M & A Law Prof Blog

Editor: Brian JM Quinn
Boston College Law School

Thursday, December 27, 2007

Genesco v. Finish Line: The Opinion

So, a few thoughts on the Genesco opinion issued yesterday: 

  1. Fraud Claims.  Chancellor Lyle finds that the Finish Line and UBS testimony was not believable as to Genesco's and Goldman Sachs's affirmative oral statements about their May performance and thus dismisses FL's and UBS's claim of fraud with respect to oral misrepresentations.  The court spends more time on Genesco's non-disclosure of the May projections -- here there is affirmative evidence that Genesco deliberately withheld these numbers during due diligence from FL and UBS, and so the time is necessary.  But ultimately, Chancellor Lyle finds that this conduct does not sustain a fraud claim either.  She bases this finding on the parties' due diligence protocol and the disclaimers made by Finish Line in the confidentiality agreement and merger agreement to find this non-disclosure not actionable. Based on Tennessee law which holds there is no deception if the information was available to the party at the time she lays the blame for the failure of this part of the claim at UBS's feet due to their own failure to again request the information prior to the execution of the merger agreement.  Chancellor Lyle writes:
    • "After detailed analysis of the facts and the law, the Court finds that Genesco and Goldman Sachs did not fraudulently conceal information. Instead, the Court finds that the fault is with Finish Line's advisor, UBS and its agents, whom Finish Line was relying on to investigate Genesco. These advisors, the Court finds, asked for the May actual numbers had been finalized and a May trial balance was prepared. At that point, with its premature request, Finish Line's advisors were required by both the law and the parties' agreemeent to renew the request for the May numbers. Despite ongoing lists by UBS for infoirmation and responses by Genesco and Goldman Sachs, UBS never asked again for the May trial balance. It failed to make such a renewed request despite several opportunities to do. Under the circumstances, where Finish Line and UBS had the means at its disposal for obtaining the information it now claims was concealed, neither the law nor the parties' agreements required Genesco or Goldman Sachs to vohmtarily provide the information. Genesco arid Goldman Sachs were allowed by law and their agreemeni not to provide the May numbers. Finish Line, then, signed the Merger Agreement at its own peril."She then bases this finding on the parties' due diligence protocol and the disclaimers made by Finish Line in the confidentiality agreement and merger agreement to find this non-disclosure not actionable. Based on Tennessee law which holds there is no deception if the information was available to the party at the time.
  2. General MAC Claims. Chancellor Lyle's MAC discussion is a bit backward.  She first finds that there is no MAC because the MAC exclusion for general economic conditions applies.  Here, the court relies upon Genesco's expert testimony that high gas, heating, oil and food prices, housing and mortgage issues, and increased consumer debt loads were generally responsible for Genesco's condition.  Chancellor Lyle even kicks in UBS's own recent write-down to support this finding.  This is the primary basis for her opinion that no MAC occurred, but Chancelllor Lyle also relies to a lesser extent on the industry exclusion in the MAC definition. She also finds that Genesco's decline was not disproportionate to others in the industry and therefore no MAC occurred.  Here, the analysis gets a little stretched; to justify this finding, Chancellor Lyle excludes the results of teen retailers despite the fact that 50%-60% of Genesco's business is in this sector.  The justification for this is not clear to me but nonethess it is what it is.  Chancellor Lyle could have stopped there but continues, finding that a material adverse effect did indeed occur (but the exlcusions found above make it not a MAC).  Here, she relies on the usual MAC cases (IBP v. Tyson, Frontier v. Holly, etc.) and finds that Genesco's recent results are materially adverse and of a durational nature adopting this as a requirement under Tennesse law for a MAC.  Here is where it gets interesting -- in defining durational she relies upon the Dec. 31 drop-dead date in the merger agreement and the ability for the parties to cure breaches prior thereto.  She finds that durationally significant should therefore be in reference to the period up to the drop-dead date.  On this basis she finds a material adverse effect to have occurred (though ultimately excluded out by the exclusions).  I'm not sure that Delaware would take the same approach or adopt the time period by reference to the cure period -- it jumbles them all together in a way that M&A lawyers do not.  Certainly, Vice Chancellor Strine did not do so in IBP.  Again, the parties choice of law and forum comes back to haunt them.  But still, the argument ends up to naught as the exclusions are relied upon to find no MAC.  Here, I'm a bit surprised she didn't put more weight on the industry exclusion as it appeared to be the strongest of the two exclusions.  But again, no harm. 
