Thursday, January 31, 2008
Wednesday, January 30, 2008
Tuesday, January 29, 2008
Saturday, January 26, 2008
Wednesday, January 23, 2008
Finish Line and UBS filed for an interlocutory appeal of their Tennessee action (download the appeal here ). A few tidbits:
- The trial date for the New York action is March 3.
- Finish Line and UBS are invoking the April 30 expiration of the commitment letter as one reason for an expedited appeal. This is a loser -- the court can just force UBS to postpone as before.
- The brief hints at the two main focuses of their arguments:
- Specific performance is an inappropriate remedy because Genesco has "unclean hands"
- The lower court inappropriately relied on the merger agreement's disclaimers to dismiss Finish Line's Rule 10b-5 claim since such waivers are ineffective in such context.
Interlocutory appeals are seldom granted but this one makes a good case. I'll have more on Finish Line's and UBS's two arguments in the next few days on the my Deal Professor column on the N.Y. Times DealBook.
Tuesday, January 15, 2008
Monday, January 14, 2008
Thursday, January 10, 2008
I'm very pleased to announce that I will now be blogging full time with the New York Times DealBook as the Deal Professor. Don't worry, it will be the same blog covering the same topics with the same length of posts and legal analysis, just with the expanded resources of those great N.Y. Times deal reporters, including Andrew Ross Sorkin and Michael de la Merced. The following links are already up:
In addition, I'll still be posting a Friday deep-view M&A legal post on the M&A Prof Law blog. I'm also talking to some great M&A law profs to come on board to this site to continue on other days.
Heartfelt thanks must go to Paul Caron, Joe Hodnicki and Peter Henning for making this all possible. I will continue to recommend and refer to this terrific law professor network Paul and Joe have put together. They are to be commended for bringing together such a high quality group of law professors covering such a diverse array of topics.
The SEC has posted up on their website the job opening for Brian Breheny - Chief of the Office of Mergers and Acquisitions. The pay is $119,731-$185,393 which is about what a first year associate in M&A makes these days. Hopefully, the attraction of being at the center of federal regulation of takeovers is more than recompense. The application deadline is January 22nd for those who want to apply, and according to the website the SEC was selected the third best federal workplace in 2007 -- this begs the question of who numbers 1 and 2 are.
Having never worked or interviewed at the SEC I have no idea of the process or how things work there. But presumptuously I've prepared a medium-term agenda for the new chief. Perhaps it might come in helpful in the interviewing process.
- Fairness Opinions. You finally need to force the SEC to sit down and take a hard look at fairness opinion practice. These opinions are subjective and not prepared using best practices or to any definitive standards; problems which are exacerbated by the conflicted nature of the investment bank in rendering these opinions. Moreover, SEC rules need to be updated in this area (e.g., fairness opinion disclosure is required in proxies but not for cash tender offers).
- Merger/Tender Offer Parity. The poison pill has sterilized the use of the tender offer as a takeover device. Consequently, there is no significant difference between the tender offer and merger structure any more. You should undertake a comprehensive review to end the disclosure, timing and other regulatory differences between tender offers and mergers to put them on parity. (e.g., a company who is not current in its financial reporting can be the subject of a tender offer but, because of an SEC staff proxy rule interpretation, may not be able to issue a merger proxy, a particular problem in options back-dating cases). There is no reason for this.
- Updating the Cross-Border Rules. The Cross-Border Rules were a significant step by the SEC to attempt to accommodate cross-border acquisitions. Yet, because of a number of technical problems with the rules (detailed here), they have not been fully utilized and instead issuers have increasingly relied on the exclusionary offer to avoid wholesale application of the U.S. securities laws. You should take the easy steps to fix these problems and again encourage these transactions to include U.S.-based holders. It would also help if the SEC looked at the scheme of arrangement exemption under Section 3(a)(10); most U.K. acquirers now use it as the preferred method to largely avoid the U.S. securities laws in acquisitions, and I am not so sure that it functions the way the SEC thinks intended it should when it first permitted this exemption.
- Abolish Rule 14e-5 as it applies to tender offers. My pet-peeve. Rule 14e-5 was promulgated in 1969 as Rule 10b-13 to prohibit bidder purchases outside of a tender offer from the time of announcement until completion. The primary reason put forth by the SEC for barring these purchases in 1969 was that they “operate to the disadvantage of the security holders who have already deposited their securities and who are unable to withdraw them in order to obtain the advantage of possible resulting higher market prices.” This is no longer correct; bidders are now obligated to offer unlimited withdrawal rights throughout the offer period. Moreover, Rule 10b-13 was issued at a time when targets had no ability to defend against these bidder purchases. Not true anymore either -- the poison pill and other regulatory bars limit or inhibit bidder purchases outside an offer. And Rule 14e-5 applies to tender offers but not mergers (the parity issue again). But the Market Reg. division of the SEC has assiduously protected this rule despite its obsolescence. You would do better to convince your fellow regulators to deregulate and leave the possibility or actuality of bidder toeholds and post-announcement purchases to be regulated by targets through a low-threshold poison pill or other takeover defenses as well as through bargaining with potential bidders (For more on this see here).
