Friday, August 17, 2007
Judge Paul Friedman of the Federal District Court for the District of Columbia, today denied the FTC's request to preliminarily enjoin Whole Food's pending acquisition of Wild Oats. The order is accessible here. The FTC subsequently released a press release stating:
Federal Trade Commission Competition Director Jeffrey Schmidt expressed regret at the federal district court decision announced today in the Whole Foods/Wild Oats case, calling it a loss for both consumers and competition.
We respect the Court’s decision, which we currently are reviewing. We brought this challenge because the evidence before us showed that the merger would most likely result in higher prices and reduced choices for consumers who shop at premium natural and organic supermarkets,” Schmidt said. “We are reviewing our options.”
. . . . The federal district court decision announced today allows the transaction to proceed, pending the FTC’s filing of a request for emergency stay with the district and appellate courts prior to its appeal being heard. The Commission also has authorized the staff to act on its administrative complaint to permanently enjoin the merger.
As I stated when the FTC initially filed this case:
"In defining the relevant markets, the Commission found that premium natural and organic supermarkets, such as Whole Foods and Wild Oats, are differentiated from conventional retail supermarkets in several critical respects. These include the breadth and quality of their perishables – produce, meats, fish, bakery items, and prepared foods – and the wide array of natural and organic products and services and amenities they offer. In addition, premium natural and organic supermarkets seek a different customer than do traditional grocery stores. Whole Foods’ and Wild Oats’ customers are buying something more than just the food product – they are seeking a shopping “experience,” where environment can matter as much as price."
The Commission's position here is similar to the one it took when it successfully blocked the merger of Staples and Office Depot. I am no antitrust expert but I am bit skeptical of the Commission's view of this market as an "experience" rather than a simple opportunity to buy higher quality natural or organic food which can otherwise be available elsewhere. This is particularly true since it would appear that barriers to entry are low and there are many other prospective and real competitors even in a narrowly defined organic and natural foods market.
Once the opinion is disclosed (it was filed under seal), we will be able to ascertain whether or not the Office Depot doctrine is now dead and confined to its particular facts. But the FTC's case here appeared to almost exclusively rely on the actions and statements of Whole Foods co-CEO John Mackey who, among other things, was posting on the Yahoo chat board for Wild Oats using the handle Rahodeb (his wife's name spelled backwards). But as I stated before "just because you have a dumb CEO still doesn't justify the FTC actions here challenging Whole Foods' proposed acquisition of Wild Oats. As far as I know, there is no stupidity provision in the antitrust laws though some may argue there should be one in the law generally."
The FTC will now attempt to raise an emergency appeal up to the D.C. Circuit. Even if the appeal is denied, depending upon the grounds of the opinion, Whole Foods still has a hard decision to make. The FTC indicated in its press release that it will continue to pursue this action. And Whole Foods is not required to complete its tender offer if either of the following conditions exist:
(a) there shall have been any, law, decree, judgment, order or injunction, promulgated, enacted, entered, enforced, issued or amended by any governmental entity that would, directly or indirectly: . . . . (ii) impose material limitations on the ability of WFM, Purchaser or any of their respective subsidiaries or affiliates to acquire or hold, transfer or dispose of, or effectively to exercise all rights of ownership of, some or all of the Shares, including the right to vote the Shares purchased by it pursuant to the Offer on an equal basis with all other Shares on all matters properly presented to the stockholders of Wild Oats. . . .
(b) there shall be pending any action, proceeding or counterclaim by any governmental entity challenging the making or consummation of the Offer or the Merger or seeking, directly or indirectly, to result in any of the consequences referred to in clauses (i) through (iii) of subparagraph (a) of this paragraph 2;
The FTC administrative action, which the FTC asserts will continue no matter the outcome of its appeal, almost certainly meets the second condition. Whole Foods may have significant comfort in the District Court opinion, but the grounds for granting a final judgment and a preliminary injunction are different. Depending upon the basis for the court's decision denying an injunction, Whole Foods still may bear significant risks that the FTC may ultimately win. To the extent this risk exists Whole Foods must decide whether to close the offer and bear it. Hopefully, John Mackey will display better judgment in this decision than in his other actions.
