November 2, 2007
On Hiatus Today
I'll be back on Monday with a full legal analysis of the ACS situtation. But here is my quote on it in the N.Y. Post today. Not page six, though . . . .
NB. The New York Post also reports that sources are saying Unisys made superior bids for ACS "a few months after the Cerberus deal was made public."
November 1, 2007
WOW, WOW, WOW: Affiliated Computer Services Ind. Directors Resign
Wow, Wow, Wow.
I had speculated earlier last week that there was a back story to Cerberus's withdrawal of its offer. It came out today with a vengeance. Unfortunately, I'm running around right now so can't offer commentary right now, except to say that 1) Darwin can't survive this -- if these allegations are true it is not only a breach of his fiduciary duties but just plain wrong. Expect the shareholder lawsuits to be filed in the next few hours. Wow -- everyone should read the below. I'll have much more tomorrow. And, for those who just want to have some fun, their investor conference call is at 4:30 today (access it here). Should be a good one.
Independent Directors of ACS Respond to Allegations by Chairman Darwin Deason
Thursday November 1, 1:34 pm ETDALLAS--(BUSINESS WIRE)--The five independent members of the Board of Directors of Affiliated Computer Services, Inc. (NYSE: ACS - News) today sent a letter to Darwin Deason, Chairman of the Company’s Board of Directors, refuting allegations he made in a press release today.
At a Board meeting today, the independent directors said they intend to resign and will not stand for re-election, but first want to ensure their successors are truly independent and capable of protecting the company’s minority shareholders. Once the process of selecting new independent directors is complete, the current independent directors will resign immediately. They are prepared to immediately review the independence of Mr. Deason’s nominees and also believe shareholders should be given the opportunity to propose additional independent directors. This was the only business conduced at today’s Board meeting.
The letter sent by the independent directors to Mr. Deason follows.
The Latest Flowers Letter
Remember SLM? It seems so long ago. When we last left the deal (or depending upon your persepctive, litigation), the parties had agreed on a trial which everyone thought would occur in January. Well, not everyone. Today, the Flowers group sent a letter to the Delaware Chancery Court. In it, Flowers et al. state:
In our conversations with Sallie Mae's counsel, they have indicated that they would be seeking a trial date commencing in either February or April 2008 (The dates apparently are dictated in part by Mr. Susman's availability.) We believe that either time frame would impair the Buying Group's ability to prepare its defense to a $900 million claim. In light of the complexities of this case and the stakes involved, the Buying Group believes that trial should be scheduled for September or October 2008, at the Court's convenience, less than one year from now.
A January trial is but a dim memory -- we are at February or April now at best. Flowers et al. go on to conclude:
As the Court recognized at the October 22 scheduling conference, once the Buying Group waived the covenants and other restrictions on Sallie Mae's conduct, the need for expedition was removed and "we really are in an ordinary kind of situation" We recognize that the Court intends that this matter proceed more promptly than the two years that is typical for non-expedited litigation, but we believe the Buying Group's proposal is consistent with that guideline. There is no longer any credible claim of irreparable injury to Sallie Mae: this case is simply a dispute about a sum ofmoney - albeit, a very, very large sum of money. The Buying Group has no interest whatsoever in prolonging this litigation. Its only interest is in assuring that it has sufficient time to develop and prepare its defense. We believe that the schedule that we have proposed accomplishes that goal. We look forward to discussing these matters with the Comi in Chambers on November 5.
The Flowers gourp is right here. This really is now just an ordinary trial about a relatively large sum of money. I would expect Strine though to split the baby a bit and set a trial somewhere in between the parties selected dates -- say a nice July trial in Delaware. We shall learn more on Nov 5. Hopefully, it will be as fun as the last hearing. BTW -- for those who are still betting on a deal, it seems so, so far away right now.
There was a hearing in Tennessee yesterday on the Genesco/Finish Line litigation. There is no transcript, but my source at the hearing reported the following:
Some of the takeaways from yesterday hearing include; GCO, Finish Line (FINL), and UBS will present a list of trial witnesses by December 5. Documents requested in discovery can extend as far back as February 3 of this year. GCO's lawyer Overton Thompson said that worse-than-expected quarterly earnings were a "short-term hiccup" that isn't uncommon in the fashion retail industry; FINL attorney Robert Walker said "Had we known that... the third quarter would look like it looks now, we would not have signed this deal."