- SPACs. The new force in our capital markets, these are a problem waiting to happen. You need to convince the SEC to take a hard look at these vehicles and to modify Rule 419 to ensure that SPACs are covered by the rule (they currently sidestep its application through a net asset test loophole). In particular, consider looking at the gun-jumping rules and how SPACs avoid them and limitations to impose since as of now SPACS have become an arb dream due to the limited information available prior to consummation of the acquisition.
Thanks to Deallawyers.com for pointing out the job post.
Wednesday, January 9, 2008
The below press release says it all -- it doesn't look good for Reddy Ice (insert melting ice joke here or query as to what exactly conceptual discussions about a renegotiated deal are). The press release below is likely a precursor to termination of the deal in early February or a price renegotiation. But it doesn't appear that GSO is a willing buyer thus far. Meanwhile -- on a slightly related topic -- one has to wonder why Genesco and Finish Line haven't filed their answers in the New York litigation yet. Perhaps their discussions are going much better.
DJN: PRESS RELEASE: Reddy Ice Holdings, Inc. Provides Update on Merger Transaction; Delays Deadline for Stockholder Notifications (Dow Jones 01/09 16:30:58) DALLAS, Jan. 9 /PRNewswire-FirstCall/ --
Reddy Ice Holdings, Inc. (NYSE: FRZ) is providing an update to the status of the pending merger contemplated by the Agreement and Plan of Merger, dated as of July 2, 2007, by and among Reddy Ice Holdings, Inc., Frozen, LLC, a Delaware limited liability company, Hockey Parent Inc., a Delaware corporation and Hockey Mergersub, Inc., a Delaware corporation, as amended by Amendment No. 1 to the Agreement and Plan of Merger, dated as of August 30, 2007 (as amended, the "Merger Agreement").
The Company believes it has fully performed its obligations and satisfied its closing conditions under the Merger Agreement. However, at the request of the purchasers, the Company's management and Board of Directors participated in discussions on January 4, 2008 with the purchasers relating to the status of the transaction and conceptual discussions regarding a modified transaction. No decisions have been reached and no definitive alternative proposals have been made by the purchasers but discussions between the parties remain ongoing.
In light of the ongoing discussions with the purchasers, the Company's Board of Directors has extended the deadline set forth in the Company's by-laws for stockholder notifications of director nominees to be considered at the Company's next annual meeting of stockholders. Under the extended deadline, such notifications must be provided to the Company's Corporate Secretary no later than February 15, 2008 and must otherwise comply with the requirements of the Company's by-laws.
Huntsman Chemical is trading below its August lows today. As we all know, Huntsman currently has agreed to be acquired by Hexion Specialty Chemicals Inc., a portfolio company of Apollo. At first blush, it appears that Hexion pulled a nice trick -- negotiating a private equity type agreement for a strategic combination. Huntsman countered with an Avaya-type model -- demanding specific performance of the financing and a reverse termination fee of $325 million. That is the public perception. But given the recent trading lows of the stock I thought I would take a second look at the merger agreement. It turns out the public perception is not all correct.
Let's start with Section 7.4 -- which is specific performance of the financing arrangements. It states:
Financing Breach. In the event that (i) Parent and Merger Sub are in compliance with the terms of Section 5.12 of this Agreement, (ii) the terms and conditions set forth in the Commitment Letter with respect to the Financing (or the definitive documentation entered into with respect to any Alternate Financing obtained in the manner provided in, and consistent with the terms of, Section 5.12) have been satisfied and (iii) one or more of the financing institutions obligated to provide a portion of the Financing (or such Alternate Financing) fails to provide its respective portion of such financing and, as a result, the Closing does not occur, Parent and Merger Sub shall, upon the request of the Company, promptly commence a litigation proceeding against any breaching financial institution or institutions in which it will use its best efforts to either (x) compel such breaching institution or institutions to provide its portion of such financing as required or (y) seek from the breaching institution or institutions the maximum amount of damages available under applicable law as a result of such breach. Parent and Merger Sub further agree that any amounts received by Parent and Merger Sub in settlement or resolution of any such proceeding, net of any reasonable fees and expenses incurred by Parent and Merger Sub in connection with any such proceeding, shall be paid to the Company promptly following receipt thereof by Parent and Merger Sub; provided, that if such recovery is obtained prior to the termination of this Agreement in accordance with its terms, Parent shall, subject to the other terms and conditions contained herein, complete the Merger and the other transactions contemplated by this Agreement.
