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Editor: Brian JM Quinn
Boston College Law School

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Saturday, September 1, 2007

Accredited's "Strong" Move

Accredited didn't even wait until Tuesday to respond and reject Lone Star's settlement offer.  It is a nice, strong move, but expect there to be behind the scenes negotiations through to September and for VC Lamb to push the parties towards a settlement.  Here's the response for your files:   

Accredited to Continue Lawsuit Against Lone Star

Rejects Proposal To Re-Price At $8.50 Per Share

SAN DIEGO--(BUSINESS WIRE)--Aug. 31, 2007--Accredited Home Lenders Holding Co. (NASDAQ:LEND) ("Accredited" or "Company") announced today that it will continue to pursue its lawsuit against Lone Star Fund V (U.S.), L.P. and two of its affiliates ("Lone Star") seeking specific performance of Lone Star's obligations to close Lone Star's tender offer for the outstanding common stock of Accredited at $15.10 per share and to complete the merger with Accredited.

Accredited noted that, on August 30, 2007, Lone Star disclosed that it has proposed to Accredited's Board of Directors to settle the lawsuit and reduce the offer price of $15.10 to $8.50 per share, a reduction of approximately 44%. As Accredited has previously announced and asserts in its lawsuit, Accredited believes that all conditions to closing of the tender offer at $15.10 per share were satisfied when more than 97% of Accredited's outstanding common stock was tendered at the scheduled expiration of the offer on August 14, 2007. The lawsuit seeking to require Lone Star to perform its obligations is scheduled for trial in the Delaware Court of Chancery beginning on September 26, 2007.

After Lone Star's August 10, 2007 announcement that it did not expect to accept Accredited shares tendered on August 14, 2007, Accredited filed the specific performance suit against Lone Star seeking to hold Lone Star to its obligations at $15.10 per share. James A. Konrath, chairman and chief executive officer of Accredited, commented, "Accredited has always believed that its case against Lone Star is very strong. Discovery has been proceeding in the lawsuit, and nothing we have seen to date has altered our perception of the strength of our case."

Accredited's Board of Directors had been meeting with the Company's litigation counsel and financial advisors on a regular basis to discuss the progress of the lawsuit and evaluate its merits. The Board of Directors believes Lone Star's proposal to reduce the tender offer price from $15.10 to $8.50 per share is not in the best interest of the shareholders and rejects it.

September 1, 2007 in Material Adverse Change Clauses | Permalink | Comments (0) | TrackBack (0)

Friday, August 31, 2007

Three Plus One Equals Billions: The Bendix-Martin Marietta War

Today's Friday M&A culture is pure candy/beach reading and the story of one of the seminal ''80s takeovers, Three Plus One Equals Billions: The Bendix-Martin Marietta War by Allan Sloan.  Pac-man anyone?  Enjoy your labor day weekend; and rest up for what should be an active Fall. 

August 31, 2007 in Friday Culture | Permalink | Comments (0) | TrackBack (0)

Genesco is Happy to be Tennessee Dreaming

Another potential Material Adverse Change dispute popped up yesterday in the pending $1.5 billion acquisition of Genesco by The Finish Line for $54.50 per share in cash.  Yesterday Genesco reported second quarter earnings. The earnings were disappointing but do not appear to be catastrophic.  Genesco reported a $4.17 million loss and declining sales at stores open more than a year which it blamed on "the combination of a later start to back-to-school, later sales tax holidays in Texas and Florida and a generally challenging retail environment, especially in footwear."

But Finish Line promptly issued this statement

The Company is disappointed with Genesco's second quarter fiscal 2008 financial results. Consistent with its responsibilities to The Finish Line's shareholders, the Company is evaluating its options in accordance with the terms of the merger agreement. The Company does not intend to make further comments at this time.