Nothing particularly exciting. Genesco's lawyer here is playing to the decision in IBP v. Tyson which requires that any adverse effect be long-term in nature in order to be a material adverse effect. I don't have enough information otherwise to make meaningful commentary but it appears that Genesco's arguments are going to be based on the above plus an argument that any adverse change was one which affected the industry generally, an event which is specifically excluded from the definition of Material Adverse Change under the Genesco merger agreement (for more on these arguments in the context of Genesco see here).
Wachtell's Client Memos
Wachtell regularly sends out one to two page client memos notifying clients of recent developments and commenting upon them. It is great marketing for the firm; it daily keeps them in the minds of clients and other industry actors and positions them as superbly on top of M&A developments.
Nonetheless, a few of the memos that have crossed my in box in the past few weeks have made me wonder. The new generation at Wachtell is continuing to take the pro-board stances Marty Lipton has historically taken. These memos often set out an ideological position on this side of the fence. This is likely good business -- Wachtell is still the go-to law firm for takeover defense. But, I'm not sure that the new generation is making their case in the same thoughtful manner. Moreover, is Wachtell necessarily serving their clientele well by taking an ideological stance in a client memo and asserting it as truth to their clients?
So, let's take a few examples. The first is the Wachtell memo which went out last week on the new FINRA fairness opinion rules. After summarizing the rule in the first page, the memo ends with the following statement:
The disclosure and procedural requirements of Rule 2290 should address many of the concerns arising from potential or perceived conflicts of interest resulting from relationships and arrangements that are not inappropriate but may be of interest to stockholders in determining whether or not to support a particular transaction.
Well, OK then. You mean this rule, which everyone acknowledges largely overlaps SEC requirements and has been described by Debevoise as "not likely to result in significant changes to current practice" solves all of these concerns? Of course not. It does nothing to address the inherent conflicts in investment bank fairness opinion practice (contingent consideration, stapled financing, the need for future business, etc.). A conflict which is exacerbated by the subjectivity in fairness opinion valuation and the failure to follow best practices by many banks in the preparation of these opinion (use Fama French factors folks not CAPM). And just to pile on, remember, this memo went out the same week a Wachtell partner called fairness opinions "the Lucy sitting in the box: 'Fairness Opinions, 5 cents.'" David Katz, the partner at Wachtell who prepared this memo is their go-to partner for the highly complex cross-border stuff. He is very smart and should know better.
When you’re right, you’re right. And when you’re wrong, you are very wrong. Here is yet more evidence of the value to stockholders of staggered boards. Anyone listening up there in that ivory tower?
The memo, entitled, Classified Boards Once Again Prove Their Value to Shareholders in Recent Takeover Battle, states:
Takeover protections such as classified boards continue to be under assault from academics and shareholder activists, who argue that they reduce the opportunity of shareholders to receive takeover premiums by making takeovers more difficult to complete. In response to shareholder proposals and the current governance environment, the number of companies in the S&P 500 Index with classified boards has decreased from 56% to 45% since 2004.
Academic theory, however, is often divorced from the real world of corporate takeover practice. The use of classified boards to increase shareholder value was demonstrated again in the recent takeover battle for Midwest Air.
This memo cites to two sources for this. The first is the recent takeover battle for Midwest where Midwest eventually received a much higher bid than AirTrans initially offered. Well that never happens. . . . The note also cites a recent paper by Thomas Bates et al., Board Classification and Managerial Entrenchment: Evidence from the Market for Corporate Control which found that "the evidence is inconsistent with the conventional wisdom that board classification is an anti-takeover device that facilitates managerial entrenchment." Nonetheless, the study still finds significantly lower value for firms with a staggered board and a lower bid rate. And the Wachtell memo did not mention that a significant body of research finds that the staggered board's primary justification is to ward off challenges for control. This includes a recent paper authored by former Wachtell partner John Coates with Lucian Bebchuk and Guhan Subramanian, The Powerful Antitakeover Force of Staggered Boards: Theory, Evidence, and Policy. Nowhere does the memo mention this substantial evidence on the other side to Wachtell's clients. So, Wachtell may ultimately prove right here but as of now the evidence is at best mixed, leaning against their position.
Additionally, I am one of those academics Mirvis criticizes in his post (though in Michigan my tower ain't so ivory), but I also practiced M&A for ten years and know anecdotally what Mirvis knows in his own heart. In my experience, bidders, particularly foreign ones, are strongly deterred by staggered boards. They know any takeover battle could be very long and public and are unwilling to risk spending their scarce management resources on the time-consuming activity of a hostile bid for the extended amount of time it could take in the presence of a staggered board. Moreover, the current takeover system discourages toe-holds meaning that a bidder may not even be able to hedge their risk and take a position which would pay off if their bid is unsuccessful and another bidder acquires the company.
