M & A Law Prof Blog

Editor: Brian JM Quinn
Boston College Law School

Wednesday, January 13, 2010


The Deal Professor has some good commentary on the state of the SEC's case against BAC.  The case is a mess.  For some reason the SEC focused its initial efforts on the bonus issue when the real issue should have been the one relating to disclosure (or lack thereof) related to Merrill's mounting "extraordinary losses" between signing and the shareholder vote.  Judge Rakoff tossed out a plea agreement in the summer and called it puzzling.  Now, the SEC has gone back and tried unsuccessfully to amend its complaint to add the disclosure piece.  While it can still pursue the disclosure claims, the SEC must now file a separate action.  

I am starting to understand why Ken Lewis resigned.  In his mind, he stepped up to the plate in the midst of a financial crisis and "did the right thing" by taking Merrill.  Of course, it was good for BAC, but who can hold that against him?  What did he get for his troubles?  Lawsuits from the SEC, the NY AG, shareholders in DE and an open invitation to speak in front of Congressional committees.  

On the other hand, does a financial crisis mean that one's disclosure obligations end?  The same question is true for AIG.  We're going to find out.  


January 13, 2010 in Cases | Permalink | Comments (0) | TrackBack (0)

Tuesday, January 12, 2010

Just Say No – to Earnouts

Here’s another reason to just say no to earnouts –Sonoran Scanners v PerkinElmer.  Plaintiff Sonoran argued that notwithstanding the lack “reasonable efforts” language in the asset purchase agreement that there should be an implied obligation to exert reasonable efforts in an earnout provision.  A federal appellate court in Massachusetts agreed with that argument in a recent appeal from summary judgment when it held that under Massachusetts law, there is such an implied obligation in an earnout  provision.

In the transaction, PerkinElmer purchased substantially all the assets of privately-held Sonoran Scanner for $3.5 million plus an earnout of up to $3.5 million.  Given Sonoran’s already weakened financial state, a significant portion of the initial $3.5 million was paid to Sonoran’s creditors and not to its shareholders.  Shareholders were to be paid on the back end. Under the terms of the earn-out provisions, PerkinElmer would pay Sonoran $750,000 if at least three of Sonoran Scanner’s CTP machines were sold in the first year following closing, $1.5 million (less any previously paid earn-out amounts) if at least ten machines were sold by the end of the second year, and additional earnout amounts if certain gross margin targets on sales of CTP machines were met.  The additional earnout payment (over and above the $1.5 million) during the five year payout period was a maximum of $2 million. 

The relevant earnout provision reads in part as follows:

 1.6 Earnout Adjustment

(a) The Base Purchase Price shall be subject to increase in the form of one or more payments, payable to the Seller subject to Section 7.2, as follows:

(i) If, on or before the first anniversary of the Closing Date, the Buyer has completed not less than a total of three Qualifying Product Sales (as defined below), the Buyer shall pay to the Seller, within ten business days of the first anniversary of the Closing Date, the sum of $750,000 (the "First Earnout Payment").  ...

(ii) If, on or before the second anniversary of the Closing Date, the Buyer has completed not less than a total of 10 Qualifying Product Sales (including any Qualifying Product Sales pursuant to Section 1.6(a)(i) above), the Buyer shall pay to the Seller, within ten business days of the second anniversary of the Closing Date, the sum of $1,500,000 minus the earnout amount, if any, paid to the Seller pursuant to Section 1.6(a)(i) above (the "Second Earnout Payment" ...

The way this provision is drafted, it's devoid of any language of obligation, relying solely on a conditional "if".  It's a poorly drafted earnout provision - one that almost begs to be litigated.  So, this case should be no surprise to anyone involved in the transaction. 