As background here, Finish Line may have buyer's remorse.  According to one report, "the deal had come under heavy fire from analysts and investors, who said Finish Line had offered too high a price and was taking on too much debt."   Nonetheless, Finish Line appears to be raising the issue that Genesco's second quarter earnings arise to the level of a MAC under the merger agreement.  The agreement defines a MAC as:

any event, circumstance, change or effect that, individually or in the aggregate, is materially adverse to the business, condition (financial or otherwise), assets, liabilities or results of operations of the Company and the Company Subsidiaries, taken as a whole; provided, however, that none of the following shall constitute, or shall be considered in determining whether there has occurred, and no event, circumstance, change or effect resulting from or arising out of any of the following shall constitute, a Company Material Adverse Effect: (A) the announcement of the execution of this Agreement or the pendency of consummation of the Merger (including the threatened or actual impact on relationships of the Company and the Company Subsidiaries with customers, vendors, suppliers, distributors, landlords or employees (including the threatened or actual termination, suspension, modification or reduction of such relationships)); (B) changes in the national or world economy or financial markets as a whole or changes in general economic conditions that affect the industries in which the Company and the Company Subsidiaries conduct their business, so long as such changes or conditions do not adversely affect the Company and the Company Subsidiaries, taken as a whole, in a materially disproportionate manner relative to other similarly situated participants in the industries or markets in which they operate; (C) any change in applicable Law, rule or regulation or GAAP or interpretation thereof after the date hereof, so long as such changes do not adversely affect the Company and the Company Subsidiaries, taken as a whole, in a materially disproportionate manner relative to other similarly situated participants in the industries or markets in which they operate; (D) the failure, in and of itself, of the Company to meet any published or internally prepared estimates of revenues, earnings or other financial projections, performance measures or operating statistics; provided, however, that the facts and circumstances underlying any such failure may, except as may be provided in subsection (A), (B), (C), (E), (F) and (G) of this definition, be considered in determining whether a Company Material Adverse Effect has occurred; (E) a decline in the price, or a change in the trading volume, of the Company Common Stock on the New York Stock Exchange (“NYSE”) or the Chicago Stock Exchange (“CHX”); (F) compliance with the terms of, and taking any action required by, this Agreement, or taking or not taking any actions at the request of, or with the consent of, Parent; and (G) acts or omissions of Parent or Merger Sub after the date of this Agreement (other than actions or omissions specifically contemplated by this Agreement).

The carve-outs on this MAC are standard and plentiful, and the carve-out for failure to meet projections which I have highlighted above would appear to exclude much of what happened with Genesco in its second quarter earnings, although the underlying facts could still establish a MAC.  I emphasize appear, because we do not know all of the private facts here.  But, as I have stated before, Delaware places a high burden on the party asserting a MAC clause:  they need to prove that the adverse change consisted 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."  In re IBP, Inc. Shareholders Litigation (“IBP”), 789 A.2d 14 (Del. Ch. 2001).  Here, based on the facts available, under Delaware law it does not appear that this threshold is met.  Finish Line's rush to issue this press release is therefore surprising, though this may just be Finish Line's last ditch attempt to renegotiate the transaction for a price more satisfactory to its investors. 

There is an alternative explanation answer though.  The Genesco merger agreement is governed not by Delaware law but by Tennessee law and has a Nashville, Tennessee forum selection clause.  Anyone care to tell me what the law on MACs as applicable to acquisition transactions is in the State of Tennessee?  Yeah, that is what I thought you would say -- there is none.  Finish Line may be taking a flyer on this uncertainty, although it should be careful as Tennessee is Genesco's home state.  This is the second time this week, I have highlighted the importance of choice of law and forum selection clauses in acquisition agreements.  Too often they are the product of political negotiations among the parties when they should be negotiating for certainty of law and adjudication.  I hate to be a shill for Delaware or New York here, but the alternative result is situations like this.

August 31, 2007 in Material Adverse Change Clauses | Permalink | Comments (0) | TrackBack (0)

Lone Star's "Smart" Move?