This is nice language -- it specifically requires Hexion and Merger Sub to go after the financing banks to fund the transaction and use their best efforts to do so (a standard which is higher than the reasonable best efforts required of Finish Line in its merger agreement and generally has been interpreted to require all actions short of bankruptcy). M&A lawyers negotiating private equity deals on the sell-side would do well to include this language.
Here is where it gets murky. Section 8.11 of the merger agreement state:
In circumstances where the Parent and Merger Sub are obligated to consummate the Merger and the Merger has not been consummated on or prior to the earlier of the last day of the Marketing Period or the Termination Date (other than as a result of the Company’s refusal to close in violation of this Agreement) the parties acknowledge that the Company shall not be entitled to enforce specifically the obligations of Parent or Merger Sub to consummate the Merger; provided, that notwithstanding the foregoing, it is agreed that the Company shall be entitled to enforce specifically the Parent’s and Merger Sub’s obligation to draw upon and cause the Financing to be funded if the conditions set forth in Section 6.1 and Section 6.2 have been satisfied (other than conditions which by their nature cannot be satisfied until Closing) and the funds contemplated by the Financing or any Alternate Financing shall be available.
Read this a few times. I read it to say that Huntsman can force Hexion to draw on the financing but cannot be required to consummate the transaction!? Can this be -- Hexion would likely counter argue that this only applies if you are at the end of the marketing period or the termination period (April 5, 2008 though extendable). Before we make any conclusions, let's see if any other provisions of the merger agreement shed light on this. Section 7.3(f) of the merger agreement contains the general cap on monetary damages. It states:
Section 7.3(f) Notwithstanding anything to the contrary in this Agreement, the parties agree that the monetary remedies set forth in this Section 7.3 and in Section 7.4 and the specific performance remedies set forth in Section 8.11 shall be the sole and exclusive remedies of (A) the Company and its Subsidiaries against Parent and Merger Sub and any of their respective former, current or future general or limited partners, stockholders, managers, employees, representatives, members, directors, officers, Affiliates or agents for any loss suffered as a result of the failure of the Merger to be consummated except in the case of fraud or with respect to Parent and Merger Sub only, a knowing and intentional breach as described in Section 7.2(b), and upon payment of such amount, none of Parent or Merger Sub or any of their respective former, current or future general or limited partners, stockholders, managers, employees, representatives, members, directors, officers, Affiliates or agents shall have any further liability or obligation relating to or arising out of this Agreement or the transactions contemplated hereby except in the case of fraud or, with respect to Parent and Merger Sub only, a knowing and intentional breach as described in Section 7.2(b); and (B) Parent and Merger Sub against the Company and its Subsidiaries and any of their respective former, current or future stockholders, managers, employees, representatives, members, directors, officers, Affiliates or agents for any loss suffered as a result of the failure of the Merger to be consummated except in the case of fraud or with respect to the Company and its Subsidiaries, a knowing and intentional breach as described in Section 7.2(b) but subject to the terms of Section 8.10, and upon payment of such amount, none of the Company and its Subsidiaries or any of their respective former, current or future stockholders, managers, employees, representatives, members, directors, officers, Affiliates or agents shall have any further liability or obligation relating to or arising out of this Agreement or the transactions contemplated hereby except in the case of fraud or, with respect to the Company and its Subsidiaries, a knowing and intentional breach as described in Section 7.2(b) but subject to the terms of Section 8.10.
So, the limitation on liability is made subject to Section 8.11 at the beginning. This is the type of drafting that got Cerberus into so much trouble. Section 8.11 is the specific performance clause and it is set forth above. Go back and read it. It only requires specific performance of the financing. Again, quite a circularity. But here before we start panicking Section 7.2(b) saves the day. It states:
(b) In the event of termination of this Agreement by any party hereto as provided in Section 7.1, this Agreement shall forthwith become void and there shall be no liability or obligation on the part of any party hereto except with respect to this Section 7.2, the fifth and sixth sentences of Section 5.2, Section 7.3, Section 7.4 (if applicable) and Article VIII; provided, however, that no such termination (or any provision of this Agreement) shall relieve any party from liability for any damages (including, in the case of the Company, claims for damages based on the consideration that would have otherwise been payable to the stockholders of the Company, and, in the case of Parent and Merger Sub, claims for damages based on loss of the economic benefits of the transaction) for a knowing and intentional breach of any covenant hereunder.
