M & A Law Prof Blog

Editor: Brian JM Quinn
Boston College Law School

Friday, June 17, 2011

3M runs afoul of earnout

UK-based Acolyte was sold to 3M in 2007 for consideration that included up to £41m in earnout payments.  Acolyte has been developing a diagnostic test for the MSRA superbug.  Investors in Acolyte have recently brought suit against 3M for failing to live up to its obligations under the earnout agreement.  From the FT

Written arguments submitted to the High Court by the MoD and Porton state that the sale agreement included 3M making “earn-out payments” of up to £41m dependent on the net sales of Acolyte’s products achieved by 3M in 2009. However, no net sales were achieved in 2009 and no pay-out was made. 3M later made an offer of an earn-out payment of $1.07m.

The government and Porton claim that 3M’s marketing efforts in the UK and Europe “fell well short” of what was required by the sale agreement and that 3M never marketed BacLite at all in the US, Canada or Australia “despite an obvious hunger for the product in those countries ...

3M said in a statement on its website that it discontinued marketing BacLite because, after diligent efforts and spending substantial resources, the company believed the product did not meet performance and customer expectations.

These "reasonable efforts", "commerically best efforts" cases are relatively common in the context of earnout agreements - anyone remember Bloor v Falstaff or Comet Systems v Miva from law school?  


(H/T: The Middle Market)

June 17, 2011 | Permalink | Comments (0) | TrackBack (0)

Thursday, June 16, 2011

Are fairness opinions useful?

Matt Cain and David Denis have a new paper, Information Produciton by Investment Banks: Evidence from Fairness Opinions.  The result is a little counter-intuitive for the cynical among us who might view the value of a fairness opinion with some suspicion.
Abstract:  We analyze a direct product of the investment banking process: target firm valuations disclosed in the fairness opinions of negotiated mergers. On average, acquirer advisors exhibit a greater degree of positive valuation bias than do target advisors. Top-tier advisors produce more accurate valuations than lower-tier advisors, but valuation accuracy is unrelated to the contingency structure of advisory fees. The stock price reactions to merger announcements and to the public disclosure of fairness opinions are positively related to the difference between target firm valuations contained in the fairness opinion and the merger offer price. We conclude that investment banks produce information not previously available to market participants through the rendering of fairness opinions.

June 16, 2011 | Permalink | Comments (0) | TrackBack (0)

AALS Section on Transactional Law and Skills: Call for Proposals

The AALS Section on Transactional Law and Skills will hold its inaugural section meeting during the AALS Annual Meeting in Washington, D.C., on Saturday, January 7, 2012 from 3:30-5:15 pm. The topic for the session is “Transactional Law Teaching and Scholarship: Moving Forward.” The Section invites submissions of proposals relating to teaching or scholarship on any aspect of transactional lawyering. Please submit proposals of no longer than two double-spaced pages by August 15, 2011 to:

Eric J. Gouvin
Western New England University School of Law
1215 Wilbraham Road
Springfield MA  01119

Proposals will be reviewed by officers and executive committee members of the Section:


  • Chair: Tina L. Stark, Emory University School of Law (through 6/30/11); Boston University School of Law (beginning 7/1/11)
  • Chair-elect: Joan MacLeod Heminway, The University of Tennessee College of Law
  • Secretary: Eric J. Gouvin, Western New England University School of Law
  • Treasurer: Afra Afsharipour, University of California, Davis, School of Law

Executive Committee

  • Lyman P.Q. Johnson: Washington and Lee University School of Law and University of St. Thomas (Minneapolis) School of Law
  • Therese H. Maynard: Loyola Law School Los Angeles
  • D. Gordon Smith: Brigham Young University Law School

Please forward this Call for Proposals to any colleagues who may be interested.


June 16, 2011 in Conference Announcements | Permalink | Comments (0) | TrackBack (0)

Wednesday, June 15, 2011

Don't cry for the shareholders

David Marcus of The Deal discusses an important footnote in Vice Chancellor Strine's opinion in the recent Massey derivative litigation.  

During oral argument, I pointed out that Strine referred to Massey shareholders as the least sympathetic victims in response to plaintiff's arguments that the board should be held accountable for the blatant violations of miner health and safety laws at the Upper Big Branch Mine.  In the written opinion, Vice Chancellor Strine expands on that view in footnote 185.  Given the immediate reaction from plaintiff's counsel to the opinion, it's worth reading and remembering who are the real victims and who benefited from the acts of management:

Footnote 185  The plaintiffs point out that one consequence of the loss of confidence the stock market had in Massey management in the wake of the Upper Big Branch Disaster was a decline in the company’s trading multiple.  The plaintiffs argue, with a rational basis, that Massey now trades at a discount to its fundamental earnings potential in comparison to other industry competitors because those competitors are judged to have a more sound approach to operating a coal company in a durably safe and profitable manner than Massey does.  PX-94 at 8. 

