has two advantages. First, Genesco can portray itself as fully responding to Finish Line's claim that it has breached the disclosure provisions of the merger agreement -- "Look we didn't even object to your over-broad discovery request and gave you over one million documents -- now close this transaction". Second, this document dump will swamp Finish Line's attorneys with needless and mostly irrelevant documents; presumably Genesco's hope is that it will also distract Finish Line/UBS and their attorneys from their case and/or cause them to miss more important documents.
Ultimately, I feel very bad for the junior associates at Latham & Watkins and Jones Day, lawyers for UBS and the Finish Line, respectively, who now have to read through all of this. It is good times, though, to be a document reproduction service in Nashville.
Friday, October 26, 2007
I'll be back on Monday. For weekend reading, here is the Goodman Global merger agreement with Hellman & Friedman via Chill Acquisition Corp. Some fun things in it which I will talk about next week, including the following atypical condition to H&F's completion of the merger:
The Company and its Subsidiaries, on a consolidated basis, shall have realized not less than $255 million in EBITDA (as hereinafter defined) for the fiscal year ended December 31, 2007. “EBITDA” shall mean EBITDA as defined in the existing indenture, dated as of December 23, 2004, governing the 7 7/8% Senior Subordinated Notes due 2012 of Holdings modified as follows: (i) business optimization expenses and other restructuring charges under clause (4) thereof shall only be permitted to be added back up to an aggregate amount of $5,000,000 for the twelve -month period ended December 31, 2007 and (2) EBITDA for the 3-month period ended March 31, 2007 and June 30, 2007, respectively, shall be deemed to be $32,700,000 and $88,300,000, respectively.
Funny, they didn't put that in their Monday press release.
Thursday, October 25, 2007
Well, not surprisingly Harman waited the maximum four business days allowed under the Form 8-K rules to file the agreements related to its settlement with its former purchasers, KKR and GSCP. Here they are:
First, the settlement agreement. And once I started reading, it didn't take long for me to be shocked. Right there in the recitals the agreement states:
WHEREAS, Parent and Merger Sub have determined that they are not obligated to proceed with the Merger based on their belief that a Company Material Adverse Effect has occurred and their belief that the Company has violated the capital expenditures covenant in the Merger Agreement.
WHEREAS, the Company steadfastly denies that a Company Material Adverse Effect has occurred or that the Company violated the capital expenditures covenant in the Merger Agreement.
I had heard street rumors that Harman had allegedly violated the cap ex requirement in their merger agreement but I had refused to believe it as too far-fetched. Nonetheless, there is hte allegation (underlined). But to see why I am so schocked, let's take a look at the actual cap ex requirement in Section 5.01(b)(vi) of the Harman merger agreement. It requires that Harman shall not:
(vi) make any capital expenditures (or authorization or commitment with respect thereto) in a manner reasonably expected to cause expenditures (x) to exceed the capital expenditure budget for the 2007 fiscal year previously provided to Parent or (y) for the 2008 fiscal year to exceed the 2008 capital expenditure budget taking into account reasonably anticipated expenditures for the balance of the year as well as expenditures already committed or made (assuming for this purpose that fiscal 2008 capital expenditure budget will not exceed 111% of the fiscal 2007 capital expenditure budget);
This is a bright line test. Typically, right after the merger agreement is signed the M&A attorneys will sit down with the CFO and other financial officer and point this restriction out (actually these officers are also involved in the negotiation of this restriction since this is their bailiwick). Since there is a set dollar amount in this covenant it is very easy to follow and thus for a company not to exceed its dollar limitations. The CFO or other financial officer simply puts in place systems to make sure that the company does not violate the covenant by spending more than that amount. This is no different than my wife telling me I can't spend more than $500 this month on entertainment. It is a direction I can easily follow and I know there are consequences if I do not (Oh, and I do follow it). This is no different here -- a violation of the cap ex covenant provides grounds for the buyers to terminate the agreement. But this is and should be a problem for sellers.
