M & A Law Prof Blog

Editor: Brian JM Quinn
Boston College Law School

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Tuesday, May 26, 2009

Delaware Weighs in on Poison Puts

The credit crisis has brought the issue of the poison put to fore.  A "poison put" is a change of control provision in an indenture that prevents a debtor from having its board replaced as a consequence of a hostile acquisition without triggering a default event.   NRG has been waving the potential of such a default as a reason for its shareholders not to tender into Exelon's hostile bid for control of NRG ("NRG: Exelon's board proposal would accelerate $8B in debt").  


In April, the WSJ ran an article on the role of poison puts in slowing down the market for corporate control during the credit crisis.  Whereas in better times, potential sellers with restrictive debt covenants. ("Poison puts undercut mergers").  Below is a discussion from the WSJ on the effect of "poison puts" on the M&A market.  


  


The Delaware courts recently had a chance to weigh in on the validity of poison puts in the Amylin case.  The opinion is here: Download Amylin-Poison Put. The core issue in the Amylin case was whether a board can, in effect, tie their own hands, as well as the hands of shareholders by leaving it to third party creditors to decide whether or not a hostile bidder is acceptable.  If you'r familiar with the deadhand/slowhand poison pill cases, then it's hard to imagine a Delaware court deciding that a board may, consistent with its fiduciary duties, agree to poison put that effectively neuters shareholders' voting rights.

In the Anylin case, creditors sued to enforce the covenant and prevent a new board that won a proxy contest from taking their seats on the board.  Shareholders and the board opposed.  The court ruled with the board. The effect of which is that poison puts must be read more generously and in a manner that does not have the effect of entrenching management and disenfranchising shareholders.   There is a nice post on this decision on the Harvard Corporate Governance Blog (here). 

- bjmq

May 26, 2009 in Cases, Takeover Defenses, Transaction Defenses | Permalink | Comments (0) | TrackBack (0)

Thursday, September 6, 2007

Leap's Defensive Weakness?

Earlier this week, MetroPCS Communications, Inc. announced that it had proposed a strategic stock-for-stock merger with Leap Wireless International.  MetroPCS is proposing to offer 2.75 shares of MetroPCS common stock for each share of Leap valuing Leap's equity at approximately $5.5 billion.  For those who collect bear-hug letters, you can access the fairly plain vanilla one here.  (Aside, showing my M&A geekiness, I've been collecting these for years; my pride and joy is one one of the extra signed copies of Georgia-Pacific Corp.'s bear-hug for Great Northern Nekoosa Corp., one of the seminal '80s takeover battles). 

As a preliminary matter, MetroPCS phrased the offer as a merger rather than an exchange offer or just plain offer in order to avoid triggering application of Rule 14e-8 of the Williams Act which would require it to commence its exchange offer within a reasonable amount of time.  This is yet another bias in the tender offer rules towards mergers which doesn't make sense -- the SEC would do better to promulgate a safe-harbor for these types of proposals so an offeror has more public flexibility in proposing a transaction structure.  Although, at this point, all of the actors here, except the public, know what MetroPCS means and why they are using this language. 

I was also browsing through the Leap organizational and other documents this morning to see how takeover proof it is.  Leap is a Delaware company and it has not opted out of Delaware's third generation business combination statute DGCL 203.  But it has no staggered board or a poison pill (though as John Coates has academically observed it still can adopt one).  While Leap's directors can be removed with or without cause, there is a prohibition on shareholders acting by written consent.  This, together with a prohibition on shareholder ability to call special meetings, would mean that MetroPCS would have to wait until next year's annual meeting to replace Leap's directors.  And Leap could force MetroPCS to do so by adopting a poison pill.  So, Leap's ultimate near-term vulnerability boils down to whether its shareholders can call a special meeting.  Here is what Leap's by-laws say about the shareholder ability to call special meetings:

Section 6. Special Meetings. Special meetings of the stockholders, for any purpose, or purposes, unless otherwise prescribed by statute or by the Certificate of Incorporation, may be called by the Chairman of the Board of Directors, the Chief Executive Officer or the Board of Directors pursuant to a resolution adopted by a majority of the total number of authorized directors (whether or not there exist any vacancies in previously authorized directorships at the time any such resolution is presented to the Board of Directors for adoption). Business transacted at any special meeting of stockholders shall be limited to the purposes stated in the notice of such meeting.

