M & A Law Prof Blog

Editor: Brian JM Quinn
Boston College Law School

Tuesday, November 17, 2009

3Com-HP Lawsuit

You know what they say ... it's not a real deal unless there's a lawsuit.  Well, the 3Com/HP deal has its first lawsuit.  The $2.7 billion all cash deal was announced last week.  Here's the merger agreement.  Given that it's an all cash deal, the complaint alleges that the board failed to meet its fiduciary duties by not getting the highest price reasonably available to shareholders when it agreed to sell the company to HP.  That's a Revlon complaint.  I used to think that meant something, but following Lyondell, I now know that unless there's a claim of fraud or misrepresentation, short of an "utter failure" by the board to attempt to meet its duties, this kind of complaint is going nowhere.  Since the only question is price, then it appears the only available remedy for those who think the company got sold for less than its fair value is appraisal under Sec 262 of the DGCL.

Here's the appraisal language from the merger agreement (Section 2.7(c)): 

(c) Statutory Rights of Appraisal.

(i) Notwithstanding anything to the contrary set forth in this Agreement, all shares of Company Common Stock that are issued and outstanding immediately prior to the Effective Time and held by Company Stockholders who shall have neither voted in favor of the Merger nor consented thereto in writing and who shall have properly and validly perfected their statutory rights of appraisal in respect of such shares of Company Common Stock in accordance with Section 262 of the DGCL (collectively, “Dissenting Company Shares”) shall not be converted into, or represent the right to receive, the Per Share Price pursuant to Section 2.7(a). Such Company Stockholders shall be entitled to receive payment of the consideration that is deemed to be due for such Dissenting Company Shares in accordance with the provisions of Section 262 of the DGCL, except that all Dissenting Company Shares held by Company Stockholders who shall have failed to perfect or who shall have effectively withdrawn or lost their rights to appraisal of such Dissenting Company Shares under such Section 262 of the DGCL shall no longer be considered to be Dissenting Shares and shall thereupon be deemed to have been converted into, and to have become exchangeable for, as of the Effective Time, the right to receive the Per Share Price, without interest thereon, upon surrender of the certificate or certificates that formerly evidenced such shares of Company Common Stock in the manner provided in Section 2.8.
(ii) The Company shall give Parent (A) prompt notice of any demands for appraisal received by the Company, withdrawals of such demands, and any other instruments received by the Company in respect of Dissenting Company Shares and (B) the opportunity to control all negotiations and proceedings with respect to demands for appraisal in respect of Dissenting Company Shares. The Company shall not, except with the prior written consent of Parent, voluntarily make any payment with respect to any demands for appraisal, or settle or offer to settle any such demands for payment, in respect of Dissenting Company Shares.
I wonder if this lawsuit even has a nuisance value.


November 17, 2009 in Delaware, Litigation | Permalink | Comments (0) | TrackBack (0)

Thursday, July 9, 2009

Broadcom-Emulex Litigation and a Collection of Strine Musings

In the Broadcom-Emulex battle that was before Vice Chancellor Strine earlier this week, Vice Chancellor Strine took Broadcom to task for “punking out” by walking away from the litigation and structuring its offer in a way that prevents the court from ruling on the just-say-no defense.  Rather than make their offer conditioned on the board pulling the poison pill, Broadcom conditioned its offer on the board accepting a friendly deal.  Those, as Strine noted in an office conference (transcript) among the parties are two different animals.  The former being an interesting and live, judiciable question and the latter looking akin to “a TW Services or SWT?  It’s always messed up, because one was the plaintiff.  Right?”

Of course, there were more “Strine-isms” from the office conference.  By this time, it’s clear that Broadcom got the Vice Chancellor’s nose out of joint for wasting the court’s time.  The court is offering to allow defendants to continue their discovery even though Broadcom dropped out of the litigation after it completed its discovery.

Strine:  Get me your subpoena.  You guys come back to me if Broadcom changes its approach.  We will take stock at the end of next week.  I expect you all to speak with each other before you come back to me within the plaintiff camp.  You know, talk seriously.  Like I said, I am sensitive to the amount of time and effort on both sides that – of all the lawyers in the room, and the lost time with family, and lost sleep, and time spent in going through airport security, which is a brilliant thing.  When are they going to end the liquid ban?  I swear, I think you could get – if you could find a – somebody should run for president.  The idea is like any person – any employee of the airlines can shoot somebody if they have more than four liquid containers on their tray and  -- you could get elected on that.  At least you would have a very high percentage vote among air travelers.

The Vice Chancellor offering his opinion on the incentives facing the named plaintiff in the case who owns exactly one share of Emulex stock:

Strine: … And that’s why I’m telling you all I’m more interested, terms of expedition, if we get past this, in the supermajority bylaw.  But you want to be serious with yourselves and the clients.  I’m not talking about Mr. Middleton.  I’m not saying he doesn’t have, technically, standing, but in the room we – I could make him happy, you know, even with – I could take it.

Mr. Smith:  A Happy Meal would make him happy.

Strine:  I could – I could double the 11-dollar offer and make Mr. Middleton happy.  And he would be – the Middleton Fund would have a great return for the year.  And I mean – he could go to – I could recommend if he came here, he could go to Libby’s three days in a row, and he could eat well.  But after that, he would be out of skin in the game.

This transaction has been a battle from the very beginning.  Emulex has characterized the Broadcom in a negative light, even filing suit in a California court -- referring back to its unpleasantness with a previous CEO.  And now, Broadcom has walked away from its opportunity to force the Emulex board to pull its pill by dropping out of the litigation and forming its offer in a way that its lawyers should know does provide the court an opportunity to rule in favor of the plaintiffs left behind. 

For the record, given that Emulex adopted its pill and other defensive measures in response to early offers from Broadcom and not on a clear day, it’s possible that the Vice Chancellor could have ordered Emulex to pull its pill.  But now we’ll never know.

The Deal Professor has a good run down of the legal issues in this case.


Update:  Broadcom drops its bid and punks out completely.

July 9, 2009 in Delaware, Hostiles, Litigation, Takeover Defenses | Permalink | Comments (0) | TrackBack (0)

Tuesday, June 23, 2009

Yahoo Shareholder Litigation Settled

In anticipation of a potential hostile approach by Microsoft last year, Yahoo adopted a "tin parachute" severance plan.  The "tin parachute" is a company-wide severance plan that makes payments to employees who lose their job following a change in control.  If part of the motivation for an acquisition is cost-reduction and if layoffs are part of the post-closing integration plan, then such a plan could be a deal-killer.  The Deal Professor discussed Yahoo's tin parachute in a post at the time.  In any event, the plan generated a lawsuit that, according to NY Times, was settled today.   Here's a copy of the proposed settlement agreement and amended severance plan.  The agreement modifies the plan to make it less onerous for a potential acquirer, but doesn't get rid of it altogether.  This watered-down plan must stay in place for at least 18 months from the date the settlement plan is approved, thus making it hard for the Yahoo board to lean on it, should Microsoft come knocking again. A new Section 5.1 also permits the board to amend or terminate the plan at any time.


June 23, 2009 in Litigation, Takeover Defenses | Permalink | Comments (0) | TrackBack (0)

Friday, January 4, 2008

Genesco -- the ambiguity of specific performance

Apparently in response to a Genesco motion to clarify, the Tenn. judge today issued this order.   A few points:

  1. The judge rules that her recent opinion is not a final order and she will issue a final order only once a ruling is issued in the N.Y. action. In other words, since it is an interim ruling, any appeal of the Tenn. opinion will likely only occur after the New York litigation is resolved.  It is unclear whether she means that the ruling has to be final in New York (i.e., all appeals exhausted up to the Second Circuit and Supreme Court) or she will reconvene proceedings based on a lower court ruling.
  2. The reason for the ambiguity in her opinion on specific performance which I previously highlighted is now apparent (i.e., at the end of the opinion she left open the issue of whether she would order specific performance of the merger or damages if Finish Line loses in New York against UBS).  In the order she specifically states that she will consider the issue of whether Finish Line is required to complete the merger in such a scenario only after a ruling in the New York litigation.  Particularly, in such a scenario she is going to permit Finish Line to argue frustration of commercial purpose.  This is a very high standard to meet.  And the case she cites for this proposition is one where the party failed to meet it. 
  3. Ultimately, this means more delay in any final resolution of this dispute.  The parties now definitely must go to New York and the possibly Tenn. for Finish Line to be held liable for damages.  And there must still be a Tenn. appeal.  The timing issue is likely more important than the possibility of Finish Line winning in Tenn. on frustration of commercial purpose since this, again, is a hard test to meet.
  4. At this point the outcome the parties would have received in Delaware versus Tenn. is beginning to diverge. 

