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Sunday, October 28, 2007

BEA Systems: Icahn Goes to Delaware

On Friday, Carl Icahn disclosed the following letter to the board of BEAS (NB.  Caps are his own just in case the Board was reading the letter too quickly and didn't get the point): 

October 26, 2007

BEA Systems, Inc.

To The Board Of Directors Of BEA:

I am the largest shareholder of BEA, holding over 58 million shares and equivalents. I am sure that the BEA Board would agree with me that it would be desirable not to have to put BEA through a disruptive proxy fight, a possible consent solicitation and a lawsuit. This can be very simply avoided if BEA will commit to the two following conditions:

BEA SHOULD ALLOW ITS SHAREHOLDERS TO DECIDE THE FATE OF BEA BY CONDUCTING AN AUCTION SALE PROCESS AND ALLOWING THE SHAREHOLDERS TO ACCEPT OR REJECT THE PROPOSAL MADE BY THE HIGHEST BIDDER. BEA should not allow the stalking horse bid from Oracle to disappear (failure to take the Oracle bid as a stalking horse would be a grave dereliction of your fiduciary duty in my view). If a topping bid arises, then all the better. But if no topping bid arises it should be up to the BEA shareholders to decide whether to take the Oracle bid or remain as an independent Company - - not THIS Board, members of which presided over the reprehensible "option" situation at BEA, a Board that has watched while, according to Oracle in its September 20, 2007 conference call, Oracle's Middleware business "grew 129% compared with the decline of 9% for BEA".

BEA SHOULD AGREE NOT TO TAKE ANY ACTION THAT WOULD DILUTE VOTING BY ISSUING STOCK, ENTRENCH MANAGEMENT OR DERAIL A POTENTIAL SALE OF BEA. We are today commencing a lawsuit in Delaware demanding the holding of the BEA annual shareholder meeting before any scorched earth transactions (such as stock issuances, asset sales, acquisitions or similar occurrences) take place at BEA, other than transactions that are approved by shareholders. AS WE STATED ABOVE, THIS LAWSUIT CAN EASILY BE AVOIDED.

Your recent press releases regarding Oracle's proposal to acquire BEA indicate to me that you intend to find ways to derail a sale and maintain your control of the company. In particular I view your public declaration of a $21 per share "take it or leave it" price as a management entrenchment tactic, not a negotiating technique. BEA is at a critical juncture and it finds itself with a "holdover Board". BEA has not held an annual meeting in over 15 months and has not filed a 10K or 10Q for an accounting period since the quarter ended April 30, 2006. Those failures have arisen out of a situation that occurred under the watch of many of the present Board members. You should have no doubt that I intend to hold each of you personally responsible to act on behalf of BEA's shareholders in full compliance with the high standards that your fiduciary duties require, especially in light of your past record. Responsibility means that SHAREHOLDERS SHOULD HAVE THE CHOICE whether or not to sell BEA. BEA belongs to its shareholders not to you. Very truly yours, /s/ Carl C. Icahn ----------------- Carl C. Icahn

I don't yet have a copy of the complaint.  But to the extent Icahn's suit is limited to the prompt holding of the annual meeting he has a very good claim.  As I noted in my defensive profile of BEAS, BEAS has not held its annual meeting since July 2006.  BEAS is in clear violation of DGCL 211 which requires that such a meeting be held within thirteen months of the past one.  Since Schnell v. Chris-Craft, 285 A.2d 437 (Del. 1971), Delaware courts have been vigilant in enforcing this requirement although they have left the door open for a delay in exigent circumstances.  See Tweedy, Browne and Knapp v. Cambridge Fund, Inc., 318 A.2d 635 (Del. 1974) (stating that not all delays in holding annual meeting are necessarily inexcusable, and, if there are mitigating circumstances explaining delay or failure to act, they can be considered in fixing time of meeting or by other appropriate order).  Here, I suspect BEAS will argue that it cannot hold its annual meeting due to its continuing options back-dating probe.  And I suspect the reason why is that BEAS simply cannot correctly fill out the compensation disclosure for their named executives because they just don't know how the options backdating effected it.  If the company’s proxy statement says that shares were priced at one level when the options were granted and it turns out that the price was different than disclosed in the proxy statement, the statement would be a material misstatement and create liability under the Exchange Act.  Hence the delay. 

There are ways around this -- one is to omit the disclosure and obtain SEC no-action relief on the point.  The Delaware court may go this route -- forcing BEAS to obtain such relief.  But of course, if the court simply orders a date and leaves BEAS to resolve this issue with the SEC, it creates uncertainty over whether the SEC will actually grant such relief (I can't see why they wouldn't, but expect BEAS to argue this).  Otherwise, perhaps the Chancery Court can use its nifty new certification option to the SEC to find the answer.   Ultimately, Delaware has always been rather strict in requiring the annual meeting to be held within the 13 month deadline -- I expect it to be the case here in some form.  Icahn is thus likely to soon get a quick win to gain momentum in this takeover fight.  Not to mention the ability to nominate a slate for 1/3 of BEAS's directors -- the maximum number he can do so due to BEAS's staggered board.      

October 28, 2007 in Delaware, Hostiles, Litigation | Permalink | Comments (0) | TrackBack (0)

Sunday, October 14, 2007

BEA: The Defensive Analysis

On Friday, Oracle delivered a bear hug letter to BEA Systems, Inc. (BEAS) offering to purchase the company for $17 per share in cash.  For those who collect bear hug letters, Oracle wasn't kind enough to release the letter itself instead releasing a press release announcing its delivery.  BEAS followed up with two letters later in the day accessible here and here.  BEAS's response was standard operating procedure -- "just say no", hire Wachtell and buy time to develop a strategy or continue to say no.  Then came Carl Icahn, owner of 13.22 percent of BEAS disclosed his own letter rejecting the Oracle offer and requesting that BEAS put itself for auction or accept a preemptive bid at a compelling valuation (i.e., higher than Oracle's offer). Interestingly, Ichan filed the letter on Form DFAN14A meaning he is preserving his right to conduct his own proxy solicitation to in his own words "seek to  nominate individuals for election as directors of the Issuer". 

So, the question now is what are BEAS's defenses?  First, the really interesting point.  BEAS, a Delaware company has not had an annual meeting since July 2006.  BEAS is in clear violation of DGCL 211.  DGCL requires that:

If there be a failure to hold the annual meeting or to take action by written consent to elect directors in lieu of an annual meeting for a period of 30 days after the date designated for the annual meeting, or if no date has been designated, for a period of 13 months after the latest to occur of the organization of the corporation, its last annual meeting or the last action by written consent to elect directors in lieu of an annual meeting, the Court of Chancery may summarily order a meeting to be held upon the application of any stockholder or director.

This gives Oracle the ability to go to Delaware Chancery Court to force BEAS to hold a shareholder meeting for the election of directors.  This is a hole in BEAS's defensive shield, but to make a full assessment let's look at the rest of its defenses:

Posion Pill

BEAS has a shareholder rights plan (aka "poison pill") with a 15 percent threshold.  It is both a flip-in and flip-over plan and is triggered If a person or group acquires, or announces a tender or exchange offer that would result in the acquisition of, 15 percent or more of BEAS's common stock.  This is a standard form of the pill and nothing particularly unusual.  For definitions of these terms see here.