So, actually, the agreement is a pretty tight one. It requires that Hexion use its best efforts to enforce the commitment letters and reasonable best efforts to replace that financing if it is unavailable. But what if Hexion can't get the financing even if it does use such efforts? Is it still obligated to close? Here there is no financing condition -- the question would be whether in light of the fulfillment of all of the conditions, the refusal to close would be a breach and though Huntsman would lose the deal it could still collect damages. I see no other provisions on the agreement on this, so it certainly appears to be a good argument for Huntsman. All private equity deals should be this tight.
Addendum: Note the deal is also unusual in that it provides for the funding of the deal pre-closing into a payment fund. Huntsman's condition to closing is predicated on the payment of the merger consideration into the payment fund (see Section 6.3(d).
Monday, January 7, 2008
Friday, January 4, 2008
Apparently in response to a Genesco motion to clarify, the Tenn. judge today issued this order. A few points:
- The judge rules that her recent opinion is not a final order and she will issue a final order only once a ruling is issued in the N.Y. action. In other words, since it is an interim ruling, any appeal of the Tenn. opinion will likely only occur after the New York litigation is resolved. It is unclear whether she means that the ruling has to be final in New York (i.e., all appeals exhausted up to the Second Circuit and Supreme Court) or she will reconvene proceedings based on a lower court ruling.
- The reason for the ambiguity in her opinion on specific performance which I previously highlighted is now apparent (i.e., at the end of the opinion she left open the issue of whether she would order specific performance of the merger or damages if Finish Line loses in New York against UBS). In the order she specifically states that she will consider the issue of whether Finish Line is required to complete the merger in such a scenario only after a ruling in the New York litigation. Particularly, in such a scenario she is going to permit Finish Line to argue frustration of commercial purpose. This is a very high standard to meet. And the case she cites for this proposition is one where the party failed to meet it.
- Ultimately, this means more delay in any final resolution of this dispute. The parties now definitely must go to New York and the possibly Tenn. for Finish Line to be held liable for damages. And there must still be a Tenn. appeal. The timing issue is likely more important than the possibility of Finish Line winning in Tenn. on frustration of commercial purpose since this, again, is a hard test to meet.
- At this point the outcome the parties would have received in Delaware versus Tenn. is beginning to diverge.
More on Monday . . . .
Wednesday, January 2, 2008
The demise of the PHH Corp. deal has me thinking about the next victim of the 2007/2008 private equity blow-out. I think the clear nominee for the dead pool has to be Reddy Ice Holdings -- it currently has a Feb 5 termination date for its merger agreement, a date which seems increasingly likely to bring the agreement's termination.
Back on July 2 Reddy Ice, the largest maker of packaged ice in the United States, announced that it had agreed to be acquired by GSO Capital Partners for $681.5 million in a deal valued at $1.1 billion including debt. Debt financing for the transaction was committed by Morgan Stanley. According to the merger agreement, the deal had a 45-day go-shop and a $7 million dollar break fee during the go-shop period, rising to $21 million thereafter. At the time I celebrated Reddy's apropos slogan "Good Times are in The Bag", not picking up that the merger agreement also contained an ominously low $21 million reverse termination fee.
The deal quickly shifted into troubled category. The definitive proxy statement describes a deal almost immediately in crisis after announcement as Reddy Ice was hit by shareholder protests against the price by Noonday Asset Management, L.P. and Shamrock Activist Value Fund L.P. and the company missed July earnings targets. By mid-August GSO was already asserting that it needed more time to market the financing for the transaction given the state of the debt markets and Reddy Ice itself. In light of these problems, GSO and Reddy Ice ultimately agreed to amend the merger agreement on August 30, 2007 to cap the future dividends Reddy Ice could pay while the transaction was pending, extend GSO's marketing period for the debt financing, move up the date of the Reddy Ice shareholder meeting to October 15, 2007, and reduce the maximum fee payable to GSO if Reddy Ice's shareholders rejected the transaction from $7 million to $3.5 million. Notably, Reddy Ice backed away from its initial position vis-a-vis GSO that it required an extension of the go-shop period and a postponement of the shareholder meeting in exchange for these amendments. According to the proxy statement, it did so because of fears that GSO would simply walk from the transaction by paying the reverse termination fee of $21 million. Reverse termination fees are powerful negotiating tools folks.
Morgan Stanley then promptly raised an objection to the amendment. We have little information on this objection but from the little public disclosure it appears that MS is claiming that the merger agreement amendment and its extension of the marketing period was entered into without MS's consent thereby disabling its obligations under the commitment letter, a fact MS stated it reserved its rights with respect thereto. GSO and Reddy Ice publicly disputed MS's claim and the transaction is not contingent on financing (NB. unless it claims a MAC GSO has no other choice but to take this position or simply pay the reverse termination fee). The MS debt commitment letter is not publicly available but the language is likely standard and requires the banks approval to amendments of the merger agreement that are not "material and adverse to the interests of the Lenders" or some formulation thereof. If this is indeed the language, one can quibble whether these amendments, particularly the extension of the marketing period, are adverse. Nonetheless this is a similar position which the financing banks also successfully took in the Home Depot Supply renegotiation.
