November 27, 2007
When Fraud Is Your MAC
Corporate acquisitions can be quite lucrative, and when a merger agreement goes down the tube it can be a particularly nasty affair. But can a failed merger be the basis for a criminal investigation? Specialty retailer Genesco Inc. is involved in a nasty fight with The Finish Line and investment bank UBS over their moves to back out of a deal to buy Genesco for $54.50 on the grounds that Genesco's financial statements were, shall we say, less-than-completely forthright. In the parlance of the M&A world, that's called invoking the MAC (Material Adverse Change) clause, a provision in the merger agreement that allows the acquirer to get out of a deal due to changed circumstances, although it's usually something more than a shift in market conditions. For the best coverage on the current MAC controversies swirling around several companies in addition to Genesco, please check Professor Steven Davidoff's thorough analysis over at the inestimable M&A Law Prof Blog.
This would appear to be an ordinary fight between corporations in which each side blusters and rattles legal sabers, only to reach an agreement to settle the matter in which everyone goes away unhappy -- except the lawyers, of course, who never come out on the short end. Only this time someone has upped the ante, because the U.S. Attorney's Office for the Southern District of New York has sent a grand jury subpoena to Genesco requiring the production of documents related to the merger agreement. A Genesco press release (here) states that "the documents are sought in connection with alleged violations of federal fraud statutes." That would be the mail, wire, and securities fraud provisions, no doubt. Genesco's CEO is quoted in the release stating, "The U.S. Attorney subpoena comes on the heels of the baseless fraud allegations made by UBS ten days ago. These allegations are completely without merit and are simply part of UBS’ litigation tactics to avoid their contractual obligations; we will fully cooperate with the U.S. Attorney in connection with their inquiry. Most importantly, we will not be deterred from enforcing our rights under the merger agreement.” In other words, UBS called out the big dogs on this one, and Genesco isn't going to roll over (to keep with the canine metaphor).
A grand jury subpoena as a litigation tactic? The legal battles over M&A deals can be rather contentious, to say the least, and getting the upper-hand on an opponent as leverage for a settlement is common. A grand jury investigation is something else altogether, though, because once started it takes on a life of its own, and the parties cannot terminate it as part of a global settlement of their claims. It would be more than a bit scary if a U.S. Attorney's Office did the bidding of one side of a corporate deal, and one would at least hope that the prosecutors were shown something to indicate that this is more than the usual overheated rhetoric that accompanies most corporate litigation -- where everyone claims to want their day in court and no one ever seems to end up there. Whether there's anything more than smoke here remains to be seen. But look for references to Genesco's press release to appear in the next filing by Finish Line and UBS in the civil litigation. (ph)
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