More on Monday . . . .

January 4, 2008 in Litigation | Permalink | Comments (0) | TrackBack (0)

Monday, December 24, 2007

The Dog Bites: Coda

So, I've been thinking a bit more about the URI/Cerberus opinion over the weekend and have the following thoughts/questions:

  1. Chancellor Chandler again reiterates that he denied URI's motion to grant summary judgment but that "the question was exceedingly close."  However, he never states in the opinion which side it was exceedingly close for; instead he details the arguments put forth by both sides for a complete and unambiguous contract and finds both to be reasonable interpretations.  I find this terribly interesting and suspect that Chandler did not make a statement either way on this to support his opinion on appeal.  But I would love to know which way he was leaning (likely URI?).  [Update:  Actually fn 104 says it all -- Chandler would have ruled for URI -- it states:
    • If defendants had filed a cross-motion for summary judgment and, therefore, borne the burden to demonstrate that their interpretation was, in fact, the only reasonable interpretation as a matter of law, this Court would not have hesitated to deny defendants’ motion. Here, however, in opposing plaintiff’s motion, defendants need only to meet the lesser burden of demonstrating that their interpretation was a reasonable interpretation and that, therefore, plaintiff’s interpretation of the Merger Agreement is not the sole reasonable interpretation. I find that defendants have satisfied this burden, concluding that their proffered interpretation is not unreasonable as a matter of law and that, therefore, the agreement is ambiguous. This was, however, as I indicated in my letter opinion denying plaintiff’s motion, an exceedingly close question.]
  2. We still don't know the contents of the conversations URI claimed attorney/client privilege for and I wonder why no member of the URI special committee testified.  We likely will never know.  This is unfortunate, because I think they are important for determining what really happened (i.e., was URI and its counsel Simpson aware of this ambiguity and decided not to raise it or were they equally caught).
  3. I wonder what Apollo is thinking?  Apollo owns URI preferred and common stock (by my calculations on a fully converted basis equal to 15,333,000 shares of common stock).  Leon Black and Michael Gross were both on the URI board but because their economic interests differed from the common holders, they recused themselves from the deliberations and didn't vote on the transaction. They've just lost a couple of hundred million in a change of control premium. I wonder whether they have been doing anything in the background?  Remember there has previously been litigation between the two in Cerberus Intern., Ltd. v. Apollo Management, L.P., 794 A.2d 1141 (Del.Supr. Mar 13, 2002) and there are the old Drexel ties there (plus they have their own big deals to push through -- e.g., Hexion/Huntsman).  I would have loved for the transaction to go through if only because we would get to see a new background to the transaction section disclosing if any of these contacts actually existed.
  4. Both Prof. Larry Ribstein and Prof. Jeff Lipshaw have weighed in on the message of Chandler's opinion for contract drafters who employ sloppy or ambiguous drafting techniques (Larry's first post is here; Jeff's is here; and Larry's reply to Jeff's post is here).  I think we actually all agree on the message but apply it in different circumstances.  So, there are at least three different circumstances where ambiguous contact drafting can arise 1) both parties are aware the language is ambiguous but leave the term open either because they cannot compromise on it or otherwise prefer an ambiguous interpretation; 2) one party is aware the language is ambiguous but the other does not and assigns a clear meaning to it; and 3) neither party is aware the language is ambiguous and both assign separate meanings to it.  Jeff makes the valid point that commercially reasonable parties can take route 1 -- after all, a MAC clause is typically  drafted in vague qualitative terms rather than quantitative ones because such vagueness and the specter of litigation can work to both sides advantage.  And I think all of us would agree that 3 is a problem -- in circumstance 3, I am particularly thinking of late night sloppy and short-hand drafting which can cause problems that neither party pick-up due to haste or lack of sleep, etc.  (BTW -- I am sure Prof. Coates is itching to respond on this and we will benefit from hearing his thoughts as soon as this dispute is over).  But I think Chandler's opinion is not actually ruling on either of these issues.  Rather, Chandler, by relying on the forthright negotiator principle, is setting a default rule in situation 2 which encourages parties to be direct in their negotiating.  That is -- where a negotiator know the other side assigns a certain meaning to an ambiguous contract term and he or she know or should have known of that meaning they are required to be forthright and inform the other side.  I believe this is an economic rule because it will discourage unintended consequences and needless litigation -- as opposed to situation 1 where litigation is actually contemplated as a potential resolution and cost.  Hopefully, Larry and Jeff agree. 
  5. I think the open airing of the circumstances of this transaction negotiation has something to say about the deal team structure at large M&A firms [NB. in footnote 132 of the opinion Chandler notes that Gary Horowitz was the supervising partner on this transaction but that he engaged in no negotiation with the buyer leaving that to the senior associate on the matter, Eric Swedenburg].  Many M&A deals are staffed by a senior associate and a senior partner or alternatively a junior partner and mid-level associate.  And junior partners and senior associates are and should be essentially interchangeable on any deal.  There a number of differences in the dynamics of each team though.  Senior associates in this situation often negotiate the entire deal and are also running the transaction documents -- they often do not get assigned a mid-level to run the drafts (besides, one of the reasons they got there is because they are form gods and want to maintain their status as A team drafters until they are elevated to partners). Junior partners have more pull to get the staffing of a mid-level to run the documents and focus more on the negotiating part. The end-result is that often sleep-deprived senior associates sweating it out to make partner and under significant stress are forced to juggle and paper entire transactions.  I do wonder if this dynamic played in this contract negotiation and the end-result.  But I have no way of knowing and perhaps it played no part.   
  6. Putting aside the issue for the moment of whether Chandler made the right decision, his ruling does resolve all the complications of trying to enforce a ruling that RAM Holdings must assert a claim against Cerberus to fund the equity and cause the banks to fund the rest of the financing as well as the jurisdictional issues in New York.  That would have been a nightmare.      
  7. The appeal: by holding a trial Chandler escaped de novo review of any ruling for URI or Cerberus on summary judment -- instead his factual conclusions will be reviewed, if at all, by the Delaware Supreme Court under a deferential standard.  Those findings will not be set aside by the Delaware Supreme Court unless they are clearly erroneous or not the product of a logical and orderly deductive reasoning process.  Legal conclusions are reviewed de novo, but given the factual findings underlying Chandler's ruling, I think the likelihood of success on appeal is low and any such appeal would be more for negotiating position.
  8. The transaction highlights the importance of the non-public information for these disputes.  When I first started writing about this matter, I thought URI had the better reading of the contract on a harmony basis but that it was ambiguous. But the parol evidence that came out prior to trial favored Cerberus's contract interpretation.   At trial, I was therefore looking for URI to put forth a counter-story based on their own parol evidence.  However, no such compelling evidence came out.  From reports of the trial proceedings, I thought this would lead Chandler to find no understanding among the parties.  I was wrong.  In the end, once Chandler found ambiguity, the parol evidence became central and Chandler's application of the "forthright negotiator" principle trumped URI's contract reading and the limited rebuttal evidence they (could?) put on.  Chandler specifically found that  URI's "attorney Eric Swedenburg categorically failed to communicate [URI's contract interpretation] to the defendants during the latter part of the negotiations."  Game over.   
  9. There is a still a litigation haze that will remain over this deal even if there is no appeal -- at a minimum there are now a number of pending class actions against URI related to its failure in August and September to disclose Cerberus's concern about its failure to be able to complete this deal.   
  10. A few final thoughts -- kudos to Chancellor Chandler for a well-reasoned and quick opinion, as well as the litigation teams on both sides for a fantastic job (Connolly Bove Lodge & Hutz, Willkie Farr & Gallagher and Orans, Elsen & Lupert for URI  :  Richards, Layton & Finger, Milbank Tweed Hadley & McCloy and Shapiro, Forman Allen, Sava & McPherson for Cerberus).  Finally, the deal lawyers go away from this scarred, but I think we all need to take a step back and remember that we do not know all of the facts here and what went through the minds of the parties as well as their private conversations -- the senior deal partners on both sides have great reputations from long careers in M&A and one deal should not change that.  But there is a moral that I repeat for all transaction lawyers -- sloppy drafting can get you into trouble, being a less than forthright negotiator even more so.  The first assignment for my M&A class next semester is to read this opinion. 

Addendum:  This morning URI announced that it had terminated the merger agreement and stated that it would not appeal.   

