Friday, August 10, 2007
When we hadn't heard from you by Monday morning, we sent you a revised draft of the merger agreement we had been negotiating with you over the past several weeks. The only substantive changes from the version we had nearly fully negotiated with you related to the mechanics of the two-step transaction (first step tender offer and second step merger). We believe that all of the other substantive provisions had been negotiated with you and your colleagues, including the representations, covenants and termination provisions. . . . . We were disappointed to hear that as of Tuesday afternoon, Upper Deck had not yet even reviewed the draft.
At least as troubling, we were shocked to hear on our call with you Tuesday that Upper Deck is expressing an unwillingness to proceed with its tender offer. This is the very form of transaction for which Upper Deck sought and obtained judicial relief, so it is startling at this point in the process to be told that Upper Deck's new preference is to terminate its offer and proceed with a one-step merger, knowing full well that would require several months, expose our stockholders to transaction risk during that time and, giving effect to the time value of money, reduce the value of the consideration received by our stockholders.
We are eager to find out if we can execute a transaction with your client, and are hopeful that we can do so. However, as we have told you on several occasions, Upper Deck's behavior has raised an increasing amount of skepticism among our directors as to whether Upper Deck truly intends to acquire Topps, or whether it is simply taking steps to interfere with the current transaction with Tornante-MDP and otherwise harm Topps' business.
Upper Deck responded by disputing Topps' assertions, maintaining that it had committed financing and stating that the reason it was not able to comment on Topps's merger agreement on Tuesday was because "Ms. Willner, who is co-counsel . . . . was out of the office on Tuesday."
This last Upper Deck comment is sure to bring a laugh to any M&A lawyer. In this high pressure world, I've never heard of anyone using that excuse and actually meaning it. As an M&A lawyer you are always available. So, it's hard to know what is going on in Upper Deck's mind right now, but it appears to be stalling. But for what purpose is unknown. Perhaps it actually is unable to keep its financing in place or otherwise is pressing ahead to interfere with Topps' current bit to be acquired by the private equity firms The Tornante Company LLC and Madison Dearborn Partners, LLC. But the latter explanation seems a bit far-fetched -- Upper Deck has spent a lot of time and money simply to interfere with a competitor's deal.
Upper Deck's tender offer expires tonight at midnight. If you look in the amended tender offer statement, there are sufficient conditions in Upper Deck's offer that are unsatisfied that it will be able to let the offer simply expire and walk. If Upper Deck extends the offer, it will (to some extent) be an expression of its seriousness. Still, in its letter, Upper Deck again requested "due diligence materials (which have been repeatedly requested since at least April) so that Upper Deck may finalize its due diligence and analysis of Topps." If Upper Deck is indeed serious, this deal still has a bit more to go before an agreement can be reached. But Upper Deck only has so much time: the special meeting of Topps’ stockholders to consider and vote on the proposed merger agreement with the Tornante consortium is on August 30.
Final Note: Upper Deck may also be able to terminate its tender offer at any time. The key is whether the Williams Act tender offer rules prohibit this practice. The one court to consider this issue held that shareholders could not state a claim under the antifraud provisions of the Williams Act for a bidder's early, intentional termination of a tender offer because "[w]here, as here, the tender offer was not completed, plaintiffs have not alleged that the misrepresentations affected their decision to tender, they have not claimed reliance, [and] plaintiffs have failed to state a cause of action under § 14(e)." P. Schoenfeld Asset Management LLC v. Cendant Corp., 47 F.Supp.2d 546, 561 (D.N.J. 1999) vacated and remanded on other grounds Semerenko v. Cendant Corp., 223 F.3d 165 (3rd Cir. 2000). But, whether other courts would go so far in the face of an intentional withdrawal by a bidder is unclear. This is particualrly true if the bidder lacked an intent to complete the tender offer from the beginning.
Thursday, August 9, 2007
SLM Corporation's press release on Tuesday and its Wednesday 10-Q filing focused primarily on rebutting the buyer consortium's claim that a Material Adverse Effect would occur if Congress passes pending legislation which would adversely effect SLM (for more see my post SLM Corporation's Material Adverse Change Clause). But in its press release, SLM also asserted that it could force the buyer consortium to raise the $4 billion in high-yield debt required to finance and close the transaction:
Sallie Mae has been advised by the Buyer that FDIC approval for the application pending before the FDIC regarding the transfer of Sallie Mae Bank is likely to be obtained in September. If FDIC approval is not obtained in September, Sallie Mae believes it can take steps that will trigger the Buyer’s debt marketing period to begin in September. As previously announced, all other material conditions to closing the transaction will have been met on Aug. 15, 2007 . . . .
