M & A Law Prof Blog

Editor: Brian JM Quinn
Boston College Law School

Friday, November 30, 2007

The Cerberus Response

Counsel for RAM Holdings (the acquisition vehicle for URI that is wholly-owned by Cerberus) today sent a letter to Chancellor Chandler.  You can download it here.  They are claiming that the contract is too ambiguous for disposition on a summary judgment motion and that there does indeed exist parol evidence supporting their case.  The first assertion is not surprising and is what I predicted -- Cerberus is trying to delay as much as possible here.  The second assertion is Richard Layton's characterization of the evidence -- we need to see more.  Again, I'll have more on this Monday or Tuesday. 

November 30, 2007 | Permalink | Comments (0) | TrackBack (0)

URI's Brief

Here is the brief for summary judgement filed by URI today.  I'll have commentary about it on Monday or Tuesday, but at first glance I think it is a good job and generally mirrors the arguments I thought they would make (as set forth in my post earlier today).  For those who are collecting outraged target statements -- the lead in to this brief is a good one. 

November 30, 2007 | Permalink | Comments (0) | TrackBack (0)

Thursday, November 29, 2007

URI's Argument

In light of the filings in the past two weeks and the fleshing out of the issues, I thought I would take the opportunity to set forth URI's argument for specific performance. 

The Fundamental Issue

The problem for Cerberus is that their interpretation of all the documents (the Merger Agreement, The Equity Commitment Letter and the Limited Guarantee) results in a key provision within Section 9.10 of the merger agreement being rendered meaningless – either that cannot have been the intention or it was very sloppy lawyering by URI’s M&A counsel and Cerberus managed to pull one a fast one on them (i.e., by “giving” them specific performance but not making available any way for URI to force RAM Holdings to force Cerberus to fund the equity).  Ultimately, though, there is ambiguity here that will force Judge Chandler to make a decision based on parol evidence -- but in the absence of parol evidence (something I believe may be the case) it would appear that URI has the better argument as follows: 

The Merger Agreement

The fundamental argument that URI is putting forth is that Section 8.2(e) of the merger agreement (limitation on Parent (i.e., RAM Holding), Cerberus, et al's liability to $100 million) is applicable only if URI terminates the agreement.  Otherwise, Section 9.10's provisions for specific performance govern.  This argument can be broken down as follows:

  • Section  9.10 – the last words are “under the circumstances provided therein” – one could read this to say that Section 8.2(e) is not meant to govern 9.10 in all circumstances but only in the circumstances provided in Section 8.2(e), otherwise why not have just end the last sentence in Section 9.10 before the words “under the circumstances provided therein”? [NB. When quoting Section 9.10 in its New York complaint, Cerberus specifically excluded the underlined language.]
  • Section 8.2(e)(last sentence) – the last sentence is actually two sentences joined by an “and”. The first part says “In no event, whether or not this Agreement has been terminated…” but the second part starts at “and in no event shall the Company seek equitable relief or seek to recover money damages in excess of such amount…” – this second part repeats the “in no event” qualifier but does not repeat the “whether or not this Agreement has been terminated” qualifier (i.e., URI will argue why repeat lead in language but fail to repeat language which immediately follows it?).  Under this interpretation, this second part has to do exclusively with circumstances where the merger agreement has been terminated (Section 8.2(e) is after all in section 8, which is all about termination). As to the first part, this has to do with not suing Cerberus/Parent for more than $100 million in connection with “any or all losses or damages”, but URI is not suing for losses or damages but rather for enforcement of the merger.
  • Section 8.2(e) first sentence – “for any and all loss or damage suffered as a result thereof…” – it seems the antecedent of “thereof” is “termination”, which bolsters URI’s argument

The problem with this argument is that the last sentence of Section 8.2(e) was not split -- you have to jump to that conclusion to adopt this interpretation.  And if you do not split it that way then the second part's inclusion of "equitable relief" is problematical.  Still it boils down to contract interpretation and if you do adopt this reading you ultimately come back to the fact that this would render Section 9.10 meaningless something the Delaware court will not do under basic contract interpretation rules.  In recent cases, Delaware has emphasized objective basic contract interpretation (Seidensticker v. The Gasparilla Inn; West Willow-Bay Court LLC. v. Robino Bay Court Plaza LLC)-- this supports URI's legal position. 

The Equity Commitment Letter

The third paragraph of the equity commitment letter states:

There is no express or implied intention to benefit any third party including, without limitation, the Company and nothing contained in this Equity Commitment Letter is intended, nor shall anything herein be construed, to confer any rights, legal or equitable, in any Person other than Parent. Under no circumstances shall the Equity Sponsor be liable for any costs or damages including, without limitation, any special, incidental, consequential, exemplary or punitive damages, to any Person, including the Parent and the Company, in respect of this Equity Commitment Letter; and any claims with respect to the transactions contemplated by the Merger Agreement or this Equity Commitment Letter shall be made only pursuant to the Guarantee to the extent applicable.

URI will argue the first part is irrelevant because it refers to “costs or damages” and they are dealing rather with a claim of specific performance by Parent against Cerberus; the second part says “any claims with respect to the transactions…shall be made only pursuant to the Guarantee, to the extent applicable” – but nothing in the limited guarantee prevents Parent from getting specific performance against Cerberus, or indeed even at all deals with Parent’s rights of specific performance against Cerberus.  Here URI will argue that the qualifier of “to the extent applicable” kicks in.  Parent in fact has no claim at all against Cerberus under the limited guarantee – it’s not dealt with because Parent is not a party to the limited guarantee and the purpose of the limited guarantee was not designed to even address Parent’s rights as against Cerberus.  Alternatively, Cerberus will argue the exact opposite -- "damages" does indeed include specific performance in the first part, and "to the extent applicable" is meant to read that even Parent can't bring any claims under the equity commitment letter.