Because of all this, if your attorneys have done their job and informed you of this covenant and included you in its negotiation, to violate it is really just plain old gross negligence. And such a violation is just the allegation made by the buyers here. Harman denies them, but if it is true people should be fired over this. Also expect the class action attorneys to amend their pending suits to include this claim to the extent it is not already in there.
I also spent a fair bit of time this morning trying to work out the value of these $400 million notes. To do so you need to add on the value of the option to convert the notes into Harman shares. The formula in the indenture for this conversion is a bit complicated, so I want to check my math. It is also an American option so Black-Scholes can't be used. In any event, I'll post my back of the envelope calculations tomorrow. If anyone else does this exercise, send me your results and we'll cross-check.
Also note that the Indenture has a substantial kicker in Section 10.13(c) if there is a change in control in Harman. That is a nice bonus: lucky limited partners of KKR and GSCP.
The notes were purchased as follows:
KKR I-H Limited $ 171,428,000.00
GS Capital Partners VI Fund, L.P. $ 26,674,000.00
GS Capital Partners VI Parallel, L.P. $ 7,335,000.00
GS Capital Partners VI Offshore Fund, L.P. $ 22,187,000.00
GS Capital Partners VI Gmbh & Co. KG $ 948,000.00
Citibank, N.A $ 85,714,000.00
HSBC USA, Inc. $ 85,714,000.00
But Citibank and HSBC have quickly hedged (really disposed of) their ownership risks and benefits under the notes per the following language in the Form 8-K:
Concurrently with the purchase of the Notes by Citibank and HSBC, each of them entered into an arrangement with an affiliate of KKR pursuant to which the KKR affiliate will have substantial economic benefit and risk associated with such Notes
And for those who love MAC definitions (who doesn't), just for fun I blacklined the new definition in the note purchase agreement against the old one in the merger agreement. Here it is:
Material Adverse Effect” means any fact, circumstance, event, change, effect or occurrence that, individually or in the aggregate with all other facts, circumstances, events, changes, effects, or occurrences, (1) has or would be reasonably expected to have a material adverse effect on or with respect to the business, results of operation or financial condition of the Company and its Subsidiaries taken as a whole, or (2) that prevents or materially delays or materially impairs the ability of the Company to consummate the
Merger, provided, however, that a CompanyMaterial Adverse Effect shall not include facts, circumstances, events, changes, effects or occurrences (i) generally affecting the consumer or professional audio, automotive audio, information, entertainment or infotainment industries, or the economy or the financial, credit or securities markets, in the United States or other countries in which the Company or its Subsidiaries operate, including effects on such industries, economy or markets resulting from any regulatory and political conditions or developments in general, or any outbreak or escalation of hostilities, declared or undeclared acts of war or terrorism (other than any of the foregoing that causes any damage or destruction to or renders physically unusable or inaccessible any facility or property of the Company or any of its Subsidiaries); (ii) reflecting or resulting from changes in Law or GAAP (or authoritative interpretations thereof); (iii ) resulting from actions of the Company or any of its Subsidiaries whichParent has expressly requested or to which Parent has expressly consented; (iv) to the extent resulting from the announcement of theMerger or the proposal thereof or this Agreement and the transactions contemplated hereby, including any lawsuit related thereto or any loss or threatened loss of or adverse change or threatened adverse change, in each case resulting therefrom, inthe relationship of the Company or its Subsidiaries with its customers, suppliers, employees or others; (v) resulting from changes in the market price or trading volume of the Company’s securities or from the failure of the Company to meet internal or public projections, forecasts or estimates provided that the exceptions in this clause (v) are strictly limited to any such change or failure in and of itself and shall not prevent or otherwise affect a determination that any fact, circumstance, event, change, effect or occurrence underlying such change or such failure has resulted in, or contributed to, a CompanyMaterial Adverse Effect; or (vi )resulting from the suspension of trading in securities generally on the NYSE; except to the extent that, with respect to clauses (i) and (ii), the impact of such fact, circumstance, event, change, effect or occurrence is disproportionately adverse to the Company and its Subsidiaries, taken as a whole.
Note the addition of a litigation exclusion for the pending shareholders class actions. Smart move.
