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Editor: Brian JM Quinn
Boston College Law School

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Friday, November 9, 2007

Restoration Hardware Sold!

Restoration Hardware, Inc. yesterday announced that it had agreed to be acquired by an affiliate of Catterton Partners.  Gary Friedman, Restoration Hardware’s CEO, is a party to the transaction, and several institutional stockholders of Restoration Hardware have agreed to invest in the transaction. The total equity value of the deal is approximately $267 million.

There are a number of interesting things about this deal: 

  1. In the press release was the following disclosure: "The transaction is not subject to any financing condition . . . ."  When was the last time you saw that in a private equity deal?  Not since before those troubling August times.  The reason why there is no financing condition here is that the transaction appears to be all equity financed with perhaps some post-transaction debt financing coming from Restoration's current credit facility.  Per Section 4.5 of the merger agreement, Catterton represents:
    • "Assuming the funding of the Financing in accordance with the Equity Commitments . . . . the proceeds from such Financing constitute all of the financing required for the consummation of the transactions contemplated by this Agreement and, together with the Company’s current $190 million credit facility with Bank of America, N.A. (the Parent and the Company have received from Bank of America, N.A. a waiver letter pursuant to which Bank of America, N.A. has agreed to maintain in place the Company’s credit facility following the Merger, subject only to certain conditions as set forth in such waiver letter), are sufficient for the satisfaction of all of Parent’s and Merger Sub’s financial obligations under this Agreement . . . .
  2. There is a reverse termination fee payable by Catterton on the deal of $10,680,000.  However, this is only payable if the acquirer breaches the agreement by, for example, refusing to close, and Restoration sues.  There is otherwise a bar on specific performance and a cap on damages for the buyer in Section 8.4(c) of the merger agreement.  This cap is set at the amount of Catterton's equity commitment.  So, this structure is like the other recent post-August M&A deals (3Com, etc.) in that it sets up a two-tiered buyer damages regime.  First, is a lower fee payable if the target terminates upon buyer breach.  And another, higher fee is available if the target does not terminate in such a case but sues.  Here, it is not as egregious as the other deals though because the second, higher damages limit is the amount of the equity commitment.  This amount is not disclosed, but I presume it is much higher than the second fee in other deals and likely the full deal amount. 
  3. For a management participating LBO, this deal is relatively light on investor protection.  The agreement provides for a 35 day go-shop, which, in these circumstances, with such significant management participation is meaningless -- no third party bidder will likely bid in this situation (though it is ameliorated by the high premium of 150%).  The go-shop break fee is $6,675,000 while the regular break fee for a post-go-shop Restoration third party deal is $10,680,000.  Finally, the deal has a provision that if the shareholders vote no Catterton is paid $2,670,000.  This last fact is ameliorated by the high vote required here which is:
  4. (i) the approval of holders of two-thirds of the outstanding shares of Restoration Hardware common stock pursuant to the certificate of incorporation of Restoration Hardware, [and] (ii) the approval of holders of a majority of the shares voting at the special meeting that are held by stockholders not participating in the transaction . . . .

Ultimately, the deal is interesting because it breaks with the reverse termination fee practices of the other private equity deals announced post-August by requiring the acquirer to pay a significantly higher fee if they refuse to close and the target does not terminate the deal.  This is a model more akin to what happened in American Home Lenders/Lone Star where the damages remedy was specific performance or payment of the entire merger consideration.  That deal was completed albeit at a lower price.  This in contrast to the many deals (Acxiom, Harman, SLM, etc.) where the buyer was able to effectively walk due to a significantly lower damages overhang.  M&A lawyers would do well to tell their clients of the difference. 

November 9, 2007 | Permalink | Comments (0) | TrackBack (0)

CKX: The Fine Art of Cramped Disclosure

CKX filed its own Form 10-Q yesterday.  In it was the following disclosure about the company's pending sale and its contingency on financing: 

Completion of the Merger is not conditioned upon 19X receiving financing, however, upon termination due to a failure of 19X to obtain necessary financing 19X must pay CKX a termination fee of $37 million, payable at the option of 19X in cash or shares of CKX common stock valued at a price of $12.00 per share.