Ultimately, I think that if you read all the words together, they stand for URI's proposition that claims for the termination fee (and other expenses payable under the guarantee) must be made through the limited guarantee.  But again you have to stretch a bit to read the agreement this way.

The Limited Guarantee

  • Section 4(b) of the limited guarantee (No Recourse) is the key section. It deals with URI’s rights against Cerberus, not with Parent’s rights against Cerberus, nor with URI’s rights against Parent (in fact, this is expressly carved out). So assuming Judge Chandler agrees with URI's reading of the merger agreement and limited guarantee, you then look at the equity commitment letter to see if Parent has the right to specifically enforce the Cerberus commitment to inject equity. And so, we are back to the equity commitment letter's statement that “and any claims with respect to the transactions contemplated by the Merger Agreement or this equity commitment letter shall be made only pursuant to the limited guarantee to the extent applicable” – but URI will argue that Parent cannot make a claim against Cerberus under the limited guarantee because Parent is not a party to that agreement and that agreement was never intended to govern the relations between Parent and Cerberus, so it could not have been intended that the equity commitment letter requires Parent to make a claim against Cerberus pursuant only to the limited guarantee, because that is non-sensical and so cannot have been the intent.
  • Cerberus's counter-argument:  If you read the equity commitment letter this way, then in the 3rd paragraph, last part beginning “and any claims…”, this argument would seem to imply that, since Parent cannot make any claims pursuant to the limited guarantee (because it is not a party), this sentence must be addressing someone else (i.e., URI) but URI is in turn not a party to the equity commitment letter, so what’s the point of this sentence?
  • URI's counter-counter argument:  One possible explanation is provision 4(a) of the limited guarantee.  This provision talks about not going after Cerberus affiliates whether by or through a claim by or on behalf of Parent – which seems to contemplate the idea of a direct claim by Parent, but since Parent is not a party to the limited guarantee, they have to catch this problem by wrapping it up in this “and any claims…” sentence in the equity commitment letter. Furthermore, Cerberus is liable in certain circumstances for up to $100 million per the limited guarantee and yet this sentence in the equity commitment letter begins “Under no circumstances shall the Equity Sponsor be liable for any costs or damages…to any person, including the Parent and the Company, in respect of this ECL”, which, if ended there, would clearly make no sense in conjunction with the $100 million provisions in the limited guarantee and in the merger agreement, and so when we read the follow-on language of “and any claims….” it becomes clear that all this section is saying is that Cerberus is indeed liable for up to $100 million in liquidated damages if the circumstances provided for in the Guarantee are applicable (“to the extent applicable”). But those are not the circumstances that URI is arguing about.

Cerberus’ Further Interpretation of The Limited Guarantee

Earlier this week counsel for Parent sent a letter to Judge Chandler.  Here, I think URI can point out that they flat out have it wrong and are conflating two sections of the limited guarantee so as to make their argument appear stronger – they say in the 2nd to last paragraph that “the limited guarantee in turn clearly states that URI’s and its affiliates only remedy – directly or through the RAM entities – against Cerberus Partners and all of its affiliates other than the RAM Entities…is a claim under the limited guarantee for…$100 million” – that’s not what the limited guarantee says. Both sections 4(a) and 4(b) of the limited guarantee deal with URI’s (not with Parents’s) rights to go after Cerberus and various of its affiliates. However, Section 4(a) of the limited guarantee explicitly excludes Cerberus from the definition of who URI cannot go after (because it deals with limiting URI’s ability to go after limited partners, officers etc of Cerberus, but explicitly carves out the right to go after Cerberus itself) and so URI has good grounds to say what Parent's counsel says in the letter is flat out wrong. 

Further, Section 4(b) deals with URI’s (not with Parents’s) rights to go after Cerberus and its affiliates, BUT section 4(b) does not have the language “directly or through the RAM entities” (that only appears in section 4(a) and is not repeated). So, the limited guarantee says nothing about Parent being able to go after Cerberus, which is precisely URI's argument that Parent has the ability to specifically enforce the equity commitment letter against Cerberus. Cerberus appears a bit off here. 

Ultimately, I think that the arguments over the limited guarantee and the equity commitment letter will inform the Judge's ruling on the merger agreement but will not be dispositive -- Chandler will largely make his decision on the merger agreement provisions alone since the evidence from the limited guarantee and equity commitment letter are as ambiguous as the merger agreement.  And, if Judge Chandler does rule in favor of URI, I beleive that the New York action is not a winner for Cerberus.  But can certainly cause delay in the process.

November 29, 2007 in Delaware, Litigation | Permalink | Comments (0) | TrackBack (0)

ADS -- the New URI?

For those who are curious below is the provision in the ADS merger agreement dealing with specific performance and the reverse termination fee.  This one is better drafted than the Cerberus/URI one (with a big but about the limited guarantee), and I'll have more tomorrow. 

