Tuesday, February 28, 2012
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...
Friday, February 17, 2012
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.
Wednesday, December 14, 2011
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.
Tuesday, October 18, 2011
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.
Thursday, October 6, 2011
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.
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.
Wednesday, February 2, 2011
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.
Tuesday, February 1, 2011
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.
Thursday, January 13, 2011
Tuesday, December 7, 2010
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.
Thursday, November 25, 2010
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.
Tuesday, November 9, 2010
On Oct 11, 2010 Gymboree, a Delaware corporation, announced that it was to be acquired by Bain Capital. I asked how long before the first lawsuit would be filed. Not that long it turns out. On Oct 12, two complaints (Halliday complaint and Himmel complaint) were filed in the California state courts. The third was filed, also in California, on Oct 18 (Harris complaint).
The allegations in the various complaints can be summarized as follows:
Acting on their own self-interest, defendants utilized a defective sales process which was not designed to maximize shareholder value or protect the interests of Gymboree’s shareholders, but rather was designed to divert the Company’s valuable assets to Bain Capital. Each of the defendants has breached their fiduciary duties of loyalty, due care, independence, candor, good faith and fair dealing, and/or has aided and abetted such breaches. Rather than acting in the best interests of the Company’s shareholders, defendants spent substantial effort tailoring the structural terms of the Proposed Acquisition to aggrandize their own personal interests and to meet the specific needs of Bain Capital, which efforts will eliminate the majority of the equity interest of the Company’s shareholders.
In essence, the Proposed Acquisition is the product of a flawed process that was designed to ensure the sale of Gymboree to Bain Capital, on terms preferential to Bain Capital and defendants, and detrimental to plaintiff and the Company’s shareholders. Plaintiff seeks to enjoin the Proposed Acquisition.
No complaints were filed in the Delaware Chancery Court.
Wednesday, September 8, 2010
I don't know how this one slipped by me. Early in July, Vice Chancellor Laster certified an interlocutory appeal by the defendants in the In re CNX Gas Corporation Shareholders Litigation (May 25, 2010 memo opinion) case. At issue was VC Laster's application of VC Strine's "unified standard" in the context of a controlling shareholder's unilateral freeze-out of the minority. VC Chancellor Laster certified the following question: "[A]re voluntary non-coercive tender offers made with full disclosure by controlling stockholders of Delaware corporations subject to entire fairness review?"
In his memo opinion in May, VC Laster suggested that the issue of the standard of review was ripe for resolution by the Supreme Court and practically invited the defendants to appeal. They did. He certified their interlocutory appeal and it went to the Delaware Supreme Court. The court promptly refused to hear the case ... well, not promptly, they waited two days.
While the Supreme Court refused to resolve the ambiguities in the law, I guess the good news is that the the decision leaves VC Laster's opinion and application of the "Cox Communications" test in place. That test says "if a first-step tender offer is both (i) recommended by a duly empowered special committee of independent directors and (ii) conditioned on the affirmative tender of a majority of the minority shares, then the business judgment standard of review presumptively applies. If either requirement is not met, then the transaction is reviewed for entire fairness."
In short, if practitioners begin to incorporate the Cox Communications test into their transaction planning, it suggests that controlling shareholders should be able to structure going private transactions around many non-meritorious lawsuits.
Tuesday, July 20, 2010
One transaction that's been drawing a lot of attention in recent days is Hugh Hefner's bid to take Playboy Enterprises (don't worry, the link is safe for work) private for $5.50/share. Hefner presently owns 69.5% of PEI’s Class A common stock and 27.7% of PEI’s Class B common stock. The Class B stock is no vote stock. Because Hefner is the controlling shareholder, the transaction when it's reviewed by the courts (and it will be - see para below re lawsuit already in place) will be subject to one of the controlling shareholder standards, depending on the form which the transaction ultimately takes place.
Vice Chancellor Laster's decision in In re CNX Gas brought this issue to fore. He invited the Delaware Supreme Court to weigh in on the various standards governing controlling shareholder transactions with back end freeze-outs and proposed a unified standard (also see In re Cox Comm'n). The proposed Playboy transaction may give the courts an opportunity to weigh in on the unified standard.
