Thursday, January 5, 2017
I'd be remiss if I didn't note that F. Ross Johnson recently passed away. Johnson was the real life protagonist of Bryan Burrough and John Helyar's Barbarians at the Gate - the story of the auction of RJR Nabisco and Johnson audacious attempt to lead a management buyout. You can find the official obit here at the NY Times. But, for most of us, we'll always have the HBO treatment of Barbarians at the Gate to remember those times.
Friday, May 16, 2014
Antoniades, et al have a paper, No Free Shop. There have always been two sides to the g0-shop issue. On the one side, if a company has the right to proactively shop itself post-signing, that should be good, right? In Topps, Chief Justice Strine called the go-shop "sucker's insurance". Generally, employing a go-shop provision is one of several ways that a board can, in good faith, reassure itself that it has received the highest price reasonably available in a sale of control.
On the other hand, when one looks at the way go-shops are actually deployed, one wonders what is going on. By now, they are regularly included in merger agreements with private equity buyers and rarely included in merger agreements with strategic buyers. If you believe that private equity buyers have characteristics of a common value buyers and strategic buyers are more like private value buyers, then the go-shop takes on a different, less appealing light.
The paper from Antoniades, et al backs up this view; go-shops are associated with lower initial prices and fewer competing offers. These results raise the question whether boards can reasonably rely on the go-shop to confirm valuations. Here's the abstract:
Abstract: We study the decisions by targets in private equity and MBO transactions whether to actively 'shop' executed merger agreements prior to shareholder approval. Specifically, targets can negotiate for a 'go-shop' clause, which permits the solicitation of offers from other would-be acquirors during the 'go-shop' window and, in certain circumstances, lowers the termination fee paid by the target in the event of a competing bid. We find that the decision to retain the option to shop is predicted by various firm attributes, including larger size, more fragmented ownership, and various characteristics of the firms’ legal advisory team and procedures. We find that go-shops are not a free option; they result in a lower initial acquisition premium and that reduction is not offset by gains associated with new competing offers. The over-use of go-shops reflects excessive concerns about litigation risks, possibly resulting from lawyers' conflicts of interest in advising targets.
Guhan Subramanian's 2007 Business Lawyer paper, Go-Shops v No-Shops, came to a different conclusion with respect to the utility of go-shops.
Wednesday, July 24, 2013
No surprise, I guess. The board seems to be doing what it can to ensure this deal doesn't go down in flames. I suppose they see the company's future without the deal as so bleak that they are willing to take some extraordinary steps to get it through. New today: Dell and Silver Lake have "upped" their offer by $0.10. Not much. Certainly not enough to move some of the loudest critics off their positions. In any event, here's the new offer:
Our proposed amendments to the merger agreement are as follows:
1. increase the merger consideration to $13.75 in cash per share of Company common stock, representing an increase in the consideration to be paid to unaffiliated stockholders of approximately $150 million; and
2. modify the “Unaffiliated Stockholder Approval” requirement in the merger agreement to provide that the voting requirement is the approval of a majority of the outstanding shares held by the unaffiliated stockholders that are present in person or by proxy and voting for or against approval of the merger agreement at the stockholder meeting.
This is our best and final proposal. We are not willing to discuss any further increase in the merger consideration nor are we willing to increase the merger consideration to $13.75 per share without the change to the Unaffiliated Stockholder Approval requirement described above. If the Special Committee believes that it would be appropriate to reset the record date for the special meeting in connection with this change to the Unaffiliated Stockholder Approval requirement, we would be ready to accept a new record date so long as the resulting delay in the special meeting is the minimum required by law.
We believe our proposed change to the Unaffiliated Stockholder Approval requirement is fair and reasonable to the Company’s unaffiliated stockholders, particularly in the context of our willingness to increase the merger consideration. There is simply no rational basis for shares that are not voted to count as votes against the merger agreement for purposes of the unaffiliated stockholder vote. If a majority of the shares held by unaffiliated stockholders who vote are voted in favor of the merger agreement, it would be unfair to deny these stockholders the merger consideration they wish to accept solely because shares not voting are counted as votes against the transaction.
