Friday, August 24, 2007
The U.S. Court of Appeals for the District of Columbia yesterday denied the FTC's request for an emergency stay halting Whole Food's acquisition of Wild Oats. In a conclusion which does not bode well for the FTC's ultimate case the Court stated that "[a]lthough the FTC raised some questions about the district court's decision, it has failed to make a strong showing that is it likely to prevail on the merits of its appeal . . . ." As a result, Whole Foods will now proceed to close its tender offer on its next expiration date, 5:00 p.m., Eastern time, on Monday, August 27, 2007.
For those keeping score, the FTC's loss comes on the heels of the Justice Department's failure to halt Oracle Corp.’s acquisition of PeopleSoft in 2004, and the FTC's failure to block Western Refining Inc.’s purchase of Giant Industries Inc. earlier this year. The FTC last won an antitrust case in court in 2002, when it stopped Libbey Inc. from buying Anchor Hocking Corp. from Newell Rubbermaid Inc. Now there is food for thought . . . .
Today's Friday culture is Bagehot's Lombard Street: A Description of the Money Market. Lombard Street is a collection of essays written by the famed Bagehot for the Economist during the 1850s. The book is a classic description of the market at that time and an enduring look at market psychology. Highly relevant for our times, Bagehot also analyzes and dissects market crises, offering monetary prescriptions that remain to this day the preferred route for stemming and avoiding financial crises. In particular, his prescriptions for the injection of mass liquidity to stem market panic is, in fact, one that the central banks of the World are following today. Enjoy your weekend!
Thursday, August 23, 2007
Earlier this week Upper Deck withdrew in a huff its competing tender offer for Topps leaving Topps with only a heavily criticized merger agreement with Michael Eisner's Tornante and MDP. I'll write more tomorrow and in-depth on the upcoming Topps shareholder vote on that transaction and the current shareholder opposition. But for now, I thought I would share this amazing letter Topps filed this morning. It's long for a blog post, but I'm going to put most of it up since it is really one of those you have to read (at least for those people who slow down to watch car crashes). I'll also post tomorrow my thoughts on a potential lawsuit by Topps's and their chance at success under the Williams Act and other grounds.
Mr. Richard McWilliam, Chief Executive Officer, The Upper Deck Company
Dear Mr. McWilliam:
We are extremely disappointed for our stockholders that you withdrew your tender offer.
You have misled our Board, our stockholders, the Delaware court and the regulators. As a result, our stock price has gyrated wildly based on your false and misleading statements to the public.
Our Board and management team have been intensely focused on maximizing value and, notwithstanding your self-serving statements to the contrary, we did indeed hope to reach an agreement by which Topps stockholders would receive $10.75 per share. While we negotiated in good faith and used our best efforts to arrive at a transaction with you, given the lame excuses you assert in your letter of August 21 for taking such action, we believe it is now apparent to everyone that your tender offer was illusory. Your conduct has been shameful, indefensible and, in my judgment, manipulative.
Your claim that you could not continue to proceed with your tender offer and finalize a transaction because the due diligence issues could not be resolved is specious. You should have read our letter of August 20 with greater care. In that letter, I stated that the Board was prepared to respond to every diligence request prior to signing a merger agreement, including those received recently.
So that there is no confusion, the letter, which was publicly filed, stated: "we have told you time and again (and reiterate again for the record) that once we conclude a consensual agreement with you (but prior to signing, of course), we will provide you with every missing piece of information you have requested.”
Notwithstanding your additional diligence requests, which we publicly confirmed we would satisfy, a cursory look at your specific requests demonstrates that they would not contain any information that was necessary for you to determine whether to proceed with your tender offer. . . . .
Time and again, Topps provided Upper Deck with a clear roadmap to a definitive agreement. Upper Deck never once indicated a strong desire to get a deal done, other than through its misleading communications to the public. We were stunned that we didn’t hear from you immediately after the HSR waiting period expired. Frankly, we had expected a call at midnight from your advisors suggesting a meeting within a day or so to get a deal done. That call never came (not at midnight, not over the weekend nor even the following week). Instead, our advisors had to reach out to yours to ask when and if we could discuss a merger agreement.
The details of your neglect have already been stated in my last letter so I won’t repeat them again here, but the fact is Topps pushed and pushed and Upper Deck delayed and delayed. Never once did Upper Deck request a meeting to discuss any outstanding business issues. Never once did Upper Deck offer to get in a room with business people and advisors to resolve differences. Never once did you or your business people pick up the phone and call me or anyone else at Topps (other than in response to our calls to you). All of the initiatives came from Topps - we had to send you drafts and then call or email repeatedly to get your advisors to focus. We had to call and email to push the process forward. We wrote letters to try to stimulate some kind of action on the part of Upper Deck. All in all, no one could possibly believe that Upper Deck’s behavior resembled the behavior of a motivated buyer.
