M & A Law Prof Blog

TRO Halts Globe Sale

Uh-oh... a crisis just a day before the World Series!  As you may remember, the NY Times agreed to sell its Boston Globe division to John Henry, the principal owner of the Red Sox.  Owning the local newspapers, obviously, makes for excellent coverage when it comes October and your team IS PLAYING IN THE WORLD SERIES.  So, you'd think everybody in Massachusetts would be on board.  Apparently, there are some Yankee fans in central Mass who disagree.  A judge today issued a TRO halting the sale: 

"The defendant ... is hereby enjoined and restrained from transferring ownership or interest in any of its assets... until further order of this court," Judge Frison wrote in her temporary restraining order. "The court retains the prerogative to inspect the financial documents of the defendant in order to resolve any disputes." 

In her temporary restraining order, Judge Frison put the "maximum end" of a settlement in the case at $60 million. In essence, the entire sale price of The New England Media Group could be set aside in an escrow account until the case is completed. The case has been in litigation since 2009. 

The New York Times Co. and Mr. Henry had scheduled to close their reported $70 million sale of The New England Media Group — which includes the Globe, the Telegram, boston.com, and telegram.com — to Mr. Henry on Friday, according to Judge Frison's restraining order. 

The issue here is who will be liable for the costs in a potential settlement of litigation against the Worcester Telegram and Gazette and independent newspaper carriers that has been ongoing since 2009.   The carriers are seeking to be treated as employees and not independent contractors.  The carriers want access to the NY Times' assets in the event they get a judgment or settlement.  They fear that following the sale to John Henry, one of the richest men in America, that Worcester Telegram and its parent will be left without sufficient assets to pay a settlement should it be reached.  The Times, obviously, wants to leave this particular liability with its Worcester subsidiary.

Although the question of which assets and liabilities will move in an asset purchase is often a difficult one, this one seems a little more straightforward.  The Times sold its New England Media Group entity to Henry. That holding company includes the T&G as well as the Globe entitities.  The present suit against the T&G corporate entity gets transferred along with entity.  Absent facts that might suggest T&G has been deliberated undercapitalized to perpetuate a fraud against the carriers why does the TRO issue?  In any event, does anyone really believe that the Times is in a better financial condition to make good on any judgment than John Henry? 

-bjmq   

 

Kodak - you have been warned

Apparently a group of creditors sent a letter to the Eastman Kodak board to remind them that they are required to get "fair value" for any assets they might sell, including the Kodak patent portfolio.  In a sale of substantially all the assets of a firm its necessary for a board to ensure that it receives "reasonably equivalent value" for the assets sold.  This is, in part, to prevent sellers from using the asset sale as a fraudulent conveyance.  The fear from creditors of Kodak is that Kodak might sell its patent portfolio and then file for bankruptcy protection, leaving creditors to take a hit.  The creditors are looking to put maximum pressure on Kodak's board before a sale to try to incentivize the Kodak board to get the highest price possible for those assets. 

-bjmq

Aggregation and Step-Transaction Doctrines in Asset Sales

Thanks to our friends at CourtroomView I was able to watch the argument last week's arguments before the Delaware Supreme Court in the BNY Mellon v Liberty Media litigation.  There weren't many fireworks in the courtroom, but isn't that the way appellate litigation usually is?  In any event, the Court just handed down its opinion in the matter affirming the lower court's decision that the spin-offs did not constitute a sale of substantially all the assets.

The issue before the court was whether the series of spin-off transactions undertaken by Liberty Media beginning in 2004 constituted a "series of transactions" for the purposes of determining whether the violated a covenant not to sell substantially all the assets of the corporation.  The opinion provides a nice overview of the relevant doctrine that applies to questions of to think about a series of transactions and asset sales.  

Applying NY law, the court agreed with the Chancery Court's application of the "aggregation doctrine": 

... where asset transactions are not piecemeal components of an otherwise integrated, pre-established plan to liquidate or dispose of nearly all assets, and where each such transaction stands on its own merits without reference to another, courts have declined to aggregate for purposes of a “substantially all” analysis.

Each of Liberty's spin-offs over the years was a transaction that stood on its own merits without reference to any of the previous spin-offs.  Thus, the aggregation doctrine counsels that the spin-offs would not constitute a sale of substantially all the assets.  