  3. Securities Fraud MAC Claims.  Chancellor Lyle then dismisses out of hand FL's and UBS's MAC claim based on the securities fraud litigation lawsuits and the SDNY subpoena.  She finds Genesco's exclusion of the May numbers from the anlaysis offered on in its Aug 30 conference call justified and adopts Genesco's argument that the subpoena cannot support a MAC unless there is a fraud claim that is first found valid.  As to the latter argument I'm not sure that is right as the merger agreement representation made by Genesco in 3.8 on this point specifically stated that there were no governmental investigations pending except as would not have, individually or in the aggregate, a MAC.  This would pick up the subpoena and so I don't see how a specific finding of fraud is needed.      
  4. Specific Performance.  The final part ordering a specific performance remedy is perhaps the most interesting part of the opinion.  Chancellor Lyle states:
    • "As to the final consideration that enforcing the merger creates a conflicted, financially weak company,the Court has thought long and hard. In deciding to order the merger, the Court has concluded that the merger has a reasonable chance of succeeding. In so concluding the Court credits the testimony of Mr. Estepa, the Senior Vice President of Genesco's mst successful banner, Journeys, which represents 50 to 60% of Genesco's business and is important to the merged entity. Mr. Estepa testified about his respect for Mr. Alan Cohen of Finish Line. Mr. Estepa testified about his determination to make the merger work and his commitment to its success. The Court also recalls that Mr. Schneider of Finish Line could not identify any systemic problem with Genesco's operation,and Mr. Cantrell's testimony that the same synergies that caused Finish Line to propose the merger, such as diversitt of product lines and customers, are still present. Finally, insolvency proof of the combined entities was not provided to this Court. That issue has been reserved and carved out of this litigation for the New York Court to decide. If the combined companies would result in an solvent entity, the New York lawsuit by UBS will halt the merger. Accordingly, form the proof presented to it, this Court concludes that the combined entity can succeed. Specific performance is not a futile, harsh result."
  5. Specific Performance (Cont'd).  Here, she relies solely on Tennessee principles of equity to make this determination and does not cite the merger agreement clause requiring specific performance.  Moreover, for equity to order specific performance there must be no other adequate remedy.  Unlike Vice Chancellor Strine in IBP, she relies on the general harm to Genesco due to the delay of the merger rather than the ultimate difficulty in determining damages (Strine relied on the latter).  I'm not so sure about her finding -- the harm she cites looks to me to be monetary harm.  The opinion would likely have stood on better grounds if she referenced either the merger agreement or Strine's damages point.  Finally and cryptically, on the issue of what happens if Finish Line loses in New York she takes a bit of a flyer.  The opinion here (as quoted in the last few sentences of the paragraph above) can be read to be saying that if the New York action doesn't succeed then the merger will no longer be required.  I think she is speaking here only to specific performance and preserving Genesco's right to come back for damages against Finish Line -- but it is unclear.  If FL does not suceed in New York they will need to come back to Tennessee to clarify this very important point.  And FL has already picked up on this -- stressing it in their press release issued last night commenting on the opinion.  I'm a bit baffled why the judge would leave the most important point so open -- perhaps she was as equally puzzled about what to do in the event FL loses in New York as the rest of us. 
  6. UBS.  It is very clear from this opinion that Chancellor Lyle does not take a kind view of UBS.   She takes the time to talk of UBS's financial situation and sophistication, notes the large loss UBS would likely take if it was forced to finance this deal and pegs the failure to discover the May numbers before close squarely on UBS. 
  7. Precedent.  Ultimately, I'm not sure the opinion will have much precedential power for MAC cases though it does support a very broad interpretation of the general industry condition that drafters should be aware of.  And it quite clearly reflects the point I have made many times before:  choice of law and forum clauses matter. 

