M & A Law Prof Blog

Stapled Financing in Poor Credit Markets

Foulds, a clerk for Vice Chancellor Parsons, has a paper on conflicts of interest in stapled financing.  Stapled financing is a practice in which the seller's advisor offers potential acquirors financing to undertake an acquisition.  Of course this is a practice where there are serious potential conflicts of interest because in a competitive setting a seller's advisor has an incentive to favor a buyer who will take the financing over a buyer who won't.   The Delaware Chancery Courts have looked warily at the practice and it's been the subject of some discussion by practitioners.  Hey, I've even got stapled financing on my list of "to do" papers.   

Foulds puts an interesting twist on the stapled financing debate by suggesting that in poor credit markets the presence of stapled financing will make a deal more likely to close.  Why?  Foulds argues that the conflict of interest is doing all the work and keeping the financing available in conditions when any other normal provider of credit would have long walked away.  It's an interesting argument.  It doesn't necessarily resolve the question of whether the presence of stapled financing has an influence on the competitive sale, but it's an interesting approach.  

The paper, My Banker's Conflicted and I Couldn't Be Happier: The Curious Durability of Staple Financing, is appearing in the Delaware Journal of Corporate Law.

-bjmq

Proskauer on Pay to Play

On August 3, 2009, the SEC proposed for comment a new rule under the Investment Advisers Act designed to address alleged “pay to play” practices by investment advisers when seeking to manage assets of government entities.

 

 

If adopted in its current form, the new Rule would prohibit investment advisers from

 

 

• providing advisory services to a government entity for compensation for two years after the adviser or certain of its associates make a contribution to a government official who can influence the entity’s selection of investment advisers.

• making any payment to a third party to solicit investment advisory business from a government entity.

The proposed Rule will affect virtually all private investment fund managers.  It takes aim at alleged “pay to play” abuses in New York and New Mexico and is intended to address policy concerns that such payments (i) can harm government pension plan beneficiaries who may receive inferior services for higher fees and (ii) can create an uneven playing field for advisers that cannot or will not make the same payments.

 

 

Proskauer has the full story here.

 

MAW

BAC-ML: The E-Mail

The internal e-mail disclosed as part of the House Oversight Committee's hearings on the BAC/Merrill deal make for some interesting reading.  In the exchange below Scott Alvarez, General Counsel for the Federal Reserve Board, lays out the major legal issues surrounding the last minute "MAC-attack" by Lewis.  He correctly identifies the disclosure issue with respect ML's losses as the real hot button legal problem for Lewis. 

From: Scott Alvarez
To: [Ben Bernanke]
Date: 12/23/08, 10:18AM

Mr. Chairman,
Shareholder suits against management for decisions like this are more a nuisance than successful.  Courts will apply a “business judgment” rule that allows management wide discretion to make reasonable business judgments and seldom holds management liable for decisions that go bad.   Witness Bear Stearns.  A different question that doesn’t seem to be the one Lewis is focused on is related to disclosure.  Management may be exposed if it doesn’t properly disclose information that is material to investors.  There are also Sarbanes-Oxley requirements that the management certify the accuracy of various financial reports.  Lewis should be able to comply with all those reporting and certification requirements while completing this deal.  His potential liability here will be whether he knew (or reasonably should have known) the magnitude of the ML losses when BAC made its disclosure to get the shareholder vote on the ML deal in early December.  I’m sure his lawyers were much involved in that set of disclosures and Lewis was clear to us that he didn’t hear about the increase in losses till recently. 

All that said, I don’t think it’s necessary or appropriate for us to give Lewis a letter along the lines he asked. First, we didn’t order him to go forward – we simply explained our views on what the market reaction would be and left the decision to him.  Second, making hard decisions is what he gets paid for and only he has the full information needed to make the decision – so we shouldn’t take him off the hook by appearing to take the decision our of his hands.
Let me know if you’d like any more information on this.
Scott
 

From: [Ben Bernanke]
To: Scott Alvarez
Date: 12/23/08, 11:08AM

Thanks, Scott.  Just to be clear, though we did not order Lewis to go forward, we did indicate that we believed that [not] going forward would detrimental to the health of (safety and soundness) of his company.  I think this is remote and so this question may be just academic, but anyway:  What would be wrong with a letter, not in advance of litigation but if requested by the defense in the litigation, to the effect that our analysis supported the safety and soundness case for proceeding with the merger and that we communicated that to Lewis?

From Bernanke's response, it's pretty clear that while the Fed didn't order BAC to close the deal, they probably told Lewis that if he decided not to close the deal that the world economy would implode and it would be all his fault.  Hmm.  Tough choice.  Tough choices like these are just examples of the "Big Deal" in action.

On the other hand, to the Chairman's question about preparing a letter to help with Lewis' potential defense in any lawsuit - through the combined wonders of e-mail and discovery, the letter he thinks might be helpful isn't required!

-bjmq

Recap of Bernanke's testimony:

Morgan Stanley's Big Freeze

I previously celebrated the Reddy Ice deal and the joys of M&A by proclaiming Reddy Ice's slogan "Good Times are in the Bag", the day the company announced that it would be acquired by GSO Capital Partners for $681.5 million in a deal valued at $1.1 billion including debt.  I should have known better -- it now appears that the celebration might have been a bit too soon.  Last week Reddy Ice filed its definitive proxy statement for the transaction.  The transaction history discloses a deal in crisis with Reddy Ice being hit by shareholder protests against the deal by Noonday Asset Management, L.P. and Shamrock Activist Value Fund L.P., the company's results for July coming below budget and recent guidance for 2007, and GSO proclaiming that it needed more time to finance the deal given the state of the debt markets and Reddy Ice.