December 24, 2007 in Litigation | Permalink | Comments (1) | TrackBack (2)

Thursday, December 20, 2007

On Hiatus Today/URI

I'll be on hiatus today.  Hopefully, we'll have a decision by tomorrow on URI.  I am very curious to see if Chandler finds that there was no common understanding of the parties on specific performance [for the legal background on this statement see my post here].  In such circumstances, he is the one who is required to fashion an equitable ruling and remedy.  I increasingly think that this will be his decision.  And it raises a host of questions.  Does he then rule for:

  1. URI, as it has the better contract reading on a harmony basis and the ambiguity is Cerberus's responsibility?  This ruling also has the virtue of being a better default rule to guide future parties towards more careful contract language.  NB. Chandler has previously criticized in his order on the Coates testimony poor drafting practices, and so this may display a predisposition towards this one.   
  2. Cerberus, as the limited guarantee comes into play in the failure of the section 8.2(e) and section 9.10 language?
  3. Either Cerberus or URI, as the party with least unclean hands (at this point I am not sure who this is, Cerberus doesn't come off great for attempting to repudiate the contract and URI may have been a less than forthright negotiator).
  4. Cerberus or URI, and leave damages up to another stage (at this point the fact that Ram Holdings is a shell comes into play).

It's a nail-biter . . . .

Final Note:  Interesting that URI did not put up a single witness from the URI special committee and invoked attorney/client privilege for some of the communications between Simpson and the board. . . . .

December 20, 2007 in Litigation | Permalink | Comments (0) | TrackBack (0)

Friday, December 14, 2007

The Order on the Expert Opinion and Testimony of Prof. Coates

Here is Chancellor Chandler's order on the testimony and report of Prof. Coates (just released by Delaware).  Chandler states: 

After thoroughly reviewing Professor Coates’s report and both parties’ briefs, I find that the portion of the report that describes buyout deal structures is admissible as factual testimony and that the remainder of the report that purports to explain drafting practices is inadmissible as impermissible legal opinion.

I think this is the right decision, but I find more interesting his statement in footnote 7:

Remarkably, in his report, Professor Coates appears to excuse practices that can only be described as inartful drafting as “one of the ways that the parties [to buyout negotiations] commonly economize on time and costs.” Id. Professor Coates states that the parties, in contravention of basic principles of contract interpretation and drafting, use certain phrases (e.g., “subject to” or “notwithstanding”) so as to “avoid the need to attempt to synthesize every provision of every related agreement that is or may be partly or wholly in conflict with the provision in question.” Id. Not surprisingly, disputes often arise precisely because of provisions that are “partly or wholly in conflict” with each other.

I respectfully agree with Chancellor Chandler as I stated last week.  And for those who want it may also give some insight into how he is reading the merger agreement.  I would also expect URI to seize on this footnote to support their case -- the poor drafting job here does not excuse what should be the plain reading of the contract, and contracts should be interpreted against the drafter.  Ultimately, the sloppy drafting in the URI merger agreement is a lesson for all M&A lawyers about how to approach and train drafting.  But that is a subject for another post.   

December 14, 2007 in Litigation | Permalink | Comments (0) | TrackBack (0)

URI: The Path Ahead

Chancellor Chandler's denial of URI's summary judgment motion yesterday means that there will now be a full trial starting next Monday on the merits.  For those who like to parse language and speculate, Chandler's letter order stated: 

Having reviewed your briefs and supplemental letters regarding URI’s motion for summary judgment, I have concluded that while the question is exceedingly close, summary judgment is not an effective vehicle for deciding the contract issues in dispute in this case. Although I am today denying URI’s motion for summary judgment, I will provide more fully my reasons for doing so in the context of the post-trial opinion that will follow promptly after the conclusion of trial on Wednesday, December 19.

There are a number of readings of the "exceedingly close" language.  A few of the most likely are: 1)  URI almost made their case but the continuing ambiguity required a trial, 2) Cerberus, on their limited affidavits and other documents, almost made their case but the continuing ambiguity required a trial, 3) Chandler still hasn't made any definitive determination other than that, given the high standard here (undisputed evidence supporting a judgment at law), it is ambiguous, 4) Chandler has made a decision but wants a trial to protect himself on appeal, and 5) the language is just comfort language and doesn't mean very much. 

I can't even begin to speculate on which one it is [Addendum:  my bet is 3 & 4], but I do think we have some data coming out of Cerberus's (successful) opposition brief and affidavits.  Assuming URI is a smart, rational actor at this point -- something I think you have to do -- they knew that their summary judgment motion would have serious problems.  So, rather than slug it out in a contest of affidavits which would only highlight the ambiguity, they decided to let Cerberus put forth its entire case and wait until trial for its factual points.  At trial, URI will now put forth their best case which appears likely to be the legal one made in their summary judgment brief -- i.e., section 9.10 has to mean something, and hope it defeats Cerberus's legal and evidentary arguments.  But, given the parol evidence we have right now, I think URI, absent any countering evidence, will still have a hard time given the evidence on Cerberus's side.  I eagerly await URI's opposing evidence, if any.  I want to emphasize that I still think things are very fluid-- and have not seen URI's evidence -- but if they have any, it may change my thinking at least, as Cerberus's evidence had similarly done.      

On Cerberus's opposition brief unsealed Wednesday I have one brief point.  Cerberus makes an argument (pp. 31-33) that URI's claim that the merger agreement contemplates specific performance does not meet the clear and convincing evidence standard required under Delaware law. Here, Cerberus is conflating the award of the remedy as opposed to the standard to interpret the contract.  To decide whether the contract requires specific performance Delaware courts use regular tools of contract interpretation.  But, once they have decided a breach (i.e., the contract required specific performance), then they will look to the clear and convincing evidence standard to decide if specific performance is actually warranted. As I have written elsewhere, I believe it is if URI wins, but others dispute this.  Otherwise, Cerberus builds on the parol evidence of Ehrenberg and the drafting record to show their side of the story.  I was particularly struck by Cerberus's claim that the limited guarantee and equity commitment letter had Delaware choice of law and choice of forum clauses, and that was changed at the request of Lowenstein Sandler. 

Finally, showing that this trial has Law & Order beat hands down, the expert opinion of John C. Coates, IV was rule inadmissible by Judge Chandler today.  The decision is under seal so we don't know the reason why.  Very interesting . . . .    

December 14, 2007 in Litigation | Permalink | Comments (1) | TrackBack (0)

Monday, December 10, 2007

The Expert Testimony of Peter R. Ehrenberg

Cerberus has filed with the court the affidavit of Peter R. Ehrenberg, a well-respected M&A attorney at Lowenstein & Sandler and senior counsel to Cerberus on the URI deal. The purpose of Mr. Ehrenberg's affidavit is to provide Cerberus's narrative of the history of the negotiation of the merger agreement.  One of the interesting things is that nowhere does Gary Horowitz, the Simpson partner on the deal, make an appearance. Not even on a telephone call -- he is missing in action.  Instead, Mr. Ehrenberg states that the main attorney on the deal was Eric Swedenburg, and Mr. Swedenburg negotiated the merger agreement on behalf of URI.  At the time he allegedly single-handedly negotiated the deal, Swedenburg was a senior associate at Simpson (NB. coincidentally? Swedenburg made partner just last week -- mazel tov -- he is also one of the authors of the Simpson memo John C. Coates referred to in his testimony). I honestly don't know what to make of this and will wait until URI's factual response to comment. But, perhaps Cerberus is attempting to set up an argument that an inexperienced, over-their-head associate (fortuitously now partner?) at Simpson made a mistake and URI can't now cover for it.  We'll see, but I feel bad for the situation Swedenburg is now in -- he may be a rock star there and this is a bit unfair to him in cosmic justice sort of way (i.e., think of all the times you as a senior associate were left to finish the deal  -- there but for the grace of . . . .).  Expect an affidavit from Horowitz saying he was the man behind the curtain -- puppeteering from behind the scenes. 

Otherwise, the affidavit puts forth a good explanation and provides strong support for Cerberus's case; something I had yet to see. In particular, Mr. Ehrenberg claims Simpson specifically attempted to delete the phrase "equitable remedies" from the last clause of Section 8.2(e), but that this request was rejected by Mr. Ehrenberg and the phrase remained. Again, this is only one side of the argument and presumably URI/Simpson will argue that this has nothing to do with whether Section 8.2(e) was only triggered upon termination. Nonetheless, I now understand why Simpson is arguing the more complicated argument that section 8.2(e) only applies to termination rather than the simpler one that the specific performance clause must have meaning. Cerberus has a good counterargument in that circumstance that it was specifically negotiated away. Ultimately, we still need to see URI's side of the story, but their case just got more complicated. 

