M & A Law Prof Blog

Weil, Gotshal 2012 survey of sponsor-backed going private transactions

Weil, Gotshal & Manges recently published its sixth survey of sponsor-backed going private transactions, which analyzes and summarizes the material transaction terms of going private transactions involving a private equity sponsor in the United States, Europe, and Asia-Pacific. (We covered last years survey here.)

The survey covers 40 sponsor-backed going private transactions with a transaction value (i.e., enterprise value) of at least $100 million announced during calendar 2012. Twenty-four of the transactions involved a target company in the United States, 10 involved a target company in Europe, and 6 involved a target company in Asia-Pacific.

Here are some of the key conclusions Weil draws from the survey:

• The number and size of sponsor-backed going private transactions were each lower in 2012 than in 2011 and 2010; . . . .
• Specific performance "lite" has become the predominant market remedy with respect to allocating financing failure and closing risk . . . . Specific performance lite means that the target is only entitled to specific performance to cause the sponsor to fund its equity commitment and close the transaction in the event that all of the closing conditions are satisfied, the target is ready, willing, and able to close the transaction, and the debt financing is available.
• Reverse termination fees appeared in all debt-financed going private transactions in 2012, . . .with reverse termination fees of roughly double the company termination fee becoming the norm.
• . . . no sponsor-backed going private transaction in 2012 contained a financing out (i.e., a provision that allows the buyer to get out of the deal without the payment of a fee or other recourse in the event debt financing is unavailable).
• Some of the financial-crisis-driven provisions, such as the sponsors’ express contractual requirement to sue their lenders upon a financing failure, have diminished in frequency. However, the majority of deals are silent on this, and such agreements may require the acquiror to use its reasonable best efforts to enforce its rights under the debt commitment letter, which could include suing a lender.
• Go-shops remain a common (albeit not predominant) feature in going private transactions, and are starting to become more specifically tailored to particular deal circumstances.
• Tender offers continue to be used in a minority of going private transactions as a way for targets to shorten the time period between signing and closing.

MAW

Dell paying Blackstone's bills

Acording to Dan Primack at Fortune, Dell's independent directors agreed to reimburse Blackstone the cost of its bid as part of the go-shop process.  This is a real positive, and I am surprised that more sellers with go-shop provisions don't do this as a matter of course. With an incumbent bidder in place, there are real disincentives for a second bidder to make the transaction specific investments required to put together a competing bid.  

This is especially true given the fact that the incumbent bidder has more time to digest the information related to the target and almost always has a matching right in place.  Rational second bidders fear that they will invest resources into making a bid only to have lose it to the incumbent - or worse overpay when the incumbent walks away.  (Aside, my matching rights paper is here for those who might be interested.)

By agreeing to reimburse second bidders if they enter into a go-shop process, the independent directors lower the bars to generating second bids and increase the likelihood that the go-shop will be more than just window dressing.  That's a good thing.  Smart counsel for independent directors will be looking at Dell and fighting hard for reimbursement provisions in future deals.  

-bjmq

Dell's go-shop to produce results?

As we close in on March 22 and the end of Dell's go-shop period, we're starting to hear rumors that the process might actually produce a second bid in the $15 range.  Although H-P and Lenovo are apparently also rummaging through Dell's books, if there is going to be a bid, Bloomberg is reporting that it would come from Blackstone. That would be an interesting development.  I wonder if they would be able to bring Michael Dell on board as part of a competing deal.  Just a couple more days.

-bjmq

Icahn throws wrench in Dell works

Carl Icahn has been very busy over the past year.  Now, he has moved on to Dell.  In a letter to the board (see Sched 14A with lett and board response), Icahn made an offer to the board that he hopes they take - and then threatens to run a proxy contest and start "years of litigation" if they don't: 

However, if this Board will not promise to implement our proposal in the event that the Dell shareholders vote down the Going Private Transaction, then we request that the Board announce that it will combine the vote on the Going Private Transaction with an annual meeting to elect a new board of directors. We then intend to run a slate of directors that, if elected, will implement our proposal for a leveraged recapitalization and $9 per share dividend at Dell, as set forth above. In that way shareholders will have a real choice between the Going Private Transaction and our proposal. To assure shareholders of the availability of sufficient funds for the prompt payment of the dividend, if our slate of directors is elected, Icahn Enterprises would provide a $2 billion bridge loan and I would personally provide a $3.25 billion bridge loan to Dell, each on commercially reasonable terms, if that bridge financing is necessary.

