December 15, 2007
URI Reply Brief
Here is a redacted copy of URI's Reply Brief on its now denied motion for summary judgment. I'll have commentary for Monday, but it should give a good insight into URI's parol evidence arguments. Neither side is getting much sleep these days.
December 14, 2007
The Order on the Expert Opinion and Testimony of Prof. Coates
Here is Chancellor Chandler's order on the testimony and report of Prof. Coates (just released by Delaware). Chandler states:
After thoroughly reviewing Professor Coates’s report and both parties’ briefs, I find that the portion of the report that describes buyout deal structures is admissible as factual testimony and that the remainder of the report that purports to explain drafting practices is inadmissible as impermissible legal opinion.
I think this is the right decision, but I find more interesting his statement in footnote 7:
Remarkably, in his report, Professor Coates appears to excuse practices that can only be described as inartful drafting as “one of the ways that the parties [to buyout negotiations] commonly economize on time and costs.” Id. Professor Coates states that the parties, in contravention of basic principles of contract interpretation and drafting, use certain phrases (e.g., “subject to” or “notwithstanding”) so as to “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.” Id. Not surprisingly, disputes often arise precisely because of provisions that are “partly or wholly in conflict” with each other.
I respectfully agree with Chancellor Chandler as I stated last week. And for those who want it may also give some insight into how he is reading the merger agreement. I would also expect URI to seize on this footnote to support their case -- the poor drafting job here does not excuse what should be the plain reading of the contract, and contracts should be interpreted against the drafter. Ultimately, the sloppy drafting in the URI merger agreement is a lesson for all M&A lawyers about how to approach and train drafting. But that is a subject for another post.
URI: The Path Ahead
Chancellor Chandler's denial of URI's summary judgment motion yesterday means that there will now be a full trial starting next Monday on the merits. For those who like to parse language and speculate, Chandler's letter order stated:
Having reviewed your briefs and supplemental letters regarding URI’s motion for summary judgment, I have concluded that while the question is exceedingly close, summary judgment is not an effective vehicle for deciding the contract issues in dispute in this case. Although I am today denying URI’s motion for summary judgment, I will provide more fully my reasons for doing so in the context of the post-trial opinion that will follow promptly after the conclusion of trial on Wednesday, December 19.
There are a number of readings of the "exceedingly close" language. A few of the most likely are: 1) URI almost made their case but the continuing ambiguity required a trial, 2) Cerberus, on their limited affidavits and other documents, almost made their case but the continuing ambiguity required a trial, 3) Chandler still hasn't made any definitive determination other than that, given the high standard here (undisputed evidence supporting a judgment at law), it is ambiguous, 4) Chandler has made a decision but wants a trial to protect himself on appeal, and 5) the language is just comfort language and doesn't mean very much.
I can't even begin to speculate on which one it is [Addendum: my bet is 3 & 4], but I do think we have some data coming out of Cerberus's (successful) opposition brief and affidavits. Assuming URI is a smart, rational actor at this point -- something I think you have to do -- they knew that their summary judgment motion would have serious problems. So, rather than slug it out in a contest of affidavits which would only highlight the ambiguity, they decided to let Cerberus put forth its entire case and wait until trial for its factual points. At trial, URI will now put forth their best case which appears likely to be the legal one made in their summary judgment brief -- i.e., section 9.10 has to mean something, and hope it defeats Cerberus's legal and evidentary arguments. But, given the parol evidence we have right now, I think URI, absent any countering evidence, will still have a hard time given the evidence on Cerberus's side. I eagerly await URI's opposing evidence, if any. I want to emphasize that I still think things are very fluid-- and have not seen URI's evidence -- but if they have any, it may change my thinking at least, as Cerberus's evidence had similarly done.
On Cerberus's opposition brief unsealed Wednesday I have one brief point. Cerberus makes an argument (pp. 31-33) that URI's claim that the merger agreement contemplates specific performance does not meet the clear and convincing evidence standard required under Delaware law. Here, Cerberus is conflating the award of the remedy as opposed to the standard to interpret the contract. To decide whether the contract requires specific performance Delaware courts use regular tools of contract interpretation. But, once they have decided a breach (i.e., the contract required specific performance), then they will look to the clear and convincing evidence standard to decide if specific performance is actually warranted. As I have written elsewhere, I believe it is if URI wins, but others dispute this. Otherwise, Cerberus builds on the parol evidence of Ehrenberg and the drafting record to show their side of the story. I was particularly struck by Cerberus's claim that the limited guarantee and equity commitment letter had Delaware choice of law and choice of forum clauses, and that was changed at the request of Lowenstein Sandler.
