M & A Law Prof Blog

New DGCL 251(h) to eliminate vote in 2 step merger

According to Richards Layton & Finger, Delaware is in the process of amending the DGCL to add a new Sec. 251(h), the purpose of which will be to eliminate a required shareholder vote in the second step of a two-step acquisition:

Under new subsection 251(h), a vote of the target corporation’s stockholders would not be required to authorize the merger if: (1) the merger agreement expressly provides that the merger shall be governed by this new subsection and shall be effected as soon as practicable following the consummation of the offer described below; (2) a corporation consummates a tender or exchange offer for any and all of the outstanding stock of the target corporation on the terms provided in such merger agreement that would otherwise be entitled to vote on the adoption of the merger agreement; (3) following the consummation of the offer, the consummating corporation owns at least the percentage of the stock of the target corporation that otherwise would be required to adopt the merger agreement; (4) at the time the target corporation’s board of directors approves the merger agreement, no other party to the merger agreement is an “interested stockholder” (as defined in Section 203(c) of the DGCL) of the target corporation; (5) the corporation consummating the offer merges with the target corporation pursuant to such merger agreement; and (6) the outstanding shares of the target corporation not canceled in the merger are converted in the merger into the same amount and kind of consideration paid for shares in the offer.

Given the recent proliferation of top-up options, the back end shareholder vote has lost much of its kick, if it ever had any.  Really, by now if a target requires an actual back-end vote it's because it either doesn't have enough shares outstanding to permit a top-up option or there were just really bad lawyers working the deal.

-bjmq

Comparison of One-Step and Two-Step Mergers

Haynes and Boone has a short summary of the pros and cons of each here.

MAW

Hertz pulls offer, birds fly away

According to Bloomberg, Hertz filed the following press release with the SEC with the SEC as an amendment to its Schedule TO:

Hertz Global Holdings, Inc. (NYSE: HTZ) (“Hertz”) today announced that it is withdrawing its exchange offer for all outstanding shares of Dollar Thrifty Automotive Group, Inc. (NYSE: DTG) (“Dollar Thrifty”).  Hertz decided to withdraw its exchange offer at this time in light of Dollar Thrifty’s plan to commence its announced share repurchase program and current market conditions.

Hertz continues to believe that a merger with Dollar Thrifty is in the best interests of both companies.  Hertz remains engaged with the FTC to secure antitrust clearance for the proposed transaction.

Once antitrust clearance has been obtained, Hertz will reassess the appropriate price and other terms of the proposed transaction based on Dollar Thrifty’s share repurchase program, Dollar Thrifty’s performance, Dollar Thrifty’s outlook and prevailing market conditions at that time.

Hear that?  That's the sound of the second bird flying away from the bush.  The Delaware courts love the "bird in the hand" cliche.  In this case, after a year of back and forth and fights between/among Dollar, Avis, and Hertz, it looks like a transaction with Dollar is just not going to happen.  Dollar signalled as much earlier this month when it halted the sales process and announced a share buyback plan (here). 

-bjmq

Autonomy and tender offers

The FT Alphaville notes an important difference between US and UK tender offers. They point to H-P's announcement that it is extending its tender offer after 42% of shares were tendered. My reaction, like Alphaville's was "that's awful low."  But it turns out, that's good for the UK where tender offers in their first round typically get only 10% of shares.  Now, that's low.  From Alphaville:

A typical level of acceptances at the first close of a UK takeover offer is somewhere around 10 per cent. That’s because investors are reluctant to give up the optionality of backing another bid emerging. In fact, hedge funds almost never give up this optionality until they absolutely have to.

But in this instance almost 42 per cent of Autonomy shareholders have signed up at the first opportunity even though there’s the possibility (admittedly slim) of a counter bid

 Interesting. I wonder what drives this behavior.  The Takeover Panel rules?

-bjmq

K&E Survey of Recent Developments in Public M&A Deal Terms

K&E just published this "survey" of recent developments in public M&A deal terms.  Unlike the broad, quantitative surveys put out by oganizations like the ABA or PLC, this one seems more impressionistic, so it may be biased by the universe of deals the authors were exposed to.  Still, a worthwhile read.