For more on the Whole Foods/Wild Oats deal see my prior posts:
Midwest Air Group yesterday announced that it had agreed to be acquired by an affiliate of TPG Capital, L.P. for $17 per share in cash in a transaction valued at approximately $450 million. The Midwest board unanimously selected this offer over Airtran's cash and stock offer valued at $16.23 at the time of the board decision. For those keeping track, on December 12, 2006, the last trading day before the public announcement of AirTran's interest in acquiring Midwest, Midwest's stock was trading at $9.08.
As I noted before,
[T]he Midwest board still has leeway to prefer the TPG offer. The Midwest board is governed by Wisconsin law, not Delaware and therefore the typical Revlon duties do not apply. In fact, the duties of a board under Wisconsin law in these circumstances have never been fully elaborated. . . . And even if Revlon duties did apply, the Midwest board could make the reasonable judgment that AirTran stock was likely to trade lower in the future, and therefore Airtran's offer was not a higher one than TPG's all-cash bid.
Ultimately, the Midwest board relied upon the the current state of the markets and the uncertainty with AirTran's financing to justify its decision to go with TPG. Given the higher current value of TPG's bid this was wholly justifiable and probably the right one. Cash is once again king, at least until this morning's Fed rate cut. It is only Midwest's previous scorched earth policy vis-a-vis TPG which makes the decision suspect.
Still some questions remain. What is the scope of Northwest's role in the TPG deal and what are the antitrust provisions in the merger agreement? What happens if shareholders vote down the deal: has Midwest agreed to a break fee payable to TPG? And, what arrangements have been made for the current executive officers of Midwest? What is the break fee in the unlikely event AirTran decides to keep bidding? Once the agreements are filed, I'll post more.
Market turmoil has been good for the M&A Prof Law Blog at least. Over the past few weeks, we've been extensively quoted in both the Wall Street Journal Deal Journal and N.Y. Times Deal Book. Check out the posts:
Private Equity’s $1 Billion Call Option, W.S.J. Deal Journal
Lone Star Sings MAC the Knife on AHL, W.S.J. Deal Journal
Sallie Mae’s $25 Billion Question, N.Y. Times DealBook
Murdoch’s Gem and Other Deal Aliases, N.Y. Times DealBook
Today's Friday culture is Nicholas Dunbar, Inventing Money: The Story of Long-Term Capital Management and the Legends Behind It. Dunbar not only aptly tells the story of LTCM's implosion but also details the financial theories which today drive hedge funds and the capital markets generally. He also finds the time to tell the story behind the 1987 crash and the role of programmed trading and portfolio insurance. Plus read about one of the greatest arbitrage trades of all time, in Italian postal bonds no less. In these times, it is a great read. Enjoy your weekend!
NB. For those who want a book which more specifically focuses on LTCM you should check out When Genius Failed: The Rise and Fall of Long-Term Capital Management by Roger Lowenstein.
Thursday, August 16, 2007
Lone Star filed an amendment to its Schedule TO last night. According to the amendment, as of the close of business on August 15, Lone Star had received tenders equal to approximately 91.5 percent of the outstanding shares of Accredited’s common stock. Unfortunately for Lone Star, it likely won't be able to rely on a failure of the minimum offer condition to terminate its offer when the tender offer is again up for expiration.
The amendment also disclosed that:
On August 14, 2007, the parties agreed to work on an expedited schedule for the proceedings and Vice Chancellor Stephen P. Lamb of the Delaware Chancery Court scheduled trial for September 26-28, 2007.
Set your calendars for this date; it is going to be a great trial on an important issue. And for those who wish to handicap judges, Lamb is a bit of an unknown quantity on material adverse change clause cases. The two main cases on MACS in Delaware, IBP and Fronteir, were decided by Strine and Noble, respectively, and a quick westlaw search showed no in-depth opinions by him on this issue. But Lamb, an ex-Skadden partner, is a fine judge, smart and dedicated and likely to bring the same common-sense business approach which Strine and Noble brought to their MAC cases. I'm going to try and attend in person.
In times of market stress, agreements that at the time seemed reasonable can cause dilemma for the parties. Perhaps the most interesting of these right now is the one associated with the liability limiting provisions that private equity actors have sometimes negotiated in their acquisition agreements. These provisions limit the liability of the private equity companies to a set amount no matter whether they intentionally breach the deal or not. The amount is typically at three-four percent of deal value. And, these provisions exclude the possibility of specific performance to require the private equity firm to consummate the transaction. So, the net effect is to give the private equity adviser a walk-away right with a cap on their liability at a fixed dollar amount. A number of troubled deals have this provision, including Manor Care, SLM, TXU (see the provisions here, here and here). Lone Star did not have this provision in its agreement; the result is that its liability exposure is substantially higher (see my post on this here).