Finally, showing that this trial has Law & Order beat hands down, the expert opinion of John C. Coates, IV was rule inadmissible by Judge Chandler today. The decision is under seal so we don't know the reason why. Very interesting . . . .
December 13, 2007
URI: No Summary Judgment
Per the below -- Chancellor Chandler decided it was too ambiguous for a summary judgment trial. This is likely the right decision despite Cerberus being the bad guy here. More tomorrow.
Company Ready to Present Case to Compel Cerberus Acquisition Vehicles to Complete Transaction GREENWICH, Conn.--(BUSINESS WIRE)--December 13, 2007--
United Rentals, Inc. (NYSE: URI) today issued the following statement regarding the decision by Delaware Court of Chancery Chancellor William B. Chandler III to proceed with a trial in the litigation that United Rentals initiated on November 19, 2007 against RAM Holdings, Inc. and RAM Acquisition Corp. The lawsuit seeks to compel the RAM entities (which are acquisition vehicles formed by Stephen Feinberg's Cerberus Capital Management, L.P.) to complete their purchase of United Rentals. In a letter sent to counsel this afternoon, Chancellor Chandler wrote, "I have concluded that while the question is exceedingly close, summary judgment is not an effective vehicle for deciding the contract issues in dispute in this case." United Rentals said: "We look forward to making a compelling case at the upcoming trial. While we believed the case could be decided through summary judgment, we respect Chancellor Chandler's decision to give a matter of this magnitude a full trial before issuing his ruling. The trial presents an important opportunity to establish that the merger agreement should be enforced as written." United Rentals added that it has fulfilled all of its obligations under the merger agreement with the RAM entities and stands ready to complete the merger transaction on the agreed-upon terms.
The Cerberus Opposition Brief
Here it is -- released late last night. I have two preliminary observations/thoughts 1) URI counsel at Simpson is invoking attorney-client privilege to avoid discussing or disclosing the URI parol evidence -- I suppose we will not see any Horowitzaffidavit at the Dec. 17 trial, and 2) I'm curious what the redacted information discloses -- particualrly surrounding the proxy statement disclosure. Cerberus's brief is also a good job -- I'm going to think about it over night and will have some more extended throughts tomorrow.
URI: Where Does it Stand?
An update on my thoughts on the URI dispute and where it stands. URI filed its latest briefs under seal so we, unfortunately, have to stop at the Lowenstein, Sandler affidavits.
- From just a reading of the merger agreement, I felt this was a difficult decision because of poor drafting and too much circularity. A harmony reading as required under rules of contract interpretation would favor URI; but the caveats in section 8.2(e) and section 9.10 favored Cerberus. My ultimate read of the merger agreement was that it favored URI's position -- section 9.10 would have to mean something absent parol evidence to the contrary -- in no case was it a slam dunk for either party.
- I suspected that there was no parol evidence on this matter, and that if that was the case it would favor URI.
- URI's motion and brief on summary judgment was as good a job as could be done, clearly indicating that it had little support from parol evidence. URI's harmony argument, though, glossed over some of the problematical language and it was not dispositive. The difficulty of making this case on summary judgment was still apparent even after this brief.
- I had thought the John C. Coates, IV affidavit a non-event and not persuasive. I was mistaken.
- Coates affidavit justified sloppy practices in the heat of battle and simply made the statement that, in this light, section 9.10 is written to be dominated by section 8.2(e). It didn't address the harmony viewpoint. But Coates' viewpoint must now be read with the affidavit of Cerberus' lead counsel Peter Ehrenberg which is the first chance we have to see any parol evidence. And here we have some evidence of an auction process being rushed by Cerberus's high bid to a seller that might have only been concerned with an extra $3, sell-side counsel who may have been understaffed dealing with more than one markup by more than one party, and the many little small protections Cerberus's counsel inserted in all the documents to protect Cerberus's very limited guarantee of Ram's obligations. Reading the Coates affidavit (despite my theoretical and general disagreement with the practices it justifies) now explains why the offending language of section 9.10 was left in the document that seems so diametrically opposed to Cerberus' claim that the limited guarantee is all its exposure is. Cerberus' counsel parol evidence explains that this side's intent was to make that language meaningless and that ultimately Cerberus and Simpson gave it up without redrafting section 9.10. This is what the Richards Layton letter to Chancellor Chandler on summary judgment was pointing to and Chandler allowed them to get the testimony in. No doubt he is going to treat the affidavits seriously.
