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Editor: Brian JM Quinn
Boston College Law School

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Friday, October 19, 2007

Dow Jones/News Corp.: The History

Dow Jones filed a revised proxy statement yesterday.  For those who love their corporate intrigue, I recommend you read the background to the transaction section -- lots of back and forth and interesting nuggets.  It is great weekend reading. 

October 19, 2007 in Takeovers | Permalink | Comments (0) | TrackBack (0)

The Flowers LP Letter

After consulting with Wayne Law School's crack IP experts, I've decided to post the Flowers letter to its limited partners.  It is downloadable here.  Nothing particularly fascinating.   

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

SEC Approves FINRA Fairness Opinion Rule

On Oct 11, the SEC approved FINRA's new proposed Rule 2290 regarding fairness opinions (see the SEC approval here; the FINRA rule release here).   The eighth extension of the comment period for the Rule was to run until the end of the month.  However, the SEC approved the rule on an expedited basis.  This is a bit odd -- this rule has been pending for three years, why the rush now?

The Rule obligates member firms of FINRA adhere to the following requirements when preparing and issuing fairness opinions: 

  • Rule 2290(a)(1) requires that when a member firm acts as a financial advisor to any party to a transaction that is the subject of a fairness opinion issued by the firm, the member must disclose if the member will receive compensation that is contingent upon the successful completion of the transaction, for rendering the fairness opinion and/or serving as an advisor.
  • Rule 2290(a)(2) requires that a member firm disclose if it will receive any other significant payment or compensation that is contingent upon the successful completion of the transaction.
  • Rule 2290(a)(3) requires that member firms disclose any material relationships that existed during the past two years or material relationships that are mutually understood to be contemplated in which any compensation was received or is intended to be received as a result of the relationship between the member and any party to the transaction that is the subject of the fairness opinion.
  • Rule 2290(a)(4) requires that members disclose if any information that formed a substantial basis for the fairness opinion that was supplied to the member by the company requesting the opinion concerning the companies that are parties to the transaction has been independently verified by the member, and if so, a description of the information or categories of information that were verified.
  • Rule 2290(a)(5) requires member disclosure of whether or not the fairness opinion was approved or issued by a fairness committee.
  • Rule 2290(a)(6) requires member firms to disclose whether or not the fairness opinion expresses an opinion about the fairness of the amount or nature of the compensation from the transaction underlying the fairness opinion, to the company’s officers, directors or employees, or class of such persons, relative to the compensation to the public shareholders of the company.
  • Rule 2290(b)(1) requires that any member issuing a fairness opinion must have written procedures for approval of a fairness opinion by the member.

As I commented before on this Rule:

The broad scope of intended topics in the initial notice to members led some to think that FINRA would finally act to address many of the deficiencies in current fairness opinion practice.  However, the initially promulgated rule was a disappointment, and after three amendments at the SEC's behest it has now been watered down into meaninglessness.  FINRA ultimately did not go so far as to require member investment banks to disclose “any significant conflicts of interest” as it initially considered. Instead, disclosure requirements in the Rule with respect to contingent consideration and relationships largely overlap with current federal securities law as set out in Item 1015(b)(4) of Regulation M-A. There are two other disclosure obligations in the Rule concerning opinion committees and independent verification of information.  These will likely be met with more boiler-plate responses – a practice which the Rule effectively permits. Furthermore, in the amending releases FINRA also watered down the Rule in its interpretation; removing a good bit of the potential for it to go beyond SEC regulation. For example, FINRA took the position in the amending releases that disclosure of contingent compensation and material relationships under the Rule can be descriptive and not quantitative; a statement as to whether it exists or not sufficient. Yet, the number is the important element here: if the amount is high it has more potential to result in bias. In addition, the Rule does nothing about the subjectivity inherent in fairness opinion preparation. It simply addresses the conflicts issue with redundant disclosure requirements that permit the investment banks to engage in the same practices as before with little, if any change.