Staggered Board

The BEAS board is divided into three classes.  Each class serves three years, with the terms of office of the respective classes expiring in successive years.  The staggered board is a powerful anti-takeover device as it requires successive proxy contests over two years (for more on this generally see Lucian Bebchuk, et al., The Powerful Antitakeover Force of Staggered Boards: Theory, Evidence and Policy)

Action by Written Consent:

Permitted.  However, under Delaware law (DGCL 141(k)) the BEAS directors can only be removed for cause since BEAS has a staggered board.  So, Oracle can't act by written consent to remove the board.  Oracle will have to wait for two annual meetings in a row to gain a majority board.  This is likely about sixteen months from now give or take. 

Notice of Director Nominations

Notice of the nomination must be delivered not earlier than the close of business on the 120th day prior to such annual meeting and not later than the close of business on the later of the 90th day prior to such annual meeting or the 10th day following the day on which public announcement of the date of such meeting is first made by the corporation.  Oracle will thus have 10 days after the meeting is called to make its nominations.

DGCL Section 203

Applicable as BEAS has not opted out of it.  This is the Delaware business combination statute, and given the presence of a poison pill here, it is not particularly relevant.  This is because Oracle cannot acquire BEAS without gaining board approval and the board's accompanying redemption of the poison pill.  Any board that would do this would also exempt out Oracle from this statute by approving their acquisition. 

The bottom line is that BEAS has strong takeover defenses in the form of a staggered board in particular.  But, Oracle can force BEAS to call a meeting rather quickly and under the nomination provisions above force an election to replace 1/3rd of the board.  This would be a quick publicity gain for Oracle and provide it valuable momentum.  If BEAS continues to adopt a scorched earth strategy and just say no to a deal (a route permitted under Delaware law), Oracle would then have to wait another year to elect a majority on the board to redeem the poison pill and agree for Oracle to acquire the company.  Few companies have this staying power but Oracle did just such thing successfully in the PeopleSoft transaction.  For those reading tea leaves, there Oracle revised its initial unsolicited bid for PeopleSoft (including one reduction) five times over eighteen months before finally acquiring it in late 2004.   Oracle began at $16/share and ended at $26.50/share in the interim fighting off a DOJ suit to prevent the deal in 2004.  And if Oracle wants to be particularly aggressive and risky, it can attempt to chew through BEAS's pill, a strategy which academic Guhan Subramanian thought viable and which he detailed in Bargaining in the Shadow of PeopleSoft's (Defective) Poison Pill.  Perhaps BEAS's pill has the same defects (OK -- I'm kidding here, no lawyer would ever recommend this strategy -- way to risky).

For its part, BEAS will take particular pains (as it did in two press release on Friday) to avoid saying that it is up for sale.  That is because, once the BEAS board decides to initiate a sale process, Revlon duties under Delaware law apply and the board is required to obtain the highest price reasonably available.  By refusing to initiate a sale process, the board adopts a legitimate "just say no" defense.  One which Delaware law permits, including the use of a poison pill to avoid a deal.   Although, hope springs eternal and perhaps a case is on the horizon where Delaware where readopt Chancello Allen's opinion in Interco and reestablish supervision and court-mandated redemption of poison pills when sufficient time has passed and they are being used solely as a shield.  But don't hold your breath. 

Ultimately, I predict Oracle will attempt to put pressure on the BEAS board by initiating litigation in Delaware to hold a BEAS annual meeting and running a proxy contest coupled with a tender offer to replace the 1/3rd of the board up for election then.  If Oracle wins it will likely put enough pressure on BEAS to reach a deal.  Particualrly with Icahn chomping at the bit.  Expect BEAS to resist until then knowing that Oracle has, in the past, met such resistance with increased consideration

NB.  BEAS's Bylaws are accessible here; BEAS's Certificate of Incorporation id accessible here

Technical Tidbit:  Any agreed acquisition will likely have to be pursuant to a tender offer rather than a merger.  This is because a company that is not current in its financial reporting (i.e., BEAS) can be the subject of a tender offer but, because of an SEC staff interpretation of the proxy rules, that company may not be able to file and mail a merger proxy and thus cannot hold a shareholder vote on the merger. 

October 14, 2007 in Hostiles | Permalink | Comments (1) | TrackBack (0)

Thursday, September 6, 2007

Leap's Defensive Weakness?

Earlier this week, MetroPCS Communications, Inc. announced that it had proposed a strategic stock-for-stock merger with Leap Wireless International.  MetroPCS is proposing to offer 2.75 shares of MetroPCS common stock for each share of Leap valuing Leap's equity at approximately $5.5 billion.  For those who collect bear-hug letters, you can access the fairly plain vanilla one here.  (Aside, showing my M&A geekiness, I've been collecting these for years; my pride and joy is one one of the extra signed copies of Georgia-Pacific Corp.'s bear-hug for Great Northern Nekoosa Corp., one of the seminal '80s takeover battles). 

As a preliminary matter, MetroPCS phrased the offer as a merger rather than an exchange offer or just plain offer in order to avoid triggering application of Rule 14e-8 of the Williams Act which would require it to commence its exchange offer within a reasonable amount of time.  This is yet another bias in the tender offer rules towards mergers which doesn't make sense -- the SEC would do better to promulgate a safe-harbor for these types of proposals so an offeror has more public flexibility in proposing a transaction structure.  Although, at this point, all of the actors here, except the public, know what MetroPCS means and why they are using this language. 

I was also browsing through the Leap organizational and other documents this morning to see how takeover proof it is.  Leap is a Delaware company and it has not opted out of Delaware's third generation business combination statute DGCL 203.  But it has no staggered board or a poison pill (though as John Coates has academically observed it still can adopt one).  While Leap's directors can be removed with or without cause, there is a prohibition on shareholders acting by written consent.  This, together with a prohibition on shareholder ability to call special meetings, would mean that MetroPCS would have to wait until next year's annual meeting to replace Leap's directors.  And Leap could force MetroPCS to do so by adopting a poison pill.  So, Leap's ultimate near-term vulnerability boils down to whether its shareholders can call a special meeting.  Here is what Leap's by-laws say about the shareholder ability to call special meetings:

Section 6. Special Meetings. Special meetings of the stockholders, for any purpose, or purposes, unless otherwise prescribed by statute or by the Certificate of Incorporation, may be called by the Chairman of the Board of Directors, the Chief Executive Officer or the Board of Directors pursuant to a resolution adopted by a majority of the total number of authorized directors (whether or not there exist any vacancies in previously authorized directorships at the time any such resolution is presented to the Board of Directors for adoption). Business transacted at any special meeting of stockholders shall be limited to the purposes stated in the notice of such meeting.

Does everyone see the problem here?  It looks like a typo -- instead of "prescribed", the drafter here probably meant "proscribed".  So, instead of limiting the calling of special meetings, by changing one letter the clause expands shareholder power provided the certificate or Delaware law permits Leap shareholders to call these meetings.  Here, Article VIII of the certificate does not allow it.  So we are down to Delaware.  DGCL 211(d) is the relevant statute, and it states:

Special meetings of the stockholders may be called by the board of directors or by such person or persons as may be authorized by the certificate of incorporate or the by-laws. 