Umm, so it really is conditioned on financing?  Right!?  Then, upping the opacity of their disclosure, CKX stated:

On November 8, 2007, 19X, Inc. (“19X”) delivered fully executed financing letters which provide for capital sufficient to complete the merger on the previously disclosed terms. The financing letters delivered by 19X include firm commitments from, as well as other detailed arrangements and engagements with, three prominent Wall Street firms and expressions of intentions from management and other significant investors in CKX. On October 30, 2007, 19X had delivered unsigned copies of the letters to allow the CKX Board of Directors to complete a review of the financing package. Upon completion of the Board’s review, 19X delivered the fully signed financing letters.

This disclosure raises more questions for me than it answers, including:

  1. Who are these Wall Street Banks?
  2. How much are their financing commitemtnts for?  In particular, the use of the statement "capital sufficient" seems funny.  Financing letters is also undefined.  So, is the term inclusive of the equity commitment and other "expressions of interest"?  It appears to be.  But if this is true, the amendment to the merger agreement requires that:
    1. "The Financing Letters shall reflect debt and equity commitments from such equity investors and financial institutions, which together with any equity to be issued in connection with the Contribution and Exchange Agreements or to be issued in exchange for securities of Parent, shall be sufficient to pay the full Merger Consideration . . . ."
    2. This provision requires all of the debt and equity financing for the deal to be "committed" not an "expression of interest".  If the financing letters referred to in the discloaure above do include the financing other than that committed to by the banks, it is not in accord with the merger agreement as I interpret it. 
  3. What does the company mean by "expressions of intentions from management and other significant investors in CKX"?   Is this part of the financing or the equity commitment?  And, in either case, why is it an "expression of interest" and not a firm commitment.  An expression of interest is below even a highly confident letter to me and is along the lines of "I express an interest in eating a sundae tonight".

So, on this basis, I would say there appears to be some trouble with the financing of this transaction, a problem which may not be cured.  But, perhaps I am reading too much into this -- cramped disclosure can do that to you.  In any event, this deal still has a ways to go.  CKX has not even filed its proxy statement yet -- instead giving management and its controlling shareholder five months to work out a deal with a pending merger agreement.  I wish I could get that option to buy.

November 9, 2007 in Current Events | Permalink | Comments (0) | TrackBack (0)

SLM Goes for a Quick Ruling

SLM filed their Form 10-Q this morning.  In it was this nugget of disclosure:

Under guidance from the Delaware Court of Chancery at a scheduling hearing on November 5, 2007, the Company has elected to pursue an expedited decision on its October 19, 2007 motion for partial judgment on the pleadings. Specifically, the Company is seeking an expedited ruling that its interpretation of the Merger Agreement as it pertains to a Material Adverse Effect is the correct interpretation. The effect of this election will be that trial is expected to commence on an undetermined date after Thanksgiving 2008, rather than in mid-July 2008.

The Flowers group still needs to agree to this.  And, although, they have made murmurings before that they might so agree, at the last scheduling conference their lawyer, Marc Wolinsky, was very silent when SLM and VC Strine discussed the issue.  So, what will the Flowers group do?  My hunch is that they will agree to it -- in order to appear amenable to Strine.  And, as I said before, I think they have a very strong case on a plain reading of the contract.  Another issue is whether Strine will ask the parties to waive their right to appeal if he does make such an expedited ruling.  There is no way Flowers would agree to this. 

The bigger question in my mind is why SLM feels the need to push this at this point -- wouldn't the company be better  off just moving on and fighting this out at a later date?  Or, heaven forbid, settling it out?   This is now devolved into a clear litigation suit -- unless SLM is willing to lower its asking price down to an acceptable level for Flowers -- something Lord et al.  appear unwilling to do. 

Interesting addedum point:  Delaware provides for pre-judgement interest on breach of contract claims.  The rate of interest to be paid is at the discretion of the judge.  So, Flowers insistence that it has not repudiated the merger agreement and equal insistence that they will not terminate is likley due to posturing on this issue.  If they lose, they can claim that they never breached the merger agreement and so do not have to pay interest.