The only novel aspect of this Rule is the requirement it places on member firms to disclose whether or not the fairness opinion expresses an opinion about the fairness of the amount or nature of the compensation from the transaction underlying the fairness opinion, to the company’s officers, directors or employees, or class of such persons, relative to the compensation to the public shareholders of the company. I have read and re-read this provision and the FINRA commentary upon it. While the purpose can be easily surmised—addressing inordinate retention and compensation paid in connection with change of control transactions—I look forward to learning how the investment banks implement this provision, because I honestly do not know how they can or will other than via the usual boiler-plate response. In any event, this requirement misapprehends what a fairness opinion does and opines to. Retention and other compensatory arrangements do arguably result in a lower price to acquiree stockholders, but do not affect whether the ultimate price itself is fair within the financial parameters of the value of the corporation or the consideration paid.  To rephrase the point, the price can be financially fair in a corporate control transaction but the retention and other compensatory arrangements still egregious.  Trying to analyze them together scrambles the egg.  FINRA should have addressed these issues separately.

Ultimately, FINRA and the SEC would have done better to address the real problems with fairness opinions (their subjectivity, etc.) rather than piling on more and largely meaningless procedural strictures.  For more on this see my article Fairness Opinions

October 19, 2007 in Fairness Opinions | Permalink | Comments (0) | TrackBack (0)

SLM: Further Developments

Two developments in the SLM case.  First, all of the business news outlets are reporting on the letter Flowers sent to its limited partners yesterday.  I've read it and can confirm that this is what it says.  Nonetheless, in the letter Flowers reportedly states that it is liable only for $192 million of the break-up fee.  Flowers has signed a guarantee to SLM for $451 million of the $900 million break-up fee; the reduction is reportedly due to side investors investing equity in the deal and therefore also taking on liability for the termination fee (for the N.Y. Times report on this see here).  And of course, the buyers can still renegotiate amongst themselves to further reallocate this liability. 

I suspect Flowers practice is extremely common and therefore that there is a more general lesson this brings out.  When sellers are negotiating reverse termination fees with private equity firms, they hopefully negotiate the size of the fee so as to effect the future actions of the PE firms.  But to the extent the PE firms can and do shift off a significant amount of their liability, agency costs are created, the PE firm has less at stake and therefore may be more likely to walk.  Food for thought for sell-side M&A attorneys -- they may try and pin the specific figure on the PE firm itself and not permit such allocations or otherwise erect alternative mechanisms to keep PE firms contractually committed. 

The second development was the delivery of another letter by SLM to V.C. Strine arguing for an expedited hearing (access the letter here).  The letter doesn't state anything particularly new.  I do think that SLM makes a very good positioning point that Flowers et al. could terminate the merger agreement as of now if they did indeed think that there was a MAC as they described.  SLM cites this fact for justifying an expedited hearing.  I'm not sure it gets SLM there and, in any event, believe that Flowers hasn't terminated the agreement yet due to posturing.  SLM also makes some further points about the MAC in its letter.   

SLM states:

  • First, defendants refuse to address the fact that the representation and warranty of Section 4.10 is subject to the preamble language in Article 4, "Except as disclosed in ... the Company 1O-K." (Lord Aff. Ex. A, Art. 4.) The preamble to Article 4 unambiguously establishes, both textually and structurally, that the disclosures in the lO-K are the relevant baseline for any analysis of Sallie Mae's representation that no MAE has occurred.

My thought:  SLM is reaching to find support for their prior assertions that a material adverse change under the merger agreement can only be an effect worse than described in the Recent Developments section of their 2006 10-K.  I'm not sure I agree with this.  The plain language of the MAC definition simply says something different.  Picking and choosing among the clauses of the merger agreement to find snippets that justify this argument is not a particularly winning one or a valid method of contract interpretation when the language appears clear as it does here. 

SLM also states:

    • Third, while the defendants repeatedly argue that the "entire impact" of the enacted legislation must be considered under the MAE clause (e.g., Counterclaims ~ 75), those words are found nowhere in the Agreement. The representation and warranty is expressly subject to the proposed legislation discussed in the Company's 10-K, and the definition of "Material Adverse Effect" states that only those "changes" in law that are "more adverse" to Sallie Mae than changes proposed in the 10-K can be considered for MAE purposes. (Lord Aff. Ex. A, § 1.01.) The unambiguous meaning of this language is that only the incremental impact of changes should be considered. For example, when the parties signed the deal, Sallie Mae's 10-K had already disclosed a legislative proposal to cut special allowance payments on certain student loans by 50 basis points. (See Verified Complaint ~ 17.) The enacted legislation cut those subsidies by 55 basis points. Under the plain language and structure of the contract (including both the MAE definition, as well as the preamble to the Article 4 representations), the only portion of this "change" in law that is "more adverse" is the additional 5 basis points in cuts. The defendants' reading - that all 55 basis points should be counted, despite the disclosure of a proposal for a 50 basis-point cut in the lO-K - would place a $26 billion merger on a razor's edge; the merger would be vulnerable to a breakup not just over 5 basis points, or even over 1 basis point, but even if enacted legislation were a single dollar more adverse to Sallie Mae than any of the proposals disclosed in the 10-K.

