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Editor: Brian JM Quinn
Boston College Law School

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Friday, September 21, 2007

Harman: Yet Another Private Equity Deal Gone Bad

The press release follows. I'll have commentary on it on Sunday.  But my initial thought is that this is plain odd – there is no information out there which I have seen which would support a material adverse change claim. Still, given that KKR’s and GS’s liability is limited under the merger agreement to the reverse termination fee of $225 million they may as well give it a shot.  And of course, they may be trying to cover up the reputational issue which would arise if they simply walked away by asserting a claim of a MAC to cover it. 

Harman Comments on Previously Announced Merger Friday September 21, 3:53 pm ET WASHINGTON--(BUSINESS WIRE)--Harman International Industries, Incorporated (NYSE:HAR - News) announced that it was informed this afternoon that Kohlberg Kravis Roberts & Co. L.P. (KKR) and GS Capital Partners VI Fund, L.P. (GSCP) no longer intend to complete the previously announced acquisition of Harman by a company formed by investment funds affiliated with or sponsored by KKR and GSCP. KKR and GSCP have informed Harman that they believe that a material adverse change in Harman's business has occurred, that Harman has breached the merger agreement and that they are not obligated to complete the merger. Harman disagrees that a material adverse change has occurred or that it has breached the merger agreement.

September 21, 2007 in Material Adverse Change Clauses | Permalink | Comments (0) | TrackBack (0)

Genesco: Bring it On

As predicted (and as I am quoted on today in the Wall Street Journal), Genesco has filed suit in Tennessee state court to enforce its rights under their agreement.  Here is the complaint  -- I'll try and have some commentary later today.  The press release is below and has some great quotes -- this is the absolute right move by Genesco.  And, as I have said before, Genesco appears to have a good case (see my post here outlining the likely legal arguments).  The interesting thing to see now will be whether Finish Line attempts to implead UBS here, Finish Line's financing bank who appears to have also asserted a potential MAC against Genesco.  If I were Finish Line I would before UBS sues for a declaratory judgment in New York -- the choice of forum for its commitment letter (for more on this possible jurisdictional shopping see my post here). 

Genesco Files Lawsuit Against The Finish Line Seeking Specific Performance of Merger Agreement NASHVILLE, Tenn., Sept. 21 /PRNewswire-FirstCall/ --

Genesco Inc. (NYSE: GCO) announced today that it has filed suit in Chancery Court in Nashville, Tennessee, seeking an order requiring The Finish Line, Inc. to consummate its merger with Genesco and to enforce The Finish Line's rights against UBS under the Commitment Letter for financing the transaction.

Commenting on the filing, Genesco Chairman and Chief Executive Officer Hal N. Pennington said, "No more delays by The Finish Line and UBS; no more reservation of rights; no more bankers' putting their pencils down. We want a court of competent jurisdiction to enforce our rights under the Merger Agreement and for The Finish Line and UBS to live up to their obligations."

Pennington continued, "We have launched this litigation in an effort to speed consummation of the merger and to force impartial review of the aspersions that The Finish Line and its bankers have cast on Genesco's business and reputation. I, along with other members of the management team and our Board of Directors, are proud to be the stewards of a company that is a leader and innovator in its industry with a rich history dating to 1924. I am proud to be the leader of a group of employees who have helped build a wonderful business for the benefit of our shareholders."

Robert V. Dale, the presiding independent director of Genesco's Board of Directors, said, "Our Board of Directors stands united in this call for The Finish Line and UBS to perform their obligations and pay our shareholders $54.50 per share in cash. Our Board, our management team and our advisors are confident that the steps we are taking are in the best interests of our shareholders."

Pennington concluded, "Commencing litigation is always a difficult decision, but continued delay by The Finish Line and UBS is simply not acceptable. Accordingly, we are seeking expedited hearings on all of our claims. I caution our shareholders and employees that there will likely be claims made back against Genesco. When they come, we will be ready."

September 21, 2007 in Material Adverse Change Clauses | Permalink | Comments (1) | TrackBack (0)

Topps and In re: Appraisal of Transkaryotic Therapies

On Wednesday, Crescendo Partners announced in a press release that it would elect to exercise appraisal rights with respect to its 6.9% share ownership in Topps.  I noted yesterday that Crescendo's action might spur other shareholders to exercise appraisal rights in this deal.  The reason why is that unlike entire fairness litigation in Delaware, which is typically contingency fee based, shareholders in appraisal proceedings shareholders must front the costs. This creates a collective action problem among others -- shareholders, particularly smaller ones, do not want to bear these expenses, do not have the wherewithal to bring an appraisal action and are unable to coordinate their actions to do so.  I wrote yesterday that this is a problem ameliorated in the Topps deal now since shareholders know Crescendo will be bearing some, if not all, of these costs.  The consequence may be a higher than ordinary number of shareholders exercising appraisal rights.  And, the Topps merger agreement is conditioned on no more than 15% of shareholders exercising appraisal rights, so if a sufficient number exercise these rights it will give Eisner's Tornante Company and Madison Dearborn Partners a walk right and put the deal in jeopardy. Topps shareholders opposed to this deal now have an incentive to exercise their rights in order to attempt to crater it. 