But although this may in fact be a market reality, it seems to me doubtful that this translates into a basis for a future damage award in a derivative case.  An entertainment restaurant corporation whose non-executive Chairman is Warren Buffett and whose CEO is Jimmy Buffett might well trade at a higher multiple than its competitors because the market perceives it to be run by financial geniuses who are better than most.  Its rivals may trade at lower multiples because they have more ordinary management or even because some have management that is perceived to be poor in quality.  Such deviations would not ordinarily provide the basis for any imposition of fiduciary liability.

In a derivative suit, there is no doubt that Massey fiduciaries could face large liability claims.  For example, it is plausible for Massey to seek to hold managers culpable if their nonexculpated breaches of fiduciary duty proximately caused the Upper Big Branch Disaster.  Such proof could subject them to hundreds of millions of dollars in liability for items such as lost mining profits and the cost of settlements and fines.  PX-32 at 8; PX-94 at 14.  But the notion that a derivative judgment could be premised on the delta between Massey’s trading multiple under the former fiduciaries and what it would be under non-breaching fiduciaries is not immediately plausible.  There are numerous problems with such an adventurous approach, not the least of which is that the only damages that could be awarded would be based on an estimate of the extent to which the defendants’ non-exculpated breaches affected the multiple, not the extent to which the market’s overall assessment of their competence diminished the multiple.  That is, to the extent that the market simply viewed the Massey management as grossly negligent or incompetent that would provide no basis for an award, and it would be incredibly difficult to figure out what portion of the delta was attributable to what factors.  Not only that, to the extent that the delta was attributable to other more traditional subjects of a damages award, such as lost profits from the Upper Big Branch mine or fines or settlement costs, that would have to be accounted for in order to avoid double counting.  Given these factors, I am not convinced that an award of this type could be based on anything other than speculation.

This brings up another mundane, but important reality.  The stockholders of Massey had an annual opportunity to elect directors.  If the plaintiffs’ rendition is correct — and it has plausibility — it was publicly and widely known that Massey took an adversarial approach to its relation to its regulators and had suffered adverse legal judgments and excessive miner injuries for years.  The plaintiffs, as investors, continued to invest in a company they say was well known to treat its workers and the environment poorly and that viewed laws as something to avoid, rather than to comply with in good faith. 

The primary protection for stockholders against incompetent management is selecting new directors.  It may well be that the corporate law does not make stockholders whole in situations like this when it is alleged that corporate managers skirted laws protecting other constituencies in order to generate higher profits for the stockholders.  If that be so, it should be no surprise as any human approach to justice will always fall short of the ideal.  It also may be that if stockholders come out a bit worse, then justice is in fact done.  Remember that to the extent that Massey kept costs lower and exposed miners and the environment to excess dangers, Massey’s stockholders enjoyed the short-term benefits in the form of higher profits.  The very reason for laws protecting other constituencies is that those who own businesses stand to gain more if they can keep the operation’s profits and externalize the costs.  Thus, the stockholders of corporations, especially given the short-term nature of holding periods that now predominate in our markets, have poor incentives to monitor corporate compliance with laws protecting society as a whole and may well put strong pressures on corporate management to produce immediate profits.  William W. Bratton, Enron and the Dark Side of Shareholder Value, 76 TUL. L. REV. 275, 1284 (2002) (“For equity investors in recent years, the practice of shareholder value maximization has not meant patient investment. Instead, it has meant obsession with short-term performance numbers.”).  Stockholder pressure to produce profits might increase the already well-known risk that profit-seeking entities have incentives to take the profits of their operations for themselves and externalize the risk of operations to others, be it to their workers or society as a whole in the form of environmental degradation.  

This is not to say that our law does not permit Massey to recoup its proven lost profits and injury if it can link them to non-exculpated breaches of fiduciary duty by its directors and officers.  It does.  Wood v. Baum, 953 A.2d 136, 141 (Del. 2008) (citing Stone ex rel. AmSouth Bancorporation v. Ritter, 911 A.2d 362, 367 (Del. 2006); Malpiede v. Townson, 780 A.2d 1075 (Del. 2001); Guttman v. Huang, 823 A.2d 492, 501 (Del. Ch. 2003)).  But it is to say that to the extent that there is some residual damage to the corporation in a situation like this when the pursuit of profit for stockholders resulted in damage to other constituencies that is not capable of remediation, that might be thought to act as a useful goad to stockholders to give more weight to legal compliance and risk management in making investment decisions and in monitoring corporate performance.  In the end, the most sympathetic victims here were not stockholders, they were Massey’s workers and their families, who suffered injuries and lost lives and loved ones, and the communities who have suffered because of environmental degradation due to of the company’s failure to meet its legal responsibilities.

Don't cry for the shareholders.  Here are the real victims.



June 15, 2011 | Permalink | Comments (0) | TrackBack (0)

Tuesday, June 14, 2011

Jerry Levin comments on AOL/HuffPost merger

He sees the "delicious irony" of the deal ...


