Thursday, December 6, 2007
In a bit of a coup for Cerberus, Prof. John C. Coates, IV has agreed to be their "deal structure" expert. Prof. Coates is a very well-respected law professor at Harvard Law School and one of the very few legal academics at a top law school to have actual, high-profile M&A experience. He was a partner at Wachtell. My thoughts. First, I'm jealous at his $950 an hour fee -- I need to raise my rates. Second, Coates's expert opinion (download his statement here ) is our first big clue outlining Cerberus’ best arguments. It boils down to two points:
- There are many deals (including some negotiated by URI deal counsel Simpson, Thacher) that have a specific performance clause which other clauses then draft into meaninglessness. This was the case here.
- Drafters resort to catch phrases like “notwithstanding” so that they need not bother to go back and fix other sections and this is done because of time constraints. This was how section 8.2(e) was caveatted and why section 9.10 does not have to be given any meaning.
Ultimately, Prof. Coates would have us read out of the merger agreement is a critical provision that no doubt was a pivotal negotiating point (the right to force deal consummation!). Prof. Coates cites Simpson Thacher’s representation of the Neiman Marcus Group to support this argument. Prof. Coates states:
For example, counsel to URI cited the 2005 buyout of Neiman Marcus as one of the deals containing a provision permitting a buyer to “pay a sum certain to walk away from the transaction.” Yet Section 9.10 of that agreement contained a specific performance clause enforceable against the buyer shell entities – and it even lacked the “subject to” cross-reference to the liability cap that is present in the URI Deal merger agreement. Nevertheless, counsel to URI did not qualify its characterization of reverse termination fees by reference to this separate provision . . . .
To determine who is right let's start with the Neiman Marcus Group merger agreement. There in section 9.10 (specific performance) there is no “subject to another section” language. When you look at section 8.2 (effects of termination), section 8.2(g) states:
Notwithstanding anything to the contrary in this Agreement, (i) (A) in the event that Parent or Merger Sub breaches its respective obligation to effect the Closing . . . . (B) Parent and Merger Sub fail to effect the Closing and satisfy such obligations because of a failure to receive the proceeds of one or more of the debt financings contemplated by the Debt Financing Commitments . . . . then the Company's right to terminate this Agreement pursuant to Section 8.1(d)(i) and receive payment of the Merger Sub Termination Fee pursuant to Section 8.2(e) shall be the sole and exclusive remedy . . . .[and] in no event shall Parent, Merger Sub and their affiliates, stockholders, partners, members, directors, officers and agents be subject to liability in excess of $500,000,000 in the aggregate for all losses and damages arising from or in connection with breaches by Parent or Merger Sub of the representations, warranties, covenants and agreements contained in this Agreement.
Putting this together, I think it changes nothing: NMG’s only remedy in the circumstances of section 8.2(g) is to terminate and receive the reverse fee. Three things here are notable for the URI transaction:
- Section 8.2(g) of the NMG merger agreement kicks in only if debt proceeds are insufficient to consummate the deal (precisely the ultimate risk sponsors want protection against; in URI this risk has not come about, at least as far as we know, but expect to at some point);
- Section 8.2(g) of the NMG merger agreement talks about “loss or damage” and so arguably, like the URI provision in that merger agreement's section 8.2(e), doesn’t apply when the company is seeking specific performance (although there is a paradox here: if that were the case, then NMG's buyer failed to protect itself adequately against the very situation where the debt was insufficient, because in this reading, the company could still force it to close under the specific performance provision); and
- The specific performance language in section 9.10 of the NMG merger agreement is very generic whereas in the URI merger agreement it appears to have been heavily negotiated and actually does talk about specifically enforcing the consummation of the transaction (NMG was silent on this). This is also true since it appears that both deals were working off Simpson's form.
I believe point three particularly strengthens URI's argument despite the suggestion that in URI’s section 9.10 the addition of the words “subject to 8.2(e) . . . . under the circumstances provided therein” weakens URI’s section 9.10 versus NMG’s section 9.10. It is evidence that the parties intended something more than what was existent in NMG and other similar deals.