There is another factor here which may raise the number of shareholders asserting appraisal rights:  The recent Delaware decision in In re: Appraisal of Transkaryotic Therapies, Inc. (access the opinion here; see my blog post on it here).  This case held that investors who buy target company shares after the record date and own them beneficially rather than of record may assert appraisal rights so long as the aggregate number of shares for which appraisal is being sought is less than the aggregate number of shares held by the record holder that either voted no on the merger or didn’t vote on the merger.  As Chancellor Chandler stated:

[a] corporation need not and should not delve into the intricacies of the relationship between the record holder and the beneficial holder and, instead, must rely on its records as the sole determinant of membership in the context of appraisal.

The court ultimately held that since the "actions of the beneficial holders are irrelevant in appraisal matters, the inquiry ends here."  [NB.  most shareholders own their shares beneficially rather than of record with one or two industry record-holders so this decision will apply to almost all shares held by Topps and in fact any other public company]

Post-Transkaryotic a number of academics and practitioners raised the concern that this holding would encourage aggressive investors (read hedge funds) to create post-record date/pre-vote positions in companies in order to assert appraisal rights with respect to their shares.  This would be particularly the case where the transaction was one being criticized for a low offered price. 

Topps appears to be a good candidate for this strategy.  The price offered by Michale Eisner's  consortium has been criticized extensively for being too "low" and led a number of proxy service firms to recommend against the merger.  In addition, the record date on the transaction was August 10, which provided a long period for investors adopting this strategy to purchase their shares.  Ultimately, it appears that we are watching the first test of the Transkaryotic opinion.  It will be interesting to see whether the potential concerns raised by this decision come to pass.  And perhaps food for thought for the Delaware Supreme Court if, and when, it ever considers the holding of the Transkaryotic case.

September 21, 2007 in Delaware, Hedge Funds, Private Equity, Takeovers | Permalink | Comments (0) | TrackBack (0)

Thursday, September 20, 2007

Accredited Home Lenders: The Back-End

Accredited Home Lenders has filed the second amendment to their merger agreement with Lone Star.  The amendment is a bit odd in that it contains a provision permitting Lone Star to terminate the tender offer if 50% of AHL's shareholders don't tender into the offer within 20 business days of the filing of AHL's amended 14d-9 statement.  More specifically, the agreement provides for one 10 business day extension after the first expiration date which will itself be 10 business days after the statement is filed.  This provision is probably meant to deal with any objecting shareholders such as Stark Investments who would have preferred that AHL go to trial for the full price.  As one person put it to me in better words than I can, it can be read as "if there is any dissent get me out of this crummy deal."  By the way for those wondering, exercising dissenter's rights under Delaware here appears problematical as DGCL 262 requires the appraisal valuation to be "the fair value of the shares exclusive of any element of value arising from the accomplishment or expectation of the merger or consolidation . . . ."  AHL appears to be worth less here than the price Lone Star is paying, itself a product of contractual commitments made in the Spring before the sub-prime crisis had completely unfolded.   

Otherwise, the conditions on the tender offer look very tight.  In addition, if one examines the back-end conditions for the merger in the merger agreement they also remain unchanged and are similarly strict.  This deal now appears about as contractually certain as one can get.   But the stock is trading at about $11.58 which appears to be a big discount of about 2% off the offer price for such a certain deal.  And dissent by shareholders is very unlikely given the mechanics of the above provisions -- they are likely to take what they can get.  Perhaps I am missing something. 

September 20, 2007 in Material Adverse Change Clauses | Permalink | Comments (0) | TrackBack (0)

Topps: Not Over Yet

The Topps shareholder meeting occurred yesterday, and it was yet again mired in controversy and accusations of manipulative practices by the Topps board.  According to Topps's press release issued yesterday, Topps's shareholders approved the proposal to be acquired by Michael Eisner's Tornante Group and Madison Dearborn Partners.   The press release was notable for not mentioning the preliminary count of votes.  But, the vote was likely exceedingly close.  Earlier in the day, Topps actually postponed the meeting yet again for a few hours because: 

Based on preliminary estimates of the vote count and discussions with a number of the Company's stockholders, the Company believes that substantially more votes are in favor of the transaction than against it, including stockholders who are in the process of voting or changing their votes to "FOR." However, at this time, the number of votes cast in favor of the transaction is not sufficient to approve the transaction under Delaware law. The Company has postponed the special meeting in order to provide an opportunity for these stockholders' votes to be received and for additional stockholders to vote "FOR" the merger. The Company intends to continue to solicit votes and proxies in favor of the merger during the postponement. During this time, stockholders will continue to be able to vote their shares for or against the merger, or to change their previously cast votes.

This raises a host of questions, including:  who were these shareholders?  Why did they not vote favorably the first time around?  And what did Topps say or do to get these shareholders to change their minds?  In addition, Topps's repeated postponement of the shareholder meeting to gain approval yet again shows their bias as well as the pernicious effects of Strine's recent decision in Mercier, et al. v. Inter-Tel which provided much wider latitude for Boards to postpone shareholder meetings in the takeover context in order to solicit more votes (more on that here). 