Wednesday, October 24, 2007
Another letter was sent today by SLM to the court (access it here). Apparently the parties met or had a telephone conversation with VC Strine this morning. In its letter, SLM accepts the waivers from Flowers (for those see my post here) and says the parties will convene and attempt to agree on a date for trial of this matter. So, there will now be a full trial (unless, of course, the parties settle).
The Journal has the story here. Cablevision stated that it will take several weeks to announce the final tally. But the clear winners here may be the shareholder plaintiffs' attorneys who will likely still attempt to collect the $29.25 million in fees Cablevision agreed to pay them to settle the shareholders class action over this deal. Here, these advocates settled for $30 million in increased consideration well before a full assessment of the transaction could be made (i.e., it being voted down for insufficient consideration). Cablevision has agreed to pay these fees but hopefully the judge considering this settlement will also take notice of these other facts and read Vice Chancellor Strine's opinion in In re Cox Communications about the perils of such practice under Delaware law.
For my prior posts on this deal see:
Well, I was wrong about SLM's strategy. Here is a copy of SLM's letter to VC Strine sent this morning. In SLM requests a January trial date. I can't believe that Flowers et al. will now disagree given Strine's statements on Monday. See you in Delaware this winter . . . .
Final Addendum Thought: Reading into all of this and making a number of leaps, I think SLM was likely being obstinante in the negotiations (or not negotiating in good faith). Flowers took the opportunity to take the intiative (see the waivers here and here). Clearly, the parties could have reached some agreement that would help SLM manage its business for the next 4-5 months. That they didn't probably means that SLM was bluffing all along to get a fast on-the-record hearing because that would favor their position. When it didn't work, they decided to cave and go with a trial. Apparently, they have determined to live with the covenant restrictions and not force VC Strine to act based on his reading of the contract without other (parol) evidence. That seems a little strange given Strine's somewhat favorable remarks at the hearing; but perhaps this is marketing to Strine's comments about such hearings.
Yesterday, the Flowers group sent the following letter to VC Strine:
The Honorable Leo E. Strine, Jr.
Dear Vice Chancellor Strine:
We write on behalf of J.C. Flowers II L.P., Bank of America, N.A., JPMorgan Chase Bank, N.A, Mustang Holding Company Inc. and Mustang Merger Sub, Inc. (collectively, the "Buying Group").
Pursuant to the Court's directions at the status conference yesterday, our clients will today deliver to Sallie Mae waivers of any and all of their rights under the Merger Agreement and a related asset backed security underwriting engagement letter that would in any way inhibit Sallie Mae from conducting its business or pursuing its strategic alternatives. The waivers are based upon drafts provided to us by Sallie Mae. All of the provisions that Sallie Mae requested the Buying Group to waive have been waived. The Buying Group has the power to waive these provisions unilaterally under Section 11.04 of the Merger Agreement. Copies of the forms of waiver are enclosed.
We did attempt to negotiate a mutual agreement with Sallie Mae but were not able to reach closure within the timeframe allotted. In our initial discussions, Sallie Mae objected to a handful of provisions that made clear that the parties' other rights and obligations were unaffected. We believe that these objections are unfounded; all of the relief that Sallie Mae sought is provided for in the waivers that have been provided. Our only objective is to ensure that Sallie Mae does not use the waivers as a basis for claiming that the Buying Group has prejudiced its defenses or that, as a result of the waivers, the Buying Group has new obligations to Sallie Mae. We are available to discuss this or any other matters at the Court's convenience.
Respectfully, David C. McBride
One can wonder what the impasse is and clearly Flowers is posturing, but my bet is that SLM is angling for a quick decision by refusing to agree to a Jan trial and otherwise to an agreement with respect to Flowers et al.'s merger agreement waivers. In this vein, I reread the transcript again and note the following:
THE COURT: If you don't have it all worked out, then I'm going to give you a trial. I'm not going to pick one of the weeks in January now, but that will be the situation. I think if we are -- if we are going forward in a normal time frame, the parties are really -- I'm not saying if you don't come to me jointly, upon reflection, and say -- that you think it would be useful as a business matter for me to do this summary judgment thing -- I'm not saying I won't consider that.
