October 27, 2011
Kodak - you have been warned
Apparently a group of creditors sent a letter to the Eastman Kodak board to remind them that they are required to get "fair value" for any assets they might sell, including the Kodak patent portfolio. In a sale of substantially all the assets of a firm its necessary for a board to ensure that it receives "reasonably equivalent value" for the assets sold. This is, in part, to prevent sellers from using the asset sale as a fraudulent conveyance. The fear from creditors of Kodak is that Kodak might sell its patent portfolio and then file for bankruptcy protection, leaving creditors to take a hit. The creditors are looking to put maximum pressure on Kodak's board before a sale to try to incentivize the Kodak board to get the highest price possible for those assets.
September 21, 2011
Aggregation and Step-Transaction Doctrines in Asset Sales
Thanks to our friends at CourtroomView I was able to watch the argument last week's arguments before the Delaware Supreme Court in the BNY Mellon v Liberty Media litigation. There weren't many fireworks in the courtroom, but isn't that the way appellate litigation usually is? In any event, the Court just handed down its opinion in the matter affirming the lower court's decision that the spin-offs did not constitute a sale of substantially all the assets.
The issue before the court was whether the series of spin-off transactions undertaken by Liberty Media beginning in 2004 constituted a "series of transactions" for the purposes of determining whether the violated a covenant not to sell substantially all the assets of the corporation. The opinion provides a nice overview of the relevant doctrine that applies to questions of to think about a series of transactions and asset sales.
Applying NY law, the court agreed with the Chancery Court's application of the "aggregation doctrine":
... where asset transactions are not piecemeal components of an otherwise integrated, pre-established plan to liquidate or dispose of nearly all assets, and where each such transaction stands on its own merits without reference to another, courts have declined to aggregate for purposes of a “substantially all” analysis.
Each of Liberty's spin-offs over the years was a transaction that stood on its own merits without reference to any of the previous spin-offs. Thus, the aggregation doctrine counsels that the spin-offs would not constitute a sale of substantially all the assets.
The Chancery Court applied an additional doctrine, the step transaction doctrine to the determination of whether the spin-offs constituted a sale of substantially all the assets. The Supreme Court described the doctrine in the following way:
The Court of Chancery analyzed the facts under the “step-transaction” doctrine, which treats the “steps” in a series of formally separate but related transactions involving the transfer of property as a single transaction, if all the steps are substantially linked. Rather than viewing each step as an isolated incident, the steps are viewed together as components of an overall plan
The step-transaction doctrine applies if the component transactions meet one of three tests. First, under the “end result test,” the doctrine will be invoked “if it appears that a series of separate transactions were prearranged parts of what was a single transaction, cast from the outset to achieve the ultimate result.” Second, under the “interdependence test,” separate transactions will be treated as one if “the steps are so interdependent that the legal relations created by one transaction would have been fruitless without a completion of the series.” The third and “most restrictive alternative is the binding-commitment test under which a series of transactions are combined only if, at the time the first step is entered into, there was a binding commitment to undertake the later steps.”
Though the Supreme Court felt application of the step transaction doctrine wasn't necessary, it's clear that under this test, when Liberty Media adopted a general business strategy of spinning out assets as the opportunity arose that it was not triggering a sale of substantially all the assets under the step transaction doctrine.
Here's Download BNY v Liberty Media.
June 27, 2011
Kelley & Ervine on anti-Sandbagging
When negotiating an acquisition agreement, it often appears that the other side is negotiationg language without any real knowledge of what the law actually is. One area where this is often the case is anti-sandbagging provisions. This article frames the sandbagging/anti-sanbagging issue and provides a useful summary of the law in several of the most relevant jurisdictions:
In Delaware, the buyer is not precluded from recovery based on pre-closing knowledge of the breach because reliance is not an element of a breach of contract claim. The same is true for Massachusetts and, effectively, Illinois (where knowledge is relevant only when the existence of the warranty is in dispute). But in California, the buyer is precluded from recovery because reliance is an element of a breach of warranty claim, and in turn, the buyer must have believed the warranty to be true. New York is less straightforward: reliance is an element of a breach of contract claim, but the buyer does not need to show that it believed the truth of the representation if the court believes the express warranties at issue were bargained-for contractual terms.