There is still substantial uncertainty that this deal will close.  Almost immediately after the announcement of the shareholder vote, Crescendo Partners issued its own press release announcing that it intended to "assert appraisal rights with respect to the shares it owns of The Topps Company, Inc. in connection with the merger agreement between Topps and entities owned by Michael D. Eisner and Madison Dearborn Partners, LLC."  The merger agreement is conditioned upon:

holders of no more than 15% of the outstanding shares of our common stock exercis[ing] their appraisal rights under Section 262 of the DGCL in connection with the merger

According to a recent 13D/A, Crescendo owns 6.9% of Topps.  However, assertion of appraisal rights in Delaware tends to be an exercise in herd behavior.  Crescendo's steps are likely to lead to more dissident shareholders exercising their appraisal rights, hoping to free-ride on Crescendo's efforts.  In any event. given the hostility and distrust of many shareholders of the Topps board's practices here and their criticism of the perceived low price, I would expect there to be significantly more shareholders taking the appraisal route than normal.  This may lead to the 15% condition not being satisfied thus putting Eisner & Co. in the position of facing litigation in Delaware with a very uncertain outcome.  Topps has already lost once in Delaware court; Eisner may not want to take that chance again by waiving the condition if it is not fulfilled.  The Topps board may still lose here. 

September 20, 2007 in Private Equity, Takeovers | Permalink | Comments (0) | TrackBack (0)

New York Double

I'm quoted in both the N.Y. Times and the N.Y. Post today on MAC cases.  It is not page six, but as a law professor I will take what I can get:

N.Y. Times:  Deal to Buy Sallie Mae in Trouble

N.Y. Post:  UBS Unlacing Sneaker Deal

September 20, 2007 in Material Adverse Change Clauses | Permalink | Comments (0) | TrackBack (0)

Wednesday, September 19, 2007

Genesco: All the Right Moves

Just as I was getting depressed about Accredited Home Lenders/Lone Star settling, the Genesco MAC case is heating up.  Below is the letter Genesco sent to Finish Line earlier today.   Genesco is making the right move here.  Based on public information, Genesco appears to have a strong case that a material adverse change has not occurred, and instead Finish Line simply has buyer’s remorse.  Finish Line has suddenly realized, along with its bank UBS, that they are taking on too much leverage on this deal.  But it is a bit too late.  By Genesco sending this letter they are putting Finish Line on notice that Finish Line is going to have to face litigation if they want completely out of this deal; in other words unlike the Radian/MGIC MAC case this deal will likely not be resolved with the parties simply terminating the merger agreement and walking away.  Clearly Finish Line is angling for a price cut – Genesco may well still agree to that but they are going to put up some fight before they compromise. In addition, Genesco’s move here expedites the time table and is a reply to UBS’s request last week for further information – it prevents UBS from going on a fishing expedition and again shifts the burden to Finish Line to make their case publicly for a MAC.  Also remember that any litigation in this case between Finish Line and Genesco must to be brought in Tennessee under the merger agreement and will be governed by Tennessee law. This gives an advantage to Genesco in that they can fight this dispute out in their home court (although the lack of case-law on this point creates uncertainty and will encourage the parties to settle).  In the end we are largely seeing the AHL deal play out all over again though perhaps with some politer discourse.  Hopefully, all of the parties have read that playbook. 

Genesco Sends Letter Regarding Merger Agreement Obligations to The Finish Line

NASHVILLE, Tenn., Sept. 19 /PRNewswire-FirstCall/ -- Hal N. Pennington, Chairman and Chief Executive Officer of Genesco Inc. (NYSE: GCO), today sent the following letter to Alan H. Cohen, Chairman of the Board and Chief Executive Officer of The Finish Line, Inc.:

Dear Alan: I am writing this letter to respond to Gary's letter of September 17 as well as to set forth our view of what The Finish Line needs to do to move toward closing. First, let me reiterate that combining our businesses makes great strategic sense. Our team still looks forward to joining with yours.

On an ongoing basis, we have routinely shared detailed financial and operational information with The Finish Line and with UBS, and have responded promptly to numerous requests for specific information. We understand that you need certain information in order to be able to obtain the financing that you need to consummate the transaction, and there are detailed provisions in the Merger Agreement that provide how that cooperative process works. Clearly, UBS' most recent request comes within neither the spirit nor letter of our agreement. It is clear from their own statements that they are looking for a way out of their commitment -- in our view, not because of Genesco's results but because the upheaval in the credit markets makes this deal less profitable for them. We are not going to allow the litigation consulting firm they have hired to go on a fishing expedition. We will, however, continue to provide both The Finish Line and UBS with information related to Genesco in accordance with the detailed processes set forth in the Merger Agreement. As you know, as recently as yesterday, we provided additional information required by UBS for inclusion in your offering memorandum.

The Merger Agreement generally provides that the closing of the merger shall be on a date no later than the second business day after the closing conditions to the merger have been satisfied. Our shareholders met Monday and voted overwhelmingly in favor of the transaction and we have satisfied all our conditions to closing. However, both The Finish Line and UBS have continually failed to meet deadlines that they established for their own actions relative to obtaining the financing to consummate the transaction. Consequently, Genesco hereby makes the following demands:

*that The Finish Line immediately consummate the merger with Genesco; and

*that The Finish Line immediately deliver a substantially completed draft offering memorandum relating to its proposed financing to UBS;

that UBS confirm that such substantially completed draft offering memorandum complies with the terms of the Commitment Letter;

that The Finish Line immediately schedule presentations to the rating agencies for the purpose of obtaining expedited ratings of The Finish Line's securities; and

that The Finish Line enforce all its rights under the Commitment Letter.