In this light, what I believe the NMG merger agreement really says is that, so long as all the conditions precedent have been met and, implicitly, that the financing is sufficient to close, then NMG can specifically enforce closing. In paragraph 23 of Prof. Coates's expert opinion he mentions that Simpson in a client memo referenced NMG as an example of the kind of deal where buyer could “pay a sum certain to walk away from the transaction.” This is bothersome: either that is quoted out of context (e.g., it could have said “buyer can pay a fee to walk if debt financing is unavailable”) or Simpson itself misunderstood the protection NMG actually had (doubtful) or I am wrong (a likely explanation -- Coates is smarter than me). The memo is still on Simpson’s website (access it here) and presto, it is quoted out of context – see, e.g., the first paragraph on page 4 of the Simpson memo – it refers specifically (no pun intended) to “if financing not available”. It states:
The buying group in each of these transactions also agreed to a “reverse termination” fee in the event of a failure to close as a result of the buyer not procuring the necessary financing. . . . In the case of the Neiman Marcus and Hertz transactions, the buyer potentially could be required to pay further damages above the termination fee in the event that the failure to close did not result from the buyer being unable to obtain the debt financing (such as, for example, the buyer failing to use its reasonable best efforts to consummate the financing, including taking down on the more expensive bridge financing following an opportunity to raise the high-yield debt).
Note that I am making this argument without having seen the NMG equity commitment letter or guarantee -- it could change things. Nonetheless, Prof. Coates is ultimately right that there are a number of deals that have specific performance clauses but then elsewhere have a mechanism which renders the specific performance clause meaningless through other provisions. The problem that he has is that in those cases the reading was clear. Here, there is ambiguity creating uncertainty about what the parties actually meant, and a better reading of the merger agreement appears to be that URI is only limited to a damages remedy if it terminates (this is generally because it is one that does give meaning to section 9.10 in light of such ambiguity -- a preference of contract interpretation -- see my post here for a fuller analysis). Prof. Coates attempts to get around this issue by making the following statement:
One of the ways that the parties commonly economize on time and costs is not to attempt to review every provision of every related agreement every time a new change is made, particularly when documents are in the final stages of negotiation. Rather, they rely on succinct but legal terms of art to achieve what is, in essence, “editing” of the entirety of a document with minimal change. Among the terms of art customarily relied upon are phrases such as “subject to” or “notwithstanding.” These phrases allow the parties to specify that one phrase or provision will take precedence over others, and thus avoid the need to attempt to synthesize every provision of every related agreement that is or may be partly or wholly in conflict with the provision in question.
I have enormous respect for Prof. Coates, but the practices he describes above as common are simply sloppy drafting which create the type of problems URI has here. When I was practicing, I was taught and taught others to avoid this type of language for the complexities and ambiguity it creates. Instead, stay up the extra hour and redraft the clause (and other documents) to read the way it should without such a problem (particularly if you are at Wachtell and being paid millions for your work on a flat fee basis -- the extra hour is not an expense for the client). This is very true when you are dealing with what appears to be the most important provision in the agreement (when can Cerberus walk or not? Pretty important.). And this is how contract drafting is taught in law schools today -- although most people, including me believe you can really only learn drafting by doing it. So, I am a bit surprised he would say this, and expect it to be strongly challenged by URI's expert (wonder who that will be?). Ultimately, I don't find Coates's argument convincing for this reason alone, but it can also be argued that it is an invalid one because it doesn't really answer the ultimate question of how this contract should be interpreted in light of the ambiguity -- again something which favors URI. After all, URI's interpretation would address a sponsor's chief worry -- being caught having to consummate a transaction without the debt financing -- while at the same time giving URI certainty where the financing was in fact available.
Final note: Obviously this is expert testimony, and I doubt Coates was expecting it to be publicly commented upon -- whether this is something Coates would say outside of this context I don't know.
Finish Line released third quarter earnings yesterday. According to Finish Line:
The Finish Line, Inc. (Nasdaq: FINL) reported consolidated net sales from continuing operations of $268.7 million for the thirteen weeks ended December 1, 2007 ("3rd quarter" or "Q3"), a decrease of 4.0% from consolidated net sales from continuing operations of $280.0 million for the thirteen weeks ended November 25, 2006 ("Q3 LY"). Due to the shift of one week in the retail calendar due to last year's 53-week year, Q3LY included approximately $6.7 million of additional sales due to an additional week of the Back To School selling season.