November 9, 2007 in Delaware, Litigation | Permalink | Comments (0) | TrackBack (0)

Thursday, November 8, 2007

On Hiatus Today: Additional Tidbits

I'll be back tomorrow with stuff on Ventana/Roche and the latest Delaware cases.  In the interim:

  1. The FT has a nice article on the weaknesses in Ventana's defenses.  I'm quoted in it as well as Bill Lawlor, the M&A guru at Dechert. 
  2. Bainbridge has an "entire" fairness analysis of the ACS deal here.
  3. A Rio Tinto/BHP deal is an M&A lawyers dream and nightmare because both companies are dual listed companies organized in the U.K. and Australia, respectively.  Both have ADSs trading in the U.S. to boot.  I talk about this issue and what a DLC is here in the context of the Thomson Reuters DLC.  Read the BHP press release here.
  4. There is a new, excellent fairness opinion article out:
    1. Fairness Opinions in Mergers and Acquisitions by Anil K. Makhija and Rajesh P. Narayanan 
    2. It finds that shareholders on both sides of the deal, aware of the conflict of interest facing advisors, rationally discount deals where advisors provide fairness opinions. The reputation of the advisor serves to mitigate this discount, while the contingent nature of advisory fees appears to have no impact.  I'm also happy to say it cites my own paper Fairness Opinions for this proposition. 
  5. Still no word from CKX on their acquirer's financing.  Funny about that. For more analysis on that deal see here
  6. The troubled Penn National Gaming deal took a step forward.  A date for the shareholder meeting was set for Dec. 12.
  7. And finally, at the Deal's M&A conference, Marty Lipton commented yesterday that although $100bn deals may not be happening at the moment, large deals are still a possibility. Moreover, he said over the last 40 years deal activity has periodically slowed for 18-36 months before coming back. Said regulation may be less of a factor in upcoming deals, as economists at the DOJ and FTC seem to have changed their way of thinking; MAC clauses have been sharpened and will become more specific; and pronouncements from Washington from now to the election are purely aimed at votes. Leon Black said the $350bn in LBO inventory from this past summer should be down to $200-250bn within three to six months and said European companies are looking at US purchases because of favorable forex and more available financing than private equities. 
    1. Hopefully he told his own people about the MAC clause point

November 8, 2007 | Permalink | Comments (0) | TrackBack (0)

Wednesday, November 7, 2007

SEC Cross-Border No-Action Letters

I've been meaning to post up the latest SEC No-Action letters relating to cross-border transactions.  Here they are:

It is my humble belief that any public M&A lawyer should regularly read these letters as it familiarizes you with the granular issues associated with the Williams Act and public M&A generally.  But, there is a problem here.  All of these releases deal with technical issues and seek to harmonize the U.S. aspects of cross-border transactions that the SEC's Cross-Border Rules did not correct.  For example, Rule 14d-10 of the Exchange Act, commonly referred to as the “all-holders/best-price” rule, requires that an acquiror keep open a tender or exchange offer to all the holders of a class of securities and pay each of them the highest consideration paid to any other shareholder during the tender offer.

The practice in cross-border takeovers is to split the offer into both a U.S. offer and a non-U.S. offer. However, the practice of having separate offers open only to U.S. or non-U.S. holders runs afoul of Rule 14d-10’s requirement that the offer be open to all holders. The Tier II exemption contains a limited exception to this rule (the Tier II exemption is short-hand for the Cross-Border Rule exemptions applicable if 40% or less of the target's shareholders are U.S. holders). It provides an exemption from the all-holders rule for an acquiror to conduct its offer in two separate offers: one offer made only to U.S. holders and another offer only to non-U.S. holders, provided that the offer to U.S. holders is on terms at least as favorable as those offered any other acquiree shareholder.  But, for mechanical reasons bidders want to include all of the ADS holders in the U.S. offer (believe me, doing anything else is almost impossible).  This means that the U.S. offer will include non-U.S. ADS holders; disqualifying the bidder from utilizing the exemption. 