I am sure you can appreciate the obligation we have to our shareholders to ensure that The Finish Line complies with its obligations under the Merger Agreement. Alan, I understand that your probable response is going to be to send me a long letter drafted by your lawyers telling me why you can't do the things we have demanded or why you need more time or why things are out of your control. Before you make that response, I encourage you to think about your obligations under the Merger Agreement, to think about the risks to your Company if you fail to comply with your obligations under the Merger Agreement, and whether you are going to continue to stall us or proceed to enforce your rights against UBS under the Commitment Letter. I look forward to hearing from you and working with you to expeditiously consummate the transaction.

Very truly yours, Hal N. Pennington, Chairman and Chief Executive Officer About Genesco Inc.

September 19, 2007 in Material Adverse Change Clauses | Permalink | Comments (0) | TrackBack (0)

Accredited Home Lenders Settles for $11.75 a share

The press release says it all.  This was expected (and only mere hours after the Fed Rate cut -- funny how that happens).  But still, from a law professor perspective, a trial would have been nice to settle issues on the interpretation of MAC clauses generally and the disproportionality standard in particular.  While not providing any legal precedent, this is a very good omen for Sellers who arguably do not set a very firm liquidated damages cap on a Buyer's ability to breach by trumping up a MAC claim.  Expect to see a turn towards this model and against reverse termination fees in private equity deals. 

Accredited Home Lenders Settles for $11.75 a share:  Includes $11.75 Per Share Tender Price, Minimal Conditions to Closing Beyond Tender of Majority of Shares, and Resolution of Delaware Lawsuit

SAN DIEGO & DALLAS--(BUSINESS WIRE)--Sept. 18, 2007--Accredited Home Lenders Holding Co. (NASDAQ:LEND) ("Accredited" or "Company"), a nationwide mortgage company specializing in non-prime residential mortgage loans, and Lone Star Fund V (U.S.) L.P., through its affiliate Lone Star U.S. Acquisitions, LLC ("Lone Star"), today announced that they have amended their June 4, 2007 merger agreement to settle the pending lawsuit between the companies and reduce the price at which Lone Star agrees to acquire all of the common stock of the Company to $11.75 per share.

The acquisition remains structured as an all-cash tender offer for all outstanding shares of Accredited common stock to be followed by a merger in which each remaining untendered share of Accredited will be converted into the same $11.75 cash per share price paid in the tender offer. The outstanding 9.75% Series A Perpetual Cumulative Preferred Shares, par value $1.00 per share, of Accredited Mortgage Loan REIT Trust (NYSE: AHH.PrA) will remain outstanding.

Lone Star has deposited approximately $295 million with The Bank of New York Mellon, as escrow agent, to fund payment of the amended tender offer price for all outstanding shares of the Company's common stock. The funds are distributable to Computershare Trust Company, N.A., the depositary for the tender offer, upon Accredited's delivery to the escrow agent of certifications regarding satisfaction of the closing conditions.

The amended merger agreement eliminates most of the original merger agreement's conditions to closing the amended tender offer. The primary remaining conditions to closing are the valid tender without withdrawal of more than 50% of Accredited's outstanding shares (the "Minimum Condition") and the absence of any injunction or similar order preventing the closing.

Lone Star's obligation to close the amended tender offer is not subject to any conditions related to the accuracy of representations or warranties made by Accredited, to the absence of a material adverse change, or to the compliance by Accredited with negative covenants, other than limited negative covenants specifically identified in the amended merger agreement.

The amended tender offer will be extended so that the scheduled expiration date will be 12:00 midnight, New York City time, on the tenth business day following the date on which Accredited files an amendment to its Solicitation/Recommendation Statement on Schedule 14D-9 setting forth the basis for the Board of Directors' recommendation of the amended merger agreement (the "14D-9/A") with the Securities and Exchange Commission ("SEC"). Lone Star will generally have the right to terminate the amended merger agreement if the Minimum Condition has not been satisfied at any scheduled expiration date after the 20th business day following the date of filing of Accredited's 14D-9/A.

In addition, Lone Star has agreed to provide to Accredited financing of $49 million, approximately $34 million of which will be applied to extinguish outstanding debt from one of the Company's creditors, leaving approximately $15 million of additional liquidity for the Company.

Accredited and Lone Star have agreed to an immediate stay of the lawsuit filed by the Company in the Delaware Chancery Court. The lawsuit will be dismissed with prejudice immediately upon the payment for shares pursuant to the amended tender offer or the termination of the merger agreement in accordance with its terms. The dismissal with prejudice can occur even if the Minimum Condition is not satisfied, so long as Lone Star does not materially breach any of its obligations under the amended merger agreement.