Notwithstanding the lack of obligatory language or specificity in the earnout provision, the appellate court, relying on MA precedent, read its conditional language to include an implied obligation of reasonable efforts.  The Massachusetts Supreme Judicial Court in Eno Sys, Inc. v Eno, (1942) held that it is implied that one who obtains the exclusive right to manufacture a product under a patent has “an implied obligation . . . to exert reasonable efforts to promote sales of the process and to establish, if reasonably possible, an extensive use of the invention.  The First Circuit reads that case to extend an implied obligation to exert reasonable efforts to an earnout provision where consideration to be paid is tied to a sales process.  

In this case, the fact that the asset purchase agreement makes some portion of the consideration contingent on back-end sales implies that the buyer will be required to exert reasonable efforts to make sales notwithstanding a lack of language in the agreement to the contrary.  For its part, PerkinElmer says it invested $2.5 million in a losing business over two years and then decided to exit the segment altogether.  PerkinElmer argued that even if it did have an implied obligation to expend reasonable efforts, it certainly did so. Whether it did or not, it's not really all that relevant this stage anymore.  It will be up to a trial court to decide whether PerkinElmer exert reasonable efforts before deciding to stop marketing the product after signing.

I'm pretty confident in assuming that the parties decided to go with an earnout as a way to "split the difference" during negotiations and come to a reasonably quick agreement rather than spend more time on valuation questions.  Consequently, they have this rather loose language that on its face does not seem to generate obligations on the side of the buyer but may leave the seller understanding something different.  In the end, the earnout becomes a deferred dispute provision.  Better just to spend the time up front on the valuation and avoid the earnout altogether.    



January 12, 2010 in Merger Agreements | Permalink | Comments (2) | TrackBack (0)

Monday, January 11, 2010

Chinese Merger Control

Zhang and Zhang have an article, Chinese Merger Control: Patterns and Implications, appearing in the Oxford Journal of Competition Law and Economics assessing the efficacy of the recent Chinese Anti-Monopoly Law.  (There's also a version on SSRN, if you don't have a subscription to the Oxford journal.)  Premerger notification and review is obviously an important deal planning issue and China's entry onto the scene in this respect is important.  It's also raised a number of concerns, in particular how China's government would use its power to block deals or seek remedies.  The fear, of course, is that authorities might be motivated by nationalism or parochial politics in approving or blocking deals as anti-competitive.  Zhang & Zhang take on this and other issues in their review.  

Abstract: China's Anti-Monopoly Law went into effect on August 1, 2008. Even though enforcement authorities tend to build their capacity progressively, China has already seen three milestone case decisions in the past year: InBev/Anheuser-BuschCoca-Cola/Huiyuan, and Mitsubishi Rayon/Lucite. In this article, we elaborate the background of each case and provide in-depth analysis of each decision. In particular, we explore the common characteristics of the cases, the economic theories on which the merger control authority has relied in its merger decisions, and the patterns regarding China's merger policy.

Along the same lines McDermott Will & Emery's China office has client memo on the new regulations on merger notification that went into effect on January 1, 2010.  The regulations start to lay out premerger notification processes that corporations wishing to merge will have to comply with.


January 11, 2010 in Antitrust, Asia | Permalink | Comments (0) | TrackBack (0)

Friday, January 8, 2010

Acquisition Financing in 2010

Davis Polk has some thoughts based on trends from 2009.  Here's the conclusion:

The fundamental tensions in acquisition financings have not changed: buyers and sellers desire deal certainty and unconditional loan commitments, and arrangers desire flexibility to ensure a successful syndication. In 2009, we saw a continuing evolution in the ways that market participants balanced these competing objectives in light of new market realities and reduced access to credit. [T]he "SunGard" limitations have survived but are more carefully negotiated for the individual transaction; and market MACs have not returned, but concerns about changes in market conditions have been addressed through expanded flex provisions. Some of the post-credit crunch technology is likely here to stay: base rate pricing will not be permitted to be less than LIBOR pricing; solvency conditions will continue to be more carefully scrutinized; and arrangers will continue to look for ways to reduce and quantify their exposure. As credit conditions continue to improve, one question will be to what extent buy-side loan market participants’ appetite for yield, and arrangers’ appetite for fees, will outweigh some of the current focus on structural issues. Evidence from late 2009 suggests that some "top of the market" features that were viewed as "off the table" in 2008 (covenant-lite, equity cures) may, under the right circumstances,  be fair game for negotiation between borrowers/sponsors and arrangers in 2010. And finding the right balance with respect to 2009 developments such as enhanced market flex and pre-closing securities demands will likely occupy a significant amount of participants’ time and energy. It promises to be an interesting year for arrangers and sponsors alike.