SLM is playing hardball here. It is not only asserting that there is no MAE, but that, under the terms of the merger agreement, it can force the private equity consortium to raise the necessary financing and close the transaction. Here, SLM is relying not only on the buyer's agreement in Section 8.01 of the merger agreement to use all "reasonable best efforts" to complete the deal but the specific buyer obligations with respect to financing in Section 8.10. The Section states:
Parent shall . . . . complete the Equity Financing as part of the consummation of the Merger and shall use its reasonable best efforts to arrange the Debt Financing . . . . In the event any portion of the Debt Financing becomes unavailable . . . . Parent shall use its reasonable best efforts to arrange to obtain alternative financing from alternative sources . . . . in an amount sufficient to consummate the transactions contemplated by this Agreement, as promptly as possible.
The Section then spells out specific provisions related to the necessary high-yield financing:
For the avoidance of doubt, in the event that (i) all or any portion of the high yield notes issuance described in the Debt Commitment Letter (the “"High-Yield Financing”) has not been consummated, (ii) all closing conditions contained in Article 9 (other than those contained in Section 9.02(a)(iii) and Section 9.03(iii)) shall have been satisfied or waived, and (iii) the bridge facilities contemplated by the Debt Commitment Letter are available on the terms and conditions described in the Debt Commitment Letter, then Parent shall cause the proceeds of such bridge financing to be used in lieu of such contemplated High-Yield Financing, or a portion thereof, as promptly as practicable following the final day of the Marketing Period.
This effectively means that SLM can require the buying consortium to use a bridge loan to finance and close the acquisition following the Marketing Period. And Marketing Period is defined in the Section to mean:
the first period of 30 consecutive calendar days (i) during and at the end of which Parent shall have (and its financing sources shall have access to), in all material respects, the Required Information (as herein defined) and (ii) throughout and at the end of which the conditions set forth in Section 9.01 and Section 9.02 (other than the receipt of the certificate referred to therein) shall be satisfied. . . . provided further that the Marketing Period shall end on any earlier date that is the date on which the High-Yield Financing and the Debt Financing (other than any portion of the Debt Financing that constituted bridge financing with respect to such High-Yield Financing) is consummated; provided further that the Marketing Period must occur either entirely before or entirely after the periods (i) from and including August 18, 2007 through and including September 3, 2007 or (ii) from and including December 22, 2007 through and including January 1, 2008.
In plain English, this means that once SLM provides the necessary information and the other conditions to the completion of the merger are satisfied, the Marketing Period begins. The buyers will then have 30 consecutive calendar days to obtain its $4.0 billion in high-yield financing and confirm its approximately $12 billion in remaining financing. But if the buyers do not obtain the necessary high-yield financing during this 30 day period, then SLM can force the buyers to close using a bridge loan for the $4.0 billion. Also, note that the Marketing Period cannot start during the last few weeks of summer -- everyone has to have a vacation every once in a while.
So, the question now comes down to whether the other conditions to closing the agreement will be satisfied such that the Marketing Period can be triggered by SLM. Here, assuming SLM stockholder approval is obtained, all of the conditions to the merger would be satisfied except the one requiring that "no Applicable Law shall prohibit the consummation of the Merger". This provision refers to the required approval of the FDIC. Since SLM owns and operates Sallie Mae Bank, a Utah chartered industrial bank, the buyer consortium is required to file a notice under the Change in Bank Control Act with the FDIC and obtain FDIC approval prior to acquiring control of the bank. FDIC approval has not yet been obtained. At first blush, it would therefore appear that SLM must wait until this approval comes before it can claim that all of the conditions to the agreement are satisfied and trigger the Marketing Period.