James A. Konrath, chairman and chief executive officer of Accredited, said, "This new agreement fairly settles our dispute and will expedite the completion of the merger with Lone Star. We will now turn to the business of rebuilding Accredited for a brighter future with Lone Star."

Accredited's Board of Directors has unanimously approved the amended merger agreement and unanimously recommends that holders of Accredited's common shares tender their shares. The basis for the Board of Directors' recommendation will be set forth in Accredited's 14D-9A filed with the SEC.

September 19, 2007 in Material Adverse Change Clauses | Permalink | Comments (0) | TrackBack (0)

PHH Corp's Vague Condition

The Wall Street Journal yesterday ran an article on PHH Corp. which has an agreement to be acquired by General Electric Capital Co. and Blackstone Group LP for $1.7 billion.  GE is buying the entire business and on-selling PHH's mortgage lending business to Blackstone.  On Monday, PHH Corp. announced that J.P. Morgan Chase & Co. and Lehman Brothers Holdings Inc., the banks who had committed to finance Blackstone's purchase, had "revised [their] interpretations as to the availability of debt financing".  This revision could result in a shortfall of up to $750 million in available debt financing for Blackstone's purchase.  According to PHH, the GE acquisition vehicle Pearl Acquisition had:

stated in the letter that it believes that the revised interpretations were inconsistent with the terms of the debt commitment letter and intends to continue its efforts to obtain the debt financing contemplated by the debt commitment letter as well as to explore the availability of alternative debt financing. Pearl Acquisition further stated in the letter that it is not optimistic at this time that its efforts will be successful and there can be no assurances that these efforts will be successful or that all of the conditions to closing the merger will be satisfied.

In their article, The Wall Street Journal spun the story as illustrating the increasing willingness of investment banks to assertively rely on contractual terms to back away from financing commitments to private equity groups, clients which have been some of the bank's best customers in recent years.  This may clearly be the case here, and if so, this highlights the lingering problems in the credit and deal markets (at least pre-Fed cut -- moral hazard, folks), and the bad financial position of the banks on these loans which makes them willing to challenge their best customers.  But there is perhaps an alternative explanation -- the banks as well as Blackstone no longer like this deal and are now both incentivized to back away from it.  However, for public relations purposes Blackstone is trying to play the good guy. 

This explanation -- the purchasers and banks are all working together to stem losses from a bad deal -- finds support in the agreements PHH struck to be acquired.  In the merger agreement, PHH agreed to condition the obligations of GE on:

All of the conditions to the obligations of the purchaser under the Mortgage Business Sale Agreement to consummate the Mortgage Business Sale (other than the condition that the Merger shall have been consummated) shall have been satisfied or waived in accordance with the terms thereof, and such purchaser shall otherwise be ready, willing and able (including with respect to access to financing) to consummate the transactions contemplated thereby . . . .

Does everyone see the problem with this language?  I usually hesitate to criticize drafting absent knowing the full negotiated circumstances and without having context of all the negotiations, but this is poor drafting under any scenario.  "ready, willing and able"?   I have no idea what the parties and DLA Piper, counsel for PHH intended this to mean, but arguably Blackstone -- the mortgage business purchaser here -- can simply say that is not a willing buyer for any reason and GE can then assert the condition to walk away from the transaction.  You can read "ready" and "able" in similarly broad fashion.  This is about as broad a walk-away right as I have ever seen -- I truly hope that PHH realized this, or were advised to this, when they agreed to it. 

Here, note that the walk-away right is GE's.  GE can either waive or assert the condition if Blackstone is not "ready, willing or able".  It does not appear that PHH has disclosed the agreement between GE and Blackstone with respect to the Mortgage Business Sale.  But, in PHH's proxy, PHH states that the mortgage business sale is conditioned upon the satisfaction or waiver of the closing conditions pertaining to GE in the merger agreement.  In addition PHH stated that:

In connection with the merger agreement, we entered into a limited guarantee, pursuant to which Blackstone has agreed to guarantee the obligations of the Mortgage Business Purchaser up to a maximum of $50 million, which equals the reverse termination fee payable to us under certain circumstances by the Mortgage Business Purchaser in the event that the Mortgage Business Purchaser is unable to secure the financing or otherwise is not ready, willing and able to consummate the transactions contemplated by the mortgage business sale agreement. 

I can't read the actual terms because the agreement is unavailable, but this may ameliorate a bit the bad drafting.  PHH has essentially granted a pure option to Blackstone to walk for $50 million.  The interesting thing here is how all of this works with GE in the middle.  We can't see the termination provisions of the mortgage business sale agreement between GE and Blackstone but presumably Blackstone can walk from that agreement by paying the $50 million to PHH -- what its obligations to GE in such a case are we don't know. 

