Saturday, June 27, 2009
I received a couple of questions offline about Lewis’ “MAC-attack” and whether a MAC claim would have plausible (who knew we had readers in Europe?!). The strength of a potential MAC claim by BAC was well covered by Steven a couple of weeks ago at the Deal Professor (Assessing a MAC Claim: The Lewis Ostrich Defense). I’d like to address Lewis’ concern. He apparently told Paulson/Bernanke that he feared shareholders would sue him for not claiming a MAC. It’s hard to imagine that this was anything other than a threat to get the Fed/Treasury to put up more cash. Why? Well, the lawsuit he suggests is one that wouldn’t go very far.
Alvarez’ assessment of a potential lawsuit was correct. Any suit for failure to claim a MAC would start with the BAC board enjoying the protection of the business judgment rule, which we all remember is a presumption that “the directors of [the] corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company. Thus, the party attacking a board decision as uninformed must rebut the presumption that its business judgment was an informed one.”
That means that any challenge to BAC decision not to invoke a MAC in the agreement would have had to fight a very steep uphill battle. To succeed, plaintiffs would have had to make the case the BAC board was uninformed/unreasonable. Since proving a MAC is extremely difficult to do in any event, it’s not clear at all that a board having discussed and considered the circumstances – which it appears clear from the abundance of the e-mails was happening -- would have made an unreasonable or uninformed decision by not attempting to claim a MAC. Basically, plaintiffs would have to make the case that finding a MAC would have been a “no-brainer” for a court looking at the facts and that the board was somehow absent when it neglected to reach the same conclusion in order to come close to winning on a claim against BAC’s board. I’m pretty confident that a court would pretty quickly dismiss such a suit.
So, what was Lewis afraid of beyond the
inconvenience/embarrassment of a lawsuit?
Who knows, but he’s got all the inconvenience you can imagine by having
to appear in front of Congress on a near regular basis these days. More likely, the threat of being forced into calling a MAC because of "shareholder pressure" and a potential lawsuit was just a negotiating tactic to get more support from the Fed.
Friday, June 26, 2009
The internal e-mail disclosed as part of the House Oversight Committee's hearings on the BAC/Merrill deal make for some interesting reading. In the exchange below Scott Alvarez, General Counsel for the Federal Reserve Board, lays out the major legal issues surrounding the last minute "MAC-attack" by Lewis. He correctly identifies the disclosure issue with respect ML's losses as the real hot button legal problem for Lewis.
From: Scott Alvarez
To: [Ben Bernanke]
Date: 12/23/08, 10:18AM
Shareholder suits against management for decisions like this are more a nuisance than successful. Courts will apply a “business judgment” rule that allows management wide discretion to make reasonable business judgments and seldom holds management liable for decisions that go bad. Witness Bear Stearns. A different question that doesn’t seem to be the one Lewis is focused on is related to disclosure. Management may be exposed if it doesn’t properly disclose information that is material to investors. There are also Sarbanes-Oxley requirements that the management certify the accuracy of various financial reports. Lewis should be able to comply with all those reporting and certification requirements while completing this deal. His potential liability here will be whether he knew (or reasonably should have known) the magnitude of the ML losses when BAC made its disclosure to get the shareholder vote on the ML deal in early December. I’m sure his lawyers were much involved in that set of disclosures and Lewis was clear to us that he didn’t hear about the increase in losses till recently.
All that said, I don’t think it’s necessary or appropriate for us to give Lewis a letter along the lines he asked. First, we didn’t order him to go forward – we simply explained our views on what the market reaction would be and left the decision to him. Second, making hard decisions is what he gets paid for and only he has the full information needed to make the decision – so we shouldn’t take him off the hook by appearing to take the decision our of his hands.
Let me know if you’d like any more information on this.
From: [Ben Bernanke]
To: Scott Alvarez
Date: 12/23/08, 11:08AM
Thanks, Scott. Just to be clear, though we did not order Lewis to go forward, we did indicate that we believed that [not] going forward would detrimental to the health of (safety and soundness) of his company. I think this is remote and so this question may be just academic, but anyway: What would be wrong with a letter, not in advance of litigation but if requested by the defense in the litigation, to the effect that our analysis supported the safety and soundness case for proceeding with the merger and that we communicated that to Lewis?
From Bernanke's response, it's pretty clear that while the Fed didn't order BAC to close the deal, they probably told Lewis that if he decided not to close the deal that the world economy would implode and it would be all his fault. Hmm. Tough choice. Tough choices like these are just examples of the "Big Deal" in action.