The Chancery Court applied an additional doctrine, the step transaction doctrine to the determination of whether the spin-offs constituted a sale of substantially all the assets.  The Supreme Court described the doctrine in the following way:

The Court of Chancery analyzed the facts under the “step-transaction” doctrine, which treats the “steps” in a series of formally separate but related transactions involving the transfer of property as  a single transaction, if all the steps are substantially linked.  Rather than viewing each step as an isolated incident, the steps are viewed together as components of an overall plan

The step-transaction doctrine applies if the component transactions meet one of three tests.  First, under the “end result test,” the doctrine will be invoked “if it appears that a series of separate transactions were prearranged parts of what was a single transaction, cast from the outset to achieve the ultimate result.”  Second, under the “interdependence test,” separate transactions will be treated as one if “the steps are so interdependent that the legal relations created by one transaction would have been fruitless without a completion of the series.”  The third and “most restrictive alternative is the binding-commitment test under which a series of transactions are combined only if, at the time the first step is entered into, there was a binding commitment to undertake the later steps.”

Though the Supreme Court felt application of the step transaction doctrine wasn't necessary, it's clear that under this test, when Liberty Media adopted a general business strategy of spinning out assets as the opportunity arose that it was not triggering a sale of substantially all the assets under the step transaction doctrine.

Here's Download BNY v Liberty Media. 

Liberty Media has just announced that the split-offs will start trading on Monday, Sept 26. 

-bjmq

 

Kelley & Ervine on anti-Sandbagging

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.

MAW

BP Asset Sales

Seems like BP is aggressively seeking to shed assets in a bid to generate cash to fund the $20 billion compensation account for the damages associated with its ongoing mess in the Gulf of Mexico.   BP started with series of sales of Alaskan, Canadian and Egyptian-based assets to Apache, raising $7 billion.  Now comes word from the Vietnam News Agency that BP plans to sell its interests in Vietnam.  These include the Lan Tay and Lan Do offshore gas fields which have been producing for more than a decade, the Nam Con Son gas field, as well as BP's 720MW Phu My gas-fired power plant    The sale may generate an additional $1.3 billion for Gulf compensation fund.

-bjmq

K&E on Purchase Price Adjustments

As we've noted before, purchase agreements relating to the acquisition of a private target often contain one or more post-closing purchase price adjustments  (for example a working capital adjustment). As this K&E M&A update notes

While the appeal of  purchase price adjustments is indisputable, they are often subject to postclosing disputes. One of the drivers of these disputes is inattention to the details of drafting the adjustment provisions, often exacerbated by the fact that these clauses straddle the realm controlled by the legal practitioners and that managed by the financial and accounting experts.

The update offers a plethora of tips on drafting these provisions properly.

MAW

More on Whether a Secured Creditor May Foreclose on Substantially All the Assets of a Debtor without Stockholder Approval

From a reader:

Michael,

I was fortunate enough to recently be asked to research the very question you posted on the M&A Law Prof Blog on July 3, 2009 -- whether a creditor may foreclose on substantially all the assets of a debtor without stockholder approval.

[In] a transcript ruling in Gunnerman v. Talisman . . . dismissing the 271 claim [V.C..] Strine states: 

 

"I think the -- the Delaware General Corporation Law clearly makes a distinction between financing transactions, mortgage transactions, collateral transactions, and sales of assets. And I don't think you can have a situation where there's the original financing transaction that pledges the collateral is outside 271's reach and then say when the creditor exercises rights under that that are within the four corners or arguably a lesser -- lesser-included option, that that somehow then triggers a stockholder vote. I think that would be bad for -- frankly, for equity investors in general, because I think it would raise the cost of capital, because it would -- it would create sort of a highjack situation that you sometimes see in new bankruptcies where it appears that everybody has to get something simply because they're present."

 

Hope this is helpful to you and all others who, like me, visit the M&A Law Prof Blog regularly to stay on top of developments in corporate law and practice.

 

Best Regards,

Marcus E. Montejo

 

Of course, we still have my other question, what if, instead of foreclosing, the Creditor works out a negotiated settlement with the Debtor pursuant to which the loan is satisfied by delivery of substantially all the assets? 

