March 2, 2012
I Bankers cover themselves in glory
One wonders why investment bankers get a bad rep? Well, they certainly didn't cover themselves in glory in the El Paso transaction. This from the El Paso opinion describing the fee arrangements - including the fee to pay Morgan Stanley, who was hired to balance Goldman's structural bias in favor of doing a transaction with Kinder Morgan:
Even worse, Goldman tainted the cleansing effect of Morgan Stanley. Goldman clung to its previously obtained contract to make it the exclusive advisor on the spin-off and which promised Goldman $25 million in fees if the spin-off was completed. Despite the reality that Morgan Stanley was retained to address Goldman’s bias toward a suboptimally priced deal with Kinder Morgan and thus Morgan Stanley’s work in evaluating whether the spin-off was a more valuable option was critical to its integrity enforcing role, Goldman refused to concede that Morgan Stanley should be paid anything if the spin-off, rather than the Merger, was consummated. Goldman’s friends in El Paso management – and that is what they seem to have been – easily gave in to Goldman. [..] This resulted in an incentive structure like this for Morgan Stanley:
- Approve deal with Kinder Morgan (the entity of which Goldman owned 19%) – get $35 million; or
- Counsel the Board to go with the spin-off or to pursue another option – get zilch, nada, zero.
This makes more questionable some of the tactical advice given by Morgan Stanley and some of its valuation advice, which can be viewed as stretching to make Kinder Morgan’s offers more favorable than other available options. Then, despite saying that it did not advise on the Merger – a claim that the record does not bear out in large measure – Goldman asked for a $20 million fee for its work on the Merger. Of course, by the same logic it used to shut out Morgan Stanley from receiving any fee for the spin-off, Goldman should have been foreclosed from getting fees for working on the Merger when it supposedly was walled off from advising on that deal. But, Goldman’s affectionate clients, more wed to Goldman than to logical consistency, quickly assented to this demand.
Here's the El Paso opinion. Of course, it wasn't just them. El Paso CEO Foshee doesn't come across as someone you'd trust to hold your wallet, either. Anyway, where might this go from here? That's a good question. As Strine notes, Foshee and Goldman's actions in connection with this sale still make out a reasonably good claim for a loyalty violation:
At a time when Foshee’s and the Board’s duty was to squeeze the last drop of the lemon out for El Paso’s stockholders, Foshee had a motive to keep juice in the lemon that he could use to make a financial Collins for himself and his fellow managers interested inpursuing an MBO of the E&P business. The defendants defend this by calling Foshee’sactions and motivations immaterial and frivolous. It may turn out after trial that Foshee is the type of person who entertains and thendismisses multi-billion dollar transactions at whim. Perhaps his interest in an MBO was really more of a passing fancy, a casual thought that he could have mentioned to Kinderover canapés and forgotten about the next day.
It could be.
Or it could be that Foshee is a very smart man, and very financially savvy. He did not tell anyone but his management confreres that he was contemplating an MBO because he knew that would have posed all kinds of questions about the negotiations with Kinder Morgan and how they were to be conducted. Thus, he decided to keep quiet about it and approach his negotiating counterpart Rich Kinder late in the process – after the basic deal terms were set – to maximize the chance that Kinder would be receptive.
Hmm. So there may be a case against Foshee, but the court recognized that monetary damages against Foshee may be an imperfect remedy - damages might be upwards of $500 million and Foshee, as well off as he might be, simply isn't worth that much. Also, aiding and abetting against Goldman is tough to prove. So what to do? Absent a competing offer on the table, Strine opted to let shareholders - who one presumes are autonomous and smart enough to determine what's in their best interests - decide for themselves whether they want to accept this tainted premium offer.
It's an imperfect result, but it may be all that's possible.
March 1, 2012
El Paso going forward
Yesterday Chancellor Leo Strine "reluctantly" declined to issue an injunction to prevent a vote of El Paso's shareholders on proposed merger with Kinder Morgan. Goldman Sachs owns 19% of Kinder Morgan, and Goldman Sachs was El Paso's financial advisor on the transaction. In any normal world, that would raise loyalty concerns and trigger an entire fairness review. Here, not so much:
“I reluctantly deny the plaintiffs’ motion for a preliminary injunction, concluding that the El Paso stockholders should not be deprived of the chance to decide for themselves about the merger, despite the disturbing nature of some of the behavior leading to its terms[.]”
How conflicted is Goldman in this transaction? Well, the lower the buyout price, the higher the relative return for Goldman as a Kinder Morgan investor. That's pretty conflicted, especially if El Paso was relying on Goldman to play a central role in negotiating a price and issue a fairness opinion. In any event, Goldman held the position that it was transparent with everyone, recusing themselves from board discussions and disclosing their interests. El Paso also hired a second financial advisor to double source the advice it was getting.
Given that all the information about Goldman's conflict has been disclosed to shareholders in advance of the vote and that shareholders are still capable of saying no, Strine is letting it go to them. Anyone familiar with the Delaware code will remember that under Section 144, a fully informed stockholder vote can cleanse a transaction where there are director conflicts. Strine is allowing the deal to move forward on the basis that a fully informed shareholder vote may be capable of cleansing the Goldman conflict in this deal.