The result is that in almost every single cross-border transaction, no-action relief is required under this Rule.  So, for example in the RBS group's successful offer for ABN AMRO, the SEC granted exemptive relief as follows:

The exemption from Rule 14d-10(a)(1) is granted to permit the Consortium to make the U.S. Offer available to all holders of ABN AMRO ADSs and all U.S. holders of ABN AMRO Ordinary Shares. The Dutch Offer will be made to all holders of ABN AMRO Ordinary Shares located in the Netherlands and to all holders of Ordinary Shares located outside of the Netherlands and the United States, if, pursuant to local laws and regulations applicable to such holders, they are permitted to participate in such offer.

The need to seek this and other technical relief which the SEC regularly grants perverts the purpose of the Cross-Border Release which was to facilitate these transactions.  Moreover, there are other, larger problems with the Cross-Border Rules which make them very user unfriendly.  For example, one of the principal difficulties acquirors have experienced in applying the Cross-Border Rules is the determination of U.S. ownership for purposes of the exemptions.  In both negotiated or “friendly” transactions (rather than unsolicited or “hostile” transactions), acquirors are required to “look through” the acquiree’s record ownership to determine the level of U.S. beneficial ownership. Specifically, an acquiror is required to look through the record ownership of brokers, dealers, banks and other nominees appearing on the acquiree’s books or those of its transfer agents and depositaries.

But the current look-through rule, unfortunately, does not work well in practice. First, the mechanics of shareholding in other jurisdictions make it difficult for acquirors to determine whether any exemptions are available under the Cross-Border Rules. Second, penalties for non-compliance, such as rescission in the case of a noncompliant securities offering, are potentially quite harsh. Consequently, acquirors unable to make a certain determination as to qualification for the exemptions under the Cross-Border Rules are more likely to structure cross-border takeovers to exclude participation by U.S. security holders. Alternatively, acquirors have submitted prospective no-action and exemptive relief requests to the staff of the SEC for relief along the lines of the Cross Border Rules. In fact, in the least U.S. regulated cross-border takeovers, 14E Offers, acquirors often decide to comply with the minimal requirements of Regulation 14E rather than rely on the Cross-Border Rule exemptions due to the expense and problems associated with the look-through analysis. Alternatively, offerors in the United Kingdom and other eligible jurisdictions may choose to structure a transaction as a scheme of arrangement under Section 3(a)(10) of the Securities Act in order to similarly avoid reliance upon the exemptions under the Cross-Border Rules while still minimizing compliance with the U.S. takeover rules and avoiding triggering the Securities Act’s registration requirements (see my post on this practice and schemes of arrangements generally see here).

Ultimately, the Cross-Border Rules are now seven years old.  The SEC is well aware of all of these problems.  They would do well to fix them in a manner which makes cross-border deals more inclusive of U.S. holders and reduces the SEC's administrative burden in repetitively responding to these no-action letters.   It has been too long. 

For more on this see my article, Getting U.S. Security Holders to the Party: The SEC's Cross-Border Release Five Years On

November 7, 2007 in Cross-Border | Permalink | Comments (0) | TrackBack (0)

Deason's Big Move

This deal just keeps the surprises coming.  Today, Affiliated Computer Services filed the following disclosure on a Form 8-K:

On November 6, 2007, Darwin Deason, Chairman of the Board of Directors of Affiliated Computer Services, Inc. (the "Company"), notified the Company that he has filed a notification under the Hart-Scott-Rodino Antitrust Improvements Act (the "HSR Act") for the acquisition of up to an additional one million shares of the Company’s Class A common stock following expiration or termination of the waiting period under the HSR Act. Accordingly, the Company intends to promptly file the notification required under the HSR Act in response to Mr. Deason’s notice.