Does everyone see the problem here?  It looks like a typo -- instead of "prescribed", the drafter here probably meant "proscribed".  So, instead of limiting the calling of special meetings, by changing one letter the clause expands shareholder power provided the certificate or Delaware law permits Leap shareholders to call these meetings.  Here, Article VIII of the certificate does not allow it.  So we are down to Delaware.  DGCL 211(d) is the relevant statute, and it states:

Special meetings of the stockholders may be called by the board of directors or by such person or persons as may be authorized by the certificate of incorporate or the by-laws. 

A bit circular, but it can be safe to say that Leap probably dodged a bullet here:  DGCL 211(d) does not appear to specifically authorize stockholders to call a special meeting.  And, in any event, Leap's board has the power to amend its by-laws although doing so in the middle of a battle for corporate control has its own legal and political ramifications.  Ultimately, though, the lesson here is how one (intentional or unintentional) letter can make a very big difference -- be careful out there. 

September 6, 2007 in Hostiles, Transaction Defenses | Permalink | Comments (1) | TrackBack (0)

Friday, July 13, 2007

ABN Amro Wins One

Today the Dutch Supreme Court overturned the provisional injunction imposed by the Dutch Enterprise Chamber on May 3, 2007 restraining ABN AMRO from completing the sale of LaSalle to Bank of America without approval of its shareholders (read ABN Amro's reaction here).  The decision means that the sale will almost now certainly proceed.  This transaction was generally viewed at the time as a crown-jewel sale implemented to deter other bidders from interfering in Barclay plc's recommended takeover of ABN Amro.  As such, the decision and likely sale are a setback for the European consortium of banks (Royal Bank of Scotland Group Plc, Fortis Group and Banco Santander) who have tabled a competing bid for both LaSalle Bank and ABN Amro.  The RBS consortium's current offer is 79% cash and is valued at $97.78 billion while Barclays's all-stock offer currently values ABN at €63.24 billion.

The ruling is not a complete surprise.  Last month the legal adviser to the Supreme Court, the advocate general, had opined that Dutch law didn't require a shareholder vote.  Still the equities of the situation spell a different result -- ABN Amro has done everything in its power to tilt this bidding contest towards its chosen suitor, Barclays, to the detriment of its shareholders.  Today is not a winning day for shareholder rights advocates.

NB.  The result would likely be the same in the United States.  ABN Amro's merger with Barclays is a stock one and there does not appear to be any change of control.  Accordingly, ABN Amro's boards' decision to merger would be reviewed by a Delaware court under the business judgment rule and "Revlon duties" would not apply.  And there would likely be no required vote on the LaSalle Bank sale as it does not appear to constitute "all or substantially all" of ABN Amro's assets, the prerequisite for such a vote under Delaware law.  Nonetheless, the Delaware courts, of late, have been willing to step in to halt inequitable practices in M&A transactions (e.g., Hollinger Inc. v. Hollinger International Inc).     

July 13, 2007 in Europe, Takeovers, Transaction Defenses | Permalink | Comments (0) | TrackBack (0)

Friday, July 6, 2007

Bausch & Lomb and AMO's Loving Stare

Advanced Medical Optics, Inc., the eye care products supplier, confirmed yesterday it had proposed to acquire Bausch & Lomb for $75 per share in cash and AMO stock.  $45 of the consideration will be in cash and the remainder in stock (no details on whether the stock collar was fixed or floating).  The proposal values Bausch & Lomb at $4.3 billion and is not contingent upon financing.  The bid comes on the heels of a $65 all-cash transaction agreed to earlier in the year by  private-equity firm Warburg Pincus LLC which valued Bausch & Lomb at $3.7 billion. 

The Bausch & Lomb press release actually contains more details of AMO's bid than AMO's release itself.  According to Bausch & Lomb, the AMO proposal includes (1) a proposed $130 million reverse termination fee payable by AMO to Bausch & Lomb in the event the transaction does not close due to the failure to obtain requisite antitrust clearance and (2) proposed reimbursement by AMO of Bausch & Lomb’s expenses up to $35 million if AMO fails to obtain the approval of its shareholders.  In addition, AMO will have up to 12 months to close the transaction and interest would be paid in cash with respect to the purchase price by AMO at the rate of 7.2% per annum beginning six months after an agreement is reached. 

AMO's proposal came before the end of Bausch & Lomb's 50 day go-shop.  And the Bausch & Lomb board has determined that the AMO Proposal is bona fide and is reasonably likely to result in a superior proposal, as defined under the Warburg merger agreement.  AMO is therefore an excluded party under the agreement and Bausch & Lomb is permitted to continue negotiating with AMO with respect to the AMO Proposal despite the end of the “go shop” period.  Because AMO's bid was made before termination of the go-shop Warburg Pincus will be entitled to a $40 million termination fee from Bausch & Lomb if an agreement is signed with AMO.   