As an aside, The American Lawyer has a lengthy piece on the Chancery Court under Chancellor Strine. It's a good read.
February 29, 2012
Martin Marietta and Vulcan in Delaware
Steven Davidoff previously did a very good overview of the issues facing Martin Marietta. I just want to add something to the discussion of the current legal battle in Delaware. Wait a minute ... what's a Maryland company seeking to take over a New Jersey company doing in a Delaware court? Martin Marietta and Vulcan are now before Chancellor Strine in Delaware arguing interpretation of a nondisclosure agreement. Martin Marietta is seeking a declaratory judgment from the Chancery Court that the NDA does not preclude them from undertaking a hostile tender offer for Vulcan. Here are the complaint, the answer, as well as the NDA in question.
Central to the Martin Marietta's argument is that the NDA does not include a standstill agreement. Had the parties, Martin Marietta argues, wanted to ensure that Martin Marietta be precluded from undertaking such a transaction in the event friendly talks fell through, they could have included the provision in the NDA, but they didn't. Martin Marietta is asking the court to give it a declaratory judgment that the NDA does not preclude them from pursing a hostile offer.
On the other hand, Vulcan claims that the confidential information handed over as part of the NDA can only be used in furtherance of the friendly transaction that the parties were contemplating when they signed the agreement. By going hostile, and presumably relying on some of the confidential information and disclosing the earlier talks, Vulcan argues that Martin Marietta is in violation of the NDA. Vulcan is looking for an injunction from the Chancellor to prevent the tender offer from going forward.
Here's the critical paragraph from the NDA:
First, Mets and Yankees? And no one thinks this deal could possibly ever go hostile? Why not call it Yankees and Red Sox? C'mon! Ok, there is no question that this NDA does not include a standstill provision of any sort. It just doesn't. Now the lawyers who negotiated the NDA know how to write standstill provisions. I'd dare say that standstill provisions are probably in their NDA form contracts. For whatever reason, they decided not to include a standstill in this agreement. Why? Who knows. It really doesn't matter, does it?
Now, look at the definition of "Transaction". Vulcan is arguing that they were negotiating a friendly deal and that any use of Vulcan's confidential information for any purpose other than the friendly deal is in violation of the NDA. The NDA defines "Transaction" as "a possible business combination transaction" between Martin Marietta and Vulcan. It doesn't read a friendly merger, a negotiated transction, or the like...just a business combination. I suppose a business combination transaction can be hostile as a well as friendly. The definition of the Transaction in the NDA certainly doesn't make it obvious that the NDA was meant to only cover a friendly, negotiated transaction and no other.
Anyway, Vulcan is asking for Chancellor Strine to read the minds of the parties rather than enforce what the parties have written on paper. It seems like hard argument for Vulcan to win.
Update: Yes, I am aware that I passed on an opportunity to offer up the "Strine engaging in a Vulcan mind meld to figure out the intent of the parties" pun. I'll let him do that in his opinion...
February 28, 2012
Kenneth Cole to go private
The experience with the J Crew going private last year was almost enough to turned me off altogether. It was, to put it mildly, not well done. Last week, Kenneth Cole announced that he intends to take his eponymous company private. In his letter to the board of Kenneth Cole Productions, Mr. Cole gave some suggestions to the board about how to approach thinking about his offer. And, wouldn't you guess, it's almost textbook:
I expect that you will establish a special committee of independent directors to consider this proposal on behalf of the Company’s public stockholders and to make a recommendation to the full Board of Directors. I also expect that the special committee will retain its own independent legal and financial advisors to assist in its review of the proposed transaction. I will not move forward with the transaction unless it is approved by the special committee. Given my extensive history and knowledge of the Company, I am prepared to negotiate a merger agreement with the special committee and its advisors and complete the transaction in an expedited manner. The merger agreement will provide that the transaction will be subject to a non-waivable condition requiring the approval of a majority of the shares of the Company that are not directly or indirectly owned by me.
Well, alright then. That's a nice start to a deal - touching all the right bases to set up a clean transaction. But, what's motivating this tranasction right now? I mean, Mr. Cole controls 89% of the voting shares of KCP. He can basically do what he wishes with the business without too much real interference from minority shareholders. Why take the company private now just as the equity markets are recovering? In the letter to the board, he lays out his stated reasons for the deal:
The proposed transaction will ensure the Company has the flexibility and structure to successfully navigate our market environment in the years to come. Recent market challenges have created a sharply competitive landscape, and I believe it is now more important than ever to embrace a more entrepreneurial perspective where we are all incentivized to grow and develop our Company’s products, brand and business with a longer term perspective. I believe it is increasingly difficult to develop this type of culture in a public company context, where the public markets are increasingly focused on short-term results. I am convinced that private ownership is in the best interests of the business and the organization and that this proposal is in the best interests of the shareholders.
... because I can. I guess that explains the $15 lowball opening offer...