Last night Lone Star delivered a letter to the board of Accredited Home Lenders offering up a compromise to resolve their material adverse change litigation.  In the letter Lone Star offered to amend their merger agreement to lower the consideration being paid to $8.50 a share, a 44% cut from the $15.10 it has agreed to pay but well above the closing price of Lone Star yesterday, $6.31.  If AHL agrees to this proposed amendment Lone Star stated that it would waive all breaches of the agreement that it claimed occurred prior to the date of amendment, including the MAC event that is the subject of the litigation.  In connection with the agreement, Lone Star also offered up a go-shop to permit AHL to solicit and entertain acquisition proposals from third parties.

First the easy part, the go-shop.  Don't read too much into this.  Given the poor state of AHL's business, the stock price of AHL today is not a piece of equity in a functioning business but rather almost wholly a potential claim to receive Lone Star's offered price.  Given this, no third party bidder is likely to emerge and Lone Star is probably offering this up for cosmetics more than anything else. 

Second, one can surmise that Lone Star sent this letter for one of two reasons:

1.  Lone Star has now come to the realization that it has a shaky MAC case and is trying to compromise to cut its losses.  (For more on this see my prior post here)

2.  Lone Star has always known that it had a shaky MAC case and this letter is part of its strategy to cut its losses.

The Lone Star people are smart money, so I'd prefer to think that they are following option two.  If so, they are making the best of a bad hand.  By asserting a MAC and permitting the stock to free-fall, their new offer looks like a god-send to many shareholders.  Moreover, given that AHL has admitted it might not be able to continue as an operating business it has a real incentive to bring Lone Star to the table.  Litigation is always uncertain and so both AHL and Lone Star also have an additional incentive to compromise.  Thus, I would expect the parties to now agree at a figure in between Lone Star's offer and the previous offer price.  But by asserting a MAC in this way Lone Star has effected the course of the negotiation to a large extent; a move that will likely save it millions if not hundreds of millions of dollars.  Other acquirers in a similar position should take note. 

Addendum:  Lone Star's move is a bit surprising coming a month before the hearing in Delaware court and the day before Labor Day weekend Friday -- a slow trading day.  That it would move this early is perhaps a suggestion that the credit and other markets are stabilizing and Lone Star wants to act before AHL can itself stabilize and demand a higher price.

August 31, 2007 in Material Adverse Change Clauses | Permalink | Comments (0) | TrackBack (0)

Thursday, August 30, 2007

Lone Star Blinks

Well, this just crossed the wire.  I think it speaks for itself (and was expected), but I'll have a little bit of commentary on it tomorrow morning.  These are great times to be watching the market from the sidelines. 

Accredited Home Lenders Holding Co.
15253 Avenue of Science
Building 1
San Diego, CA 92128
Attention:  Board of Directors

Dear Directors:

We write regarding the Agreement and Plan of Merger, dated as of June 4, 2007 (as amended by the First Amendment dated as of June 15, 2007) (the "Merger Agreement"), by and among Accredited Home Lenders Holding Co. (the "Company"), LSF5 Accredited Investments, LLC ("Parent") and LSF5   Accredited Merger Co., Inc. ("Purchaser" and, together with Parent and its affiliates, "Lone Star").  All capitalized terms not defined herein shall have the meanings set forth in the Merger Agreement.

As you are aware, Parent and Purchaser recently extended the expiration date for the current Offer until September 12, 2007, our fourth extension.  It is very clear to us that the Company is unlikely to be able to satisfy the conditions to the Offer prior to September 12, 2007, and will in all likelihood not be able to meet those conditions even if the Offer is extended beyond that date.

The current impasse between the Company and Lone Star over the completion of the Offer, which is the subject of the litigation in Delaware Chancery Court, ultimately benefits neither Lone Star nor the  Company's stockholders.  Among other things, we believe, and apparently the Company also believes based on its previous public statements, that under current conditions the Company may suffer further declines in value and have a difficult time surviving as a going concern.  It is patently clear that swift action by the Board of Directors is needed to preserve the Company's existing enterprise value.