Hmm. Number 2 is very interesting. A couple of weeks ago, Chancellor Strine was asked to rule on a motion to expedite prior the shareholder vote (Transcript: Motion to Expedite). His reaction? No. He ruled that there were sufficient procedural safeguards ( see e.g. In re MFW) in place such that if unaffiliated shareholders felt that this deal was not in their interests, they had the power to vote the deal down, so no injunction. I wonder what he would say today. He certainly couldn't be as confident that unaffiliated shareholders now have the power to vote down the deal, because they no longer do. Now, it may be that the fact that Dell has effectively neutralized his 16% vote through a voting agreement is enough to get them over the line in front of a judge, but it's not a slam dunk. The Chancellor's confidence stemmed from his feeling that a majority of the minority were "fully able to protect themeselves" given the combination of Dell's neutralized vote and the voting requirements. Now, one of those protections is gone.
My guess is this transaction will be back in court before August 2. I suspect it may go less well for the board the next time if the Special Committee agrees to this change in the voting rules, but that is a risk it looks like the board feels it might have to take.
Monday, June 3, 2013
[Updated] Here are a handful of law firm memos on the MFW Shareholders Litigation (in which the Delaware Court of Chancery held that the Business Judgment Rule applied to a freeze-out merger that was conditioned on the approval of both an independent Special Committee and a Majority-of-the-Minority stockholder Vote). Brian discussed the same case here.
Thursday, March 28, 2013
Acording to Dan Primack at Fortune, Dell's independent directors agreed to reimburse Blackstone the cost of its bid as part of the go-shop process. This is a real positive, and I am surprised that more sellers with go-shop provisions don't do this as a matter of course. With an incumbent bidder in place, there are real disincentives for a second bidder to make the transaction specific investments required to put together a competing bid.
This is especially true given the fact that the incumbent bidder has more time to digest the information related to the target and almost always has a matching right in place. Rational second bidders fear that they will invest resources into making a bid only to have lose it to the incumbent - or worse overpay when the incumbent walks away. (Aside, my matching rights paper is here for those who might be interested.)
By agreeing to reimburse second bidders if they enter into a go-shop process, the independent directors lower the bars to generating second bids and increase the likelihood that the go-shop will be more than just window dressing. That's a good thing. Smart counsel for independent directors will be looking at Dell and fighting hard for reimbursement provisions in future deals.
Wednesday, January 30, 2013
... and rightly so. From Bloomberg:
Michael Dell, the special committee of the company’s board and their advisers are finalizing details of the equity financing while making sure they have explored all possible alternative options, including a sale to other buyers, said two of the people familiar with the situation. Given the potential for conflicts in a deal where Michael Dell helps take his company private, financial advisers and Dell’s board are being extra cautious, said these people.
Evercore Partners Inc. (EVR), which is advising the special committee of the board, has approached other potential buyers and no alternative bids have emerged so far, said one of the people. Dell and its advisers have also explored the possibility of a dividend recapitalization, which would involve taking on debt to help pay for a special dividend, as a way to increase shareholders’ value, said another person.
What's the over/under on the number of suits filed once this transaction is announced regardless of how good the process? I say 9.
Friday, August 24, 2012
Peter D. Lyons, David P. Connolly and Zhak S. Cohen of Shearman & Sterling analyze a series of recently decided high-profile cases involving conflicts of interest in change of control transactions and conclude that these cases
have not changed our guidance for handling conflicts: identify them early, disclose them appropriately, determine whether they are disqualifying or can be mitigated and, when mitigation is possible, mitigate them effectively.
You can read the whole thing here.
Saturday, August 18, 2012
Standard learning has long held that a minority shareholder of a Pennsylvania corporation who was deprived of his stock by a "cash-out" or "squeeze-out" merger had no remedy after the merger was completed other than to take what the merger gave or demand statutory appraisal and be paid the "fair value" for his shares. No other post-merger remedy, whether based in statute or common law, was thought to be available to a minority shareholder to address the actions of the majority in a "squeeze-out." Now, after the Pennsylvania Supreme Court’s holding in Mitchell Partners, L.P. v. Irex Corporation, minority shareholders may pursue common law claims on the basis of fraud or fundamental unfairness against the majority shareholders that squeezed them out.
The full client alert can be found here.