That was all by the end of summer, but since then Reddy Ice has continued its slow melt (pun very much intended). The new go-shop period came and went without a bidder, on Nov. 30 its CEO Jimmy C. Weaver resigned and on Jan 2 Reddy Ice announced that its COO Raymond Booth had also resigned. Meanwhile, management (now gone) has thrice lowered full-year guidance blaming adverse weather conditions since the announcement of the agreement. Note that the MAC contains an exclusion for adverse effects based on weather conditions -- Reddy Ice's finger-pointing at the weather not coincidentally provides it a convenient out on the MAC. The only good news for the deal is that Reddy Ice's shareholders have approved it.
And thus far, GSO has not asserted a MAC (for the definition of a MAC see pp. 53-54 of the merger agreement). But on Oct. 5, GSO informed Reddy Ice that it planned to extend the marketing period for the deal's $775 million debt package through Jan. 31. According to the merger agreement amendment the drop-dead date for deal is defined as follows:
“End Date” shall mean December 15, 2007, provided that the Company shall have the right, in its sole discretion to extend the End Date by up to 60 days if any of the conditions set forth in Sections 6 or 7 shall not have been satisfied or waived as of December 1, 2007, provided, further, that if the Marketing Period has commenced but not ended before any such End Date (including as a result of any extension pursuant to the final proviso of the definition of the term “Marketing Period”), such End Date shall automatically be extended to occur three Business Days after the final day of the Marketing Period.
And marketing period is defined as follows:
“Marketing Period” means the first period of 20 consecutive calendar days after all of the conditions set forth in Section 6 (other than conditions that by their nature can only be satisfied at the Closing) have been satisfied . . . . provided further that, prior to the expiration of the Marketing Period, the Parents shall be entitled in their sole discretion, from time to time on written notice to the Company, to extend the duration of the Marketing Period beyond a 20 calendar day period to end on any date on or prior to January 31, 2008 and, if, and only if, the Company consents in its sole discretion following the request of the Parents, to extend the duration of the Marketing Period beyond a 20 calendar day period to end on a date after January 31, 2008 but on or prior to February 28, 2008.”
The bottom-line is that the marketing period expires on Jan 31 unless the parties agree to extend it to Feb 28. And if the financing is not in place by Jan 31 or the Feb 28 extension, section 8.1(i) of the merger agreement provides that it can be terminated:
(i) by the Company if the Parents have failed to consummate the Merger by 5:00 p.m. on the third Business Day after the final day of the Marketing Period and all of the conditions set forth in Section 6 would have been satisfied if the Closing were to have occurred on such date.
The third business day after Jan 31 is Feb 5. The signs are ominous -- there has been no word from the parties on the status of the debt marketing (and no word that it has even begun). Moreover, it does not appear that Reddy Ice has commenced the tender offer for its 10 1/2 percent discount notes as contemplated (if requested by GSO) by section 5.11 the merger agreement. It appears that the only issue left in this deal is whether GSO quietly decides to pay the reverse termination fee of $21 million or assert a MAC to limit its payment and negotiate a lower reverse termination fee. In such a case we may very well have another sort-of MAC dispute in Delaware -- the choice of law and forum of the merger agreement. But I doubt Reddy Ice will pick this fight -- left without a management team and a rapidly declining business Reddy Ice will likely want to move on as other (Acxiom, Harman) have done to restore their business and their market credibility. GSO likely knows this and will play hardball on the fee.
Of course there is also the issue of MS's conduct. In September I would have speculated that MS would not be treating a first-tier private equity firm like Blackstone this way. But as the Fall has progressed and the potential liability increased it is clear that banks are willing to risk even their largest clients to wriggle away from some of these deals.
Final lesson: For M&A lawyers, remember that financing commitment letters as currently drafted can provide financing banks an out if the deal is renegotiated. Consider negotiating for wider language permitting freer amendment of the transactions documents and particularly consider denoting specific amendments which can be made without bank approval (e.g., lowering of the consideration, extension of the marketing period, etc.)
Final Note: For those who enjoy their deal code names, in the merger agreement merger sub is Hockey MergerSub and its parents are Frozen, LLC and HockeyParent. Sort of cute.