The poor performance of Finish Line here, together with similar poor performance recently by Foot Locker, Shoe Carnival, Shoe Pavilion, etc. buttress Genesco's claim of no MAC under the exclusion for "changes in general economic conditions that affect the industries" Genesco operates. Nonetheless, yesterday it was also announced that a shareholder class action had been filed against Genesco. According to the plaintiffs' attorney press release (Law Offices Bernard M. Gross, P.C.?):
The complaint charges Genesco and certain of its officers and directors with violations of the Securities Act of 1934. Genesco is in the footwear business. The complaint alleges that during the Class Period, defendants made false and misleading statements concerning Genesco's business and prospects. As a result of their representations, Genesco was seen as an attractive acquisition target for Foot Locker, Inc. and others. Subsequently, The Finish Line, Inc. made an increased offer, based on Genesco's purported success. When the truth about Genesco's results began to be revealed, however, Finish Line indicated it would no longer pursue the acquisition. Then, on November 26, 2007, Genesco received a subpoena from the U.S. Attorney's office for the Southern District of New York seeking documents related to its merger agreement and in connection with alleged violations of federal fraud statutes. On this news, Genesco's stock plunged to $25.44 per share on November 27, 2007, almost a 16% drop.
A few other law firms also filed complaints (or it may have been a joint filing -- unclear). In any event, expect Finish Line to add this to its arsenal or purpoted MAC claims. More complexity, more uncertainty.
Tuesday, December 4, 2007
Kevin Miller, an excellent M&A lawyer at Alston & Bird, has a post up on DealLawyers.com concerning the possibility of specific performance being ordered in the URI case. You can read the full post by clicking here, but what follows is the gist of his argument:
URI's brief fails to justify specific performance for two reasons, both relating to the alleged harms it claims: (i) the defendants' failure to pay the agreed cash merger consideration and (ii) the decline in the value of URI shares as a result of the defendants' allegedly manipulative disclosures.
First, to the extent the alleged harms solely relate to the fact that URI's shareholders will not receive the agreed cash merger consideration or that the value of the URI shares they hold has declined, money damages would appear to be a practicable and therefor more appropriate remedy. URI voluntarily agreed to a cap on money damages - and should not now be permitted to claim that money damages are inadequate as a remedy because of that agreed limitation.
Second, and more importantly, the alleged harms are not harms to URI. They are only harms to URI's shareholders who are not third party beneficiaries under the merger agreement and are consequently not entitled to protection or relief against such harms (see Consolidated Edison v. Northeast Utilities, 426 F.3d 524 (2d Cir. 2005) applying New York law and holding that shareholders cannot sue for lost merger premium; see also Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031 (Del. 2004) applying Delaware law in analogous circumstances).
I don't agree with Mr. Miller's argument and believe that specific performance is available here if URI wins on its contract claims for the following reasons:
- Mr. Miller's argument doesn't make logical sense. In Mr. Miller's world, Chandler agrees with URI's interpretation of the merger agreement that specific performance is required under 9.10. In other words, Chandler finds that the last sentence of section 8.2(e) limiting URI's rights to damages in the amount of $100 million is applicable only in cases where the merger agreement is terminated. But then at the damages phase after deciding Cerberus to be in breach and URI to have a right of specific performance under sec. 9.10, Chandler orders that as a matter of Delaware law, damages are more appropriate. This doesn't make sense because, if he did do this, it would mean that the $100 million guarantee limitation again kicks in leaving URI without full compensation for Cerberus's breach and giving Cerberus, the breaching party, exactly what they were asking for despite Chandler's finding of the intent of the contract. Even if the Chancery Court were not a court of equity I doubt they would come to such an illogical conclusion.
- Specific performance was agreed to here. If Chandler agrees with URI's reading of the merger agreement then Cerberus specifically agreed that specific performance was permissible under sec 9.10. In similar paradigms, the Chancery Court has held litigants to their agreement that a damages remedy was inadequate and an equitable one appropriate. Thus in True North Communications, Inc. v. Publicis, S.A., Del.Ch., 711 A.2d 34, 45, aff'd, Del.Supr., 705 A.2d 244 (1997), the Chancery Court provided a grant of injunctive relief based on a defendant's agreement that an equitable remedy was appropriate and damages an inadequate remedy. Here, if URI's argument is correct, it is likely the Chancery Court would bar Cerberus from arguing against specific performance due to their contractual agreement. This is after all a court of equity.