A bit circular, but it can be safe to say that Leap probably dodged a bullet here:  DGCL 211(d) does not appear to specifically authorize stockholders to call a special meeting.  And, in any event, Leap's board has the power to amend its by-laws although doing so in the middle of a battle for corporate control has its own legal and political ramifications.  Ultimately, though, the lesson here is how one (intentional or unintentional) letter can make a very big difference -- be careful out there. 

September 6, 2007 in Hostiles, Transaction Defenses | Permalink | Comments (1) | TrackBack (0)

Tuesday, August 28, 2007

The Sun Sets (Partially) on the Arizona Anti-Takeover Act

A federal district court in Arizona has preliminarily enjoined the enforcement of the Arizona business combination statute and control share statute with respect to Roche Holding AG's hostile bid for Ventana Medical Systems Inc. (see the opinion here).  This is the first court since the 1980s to hold a state anti-takeover statute invalid under commerce clause grounds (remember CTS and MITE from law school?).

In this case, Ventana was incorporated in Delaware but headquartered in Arizona and had substantial assets in that state.  Arizona's third generation anti-takeover law, the Arizona Anti-Takeover Act,  purports to cover Ventana since it has a substantial presence in the state.  Roche sued in federal district court to have it declared unconstitutional and requested that enforcement of the statute be preliminarily enjoined.  In granting this motion, the federal court found Roche to have a substantial likelihood of success on the merits because the statute applied to corporations organized under laws of states other than Arizona.  Here the Court found that:

there is strong authority demonstrating that the Arizona statutes violate the Commerce Clause because the burden on interstate commerce “is clearly excessive in relation to the putative local benefits” to Arizona. In this case the burden on interstate commerce created by the broad application of Arizona statues includes the frustration and regulation generated by a tender offer made to a foreign corporation, such as Defendant. While Arizona clearly has an interest in protecting businesses that have significant contacts with Arizona, such as Defendant, Arizona clearly has “no interest in protecting nonresident shareholders of nonresident corporations.” In balancing such competing interests, the interference with interstate commerce created by the regulation of a foreign corporation controls. The instant case, based upon the Arizona statutes and their application to foreign corporations, is no different than the cases presented above as the Arizona statutes, while protecting businesses with significant contacts with Arizona, unreasonably interfere with interstate commerce based upon the regulation of businesses that are not incorporated in Arizona.

(citations omitted).  The Court distinguished the Supreme Court's decision in CTS on the following grounds:

In CTS Corp., the Supreme Court upheld the constitutionality of Indiana’s Control Share Acquisition statute, which would impact the voting rights of an acquiring corporation in the event of a takeover of a target corporation, largely because the Indiana statute applied only to corporations organized under the laws of Indiana.

Thus, the difference for the Court here was the situs of incorporation for Ventana outsdie the state of Arizona.  This opinion is therefore a strong statement in support of the internal affairs doctrine and should make life easier for M&A lawyers by more strictly confining the application of state takeover laws to companies organized in the state of their origin (although other federal cases from the '80s have held similarly - nice to know we are not going the other way though).   And for those who engage in the race-to-the-bottom/race-to-the-top state corporate law debate, the case is a probably a good example of the need for a mediating and trumping federal presence in this debate.  Here, I'll relate the historical tidbit that the Arizona Anti-takeover Law was initially proposed in 1987 by officials of Greyhound Corporation who claimed that they were the target of a hostile takeover.

Nonetheless, Ventana still can rely on its Delaware defenses including that state's business combination statute (DGCL 203) and the poison pill it has adopted.  To be continued.

Thanks to Steven Haas for informing me of this decision. 

August 28, 2007 in Hostiles, State Takeover Laws | Permalink | Comments (0) | TrackBack (0)

Wednesday, August 15, 2007

AirTran Returns

Yesterday, AirTran reentered the bidding for Midwest Air Group.  In a press release, AirTran announced an offer to acquire Midwest for $16.25 per share.  The consideration under the new proposal would consist of $10 a share in cash and 0.6056 shares of AirTran common stock and values Midwest at $445 million in total value.  As I write, AirTran's stock is trading at $10.49 valuing the offer at $16.35.  The offer is slightly higher than the $16 a share offer from TPG Capital, L.P. the Midwest board announced on Monday that they were accepting.

My initial reaction is that AirTran management may want to read Bernard Black's classic Stanford law review article Bidder Overpayment in TakeoversProfessor Black ably analyzes the factors which go into the documented effect of bidder overpayment and the puzzling persistence of takeovers when studies have shown that they are at best wealth neutral for buyers.  These include the classic winner's curse which is a product of information asymmetry and a bidder's consequent over-estimation of value (Think about competing with another bidder to buy a home).  But it is also effected by other factors such as management optimism and uncertainty and simple agency costs (i.e., the risk of the acquisition is largely borne by AirTran's post-transaction shareholders).  Some analysts have claimed that AirTran would be better positioned without Midwest, so perhaps these factors are in play here.  Of course, we will only know the answer post-transaction if and when Midwest is acquired by AirTrans. 

Finally, the Midwest board still has leeway to prefer the TPG offer.  The Midwest board is governed by Wisconsin law, not Delaware and therefore the typical Revlon duties do not apply.  In fact, the duties of a board under Wisconsin law in these circumstances have never been fully elaborated.  Moreover, Wisconsin has a constituency statute which permits a board considering a takeover to consider constituencies other than shareholders, such as employees.  The Midwest board has before invoked this constituency statute to justify rejection of Airtran's bid.  It may do so again.  And even if Revlon duties did apply, the Midwest board could make the reasonable judgment that AirTran stock was likely to trade lower in the future, and therefore Airtran's offer was not a higher one than TPG's all-cash bid.  Here, the strong shareholder support for Airtran's stock component will make such a board decision harder to support.  But AirTran still has a ways to go before it actually reaches an agreement to acquire Midwest. 

August 15, 2007 in Hostiles, Private Equity, Takeovers | Permalink | Comments (0) | TrackBack (0)

Tuesday, August 14, 2007

Midwest Chooses?

Midwest Air Group, owner of Midwest Airlines, yesterday announced that it had determined to pursue an all-cash offer from TPG Capital, L.P. to acquire all of the outstanding shares of Midwest for $16.00 per share in a transaction valued at about $424 million.  Midwest and TPG expect to execute an agreement by tomorrow, August 15.  Midwest did not disclose it at the time, but it subsequently was reported that Northwest Airlines would be an investor in this transaction with "no management role" in the operations of Midwest.  Miudwest's announcement comes on the heels of AirTran Holdings Inc.'s weekend disclosure that it had allowed its own "hostile" cash and stock offer valued at $15.75 a share to expire.