Like the “go shop” period provided in the Going Private Transaction, your fiduciary duties as directors require you to call the annual meeting as contemplated above in order to provide shareholders with a true alternative to the Going Private Transaction. As you know, last year’s annual meeting was held on July 13, 2012 (and indeed for the past 20 years Dell’s annual meetings have been held in this time frame) and so it would be appropriate to hold the 2013 annual meeting together with the meeting for the Going Private Transaction, which you have disclosed will be held in June or early July.

If you fail to agree promptly to combine the vote on the Going Private Transaction with the vote on the annual meeting, we anticipate years of litigation will follow challenging the transaction and the actions of those directors that participated in it. The Going Private Transaction is a related party transaction with the largest shareholder of the company and advantaging existing management as well, and as such it will be subject to intense judicial review and potential challenges by shareholders and strike suitors. But you have the opportunity to avoid this situation by following the fair and reasonable path set forth in this letter.

Now, I think he has a real point here.  And that's the special dividend. He proposes the board use $7.4 billion in cash that it has covented to bring back from offshore to finance the going-private transaction as the main source of cash for the dividend.  Think about it this way, there is a grand public policy discussion about corporate taxes and how the present structure of corporate taxes causes firms to stockpile cash off-shore.  This cash has to be left there - the argument goes - lest it come back and be taxed at punitive rates.  

OK, I am not going to take sides in that whole debate, but I will say this.  Dell is content to leave it's large pile of cash offshore and away from the shareholders because of the tax issue. However, if the cash is necessary to finance an acquisition of the company by Michael Dell, well then, paying all those taxes to bring the cash back onshore isn't all that big a deal and is well worth the effort.

Icahn is pointing to that and saying in effect, "Hey, wait a minute. Why bring the cash back to finance a going private deal?!  If Michael Dell is just buying cash with cash, doesn't that undervalue what's left of the company?  Why not bring the cash back to the US, pay the taxes, and then distribute it to shareholders?"  

I tend to sympathize with that view.  If the taxes are really so onerous that the board has refused to bring the cash back until now, why isn't it a corporate waste to use them to finance a going-private transaction by the founder?  The board will have to deal with that question at some point.

-bjmq

MBOs and Dell's opportunity

Dennis Berman at the WSJ has a piece at WSJ.com that asks the right question about the now simmering Dell going private transaction.  Who is Dell working for? 

Management buyouts are always fraught, precisely for this reason. Prodded by court rulings, boards have taken steps to minimize the most flagrant problems. Should a deal be announced, be prepared for a barrage of reminders about "independent committees," "go shops" and the like.

But these steps are ultimately cosmetic. No one will say it this way, but it's the way deals happen: The conflict is the opportunity.

For example, without Mr. Dell's stake, it would be nearly impossible to assemble the $22 billion to $25 billion needed to buy the company. It's also unlikely that another buyout shop or industry player would make a competing bid without Mr. Dell's consent.

In these situations, a powerful executive like Mr. Dell can effectively act as his own poison pill, guarding against outcomes he doesn't like.

Make no mistake.  Once this deal is announced there will be multiple suits.  So of course, the lawyers are being attentive to the requirements.  But if the J Crew transaction from last year is any guide the deal will pasts muster.  However, these going private transactions always raise a question with me.  If Dell (or whoever is the continuing management) have such good ideas about how to run the company, why don't they just go ahead and implement them now for the public shareholders?  Why keep all the good ideas and strong management for when the business goes private?  It's a question without a real answer.

-bjmq

 

Comparison of One-Step and Two-Step Mergers

Haynes and Boone has a short summary of the pros and cons of each here.

MAW

Shnader on Squeeze-out Mergers in Pennsylvania

Standard learning has long held that a minority shareholder of a Pennsylvania corporation who was deprived of his stock by a "cash-out" or "squeeze-out" merger had no remedy after the merger was completed other than to take what the merger gave or demand statutory appraisal and be paid the "fair value" for his shares. No other post-merger remedy, whether based in statute or common law, was thought to be available to a minority shareholder to address the actions of the majority in a "squeeze-out." Now, after the Pennsylvania Supreme Court’s holding in Mitchell Partners, L.P. v. Irex Corporation, minority shareholders may pursue common law claims on the basis of fraud or fundamental unfairness against the majority shareholders that squeezed them out.

The full client alert can be found here.