- Regardless, specific performance is justified here as there is no adequate damages remedy. Mr. Miller is right that in Delaware a party is never absolutely entitled to specific performance; the remedy is a matter of grace and not of right, and its appropriateness rests in the sound discretion of the court. In general, equity will not grant specific performance of a contract if it cannot “effectively supervise and carry out the enforcement of the order.” Moreover, the balance of the equities must favor granting specific performance. A remedy at law, i.e., money damages, will foreclose the equitable relief of specific performance when that remedy is “complete, practical and as efficient to the end of justice as the remedy in equity, and is obtainable as [a matter] of right.” NAMA Holdings, LLC v. Related World Market Center, LLC 922 A.2d 417 (Del.Ch. 2007). Here, however, a monetary damages award would be against RAM Holdings (the Cerberus subsidiary). This is a shell company and, as the Chandler no doubt knows, would not be able to pay any amount. Rather, again if Chandler awarded a monetary damage award URI could only collect against the $100 million guarantee issued by Cerberus resulting in URI not receiving full recompense for its damages. Given this, it is hard to see how Chandler can find that monetary damages is a complete remedy as it again results in Cerberus winning a back door victory and URI without full compensation for Cerberus's breach -- a predicate for specific performance even without Cerberus's agreement in sec. 9.10. And, of course, such a decision would fly in the face of the parties' intent to the extent Chandler rules in URI's favor on the breach point.
- Delaware Precedent supports the grant of specific performance. In In re IBP, Inc. Shareholders Litigation, 789 A.2d 14 (Del.Ch. 2001), Vice Chancellor Strine found that sellers in a merger agreement were entitled to specific performance. His decision rested in part on the ability of the sellers to elect to receive stock in the transaction (not an issue here) but also upon the fact that monetary damages would be exceedingly difficult to establish. The latter point is applicable here even if there was not the issue of the guarantee. There is also some good dictum in that case which supports URI's case.
- The fact that the URI shareholders are not a party to this agreement is not an issue. Mr. Miller's second point is contrary to established case-law. He is arguing that URI cannot establish damages here because URI's shareholders are not a party to the agreement and are not third party beneficiaries. But he is conflating a number of issues. First, under basic contract law URI can itself contract for a benefit to a third party (i.e., its shareholders) and if the other party breaches, the damages remedy is generally the amount URI would have to incur to cure the breach. So, for example, I hire a music teacher for my child and agree that they will provide lessons at $10 an hour. If the music teacher breaches and I have to hire a new music teacher at $12 an hour, then my damages against the first music teacher are relatively clear under contract law -- it is the $2 an hour difference. This is the case here. The opposite outcome would mean that no contract of this type could ever be truly enforced. Moreover, numerous cases in Del., New York and federal courts have enforced buyer obligations under merger agreements on this same rationale -- none to my knowledge has ever held Mr. Miller's position to be correct. Mr. Miller attempts to distinguish IBP on this issue, but again I think he misses the point that Strine treated IBP and its shareholder claims as one and the same. There appears no jusitification for any different treatment here.
- The third party beneficiary clause does not effect this outcome. This is where Mr. Miller again conflates the issue. He cites the "no third party beneficiary" clause in the merger agreement and the Con Ed. case to assert that URI has no damages claim with respect to the consideration paid to its shareholders. But the no third party beneficiary clause and the Con Ed. case merely state that shareholders in this regard have no right to sue in their personal capacity under the merger agreement -- only the company can. Tooley, the Delaware case he cites, says the same thing. Here, though, URI is bringing the claim, not the shareholders -- so this is not a problem and as I stated in point 5-- URI is permitted under established case-law to bring this claim. Again, I challenge anyone to find a case where a seller in a merger contract sues to enforce the contract and the court denies the claim because the damages remedy is to the shareholders. There isn't one because it just doesn't jibe with basic contract interpretation laws or the parties likely intent and it just doesn't make commercial sense.
Finally, there is one big problem on the specific performance front for URI, and that is the complexity of any such remedy. In alternative scenarios, Delaware courts have refused to grant specific performance because it would be too complex a remedy for the court to implement. So, in Carteret Bancorp., Inc. v. Home Group, Inc., 1988 WL 3010 (Del. Ch. 1988), the court refused to issue an injunction requiring defendants to use their best efforts to obtain required regulation approvals and, specifically, to take or refrain from taking certain identified actions in part on the grounds that it was too complex. This may be the case here -- the remedy URI seeks is certainly a complex one. And a weakness in URI's brief is their assumption that Chandler can fashion a specific performance remedy in this case --i.e., force Cerberus to fund the equity. I think URI has a good case in Delaware but I simply do not know what happens if they do indeed win at the Dec. mini-trial. I suppose it all shifts up to New York with URI litigating RAM Holding's claim against Cerberus under the equity commitment letter? But who knows, and maybe that is why URI didn't address this issue in depth -- they just don't know either. BTW -- URI's response to Cerberus's N.Y. complaint is due 30 days after they are served (if they are served outside N.Y.) -- this is around Dec. 16 -- I suspect URI will ask Cerberus for more time to respond, though, in order to see how the Delaware action plays out.