Ultimately, Wachtell would have done better to inform their clients of the conflicted academic and practitioner evidence than promoting their platform. The two examples they cite -- Midwest and this lone paper do not make a case. It is sort of like saying that because my wife likes me everyone else does. Assuming the truth of the former does not also mean the latter is true. Attacking academics isn't going to get you past that.
And finally, there was this gem the other day also on the Harvard Corporate Governance Blog by Theodore Mirvis:
Many car advertisements on TV bear a legend explaining that the driving depicted is by professional drivers on a closed track–and warning viewers not to try the twists and turns at home. Well, maybe something like that could or should be said of the European Court of Justice’s recent decision, a precis of which appears here, striking down Germany’s “Volkswagen law” and seeming to pave the way for Porsche to acquire the company.
One might recall the earlier periods over here when state anti-takeover statutes bit the dust one by one, yielding to a perceived national policy of unrestrained takeover activity and opposition to the local interest of states (especially non-chartering states) in preserving the independence of their corporate residents. There are probably more twists and turns to come as the EC works out what is meant by the “free movement of capital.”
So, Mirvis thinks European state protection of companies is a good thing for their economies and their shareholders (e.g., French protection of Danone, their chief yogurt maker, as a national champion)? Has he been getting enough sleep lately?
And I close with the following query: Are Wachtell client memos the ultimate in "Lucy in the Box". Five cents please.
October 31, 2007
Cerberus's Sad Goodbye
Affiliated Computer Services has admirably filed today on a Form 8-K the letter it received from Cerberus. ACS had no other comment. Obviously, there is a back story here which will come out over the next few weeks. In any event, here it is (and I wish my exes had been as nice to me when we broke up)
Special Committee of the Board of Directors
Affiliated Computer Services, Inc.
We are very impressed with the management, business and opportunities of Affiliated Computer Services, Inc. (the “Company”) and continue to believe that the Company represents an attractive investment opportunity. We regret that we must withdraw our offer to acquire the Company due to the continuation of poor conditions in the debt financing markets. We are very focused on our ability to complete transactions that we initiate. From March 20, 2007, the date of our first offer letter, to the date hereof, Cerberus Capital Management, L.P. (“Cerberus”) and its affiliated funds have completed a significant number of transactions, including our acquisition of Chrysler LLC.
We believe that our proposal was in the best interests of the Company’s shareholders and that, had our proposal been put to a shareholder vote, it would have received approval by an overwhelming majority of the Company’s unaffiliated shareholders. Had the Special Committee engaged with Cerberus and Mr. Darwin Deason on the schedule we proposed in our offer letter, we are confident that our acquisition of the Company would have been approved and closed, and unaffliated shareholders would have been paid a substantial premium for their shares, some months ago. If market conditions change, we may consider proposing another transaction with the Company.
Very truly yours, CERBERUS CAPITAL MANAGEMENT, L.P.
Harman's Conference Call
I just finished listening to the Harman conference call last week (access the transcript here). I was hoping that it would answer some of my still remaining questions. These include the exact internal pricing on the issued bonds to KKR et al., the propriety of a KKR board member now sitting on the Harman board, the intentions of Harman with respect to this KKR et al. investment, and the validity of settling the dispute in this manner. The number of actual analysts questions with respect to any of this? None. In fact, the analysts did not ask a single question about the settlement, the dispute or the underlying financial causes of it. That is a shame, because if I was investing in Harman these are some of the first things I would like to know. I realize it is not easy being an analyst these days, but still, you would think they would have the gumption to ask the hard questions and let Harman decide whether to respond.
Maxim Integrate Products has problems. Due to an options back-dating investigation, the company has not filed its financial reports with the SEC since May 2006. This internal investigation ultimately concluded that stock option grants to employees and directors had been either back-dated or otherwise manipulated for a seven year period starting in 2000. Then on Oct. 2, Nasdaq delisted Maxim for seven "deficiencies," including delinquent reports for three quarters, two missing annual reports, a late proxy filing and failure to hold its annual shareholder meeting. The company now trades on the Pink Sheets. It expects to restate and file its past due reports in the first quarter of 2008, when it has stated it will seek relisting in the Nasdaq.
So, it was with a bit of surprise that I ran across this tidbit from a Form 8-K filed by Maxim earlier this month:
Maxim Integrated Products, Inc. suspended stock option exercises starting September 23, 2006 . . . . The Company will continue to prohibit the exercise of stock options until the Company completes its financial restatement and becomes current in its reporting obligations with the Commission. During the period which the exercise of stock options has been and will be suspended, stock options held by current and former employees have expired and will expire due to the expiration of their 10-year terms. The Company has implemented a program to provide cash payments to individuals who hold options granted from September 1996 through March 1998 that expire due to their maximum 10-year terms. . . . . . Approximately 525 individuals will be eligible for this program, and the aggregate payments are expected to total approximately $98 million . . . . .