MAW

More fun with top-up option math

Comverge announced the completion of its tender offer and the closing of its acquisition by a private equity group.  The transaction included a top-up option, described in Comverge’s 14d-9:

Top-Up Option

Pursuant to the terms of the Merger Agreement, the Company has granted Purchaser an irrevocable option (the “Top-Up Option”), upon the terms and subject to the conditions set forth in the Merger Agreement (including that the Minimum Condition has been satisfied), to purchase from the Company, at a price per share equal to the Offer Price, an aggregate number of Shares (the “Top-Up Shares”) equal to the number of Shares that, when added to the number of Shares then owned of record by Parent or Purchaser, constitutes one Share more than 90% of the sum of the Shares then outstanding and the Shares the Company may be required to issue on or prior to the Closing (as defined in the Merger Agreement) as a result of vesting, conversion or exercise of the Company’s stock options or other derivative securities, including convertible securities and other rights to acquire the Company’s common stock. However, in no event shall the Top-Up Option be exercisable if the number of Top-Up Shares would exceed the number of authorized but unissued Shares that are not already reserved for issuance as of immediately prior to the issuance of the Top-Up Shares. The Company has approximately 147,698,561 authorized but unissued Shares, after giving effect to all outstanding Options as of March 31, 2012.

According to Comverge’s amended 14d-9, when the tender closed, 65% of the outstanding shares were tendered, or 17,972,755 shares.  Now, that’s enough to meet the 50% minimum condition for the tender, but well short of the 90% required to effectuate a 253 short form merger.  And that’s where the top-up option comes in handy. But, go ahead and guess how many shares Comverge has to issue to the acquirer pursuant to the top-up option to get to 90%?  C’mon, it’s lawyer math -

(17,972,755 tendered shares [corrected]  + x option shares) / (27,650,392 outstanding shares + x option shares) = 90%

x = 69,310,020

 That’s a lot of stock!  Fortunately, Comverge was awash in authorized, but unissued stock.  Even though you might get queasy at issuing so much stock in order to avoid a shareholder vote, the courts have ruled on this question and, subject to certain conditions, have okayed it (see Olson v EV3).

More on top-up option math, see an earlier post from a couple of years ago.

-bjmq

Blinking in the face of a going-private

Kara Swisher of AllThingsD has the story of how Demand Media was considering a going-private transcation, but then decided against it:

One thing was true: “Demand was definitely at the altar, but it did not get to the vows,” said one source.

Another source noted that the board also determined that Demand’s situation was improving, and that new trends are showing that the bottom might be been reached. The company reports its first-quarter earnings on May 8, which is expected to show some traction related to its many challenges.

“There is nothing [Thomas H.] Lee could do that Demand could not do for itself,” said one person. “So throwing in the towel seemed premature for now.”

Somehow it's heartening that directors looked at a going private deal and decided that they, the directors, could generate value for the public shareholders by staying public.  

-bjmq

 

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...

-bjmq

 

TransUnion to be sold by Pritzkers

TransUnion, of Smith v Van Gorkom fame, is to be sold by the Pritzker family and Madison Dearborn Partners to Advent International and Goldman Sachs for $3 billion.  This sale will mark the exit of the Pritzker's from TransUnion.  

Somewhere ... a corporate law geek just shed a tear.

-bjmq

J Crew settled

Chancellor Strine approved the J Crew settlement today over the objections of one of the co-lead plaintiffs, Martin Vogel.

The only individual acting as a lead plaintiff, Martin Vogel, was also removed because he opposed the settlement. ...

Mark Vogel, a New Jersey lawyer and investment adviser who represented his father Martin Vogel at Wednesday's hearing, said the class action process was driven by attorneys who "confined me to a silo" and "steamrolled" him.

"Lead counsel's game is to intimidate the one individual who managed to find his way into their cozy club," Mark Vogel said.

Vogel laid out his complaints about plaintiff counsel in his objection (here).  Notwithstanding those complaints, Vogel was removed as a co-lead plaintiff and the case was permitted to settle.  The plaintiff's counsel received a $6.5 million fee award and the board got another chastizing.

Strine also criticized the behavior of J Crew's directors and chief executive for allowing TPG Capital, one of the buyers, to get a head start in the sale process, which he said may have eliminated potential rivals.

"It's icky stuff," said Strine. "This was not good corporate governance."

Not good, indeed.

-bjmq

Grupo Mexico Rundowns

There are a couple of good rundowns of the In re Southern Peru/Grupo Mexico decision out there worth reading.  This case has been working its way through the Delaware courts since 2004.  That's a long time in coming, but not unusual for cases where parties are not seeking an injunction, but rather a damages remedy.  The Sourthern Peru opinion is worth taking a look at because Chancellor Strine issued a $1.2 billion (billion, not million) judgment against the controlling shareholder. Richards Layton & Finger have posted a useful summary of the issues as well as the opinion here.  Steven Davidoff at The Deal Professor has a very good summary of the issues at stake in the case as well.  You can find it here.