NB. For those following the Genesco trial many of the principles above apply there under Tennessee law, but the matter is complicated by the solvency issue.
Last week and as I previously predicted, the judge in the Genesco Tenn. trial issued an order that the trial next week will be on both the fraud and MAC claims. In addition, the Judge ruled that she would not rule on Genesco's motion to dismiss the fraud claims until after trial as there is no time and this is otherwise a fact-specific inquiry which depends upon the intent of the parties. I am not sure that this is a big defeat for Genesco. The Judge likely does not want to delay resolution of this dispute. And, at a time so close to trial, she is likely loathe to simply throw out the fraud claims without hearing the factual evidence.
The Judge also ordered that if she did rule in favor of Genesco's claims she would hold a separate trial on the damages remedy. I think this is a smart move. She is clearly aware of the N.Y. action and the effect an negative ruling will have on Finish Line. So, I don't think this is adverse to Finish Line or is something to be overly read into -- it just means she knows the stakes. Both parties are lucky to have this Judge deciding this dispute.
Monday, December 3, 2007
One of the more interesting and distressing things about today's M&A market is the number of deals which are either dead or walking wounded.
- For example, take the pending acquisition of PHH Corp. by General Electric Capital Corp. GE's acquisition is conditioned on The Blackstone Group being "ready, willing and able" to consummate GE's on-sale of PHH's mortgage operations [Yes, the quoted language is actually in the negotiated merger agreement]. On September 14, 2007, GE notified PHH that it had received a letter from Blackstone's acquisition vehicle that it had a financing short-fall of up to $750 million in available debt financing. Since that time, PHH's shareholders have approved the deal but no word from Blackstone -- they don't seem to be ready, willing or able. The deal is on life support and GE is likely waiting for December 31, 2007, the drop-dead date on the merger agreement, to terminate the deal. PHH is clearly the walking wounded verging on dead.
- Another deal in this category is the "pending" acquisition of SLM Corp. by a consortium led by the Flowers Group. After a flurry of litigation, the merger agreement is still pending but any trial is months if not longer out, and it appears that the fight has been reduced to a dispute over the $900 million reverse termination fee. Given what I believe is SLM's weak case, expect this one to also linger for a while and then be resolved quietly -- likely in some type of settlement akin to what happened in Harman (i.e., the Flowers consortium invests an amount directly in SLM so both sides can proclaim victory and the merger agreement is terminated). SLM is another of the walking wounded -- more like walking dead.
I think this is rather unprecedented and symbolic of the state of this market. Can anyone remember when so many deals have either been renegotiated, or are otherwise wounded or troubled? And I think it is problematical in the long term. Going-forward, targets and M&A target lawyers will be much more wary, rationally over-negotiating deals in order to tighten up provisions which have come to light as ambiguous or otherwise providing too much leeway to buyers. This will create its own problems as overly-complex and heavily negotiated language inevitably creates further ambiguity (see, e.g., Section 8.2(e) of the URI/Cerberus merger agreement), and targets are less willing to rely on reputation to cover gaps. And, of course, all of this backlog must still be cleared out. Another interesting development is how wary investors have become of private equity deals with reverse termination provisions. Take the first four big private equity deals announced post August: 3Com ($2.2 billion), Radiation Therapy Services $(1.1 billion), Goodman Global ($2.65 billion), and Puget Energy ($7.4 billion). As of Nov. 30 their deal spreads were 23%, 8.8%, 4.5%, and 6.6%, respectively. These are much wider spreads than one would expect (although in fairness 3Com and Puget have regulatory issues and Goodman has an EBITDA condition perhaps explaining some of this).
In any event, for those keeping score here is the full holiday list of the Dead, Wounded and Troubled. Happy Hanukkah!
- MGIC/Radian Group -- An Aug. MAC case. The parties mutually agreed to terminate their merger agreement after MGIC asserted a MAC had occurred.
- Harman/KKR & GS Capital Partners -- The merger agreement was terminated and $400 million invested by KKR & GSCP in Harman after the buyers asserted a MAC and breach of the merger agreement by Harman. This investment was a face-saving way out for Harman as a negotiated disposition of the $200 million reverse termination fee.
- Acxiom/Silver Lake & ValueAct -- The merger agreement was terminated and $65 million paid by the buyers to Acxiom after a MAC was asserted by the buyers. This amount was $1.75 million less than the reverse termination fee in the merger agreement.
- Fremont General Corporation/Gerald J. Ford -- Investment Agreement abandoned after buyer stated he was not prepared to "proceed"; another likley MAC claim.