According to ACS's proxy, as of April 13, 2007, there were 92,530,441 shares of Class A common stock of ACS outstanding.  So, if this transaction is consummated, it will increase Deason's voting control of ACS by about one percent and cost him about $44 million at today's stock price.  HSR filing rules require a filing for incremental acquisitions exceeding threshold dollar levels generally above $50 million so I'm not sure why a filing needed here [I'll check with our antitrust expert and get back on this].  Still, this acquisition will increase Deason's control of ACS, and could be a prelude for him seeking greater than a 50% voting interest.  Now, that raises all sorts of legal issues. 

In addition, the acquisition shows how the paralysis at ACS is working to Deason's advantage.  A normal board in these circumstances would likely block Deason from further acquistions through implementation of a poison pill.  Here though, as I said Monday, the board cannot meet unless Deason or the CEO calls a meeting.  The CEO is firmly beholden to Deason and so will not call one unless Deason wants, and Deason will not do so because then it would allow the independent directors to act.  Deason is now using this power to his advantage.  The independent directors in this situation would do well to act in Del. court to protect the company and not just themselves.  On that note, The Race To The Bottom has a solid, informative post today on how independent these directors have historically been.  Want to guess the answer?

November 7, 2007 | Permalink | Comments (0) | TrackBack (0)

Tuesday, November 6, 2007

SLM Transcript Hearing

Access it here.  As usual it is a great read, though rather long.  I start with a quote from Strine:

I mean, we haven't gotten Mother Teresa and Gandhi and Franklin Roosevelt to come back to life as some sort of tribunal of MAC . . . .

As for a trial date, Strine said to SLM:

I'm not holding you to -- I forget what you said. A month. I'm not holding you to the week. If you can get your document production substantially completed, really, by the end of the calendar year, except for that category of information that really -- that the defendants are going to seek relating to the performance of Sallie Mae in January and early February, then we will go with the July date. If not -- and I want people to be realistic about this. If not, we are going to go to with the date right after Labor Day, although September, for -- often, for folks' religious reasons, ends up starting to get difficult.

Ultimately, he set a trial date of July 14 based on this with lots of side comments about an expected delay past Thanksgiving.  I would be very surprised if this went to trial in 2008.  All-in-all, I think the Flowers group fared better this time.  In fact, reading the transcript one is struck by how little Marc Wolinsky, the lawyer for the Flowers Group had to speak to get a result he was likely happy with. 

Otherwise, the most interesting thing is that Strine sent the parties to back to consider a "discovery-free" paper ruling again if they want one with the cost being a longer delay in a real trial.  Here, SLM seemed to be more hesitant, a few times saying they needed to confer with their client before agreeing to it. 

Strine also seemed to be very cognizant of appellate review on this matter -- referring to the possibility several times and at one point contemplating the parties' waiving their rights to such an appeal.  Finally, just for fun he had the following to say about investment bankers and the discovery process:

My experience is that investment banks, high on their priority list is not the production of documents. Unfortunately, you had -- sometimes they will even tell you, "We have no duty to produce documents. Even though we took money from the client, we don't have to do that." Then you have to go through the rigmarole and . . . .

Those recalcitrant investment bankers . . . .

November 6, 2007 in Delaware, Litigation | Permalink | Comments (0) | TrackBack (0)

MIA Watch: The CKX Deal

Remember CKX, Inc.'s $1.33 billion take private?  The company famously owns the intellectual property rights of Elvis Presley and Muhammad Ali as well as American Idol.  Way back on June 1, CKX announced an agreement to sell the company to 19X, Inc., a private company owned and controlled by Mr. Sillerman, Chairman and Chief Executive Officer of CKX, and Simon R. Fuller, you know who he is.

At the time, the deal contained a provision for 19X to obtain the necessary financing commitment letters after the transaction was signed.  Once the financing was in place, CKX would then prepare a proxy statement to go forward with the transaction.  This was unusual because, typically, a board will require financing to be committed before the transaction is effected.  The reasons are obvious -- doing it afterwards is an effective financing out for the acquirer and can strand the company in purgatory for extended periods as a leveraged buyer struggles to obtain the necessary financing.  There is no such financing out in the CKX merger agreement, but I believe (though cannot confirm) that 19X's sole asset is 1,419,817 shares of CKX (per its 13D).  If so, it would have only about $15-$20 million in assets -- so there is very little to collect for a judgement under the merger agreement if 19X breaches the agreement and refuses to close -- an effective financing out and, if true, the lowest of the low in reverse termination fees.