Addendum:  Here are the affidavits of two other Lowenstein lawyers on the deal -- the associates who took the notes.  Again, no appearance by Horowitz -- Swedenburg is the primary lawyer.  They add more support to Ehrenberg's points but again leave open for URI to argue that they were talking about only in the event of termination, etc.  I'm increasingly puzzled by what URI actually thought they negotiated and what the parol evidence is revealing. 

December 10, 2007 in Litigation | Permalink | Comments (0) | TrackBack (0)

Genesco: The First Day

I had a lot of reports today on the Genesco trial.  No smoking guns yet; the stock dropped at 11:30 a.m. but the fall doesn't correspond to any change in the testimony (perhaps related to an analyst report)' only two and a bit witnesses put on; it appears that the key witness is going to be the Genesco CFO; a few semi-incriminating emails (the worst from said CFO); no real mention of the SDNY investigation; the judge is taking copious notes; and UBS appears to be doing a better job than Finish Line.  Since I am not watching and all of the above is hearsay, I'll forgo any conclusions.  I'm hoping to catch the testimony tomorrow. 

December 10, 2007 in Litigation | Permalink | Comments (0) | TrackBack (0)

Genesco Trial Starts Today

The Genesco trial begins today. It appears that we are going to have our first MAC decision out of the August credit crunch. I am personally excited as we are also likely to get some guidance out of the industry exclusion condition in MAC clauses -- something sorely needed.  And it is no coincidence that it is coming out of an industry, and not a private equity, deal. 

For those who want a summary of the issues see my Handy-Dandy Genesco Litigation Organizer. I'll also have commentary on the comings and goings. In addition, per this court order the CVN Network? will be running a live feed. The order notes that there will be no confidential information presented at trial which likely means that Finish Line and UBS do not have a smoking gun.  Meanwhile, for those wondering what is driving this litigation UBS reportedly received an $11.5 billion injection of capital today and took an unexpected $10 billion write-down. 

December 10, 2007 in Litigation, Material Adverse Change Clauses | Permalink | Comments (0) | TrackBack (0)

Thursday, December 6, 2007

The Expert Opinion of John C. Coates, IV

In a bit of a coup for Cerberus, Prof. John C. Coates, IV has agreed to be their "deal structure" expert. Prof. Coates is a very well-respected law professor at Harvard Law School and one of the very few legal academics at a top law school to have actual, high-profile M&A experience. He was a partner at Wachtell. My thoughts. First, I'm jealous at his $950 an hour fee -- I need to raise my rates. Second, Coates's expert opinion (download his statement here ) is our first big clue outlining Cerberus’ best arguments. It boils down to two points:

  • There are many deals (including some negotiated by URI deal counsel Simpson, Thacher) that have a specific performance clause which other clauses then draft into meaninglessness.  This was the case here. 
  • Drafters resort to catch phrases like “notwithstanding” so that they need not bother to go back and fix other sections and this is done because of time constraints.  This was how section 8.2(e) was caveatted and why section 9.10 does not have to be given any meaning. 

Ultimately, Prof. Coates would have us read out of the merger agreement is a critical provision that no doubt was a pivotal negotiating point (the right to force deal consummation!).  Prof. Coates cites Simpson Thacher’s representation of the Neiman Marcus Group to support this argument.  Prof. Coates states:   

For example, counsel to URI cited the 2005 buyout of Neiman Marcus as one of the deals containing a provision permitting a buyer to “pay a sum certain to walk away from the transaction.” Yet Section 9.10 of that agreement contained a specific performance clause enforceable against the buyer shell entities – and it even lacked the “subject to” cross-reference to the liability cap that is present in the URI Deal merger agreement.  Nevertheless, counsel to URI did not qualify its characterization of reverse termination fees by reference to this separate provision . . . .

To determine who is right let's start with the Neiman Marcus Group merger agreement.  There in section 9.10 (specific performance) there is no “subject to another section” language.  When you look at section 8.2 (effects of termination), section 8.2(g) states:

Notwithstanding anything to the contrary in this Agreement, (i) (A) in the event that Parent or Merger Sub breaches its respective obligation to effect the Closing . . . . (B) Parent and Merger Sub fail to effect the Closing and satisfy such obligations because of a failure to receive the proceeds of one or more of the debt financings contemplated by the Debt Financing Commitments . . . . then the Company's right to terminate this Agreement pursuant to Section 8.1(d)(i) and receive payment of the Merger Sub Termination Fee pursuant to Section 8.2(e) shall be the sole and exclusive remedy . . . .[and] in no event shall Parent, Merger Sub and their affiliates, stockholders, partners, members, directors, officers and agents be subject to liability in excess of $500,000,000 in the aggregate for all losses and damages arising from or in connection with breaches by Parent or Merger Sub of the representations, warranties, covenants and agreements contained in this Agreement.

Putting this together, I think it changes nothing:  NMG’s only remedy in the circumstances of section 8.2(g) is to terminate and receive the reverse fee.  Three things here are notable for the URI transaction: 

  1. Section 8.2(g) of the NMG merger agreement kicks in only if debt proceeds are insufficient to consummate the deal (precisely the ultimate risk sponsors want protection against; in URI this risk has not come about, at least as far as we know, but expect to at some point);
  2. Section 8.2(g) of the NMG merger agreement talks about “loss or damage” and so arguably, like the URI provision in that merger agreement's section 8.2(e), doesn’t apply when the company is seeking specific performance (although there is a paradox here: if that were the case, then NMG's buyer failed to protect itself adequately against the very situation where the debt was insufficient, because in this reading, the company could still force it to close under the specific performance provision); and
  3. The specific performance language in section 9.10 of the NMG merger agreement is very generic whereas in the URI merger agreement it appears to have been heavily negotiated and actually does talk about specifically enforcing the consummation of the transaction (NMG was silent on this).  This is also true since it appears that both deals were working off Simpson's form. 

I believe point three particularly strengthens URI's argument despite the suggestion that in URI’s section 9.10 the addition of the words “subject to 8.2(e) . . . . under the circumstances provided therein” weakens URI’s section 9.10 versus NMG’s section 9.10.  It is evidence that the parties intended something more than what was existent in NMG and other similar deals. 

In this light, what I believe the NMG merger agreement really says is that, so long as all the conditions precedent have been met and, implicitly, that the financing is sufficient to close, then NMG can specifically enforce closing.  In paragraph 23 of Prof. Coates's expert opinion he mentions that Simpson in a client memo referenced NMG as an example of the kind of deal where buyer could “pay a sum certain to walk away from the transaction.”  This is bothersome: either that is quoted out of context (e.g., it could have said “buyer can pay a fee to walk if debt financing is unavailable”) or Simpson itself misunderstood the protection NMG actually had (doubtful) or I am wrong (a likely explanation -- Coates is smarter than me). The memo is still on Simpson’s website (access it here) and presto, it is quoted out of context – see, e.g., the first paragraph on page 4 of the Simpson memo – it refers specifically (no pun intended) to “if financing not available”.  It states:

The buying group in each of these transactions also agreed to a “reverse termination” fee in the event of a failure to close as a result of the buyer not procuring the necessary financing. . . . In the case of the Neiman Marcus and Hertz transactions, the buyer potentially could be required to pay further damages above the termination fee in the event that the failure to close did not result from the buyer being unable to obtain the debt financing (such as, for example, the buyer failing to use its reasonable best efforts to consummate the financing, including taking down on the more expensive bridge financing following an opportunity to raise the high-yield debt).

Note that I am making this argument without having seen the NMG equity commitment letter or guarantee -- it could change things.  Nonetheless, Prof. Coates is ultimately right that there are a number of deals that have specific performance clauses but then elsewhere have a mechanism which renders the specific performance clause meaningless through other provisions. The problem that he has is that in those cases the reading was clear. Here, there is ambiguity creating uncertainty about what the parties actually meant, and a better reading of the merger agreement appears to be that URI is only limited to a damages remedy if it terminates (this is generally because it is one that does give meaning to section 9.10 in light of such ambiguity -- a preference of contract interpretation -- see my post here for a fuller analysis). Prof.  Coates attempts to get around this issue by making the following statement: 

One of the ways that the parties commonly economize on time and costs is not to attempt to review every provision of every related agreement every time a new change is made, particularly when documents are in the final stages of negotiation.  Rather, they rely on succinct but legal terms of art to achieve what is, in essence, “editing” of the entirety of a document with minimal change.  Among the terms of art customarily relied upon are phrases such as “subject to” or “notwithstanding.”  These phrases allow the parties to specify that one phrase or provision will take precedence over others, and thus avoid the need to attempt to synthesize every provision of every related agreement that is or may be partly or wholly in conflict with the provision in question.

