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Thursday, December 27, 2007

Genesco v. Finish Line: The Opinion

So, a few thoughts on the Genesco opinion issued yesterday: 

  1. Fraud Claims.  Chancellor Lyle finds that the Finish Line and UBS testimony was not believable as to Genesco's and Goldman Sachs's affirmative oral statements about their May performance and thus dismisses FL's and UBS's claim of fraud with respect to oral misrepresentations.  The court spends more time on Genesco's non-disclosure of the May projections -- here there is affirmative evidence that Genesco deliberately withheld these numbers during due diligence from FL and UBS, and so the time is necessary.  But ultimately, Chancellor Lyle finds that this conduct does not sustain a fraud claim either.  She bases this finding on the parties' due diligence protocol and the disclaimers made by Finish Line in the confidentiality agreement and merger agreement to find this non-disclosure not actionable. Based on Tennessee law which holds there is no deception if the information was available to the party at the time she lays the blame for the failure of this part of the claim at UBS's feet due to their own failure to again request the information prior to the execution of the merger agreement.  Chancellor Lyle writes:
    • "After detailed analysis of the facts and the law, the Court finds that Genesco and Goldman Sachs did not fraudulently conceal information. Instead, the Court finds that the fault is with Finish Line's advisor, UBS and its agents, whom Finish Line was relying on to investigate Genesco. These advisors, the Court finds, asked for the May actual numbers had been finalized and a May trial balance was prepared. At that point, with its premature request, Finish Line's advisors were required by both the law and the parties' agreemeent to renew the request for the May numbers. Despite ongoing lists by UBS for infoirmation and responses by Genesco and Goldman Sachs, UBS never asked again for the May trial balance. It failed to make such a renewed request despite several opportunities to do. Under the circumstances, where Finish Line and UBS had the means at its disposal for obtaining the information it now claims was concealed, neither the law nor the parties' agreements required Genesco or Goldman Sachs to vohmtarily provide the information. Genesco arid Goldman Sachs were allowed by law and their agreemeni not to provide the May numbers. Finish Line, then, signed the Merger Agreement at its own peril."She then bases this finding on the parties' due diligence protocol and the disclaimers made by Finish Line in the confidentiality agreement and merger agreement to find this non-disclosure not actionable. Based on Tennessee law which holds there is no deception if the information was available to the party at the time.
  2. General MAC Claims. Chancellor Lyle's MAC discussion is a bit backward.  She first finds that there is no MAC because the MAC exclusion for general economic conditions applies.  Here, the court relies upon Genesco's expert testimony that high gas, heating, oil and food prices, housing and mortgage issues, and increased consumer debt loads were generally responsible for Genesco's condition.  Chancellor Lyle even kicks in UBS's own recent write-down to support this finding.  This is the primary basis for her opinion that no MAC occurred, but Chancelllor Lyle also relies to a lesser extent on the industry exclusion in the MAC definition. She also finds that Genesco's decline was not disproportionate to others in the industry and therefore no MAC occurred.  Here, the analysis gets a little stretched; to justify this finding, Chancellor Lyle excludes the results of teen retailers despite the fact that 50%-60% of Genesco's business is in this sector.  The justification for this is not clear to me but nonethess it is what it is.  Chancellor Lyle could have stopped there but continues, finding that a material adverse effect did indeed occur (but the exlcusions found above make it not a MAC).  Here, she relies on the usual MAC cases (IBP v. Tyson, Frontier v. Holly, etc.) and finds that Genesco's recent results are materially adverse and of a durational nature adopting this as a requirement under Tennesse law for a MAC.  Here is where it gets interesting -- in defining durational she relies upon the Dec. 31 drop-dead date in the merger agreement and the ability for the parties to cure breaches prior thereto.  She finds that durationally significant should therefore be in reference to the period up to the drop-dead date.  On this basis she finds a material adverse effect to have occurred (though ultimately excluded out by the exclusions).  I'm not sure that Delaware would take the same approach or adopt the time period by reference to the cure period -- it jumbles them all together in a way that M&A lawyers do not.  Certainly, Vice Chancellor Strine did not do so in IBP.  Again, the parties choice of law and forum comes back to haunt them.  But still, the argument ends up to naught as the exclusions are relied upon to find no MAC.  Here, I'm a bit surprised she didn't put more weight on the industry exclusion as it appeared to be the strongest of the two exclusions.  But again, no harm. 