I'm presenting the paper Paradigm Shift: Federal Securities Regulation in the New Millennium tomorrow in New York at the American Association of Law Professors annual meeting of the securities regulation section. Here is the abstract:
In May 2007, Oaktree Capital Management LLC, a U.S.-based hedge fund adviser with over forty billion dollars in assets under management, sold approximately fourteen percent of its equity for more than $800 million in a widespread offering made to a number of prospective purchasers. This equity offering was not made on the New York Stock Exchange or Nasdaq. Instead, Oaktree's initial offering was made on the U.S. private market. The company thereafter listed its equity securities on Goldman Sachs & Co.'s non-public market, the GS Tradable Unregistered Equity OTC Market. This offering is emblematic of a paradigm shift occurring in the capital markets: the market for capital is increasingly competitive and global, viable public and private markets are proliferating world-wide, domestic investing patterns are changing as intermediary investing and deretailization occur, and financial innovation is quickening. The result is an on-going, perhaps revolutionary, transformation in the scope and structure of the global and domestic capital markets. This essay is about this paradigm shift, its implications for the SEC regulatory process and the future of federal securities regulation. It was prepared for and will be presented at the 2008 meeting of the AALS securities regulation section.
I hope to see you there.
I'm a bit surprised at the number of articles today on the collapse of PHH Corp. and its possible wider implications. The deal has been walking dead since mid-September when PHH Corp. announced that J.P. Morgan Chase & Co. and Lehman Brothers Holdings Inc., the banks who had committed to finance Blackstone's purchase, had "revised [their] interpretations as to the availability of debt financing". And I had noted early this month that the parties were likely just waiting for the Dec. 31 drop-dead date to terminate the transaction. So, no surprise, but both the Wall Street Journal articles and New York Times articles have a lot of spin both ways as to what the collapse means -- is it a reputational hit for Blackstone? Does it mean that financing banks will no longer toe the Blackstone line? Is it a win for the now tight-fisted J.P. Morgan? Etc.
Well, as for reputation -- it has become an increasingly discardable thing throughout the Fall as more and more private equity firms walk on deals. But, in any event, I think it is really none of these given the PHH deals unique structure. As I stated back in September, [i]n the merger agreement, GE was supposed to buy all of PHH and on-sell PHH's mortgage lending business to Blackstone. PHH agreed to condition the obligations of GE on:
All of the conditions to the obligations of [Blackstone] under the Mortgage Business Sale Agreement to consummate the Mortgage Business Sale (other than the condition that the Merger shall have been consummated) shall have been satisfied or waived in accordance with the terms thereof, and [Blackstone] shall otherwise be ready, willing and able (including with respect to access to financing) to consummate the transactions contemplated thereby . . . .
Does everyone see the problem with this language? It is hard to criticize drafting absent knowing the full negotiated circumstances and without having context of all the negotiations, but this is poor drafting under any scenario. "ready, willing and able"? I have no idea what the parties and DLA Piper, counsel for PHH intended this to mean, but arguably Blackstone -- the mortgage business purchaser here -- can simply say that is not a willing buyer for any reason and GE can then assert the condition to walk away from the transaction or postpone closing until the drop-dead date (as happened here). You can read "ready" and "able" in similarly broad fashion. This is about as broad a walk-away right as I have ever seen -- I truly hope that PHH realized this, or were advised to this, when they agreed to it.
Here, note that the walk-away right was GE's. GE could have either waived or asserted the condition if Blackstone was not "ready, willing or able". GE here chose to assert this condition. It does not appear that PHH disclosed the agreement between GE and Blackstone with respect to the Mortgage Business Sale. But, in PHH's proxy PHH stated that the mortgage business sale was conditioned upon the satisfaction or waiver of the closing conditions pertaining to GE in the merger agreement. In addition PHH stated that:
In connection with the merger agreement, we entered into a limited guarantee, pursuant to which Blackstone has agreed to guarantee the obligations of the Mortgage Business Purchaser up to a maximum of $50 million, which equals the reverse termination fee payable to us under certain circumstances by the Mortgage Business Purchaser in the event that the Mortgage Business Purchaser is unable to secure the financing or otherwise is not ready, willing and able to consummate the transactions contemplated by the mortgage business sale agreement.
I can't read the actual terms because the agreement is unavailable, but this may ameliorate a bit the bad drafting. PHH essentially granted a pure option to Blackstone to walk for $50 million. The interesting thing here is how all of this worked with GE in the middle. We can't see the termination provisions of the mortgage business sale agreement between GE and Blackstone but presumably Blackstone can walk from that agreement by paying the $50 million to PHH -- what its obligations to GE are in this case we don't know.