I have enormous respect for Prof. Coates, but the practices he describes above as common are simply sloppy drafting which create the type of problems URI has here.  When I was practicing, I was taught and taught others to avoid this type of language for the complexities and ambiguity it creates.  Instead, stay up the extra hour and redraft the clause (and other documents) to read the way it should without such a problem (particularly if you are at Wachtell and being paid millions for your work on a flat fee basis -- the extra hour is not an expense for the client).  This is very true when you are dealing with what appears to be the most important provision in the agreement (when can Cerberus walk or not? Pretty important.).  And this is how contract drafting is taught in law schools today -- although most people, including me believe you can really only learn drafting by doing it.  So, I am a bit surprised he would say this, and expect it to be strongly challenged by URI's expert (wonder who that will be?).  Ultimately, I don't find Coates's argument convincing for this reason alone, but it can also be argued that it is an invalid one because it doesn't really answer the ultimate question of how this contract should be interpreted in light of the ambiguity -- again something which favors URI.  After all, URI's interpretation would address a sponsor's chief worry -- being caught having to consummate a transaction without the debt financing -- while at the same time giving URI certainty where the financing was in fact available.

Final note:  Obviously this is expert testimony, and I doubt Coates was expecting it to be publicly commented upon -- whether this is something Coates would say outside of this context I don't know.    

December 6, 2007 in Litigation | Permalink | Comments (1) | TrackBack (1)

Tuesday, December 4, 2007

URI: The Specific Performance Issue

Kevin Miller, an excellent M&A lawyer at Alston & Bird, has a post up on DealLawyers.com concerning the possibility of specific performance being ordered in the URI case.  You can read the full post by clicking here, but what follows is the gist of his argument:

URI's brief fails to justify specific performance for two reasons, both relating to the alleged harms it claims: (i) the defendants' failure to pay the agreed cash merger consideration and (ii) the decline in the value of URI shares as a result of the defendants' allegedly manipulative disclosures.

First, to the extent the alleged harms solely relate to the fact that URI's shareholders will not receive the agreed cash merger consideration or that the value of the URI shares they hold has declined, money damages would appear to be a practicable and therefor more appropriate remedy. URI voluntarily agreed to a cap on money damages - and should not now be permitted to claim that money damages are inadequate as a remedy because of that agreed limitation.

Second, and more importantly, the alleged harms are not harms to URI. They are only harms to URI's shareholders who are not third party beneficiaries under the merger agreement and are consequently not entitled to protection or relief against such harms (see Consolidated Edison v. Northeast Utilities, 426 F.3d 524 (2d Cir. 2005) applying New York law and holding that shareholders cannot sue for lost merger premium; see also Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031 (Del. 2004) applying Delaware law in analogous circumstances).

I don't agree with Mr. Miller's argument and believe that specific performance is available here if URI wins on its contract claims for the following reasons:

  1. Mr. Miller's argument doesn't make logical sense.  In Mr. Miller's world, Chandler agrees with URI's interpretation of the merger agreement that specific performance is required under 9.10.  In other words, Chandler finds that the last sentence of section 8.2(e) limiting URI's rights to damages in the amount of $100 million is applicable only in cases where the merger agreement is terminated.  But then at the damages phase after deciding Cerberus to be in breach and URI to have a right of specific performance under sec. 9.10, Chandler orders that as a matter of Delaware law, damages are more appropriate.  This doesn't make sense because, if he did do this, it would mean that the $100 million guarantee limitation again kicks in leaving URI without full compensation for Cerberus's breach and giving Cerberus, the breaching party, exactly what they were asking for despite Chandler's finding of the intent of the contract.  Even if the Chancery Court were not a court of equity I doubt they would come to such an illogical conclusion.
  2. Specific performance was agreed to here.  If Chandler agrees with URI's reading of the merger agreement then Cerberus specifically agreed that specific performance was permissible under sec 9.10.  In similar paradigms, the Chancery Court has held litigants to their agreement that a damages remedy was inadequate and an equitable one appropriate.  Thus in True North Communications, Inc. v. Publicis, S.A., Del.Ch., 711 A.2d 34, 45, aff'd, Del.Supr., 705 A.2d 244 (1997), the Chancery Court provided a grant of injunctive relief based on a defendant's agreement that an equitable remedy was appropriate and damages an inadequate remedy.  Here, if URI's argument is correct, it is likely the Chancery Court would bar Cerberus from arguing against specific performance due to their contractual agreement.  This is after all a court of equity. 
  3. Regardless, specific performance is justified here as there is no adequate damages remedy. Mr. Miller is right that in Delaware a party is never absolutely entitled to specific performance; the remedy is a matter of grace and not of right, and its appropriateness rests in the sound discretion of the court. In general, equity will not grant specific performance of a contract if it cannot “effectively supervise and carry out the enforcement of the order.”  Moreover, the balance of the equities must favor granting specific performance.  A remedy at law, i.e., money damages, will foreclose the equitable relief of specific performance when that remedy is “complete, practical and as efficient to the end of justice as the remedy in equity, and is obtainable as [a matter] of right.”  NAMA Holdings, LLC v. Related World Market Center, LLC 922 A.2d 417 (Del.Ch. 2007).  Here, however, a monetary damages award would be against RAM Holdings (the Cerberus subsidiary).  This is a shell company and, as the Chandler no doubt knows, would not be able to pay any amount.  Rather, again if Chandler awarded a monetary damage award URI could only collect against the $100 million guarantee issued by Cerberus resulting in URI not receiving full recompense for its damages.  Given this, it is hard to see how Chandler can find that monetary damages is a complete remedy as it again results in Cerberus winning a back door victory and URI without full compensation for Cerberus's breach -- a predicate for specific performance even without Cerberus's agreement in sec. 9.10. And, of course, such a decision would fly in the face of the parties' intent to the extent Chandler rules in URI's favor on the breach point.
  4. Delaware Precedent supports the grant of specific performance.  In In re IBP, Inc. Shareholders Litigation, 789 A.2d 14 (Del.Ch. 2001), Vice Chancellor Strine found that sellers in a merger agreement were entitled to specific performance.  His decision rested in part on the ability of the sellers to elect to receive stock in the transaction (not an issue here) but also upon the fact that monetary damages would be exceedingly difficult to establish.  The latter point is applicable here even if there was not the issue of the guarantee.  There is also some good dictum in that case which supports URI's case. 
  5. The fact that the URI shareholders are not a party to this agreement is not an issue. Mr. Miller's second point is contrary to established case-law.  He is arguing that URI cannot establish damages here because URI's shareholders are not a party to the agreement and are not third party beneficiaries.  But he is conflating a number of issues.  First, under basic contract law URI can itself contract for a benefit to a third party (i.e., its shareholders) and if the other party breaches, the damages remedy is generally the amount URI would have to incur to cure the breach.  So, for example, I hire a music teacher for my child and agree that they will provide lessons at $10 an hour.  If the music teacher breaches and I have to hire a new music teacher at $12 an hour, then my damages against the first music teacher are relatively clear under contract law -- it is the $2 an hour difference.  This is the case here.  The opposite outcome would mean that no contract of this type could ever be truly enforced.  Moreover, numerous cases in Del., New York and federal courts have enforced buyer obligations under merger agreements on this same rationale -- none to my knowledge has ever held Mr. Miller's position to be correct.  Mr. Miller attempts to distinguish IBP on this issue, but again I think he misses the point that Strine treated IBP and its shareholder claims as one and the same.  There appears no jusitification for any different treatment here. 
  6. The third party beneficiary clause does not effect this outcome.  This is where Mr. Miller again conflates the issue.  He cites the "no third party beneficiary" clause in the merger agreement and the Con Ed. case to assert that URI has no damages claim with respect to the consideration paid to its shareholders.  But the no third party beneficiary clause and the Con Ed. case merely state that shareholders in this regard have no right to sue in their personal capacity under the merger agreement -- only the company can.  Tooley, the Delaware case he cites, says the same thing.  Here, though, URI is bringing the claim, not the shareholders -- so this is not a problem and as I stated in point 5-- URI is permitted under established case-law to bring this claim.  Again, I challenge anyone to find a case where a seller in a merger contract sues to enforce the contract and the court denies the claim because the damages remedy is to the shareholders.  There isn't one because it just doesn't jibe with basic contract interpretation laws or the parties likely intent and it just doesn't make commercial sense. 