MAW

Top-up option guidance

I've written about top-up options before.  Now, if you're considering including a top-up option in your next deal, remember to read Olson v Ev3 before you get started.  It provides a very good review of the issues related to the use of top-up options and how acquirers can structure them so that they withstand litigation challenges.  The court notes just how ubiquitous top-up options have become in recent years:

Not surprisingly, given these advantages, top-up options have become ubiquitous in two-step acquisitions. They appeared in more than 93% of two-step deals during 2007, 100% of two-step deals during 2008, and more than 91% of two-step deals during 2009. [citing Mergermetrics]

The trigger to exercise the top-up option in the Ev3 transaction was 75%.  That's a pretty modest - as things go these day - trigger for top-up option.  The target might not have had enough authorized stock to allow them to go any lower. 

You can read client memos on top-up options from Bingham and Paul Weiss. 

-bjmq

Appraisal - Arbs and top-up options

Last week following the decision in In re Cogent, I moved on.  I mean, why not, right?  The court passed on the deal and it can now proceed to close.  Well, not everybody is like me.  Who is like a dog with a bone?  Appraisal arbs, that's who.  Take a look at this press release from Koyote Trading to Cogent shareholders. (The Deal Prof noticed this, too.)  In it they write the following: 

“We are pleased that 3M acquired a 52% stake in Cogent last week principally through the acquisition of a 38.8% stake owned by the CEO Mr. Ming Hsieh. However, as we and other owners of Cogent have been saying for some time, the $10.50 valuation is clearly inadequate by any number of metrics,” stated Zachary Prensky, co-manager of the Special Situations desk at Koyote. As stated by 3M in a press release dated Friday, October 8^th, 2010, less than 15% of the outstanding publically-owned common stock of Cogent was tendered to 3M. ...

We applaud 3M’s long term commitment to a business that we are excited about. But the price offered is inadequate to 48% of Cogent shareholders that declined to participate in 3M’s tender. With the senior management and Board of Cogent committed to the $10.50 valuation, we have no choice but to explore the possible formation of a committee of shareholders to negotiate directly with 3M for a fair and adequate price for our stake. If 3M works with us, we believe we can find a middle ground that rewards minority shareholders for their long-term support of Cogent’s business plan,” added Mr. Prensky.

So, do they really think that the Cogent board will sit down and negotiate a higher price when a court has already given its blessing to the merger agreement?  I doubt it.   No, what they are probably up it is organizing a committee to pursue appraisal.  Meet the appraisal arbs.  A memo from Latham & Watkins issued way back in 2007 outlines the strategy. 

[T]he Delaware Chancery Court issued its opinion in the Transkaryotic appraisal proceedings. The issue was whether some 10 million Transkaryotic shares acquired afterthe record date largely by hedge funds and arbitragers were entitled to appraisal even though the beneficial owners could not demonstrate that the particular shares had, in fact, either been voted against the merger transaction or had not voted at all—a statutory prerequisite for assertingappraisal rights.

The effect is to create a post-deal announcement market for target shares.  Arbs who believe that there might be some real value in an appraisal proceeding can bid the price up and pursue and action - the reasonable costs of which may be borne by the surviving company.   Looks like Koyote is thinking of something along these lines with respect to Cogent.  Of course, the thing about an appraisal proceeding - it's a battle of experts and in the end the court determines the fair value of the shares - excluding any value created by the announced transaction.  That's a little like when a student comes back to me asking for their exam to be re-graded.  If you're lucky, it might go up.  Then again, it could go down.

On a related matter, there is an open issue with top-up options and appraisal that will receive more attention as deal-makers continue their push toward ever lower and lower triggers for the top-up option.  That issue has to do with the dilutive effect of the top-up on shares that may seek appraisal.  If Cede tells us anything, it's that a court will analyze the top-up as an integrated part of the entire transaction.  That could be troublesome if a diluted appraisal arb challenges a top-up option as part of an appraisal action.

This issue was a live one in Cogent.  The plaintiffs made the following argument: 

The last argument Plaintiffs make regarding the Top-Up Option is that the appraisal rights of Cogent stockholders will be adversely affected by the potential issuance of 139 million additional shares.  They claim that the value of current stockholder’s shares may be significantly reduced as a result of the dilutive effect of a substantial increase in shares outstanding and the “questionable value” of the promissory note.  Plaintiffs argue that the Top-Up Option will result in the issuance of numerous shares at less than their fair value. As a result, when the Company’s assets are valued in a subsequent appraisal proceeding following the execution of the Top-Up Option, the resulting valuation will be less than it would have been before the Option’s exercise.