Read the whole thing here.


January 8, 2010 in Deals, Going-Privates, Leveraged Buy-Outs, Transactions | Permalink | Comments (0) | TrackBack (0)

Worst Deals of the Century?

Hot on the heels of Gerald Levin's claiming the mantle of the "worst deal of the century", the Telegraph (UK) helpfully puts together its own shortlist of "worst deals" of this century.  Given that the century started in 2000, that's only about a decade's worth of bad deals to choose from.  Here's their list (with an obvious European bias):

1. AOL - Time Warner
2. Vodaphone - Mannesmann
3. France Telecom - Orange
4. Vivendi - Seagram
5. RBS - ABN Amro

Is that it?  Let's let the crowd speak and a hundred flowers bloom.  What do you think are the worst deals of the century?  I'll leave comments open for nominations to compete with this list for the worst deal of the century!  Remember the deal has to have been closed after January 1, 2000.


January 8, 2010 in Friday Culture | Permalink | Comments (1) | TrackBack (0)

Thursday, January 7, 2010

Shrinking Delaware?

Mark Roe has a paper, Delaware's Shrinking Half-Life, appearing in the current Stanford Law Review.  Notwithstanding Delaware's pre-eminent position in the incorporation business, Roe argues that Delaware is living on a knife's edge.  The problem for Delaware he suggests is that in order for Delaware to keep up, it has to continually chase new incorporations/reincorporations as its tax base decomposes before its eyes.

Abstract:  A revisionist consensus among corporate law academics has begun to coalesce that, after a century of academic thinking to the contrary, states do not compete head-to-head on an ongoing basis for chartering revenues, leaving Delaware alone in the ongoing interstate charter market. The revisionist view pushes us to consider how free Delaware is to act. Where and when would it come up against boundaries, punishments, and adverse consequences? When do other states (and Washington) constrain Delaware? Recent state corporate lawmaking helps us to define those boundaries in terms of potential state competition and to see that the critical actors are not other states’ lawmakers directly, but Delaware’s own corporate constituents who, if disgruntled, can induce other states to enact new laws. Moreover, analysis of previously unassembled chartering revenue data from Delaware’s Secretary of State’s office displays a vital dimension of state competition, once thought to be relatively unimportant, but that’s becoming increasingly powerful: Delaware’s tax base is eroding, and it’s eroding faster in the past decade or so than ever. Delaware must move ever faster to replenish that erosion. The dynamism of American business interacts with even a lackluster state-based corporate chartering market to put powerful pressure on Delaware, whose business base is persistently eroding as firms merge, close, and restructure.


January 7, 2010 | Permalink | Comments (0) | TrackBack (0)

Wednesday, January 6, 2010

Ribstein on "The Cloudy Future of Big Law"

Yesterday, over at Ideoblog, Larry Ribstein had another in a series of thoughtful musings on the future of Big Law. His post, "The Cloudy Future of Big Law" responded to this post at Above the Law, which primarily focused on the unprecedented layoffs in 2009 and went on to suggest that "[t]here is reason to be hopeful that 2010 will be much better than 2009."

Professor Ribstein is somewhat more pessimistic, pointing out that "there are also reasons not to be hopeful." Indeed, he believes that, although the economic "crisis may be over and there may be a lot of regulatory and other work for lawyers, . . . that doesn't necessarily translate into a rosy future for Big Law."