Some of this is a bit premature, as the parties have not yet agreed to terms, much less to a structure for this proposed transaction. However, the current state of the doctrine can and should influence decisions on how to structure the transaction. In short, a negotiated transaction with a controlling shareholder in the form of a statutory merger will, upon a challenge, be subjected to entire fairness review (Kahn v Lynch). On the other hand, if the transaction is structured as a unilateral tender offer followed by a Sec 253 short form merger, the board's actions with respect to the transaction will receive the deferential business judgment standard (in re Siliconix). Of course, if you're Hefner and you're worried about a possible legal challenge, you structure the transaction as a unilateral tender offer with a back end freeze-out.
Of course, the unilateral route leaves the door open to a topping bid - Penthouse (Friend Finder) is already interested. And some have already asked whether the Playboy board must the company to the highest bidder (i.e. Penthouse). Of course, the board is free to pursue an auction. But, there's a problem.
Hef doesn't want to sell. According to the PLA's announcement, Hefner is not interested in third party offers.
In the proposal letter, Hefner advises the board of directors that out of Hefner’s concerns for, amongst other matters, the PEI brand, the editorial direction of the magazine and PEI’s legacy, Hefner is not interested in any sale or merger of PEI, selling Hefner’s shares to any third party or entering into discussions with any other financial sponsor for a transaction of the nature proposed in the letter.
Although as controlling shareholder, Hefner has an obligation to deal fairly with minority shareholders, such a duty does not require him to sell if he doesn't want to. If the board doesn't want to do a deal with him, Hefner is free to vote 'no' to any other deal they propose, or in the event the alternative transaction is structured as a tender offer, not to tender his shares.
The result may well be that Playboy gets sold to Hefner at a "fair" price not necessarily the highest price. For shareholders, that's just the cost of buying a minority position in a company where there is a control block. Don't expect much of a premium.
The inevitable lawsuit:
No surprise, a lawsuit has already been filed with respect to this transaction. The general allegation is that the board violated its fiduciary duties to the corporation for selling Playboy to Hefner "too cheaply." Let's put aside the question of whether such a Revlon claim has any real legs. I'd just like to flag that the lawsuit alleges the board sold the company too cheaply. They seem to have jumped the gun. No one has announced a sale, simply that Hefner has made an offer. The board hasn't even made a recommendation, yet.
I suspect, given that there's already a lawsuit in place accusing them of fiduciary wrong-doing that the board will take its time and pay close attention to the sale process.
Thursday, June 10, 2010
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.
Friday, May 28, 2010
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.
Monday, May 17, 2010
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.
Monday, February 22, 2010
Although minority shareholders were vocally opposed to the transaction, it succeeded at the ballot box. It's all still a little fizzy what was going on here. The Hong Kong police have since raided Mr. Li's home apparently and sealed up the ballot boxes. At this point, there is no indication that Mr. Li violated any laws. It's an odd situation. It's hard to imagine the police intervening in a US corporate election, but there you have it.Bloomberg reports that the company's offices were searched by police earlier this month, along with those of Fortis Insurance Co. (Asia), a local insurer that was once controlled by Li through his Pacific Century Regional Developments (PCRD).
Hong Kong's Securities and Futures Commission won a court ruling in April, 2009 to block Li’s bid after the regulator alleged that hundreds of people, including Fortis Asia agents, were given shares in the phone carrier to boost support for the deal.Li, the son of Hong Kong's richest man, Li Ka-shing and a billionaire in his own right with a fortune we estimate at $1.1 billion, has not been implicated in any wrongdoing.
Friday, January 8, 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.
Monday, January 4, 2010
Is it the new year already?
I have posted on the 3(a)(10) fairness hearing process before. The 3(a)(10) fairness hearing provides a valid exemption for the issuance of stock so that such stock can be freely traded without being registered with the SEC. In the deal context, buyers will sometime rely on a 3(a)(10) fairness hearing in lieu of an S-4 when they are using stock as consideration and the sellers want that stock to be able to trade immediately. The advantages of the fairness hearing are chiefly in the price and speed. When the amount of stock being issued is relatively small and/or parties are looking to avoid a potentially protracted SEC review process, the fairness hearing can be an attractive alternative. This is particularly true in California, which has more experience than most in conducting fairness hearings.