So, does everyone get this? Maxim is making whole employees who cannot exercise their about to expire options due to the imposed black-out period. Maxim lists out the main beneficiaries of this program in this 8-K. This includes, surprise, a $5.21 million dollar payment to the current CEO of Maxim Tunç Doluca who is actually the largest beneficiary of the program. Now, I'm not against making whole employees who were not at fault or otherwise involved in this back-dating scandal. This could be a reasonable and justified business expense. But, to make-whole the CEO at a time when the failure to exit the black-out period is due to a restatement process he is driving and ultimately responsible for simply sends the wrong message. I realize that Mr Doluca replaced the old CEO of Maxim who left allegedly in connection with this scandal. But he is the one who now has responsibility to clean up this mess. He should be penalized for his failure to do so on a timely basis -- as his shareholders have been. Not made whole.
So, it is not M&A, but I thought I would put my two cents in on this one.
Icahn's Complaint: The Copy
You can download a copy of his complaint here. My post analyzing it can be accessed here (or just scroll down).
October 30, 2007
It is a bit odd, but it doesn't appear that Icahn has filed his complaint yet in Delaware Chancery Court. At least it is not showing up on Lexis as being filed. I say, odd, because I have a copy of it in my hands as we speak. So, I'm not going to post it yet, but can report the following. The complaint is rather summary, and in it, Icahn asks for two major grounds of relief:
- First, that BEAS be ordered to hold its annual meeting no later than November 30, 2007.
- Second, Icahn requests that BEAS be:
- Temporarily, preliminarily and permanently enjoining defendants and all those acting in concert with them from taking any action to (1) issue shares of the Company's stock, (2) to sell any material assets of the Company, (3) interfere with a proper sale of the Company, or (4) take any other action that would have the effect of interfering. with a full, fair and free vote by the Company's shareholders at the annual meeting without first obtaining approval by the Company's shareholders . . . .
The second request is clearly a placeholder. The Delaware courts are unlikely to grant such broad relief without a specified transaction pending which violates Blasius or one of the other standards of review under Delaware law (Blasius is the most likely standard applying here with respect to shareholder votes -- for an explanation of the Blasius standard see here).
But there is one interesting statement in the complaint on this:
It appears that the Company's management wants neither a bid much less the prospect that nominees of the Icahn Group sit around the board table with them. Plaintiffs have reason to believe that to fend off such Wanted oversight, the Company will place new blocks of stock in friendly hands before any stockholders' meeting can be scheduled or to conduct a "strategic transaction" that would entrench management in place.
Can it be true? Is BEAS really contemplating issuing a "sweet-heart" preferred? We haven't seen this type of share placement since the late eighties/early nineties. And it has fallen out of disfavor because it is viewed as inappropriately influencing the takeover process and entrenching management. Nonetheless, in Shamrock Holdings, Inc. v. Polaroid Corp., 559 A.2d 257, 269- 70 (Del.Ch.1989) and other cases the Delaware courts have taken a lenient approach in enjoining or otherwise prohibiting such action. So, perhaps BEAS management is willing to take the shareholder heat in order to preserve their jobs. Stranger things have happened.
Genesco's Answer to the Finish Line Counter-Claim
For those following this litigation here is a copy of Genesco's answer to Finish Line's counter-claim. Nothing particularly new in it, though there are ten Genesco attorneys named on the filing. That is a lot of people to review one document.
Washington Group International Postpones Shareholder Meeting
Washington Group International today announced that it had postponed its shareholder meeting from today until November 9, 2007. The meeting is being held to vote on the proposed acquisition of Washington Group by URS Corporation. In WGI's words, "[t]he meeting has been postponed to allow for the solicitation of additional votes in favor of the transaction in light of the fact that the transaction has, to date, received insufficient votes for approval."
We've now seen at least two postponements of shareholder meetings (Topps and here) since Strine's recent decision in Mercier, et al. v. Inter-Tel. Inter-tel permitted a board to to post-pone its shareholder meeting itself in order to gain time for stockholders to approve a proposed takeover transaction. Strine permitted this postponement despite the almost certain defeat of the takeover proposal if the meeting were not postponed (for a more thorough explanation of Inter-tel and its meaning for Blasius review see my post here). In both Topps and the Inter-tel deals the maneuver was ultimately successful and the deals approved. I expect it to be the same here. And again the proxy advisory firms are split -- Glass Lewis, Proxy Governance, and Egan-Jones -- have recommended that in favor of the transaction. Institutional Shareholder Services* -- has recommended against. Someone would write a paper on this phenomenon and the reasons for it.