Bausch & Lomb is the second go-shop deal in a week to attract another bidder (Everlast was the other one).  A heartening change from previous times when go-shops were seen as mainly illusory cover for private equity bids made with management complicity.  It still remains to be seen, though, whether the increasingly competitive M&A market will see more "go-shop" bids.  And if it does so, targets and initial bidders react by simply failing to include these provisions. 

July 6, 2007 in Takeovers, Transaction Defenses | Permalink | Comments (0) | TrackBack (0)

Tuesday, June 5, 2007

Avaya's Break-Fees

Avaya yesterday filed the merger agreement with respect to its acquisition by Silver Lake and TPG Capital for approximately $8.2 billion or $17.50 per common share.  The deal terms appear rather standard for a private equity buy-out.  Avaya had previously announced that the agreement contained a fifty day go-shop; in what is becoming the norm, the agreement also sets a staggered break fee of $80 million during the go-shop period and $250 million thereafter.  For more on the transaction, see the Marketwatch article here.

The deal is a nice Illustration of the dynamic nature of our capital market and the effect of a thick M&A market.  Avaya was spun-off from Lucent.  Lucent has subsequently merged with Alcatel to form Alcatel Lucent.  And Lucent was itself was spun off by AT&T -- AT&T has itself been acquired by SBC which took on AT&T's name. 

June 5, 2007 in Going-Privates, Private Equity, Transaction Defenses | Permalink | Comments (0) | TrackBack (0)

Monday, June 4, 2007

Games People Play

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.    

June 4, 2007 in Going-Privates, Leveraged Buy-Outs, Management Buy-Outs, Private Equity, Transaction Defenses | Permalink | Comments (0) | TrackBack (0)

Wednesday, May 30, 2007

CDW Corp. to be Acquired by Madison Dearborn Partners

CDW Corporation, the technology products retailer, yesterday announced that it had agreed to be acquired by the private equity firm Madison Dearborn Partners, LLC in a transaction valued at approximately $7.3 billion.  MDW will pay $87.75 in cash per share.  CDW's founder Michael P. Krasny owns 22 percent of the company and has agreed to vote in favor of the transaction.

CDW has yet to file the merger agreement, but according to the press release:

Before approving the merger agreement, the [CDW] Board of Directors conducted an auction process in which a number of potential bidders participated. Under the agreement, CDW will, with the assistance of Morgan Stanley, actively solicit proposals from third parties during the next 30 days.

The go-shop is a bit short for these provisions which are typically more in the range of 40-60 days. 
Funny enough, CDW did not disclose the break fees for the transaction in the press release, nor did it give the terms of Krasny's agreement to vote for the transaction.  It will be interesting to see how tight Krasny's voting agreement is.   It looks like CDW is going to wait the two full business days to file the merger and voting agreement; I'll have more once it is filed. 

May 30, 2007 in Going-Privates, Private Equity, Takeovers, Transaction Defenses | Permalink | Comments (0) | TrackBack (0)

Friday, May 25, 2007

Trading Baseball Card Companies

The Topps Company, Inc. yesterday announced that it had received a $416 million offer from The Upper Deck Company, to acquire Topps for a price of $10.75 per share.  Both Topps and Upper Deck are in the trading card business; Topps also makes Bazooka bubble gum.  Topps currently has an agreement to be acquired by a group consisting of The Tornante Company LLC and Madison Dearborn Partners, LLC for $9.75 per share in cash.  The Tornante Company is headed by former Disney CEO Michael Eisner.

The Tornante led bid was opposed by three of the 10 members of Topps's board and hedge fund Crescendo Partners II, which says the offer undervalues the company.  Topps initial agreement had a 40-day go-shop provision, and Topps disclosed in its press release that it had rejected an indication of interest previously made by Upper Deck during that time period.  Topps had previously identified Upper Deck in its proxy statement for the transaction only as a competitor.  The disclosure of Topps on this point is actually a bit funny:

On April 12, 2007, prior to the expiration of the go-shop period, one of the potential go-shop bidders, who is the principal competitor of our entertainment business, submitted a non-binding indication of interest to acquire Topps for $10.75 per share, in cash. Lehman Brothers called this interested party on the first day of the go-shop period, and numerous times during this period, for the purpose of soliciting and/or assisting them with the development of their bid for Topps. Lehman Brothers’ calls were infrequently returned . . . . .