These clauses essentially give the private equity fund an "option" on the acquired company. They can rationally assess at the time of closing whether it is worth it to close in numerical dollar terms. This makes for a very interesting calculus, particularly in these times. Private equity firms who have negotiated these clauses must be making some hard, number-crunching decisions. No one likes to pay the size of these possible payments ($1 billion in the case of TXU, $900 million in the case of SLM), tarnish their reputation as a bad player or admit to your investors that you made a bad decision, but sometimes cutting your losses is the better part of valor. Or at least it is a good negotiating chip.
Nonetheless, I'm not sure that sellers have fully appreciated the impact of these clauses. I suspect the conversation goes something like this: "Buyer: We're a private equity firm and our investors require that we cap our losses. You have a three percent break fee, shouldn't that be the same for us? Seller: Well, that makes sense". OK, it probably doesn't go exactly like that, but the point is that the three percent here may not be the right price. Would a correctly priced option cost that little? (interestingly, if you have some reasonable certainty as to a closing date this would be a European option so you could actually try and use Black-Scholes). Does this amount properly compensate the company and its shareholders for a blown deal? And should the private equity firms even have this option; this is not something that would seem rational with an industry buyer? Seller's counsel would do well to highlight these issues to their clients, particularly the optionality embedded in these liability limiting clauses.
NB. It is not quite a private equity deal but the Tribune deal has similar provisions which limit the liability of Sam Zell to $25 million (see Sec. 8.20 of the Zell purchase agreement). Not bad on an $8 billion transaction.
Addendum: a reader has pointed me to a clause in the Avaya merger agreement which more thoughtfully addresses this issue. In Section 7.3(f) the parties specifically cap monetary damages in case of breach but provide for specific performance. This effectively ends the optionality contained in the other agreements discussed above. Here is the relevant language:
Notwithstanding the foregoing, it is explicitly agreed that the Company shall be entitled to seek specific performance of Parent’s obligation to cause the Equity Financing to be funded to fund the Merger in the event that (i) all conditions in Sections 6.1 and 6.2 have been satisfied (or, with respect to certificates to be delivered at the Closing, are capable of being satisfied upon the Closing) at the time when the Closing would have occurred but for the failure of the Equity Financing to be funded, (ii) the financing provided for by the Debt Commitment Letters (or, if alternative financing is being used in accordance with Section 5.5, pursuant to the commitments with respect thereto) has been funded or will be funded at the Closing if the Equity Financing is funded at the Closing, and (iii) the Company has irrevocably confirmed that if specific performance is granted and the Equity Financing and Debt Financing are funded, then the Closing pursuant to Article II will occur. For the avoidance of doubt, (1) under no circumstances will the Company be entitled to monetary damages in excess of the amount of the Parent Termination Fee and (2) while the Company may pursue both a grant of specific performance of the type provided by the preceding sentence and the payment of the Parent Termination Fee under Section 7.1(b), under no circumstances shall the Company be permitted or entitled to receive both a grant of specific performance of the type contemplated by the preceding sentence and any money damages, including all or any portion of the Parent Termination Fee.
Practitioners take note.
I was flipping through the TXU merger agreement last night, and I noticed the following choice of law clause in section 9.5 (caps are in the original):
THIS AGREEMENT SHALL BE CONSTRUED, PERFORMED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK (EXCEPT TO THE EXTENT THAT MANDATORY PROVISIONS OF TEXAS LAW ARE APPLICABLE), WITHOUT GIVING EFFECT TO ITS PRINCIPLES OR RULES OF CONFLICT OF LAWS TO THE EXTENT SUCH PRINCIPLES OR RULES WOULD REQUIRE OR PERMIT THE APPLICATION OF THE LAWS OF ANOTHER JURISDICTION.
This clause makes my head hurt (and not because of the caps). What are the mandatory laws of Texas? What Texas conflict of laws principles require the application of the laws of another jurisdiction? I am not sure whose form this is (likely Vinson & Elkins or Simpson, Thacher who are counsel to the buyer), but I suspect if you asked them, you would be greeted with a blank stare. And a junior associate could spend hours, if not days, researching this issue.