My thought:  I've addressed elsewhere why the plain meaning of the MAC definition appears to be that the enacted legislation only need be more adverse; it does not add its own materiality qualifier over and above the 10-K recent developments section as SLM is arguing above.  And here SLM admits again that it is more adverse -- by 5 basis points.  As for the razor's edge argument -- so what?  If SLM and Flowers et al. had monetized the potential MAC by saying it could have an effect of no more than $1 billion and then Flowers could walk this would also be a razor's edge.  If the effect was $1 more than a billion Flowers et al. could terminate. Could SLM make this same argument in such a case.  No.  Every contract defines a point where there is breach and no breach, so every contract point is just such a razor's edge.  In fact, if you adopted SLM's argument then the razor's edge would now have a materiality qualifier but it would still be there.  SLM just doesn't like the fact that the razor's edge here is to low; not that there is a razor's edge at all.

The parties are meeting before Strine this Monday; I expect that he will make his ruling on expedited treatment then.   

Final note:  you can access SLM's Reply to Counterclaim filed today here.  Nothing particularly new. 

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

Thursday, October 18, 2007

On Hiatus Today

I'll be back tomorrow (Friday)

October 18, 2007 | Permalink | Comments (0) | TrackBack (0)

Wednesday, October 17, 2007

Cablevision: The End-Game (and the Shareholder Attorney Sell-Out?)

The Dolan's third attempt to take Cablevision private in a $10.6 billion transaction appears to be teetering on the brink.  Earlier this week, Mario Gabelli, whose mutual funds own 8.3 percent of Cablevision, wrote to the company to signal that he would vote against the plan.  And the Wall Street Journal is reporting today that ClearBridge Advisors LLC, Cablevision's biggest investor with a 14% interest, plans to vote against the deal.  Two other large institutional shareholders T Rowe Price and Marathon Asset Management have also indicated their intention to oppose the buyout.  Finally, ISS Governance Services, and Proxy Governance Inc have recommended that their clients vote against the transaction.  Last night, Cablevision Chief Executive James Dolan released a statement asserting that the Dolan family would not raise its offer.

Under the merger agreement, the required vote to approve the plan is:

Public Stockholders holding more than 50% of the outstanding shares of Class A Stock held by Public Stockholders other than executive officers and directors of the Company and its Subsidiaries . . . .

Public Stockholders excludes "the Family Stockholders, Family LLC, any Subsidiary of Family LLC and the Other Dolan Entities."  These terms as defined in the merger agreement are essentially the Dolan family group.  So, in order for the proposal to succeed it needs to be approved by a majority of the minority of the unaffiliated, public stockholders.  According to the proxy statement this comprises approximately 113 million shares of Cablevision Class A shares.  But, even if the majority of the minority provision is met, the deal can still fail because it is conditioned on no more than 10% of Cablevision's class A shareholders exercising appraisal rights under Delaware law (DGCL 262).  The condition specifically requires that:

The total number of Dissenting Shares shall not exceed 10% of the issued and outstanding shares of Class A Stock immediately prior to the filing of the Merger Certificate . . . .

In his 13D filing last week, Mr. Gabelli indicated that he was considering exercising these rights.  This would mean only 1.7% more of the Class A shares would need to exercise appraisal rights for the condition not to be met.  Appraisal rights in Delaware must be exercised prior to the vote on the transaction, and are typically exercised immediately prior to the meeting.  Thus, this deal may still fail even if the majority of the minority condition is met.  I seriously doubt the Dolan's would want to face the substantial uncertainty of Delaware appraisal proceedings and the significant extra costs it may impose on their acquisition.  If the 10% threshold is met, my instincts are that they will walk. 

Oh -- and for those waiting for the plaintiffs' lawyers to bail them out of this mess.  Don't.  At the time this third attempt at a take private was announced, the press release had the following statement:

Lawyers representing shareholders in the pending going private action in Nassau County Supreme Court actively participated in the negotiations, which led to improvements to the financial terms of the transaction as well as significant contractual protections for shareholders. . . . The parties have agreed in principle to the dismissal of the pending going private litigation, subject to approval by the Nassau County Supreme Court.