This is territory Professor Ribstein has covered beforehere he is in the abstract from his article on the subject, The Death of Big Law:

Large law firms face unprecedented stress. Many have dissolved, gone bankrupt or significantly downsized in recent years. These events reflect more than just a shrinking economy: the basic business model of the large U.S. law firm is failing and needs fundamental restructuring.

I’d like to focus on just one of the trends Professor Ribstein believes to be "very relevant to the future of Big Law." In his post he points to:

The pressure on hourly billing, which has been a major profit generator for big firms. Although I keep hearing that reports of its demise are premature, don't bet on that.

Professor Ribstein may be right. Perhaps the recent push to replace the billable hour reflects more than just a shrinking economy and will continue even after economic conditions improve. If so, it could certainly be a blow to the current Big Law business model.

But I wonder if this is really a trend rather than a temporary response to current circumstances. Here are a few headlinesguess what they have in common:

  • The Vanishing Hourly Fee, ABA Journal

  • The New Value Billing, The American Lawyer

  • The Rise and Fall of the Billable Hour, New York State Bar Journal

  • Time to Question the Billable Hour, Connecticut Law Tribune

  • Value Pricing: The Billable Hour Death Knell, Accounting Today

  • Preparing a Requium for the Billable Hour, New York Law Journal

The first 3 were written following the economic slowdown of 1991-1992 and the last 3 were written following the bursting of the tech bubble in 2000, in each case following the unprecedented stress faced by law firms at the time. In hindsight we now know that, in each instance, the death of the billable hour was greatly exaggerated. Once demand for lawyers recovered there was less pressure on fees and, consequently, less focus on how they were calculated.

I’m not saying this time will be the same.  I just think it’s a little too early to tell.


January 6, 2010 in Current Affairs, Current Events, Lawyers | Permalink | Comments (2) | TrackBack (0)

Tuesday, January 5, 2010

Levin: Yeah...sorry about that...

"I presided over the worst deal of the century, apparently."

Gerald Levin and Steve Case on CNBC two days ago.  At least he recognizes that where the blame for that deal should lie.  This was actually a very reflective discussion about the complications of doing big deals and responsibility in the C-Suite following the financial crisis. 

Steve Case made an interesting comment when thinking about the AOL/TW deal.  He said that AOL/TW might have been better off if the managements of both companies were swept out and the combined company were run by an entirely new management team.   Much like a new administration sweeps out the old every four years in DC.  AOL/TW might have been better off if the board got rid of the incumbent managers on both sides and hired a new set of hands to manage what was a new company.  That's an interesting concept that will no doubt be unpopular.  This segment is worth watching if you have the time.


January 5, 2010 | Permalink | Comments (0) | TrackBack (0)

Prompt Notice and Topping Bids

Generally, directors have a fiduciary duty to consider topping bids.  Try as they might, directors cannot contract around their fiduciary obligations in the merger context.  A recent ruling out of the Delaware Chancery Court (NACCO v Applica) before Christmas reminds us that while you can't contract out of your fiduciary obligations, breaching your contractual obligations can come at a price as well. 

The Merger Agreement Applica signed with NACCO included a relatively standard no-shop as well as a common "information rights" provision that required Applica to bid.  These information rights are extremely common.  Some time ago I  tried counting them up as part of a paper on matching rights in merger agreements.  Turns out that these information rights appeared in more than 98% of transactions in my sample of 331 deals.  If that's not boilerplate, I don't know what is.  Of course, I think Vice Chancellor Strine likes to say, "The reason boilerplate provisions appear in every merger agreement is because they're important!"

