Monday, November 19, 2007
Here it is, finally. I'll have more on it later (but for now see my post from last week -- this is unfolding as I predicted and URI's claims at this point are not surprising -- they are clearly relying on the unavailability of financing to escape their obligations).
GREENWICH, Conn.--(BUSINESS WIRE)--November 19, 2007 United Rentals, Inc. (NYSE: URI) announced today that it has filed a lawsuit against RAM Holdings, Inc. and RAM Acquisition Corp. (collectively, "RAM"), acquisition vehicles formed by Stephen A. Feinberg's Cerberus Capital Management, L.P. to acquire United Rentals. The lawsuit, filed in the Delaware Court of Chancery, seeks to compel the Cerberus acquisition vehicles to complete the agreed-upon transaction.
As previously announced, United Rentals received a letter from RAM, repudiating the merger agreement even though there has been no material adverse change in United Rentals' business. The letter was sent after a meeting led by Mr. Feinberg at which RAM informed United Rentals' advisors that RAM did not want to force its financing sources to fulfill their commitments, even though the merger agreement requires them to do so. At the meeting, Cerberus specifically confirmed that there has not been a material adverse change. United Rentals believes that the repudiation, which is unwarranted and incompatible with the covenants of the merger agreement, is nothing more than a naked ploy to extract a lower price at the expense of United Rentals' shareholders.
The lawsuit asserts that the "Specific Performance" provision of the merger agreement, which states that "irreparable damage would occur in the event that any of the provisions of th(e) Agreement were not performed in accordance with their specific terms or were otherwise breached," explicitly gives United Rentals the right to compel consummation of the merger in the present situation. The lawsuit contends that the Cerberus acquisition vehicles are directly violating the merger agreement and acting in bad faith, and do not have the right to pay a reverse break-up fee and simply walk away. There is no financing barrier to completing the merger, as RAM has binding commitment letters from its financing sources to provide financing for the transaction. United Rentals believes that the financing sources stand ready to fulfill their contractual obligations.
As described in the lawsuit, the Specific Performance provision of the merger agreement requires RAM to draw down the committed financing and consummate the merger under precisely these circumstances. The lawsuit also contends that the Cerberus acquisition vehicles sought to further their scheme to buy United Rentals for less bytaking advantage of the dramatic stock price drop that occurred after their intention to walk away from their obligation to consummate the merger was leaked to a news organization. The lawsuit asks the Court to award United Rentals specific performance of the merger agreement to consummate the merger in accordance with its terms.
The United Rentals Board believes it is in the best interest of the Company and its stockholders to bring this action to enforce their contractual rights, and looks forward to prevailing in court.
The New York law firm of Orans, Elsen & Lupert LLP and the Wilmington, Delaware law firm of Rosenthal, Monhait & Goddess, P.A. is representing United Rentals in this litigation.
Sunday, November 18, 2007
The Genesco/Finish Line material adverse change dispute is now about as ugly as it gets. First, early last week Genesco filed an amended complaint. The amended complaint was largely unremarkable and unchanged from the original, although in addition to a specific performance claim, Genesco amended its complaint to include an alternative claim for damages relief (this is important -- I'll get to it below under the heading Solvency). Later in the week, Finish Line answered. Finish Line, now having the benefit of discovery, counter-claimed "against Genesco for having intentionally, or negligently, misrepresented its financial condition in order to induce Finish Line into entering" the transaction. Shifting tactics, Finish Line also baldly asserted that a material adverse change had occurred to Genesco under the terms of the merger agreement. Moreover, Finish Line asserted that "[t]his fundamental change in Genesco's financial position also raises serious doubts that Finish Line and the combined company will be solvent following the Merger." Finish Line concluded its answer and counter-claim by stating:
As a result, Finish Line suffered injury by entering into the Merger Agreement while unaware that Genesco was in the midst of a financial free-fall, for which there still appears to be no bottom.
It actually got worse after this. On Friday, UBS counter-claimed in the Tennessee Court. UBS didn't assert a claim of "intentional, or negligent, misrepresentation". Instead they threw down a counter-claim of fraud against Genesco. Things are real bad when your ostensible banker is accusing you of fraud. Not content with that charge, UBS also sued both Finish Line and Genesco in the Southern District of New York seeking to void its financing commitment letter since Finish Line could not deliver the solvency certificate required to close the financing. The reason UBS asserted was that "[d]ue to Finish Line's earnings difficulties and Genesco's disastrous financial condition, the combined Finish Line-Genesco entity would be insolvent . . . . " Clearly, Finish Line's specially hired uber-banker Ken Moelis was unable to perform his expected job of reigning in UBS. [update here is the UBS N.Y. complaint]
This is a mess.
Material Adverse Change Clause
First, the material adverse change issue. My first thought is that this case is a very good example of the fact-based nature of MAC disputes. When we first looked at this deal back on August 31, I noted that I thought Genesco had a good legal case based on the tight MAC clause it had negotiated. But I also stated that my conclusions at that time were based on the public evidence and that discovery would flesh out the validity of Finish Line's claims. It now appears that Finish Line's claim is premising its MAC claim on Genesco's earnings drop -- a decline of 100% to $0.0 earnings per share compared to the same period from the previous year when Genesco's earnings per share were $0.24.
As we know under Delaware law a "short-term hiccup in earnings should not suffice; rather the Material Adverse Effect should be material when viewed from the longer-term perspective of a reasonable acquiror." In re IBP, Inc. Shareholders Litigation (“IBP”), 789 A.2d 14 (Del. Ch. 2001). Thus, it is interesting to note that Finish Line's only support for this assertion appears to be the following:
What is more, there is no indication Genesco's decline has bottomed out. Genesco's most recent financials instead indicate that it is poised to suffer another substantial drop in earnings in the third quarter.
Finish Line still hasn't factually asserted anything longer term than two quarters of adverse performance. Thus, to the extent the Tennessee court adopts Delaware law on this issue, Finish Line is going to have to show at trial that this is an adverse change that is going to continue. They have a good start with the two-quarter drop, if indeed Genesco's results announced later this month show such a drop, but at trial Finish Line will still need to prove the long term nature of this change. Moreover, the MAC clause in the merger agreement excludes out a failure to meet projections as well as:
(B) changes in the national or world economy or financial markets as a whole or changes in general economic conditions that affect the industries in which the Company and the Company Subsidiaries conduct their business, so long as such changes or conditions do not adversely affect the Company and the Company Subsidiaries, taken as a whole, in a materially disproportionate manner relative to other similarly situated participants in the industries or markets in which they operate;
Nowhere does Finish Line comprehensively address this argument. My bet is, given the of-late poor performance of Finish Line itself, the definitive MAC issue at the Tennessee trial is going to revolve substantially around whether this sub-clause (B) excludes out any MAC. Here, note the materially disproportionate requirement, something notably absent in the SLM/Flowers MAC (to their detriment). Thus, Finish Line still has a high hurdle to meet in order to prove a MAC-- it must prove the long term nature of this claim beyond two quarters and that it is materially disproportionate to what is occurring in the industry generally.
Perhaps as a comment on the Finish Line MAC claim, UBS in its own complaint makes the following statement about the Material Adverse Change to Genesco:
UBS denies that there necessarily has been no Material Adverse Effect with respect to Genesco's business.
UBS has yet to claim a MAC occurred in the merger agreement. And, I have not read UBS's N.Y. complaint but it appears that they have not asserted the mirror-image MAC clause in their financing commitment letter to justify not financing the deal. Rather, their argument appears centered on fraud by Genesco and the insolvency of the combined entity.
The one monkey-wrench here is the solvency claim which may in and of itself justify a MAC claim.