In the proxy statement, Cablevision stated:

following participation by representatives of the plaintiffs in the Transactions Lawsuits in the negotiations. . . . the Dolan Family Continuing Investors agreed to a $30 million increase in the merger consideration . . . . For their work on behalf of stockholders in the Transactions Lawsuits and in the actions relating to alleged options backdating in the Nassau County Supreme Court and the U.S. District Court for the Eastern District of New York, plaintiffs’ counsel intends to request that the Nassau County Supreme Court award them fees, including expenses, of $29,250,000. The settling defendants have agreed not to challenge the fees and expenses application for this amount. Cablevision has agreed to pay such amount, if approved by the court, following completion of the merger.

This just doesn't seem right.  The shareholders plaintiffs' attorneys are receiving $29.25 million in fees for adding (at best) value of $30 million, and settling well before a full assessment of the transction could be made.  For more criticism, I'll link to Vice Chancellor Strine's opinion in In re Cox Communications about the perils of such practice under Delaware law and the possibility of selling minority shareholders short, particularly here where the Dolan family has been repeatedly accused of underbidding for Cablevision.   

October 17, 2007 in Going-Privates | Permalink | Comments (0) | TrackBack (0)

Tuesday, October 16, 2007

Allocating the Potential Liability of the Flowers Group

The WSJ Deal Journal had a post yesterday on the Flowers group's allocated liability for the $900 million break fee in connection the SLM merger agreement.  The post quoted a source who stated that:

“It has been difficult to get information out of Flowers on this one,” one investor told PE Hub. “We aren’t even sure how the $900 million breakup fee will be allocated among the syndicate.”

The post then linked to a Breakingviews post asserting that the Flowers group was only on the hook for $200 million of the $900 million fee if it was required to be paid (that is a big if). 

I'm not sure where these figures come from.  In the SLM complaint, SLM states that Flowers has guaranteed $451,800,000, JP Morgan $224,100,000, and BofA $224,100,000 of the $900 million termination fee.  So, again, I don't know how breakingviews got from $451 million to $200 million. 

Of course, internally and privately the parties may have reordered these guarantees.  This may very well be the case as some public reports have stated that JP Morgan and BofA are driving this renegotiation and stand to lose a much greater amount than the termination fee if the deal goes through.  It would not be a surprise if they agreed to cover some of Flowers potential liability here in case SLM is successful on its claims in Delaware. 

October 16, 2007 in Takeovers | Permalink | Comments (0) | TrackBack (0)

Anlayzing the Flowers Group Counter-Claim

The Flowers consortium filed their answer and counter-claim yesterday in Delaware Chancery Court.  The Flowers group counter-claim boils down to a request that the Chancery Court declare that a Material Adverse Effect under the merger agreement with SLM has occurred and that it will be continuing at the time of closing such that Flowers et al. are excused from performance (and paying the $900 million termination fee).  This dispute is no longer over whether a deal will be reached -- I think it has devolved into a battle over the $900 million.  And after reviewing Flowers et al.'s counter-clam, I continue to believe that they have made a good legal argument that a MAC under the merger agreement definition has occurred.  I might add they are following the exact legal arguments I predicted in my prior post here.  So, let's begin.  The relevant portions of MAC definition in the merger agreement are:

"Material Adverse Effect” means a material adverse effect on the financial condition, business, or results of operations of the Company and its Subsidiaries, taken as a whole, except to the extent any such effect results from: . . . . (b) changes in Applicable Law provided that, for purposes of this definition, “changes in Applicable Law” shall not include any changes in Applicable Law relating specifically to the education finance industry that are in the aggregate more adverse to the Company and its Subsidiaries, taken as a whole, than the legislative and budget proposals described under the heading “Recent Developments” in the Company 10-K, in each case in the form proposed publicly as of the date of the Company 10-K) or interpretations thereof by any Governmental Authority; . . . . (e) changes affecting the financial services industry generally; that such changes do not disproportionately affect the Company relative to similarly sized financial services companies and that this exception shall not include changes excluded from clause (b) of this definition pursuant to the proviso contained therein . . . .