The litigation is now off to New York and, I would suspect, an appeal in Tennessee (and maybe back in Tennessee after New York). In New York, the issue is currently whether Finish Line can deliver a solvency certificate, though UBS can amend its complaint to include further claims.  In addition FL is now required to use its reasonable best efforts to obtain financing from other sources -- financing which is likely to be unavailable. I would hope the parties would now come to the table to negotiate a resolution and would not be surprised if Genesco brought a defamation and/or tortious interference of contract claim against UBS for bargaining leverage or maybe out of spite.  Genesco has persevered throughout though and may not wish to pursue a settlement, but given the risks there are still strong forces at work for them and UBS to come to the table.  Finish Line at this point is a mere spectator praying that UBS and Genesco do so.

December 27, 2007 in Material Adverse Change Clauses | Permalink | Comments (0) | TrackBack (1)

Genesco wins in Tennessee

Now its off to New York to litigation the solvency issue and whatever else UBS can concoct up (there is the Tenn. appeal too).  Access the opinion here.  I'll have more tomorrow. 

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

URI/Cerberus: The Final Word

I think we now have a confident view of how the negotiation occurred. Throughout the contract negotiation process the Cerberus side made it clear at all times that its contracting policy did not permit it to allow the Seller a specific performance remedy and the URI side pushed at all times to get them on the hook if the financing was available. URI tried to do that that in many ways on all three agreements (merger agreement, limited guarantee, equity commitment letter) without making all the progress they wanted.

The Cerberus legal team was under strict orders to keep the out clear to their side; Simpson via Swedenburg ultimately was under pressure to get Cerberus signed up as best he could. I believe he was lucky that the other side allowed 9.10 to stay in subject to 8.2(e) even if 8.2(e)'s final sentence added by Ehrenberg reduced URI's optionality to force it to accept the payment of the reverse termination fee in a Cerberus breach. And, think about it, one can reasonably conclude from the evidence that URI and Simpson adopted this strategy deliberately -- if so, they did a fantastic job given their hand even if Swedenburg was found not to be a forthright negotiator (there are other explanations here but for now let's take this one). According to Chandler, he almost succeeded and no doubt Chandler realized the higher probabilities of being reversed on summary judgment versus a trial and that must have factored into his thinking to deny summary judgment to URI. Sloppy drafting helped URI much more than Cerberus. At the time the deal was executed, it may be that URI took a calculated risk that Cerberus wouldn't take the reputational hit of walking and (unfortunately) was wrong.

Auctions are funny. Throughout the process the seller is always pushing its bankers to make predictions about the intent of the bidding parties and the investment bankers are always worried about looking dumb or being wrong or misinformed about that. So they call the bidders or their agents (which is worse but necessary sometimes) to gauge their intent--they do that frequently, too frequently. However the communication is always a two way street and often the bidders can detect anxiety on the part of the seller or more likely the banker who has already put his credibility on the line about how the auction should go. There is evidence in the case that UBS did that in spades. Mayer told UBS he needed an option contract clear and simple. I believe Cerberus felt it had the strong hand in the negotiations: they lowered their price at least once in the end game; UBS made that an "issue of looking bad to the URI Board" not an issue that Cerberus was "out of the auction or on the back burner." Later on, when UBS told Cerberus, the URI board won't sign an option, all negotiations should have been on the back burner. Mayer giving his word that he would close (AND THAT IS EXACTLY WHAT HE DID --See pp. 28-29 of the opinion) should not have worked.

But the negotiations weren't ended, most likely because the lower bidder also was balking at specific performance and If I were Mayer I would note that. Neither the Street nor the general corporate client pool have very long memories and the win makes them look like smart money when they are troubled on other fronts, but the more I think about it the more I move Cerberus from a winner on this deal to a loser.  I increasingly believe Cerberus' reputation, particularly Mayer's and Feinberg's, have been damaged by this event. And the reason isn't contractual--it's the "nice nice" words they used. (of course, UBS should have been very suspicious given that their point person at Cerberus was removed from the deal team for being "empathetic" with the Seller's advisors who had already been subject to Cerberus reneging behavior.) UBS and the URI board played the "mark" and the mark must always bear some blame for "wanting to believe".  Again we can read the evidence in a favorable light towards URI and Simpson and conclude that Swedenburg ultimately contracted with this party on a non-forthright basis as their counter-move; it was certainly the best move they had at that point to the extent a deal was being pushed through. Short term, I doubt Cerberus can play effectively in non-distressed auctions. Longer term, when the Street and the corporate client pool forgets this incident, there will be one type of entity that won't forget. Other private equity sponsors. I doubt if Cerberus will be able to contract effectively using their forms of agreement with them for a very long time.

Ultimately, the moral of the story for transactional lawyers is that sloppy drafting is bad and not being forthright in your bargaining can be troublesome.  But here I now add a caveat -- if you discuss this with your client and they are willing to take the informed risks, then so be it.  But remember you might also be on the stand too and that has its own reputational effect.   

Final Question:  Under the above, one would have thought URI and its counsel realized the weak hand they had at trial after Chandler denied summary judgment.   So why not settle?  I would suspect Cerberus put a low number on the table -- say $25 a share.  And URI made the decision that they would rather have the $100 million and build back up as a public company than that lower figure.