The market is still uncertain about the prospects of a completed deal.  On the announcement, Midwest's stock actually closed down 1.62% yesterday at $14 a share.  To understand why, one need only read this excerpt from a letter delivered yesterday to the Midwest board from its largest shareholder (8.8%) Pequot Capital:

We have significant concerns with this Board’s decision to pursue an all-cash proposal from a private equity firm and its consortium. We are not convinced that this taxable, all-cash indication of interest is superior to the enhanced cash and stock offer that you indicated was made by Airtran this past weekend. In addition, we fail to see how TPG and Northwest will be able to match the job creation and growth opportunities promised by Airtran for the benefit of Midwest’s employees, suppliers, customers and communities.

Midwest's behavior throughout this transaction has been problematical.  Their scorched earth policy has produced clear benefits -- Midwest's initial bid was $11.25, but their "just say no" policy to AirTran has highlighted the problems with anti-takeover devices and their potential use to favor suitors.  Midwest management may have succeeded in preserving their jobs with this gambit, but it may be to the detriment of its shareholders. 

It is also to the detriment of AirTran.  AirTran has now incurred significant transaction costs, including lost management time expended on this transaction, and, assuming the bidding is done, now has nothing to show for it:  TPG is a free-rider on AirTran's efforts.  Here, I must admit I am a bit puzzled as to why AirTran did not establish a toe-hold; that is a pre-offer purchase of Midwest shares.  If they had taken this route, AirTran would have paid for its expenses through its gain from this pre-announcement stock purchase.  But instead, AirTran purchased only a few hundred shares for proxy purposes.  This may have been due to regulatory reasons, but if not, it appears to be poor planning by AirTran.  And AirTran is not alone.  Toeholds are common in Europe (KKR recently used the strategy quite successfully in the Alliance Boots Plc transaction), but in the United States they are less utilized due to regulatory impediments such as HSR filings and waiting periods, Rule 14e-5 which prohibits purchases outside an offer post-announcement, and Schedule 13D ownership reporting requirements.  Consequently, one study has found that at least forty-seven percent of initial bidders in the United States have a zero equity position upon entrance into a contest for corporate control.  M&A lawyers may do well, though, to advise bidders to rethink this hesitancy.  For more on this issue, see my post, The Obsolescence of Rule 14e-5

August 14, 2007 in Hostiles, Private Equity, Takeovers, Tender Offer | Permalink | Comments (0) | TrackBack (0)

Friday, August 10, 2007

Topps' Dilemma

Topps and Upper Deck exchanged a puzzling set of letters this week (see the Topps letter here, the Upper Deck letter here).  To get a gist of the discussion, here is an excerpt from the Topps letter:

When we hadn't heard from you by Monday morning, we sent you a revised draft of the merger agreement we had been negotiating with you over the past several weeks. The only substantive changes from the version we had nearly fully negotiated with you related to the mechanics of the two-step transaction (first step tender offer and second step merger). We believe that all of the other substantive provisions had been negotiated with you and your colleagues, including the representations, covenants and termination provisions. . . . . We were disappointed to hear that as of Tuesday afternoon, Upper Deck had not yet even reviewed the draft.

At least as troubling, we were shocked to hear on our call with you Tuesday that Upper Deck is expressing an unwillingness to proceed with its tender offer. This is the very form of transaction for which Upper Deck sought and obtained judicial relief, so it is startling at this point in the process to be told that Upper Deck's new preference is to terminate its offer and proceed with a one-step merger, knowing full well that would require several months, expose our stockholders to transaction risk during that time and, giving effect to the time value of money, reduce the value of the consideration received by our stockholders.

We are eager to find out if we can execute a transaction with your client, and are hopeful that we can do so. However, as we have told you on several occasions, Upper Deck's behavior has raised an increasing amount of skepticism among our directors as to whether Upper Deck truly intends to acquire Topps, or whether it is simply taking steps to interfere with the current transaction with Tornante-MDP and otherwise harm Topps' business.

Upper Deck responded by disputing Topps' assertions, maintaining that it had committed financing and stating that the reason it was not able to comment on Topps's merger agreement on Tuesday was because "Ms. Willner, who is co-counsel . . . . was out of the office on Tuesday."

This last Upper Deck comment is sure to bring a laugh to any M&A lawyer.  In this high pressure world, I've never heard of anyone using that excuse and actually meaning it.  As an M&A lawyer you are always available.  So, it's hard to know what is going on in Upper Deck's mind right now, but it appears to be stalling.  But for what purpose is unknown.  Perhaps it actually is unable to keep its financing in place or otherwise is pressing ahead to interfere with Topps' current bit to be acquired by the private equity firms The Tornante Company LLC and Madison Dearborn Partners, LLC.  But the latter explanation seems a bit far-fetched -- Upper Deck has spent a lot of time and money simply to interfere with a competitor's deal. 

Upper Deck's tender offer expires tonight at midnight.  If you look in the amended tender offer statement, there are sufficient conditions in Upper Deck's offer that are unsatisfied that it will be able to let the offer simply expire and walk.  If Upper Deck extends the offer, it will (to some extent) be an expression of its seriousness.  Still, in its letter, Upper Deck again requested  "due diligence materials (which have been repeatedly requested since at least April) so that Upper Deck may finalize its due diligence and analysis of Topps."  If Upper Deck is indeed serious, this deal still has a bit more to go  before an agreement can be reached.   But Upper Deck only has so much time:  the special meeting of Topps’ stockholders to consider and vote on the proposed merger agreement with the Tornante consortium is on August 30.

Final Note:  Upper Deck may also be able to terminate its tender offer at any time.  The key is whether the Williams Act tender offer rules prohibit this practice.  The one court to consider this issue held that shareholders could not state a claim under the antifraud provisions of the Williams Act for a bidder's early, intentional termination of a tender offer because "[w]here, as here, the tender offer was not completed, plaintiffs have not alleged that the misrepresentations affected their decision to tender, they have not claimed reliance, [and] plaintiffs have failed to state a cause of action under § 14(e)."  P. Schoenfeld Asset Management LLC v. Cendant Corp., 47 F.Supp.2d 546, 561 (D.N.J. 1999) vacated and remanded on other grounds Semerenko v. Cendant Corp., 223 F.3d 165 (3rd Cir. 2000).  But, whether other courts would go so far in the face of an intentional withdrawal by a bidder is unclear.  This is particualrly true if the bidder lacked an intent to complete the tender offer from the beginning. 

August 10, 2007 in Hostiles, Takeovers, Tender Offer | Permalink | Comments (0) | TrackBack (0)

Wednesday, August 8, 2007

The Japanese Poison Pill (Redux)

The Wall Street Journal is reporting that the Japanese Supreme Court has upheld a landmark lower-court ruling affirming the use of a poison pill defense by Bull-Dog Sauce Co.   The lower court had held that Bull Dog, a Japenese condiment maker, could employ the defense to fend off an unsolicited offer to be acquired from Steel Partners Japan Strategic Fund (Offshore) LP, a U.S. fund.   Steel Partners is offering Yen 1,700 per share, a 25.8% premium to Bull Dogs's 12-month average closing share price.  Steel Partners is one of the best-known takeover funds in Japan and is seen as a symbol of shareholder activism in that country.