As an initial matter, Flowers attempts to establish that a "material adverse effect" has occurred.  This is the initial requirement under the MAC definition.  Flowers et al. state that the recently enacted legislation:

Will cut subsidies to the student loan industry by $22.32 billion over the next five years on a present discounted value basis, and that will cut Sallie Mae’s core income by approximately $316 million, or 15.2% in 2009, rising to a reduction of approximately $595 million, or 23.%% in 2012, as compared to reasonable projections of Sallie Mae’s core net income if the new legislation had not been enacted . . . .

This is the first real quantification of the ultimate effect of this legislation I have seen.  To my knowledge, SLM itself has refused to quantify the aggregate impact of this legislation.  Instead to date, SLM has only stated that the legislation will have an aggregate adverse impact of 1.8%-2.1% to core earnings over the next five years over above the total impact of the legislation disclosed in the recent developments section of their 10-K. In In re IBP, Inc. Shareholders Litigation (“IBP”), 789 A.2d 14 (Del. Ch. 2001) and Frontier Oil Corp. v. Holly, the Delaware courts set a high bar for proving a MAC.  Under these cases the party asserting a MAC has the burden of proving that the adverse change will have long-term effects and must be materially significant.  If the Flowers group is correct in their assessment of the detrimental effects, this high bar would likely be met.  This could explain why SLM does not argue that there was no "material adverse effect" under the above definition in its own complaint but instead argues that a MAC is barred due to application of one of the exclusions in the definition. 

The Flowers group must not only meet their burden of proving that a material adverse effect has occurred, they must show that one of the exclusions above in the MAC definition are not applicable.  Here, Flowers first addresses clause (b) -- the "changes in applicable law" exclusion.  Remember from my prior post, SLM is arguing that:

the “enacted legislation is entirely excluded from consideration as an MAE unless it is more adverse to Sallie Mae than the” proposals disclosed in the Recent Developments Section of the 10-K. Furthermore, SLM argues that any adverse enacted legislation must be considered in comparison to these proposals. SLM then concludes by asserting that only if the difference between the proposals and the enacted Bill is a material adverse effect with respect to the “totality” of the “financial condition, business, or results of operation” of SLM and its subsidiaries is it not excluded from the definition of MAC.

The Flowers group counters with the same argument I made in my post.  Namely on its face the plain language of the MAC definition requires that the enacted legislation be only adverse -- there is no materiality qualifier.  The Flowers group states:

The exception is limited however. If a “change in Applicable Law” is “in the aggregate more adverse” to Sallie Mae than the proposals described in the Sallie Mae 10-K, then the new legislation is not a “change in Applicable Law” that is excluded from consideration in evaluating whether there has been a Material Adverse Effect. Accordingly, “changes in Applicable Law” that are in the aggregate more adverse to the company than the proposals described in the Sallie Mae 10-K must be considered in determining whether there has been a Material Adverse Effect.

Flowers then asserts that since this is the plain language of the contract, the court need look no further.  Here, I agree.  Basic contract interpretation rules require the court to look first to the plain language of this contract.  And here the language negotiated by these highly sophisticated parties is clear that it need only be adverse.  Nonetheless, the Flowers group makes a strong case in their counter-claim that even if parole evidence (evidence outside the contract) is considered, the parties specifically considered the second Kennedy proposal for inclusion in the MAC definition exclusions and rejected this consideration.  The Flowers group states:   

On April 14, 2007, after learning the published details of the Kennedy Proposal, Mustang again revised Sallie Mae’s Material Adverse Effect definition, reiterating that Mustang would only accept the risk of enactment of those proposals that were described in the Sallie Mae 10-K, e.g., excluding the Kennedy Proposal, and that Mustang would not accept the risk of any legislation “more adverse” to the Company. During the discussion on April 14, 2007, the parties agreed that the Kennedy Proposal, if enacted, would not be subject to the “changes in Applicable Law” carve-out from the definition of Material Adverse Effect. The Material Adverse Effect language was finalized on April 15, 2007, with Mustang adding language to ensure that the carve-out for the proposals in the Sallie Mae 10-K was for those proposals in the form posed publicly as of the date of the Company 10-K, i.e. March 1, 2007.

While SLM will obviously have a different story, the Flowers group's argument is supported by the fact that the second Kennedy proposal was disclosed in SLM's April 10 10-Q filed just before the merger agreement was announced.  The parties could have specifically included this proposal but did not. 

