M & A Law Prof Blog

Is it over, yet?

CF Industries announced last night that it was dropping its bid for Terra Industries. Although this is a de-escalation in the fight amongst CF, Terra, and Agrium.  It's not over yet in the "forever war" though.  Agrium's $5.36 billion hostile bid for CF Industries is still on the table. It's not obvious after dropping their bid for Terra that CF is simply going to roll over for Agrium.  It still calls the Agrium offer "less than compelling".  Agrium for its part is gearing up for an old fashioned proxy fight.  It has nominated two candidates for the board of CF Industries and is calling on CF Industries shareholders to force the board to redeem its poison pill.  Wonder if we have any popcorn left?  

-bjmq

More on NACCO Industries from Davis Polk

Brian recently posted about the NACCO Industries case (here), As he reminds us:

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.

Davis Polk has just issued this client alert, drawing a few more lessons from the case.  Here's a sample:

A recent Delaware Chancery Court decision raises the stakes for faulty compliance with Section 13(d) filings, holding that a jilted merger partner in a deal-jump situation may proceed with a common law fraud claim for damages against the topping bidder based on its misleading Schedule 13D disclosures.  NACCO Industries, Inc. v. Applica Inc., No. 2541-VCL (Del. Ch. Dec 22, 2009).  The decision, which holds that NACCO Industries may proceed with numerous claims arising out of its failed 2006 merger with Applica Incorporated, also serves as a cautionary reminder to both buyers and sellers that failure to comply with a "no-shop" provision in a merger agreement not only exposes the target to damages for breach of contract, but in certain circumstances can also open the topping bidder to claims of tortious interference.

MAW

Industry Links in Merger Waves

Ahern and Harford have a new paper, The Importance of Industry Links in Merger Waves, that uses a network approach to understand merger waves.  It seems to be true that industry links were important component of the first great merger wave (late 19th century) and since the early 1990s.  On the other hand, it's less obviously true of the merger wave of the 1920s (stock market bubble), the 1960s (conglomerate era), and the 1980s (de-conglomerate era).  

Abstract: Prior research finds that economic shocks lead to merger waves within an industry. However, industries do not exist in isolation. In this paper, we argue that both intra- and inter-industry merger waves are driven by customer-supplier relations between industries. To test our theory, we construct an industry network using techniques from the social-networking literature, where inter-industry connections are determined by the strength of supplier and customer relations. First, we find that the strength of industry network ties strongly predicts inter-industry merger activity in the cross-section. Second, we show that merger waves propagate across the industry network over time: high levels of merger activity in an industry lead to subsequently higher levels of activity in connected industries. By using a network approach, we provide new insight into understanding why mergers occur in waves.

-bjmq

SEC-BAC

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.  

-bjmq

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.    

-bjmq

  

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-Busch, Coca-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.

-bjmq