However, note that SLM claimed in its press release that it did not need such approval to begin the marketing period. What's going on? Here, SLM is relying on the hold-separate clause in Section 8.01 of the merger agreement. This Section states:
Parent shall agree to hold separate or to divest any of the businesses or properties or assets of the Company and its Subsidiaries, and the Affiliates of Parent agree to restructure the equity ownership of Parent and the related governance rights with respect to Parent or the Company and its Subsidiaries to obtain HSR Act clearance (the “Specified Actions”), if and as may be required (i) by the applicable Governmental Authority in order to resolve such objections as such Governmental Authority may have to such transactions under any Applicable Law (it being understood and agreed that the foregoing shall include the prompt divestiture, liquidation, sale or other disposition of, or other appropriate action (including the placing in a trust or otherwise holding separate) with respect to Company Bank, if Parent has been unable to obtain the requisite regulatory approvals relating to Company Bank in a reasonably timely manner customary for other transactions of a similar nature) . . . .
In its proxy statement, SLM asserts that this clause would require the buyers to "divest, hold separate or take other appropriate action with respect to Sallie Mae Bank, if necessary" to obtain FDIC and other bank regulator approval. If SLM is correct then the buyer group would have to take such steps to satisfy the applicable law condition, and SLM is also likely correct that as of Sept. 3 it could force the buyers to begin the marketing period provided the customary time period for approval of these transactions by the FDIC had elapsed. So easy right?
Well, not so fast. The above provision is (intentionally or unintentionally) not very clearly drafted. The inclusion of the modifier HSR Act in it (my bold) could lead one to conclude that this hold-separate clause only requires such actions to obtain HSR clearance, not FDIC clearance. But, the clause then goes on to refer to clearances to be obtained for the Sallie Mae Bank (referred to as the Company Bank) which clearly implicate obtaining FDIC approval. In short, the clause is ambiguous enough that the buyers can reasonably take the position it only applies to clearances to be obtained under the HSR Act and, consequently, SLM cannot force the marketing period to begin without such approval. Whether the buyer group actually takes this position depends upon their own assessment of the likelihood a court will interpret a clause this way and how much hard ball they also want to play.
In sum, it appears that SLM is on uncertain ground in it assertion that it can force the marketing period to begin and trigger a close without necessary FDIC approval.
Addendum: Note there appear to be other possible arguments the buyer consortium could raise to dispute SLM's assertion, such as claiming that a customary time period for FDIC approval has not elapsed and the hold-separate clause consequently not triggered. Also, the financing banks themselves could invoke the MAE in their own debt commitment letters thereby forestalling the buyer group's obligation to close -- but this would expose them to significant liability, something they would be loathe to do -- and so, it is an unlikely event.
Wednesday, August 8, 2007
Late last night, SLM Corporation (the lender formerly know as Sallie Mae) issued a public statement asserting that recently proposed congressional legislation, if adopted, would not constitute a Material Adverse Effect (MAE) under its acquisition agreement with affiliates of J.C. Flowers & Co., Bank of America and JPMorgan Chase. SLM stated:
The Company reaffirms its confidence that legislative proposals currently being considered by the U.S. Congress would not, if enacted, constitute a MAE under the merger agreement. Legislation only would be relevant for MAE consideration to the extent its adverse impact materially exceeds the adverse impact of the matters already disclosed to the Buyer before the signing of the merger agreement. Sallie Mae estimates the adverse impact of existing legislative proposals on projected 2008-2012 net income to be less than 10 percent as compared to the matters already disclosed to the Buyer. Under applicable legal standards, this impact would not constitute an MAE.
The company elaborated its arguments on page 101 of its 10-Q filed today. SLM's position can only be seen as a warning to the consortium that a termination of the agreement on these grounds will likely lead to litigation for breach of contract (See the Deal Journal post on this here).
