M & A Law Prof Blog

Adams on Drafting M&A Contracts

Ken Adams has new booklet on drafting M&A contracts in the works.  Here's his post describing the project.  It will go online sometime in the next couple of months. I'm sure it will be a worthy addition to your library.  

-bjmq

K&E on Purchase Price Adjustments

As we've noted before, purchase agreements relating to the acquisition of a private target often contain one or more post-closing purchase price adjustments  (for example a working capital adjustment). As this K&E M&A update notes

While the appeal of  purchase price adjustments is indisputable, they are often subject to postclosing disputes. One of the drivers of these disputes is inattention to the details of drafting the adjustment provisions, often exacerbated by the fact that these clauses straddle the realm controlled by the legal practitioners and that managed by the financial and accounting experts.

The update offers a plethora of tips on drafting these provisions properly.

MAW

Michigan's New Anti-takeover Law

I thought we had moved beyond much of this silliness.  I guess I was wrong.  According to the Detroit News, the Michigan legislature is "rushing to pass a bill that would require two-thirds of a Michigan insurance company's shareholders to approve its hostile acquisition by another firm."  

 The bill (Senate Bill 1174) requires that any acquisition of a domestic (Michigan) insurer with less than 200 employees would require the "approval " of at least 66.67% of the shareholders if the proposed transaction is not approved by the board of directors.  Initial query - how is it that shareholders are supposed to "approve" an acquisition agreement that has not been approved by the board?  Unless the new law includes a requirement that board sign merger agreements that they don't approve of, the only way for shareholders to "approve" of a hostile transaction is by tendering their shares.  Oh ... and the bill purports to make it illegal for any person to make a tender offer for the shares of a domestic insurance company if such tender would result in a change of control!  Thanks always for the small things: the House version of this bill sunsets the legislation on May 1, 2012.

My problem with these kinds of efforts, other than them being vanity pieces, is that they are often touted as pro-employment/pro-community laws and supported by both labor and community leaders.  The truth is, though, they are not.  You know - the buyer will lay everyone off and give nothing back to the community - that kind of thing.  For example – here’s a letter to the editor of the Detroit News making just that argument with respect to this bill.  

But nothing in the law requires the board to do anything for labor or the community.  Indeed, I suspect that at the right price the board of a target Michigan firm subject to this law might be happy to do a deal.  But, there is no requirement in the law that the board in doing a transaction seek guarantees of employment for labor or seek commitments from the buyer that it remain in the community.  In effect, all these legislative efforts really do is give managers an additional lever to negotiate a better deal for shareholders.  

If legislators think they are passing these laws to protect local communities and jobs, they should guess again.  America’s Rust Belt is littered with efforts like these. 

 -bjmq

BAC-ML Case Study

Robert Rhee has posted a Case Study of the Bank of America and Merrill Lynch Merger.  It has a nice tick-tock of events and could be a useful teaching tool, bringing together questions of corporate law and ethics.   I'd only quibble with one conclusion he draws that BAC's decision to acquire ML was not informed and thus a violation of the BAC board's duty of care.  While there are issues with respect to the transaction, I don't think a care violation on the part of the BAC board is one of them.  The courts are highly sensitive to facts and circumstances analysis.  The process adopted when the world is in crisis is not going to be the same when directors believe they have all the time in the world.  I doubt that a court would or should go so far as to pin care violation on the BAC board. 

Abstract: This is a case study of the Bank of America and Merrill Lynch merger.  It is based on the article, Fiduciary Exemption for Public Necessity: Shareholder Profit, Public Good, and the Hobson’s Choice during a National Crisis, 17 Geo. Mason L. Rev. 661 (2010). The case study analyzes the controversial events occurring between the merger signing and closing. It reviews in depth the circumstances under the federal government threatened to fire the board and management of Bank of America unless it consummated the Merrill Lynch acquisition. Among other issues, this case study raises the questions: (1) what is the role of a private firm during a public crisis? (2) what are the responsibilities of the board? (3) what is the role of government and how should it treat private firms? This case study can be used in corporate ethics classes in business schools, or business associations classes in law schools.

-bjmq

Summer Reading: Anglo-American Securities Regulation

Martin Wolf at the FT has started a series of columns in which he is thinking about the future of the financial markets.  In his take on the goings-on at Goldman in the wake of the Financial Crisis he made the following observation: 

Financial systems are important servants of the economy, but poor masters. A large part of the activity of the financial sector seems to be a machine to transfer income and wealth from outsiders to insiders, while increasing the fragility of the economy as a whole. Given the extent of the government-induced distortions in the system, even the fiercest free marketeer should accept this. It is hard to see any substantial benefit from the massive leveraging up of the economy and, above all, the real estate sector, that we saw recently. This just created illusory gains on the way up and real pain on the way down.

All true.  But hasn't Wall Street been an insiders v. outsiders game for as long as it's been around? I'm sure Wolf would agree.  Indeed, populist anger at the insiders for fleecing a naive public isn't a new phenomena at all.  Take for example the South Seath Bubble of the 18th century.  Jonathan Swift's poem, The South Sea Project, about sums it up.

But, I affirm, 'tis false in fact,
   Directors better knew their tools;
 We see the nation's credit crack'd,
   Each knave has made a thousand fools.

One fool may from another win,
   And then get off with money stored;
 But, if a sharper once comes in,
   He throws it all, and sweeps the board.

As fishes on each other prey,
   The great ones swallowing up the small,
 So fares it in the Southern Sea;
    The whale directors eat up all. ...

While some build castles in the air,
   Directors build them in the seas;
 Subscribers plainly see them there,
   For fools will see as wise men please. ...

Directors, thrown into the sea,
   Recover strength and vigour there;
But may be tamed another way,
   Suspended for a while in air.

One of the books on my summer reading list is Anglo-American Securities Regulation: Cultural and Political Roots, 1690-1860 by Stuart Banner.  A colleague of mine noticing that I had the book with me remarked that it’s funny how these books get published, move on into obscurity and then following a series of fortuitous events get pushed out in paperback.  Well, I’m glad the publishers decided to put it out in paper back.  So far (I’m just a third in), Banner’s book is a wonderful description of the tensions between insiders and outsiders in early securities markets. 

It seems that “sharpers” have been taking advantage of gullible and optimistic “investors” for as long as people have been trading securities.  Notwithstanding the shocking nature of recent revelations, there isn’t much new in what is now coming out in the papers.  If you read the fine print on page 8 of the boilerplate section of Goldman’s ABACUS flip-book, it says quite clearly that Goldman is not in a fiduciary relationship with its “client”.  Indeed, that same section says:

Goldman is currently and may be from time to time in the future active on both sides of the market and have long or short positions in [the securities that are subject of this offer].  Goldman Sachs may have conflicts of interest due to present or future relationships between Goldman Sachs and any Collateral, the Issuer thereof, any Reference Entity, or any obligation of any Reference Entity.

You’re on your own is the message.  Same as it ever was, I suppose.  

-bjmq

"Big Short": The Musical 

Bet Against the American Dream from Alexander Hotz on Vimeo.