It looks like deal lawyers saw this coming, so the Cogent merger agreement included a protective provision as part of the top-up:

Plaintiffs admit that Defendants have attempted to mitigate any potential devaluation that might occur by agreeing, in § 2.2(c) of the Merger Agreement, that “the fair value of the Appraisal Shares shall be determined in accordance with DGCL § 262 without regard to the Top-Up Option, the Top-Up Option Shares or any promissory note delivered by the Merger Sub.”  Plaintiffs question, however, the ability of this provision to protect the stockholders because, they argue, a private contract cannot alter the statutory fair value or limit what the Court of Chancery can consider in an appraisal.(66) Because DGCL § 262’s fair value standard requires that appraisal be based on all relevant factors, Plaintiffs contend the Merger Agreement cannot preclude a court from taking into account the total number of outstanding shares, including those distributed upon the exercise of the Top-Up Option.  In addition, they argue that even if the parties contractually could provide such protection to the stockholders, § 2.2 of the Merger Agreement fails to accomplish that purpose because the Merger Agreement does not designate stockholders as third-party beneficiaries with enforceable rights.

 While the issue of whether DGCL § 262 allows merger parties to define the conditions under which appraisal will take place has not been decided conclusively, there are indications from the Court of Chancery that it is permissible.(67) The analysis in the cited decisions indicates there is a strong argument in favor of the parties’ ability to stipulate to certain conditions under which an appraisal will be conducted—certainly to the extent that it would benefit dissenting stockholders and not be inconsistent with the purpose of the statute. In this case, I find that § 2.2(c) of the Merger Agreement, which states that “the fair value of theAppraisal Shares shall be determined in accordance with Section 262 without regard to the Top-Up Option . . . or any promissory note,” is sufficient to overcome Plaintiffs’ professed concerns about protecting the Company’s stockholders from the potential dilutive effects of the Top-Up Option.  Accordingly, I find that Plaintiffs have not shown that they are likely to succeed on the merits of their claims based on the Top-Up Option.

When the top-up option was simply a cleaning up device to help tidy up a tender, I suspect that few merger agreements included protective provisions as part of the top-up.  If we are moving toward lower and lower top-up triggers, then this kind of protective provision will become required, lest a challenge get some traction in the courts.

-bjmq

Top-Up Options

Top-Up options are fairly standard in friendly tender offers.  A top-up option provides that so long as x% of shareholders tender in the offer, the target will issue the remaining shares to put the acquirer over the 90% threshold so that it can complete a short-form squeeze-out merger. The minimum number of shares triggering the top-up varies but the target share issuance can be no more than 19.9% of the target's outstanding shares due to stock exchange rules (although it's debatable whether this really matters or not). Also, as Brian has pointed out before, make sure you do the math to determine if the target has enough authorized but unissued stock so that the top-up is possible (this should really make you remember the importance of paying attention in your basic Business Associations class). 

Now, for people interested in learning more about Top-ups, Davis Polk has issued a client memo on two recent Delaware cases touching upon top-ups.  As the Deal Professor notes, Chancellor Parsons’ recent opinion in the In re Cogent, Inc. S'holders Litig. case provides a good “road map for how deal lawyers should negotiate and structure top-up options in order for them to comply with Delaware law.”

-AA

More on the Potash Litigation

I'll just add this brief comment to Afra's good post on the state of the proposed Potash/BHP transaction. Potash has sued BHP in federal court over this BHP's hostile offer (Download Potash complaint). It's worth noting that since the complaint alleges various violations of the Williams Act, which you'll remember is the disclosure regime that governs tender offers, Potash is limited in the remedies that it can ask for.  The best remedy for inadequate or incorrect disclosure is .... well ... disclosure.  That's why the injunction that Potash is asking for is tied to slowing the offer down until the disclosure can be corrected.  In the real world of large NY law firms, that isn't a whole lot of time ... 24, 48 hours to kick out an amended Schedule TO?  

I have no doubt that if Potash could get an injunction preventing the offer from going forward, it would.  In fact, they hint at it in the complaint - suggesting the tender is coercive because BHP is only seeking 51% has not conditioned the offer on receiving more than 67% of the outstanding shares.  I think they're hoping that a judge will agree with them and enjoin the whole deal.  Well, that's not going to happen.  There's no obligation under the Williams Act that an offerer buy 100% of the outstanding shares, and buying less than all, without more, is just not coercive.   In any event, the courts have regularly ruled that the Williams Act is not intended to be a defensive weapon to protect management from unwanted bids.  A plaintiff is only going to get an injunction to block a bid if the preferred remedy - disclosure - isn't enough to avoid irreparable harm (see Rondeau v Mosinee Paper), and I don't see the irreparable harm here.