Ultimately, though, the problem is that these provisions provided too much room for all three of GE, Blackstone and the Banks to maneuver to escape this transaction. GE can simply work with Blackstone to have it assert that it is unwilling to complete the transaction for any plausible reason; Blackstone can similarly rely upon the Banks actions and what is likely a loosely drafted commitment letter to make such a statement or come up with another one. The end-result is to place very loose reputational restraints on the purchasers' ability to walk from the transaction. Compare this with other private equity deals with similar option-type termination fees. There, the private equity firms have to actually breach the merger agreement and their commitments to walk. This is a more powerful constraint as the private equity firms do not want to squander their reputational capital by appearing to be unreliable on their deal commitments (sic URI).
These all combined here to provide tremendous leeway for the parties to work to shift blame and walk from the PHH transaction. This is unlike URI/Cerberus where blame was squarely on Cerberus. PHH in its termination announcement stated it had requested that Blackstone pay the $50 million to it in accordance with its agreements. Small consolation.
Tuesday, January 1, 2008
The picture which emerges from the Genesco opinion is a bidder engaged in a hot auction worried about a topping bid and pushing the limit on pricing. In the background is a financing bank looking to build a big client and piloting the ship -- providing the necessary financing and expertise to complete the transaction. In their haste to put forth a topping bid both parties fail to complete their due diligence and the markets turn on them with a vengeance. This failure to push on delivery of the May numbers by Finish Line and UBS is ultimately not surprising -- in the heat of closing negotiations and the back and forth of due diligence even material information is often not asked for or exchanged. But what is interesting about the scenario here is that the opinion places UBS as taking the lead on financial due diligence with the assistance of Duff & Phelps' due diligence consulting services. If true, this likely means FL had no sophisticated corporate development/finance function capable of doing a deal like this and effectively just did "merchant" due diligence -- analyzing operations for the most part. The financial due diligence and the process generally were supervised and led by UBS.
Again, if true, the implications are rather astounding. First, you have to ask why would UBS do a deal like this for a minnow to swallow a whale in a highly leveraged transaction (even at the time announced) without having a client capable of being an independent judge of financial numbers to come from the seller? Likely someone at UBS wanted to create a new client (big FL) and was willing to do all the work to get there (supply all the judgment plus the $1.6 billion in money in exchange for only $11 million in equity). Ken Moelis had just left UBS and there are logical dynamics at work to justify this course of action in order to beefen up the UBS M&A bank component. And again, if this is true, the more disturbing point is UBS's current conduct -- if they indeed piloted and financed this transaction, their suit in New York is a double betrayal of FL. It is not just a failure to provide financing but a failure by UBS to suitably advise their client at the time of the deal. This is something which Ken Moelis, who has been hired by Finish Line post-agreement, has been unable to cure. Nor would he likely be able to -- it appears that the upper echelon at UBS are willing to sacrifice their M&A banking reputation, and perhaps business, in order to cut their losses and save a few hundred million plus. So very odd . . . .
And the risk that has come to pass is clearly one that the parties at the time contemplated. Genesco asked for and FL agreed to provide a solvency opinion. Genesco negotiated a no-outs deal which was not contingent on financing and contained a specific performance clause. If there was a failure here it was for FL to negotiate a completely symmetrical agreement on the financing with UBS which did not contain similar outs. But it is hard to blame them because it is virtually inconceivable at that time that the reality which is now unfolding would actually occur. I really do wonder what Finish Line is thinking in their hearts right now about UBS . . . .
The New York Action: What next?
This leads to next steps. The opinion enforces the merger agreement provision which requires Finish Line to use its reasonable best efforts to obtain financing. But, FL's financing commitment letter with UBS requires that a solvency opinion be delivered. FL can argue that the combined entity will be insolvent, and therefore reasonable best efforts does not contemplate a breach of a contract. The judge's opinion never really addressed this point, and so I expect FL to argue that reasonable best efforts does not require it to prosecute the New York action. But Genesco will still litigate the issue there, and if it loses this throws FL into a bad place. The judge's opinion in Tennessee leaves some ambiguity as to whether she would force a merger if UBS wins in New York. FL would then be hoping that the judge in Tenn. is merciful and, based on this ambiguity, refused to order a damages remedy. But I think that this is a weak legal argument. FL was specifically held by the Tenn. judge to have breached the merger agreement. I think the judge would likely still award monetary damages, an event which likely would force FL into an insolvency scenario. Risky business indeed; at this point, I think FL would probably be better off becoming Genesco's ally and appear to be adhering to the Tenn. judge's opinion creating a good image for itself if it should have to return before her. Unless, of course, the insolvency argument is actually true. Here, we still need to see the facts, and that may change things as occurred in URI.