We believe there is a way forward that would benefit all of the relevant constituencies.  Lone Star is prepared, with the consent of the Company, to amend the Offer immediately to change the Offer Price to $8.50 per Company Common Share, which represents a premium of 35% over the closing price of the Company Common Shares on August 30, 2007.  As part of the amended Offer, we would modify the conditions to the Offer such that the only substantial condition to the consummation of the Offer would be the Minimum Condition.  While we propose also to retain a condition regarding compliance with representations, warranties and covenants in the Merger Agreement, we would waive all breaches that occurred prior to the date of amendment, including those that are the subject of the litigation.

Immediately following the announcement of the amended Offer, each of the Company and Lone Star would obtain a dismissal, with prejudice, of the claims and counterclaims constituting the current litigation in Delaware Chancery Court.  We would then extend the Offer for a period of ten business days following the filing of the revised Offer Documents.  Upon commencement of the amended Offer, Lone Star would deposit with an escrow bank all of the funds required to pay for tendered Company Common Shares immediately after the minimal conditions to consummation of the Offer have been met.  Lone Star would also propose to amend the Merger Agreement so that, during the pendency of the amended Offer, the Board of Directors would be free to solicit and entertain acquisition proposals from third parties and to terminate the Agreement in favor of any offer that the Board determines to be superior, subject to entry into mutual releases of claims and Lone Star's right to match any such offer.
      

As we are certain you appreciate, time is of the essence, and while we understand that the Board of Directors will have to carefully consider the proposal outlined in this letter, it is essential that we have a prompt response from you.  Please note that the text of this letter will be released publicly and filed as an exhibit to our Offer Documents. Nothing contained in this letter should be considered an express or implied consent or waiver with respect to any provision of the Merger Agreement or a waiver of any past or future breach of the Company's obligations and covenants under the Merger Agreement.  We expressly reserve all rights, claims, causes of action and prerogatives under the Merger Agreement and applicable law.

                                       Very truly yours,

                                       LSF5 ACCREDITED INVESTMENTS, LLC

                                       By /s/ Marc L. Lipshy
                                              Name:   Marc L. Lipshy
                                              Title:  Vice President

August 30, 2007 in Material Adverse Change Clauses | Permalink | Comments (0) | TrackBack (0)

The Gates of Taiwan

On Monday, Taiwanese based Acer Inc. announced that it had agreed to acquire Gateway, Inc.  Under  the agreement, Acer will commence a cash tender offer to purchase all the outstanding shares of Gateway for $1.90 per share, valuing the company at approximately $710 million.  For those who bought at $100 a share in 2000, I am very, very sorry.  The acquisition is subject to CFIUS review and a finding of no national security issues (more on this at the end). 

For language hogs, the merger agreement contains some solid contract language dealing with Gateway's exercise of its right of first refusal to acquire from Lap Shun (John) Hui all of the shares of PB Holding Company, S.ar.l, the parent company for Packard Bell BV.   In Section 5.11 (pp. 36-37), Acer agrees to fund the purchase of Packard Bell by Gateway.  The interesting stuff is in Section 7.2 which deals with what happens to Packard Bell if the agreement is terminated.  In almost all circumstances of termination Gateway is required to on-sell Packard or its right to buy Packard to Acer.  The big exception is in the case of a superior proposal.  In such circumstance, if the third party bidder elects, Gateway is required to auction off Packard or its right to buy Packard to the highest bidder.  According to one report on The Deal Tech Confidential Blog, Lenovo is contemplating an intervening bid for Gateway in order to acquire Packard; their lawyers should take a look at these provisions.  In any event, Gateway did not disclose in its public filings that, if the Acer deal fails, it is highly unlikely to remain the owner of Packard Bell if it succeeds in purchasing it. 