Finally, there is one big problem on the specific performance front for URI, and that is the complexity of any such remedy.  In alternative scenarios, Delaware courts have refused to grant specific performance because it would be too complex a remedy for the court to implement.  So, in Carteret Bancorp., Inc. v. Home Group, Inc., 1988 WL 3010 (Del. Ch. 1988), the court refused to issue an injunction requiring defendants to use their best efforts to obtain required regulation approvals and, specifically, to take or refrain from taking certain identified actions in part on the grounds that it was too complex.  This may be the case here -- the remedy URI seeks is certainly a complex one.  And a weakness in URI's brief is their assumption that Chandler can fashion a specific performance remedy in this case --i.e., force Cerberus to fund the equity. I think URI has a good case in Delaware but I simply do not know what happens if they do indeed win at the Dec. mini-trial.  I suppose it all shifts up to New York with URI litigating RAM Holding's claim against Cerberus under the equity commitment letter?  But who knows, and maybe that is why URI didn't address this issue in depth -- they just don't know either.  BTW -- URI's response to Cerberus's N.Y. complaint is due 30 days after they are served (if they are served outside N.Y.) -- this is around Dec. 16 -- I suspect URI will ask Cerberus for more time to respond, though, in order to see how the Delaware action plays out. 

NB.  For those following the Genesco trial many of the principles above apply there under Tennessee law, but the matter is complicated by the solvency issue. 

December 4, 2007 in Contracts, Litigation, Merger Agreements | Permalink | Comments (1) | TrackBack (0)

Genesco: The Scope of Trial

Last week and as I previously predicted, the judge in the Genesco Tenn. trial issued an order that the trial next week will be on both the fraud and MAC claims.  In addition, the Judge ruled that she would not rule on Genesco's motion to dismiss the fraud claims until after trial as there is no time and this is otherwise a fact-specific inquiry which depends upon the intent of the parties.  I am not sure that this is a big defeat for Genesco.  The Judge likely does not want to delay resolution of this dispute.  And,  at a time so close to trial, she is likely loathe to simply throw out the fraud claims without hearing the factual evidence. 

The Judge also ordered that if she did rule in favor of Genesco's claims she would hold a separate trial on the damages remedy.  I think this is a smart move.  She is clearly aware of the N.Y. action and the effect an negative ruling will have on Finish Line.  So, I don't think this is adverse to Finish Line or is something to be overly read into -- it just means she knows the stakes.  Both parties are lucky to have  this Judge deciding this dispute. 

December 4, 2007 in Litigation | Permalink | Comments (0) | TrackBack (0)

Monday, December 3, 2007

URI Trial: Dec. 17

Well, Chancellor Chandler issued a scheduling order yesterday setting expedited discovery and a trial for Dec. 17 in Georgetown, Delaware.  It is interesting to watch the different court-room styles of Chandler (here) and Strine (in SLM).  Chandler is holding these scheduling conferences and scheduling disputes outside of public purview as opposed to Strine's two very public hearings for SLM.  In any event, I am surprised to find that there is going to be an actual mini-trial and a measure of discovery before Chandler's decision on URI's summary judgment motion.  I had thought Chandler was going to decide URI's motion on the papers.  I think this favors URI as it gives more leeway for Chandler to make a decision on the merits despite the ambiguity of the merger agreement.  This is particularly true since I am thus far unimpressed with the parol evidence cited by Cerberus.  But, more evidence is likely to come out and we still need to read Cerberus's response to URI's motion. 

It is going to be a fun holiday in Delaware -- at least if you are a lawyer who charges by the billable hour.  For those attending note there is no sales tax in Delaware -- just in time for holiday shopping. 

Aside:  Cerberus continues to clean up its littered deal sheet.  Today H&R Block and Cerberus announced the termination of Cerberus's purchase of H&R Block mortgage subsidiary Option One. 

December 3, 2007 in Litigation | Permalink | Comments (0) | TrackBack (0)

URI -- Some Thoughts and Questions

I read the URI brief for summary judgment and Richards, Layton's letter to Judge Chandler again over the weekend (RL is counsel to RAM Holdings).  I'm going to wait for Cerberus's response for a full analysis, but a few thoughts and questions:

  1. The URI brief was a good job -- the best they could do under the circumstances.  And it repeated ad infinitum Cerberus's Achilles heel:  basic contract interpretation rules require that the merger agreement be interpreted so the specific performance clause has meaning.  URI addressed only in footnote 12 the effect of the limited guarantee and the equity commitment letter on this -- here URI adopted largely the argument I thought they would.  But waiting to address this component of the dispute is good strategy -- URI will wait until their reply brief to see Cerberus's arguments on this point. 
  2. I think URI makes an important point that "equitable remedies" includes monetary damages to justify including it in the second part of the last sentence in Section 8.2(e) rather than the enforcement of the terms of the contract itself, i.e. specific performance isn't a remedy (for a failure to enforce or a breach) it is something different. That would mean URI could agree to limit its equitable remedies without giving up enforcement of the contract itself.
  3. I'm not sure their arguments for summary judgment were convincing -- there is ambiguity here, something Cerberus is doing everything to highlight.   
  4. This leads me to a question -- do Delaware courts commonly issue summary judgment when a party to the dispute insists that parole evidence is necessary?  In particular, has Chancellor Chandler done this -- I suspect that both parties are researching this item -- if anyone has any thoughts on this let me know. 
  5. Both parties here are trying to seize the equity mantle, but URI is ultimately the aggrieved party -- something Chandler undoubtedly knows, and given Cerberus's stretched reading of some of the documents he might be tempted to invoke.

I have more significant, further comments on RL's letter.

  1. RL's claim that the reverse termination fee was doubled as a trade-off for specific performance is not believable. A $50 million reverse term fee would be an outlier low fee (1.6%) in the context of a hotly contested auction. URI was simply demanding something that Cerberus knew it had to give. 
  2. The letter and the references to earlier drafts and contemporaneous notes are interesting; however, no explanation is given then for why section 9.10 remained in the final contract--i.e. Cerberus has of yet failed to address harmony.  Moreover, the parol evidence they cite is more consistent with URI bargaining for a pure claim of specific performance in all circumstances and falling back to section 8.2(e) as a resolution.
  3. The "all" versus "one" party statement on page 5. Does Mr. Williams expect to find any kind of paper in the hands of the bankers or board members indicating someone thought there was no specific performance right? Or is this just trying to make discovery last as long as possible? I suspect the latter. Surely in 2007, nothing like that should exist (particularly given the disclosure on this in the proxy statement)
  4. RL continues to make the misleading argument that because the limited guarantee was "URI's sole and exclusive" remedy against the Cerberus entities the merger agreement should be read to exclude specific performance.  They have yet to address RAM Holding's ability to enforce the limited guarantee.  As I said on Friday "So, the limited guarantee says nothing about Parent [RAM Holdings] being able to go after Cerberus, which is precisely URI's argument that Parent has the ability to specifically enforce the equity commitment letter against Cerberus. Cerberus appears a bit off here." 

Final note:  For those who think Cerberus would never agree to specific performance read the GMAC transaction documents. 

December 3, 2007 in Litigation | Permalink | Comments (0) | TrackBack (0)

Thursday, November 29, 2007

URI's Argument

In light of the filings in the past two weeks and the fleshing out of the issues, I thought I would take the opportunity to set forth URI's argument for specific performance. 

The Fundamental Issue

The problem for Cerberus is that their interpretation of all the documents (the Merger Agreement, The Equity Commitment Letter and the Limited Guarantee) results in a key provision within Section 9.10 of the merger agreement being rendered meaningless – either that cannot have been the intention or it was very sloppy lawyering by URI’s M&A counsel and Cerberus managed to pull one a fast one on them (i.e., by “giving” them specific performance but not making available any way for URI to force RAM Holdings to force Cerberus to fund the equity).  Ultimately, though, there is ambiguity here that will force Judge Chandler to make a decision based on parol evidence -- but in the absence of parol evidence (something I believe may be the case) it would appear that URI has the better argument as follows: 

The Merger Agreement

The fundamental argument that URI is putting forth is that Section 8.2(e) of the merger agreement (limitation on Parent (i.e., RAM Holding), Cerberus, et al's liability to $100 million) is applicable only if URI terminates the agreement.  Otherwise, Section 9.10's provisions for specific performance govern.  This argument can be broken down as follows:

  • Section  9.10 – the last words are “under the circumstances provided therein” – one could read this to say that Section 8.2(e) is not meant to govern 9.10 in all circumstances but only in the circumstances provided in Section 8.2(e), otherwise why not have just end the last sentence in Section 9.10 before the words “under the circumstances provided therein”? [NB. When quoting Section 9.10 in its New York complaint, Cerberus specifically excluded the underlined language.]
  • Section 8.2(e)(last sentence) – the last sentence is actually two sentences joined by an “and”. The first part says “In no event, whether or not this Agreement has been terminated…” but the second part starts at “and in no event shall the Company seek equitable relief or seek to recover money damages in excess of such amount…” – this second part repeats the “in no event” qualifier but does not repeat the “whether or not this Agreement has been terminated” qualifier (i.e., URI will argue why repeat lead in language but fail to repeat language which immediately follows it?).  Under this interpretation, this second part has to do exclusively with circumstances where the merger agreement has been terminated (Section 8.2(e) is after all in section 8, which is all about termination). As to the first part, this has to do with not suing Cerberus/Parent for more than $100 million in connection with “any or all losses or damages”, but URI is not suing for losses or damages but rather for enforcement of the merger.
  • Section 8.2(e) first sentence – “for any and all loss or damage suffered as a result thereof…” – it seems the antecedent of “thereof” is “termination”, which bolsters URI’s argument

The problem with this argument is that the last sentence of Section 8.2(e) was not split -- you have to jump to that conclusion to adopt this interpretation.  And if you do not split it that way then the second part's inclusion of "equitable relief" is problematical.  Still it boils down to contract interpretation and if you do adopt this reading you ultimately come back to the fact that this would render Section 9.10 meaningless something the Delaware court will not do under basic contract interpretation rules.  In recent cases, Delaware has emphasized objective basic contract interpretation (Seidensticker v. The Gasparilla Inn; West Willow-Bay Court LLC. v. Robino Bay Court Plaza LLC)-- this supports URI's legal position. 

The Equity Commitment Letter

The third paragraph of the equity commitment letter states:

There is no express or implied intention to benefit any third party including, without limitation, the Company and nothing contained in this Equity Commitment Letter is intended, nor shall anything herein be construed, to confer any rights, legal or equitable, in any Person other than Parent. Under no circumstances shall the Equity Sponsor be liable for any costs or damages including, without limitation, any special, incidental, consequential, exemplary or punitive damages, to any Person, including the Parent and the Company, in respect of this Equity Commitment Letter; and any claims with respect to the transactions contemplated by the Merger Agreement or this Equity Commitment Letter shall be made only pursuant to the Guarantee to the extent applicable.

URI will argue the first part is irrelevant because it refers to “costs or damages” and they are dealing rather with a claim of specific performance by Parent against Cerberus; the second part says “any claims with respect to the transactions…shall be made only pursuant to the Guarantee, to the extent applicable” – but nothing in the limited guarantee prevents Parent from getting specific performance against Cerberus, or indeed even at all deals with Parent’s rights of specific performance against Cerberus.  Here URI will argue that the qualifier of “to the extent applicable” kicks in.  Parent in fact has no claim at all against Cerberus under the limited guarantee – it’s not dealt with because Parent is not a party to the limited guarantee and the purpose of the limited guarantee was not designed to even address Parent’s rights as against Cerberus.  Alternatively, Cerberus will argue the exact opposite -- "damages" does indeed include specific performance in the first part, and "to the extent applicable" is meant to read that even Parent can't bring any claims under the equity commitment letter.

Ultimately, I think that if you read all the words together, they stand for URI's proposition that claims for the termination fee (and other expenses payable under the guarantee) must be made through the limited guarantee.  But again you have to stretch a bit to read the agreement this way.

The Limited Guarantee

  • Section 4(b) of the limited guarantee (No Recourse) is the key section. It deals with URI’s rights against Cerberus, not with Parent’s rights against Cerberus, nor with URI’s rights against Parent (in fact, this is expressly carved out). So assuming Judge Chandler agrees with URI's reading of the merger agreement and limited guarantee, you then look at the equity commitment letter to see if Parent has the right to specifically enforce the Cerberus commitment to inject equity. And so, we are back to the equity commitment letter's statement that “and any claims with respect to the transactions contemplated by the Merger Agreement or this equity commitment letter shall be made only pursuant to the limited guarantee to the extent applicable” – but URI will argue that Parent cannot make a claim against Cerberus under the limited guarantee because Parent is not a party to that agreement and that agreement was never intended to govern the relations between Parent and Cerberus, so it could not have been intended that the equity commitment letter requires Parent to make a claim against Cerberus pursuant only to the limited guarantee, because that is non-sensical and so cannot have been the intent.
  • Cerberus's counter-argument:  If you read the equity commitment letter this way, then in the 3rd paragraph, last part beginning “and any claims…”, this argument would seem to imply that, since Parent cannot make any claims pursuant to the limited guarantee (because it is not a party), this sentence must be addressing someone else (i.e., URI) but URI is in turn not a party to the equity commitment letter, so what’s the point of this sentence?
  • URI's counter-counter argument:  One possible explanation is provision 4(a) of the limited guarantee.  This provision talks about not going after Cerberus affiliates whether by or through a claim by or on behalf of Parent – which seems to contemplate the idea of a direct claim by Parent, but since Parent is not a party to the limited guarantee, they have to catch this problem by wrapping it up in this “and any claims…” sentence in the equity commitment letter. Furthermore, Cerberus is liable in certain circumstances for up to $100 million per the limited guarantee and yet this sentence in the equity commitment letter begins “Under no circumstances shall the Equity Sponsor be liable for any costs or damages…to any person, including the Parent and the Company, in respect of this ECL”, which, if ended there, would clearly make no sense in conjunction with the $100 million provisions in the limited guarantee and in the merger agreement, and so when we read the follow-on language of “and any claims….” it becomes clear that all this section is saying is that Cerberus is indeed liable for up to $100 million in liquidated damages if the circumstances provided for in the Guarantee are applicable (“to the extent applicable”). But those are not the circumstances that URI is arguing about.

Cerberus’ Further Interpretation of The Limited Guarantee

Earlier this week counsel for Parent sent a letter to Judge Chandler.  Here, I think URI can point out that they flat out have it wrong and are conflating two sections of the limited guarantee so as to make their argument appear stronger – they say in the 2nd to last paragraph that “the limited guarantee in turn clearly states that URI’s and its affiliates only remedy – directly or through the RAM entities – against Cerberus Partners and all of its affiliates other than the RAM Entities…is a claim under the limited guarantee for…$100 million” – that’s not what the limited guarantee says. Both sections 4(a) and 4(b) of the limited guarantee deal with URI’s (not with Parents’s) rights to go after Cerberus and various of its affiliates. However, Section 4(a) of the limited guarantee explicitly excludes Cerberus from the definition of who URI cannot go after (because it deals with limiting URI’s ability to go after limited partners, officers etc of Cerberus, but explicitly carves out the right to go after Cerberus itself) and so URI has good grounds to say what Parent's counsel says in the letter is flat out wrong. 

Further, Section 4(b) deals with URI’s (not with Parents’s) rights to go after Cerberus and its affiliates, BUT section 4(b) does not have the language “directly or through the RAM entities” (that only appears in section 4(a) and is not repeated). So, the limited guarantee says nothing about Parent being able to go after Cerberus, which is precisely URI's argument that Parent has the ability to specifically enforce the equity commitment letter against Cerberus. Cerberus appears a bit off here. 

Ultimately, I think that the arguments over the limited guarantee and the equity commitment letter will inform the Judge's ruling on the merger agreement but will not be dispositive -- Chandler will largely make his decision on the merger agreement provisions alone since the evidence from the limited guarantee and equity commitment letter are as ambiguous as the merger agreement.  And, if Judge Chandler does rule in favor of URI, I beleive that the New York action is not a winner for Cerberus.  But can certainly cause delay in the process.

November 29, 2007 in Delaware, Litigation | Permalink | Comments (0) | TrackBack (0)

The Handy-Dandy Genesco Litigation Organizer

So, Genesco's third quarter earning results are out this morning.  For those who also want to hear the conference call you can access the replay here.  This is on top of all of the filings made this week by all three parties as well as the announcement of a U.S. attorney subpoena of Genesco related to a fraud investigation.  It's simply getting hard for anyone to keep up with all that is going on in this matter.  So, for those following the case, here is an organizer of the expected chronological steps of the Genesco deal.  Bottom-Line -- it has a long way to go before any resolution and many more turns it can take.