The issue had been rumored on the Street for a while, but still the solvency claim is amazing. Finish Line is clearly frantically trying to avoid a doomsday scenario where it is required to complete the Genesco deal but lacks the financing to do so. Thus, Finish Line claims that "[t]he ability of Finish Line and the combined enterprise to emerge solvent from the Merger is an additional condition precedent to the Merger Agreement under Sections 4.9 and 7.3." However, Section 4.9 is Finish Line's own representation to Genesco as to its solvency post-closing. Section 7.3 is the condition that Finish Line's own representations must be true in order for Finish Line to require Genesco to close. But, Genesco can waive this condition and the breach of this representation! Moreover, Finish Line appears to be aware of this snafu; so it also claims that if the post-combination company is insolvent it would violate Genesco's representation in 3.17 that the merger will not violate any law applicable to Genesco. I think this final argument is a stretch -- the violative conduct would be that of Finish Line -- if the parties had wanted to pick up this type of conduct they would have had Genesco make the representation rather than Finish Line.
Still, any judge would be loathe to order specific performance of a merger that would render the other party insolvent -- which is why I suspect Genesco is now asking for a monetary award. This is an alternative to this issue. Nonetheless, I want to emphasize that any judge in the face of this insolvency may find it to be MAC. I don't believe that this is what the MAC is intended to encompass or that the plain language is designed to address such events -- it is merely changes to Genesco. If the parties had wanted they could have negotiated a solvency condition. But they didn't. Nonetheless, the event is so horrific a judge may find a way to read the MAC clause this way.
The bottom line is that even if this combination would indeed render Finish Line insolvent, I'm not sure they get out of this agreement unless the judge stretches in interpreting the MAC clause. There is no specific solvency condition and the agreement does not contain any specific out for such circumstances.
Unfortunately for Finish Line, UBS has a better case to escape its financing commitments. Under the financing commitment letter, it is a condition to closing that UBS receive:
all customary opinions, certificates and closing documentation as UBS shall reasonably request, including but not limited to a solvency certificate.
If the combined company is indeed going to be insolvent UBS can get out of its financing commitment. But as I've said, it is unclear if Finish Line can also get out of its own agreement. Given this, Finish Line must clearly be desperate to raise this issue in its own filings. But I suppose it has nothing to lose at this point.
It is at this point that I will quote Finish Lines representation at Section 4.6:
For avoidance of doubt, it shall not be a condition to Closing for Parent or Merger Sub to obtain the Financing or any alternative financing.
While I tut-tut the lawyers for putting this as a representation (it is more appropriate to include as a covenant or in the conditions to closing), it bears repeating that there is no financing condition in this merger agreement.
As an aside, in Section 6.9 Finish Line agrees that:
In the event any portion of the Financing becomes unavailable on the terms and conditions contemplated in the Commitment Letter, Parent shall use its reasonable best efforts to arrange to obtain alternative financing from alternative sources in an amount sufficient to consummate the transactions contemplated by this Agreement on terms and conditions not materially less favorable to Parent in the aggregate (as determined in the good faith reasonable judgment of Parent) than the Financing as promptly as practicable following the occurrence of such event but in all cases at or prior to Closing. Parent shall give the Company prompt notice of any material breach by any party to the Commitment Letter of which Parent or Merger Sub becomes aware or any termination of the Commitment Letter. Parent shall keep the Company informed on a reasonably current basis in reasonable detail of the status of its efforts to arrange the Financing.
This doesn't mean particularly much for Genesco as there is no way that any bank is going to give financing to Finish Line on the same terms as UBS has. Any financing will be much less favorable, so Genesco can't get much from this. I note this only as a possible rabbit hole.
The fraud claim by UBS and intentional or negligent misrepresentation claim by Finish Line are much more interesting. Finish Line alleges that:
On top of this, by its own admission, Genesco also knew by at least early June that its second quarter projections were based on the erroneous assumption that certain state's back-to-school dates and tax holidays fell during the second quarter. Despite this, Genesco intentionally, or negligently, failed to provide Defendants, prior to execution of the Merger Agreement, with its May operating results or tell Defendants that Genesco's second quarter projections mistakenly relied on certain back-to-school dates and tax holidays occurring in the quarter.
UBS's fraud claim relies on similar non-disclosure.
I'm going to wait and see Genesco's response before responding to this as it is a pure question of fact. If the court finds this true, it would generally justify excusing Finish Line's performance. The New York law on this is actually more developed -- I am not sure off-hand what the Tennessee law is. Again, though, this is really just something that will depend on how each judge rules. Ultimately since the Tennessee judge is ruling first, the New York one will likely follow.
But I will say this, Finish Line clearly wants out of this agreement at all cost and is playing a scorched earth policy. It has now completely alienated the employees and officers of a company it may have to acquire. Quite a risk and perhaps why they did not allege fraud but rather negligent misrepresentation (though again I am not up on Tennessee law on this point so there may be real differences and reasons for this -- I'll look into it).
The bottom-line is that this deal still has a long way to go before it closes. Although Genesco still has a decent defense against a MAC claim, the solvency and fraud claims could still strongly work to Finish Line's favor. This is something we just don't know until we see Genesco's response, and even then much of this will be determined at trial as a question of fact. Also, do not forget that even if Genesco wins in Tennessee, there is still now a New York action to face (and UBS can further amend its complaint there to litigate a MAC claim under N.Y. law in the financing commitment letter). This may ultimately be Finish Line's problem but still has the potential to mean no deal for Genesco or a damages remedy it can only enforce in bankruptcy court (Finish Line's bankruptcy that is) if Finish Line is unable to enforce its financing commitment. Of course, the lawyers could have avoided this final complexity by siting the choice of forum clauses in the financing commitment letter and the merger agreement in the same states. M&A lawyers should take note.
Ultimately given the risks, if I was Genesco the good business decision would be to settle this out for a lump sum payment -- but the parties appear too intractable at this point for such a disposition. Though there is a very real scenario here where Genesco actually ends up controlling Finish Line -- talk about payback.
Friday, November 16, 2007
WIth all that is going on with Cerberus/United Rentals, I've fallen behind on the Genesco/Finish Line litigation. This week Genesco filed an amended complaint and Finish Line answered. As you will see, Finish Line is now claiming a full-fledged MAC. I'll have a more complete analysis on Monday but will leave you with this tidbit from Finish Line's answer:
This fundamental change in Genesco's financial position also raises serious doubts that Finish Line and the combined company will be solvent following the Merger. The ability of Finish Line and the combined enterprise to emerge solvent from the Merger is an additional condition precedent to the Merger Agreement under Sections 4.9 and 7.3. The failure of this condition would constitute yet another reason Genesco is not entitled to specific performance.
It is now day three of the United Rentals/Cerberus saga. Still no lawsuit by United Rentals. I'm a bit surprised -- I would have thought that they had the complaint ready to go and would have filed yesterday to keep momentum.
Yesterday's big development in the dispute was Cerberus's filing of a 13D amendment. The filing included a copy of Cerberus's limited guarantee. The guarantee had not previously been made public, Cerberus clearly included this agreement in its filing in order to publicly reinforce its argument that Cerberus is only liable for the $100 million termination fee and not a dollar more. The guarantee specifically limits Cerberus's liability to $100 million and contains a no recourse clause. This clause provides in part:
The Company hereby covenants and agrees that it shall not institute, and shall cause its controlled affiliates not to institute, any proceeding or bring any other claim arising under, or in connection with, the Merger Agreement or the transactions contemplated thereby, against the Guarantor [Cerberus] or any Guarantor/Parent Affiliates except for claims against the Guarantor under this Limited Guarantee.