- Consequently, URI tried to paper over the problem in the proxy statement. This doesn't work and no doubt Cerberus' counsel pointed that out at the time and Simpson (and likely the same people at Simpson) were handling the proxy. I am wondering again about URI's proxy disclosure practices in light of the affidavits.
- Obviously the URI Brief for summary judgment on specific performance may be their best shot, but if it is and they cannot answer the Coates/Ehrenberg affidavits, all the ambiguity in the document itself now works against URI. I await their response. This is a great case -- much better than any Law & Order episode.
SLM -- Mistakes Were Made
The SLM saga trended towards farce yesterday when SLM issued a press release stating:
To address recent reports in the marketplace regarding the proposed buyout of Sallie Mae by a group led by J.C. Flowers, Bank of America and JP Morgan Chase, the company's Board of Directors states the following:
-- Over the past eight weeks, in a series of discussions between the company and senior representatives of the Flowers group, Sallie Mae has indicated that, to resolve the dispute between the parties, the company offered to consider an alternative transaction with the Flowers group, and to give them the opportunity to update their due diligence and submit a new proposal to acquire the company with no pre-conditions.
-- The buyer's group has indicated to Sallie Mae that it does not wish to pursue these opportunities.
-- The Board remains committed to protecting the rights of our shareholders, and will pursue all available recourse, including the company's existing lawsuit against the buyer's group.
-- The company has indications of interest, subject to customary terms and conditions, from 10 financial institutions for new secured warehouse funding significantly in excess of $30 billion.
Reading through this press release, I believe that SLM went back to the Flowers group and expressed its willingness to accept a reduced price in light of SLM's continuing deteriorating financial position. The Flowers group rejected this proposal. This is something I would also do -- the Flowers group is likely waiting for SLM to stabilize if it indeed wants to still pursue this transaction -- and the bottom does not seem quite there yet. And, in any event, financing this transaction to the extent it would be renegotiated would be quite difficult in today's credit market -- SLM's statement about no pre-conditions would likely not have permitted any large financing outs. A few other observations:
- SLM clearly made a mistake refusing to accept the Flower's Group October proposal to reduce the consideration to $50 a share plus a likely valueless warrant given SLM's relatively weak position that a MAC did not occur. They should have realized this at the time and the fact that they didn't is attributable either to 1) bad-decision-making by Albert L. Lord, the executive chairman of the board at SLM and the other executives at SLM, and/or 2) bad advice from their advisors.
- Under either explanation, I doubt Lord and the CEO of SLM, C.E. Andrews, can survive. Whether or not they received bad advice, they have presided over the destruction of billions of dollars of shareholder value -- money that did not have to be lost. Lord in particular appears to have been responsible for the "no-compromise" October strategy.
- I hesitate to blame the advisors here -- one scenario is that they provided SLM the right advice and Lord and the other executive officers at SLM ignored it. Not a great situation to be in and perhaps a lesson in dealing with head-strong? executives.
- By returning to the Flowers group to suggest a reworking of the transaction, SLM is essentially now admitting that a MAC occurred due to the October legislation.
- SLM arguably did not have to release the above information. I suspect that they are doing so in order to set up a de minimis settlement announcement in the near future (i.e., $25-$50 million).
Finally, SLM yesterday also announced another expected decline in earnings:
The company is lowering its 2008 core earnings EPS guidance from $3.25 to a range of $2.60 to $2.80 due primarily to increased costs from replacing the company's interim funding facility.