Steel Partners had sued Bull-Dog alleging that the poison pill was discriminatory and therefore in violation of Japanese law.  On June 24, 2007, 80% of Bull Dog's shareholders had voted to approve the issuance of stock acquisition rights underlying the poison pill at its annual general meeting of shareholders.  Both the lower court and the Supreme Court apparently relied heavily on this vote to find that the poison pill was not discriminatory because the company's shareholders had approved it.  According to the Journal:

Bull-Dog's defensive scheme gives all shareholders three equity warrants for each Bull-Dog share they own.  But the firm bars Steel Partners from exercising its warrants, instead granting it 396 yen ($3.33) for each warrant -- a 2.3 billion yen ($19.3 million) payout for Steel Partners -- but making it impossible for the U.S. fund to take control of the Japanese company.

A prior Journal report also calculated that the poison pill will dilute the fund's holdings to less than 3% from more than 10% if exercised.  Bull-Dog is now scheduled to redeem the warrants on Aug. 9.  This is a clear loss for Steel Partners.  But, as I stated in an earlier post on the lower court ruling: 

The decision is a bit of a surprise since in at least two other cases the Japanese courts had invalidated the use of a poison pill.  But the big difference here appears to be the shareholder vote.  Poison pills are often decried as denying shareholders the right to make their own decisions concerning a sale of their company.  Yet in this instance there was a vote which overwhelmingly validated use of this mechanism.  And Bull Dog's pill is a relatively mild one providing for limited dilutive effect.  The case can therefore be distinguished on these grounds and likely confined to justifying the use of a pill to fend off unsolicited bids in Japan in those instances where shareholders overwhelmingly oppose the transaction. 

For U.S. purposes, the decision also highlights a more democratic use of the pill.  One where shareholders get a say on its use to deter unsolicited offers.  This is a path which many activists in the United States have called for.   And it is one which permits shareholders a say in the important takeover decision, one they are today often deprived of.  For more, see Ronald J. Gilson, The Poison Pill in Japan:  The Missing Infrastructure

August 8, 2007 in Asia, Hostiles, Takeover Defenses | Permalink | Comments (0) | TrackBack (0)

Tuesday, August 7, 2007

Upper Deck Ducks a Second Request

The Topps Company, Inc. announced yesterday that it has been advised by The Upper Deck Company that the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, with respect to Upper Deck's offer to acquire Topps had expired without a second request, an event which would have delayed Upper Deck's bid by several months.  The antitrust condition to Upper Deck's offer is now satisfied and Upper Deck can now proceed with its $416 million bid.  Upper Deck's offer of $10.75 a share is materially higher than the current agreement Topps has to be acquired by Michael Eisner's The Tornante Company LLC and Madison Dearborn Partners, LLC for $9.75 a share in cash, or about $385 million. 

Topps stated in its press release that "it continues to negotiate with Upper Deck to see if a consensual transaction can be reached."  As I stated before, "[i]f and when [Upper Deck clears its offer with the antitrust regulators], expect the bidding for Topps to continue."  The next move is Tornante's and Madison's.  If they walk, they will split a break fee of $12 million, higher than the $8 million fee payable during the go-shop period when Topps initially spurned Upper Deck's bid.   

August 7, 2007 in Hostiles, Private Equity, Takeovers | Permalink | Comments (0) | TrackBack (0)

Wednesday, August 1, 2007

Topps Postpones Shareholder Meeting

The Topps Company, Inc. announced yesterday that it had postponed the special meeting of Topps' stockholders to vote on the proposed merger agreement with Michael Eisner's The Tornante Company LLC and Madison Dearborn Partners, LLC to August 30, 2007.  The record date is now August 10, 2007. 

Upper Deck's competing, higher bid is still in the HSR Act waiting period being reviewed by the FTC or DOJ.  The waiting period under the HSR Act for the Upper Deck bid will expire at 11:59 pm ET on August 3, 2007, unless this period is earlier terminated or extended.  Given this, Topps had no choice but to postpone its own shareholder meeting.  By the time the Topps shareholder meeting is held, the FTC or DOJ will have decided whether to initiate a second request concerning the Upper Deck acquisition proposal; if a second request is made it would postpone the Upper Deck bid by several months at best.  In a few days Topps board and its shareholders will thus be in a better position to assess the Upper Deck bid and choose.  But the choice will become much harder if a second request is made forcing Topps shareholders to decide between a lower, certain bid and Upper Deck's less sure and delayed higher one.  For more see Upper Deck Tries to Buy Time, Topps and Upper Deck: The Antitrust Risk.

August 1, 2007 in Hostiles, Regulation, Takeovers | Permalink | Comments (0) | TrackBack (0)

Tuesday, July 31, 2007

Midwest Air Group Blinks

Midwest Air Group, Inc., parent of Midwest Airlines, announced today that it has formed a special committee to explore strategic and financial alternatives for the company.  According to the announcement:

While the board of directors has not changed its recommendation regarding the unsolicited exchange offer by AirTran Holdings, Inc., the committee intends to commence discussions with AirTran regarding its proposal to acquire all outstanding shares of Midwest. Additionally, the committee intends to hold discussions with other strategic and financial parties that have recently expressed interest in pursuing a transaction with Midwest.

Airtran's battle for Midwest has been one of the most vigorously fought takeover battles of this decade.  The formation of a special committee by Midwest is likely driven by increasing shareholder protest at their board's scorched earth resistance to Airtran's "hostile" bid.  Last week, hedge fund Octavian Management LLC, Midwest's largest shareholder with a 7.5% stake, called the Airtran bid "extremely compelling" and stated that it was "irresponsible and wrong for the company not to abide by its fiduciary responsibility to engage with AirTran" in negotiation.  The Midwest committee will therefore serve to cover the board's liability exposure, but it is also likely to lead to a serious exploration of the AirTrans offer.  If Airtran succeeds in acquiring Midwest it will be a powerful statement about the ability of any public company to "just say no" and resist a transaction, but it will also serve as a reminder of the immense transaction costs our current takeover system imposes by permitting the use of anti-takeover devices. 

July 31, 2007 in Hostiles | Permalink | Comments (0) | TrackBack (0)

Bausch & Lomb's Wary Eye

The Board of Directors of Bausch & Lomb Inc. yesterday responded in a letter to Advanced Medical Optics' proposal to acquire B&L for $75 per share in cash and AMO stock.  B&L currently has an agreement to be acquired by affiliates of Warburg Pincus for $65 per share in cash.

In their letter, the B&L board and special committee expressed uncertainty as to the ability of AMO to complete an acquisition of B&L.  ValueAct Capital, the owner of 8.8 million shares of AMO common stock, representing 14.7% of the outstanding AMO shares, has publicly stated it will vote against the acquisition.  AMO is required to have its own shareholder vote on the proposal in order to approve the share component of the offered consideration.  Given this completion risk, the B&L board stated that the $50 million reverse termination fee proposed by AMO was too low. 

AMO had previously been designated by B&L as a party who B&L could continue to negotiate with despite the end of the "go shop" period in the Warburg Pincus merger agreement.  However, in yesterday's letter the B&L board threatened to withdraw this status if AMO was not more cooperative.  The effect of such a redesignation would be to require B&L, if it ultimately accepts the AMO bid, to pay Warburg a $120 million termination fee rather than the lower $40 million required if a bid was received during the "go shop" period.