Variations of this underlined language crept into choice of law provisions at some point and it has stubbornly remained there despite the best efforts of knowledgeable lawyers to eradicate it because of their potential for incongruity. Former Shearman & Sterling partner Michael Gruson aptly explained why this language is unnecessary and possibly harmful text in his article, Governing Law Clauses Excluding Principles of Conflict of Laws, 37 INT'L LAW. 1023 (2003). Here, Gruson highlighted the resulting absurdities under New York law if the language of this clause were strictly applied. For example, depending upon the conflicts of laws wording exclusion, the language may technically requires a court to also exclude the very conflict of laws rules that permit the parties to select a law to govern their agreement as well as to ignore the internal affairs doctrine. Both would be unwanted results. And the mandatory provision is just vague drafting: theoretically all Texas laws are mandatory in some manner. Accordingly, to avoid such issues, the better practice would have been for Vinson and/or Simpson to draft their clause simply as follows:
Section 8.4 Governing Law. This Agreement, and all claims or causes of action (whether at Law, in contract or in tort) that may be based upon, arise out of or relate to this Agreement or the negotiation, execution or performance hereof, shall be governed by and construed in accordance with the Laws of the State of Delaware.
So much easier, and as Gruson notes an equivalent, clearer result.
Wednesday, August 15, 2007
Yesterday, Lone Star announced that it is extending its tender offer for all of the outstanding shares of common stock of Accredited Home Lenders Holding Co. The tender offer was set to close at midnight, on August 14, 2007. The extension is until 12:00 midnight on August 28, 2007. In extending the tender offer Lone Star relied upon Section 2.01(d)(iii) of the Merger Agreement which requires that:
if, on the Initial Expiration Date or any subsequent date as of which the Offer is scheduled to expire, any Offer Condition is not satisfied and has not been waived, then, to the extent requested in writing by the Company, Purchaser shall extend the Offer for one or more periods ending no later than the Outside Date [Ed. Dec. 31, 2007], to permit such Offer Condition to be satisfied; provided, however, that no individual extension shall be for a period of more than ten (10) business days . . .
According to Lone Star's press release, AHL made such a request. Lone Star was therefore required under the merger agreement to extend the offer. Lone Star's only other alternative was to repudiate or terminate the agreement. But, Lone Star can only terminate the agreement under specified circumstances, including a breach of a representation or warranty of AHL. Here, there does not appear to be such a breach; rather Lone Star is asserting the failure of a condition. On the publicly available facts, Lone Star therefore appears to have no grounds to currently terminate the agreement. And repudiation would place Lone Star as the bad guy in Delaware Chancery Court and possibly enhance their liability. Thus, Lone Star's choice to extend the agreement is really a non-event, something required under the Agreement until the resolution of the Material adverse change issue in Delaware Chancery Court.
But, tell that to the day-traders and others who are furiously trading this stock. It is up $1.14 as I write or 20.73% on Lone Star's announcement. How is that for market irrationality? Investors/traders attempting to arbitrage this event would do better simply analyzing Lone Star's ultimate case (for more on that see my post Lone Star's Pickle).
Yesterday, AirTran reentered the bidding for Midwest Air Group. In a press release, AirTran announced an offer to acquire Midwest for $16.25 per share. The consideration under the new proposal would consist of $10 a share in cash and 0.6056 shares of AirTran common stock and values Midwest at $445 million in total value. As I write, AirTran's stock is trading at $10.49 valuing the offer at $16.35. The offer is slightly higher than the $16 a share offer from TPG Capital, L.P. the Midwest board announced on Monday that they were accepting.
My initial reaction is that AirTran management may want to read Bernard Black's classic Stanford law review article Bidder Overpayment in Takeovers. Professor Black ably analyzes the factors which go into the documented effect of bidder overpayment and the puzzling persistence of takeovers when studies have shown that they are at best wealth neutral for buyers. These include the classic winner's curse which is a product of information asymmetry and a bidder's consequent over-estimation of value (Think about competing with another bidder to buy a home). But it is also effected by other factors such as management optimism and uncertainty and simple agency costs (i.e., the risk of the acquisition is largely borne by AirTran's post-transaction shareholders). Some analysts have claimed that AirTran would be better positioned without Midwest, so perhaps these factors are in play here. Of course, we will only know the answer post-transaction if and when Midwest is acquired by AirTrans.