June 14, 2011 | Permalink | Comments (0) | TrackBack (0)

AALS Section on Transactional Law and Skills

As Gordon Smith announced yesterday, under the leadership of Tina Stark, who will be heading the Transactional Law Program at Boston University, an ad hoc committee of transactional lawyering professors proposed a new section on transactional law and skills to the Association of American Law Schools. The AALS has approved the new section, and we will have our first section meeting at the annual meeting in Washington D.C. on Saturday, January 7, 2012 from 3:30-5:15 pm.


Chair: Tina L. Stark, Boston University School of Law
Chair-elect: Joan MacLeod Heminway, The University of Tennessee College of Law
Secretary: Eric J. Gouvin, Western New England University School of Law
Treasurer: Afra Afsharipour, University of California, Davis, School of Law

Executive Committee

Lyman P.Q. Johnson: Washington and Lee University School of Law
Therese H. Maynard: Loyola Law School Los Angeles
D. Gordon Smith: Brigham Young University Law School

More information about the annual meeting program will be forthcoming soon.

I think that the formation of this new section offers exciting opportunities for those of us who study transactional lawyering.


June 14, 2011 in Conference Announcements, Transactions | Permalink | Comments (0) | TrackBack (0)

Wendy's sells Arbys division

Wendy's announced the sale of 80% of its Arbys division yesterday for $180 million plus the assumption of $190 million in debt.   Here's the Purchase and Sale Agreement.  The transaction isn't structured as a merger, rather it's a stock purchase.  Wendy’s/Arby’s Restaurants, LLC owns 100% of the shares of Arby’s Restaurant Group, Inc.  It will sell 80% of those shares to Roark, a private equity buyer that is active in the restaurant space. 

A couple of things about the agreement.  First, there's a carve out for the Arby's Santa Monica location (pictured below).   It's must be a good location, because Wendy's doesn't want to let it go:

Section 5.20.         Santa Monica Restaurant.  For a period of twelve (12) months following the Closing Date, Seller and its Affiliates shall have the right to negotiate the terms of a new or renewed lease or an assignment and amendment to the existing lease with the landlord for the Santa Monica Restaurant relating to, and seek all required zoning and other approvals, licenses, authorizations and permits and take all other reasonably necessary or advisable actions for, the conversion of the Santa Monica Restaurant from an “Arby’s” branded restaurant to a “Wendy’s” branded restaurant (the “Conversion”), and Buyer shall, and shall cause its Affiliates (including the Company Group) to, cooperate reasonably with Seller and its Affiliates in connection therewith.  If, during the period of twelve (12) months following the Closing Date, Seller or any of its Affiliates (a) enters into an agreement or reaches an agreement in principle with the Santa Monica landlord for the Conversion and (b) obtains all required zoning and other approvals, licenses, authorizations and permits for the Conversion (as reasonably determined by Seller), then Buyer shall, and shall cause its Affiliates to, as promptly as practicable (and in any event within thirty (30) days) following receipt of a written demand therefor from Seller, without any consideration to be paid by Seller or any of its Affiliates to Buyer or any of its Affiliates (including the Company Group), (x) cease operating the Santa Monica Restaurant as an “Arby’s” branded restaurant and (y) transfer or cause to be transferred to Seller or its designated Affiliate (i) all of the interests to the Santa Monica Restaurant of Buyer and its Affiliates, free and clear of any Liens, and (ii) the note payable set forth under Section 3.7(b) of the Seller Disclosure Letter with the RTM number of 4100440.  Until the earlier of (1) the date on which Buyer and its Affiliates cease to operate the Santa Monica Restaurant as an “Arby’s” branded restaurant pursuant to this Section 5.20 and (2) the date that is twelve (12) months following the Closing Date, Buyer shall, and shall cause its Affiliates (including the Company Group) to, use commercially reasonable efforts to operate the Santa Monica Restaurant in the ordinary course consistent with practices existing as of immediately prior to the Closing. Notwithstanding anything in this Agreement to the contrary, Seller shall bear all costs and expenses related to, or arising out of, the Conversion and the other transactions contemplated by this Section 5.20.


Another thing worth keeping in mind - this is a division sale.  It's not a cash-out sale where Revlon duties apply.  That's probably one reason why there is no fiduciary termination right in the sale agreement.  Presumably, one could make Omnicare-like arguments that directors are required to include effective fiduciary outs in material corporate transactions, but there is a gray area -- where is the line between a merger or sale that doesn't implicate Revlon and where an effective fiduciary out is required and a division sale where one expects boards to receive the deference of business judgement?  It's there somewhere, but where exactly?

Now, Wendy's didn't sell off all of Arbys.  It hung onto 20%.  Over at the Deal Journal, they call this move "schmuck insurance".  Well, it worked for eBay. 




June 14, 2011 | Permalink | Comments (0) | TrackBack (0)