One hopes it wasn't because of this that a deal was not reached.  Topps response to yesterday's offer was similarly tepid:

[Topps's] Board of Directors noted that there are material outstanding issues associated with Upper Deck's latest indication of interest, including, but not limited to, the availability of committed financing for the transaction, the completion of a due diligence review of the Company by Upper Deck, Upper Deck's continued unwillingness to sufficiently assume the risk associated with a failure to obtain the requisite antitrust approval and Upper Deck's continued insistence on limiting its liability under any definitive agreement. Upper Deck's present indication of interest was accompanied by a highly conditional "highly confident" letter from a commercial bank.

I'm usually skeptical of private equity buy-outs and target attempts to put the fix in on a chosen acquirer.  This is particularly true here where both board members and shareholders have complained of the offer price.  Still, Topps may be justified in its own skepticism.  A deal between Topps and Upper Deck apparently has substantial antitrust risk.  Upper Deck's bid may therefore not be a "true" bid but rather an attempt for Upper Deck to gain access to its main rival's confidential information.  In addition, a deal for Topps by Upper Deck would apparently require approval by Major League Baseball.  Moreover, the financing for this deal does appear to be uncertain.  In this day of cheap and easy credit the best Upper Deck could obtain from its lenders was a "highly" confident letter.  This is a 1980's invention of Michael Milken; bankers issue these letters for deals that are riskier and financing uncertain.  Instead of a firm commitment letter, they therefore state they are "highly" confident that financing can be arranged.  So, if Topps has a firm deal on the table the extra money being offered here by Upper Deck might not be worth it given the deal completion risks and possible harm to Topps if it permits a competitor to review its confidential information.  Still, Upper Deck's offer is a nice negotiating tool with the current buy-out group even if a deal is not possible.  Topps shares rose 48 cents, and closed at $10.26 yesterday, so the market presumably agrees.

May 25, 2007 in Going-Privates, Hostiles, Leveraged Buy-Outs, Private Equity, Transaction Defenses | Permalink | Comments (0) | TrackBack (0)

Tuesday, May 22, 2007

Acxiom's Hedge Fund Problem

Today, MMI Investments L.P., the hedge fund and Acxiom’s second largest stockholder owning 8.2% of the company, disclosed a letter delivered to the Acxiom board of directors in opposition to Acxiom's agreement last week to be acquired by Silver Lake Partners and ValueAct Capital Partners in a transaction valued at $3 billion (the letter is annexed to MMI's 13D amendment filed today).   ValueAct Capital Partners is also a hedge fund and so the news and blogs are highlighting this as a clash of two hedge fund trends:  hedge funds taking on private equity roles and hedge funds as activist shareholder investors.  It is also yet another real example this week of shareholder resistance to private equity/hedge fund buy-outs -- the other two being Clear Channel and OSI Restaurant Partners.  More interesting to me was the following language in MMI's letter to the Acxiom board:

Our concerns about valuation are only amplified by our frustration with both the timing and structure of this transaction. Given the strategic initiatives currently underway (and recent earnings pain that your existing stockholders have had to bear) we struggle to understand why this is the right time to sell our company. Moreover it is our belief that the “go-shop” mechanism is a poor substitute for a full auction for a comprehensively marketed property. We can only hope that the “go-shop” for our company is a genuine one, with clear, concise, and thoughtful distribution of information, and thorough outreach to potential buyers from Acxiom’s industry, as well as those in comparable or tangential industries, and financial buyers (many of whom have significant experience and resources in the marketing data and informatics industry).

Acxiom has yet to file the acquisition agreement.  But according to a conference call last week, Acxiom's "go-shop" is a relatively robust form of the provision.  Pursuant to its provisions, Acxiom will have 60 days to solicit other superior proposals, and if it agrees to one, is required to pay only a reduced break-up fee of 1% of the equity value of the company.  Nonetheless, on that same conference call Acxiom management disclosed it permitted only one other bidder to conduct due diligence prior to agreeing to the ValueAct transaction, and only then because Acxiom was approached.  According to Acxiom, the transaction will require a 2/3rd majority vote of Acxiom's shareholders to win approval.  Given this requirement, shareholder resistance and the fact that Acxiom stock is trading above the offer price, the current offer appears to be only an opening gambit, yet again highlighting the perils of "go-shops" and the head-start and cover they provide to a chosen acquirer.

Update:  Acxiom filed its merger agreement later today; it contains the above provisions.   