For those who track such things the deal has a no-solicit and a $21.3 million break fee -- about normal.  It is also yet another cash tender offer with a top-up option

The other interesting thing about this transaction is the Exon Florio condition.  The Congress enacted the Exon-Florio Amendment, Section 721 of the Defense Production Act of 1950, as part of the Omnibus Trade and Competitiveness Act of 1988.  The statute grants the President authority to block or suspend a merger, acquisition or takeover by a foreign entity if there is “credible evidence” that a “foreign interest exercising control might take action that threatens to impair the national security” and existing provisions of law do not provide “adequate and appropriate authority for the President to protect the national security in the matter before the President."

The Exon-Florio provision is implemented by the Committee on Foreign Investment in the United States ("CFIUS"), an inter-agency committee chaired by the Secretary of Treasury.  Exon Florio was amended in July by The National Security Foreign Investment Reform and Strengthened Transparency Act.  For a summary of the final legislative provisions, see this client memo by Wiley Rein here.  The legislation is Congress's response to the uproar over the acquisition of Peninsular & Oriental Steam by Dubai Ports and the ensuing political brawl and heavy congressional protest which led to Dubai Ports terminating the U.S. component of its acquisition.  The dispute was always puzzling:  Dubai Ports was acquiring an English company with port operations in the United States and Dubai Ports is headquartered in the United Arab Emirates, one of our strongest allies in the Mid-East.  Nonetheless, the controversy has now spawned a change in the CFIUS review process.  And on the whole, the measure is fairly benign, endorsed by most business organizations and will not bring any significant change to the national security process.  However, the bill does come on the heels of a significant upswing of CFIUS scrutiny of foreign transactions.  According to one news report, CFIUS considered 113 transactions in 2006, up 74 percent from the previous year.  How this will all ultimately effect the willingness of foreigners to invest in the U.S. is still unclear, though you can make a prediction. 

Back to the Acer transaction.  The tender offer is conditioned on:

the period of time for any applicable review process by the Committee on Foreign Investment in the United States (“CFIUS”) under Exon-Florio (including, if applicable, any investigation commenced thereunder) shall have expired or been terminated, CFIUS shall have provided a written notice to the effect that review of the transactions contemplated by this Agreement has been concluded and that a determination has been made that there are no issues of national security sufficient to warrant investigation under Exon-Florio, or the President shall have made a decision not to block the transaction.

This Exon-Florio condition appears prudent given that Lenovo had to make concessions to clear CFIUS review when it bought IBM's computing division.  CFIUS review, though, has a minimum review period of 30 days which is longer than the 20 business day minimum required for a tender offer to remain open.  Given this, I'm surprised Acer and Gateway went the tender offer route; typically in these situations you would use a merger structure which allows for a longer time period between signing and closing, but is more certain to get 100% of the shares in a more timely fashion.  One likely reason is that they did so because they anticipate clearing Exon-Florio quickly.  This, of course, is now in the hands of the U.S. government.   

August 30, 2007 in Cross-Border, Exon-Florio, Merger Agreements, Tender Offer | Permalink | Comments (0) | TrackBack (0)

Wednesday, August 29, 2007

Topps's Predictable Postponement

Earlier this week Topps announced that it would postpone the special meeting of Topps’ stockholders to consider and vote on the proposed merger agreement with affiliates of The Tornante Company LLC and Madison Dearborn Partners, LLC  to Wednesday, September 19, 2007.  The meeting was to have been held on August 30.  (NB. the postponement is 20 days so as to avoid problems with the Delaware long form merger statute (DGCL 251(c)) which requires twenty days notice prior to the date of the meeting.)

In the press release, Topps disclosed its belief that the merger was likely be voted down if the meeting was held on August 30. Topps also justified delaying the meeting by stating that:

the Executive Committee believes that stockholders should have the opportunity to consider the fact that Upper Deck has very recently withdrawn its tender offer and ceased negotiating with Topps to reach a consensual agreement, and that no other bidder has emerged to acquire Topps. In addition, as a result of the developments with Upper Deck, Topps would like additional time to communicate with investors about the proposed $9.75 all cash merger with Tornante-MDP . . . .Finally, given the recent turmoil in the credit markets and the impact that this turmoil may have on alternatives to the merger (including alternatives proposed by Crescendo Partners), Topps believes stockholders should be provided with additional time to consider whether to vote in favor the transaction.