On the other hand, to the Chairman's question about preparing a letter to help with Lewis' potential defense in any lawsuit - through the combined wonders of e-mail and discovery, the letter he thinks might be helpful isn't required!
Recap of Bernanke's testimony:
Wednesday, June 24, 2009
So, GM just announced that it will close its Shreveport, LA plant. That's the plant that assembles the Hummer H3. OK, I suppose that means GM and Tengzhong Heavy won't be signing much of a transition services agreement for the assembling of the H3 line. When that line gets shut down, that will leave the Hummer division with no access to any real manufacturing assets. That leaves one to wonder what exactly will be left for GM to sell Tengzhong Heavy. Perhaps GM is planning on selling its rights to the brand and transferring the H1/H2 assembly contract with AM General to Tengzhong Heavy? How will Tengzhong Heavy get from owning a brand and an assembly contract to its next generation "green" Hummer? Looks to me like a deal about to crater.
Commissioner Paredes shared his dissenting view on the new shareholder access proposal in a speech before the Chanber of Commerce yesterday. The text of the speech is here. He argues that states are best able to tailor approaches to the corporate law, in particular that Delaware has an enabling statute intended to provide shareholders with flexibility in designing their relations with management. He points to DGCL new sections 112 and 113 as examples of Delaware's flexibility. One might also point to the new North Dakota Public Company chapter of its corporation code as an example of state flexibility and tailoring. Its section 10-35-08 provides for shareholder access to the corporate proxy on terms largely similar to those proposed by the SEC.
Tuesday, June 23, 2009
In anticipation of a potential hostile approach by Microsoft last year, Yahoo adopted a "tin parachute" severance plan. The "tin parachute" is a company-wide severance plan that makes payments to employees who lose their job following a change in control. If part of the motivation for an acquisition is cost-reduction and if layoffs are part of the post-closing integration plan, then such a plan could be a deal-killer. The Deal Professor discussed Yahoo's tin parachute in a post at the time. In any event, the plan generated a lawsuit that, according to NY Times, was settled today. Here's a copy of the proposed settlement agreement and amended severance plan. The agreement modifies the plan to make it less onerous for a potential acquirer, but doesn't get rid of it altogether. This watered-down plan must stay in place for at least 18 months from the date the settlement plan is approved, thus making it hard for the Yahoo board to lean on it, should Microsoft come knocking again. A new Section 5.1 also permits the board to amend or terminate the plan at any time.
Suppose a buyer is negotiating the terms of a potential acquisition of a family business when the parties encounter an issue over valuation. The seller’s projections show 500% growth over the three years following the sale. However, the buyer doubts these projections and therefore thinks the business is worth only a fraction of the seller’s asking price. This is a classic circumstance in the M&A world.
Often, the parties will bridge this valuation gap through the use of an earnout. Under such an arrangement, the seller gets paid a percentage of the asking price up front, and the parties agree to additional future payments if the company meets specific financial goals. For example, the buyer might agree to pay 75% of the purchase price up front, with another payout contingent on generating a particular amount of cash flow over a three-year period. This contingent payment could be binary, meaning it is paid or not depending on whether the target is hit, or it could be based on a sliding scale. For example, 50% of the contingent payment is made if 50% of the target is hit, 60% is paid if 60% of the target is hit, and so on.
Earn-outs are complex and must be carefully structured. For example, since the ultimate price payable pursuant to an earn-out provision will depend on future performance, the seller generally attempts to retain control of the business during the earn-out period to assure that changes in operations after the sale do not affect the ability to attain the specified target. The buyer, of course, often resists any restriction on its ability to run the business as it sees fit after the closing.
Here’s a recent article from BNA’s Mergers And Acquisitions Law Report highlighting many of the pitfalls to be avoided.
Monday, June 22, 2009
The University of Tennessee College of Law is inviting applications for a one semester visiting faculty position to commence in the Spring Semester of 2010, to teach Business Associations and a business law related course through the Clayton Center for Entrepreneurial Law. Successful applicants must have a strong academic and practice background. Preference may be given to those applicants who are seeking to enter the academy from private practice. Applications, including a letter of intent, resume and the names and contact information of three references, should be sent to:
George W. Kuney
W.P. Toms Distinguished Professor of Law and
Director of the Clayton Center for Entrepreneurial Law
The University of Tennessee College of Law
Knoxville, TN 37996-1810