NB. The post-ponement here is different than the successful strategies used by Bioenvision and OSI to gain approval of their takeovers -- to instead adjourn the shareholder meeting. For an explanation of the two different strategies and the pros and cons of each see my post here.
Lessons From Cablevision: It's all in the 13D
I've been meaning to jot down a few of my thoughts on possible lessons learned from the failed Cablevision take-private.
- Gabelli's 13D Filings. Mario Gabelli's funds eschew 13G filings and always file their holdings on 13Ds. The reason is obvious -- it provides significantly more latitude to an institutional investor to influence management and lobby against takeover transactions. These days, this is something almost every institutional investor should allow for. And, in the case of Cablevision, it was a successful strategy -- Gabelli's activist position and use of the 13D amendment process to disclose its opposition to the deal facilitated its defeat. Given this, most institutional investors should strongly consider adopting a similar policy and filing 13Ds instead of a 13G for passive holders. It is clearly a hassle because you need to constantly amend it for changed information, but a 13D provides much wider latitude to act. It can also avoid possible future SEC trouble for a failure by the filer to convert from a 13G to a 13D when influencing activity is taking place. This is particularly important since the Wall Street Journal Deal Journal noted last week that the SEC is investigating a number of 13G filers for failing to act as passive investors and taking 13D like "activities".
- The Majority of the Minority. The Cablevision deal was one of those rare takeover transactions which was actually voted down by the shareholders. Lear earlier this year was another one. However, while some papers cited this as a victory for institutional shareholders and once again signaling a new age of shareholder activism, I wouldn't make too much of it. This is because, the Cablevision deal was required to be approved by a majority of the minority. The minority here held only 35.4% of Cablevision. This meant only 17.7% of the Cablevision shares needed to vote against the merger for it to be defeated (and Gabelli held 8.25%). This was a much lower threshold than a simple majority and also meant defeat was easier.
- The Stink Stays on a Bad Deal. Given their past bids, the Dolans had significant pre-existing adverse opinion to effect in this third attempt to take Cablevision private. It likely made shareholders more skeptical and less willing to trust that the Dolans were acting fairly here. Their quick settlement of the shareholder litigation for a $30 million increase in the consideration and payment by Cablevision of approximately $30 million in plaintiffs' attorneys fees did not help.
Applebee's and the New, New Thing: Appraisal Rights
The Applebee's shareholder meeting to vote on its acquisition by IHOP is today at 10:00 a.m. (Kansas time). The meeting will be held at the Doubletree Hotel, 10100 College Blvd., Overland Park, Kansas 66210 for those who wish to attend (pancakes anyone?). The vote is likely to be a close one. Applebee's senior management, which holds about 5.1% of the company's shares, is probably going to vote against the transaction; they previously voted against it on the company's board. Burton "Skip" Sack, Applebee's largest individual shareholder, with about 3.2% of the stock, has also exercised his dissenter's rights and filed for an appraisal proceeding in Delaware Chancery Court if the transaction goes through. Sowing some confusion, the proxy services have split on the deal. Institutional Shareholder Services and Glass, Lewis & Co. favor the deal; Proxy Governance and Egan-Jones Proxy Services are against it.
Sack's exercise of appraisal rights is the third such maneuver in a troubled deal in recent months. Crescendo Partners exercised appraisal rights in the acquisition of Topps by Michael Eisner's Tornante and MDP Partners with respect to 6.9% of the total number of outstanding Topps shares. And Mario Gabelli's GAMCO exercised appraisal rights in the failed Cablevision take-private with respect to 8.25% of the total number of outstanding Cablevision shares.
I would expect these events to happen more often as institutional and other significant investors flex their muscles in troubled deals. In addition, exercising appraisal rights sets up the investor nicely If no one else has exercised appraisal rights. There will now be no free-rider problem or multiple litigants for the dissenter to negotiate with. Instead, it can now negotiate a private one-on-one deal with the buyer as to the purchase price for its shares under the shadow of its appraisal rights litigation. This is a benefit typically unavailable to the average shareholder who cannot afford the litigation expenses and free rider problems of appraisal rights. Of course, this highlights the problems of appraisal rights generally in Delaware.