Finally, the Flowers group argues that a material adverse effect has also occurred due to a separate 4.9% decline in core earnings for SLM resulting from the current credit crunch.  Moreover, the Flowers group argues that the adverse effect is not excluded by clause (e) above -- "general industry changes" because:

While current market conditions have had a negative effect on most financial institutions, the collapse of the securitization market and disruption of the asset-backed commercial paper market have “disproportionately affect[ed]” Sallie Mae relative to similarly sized financial services companies” and this are not excluded from the Merger Agreement’s definition of Material Adverse Effect . . . .

I'm not sure this is a winner.  The 4.9% adverse effect is below the 5% materiality threshold for GAAP and, although there is little case law on this, to establish a MAC it is generally thought that the effect to earnings must be significantly higher.  Moreover, the general exclusion here is likely to absorb much of this claim.  So, I think the Flowers group is keeping this in for form but has a much better claim based on the enacted legislation. 

Bottom Line:  Obviously, this is all based on the public information and more will come out prior to trial, but as of now, I believe that the Flowers group has a solid claim that a MAC occurred under the merger agreement and that it is not excluded.  I think this is particularly true given the quantification of the impact on SLM and the evidence that the second Kennedy proposal was considered and excluded from the MAC definition.  The latter point is particularly problematical for SLM because it argues strongly against their own argument that a materiality qualifier should be written into the applicable law exclusion.  If this is true then why was the second Kennedy proposal specifically excluded by the parties from the MAC definition? 

Final Note:  As I stated yesterday on the expedited relief SLM has requested: 

I think Flowers makes a good point that this is now only about the $900 million and they are willing to fight it out by permitting SLM to terminate the merger agreement without prejudice.  This would alleviate SLM's need for expedited relief.  Still, I think the judge on this matter, Vice Chancellor Strine, will grant the request to expedite as it will mean a trial and opinion is more likely. This is a prominent case and Strine will not only want to put his name on another notable opinion, but he has incentives to maintain Delaware as the more certain law on these adjudications by doing so (this will mean more companies choosing Delaware law and forum to adjudicate these disputes).  Plus Strine wrote the opinion in IBP v. Tyson, the last big MAC case, and he will likely want to take the opportunity to flesh out the law on that opinion. From my perspective, this is a good thing as we could use more case law on the interpretation of the exclusions from a MAC definition. 

On further reflection, I continue to think this is the way things will go.  There is a meeting in Strine's chambers next Monday at 1:00 p.m. on scheduling.  We will have more information then. 

October 16, 2007 in Material Adverse Change Clauses | Permalink | Comments (1) | TrackBack (0)

Monday, October 15, 2007

Flowers et al.: The Counter-C+laim

You can download the counter-claim here, and the letter Flowers counsel sent to the VC Strine about expedited relief here

I have a couple of quick thoughts and will give a full analysis tomorrow morning.  First, I think it is becoming increasingly clear that the parties are now arguing over the $900 million rather than salvaging a deal.  Here, the argument appears to be revolving around whether the enacted bill only needs to be more adverse than what was disclosed in the 10-K or have a material adverse effect over and above the 10-K disclosure.  Flowers is arguing the latter and focuses on this point in its counter-claim; SLM is arguing the former.  As I've said before and based on publicly available information, I believe the Flowers reading is the better one; it is certainly the plain language of the contract. 

On the expedited relief SLM has requested -- I think Flowers makes a good point that this is now only about the $900 million and they are willing to fight it out by permitting SLM to terminate the merger agreement without prejudice.  This would alleviate SLM's need for expedited relief.  Still, I think the judge on this matter, Vice Chancellor Strine, will grant the request to expedite as it will mean a trial and opinion is more likely. This is a prominent case and Strine will not only want to put his name on another notable opinion, but he has incentives to maintain Delaware as the more certain law on these adjudications by doing so (this will mean more companies choosing Delaware law and forum to adjudicate these disputes).  Plus Strine wrote the opinion in IBP v. Tyson, the last big MAC case, and he will likely want to take the opportunity to flesh out the law on that opinion. From my perspective, this is a good thing as we could use more case law on the interpretation of the exclusions from a MAC definition. 