Monday, June 27, 2011
When negotiating an acquisition agreement, it often appears that the other side is negotiationg language without any real knowledge of what the law actually is. One area where this is often the case is anti-sandbagging provisions. This article frames the sandbagging/anti-sanbagging issue and provides a useful summary of the law in several of the most relevant jurisdictions:
In Delaware, the buyer is not precluded from recovery based on pre-closing knowledge of the breach because reliance is not an element of a breach of contract claim. The same is true for Massachusetts and, effectively, Illinois (where knowledge is relevant only when the existence of the warranty is in dispute). But in California, the buyer is precluded from recovery because reliance is an element of a breach of warranty claim, and in turn, the buyer must have believed the warranty to be true. New York is less straightforward: reliance is an element of a breach of contract claim, but the buyer does not need to show that it believed the truth of the representation if the court believes the express warranties at issue were bargained-for contractual terms.
In New York, it depends on how and when the buyer came to have knowledge of the breach. If the buyer learned of facts constituting a breach from the seller, the claim is precluded, but the buyer will not be precluded from recovery where the facts were learned by the buyer from a third party (other than an agent of the seller) or the facts were common knowledge.
Given the mixed bag of legal precedent and little published law on the subject, if parties want to ensure a particular outcome, they should be explicit. When the contract is explicit, courts in California, Delaware, Massachusetts and New York have either enforced such provisions or suggested that they would. Presumably Illinois courts would enforce them as well, but there is very little or no case law to rely upon.
June 27, 2011 in Asset Transactions, Contracts, Deals, Delaware, Leveraged Buy-Outs, Management Buy-Outs, Merger Agreements, Private Equity, Private Transactions, Transactions | Permalink | Comments (0) | TrackBack (0)
Tuesday, March 1, 2011
So, despite the flawed process, the useless fairness opinion, the fig-leaf go shop, and the problematic disclosure, the J.Crew MBO was approved by almost 64% of the company's outstanding shares. Looks like many of the large institutional investors in the company voted for the deal, even though ISS recommended that they reject the proposal. At the end of the day, the shareholders' meeting on the deal was typically short (a total of 4 minutes) and undramatic. Not much of a surprise...
Friday, February 18, 2011
David Faber at CNBC tells us what he really thinks about J Crew's "process" and the attempts to make it all right:
The bottom line: go-shops are a waste of time. Fairness opinions are barely worth the paper they are written on when there's bigger fee on the line and management led buyouts are a very tricky thing to get right.
He might be right, but then where does that leave us? These conflicts might well be inherently unresolvable. It would be nice if the go-shop or fairness opinion were a magic wand that we could wave over conflict transactions and make them go away, but it doesn't look like it's that easy. I guess the shareholders could still vote no. That's a possibility...not likely...but a possibility.
Monday, November 1, 2010
Wednesday, September 22, 2010
Matthew Cain and Steven Davidoff (The Deal Professor) have a new paper, Form Over Substance? The Value of Corporate Process and Management Buy-Outs, over at SSRN. This area of the law is one where there is a lot of interest and I suspect is ripe for some change, particularly with respect to challenges to cash-out mergers. So this paper is a welcome addition to the mix.
We examine management buy-out (MBO) transactions announced from 2003-2009 in order to study the wealth effects of MBOs and the role of process. We find that there is “value” in corporate process. MBO offer premiums are positively associated with competitive contracts and the existence of special committees. Among transactions with low initial offer premiums, bid failures are more likely when target shareholders benefit from competitive contracts. Our results allow for a cautious approach and more rigorous application of current Delaware law to provide that courts more vigorously scrutinize MBO transactions. They also inform the proper standard for review of other forms of takeovers with explicit agency/principal conflicts, including freeze-outs.
Friday, May 28, 2010
Richards Layton just released this client alert on In re CNX Gas Corp. Shareholders Litigation, in which the Delaware Chancery Court attempts to clarify the standard applicable to controlling stockholder freeze-outs (a first-step tender offer followed by a second-step short-form merger). In short, the Court held that the presumption of the business judgment rule applies to a controlling stockholder freeze out only if the first-step tender offer is both
(i) negotiated and recommended by a special committee of independent directors and
(ii) conditioned on a majority-of-the-minority tender or vote.
Monday, May 17, 2010
When an over-leveraged LBO turns out to have an unsustainable capital structure, creditors in an ensuing bankruptcy or other restructuring MAY seek to recover payments made to selling shareholders in the LBO as fraudulent conveyances. In this client alert, WGM describes what selling sponsors can do to mitigate the risk of successful post-LBO fraudulent conveyance claims.