  3. Securities Fraud MAC Claims.  Chancellor Lyle then dismisses out of hand FL's and UBS's MAC claim based on the securities fraud litigation lawsuits and the SDNY subpoena.  She finds Genesco's exclusion of the May numbers from the anlaysis offered on in its Aug 30 conference call justified and adopts Genesco's argument that the subpoena cannot support a MAC unless there is a fraud claim that is first found valid.  As to the latter argument I'm not sure that is right as the merger agreement representation made by Genesco in 3.8 on this point specifically stated that there were no governmental investigations pending except as would not have, individually or in the aggregate, a MAC.  This would pick up the subpoena and so I don't see how a specific finding of fraud is needed.      
  4. Specific Performance.  The final part ordering a specific performance remedy is perhaps the most interesting part of the opinion.  Chancellor Lyle states:
    • "As to the final consideration that enforcing the merger creates a conflicted, financially weak company,the Court has thought long and hard. In deciding to order the merger, the Court has concluded that the merger has a reasonable chance of succeeding. In so concluding the Court credits the testimony of Mr. Estepa, the Senior Vice President of Genesco's mst successful banner, Journeys, which represents 50 to 60% of Genesco's business and is important to the merged entity. Mr. Estepa testified about his respect for Mr. Alan Cohen of Finish Line. Mr. Estepa testified about his determination to make the merger work and his commitment to its success. The Court also recalls that Mr. Schneider of Finish Line could not identify any systemic problem with Genesco's operation,and Mr. Cantrell's testimony that the same synergies that caused Finish Line to propose the merger, such as diversitt of product lines and customers, are still present. Finally, insolvency proof of the combined entities was not provided to this Court. That issue has been reserved and carved out of this litigation for the New York Court to decide. If the combined companies would result in an solvent entity, the New York lawsuit by UBS will halt the merger. Accordingly, form the proof presented to it, this Court concludes that the combined entity can succeed. Specific performance is not a futile, harsh result."
  5. Specific Performance (Cont'd).  Here, she relies solely on Tennessee principles of equity to make this determination and does not cite the merger agreement clause requiring specific performance.  Moreover, for equity to order specific performance there must be no other adequate remedy.  Unlike Vice Chancellor Strine in IBP, she relies on the general harm to Genesco due to the delay of the merger rather than the ultimate difficulty in determining damages (Strine relied on the latter).  I'm not so sure about her finding -- the harm she cites looks to me to be monetary harm.  The opinion would likely have stood on better grounds if she referenced either the merger agreement or Strine's damages point.  Finally and cryptically, on the issue of what happens if Finish Line loses in New York she takes a bit of a flyer.  The opinion here (as quoted in the last few sentences of the paragraph above) can be read to be saying that if the New York action doesn't succeed then the merger will no longer be required.  I think she is speaking here only to specific performance and preserving Genesco's right to come back for damages against Finish Line -- but it is unclear.  If FL does not suceed in New York they will need to come back to Tennessee to clarify this very important point.  And FL has already picked up on this -- stressing it in their press release issued last night commenting on the opinion.  I'm a bit baffled why the judge would leave the most important point so open -- perhaps she was as equally puzzled about what to do in the event FL loses in New York as the rest of us. 
  6. UBS.  It is very clear from this opinion that Chancellor Lyle does not take a kind view of UBS.   She takes the time to talk of UBS's financial situation and sophistication, notes the large loss UBS would likely take if it was forced to finance this deal and pegs the failure to discover the May numbers before close squarely on UBS. 
  7. Precedent.  Ultimately, I'm not sure the opinion will have much precedential power for MAC cases though it does support a very broad interpretation of the general industry condition that drafters should be aware of.  And it quite clearly reflects the point I have made many times before:  choice of law and forum clauses matter. 

The litigation is now off to New York and, I would suspect, an appeal in Tennessee (and maybe back in Tennessee after New York). In New York, the issue is currently whether Finish Line can deliver a solvency certificate, though UBS can amend its complaint to include further claims.  In addition FL is now required to use its reasonable best efforts to obtain financing from other sources -- financing which is likely to be unavailable. I would hope the parties would now come to the table to negotiate a resolution and would not be surprised if Genesco brought a defamation and/or tortious interference of contract claim against UBS for bargaining leverage or maybe out of spite.  Genesco has persevered throughout though and may not wish to pursue a settlement, but given the risks there are still strong forces at work for them and UBS to come to the table.  Finish Line at this point is a mere spectator praying that UBS and Genesco do so.

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