Section 9.8.2 The Parties agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that, prior to the termination of this Agreement pursuant to Section 8.1, Parent and Merger Sub shall be entitled to an injunction or injunctions to prevent breaches of this Agreement by the Company and to enforce specifically the terms and provisions of this Agreement, in addition to any other remedy to which they are entitled pursuant to the terms of this Agreement, at law or in equity. Notwithstanding the first sentence of this Section 9.8.2, however, the Parties acknowledge that the Company shall be entitled to an injunction or injunctions to prevent breaches of this Agreement by Parent or Merger Sub or to enforce specifically the terms and provisions of this Agreement only to prevent breaches of or enforce compliance with those covenants of Parent or Merger Sub that require Parent or Merger Sub to (x) use its reasonable best efforts to obtain the financing contemplated by the Commitments, including without limitation, the covenants set forth in Section 6.5 (Reasonable Best Efforts) and Section 6.14 (Financing) and (y) consummate the Merger, if in the case of clause (y), the financing provided for in the Commitments (and, if alternative financing is being used, pursuant to commitments with respect thereto) is available to be drawn down by Parent pursuant to the terms of the applicable agreements but is not so drawn solely as a result of Parent refusing to do so in breach of this Agreement. For the avoidance of doubt, whether or not the Company is entitled to seek injunctions or specific performance pursuant to the provisions of the preceding sentence or otherwise, in no event will the Company be entitled to seek monetary damages in excess of (i) $3,000,000 with respect to the reimbursement and indemnification obligations of Parent under Section 6.15 (the third and fourth sentences thereof), Section 6.16.3 (first and third sentences thereof) and Section 6.16.6 and (ii) $170,000,000, in the aggregate, inclusive of the Business Interruption Fee, if applicable, for all other losses and damages arising from or in connection with breaches of this Agreement by Parent, Merger Sub or any Parent Representative or otherwise relating to or arising out of this Agreement or the transactions contemplated by this Agreement. Any legal action, suit or proceeding arising out of or relating to this Agreement or the transactions contemplated hereby shall be brought solely in the Chancery Court of the State of Delaware; provided that if (and only after) such courts determine that they lack subject matter jurisdiction over any such legal action, suit or proceeding, such legal action, suit or proceeding shall be brought in the Federal courts of the United States located in the State of Delaware; provided, further, that if (and only after) both the Chancery Court of the State of Delaware and the Federal courts of the United States located in the State of Delaware determine that they lack subject matter jurisdiction over any such legal action, suit or proceeding, such legal action, suit or proceeding shall be brought in the United States District Court for the Southern District of New York. Each Party hereby irrevocably submits to the exclusive jurisdiction of such courts in respect of any legal action, suit or proceeding arising out of or relating to this Agreement or the transactions contemplated hereby, and hereby waives, and agrees not to assert, as a defense in any such action, suit or proceeding, any claim that it is not subject personally to the jurisdiction of such courts, that the action, suit or proceeding is brought in an inconvenient forum, that the venue of the action, suit or proceeding is improper or that this Agreement or the transactions contemplated hereby may not be enforced in or by such courts. Each Party agrees that notice or the service of process in any action, suit or proceeding arising out of or relating to this Agreement or the transactions contemplated hereby shall be properly served or delivered if delivered in the manner contemplated by Section 9.2.

November 29, 2007 | Permalink | Comments (0) | TrackBack (0)


For those who wonder how efficient markets are or otherwise how shaky many of these private equity deal are, check out this chart of ADS today.  Sorry for the blur -- I'll try and fix it -- but apparently the over $15 drop (about 20%) was based on rumors that Blackstone was going to pull out of the deal or otherwise seeking a price cut.  Once again beware reverse termination fees and bear raids.  And I'm glad my job is so low-stakes:


November 29, 2007 | Permalink | Comments (0) | TrackBack (0)

The Handy-Dandy Genesco Litigation Organizer

So, Genesco's third quarter earning results are out this morning.  For those who also want to hear the conference call you can access the replay here.  This is on top of all of the filings made this week by all three parties as well as the announcement of a U.S. attorney subpoena of Genesco related to a fraud investigation.  It's simply getting hard for anyone to keep up with all that is going on in this matter.  So, for those following the case, here is an organizer of the expected chronological steps of the Genesco deal.  Bottom-Line -- it has a long way to go before any resolution and many more turns it can take.