-bjmq

14D-9's and the 21st Century

It used to be that a board in response to an unwanted offer a board would just send a press release to PR Newswire and then file a 14D-9.  My ... how times have changed.   Potash is presently fending off an unwanted bid from BHP and rather than simply issue a press release, they go to YouTube! (H/T WSJ Deal Journal)  Here's Potash CEO Bill Doyle explaining the board's reasons for rejecting the offer:

It's a simple, low budget production.  I wonder why they thought it would be more useful than a press release.  It's certainly not easier - it takes CEO time and still requires a filing with the SEC.  Since you can't file a video clip, yet, the whole thing has to be transcribed before its filed.  Here's the filing for the video.  It's also not the kind of thing that CNBC or some other business network is going to want to air.  I wonder what it's for.

Oh and here's Bill Doyle on those dastardly arbitrageurs ... you know who you are ...

To be honest, I  still think the guys over at Woot! know how to use video to communicate with their customers and shareholders.  Can you imagine the impact of a monkey puppet rejecting BHP's bid?! 

-bjmq

Japanese Mandatory Tender Offer Rules

Orrick has a two-part client memo on the mandatory tender offer rules in Japan (Part 1 and Part 2).

-bjmq

Richards Layton on Freeze-outs

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.

MAW

Some Tender Offer Quirks

Courtesy of K&E

MAW

Primer on the Tender Offer rules from Morrison Foerster

Can be found here.

The Gates of Taiwan

On Monday, Taiwanese based Acer Inc. announced that it had agreed to acquire Gateway, Inc.  Under  the agreement, Acer will commence a cash tender offer to purchase all the outstanding shares of Gateway for $1.90 per share, valuing the company at approximately $710 million.  For those who bought at $100 a share in 2000, I am very, very sorry.  The acquisition is subject to CFIUS review and a finding of no national security issues (more on this at the end). 

For language hogs, the merger agreement contains some solid contract language dealing with Gateway's exercise of its right of first refusal to acquire from Lap Shun (John) Hui all of the shares of PB Holding Company, S.ar.l, the parent company for Packard Bell BV.   In Section 5.11 (pp. 36-37), Acer agrees to fund the purchase of Packard Bell by Gateway.  The interesting stuff is in Section 7.2 which deals with what happens to Packard Bell if the agreement is terminated.  In almost all circumstances of termination Gateway is required to on-sell Packard or its right to buy Packard to Acer.  The big exception is in the case of a superior proposal.  In such circumstance, if the third party bidder elects, Gateway is required to auction off Packard or its right to buy Packard to the highest bidder.  According to one report on The Deal Tech Confidential Blog, Lenovo is contemplating an intervening bid for Gateway in order to acquire Packard; their lawyers should take a look at these provisions.  In any event, Gateway did not disclose in its public filings that, if the Acer deal fails, it is highly unlikely to remain the owner of Packard Bell if it succeeds in purchasing it. 

For those who track such things the deal has a no-solicit and a $21.3 million break fee -- about normal.  It is also yet another cash tender offer with a top-up option. 

The other interesting thing about this transaction is the Exon Florio condition.  The Congress enacted the Exon-Florio Amendment, Section 721 of the Defense Production Act of 1950, as part of the Omnibus Trade and Competitiveness Act of 1988.  The statute grants the President authority to block or suspend a merger, acquisition or takeover by a foreign entity if there is “credible evidence” that a “foreign interest exercising control might take action that threatens to impair the national security” and existing provisions of law do not provide “adequate and appropriate authority for the President to protect the national security in the matter before the President."

The Exon-Florio provision is implemented by the Committee on Foreign Investment in the United States ("CFIUS"), an inter-agency committee chaired by the Secretary of Treasury.  Exon Florio was amended in July by The National Security Foreign Investment Reform and Strengthened Transparency Act.  For a summary of the final legislative provisions, see this client memo by Wiley Rein here.  The legislation is Congress's response to the uproar over the acquisition of Peninsular & Oriental Steam by Dubai Ports and the ensuing political brawl and heavy congressional protest which led to Dubai Ports terminating the U.S. component of its acquisition.  The dispute was always puzzling:  Dubai Ports was acquiring an English company with port operations in the United States and Dubai Ports is headquartered in the United Arab Emirates, one of our strongest allies in the Mid-East.  Nonetheless, the controversy has now spawned a change in the CFIUS review process.  And on the whole, the measure is fairly benign, endorsed by most business organizations and will not bring any significant change to the national security process.  However, the bill does come on the heels of a significant upswing of CFIUS scrutiny of foreign transactions.  According to one news report, CFIUS considered 113 transactions in 2006, up 74 percent from the previous year.  How this will all ultimately effect the willingness of foreigners to invest in the U.S. is still unclear, though you can make a prediction. 