Beyond that, a couple of open questions to be answered in the UBS N.Y. litigation:
- Who gives this solvency opinion? Does FL hire Houlihan or some other appraisal firm to perform an independent analysis or is this a certificate from the FL CFO delivered to UBS. In the case of the former, the parties would be hard pressed to find a bank willing to take this assignment on given the liability exposure. In the case of the latter, FL has almost total control over the analysis (albeit with likely input from a bank they can hire). In light of these difficulties, expect Genesco to offer up a proxy certificate (but I doubt it will be Goldman giving this opinion again given the liability issues).
- What law governs (i.e., which law determines solvency) Is it N.Y. or Tennessee or the place of incorporation of the companies (Delaware). Most likely it will be New York as that is the law of the financing commitment letter.
- Which test of insolvency applies? Is it assets minus liabilities of the combined entity, i.e., a balance sheet test, or a cash flow test, i.e., can the combined entity generate enough cash to pay its debts as they come due in the usual course of business. The applicable test is in some part dependent on the applicable law (both have been utilized in New York though the latter is the definition of insolvency in the New York Business Corporation Law).
- Is the N.Y. judge going to back door the no-MAC claim into a finding of solvency? In other words, given the Tenn. judge's finding of no MAC will the N.Y. judge rule that the parties could not have contemplated an insolvency event without such a finding. This is an argument Genesco is likely to make but I think UBS will simply and correctly that the judge excluded all issues of insolvency, including those related to the MAC from the Tenn. opinion.
- What is the scope of the solvency certificate (the combined entity or just FL) and when is it given for (now or back in early Fall when the deal should have closed)?
- Expect Genesco to begin pushing towards a close in the next week or so. I haven't been able to check over the weekend but I am not even sure FL and Genesco have even answered the N.Y. complaint yet. Expect them both now to do so and for Genesco to push for an expedited trial. I would expect the Southern District judge to act quickly on this.
- Finally, there is the Tenn. appeal and its effect on this action . . . .
A few final thoughts on the Genesco Opinion.
- Toto we're not in Delaware anymore. The differences between this opinion and the URI one are self-apparent. But, the Tenn. judge did a good job when you consider the experience the Delaware judges have with these disputes. Ultimately, her ruling was the same one that the parties would likely have received in Delaware but with a few detours, i.e., the finding of a MAC before the exclusion applied. Nonetheless, the litigation is again a reminder of the importance of choice of forum and choice of law clauses.
- In my haste to get a post up on Friday, I mangled my analysis of the MAC clause in the merger agreement. The opinion centered on the clause (B) exclusion:
- "changes in the national or world economy or financial markets as a whole or changes in general economic conditions that affect the industries in which the Company and the Company Subsidiaries conduct their business, so long as such changes or conditions do not adversely affect the Company and the Company Subsidiaries, taken as a whole, in a materially disproportionate manner relative to other similarly situated participants in the industries or markets in which they operate . . . ."
- The judge here held that that high gas, heating, oil and food prices, housing and mortgage issues, and increased consumer debt loads were generally responsible for Genesco's condition and therefore this exclusion applied. My mistake was overly parsing the language of both the opinion and the MAC clause to read it as a number of exclusions upon which she based her opinion -- but on a second read her finding appears to be solely based on the underlined language.
- In the same vein, I made the point in my Friday post that the judge's reading of the exclusion was a broad interpretation of the general economic condition exclusion. On reflection, I think it is rather a reminder of how just how broad this exclusion normally is rather than an abnormally broad reading. Practitioners should remember this and focus on the disproportionality qualifier also included in the MAC exclusion above in order to contour this out appropriately. Here, the opinion is disappointing because it provided no analysis of what "materially disproportionate" actually means, instead making rather summary conclusions. This is unfortunate because we could have used some analysis on the meaning of disproportionate in a MAC clause exclusion.
- Finally, on the MAC, the lack of an intra-industry exclusion ultimately did not hurt Genesco, but they would have been served well by such an exclusion, i.e., an exclusion for changes to the industry itself that was not premised simply on changes to general economic conditions. Again, a point for practitioners to remember.
- Finally, the appeal -- there are weaknesses in the Tenn. opinion, but given the fact based nature of these findings it is hard to see a Tenn. court overturning it, especially given the thorough vetting the judge did here and the deferential standard on appeal for fact-based findings. The weakest point in the opinion is probably the analysis of the breach/MAC claim based on the SDNY investigation and the securities litigation. The opinion should have stated that there is no breach and no MAC because Section 3.18 requires that the investigation have, individually or in the aggregate, be a MAC. Here, even if the appellate court finds fault with her summary adoption of Genesco's argument that an actual finding of fraud must be shown, it would still revert to the MAC analysis actually required to find that the litigation and investigation have not had a material adverse effect as of now on Genesco (there is no future element in the MAC here, a big advantage to Genesco).