All a legitimate buyer would have needed to do was to complete the tender on the terms you stated - buy whatever shares were tendered and then deal with the back-end either through a short-form or long-form merger. You had the requisite regulatory approvals and claimed to have all of the financing. All of the so-called conditions to your offer were, in fact, wholly within your control when you terminated your offer. In any case, if Upper Deck had followed through on its tender offer, it could have acquired a majority of the shares in short order (and, we suspect, would have received overwhelming support for the offer from the stockholders), obtained control of the Board immediately and thereby thwarted any further efforts by any third party to acquire control of Topps or the Board. That’s what a real buyer would have done.
Furthermore, given your lack of experience in the confectionery business, we find it more than curious that during the 5½ months since you have had access to our data room, you only performed a limited review of the hundreds of documents made available on Topps Confectionery, had no follow-up questions on the business, did not ask to speak with the supplier that manufactures most of our confectionery products and did not ask to speak with management to get clarity on the recent softening in performance. We believe that any buyer would want to assess the value of Topps’ Confectionery business regardless of their plans for the business. Topps Confectionery represents approximately half of the Company’s revenues and earnings and is the division that faces the most challenging strategic and financial conditions going forward.
Finally, on August 21, we filed a merger agreement, which we believed our Board was prepared to recommend, subject only to Topps’ obligations under the existing merger agreement with Tornante-MDP. Incredibly, rather than contact us or our advisors to finalize a transaction that would benefit our stockholders, you withdrew your tender offer. It appears that you were using your tender offer as a Trojan horse to gain access to our confidential information, disrupt our business and interfere with our pending merger transaction, the consummation of which could threaten the success of your business.
We intend to hold Upper Deck fully responsible for the damages you have caused Topps and its stockholders, and hope that our stockholders, or representatives acting on their behalf, and appropriate regulators will do likewise.; We will now turn our attention to completing the Tornante – Madison Dearborn Partners transaction.
Allan A. Feder
The redacted opinion in the Whole Foods/Wild Oats transaction has been released (access it here). I haven't analyzed it thoroughly but at first glance Judge Friedman rests much of his decision on a rejection of the FTC's market definition. Judge Friedman defines the market more broadly than the organic supermarket sector; instead, he groups Whole Foods and Wild Oats together with the many other supermarkets selling natural and organic groceries. On this basis, he finds that "[t]he evidence shows that there are many alternatives to which customers could readily take their business if Whole Foods and Wild Oats merged and Whole Foods imposed," price increases. The case now goes before the D.C. Circuit.
Earlier this week, Lone Star filed its answer and counter-claims to Accredited Home Lender's lawsuit which seeks to force Lone Star to complete its pending acquisition of AHL. Lone Star bases its counter-claims on two core assertions 1) AHL has breached its representations and warranties and covenants under the merger agreement, and 2) a Material Adverse Effect (as defined in the merger agreement) has occurred or is reasonably likely to occur. Lone Star asserts that these claims entitle it to terminate the merger agreement and limits its liability in the transaction to no more than the reverse termination fee, or $12 million.
More specifically: Lone Star's claim of breach of the merger agreement by AHL is in part premised upon Section 7.01 of the merger agreement which requires AHL “to conduct its business in the ordinary course and [to] use its commercially reasonable efforts to preserve substantially intact the business organization of the Company and to preserve the current relationships of the Company and the Company Subsidiaries . . . .” Lone Star here claims that AHL breached this agreement by failing to take the necessary steps, including slashing employees and overhead, to preserve its sub-prime lending business. Lone Star also asserts a claim that AHL breached Section 8.02 of the merger agreement, which requires AHL to afford Lone Star access to the “books and records of the Company and the Company Subsidiaries, and all other financial, operating and other data and information as [Lone Star] may reasonably request.” Lone Star also alleges that AHL has:
breached its representations, warranties and covenants by, among other things, its (i) acts and omissions that drastically weakened the financial and operating condition of the Company, (ii) acts and omissions that hastened the Company’s descent into a severe liquidity crisis, (iii) acts and omissions that have, or soon will, restrict the Company’s access to the its revolving loans, (iv) violations of covenants in the Company’s core credit facilities, and (v) misstatements regarding and mismanagement of the failing retail loan origination program.