- H&R Block subsidiary Option One/Cerberus -- parties mutually agree to terminate deal after "certainclosing conditions" could not be met.
- PHH Corp./GE & Blackstone -- see above
- SLM Corp./Flowers et al. -- see above
- Genesco/Finish Line & UBS -- litigation in Tennessee over MAC and negligent misrepresentation claims by Finish Line and fraud claim by UBS. UBS has also sued in a New York court to terminate its financing obligations to Finish Line concerning the merger.
- URI/Cerberus -- litigation in Delaware over specific performance after Cerberus repudiated its obligations under the merger agreement. Cerberus has sued in New York claiming that its guarantee limits its damages to $100 million.
- Reddy Ice/GCO-- Morgan Stanley asserted back in Sept. that it no longer is required to finance the deal. According to the merger agreement, the deal is in a marketing period which ends on Jan 31, 2007. With a low reverse termination fee of $21 million this deal is walking wounded. To boot Reddy Ice's recent results have not been too hot (weak attempt at a pun), and their CEO resigned earlier this week for health reasons.
- 3Com/Bain Capital & Huawei (23% deal spread) -- Appears to be held up in CFIUS review under the Exon-Florio amendment -- in fact it appears that 3Com has yet to even disclose whether the deal is so conditioned upon CFIUS approval (see my post on their seemingly poor disclosure practices here). Reverse termination fee of $66/$110 million.
- CKX/Robert Sillerman (9.7% deal spread but hard to estimate) -- Proxy statement yet to be filed after five months. The financing on this deal appears yet to be firmly committed.
- Cumulus Media/Merrill Lynch (42.4% deal spread) -- $15 million reverse termination fee.
- Goodman Global/Hellman Friedman (8.8% deal spread) -- reverse termination fee of $75/$139 million and merger conditioned on $255 million in EBITDA in 2007.
- Myers Industries/Goldman Sachs (11.1% deal spread) -- marketing period ends Dec. 15 after being extended previously.
- Penn National Gaming/Fortress Investment Corp. (12.8% deal spread) -- shareholder meeting on Dec. 12 to approve deal/reverse termination fee of $200 million.
- Tribune/Sam Zell (10.6% deal spread) -- $25 million reverse termination fee.
NB. I define troubled deals as those with a greater than 10% deal spread as of Nov. 30 and which are not industry buy-outs (i.e., they are private equity and management buy-outs) or deals that otherwise have reverse termination fees and abnormal deal spreads.
Settled at Reduced Price/Closed
- Accredited Home Lenders/Lone Star -- closed after MAC asserted and price lowered.
- Home Depot Wholesale Supply/Bain Capital Partners, The Carlyle Group and Clayton, Dubilier & Rice -- closed after MAC asserted and price lowered.
Addendum: I am sure I missed a few so if anyone has more just put in a commen or email me and I will add them in throughout the day.
Well, Chancellor Chandler issued a scheduling order yesterday setting expedited discovery and a trial for Dec. 17 in Georgetown, Delaware. It is interesting to watch the different court-room styles of Chandler (here) and Strine (in SLM). Chandler is holding these scheduling conferences and scheduling disputes outside of public purview as opposed to Strine's two very public hearings for SLM. In any event, I am surprised to find that there is going to be an actual mini-trial and a measure of discovery before Chandler's decision on URI's summary judgment motion. I had thought Chandler was going to decide URI's motion on the papers. I think this favors URI as it gives more leeway for Chandler to make a decision on the merits despite the ambiguity of the merger agreement. This is particularly true since I am thus far unimpressed with the parol evidence cited by Cerberus. But, more evidence is likely to come out and we still need to read Cerberus's response to URI's motion.
It is going to be a fun holiday in Delaware -- at least if you are a lawyer who charges by the billable hour. For those attending note there is no sales tax in Delaware -- just in time for holiday shopping.
Aside: Cerberus continues to clean up its littered deal sheet. Today H&R Block and Cerberus announced the termination of Cerberus's purchase of H&R Block mortgage subsidiary Option One.
I read the URI brief for summary judgment and Richards, Layton's letter to Judge Chandler again over the weekend (RL is counsel to RAM Holdings). I'm going to wait for Cerberus's response for a full analysis, but a few thoughts and questions:
- The URI brief was a good job -- the best they could do under the circumstances. And it repeated ad infinitum Cerberus's Achilles heel: basic contract interpretation rules require that the merger agreement be interpreted so the specific performance clause has meaning. URI addressed only in footnote 12 the effect of the limited guarantee and the equity commitment letter on this -- here URI adopted largely the argument I thought they would. But waiting to address this component of the dispute is good strategy -- URI will wait until their reply brief to see Cerberus's arguments on this point.
