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).