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
May 03, 2011
K&E Survey of Recent Developments in Public M&A Deal Terms
K&E just published this "survey" of recent developments in public M&A deal terms. Unlike the broad, quantitative surveys put out by oganizations like the ABA or PLC, this one seems more impressionistic, so it may be biased by the universe of deals the authors were exposed to. Still, a worthwhile read.
March 01, 2011
J.Crew MBO Approved
So, despite the flawed process, the useless fairness opinion, the fig-leaf go shop, and the problematic disclosure, the J.Crew MBO was approved by almost 64% of the company's outstanding shares. Looks like many of the large institutional investors in the company voted for the deal, even though ISS recommended that they reject the proposal. At the end of the day, the shareholders' meeting on the deal was typically short (a total of 4 minutes) and undramatic. Not much of a surprise...
January 12, 2011
2011: An M&A Rebound?
I am teaching M&A again this semester. In my first class yesterday, I tried to give my students a sense of how M&A deal activity has been faring over the past several years and where things are expected to go. It appears that the mood about M&A in 2011 is more buoyant than it was in the lull of the summer of 2010. After reading reports like this one from E&Y, I am feeling cautiously optimistic. I am not sure if all of this optimism will last, but for now, the new year is starting off pretty well. This week’s merger Monday included a host of M&A deal activity, with $21 billion in announced deals.
So far, so good…but it’s only January.
September 22, 2010
Hostile Cross-Border Deals: BHP's Pursuit of PotashCorp
A heated cross-border hostile takeover saga (with big US connections) has been occurring over potash (a key input for fertilizer and other agricultural products), and the moves by the various players should remind our readers of classic plays in the hostile takeover game. In August of this year, British-Australian giant BHP Billiton (the jilted former suitor of Rio Tinto back in 2008) launched a $39 billion takeover bid for Canadian company Potash Corporation of Saskatchewan Inc. (“PotashCorp”). PotashCorp’s board has been actively resisting BHP’s bid, putting forth the usual argument that BHP’s offer is opportunistic, inadequate and coercive, that Potash is better off alone rather than selling to BHP (without of course ruling out a potential sale at some point), and that “superior offers are expected to emerge.” PotashCorp’s management has not relied only on the standard letters, press releases and regulatory filings to resist BHP, as Brian noted earlier, PotashCorp’s CEO has also posted videos to communicate with the company’s shareholders. Meanwhile BHP’s CEO is busy meeting with Canadian lawmakers and defending the Potash bid to his shareholders. Now, there is also news that China’s Sinochem Corp. has allegedly hired expensive bankers (are there any other kind…) to explore a rival offer for PotashCorp. In light of potential competition from Sinochem, BHP’s CEO stated yesterday that BHP would be willing to walk away if the offer didn’t make sense for his shareholders. Of course, this could also be because it is not clear that BHP’s shareholders buy the argument that the PotashCorp acquisition is the way to go (especially since there is a lot of evidence that big transactions like this rarely add value for the shareholders of the buyer). Moreover, unlike these kinds of big deal involving US companies where shareholders of the acquirer often do not get voting rights, BHP may need shareholder approval for its offer under the UK Listing Rules which require approval from shareholders of the acquirer of larger (Class 1 transactions), meaning a transaction that amounts to 25 percent (or more) of any of the company‘s gross assets, profits, or gross capital, or in which the consideration is 25 percent (or more) of the market capitalization of the company‘s common stock.
PotashCorp isn’t waiting around to see if Sinochem comes forward with an offer, it has also filed a suit in US federal court seeking to block the takeover and accusing “BHP of making false and misleading statements in regards to how it plans to run the combined company in the future.” PotashCorp has also raised the BHP shareholder vote issue, stating in its complaint that “BHP failed to disclose to PCS shareholders that on the day it launched its hostile bid, and thereafter in light of the market reaction to the offer price, it was reasonably likely that a vote of BHP shareholders – required under U.K. law for any acquisition where the consideration equals 25% or more of the acquirer’s market capitalization – would be required. Indeed, even BHP’s lowball bid was equal to approximately 23% of BHP’s market capitalization at the time the tender offer was commenced. BHP’s misleading omission deprived PCS shareholders of critical information in at least two respects: that approval of the transaction was uncertain, and that the need for shareholder approval could constrain BHP’s ability to increase its bid to a level closer to fair value.”
