Friday, May 31, 2013
I received a couple of emails from readers who enjoyed the previous youtube clip of highlighting issues related to sandbagging (Like the cat that ate the canary) in merger agreements. Now, here's another one - consider it free/fun CLE (especially you summer associates!) in which Rick Climan and Keith Flaum walk us through unexpected issues in indemnification provisions.
More specifically, the topic for this clip is the question of whether there should be indemnification for any direct or indirect damages that relate from any direct or indirect breach of any representation or warranty. Hmmm. Word to the wise associate - don't fall for it. Why? Here's the Rube Goldberg hypothetical to explain why:
Thursday, May 30, 2013
NetSpend: Interesting Insights on Revlon Process, “Don’t Ask, Don’t Waive” Standstills & Fairness Opinions
The Delaware Chancery court's recent decision in Koehler v. NetSpend Holdings Inc. is worth a read for deal planners. Vice Chancellor Glasscock criticized the board's Revlon process, stating:
The Plaintiff has demonstrated that a reasonable likelihood exists that the sales process undertaken by the NetSpend Board—which included lack of a pre-agreement market canvass, negotiation with a single potential purchaser, reliance on a weak fairness opinion, agreement to forgo a post-agreement market check, and agreement to deal protection devices including, most significantly, a don’t-ask-don’t-waive provision—was not designed to produce the best price for the stockholders.
Nevertheless, in line with other recent Delaware decisions where the courts have been reluctant to enjoin a deal when there are no other potential bidders, the court denied plaintiff's motion to enjoin the deal. Still, Vice Chancellor Glassock's criticism of the fairness opinion provided by the company's financial advisor and the board's use of a DADW provision should give sellers some guidance for future deals.
For more info, take a look at this memorandum by Sullivan & Cromwell.
File this one under miscellaneous regulatory approval. It's likely that the Smithfield acquisition by Shuanghui International is going to get pretty intensive review by a Congress. No big surprise there. Congress has regularly used large Chinese acquisitions to make political hay. This one, though, is a little different. What's the hook? National security - "Gawd, they're taking our ham!" Seems like weak tea. Heidi Moore suggests a different national security hook - concern that the lack of effective food standards at the Chinese parent could bleed down into Smithfield and adversely affect the US food supply. That's interesting and might be compelling, but we'll see how it plays out. Hey, maybe the result will be to increase the FDA's budget. OK, probably not...
Chancellor Strine broke some new ground with respect to the question of what is the approrpriate standard of review in a going provate transaction with a controller. This issue has been percolating around for for some years and has gone unresolved (In re Cox, In re CNX Gas Corp., among others). In an opinion just handed down in MFW Shareholders Litigation Strine explains why the Supreme Court's Kahn v Lynch jurisprudence with respect to standards of review in going private transactions with controllers is deficient:
The question of what standard of review should apply to a going private merger conditioned upfront by the controlling stockholder on approval by both a properly empowered, independent committee and an informed, uncoerced majority of the minority vote has been a subject of debate for decades now. For various reasons, the question has never been put directly to this court or, more important, to our Supreme Court.
This is in part due to uncertainty arising from a question that has been answered. Almost twenty years ago, in Kahn v. Lynch, our Supreme Court held that the approval by either a special committee or the majority of the noncontrolling stockholders of a merger with a buying controlling stockholder would shift the burden of proof under the entire fairness standard from the defendant to the plaintiff. …
Uncertainty about the answer to a question that had not been put to our Supreme Court thus left controllers with an incentive system all of us who were adolescents (or are now parents or grandparents of adolescents) can understand. Assume you have a teenager with math and English assignments due Monday morning. If you tell the teenager that she can go to the movies Saturday night if she completes her math or English homework Saturday morning, she is unlikely to do both assignments Saturday morning. She is likely to do only that which is necessary to get to go to the movies (i.e. complete one of the assignments) leaving her parents and siblings to endure her stressful last minute scramble to finish the other Sunday night.
For controlling stockholders who knew that they would get a burden shift if they did one of the procedural protections, but who did not know if they would get any additional benefit for taking the certain business risk of assenting to an additional and potent procedural protection for the minority stockholders, the incentive to use both procedural devices and thus replicate the key elements of the arm’s length merger process was therefore minimal to downright discouraging.
In MFW, the board conditioned the transaction on approval by a special committee and approval of a majority of the minority. The question for the court was whether by using both protective devices under these facts, does a board get the additional protection of business judgment review rather than simply a shifting of hte burden under entire fairness review. Granting BJR with additional protective devices would go some way to resolving the "homework" incentives described by Strine.
Strine provides the following guidance for transaction planners:
When a controlling stockholder merger has, from the time of the controller’s first overture, been subject to:
(i) negotiation and approval by a special committee of
independent directors fully empowered to say no, and
(ii) approval by an uncoerced, fully informed vote of a majority of the minority investors,
the business judgment rule standard of review applies.
This result makes sense. If transaction planners are able to replicate in form and substance an arm's length transaction, then they should get the benefit of BJR. To the extent minority shareholders are guaranteed through these procedural protections the right to a fully informed and uncoerced vote, then worries about controllers abusing their position to take companies private at the expense of minority shareholders should be mitigated. Now, we'll see if the Supreme Court decides to jump in and take a side on this question.