NB. the definition of Guarantor/Parent Affiliates above specifically excludes the Merger Sub.
I have no doubt that Cerberus is going to argue that this limited guarantee, when read with the merger agreement, reinforces its interpretation of the agreement that specific performance is NOT available. Again, unfortunately, there is vagueness here. The integration clause of the limited guarantee states:
Entire Agreement. This Limited Guarantee constitutes the entire agreement with respect to the subject matter hereof and supersedes any and all prior discussions, negotiations, proposals, undertakings, understandings and agreements, whether written or oral, among Parent, Merger Sub and the Guarantor or any of their affiliates on the one hand, and the Company or any of its affiliates on the other hand, except for the Merger Agreement.
So, this means that when interpreting the limited guarantee a judge will also look to the merger agreement for context and guidance. I put forth my analysis of the merger agreement yesterday (read it here). Nonetheless, it would appear that this limited guarantee creates more uncertainty, though to the extent it is given any reading it reinforces Cerberus's position, with one possible exception.
This exception is Merger Sub -- the acquisition vehicle created by Cerberus to complete the transaction. Essentially, this guarantee says nothing about what merger sub can and cannot do. So, a possible United Rentals argument is that merger sub can be ordered by the court to specifically enforce the financing letters against Cerberus and the Banks. To the extent that the merger agreement permits specific performance (a big if) this would side-step the guarantee issue.
Ultimately, though, the vagueness means that a Delaware judge will need to look at the parol evidence -- that is the evidence outside the contract -- to find what the parties intended here. What this will reveal we don't know right now -- so I must emphasize strongly that, while I tend to favor United Rental's position, it is impossible to make any definitive conclusions on who has the better legal argument at this point.
Note: The Limited Guarantee has a New York choice of law clause and has an exclusive jurisdiction clause siting any dispute over tis terms in New York County. The merger agreement has a Delaware choice of law and selects Delaware as the exclusive forum for any dispute. This mismatch is sloppy lawyering -- it is akin to what happened in Genesco/Finish Line. And while I have not seen the financing letters for the United Rentals deal, my hunch is that the bank financing letters have similar N.Y. choice of forum and law provisions. This very much complicates the case for United Rentals and Cerberus as any lawsuit in Delaware will inevitably end up with Cerberus attempting to implead the banks or United Rentals suing the banks outright (if they can under the letters). If the financing letters have a different jurisdictional and law choice it makes things that much more complicated. M&A lawyers should be acutely aware of this issue for future deals.
Final Note: Weekend reading for everyone is the United Rentals proxy (access it here). Let's really find out what they did and did not disclose about the terms of this agreement and the deal generally.
Wednesday, November 14, 2007
This Fall has been remarkable for private equity M&A stories, but yesterday perhaps the most remarkable one unfolded. It began early in the day when United Rentals, Inc. announced that Cerberus Capital Management, L.P. had informed it that Cerberus was not prepared to proceed with the purchase of United Rentals. United Rentals stated:
The Company noted that Cerberus has specifically confirmed that there has not been a material adverse change at United Rentals. United Rentals views this repudiation by Cerberus as unwarranted and incompatible with the covenants of the merger agreement. Having fulfilled all the closing conditions under the merger agreement, United Rentals is prepared to complete the transaction promptly.
The Company also pointed out that Cerberus has received binding commitment letters from its banks to provide financing for the transaction through required bridge facilities. The Company currently believes that Cerberus’ banks stand ready to fulfill their contractual obligations.
United Rentals also announced that it had retained boutique litigation firm Orans, Elsen & Lupert LLP to represent it in this matter on potential litigation. Simpson Thacher represented United Rentals in the transaction but is likely conflicted out from representing United Rentals in any litigation due to the involvement of banks represented by Simpson in financing the transaction and the banks' likely involvement in any litigation arising from this matter (more on their liability later). United Rentals later that day filed a Form 8-K attaching three letters traded between the parties on this matter. Cerberus's last letter sent today really says it all and is worth setting out in full:
Dear Mr. Schwed:
We are writing in connection with the above-captioned Agreement. As you know, as part of the negotiations of the Agreement and the ancillary documentation, the parties agreed that our maximum liability in the event that we elected not to consummate the transaction would be payment of the Parent Termination Fee (as defined in the Agreement) in the amount of $100 million. This aspect of the transaction is memorialized in, among other places, Section 8.2(e) of the Agreement, the final sentence of which reads as follows:
“In no event, whether or not this Agreement has been terminated pursuant to any provision hereof, shall Parent, Merger Sub, Guarantor or the Parent Related Entities, either individually or in the aggregate, be subject to any liability in excess of the Parent Termination Fee [$100 Million] for any or all losses or damages relating to or arising out of this Agreement or the transactions contemplated by this Agreement, including breaches by Parent or Merger Sub of any representations, warranties, covenants or agreements contained in this Agreement, and in no event shall the Company seek equitable relief or seek to recover any money damages in excess of such amount from Parent, Merger Sub, Guarantor or any Parent Related Party or any of their respective Representatives.”
In light of the foregoing, and after giving the matter careful consideration, this is to advise that Parent and Merger Sub are not prepared to proceed with the acquisition of URI on the terms contemplated by the Agreement.
Given this position and the rights and obligations of the parties under the Agreement and the ancillary documentation, we see two paths forward. If URI is interested in exploring a transaction between our companies on revised terms, we would be happy to engage in a constructive dialogue with you and representatives of your choosing at your earliest convenience. We could be available to meet in person or telephonically with URI and its representatives for this purpose immediately. In order to pursue this path, we would need to reach resolution on revised terms within a matter of days. If, however, you are not interested in pursuing such discussions, we are prepared to make arrangements, subject to appropriate documentation, for the payment of the $100 million Parent Termination Fee. We look forward to your response.
We should all save this one for our files.
Back in August when I first warned in my post, Private Equity's Option to Buy, on the dangers of reverse termination fees, I speculated that it would be a long Fall as private equity firms decided whether or not to walk on deals that were no longer as economically viable and which had reverse termination fees. I further theorized that one of the biggest barriers to the exercise of these provisions was the reputational issue. Private equity firms would be reluctant to break their commitments due to the adverse impact on their reputational capital and future deal stream. This proved true throughout the Fall as time and again in Acxiom, Harman, SLM, etc. private equity firms claimed material adverse change events to exit deals refusing to simply invoke the reverse termination fee structure and be seen as repudiating their agreements. I believe this was due to the reputational issue (not to mention the need to avoid paying these fees).
Cerberus is completely different. Nowhere is Cerberus claiming a material adverse change. Cerberus is straight out stating they are exercising their option to pay the reverse termination fee, breaking their contractual commitment and repudiating their agreement. Cerberus has decided that the reputational impact of their actions is overcome in this instance by the economics. And this is now the second deal, after Affiliated Computer Services, that Cerberus has walked on in the past month. The dog not only bites, it bites hard. Any target dealing with them in the future would now be irresponsible to agree to a reverse termination provision. Nonetheless, Cerberus is smart money; clearly, they think walking from this deal outweighs any adverse impact on their ability to agree to and complete future transactions.