For those who are wondering if this is further evidence of a MAC, the percentage decline would likely qualify but if it is indeed related to a one-time event it would unlikely be a MAC under IBP v. Tyson which requires a MAC to be of a long-term, durational nature. The MAC might also be excluded under the MAC exclusion in the merger agreement for changes in the industry of SLM generally. It states:
(e) changes affecting the financial services industry generally; that such changes do not disproportionately affect the Company relative to similarly sized financial services companies and that this exception shall not include changes excluded from clause (b) of this definition pursuant to the proviso contained therein;
Note that in clause (b) of the MAC -- the exclusion for changes in Applicable Law -- the merger agreement speaks of changes effecting companies in the education finance industry, so under (e) we are talking of a wider sub-set of financial institutions in the consumer credit business generally. Whether SLM's results are worse than these other institutions I am not sure, but the industry is certainly not doing well.
Finally, remember that if the Flowers Groups was required to close when it first declared a MAC, any subsequent events vould not be used to support a MAC claim -- so if the first MAC declaration was invalid (unlikely), then this deterioration arguably would not matter to the extent the SLM transaction would have closed before this time. This I am unsure of since the transaction was still waiting for clearance to transfer SLM's Utah bank at the time of Flower's MAC declaration and this could have delayed things through now.
SLM closed yesterday at $28.49 a share. As we say in the law in the tort context, res ipsa loquitor.
December 10, 2007
Myers Industries: The True Option
Well -- fresh off my post yesterday about the Future of Private Equity M&A and the hope for PE deals, Myers Industries became the latest train wreck triggered by a reverse termination fee. It appears that the reputational constraints are becoming less of a barrier to exercising these provisions as time passes and more private equity firms do so. Myer's announcement stated:
The Board of Directors of Myers Industries, Inc. (NYSE: MYE) today announced that GS Capital Partners (GSCP) has requested more time to complete the acquisition of the Company. In consideration for extending the closing date of the transaction from December 15, 2007 to April 30, 2008, GSCP has agreed to make a non-refundable payment to Myers of the previously agreed upon $35 million fee. GSCP has secured an extension of its debt financing commitments from Goldman Sachs Credit Partners and Key Bank pursuant to which GSCP has agreed to contribute another $30 million of equity to the transaction.
GSCP has acknowledged that there has been no material adverse change in Myers' business, and that GSCP's deadline extension request resulted from its desire to further evaluate conditions in certain industries in which Myers operates.
Isn't that nice of GSCP -- this is now the second deal (after Harman) that GSCP has backed out of -- they are on the list with Cerberus. And it was not coincidental that the $35 million payment by GSCP referred to above was the same amount as the reverse termination fee in the merger agreement. NB. This provision was clearly drafted by Fried Frank, counsel for GSCP -- Myers had no choice here -- the $35 million was the best it could get.
And this is where it gets really interesting. In the Letter Agreement signed with respect to this payment, the parties amend the merger agreement to remove any other penalty GSCP is subject to if it fails to complete the acquisition. Again, they do not terminate the agreement, but rather amend it. The Letter Agreement states:
MergerCo hereby agrees to pay, or cause to be paid, to the Company an amount equal to $35 million (the "Fee") in immediately available funds on the second Business Day following the date of this Letter Agreement in satisfaction of any obligation MergerCo may have under Section 8.6(c) of the Merger Agreement. The Fee is nonrefundable. The Company hereby waives any right that it has against Parent, MergerCo or the Guarantors to recover any other fee or damages pursuant to, arising out of or in connection with the Merger Agreement (including any right to recover the MergerCo Termination Fee pursuant to Section 8.6(c) of the Merger Agreement) in the event that the transactions contemplated by the Merger Agreement are not consummated for any reason (including the termination or any alleged breach of the Merger Agreement). The Company hereby agrees that from and after the date of this Letter Agreement, it is not entitled to, and will not seek, specific performance or any equitable remedy against Parent, MergerCo, the Guarantors, or any of their respective Affiliates, arising out of, or in connection with, the consummation of the Merger or failure to consummate the Merger.
Yet, since the merger agreement is still in effect, GSCP now has a true option on Myer Industries for the already paid lump sum of $35 million. Per the letter agreement, the option is exercisable until the merger agreement is terminated by Myers (which it can do fifteen days after the date that Myers delivers to GSCP Myers' unaudited quarterly financial statements for the period ended March 31, 2008) or by GSCP (which it can do after April 30, 2008). Mitigating this boon to GSCP, Myers is provided in the Letter Agreement full latitude to solicit and enter into discussions with third parties concerning competing bids -- the termination fee is also reduced to $0, although GSCP still has a six business day matching right. In addition, the covenants limiting pre-closing actions by Myers are largely stripped. The end result is to turn the merger agreement into a an option; GSCP now has a four month period to decide whether or not to exercise it and buy Myer. A good deal for $35 million given the volatility in the market.