In New York, it depends on how and when the buyer came to have knowledge of the breach. If the buyer learned of facts constituting a breach from the seller, the claim is precluded, but the buyer will not be precluded from recovery where the facts were learned by the buyer from a third party (other than an agent of the seller) or the facts were common knowledge.
Given the mixed bag of legal precedent and little published law on the subject, if parties want to ensure a particular outcome, they should be explicit. When the contract is explicit, courts in California, Delaware, Massachusetts and New York have either enforced such provisions or suggested that they would. Presumably Illinois courts would enforce them as well, but there is very little or no case law to rely upon.
June 27, 2011 in Asset Transactions, Contracts, Deals, Delaware, Leveraged Buy-Outs, Management Buy-Outs, Merger Agreements, Private Equity, Private Transactions, Transactions | Permalink | Comments (0) | TrackBack
July 25, 2010
BP Asset Sales
Seems like BP is aggressively seeking to shed assets in a bid to generate cash to fund the $20 billion compensation account for the damages associated with its ongoing mess in the Gulf of Mexico. BP started with series of sales of Alaskan, Canadian and Egyptian-based assets to Apache, raising $7 billion. Now comes word from the Vietnam News Agency that BP plans to sell its interests in Vietnam. These include the Lan Tay and Lan Do offshore gas fields which have been producing for more than a decade, the Nam Con Son gas field, as well as BP's 720MW Phu My gas-fired power plant The sale may generate an additional $1.3 billion for Gulf compensation fund.
April 27, 2010
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.
April 12, 2010
More on Whether a Secured Creditor May Foreclose on Substantially All the Assets of a Debtor without Stockholder Approval
From a reader:
I was fortunate enough to recently be asked to research the very question you posted on the M&A Law Prof Blog on July 3, 2009 -- whether a creditor may foreclose on substantially all the assets of a debtor without stockholder approval.
[In] a transcript ruling in Gunnerman v. Talisman . . . dismissing the 271 claim [V.C..] Strine states:
"I think the -- the Delaware General Corporation Law clearly makes a distinction between financing transactions, mortgage transactions, collateral transactions, and sales of assets. And I don't think you can have a situation where there's the original financing transaction that pledges the collateral is outside 271's reach and then say when the creditor exercises rights under that that are within the four corners or arguably a lesser -- lesser-included option, that that somehow then triggers a stockholder vote. I think that would be bad for -- frankly, for equity investors in general, because I think it would raise the cost of capital, because it would -- it would create sort of a highjack situation that you sometimes see in new bankruptcies where it appears that everybody has to get something simply because they're present."
Hope this is helpful to you and all others who, like me, visit the M&A Law Prof Blog regularly to stay on top of developments in corporate law and practice.
Marcus E. Montejo
Of course, we still have my other question, what if, instead of foreclosing, the Creditor works out a negotiated settlement with the Debtor pursuant to which the loan is satisfied by delivery of substantially all the assets?
October 01, 2009
GM: Saturn Sale Collapses
The proposed sale of GM's Saturn division to Penske has collapsed and it looks like the Saturn brand will head for the dust-bin. That's too bad. They had a great one price concept, but "corporate" never really set them free to follow through. In the end it became just another wasted GM brand.
If anyone might have had a chance to make it work it would have been someone like Roger Penske, who has a long history in the auto business but is still enough of an outsider. The Detroit Free Press reports that the main reason for Penske walking was an inability to find anyone (Renault, in particular) to build the next generation Saturn once the transition services agreement with GM would expire.
Penske said it had negotiated a deal to get products manufactured by another company but that agreement had fallen apart.