  • Step 1:   Tenn. Trial Begins Dec. 10
    • Issue One:  MAC Claim
      • Likely Outcome:  I believe the dispute is likely to center around the existence of a MAC generally and the MAC exclusion for "changes in general economic conditions that affect the industries" Genesco operates in.  As I've said before, I still think Genesco has a good case here.  Their earnings today certainly were not great, but they are in a challenging retail environment. 
        • Comment:  Poor performance by Finish Line, Foot Locker, Shoe Carnival, Shoe Pavilion, etc. buttress Genesco's claim of no MAC under this exclusion.
    • Issue Two:  Negligent Misrepresentation (Finish Line)/Fraud (UBS)
      • Comment:  Claims center generally around two non-disclosures by Genesco:  First, Genesco provided projections it knew it would fail to meet. Second, Genesco, "hid" its May 2007 numbers and on June 5 said it was on track and knew that statement was materially false.
      • Likely Outcome:  I'll wait until I see Finish Line's and UBS's responses to fully comment but Genesco in its motion to dismiss and strike makes a good argument that these claims are barred by non-reliance among other grounds.  However, there are a number of New York cases on this point more favorable to Finish Line that it will likely try and rely upon.  I'll have a full post on this over the weekend. 
      • Mystery Solved:  Reading Genesco's motion, I finally realized that UBS is making a fraud claim rather than a negligent misrepresentation claim due to the fact it is not a party or a beneficiary of the merger agreement -- there was no misrepresentation to rely upon.
      • Timing:  I believe the Tenn. Court will deny Genesco's motion to limit the hearing if it denies Genesco's motion to strike.  Given the discovery in this case, the judge will likely view it as all one dispute. 
    • Issue Three:  MAC Claim due to Southern District Subpoena and Possible Other Investigations
      • Comment:  Finish Line is stating that it will assert at trial that a MAC has occurred due to the federal securities fraud investigation.  In addition, Finish Line is asserting that such investigation violates Section 3.8 of the merger agreement (absence of litigation).
      • Likely Outcome:  This is a troubling one. The MAC has no forward-looking element so the event has to be a MAC as of this date.  Hard to see that it is right now.  But, if Genesco did indeed know it was not going to meet projections and continued to publicly say the opposite, that is likely grounds for a securities fraud claim.  I do not know if any shareholder suit on this has been brought to date, but if one were by Geensco's shareholders or the SEC it could strengthen Finish Line's case . . . .
        • Comment:  Genesco has a cure right under the merger agreement if this is indeed a breach of Section 3.8 or a MAC.
      • Question:  Why did the SDNY issue this subpoena.  It is very odd -- and if this is a securities fraud claim where is the SEC? 
  • Step 2:  Tenn Trial Outcome
    • If Genesco loses, it goes away quite wounded, but if Genesco wins this puts Finish Line in a terrible position.  I believe It then becomes Genesco's ally against UBS.  There is no financing out under the agreement and so if UBS does not fund Finish Line is still on the hook.  I doubt Finish Line could find the funding somewhere else so Finish Line would either 1) have to declare bankruptcy, or 2) negotiate with Genesco for relief -- in this scenario I believe Finish Line is likely acquired by Genesco.   
      • Comment:  If the court does not order specific performance, the damages remedy is likely to be $54.50 minus the stock price at time of judgment (but the exact measure of damages is uncertain and the measurement date can be argued).  If it is a damages remedy then Finish Line has the same two options above.   
  • Step 3:  New York Trial
    • There are a host of issues here, including who actually gives the solvency certificate required by UBS? What law governs to determine solvency?  Etc.
    • Likely Outcome:  I have insufficient information on this to make any prediction, but Genesco's earnings announcement today didn't help its case.
    • Comment:  UBS is also likely to amend their claim at this time to include anything else they have grounds to assert.
    • Mystery:  Why is UBS taking such a scorched earth strategy here?  What target would permit them to finance a bid on a going-forward basis?  Perhaps they do actually believe they were defrauded here . . . .
  • Step 4:  The Fun Stuff
    • If Genesco wins in Tenn. it may sue UBS for defamation and tortious interference of contract.
    • Comment:  Genesco likely hasn't sued at this time because it is waiting for the Tenn. decision.  Clearly UBS is in no mood to bargain at this time, so bringing these claims for leverage probably aren't worth much. 
    • Likely Outcome:  These claims are hard to prove (unless you have Joe Jamail and a Galveston jury) but certainly have a settlement value.

Quote of the Day:

Defendants, having failed to discover evidence that an MAE occurred in Genesco's business, have flipped through the "how to get out of a valid merger" playbook and alleged that Genesco engaged in fraud in order to induce Defendants to agree to the deal.

-- Genesco's motion to dismiss and strike.

I wish I had a copy of that book.

November 29, 2007 in Litigation | Permalink | Comments (0) | TrackBack (0)

Wednesday, November 28, 2007

United Rentals/Genesco Tidbits

United Rentals

Chancellor William B. Chandler III has been assigned as the judge for the URI Case.  In addition, people may be interested in this letter sent to the Delaware court earlier this week by Cerberus concerning the New York litigation.  In it they state "the RAM Entities do not oppose expedited proceedings in this action," but interpose the issue that:

to obtain an order of specific performance that would require the merger transaction to close, URI would be required to prevail here and, in addition, to obtain an order fiom the New York court requiring CCM to provide the RAM Entities with the cquity infusion that would be one of the essential requirements for the RAM Entities to consummate the merger transaction.

I'll have a full post on Friday on this and the legal state of play generally. 


Genesco filed a motion to dismiss and strike Finish'Line's Fraud and Misrepresentation Counterclaims and Affirmative Defenses.  They have some good argument and, though I need to read them fully, cite some apparently strong cases on disclosure of forward-looking information (not so oddly enough in the real estate context).  In addition, UBS responded to GCO's motion to limit the upcoming trial hearing only to the MAC claim (read it here).  Finish Line also responded (read it here).  I note one tidbit in the Finish Line filing on page five with the heading:

The Federal Criminal Investigation of Genesco is a Material Adverse Effect and Precludes Specific Performance.

Funny about that.  I'll have more on Genesco tomorrow

November 28, 2007 | Permalink | Comments (0) | TrackBack (0)

Is Midwest Air Hiding Something?

The acquisition of Midwest Air Group by TPG Capital, L.P. and Northwest Airlines, Inc. is currently stuck in a holding pattern complying with a request for additional information, commonly known as a second request, by the Department of Justice under the Hart-Scott-Rodino Antitrust Improvements Act of 1976.  A second request is common, but it can lead to federal action to halt or otherwise force the parties to restructure an M&A transaction. 

So, given the current posture of the deal, the merger agreement provisions on this matter would be important.  Here, you start with Section 6.3(a):