B&L's actions appear to be appropriate considering the uncertainty surrounding the AMO proposal.  However, the threat of a redesignation of AMO seems a bit odd -- such a move would only hurt B&L shareholders and make it harder for AMO to pay the consideration offered.  It therefore seems motivated to assuage likely complaints of Warburg more than anything else.  B&L is currently in discussions with AMO's shareholders concerning their intentions with respect to any AMO vote, and apparently is in a dispute with AMO concerning the provision of information to these shareholders.  the actions of AMO's large shareholder have clearly thrown a monkey-wrench into AMO's bid and put them in the role of "decider" for this acquisition contest.  Another victory for institutional shareholder activists.   

July 31, 2007 in Hostiles, Private Equity, Takeovers | Permalink | Comments (0) | TrackBack (0)

Monday, July 30, 2007

ABN AMRO Withdraws Barclays Recommendation

The Managing and Supervisory Boards of ABN AMRO today announced that they would no longer recommend the Barclays offer to combine with ABN AMRO.  Instead, the boards announced that they  were not "currently in a position to recommend either" the Barclays offer or the Royal Bank of Scotland consortium "[o]ffers for acceptance to ABN AMRO shareholders".  As at the market close on 27 July 2007, the Barclays offer was at a 1.0% discount to the ABN AMRO share price and the RBS consortium offer was at a premium of 8.5% to the ABN AMRO share price; 9.6% higher than the Barclays offer. 

This essentially leaves the battle for ABN AMRO in the hands of its shareholders.  Nonetheless, there are structural differences which may influence the contest.  The RBS consortium is proceeding through an exchange offer structure (see the Form F-4 here, it is a nice precedent for a U.S./Dutch cross-border exchange offer).   The Barclays offer is pursuant to a Dutch merger protocol.  RBS has launched its offer and Barclays today stated that it intended to make its offer documentation available on August 6.   Given the need for all of the parties to obtain regulatory and other approvals, it is likely that they will remain on the same timing track.  Thus, ultimately, the contest  now largely depends on the share price of Barclays increasing during this time period sufficiently to justify its acquisition proposal:  an uncertain prospect in today's volatile markets.   

July 30, 2007 in Cross-Border, Europe, Hostiles | Permalink | Comments (0) | TrackBack (0)

Thursday, July 19, 2007

Upper Deck Tries to Buy Time

On Tuesday, The Upper Deck Company announced that had withdrawn its Hart-Scott-Rodino Antitrust Improvements Act notification filing related to its proposed acquisition of The Topps Company, Inc.  Upper Deck stated at that time that it plans to re-file its notification today, July 19, 2007.  Upper Deck had originally filed its HSR notification on July 2, 2007.  By re- filing its notification with the FTC, Upper Deck now has another full 15 day period to discuss the transaction, and answer any questions raised by the FTC, the agency reviewing the HSR filing.  Assuming Upper Deck does file today, the waiting period under the HSR Act will expire at 11:59 pm ET on August 3, 2007, unless this period is earlier terminated or extended.

Upper Deck stated that "its decision to withdraw and re-file its notification was prompted in part by the July 4th holiday and by additional factors outside of its control."  Sometimes, companies withdraw and refile HSR notifications to correct or update information.  But refilings also sometimes occur when companies want to give the FTC or DOJ more time to review the transaction in the hopes of avoiding a second request which would delay Upper Deck's bid by several months.  This was likely the circumstances here.  Upper Deck is desperate to avoid a second request so as to make its $416 million bid more compelling than the current agreement Topps has to be acquired by a The Tornante Company LLC and Madison Dearborn Partners, LLC for $9.75 a share in cash, or about $385 million.  A refiling buys more time to convince the FTC that there is no antitrust problem with its transaction. And as I stated before in a prior post:

And the antitrust risk is clearly in both parties minds, as Topps 14D/9 filed today details that the substance of the parties' negotiations have concerned antitrust issues.  Topps is requesting that Upper Deck agree to a $56.5 million reverse termination fee and a modified hell or high water provision (a provision in which Upper Deck would agree to sell or hold separate assets to satisfy governmental antitrust concerns).  Upper Deck has resisted these provision, and the parties have agreed to suspend negotiations on the matter until the antitrust risk is clarified through the HSR process. 

Topps was scheduled to hold a shareholders meeting to vote on the Tornante acquisition on June 28.  But, the Delaware Court of Chancery enjoined the holding of the meeting to permit Upper Deck to commence its tender offer.  Topps has yet to announce the new date for the meeting but has set the record date for the close of business on July 3. 

For the time being, the deal is in the hands of the antitrust  authorities.  If and when they clear the transaction, expect the bidding for Topps to continue.  In the case of a second request, Topps may try and push forward with the Tornante bid, perhaps with a sweetener from that consortium to hasten the process.

With its HSR refiling Upper Deck is signalling that a second request is still a very real possibility.

July 19, 2007 in Hostiles, Takeovers | Permalink | Comments (0) | TrackBack (0)

Monday, July 16, 2007

RBS Et Al. Stays The Course

Fortis, RBS and Santander announced today that they intend to proceed with their proposed offer for ABN AMRO. The consortium left the consideration per ABN AMRO share being offered unchanged at €38.40 but raised the cash component to approximately 93% (€35.60 in cash plus 0.296 New RBS Shares for each ABN AMRO share).  The offer values the equity of ABN AMRO at €71.1 billion or $98.03 billion.

The prior bid has been 79% cash. It was also conditioned upon a shareholder vote with respect to the LaSalle Bank sale and withheld €1 a share to cover costs for litigation over ABN's LaSalle bank unit.  This condition and the withholding have been dropped in this bid in the wake of the Dutch court ruling upholding the sale of LaSalle Bank to Bank of America.  Instead, RBS issued a press release today stating that the net cash received from the LaSalle sale will go to RBS.  The new RBS consortium offer puts significant pressure on Barclays to raise its competing all-share bid which currently values ABN AMRO at about €65 billion.

ABN AMRO's securities are registered with the SEC and it has greater than 10% of its shareholders resident in the United States disqualifying the RBS-led group from using the SEC's cross-border exemptions.  Accordingly, there will be two offers made by the RBS consortium:  one to U.S. shareholders and ADS holders wherever located governed by U.S. rules and one to all other shareholders governed by Dutch rules.  In connection with the U.S. bid, RBS will need to prepare and file with the SEC a registration statement on Form F-4.  However, unless ABN AMRO cooperates, the RBS consortium will not need to include in the F-4 the usually required U.S. GAAP pro forma financial information for the combination.  This omission is permitted by Rule 409 of the Securities Act since the information is reasonably unavailable (usually required ABN AMRO auditor consents can also be omitted under Rule 437).  And it is a way for hostile bidders in cross-border transactions to gain timing parity by having to avoiding the time-consuming process of preparing this financial information.   