October 15, 2007 in Material Adverse Change Clauses | Permalink | Comments (0) | TrackBack (0)

Sunday, October 14, 2007

BEA: The Defensive Analysis

On Friday, Oracle delivered a bear hug letter to BEA Systems, Inc. (BEAS) offering to purchase the company for $17 per share in cash.  For those who collect bear hug letters, Oracle wasn't kind enough to release the letter itself instead releasing a press release announcing its delivery.  BEAS followed up with two letters later in the day accessible here and here.  BEAS's response was standard operating procedure -- "just say no", hire Wachtell and buy time to develop a strategy or continue to say no.  Then came Carl Icahn, owner of 13.22 percent of BEAS disclosed his own letter rejecting the Oracle offer and requesting that BEAS put itself for auction or accept a preemptive bid at a compelling valuation (i.e., higher than Oracle's offer). Interestingly, Ichan filed the letter on Form DFAN14A meaning he is preserving his right to conduct his own proxy solicitation to in his own words "seek to  nominate individuals for election as directors of the Issuer". 

So, the question now is what are BEAS's defenses?  First, the really interesting point.  BEAS, a Delaware company has not had an annual meeting since July 2006.  BEAS is in clear violation of DGCL 211.  DGCL requires that:

If there be a failure to hold the annual meeting or to take action by written consent to elect directors in lieu of an annual meeting for a period of 30 days after the date designated for the annual meeting, or if no date has been designated, for a period of 13 months after the latest to occur of the organization of the corporation, its last annual meeting or the last action by written consent to elect directors in lieu of an annual meeting, the Court of Chancery may summarily order a meeting to be held upon the application of any stockholder or director.

This gives Oracle the ability to go to Delaware Chancery Court to force BEAS to hold a shareholder meeting for the election of directors.  This is a hole in BEAS's defensive shield, but to make a full assessment let's look at the rest of its defenses:

Posion Pill

BEAS has a shareholder rights plan (aka "poison pill") with a 15 percent threshold.  It is both a flip-in and flip-over plan and is triggered If a person or group acquires, or announces a tender or exchange offer that would result in the acquisition of, 15 percent or more of BEAS's common stock.  This is a standard form of the pill and nothing particularly unusual.  For definitions of these terms see here.

Staggered Board

The BEAS board is divided into three classes.  Each class serves three years, with the terms of office of the respective classes expiring in successive years.  The staggered board is a powerful anti-takeover device as it requires successive proxy contests over two years (for more on this generally see Lucian Bebchuk, et al., The Powerful Antitakeover Force of Staggered Boards: Theory, Evidence and Policy)

Action by Written Consent:

Permitted.  However, under Delaware law (DGCL 141(k)) the BEAS directors can only be removed for cause since BEAS has a staggered board.  So, Oracle can't act by written consent to remove the board.  Oracle will have to wait for two annual meetings in a row to gain a majority board.  This is likely about sixteen months from now give or take. 

Notice of Director Nominations

Notice of the nomination must be delivered not earlier than the close of business on the 120th day prior to such annual meeting and not later than the close of business on the later of the 90th day prior to such annual meeting or the 10th day following the day on which public announcement of the date of such meeting is first made by the corporation.  Oracle will thus have 10 days after the meeting is called to make its nominations.

DGCL Section 203

Applicable as BEAS has not opted out of it.  This is the Delaware business combination statute, and given the presence of a poison pill here, it is not particularly relevant.  This is because Oracle cannot acquire BEAS without gaining board approval and the board's accompanying redemption of the poison pill.  Any board that would do this would also exempt out Oracle from this statute by approving their acquisition. 

The bottom line is that BEAS has strong takeover defenses in the form of a staggered board in particular.  But, Oracle can force BEAS to call a meeting rather quickly and under the nomination provisions above force an election to replace 1/3rd of the board.  This would be a quick publicity gain for Oracle and provide it valuable momentum.  If BEAS continues to adopt a scorched earth strategy and just say no to a deal (a route permitted under Delaware law), Oracle would then have to wait another year to elect a majority on the board to redeem the poison pill and agree for Oracle to acquire the company.  Few companies have this staying power but Oracle did just such thing successfully in the PeopleSoft transaction.  For those reading tea leaves, there Oracle revised its initial unsolicited bid for PeopleSoft (including one reduction) five times over eighteen months before finally acquiring it in late 2004.   Oracle began at $16/share and ended at $26.50/share in the interim fighting off a DOJ suit to prevent the deal in 2004.  And if Oracle wants to be particularly aggressive and risky, it can attempt to chew through BEAS's pill, a strategy which academic Guhan Subramanian thought viable and which he detailed in Bargaining in the Shadow of PeopleSoft's (Defective) Poison Pill.  Perhaps BEAS's pill has the same defects (OK -- I'm kidding here, no lawyer would ever recommend this strategy -- way to risky).