Vice Chancellor Laster reminds us that these information rights (or "prompt notice" provisions) still have meaning.  In the NACCO case, there's reason to suspect that Applica was, let's say, somewhat less than prompt in notifying NACCO that Harbinger was interested in putting together a bid.  For its part, Harbinger was apparently a little lazy in updating its 13D to reflect the fact that it had a developed something other than a passive interest in Applica.  While the latter is not a good thing, it's not disabling.  Harbinger after all didn't sign an NDA and/or standstill, so it could do what it wanted.  Applica, on the other hand, was not so free. 

And that's where NACCO provides some lessons for sellers.  NACCO reminds us that if you are going to terminate a merger agreement, you better comply with all its provisions.  If you don't, if you perhaps willfully delay your notice to the buyer about a competing proposal, you might not be able to terminate without breaching.  And, if you breach, your damages will be contract damages and not limited by the termination fee provision.  Remember, you only get the benefit of the termination fee if you terminate in accordance with the terms of the agreement.  Willfully breaching by not providing "prompt notice" potentially leaves a seller exposed for expectancy damages.  Suddenly fiduciary duty feels expensive!

These provisions - even if the notice provisions that seem like boilerplate - have meaning and must be respected, or you may have to pay a price.


Update: K&E has a memo summarizing the NACCO case here.

January 5, 2010 in Litigation | Permalink | Comments (0) | TrackBack (0)

Monday, January 4, 2010

Fairness Hearings and Going Private Transactions

Is it the new year already?

I have posted on the 3(a)(10) fairness hearing process before.  The 3(a)(10) fairness hearing provides a valid exemption for the issuance of stock so that such stock can be freely traded without being registered with the SEC.  In the deal context, buyers will sometime rely on a 3(a)(10) fairness hearing in lieu of an S-4 when they are using stock as consideration and the sellers want that stock to be able to trade immediately.  The advantages of the fairness hearing are chiefly in the price and speed.  When the amount of stock being issued is relatively small and/or parties are looking to avoid a potentially protracted SEC review process, the fairness hearing can be an attractive alternative.  This is particularly true in California, which has more experience than most in conducting fairness hearings.   

Now, comes a situation that raises an eyebrow.  Typically when a controlling shareholder takes a company private, they'll do so by by following the 13e-3 going private rules.  In general these rules require that any (series of ) transaction(s) (merger, tender, etc) where an affiliate purchases the issuer and causes the issuer to go private has to be accomplished under the 13e-3 rules.  Because of the inherent risk of loyalty problems arising from these kinds of transactions, the SEC will give them closer review than normal, including additional disclosures, etc. 

Now comes tiny Regan Holding Corp.  Last month they announced that management will be taking the company private and eliminating outside shareholders.  Just another company turning out the lights in the face of the costs of being public (they estimate approximately $700,000 per year).  It's probably the right move for them.  But here's the thing - rather than do the transaction pursuant to 13-e-3, they are proposing to do a merger with a Legacy Alliance, a privately-held, affiliated company that is controlled by the directors of RHC and formed solely for the purpose of accomplishing the reorganization.  In the merger, Legacy Alliance will issue unregistered stock of the buyer to shareholders of RHC. The exchange ratio assures that the number of shareholders from approximately 3,400 to less than 300.  Presumably after they get to the magic number of 300, they'll file a Form 15 and go dark.  Because the stock is unregistered, Legacy needs an exemption and this is where 3(a)(10) comes in.  

I suspect RHC didn't go the 13e-3 route for the same reason that it decided to go dark - cost.  This is route is a lot simpler, but I suspect this short series of transactions (a reorg eliminating a large number of shareholders followed by the filing of a Form 15) may just be a way to skirt the 13e-3 rules and save some money.   I guess they figure that the examiner at the Department of Corporations who will review this transaction for fairness won't mind these maneuverings.  We'll see.

Happy New Year!


Update:  A reader helpfully pointed out that RHC filed their 13e-3 today and also that they had intended to do this for some time.  Maybe too much egg-nog for me over the holidays?

January 4, 2010 in Going-Privates | Permalink | Comments (0) | TrackBack (0)