[Addendum: I have been rereading this and my other posts and I realize I may appear schizophrenic (and perhaps a bit too hard) on my thoughts on what exactly Swedenburg knew, thought and negotiated.  We will likely never know, but at the end of the day I think we have to put a rational spin on things.  So, I am going to leave it to the reader to decide and put forth above what is a highly plausible and positive, rational interpretation] 

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

Monday, December 24, 2007

The Dog Bites: Coda

So, I've been thinking a bit more about the URI/Cerberus opinion over the weekend and have the following thoughts/questions:

  1. Chancellor Chandler again reiterates that he denied URI's motion to grant summary judgment but that "the question was exceedingly close."  However, he never states in the opinion which side it was exceedingly close for; instead he details the arguments put forth by both sides for a complete and unambiguous contract and finds both to be reasonable interpretations.  I find this terribly interesting and suspect that Chandler did not make a statement either way on this to support his opinion on appeal.  But I would love to know which way he was leaning (likely URI?).  [Update:  Actually fn 104 says it all -- Chandler would have ruled for URI -- it states:
    • If defendants had filed a cross-motion for summary judgment and, therefore, borne the burden to demonstrate that their interpretation was, in fact, the only reasonable interpretation as a matter of law, this Court would not have hesitated to deny defendants’ motion. Here, however, in opposing plaintiff’s motion, defendants need only to meet the lesser burden of demonstrating that their interpretation was a reasonable interpretation and that, therefore, plaintiff’s interpretation of the Merger Agreement is not the sole reasonable interpretation. I find that defendants have satisfied this burden, concluding that their proffered interpretation is not unreasonable as a matter of law and that, therefore, the agreement is ambiguous. This was, however, as I indicated in my letter opinion denying plaintiff’s motion, an exceedingly close question.]
  2. We still don't know the contents of the conversations URI claimed attorney/client privilege for and I wonder why no member of the URI special committee testified.  We likely will never know.  This is unfortunate, because I think they are important for determining what really happened (i.e., was URI and its counsel Simpson aware of this ambiguity and decided not to raise it or were they equally caught).
  3. I wonder what Apollo is thinking?  Apollo owns URI preferred and common stock (by my calculations on a fully converted basis equal to 15,333,000 shares of common stock).  Leon Black and Michael Gross were both on the URI board but because their economic interests differed from the common holders, they recused themselves from the deliberations and didn't vote on the transaction. They've just lost a couple of hundred million in a change of control premium. I wonder whether they have been doing anything in the background?  Remember there has previously been litigation between the two in Cerberus Intern., Ltd. v. Apollo Management, L.P., 794 A.2d 1141 (Del.Supr. Mar 13, 2002) and there are the old Drexel ties there (plus they have their own big deals to push through -- e.g., Hexion/Huntsman).  I would have loved for the transaction to go through if only because we would get to see a new background to the transaction section disclosing if any of these contacts actually existed.
  4. Both Prof. Larry Ribstein and Prof. Jeff Lipshaw have weighed in on the message of Chandler's opinion for contract drafters who employ sloppy or ambiguous drafting techniques (Larry's first post is here; Jeff's is here; and Larry's reply to Jeff's post is here).  I think we actually all agree on the message but apply it in different circumstances.  So, there are at least three different circumstances where ambiguous contact drafting can arise 1) both parties are aware the language is ambiguous but leave the term open either because they cannot compromise on it or otherwise prefer an ambiguous interpretation; 2) one party is aware the language is ambiguous but the other does not and assigns a clear meaning to it; and 3) neither party is aware the language is ambiguous and both assign separate meanings to it.  Jeff makes the valid point that commercially reasonable parties can take route 1 -- after all, a MAC clause is typically  drafted in vague qualitative terms rather than quantitative ones because such vagueness and the specter of litigation can work to both sides advantage.  And I think all of us would agree that 3 is a problem -- in circumstance 3, I am particularly thinking of late night sloppy and short-hand drafting which can cause problems that neither party pick-up due to haste or lack of sleep, etc.  (BTW -- I am sure Prof. Coates is itching to respond on this and we will benefit from hearing his thoughts as soon as this dispute is over).  But I think Chandler's opinion is not actually ruling on either of these issues.  Rather, Chandler, by relying on the forthright negotiator principle, is setting a default rule in situation 2 which encourages parties to be direct in their negotiating.  That is -- where a negotiator know the other side assigns a certain meaning to an ambiguous contract term and he or she know or should have known of that meaning they are required to be forthright and inform the other side.  I believe this is an economic rule because it will discourage unintended consequences and needless litigation -- as opposed to situation 1 where litigation is actually contemplated as a potential resolution and cost.  Hopefully, Larry and Jeff agree. 