Wednesday, July 29, 2009
Milbank, Tweed reviews the decision of the Delaware Court of Chancery in Police & Fire Ret. Sys. of the City of Detroit v. Bernal, et al. and concludes
[The Delaware Supreme Court’s recent decision in Lyondell Chemical Company v. Ryan] confirmed that directors may aggressively pursue a transaction that they determine in good faith to be beneficial to shareholders, despite the absence of an auction process, so long as their actions are reasonable and aimed at obtaining the best available price for shareholders. However, . . . the language used by the Court in Bernal certainly suggests that when a company has attracted more than one bidder, the best way for a board to satisfy its Revlon duties and maximize shareholder value is to follow a robust sale or auction process that avoids taking actions that could be perceived as favoring one bidder over another. As Court of Chancery decisions in recent years have demonstrated, when only one bidder exists, Delaware Courts are reluctant to upset the deal and risk losing an attractive opportunity for target company shareholders. In contrast, when more than one bidder is involved, Delaware Courts are more comfortable scrutinizing a deal and taking steps to permit an auction to continue.
Get the full story here.
July 29, 2009 in Asset Transactions, Deals, Going-Privates, Leveraged Buy-Outs, Management Buy-Outs, Merger Agreements, Mergers, Private Equity, Takeovers, Transactions | Permalink | Comments (2) | TrackBack (0)
Tuesday, June 5, 2007
The shareholders of OSI Restaurant Partners yesterday approved the amended merger agreement for the company to be acquired by an investor group consisting of Bain Capital Partners, LLC, Catterton Management Company, LLC, OSI's founders and its executive management. OSI did not disclose the exact vote in its press release announcing the results, but it has been reported that the merger agreement would not have been approved had OSI not acted to lower the threshold required vote a few weeks ago. OSI now expects the transaction to now close on June 19, 2007. Presumably, the extra time is to rearrange the financing for the transaction.
I've written a lot on this deal (see posts Bloomin' Onion, Bloomin' Onion (Redux), Bloomin' Onion Part III, Free Food! OSI Restaurant Partners Shareholder Meeting Today, and Games People Play). I was also quoted yesterday in a piece in the St. Petersburg Times (OSI is headquartered there) where I stated that this deal is "an interesting case study in management buyouts with private equity and how the process can be, for lack of a better word, manipulated . . . ." More specifically, I believe that management's undue influence on the OSI sale process left the OSI shareholders with a Hobson's choice -- giving shareholders no other option than to accept this bid. The St. Petersburg article chronicles management's impropriety here, and its effect is also illustrated by Institutional Shareholder Services statement recommending the transaction:
We recognize the shortcomings in the process and the conflicts of interest of management and founders . . . . but given the downside of a failed transaction resulting in a loss of premium and likely continued deterioration of fundamentals, support for the transaction is warranted.
Hopefully, OSI was at least nice enough to serve their soon to be former shareholders some tasty, free food at the meeting yesterday. They deserve that at least.
Monday, June 4, 2007
OSI Restaurant Partners, Inc., owner of the Outback Steakhouse and Cheeseburger in Paradise restaurant chains, will tomorrow hold its shareholder vote with respect to the $3.2 billion offer to be acquired by a consortium led by Bain Capital Partners, LLC and Catterton Management Company, LLC.
This buy-out has been problematical from the start. OSI's founders, CEO, CFO, COO and Chief Legal Officer are all involved in the buy-out and at times have acted to influence the process. In addition, the buy-out has been criticized for its low premium and OSI has postponed its meeting three times in order to round up enough shareholder support. With the last post-ponement, OSI announced that the buy-out group had agreed to increase the consideration offered to $41.15 up from $40.00 per share.
In connection with the announcement, OSI also agreed with the buy-out group to lower the threshold vote required to approve the merger. The original vote per the proxy statement required approval by:
a majority of the outstanding shares of our common stock entitled to vote at the special meeting vote for the adoption of the Merger Agreement without consideration as to the vote of any shares held by the OSI Investors.
The revised vote per the merger agreement amendment now requires approval by a majority of the outstanding shares, the required threshold under Delaware law and:
the affirmative vote of the holders, as of the record date, of a majority of the number of shares of Company Common Stock held by holders that are not Participating Holders, voting together as a single class, to adopt the Agreement and the Merger.