On Sept 28, CKX announced that the deal had been reworked to include less cash consideration and more stock (the stock being a distributed subsidiary FX Real Estate and Entertainment Inc.).  At the time, the amendment to the merger agreement provided more time to CKX to line up its financing.  Amended Section 6.4 stated:

SECTION 6.4 FINANCING (a) On or before October 30, 2007, Parent and Merger Sub shall deliver to the Company true and complete copies of (i) a fully executed commitment letter . . . . and (ii) a fully executed commitment letter . . . . The Financing Letters shall reflect debt and equity commitments from such equity investors and financial institutions, which together with any equity to be issued in connection with the Contribution and Exchange Agreements or to be issued in exchange for securities of Parent, shall be sufficient to pay the full Merger Consideration . . . .

So, it appears that the agreement was reworked due to financing problems in the deal.  In fact, the press release for the revised deal specifically noted the reduction in cash consideration would make the deal easier to finance. 

Well, Oct. 30 came and went.  And lo and behold, still no financing letters, resulting in a breach of the merger agreement by the buyer.  Instead, CKX put out the following press release:

CKX, Inc. announced today that 19X, Inc., which previously had agreed to acquire the Company in a merger transaction, had delivered financing letters in furtherance of its obligation to provide the Company with evidence of financing sufficient to complete the acquisition on the previously disclosed terms. The letters, which have not yet been signed by any parties, include firm commitments from, as well as other detailed arrangements and engagements with, three prominent Wall Street firms and expressions of intentions from management and other significant investors in CKX. The Company has a regularly scheduled Board Meeting this Friday, at which the Board of Directors will review the letters. Following completion of the Board’s review, 19X is expected to deliver fully executed letters.

Well that is odd.  Why unsigned letters?  Unsigned commitment letters have no force -- you would think, given the market conditions, CKX would want to firm up its financing as quick and possible.  And the board meeting referred to above came and went on Friday and there is still no word from the board, CKX or the buyer.  And, of course, those signed commitment letters required by the above amendment have still not appeared.  All of this is a bit odd.  I suspect that the financing referred to above is not on the terms Sillerman wants or is otherwise supplemented by an equity commitment he does not want to make.  But this is a mere guess.  I can't wait to find out the truth -- shareholders might wish that CKX was more fulsome in its disclosure on this matter.  Instead, the deal is MIA. 

Ultimately, the above delays and reworkings illustrate the perils of agreeing to a leveraged deal without the financing locked up at the beginning or otherwise without a firm.  CKX is now at the mercy of its controlling shareholder/buyer as it seemingly struggles to finance this deal with little choice but to extend the merger agreement.  Not a great place.

November 6, 2007 in Going-Privates | Permalink | Comments (0) | TrackBack (0)

Sunday, November 4, 2007

ACS: The Legal Analysis

It is hard to know where to begin.  That is my first thought when confronting the legal issues arising from the fiasco at Affiliated Computer Services.  When we last left this matter on Friday, the independent directors of ACS had resigned pending the election of new directors, filed suit in Delaware Chancery Court for a declaratory ruling that they did not breach their fiduciary duties in negotiating the potential sale of ACS, and sent a letter to Darwin Deason, Chairman of the Board of ACS and controller of 40% of the voting stock of ACS (but only 10% of the economic interest), accusing him and ACS management of breaching their own fiduciary duties in unduly favoring a deal with Cerberus.  For his part, Deason in his own letter, demanded the ind. directors' “immediate resignations” because of “numerous and egregious breaches of fiduciary duty and other improper conduct,” related to their own running of the Cerberus auction.  Then the lawyers for each of these groups (Weil for the ind. directors/Kasowitz for Lynn Blodgett CEO of ACS) exchanged their own letters making further allegations of inappropriate conduct against the other parties (though Weil alleges Kasowitz's letter was written by Deason's counsel Cravath, although Cravath may also be company counsel?!).  Throwing all of this into the mix, two of the firms involved -- Cravath and Skadden -- are now being accused of acting in a conflicted manner.  Whew, I'm exhausted already. 