The postponement was not a surprise.  When VC Strine's issued his decision earlier this month in Mercier, et al. v. Inter-Tel, upholding the Inter-Tel's board's decision to postpone a shareholder meeting under certain defeat, I predicted that postponement of the shareholder meeting would now be a tool more extensively utilized by boards to attempt to salvage troubled deals and permit arbitrageurs to exercise greater influence on M&A deals.   But, in Topps's case they have kept the record date at August 10, so that arbs will not be able to influence the outcome as much; a practice I hope becomes common in these situations.  This is particularly true given the posture of the Topps deal; the stock is now trading well below the price it was when the Upper Deck offer was pending and the prevailing arb position is more likely short because of it (though this is speculation from a lawyer not an arb, if anyone has more concrete information please let me know).   

I haven't had time of late to write more generally on the Topps deal.  But, it is hard not to blame the Topps board here.  The Topps board has been heavily criticized by its shareholders for accepting the Tornante bid and for undue management influence in this process.  This made resistance to the Upper Deck bid appear illegitimate in many shareholders eyes, even if Topps was right and Upper Deck's bid was merely an illusory one made by a competitor to obtain confidential information.    With the Upper Deck bid withdrawn, the Topps board is now locked in a vicious fight with the Crescendo Partners-led The Committee to Enhance Topps to obtain Topps shareholder approval.  But with three proxy advising firms, including ISS, now recommending against the transaction, Topps still has a long way to go.  By the way, the proxy letters going back and forth between the parties are fantastic -- check them out here

August 29, 2007 in Mergers, Proxy, Takeovers | Permalink | Comments (0) | TrackBack (0)

MGIC/Radian Deal -- MIA

The MGIC Investment and Radian Group Inc. merger took an interesting turn this past week.  On August 7, MGIC in a public filing disclosed that it believed a material adverse change had occurred with respect to Radian in light of the C-BASS impairment announced that previous week.  C-Bass is the subprime loan subsidiary jointly owned by MGIC and Radian; it has been hit hard by the subprime crisis and has experienced greater than $1 billion in losses in the last few months. MGIC further stated that it had  requested additional information from Radian and expected to complete its MAC analysis the week of August 13. Radian, not surprisingly, refuted MGIC's assertion in its own filing.  At the time, Radian stated that it was "compelled to carefully assess the proprietary nature of the subsequent information requests [of MGIC] to ensure that Radian does not provide MGIC with an unfair competitive advantage in the event that MGIC decides that it does not have an obligation to complete the merger.."

The Radian/MGIC deal raises similar issues as the Lone Star/Accredited Home Lenders deal, and they are both governed by Delaware law.  In particular they both raise mixed legal/factual issue of whether any material adverse change is disproportionate to Radian to an extent greater than the adverse changes to the industry generally (see my post on this here; see the MAC clause in the merger agreement at pp. 7-8).  Given the similarities between the Lone Star/AHL deal and this one, I expected Radian and MGIC to wait until VC Lamb issues his decision and opinion in the Lone Star/AHL litigation in late September/early October before proceeding.  And that appears to be what is happening.  On Aug 21, MGIC sued Radian in federal district court in Milwaukee (its home town), to obtain information from Radian it believes is required to be delivered under the merger agreement and it needs to properly assess whether a MAC occurred (see news report here).  MGIC is stalling for time through a nice legal maneuver.  The deal is now likely on hold for the next month. 