Finally, the Midwest board still has leeway to prefer the TPG offer. The Midwest board is governed by Wisconsin law, not Delaware and therefore the typical Revlon duties do not apply. In fact, the duties of a board under Wisconsin law in these circumstances have never been fully elaborated. Moreover, Wisconsin has a constituency statute which permits a board considering a takeover to consider constituencies other than shareholders, such as employees. The Midwest board has before invoked this constituency statute to justify rejection of Airtran's bid. It may do so again. And even if Revlon duties did apply, the Midwest board could make the reasonable judgment that AirTran stock was likely to trade lower in the future, and therefore Airtran's offer was not a higher one than TPG's all-cash bid. Here, the strong shareholder support for Airtran's stock component will make such a board decision harder to support. But AirTran still has a ways to go before it actually reaches an agreement to acquire Midwest.
Tuesday, August 14, 2007
Midwest Air Group, owner of Midwest Airlines, yesterday announced that it had determined to pursue an all-cash offer from TPG Capital, L.P. to acquire all of the outstanding shares of Midwest for $16.00 per share in a transaction valued at about $424 million. Midwest and TPG expect to execute an agreement by tomorrow, August 15. Midwest did not disclose it at the time, but it subsequently was reported that Northwest Airlines would be an investor in this transaction with "no management role" in the operations of Midwest. Miudwest's announcement comes on the heels of AirTran Holdings Inc.'s weekend disclosure that it had allowed its own "hostile" cash and stock offer valued at $15.75 a share to expire.
The market is still uncertain about the prospects of a completed deal. On the announcement, Midwest's stock actually closed down 1.62% yesterday at $14 a share. To understand why, one need only read this excerpt from a letter delivered yesterday to the Midwest board from its largest shareholder (8.8%) Pequot Capital:
We have significant concerns with this Board’s decision to pursue an all-cash proposal from a private equity firm and its consortium. We are not convinced that this taxable, all-cash indication of interest is superior to the enhanced cash and stock offer that you indicated was made by Airtran this past weekend. In addition, we fail to see how TPG and Northwest will be able to match the job creation and growth opportunities promised by Airtran for the benefit of Midwest’s employees, suppliers, customers and communities.
Midwest's behavior throughout this transaction has been problematical. Their scorched earth policy has produced clear benefits -- Midwest's initial bid was $11.25, but their "just say no" policy to AirTran has highlighted the problems with anti-takeover devices and their potential use to favor suitors. Midwest management may have succeeded in preserving their jobs with this gambit, but it may be to the detriment of its shareholders.
It is also to the detriment of AirTran. AirTran has now incurred significant transaction costs, including lost management time expended on this transaction, and, assuming the bidding is done, now has nothing to show for it: TPG is a free-rider on AirTran's efforts. Here, I must admit I am a bit puzzled as to why AirTran did not establish a toe-hold; that is a pre-offer purchase of Midwest shares. If they had taken this route, AirTran would have paid for its expenses through its gain from this pre-announcement stock purchase. But instead, AirTran purchased only a few hundred shares for proxy purposes. This may have been due to regulatory reasons, but if not, it appears to be poor planning by AirTran. And AirTran is not alone. Toeholds are common in Europe (KKR recently used the strategy quite successfully in the Alliance Boots Plc transaction), but in the United States they are less utilized due to regulatory impediments such as HSR filings and waiting periods, Rule 14e-5 which prohibits purchases outside an offer post-announcement, and Schedule 13D ownership reporting requirements. Consequently, one study has found that at least forty-seven percent of initial bidders in the United States have a zero equity position upon entrance into a contest for corporate control. M&A lawyers may do well, though, to advise bidders to rethink this hesitancy. For more on this issue, see my post, The Obsolescence of Rule 14e-5.
I posted yesterday on the Accredited Home Lenders/Lone Star transaction and Lone Star's assertion of a Material Adverse Change. I've now read through the complaint AHL has filed in Delaware Chancery Court seeking to force Lone Star to close this transaction. After reviewing it, I'm increasingly convinced that Lone Star is probably asserting a MAC for strategic reasons, and based on the public record, I believe is unlikely to prove a MAC.