Back to the Acer transaction.  The tender offer is conditioned on:

the period of time for any applicable review process by the Committee on Foreign Investment in the United States (“CFIUS”) under Exon-Florio (including, if applicable, any investigation commenced thereunder) shall have expired or been terminated, CFIUS shall have provided a written notice to the effect that review of the transactions contemplated by this Agreement has been concluded and that a determination has been made that there are no issues of national security sufficient to warrant investigation under Exon-Florio, or the President shall have made a decision not to block the transaction.

This Exon-Florio condition appears prudent given that Lenovo had to make concessions to clear CFIUS review when it bought IBM's computing division.  CFIUS review, though, has a minimum review period of 30 days which is longer than the 20 business day minimum required for a tender offer to remain open.  Given this, I'm surprised Acer and Gateway went the tender offer route; typically in these situations you would use a merger structure which allows for a longer time period between signing and closing, but is more certain to get 100% of the shares in a more timely fashion.  One likely reason is that they did so because they anticipate clearing Exon-Florio quickly.  This, of course, is now in the hands of the U.S. government.   

Topps's Car Wreck

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.

Sincerely,

Allan A. Feder

Lead Director

Mistakes M&A Lawyers Make

RARE Hospitality International, Inc. announced on Friday that it will be acquired by Darden Restaurants, Inc. for $38.15 per share in cash in a transaction valued at approximately $1.4 billion.  The acquisition will be effected via tender offer, showing yet again that the cash tender offer is reemerging as a transaction structure (see my post the Return of the Tender Offer).  Darden is financing the acquisition through cash and newly committed credit facilities.  And the deal is the latest in the super-hot M&A restaurant-chain deal sector.      

A perusal of the merger agreement shows a rather standard industry agreement.  RARE's main restaurant chain is LoneHorn Steakhouse, and so merger sub is called Surf & Turf Corp. -- the bounds of creativity in M&A.  There is a top-up which is also fast becoming a standard procedure in cash tender offers.  This top-up provision provides that so long as a majority of RARE’s shares are tendered in the offer, RARE will issue the remaining shares to put Darden over the 90% squeeze-out threshold.  RARE's stock issuance here cannot be more than 19.9% of the target's outstanding shares due to stock exchange rules, and cannot exceed the authorized number of outstanding shares in RARE’s certificate of incorporation. 

I looked for any new gloss on the Material Adverse Change clause to address current market conditions.  There was nothing that appeared to address the particular situation, although any non-disproportionate "increase in the price of beef" is a MAC-clause trigger; apropos for a steakhouse chain.  Finally, for those interested in topping Darden’s bid, the termination fee is $39.6 million.  If another bidder makes a superior proposal, then under Section 5.02(b) of the merger agreement, RARE cannot terminate the agreement "unless concurrently with such termination the Company pays to Parent the Termination Fee and the Expenses payable pursuant to Section 6.06(b)".  The only problem?  Expenses is used repeatedly throughout the Agreement as a defined term everywhere except 6.06(b) -- which makes no references to Expenses or even expenses.  In fact, it appears that nowhere does the agreement define Expenses.  Transaction expenses can sometimes be 1-2% of additional deal value, a significant amount that any subsequent bidder must account for.  So how much should a subsequent bidder budget here?  Or to rephrase, what expenses must RARE pay if a higher bid emerges?  And how can RARE terminate the deal to enter into an agreement with another bidder if RARE does not know which expenses it is so required to pay?  Darden may also want similar certainty as to its reimbursed expenses, if any, in such a paradigm.  Lots of questions in this ambiguity.  Not the biggest mistake in the world, but Wachtell, attorneys for the buyer, and Alston & Bird, attorneys for the seller, both have incentives to fix this one.

Midwest Chooses?

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

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

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

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

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

Topps' Dilemma

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

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

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

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

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

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

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

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

The Return of the Tender Offer (Redux)

Three weeks ago I penned a post on the The Return of the Tender Offer.  Yesterday, Theodore Mirvis a partner at Wachtell, Lipton, Rosen & Katz posted to the Harvard Corporate Governance Blog a memorandum issued by Wachtell last week on the same subject.  It is worth a read for those wanting a highlight of the benefits tender offers provide over mergers.  And nice to know we are in agreement on the return of the beloved '80s structure, particularly since I was a week or two ahead of those super-fast Wachtell lawyers.