The MGIC/Radian litigation also highlights the importance of tight forum selection clauses.  Clause 9.11 of the merger agreement stipulates that the parties accept jurisdiction in any suit for specific enforcement of the transactions contemplated by the agreement in any New York court.  But this is not mandatory submission to jurisdiction.  This may or may not have been the parties bargained for intent in future disputes (i.e., it may have just been a quick negotiation following the form late at night without really thinking through the possibilities of such an agreement).  But, whatever the case, by suing for information in a Milwaukee court, Radian has now established home court advantage for any subsequent MAC litigation fight. 

August 29, 2007 in Litigation, Material Adverse Change Clauses, Mergers | Permalink | Comments (0) | TrackBack (0)

Tuesday, August 28, 2007

The Sun Sets (Partially) on the Arizona Anti-Takeover Act

A federal district court in Arizona has preliminarily enjoined the enforcement of the Arizona business combination statute and control share statute with respect to Roche Holding AG's hostile bid for Ventana Medical Systems Inc. (see the opinion here).  This is the first court since the 1980s to hold a state anti-takeover statute invalid under commerce clause grounds (remember CTS and MITE from law school?).

In this case, Ventana was incorporated in Delaware but headquartered in Arizona and had substantial assets in that state.  Arizona's third generation anti-takeover law, the Arizona Anti-Takeover Act,  purports to cover Ventana since it has a substantial presence in the state.  Roche sued in federal district court to have it declared unconstitutional and requested that enforcement of the statute be preliminarily enjoined.  In granting this motion, the federal court found Roche to have a substantial likelihood of success on the merits because the statute applied to corporations organized under laws of states other than Arizona.  Here the Court found that:

there is strong authority demonstrating that the Arizona statutes violate the Commerce Clause because the burden on interstate commerce “is clearly excessive in relation to the putative local benefits” to Arizona. In this case the burden on interstate commerce created by the broad application of Arizona statues includes the frustration and regulation generated by a tender offer made to a foreign corporation, such as Defendant. While Arizona clearly has an interest in protecting businesses that have significant contacts with Arizona, such as Defendant, Arizona clearly has “no interest in protecting nonresident shareholders of nonresident corporations.” In balancing such competing interests, the interference with interstate commerce created by the regulation of a foreign corporation controls. The instant case, based upon the Arizona statutes and their application to foreign corporations, is no different than the cases presented above as the Arizona statutes, while protecting businesses with significant contacts with Arizona, unreasonably interfere with interstate commerce based upon the regulation of businesses that are not incorporated in Arizona.

(citations omitted).  The Court distinguished the Supreme Court's decision in CTS on the following grounds:

In CTS Corp., the Supreme Court upheld the constitutionality of Indiana’s Control Share Acquisition statute, which would impact the voting rights of an acquiring corporation in the event of a takeover of a target corporation, largely because the Indiana statute applied only to corporations organized under the laws of Indiana.

Thus, the difference for the Court here was the situs of incorporation for Ventana outsdie the state of Arizona.  This opinion is therefore a strong statement in support of the internal affairs doctrine and should make life easier for M&A lawyers by more strictly confining the application of state takeover laws to companies organized in the state of their origin (although other federal cases from the '80s have held similarly - nice to know we are not going the other way though).   And for those who engage in the race-to-the-bottom/race-to-the-top state corporate law debate, the case is a probably a good example of the need for a mediating and trumping federal presence in this debate.  Here, I'll relate the historical tidbit that the Arizona Anti-takeover Law was initially proposed in 1987 by officials of Greyhound Corporation who claimed that they were the target of a hostile takeover.

Nonetheless, Ventana still can rely on its Delaware defenses including that state's business combination statute (DGCL 203) and the poison pill it has adopted.  To be continued.

Thanks to Steven Haas for informing me of this decision. 

August 28, 2007 in Hostiles, State Takeover Laws | Permalink | Comments (0) | TrackBack (0)

Sunday, August 26, 2007

Home Depot and the Private Equity "Problem"

The Wall Street Journal is reporting that Home Depot has agreed to cut the sale of its wholesale supply unit to $8.5 billion, eighteen percent less than the $10.325 billion agreed to a few months earlier.  The sale to affiliates of Bain Capital Partners, The Carlyle Group and Clayton, Dubilier & Rice will likely close this week on this basis.  The deal is important because it is the first time in this market crisis that private equity firms have relied upon their reverse termination fee "option" to substantially drive down the price of an acquisition.  It is also shows how stretched the banks are these days and the lengths that they are going to keep private equity debt off their books. 