Appropriate Action; Licenses; Filings. The Company, the Parent and the Merger Sub shall use their reasonable best efforts to, as applicable (i) take, or cause to be taken, all appropriate action, and do, or cause to be done, all things necessary, proper or advisable under applicable Law to consummate and make effective the transactions contemplated by this Agreement, (ii) obtain all Licenses required under applicable Law (including all rulings and approvals of Governmental Authorities) as a result of consummation of the transactions contemplated by this Agreement, including the Merger (collectively, “Governmental Licenses”), (iii) obtain all Consents required under material Contracts to which the Company or any of the Company Subsidiaries is a party or by which it is bound (collectively, “Company Consents”), (iv) obtain all Consents required under material Contracts to which the Parent or any of the Parent Subsidiaries is a party or by which it is bound (collectively, “Parent Consents”), and (v) make all necessary notices, reports, filings and registrations, and thereafter make any other required submissions, with respect to this Agreement and the Merger required under applicable Law (including the filings and other submissions, if any, required under the Securities Act and the Exchange Act) (collectively, “Governmental Filings”); provided, that the Parent, the Merger Sub and the Company shall cooperate with each other in connection with the making of all Governmental Filings, including providing copies of all such documents to the non-filing party and its advisors prior to filing (provided, that, in certain circumstances, such filings may be made available only to outside counsel of the non-filing party with a mutually acceptable agreement that such information may not be shared with the nonfiling party) and, if requested, to accept all reasonable additions, deletions or changes suggested in connection therewith. Notwithstanding the foregoing, (i) the Parent and Merger Sub shall not be required to make a change in the identity of its members or a material change in the terms of its members’ investment in the Parent in connection with obtaining any such approval and (ii) the Company shall not (and shall not permit any Company Subsidiary to) pay any consent fee, waive any material rights, materially amend the terms of any Contract or agree to hold separate or dispose of any assets or make any material changes to the operations or business of the Company or the Parent or any of their respective Affiliates, or commit to do any of the foregoing, in connection with obtaining any Governmental Licenses or Company Consents or in connection with any Governmental Filings, in each case without the prior written consent of the Parent in its sole discretion. The Company and the Parent shall furnish all information required for any Governmental Filing to be made pursuant to the rules and regulations of any applicable Law in connection with the transactions contemplated by this Agreement.

This long provision should ring alarm bells for any M&A lawyer.  Why?  It's not that it is unusual or otherwise -- it is simply because it is the boilerplate you typically see in transactions where no antitrust problems are expected.  It is too ordinary.  In a transaction like this, given Northwest's involvement you would expect to see an extended provision allocating the antitrust risk and detailing procedures in the case of a second request.  So where is it?  Well, reading further along in the merger agreement one finds the following provision in Section 6.10:

Section 6.10 [Intentionally Omitted.]

Now that is odd also.  In these days where provisions automatically renumber on computers why didn't they just delete it and automatically renumber.  Is there perhaps an undisclosed side agreement on antitrust issues here?  It certainly looks off.  And if any reporters are out there feel free to give Midwest a call on this.  I will say this, though, if they have taken this step, given the materiality of the antitrust issues and any provisions dealing with it, I believe this would almost certainly violate the Exchange Act disclosure requirements for material information.  If so, Midwest would do well to retain new counsel familiar with the Titan proceedings where Titan was fined by the SEC for similar disclosure failures (more on that here).  But again, all of this is mere speculation and it may mean nothing.

I'll have more if anyone speaks with Midwest and then me (including if Midwest has an explanation). 

November 28, 2007 | Permalink | Comments (0) | TrackBack (0)

The Hard Road of a Delaware Bidder (Restoration Hardware & Tesoro)

It is not easy to be an unsolicited bidder for a Delaware company. 

A target board has wide latitude to implement takeover and transaction defenses against an unsolicited bid.  This can be as part of a "just say no" defense -- the board can refuse to accept an offer and adopt a shareholder rights plan (aka poison pill) in order to force a hostile bidder to wage a proxy contest to take over the company.  If the target has a staggered board this can necessitate multiple proxy contests over several years. 

A board has less defensive latitude once it enters "Revlon" mode -- that is, a sale or break-up of the company becomes inevitable.  In that case, the target board has the duty to obtain the highest price reasonably available.  However, the Delaware courts have repeatedly said that there is no "single road" map in Revlon-land to obtaining the highest price reasonably available and has repeatedly permitted boards a large measure of freedom in designing their sale or break-up process. 

Recent developments in two deals illustrate the difficulties bidders have under either mode of review.

Restoration Hardware/Sears

Restoration Hardware comes under the second heading -- the company has agreed to be acquired by an affiliate of Catterton Partners.  It is in Revlon mode and now has a duty to obtain the highest price reasonably available.  In this light, Sears Holding Corporation has disclosed a 13.67% stake in Restoration Hardware and subsequently stated that Sears "would be prepared to enter into an agreement to offer your stockholders $6.75 per share in cash via tender offer."  But yesterday, Restoration Hardware stated that it will not provide any confidential information to Sears unless "Sears will agree to execute the customary confidentiality and standstill agreement on substantially the same terms that other parties have signed . . . ."  Sears at this time does not appear willing to agree to such a standstill. 

So, the question is whether a company in Revlon mode can require a standstill from a prospective bidder in order to provide confidential information to them.  The answer is a qualified yes.  In In re J.P. Stevens & Co., Inc. Shareholders Litigation, 542 A.2d 770 (Del.Ch.1988), Chancellor Allen held that a target in Revlon mode subject to an agreed transaction could require another prospective bidder to enter into a standstill agreement prior to providing confidential information so long as the requirement was not for "inequitable purposes" such as favoring the other bidder over the interests of the target's stockholders. 
The Delaware courts have subsequently affirmed this holding.  See, e.g., Golden Cycle, LLC v. Allan, 1998 WL 276224 (Del.Ch.1998). 

So, Restoration is on acceptable ground here so long as it has a legitimate purpose -- here the fact all bidders are required to enter into the standstill likely provides it with enough cover despite the fact the chosen bidder has partnered with management and Restoration's controlling shareholder.  Nonetheless, in the recent decision in In re Topps Shareholders Litigation, 2007 WL 1732586 (Del.Ch. June 14, 2007), VC Strine enjoined enforcement by Topps (the target) of a standstill against unsolicited bidder Upper Deck because he found Topps's actions favored its preferred bidder, a buy-out group led by Michael Eisner.  VC Strine stated:

Topps went public with statements disparaging Upper Deck's bid and its seriousness but continues to use the Standstill to prevent Upper Deck from telling its own side of the story. The Topps board seeks to have the Topps stockholders accept Eisner's bid without hearing the full story.