- I think URI makes an important point that "equitable remedies" includes monetary damages to justify including it in the second part of the last sentence in Section 8.2(e) rather than the enforcement of the terms of the contract itself, i.e. specific performance isn't a remedy (for a failure to enforce or a breach) it is something different. That would mean URI could agree to limit its equitable remedies without giving up enforcement of the contract itself.
- I'm not sure their arguments for summary judgment were convincing -- there is ambiguity here, something Cerberus is doing everything to highlight.
- This leads me to a question -- do Delaware courts commonly issue summary judgment when a party to the dispute insists that parole evidence is necessary? In particular, has Chancellor Chandler done this -- I suspect that both parties are researching this item -- if anyone has any thoughts on this let me know.
- Both parties here are trying to seize the equity mantle, but URI is ultimately the aggrieved party -- something Chandler undoubtedly knows, and given Cerberus's stretched reading of some of the documents he might be tempted to invoke.
I have more significant, further comments on RL's letter.
- RL's claim that the reverse termination fee was doubled as a trade-off for specific performance is not believable. A $50 million reverse term fee would be an outlier low fee (1.6%) in the context of a hotly contested auction. URI was simply demanding something that Cerberus knew it had to give.
- The letter and the references to earlier drafts and contemporaneous notes are interesting; however, no explanation is given then for why section 9.10 remained in the final contract--i.e. Cerberus has of yet failed to address harmony. Moreover, the parol evidence they cite is more consistent with URI bargaining for a pure claim of specific performance in all circumstances and falling back to section 8.2(e) as a resolution.
- The "all" versus "one" party statement on page 5. Does Mr. Williams expect to find any kind of paper in the hands of the bankers or board members indicating someone thought there was no specific performance right? Or is this just trying to make discovery last as long as possible? I suspect the latter. Surely in 2007, nothing like that should exist (particularly given the disclosure on this in the proxy statement)
- RL continues to make the misleading argument that because the limited guarantee was "URI's sole and exclusive" remedy against the Cerberus entities the merger agreement should be read to exclude specific performance. They have yet to address RAM Holding's ability to enforce the limited guarantee. As I said on Friday "So, the limited guarantee says nothing about Parent [RAM Holdings] 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."
Final note: For those who think Cerberus would never agree to specific performance read the GMAC transaction documents.
So, last Thursday the stock of Alliance Data Systems went on a wild ride; it dropped over 20% or over $15 a share but returned to its previous level in the space of about hour and a half. The reason was due to a bear rumor that Blackstone was seeking to renegotiate or otherwise repudiate its agreement to acquire ADS. ADS later issued a statement denying the rumor and ADS stock is now trading back at the level it was before the rumor. I do hope the SEC investigates and prosecutes the person(s) responsible for this rumor -- that is was spread the day before Nov. 30 -- year-end for many traders -- I believe was no coincidence. Someone was trying to make their book and did so with a vengeance.
Nonetheless, this post is about the ADS merger agreement and the Blackstone's ability to walk. Here, the question on everyone's minds is does the ADS agreement have the same type of optionality as other private equity reverse fee termination deals (e.g., Acxiom, Harman, etc.)? The answer is a qualified no. A review of Section 9.8.2 of the ADS merger agreement finds it similar in an important respect to Cerberus/URI. The ADS merger agreement contemplates specific performance of the financing by Blackstone and a $170 million cap on Blackstone' liability otherwise; there is no naked reverse terminate fee. However, unlike Cerberus/URI, the ADS merger agreement is much clearer and specifically accounts for the two situations. It appears unlikely that Blackstone could argue the same ambiguity Cerberus is; the ADS merger agreement on its face rather reads rather unambiguously to provide that the liability cap does not apply to the specific performance provisions. For those who care, Simpson represented Blackstone in this deal as opposed to Cerberus/URI where it represented URI. If only they had negotiated the same provision for URI.
The problem ADS likely has is with the equity commitment letter and Blackstone guarantee. Neither appears to have been disclosed (although the guarantee is Exhibit A to the merger agreement it was omitted from ADS's SEC filings. Thanks for the full disclosure.). However, if it follows practice the guarantee is likely governed by New York law and has a New York forum clause as opposed to the ADS merger agreement which has a Delaware law and Delaware forum clause. And it is likely that there is enough ambiguity in these two documents to provide Blackstone a colorable claim similar to the one Cerberus is making in New York -- that its guarantee and equity commitment letter read together limit the amount it is ever required to pay to the break fee and nullify the specific performance requirement. The argument is likely a stretch but is certainly one which Blackstone can use as a bargaining tool if it wants (if indeed the documents do read as I believe they do).