Like may other private equity agreements, the sale agreement for HD Supply specifically limited the private equity consortium's damages in case it decided not to close the transaction for any reason whatsoever, and specifically excluded the option of specific performance.  Here, the agreement limited the consortium's damages of no more than $309,750,000.  As I have written before, many private equity deals contain this provision; and in this volatile market and the current credit-squeeze the option like nature of these provisions cannot be ignored.  This was the case here as, according to the Journal, the banks who agreed to finance this transaction, including JP Morgan Chase, actually offered at one point to pay this fee on behalf of the private equity consortium if they agreed to walk.  This is bad, folks. 

That the banks would go these lengths shows how desperate they are to avoid the situation First Boston found itself back in '80s when it got stuck in the "burning bed", unable to redeem hundreds of millions it had lent for the leveraged buyout of Ohio Mattress Company, maker of Sealy mattresses.  First Boston only escaped bankruptcy by being acquired by Credit Suisse.  In the case of HD Supply, the banks apparently asserted that they were no longer required to comply with their commitment letters to finance the acquisition because of the prior agreed change in the purchase price and the revised market conditions it reflected.  The position seems a bit tenuous, but I don't have all the facts, and the letters aren't publicly available.  Ultimately, though, it appears the need of all the parties to save reputation in the markets as well as Home Depot's need to finance its share buy-back, pushed them to a deal; according to the Journal, Home Depot is providing guarantees on part of the six billion dollars in bank financing provided in connection with the leveraged buyout deal as well as taking up to 12.5% of the equity, while the private equity firms are putting in more equity.

Of greater significance is the fact that the parties would go to these lengths to renegotiate a deal, and make the threats they have around the reverse termination fee.  This doesn't bode well for the many other private equity deals in the market today that have this similar reverse termination fees (e.g., SLM, TXU, Manor Care, etc.).  As we move into Fall and the banks begin to sweat their liability exposure, expect more re negotiations and a high chance that the economics of one of these many deals will become so bad that either the private equity firms or their financing banks will blink, taking the reputation hit, walking away from the deal and paying this fee.  Food for thought as you chew your hot dog over this upcoming Labor Day weekend.

Final Point.  The banks and private equity consortium will spin this as a MAC case, but a review of the definition of MAC on pp. 5-6 of the merger agreement finds a weak case for that (the MAC contains the standard carve-out for changes in the industry generally and markets except for disproportionate impact; it appears to be a tough case to establish here).  I believe the banks and buying consortium will claim the MAC in order to publicly cover for the raw negotiating position they have taken by using the reverse termination fee and threatening to walk.      

NB. Home Depot's counsel on this transaction was again Wachtell.  Interesting, given the criticism Marty Lipton received in advising Nardelli on his infamous "take no questions" shareholder meeting. 

August 26, 2007 in Material Adverse Change Clauses, Private Equity, Private Transactions | Permalink | Comments (0) | TrackBack (0)

Merger News That Matters

It is being reported that LeBoeuf, Lamb, Greene & MacRae LLP and Dewey Ballantine LLP are in advanced merger talks and that a deal could be announced as soon as tomorrow.  Last year, Dewey walked away from an agreed combination with San Francisco-based Orrick, Herrington & Sutcliffe LLP.

LeBoeuf is particularly known for its Central European/Russian M&A practice led by Oleg Berger and Mark Banovich.  Nonetheless, Dewey  has the stronger M&A practice, though it has suffered of late from a number of departures including Michael Aiello to Weil, Gotshal & Manges.

August 26, 2007 in Lawyers | Permalink | Comments (0) | TrackBack (0)