For its part, BEAS will take particular pains (as it did in two press release on Friday) to avoid saying that it is up for sale.  That is because, once the BEAS board decides to initiate a sale process, Revlon duties under Delaware law apply and the board is required to obtain the highest price reasonably available.  By refusing to initiate a sale process, the board adopts a legitimate "just say no" defense.  One which Delaware law permits, including the use of a poison pill to avoid a deal.   Although, hope springs eternal and perhaps a case is on the horizon where Delaware where readopt Chancello Allen's opinion in Interco and reestablish supervision and court-mandated redemption of poison pills when sufficient time has passed and they are being used solely as a shield.  But don't hold your breath. 

Ultimately, I predict Oracle will attempt to put pressure on the BEAS board by initiating litigation in Delaware to hold a BEAS annual meeting and running a proxy contest coupled with a tender offer to replace the 1/3rd of the board up for election then.  If Oracle wins it will likely put enough pressure on BEAS to reach a deal.  Particualrly with Icahn chomping at the bit.  Expect BEAS to resist until then knowing that Oracle has, in the past, met such resistance with increased consideration

NB.  BEAS's Bylaws are accessible here; BEAS's Certificate of Incorporation id accessible here

Technical Tidbit:  Any agreed acquisition will likely have to be pursuant to a tender offer rather than a merger.  This is because a company that is not current in its financial reporting (i.e., BEAS) can be the subject of a tender offer but, because of an SEC staff interpretation of the proxy rules, that company may not be able to file and mail a merger proxy and thus cannot hold a shareholder vote on the merger. 

October 14, 2007 in Hostiles | Permalink | Comments (1) | TrackBack (0)

Topps Closes

Topps issued the following press release on Friday:

The Topps Company, Inc. (Nasdaq: TOPP) today announced the closing of the acquisition of Topps by Michael Eisner's The Tornante Company LLC and Madison Dearborn Partners, LLC. Under the terms of the agreement, Topps stockholders will receive $9.75 in cash for each share of Topps common stock held, for a total aggregate purchase price of approximately $385 million payable to stockholders.

"This is a great day for Topps and its shareholders," said Arthur T. Shorin, Chief Executive Officer of Topps. "This transaction provides our former investors with full value for their shares and ensures the further success of our iconic company."

Topps President and Chief Operating Officer Scott Silverstein added, "We are pleased to have an experienced and talented group of investors who are committed to growing our company and to delivering added value to our partners, the people who enjoy our products every day, and our terrific team of employees whose efforts have made this transaction possible."

"Topps is a wonderful company with a rich history and a strong brand portfolio. We look forward to working with the company's outstanding management and employees to grow Topps in new and innovative ways," Eisner said on behalf of the investors.

Given the way the Topps board manipulated the takeover process and spurned a higher offer from Upper Deck, both over vociferous shareholder objections, I'm not sure how great a day it was for Topps' shareholders.  They have now lost out on the potential upside Eisner et al. have purchased.  Eisner wins again for now. 

There was also no mention in the above release of the final number of dissenting shareholders, but it must have been below the 15% condition set in the merger agreement.  Still, Crescendo Partners has delivered to Topps a written demand for the appraisal of 2,684,700 shares of Topps common stock (or approximately 6.9% of the total number of outstanding shares of Topps common stock).  In a nice maneuver, they will not get to negotiate for a higher price outside the takeover process. 

Despite the loss of Topps as a public company we will still have a Delaware decision (In re Topps Shareholders Litigation, 2007 WL 1732586 (Del.Ch. June 14, 2007)) and a great case study in how not to run a takeover process.  Sayanora Topps.  For my prior posts on the Topps deal see the following:

Topps: The End Game of Dissenters' Rights

Topps and In re: Appraisal of Transkaryotic...

Topps: Not Over Yet

Topps Shareholder Meeting Tomorrow

Topps's Predictable Postponement

Topps's Car Wreck

Upper Deck Extends Tender Offer

Topps's Dilemma

Upper Deck Ducks a Second Request

Topps Postpones Shareholder Meeting

Upper Deck Tries to Buy Time

Topps and Upper Deck: The Antitrust Risk

More on Topps

In Re Topps Company Shareholders Litigation/In...

The Battle for Topps

Trading Baseball Card Companies

October 14, 2007 in Private Equity, Takeovers | Permalink | Comments (0) | TrackBack (0)