For M&A buffs, it is worth keeping an eye on this deal, there are a lot of moving targets and I wouldn’t be surprised if more legal, strategic and regulatory issues arise.
June 10, 2010
WGM on Sponsor-backed Going Private Transactions
For the fourth year in a row, Weil, Gotshal & Manges has produced a survey of sponsor-backed going private transactions that analyzes and summarizes the material transaction terms of going private transactions involving a private equity sponsor in the United States, Europe and Asia-Pacific.
Weil surveyed 28 sponsor-backed going private transactions announced from January 1, 2009 through December 31, 2009 with a transaction value of at least $100 million (excluding target companies that were real estate investment trusts). Fourteen of the surveyed transactions involved a target company in the United States, nine involved a target company in Europe and five involved a target company in Asia-Pacific.
The survey can be found here.
June 02, 2010
Rushing to get my bid in...
May 28, 2010
Richards Layton on Freeze-outs
Richards Layton just released this client alert on In re CNX Gas Corp. Shareholders Litigation, in which the Delaware Chancery Court attempts to clarify the standard applicable to controlling stockholder freeze-outs (a first-step tender offer followed by a second-step short-form merger). In short, the Court held that the presumption of the business judgment rule applies to a controlling stockholder freeze out only if the first-step tender offer is both
(i) negotiated and recommended by a special committee of independent directors and
(ii) conditioned on a majority-of-the-minority tender or vote.
May 27, 2010
Continuing Problems with Prudential’s Plans to Purchase AIG’s Asian Assets
Back in March, Prudential announced a $35.5 billion purchase of American International Assurance, the Asian arm of A.I.G. (for more info see this prior post). The deal hit some snags early on because of regulator concern about Prudential's capital. Prudential is also encountering serious resistance from investors as it tries to complete a $21 billion rights offering in order to finance the deal. The offering requires a shareholder vote (a whopping 75% of the shares that are voted) and the Prudential shareholder meeting is scheduled for June 7th. The economist magazine has come out in favor of the deal, seeing it as more about "uniting competitors in Hong Kong and Singapore, which comprise about half of the activities in Asia of both AIA and Prudential" than about destiny and empire building. But now RiskMetrics has now entered the fray and recommended a vote against the deal. The concern is that Prudential may be overpaying for this deal, and that post-acquisition many of AIA’s people may leave to join the company’s rivals.
Prudential's management has not done an amazing job selling this rather expensive deal to their shareholders. Will this be another big deal that goes bust?
May 17, 2010
WGM on Mitigating Fraudulent Conveyance Risk
When an over-leveraged LBO turns out to have an unsustainable capital structure, creditors in an ensuing bankruptcy or other restructuring MAY seek to recover payments made to selling shareholders in the LBO as fraudulent conveyances. In this client alert, WGM describes what selling sponsors can do to mitigate the risk of successful post-LBO fraudulent conveyance claims.
May 05, 2010
Will Other Suitors Come Knocking at Palm’s Door?
There has been a lot of fun merger activity and news lately. Unfortunately for me, I’ve been bogged down in end of the semester exam angst. But there is a deal that has caught my attention (in my prior life, I was a Silicon Valley lawyer): HP’s proposed $1.2 billion acquisition of Palm. HP is certainly no stranger to large tech deals, and it’s no secret that Palm has been trying to find a suitor. There is some speculation about whether now that HP has stepped up other suitors will emerge given Palm’s valuable patent portfolio which some value at approximately $1.4 billion. Of course, the usual crowds have already started investigating whether the Palm board breached its fiduciary duty to its shareholders in agreeing to sell the company to HP. According to one plaintiff’s side firm “the deal is suspicious because it appears from a review of the Company's financial statements that the inherent value of the Company's stock is greater than $5.70 per share, because the share price was as high as $6.29 just this month prior to the announcement of the deal, because the share price has been as high as $13.58 just this year and also because it appears that the Company's Board of Directors failed to shop the Company to other potential buyers to assure that its shareholders would receive the best price possible for their shares.” For those of you familiar with Delaware case law on this type of acquisition, you know well that Palm’s sale to HP is a change of control transaction that implicates Revlon duties. But, this will likely be a tough case to win on fiduciary duty grounds as the Delaware courts have stated that "there are no legally prescribed steps that directors must follow to satisfy their Revlon duties." As we have noted many times on this blog, the Delaware Supreme Court’s recent decision in Lyondell Chemical Company v. Ryan seems to confirm that only an utter failure to attempt to secure maximum value will cause directors to run afoul of their obligations under Revlon. Moreover, the terms of the Palm-HP acquisition agreement give a lot of room for a higher bidder to emerge. The $33 million termination fee is fairly low (approximately 2.75% of the deal value) and Palm’s board has a typical fiduciary out. So will other suitors come knocking at Palm’s door?