It Gets Complicated
It is actually not that simple, though. United Rental's lawyers did not negotiate a straight reverse termination fee. Instead, and unlike in Harman for example, there is a specific performance clause in the merger agreement. Section 9.10 of the United Rentals/Cerberus merger agreement states:
The parties agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. Accordingly . . . . (b) the Company shall be entitled to seek an injunction or injunctions to prevent breaches of this Agreement by Parent or Merger Sub or to enforce specifically the terms and provisions of this Agreement and the Guarantee to prevent breaches of or enforce compliance with those covenants of Parent or Merger Sub that require Parent or Merger Sub to (i) use its reasonable best efforts to obtain the Financing and satisfy the conditions to closing set forth in Section 7.1 and Section 7.3, including the covenants set forth in Section 6.8 and Section 6.10 and (ii) consummate the transactions contemplated by this Agreement, if in the case of this clause (ii), the Financing (or Alternative Financing obtained in accordance with Section 6.10(b)) is available to be drawn down by Parent pursuant to the terms of the applicable agreements but is not so drawn down solely as a result of Parent or Merger Sub refusing to do so in breach of this Agreement. The provisions of this Section 9.10 shall be subject in all respects to Section 8.2(e) hereof, which Section shall govern the rights and obligations of the parties hereto (and of the Guarantor, the Parent Related Parties, and the Company Related Parties) under the circumstances provided therein.
If this provision were viewed in isolation, then I would predict that United Rentals will shortly sue in Delaware to force Cerberus to specifically perform and enforce its financing letters. Cerberus would then defend itself by claiming that financing is not available to be drawn under the commitment letters and implead the financing banks (akin to what is going on with Genesco/Finish Line/UBS). In short, Cerberus would use the banks as cover to walk from the agreement. And based solely upon this provision, United Rentals would have a very good case for specific performance, provided that the banks were still required to finance the deal under their commitment letters. Something United Rentals claims they are indeed required to do.
But there is a big catch here. Remember Cerberus's letter up above? It is worth repeating now that the last sentence of Section 8.1(e) of the merger agreement states:
In no event, whether or not this Agreement has been terminated pursuant to any provision hereof, shall Parent, Merger Sub, Guarantor or the Parent Related Parties, either individually or in the aggregate, be subject to any liability in excess of the Parent Termination Fee for any or all losses or damages relating to or arising out of this Agreement or the transactions contemplated by this Agreement, including breaches by Parent or Merger Sub of any representations, warranties, covenants or agreements contained in this Agreement, and in no event shall the Company seek equitable relief or seek to recover any money damages in excess of such amount from Parent, Merger Sub, Guarantor or any Parent Related Party or any of their respective Representatives.
Note the underlined/bold language: under Section 8.1(e) equitable relief is specifically subject to the $100,000,000 cap. As every first year law student knows, specific performance is a type of equitable relief. Furthermore, Section 9.10 is specifically made subject to 8.1(e) which in fact begins with the clause "Notwithstanding anything to the contrary in this Agreement, including with respect to Sections 7.4 and 9.10 . . . ."
Thus, Cerberus is almost certainly going to argue that Section 8.1(e) qualifies Section 9.10 and that specific performance of the merger agreement can only be limited to $100,000,000. Conversely, United Rentals is going to argue that "equitable relief" here refers to other types of equitable relief than set out in Section 9.10 and that to read Section 8.1(e) any other way would render Section 9.10 meaningless. United Rentals will also argue that specific performance of the financing commitment letters here is at no cost to Cerberus and so the limit is not even met.
So, who has the better argument? First, the contract is vague enough that the Delaware Chancery Court will likely have to look at parol evidence -- evidence outside the contract to make a determination. What this evidence will show is unknown. Nonetheless, I think United Rentals still has the better argument. Why negotiate Section 9.10 unless it was otherwise required to make Cerberus enforce its financing commitment letters? To read the contract Cerberus's way is to render the clause meaningless. This goes against basic rules of contract interpretation. And the qualification at the beginning of Section 8.1(e) "Notwithstanding anything to the contrary in this Agreement, including with respect to Sections 7.4 and 9.10 . . . ." can be argued to only qualify the first sentence not the last sentence referred to above. Ultimately, Gary Horowitz at Simpson who represented United Rentals is a smart guy -- I can't believe he would have negotiated with an understanding any other way.
The bottom-line is that this is almost certainly going to litigation in Delaware. Because of the specter and claims that United Rental will make for specific performance, Cerberus will almost certainly then implead the financing banks. And as I wrote above, it appears that right now, based on public information, United Rentals has the better though not certain argument. Of course, even if they can gain specific performance, the terms of the bank financing may still allow Cerberus to walk. That is, the financing letters may provide the banks an out -- an out they almost certainly will claim they can exercise here. I don't have the copies of the letters and so can't make any assessment of their ability to walk as of now, though United Rentals is claiming in their press release above that the banks are still required under their letters to finance this transaction.
Ultimately, Cerberus is positioning for a renegotiation. But unlike SLM and Harman, Cerberus has the real specter of having to do more than pay a reverse termination fee: they may actually be required to complete the transaction. Like the Accredited Home Lenders/Lone Star MAC litigation, this is likely to push them more forcefully to negotiate a price at which they will acquire the company. United Rentals is also likely to negotiate in order to eliminate the uncertainty and move on with a transaction. But, they are in a much stronger position than SLM which only has the reverse termination fee as leverage. M&A lawyers representing targets should note the difference to their clients before they agree to only a reverse termination fee. In United Rental's case, though, it still likely means a settlement as with most MAC cases. The uncertainties I outline above likely make a trial too risky for United Rental's directors to contemplate provided Cerberus offers an adequate amount of consideration.
Coda on Possible Securities Fraud Claims
According to one of Cerberus's letters filed today, Cerberus requested on August 29 to renegotiate the transaction. They also expressed concerns in that letter that their comments on United Rentals merger proxy weren’t taken. United Rentals responded that they were politely considered and disregarded. It's a good bet that the comments disregarded were Cerberus requesting United Rentals to disclose in the proxy statement that United Rentals cannot get specific performance and United Rentals ignoring them. To say the least it was a bit risky for Untied Rentals to mail a proxy statement that does not disclose in the history of the transaction that the other side is trying to renegotiate the deal, and has specifically disagreed with your disclosure as to specific performance rights. Here come the plaintiff's lawyers.
Tuesday, November 13, 2007
On Nov. 1 the Delaware Chancery Court issued an opinion in In re Checkfree Corp Securities Litigation. The case is yet another in the recent line of Chancery Court opinions examining the required disclosure in takeover proxy statements of financial analyses underlying a fairness opinion. The particular issue in Checkfree was whether management projections are required to be disclosed in a proxy statement if they are utilized by the financial advisor in the preparation of their fairness opinion.
In this case, Checkfree had agreed to be acquired by Fiserv for $48 a share. In connection with their agreement, the Checkfree Board had received a fairness opinion from Goldman Sachs. Checkfree's proxy statement to approve the transaction contained the usual summary description of the financial analyses underlying the fairness opinion. Plaintiffs' claimed that this was deficient under Delaware law and sued to preliminary enjoin completion of the transaction. More specifically, plaintiffs alleged that:
the CheckFree board breached its duty to disclose by not including management's financial projections in the company's definitive proxy statement. They argue that the proxy otherwise indicates that management prepared certain financial projections, that these projections were shared with Fiserv, and that Goldman utilized these projections when analyzing the fairness of the merger price.
Here, the plaintiffs' relied heavily on the recent case of In re Netsmart Technologies, Inc. Shareholders Litigation, 924 A.2d 171 (Del. Ch.2007), for the proposition that a company is required to disclose all of the information underlying its fairness opinion in its takeover proxy statement.
The court began its analysis by rejecting this sweeping requirement. Chancellor Chandler wrote:
"disclosure that does not include all financial data needed to make an independent determination of fair value is not ... per se misleading or omitting a material fact. The fact that the financial advisors may have considered certain non-disclosed information does not alter this analysis."
The court then put forth the relevant standard:
The In re Pure Resources Court established the proper frame of analysis for disclosure of financial data in this situation: "[S]tockholders are entitled to a fair summary of the substantive work performed by the investment bankers upon whose advice the recommendations of their board as to how to vote on a merger or tender rely."