Ultimately, though, the problem is that these provisions provide too much room for all three of GE, Blackstone and the Banks to maneuver to escape this transaction.  GE can simply work with Blackstone  to have it assert that it is unwilling to complete the transaction for any plausible reason; Blackstone can similarly rely upon the Banks actions and what is likely a loosely drafted commitment letter to make such a statement or come up with another one. The end-result is to place very loose reputational restraints on the purchasers' ability to walk from the transaction.  Compare this with other private equity deals with similar option-type termination fees.  There, the private equity firms have to actually breach the merger agreement and their commitments to walk.  This is a powerful  constraint as the private equity firms do not want to squander their reputational capital by appearing to be unreliable on their deal commitments.  Here, the problem is that the drafting of the merger agreement condition allows Blackstone to walk for any reason and GE to rely on that to terminate its own obligations.  This is a much lighter reputational constraint -- they do not need to breach the agreement and their commitments to terminate the deal.  The result is exactly what is happening here.  If the deal goes bad the purchasers have little incentive to keep from cutting their losses and walking, and wide latitude to appear to be doing so for the right reasons and in accordance with their commitments.   And this is why this is not only poor drafting, but a poor agreement for PHH to have made.

Addendum:  As a comment notes there are also disclosure issues here.  Although Form 8-K and Form 14A (for proxy statements) arguably don't require PHH to disclose the on-sale agreement since PHH is only a third party beneficiary and not a party to this agreement, they likely should have disclosed the agreement on general materiality grounds. 

September 19, 2007 in Merger Agreements, Private Equity | Permalink | Comments (1) | TrackBack (0)

Tuesday, September 18, 2007

Accredited Home Files 10-Q

Accredited Home Lenders filed its quarterly report on Form 10-Q yesterday.  The filing comes in advance of next week's trial in Delaware Chancery Court to determine if there has been a material adverse effect under Accredited Home Lender's agreement to be acquired by Lone Star.  I'm going to leave the number-crunching on the 10-Q to others, but the filing did have some interesting tid-bits for those following the company and its travails.  AHL is clearly going out of its way to show that the changes effecting it are not disproportional as those in its industry as a whole -- a key requirement for it to avoid Lone Star establishing that a MAC has occurred.  And so, in its form 10-Q it provides a list of thirty other recent, significant events in the industry affecting other lenders such as bankruptcy, liquidation, etc.  The list provides good support for AHL's case.  Beyond that, there is this fun risk factor disclosure:

We face steeply declining employee morale, and our inability to retain qualified employees could significantly harm our business.

As a result of the ongoing turbulence in the non-prime mortgage industry, our headcount has declined from approximately 4,200 at December 31, 2006 to approximately 1,000 following the completion of the restructuring we have implemented in September 2007. In light of the decision to suspend substantially all U.S. lending as part of the restructuring, it will be very difficult to motivate and retain the remaining sales personnel who expect to derive significant income from commissions and bonuses on closed loans. It will also be difficult to motivate and retain non-commissioned personnel who are faced with great uncertainty regarding their future employment and advancement prospects with the Company. The inability to retain or replace sufficient qualified personnel may jeopardize our ability to run our downsized operations or successfully resume U.S. lending operations should the opportunity arise.

Another issue with AHL is what the company would be worth without its current litigation claim against Lone Star.  In other words, how is the market pricing this stock.  Is there still any value in AHL or has the stock simply become the right to a  litigation claim?  Here, AHL has disclosed that it may not be able to continue as a going concern if it is not acquired by Lone Star.  But, perhaps the canary in the mine-shaft is whether AHL has defaulted on its debt covenants.  Such a default on any of its instruments would create cross-defaults on the remainder and likely send it into a death spiral similar to what is happening with Movie Gallery.  AHL made what appears to be very careful disclosure on this point in the 10-Q, not commenting upon it either way.  AHL's banks and debt-holders have incentives to take a similar course, as they would much prefer AHL to be acquired and do not want to create further issues for Lone Star to support its MAC claim. Nonetheless, I would expect Lone Star to raise this issue at trial -- tripping your debt covenants is clearly a MAC though maybe not disproportional in this environment.  For those attending next week, it's going to be the trial of the year in Delaware Chancery (if there is not a settlement before then). 

September 18, 2007 in Material Adverse Change Clauses | Permalink | Comments (0) | TrackBack (0)

Topps Shareholder Meeting Tomorrow

In advance of the Topps shareholder meeting tomorrow, Michael Eisner's Tornante and Madison Dearborn issued a helpful press release entitled "Tornante and Madison Dearborn Will Not Raise Price for Topps Company Group Reiterates Final Price Prior to Wednesday’s Shareholder Vote".  In it they state that:

Topps is a wonderful company with a rich history, and we are prepared to buy it at the price of $9.75 per share set forth in our agreement. We thoroughly analyzed the value of Topps prior to entering into our deal with the company in March. We believed $9.75 per share was more than a full and fair price for the company then, and we continue to believe that to be the case now especially considering the current economic environment.  If Topps shareholders feel differently and vote against our deal this week, we wish them well, but our price is final and we will not increase it.

The statement comes on the heels of the recommendations by ISS, Glass, Lewis and Proxy Governance, Inc. that shareholders reject Eisner's merger proposal.  The ISS one is particular was interesting as it rested in part on the fact that "the original sales process exhibited something less than M&A 'best practices,' an opinion apparently shared by the Delaware courts."  ISS's focus on these issues for its recommendations is admirable.   

Topps had previously postponed its meeting based on VC Strine's recently issued decision in Mercier, et al. v. Inter-Tel, upholding the Inter-Tel's board's decision to postpone a shareholder meeting in circumstances of almost certain defeat.  It appears that the postponement still hasn't done Topps much good and the shareholders are likely to still vote down this transaction. 