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 16, 2010
Speed-dating and the Return of Irrational Deals?
It’s been a good April for deal junkies. There are predictions of a pickup in deal-making (although some question whether these predictions are just that). If the last few months spate of both friendly and hostile deals are a good indication, then predictions that “The next two quarters will probably be defined as a very aggressive period of speed-dating, where companies will try out different combinations to see if they make strategic sense and are actionable,” (by Paul G. Parker, head of global mergers and acquisitions for Barclays Capital) may likely come to fruition. Obviously there are a lot of pluses to more deals being done (especially for those of us who study deals and deal-making). As I asked in my post earlier this week, one of the big questions will be whether deal technology like reverse termination fees (RTFs) will persist in 2010 and if so in what form. This was hot topic at the M&A panel held this week at the Tulane University’s Corporate Law Institute. I for one hope and expect to see the continuing complexity of RTFs where buyers and sellers actually take into account deal risk, such as financing risk, rather than a return to the problematic option-style RTF structure of the private equity deals of 2004-2007. But then again, you never know…
Chancellor Strine joked at Tulane that “We need to get past point at which boards prudently take into account risk. We need to get them to do irrational deals” since "Those are the deals that make this conference fun.”
I guess you could say that those are the deals that make my job fun as well ;-)
April 14, 2010
What is going on with reverse termination fees?
We at the M&A Law Prof blog are somewhat enamored of reverse termination fees (RTFs). I have a draft paper (Transforming the Allocation of Deal Risk Through Reverse Termination Fees) coming out this fall in the Vanderbilt Law Review and Brian has a paper (Optionality in Merger Agreements) coming out in the Delaware Journal of Corporate Law. Brian’s paper examines whether reverse termination fees are “a symmetrical response to the seller’s judicially-mandated fiduciary put and whether such fees represent an efficient transactional term.” Brian’s paper is terrific, so I encourage you to read it (and no, he isn’t paying me to tell you this). For those interested in learning more about the history of the use of RTFs, take a look at Elizabeth Nowicki's nifty empirical account of "reverse termination fee clauses in acquisition agreements for deals announced from 1997 through 2007, using a data set of 2,024 observations."
My paper is an account of the use of RTFs in strategic transactions. The abstract gives a summary:
ABSTRACT: Buyers and sellers in strategic acquisition transactions are fundamentally shifting the way they allocate deal risk through their use of reverse termination fees (RTFs). Once relatively obscure in strategic transactions, RTFs have emerged as one of the most significant provisions in agreements that govern multi-million and multi-billion dollar deals. Despite their recent surge in acquisition agreements, RTFs have yet to be examined in any systematic way. This Article presents the first empirical study of RTFs in strategic transactions, demonstrating that these provisions are on the rise. More significantly, this study reveals the changing and increasingly complex nature of RTF provisions and how parties are using them to transform the allocation of deal risk. By exploring the evolution of the use of RTF provisions, this study explicates differing models for structuring deal risk and yields greater insights into how parties use complex contractual provisions not only to shift the allocation of risk, but also to engage in contractual innovation.
My study only spans deals announced before mid-2009, so I am thinking about a part 2 of this paper that looks at the use of RTF structures in deals after mid-2009. My question is whether, and if so how and why, RTF provisions have changed now that they have become a somewhat more mature provision in acquisition agreements and in light of predictions that happy days may be here again for dealmakers. If you have any comments on this paper, they are especially welcome before the end of April but even after that I may be able to make some minor tweaks, so please send me your thoughts.
