M & A Law Prof Blog

Editor: Brian JM Quinn
Boston College Law School

Thursday, November 29, 2007

The Handy-Dandy Genesco Litigation Organizer

So, Genesco's third quarter earning results are out this morning.  For those who also want to hear the conference call you can access the replay here.  This is on top of all of the filings made this week by all three parties as well as the announcement of a U.S. attorney subpoena of Genesco related to a fraud investigation.  It's simply getting hard for anyone to keep up with all that is going on in this matter.  So, for those following the case, here is an organizer of the expected chronological steps of the Genesco deal.  Bottom-Line -- it has a long way to go before any resolution and many more turns it can take.

  • Step 1:   Tenn. Trial Begins Dec. 10
    • Issue One:  MAC Claim
      • Likely Outcome:  I believe the dispute is likely to center around the existence of a MAC generally and the MAC exclusion for "changes in general economic conditions that affect the industries" Genesco operates in.  As I've said before, I still think Genesco has a good case here.  Their earnings today certainly were not great, but they are in a challenging retail environment. 
        • Comment:  Poor performance by Finish Line, Foot Locker, Shoe Carnival, Shoe Pavilion, etc. buttress Genesco's claim of no MAC under this exclusion.
    • Issue Two:  Negligent Misrepresentation (Finish Line)/Fraud (UBS)
      • Comment:  Claims center generally around two non-disclosures by Genesco:  First, Genesco provided projections it knew it would fail to meet. Second, Genesco, "hid" its May 2007 numbers and on June 5 said it was on track and knew that statement was materially false.
      • Likely Outcome:  I'll wait until I see Finish Line's and UBS's responses to fully comment but Genesco in its motion to dismiss and strike makes a good argument that these claims are barred by non-reliance among other grounds.  However, there are a number of New York cases on this point more favorable to Finish Line that it will likely try and rely upon.  I'll have a full post on this over the weekend. 
      • Mystery Solved:  Reading Genesco's motion, I finally realized that UBS is making a fraud claim rather than a negligent misrepresentation claim due to the fact it is not a party or a beneficiary of the merger agreement -- there was no misrepresentation to rely upon.
      • Timing:  I believe the Tenn. Court will deny Genesco's motion to limit the hearing if it denies Genesco's motion to strike.  Given the discovery in this case, the judge will likely view it as all one dispute. 
    • Issue Three:  MAC Claim due to Southern District Subpoena and Possible Other Investigations
      • Comment:  Finish Line is stating that it will assert at trial that a MAC has occurred due to the federal securities fraud investigation.  In addition, Finish Line is asserting that such investigation violates Section 3.8 of the merger agreement (absence of litigation).
      • Likely Outcome:  This is a troubling one. The MAC has no forward-looking element so the event has to be a MAC as of this date.  Hard to see that it is right now.  But, if Genesco did indeed know it was not going to meet projections and continued to publicly say the opposite, that is likely grounds for a securities fraud claim.  I do not know if any shareholder suit on this has been brought to date, but if one were by Geensco's shareholders or the SEC it could strengthen Finish Line's case . . . .
        • Comment:  Genesco has a cure right under the merger agreement if this is indeed a breach of Section 3.8 or a MAC.
      • Question:  Why did the SDNY issue this subpoena.  It is very odd -- and if this is a securities fraud claim where is the SEC? 
  • Step 2:  Tenn Trial Outcome
    • If Genesco loses, it goes away quite wounded, but if Genesco wins this puts Finish Line in a terrible position.  I believe It then becomes Genesco's ally against UBS.  There is no financing out under the agreement and so if UBS does not fund Finish Line is still on the hook.  I doubt Finish Line could find the funding somewhere else so Finish Line would either 1) have to declare bankruptcy, or 2) negotiate with Genesco for relief -- in this scenario I believe Finish Line is likely acquired by Genesco.   
      • Comment:  If the court does not order specific performance, the damages remedy is likely to be $54.50 minus the stock price at time of judgment (but the exact measure of damages is uncertain and the measurement date can be argued).  If it is a damages remedy then Finish Line has the same two options above.   
  • Step 3:  New York Trial
    • There are a host of issues here, including who actually gives the solvency certificate required by UBS? What law governs to determine solvency?  Etc.
    • Likely Outcome:  I have insufficient information on this to make any prediction, but Genesco's earnings announcement today didn't help its case.
    • Comment:  UBS is also likely to amend their claim at this time to include anything else they have grounds to assert.
    • Mystery:  Why is UBS taking such a scorched earth strategy here?  What target would permit them to finance a bid on a going-forward basis?  Perhaps they do actually believe they were defrauded here . . . .
  • Step 4:  The Fun Stuff
    • If Genesco wins in Tenn. it may sue UBS for defamation and tortious interference of contract.
    • Comment:  Genesco likely hasn't sued at this time because it is waiting for the Tenn. decision.  Clearly UBS is in no mood to bargain at this time, so bringing these claims for leverage probably aren't worth much. 
    • Likely Outcome:  These claims are hard to prove (unless you have Joe Jamail and a Galveston jury) but certainly have a settlement value.

Quote of the Day:

Defendants, having failed to discover evidence that an MAE occurred in Genesco's business, have flipped through the "how to get out of a valid merger" playbook and alleged that Genesco engaged in fraud in order to induce Defendants to agree to the deal.

-- Genesco's motion to dismiss and strike.

I wish I had a copy of that book.


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