 

MAW

GM: Saturn Sale Collapses

The proposed sale of GM's Saturn division to Penske has collapsed and it looks like the Saturn brand will head for the dust-bin.  That's too bad.  They had a great one price concept, but "corporate" never really set them free to follow through.  In the end it became just another wasted GM brand. 

If anyone might have had a chance to make it work it would have been someone like Roger Penske, who has a long history in the auto business but is still enough of an outsider.  The Detroit Free Press reports that the main reason for Penske walking was an inability to find anyone (Renault, in particular) to build the next generation Saturn once the transition services agreement with GM would expire.   

Penske said it had negotiated a deal to get products manufactured by another company but that agreement had fallen apart. 

“That agreement was rejected by that manufacturer's board of directors,” Penske said in a statement. “Without that agreement, the company has determined that the risks and uncertainties related to the availability of future products prohibit the company from moving forward with this transaction.”

I guess the manufacturer didn't see much of a future there.  So another GM brand will go away.  GM is still negotiating with a consortium of Swedish and Chinese investors over the future of the Saab brand.  The sale of Opel to Magna looks set to sign next week.  That leaves only the "brand that shall not be named" hanging on for the time being. 

-bjmq

 

No Big Deal: GM & Chrysler

Stephen Lubben at Seton Hall has a new paper, No Big Deal: The GM and Chrysler Cases in Context in which he takes on the critics of the government's intervention into GM and Chrysler.  It's well worth reading.

Abstract: Almost every leading corporate bankruptcy academic has spoken against the automotive bankruptcy cases. And the Chrysler and GM chapter 11 cases have been vilified in every major finance-focused media outlet - by everyone from Ralph Nader to Richard Epstein. In this short paper, originally written for the TARP Congressional Oversight Panel, I address the key academic arguments against the automotive chapter 11 cases and contextualize what happened in these two cases. Stripped of their speculation and 'what ifs,' I show that these arguments are no more persuasive than the loose, unsupported arguments thrown about in the popular press. But first, I show how these cases, and particularly their structure - a quick lender-controlled §363 sale - are entirely within the mainstream of chapter 11 practice for the last decade.

-bjmq

Post- Closing Purchase Price Adjustments

Agreements to purchase private companies often include a post-closing purchase price adjustment (generally based on closing working capital versus some agreed upon target). In an effort to ascertain current market practice, White & Case surveyed 87 private company purchase agreements that were publicly filed in 2008 and contained purchase price adjustments.  Full report here.

MAW

What must a Board do to satisfy its Revlon duties?

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.

 

MAW

For Sale – One Slightly Used Baseball Team

The New York Times announced in its earnings call yesterday that it expects to sell its 18% stake in New England Sports Ventures, which among things owns the Boston Red Sox by January 2009.  I’m starting a collection. 

-bjmq

GM 363 Sale Approved

The Federal bankruptcy court approved GM's petition to sell substantially all of its assets to New GM Co. in a 363 sale last night.  The following documents were released by the court:

 1. The Decision On Debtors Motion For Approval Of (1) Sale Of Assets To Vehicle Acquisition Holdings Llc; (2) Assumption And Assignment Of Related Executory Contracts; And (3) Entry Into UAW Retiree Settlement Agreement (95 pages);

 2. Order Granting (I) Authorizing Sale Of Assets Pursuant To Amended And Restated Master Sale And Purchase Agreement With New GM Co, Inc., A U.S. Treasury-Sponsored Purchaser; (Ii) Authorizing Assumption And Assignment Of Certain Executory Contracts And Unexpired Leases In Connection With The Sale; And (Iii) Granting Related Relief (184 pages); and

 3. Order Pursuant To Bankruptcy Code Sections 105(A), 361, 362, 363, 364 And 507 And Bankruptcy Rules 2002, 4001 And 6004 (A) Approving Amendment To DIP Credit Facility To Provide For Debtors Post-Petition Wind-Down Financing (84 pages).

-bjmq

Can Secured Creditor Foreclose on Substantially All the Assets of a Debtor without Stockholder Approval?