In light of these problems, the parties ultimately agreed to amend the merger agreement to cap the future dividends Reddy Ice could pay while the transaction was pending, extend GSO's marketing period for the debt financing, move up the date of the Reddy Ice shareholder meeting to October 15, 2007, and reduce the maximum fee payable to GSO if Reddy Ice's shareholders rejected the transaction from $7 million to $3.5 million. Notably, Reddy Ice backed away from its initial position vis-a-vis GSO that it required an extension of the go-shop period and a postponement of the shareholder meeting in exchange for these amendments.  For those who don't believe that private equity reverse termination provisions will be a factor in this Fall's deal renegotiations, I suggest you read this transaction history very carefully.  The Reddy Ice board specifically cites its fears that GSO would simply walk from the transaction by paying the reverse termination fee of $21 million as a factor in its renegotiation.  Note that this amendment still preserves this option. 

Now Morgan Stanley is objecting to the amendment.  MS has agreed to provide GCO with debt financing for this transaction, and MS is claiming that the merger amendment was entered into without its consent thereby disabling its obligations under the commitment letter, a fact MS is reserving its rights with respect thereto.  MS agreed to a $485 million term loan facility, an $80 million revolving credit facility, and a $290 million senior secured second-lien term loan facility.  GSO and RI are disputing MS's claim and the transaction is not contingent on financing, i.e., unless it claims a MAC GSO has no other choice but to take this position.  The MS debt commitment letter is not publicly available but they are likely relying on the following relatively standard clause: 

[Bank] shall have reviewed, and be satisfied with, the final structure of the Acquisition and the terms and conditions of the Acquisition Agreement (it being understood that [Bank] is satisfied with the execution version of the Acquisition Agreement received by [Bank] and the structure of the Acquisition reflected therein and the disclosure schedules to the Acquisition Agreement received by [Bank]). The Acquisition and the other Transactions shall be consummated concurrently with the initial funding of the Facilities in accordance with the Acquisition Agreement without giving effect to any waivers or amendments thereof that is material and adverse to the interests of the Lenders, unless consented to by [Bank] in its reasonable discretion. Immediately following the Transactions, none of Borrower, the Acquired Business nor any of their subsidiaries shall have any indebtedness or preferred equity other than as set forth in the Commitment Letter.

I am not involved in the bank finance industry these days, but still, it is hard to see how this amendment is adverse to the position of MS (assuming that the clause in their debt commitment letter is similar to the one above).  If anything, the extension of the marketing period is beneficial to MS.  The remainder of the amendment does not appear to effect MS except perhaps the dividend provision, but GSO can always fund that if necessary.  But, Marty Lipton -- a man much smarter than me -- was recently on the wrong side of this debate when he made a similar argument in the context of the Home Depot supply deal, though that deal was more substantially renegotiated.  Ultimately, MS's position is likely similar to one taken by banks in the recent Home Depot and Genesco deals -- they are using ostensible contractual claims to attempt to renegotiate deals that no longer are attractive and they are likely to lose money on.  Here, based on a number of big assumptions, MS's claims seem a bit over-stated, though it may be enough to engender a further renegotiation of the deal premised upon MS's implicit threat to walk.  Good Times are NOT in the Bag. 

Final Note:  In a developing market with a number of situationa like this, MS is taking a shot at this strategy with a lower priority client first.  I doubt they would take the same position with KKR. 

Pity Today's M&A Investment Bankers

On the heels of the handwringing on the plight of today's investment banker in Jonathan Knee's the Accidental Investment Banker, William Cohan has an op-ed in today's Financial Times entitled Shed no Tears for the Legendary Wall Street Banker.  Cohan, who authored The Last Tycoons: The Secret History of Lazard Frères & Co., writes:

So how are all those overpaid and overworked M&A bankers feeling these days? Not so great, in fact. At the very same moment when they have never been busier - flying round the world in private jets to attend infinitely ponderous and desperately important meetings - M&A advisory revenue has never been more irrelevant to their firms' bottom lines.

He goes on to make the now common observation about the demise of brand-name bankers and the rise of private equity as a force minimizing the need for M&A bankers.  And he quotes one corporate lawyer as stating that "Bankers are [now] sitting in coach."  Well, there is schadenfraude for you. 

But the thing that caught my eye is the common-theme complaint here about advances, technology etc. making the traditional role of M&A investment banker less relevant and the need for reinvention.  Well, I think the foregoing need is one that every white collar worker today has to deal with.  Blue collar workers are in a worse position as they find it harder to reinvent themselves.   Welcome to the real world M&A bankers.

Archstone-Smith in $22.2 Billion Acquisition by Tishman Speyer and Lehman

Archstone-Smith today announced that it agreed to be acquired by Tishman Speyer and Lehman Brothers, in a transaction valued at approximately $22.2 billion.  The group will pay $60.75 per share in cash. Showing yet agin the depths of our capital markets, the transaction is not conditioned on receipt of financing.  The CEO of Archstone, R. Scot Sellers, has agreed to stay with the newly-private company and agreed to terms of a new employment agremeent effective upon the completion of the acquisition.
I'll have more once the merger agreement and the terms of the CEO Sellers' new employment agreement are made public.