Thus, Restoration can only go so far in its demands for a standstill, and if Sears subsequently puts a legitimate offer on the table Restoration will likely be unable to escape waiving the standstill (if Sears ultimately agrees to one).  Nonetheless, even then Restoration can still affect the due diligence process here in order to attempt to influence the bidding.  For those who want an trenchant example, note that subsequently Upper Deck withdrew its bid for Topps citing Topps failure to cooperate in the due diligence process -- Topps was ultimately acquired by Eisner's group with the cooperation of its management.  Nonetheless, Upper Deck may have had other reasons to withdraw its bid and Sears now has a big stake in Restoration so it may have more staying power. 


Tesoro on the other hand is not in Revlon-mode.  On November 7, Tracinda Corporation announced a cash tender offer to purchase up to 21,875,000 shares of Tesoro (approximately 16 percent) at a price of $64 per share.  Tesoro responded with a neutral position (neither recommending for or against this offer) and adopted a poison pill.   Yesterday, Tracinda announced that it was withdrawing its tender offer stating that:

[t]he rights plan recently adopted by the Tesoro Board of Directors inhibits value for all Tesoro shareholders by, among other things, restricting the ability of shareholders to vote, sell or acquire Tesoro shares freely without fear of triggering the draconian provisions of the rights plan.

I find Tracinda's statement hard to believe.  The poison pill adopted by Tracinda had a high trigger threshold of 20% -- it was specifically set so as not to be triggered by completion of the Tracinda offer.  Tesoro was likely able under Delaware law to set an even lower threshold of 15% and possibly down to 10% and was even further accommodating by providing a neutral recommendation.  Moreover, Tracinda specifically stated in its Schedule TO that it:

does not have any current plans, proposals or negotiations that relate to or would result in: (1) any extraordinary transaction, such as a merger, reorganization or liquidation involving Tesoro or any of its subsidiaries . . . .

This is a boiler-plate response, but still it is required to be truthful.  Moreover, Tracinda is a highly sophisticated takeover machine --- it surely knew that Tesoro's response would be to adopt a poison pill (for more see John Coates's article: Takeover Defenses in the Shadow of the Pill: A Critique of the Scientific Evidence). Thus, it is hard to make sense of Tracinda's tactics here, but I would strongly suspect that they will be back.   In such circumstances Tesoro may be less accommodating -- an option available under Delaware law.   

November 28, 2007 in Takeovers | Permalink | Comments (0) | TrackBack (0)

Tuesday, November 27, 2007

Affiliated Computer Services: The Hidden M&A Deal

So another deal development stuffed into the Wednesday Thanksgiving dump occurred with Affiliated Computer Services.  Last Wednesday, ACS announced the resignation of its independent directors and their replacement with a new set of independent directors endorsed by Darwin Deason, the controlling shareholder of ACS.  In connection with this appointment, the newly resigned directors agreed to dismiss without prejudice their lawsuit against ACS & Deason et al. arising out of the failed buy-out proposal made by Cerberus.  For full details of this litigation and the events leading it up to it see my post ACS:  The Legal Analysis.

This is a big disappointment.  I would have hoped that the old independent directors would have stood up to Deason and investigated the alleged breaches of fiduciary duty by him and the other officers of ACS arising out of the ACS failed sale process.  Instead, they appear to have decided to simply walk away from their positions with the likely understanding that ACS would pay their fees and expenses and otherwise let them go without their own alleged suit (although in all fairness to ACS if there was such a written understanding it would be required to be disclosed on Form 8-K and no such understanding has been).  Moreover, the new directors whom the old directors now agree are independent take their positions at a company where Deason has contractual arrangements providing him almost full control over its operations down to his ability to approve the expense reimbursements of the CEO.  One would have hoped that the price for serving demanded by these independent directors would have been a new arrangement which provided them normal control over the company.  In the end, this will all be left to the plaintiffs lawyers -- I have not read their complaints but I do hope one of them challenges the validity of Deason's contractual and By-law powers under Delaware Law (see my post here on this).

But the M&A deal here was still to come.  That same day, ACS also announced that "the Board of Directors has endorsed a proposed $1 billion share repurchase program and has authorized the company to purchase up to $200 million of the company's Class A Common Stock, effective immediately, under this program."  In connection with this announcement, Deason agreed to suspend his contemplated purchase of "an additional one million shares of the company's Class A common stock."  The company stated that he did so because of affiliate repurchase restrictions.  Isn't that nice of him? 

But why wouldn't he suspend his purchases?  My calculations find that if this program is fully implemented it will raise Deason's voting control over the company above the magic 50% number.   According to ACS's last proxy, Deason controls 41.59% of the company votes.  At the company's current share price of approx. $41.50 a share, the full billion dollar repurchase would retire approx. 24 million Class A shares and raise Deason's holdings of Class A shares from roughly 2.8% to 3.8% of the outstanding total class A shares (based on the proxy statement's figures of 92,530,441 shares of Class A common stock and 68,434,055 Class A shares outstanding after the full buy-back).  Not such a big rise. 

But here is the kicker -- the full implementation of the buy-back provisions, based on my calculations, provides Deason with approximately 51% of the voting control due to his ownership of Class A and B shares (based on the proxy statement figure of 6,599,372 shares of Class B common stock issued and outstanding all held by Deason --Deason's ownership of 6,599,372 million Class B shares with 10 votes a piece and 2,619,439 Class A shares with one vote a piece would give him 68,613,159 votes out of an estimated 134,427,775 votes outstanding after full implementation of this buy-back and based on my calculations from the latest share figures in ACS's 2007 proxy).