An interesting question appeared in my in-box a few days ago from the ABA’s Private Equity/Venture Capital Listserve.  Here is a somewhat edited version (thanks to Peter Sugar for helping me refine the question):

 

Creditor makes a loan to Debtor.  The loan is secured by the stock of a wholly owned subsidiary of Debtor.  The stock constitutes substantially all of the assets of Debtor.   So, under the terms of the loan, upon a default, Creditor can take 100% of the shares in the subsidiary.

 

The loan is in default and Creditor plans to exercise its rights to acquire 100% of the shares in the subsidiary.  Under the relevant statute, the sale, lease, or exchange of all or substantially all of a company’s assets must be authorized by the affirmative vote of its stockholders.

 

Here's the question: Should any of this be put to a shareholders' vote?

 

I asked my partner Steven Weise what he thought (something I do quite often) and he pointed to Sections of the California and Delaware Corp. Codes:

 

California Corp Code § 1000:

 

"Any . . . pledge or other hypothecation of all or any part of the corporation's property, real or personal, for the purpose of securing the payment or performance of any contract or obligation may be approved by the board.  Unless the articles otherwise provide, no approval of shareholders . . . shall be necessary for such action."

 

Delaware GCL § 272:

 

“The authorization or consent of stockholders to the mortgage or pledge of a corporation's property and assets shall not be necessary, except to the extent that the certificate of incorporation otherwise provides."

 

So if Debtor is a California or Delaware corporation, no stockholder vote is necessary to enter into the loan agreement or pledge the stock of the subsidiary.

 

He went on to say he thought that the foreclosure by the secured party should not require shareholder consent because such a requirement (i) would make these statutory provisions useless and (ii) a foreclosure is not a sale "by" the corporation.

 

But what if, instead of foreclosing, the Creditor works out a negotiated settlement with the Debtor pursuant to which the loan is satisfied by the stock of the subsidiary?  Could you argue that (i) the right to enforce is inherent in the creation of the security interest and (ii) the reasonable anticipation of the parties when a security interest is created is that the secured loan will be paid and the security interest won't be enforced, so (iii) if there is a default, even in a settlement, it's still "involuntary" because of the threat of foreclosure?

 

Thoughts in the comments are welcome.

 

MAW

Hummer: Mark your calendars

Recent reports suggest that Tengzhong Heavy Industrial Machinery is in discussions with the Chinese government over its proposed acquisition of the Hummer brand, dealership contracts and AM General production contract (for the H1/H2 model).  Since GM recently announced it will be closing the Shreveport plant that produces the H3 model, I'm assuming those facilities aren't going to be part of the package.

In any event, Chinese news reports now say that Tengzhong and GM will sign a definitive agreement on July 10.  Mark your calendars!

-bjmq

DGCL 303 and Sales of Substantially-All-the-Assets in Bankruptcy

Almost lost in the big news of the day that GM has filed for bankruptcy (bankruptcy petition here) was the announcement that over the weekend Judge Gonzalez approved the sale of substantially all the assets of Chrysler in bankruptcy to Fiat for approximately $2 billion.  The judge’s ruling is here.  The sale will close quickly and New Chrysler will emerge to try to rebuild the American auto industry.  But wait a minute.  A sale of substantially all the assets of Chrysler?  Isn’t there supposed to be a shareholder vote?  Well, yes, but no.  (For purposes of this example, I’m assuming Chrysler is a corporation, which it’s not.  It’s an LLC.)

First, there is the issue of Federal preemption by the bankruptcy code.  Second, the Delaware corporate code Section 303 recognizes that in bankruptcy a judge may order a sale of assets or a merger and that such a sale/merger occur without further action by directors or stockholders.   Any sale or merger ordered in bankruptcy also eliminates appraisal rights to the extent there might have been any.  Although a sale of substantially all the assets of Chrysler to Fiat in January (so, pre-bankruptcy) would have required a vote of the Chrysler stockholders.  The same transaction in bankruptcy, if approved by the bankruptcy judge go through without a vote, however.

In Chrysler’s case, the issue of a shareholder approval would not likely have been a problem given that it is (was) controlled by Cerberus.  However, in a corporate setting where share ownership is more widely distributed the decision whether to do a transaction in or out of bankruptcy may at times turn on questions of shareholder approval.

- bjmq