The Expert Testimony of Peter R. Ehrenberg
Cerberus has filed with the court the affidavit of Peter R. Ehrenberg, a well-respected M&A attorney at Lowenstein & Sandler and senior counsel to Cerberus on the URI deal. The purpose of Mr. Ehrenberg's affidavit is to provide Cerberus's narrative of the history of the negotiation of the merger agreement. One of the interesting things is that nowhere does Gary Horowitz, the Simpson partner on the deal, make an appearance. Not even on a telephone call -- he is missing in action. Instead, Mr. Ehrenberg states that the main attorney on the deal was Eric Swedenburg, and Mr. Swedenburg negotiated the merger agreement on behalf of URI. At the time he allegedly single-handedly negotiated the deal, Swedenburg was a senior associate at Simpson (NB. coincidentally? Swedenburg made partner just last week -- mazel tov -- he is also one of the authors of the Simpson memo John C. Coates referred to in his testimony). I honestly don't know what to make of this and will wait until URI's factual response to comment. But, perhaps Cerberus is attempting to set up an argument that an inexperienced, over-their-head associate (fortuitously now partner?) at Simpson made a mistake and URI can't now cover for it. We'll see, but I feel bad for the situation Swedenburg is now in -- he may be a rock star there and this is a bit unfair to him in cosmic justice sort of way (i.e., think of all the times you as a senior associate were left to finish the deal -- there but for the grace of . . . .). Expect an affidavit from Horowitz saying he was the man behind the curtain -- puppeteering from behind the scenes.
Otherwise, the affidavit puts forth a good explanation and provides strong support for Cerberus's case; something I had yet to see. In particular, Mr. Ehrenberg claims Simpson specifically attempted to delete the phrase "equitable remedies" from the last clause of Section 8.2(e), but that this request was rejected by Mr. Ehrenberg and the phrase remained. Again, this is only one side of the argument and presumably URI/Simpson will argue that this has nothing to do with whether Section 8.2(e) was only triggered upon termination. Nonetheless, I now understand why Simpson is arguing the more complicated argument that section 8.2(e) only applies to termination rather than the simpler one that the specific performance clause must have meaning. Cerberus has a good counterargument in that circumstance that it was specifically negotiated away. Ultimately, we still need to see URI's side of the story, but their case just got more complicated.
Addendum: Here are the affidavits of two other Lowenstein lawyers on the deal -- the associates who took the notes. Again, no appearance by Horowitz -- Swedenburg is the primary lawyer. They add more support to Ehrenberg's points but again leave open for URI to argue that they were talking about only in the event of termination, etc. I'm increasingly puzzled by what URI actually thought they negotiated and what the parol evidence is revealing.
Genesco: The First Day
I had a lot of reports today on the Genesco trial. No smoking guns yet; the stock dropped at 11:30 a.m. but the fall doesn't correspond to any change in the testimony (perhaps related to an analyst report)' only two and a bit witnesses put on; it appears that the key witness is going to be the Genesco CFO; a few semi-incriminating emails (the worst from said CFO); no real mention of the SDNY investigation; the judge is taking copious notes; and UBS appears to be doing a better job than Finish Line. Since I am not watching and all of the above is hearsay, I'll forgo any conclusions. I'm hoping to catch the testimony tomorrow.
Genesco Trial Starts Today
The Genesco trial begins today. It appears that we are going to have our first MAC decision out of the August credit crunch. I am personally excited as we are also likely to get some guidance out of the industry exclusion condition in MAC clauses -- something sorely needed. And it is no coincidence that it is coming out of an industry, and not a private equity, deal.
For those who want a summary of the issues see my Handy-Dandy Genesco Litigation Organizer. I'll also have commentary on the comings and goings. In addition, per this court order the CVN Network? will be running a live feed. The order notes that there will be no confidential information presented at trial which likely means that Finish Line and UBS do not have a smoking gun. Meanwhile, for those wondering what is driving this litigation UBS reportedly received an $11.5 billion injection of capital today and took an unexpected $10 billion write-down.