July 16, 2007 in Europe, Hostiles, Tender Offer | Permalink | Comments (0) | TrackBack (0)

Monday, July 9, 2007

Topps and Upper Deck: The Antitrust Risk

The Topps Company, Inc. today announced that its Board of Directors had unanimously recommended that its stockholders reject the pending, unsolicited Upper Deck tender offer. Upper Deck is offering $10.75 a share or $416 million.  In connection with their rejection, the Topps board asserted that the terms of the Upper Deck tender offer are substantially similar to the acquisition proposals submitted by Upper Deck to Topps on April 12, 2007 and May 21, 2007.  However, Topps stated that it will continue discussions with Upper Deck to see if a consensual transaction is possible.  Topps has currently agreed to be acquired by The Tornante Company LLC and Madison Dearborn Partners, LLC for $9.75 a share in cash, or about $385 million.  Topps' board has not changed its recommendation for that transaction.   

On July 2, Upper Deck, Topps main competitor in the trading card market, filed with the Federal Trade Commission and the Department of Justice the documentation necessary to commence the initial 15-day antitrust regulatory review period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976  with respect to the tender offer. The review period is 15 days and not the normal 30 days because it is a tender offer, and the period is scheduled to expire on July 17, 2007.  However, there is a strong chance the FTC or DOJ will issue a second request for this proposed transaction, delaying the process.  Until this review is completed, Upper Deck will not be able to close its tender offer. 

And the antitrust risk is clearly in both parties minds, as Topps 14D/9 filed today details that the substance of the parties' negotiations have concerned antitrust issues.  Topps is requesting that Upper Deck agree to a $56.5 million reverse termination fee and a modified hell or high water provision (a provision in which Upper Deck would agree to sell or hold separate assets to satisfy governmental antitrust concerns).  Upper Deck has resisted these provision, and the parties have agreed to suspend negotiations on the matter until the antitrust risk is clarified through the HSR process. 

Topps was scheduled to hold a shareholders meeting to vote on the Tornante acquisition on June 28.  But, the Delaware Court of Chancery enjoined the holding of the meeting to permit Upper Deck to commence its tender offer.  Topps has yet to announce the new date for the meeting but has set the record date for the close of business on July 3. 

For the time being, the deal is in the hands of the antitrust  authorities.  If and when they clear the transaction, expect the bidding for Topps to continue.  In the case of a second request, Topps may try and push forward with the Tornante bid, perhaps with a sweetener from that consortium to hasten the process.  At the very least the market agrees with a higher offer, Topps is trading today at $10.42 as I write, above Tornante's current offer price. 

July 9, 2007 in Hostiles, Regulation, Takeovers | Permalink | Comments (0) | TrackBack (0)

Sunday, June 3, 2007

The Battle for Topps

The battle for Topps Company, Inc. continues to heat up.  On May 24, 2007, the company announced that it had received a $416 million offer from its rival, The Upper Deck Company, to acquire Topps for a price of $10.75 per share.  Topps currently has an agreement to be acquired by a group consisting of The Tornante Company LLC and Madison Dearborn Partners, LLC for $9.75 per share in cash.  The Tornante Company is headed by former Disney CEO Michael Eisner.

Last week, Deal Book reported that the hedge fund Crescendo Partners, owner of 6.6% of Topps, was alleging that certain Topps board members have conflicts of interest that prevent the company from negotiating in good faith with, Upper Deck.  Deal Book reported that "[i]n a letter sent to the company’s board of directors, a Crescendo Partners managing director Arnaud Ajdler, who is also a Topps board member, said the chief executive of Topps, Arthur Shorin, “does not want to see the company started by his father and uncles fall into the hands of a longtime rival.”

Crescendo today sent a second letter to the Topps board which states in part:

Finally, in your communications, you like to repeat that Crescendo wants to take over Topps without paying stockholders for their shares. Once again, you are misleading your stockholders. When a buyer wants to take a company private, as Mr. Eisner and Madison Dearborn are attempting to do, the buyer pays stockholders a premium for their shares. While this premium is typically 20 to 30%, you have approved a transaction that would pay stockholders a meager 3% premium and a significant discount to where the shares are currently trading. As you well know, Crescendo is NOT trying to take the Company private. If the ill-advised Eisner merger is voted down, Crescendo will ask its fellow stockholders, the true owners of Topps, to replace seven of the incumbent directors on the Board with a new slate. This well-qualified slate is committed to taking all necessary actions to improve the company's capital structure and operations for the benefit of ALL the stockholders. As detailed in our proxy statement, we believe that the Company could be worth conservatively between $16 and $18 per share if managed properly.

This is yet another example of the increasing potential for conflict between private equity and hedge funds as hedge funds emerge as activist investors in search of extraordinary returns and the private equity bubble rages.  But more immediately, the Topps Board now has a competing bid and a hostile proxy contest on its hands formented by one of its own members.  Stay-tuned. 

June 3, 2007 in Hedge Funds, Hostiles, Private Equity, Proxy | Permalink | Comments (0) | TrackBack (0)

Tuesday, May 29, 2007

The RBS Consortium's Offer for ABN Amro

The Royal Bank of Scotland Group plc, Fortis and Santander today announced the terms of their proposed €71.1 billion offer for ABN Amro.  If completed, it would be the largest financial services deal in history.  According to the consortium, its bid is at a 13.7% premium to the competing €64 billion bid from Britain's Barclays plc supported by ABN Amro. The consortium is offering €38.40 per ABN share comprising 79% cash with the remainder consisting of new RBS shares.  But the group will also hold back €1 a share in cash (or $2.5 billion) as a reserve against litigation costs and damages that might arise from the Bank of America's lawsuit against ABN Amro to enforce the sale of LaSalle Bank to it.  In a just world this would be money that would come out of the pocket of ABN Amro CEO, Rijkman Groenink and the ABN Amro Supervisory Board for mucking up this sale process instead of their shareholders. 

The group detailed the financing arrangements for the bid, and also detailed their plans to break-up ABN Amro upon its acquisition:  RBS will acquire ABN Amro's Global Wholesale Businesses (including the Netherlands but excluding Brazil), LaSalle Bank and International Retail Businesses for a consideration of €27.2 billion. The full offer document can be accessed here.  The group will now proceed to have their required shareholder meetings and expect to commence the full offer in August of 2007. However, this is a pre-conditional offer -- certain conditions must be satisfied before the full offer can commence.  The most significant pre-condition is one requiring a favorable ruling on the currently pending litigation over the LaSalle matter.  It requires that:

The preliminary ruling of the Dutch Enterprise Chamber that the consummation of the Bank of America Agreement should be subject to ABN AMRO shareholder approval has been upheld or otherwise remains in force, whether or not pursuant to any decision of the Dutch Supreme Court, or of any other judicial body, and ABN AMRO shareholders have failed to approve the Bank of America Agreement by the requisite vote at the ABN AMRO EGM.

Thus, like many a U.S. takeover, the final disposition of ABN Amro will be decided by the courts.  The Dutch Supreme Court is expected to rule in July or August.  Until then, there will continue to be significant uncertainty in the market over the RBS-bid and the future of ABN Amro.   