The complaint is fairly straightforward. It claims that Lone Star has either repudiated or breached the merger agreement by claiming a MAC and asserting that it will refuse to close its pending tender offer. The complaint seeks either specific performance or monetary damages. And with a strong caveat that I do not know the non-public facts, it appears that AHL has a strong case. First, the MAC has a specific out for "changes generally affecting the industry in which the Company and the Company Subsidiaries operate" provided that "that such changes do not disproportionately affect the Company." Moreover, the MAC clause also excludes "any deterioration in the business, results of operations, financial condition, liquidity, stockholders’ equity and/or prospects of the Company and/or the Company Subsidiaries substantially resulting from circumstances or conditions existing as of the date of this Agreement that were generally publicly known as of the date of this Agreement or that were Previously Disclosed." (read the full MAC in the merger agreement here)
Lone Star initially has a tough burden proving a MAC under Delaware law, the governing law of the merger agreement (for a discussion of the law on MAC clauses in Delaware see my prior post here). Furthermore, the requirement to show that the change is disproportionate raises similar issues as the MGIC/Radiant MAC case and, given market conditions, is likely a difficult one for Lone Star to sustain its burden of proof. Nonetheless, on August 2, 2007, AHL disclosed that the auditors opinion for its 2006 10-K noted "that the ultimate outcome of the merger is not determinable and that, if the merger is not consummated or if market conditions deteriorate further, the Company’s financial and operational viability is uncertain." In these times, possible insolvency may be, although is not certain to be, a MAC that is disproportionate.
Nonetheless, a review of the history of the transaction in the Schedule TO and the AHL complaint reveals that it was negotiated in May and June of 2007. Not only was AHL in the midst of financial crisis then (Lone Star in fact lowered its offer during this time because of AHL's deterioration), but the sub-prime crisis was beginning to enter full swing. Again, without knowing the more specific facts here, it is hard to see how Lone Star can show that the current problems at AHL are not related to facts known at the time of the Agreement.
So, if I am correct, why is Lone Star asserting a MAC? Well, the alternative for Lone Star is not very palatable. The market has swung hard against them, and they are about to buy a company on the verge of insolvency. Under the Merger Agreement, Lone Star could terminate the agreement and its tender offer upon the occurrence of a MAC. But they haven't, hinting at their deal strategy. It appears that Lone Star has made a bad deal, and are struggling to minimize their losses. The assertion of a MAC by Lone Star buys them two to three months of time in litigation to attempt to negotiate a settlement, an exit from the deal, and a cap on their losses. Nonetheless, these losses could potentially run up to $400 million. A pickle if there ever was one. I wouldn't sleep very well if I was a partner in Lone Star this week.
Monday, August 13, 2007
Another Material Adverse Change case has popped up. And this one has the potential for a landmark MAC opinion in the Delaware Chancery Court. This dispute concerns the private equity fund Lone Star's agreed takeover of Accredited Home Lenders. On Friday, Lone Star filed an amendment to its Schedule TO which stated that:
On August 10, 2007, Lone Star informed the Chairman of the Special Committee of the Board of Directors of the Company that, in light of the drastic deterioration in the financial and operational condition of the Company, among other things, as of today, the Company would fail to satisfy the conditions to the closing of the tender offer. Accordingly, Purchaser does not expect to be accepting Shares tendered as of the end of the current offer period ending at 12:00 midnight, New York City time, on August 14, 2007.
AHL responded that day in its own press release:
With the receipt of all required regulatory approvals and the resolution of the Wan litigation, Accredited believes that, assuming more than 50% of Accredited’s outstanding shares are tendered by the expiration of the current tender offer period on August 14, 2007, all conditions to closing of the tender offer will have then been satisfied.
Accredited noted that the Agreement and Plan of Merger with Lone Star expressly provides that changes generally affecting the non-prime industry in which the Company operates which have not disproportionately affected the Company do not provide a basis for Lone Star to walk away from its obligations. Accredited said that it intends to hold Lone Star to its obligations, and to hold it fully responsible for any damages caused by its failure to satisfy those obligations.
And today it was reported that AHL had sued Lone Star for specific enforcement of the transaction in Delaware Chancery Court. Note that the Merger Agreement is governed by Delaware law and any dispute thereunder is required to be litigated there.