  • Step 1:   Tenn. Trial Begins Dec. 10
    • Issue One:  MAC Claim
      • Likely Outcome:  I believe the dispute is likely to center around the existence of a MAC generally and the MAC exclusion for "changes in general economic conditions that affect the industries" Genesco operates in.  As I've said before, I still think Genesco has a good case here.  Their earnings today certainly were not great, but they are in a challenging retail environment. 
        • Comment:  Poor performance by Finish Line, Foot Locker, Shoe Carnival, Shoe Pavilion, etc. buttress Genesco's claim of no MAC under this exclusion.
    • Issue Two:  Negligent Misrepresentation (Finish Line)/Fraud (UBS)
      • Comment:  Claims center generally around two non-disclosures by Genesco:  First, Genesco provided projections it knew it would fail to meet. Second, Genesco, "hid" its May 2007 numbers and on June 5 said it was on track and knew that statement was materially false.
      • Likely Outcome:  I'll wait until I see Finish Line's and UBS's responses to fully comment but Genesco in its motion to dismiss and strike makes a good argument that these claims are barred by non-reliance among other grounds.  However, there are a number of New York cases on this point more favorable to Finish Line that it will likely try and rely upon.  I'll have a full post on this over the weekend. 
      • Mystery Solved:  Reading Genesco's motion, I finally realized that UBS is making a fraud claim rather than a negligent misrepresentation claim due to the fact it is not a party or a beneficiary of the merger agreement -- there was no misrepresentation to rely upon.
      • Timing:  I believe the Tenn. Court will deny Genesco's motion to limit the hearing if it denies Genesco's motion to strike.  Given the discovery in this case, the judge will likely view it as all one dispute. 
    • Issue Three:  MAC Claim due to Southern District Subpoena and Possible Other Investigations
      • Comment:  Finish Line is stating that it will assert at trial that a MAC has occurred due to the federal securities fraud investigation.  In addition, Finish Line is asserting that such investigation violates Section 3.8 of the merger agreement (absence of litigation).
      • Likely Outcome:  This is a troubling one. The MAC has no forward-looking element so the event has to be a MAC as of this date.  Hard to see that it is right now.  But, if Genesco did indeed know it was not going to meet projections and continued to publicly say the opposite, that is likely grounds for a securities fraud claim.  I do not know if any shareholder suit on this has been brought to date, but if one were by Geensco's shareholders or the SEC it could strengthen Finish Line's case . . . .
        • Comment:  Genesco has a cure right under the merger agreement if this is indeed a breach of Section 3.8 or a MAC.
      • Question:  Why did the SDNY issue this subpoena.  It is very odd -- and if this is a securities fraud claim where is the SEC? 
  • Step 2:  Tenn Trial Outcome
    • If Genesco loses, it goes away quite wounded, but if Genesco wins this puts Finish Line in a terrible position.  I believe It then becomes Genesco's ally against UBS.  There is no financing out under the agreement and so if UBS does not fund Finish Line is still on the hook.  I doubt Finish Line could find the funding somewhere else so Finish Line would either 1) have to declare bankruptcy, or 2) negotiate with Genesco for relief -- in this scenario I believe Finish Line is likely acquired by Genesco.   
      • Comment:  If the court does not order specific performance, the damages remedy is likely to be $54.50 minus the stock price at time of judgment (but the exact measure of damages is uncertain and the measurement date can be argued).  If it is a damages remedy then Finish Line has the same two options above.   
  • Step 3:  New York Trial
    • There are a host of issues here, including who actually gives the solvency certificate required by UBS? What law governs to determine solvency?  Etc.
    • Likely Outcome:  I have insufficient information on this to make any prediction, but Genesco's earnings announcement today didn't help its case.
    • Comment:  UBS is also likely to amend their claim at this time to include anything else they have grounds to assert.
    • Mystery:  Why is UBS taking such a scorched earth strategy here?  What target would permit them to finance a bid on a going-forward basis?  Perhaps they do actually believe they were defrauded here . . . .
  • Step 4:  The Fun Stuff
    • If Genesco wins in Tenn. it may sue UBS for defamation and tortious interference of contract.
    • Comment:  Genesco likely hasn't sued at this time because it is waiting for the Tenn. decision.  Clearly UBS is in no mood to bargain at this time, so bringing these claims for leverage probably aren't worth much. 
    • Likely Outcome:  These claims are hard to prove (unless you have Joe Jamail and a Galveston jury) but certainly have a settlement value.

Quote of the Day:

Defendants, having failed to discover evidence that an MAE occurred in Genesco's business, have flipped through the "how to get out of a valid merger" playbook and alleged that Genesco engaged in fraud in order to induce Defendants to agree to the deal.

-- Genesco's motion to dismiss and strike.

I wish I had a copy of that book.

November 29, 2007 in Litigation | Permalink | Comments (0) | TrackBack (0)

Tuesday, November 27, 2007

Genesco: The Government Steps In

Thanksgiving was not so good for Genesco.  Genesco yesterday announced that last Wednesday it had received a subpoena from the Office of the U.S. Attorney for the Southern District of New York for documents relating to Genesco's negotiations and merger agreement with The Finish Line. According to Genesco, "[t]he subpoena states that the documents are sought in connection with alleged violations of federal fraud statutes."  The always timely White Collar Crime Prof Blog has much to say on this tactic including the following:

A grand jury subpoena as a litigation tactic?  The legal battles over M&A deals can be rather contentious, to say the least, and getting the upper-hand on an opponent as leverage for a settlement is common.  A grand jury investigation is something else altogether, though, because once started it takes on a life of its own, and the parties cannot terminate it as part of a global settlement of their claims.  It would be more than a bit scary if a U.S. Attorney's Office did the bidding of one side of a corporate deal, and one would at least hope that the prosecutors were shown something to indicate that this is more than the usual overheated rhetoric that accompanies most corporate litigation -- where everyone claims to want their day in court and no one ever seems to end up there.  Whether there's anything more than smoke here remains to be seen.  But look for references to Genesco's press release to appear in the next filing by Finish Line and UBS in the civil litigation.

Read the full post here.  This case is rising to a boil as we head into the Tennessee trial on Dec. 11.  Genesco also filed yesterday a motion to clarify the scope of the hearing (download it here).  They are claiming that the hearing should exclude consideration of Finish Line's fraud claims and encompass only the MAC claims.  I'll have commentary on that development tomorrow.  Hoping to see you in Nashville. .  . .

November 27, 2007 in Litigation, Material Adverse Change Clauses | Permalink | Comments (0) | TrackBack (0)

URI: The Motion For Expedited Treatment

URI yesterday filed a motion in Delaware Chancery Court for expedited proceedings (download the motion here).  URI is requesting that they be permitted to file a summary judgment motion by November 29 with oral argument to be heard as soon as possible thereafter.  Alternatively, URI requests that a trial date be set so that a decision can be rendered before January 22, 2008. 

URI references the Jan 22 date since:

[T]he reason it is important that this proceeding be expedited, is that delay will frustrate plaintiffs ability to compel defendants to draw down their committed financing.  The obligation of defendants' financing sources to provide necessary acquisition funding expires on January 22, 2008 2 (see paragraph 9 of Exhibit B hereto stating that these commitments "automatically terminate without further action or notice at 5:00 p.m. (Eastern Standard Time) on the day that is six months from the date hereof[July 22,2007] (the 'Expiration Date'), if the Closing Date shall not have occurred by such time."). Thus, for plaintiff to receive meaningful relief, this action must be fully and finally adjudicated before January 22, 2008.

I'm skeptical of this argument -- as I stated before "[t]he banks here (and Cerberus) have no incentive for a quick ruling in this dispute. Therefore, they will likely do what UBS has done in Genesco/Finish Line -- simply extend the drop-dead date to avoid grounds for a preliminary injunction ruling."  Nonetheless, the Delaware Chancery court is likely to accommodate URI with some form of expedited proceedings based on the general harm to URI:  which is why I am surprised URI did not make this argument.  My speculation is that URI did not do so because they want to appear to the public as still in good shape, but will likely raise the issue orally before the court.  The bottom-line is that this case is likely to move quickly but still any summary judgment motion is unlikely to be decided until next year.    A trial would not be until the Spring at best, and more likely the Summer.  And Cerberus has every reason to delay here in order for the credit markets (and its own financial position) to improve. 

Finally, note that the summary judgment motion request is similar to the "paper ruling" SLM had requested.  It increasingly appears that there exists little parol evidence with respect to the reading of this contract -- i.e., no real extrinsic evidence outside the merger agreement as to what the parties meant by this contract and whether it does indeed contemplate specific performance.  Indeed, the only evidence cited by either party thus far has been the transaction documentation and the proxy statement.  And the ex post facto attempts of URI to clarify the wording of the transaction documents through the proxy agreement are likely to be disregarded by the court.   It thus appears that this really is a matter of simple contract interpretation -- this lends itself to a summary judgment motion but highlights the uncertainty in this case due to the clear ambiguity in the documents.  I think this favors URI, but ultimately pushes both parties to a settlement. 

November 27, 2007 in Delaware, Litigation | Permalink | Comments (0) | TrackBack (0)