M & A Law Prof Blog

Weil, Gotshal 2012 survey of sponsor-backed going private transactions

Weil, Gotshal & Manges recently published its sixth survey of sponsor-backed going private transactions, which analyzes and summarizes the material transaction terms of going private transactions involving a private equity sponsor in the United States, Europe, and Asia-Pacific. (We covered last years survey here.)

The survey covers 40 sponsor-backed going private transactions with a transaction value (i.e., enterprise value) of at least $100 million announced during calendar 2012. Twenty-four of the transactions involved a target company in the United States, 10 involved a target company in Europe, and 6 involved a target company in Asia-Pacific.

Here are some of the key conclusions Weil draws from the survey:

• The number and size of sponsor-backed going private transactions were each lower in 2012 than in 2011 and 2010; . . . .
• Specific performance "lite" has become the predominant market remedy with respect to allocating financing failure and closing risk . . . . Specific performance lite means that the target is only entitled to specific performance to cause the sponsor to fund its equity commitment and close the transaction in the event that all of the closing conditions are satisfied, the target is ready, willing, and able to close the transaction, and the debt financing is available.
• Reverse termination fees appeared in all debt-financed going private transactions in 2012, . . .with reverse termination fees of roughly double the company termination fee becoming the norm.
• . . . no sponsor-backed going private transaction in 2012 contained a financing out (i.e., a provision that allows the buyer to get out of the deal without the payment of a fee or other recourse in the event debt financing is unavailable).
• Some of the financial-crisis-driven provisions, such as the sponsors’ express contractual requirement to sue their lenders upon a financing failure, have diminished in frequency. However, the majority of deals are silent on this, and such agreements may require the acquiror to use its reasonable best efforts to enforce its rights under the debt commitment letter, which could include suing a lender.
• Go-shops remain a common (albeit not predominant) feature in going private transactions, and are starting to become more specifically tailored to particular deal circumstances.
• Tender offers continue to be used in a minority of going private transactions as a way for targets to shorten the time period between signing and closing.

MAW

Buffet and D&O Insurance

...or the lack of it.  In a live-chat with Warren Buffet at the University of Nebraska, Omaha, Buffet dropped this bit of golden Buffet wisdom.  How to get directors to do a good job?  Well...don't give them D&O insurance.  They'll pay attention for sure. 

Swimming against the tide has worked for him.

-bjmq

Gibson Dunn's 2012 Survey on No-Shops & Fiduciary Out Provisions

In this client alert, Gibson Dunn details the results of its survey of no-shop and fiduciary-out provisions contained in 59 merger agreements filed with the SEC during 2012 reflecting transactions with an equity value of $1 billion or more.  Among other things, they have compiled data relating to

• a target’s ability to negotiate with an alternative bidder,
• the requirements to be met before a target board can change its recommendation,
• each party’s ability to terminate a merger agreement in connection with the fiduciary out provisions, and
• the consequences of such a termination. 

MAW

Governing Law Clauses

For many years, lawyers with too much time on their hands have debated whether there is a difference in effect between these two governing law clauses:

"This contract shall be governed by New York law."

"This contract shall be governed by New York law, without regard to conflict-of-laws principles."

Some believe that the first clause, which does not address conflict-of-laws rules, requires application of New York’s conflict-of-laws principles. As a result a court might apply the substantive law of a jurisdiction other than New York--despite the clear intent of the provision.

As this client alert from Shearman & Sterling notes, the debate is finally over. Now we can all get back to arguing about the permissibility of splitting infinitives.

MAW

Gibson Dunn on "Don't Ask, Don't Waive" Standstill Provision

The typical M&A confidentiality agreement contains a standstill provision, which among other things, prohibits the potential bidder from publicly or privately requesting that the target company waive the terms of the standstill.  The provision is designed to reduce the possibility that the bidder will be able to put the target  "in play" and bypass the terms and spirit of the standstill agreement.

In this client alert, Gibson Dunn discusses a November 27, 2012 bench ruling issued by Vice Chancellor Travis Laster of the Delaware Chancery Court that enjoined the enforcement of a "Don't Ask, Don't Waive" provision in a standstill agreement, at least to the extent the clause prohibits private waiver requests.