December 9, 2007
The Future of Private Equity M&A
Last week, I posted the Wounded and the Dead, discussing the abnormally high number of deals in today's M&A market which are either dead or walking wounded. But, as a bright market observer pointed out to me, even the majority of private equity deals, over thirty of them in fact, have completed during this time of extreme market turbulence. And some of them, such as Coinmach Service/Babcock and Catalina Marketing/Hellman & Friedman Capital, could also have been classified as walking wounded prior to their close. So, for those who make their money on these deals -- sponsors, investment banks, lawyers and even arbitrageurs -- it is not time to retire or otherwise go into a new business (NB. academia is great). We can learn from deals that have succeeded during this time to structure more certain transactions. So, here are my thoughts on the dos and don'ts for future private equity deals -- some are short-term recommendations based on current economic and market conditions; others more lasting. And obviously, they are aspirational and may bend to commercial realities. At the end of the list, I put forth a non-exclusive list of the thirty or so private equity deals which have closed with some notes.
The Do's and Don'ts of Private Equity
- Don't Sign Options, sign deals.
- Be in the right business. Don't be in the mortgage lending business (AHL, Fremont, Option One, MGIC/Radian); Don't be tied into housing in any way or in retail or service businesses that subsidize sales with credit to customers without more general access to credit. Be careful generally if you are in a cyclical retail industry. This may change, but right now the credit markets are too unstable to finance these types of deals on a certain basis.
- Keep Things Simple. Don't deal with equity syndicates, consortiums, multiple sponsors and the like (SLM, etc.)--no closings contingent on other closings (PHH).
- Restructuring an agreed deal is not necessarily a good thing. Don't allow a sponsor to reduce equity exposure pre-closing (Home Depot); Don't leave financing as a post-announcement condition (CKX).
- Know thyself. Don't blow your quarterly numbers; Especially, don't blow your covenants (Harman). Fire your CFO if the latter happens. Small consolation but a necessity. EBITDA conditions are actually that.
- Reputation matters. Work with established private equity firms with lots of clout. They have been in this business for years and will need to be there in the coming ones. This is not the time to work with new entities no matter how good their principals are. Here, I believe Blackstone and Fortress being public actually make them less likely to try to walk on deals because of their increased public profile. Note this KKR.
- Reputation goes both ways. Don't lie or stretch the truth too much prior to executing a contract. It may not be fraud; but it is not nice and it pisses people off (GCO, maybe).
- Avoid Hedge Fund deals. Hedge funds have less reputational capital at stake. They are in these deals to seek alpha and will change style and go back to trading oil if the playing field suddenly changes.
- Leverage Stapled-Financing. Pick your banks carefully -- use staple-financing negotiations to firm up your financing letters and provide flexibility to restructure deals if you so agree.
Get Good Lawyers. Retain experienced M&A counsel. Think hard about retaining counsel which has such sell-side experience but does not regularly represent private equity firms (the excellent M&A lawyers at Shearman & Sterling and Wachtell, despite their difficulties, spring to mind). Do not retain Wilson Sonsini (3Com, Acxiom).
Get an independent Financial Advisor. Think hard about hiring an independent M&A bank (Greenhill, Perella have some terrific people). It is increasingly clear that the majors lack internal leverage with their own financing departments. If things get difficult -- don't expect them to be there for you or otherwise ignore the conflict.
Remember. Do not do a deal with Cerberus; do not do a deal financed by UBS. Remember, even Goldman Sachs via GS Capital Partners invoked a MAC and a breach in Harman. Ask your lawyers specifically about closing risks -- point them to the Avaya deal as a good example of a specific performance clause. See the trading prices of Acxiom, Harman, URI, etc. to remind you of the effects of a cratered deal in light of reverse termination fees and heightened optionality. Note the shareholder lawsuits in their wake.
- Do not negotiate options, negotiate deals. Look at the Avaya model as precedent -- negotiate specific performance of the financing letters. Strongly advise your clients of the commercial risks if they do agree to a pure reverse termination fee. Negotiate higher reverse termination fees if you do have to make such a deal.