NB.  The RBS group has also decided to take a different course in this offer document with respect to the acquisition of LaSalle Bank.  The consoritum offer itself, once it commences, is now conditioned upon "ABN AMRO shareholders hav[ing] failed to approve the Bank of America Agreement by the requisite vote at the ABN AMRO EGM convened for that purpose."  The group's previous offer was cross-conditional on ABN Amro reaching an agreement to sell LaSalle directly to RBS.  Now, it appears RBS is content to acquire only ABN Amro, and subsequently purchase LaSalle.   

May 29, 2007 in Cross-Border, Europe, Hostiles, Tender Offer | Permalink | Comments (0) | TrackBack (0)

Friday, May 25, 2007

Trading Baseball Card Companies

The Topps Company, Inc. yesterday announced that it had received a $416 million offer from The Upper Deck Company, to acquire Topps for a price of $10.75 per share.  Both Topps and Upper Deck are in the trading card business; Topps also makes Bazooka bubble gum.  Topps currently has an agreement to be acquired by a group consisting of The Tornante Company LLC and Madison Dearborn Partners, LLC for $9.75 per share in cash.  The Tornante Company is headed by former Disney CEO Michael Eisner.

The Tornante led bid was opposed by three of the 10 members of Topps's board and hedge fund Crescendo Partners II, which says the offer undervalues the company.  Topps initial agreement had a 40-day go-shop provision, and Topps disclosed in its press release that it had rejected an indication of interest previously made by Upper Deck during that time period.  Topps had previously identified Upper Deck in its proxy statement for the transaction only as a competitor.  The disclosure of Topps on this point is actually a bit funny:

On April 12, 2007, prior to the expiration of the go-shop period, one of the potential go-shop bidders, who is the principal competitor of our entertainment business, submitted a non-binding indication of interest to acquire Topps for $10.75 per share, in cash. Lehman Brothers called this interested party on the first day of the go-shop period, and numerous times during this period, for the purpose of soliciting and/or assisting them with the development of their bid for Topps. Lehman Brothers’ calls were infrequently returned . . . . .

One hopes it wasn't because of this that a deal was not reached.  Topps response to yesterday's offer was similarly tepid:

[Topps's] Board of Directors noted that there are material outstanding issues associated with Upper Deck's latest indication of interest, including, but not limited to, the availability of committed financing for the transaction, the completion of a due diligence review of the Company by Upper Deck, Upper Deck's continued unwillingness to sufficiently assume the risk associated with a failure to obtain the requisite antitrust approval and Upper Deck's continued insistence on limiting its liability under any definitive agreement. Upper Deck's present indication of interest was accompanied by a highly conditional "highly confident" letter from a commercial bank.

I'm usually skeptical of private equity buy-outs and target attempts to put the fix in on a chosen acquirer.  This is particularly true here where both board members and shareholders have complained of the offer price.  Still, Topps may be justified in its own skepticism.  A deal between Topps and Upper Deck apparently has substantial antitrust risk.  Upper Deck's bid may therefore not be a "true" bid but rather an attempt for Upper Deck to gain access to its main rival's confidential information.  In addition, a deal for Topps by Upper Deck would apparently require approval by Major League Baseball.  Moreover, the financing for this deal does appear to be uncertain.  In this day of cheap and easy credit the best Upper Deck could obtain from its lenders was a "highly" confident letter.  This is a 1980's invention of Michael Milken; bankers issue these letters for deals that are riskier and financing uncertain.  Instead of a firm commitment letter, they therefore state they are "highly" confident that financing can be arranged.  So, if Topps has a firm deal on the table the extra money being offered here by Upper Deck might not be worth it given the deal completion risks and possible harm to Topps if it permits a competitor to review its confidential information.  Still, Upper Deck's offer is a nice negotiating tool with the current buy-out group even if a deal is not possible.  Topps shares rose 48 cents, and closed at $10.26 yesterday, so the market presumably agrees.

May 25, 2007 in Going-Privates, Hostiles, Leveraged Buy-Outs, Private Equity, Transaction Defenses | Permalink | Comments (0) | TrackBack (0)

Thursday, May 24, 2007

M&A Nirvana: Alcan, BHP Billiton and a Tri Listed Company Structure

The rumors yesterday that BHP Billition was to be a white night for Alcan with respect to Alcoa's pending $28 billion offer to acquire Alcan, had me thinking about M&A nirvana:  the Tri Listed Company.  BHP Billion is a dual listed company.  A DLC structure is a virtual merger structure utilized in cross-border transactions.  The companies do not actually effect an acquisition of one another, but instead enter into an unbelievably complex set of agreements in which they agree to equalize their shares, run their operations collectively and share equally in profits, losses, dividends and any liquidation.  In the case of BHP Billiton, this structure involves Billiton, an English company, and BHP, and Australian company. 

If BHP Billiton were to acquire Alcan, it could do so by adding a third leg with Alcan and forming the world's first tri listed company.  The agreements to do this would reach new levels of complexity (hence my thoughts of M&A nirvana), and the operation of the company could become a bit complex to say the least.  For example, the shareholder meeting for the company would have to last almost 24 hours in order to encompass meetings on three continents for three companies.  But the structure is feasible.  Thomson, a Canadian company, and Reuters, an English company, showed its viability by recently agreeing to combine using this structure in the first English/Canadian DLC (see my blog post on this here).  The Australian element should be able to fit within this framework. 

And a BHP Billiton acquisition through a TLC would actually make good sense.  It would assuage issues of Canadian nationalism by maintaining the presence of Alcan in Canada.  It would preserve beneficial dividend tax treatment for Canadian shareholders and establish a strong Canadian shareholder base for the TLC.  It would also avoid triggering any existent change of control provisions in any joint venture agreements that Alcan might have.  Finally, an acquisition in this form would ensure that certain valuable hydroelectric, power and other rights and agreements that the Quebec government has granted to Alcan would not be terminated, an event Alcan asserts would happen with a true acquisition.

The above calculus would also apply if Rio Tinto decides to bid for Alcan.  Rio Tinto like BHP Billiton is also a DLC involving an English company and an Australian one. 

If BHP Billiton and Alcan (or Rio Tinto and Alcan) agreed to such a structure it would permit Alcoa to counter with its own DLC proposal thereby raising further complexity to this takeover battle.  And if Alcoa succeeded this would also be a milestone as there has yet to be a true U.S. DLC.  BP came close in 1998 with Amoco, but the SEC refused to allow pooling accounting and so it was at the last minute converted into a true acquisition.  The closest is Carnival, a Panamanian and English DLC.  Carnival's Panamanian company has equivalent U.S. corporate governance provisions and is treated as a U.S. tax-domiciled entity. 

Final Note:  Legal geeks should note that the SEC recently revised its position on the requirement to register the shares of newly-formed DLCs (or presumably TLCs).  Historically, the SEC did not require a new registration statement to be filed as the shares of both companies remained outstanding and there was no triggering offering.  But, with the Carnival DLC the SEC took the position that the changes in the character of the securities of the company were so fundamental that a registration statement is now required with respect to both sets of shares of the DLC.  So, a BHP Billiton/Alcan tie-up would require reregistration of the shares of each of the three companies with the SEC unless U.S. holders constituted 10% or less of the company's shareholder base. 

May 24, 2007 in Cross-Border, Hostiles, Takeovers | Permalink | Comments (1) | TrackBack (0)