Note, the Wall Street Journal Deal Journal noted this trend last week in a post and incorrectly attributed it to 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 Applebee's 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. [NB. Lawrence Hamermesh, a well-known professor at Widener University School of Law, disagreed with such thoughts on the Harvard Law School Corporate Governance Blog].
But the Wall Street Journal was incorrect to attribute the emergent trend of appraisal rights to Transkaryotic since in the three cases above we are not dealing with an arbitrage or post-record date acquisition exercise of appraisal rights. Here, the exercise of appraisal rights were by long-term shareholders who have not been effected (or even aided) by the Transkaryotic decision.
Still, it will be interesting to see what will happen in the Applebee's transaction and whether the strategy hypothesized in Transkaryotic will come to pass. It didn't happen in either Topps or Cablevision but perhaps we will be third time lucky. Applebee's, after all, is the perfect situation for such an exercise.
Practice Point: Given the rise in appraisal rights, buyers would do well to include an appraisal rights condition in their merger agreement which conditions the closing on no more than x% of the shareholders dissenting from the transaction. Topps and Cablevision had the provision, Applebee's does not. By not including it, IHOP has risked a situation similar to what occurred in Transkaryotic. There approximately 34.6 percent of Transkaryotic shareholders sought appraisal rights. Yikes.
October 28, 2007
How to Draft a Reverse Termination Fee Provision
There have now been four relatively large private equity transactions announced since the August credit/market crisis: 3Com ($2.2 billion), Radiation Therapy Services $(1.1 billion), Goodman Global ($2.65 billion), and Puget Energy ($7.4 billion). Given this growing, yet still small, dataset, I thought it would be a good time to assess how private equity reverse termination fees are being drafted and whether there has been any shift in market practice post-August. So, let's start with the Goodman Global merger agreement which was filed last Thursday and negotiated by attorneys at O'Melveny for Goodman Global and Simpson Thacher for the private equity buyer, Hellman & Friedman.
Section 7.1(e) permits termination:
(e) by the Company by notice to Parent, if (i) Parent shall have breached or failed to perform in any material respect any of its representations, warranties, covenants or other agreements contained in this Agreement, which breach or failure to perform . . . . or (ii) the conditions to closing set forth in Section 6.1 and Section 6.3 (other than the condition set forth in Section 6.3(c)) are satisfied on the final day of the Marketing Period and Parent and Merger Sub have not received the proceeds of the Debt Financing or Equity Financing (other than as a result of failure by the Company to satisfy the condition set forth in Section 6.3(c)) on or prior to the final day of the Marketing Period;
Note the underlined terms in the second prong of the termination right. This provides Goodman Global with a termination right if H&F refuses to close the transaction due to a failure of the debt OR equity financing for any reason whatsoever.
The merger agreement then sets forth in Section 7.2(c) a manner for Goodman Global to receive a $75 million termination fee in such circumstances:
In the event that this Agreement is terminated by the Company pursuant to Section 7.1(e)(ii) and the notice of termination includes a demand, which demand shall be irrevocable, to receive the Parent Termination Fee (a “Parent Termination Fee Notice”), Parent shall pay $75,000,000 (the “Parent Termination Fee”) to the Company no later than two (2) Business Days after such termination. . . .
NB. Under Section 7.2(d) Goodman Global is also entitled in these circumstances to a repayment of fees and expenses up to $5 million.
But this does not end the matter. Section 7.2(e) states:
Anything in this Agreement to the contrary notwithstanding, (i) the maximum aggregate liability of Parent and Merger Sub for all Company Damages shall be limited to $139,200,000 (the “Parent Liability Limitation") . . . .
Section 7.2(e) caps the aggregate liability of H&F to $139,200,000 for any breach of the merger agreement; elsewhere in Section 8.5(a) of the agreement it provides that specific performance is not available to Goodman Global under any circumstances. So, H&F can absolutely walk from the transaction knowing that its maximum liability under any circumstance is $139,200,000.
So, this begs the question -- what is the reverse termination fee here $75 million or $139 million (3% or 5% of the deal value)? By the terms of the agreement it is $75 million if all of the conditions are satisfied and only the financing is unavailable. In such a situation, Goodman Global can terminate and collect the $75 million. In all other circumstances, Goodman will have to sue for failure of H&F to complete and can receive damages up to the $139 million. The agreement specifically excepts out specific performance of the bank/hedge fund commitment letters and nowhere does it permit a suit based on the banks' failure to adhere to their commitment letters. Presumably, although the agreement can be read ambiguously on this point, if the financing is unavailable and Goodman Global can otherwise prove that the conditions to the agreement are not satisfied, it can choose not to terminate the agreement and instead try and collect up to the maximum $139 million. But if Goodman Global decides to choose door number 1 and the $75 million it cannot pursue a greater amount of damages.