Ultimately, the Topps board has done a disservice to its shareholders -- it has run this process in a biased manner, raised questions with respect to its dealings with Upper Deck, and been chastised in Delaware court for its failings in In Re Topps Shareholder Litigation.  A no vote will likely lead to a subsequent proxy contest by Crescendo Partners to remove the board members who supported this transaction.  In the meantime, under the merger agreement, Eisner would walk away with a payment of up to $4.5 million as reimbursement for his expenses. 

The Topps meeting is tomorrow, September 19, 2007 at 11:00 a.m., local time, at Topps' executive offices located at One Whitehall Street, New York, NY 10004.  If anyone attends and has some interesting information please let me know and I will post it.  Perhaps Topps will even give out souvenir cards -- shareholders would then at least have something to show for the deal.

September 18, 2007 in Private Equity, Takeovers | Permalink | Comments (0) | TrackBack (0)

More on Merrill Lynch & Co., Inc. v. Allegheny Energy, Inc.

Robert Miller over at Truth on the Market has another post up on the recent Second Circuit decision in Merrill Lynch & Co., Inc. v. Allegheny Energy, Inc.  In it he further analyzes the ramifications of and problems with 10b-5 and due-diligence disclosure representations and further discusses the off-line conversation on these matters between myself and him. 

September 18, 2007 in Private Transactions | Permalink | Comments (0) | TrackBack (0)

Sunday, September 16, 2007

Morgan Stanley's Big Freeze

I previously celebrated the Reddy Ice deal and the joys of M&A by proclaiming Reddy Ice's slogan "Good Times are in the Bag", the day the company announced that it would be acquired by GSO Capital Partners for $681.5 million in a deal valued at $1.1 billion including debt.  I should have known better -- it now appears that the celebration might have been a bit too soon.  Last week Reddy Ice filed its definitive proxy statement for the transaction.  The transaction history discloses a deal in crisis with Reddy Ice being hit by shareholder protests against the deal by Noonday Asset Management, L.P. and Shamrock Activist Value Fund L.P., the company's results for July coming below budget and recent guidance for 2007, and GSO proclaiming that it needed more time to finance the deal given the state of the debt markets and Reddy Ice.

In light of these problems, the parties ultimately agreed to amend the merger agreement to cap the future dividends Reddy Ice could pay while the transaction was pending, extend GSO's marketing period for the debt financing, move up the date of the Reddy Ice shareholder meeting to October 15, 2007, and reduce the maximum fee payable to GSO if Reddy Ice's shareholders rejected the transaction from $7 million to $3.5 million. Notably, Reddy Ice backed away from its initial position vis-a-vis GSO that it required an extension of the go-shop period and a postponement of the shareholder meeting in exchange for these amendments.  For those who don't believe that private equity reverse termination provisions will be a factor in this Fall's deal renegotiations, I suggest you read this transaction history very carefully.  The Reddy Ice board specifically cites its fears that GSO would simply walk from the transaction by paying the reverse termination fee of $21 million as a factor in its renegotiation.  Note that this amendment still preserves this option. 

Now Morgan Stanley is objecting to the amendment.  MS has agreed to provide GCO with debt financing for this transaction, and MS is claiming that the merger amendment was entered into without its consent thereby disabling its obligations under the commitment letter, a fact MS is reserving its rights with respect thereto.  MS agreed to a $485 million term loan facility, an $80 million revolving credit facility, and a $290 million senior secured second-lien term loan facility.  GSO and RI are disputing MS's claim and the transaction is not contingent on financing, i.e., unless it claims a MAC GSO has no other choice but to take this position.  The MS debt commitment letter is not publicly available but they are likely relying on the following relatively standard clause: 

[Bank] shall have reviewed, and be satisfied with, the final structure of the Acquisition and the terms and conditions of the Acquisition Agreement (it being understood that [Bank] is satisfied with the execution version of the Acquisition Agreement received by [Bank] and the structure of the Acquisition reflected therein and the disclosure schedules to the Acquisition Agreement received by [Bank]). The Acquisition and the other Transactions shall be consummated concurrently with the initial funding of the Facilities in accordance with the Acquisition Agreement without giving effect to any waivers or amendments thereof that is material and adverse to the interests of the Lenders, unless consented to by [Bank] in its reasonable discretion. Immediately following the Transactions, none of Borrower, the Acquired Business nor any of their subsidiaries shall have any indebtedness or preferred equity other than as set forth in the Commitment Letter.

I am not involved in the bank finance industry these days, but still, it is hard to see how this amendment is adverse to the position of MS (assuming that the clause in their debt commitment letter is similar to the one above).  If anything, the extension of the marketing period is beneficial to MS.  The remainder of the amendment does not appear to effect MS except perhaps the dividend provision, but GSO can always fund that if necessary.  But, Marty Lipton -- a man much smarter than me -- was recently on the wrong side of this debate when he made a similar argument in the context of the Home Depot supply deal, though that deal was more substantially renegotiated.  Ultimately, MS's position is likely similar to one taken by banks in the recent Home Depot and Genesco deals -- they are using ostensible contractual claims to attempt to renegotiate deals that no longer are attractive and they are likely to lose money on.  Here, based on a number of big assumptions, MS's claims seem a bit over-stated, though it may be enough to engender a further renegotiation of the deal premised upon MS's implicit threat to walk.  Good Times are NOT in the Bag. 

