April 7, 2010
The Death of a FUN Deal
As predicted by our friend the Deal Professor, Apollo Management’s proposed $2.4 billion leveraged buyout of Cedar Fair, the amusement park operator, has died. This deal and its death are important for two reasons. One, it's yet another confirmation that the LBO market is going to continue to be slow at least in the next year. Second, the deal represents the dangers that boards face in moving forward with M&A transactions. The two sides terminated the deal, with Cedar Fair agreeing to pay Apollo $6.5 million for its expenses, in advance of a scheduled April 8th unitholders meeting since it was clear that the deal would be voted down by Cedar Fair’s unhappy investors. This is a big blow to the Cedar Fair board that just months ago unanimously approved the transaction and even got two fairness opinions (for which they paid $3 million in total) to support their recommendation. Knowing that the company is now in a vulnerable position, in connection with terminating the Apollo deal, the board also adopted a 3 year poison pill with a 20% trigger.
The next few months will likely not be FUN for the Cedar Fair board and management. The company has a heavy debt load which it will need to refinance. In addition, the company’s next scheduled unitholders meeting is on June 7th. The company’s investors, some of whom tried to hold a meeting on the street when the company postponed the initial meeting to vote on the Apollo deal, are really unhappy with the board and management. I expect that there will be a big push to replace at least some of these people. The Cedar Fair board and management should brace themselves for a wild ride in the next few months. I suspect that the Cedar Fair investors are not going to be distracted by all the fun they can have on the company’s two new roller coasters, the Intimidator305, a 305-foot-tall roller coaster at Kings Dominion, and Intimidator, a 232-foot-tall roller coaster at Carowinds.
In the meantime, I look forward to following the fallout from this deal. Busted deals may not be fun for the players, but they do provide some amusement for law profs.
Parliamentary Report on Cadbury Acquisition
The UK Parliament's Committee on Business Innovation and Skills has just released its report on Kraft's acquisition of Cadbury (here). The report criticizes Kraft for what it calls Kraft's "cynical ploy" in promising to keep UK manufacturing facilities during the bidding and then immediately announcing their closure upon completion of the deal. The report also laments the reported role of institutional (or short-term) investors in deciding the outcome of the contested sale and makes a number of recommendations in line with Lord Mandelson's earlier recommendations., These include:
• Raising the voting threshold for securing a change of ownership to two-thirds;
• Lowering the requirement of disclosure of share ownership during a bid from 1% to 0.5% so companies can see who is building stakes on the register;
• Giving bidders less time to “put up or shut up” so that the phoney takeover war ends more quickly and properly evidenced bids must be tabled;
• Requiring bidders to set out publicly how they intend to finance their bids not just on day one, but over the long term, and their plans for the acquired company, including details of how they intend to make cost savings;
• Requiring greater transparency on advisors’ fees and incentives; and
• Requiring all companies making significant bids in this country to put their plans to their own shareholders for scrutiny.
The Takeover Panel's consultation on reform of its rules is expected to be completed on May 21, 2010.
April 5, 2010
Arbitration in Delaware
In the last couple of days there have been a couple of pieces on line (like this one) that suggest that arbitration proceedings in Delaware will be the end of the world for corporate law. I'll admit, my first thought when I saw that Delaware was instituting voluntary arbitration was that perhaps too many litigants would take their disputes private, thus depriving the Delaware courts of the judicial oxygen required to keep the Delaware common law alive. Thinking about it now, I think that fear is over-stated for a couple of important reasons.
First, it's voluntary. Plaintiff cases may derive higher settlement values by staying public - if a director thinks that embarrassing testimony would be presented at trial, he may be more interesting in avoiding a trial. If the process is private, no one will know that you were a bad director, so there may be greater incentive to fight. If I can figure that out, plaintiffs can as well. So there's an incentive for them to resist agreeing to take cases dark.
Second, the arbitration process only involves cases where the claim is one for a monetary remedy. There are precious few of those cases out there. Why? If a plaintiff brings a derivative suit alleging some violation of the duty of care (in the takeover context) and the only claim is for monetary damages, that case will be quickly shown the door (BJR, 102(b)(7), ...). The smart plaintiff attorney simply doesn't bring those cases. Their cases always have some claim for injunctive relief in an attempt to survive a motion to dismiss.
More likely than not, arbitration in Delaware will be limited to commercial disputes and not include many shareholder/corporate law actions. That's my guess. If we are worried about the common law atrophying I'd be more worried about the trend spotted by Armour, Black, and Cheffins noted (see below).