This is important. Because of the mechanics and incentives of the parties here, I doubt you will ever have a situation where the private equity firm is unwilling to close in circumstances where the financing is available. Or to again rephrase, if the private equity firm does not want to close, it can collaborate with the financing banks/hedge funds to claim that the financing is unavailable for reasons under the agreement (read, material adverse change, etc.). In such a case, Goodman Global is faced with a choice, terminate and claim that the conditions are satisfied and receive the $75 million. Or sue, and attempt to collect up to the $139 million. Otherwise, the agreement has incentives to push H&F towards payment of the $75 million. For, if H&F's failure to pay the termination fee:
is not the subject of a bona fide dispute, the Company shall be entitled to seek and receive, in addition to the Parent Termination Fee and/or the expense reimbursement pursuant to Section 7.2(d), interest thereon and the Company’s costs and expenses of collection thereof (including reasonable attorneys’ fees and expenses).
Though theoretically the $139 million is available, the above structure creates bargaining incentives which will push Goodman Global to take the $75 million termination option in almost all circumstances. It will want to get past a bad deal, terminate as soon as possible, settle around the $75 million and move onward. The alternative is to be seen as the litigating party, slug through such litigation over the existence of a material adverse effect or some other alleged failure of a condition and try and get a damages claim up to the $139 million. The extra $50 million is not worth it. Conversely, the buyer will be able to claim they settled for the lesser amount against an uncertain case.
And for those who want support that this is what will happen, Acxiom had just such a structure in its agreement and surprise, that was what occurred there (see more here).
Both 3Com and Radiation Therapy also have similar structures (see the merger agreements here and here, respectively). Puget Sound has not filed its merger agreement but is not a useful reference due to the long period between signing and closing for a utility deal. And I think Goodman Global is the best drafted of the three for those looking for precedent.
I'm very surprised that this is the model that is developing. I suppose the higher payment permits the seller to trumpet a higher possible reverse termination fee while not having to agree to a financing condition (note that all of the press releases for these deals did not have the formerly usual statement of "There is no financing condition"). Though, again, the parties will naturally gravitate to the lower threshold. And given the still jumpy credit markets any reverse termination fee creates a higher risk of no completion. So, for lawyers adopting this model I think they would do well to advise their clients of the incentives in this structure and simplify it. The Goodman Global model can be built upon to provide a greater certainty of a higher reverse termination fee for the seller -- here the interplay of the two clauses means that the higher cap is likely to be only illusory. But the additional drafting creates ambiguity. Lawyers who negotiate this model may do well to simplify it with only one slightly higher fee compromising perhaps at 4%.
Final Thought: Only Puget of the four has a go-shop provision. This is an interesting development. Perhaps parties are realizing the issues with these mechanisms and more carefully considering their use. On this note, Christina Sautter has a forthcoming article, Shopping During Extended Store Hours: From No Shops to Go-Shops - the Development, Effectiveness, and Implications of Go-Shop Provisions in Change of Control Transactions. It is an intelligent, thorough look at go-shops and the first of what is likely to be a wave of academic articles on the subject.
BEA Systems: Icahn Goes to Delaware
On Friday, Carl Icahn disclosed the following letter to the board of BEAS (NB. Caps are his own just in case the Board was reading the letter too quickly and didn't get the point):
October 26, 2007
BEA Systems, Inc.
To The Board Of Directors Of BEA:
I am the largest shareholder of BEA, holding over 58 million shares and equivalents. I am sure that the BEA Board would agree with me that it would be desirable not to have to put BEA through a disruptive proxy fight, a possible consent solicitation and a lawsuit. This can be very simply avoided if BEA will commit to the two following conditions:
BEA SHOULD ALLOW ITS SHAREHOLDERS TO DECIDE THE FATE OF BEA BY CONDUCTING AN AUCTION SALE PROCESS AND ALLOWING THE SHAREHOLDERS TO ACCEPT OR REJECT THE PROPOSAL MADE BY THE HIGHEST BIDDER. BEA should not allow the stalking horse bid from Oracle to disappear (failure to take the Oracle bid as a stalking horse would be a grave dereliction of your fiduciary duty in my view). If a topping bid arises, then all the better. But if no topping bid arises it should be up to the BEA shareholders to decide whether to take the Oracle bid or remain as an independent Company - - not THIS Board, members of which presided over the reprehensible "option" situation at BEA, a Board that has watched while, according to Oracle in its September 20, 2007 conference call, Oracle's Middleware business "grew 129% compared with the decline of 9% for BEA".