  5. I think the open airing of the circumstances of this transaction negotiation has something to say about the deal team structure at large M&A firms [NB. in footnote 132 of the opinion Chandler notes that Gary Horowitz was the supervising partner on this transaction but that he engaged in no negotiation with the buyer leaving that to the senior associate on the matter, Eric Swedenburg].  Many M&A deals are staffed by a senior associate and a senior partner or alternatively a junior partner and mid-level associate.  And junior partners and senior associates are and should be essentially interchangeable on any deal.  There a number of differences in the dynamics of each team though.  Senior associates in this situation often negotiate the entire deal and are also running the transaction documents -- they often do not get assigned a mid-level to run the drafts (besides, one of the reasons they got there is because they are form gods and want to maintain their status as A team drafters until they are elevated to partners). Junior partners have more pull to get the staffing of a mid-level to run the documents and focus more on the negotiating part. The end-result is that often sleep-deprived senior associates sweating it out to make partner and under significant stress are forced to juggle and paper entire transactions.  I do wonder if this dynamic played in this contract negotiation and the end-result.  But I have no way of knowing and perhaps it played no part.   
  6. Putting aside the issue for the moment of whether Chandler made the right decision, his ruling does resolve all the complications of trying to enforce a ruling that RAM Holdings must assert a claim against Cerberus to fund the equity and cause the banks to fund the rest of the financing as well as the jurisdictional issues in New York.  That would have been a nightmare.      
  7. The appeal: by holding a trial Chandler escaped de novo review of any ruling for URI or Cerberus on summary judment -- instead his factual conclusions will be reviewed, if at all, by the Delaware Supreme Court under a deferential standard.  Those findings will not be set aside by the Delaware Supreme Court unless they are clearly erroneous or not the product of a logical and orderly deductive reasoning process.  Legal conclusions are reviewed de novo, but given the factual findings underlying Chandler's ruling, I think the likelihood of success on appeal is low and any such appeal would be more for negotiating position.
  8. The transaction highlights the importance of the non-public information for these disputes.  When I first started writing about this matter, I thought URI had the better reading of the contract on a harmony basis but that it was ambiguous. But the parol evidence that came out prior to trial favored Cerberus's contract interpretation.   At trial, I was therefore looking for URI to put forth a counter-story based on their own parol evidence.  However, no such compelling evidence came out.  From reports of the trial proceedings, I thought this would lead Chandler to find no understanding among the parties.  I was wrong.  In the end, once Chandler found ambiguity, the parol evidence became central and Chandler's application of the "forthright negotiator" principle trumped URI's contract reading and the limited rebuttal evidence they (could?) put on.  Chandler specifically found that  URI's "attorney Eric Swedenburg categorically failed to communicate [URI's contract interpretation] to the defendants during the latter part of the negotiations."  Game over.   
  9. There is a still a litigation haze that will remain over this deal even if there is no appeal -- at a minimum there are now a number of pending class actions against URI related to its failure in August and September to disclose Cerberus's concern about its failure to be able to complete this deal.   
  10. A few final thoughts -- kudos to Chancellor Chandler for a well-reasoned and quick opinion, as well as the litigation teams on both sides for a fantastic job (Connolly Bove Lodge & Hutz, Willkie Farr & Gallagher and Orans, Elsen & Lupert for URI  :  Richards, Layton & Finger, Milbank Tweed Hadley & McCloy and Shapiro, Forman Allen, Sava & McPherson for Cerberus).  Finally, the deal lawyers go away from this scarred, but I think we all need to take a step back and remember that we do not know all of the facts here and what went through the minds of the parties as well as their private conversations -- the senior deal partners on both sides have great reputations from long careers in M&A and one deal should not change that.  But there is a moral that I repeat for all transaction lawyers -- sloppy drafting can get you into trouble, being a less than forthright negotiator even more so.  The first assignment for my M&A class next semester is to read this opinion. 

Addendum:  This morning URI announced that it had terminated the merger agreement and stated that it would not appeal.   

December 24, 2007 in Litigation | Permalink | Comments (1) | TrackBack (2)