May 22, 2007 in Hedge Funds, Private Equity, Takeovers, Transaction Defenses | Permalink | Comments (0) | TrackBack (0)

Monday, May 21, 2007

Alltel Dials PE

Alltel Corp., the cell-phone network operator, today announced that it had agreed to be acquired by TPG Capital and GS Capital Partners, in a transaction valued at approximately $27.5 billion.  TPG Capital and GSCP will acquire Alltel in a merger transaction paying $71.50 per share in cash.

The deal has already been criticized for its small premium, and the press release offers few details of the transaction.  But it appears that there is no "go-shop", break fees have yet to be disclosed and it is uncertain if there is any financing condition on the deal.  The absence of a "go-shop" is a bit puzzling, it could have at least provided the buyers some aesthetic cover particularly since it has been reported that Alltel has been throughly shopped over the past few months and no buyers have emerged.  I'll have more once the merger agreement is filed:  it looks like Alltel is going to wait out the two business days they have to file.  In particular, Alltel CEO Scott Ford has already agreed to continue as CEO with the private company and so it will be interesting to see his arrangements.   

May 21, 2007 in Going-Privates, Takeovers, Transaction Defenses | Permalink | Comments (0) | TrackBack (0)

Wednesday, May 16, 2007

Bausch & Lomb Blinks

Bausch & Lomb today announced that it had agreed to be acquired by Warburg Pincus, the private equity firm, in a transaction valued at approximately $4.5 billion, including approximately $830 million of debt. Warburg Pincus will pay $65.00 per share in cash in the transaction.  There is no financing condition on the deal. 

Bausch & Lomb has been a rumored takeover candidate for the past month, and as I blogged before, has been cleaning itself up for a sale as it recovers from the recall and subsequent discontinuation of its ReNu and MoistureLoc contact lens solution, after the product was connected with a rare fungal eye infection that can cause blindness.

Two notable aspects of the transaction.  First the transaction is yet another one where Wachtell negotiated a 50-day "go-shop".  Baush & lomb will have a fifty day period to solicit superior proposals.  Second, the deal has an abnormally low break-fee of $40 million or approximately 1% of the transaction value. 

I have previously blogged before here and here about the illusory nature of "go-shops"; they tend to cover for an undue head start for the initial acquirer and management involvement in the initial acquisition agreement.  According to one recent study, only one "go-shop" provision has solicited a higher bid since 2004.  The lower break-up fee here will help ameliorate these issues, but still, given the head start of Warburg and possible management involvement (the extent of their involvement here is still unclear), you have to wonder whether this yet another "go-shop" provision that will find no one willing to buy.    

May 16, 2007 in Private Equity, Takeovers, Transaction Defenses | Permalink | Comments (0) | TrackBack (0)

Wednesday, April 25, 2007

ABN AMRO's Fast Shuffle

ABN Amro yesterday filed with the SEC the agreement with respect to Bank of America's $21 billion dollar purchase of ABN Amro's U.S. subsidiary, LaSalle Bank.

Per the terms of the agreement (and Bank of America counsel Wachtell's fine negotiating skills), the LaSalle Bank contract contains a "calendar" 14 day "go shop" clause which continues until 11:59 PM New York time on May 6th, 2007. Under that clause an alternative bidder has 14 days to execute a definitive sales agreement on superior terms for cash and not subject to a financing condition. This is followed by a 5 business day right for Bank of America to match the new bidder's superior proposal. There is a $200 million termination fee to be paid by ABN Amro if Bank of America does not match.

This short time fuse almost certainly forestalls other bids for LaSalle Bank.  And, as I speculated it would do on Monday, through an almost certain sale of LaSalle Bank ABN Amro has implemented a big roadblock to the $103.75 billion cash and RBS shares bid for ABN Amro announced today by the RBS consortium (Fortis, RBS and Santander).  This competing bid is conditioned on ABN Amro having taken such steps as may be required to ensure that LaSalle Bank remains within the ABN Amro group.  This is all just wrong.  Nonetheless, under Netherlands law no ABN Amro shareholder vote here is required for the LaSalle Bank sale because it consitutes less than 30% of ABN Amro's assets, and Netherlands law does not otherwise prohibit a "crown-jewel" lock-up of this nature.  For those who are wondering, it is questionable whether Delaware in a similar situation would permit these machinations. 

April 25, 2007 in Hostiles, Lock-ups, Takeovers, Transaction Defenses | Permalink | Comments (0) | TrackBack (0)