“That agreement was rejected by that manufacturer's board of directors,” Penske said in a statement. “Without that agreement, the company has determined that the risks and uncertainties related to the availability of future products prohibit the company from moving forward with this transaction.”
I guess the manufacturer didn't see much of a future there. So another GM brand will go away. GM is still negotiating with a consortium of Swedish and Chinese investors over the future of the Saab brand. The sale of Opel to Magna looks set to sign next week. That leaves only the "brand that shall not be named" hanging on for the time being.
September 30, 2009
No Big Deal: GM & Chrysler
September 18, 2009
Post- Closing Purchase Price Adjustments
Agreements to purchase private companies often include a post-closing purchase price adjustment (generally based on closing working capital versus some agreed upon target). In an effort to ascertain current market practice, White & Case surveyed 87 private company purchase agreements that were publicly filed in 2008 and contained purchase price adjustments. Full report here.
July 29, 2009
What must a Board do to satisfy its Revlon duties?
Milbank, Tweed reviews the decision of the Delaware Court of Chancery in Police & Fire Ret. Sys. of the City of Detroit v. Bernal, et al. and concludes
[The Delaware Supreme Court’s recent decision in Lyondell Chemical Company v. Ryan] confirmed that directors may aggressively pursue a transaction that they determine in good faith to be beneficial to shareholders, despite the absence of an auction process, so long as their actions are reasonable and aimed at obtaining the best available price for shareholders. However, . . . the language used by the Court in Bernal certainly suggests that when a company has attracted more than one bidder, the best way for a board to satisfy its Revlon duties and maximize shareholder value is to follow a robust sale or auction process that avoids taking actions that could be perceived as favoring one bidder over another. As Court of Chancery decisions in recent years have demonstrated, when only one bidder exists, Delaware Courts are reluctant to upset the deal and risk losing an attractive opportunity for target company shareholders. In contrast, when more than one bidder is involved, Delaware Courts are more comfortable scrutinizing a deal and taking steps to permit an auction to continue.
Get the full story here.
July 29, 2009 in Asset Transactions, Deals, Going-Privates, Leveraged Buy-Outs, Management Buy-Outs, Merger Agreements, Mergers, Private Equity, Takeovers, Transactions | Permalink | Comments (2) | TrackBack
July 24, 2009
For Sale – One Slightly Used Baseball Team
The New York Times announced in its earnings call
yesterday that it expects to sell its 18% stake in New England Sports Ventures, which among things owns the
Boston Red Sox by January 2009. I’m starting
July 06, 2009
GM 363 Sale Approved
The Federal bankruptcy court approved GM's petition to sell substantially all of its assets to New GM Co. in a 363 sale last night. The following documents were released by the court:
1. The Decision On Debtors Motion For Approval Of (1) Sale Of Assets To Vehicle Acquisition Holdings Llc; (2) Assumption And Assignment Of Related Executory Contracts; And (3) Entry Into UAW Retiree Settlement Agreement (95 pages);
2. Order Granting (I) Authorizing Sale Of Assets Pursuant To Amended And Restated Master Sale And Purchase Agreement With New GM Co, Inc., A U.S. Treasury-Sponsored Purchaser; (Ii) Authorizing Assumption And Assignment Of Certain Executory Contracts And Unexpired Leases In Connection With The Sale; And (Iii) Granting Related Relief (184 pages); and
3. Order Pursuant To Bankruptcy Code Sections 105(A), 361, 362, 363, 364 And 507 And Bankruptcy Rules 2002, 4001 And 6004 (A) Approving Amendment To DIP Credit Facility To Provide For Debtors Post-Petition Wind-Down Financing (84 pages).
July 03, 2009
Can Secured Creditor Foreclose on Substantially All the Assets of a Debtor without Stockholder Approval?