Preliminary Observations 

  1. The lawsuit by the Cerberus independent directors was a smart tactical move likely to preempt a similar suit against them brought by Deason (read the complaint here).  Now the independent directors can be viewed as the plaintiffs, the good guys and drive the litigation.  Plus, they can now engage in discovery, amend their complaint as necessary and have a bargaining chip against Deason.  And most importantly, since they brought this action in their capacity as directors under Delaware law they can receive indemnification under DGCL 145 and, in fact, under ACS's By-laws (s. 33) automatically are advanced attorney's fees in prosecuting this action.  Nifty.  See Hibbert v. Hollywood Park, Inc., 457 A.2d 339, 343 (Del. 1983) (holding that per the contractual indemnification provisions of the company the directors only needed to be a party to the lawsuit not the defendants to be indemnified).
  2. Relatedly, my big question is why didn't the ind. directors here sue Deason and management for breach of their fiduciary duties?  I find this almost certainly intentional omission odd.  Perhaps it was because they need/want to do so on behalf of the company but cannot currently call a board meeting to so act (see the next point).  Although a derivative suit is possible.  Hmmmm.
  3. The future governance of ACS is a nightmare.  First, per the By-laws (Art. 16) only Deason or the CEO can call a special meeting of the Board.  In the interim, per DGCL 141(f), they can only act by written consent with the approval of all the directors (there is no By-law or Certificate of Incorporation provision that I saw to the opposite).  So, the ind. directors are stuck, waiting for the next meeting to act.  Deason has a clear incentive here to postpone the holding of the next board meeting until the next shareholder vote in order to prevent the ind. directors from acting and perhaps firing him.  This means board paralysis for months until then; a terrible way to run a company.   
  4. Deason's employment agreement gives him unprecedented control over the company.  I've actually never seen anything like this structured in this manner.  Under his employment agreement he is given sole authority for:
    • (i) selecting and appointing the individual(s) to serve in, or to be removed from, the offices of Chief Executive Officer, President, Chief Financial Officer, Executive Vice Presidents, General Counsel, Secretary and Treasurer and (subject to appropriate charter amendment confirming the Executive's authority to fill such vacancies) to fill any director vacancies created in the event any such removal from office, (ii) recommending to the Board individuals for election to, or removal from, the Board itself, (iii) recommending to the Compensation Committee to the Board, or as applicable, to the Special Compensation Committee to the Board, salary, bonus, stock option and other compensation matters for such officers, (iv) approval of 3 4 acquisitions to the extent authority has previously been granted by the Board to the Executive in his capacity as the member of the Special Transactions Committee (except to the extent the Executive had previously delegated authority to the President with respect to such acquisitions which do not exceed $25 million in total consideration), (v) spending commitments in excess of $5 million, and (vi) approval of expense reports for the CEO and CFO.

I love the last two -- he has to approve the expenses of the CEO?!  How independent of him is she?  In any event, hornbook law in Delaware is that, under DGCL 141(a), the business and affairs of every corporation shall be managed by or under the direction of a board of directors, except as may be otherwise provided in its certificate of incorporation. I'm still tracing through all of the (complicated) governance provisions, but my preliminary conclusions are that they didn't put enough of the above in the Certificate, but rather put most of Deason's powers in the By-laws and the rest in the employment agreement itself.  I'll have a longer post on this later this week (I promise) once I'm done with my analysis, but my preliminary view is that these provisions violate 141(a) because to be effective in limiting the board's power they must be in the Certificate.  They are not.  In any event, this is the poorest of the poor in corporate governance to say the least.  This is particularly true when your CEO was famously accused of threatening to kill his personal chef.