So, these new independent directors (who I assume approved this buy-back) have now implemented a plan through which Deason can perhaps obtain the majority control he likely covets.  Talk about off to a good start.  And think about the legal issues this now raises -- if this plan is fully implemented and Deason does indeed gain a majority vote, has the company triggered Revlon duties here by passing full control to Deason despite the effective control he already exercises?  If so, has the board already breached their fiduciary duties by failing to follow procedures designed to obtain the highest price reasonably available?  And if either of the two answers is no, has the board otherwise breached their fiduciary duties by initiating this transaction on this basis without putting into place adequate protections for the minorities or otherwise procedures to ensure ?  And this is even before Deason attempts to initiate another going-private transaction (if he decides to do so). 

None of this was disclosed in the three press releases issued by ACS on Wednesday. 

November 27, 2007 | Permalink | Comments (0) | TrackBack (0)

Genesco: The Government Steps In

Thanksgiving was not so good for Genesco.  Genesco yesterday announced that last Wednesday it had received a subpoena from the Office of the U.S. Attorney for the Southern District of New York for documents relating to Genesco's negotiations and merger agreement with The Finish Line. According to Genesco, "[t]he subpoena states that the documents are sought in connection with alleged violations of federal fraud statutes."  The always timely White Collar Crime Prof Blog has much to say on this tactic including the following:

A grand jury subpoena as a litigation tactic?  The legal battles over M&A deals can be rather contentious, to say the least, and getting the upper-hand on an opponent as leverage for a settlement is common.  A grand jury investigation is something else altogether, though, because once started it takes on a life of its own, and the parties cannot terminate it as part of a global settlement of their claims.  It would be more than a bit scary if a U.S. Attorney's Office did the bidding of one side of a corporate deal, and one would at least hope that the prosecutors were shown something to indicate that this is more than the usual overheated rhetoric that accompanies most corporate litigation -- where everyone claims to want their day in court and no one ever seems to end up there.  Whether there's anything more than smoke here remains to be seen.  But look for references to Genesco's press release to appear in the next filing by Finish Line and UBS in the civil litigation.

Read the full post here.  This case is rising to a boil as we head into the Tennessee trial on Dec. 11.  Genesco also filed yesterday a motion to clarify the scope of the hearing (download it here).  They are claiming that the hearing should exclude consideration of Finish Line's fraud claims and encompass only the MAC claims.  I'll have commentary on that development tomorrow.  Hoping to see you in Nashville. .  . .

November 27, 2007 in Litigation, Material Adverse Change Clauses | Permalink | Comments (0) | TrackBack (0)

URI: The Motion For Expedited Treatment

URI yesterday filed a motion in Delaware Chancery Court for expedited proceedings (download the motion here).  URI is requesting that they be permitted to file a summary judgment motion by November 29 with oral argument to be heard as soon as possible thereafter.  Alternatively, URI requests that a trial date be set so that a decision can be rendered before January 22, 2008. 

URI references the Jan 22 date since:

[T]he reason it is important that this proceeding be expedited, is that delay will frustrate plaintiffs ability to compel defendants to draw down their committed financing.  The obligation of defendants' financing sources to provide necessary acquisition funding expires on January 22, 2008 2 (see paragraph 9 of Exhibit B hereto stating that these commitments "automatically terminate without further action or notice at 5:00 p.m. (Eastern Standard Time) on the day that is six months from the date hereof[July 22,2007] (the 'Expiration Date'), if the Closing Date shall not have occurred by such time."). Thus, for plaintiff to receive meaningful relief, this action must be fully and finally adjudicated before January 22, 2008.

I'm skeptical of this argument -- as I stated before "[t]he banks here (and Cerberus) have no incentive for a quick ruling in this dispute. Therefore, they will likely do what UBS has done in Genesco/Finish Line -- simply extend the drop-dead date to avoid grounds for a preliminary injunction ruling."  Nonetheless, the Delaware Chancery court is likely to accommodate URI with some form of expedited proceedings based on the general harm to URI:  which is why I am surprised URI did not make this argument.  My speculation is that URI did not do so because they want to appear to the public as still in good shape, but will likely raise the issue orally before the court.  The bottom-line is that this case is likely to move quickly but still any summary judgment motion is unlikely to be decided until next year.    A trial would not be until the Spring at best, and more likely the Summer.  And Cerberus has every reason to delay here in order for the credit markets (and its own financial position) to improve. 

Finally, note that the summary judgment motion request is similar to the "paper ruling" SLM had requested.  It increasingly appears that there exists little parol evidence with respect to the reading of this contract -- i.e., no real extrinsic evidence outside the merger agreement as to what the parties meant by this contract and whether it does indeed contemplate specific performance.  Indeed, the only evidence cited by either party thus far has been the transaction documentation and the proxy statement.  And the ex post facto attempts of URI to clarify the wording of the transaction documents through the proxy agreement are likely to be disregarded by the court.   It thus appears that this really is a matter of simple contract interpretation -- this lends itself to a summary judgment motion but highlights the uncertainty in this case due to the clear ambiguity in the documents.  I think this favors URI, but ultimately pushes both parties to a settlement. 

November 27, 2007 in Delaware, Litigation | Permalink | Comments (0) | TrackBack (0)

Monday, November 26, 2007

Further Thoughts on URI/Cerberus

I thought I would add a few more thoughts on the the URI/Cerberus dispute in light of the N.Y. complaint filed on Wednesday.