Finally, Lone Star asserts that AHL has suffered a Material Adverse Effect and therefore is in breach of the merger agreement.
As an initial matter, Lone Star's claims surrounding breach of the representations and warranties and covenants look tough to prove, and though Lone Star does well to dress them up, appear to be just a MAC claim in disguise (and, in fact, any breach of a representation or warranty has to be a MAC to justify termination; the breach of covenant does not require that Lone Star prove a MAC, merely a material breach). Nonetheless, to the extent Lone Star is challenging AHL's business decisions, the court is likely to look at the actions of AHL within the context of the business judgment rule and commercial reasonableness. This is a question of fact, but based on the known facts and given the crisis AHL's actions appear reasonable reactions to the sub-prime lending crisis. Moreover, there is a 60 day cure period in the contract for AHL to cure any breaches. Today, AHL announced that it was taking several restructuring initiatives, including terminating 1,000 employees, closing substantially all of the retail lending business and no longer accepting new U.S. loan applications. AHL is likely to claim that these actions, which Lone Star asserts in its counter-claim that AHL had previously failed to take, are such a cure. In fact, I interpret AHL's actions today as a direct response to this claim by Lone Star, though it likely had no other choice from a business perspective given the market situation.
As for the MAC claim, the question boils down to two issues: 1) what did Lone Star know and when did they know it, and 2) is the MAC in Lone Star's business "disproportionate" to the adverse changes in the sub-prime lending business generally. This is important because the definition of MAC in the merger agreement specifically excludes events resulting from any circumstance or condition existing and known to Lone Star as of the date of the merger agreement as well as those that do not disproportionately affect AHL as compared to other companies operating in the industry in which AHL operates.
Here, AHL attempts to prove lack of knowledge by relying on the issuance of a "going concern" qualification by AHL's auditors and the revision in AHL management’s projections from an estimated loss for the third quarter of $64 million to a $230 million loss for the third quarter. It is hard to assess these claims without full information, but my gut reaction is that Lone Star cannot escape the sub-prime implosion, which unfortunately for Lone Star was in full swing at the time of its agreement. I believe that knowledge is likely to be attributed, but this is now a question of fact that will ultimately be decided by Vice Chancellor Lamb. And even if Lone Star can establish that knowledge was absent, it still must prove the MAC to be "disproportional".
Lone Star thus also goes out of its way to prove dis proportionality citing specific lawsuits against the company and other alleged facts to prove that the events occurring at AHL are either specific to AHL or so disproportionate as to be a MAC. Here, Lone Star again cites the disproportionate effect of the implosion of AHL's retail business which AHL shut today. But again, given the mass industry turmoil -- Lehman today shut its sub-prime unit for example -- dis proportionality is going to be hard to prove even in AHL's catastrophic circumstances. Also -- look for the parties to argue over which industry the disproportionality should be measured against; Lone Star is going to argue it is the broader mortgage lending business -- AHL will argue it is the sub-prime business.
Lone Star's claims of a MAC thus appear at this point to be less than solid. Nonetheless, things will reach more clarity as the facts are disclosed at the hearing before VC Lamb. For now, though, two things appear certain. First, given AHL's moves today to shut down its business, purchasing its stock is, more than ever, essentially the purchase of a litigation claim. And whatever the ultimate outcome, VC Lamb will have an important opportunity in this case to clarify Delaware law on MACs and issue an opinion that could have wider consequences for a number of other pending transactions.
Tuesday, August 21, 2007
On August 14 in Mercier, et al. v. Inter-Tel, Vice Chancellor Strine upheld the decision of a special committee to postpone a shareholder meeting to vote on an acquisition proposal which was made on the day of that meeting. In his opinion, Strine held that postponement was appropriate under the "compelling justification" test of Blasius Industries, Inc. v. Atlas Corp., 564 A.2d 651 (Del. Ch. 1988), since "compelling circumstances are presented when independent directors believe that: (1) stockholders are about to reject a third-party merger proposal that the independent directors believe is in their best interests; (2) information useful to the stockholders' decision-making process has not been considered adequately or not yet been publicly disclosed; and (3) if the stockholders vote no... the opportunity to receive the bid will be irretrievably lost."
The opinion is important for three reasons. First, Strine is the first to hold the "compelling justification" test of Blasius to be met [Ed. Note -- this is actually the second case see the correction below]. Second, this being a Strine opinion, he uses the opportunity presented to attempt a rewrite of the Blasius standard. Third, the opinion provides important guidance for a board wishing to postpone a shareholder meeting on an acquisition proposal. Ultimately, the decision increases a target board's ability to control an acquisition process and influence its outcome.