As a result, Gibson advises that

until further guidance is given by the Delaware courts, targets entering into a merger agreement should consider the potential effects of any pre-existing Don't Ask, Don't Waive standstill agreements with other parties .  . .. We note in particular that the ruling does not appear to invalidate per se all Don't Ask, Don't Waive standstills, as the opinion only questions their enforceability where a sale agreement with another party has been announced and the target has an obligation to consider competing offers. In addition, the Court expressly acknowledged the permissibility of a provision restricting a bidder from making a public request of a standstill waiver. Therefore, we expect that target boards will continue to seek some variation of Don't Ask, Don't Waive standstills.

MAW

Bingham on Big Boy Language

Bingham just issued this interesting Legal Alert on Pharos Capital Partners, L.P. v. Deloitte & Touche.

In that case, on Oct. 26, 2012, the United States District Court for the Southern District of Ohio granted summary judgment in favor of Credit Suisse, holding that, under New York or Ohio law, plaintiff Pharos Capital Partners failed to prove it justifiably relied on Credit Suisse in connection with its private equity investment in National Century Financial Enterprises  (a business that was later found to be fraudulent) because Pharos expressly disavowed any such reliance in a letter agreement with Credit Suisse.

According to Bingham:

The decision is significant for the financial industry because it enforces a party’s representations in an agreement that it was relying on its own due diligence investigation in connection with its investment, rather than any alleged representations made by a placement agent. Prior to the decision in Pharos, many courts have been reluctant to enforce such agreements to defeat claims for fraud and negligent misrepresentation.

MAW

Weil on Arbitration vs. Litigation

Practitioners are often asked by their clients, "Which do you recommend to resolve disputes under a merger agreement: Litigation or Arbitration?"

Here's a Weil client alert by Sara Duran that "addresses the pros and cons of arbitration, situations where litigation may be preferable and drafting considerations for an agreement to arbitrate, in each case, from the viewpoint of US counterparties arbitrating domestically and applying US law."

MAW

 

Adams on the Contract Process

While I don't always agree with his point of view (including, ironically, his view that there should be no disagreements, because there is only one right answer for all drafting issues), Ken Adams is almost always thought provoking when discussing contract process issues.  He has just made available this hyperlinked list of all of his blog posts relating to the contract process.

MAW

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

Ten Books for Transactional Practioners

Over at Truth on The Market, J.W. Verret lists the Top Ten Books in Corporate Law that he believes a practitioner would find useful in day to day practice.  This follows a prior post listing his top ten books in corporate governance, which reader comments led him to believe had (perhaps) too academic a focus.  As he notes, most of the entries on the new list are treatises. 

Acknowledging that corporate practices can vary widely, I have to say that, while I have consulted most of the books on his list, they are not the ones I turn to most often.  As a transactional practitioner I’m generally looking for books that give more concise, practical advice on how to actually do things.

So, here’s my list of 10 texts for the transactional practitioner (in no particular order):

1. Corporate Finance and the Securities Laws, by Charles J. Johnson, Jr., Esq., Joseph McLaughlin, Esq.
2. Negotiated Acquisitions of Companies, Subsidiaries and Divisions, by Lou R.  Kling & Eileen T. Nugent
3. Start-Up & Emerging Companies: Planning, Financing & Operating the Successful Business, edited and co-authored by Gregory C. Smith with  Contributing Experts
4. Negotiating and Drafting Contract Boilerplate, edited & co-authored by Tina L. Stark
5. Any one of: (a) The Section 16 Treatise and Reporting Guide, (b) The Section 16 Deskbook or (c) The Section 16 Forms and Filings Handbook, each of which is by Peter Romeo and Alan Dye
6. Resales of Restricted Securities, by J. William Hicks 
7. The Williams Act—Tender Offers and Stock Accumulations, by Arnold S. Jacobs 
8. Legal Opinions: Drafting, Interpreting, and Supporting Closing Opinions in Business Transactions, by Donald W. Glazer, Scott T. FitzGibbon, Steven O. Weise 
9. Regulation of Securities: SEC Answer Book, by Steven Mark Levy 
10.  Regulation of Corporate Disclosure, by J. Robert Brown

In the interest of full disclosure, several have been written or edited by partners or former partners of mine and I’ve contributed to a couple of them.  I have excluded bar resources and pure form books, although often these are the things I use most frequently.  I also excluded any text that is over two volumes long.  And of course I've left off imternet resources, which I use quite frequently.

Thoughts welcome in the comments.