It then went on to distinguish Netsmart by stating:
the proxy at issue [in Netsmart] did not include a fair summary of all the valuation methods the investment bank used to reach its fairness opinion. Although the Netsmart Court did indeed require additional disclosure of certain management projections used to generate the discounted cash flow analysis conducted by the investment bank, the proxy in that case affirmatively disclosed an early version of some of management's projections. Because management must give materially complete information "[o]nce a board broaches a topic in its disclosures," the Court held that further disclosure was required.
Finally, the court held:
Here, while a clever shareholder might be able to recalculate limited portions of management's projections by toying with some of the figures included in the proxy's charts, the proxy never purports to disclose these projections and in fact explicitly warns that Goldman had to interview members of senior management to ascertain the risks that threatened the accuracy of those projections. One must reasonably infer, therefore, that the projections given to Goldman did not take those risks into account on their own. These raw, admittedly incomplete projections are not material and may, in fact, be misleading.
This is the right decision under Delaware law. M&A lawyers in the future should now be careful about unnecessary disclosure of projections in proxy statements to avoid triggering NetSmart's requirements. Relatively simple.
The problem with this decision is of wider consequence. Namely, can anyone tell me what exactly is required to be disclosed concerning fairness opinion financial analyses under Delaware law? In Pure Resources, Netsmart and here, the Delaware courts have created an obligation of disclosure for the analyses underlying fairness opinions under Delaware law. Yet, while a worthy goal, judge-made disclosure rules are standard-based and decided on a case-by-case basis. This is a poor way to regulate disclosure. It would be better done through the traditional way -- SEC rule-making under the Williams Act and proxy rules. Yet, the SEC has largely abandoned takeover regulation. In the last seventeen years it has only initiated two major rule-making procedures (the M&A Release and all-holders/best price amendments). There were rumors two years ago that the SEC was looking at fairness opinion disclosure, but nothing has come of it. Instead, we are stuck with this, uncertain disclosure rules that arguably do not ameliorate the fundamental issues underlying fairness opinions. I'm not criticizing Delaware here -- they are doing their best to fill the gap with the tools at hand. But, this all would be much better done by the SEC. Is anybody out there?
Monday, November 12, 2007
SLM and the Flowers group have agreed to permit Strine to make a preliminary "paper" ruling on their material adverse change case. The schedule per the order is as follows: the Flowers group will file their brief by November 27, SLM will respond by December 14, and oral arguments will be held on December 19. It is going to be a fun holiday in Delaware.
Having thought about this a bit more, I suspect this is a win for both parties. To the extent SLM, doesn't want to bury this issue they now get a quick ruling and can move on. For Flowers, as I've said before they have a very good case on the plain reading of the contract, so it is no loss for them. Ultimately, I think think Strine will make a dispositive ruling on this motion in favor of Flowers.
Best of all, it now appears likely that we will get a decision out of the court on another MAC case, something sorely needed to clarify the MAC case-law.
Friday, November 9, 2007
SLM filed their Form 10-Q this morning. In it was this nugget of disclosure:
Under guidance from the Delaware Court of Chancery at a scheduling hearing on November 5, 2007, the Company has elected to pursue an expedited decision on its October 19, 2007 motion for partial judgment on the pleadings. Specifically, the Company is seeking an expedited ruling that its interpretation of the Merger Agreement as it pertains to a Material Adverse Effect is the correct interpretation. The effect of this election will be that trial is expected to commence on an undetermined date after Thanksgiving 2008, rather than in mid-July 2008.
The Flowers group still needs to agree to this. And, although, they have made murmurings before that they might so agree, at the last scheduling conference their lawyer, Marc Wolinsky, was very silent when SLM and VC Strine discussed the issue. So, what will the Flowers group do? My hunch is that they will agree to it -- in order to appear amenable to Strine. And, as I said before, I think they have a very strong case on a plain reading of the contract. Another issue is whether Strine will ask the parties to waive their right to appeal if he does make such an expedited ruling. There is no way Flowers would agree to this.
The bigger question in my mind is why SLM feels the need to push this at this point -- wouldn't the company be better off just moving on and fighting this out at a later date? Or, heaven forbid, settling it out? This is now devolved into a clear litigation suit -- unless SLM is willing to lower its asking price down to an acceptable level for Flowers -- something Lord et al. appear unwilling to do.
Interesting addedum point: Delaware provides for pre-judgement interest on breach of contract claims. The rate of interest to be paid is at the discretion of the judge. So, Flowers insistence that it has not repudiated the merger agreement and equal insistence that they will not terminate is likley due to posturing on this issue. If they lose, they can claim that they never breached the merger agreement and so do not have to pay interest.
Tuesday, November 6, 2007
Access it here. As usual it is a great read, though rather long. I start with a quote from Strine:
I mean, we haven't gotten Mother Teresa and Gandhi and Franklin Roosevelt to come back to life as some sort of tribunal of MAC . . . .
As for a trial date, Strine said to SLM:
I'm not holding you to -- I forget what you said. A month. I'm not holding you to the week. If you can get your document production substantially completed, really, by the end of the calendar year, except for that category of information that really -- that the defendants are going to seek relating to the performance of Sallie Mae in January and early February, then we will go with the July date. If not -- and I want people to be realistic about this. If not, we are going to go to with the date right after Labor Day, although September, for -- often, for folks' religious reasons, ends up starting to get difficult.
Ultimately, he set a trial date of July 14 based on this with lots of side comments about an expected delay past Thanksgiving. I would be very surprised if this went to trial in 2008. All-in-all, I think the Flowers group fared better this time. In fact, reading the transcript one is struck by how little Marc Wolinsky, the lawyer for the Flowers Group had to speak to get a result he was likely happy with.
Otherwise, the most interesting thing is that Strine sent the parties to back to consider a "discovery-free" paper ruling again if they want one with the cost being a longer delay in a real trial. Here, SLM seemed to be more hesitant, a few times saying they needed to confer with their client before agreeing to it.
Strine also seemed to be very cognizant of appellate review on this matter -- referring to the possibility several times and at one point contemplating the parties' waiving their rights to such an appeal. Finally, just for fun he had the following to say about investment bankers and the discovery process:
My experience is that investment banks, high on their priority list is not the production of documents. Unfortunately, you had -- sometimes they will even tell you, "We have no duty to produce documents. Even though we took money from the client, we don't have to do that." Then you have to go through the rigmarole and . . . .
Those recalcitrant investment bankers . . . .
Sunday, November 4, 2007
It is hard to know where to begin. That is my first thought when confronting the legal issues arising from the fiasco at Affiliated Computer Services. When we last left this matter on Friday, the independent directors of ACS had resigned pending the election of new directors, filed suit in Delaware Chancery Court for a declaratory ruling that they did not breach their fiduciary duties in negotiating the potential sale of ACS, and sent a letter to Darwin Deason, Chairman of the Board of ACS and controller of 40% of the voting stock of ACS (but only 10% of the economic interest), accusing him and ACS management of breaching their own fiduciary duties in unduly favoring a deal with Cerberus. For his part, Deason in his own letter, demanded the ind. directors' “immediate resignations” because of “numerous and egregious breaches of fiduciary duty and other improper conduct,” related to their own running of the Cerberus auction. Then the lawyers for each of these groups (Weil for the ind. directors/Kasowitz for Lynn Blodgett CEO of ACS) exchanged their own letters making further allegations of inappropriate conduct against the other parties (though Weil alleges Kasowitz's letter was written by Deason's counsel Cravath, although Cravath may also be company counsel?!). Throwing all of this into the mix, two of the firms involved -- Cravath and Skadden -- are now being accused of acting in a conflicted manner. Whew, I'm exhausted already.
