M & A Law Prof Blog

Editor: Brian JM Quinn
Boston College Law School

Friday, November 9, 2007

CKX: The Fine Art of Cramped Disclosure

CKX filed its own Form 10-Q yesterday.  In it was the following disclosure about the company's pending sale and its contingency on financing: 

Completion of the Merger is not conditioned upon 19X receiving financing, however, upon termination due to a failure of 19X to obtain necessary financing 19X must pay CKX a termination fee of $37 million, payable at the option of 19X in cash or shares of CKX common stock valued at a price of $12.00 per share.

Umm, so it really is conditioned on financing?  Right!?  Then, upping the opacity of their disclosure, CKX stated:

On November 8, 2007, 19X, Inc. (“19X”) delivered fully executed financing letters which provide for capital sufficient to complete the merger on the previously disclosed terms. The financing letters delivered by 19X include firm commitments from, as well as other detailed arrangements and engagements with, three prominent Wall Street firms and expressions of intentions from management and other significant investors in CKX. On October 30, 2007, 19X had delivered unsigned copies of the letters to allow the CKX Board of Directors to complete a review of the financing package. Upon completion of the Board’s review, 19X delivered the fully signed financing letters.

This disclosure raises more questions for me than it answers, including:

  1. Who are these Wall Street Banks?
  2. How much are their financing commitemtnts for?  In particular, the use of the statement "capital sufficient" seems funny.  Financing letters is also undefined.  So, is the term inclusive of the equity commitment and other "expressions of interest"?  It appears to be.  But if this is true, the amendment to the merger agreement requires that:
    1. "The Financing Letters shall reflect debt and equity commitments from such equity investors and financial institutions, which together with any equity to be issued in connection with the Contribution and Exchange Agreements or to be issued in exchange for securities of Parent, shall be sufficient to pay the full Merger Consideration . . . ."
    2. This provision requires all of the debt and equity financing for the deal to be "committed" not an "expression of interest".  If the financing letters referred to in the discloaure above do include the financing other than that committed to by the banks, it is not in accord with the merger agreement as I interpret it. 
  3. What does the company mean by "expressions of intentions from management and other significant investors in CKX"?   Is this part of the financing or the equity commitment?  And, in either case, why is it an "expression of interest" and not a firm commitment.  An expression of interest is below even a highly confident letter to me and is along the lines of "I express an interest in eating a sundae tonight".

So, on this basis, I would say there appears to be some trouble with the financing of this transaction, a problem which may not be cured.  But, perhaps I am reading too much into this -- cramped disclosure can do that to you.  In any event, this deal still has a ways to go.  CKX has not even filed its proxy statement yet -- instead giving management and its controlling shareholder five months to work out a deal with a pending merger agreement.  I wish I could get that option to buy.


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