N.Y. Complaint

Having reread Cerberus's complaint, I still think it is a non-event (see my initial thoughts here).  Cerberus is seeking:

a judicial declaration that, under the terms of the Limited Guarantee and the Equity Commitment Letter, Cerberus Partners and CCM cannot be compelled to do so, and that Cerberus Partners can be compelled only to pay damages in an amount not to exceed $100 million.

The plaintiffs in this lawsuit are not RAM Holdings, Inc. and RAM Acquisition Corp. -- the entities which Cerberus has created to complete the URI acquisition and who are the parties to the merger agreement.   Rather, the plaintiffs here are the ultimate Cerberus funding entities.  Generally speaking, if URI is right and the merger agreement requires specific performance, the RAM entities would then enforce the equity commitment letter to compel Cerberus to finance this portion of the deal.  But if Cerberus's suit here is successful, then the equity financing is unavailable even if URI wins in Delaware and Cerberus is thus liable for only the $100 million it guaranteed. 

Cerberus's argument simply doesn't work.  If the merger agreement indeed contemplates specific performance, then the RAM entities should be able to enforce the equity commitment letter.  Cerberus attempts to side-step this by referencing a clause in the equity commitment letter which states that Cerberus shall "not, under any circumstances, be liable under the Equity Commitment Letter for any costs or damages to any person, including RAM Holdings and URI".  Yet, specific performance can be argued here not to be a damages remedy -- and if the merger agreement does contemplate specific performance, I find it hard to beleive that the parties contemplated that the right would then be rendered meaningless by subjecting the equity commitment letter to the guarantee.       

Further Thoughts on the Merger Agreement

On this point, Section 9.10 of the merger agreement, the specific performance clause, contains a clause which reinforces URI's argument that specific performance is unavailable only if it chooses to terminate the merger agreement. The last sentence of Section 9.10 provides:

The provisions of this Section 9.10 shall be subject in all respects to Section 8.2(e) hereof, which Section shall govern the rights and obligations of the parties hereto (and of the Guarantor, the Parent Related Parties, and the Company Related Parties) under the circumstances provided therein."

Interestingly, when quoting Section 9.10 in its New York complaint, Cerberus specifically excluded the underlined language. I was initially a bit skeptical of URI's argument that the merger agreement should be read so that specific performance is unavailable only if they choose to terminate this agreement.  But if this clause of Section 9.10 is read with Section 8.2(e) there is a good argument that, with one exception, section 8.2(e) is solely applicable to the situation where URI has terminated the agreement.  The one exception is what I spoke about last week -- The lead-in to the last sentence of Section 8.2(e) "[i]n no event, whether or not this Agreement has been terminated pursuant to any provision hereof," to the $100 million dollar limitation and inclusion of "equitable" relief in that sentence.  This really muddles everything.  Still, the first clause of the last sentence of Section 8.2(e) includes the words “whether or not this Agreement has been terminated” whereas those words are not included in the second clause of the last sentence of Section 8.2(e), which references equitable remedies. It could be argued that the words “whether or not this Agreement has been terminated” were needed so that the first clause of the last sentence would apply even if the agreement were not terminated.

This jibes with my initial point that if the limitation on equitable remedies in Section 8.2(e) were intended to be an outright ban on specific performance then the specific performance right in Section 9.10 would be meaningless.  So again, I think that the agreement is unclear at best, but after reflecting on it over the weekend, I think the better reading of the agreement is that URI can either (i) terminate the merger agreement and collect $100M or (ii) exercise its specific performance rights to compel Cerberus to draw down the financing and then close the deal. The termination fee provision only excludes the use of specific performance where URI has terminated the deal. In other words, URI cannot collect $100M and then seek additional damages or further equitable relief. This makes sense  -- Cerberus should not be required to pay the termination fee and then be subject to additional legal remedies. But if URI does not terminate the deal, then specific performance is fair game. 

The only hitch is that darn lead-in to the last sentence of Section 8.2(e).  And that is what throws everything a bit off and why this is bound for a trial on the parol evidence (or more likely settlement).

Trial Date

The other day I also stated the following: 

Note on Delaware Trial Date: A Wednesday news article reported that there is likely to be an expedited Delaware court ruling, possibly by December or January, in the URI litigation. The reason given is that "URI envisions an earlier court decision in its pursuit of specific performance, as the drop dead date on financing for the deal is 22 January." Don't bet on it. The banks here (and Cerberus) have no incentive for a quick ruling in this dispute. Therefore, they will likely do what BUS has done in Genesco/Finish Line -- simply extend the drop-dead date to avoid grounds for a preliminary injunction ruling."

Here, note that Section 6.10(a) of the Merger Agreement does not change my view.  It states:

Parent shall not, and shall not permit Merger Sub to, agree to or permit any amendment, supplement or other modification of, or waive any of its rights under, any Financing Commitment or any definitive agreements related to the Financing, in each case, without the Company’s prior written consent (which consent shall not be unreasonably withheld or delayed), except any such amendment, supplement or other modification to the Debt Financing Commitments that would not reasonably be expected to prevent, materially impede or materially delay the consummation of the Debt Financing or the transactions contemplated by this Agreement. . ."

It could be argued that the banks postponing the drop-dead date for the financing is an amendment or waiver requiring URI's approval.  URI could then argue that such an agreement would damage it therefore justifying the irreparable harm for a preliminary judgment.  I'm skeptical -- if URI is going to be harmed by the delay, it can make a motion now for a preliminary injunction -- it may do so, but will only proceed if it thinks the facts as they are (prior to discovery) will justify it.  The drop-dead date on the financing doesn't play into this.  And it is hard to believe that URI can get a preliminary injunction for an issue made by its own refusal to grant a waiver or modification. 

November 26, 2007 | Permalink | Comments (0) | TrackBack (0)