To determine if SLM is correct the starting point is the merger agreement and its definition of MAE:
"Material Adverse Effect” means a material adverse effect on the financial condition, business, or results of operations of the Company and its Subsidiaries, taken as a whole, except to the extent any such effect results from: (a) changes in GAAP or changes in regulatory accounting requirements applicable to any industry in which the Company or any of its Subsidiaries operate; (b) changes in Applicable Law provided that, for purposes of this definition, “changes in Applicable Law” shall not include any changes in Applicable Law relating specifically to the education finance industry that are in the aggregate more adverse to the Company and its Subsidiaries, taken as a whole, than the legislative and budget proposals described under the heading “Recent Developments” in the Company 10-K, in each case in the form proposed publicly as of the date of the Company 10-K) or interpretations thereof by any Governmental Authority; (c) changes in global, national or regional political conditions (including the outbreak of war or acts of terrorism) or in general economic, business, regulatory, political or market conditions or in national or global financial markets; that such changes do not disproportionately affect the Company relative to similarly sized financial services companies and that this exception shall not include changes excluded from clause (b) of this definition pursuant to the proviso contained therein; (d) any proposed law, rule or regulation, or any proposed amendment to any existing law, rule or regulation, in each case affecting the Company or any of its Subsidiaries and not enacted into law prior to the Closing Date; (e) changes affecting the financial services industry generally; that such changes do not disproportionately affect the Company relative to similarly sized financial services companies and that this exception shall not include changes excluded from clause (b) of this definition pursuant to the proviso contained therein; (f) public disclosure of this Agreement or the transactions contemplated hereby, including the initiation of litigation by any Person with respect to this Agreement; (g) any change in the debt ratings of the Company or any debt securities of the Company or any of its Subsidiaries in and of itself (it being agreed that this exception does not cover the underlying reason for such change, except to the extent such reason is within the scope of any other exception within this definition); (h) any actions taken (or omitted to be taken) at the written request of Parent; or (i) any action taken by the Company, or which the Company causes to be taken by any of its Subsidiaries, in each case which is required pursuant to this Agreement.
The merger agreement is governed by Delaware law. The seminal case on the interpretation of an MAE clause is In re IBP, Inc. Shareholders Litigation (“IBP”), 789 A.2d 14 (Del. Ch. 2001). There the Delaware Chancery court applying New York law held that:
Practical reasons lead me to conclude that a New York court would incline toward the view that a buyer ought to have to make a strong showing to invoke a Material Adverse Effect exception to its obligation to close. Merger contracts are heavily negotiated and cover a large number of specific risks explicitly. As a result, even where a Material Adverse Effect condition is a broadly written as the one in the Merger Agreement, that provision is best read as a backstop protecting the acquiror from the occurrence of unknown events that substantially threaten the overall earnings potential of the target in a durationally-significant manner. A short-term hiccup in earnings should not suffice; rather the Material Adverse Effect should be material when viewed from the longer-term perspective of a reasonable acquiror.
Subsequently, in Frontier Oil Corp. v. Holly, the Delaware Chancery Court adopted IBP's holding as Delaware law when considering a claimed MAE. The court in Frontier stated that "[t]he notion of an MAE is imprecise and varies both with the context of the transaction and its parties and the words chosen by the parties." It continued to hold that the burden of proof rests on the party seeking to rely on the MAE to prove both that the event exists, and that it would have an MAE. Finally, the court relied on these holdings and IBP to hold that "substantial" litigation costs and the potential of a "catastrophic," judgment of "hundreds of millions of dollars" did not constitute an MAE because the substantial defense costs could be borne by the acquirer without an MAE and the acquirer had not borne their burden to prove the speculative nature of the potential damages.
Taken together, IBP and Frontier place a substantial burden on an acquirer to prove an MAE occurred. To do so they must show that the loss will have long-term effects and must be materially significant. Each case is unique, to be determined on its facts alone.
In the case of SLM itself, its MAE clause is a tight one. For example, it does not include "prospects" as a potential MAE, a term that is often included and which significantly widens the basis for an MAE. This means that the mere prospect of this legislation is likely not sufficient to establish an MAE; the legislation must pass. And here the clause specifically addresses an MAE for changes in laws. Thus, to determine if an MAE has occured, the first question is whether the proposed legislation is already accounted for under the clauses I highlighted above in the MAE clause. The second question is whether the possibility of this legislation was adequately and previously disclosed by SLM at the time of the merger agreement. Finally, the acquiror will ultimately have to prove that the legislative change is "material". Here, the requirement that the change be long term appears to be satisfied. The issue is whether a less than 10% drop in net income is material for purposes of an MAE.