An interesting question appeared in my in-box a few days ago from the ABA’s Private Equity/Venture Capital Listserve. Here is a somewhat edited version (thanks to Peter Sugar for helping me refine the question):
Creditor makes a loan to Debtor. The loan is secured by the stock of a wholly owned subsidiary of Debtor. The stock constitutes substantially all of the assets of Debtor. So, under the terms of the loan, upon a default, Creditor can take 100% of the shares in the subsidiary.
The loan is in default and Creditor plans to exercise its rights to acquire 100% of the shares in the subsidiary. Under the relevant statute, the sale, lease, or exchange of all or substantially all of a company’s assets must be authorized by the affirmative vote of its stockholders.
Here's the question: Should any of this be put to a shareholders' vote?
I asked my partner Steven Weise what he thought (something I do quite often) and he pointed to Sections of the California and Delaware Corp. Codes:
California Corp Code § 1000:
"Any . . . pledge or other hypothecation of all or any part of the corporation's property, real or personal, for the purpose of securing the payment or performance of any contract or obligation may be approved by the board. Unless the articles otherwise provide, no approval of shareholders . . . shall be necessary for such action."
Delaware GCL § 272:
“The authorization or consent of stockholders to the mortgage or pledge of a corporation's property and assets shall not be necessary, except to the extent that the certificate of incorporation otherwise provides."
So if Debtor is a California or Delaware corporation, no stockholder vote is necessary to enter into the loan agreement or pledge the stock of the subsidiary.
He went on to say he thought that the foreclosure by the secured party should not require shareholder consent because such a requirement (i) would make these statutory provisions useless and (ii) a foreclosure is not a sale "by" the corporation.
But what if, instead of foreclosing, the Creditor works out a negotiated settlement with the Debtor pursuant to which the loan is satisfied by the stock of the subsidiary? Could you argue that (i) the right to enforce is inherent in the creation of the security interest and (ii) the reasonable anticipation of the parties when a security interest is created is that the secured loan will be paid and the security interest won't be enforced, so (iii) if there is a default, even in a settlement, it's still "involuntary" because of the threat of foreclosure?
Thoughts in the comments are welcome.
June 30, 2009
Hummer: Mark your calendars
Recent reports suggest that Tengzhong Heavy Industrial Machinery is in discussions with the Chinese government over its proposed acquisition of the Hummer brand, dealership contracts and AM General production contract (for the H1/H2 model). Since GM recently announced it will be closing the Shreveport plant that produces the H3 model, I'm assuming those facilities aren't going to be part of the package.
June 01, 2009
DGCL 303 and Sales of Substantially-All-the-Assets in Bankruptcy
Almost lost in the big news of the day that GM has
filed for bankruptcy (bankruptcy petition here)
was the announcement that over the weekend Judge Gonzalez approved the sale of
substantially all the assets of Chrysler in bankruptcy to Fiat for
approximately $2 billion. The judge’s
ruling is here.
The sale will close quickly and New
Chrysler will emerge to try to rebuild the American auto industry. But wait a minute. A sale of substantially all the assets of
Chrysler? Isn’t there supposed to be a
shareholder vote? Well, yes, but no. (For purposes of this example, I’m assuming
Chrysler is a corporation, which it’s not.
It’s an LLC.)
First, there is the issue of Federal preemption by the bankruptcy code. Second, the Delaware corporate code Section 303 recognizes that in bankruptcy a judge may order a sale of assets or a merger and that such a sale/merger occur without further action by directors or stockholders. Any sale or merger ordered in bankruptcy also eliminates appraisal rights to the extent there might have been any. Although a sale of substantially all the assets of Chrysler to Fiat in January (so, pre-bankruptcy) would have required a vote of the Chrysler stockholders. The same transaction in bankruptcy, if approved by the bankruptcy judge go through without a vote, however.
In Chrysler’s case, the issue of a shareholder approval would not likely have been a problem given that it is (was) controlled by Cerberus. However, in a corporate setting where share ownership is more widely distributed the decision whether to do a transaction in or out of bankruptcy may at times turn on questions of shareholder approval.