- Two-tiered termination fees mean nothing. The recent trend (3Com, etc.) is to have a two-tiered termination fee -- the lower if financing is unavailable, the higher for a pure breach. Realize that in a renegotiation, the private equity firm is always going to have a strong case for the lower one and that it is the starting point and settlement will only be lower (Acxiom). It is highly unlikely that the fee will ever go much above the lower one. A two-tiered break up fee is a cosmetic.
- A MAC Clause is nothing but a negotiating tool in the hands of the willing. Remember this.
- Avoid complex drafting. If any section of your agreement has one or more "to the extent applicables", "Notwithstanding", or otherwise has too many caveats redraft it to make it clearer and unambiguous. Stay awake the extra two hours to do this.
- Choice of Forum clauses matter. Don't give your buyer leverage for settlement and postponement by being able to litigate in multiple jurisdictions (Genesco, URI). Delaware is again proving themselves in these disputes as the place to litigate.
- Choice of Law clauses matter. N.Y. is the law for financing documents. Delaware is generally the law for merger agreements. Neither is likely to change. Find a work-around that deals with this disparity.
- Do not boilerplate deals. For example, Wilson Sonsini using the same structure for 3Com the week a similar structure they used in Acxiom cratered. Market forces require a rethink of how these documents work -- don't simply use the olds ones.
- Financing Documents matter. Think about third party beneficiary clauses in equity commitment and financing letters (URI).
- Guarantees matter. If you have a specific performance model make it clear the guarantee is unaffected. Read these letter thoroughly and make sure they interact correctly with the merger agreement.
- Think three steps ahead. Spend an hour talking through scenarios in light of what happens. For example, these disputes inevitably span shareholder litigation -- have MAC and rep carve-outs for such eventualities (if possible).
- Go-shops are ephemeral. Go-shops have seldom turned up competing bids. Management and the private equity buyer have too much of a head start. And when they do come in (Restoration Hardware, Topps), management is still likely to attempt to manipulate the process towards their favored pe firm.
- If it is seems shaky, it is. If, upon deal announcement, the analysts think it is over-leveraged, it likely is.
- Avoid deals where management is too cute on their disclosure. For example, putting closing conditions in a schedule and then not disclosing what they are (3Com); not disclosing a possible renegotiation (URI), etc. This not only is a possible violation of the federal securities laws, it is a trap for the unwary (of course, in some cases we won't know this until it happens).
- Nothing is Certain. Leave this type of investing to the professionals.
Here is a non-exclusive list of private equity deals which have closed since August. Read them, study them, learn.
- 1-800 Contacts/Fenway Partners closed September 6. 2007. Per the merger agreement, reverse termination fee of $10,330,550 rising to $13,774, 000 if there is a willful breach by Fenway with Fenway guaranteeing; language appears to permit specific performance if no termination.
- Aeroflex/Vertitas Capital closed in August--Per the merger agreement, $20,000,000 reverse termination fee; specific performance clause nullified.
- Alltel/GS Capital Ptners/TPG Capital closes late November despite market jitters. Per the merger agreement, $625,000,000 reverse termination fee.
- Applebees/IHOP closes late November despite jitters over whether financing would fall through --Per the merger agreement, deal had specific performance with no outs for IHOP.
- Archstone-Smith/Lehman Bros Tishman Speyer closes in early October -- Per the merger agreement, very large $1.5 billion reverse term fee but no specific performance (25% of Lehman's equity commitment and 100% of Tishman Speyer's),
- Avaya/Silverlake-TPG Capital closes in October -- a very good merger agreement with specific performance of the debt and equity financing required (similar to Affiliated Data Services). Every M&A attorney should read this agreement.
- Bausch & Lomb/Warburg Pincus closes late October--merger agreement states Bausch & Lomb cannot seek specific performance and its reverse termination fee of $120mm is sole exclusive remedy. I was surprised B&L was so accommodating in a competitive situation.
- BISYS/Citigroup and J.C. Flowers closed early August -- merger agreement provided for $36 million reverse termination fee as sole and exclusive remedy for BISYS.
- Catalina Marketing/Hellman & Friedman Capital partners closed early October -- a walking wounded deal -- per the merger agreement, a $50,640,000 reverse termination fee with specific performance excluded.
- CDW Corp/Madison Dearborn Partners-Providence Equity Partners closed mid Oct -- per the merger agreement, a $146,000,000 reverse termination fee with $292,000,000 cap on damages -- no right of specific performance.