This would be a fact-based decision of the Delaware courts which would focus on the intent of the parties at the time of entering into the merger agreement. And courts have traditionally set a high bar for materiality in the context of MAEs. Thus, litigation over an MAE in Delaware is an uncertain quantity. In the face of such uncertainty, the consortium is unlikely to want to have such liability exposure. Invocation of the MAE clause by the consortium to terminate the deal is therefore unlikely. Rather, they are likely posturing for a lower negotiated price. But with its public statements, it appears that SLM is not going to accept a price reduction without a fight. The consortium thus appears to be in a relatively weak negotiating position to claim an MAE. But undoutedly, they have a different view.
The Wall Street Journal is reporting that the Japanese Supreme Court has upheld a landmark lower-court ruling affirming the use of a poison pill defense by Bull-Dog Sauce Co. The lower court had held that Bull Dog, a Japenese condiment maker, could employ the defense to fend off an unsolicited offer to be acquired from Steel Partners Japan Strategic Fund (Offshore) LP, a U.S. fund. Steel Partners is offering Yen 1,700 per share, a 25.8% premium to Bull Dogs's 12-month average closing share price. Steel Partners is one of the best-known takeover funds in Japan and is seen as a symbol of shareholder activism in that country.
Steel Partners had sued Bull-Dog alleging that the poison pill was discriminatory and therefore in violation of Japanese law. On June 24, 2007, 80% of Bull Dog's shareholders had voted to approve the issuance of stock acquisition rights underlying the poison pill at its annual general meeting of shareholders. Both the lower court and the Supreme Court apparently relied heavily on this vote to find that the poison pill was not discriminatory because the company's shareholders had approved it. According to the Journal:
Bull-Dog's defensive scheme gives all shareholders three equity warrants for each Bull-Dog share they own. But the firm bars Steel Partners from exercising its warrants, instead granting it 396 yen ($3.33) for each warrant -- a 2.3 billion yen ($19.3 million) payout for Steel Partners -- but making it impossible for the U.S. fund to take control of the Japanese company.
A prior Journal report also calculated that the poison pill will dilute the fund's holdings to less than 3% from more than 10% if exercised. Bull-Dog is now scheduled to redeem the warrants on Aug. 9. This is a clear loss for Steel Partners. But, as I stated in an earlier post on the lower court ruling:
The decision is a bit of a surprise since in at least two other cases the Japanese courts had invalidated the use of a poison pill. But the big difference here appears to be the shareholder vote. Poison pills are often decried as denying shareholders the right to make their own decisions concerning a sale of their company. Yet in this instance there was a vote which overwhelmingly validated use of this mechanism. And Bull Dog's pill is a relatively mild one providing for limited dilutive effect. The case can therefore be distinguished on these grounds and likely confined to justifying the use of a pill to fend off unsolicited bids in Japan in those instances where shareholders overwhelmingly oppose the transaction.
For U.S. purposes, the decision also highlights a more democratic use of the pill. One where shareholders get a say on its use to deter unsolicited offers. This is a path which many activists in the United States have called for. And it is one which permits shareholders a say in the important takeover decision, one they are today often deprived of. For more, see Ronald J. Gilson, The Poison Pill in Japan: The Missing Infrastructure.
Tuesday, August 7, 2007
There has been a fair bit of comment on the Blogs about whether the Bancrofts could have actually received a premium for their voting shares under Delaware law (A: a complicated yes, except in exigent circumstances and possibly subject to review for entire fairness). For those interested, see the following posts which offer a more complete analysis of the issue:
Can Controlling Shareholders Demand More to Sell Their Shares? on the Delaware Corporate and Commercial Litigation Blog
Paying a Premium for Supermajority Voting Shares on Professor Bainbridge's Professor Bainbridge.com
The DJ Deal, the control premium and Conrad Black on Professor Larry Ribstein's Ideoblog
The Voting Agreement for the Dow Jones/News Corp. deal locks up 37% of Dow Jones's voting interests. As with the Merger Agreement, the voting agreement contains a fiduciary out which permits the signing shareholders to terminate the agreement to support a superior proposal. The agreement contains no prohibition on these shareholders then subsequently entering into a new voting agreement with respect to this superior proposal.