April 07, 2010
The Death of a FUN Deal
As predicted by our friend the Deal Professor, Apollo Management’s proposed $2.4 billion leveraged buyout of Cedar Fair, the amusement park operator, has died. This deal and its death are important for two reasons. One, it's yet another confirmation that the LBO market is going to continue to be slow at least in the next year. Second, the deal represents the dangers that boards face in moving forward with M&A transactions. The two sides terminated the deal, with Cedar Fair agreeing to pay Apollo $6.5 million for its expenses, in advance of a scheduled April 8th unitholders meeting since it was clear that the deal would be voted down by Cedar Fair’s unhappy investors. This is a big blow to the Cedar Fair board that just months ago unanimously approved the transaction and even got two fairness opinions (for which they paid $3 million in total) to support their recommendation. Knowing that the company is now in a vulnerable position, in connection with terminating the Apollo deal, the board also adopted a 3 year poison pill with a 20% trigger.
The next few months will likely not be FUN for the Cedar Fair board and management. The company has a heavy debt load which it will need to refinance. In addition, the company’s next scheduled unitholders meeting is on June 7th. The company’s investors, some of whom tried to hold a meeting on the street when the company postponed the initial meeting to vote on the Apollo deal, are really unhappy with the board and management. I expect that there will be a big push to replace at least some of these people. The Cedar Fair board and management should brace themselves for a wild ride in the next few months. I suspect that the Cedar Fair investors are not going to be distracted by all the fun they can have on the company’s two new roller coasters, the Intimidator305, a 305-foot-tall roller coaster at Kings Dominion, and Intimidator, a 232-foot-tall roller coaster at Carowinds.
In the meantime, I look forward to following the fallout from this deal. Busted deals may not be fun for the players, but they do provide some amusement for law profs.
February 17, 2010
K&E on "Just Say No"
According to this client memo from K&E, recent takeover battles are bringing into question the continued vitality of the “just say no” defense, which allows the board of a target company to refuse to negotiate (and waive structural defenses) to frustrate advances from unwanted suitors.
According to the authors, "just say no" is more properly viewed as a tactic rather than an end, and when viewed this way,
it is apparent that the vitality of the “just say no” defense is not and will not be the subject of a simple “yes or no” answer from the Delaware courts. Instead, the specific facts and circumstances of each case will likely determine the extent to which (and for how long) a court will countenance a target’s board continuing refusal to negotiate with, or waive structural defenses for the benefit of, a hostile suitor.
January 14, 2010
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.
January 14, 2010 in Break Fees, Contracts, Corporate, Deals, Federal Securities Laws, Leveraged Buy-Outs, Merger Agreements, Mergers, Private Equity, Transactions | Permalink | Comments (1) | TrackBack
January 08, 2010
Acquisition Financing in 2010
Davis Polk has some thoughts based on trends from 2009. Here's the conclusion:
The fundamental tensions in acquisition financings have not changed: buyers and sellers desire deal certainty and unconditional loan commitments, and arrangers desire flexibility to ensure a successful syndication. In 2009, we saw a continuing evolution in the ways that market participants balanced these competing objectives in light of new market realities and reduced access to credit. [T]he "SunGard" limitations have survived but are more carefully negotiated for the individual transaction; and market MACs have not returned, but concerns about changes in market conditions have been addressed through expanded flex provisions. Some of the post-credit crunch technology is likely here to stay: base rate pricing will not be permitted to be less than LIBOR pricing; solvency conditions will continue to be more carefully scrutinized; and arrangers will continue to look for ways to reduce and quantify their exposure. As credit conditions continue to improve, one question will be to what extent buy-side loan market participants’ appetite for yield, and arrangers’ appetite for fees, will outweigh some of the current focus on structural issues. Evidence from late 2009 suggests that some "top of the market" features that were viewed as "off the table" in 2008 (covenant-lite, equity cures) may, under the right circumstances, be fair game for negotiation between borrowers/sponsors and arrangers in 2010. And finding the right balance with respect to 2009 developments such as enhanced market flex and pre-closing securities demands will likely occupy a significant amount of participants’ time and energy. It promises to be an interesting year for arrangers and sponsors alike. Read the whole thing here. MAW
The fundamental tensions in acquisition financings have not changed: buyers and sellers desire deal certainty and unconditional loan commitments, and arrangers desire flexibility to ensure a successful syndication. In 2009, we saw a continuing evolution in the ways that market participants balanced these competing objectives in light of new market realities and reduced access to credit. [T]he "SunGard" limitations have survived but are more carefully negotiated for the individual transaction; and market MACs have not returned, but concerns about changes in market conditions have been addressed through expanded flex provisions. Some of the post-credit crunch technology is likely here to stay: base rate pricing will not be permitted to be less than LIBOR pricing; solvency conditions will continue to be more carefully scrutinized; and arrangers will continue to look for ways to reduce and quantify their exposure. As credit conditions continue to improve, one question will be to what extent buy-side loan market participants’ appetite for yield, and arrangers’ appetite for fees, will outweigh some of the current focus on structural issues. Evidence from late 2009 suggests that some "top of the market" features that were viewed as "off the table" in 2008 (covenant-lite, equity cures) may, under the right circumstances, be fair game for negotiation between borrowers/sponsors and arrangers in 2010. And finding the right balance with respect to 2009 developments such as enhanced market flex and pre-closing securities demands will likely occupy a significant amount of participants’ time and energy. It promises to be an interesting year for arrangers and sponsors alike.