 Me?  I'm still working my way through the 106 page opinion.  

-bjmq 

Proposed Del Monte Settlement

In an example that not all transaction-related litigation is created equally, Reuters is reporting Del Monte and Barclays have agreed to a settlement in the pending challenge to the Del Monte transaction.  You'll remember that Vice Chancellor Laster's earlier opinion in this case raised eyebrows when he pointed out the deficiencies in the Del Monte board's sale process.  The proposed settlement includes a payment of $84.3 million, including a whopping $23.7 million payment in attorney fees.  Vice Chancellor Laster still has to approve the settlement and the fees, but he previously approved an interim $2.75 million fee in this case and he has hinted that he is not opposed to large fee awards in cases where it is deserved.  This may be one of those cases.

-bjmq

Weil, Gotshal survey of sponsor-backed going private transactions

Weil, Gotshal has just released its fifth annual survey of sponsor-backed going private transactions, analyzing and summarizing the material transaction terms of going private transactions involving a private equity sponsor in the United States, Europe and Asia-Pacific.  Have a look.

MAW

 

J Crew - but we had a deal!

J Crew has filed a letter with the court in response to the plaintiff's letter.  You can download it here.  Rather than subvert the MOU, defendants argue in their letter that they have fully complied with the terms of the MOU and that the plaintiffs are just trying to have their cake and eat it, too.   The plaintiffs complained that J Crew's board was undermining the terms of the settlement by announcing that they had received no offers by the end of the initial go-shop period.   So what, say the defendants (from their letter):

Plaintiffs claim that the January 18 press release undermined the go shop. But that makes no sense. Announcing the results of the initial go-shop would have no effect on the viability of the extended go-shop. If there were additional bidders during the initial go-shop, announcing that fact before extending the go-shop would simply have the effect of continuing an open, public auction, something that would benefit shareholders. And TPG would be forced to compete with any new bidder no matter whether the Company publicly announced it or not.  If there were no additional bidders during the initial go-shop, announcing that fact could only encourage bidders who might be on the fence to bid during the extended go-shop because they would perceive less competition. In either event, TPG could not possibly be benefited by knowing whether there were or were not additional bidders during the initial go-shop. Plaintiffs do not provide any explanation as to how the announcement of the results of the go-shop would in any way affect the go-shop process.

Nor could they. The public disclosure of the results of the initial go-shop period simply will not have any meaningful effect on the extended go-shop. Potential new bidders do not care whether someone did or did not bid before (except the fact that there were no bidders means that there potentially is less competition for the Company.) Likewise, TPG cannot do anything with the information it learned from J. Crew’s public disclosure. If there is a new bid, it still will have to compete with that bid.

Looks like this whole thing is landing on Vice Chancellor Strine's lap.

-bjmq

J Crew settlement in trouble

In the most cynical view of the shareholder lawsuit, managers are happy to settle even spurious claims because the global release and settlement generates effectively a 'get out of jail free' card absolving them of any fiduciary failings that may have come before the settlement.   That's a pretty cynical view, mind you, but I suppose I can envision facts where it might be true.  

Now comes J. Crew.  The process employed to take the company private has been ... to put it charitably ... less than perfect.  Read about it here and here and here.  In any event, the J. Crew board ended up on the receiving end of a well-deserved shareholder lawsuit for their apparent inability to comply with their fiduciary obligations in connection with the going-private transaction.  It appeared two weeks ago that the parties were near settlement.  In fact, they reached a settlement, but had yet to bring it before Vice Chancellor Strine for approval.   According to a letter filed with the court yesterday and reported by Bloomberg this morning, plaintiffs counsel are accusing management of undermining the settlement from almost before the ink was dry  (Download JCrew Settlement letter).   The plaintiff's letter to Vice Chancellor Strine updating him on the situation reads like the J. Crew board was hoping to use the settlement like a 'get out of jail free' card while they pursued their preferred transaction:

The Special Committee, however, flatly refused to even discuss or respond to Plaintiff's objections on these issues.  Defendants took very aggressive positions concerning the terms of the settlement stipulation.  For example Defendants' revision to the settlement stipulation included an overly board release that would prevent shareholders from challenging Defendants' future actions related to the sale of J.Crew, inclding any alternative transaction that might arise.  Plaintiffs never agreed to release claims related to Defendants' future conduct, and could never do so in good faith, especially in light of Defendants' recent actions, which Plaintiffs believe show a disregard for their fiduciary duties.