In Omnicare, Inc. v. NCS HealthCare, Inc., the Delaware Supreme Court effectively required that underlying merger agreements with these types of voting arrangements contain a “fiduciary-out” clause whereby the acquiree board could terminate the transaction and the voting agreement if, in light of subsequent developments, including a competing offer, their fiduciary duties required it to. In response, acquirors began to insist that clauses be written into these deals which permitted such termination but then obligated the shareholder parties to the voting agreement not to sell their shares or support a competing acquisition proposal for an extended period of time after termination(typically a year to eighteen months). The result was that any potential subsequent bidder would have to commit to holding out their superior bid for this time. This is a powerful discouraging device for such bids and is an effective side-step of Omnicare's requirements. But the practice was upheld in the Delaware Chancery Court in Orman v. Cullman, No. Civ.A. 18039, 2004 WL 2348395 (Del. Ch. Oct. 20, 2004).
The Dow Jones voting agreement is unusual in that it does not contain this type of clause. Instead, if a superior proposal emerges the party shareholders can terminate the agreement and agree to support the superior proposal immediately. The lack of such a clause is testament to the bargaining power of the Bancroft family (maybe Wachtell did earn some of their rumored $10 million fee), or, alternatively, News Corp.'s confidence that no such superior proposal will emerge.
The merger agreement contains a fiduciary out permitting Dow Jones to terminate the merger agreement in the case of a superior proposal and prior to a shareholder vote. Historically and given how public the sale of Dow Jones has been, the M&A lawyers could have taken the position that such a fiduciary out was unnecessary, particularly given the existence of a voting agreement with respect to 37% of Dow Jones voting stock. Nonetheless, such a position is likely completely foreclosed by the Delaware Supreme Court's decision in Omnicare, Inc. v. NCS HealthCare, Inc. And accordingly, the agreement also contains a break-up fee of $165 million, and a no-solicit as well. Prospective bidders take note.
For those wishing to assess the antitrust risk of the deal, the relevant provision is in clause 5.5 of the Merger Agreement. The provision is unusual in that it requires Dow Jones to use its "best efforts" to close the deal. Practitioners will note that typically the clause is "reasonable best efforts". "Best efforts" has been interpreted in some jurisdictions to require all actions short of bankruptcy. "Reasonable best efforts" requires something less -- how much less is uncertain but generally the efforts a reasonable person would use (NB. these are general descriptions, the definition of both terms is hoplessly muddled and conflicted in the courts -- an observation made by Allan Farnsworth decades ago and still true today). Clause 5.5 also contains a limiting provision that excludes from the "best efforts" requirement the disposal of material assets and businesses. And while this ameliorates some of its bite, the clause still gives Dow Jones significant power to force News Corp. to satisfy any antitrust concerns.
I also have comments on the voting agreementI which I will reserve for a separate post.
McDonald's filed its 10-Q yesterday and disclosed that it had agreed to sell Boston Market. The company expects to complete the transaction in the third quarter, 2007. Boston Market is not a material business to McDonald's and the 10-Q did not give any other details of the transaction. But also on Monday a spokesman for Sun Capital Partners, a private equity firm based in Boca Raton, Florida helpfully announced that it was the buyer. According to news reports, Boston Market, originally called Boston Chicken, has 630 restaurants in 28 states. McDonald's acquired it in 2000 for $173.5 million. For those who follow these things, the bankruptcy of Boston Market (then known as Boston Chicken) was a case-study in the perils of restaurant chains as financing companies who drive expansion through quick and shaky finance schemes for their franchisees (see more here).
The Topps Company, Inc. announced yesterday that it has been advised by The Upper Deck Company that the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, with respect to Upper Deck's offer to acquire Topps had expired without a second request, an event which would have delayed Upper Deck's bid by several months. The antitrust condition to Upper Deck's offer is now satisfied and Upper Deck can now proceed with its $416 million bid. Upper Deck's offer of $10.75 a share is materially higher than the current agreement Topps has to be acquired by Michael Eisner's The Tornante Company LLC and Madison Dearborn Partners, LLC for $9.75 a share in cash, or about $385 million.
Topps stated in its press release that "it continues to negotiate with Upper Deck to see if a consensual transaction can be reached." As I stated before, "[i]f and when [Upper Deck clears its offer with the antitrust regulators], expect the bidding for Topps to continue." The next move is Tornante's and Madison's. If they walk, they will split a break fee of $12 million, higher than the $8 million fee payable during the go-shop period when Topps initially spurned Upper Deck's bid.