- Ceridan/Thomas H. Lee and Fidelity National Financial closed in early November; per the merger agreement, Cerdian had right to enforce specific performance. A $165,000,000 reverse termination fee.
- Coinmach Service/Babcock and Brown Infrastructure--closed in late November; a walking wounded deal; per the merger agreement, a $15,000,000 million reverse termination fee (small); oddly no specific performance clause at all; equity was syndicated; weak sponsor; closing delayed day by day waiting for equity to show up (I guess).
- Crescent Real Estate Equities/Morgan Stanley Real Estate closes in August -- per the merger agreement, $300 million reverse termination fee -- no specific performance.
- Deb Shops/Lee Equity Partners closed late October -- per the merger agreement, $15,000,000 reverse termination fee; no specific performance clause.
- Equity Inns/Whitehall Street Global Real Estate Limited Partnership closed late October -- per the merger agreement, a $75,000,000 reverse termination fee. Odd tax language concerning treatment of such payment (may be useful?). Good limitation language on specific performance.
- First Data/KKR closes late September -- walking wounded deal -- per the merger agreement, $700 million reverse termination fee; specific performance excluded; much clearer agreement than URI; negotiated by Simpson for KKR.
- Friendly Ice Cream/Sun Capital Partners closed late August -- per the merger agreement, a low $5,000,000 reverse termination fee; ambiguous on specific performance. I love Reeses Pieces sundaes.
- Guitar Center/Bain Capital closed early Oct; a walking wounded deal -- per the merger agreement, a $58,000,000 reverse termination fee with a higher damages cap of $100,000,000. Another ambiguous agreement as to whether specific performance is available.
- John Nuveen/Madison Dearborn Partners closed mid November -- per the merger agreement, $200,000,000 reverse termination fee doubling to $400,000,000 under certain conditions; no specific performance.
- MC Shipping/ Bear Stearns Merchant Banking Partners closed mid Sept; per the merger agreement, a plain vanilla deal with a standard specific performance clause (if you count a merger under Liberian law plain vanilla).
- National Home Health Care/Angelo Gordon finally closes late November; drop-dead date extended due to issues obtaining regulatory approvals and EBDITDA condition of merger agreement; per the merger agreement, the deal was conditioned on financing and there was no reverse termination fee.
- Ryerson/Platinum Equity closed mid October -- per the merger agreement, $25,000,000 reverse termination fee -- no specific performance clause.
- Sequa/Carlyle closed last week -- per the merger agreement, no specific performance and a $60,570,000 reverse termination fee.
- Samsonite/CVC Cap Partner -- per the merger agreement, specific performance available -- although some ambiguity; $50,000,000 reverse termination fee; all equity financed.
- Smith & Wollensky/Patina Restaurant Group closed in August; merger agreement had no specific performance fee or specific performance clause -- competing bidder -- companion asset sale of NYC restaurant assets to Stillman entity also closed simultaneously.
- Smithway Motor Express/Western Express closed end of October; per the merger agreement; this had only a $1,000,000 reverse termination fee with an ambiguous specific performance fee which excludes such a remedy when the financing is unavailable; was expected to close in August and had lots of delays. Western Express represented by inexperienced private equity counsel.
- Station Casinos/Fertitta Colony Partners closed in November -- per the merger agreement, reverse termination fee of $160,000,000. Good provision on this being the sole and exclusive remedy of Station Casinos.
- Symbion/Crestview Partners (equity partner Northwestern Mutual) closed in late August -- per the merger agreement, $12,500,000 reverse termination fee, but specific performance still available. Not a standard agreement (looks like a sell-side merger agreement drafted by counsel which did not regularly do pe deals).
- Topps/Tornante closed in October -- complex -- with an intervening bid by Upper Deck. per the merger agreement, a $12,000,000 reverse termination fee but also specific performance.
- TXU/KKR-TPG-GS closed in October -- per the merger agreement, $1 billion reverse termination fee -- a bit of ambiguity but likely no specific performance permitted.
- Vertrue/One Equity; Rho Ventures (Oak Investment dropped from the deal); Brencourt Advisors closed in mid August -- per the merger agreement ,$17,500,000 reverse termination fee with no specific performance.