4.    This company is a mess.  Only the bravest (or the foolhardy) would invest in this situation. 

The Case Against the Ind Directors

As outlined in Deason's and Kasowitz's letters, the case against the ind. directors is as follows:

  1. They refused to accept the Cerberus offer negotiated by Deason with a go-shop and "low" break-up fee and instead insisted on conducting an auction of the company.
  2. Relatedly, they failed to present the Cerberus offer to the shareholders directly.   
  3. They inappropriately provided proprietary information to a competitor of the company.
  4. They received and relied upon the advice of company counsel, Skadden, without authorization of ACS.
  5. They paid themselves substantial fees (>100K each) for serving on the ind. committee. 

The Case Against Deason

  1. He worked with Cerberus to force their deal through against the will of the special committee.  Specifically, he entered into an initial exclusivity agreement which he refused to waive for three months. 
  2. Deason and management worked to ensure that other bidders did not receive full information or management cooperation.
  3. Deason and management refused to permit the ind. committee to meet with company counsel.
  4. Deason attempted to coerce the ind. directors to resign last Tuesday at a board meeting. 
  5. Deason took all of these actions in order for his own personal financial gain through the bid with Cerberus.  Management followed his lead because they were beholden to him and their post-transaction employment depended upon it. 

The Legal Analysis

My opinion is that the ind. directors here did the right thing.  Deason, on the other hand, engaged in conduct that Delaware courts have historically condemned.  There is not enough here for me to give an opinion on management's liability, but to the extent they followed Deason's direction they are also liable. 

This is actually a relatively simple case.  Since Smith v. Van Gorkom, the Delaware courts have been adamant that the sale of the company is something for the board to decide.  It is not something that can be forced upon it by a singe executive (or here Chairman).  Moreover, the Delaware courts most recently in Topps and Lear have repeatedly endorsed the idea that the sale process, whether it be by the Board or a comm. thereof, is something for the board to set, even when the company is in Revlon mode.  Here, the board's refusal to accept a pre-negotiated deal that Deason had a personal financial interest in appears quite justified.  Other bidders would likely be deterred by his and management's involvement and financial interest; something which a go-shop and low break-up fee would not ameliorate.  In particular, it is increasingly recognized that go-shops provide only limited benefits and do not work particularly well when the initial deal is one involving management.  The head start and management participation is too much of a deterrent for bidders. Thus, my hunch is that on these bare facts, Deason is likely in the wrong and a Delaware court would not only rule so but rule Deason (and likely management) breached their fiduciary duties by unduly attempting to influence the auction process.   

As for the other claims:

  1. I can't see how wanting to consult with company counsel can ever be a bad thing. 
  2. The compensation of the ind. directors here is high but not extraordinary or something that would otherwise disqualify them. 
  3. The provision of proprietary information could be troubling.  We need more facts to make this determination. 
  4. Deason should ultimately be careful in his crusade here.  As Conrad Black proved, the Delaware courts do not look kindly on mercurial, imperial controlling shareholders. 

Possible Legal Conflicts Claims

  1. Skadden provided advice to the ind. directors when it was company counsel.
  2. Cravath is now company counsel when it had previously been Deason's counsel.

As I said, I'm not sure I see the problem in the first.  The second may be more problematical to the extent ACS may have a claim against Deason.  Moreover, what is Cravath, a nice, reputable firm doing sullying its name in this mess?  They likely realize the same thing which is why Kasowitz is taking the public lead here. 

November 4, 2007 in Delaware, Leveraged Buy-Outs, Litigation, Takeovers | Permalink | Comments (0) | TrackBack (0)

SLM Hearing Today

There is a hearing on the SLM case today, presumably to set a trial date.  I have a source at the hearing and will post information and commentary as soon as I receive it.  Hopefully it will be as fun as the last one. 

November 4, 2007 | Permalink | Comments (0) | TrackBack (0)

Wachtell, Lipton, Shareholder Access, and Diatribes in Place of Analysis

The ever relevant Race to the Bottom has a nice post on Wachtell's recent comment letter on the SEC's latest proxy proposals entitled:  Wachtell, Lipton, Shareholder Access, and Diatribes in Place of Analysis.  It is a nice follow-up to my post last week on Wachtell's client memos.  Enjoy. 

November 4, 2007 | Permalink | Comments (0) | TrackBack (0)