BEA SHOULD AGREE NOT TO TAKE ANY ACTION THAT WOULD DILUTE VOTING BY ISSUING STOCK, ENTRENCH MANAGEMENT OR DERAIL A POTENTIAL SALE OF BEA. We are today commencing a lawsuit in Delaware demanding the holding of the BEA annual shareholder meeting before any scorched earth transactions (such as stock issuances, asset sales, acquisitions or similar occurrences) take place at BEA, other than transactions that are approved by shareholders. AS WE STATED ABOVE, THIS LAWSUIT CAN EASILY BE AVOIDED.
Your recent press releases regarding Oracle's proposal to acquire BEA indicate to me that you intend to find ways to derail a sale and maintain your control of the company. In particular I view your public declaration of a $21 per share "take it or leave it" price as a management entrenchment tactic, not a negotiating technique. BEA is at a critical juncture and it finds itself with a "holdover Board". BEA has not held an annual meeting in over 15 months and has not filed a 10K or 10Q for an accounting period since the quarter ended April 30, 2006. Those failures have arisen out of a situation that occurred under the watch of many of the present Board members. You should have no doubt that I intend to hold each of you personally responsible to act on behalf of BEA's shareholders in full compliance with the high standards that your fiduciary duties require, especially in light of your past record. Responsibility means that SHAREHOLDERS SHOULD HAVE THE CHOICE whether or not to sell BEA. BEA belongs to its shareholders not to you. Very truly yours, /s/ Carl C. Icahn ----------------- Carl C. Icahn
I don't yet have a copy of the complaint. But to the extent Icahn's suit is limited to the prompt holding of the annual meeting he has a very good claim. As I noted in my defensive profile of BEAS, BEAS has not held its annual meeting since July 2006. BEAS is in clear violation of DGCL 211 which requires that such a meeting be held within thirteen months of the past one. Since Schnell v. Chris-Craft, 285 A.2d 437 (Del. 1971), Delaware courts have been vigilant in enforcing this requirement although they have left the door open for a delay in exigent circumstances. See Tweedy, Browne and Knapp v. Cambridge Fund, Inc., 318 A.2d 635 (Del. 1974) (stating that not all delays in holding annual meeting are necessarily inexcusable, and, if there are mitigating circumstances explaining delay or failure to act, they can be considered in fixing time of meeting or by other appropriate order). Here, I suspect BEAS will argue that it cannot hold its annual meeting due to its continuing options back-dating probe. And I suspect the reason why is that BEAS simply cannot correctly fill out the compensation disclosure for their named executives because they just don't know how the options backdating effected it. If the company’s proxy statement says that shares were priced at one level when the options were granted and it turns out that the price was different than disclosed in the proxy statement, the statement would be a material misstatement and create liability under the Exchange Act. Hence the delay.
There are ways around this -- one is to omit the disclosure and obtain SEC no-action relief on the point. The Delaware court may go this route -- forcing BEAS to obtain such relief. But of course, if the court simply orders a date and leaves BEAS to resolve this issue with the SEC, it creates uncertainty over whether the SEC will actually grant such relief (I can't see why they wouldn't, but expect BEAS to argue this). Otherwise, perhaps the Chancery Court can use its nifty new certification option to the SEC to find the answer. Ultimately, Delaware has always been rather strict in requiring the annual meeting to be held within the 13 month deadline -- I expect it to be the case here in some form. Icahn is thus likely to soon get a quick win to gain momentum in this takeover fight. Not to mention the ability to nominate a slate for 1/3 of BEAS's directors -- the maximum number he can do so due to BEAS's staggered board.
Genesco: The Big Dump
The AP is reporting that Genesco Inc. has turned over more than 1.5 million pages of internal documents to The Finish Line Inc. in connection with Genesco's lawsuit to compel Finish Line to complete their previously agreed merger. Genesco here appears to be setting up a "full disclosure" strategy. This has two advantages. First, Genesco can portray itself as fully responding to Finish Line's claim that it has breached the disclosure provisions of the merger agreement -- "Look we didn't even object to your over-broad discovery request and gave you over one million documents -- now close this transaction". Second, this document dump will swamp Finish Line's attorneys with needless and mostly irrelevant documents; presumably Genesco's hope is that it will also distract Finish Line/UBS and their attorneys from their case and/or cause them to miss more important documents.
Ultimately, I feel very bad for the junior associates at Latham & Watkins and Jones Day, lawyers for UBS and the Finish Line, respectively, who now have to read through all of this. It is good times, though, to be a document reproduction service in Nashville.