A copy of the settlement stipulation was attached to the letter as an exhibit and you can download it here (Download JCrew Settlement MOU).  This settlement stipulation has not yet been approved by Vice Chancellor Strine and now looks like it won't be as the plaintiffs are gearing up for a trial.  

This case is extremely interesting for those of us thinking about the developing doctrine with respect to transactions involving managers and control persons.  Along those lines, The Deal Professor will be sponsoring an important symposium in Delaware on this topic in April.  If this case ends up going to trial there might be a nice confluence of events in April that will make Wilmington the place to be somebody this Spring.

 -bjmq

J. Crew conflicts

Bloomberg highlights the various potential conflicts of interest associated with J. Crew's pending going private deal with TPG (unembeddable video here).

-bjmq

J. Crew deal raises eyebrows for good reason

I've spent a lot of time recently looking at filings of acquisition-related litigation.  And just about the time I start thinking that all these suits are useless pie-dividing exercises, along comes a set of facts like J. Crew that makes me think twice.  Maybe a lawsuit here isn't such a bad idea...

Preeta Das and Gina Chon lay out some of the most important facts in their piece on this in the WSJ:

J.Crew Group Inc.'s chief executive Millard "Mickey" Drexler was negotiating a potential sale of the clothing company for nearly seven weeks before he informed the company's board of his talks, according to the latest company securities filings.

Seven weeks?!  Wait a minute ... and Drexler is expected to stay on in his position as CEO and get a significant equity piece of the private J. Crew?  As any regular reader will recognize ... I don't know much, but I do know this:  if you are CEO of a company and you're negotiating to take the company private with you at the helm, you have to tell your board and make the structure of the negotiation resemble an arm's length transaction as much as possible.  If not, you're setting yourself up for a well-deserved lawsuit.

In this case, Drexler kept the board in the dark about his negotiations with a private equity buyer for seven weeks.  His private discussions weren't just talks over drinks at the country club.  Apparently, he brought in executives from the company to give presentations, gave private equity buyers access to earnings estimates and the like.   And then when he finally brought the board in the loop on the potential transaction, Drexler made it clear that he had already lined himself up with his preferred buyer - TPG.  

Once the board was apprised of the discussions with TPG and formed a special committee on Oct. 15 to evaluate a sale, Mr. Drexler told the committee that if the company were to be sold, he "had significant reservations about the prospect of working for a new boss, but that he had a high comfort level with TPG."

This led the committee to determine that Mr. Drexler, who is credited for J.Crew's success in recent years, would be unwilling to work for any third party other than TPG.

Here's the proxy statement.

OK, sure, the deal includes what is now the standard "go-shop" provision for a going-private transaction.  But, if the "go-shop" is used to simply used to paper over earlier failings, then we're going down the wrong road with this provision.

Going-private transactions where management stays on are very tricky deals.  Potential conflicts abound and when CEOs fall in love with one bidder over another, they risk running afoul of their Revlon obligations. Granted, the courts are very lenient with boards who fall short of the Revlon standard but yet negotiate in good faith and at an arm's length basis.  On the other hand, in MacMillan-like situations, where boards/CEO have closed their eyes to other potential opportunities and focus solely on a preferred bidder, courts give such deals - for good reason - much closer scrutiny. 

-bjmq

Thanksgiving deal

Who announces a deal on Thanksgiving?!  Delmonte, it seems.  

Vestar Capital Partners and a fund run by Centerview partner James Kilts will join KKR in the deal, which ranks as one of the largest U.S. leveraged buyouts of the year. The three partners will assume about $1.3 billion in Del Monte's debt. When including the debt, the company said the deal value is $5.3 billion.

Del Monte can try to solicit high offers until Jan. 8, 2011 during a so-called "go shop" period. Del Monte said it expects the deal to close in March if it gets no higher bid.

The go-shop has nearly become a standard term over the past couple of years.  This development is a bit of a puzzle.  Sure, directors of sellers are likely afraid that they might face litigation if they don't so something to actively test the market.   There's something to that.  On the other hand, courts have -- particularly in recent years - been less demanding of selling directors.   There's no reason to believe that for a high profile transaction like this one that a no-shop with a fiduciary out wouldn't be sufficient.  Hey, don't get me wrong, I'm all for go-shops.   I just wonder whether there's more to them given that financial buyers who have always been averse to auctions are now willing to give go-shops without too much complaining any more. 

Now for more turkey.

-bjmq