The summary facts are these: Inter-Tel had agreed to be acquired by Mitel Networks Corporation for $25.60 a share in a cash merger. A competing proposal was put forth for a recapitalization of Inter-Tel by the founder of the company who was also a director. Institutional Shareholder Services and several shareholders also subsequently came out in opposition to the Mitel merger. Faced with certain defeat, the special committee of the board of Inter-Tel voted on the actual day of the meeting to postpone it in order to attempt to persuade sufficient shareholders to change their vote. In the postponed meeting, the shareholders voted to approve the merger based in part on the changed recommendation of ISS and subsequent deteriorated financial condition of Inter-Tel.
First, the technical points in the opinion concerning the shareholder meeting postponement:
- The board here "postponed" the meeting rather than adjourning it once it had been convened. The Delaware General Corporation Law does not address this practice, but practitioners have generally believed that this is permissible. Strine's acceptance of this postponement without comment in his opinion implicitly confirms this. This, together with Strine's ultimate holding, opens up a wide technical loop-hole for future boards to "postpone" shareholder meetings when faced with an uncertain vote rather than adjourning them. Given today's market volatility and the uncertainty behind a number of deals, expect this option to be exercised in the near-future (e.g., a likely candidate is Topps).
- Inter-Tel ultimately set the new shareholder meeting date twenty days after the old one. The Delaware long form merger statute (DGCL 251(c)) requires twenty days notice prior to the date of the meeting. The opinion thus leaves the question open whether a postponed meeting is a new one for these purposes such that the full twenty days notice period starts anew.
- Inter-Tel's proxy had included a provision granting the board the power to "adjourn or postpone the special meeting" to solicit more proxies. This provision was included due to informal SEC proxy requirements that shareholders must approve any adjournment. In the case of Inter-Tel there were insufficient votes voting to adjourn the meeting. In footnote 38 of the opinion, Strine stated that "[i]f the special meeting had actually been convened, Inter-Tel's bylaws would seem to have required stockholder consent to adjourn." Section 2.8 of Inter-Tel's By-laws states that "The stockholders entitled to vote at the meeting, present in person or represented by proxy, shall have the power to adjourn the meeting form time to time." Thus, Inter-Tel side-stepped this dilemma through a postponement. Note that a separate by-law would have been required to give the Chair of the meeting power to adjourn the board in the absence of the necessary shareholder vote.
Now for the more interesting part, the doctrinal issues:
In his opinion, Strine first distinguished the holding of In re Mony Group, 853 A.2d 661 (Del.Ch. 2004); there the Delaware Chancery Court applied the business judgment rule to analyze a board decision to postpone a shareholder meeting on an acquisition proposal and set a new record date(NB. I've always thought this decision to be doctrinally problematical). Strine found Mony distinguishable since there the merger was going to be approved; the directors would therefore be removed if the vote went through and so were disinterested and the shareholders still free to accept or reject the merger. Here, Blasius was applicable since the merger would likely not be approved, an event which would keep the directors in office. Strine then proceeded into an analysis of the Blasius standard invoking adjectives such as "bizarre" and "crude" to describe it. He concluded by stating that the Blasius approach should be "reserved largely for director election contests or election contests having consequences for corporate control.” Here, Strine judicially constricted the reach of Blasius from that decision itself and the Delaware Supreme Court's decision in MM Companies, Inc. v. Liquid Audio, Inc., 813 A.2d. 1118 (Del. 2003) which speak of applying the standard to board actions which have "the primary purpose of interfering with or impeding the effective exercise of a shareholder vote." Accordingly, his holding here may not be one the Delaware Supreme Court ultimately agrees with.
Strine then attempted to recast Blaisus as interpreted by Liquid Audio itself:
Although it does not use those precise words, Liquid Audio can be viewed as requiring the directors to show that their actions were reasonably necessary to advance a compelling corporate interest . . . . Consistent with the directional impulse of Liquid Audio, I believe that the standard of review that ought to be employed in this case is a reasonableness standard consistent with the Unocal standard.