OSI Investors and Participating Holders in the above two clauses are the same group: the executive officers and founders of OSI who are participating in the buy-out. Careful readers here will note that the change in language above reduces the required vote for approval of non-participating shareholders from a majority of all outstanding shares to a majority of the minority shares. The St. Petersburg Times reports that this change has the effect of lowering the number of required votes to approve the transaction by 4.4 million (from 37.8-million of the 66.8-million shares not owned by OSI participants to 33.4-million votes plus one).
As noted, Delaware only requires an absolute majority, so the required vote in either case is higher. OSI is requiring this higher vote due to the requisites of Delaware law which require a majority of the minority of OSI shareholders to insulate the OSI participants and the Board from liability by waiving management's conflict. So, both votes still preserve this majority of the minority aspect (a smart move given managements conflicted metaling in the buy-out process). But, the special committee's agreement to lower the vote is a dubious one at best, and though probably acceptable under Delaware law, is further evidence of the problems which can arise with management buy-outs generally and the board process here in particular.
Friday, May 25, 2007
OSI Restaurant Partners is holding its three times postponed shareholder meeting today. According to OSI's press release, the purpose of the meeting is only to adjourn it to June 5, 2007 in order to provide OSI shareholders more time to consider an increased offer from a consortium led by Bain Capital Partners, LLC and Catterton Management Company, LLC. The buy-out group on Tuesday announced that it will now pay $41.15 per share in cash up from $40.00 per share.
I've blogged before about this deal and management's inordinate and inappropriate involvement in the process. OSI's founders, CEO, CFO, COO and Chief Legal Officer are all participating in the deal. I believe that their undue influence on the process and participation has given shareholders a Hobson's choice: no deal at all or a less than full premium in the private equity/management buy-out being offered. Nonetheless, analysts believe that the latest increase offered by the buy-out group should be enough to gain shareholder approval. A substantial number of OSI's shares are now held by arbitrageurs, and Tuesday's 3% raise is a nice return on an annualized basis for them.
For aggrieved OSI shareholders, I note that dissenters' rights are available if the transaction goes through and you don't vote for it. Additionally, another way to earn some extra return, would be to attend the next two meetings. These meetings typically have a spread of food and refreshments, and since OSI is a restaurant company it might be tastier and more copious than normal. I make no promises about this, but if there is food it would be free for shareholders, so the more you eat the more money you can put into your pocket (actually stomach). Not to mention you can exercise your shareholder rights. Today's meeting time and place for those OSI shareholders hungry and/or interested is:
Friday, May 25, 2007, at 11:00 a.m., Eastern Daylight Time, at A La Carte Event Pavilion, 4050-B Dana Shores Drive, Tampa, Florida 33634.
Let me know if it was worth the trip and I'll make another post on June 5 as a reminder, perhaps including the menu from this meeting.
Update: The meeting today voted to adjourn to June 5.
Tuesday, May 22, 2007
OSI Restaurant Partners, Inc., owner of the Outback Steakhouse and Cheeseburger in Paradise restaurant chains, today announced that it agreed to an increased offer from a consortium led by Bain Capital Partners, LLC and Catterton Management Company, LLC. The buy-out group will now pay $41.15 per share in cash up from $40.00 per share. OSI's founders who are part of the acquiring group have agreed to receive only $40 per share for their stakes. Bloomberg reports that many shareholders are likely to still view the consideration as insufficient, but that analysts believe the raise should be enough to obtain necessary shareholder approval.
In connection with the new agreement, OSI today also postponed for the third time to May 25, 2007 its shareholder meeting to consider the proposal. It was supposed to be held today. I've blogged before about the perils of management-led buy-outs and the OSI one in particular (see here and here). OSI's CEO, CFO, COO and Chief Legal Counsel as well as its founders are all participating in the buy-out and have exercised what appears to be inappropriate influence and activity in this transaction. The postponement of the meeting for three times in order to make sure that the proposal has sufficient votes speaks to these issues.
NB. If the transaction were structured as a tender offer, the payment of differential consideration here to the OSI founders would not be permitted due to the requirements of the all-holders/best price rule. This rule does not apply to mergers. Hopefully, if the SEC ever decides to update its tender offer and merger rules for the modern age, it will end this no longer justified disparity by applying the rule to both structures or neither. For more on this and other no longer jusitifed SEC merger/tender offer distinctions, see my soon to be published article, The SEC and the Failure of Federal Takeover Regulation.