- The lawsuit by the Cerberus independent directors was a smart tactical move likely to preempt a similar suit against them brought by Deason (read the complaint here). Now the independent directors can be viewed as the plaintiffs, the good guys and drive the litigation. Plus, they can now engage in discovery, amend their complaint as necessary and have a bargaining chip against Deason. And most importantly, since they brought this action in their capacity as directors under Delaware law they can receive indemnification under DGCL 145 and, in fact, under ACS's By-laws (s. 33) automatically are advanced attorney's fees in prosecuting this action. Nifty. See Hibbert v. Hollywood Park, Inc., 457 A.2d 339, 343 (Del. 1983) (holding that per the contractual indemnification provisions of the company the directors only needed to be a party to the lawsuit not the defendants to be indemnified).
- Relatedly, my big question is why didn't the ind. directors here sue Deason and management for breach of their fiduciary duties? I find this almost certainly intentional omission odd. Perhaps it was because they need/want to do so on behalf of the company but cannot currently call a board meeting to so act (see the next point). Although a derivative suit is possible. Hmmmm.
- The future governance of ACS is a nightmare. First, per the By-laws (Art. 16) only Deason or the CEO can call a special meeting of the Board. In the interim, per DGCL 141(f), they can only act by written consent with the approval of all the directors (there is no By-law or Certificate of Incorporation provision that I saw to the opposite). So, the ind. directors are stuck, waiting for the next meeting to act. Deason has a clear incentive here to postpone the holding of the next board meeting until the next shareholder vote in order to prevent the ind. directors from acting and perhaps firing him. This means board paralysis for months until then; a terrible way to run a company.
- Deason's employment agreement gives him unprecedented control over the company. I've actually never seen anything like this structured in this manner. Under his employment agreement he is given sole authority for:
- (i) selecting and appointing the individual(s) to serve in, or to be removed from, the offices of Chief Executive Officer, President, Chief Financial Officer, Executive Vice Presidents, General Counsel, Secretary and Treasurer and (subject to appropriate charter amendment confirming the Executive's authority to fill such vacancies) to fill any director vacancies created in the event any such removal from office, (ii) recommending to the Board individuals for election to, or removal from, the Board itself, (iii) recommending to the Compensation Committee to the Board, or as applicable, to the Special Compensation Committee to the Board, salary, bonus, stock option and other compensation matters for such officers, (iv) approval of 3
4 acquisitions to the extent authority has previously been granted by the Board to the Executive in his capacity as the member of the Special Transactions Committee (except to the extent the Executive had previously delegated authority to the President with respect to such acquisitions which do not exceed $25 million in total consideration), (v) spending commitments in excess of $5 million, and (vi) approval of expense reports for the CEO and CFO.
- (i) selecting and appointing the individual(s) to serve in, or to be removed from, the offices of Chief Executive Officer, President, Chief Financial Officer, Executive Vice Presidents, General Counsel, Secretary and Treasurer and (subject to appropriate charter amendment confirming the Executive's authority to fill such vacancies) to fill any director vacancies created in the event any such removal from office, (ii) recommending to the Board individuals for election to, or removal from, the Board itself, (iii) recommending to the Compensation Committee to the Board, or as applicable, to the Special Compensation Committee to the Board, salary, bonus, stock option and other compensation matters for such officers, (iv) approval of 3
I love the last two -- he has to approve the expenses of the CEO?! How independent of him is she? In any event, hornbook law in Delaware is that, under DGCL 141(a), the business and affairs of every corporation shall be managed by or under the direction of a board of directors, except as may be otherwise provided in its certificate of incorporation. I'm still tracing through all of the (complicated) governance provisions, but my preliminary conclusions are that they didn't put enough of the above in the Certificate, but rather put most of Deason's powers in the By-laws and the rest in the employment agreement itself. I'll have a longer post on this later this week (I promise) once I'm done with my analysis, but my preliminary view is that these provisions violate 141(a) because to be effective in limiting the board's power they must be in the Certificate. They are not. In any event, this is the poorest of the poor in corporate governance to say the least. This is particularly true when your CEO was famously accused of threatening to kill his personal chef.
4. This company is a mess. Only the bravest (or the foolhardy) would invest in this situation.
The Case Against the Ind Directors
As outlined in Deason's and Kasowitz's letters, the case against the ind. directors is as follows:
- They refused to accept the Cerberus offer negotiated by Deason with a go-shop and "low" break-up fee and instead insisted on conducting an auction of the company.
- Relatedly, they failed to present the Cerberus offer to the shareholders directly.
- They inappropriately provided proprietary information to a competitor of the company.
- They received and relied upon the advice of company counsel, Skadden, without authorization of ACS.
- They paid themselves substantial fees (>100K each) for serving on the ind. committee.
The Case Against Deason
- He worked with Cerberus to force their deal through against the will of the special committee. Specifically, he entered into an initial exclusivity agreement which he refused to waive for three months.
- Deason and management worked to ensure that other bidders did not receive full information or management cooperation.
- Deason and management refused to permit the ind. committee to meet with company counsel.
- Deason attempted to coerce the ind. directors to resign last Tuesday at a board meeting.
- Deason took all of these actions in order for his own personal financial gain through the bid with Cerberus. Management followed his lead because they were beholden to him and their post-transaction employment depended upon it.
The Legal Analysis
My opinion is that the ind. directors here did the right thing. Deason, on the other hand, engaged in conduct that Delaware courts have historically condemned. There is not enough here for me to give an opinion on management's liability, but to the extent they followed Deason's direction they are also liable.
This is actually a relatively simple case. Since Smith v. Van Gorkom, the Delaware courts have been adamant that the sale of the company is something for the board to decide. It is not something that can be forced upon it by a singe executive (or here Chairman). Moreover, the Delaware courts most recently in Topps and Lear have repeatedly endorsed the idea that the sale process, whether it be by the Board or a comm. thereof, is something for the board to set, even when the company is in Revlon mode. Here, the board's refusal to accept a pre-negotiated deal that Deason had a personal financial interest in appears quite justified. Other bidders would likely be deterred by his and management's involvement and financial interest; something which a go-shop and low break-up fee would not ameliorate. In particular, it is increasingly recognized that go-shops provide only limited benefits and do not work particularly well when the initial deal is one involving management. The head start and management participation is too much of a deterrent for bidders. Thus, my hunch is that on these bare facts, Deason is likely in the wrong and a Delaware court would not only rule so but rule Deason (and likely management) breached their fiduciary duties by unduly attempting to influence the auction process.
As for the other claims:
- I can't see how wanting to consult with company counsel can ever be a bad thing.
- The compensation of the ind. directors here is high but not extraordinary or something that would otherwise disqualify them.
- The provision of proprietary information could be troubling. We need more facts to make this determination.
- Deason should ultimately be careful in his crusade here. As Conrad Black proved, the Delaware courts do not look kindly on mercurial, imperial controlling shareholders.
Possible Legal Conflicts Claims
- Skadden provided advice to the ind. directors when it was company counsel.
- Cravath is now company counsel when it had previously been Deason's counsel.
As I said, I'm not sure I see the problem in the first. The second may be more problematical to the extent ACS may have a claim against Deason. Moreover, what is Cravath, a nice, reputable firm doing sullying its name in this mess? They likely realize the same thing which is why Kasowitz is taking the public lead here.