The underlying story here is that Lone Star is asserting that a MAC occurred under the Merger Agreement due to the recent deterioration of the financial markets and the sub-prime industry generally in which AHL operates. AHL is disputing this assertion by stating that these events are specifically excluded under the negotiated MAC clause. To determine who is correct, the starting point is to look at the MAC clause in the merger agreement. The relevant section defines a MAC as:
“Material Adverse Effect” means, with respect to the Company, an effect, event, development or change that is materially adverse to the business, results of operations or financial condition of the Company and the Company Subsidiaries, taken as a whole; provided, however, that in no event shall any of the following, alone or in combination, be deemed to constitute, nor shall any of the following be taken into account in determining whether there has been, a Material Adverse Effect: (a) a decrease in the market price or trading volume of Company Common Shares (but not any effect, event, development or change underlying such decrease to the extent that such effect, event, development or change would otherwise constitute a Material Adverse Effect); (b) (i) changes in conditions in the U.S. or global economy or capital or financial markets generally, including changes in interest or exchange rates; (ii) changes in applicable Law or general legal, tax, regulatory or political conditions of a type and scope that, as of the date of this Agreement, could reasonably be expected to occur, based on information that is generally available to the public or has been Previously Disclosed; or (iii) changes generally affecting the industry in which the Company and the Company Subsidiaries operate; provided, in the case of clause (i), (ii) or (iii), that such changes do not disproportionately affect the Company and the Company Subsidiaries as compared to other companies operating in the industry in which the Company and the Company Subsidiaries operate . . . .
Thus, AHL is arguing that any material adverse effect is caused by changes to the sub-prime industry generally and that they do not disproportionately effect AHL. The argument in Delaware court will likely be over the "disproportionate effect" of these changes. This will be a fact-based inquiry. And, as I noted in my post on the SLM MAC, Delaware raises a high bar to proving a MAC placing the burden on the asserting party. Therefore, we will have to wait for Lone Star's day in court to see whether it can meet this bar. But, if the case does result in an opinion, it will likely clarify the grounds for invocation of MAC clauses in a number of pending transactions which have been effected by the current market crises.
NB. M&A attorneys take note that Lone Star is in a different negotiating position than the SLM consortium. There, the consortium specifically negotiated in their merger agreement that specific performance of the transaction was not a permitted remedy and that the consortium's damages would be limited in any dispute to $900 million even in the case of any willful or intentional breach of the agreement by the consortium. Lone Star has no such provision and their merger agreement contemplates in Sec. 11.07 specific performance for any breach. Thus, the calculus for Lone Star in asserting a MAC is much different and uncertain than the SLM consortium.
Astute market watchers will note that Wachtell is currently on opposite sides of two Material Adverse Change disputes. Craig M. Wasserman at the firm is leading a team representing the consortium which has agreed to buy SLM Corporation (the consortium is claiming a possible MAC). Edward D. Herilhy is leading a team representing MGIC Investment and Radian Group Inc. (MGIC is disputing a possible claimed MAC). Interestingly, Wachtell junior partner Nicholas G. Demmo is listed in the transaction documents as being on both deal teams (it is noted here in the SLM merger agreement, and here on the cover of the MGIC/Radian S-4/proxy statement). And while there should be nice synergies (cost-savings?) for him in working on both sides of this issue, one has to hope that, on those late Wachtell nights, he doesn't make a mistake and confuse the two with his clients.
NB. I was also quoted on the MGIC/Radian dispute this weekend in the Milwaukee Journal Sentinel (see the article here).
On Friday late afternoon, The Upper Deck Company announced that it was extending its tender offer for all outstanding shares of The Topps Company, Inc. until 12:00 midnight, New York City time, on August 29, 2007. Upper Deck also announced that, as of August 10, 11,829,601 shares had been tendered into the offer constituting 30.52% of the outstanding shares.
The extension is a sign of the seriousness of Upper Deck's offer. Nonetheless, the bad blood by the parties is still an obstacle towards finalizing a transaction. The parties are also fighting over the transaction structure, between merger or tender offer. Upper Deck has asserted that it has committed financing but expressed a preference for a merger transaction over its current tender offer in order to permit additional time to consummate its necessary financing. But a perusal of their commitment letter shows that it contemplates either a singe or two-step structure. Moreover, the Material Adverse Change clause which provides an out to the bank lenders specifically excludes "changes in the economy or financial markets generally", and states the MAC must effect Upper Deck, not the ability of the lenders to finance credit in the market. It would thus appear that there is no financing obstacle for Upper Deck to proceed with the tender offer route if it wishes, and that it can force its lenders to do so. Upper Deck's position is thus puzzling, and while their extension of the offer is a sign of their intentions, their other conduct still raises concern over whether an agreement will be reached between the parties.