Read the whole thing here.
December 28, 2009
Just in time for the holidays
The M&A Market Trends Subcommittee of the ABA just announced that the 2009 Private Target Deal Points Study is now available to Subcommittee members here. Highlights of the 2009 Study were presented last month at an ABA telecast on "M&A Negotiation Trends: Insights from the 2009 Deal Points Study on Private Targets." The MP3 is available here. If you want full access to this and the many other valuable studies published by the subcommittee, you must be (or know really well) an active member. You can directly sign up for update alerts here. One supplement already in the pipeline focuses on financial sellers (i.e., VCs and private equity groups). Benchmarking "financial seller deals" with the Study sample generally, the subcommittee is trying to answer the age-old question: "Do financial sellers really get a better deal?" It expects to release this supplement at the Subcommittee's meeting in Denver (April 23-24) MAW
The M&A Market Trends Subcommittee of the ABA just announced that the 2009 Private Target Deal Points Study is now available to Subcommittee members here. Highlights of the 2009 Study were presented last month at an ABA telecast on "M&A Negotiation Trends: Insights from the 2009 Deal Points Study on Private Targets." The MP3 is available here.
If you want full access to this and the many other valuable studies published by the subcommittee, you must be (or know really well) an active member. You can directly sign up for update alerts here.
One supplement already in the pipeline focuses on financial sellers (i.e., VCs and private equity groups). Benchmarking "financial seller deals" with the Study sample generally, the subcommittee is trying to answer the age-old question: "Do financial sellers really get a better deal?" It expects to release this supplement at the Subcommittee's meeting in Denver (April 23-24)
November 07, 2009
IPOs versus Acquisitions: An Empirical Analysis
Abstract: Using a hand-collected data set of private firm acquisitions and IPOs, this paper presents an empirical analysis of a private firm's choice between IPOs and acquisitions, and develops the first empirical analysis in the literature of the “IPO valuation premium puzzle” (where many private firms seem to choose to be acquired rather than to go public at higher valuations). In the first part of the paper, we test several new hypotheses regarding a firm's choice between IPOs and acquisitions and develop several new empirical findings. First, firms operating in less concentrated industries characterized by the absence of a dominant market player (and therefore more viable against product market competition) are more likely to go public rather than be acquired. Second, firms facing a greater extent of information asymmetry in the equity market, more capital intensive firms, and those operating in industries characterized by greater private benefits of control, are more likely to go public rather than to be acquired. Third, the likelihood of an IPO over an acquisition is greater for venture backed firms and those characterized by higher pre-exit sales growth. Finally, we document that the passage of the Sarbanes-Oxley Act has motivated a larger proportion of firms to favor acquisitions over IPOs. Our comparison of private firm valuations in IPOs and acquisitions in the second part of the paper indicates that IPO valuation premia disappear for larger firms after controlling for various factors affecting a firm's choice between IPOs and acquisitions. Further, after controlling for the long run component of the expected payoff to firm insiders from an IPO exit, we find that the IPO valuation premium vanishes even for smaller venture backed firms and shrinks substantially for non-venture backed firms as well. Thus, we are able to resolve the IPO valuation premium puzzle for the first time in the literature.