Thursday, November 1, 2007
Remember SLM? It seems so long ago. When we last left the deal (or depending upon your persepctive, litigation), the parties had agreed on a trial which everyone thought would occur in January. Well, not everyone. Today, the Flowers group sent a letter to the Delaware Chancery Court. In it, Flowers et al. state:
In our conversations with Sallie Mae's counsel, they have indicated that they would be seeking a trial date commencing in either February or April 2008 (The dates apparently are dictated in part by Mr. Susman's availability.) We believe that either time frame would impair the Buying Group's ability to prepare its defense to a $900 million claim. In light of the complexities of this case and the stakes involved, the Buying Group believes that trial should be scheduled for September or October 2008, at the Court's convenience, less than one year from now.
A January trial is but a dim memory -- we are at February or April now at best. Flowers et al. go on to conclude:
As the Court recognized at the October 22 scheduling conference, once the Buying Group waived the covenants and other restrictions on Sallie Mae's conduct, the need for expedition was removed and "we really are in an ordinary kind of situation" We recognize that the Court intends that this matter proceed more promptly than the two years that is typical for non-expedited litigation, but we believe the Buying Group's proposal is consistent with that guideline. There is no longer any credible claim of irreparable injury to Sallie Mae: this case is simply a dispute about a sum ofmoney - albeit, a very, very large sum of money. The Buying Group has no interest whatsoever in prolonging this litigation. Its only interest is in assuring that it has sufficient time to develop and prepare its defense. We believe that the schedule that we have proposed accomplishes that goal. We look forward to discussing these matters with the Comi in Chambers on November 5.
The Flowers gourp is right here. This really is now just an ordinary trial about a relatively large sum of money. I would expect Strine though to split the baby a bit and set a trial somewhere in between the parties selected dates -- say a nice July trial in Delaware. We shall learn more on Nov 5. Hopefully, it will be as fun as the last hearing. BTW -- for those who are still betting on a deal, it seems so, so far away right now.
Tuesday, October 30, 2007
For those following this litigation here is a copy of Genesco's answer to Finish Line's counter-claim. Nothing particularly new in it, though there are ten Genesco attorneys named on the filing. That is a lot of people to review one document.
Sunday, October 28, 2007
On Friday, Carl Icahn disclosed the following letter to the board of BEAS (NB. Caps are his own just in case the Board was reading the letter too quickly and didn't get the point):
October 26, 2007
BEA Systems, Inc.
To The Board Of Directors Of BEA:
I am the largest shareholder of BEA, holding over 58 million shares and equivalents. I am sure that the BEA Board would agree with me that it would be desirable not to have to put BEA through a disruptive proxy fight, a possible consent solicitation and a lawsuit. This can be very simply avoided if BEA will commit to the two following conditions:
BEA SHOULD ALLOW ITS SHAREHOLDERS TO DECIDE THE FATE OF BEA BY CONDUCTING AN AUCTION SALE PROCESS AND ALLOWING THE SHAREHOLDERS TO ACCEPT OR REJECT THE PROPOSAL MADE BY THE HIGHEST BIDDER. BEA should not allow the stalking horse bid from Oracle to disappear (failure to take the Oracle bid as a stalking horse would be a grave dereliction of your fiduciary duty in my view). If a topping bid arises, then all the better. But if no topping bid arises it should be up to the BEA shareholders to decide whether to take the Oracle bid or remain as an independent Company - - not THIS Board, members of which presided over the reprehensible "option" situation at BEA, a Board that has watched while, according to Oracle in its September 20, 2007 conference call, Oracle's Middleware business "grew 129% compared with the decline of 9% for BEA".
BEA SHOULD AGREE NOT TO TAKE ANY ACTION THAT WOULD DILUTE VOTING BY ISSUING STOCK, ENTRENCH MANAGEMENT OR DERAIL A POTENTIAL SALE OF BEA. We are today commencing a lawsuit in Delaware demanding the holding of the BEA annual shareholder meeting before any scorched earth transactions (such as stock issuances, asset sales, acquisitions or similar occurrences) take place at BEA, other than transactions that are approved by shareholders. AS WE STATED ABOVE, THIS LAWSUIT CAN EASILY BE AVOIDED.
Your recent press releases regarding Oracle's proposal to acquire BEA indicate to me that you intend to find ways to derail a sale and maintain your control of the company. In particular I view your public declaration of a $21 per share "take it or leave it" price as a management entrenchment tactic, not a negotiating technique. BEA is at a critical juncture and it finds itself with a "holdover Board". BEA has not held an annual meeting in over 15 months and has not filed a 10K or 10Q for an accounting period since the quarter ended April 30, 2006. Those failures have arisen out of a situation that occurred under the watch of many of the present Board members. You should have no doubt that I intend to hold each of you personally responsible to act on behalf of BEA's shareholders in full compliance with the high standards that your fiduciary duties require, especially in light of your past record. Responsibility means that SHAREHOLDERS SHOULD HAVE THE CHOICE whether or not to sell BEA. BEA belongs to its shareholders not to you. Very truly yours, /s/ Carl C. Icahn ----------------- Carl C. Icahn
I don't yet have a copy of the complaint. But to the extent Icahn's suit is limited to the prompt holding of the annual meeting he has a very good claim. As I noted in my defensive profile of BEAS, BEAS has not held its annual meeting since July 2006. BEAS is in clear violation of DGCL 211 which requires that such a meeting be held within thirteen months of the past one. Since Schnell v. Chris-Craft, 285 A.2d 437 (Del. 1971), Delaware courts have been vigilant in enforcing this requirement although they have left the door open for a delay in exigent circumstances. See Tweedy, Browne and Knapp v. Cambridge Fund, Inc., 318 A.2d 635 (Del. 1974) (stating that not all delays in holding annual meeting are necessarily inexcusable, and, if there are mitigating circumstances explaining delay or failure to act, they can be considered in fixing time of meeting or by other appropriate order). Here, I suspect BEAS will argue that it cannot hold its annual meeting due to its continuing options back-dating probe. And I suspect the reason why is that BEAS simply cannot correctly fill out the compensation disclosure for their named executives because they just don't know how the options backdating effected it. If the company’s proxy statement says that shares were priced at one level when the options were granted and it turns out that the price was different than disclosed in the proxy statement, the statement would be a material misstatement and create liability under the Exchange Act. Hence the delay.
There are ways around this -- one is to omit the disclosure and obtain SEC no-action relief on the point. The Delaware court may go this route -- forcing BEAS to obtain such relief. But of course, if the court simply orders a date and leaves BEAS to resolve this issue with the SEC, it creates uncertainty over whether the SEC will actually grant such relief (I can't see why they wouldn't, but expect BEAS to argue this). Otherwise, perhaps the Chancery Court can use its nifty new certification option to the SEC to find the answer. Ultimately, Delaware has always been rather strict in requiring the annual meeting to be held within the 13 month deadline -- I expect it to be the case here in some form. Icahn is thus likely to soon get a quick win to gain momentum in this takeover fight. Not to mention the ability to nominate a slate for 1/3 of BEAS's directors -- the maximum number he can do so due to BEAS's staggered board.
The AP is reporting that Genesco Inc. has turned over more than 1.5 million pages of internal documents to The Finish Line Inc. in connection with Genesco's lawsuit to compel Finish Line to complete their previously agreed merger. Genesco here appears to be setting up a "full disclosure" strategy. This has two advantages. First, Genesco can portray itself as fully responding to Finish Line's claim that it has breached the disclosure provisions of the merger agreement -- "Look we didn't even object to your over-broad discovery request and gave you over one million documents -- now close this transaction". Second, this document dump will swamp Finish Line's attorneys with needless and mostly irrelevant documents; presumably Genesco's hope is that it will also distract Finish Line/UBS and their attorneys from their case and/or cause them to miss more important documents.