Strine pines here for a "legitimate objective" test but ultimately acknowledges that this is a reading that cannot currently be wholly jibed with the "compelling justification" standard of Blasisus/Liquid Audio. So, he concludes by applying this "compelling justification" standard to the facts at hand to find that the following factors were sufficient to justify a same-day meeting postponement: (i) ISS's suggestion that it might change its negative recommendation if it had more time to study recent market events (including the debt market's volatility and the bidder's refusal to increase the consideration), (ii) the founder's competing proxy proposal for a recapitalization that was still being reviewed by the SEC, and (iii) the desire to announce the company's negative second-quarter results. Strine found that the directors acted with "honesty of purpose" and noted that they did not have any entrenchment motive because they would not serve with the surviving entity. Thus, the Blasisus standard was satisfied and the plaintiff's request for a preliminary injunction of the merger denied.
There is obviously more to this opinion and commentators will rush to fit this within the various doctrinal standards of the Delaware courts (hint: start with Strine's own article on the subject). Moreover, the opinion contains the usual Strine nuggets including an aside that we Americans have more words for money than Eskimos for snow. But perhaps the most interesting point in the opinion was Strine's observations on arbitrageurs and their effect on acquisition proposals. Here, the board had specifically based its postponement in part to permit arbitrageurs more time to increase their positions so as to vote in favor of the merger, though, ultimately it appears that they did not effect the vote. Strine addressed this issue by specifically refusing to:
premise an injunction on the notion that some stockholders are 'good' and others are 'bad short-termers . . . . .
And while Strine left open the door for future challenges if arbitrageurs do indeed effect the outcome in such circumstances, the difficulty of proving who are the shareholders voting may open a small gate here for undue influence. Hopefully, this is a gate that the Delaware courts will police thoroughly so as to prevent boards from unduly shifting a shareholder vote.
Thanks and credit for some of the observations on this post to J. Travis Laster & Steven M. Haas of Abrams & Laster LLP who have put together a superb client alert on this opinion.
Correction: Steven M. Haas helpfully wrote to correct a point above: "Strine actually found a compelling justification in Hollinger. There, like Inter-Tel, he found a compelling justification . . . .That reminds me of one of my favorite Strinisms from the ABRY Partners oral argument: "What happens in Dover.... Sometimes gets remanded back to Wilmington...."
Monday, August 20, 2007
RARE Hospitality International, Inc. announced on Friday that it will be acquired by Darden Restaurants, Inc. for $38.15 per share in cash in a transaction valued at approximately $1.4 billion. The acquisition will be effected via tender offer, showing yet again that the cash tender offer is reemerging as a transaction structure (see my post the Return of the Tender Offer). Darden is financing the acquisition through cash and newly committed credit facilities. And the deal is the latest in the super-hot M&A restaurant-chain deal sector.
A perusal of the merger agreement shows a rather standard industry agreement. RARE's main restaurant chain is LoneHorn Steakhouse, and so merger sub is called Surf & Turf Corp. -- the bounds of creativity in M&A. There is a top-up which is also fast becoming a standard procedure in cash tender offers. This top-up provision provides that so long as a majority of RARE’s shares are tendered in the offer, RARE will issue the remaining shares to put Darden over the 90% squeeze-out threshold. RARE's stock issuance here cannot be more than 19.9% of the target's outstanding shares due to stock exchange rules, and cannot exceed the authorized number of outstanding shares in RARE’s certificate of incorporation.
I looked for any new gloss on the Material Adverse Change clause to address current market conditions. There was nothing that appeared to address the particular situation, although any non-disproportionate "increase in the price of beef" is a MAC-clause trigger; apropos for a steakhouse chain. Finally, for those interested in topping Darden’s bid, the termination fee is $39.6 million. If another bidder makes a superior proposal, then under Section 5.02(b) of the merger agreement, RARE cannot terminate the agreement "unless concurrently with such termination the Company pays to Parent the Termination Fee and the Expenses payable pursuant to Section 6.06(b)". The only problem? Expenses is used repeatedly throughout the Agreement as a defined term everywhere except 6.06(b) -- which makes no references to Expenses or even expenses. In fact, it appears that nowhere does the agreement define Expenses. Transaction expenses can sometimes be 1-2% of additional deal value, a significant amount that any subsequent bidder must account for. So how much should a subsequent bidder budget here? Or to rephrase, what expenses must RARE pay if a higher bid emerges? And how can RARE terminate the deal to enter into an agreement with another bidder if RARE does not know which expenses it is so required to pay? Darden may also want similar certainty as to its reimbursed expenses, if any, in such a paradigm. Lots of questions in this ambiguity. Not the biggest mistake in the world, but Wachtell, attorneys for the buyer, and Alston & Bird, attorneys for the seller, both have incentives to fix this one.