Final Note:  In a developing market with a number of situationa like this, MS is taking a shot at this strategy with a lower priority client first.  I doubt they would take the same position with KKR. 

September 16, 2007 in Investment Banks, Private Equity, Takeovers | Permalink | Comments (1) | TrackBack (0)

The (Un)Happy Trio: Genesco, Finish Line and UBS

The Genesco material adverse change dispute is starting to heat up in advance of the Genesco special meeting to vote on the transaction today.  On Friday, The Finish Line, Inc. announced that it had received two letters from UBS which it helpfully forwarded to Genesco Inc.  The Finish Line did not disclose the full text of the letters, but did disclose a portion.  According to The Finish Line, UBS stated in one letter:

[O]ur agreement to perform under the Commitment Letter may be terminated if a Material Adverse Effect has occurred with respect to Genesco. As of today, we are not yet satisfied that Genesco has not experienced a Material Adverse Effect. ... Based on the foregoing, we ask that you cause Genesco and its representatives and advisors to provide all financial and other information that we request so that we may conclude whether a Material Adverse Effect has occurred.

You get the idea.  It appears that UBS and Finish Line are now attempting to follow the strategy played out in the Home Depot supply business sale renegotiation.  UBS and Finish Line, together with Finish Line's newly hired uber-banker Ken Moelis, are trying to tag-team in order to renegotiate or terminate the Genesco deal based on claims of a material adverse change.  This is a strategy that we will likely see often this Fall as banks and private equity buyers attempt to renegotiate deals that are no longer as financially attractive.  The Finish Line and UBS also appear to be following the successful strategy used by MGIC to terminate its deal with Radian based on a similar MAC claim.  Essentially, UBS (I believe likely at Finish Line's behest) are claiming that more information is needed in order to buy time to renegotiate the transaction or otherwise obtain Genesco's agreement to terminate the deal.  UBS is asking for "all financial and other information that we request", hardly a narrow request.  This maneuver permits them to avoid litigation for the moment, buy time and appear to be the good guys here.

The strategy doesn't appear to be working.  Genesco responded to these letters after market close with its own press release which stated: 

In response to The Finish Line's announcement, Genesco Inc. reiterates that no "material adverse effect" under the previously announced merger agreement with Finish Line has occurred with respect to Genesco.

In a previous post I outlined why, based on public information, it appears that The Finish Line has a weak case to claim a MAC, at least under Delaware law.  The MAC clause in the financing commitment letter for The Finish Line issued by UBS is identical to the one in the merger agreement with one critical exception.  The commitment letter is governed by New York law, the Genesco/Finish Line merger agreement by Tennessee law.  I previously criticized the lawyers in this deal for selecting the law of a state with no defined case law on merger agreements, particularly MACS.  Their choice has now raised the prospect of a court in New York finding a MAC while a court in Tennessee finds the opposite.  Now that would be fun (at least from my perspective).  This is unlikely from a practical perspective -- who could see courts consciously reaching this result? -- still M&A lawyers in the future would do well to avoid this difficulty.

The Genesco shareholder meeting will be held at 11:00 a.m., local time, at Genesco's executive offices, located at Genesco Park, 1415 Murfreesboro Road, Nashville, Tennessee.  I encourage any Genesco shareholders in the area to attend, not only for the free food, but for the interesting situation a yea vote will create.  If the merger is approved, all of the conditions to the merger in the merger agreement would now presumably be satisfied (assuming no MAC -- see Article 7 of the agreement).  But what Genesco will do is uncertain and likely depend upon the non-public information they have as to whether a MAC occurred.  If they are confident in their position, a quick injunctive suit in Tennessee would do them well in order to gain first mover advantage and position them to consolidate in Tennessee a New York lawsuit brought by UBS which could over-shadow their own litigation.  Such a suit would also likely be a good move even if they are not as confident in order to establish a firm bargaining position.  More to come. 

September 16, 2007 in Material Adverse Change Clauses | Permalink | Comments (0) | TrackBack (0)

More on Black Market Capital

Allaboutalpha, a leading blog on the hedge fund industry, has a nice, extensive discussion of my latest paper:  Black Market Capital.  Black Market Capital discusses the federal regulation of hedge funds and private equity and the rise of fund adviser ipos, special purpose acquisition companies, structured trust acquisition companies and exchange traded funds all of which attempt to mimic hedge fund or private equity performance and are marketed to public investors on this basis.  My paper was posted to the SSRN last week.  According to Allaboutalpha: 

[Davidoff] concludes the paper by methodically walking through many of the positive arguments for hedge funds that we have also made on this website (he even cites some of the same sources).  This dispassionate, methodical style may destine Davidoff’s paper to be a beacon for the industry as it struggles to debunk commonly-held misperceptions. 

You can read their further analysis here.  You can download my paper on the SSRN here

September 16, 2007 in Hedge Funds, Private Equity | Permalink | Comments (0) | TrackBack (0)