Ultimately, I feel very bad for the junior associates at Latham & Watkins and Jones Day, lawyers for UBS and the Finish Line, respectively, who now have to read through all of this. It is good times, though, to be a document reproduction service in Nashville.
Wednesday, August 29, 2007
The MGIC Investment and Radian Group Inc. merger took an interesting turn this past week. On August 7, MGIC in a public filing disclosed that it believed a material adverse change had occurred with respect to Radian in light of the C-BASS impairment announced that previous week. C-Bass is the subprime loan subsidiary jointly owned by MGIC and Radian; it has been hit hard by the subprime crisis and has experienced greater than $1 billion in losses in the last few months. MGIC further stated that it had requested additional information from Radian and expected to complete its MAC analysis the week of August 13. Radian, not surprisingly, refuted MGIC's assertion in its own filing. At the time, Radian stated that it was "compelled to carefully assess the proprietary nature of the subsequent information requests [of MGIC] to ensure that Radian does not provide MGIC with an unfair competitive advantage in the event that MGIC decides that it does not have an obligation to complete the merger.."
The Radian/MGIC deal raises similar issues as the Lone Star/Accredited Home Lenders deal, and they are both governed by Delaware law. In particular they both raise mixed legal/factual issue of whether any material adverse change is disproportionate to Radian to an extent greater than the adverse changes to the industry generally (see my post on this here; see the MAC clause in the merger agreement at pp. 7-8). Given the similarities between the Lone Star/AHL deal and this one, I expected Radian and MGIC to wait until VC Lamb issues his decision and opinion in the Lone Star/AHL litigation in late September/early October before proceeding. And that appears to be what is happening. On Aug 21, MGIC sued Radian in federal district court in Milwaukee (its home town), to obtain information from Radian it believes is required to be delivered under the merger agreement and it needs to properly assess whether a MAC occurred (see news report here). MGIC is stalling for time through a nice legal maneuver. The deal is now likely on hold for the next month.
The MGIC/Radian litigation also highlights the importance of tight forum selection clauses. Clause 9.11 of the merger agreement stipulates that the parties accept jurisdiction in any suit for specific enforcement of the transactions contemplated by the agreement in any New York court. But this is not mandatory submission to jurisdiction. This may or may not have been the parties bargained for intent in future disputes (i.e., it may have just been a quick negotiation following the form late at night without really thinking through the possibilities of such an agreement). But, whatever the case, by suing for information in a Milwaukee court, Radian has now established home court advantage for any subsequent MAC litigation fight.
Thursday, August 23, 2007
Earlier this week Upper Deck withdrew in a huff its competing tender offer for Topps leaving Topps with only a heavily criticized merger agreement with Michael Eisner's Tornante and MDP. I'll write more tomorrow and in-depth on the upcoming Topps shareholder vote on that transaction and the current shareholder opposition. But for now, I thought I would share this amazing letter Topps filed this morning. It's long for a blog post, but I'm going to put most of it up since it is really one of those you have to read (at least for those people who slow down to watch car crashes). I'll also post tomorrow my thoughts on a potential lawsuit by Topps's and their chance at success under the Williams Act and other grounds.
Mr. Richard McWilliam, Chief Executive Officer, The Upper Deck Company
Dear Mr. McWilliam:
We are extremely disappointed for our stockholders that you withdrew your tender offer.
You have misled our Board, our stockholders, the Delaware court and the regulators. As a result, our stock price has gyrated wildly based on your false and misleading statements to the public.
Our Board and management team have been intensely focused on maximizing value and, notwithstanding your self-serving statements to the contrary, we did indeed hope to reach an agreement by which Topps stockholders would receive $10.75 per share. While we negotiated in good faith and used our best efforts to arrive at a transaction with you, given the lame excuses you assert in your letter of August 21 for taking such action, we believe it is now apparent to everyone that your tender offer was illusory. Your conduct has been shameful, indefensible and, in my judgment, manipulative.
Your claim that you could not continue to proceed with your tender offer and finalize a transaction because the due diligence issues could not be resolved is specious. You should have read our letter of August 20 with greater care. In that letter, I stated that the Board was prepared to respond to every diligence request prior to signing a merger agreement, including those received recently.
So that there is no confusion, the letter, which was publicly filed, stated: "we have told you time and again (and reiterate again for the record) that once we conclude a consensual agreement with you (but prior to signing, of course), we will provide you with every missing piece of information you have requested.”
Notwithstanding your additional diligence requests, which we publicly confirmed we would satisfy, a cursory look at your specific requests demonstrates that they would not contain any information that was necessary for you to determine whether to proceed with your tender offer. . . . .
Time and again, Topps provided Upper Deck with a clear roadmap to a definitive agreement. Upper Deck never once indicated a strong desire to get a deal done, other than through its misleading communications to the public. We were stunned that we didn’t hear from you immediately after the HSR waiting period expired. Frankly, we had expected a call at midnight from your advisors suggesting a meeting within a day or so to get a deal done. That call never came (not at midnight, not over the weekend nor even the following week). Instead, our advisors had to reach out to yours to ask when and if we could discuss a merger agreement.
The details of your neglect have already been stated in my last letter so I won’t repeat them again here, but the fact is Topps pushed and pushed and Upper Deck delayed and delayed. Never once did Upper Deck request a meeting to discuss any outstanding business issues. Never once did Upper Deck offer to get in a room with business people and advisors to resolve differences. Never once did you or your business people pick up the phone and call me or anyone else at Topps (other than in response to our calls to you). All of the initiatives came from Topps - we had to send you drafts and then call or email repeatedly to get your advisors to focus. We had to call and email to push the process forward. We wrote letters to try to stimulate some kind of action on the part of Upper Deck. All in all, no one could possibly believe that Upper Deck’s behavior resembled the behavior of a motivated buyer.
All a legitimate buyer would have needed to do was to complete the tender on the terms you stated - buy whatever shares were tendered and then deal with the back-end either through a short-form or long-form merger. You had the requisite regulatory approvals and claimed to have all of the financing. All of the so-called conditions to your offer were, in fact, wholly within your control when you terminated your offer. In any case, if Upper Deck had followed through on its tender offer, it could have acquired a majority of the shares in short order (and, we suspect, would have received overwhelming support for the offer from the stockholders), obtained control of the Board immediately and thereby thwarted any further efforts by any third party to acquire control of Topps or the Board. That’s what a real buyer would have done.
Furthermore, given your lack of experience in the confectionery business, we find it more than curious that during the 5½ months since you have had access to our data room, you only performed a limited review of the hundreds of documents made available on Topps Confectionery, had no follow-up questions on the business, did not ask to speak with the supplier that manufactures most of our confectionery products and did not ask to speak with management to get clarity on the recent softening in performance. We believe that any buyer would want to assess the value of Topps’ Confectionery business regardless of their plans for the business. Topps Confectionery represents approximately half of the Company’s revenues and earnings and is the division that faces the most challenging strategic and financial conditions going forward.
Finally, on August 21, we filed a merger agreement, which we believed our Board was prepared to recommend, subject only to Topps’ obligations under the existing merger agreement with Tornante-MDP. Incredibly, rather than contact us or our advisors to finalize a transaction that would benefit our stockholders, you withdrew your tender offer. It appears that you were using your tender offer as a Trojan horse to gain access to our confidential information, disrupt our business and interfere with our pending merger transaction, the consummation of which could threaten the success of your business.
We intend to hold Upper Deck fully responsible for the damages you have caused Topps and its stockholders, and hope that our stockholders, or representatives acting on their behalf, and appropriate regulators will do likewise.; We will now turn our attention to completing the Tornante – Madison Dearborn Partners transaction.
Allan A. Feder