VC Strine is clearly going back and forth in his mind about what he wants to do, though it appears that he is leaning towards a trial if the parties don't agree to a summary disposition. Still, SLM is likely to continue to argue for this route. Expect them to raise it again at the next hearing. But given the tenor of Strine's thoughts, I would expect him to disagree if Flowers objects -- this litigation is likely for a Jan trial.
Most importantly, stay-tuned for another hearing in the next week or so. Everyone had great fun reading the hearing transcript yesterday (See the WSJ posts here and here), so a trial could turn out to be the most exciting M&A litigation in Delaware since Viacom -- the original Deal From Hell -- though, here only $900 million is at stake.
The special meeting of stockholders of Cablevision Systems Corporation is to be held today to vote on the third take-private proposal put forth by the Dolan family. For those who wish to attend the meeting is at 11:00 A.M., New York time, at their corporate headquarters building at 1111 Stewart Avenue, Bethpage, New York, 11714. The Dolans are a pretty rich bunch so perhaps there will be some good free food, or maybe even a Knick.
The vote is going to be a close one. Earlier this week, Mario Gabelli's GAMCO stated in an SEC filing that they would exercise appraisal rights with respect to the 19,042,259 shares of Cablevision they own. This represents about 8.25% of the total number of outstanding shares. And the Gabelli's issued their own statement. Cablevision President and CEO James L. Dolan stated:
On behalf of my parents, brothers and sisters, I want to state emphatically that there will be no modification of the family’s accepted offer to acquire Cablevision. We are looking forward to next week’s vote and hope that the transaction is approved, but I’d underscore that I am completely prepared to continue to lead the company into the future as a public company if the transaction is not approved.
For those handicapping the deal, note two very important milestones. Under the merger agreement, the required vote to approve the plan is a majority of the minority of the unaffiliated, public stockholders. But, even if the majority of the minority provision is met, the deal can still fail because it is conditioned on no more than 10% of Cablevision's class A shareholders exercising appraisal rights under Delaware law (DGCL 262). The condition specifically requires that:
The total number of Dissenting Shares shall not exceed 10% of the issued and outstanding shares of Class A Stock immediately prior to the filing of the Merger Certificate . . . .
Under Delaware law appraisal rights need to be exercised prior to the meeting today. So, if the deal is approved, also look in the announcement of the vote for the number of dissenting stockholders. If it is over 10% the Dolan's can walk. In the words of a Yankee -- "it ain't over until it is over"
Tuesday, October 23, 2007
3Com filed its preliminary proxy statement yesterday. After having read through it I still can't determine whether the deal is conditioned on clearance by CFIUS under the Exon-Florio amendment (for more on this see here). In the description to the merger section 3Com states that the merger is conditioned upon:
any waiting period (and any extension thereof) under the HSR Act shall have expired or been terminated, any waiting period (and any extension thereof) under the antitrust laws of various other jurisdictions shall have expired or been terminated, and clearances, consents, approvals, orders and authorizations from certain government authorities shall have been obtained . . . .
The only other disclosure on this matter in the proxy is this:
The parties have agreed to make a joint voluntary filing of the transaction with the Committee on Foreign Investment in the United States (“CFIUS”).
Except for these filings and the filing of a certificate of merger in Delaware at or before the effective date of the Merger, we are unaware of any material federal, state or foreign regulatory requirements or approvals required for the execution of the Merger Agreement or completion of the Merger.
This would imply that, under the above condition, Exon-Florio clearance is indeed required for the merger to go through. But my conclusion is only an inference. Given the controversy this deal is generating and congressional interest on this point, I can't believe that 3Com's counsel Wilson, Sonsini would draft such intentionally non-descript disclosure. I do believe that this failure is a material omission under the federal securities laws and I hope the SEC reviews the proxy and comments upon this forcing 3Com to clairfy the issue (Note well shareholder class action attorneys who are currently suing 3Com in Delaware and Massachusetts). I am suspect of the congressional interest in this deal and the hostility Congress sometimes displays to foreign investment, but I believe 3Com is not helping its case here.