In the future, M&A lawyers for targets will need to pay greater attention to these ancillary documents to ensure that this problem cannot arise. To the extent feasible choice of forum clauses and choice of law clauses in the merger agreement and financing documents should match. In addition, third party beneficiary clauses should be considered as well as clear provisions in the guarantee that it does not foreclose specific performance of the financing commitment letters. I am looking forward to the announcement of the next big private equity deal to see if we all have learned from our mistakes.
Activision, Inc. and Vivendi yesterday announced that they have signed a definitive agreement to combine Vivendi Games with Activision. The transaction is structured as follows:
- Vivendi Games will be acquired by Activision via a reverse subsidiary merger. In the merger, Vivendi will receive 295.3 million new shares of Activision common stock. The transaction implies a value of approximately $8.1 billion for Vivendi Games.
- Concurrently with the merger, Vivendi will purchase 62.9 million Activision shares at a price of $27.50 per share for a total of $1.7 billion in cash.
- Within five business days after closing the above transaction, Activision Blizzard (the newly renamed combined entity) will launch a $4 billion all-cash tender offer to purchase up to 146.5 million Activision Blizzard common shares at $27.50 per share.
- Vivendi will also acquire from Activision Blizzard additional newly issued shares for up to an additional $700 million of Activision common stock at $27.50 per share, the proceeds of which would also be used to fund the tender offer.
Upon consummation of all of these transactions, it is expected that Vivendi will own an approximate 68% ownership stake in Activision Blizzard on a fully diluted basis. The parties have yet to file all of the transaction documents with the SEC -- I'll have a full analysis once they are -- but there are already a number of issues raised, including:
- Activision, a Delaware company, is selling control of the company to Vivendi. As such, they are subject to Revlon duties and the board of Activision is now under the duty to obtain the highest price reasonably available for Activision. It remains to be seen if any subsequent bidders will emerge, but if they do, the value of Blizzard and its strategic contribution will provide the Activision board some leeway in valuing alternative offers. How much -- that is unknown.
Bottom-line: Activision is now in play (get it?).
- If this deal is indeed completed, Vivendi will become a majority holder of Activision. It will be interesting to see what protections the Activision board has negotiated for the minority shareholding position they are creating. At a minimum, this should include a standstill, and possibly voting restrictions and restrictions on minority freeze-outs depending upon how hard the Activision board bargained.
- As with any acquisitions of private companies, valuing Vivendi Games it is quite hard and subject to criticism for under or more likely, over-valuation. Expect there to be a fair bit of cirticism either way on the valuation assigned to Vivendi Games. [Addendum: See here Deal Journal's excellent post on this point]
- In the same vein, the deal could get significantly delayed due to the significant time need to the prepare the proxy statement for this transaction. Here, Vivendi Games is material to Activision-- full financial statements and MD&A must therefore prepared for Vivendi Games for inclusion in the Activision proxy-- Vivendi recently terminated its reporting obligations to the SEC, but presumably since it has been historically reporting in U.S. GAAP this should ease the preparation of these financials.
Finally, for legal geeks, the press release contained the following boilerplate:
This communication is being made in respect of the proposed business combination involving Activision, Vivendi and Vivendi Games. In connection with the proposed transactions, Activision plans to file with the SEC a Registration Statement on Form S-4 containing a Proxy Statement as well as other documents regarding the proposed transactions. The definitive Proxy Statement will be mailed to stockholders of Activision. INVESTORS AND SECURITY HOLDERS OF ACTIVISION ARE URGED TO READ THE REGISTRATION STATEMENT, PROXY STATEMENT AND OTHER DOCUMENTS FILED WITH THE SEC CAREFULLY AND IN THEIR ENTIRETY WHEN THEY BECOME AVAILABLE BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION ABOUT THE PROPOSED TRANSACTIONS.
I think this is a mistake. Historically, the SEC has not permitted Form S-4 to be utilized to issue shares to a single shareholder in an agreed transaction as there is no offer to sell under Rule 145. I suspect someone just shoved in the wrong boilerplate -- the transaction documents should contemplate solely a proxy statement and, possibly, a registration rights agreement for Vivendi's shares.
Finaly note: Vivendi's counsel was Gibson, Dunn & Crutcher LLP -- a coup for that firm. Congratulations.