MAW

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 NACCO Industries from Davis Polk

Brian recently posted about the NACCO Industries case (here), As he reminds us:

NACCO reminds us that if you are going to terminate a merger agreement, you better comply with all its provisions.  If you don't, if you perhaps willfully delay your notice to the buyer about a competing proposal, you might not be able to terminate without breaching.  And, if you breach, your damages will be contract damages and not limited by the termination fee provision.  Remember, you only get the benefit of the termination fee if you terminate in accordance with the terms of the agreement.  Willfully breaching by not providing "prompt notice" potentially leaves a seller exposed for expectancy damages.

Davis Polk has just issued this client alert, drawing a few more lessons from the case.  Here's a sample:

A recent Delaware Chancery Court decision raises the stakes for faulty compliance with Section 13(d) filings, holding that a jilted merger partner in a deal-jump situation may proceed with a common law fraud claim for damages against the topping bidder based on its misleading Schedule 13D disclosures.  NACCO Industries, Inc. v. Applica Inc., No. 2541-VCL (Del. Ch. Dec 22, 2009).  The decision, which holds that NACCO Industries may proceed with numerous claims arising out of its failed 2006 merger with Applica Incorporated, also serves as a cautionary reminder to both buyers and sellers that failure to comply with a "no-shop" provision in a merger agreement not only exposes the target to damages for breach of contract, but in certain circumstances can also open the topping bidder to claims of tortious interference.

MAW

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

Be careful out there

Cautionary tales about catastrophic typos, due diligence errors and the like help focus the senses.  Here’s one from Law Shucks:

One of the primary responsibilities of junior M&A associates in due diligence is to review material contracts for assignability and change-of-control provisions.

 

Should be simple, right?
 
Lawyers at Cravath and/or Cahill Gordon misinterpreted an assignment, and it led to a $115 million reduction in purchase price.

Read the whole thing here.

 

MAW

URI: The Specific Performance Issue

Kevin Miller, an excellent M&A lawyer at Alston & Bird, has a post up on DealLawyers.com concerning the possibility of specific performance being ordered in the URI case.  You can read the full post by clicking here, but what follows is the gist of his argument:

URI's brief fails to justify specific performance for two reasons, both relating to the alleged harms it claims: (i) the defendants' failure to pay the agreed cash merger consideration and (ii) the decline in the value of URI shares as a result of the defendants' allegedly manipulative disclosures.

First, to the extent the alleged harms solely relate to the fact that URI's shareholders will not receive the agreed cash merger consideration or that the value of the URI shares they hold has declined, money damages would appear to be a practicable and therefor more appropriate remedy. URI voluntarily agreed to a cap on money damages - and should not now be permitted to claim that money damages are inadequate as a remedy because of that agreed limitation.

Second, and more importantly, the alleged harms are not harms to URI. They are only harms to URI's shareholders who are not third party beneficiaries under the merger agreement and are consequently not entitled to protection or relief against such harms (see Consolidated Edison v. Northeast Utilities, 426 F.3d 524 (2d Cir. 2005) applying New York law and holding that shareholders cannot sue for lost merger premium; see also Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031 (Del. 2004) applying Delaware law in analogous circumstances).

I don't agree with Mr. Miller's argument and believe that specific performance is available here if URI wins on its contract claims for the following reasons:

1. Mr. Miller's argument doesn't make logical sense.  In Mr. Miller's world, Chandler agrees with URI's interpretation of the merger agreement that specific performance is required under 9.10.  In other words, Chandler finds that the last sentence of section 8.2(e) limiting URI's rights to damages in the amount of $100 million is applicable only in cases where the merger agreement is terminated.  But then at the damages phase after deciding Cerberus to be in breach and URI to have a right of specific performance under sec. 9.10, Chandler orders that as a matter of Delaware law, damages are more appropriate.  This doesn't make sense because, if he did do this, it would mean that the $100 million guarantee limitation again kicks in leaving URI without full compensation for Cerberus's breach and giving Cerberus, the breaching party, exactly what they were asking for despite Chandler's finding of the intent of the contract.  Even if the Chancery Court were not a court of equity I doubt they would come to such an illogical conclusion.
2. Specific performance was agreed to here.  If Chandler agrees with URI's reading of the merger agreement then Cerberus specifically agreed that specific performance was permissible under sec 9.10.  In similar paradigms, the Chancery Court has held litigants to their agreement that a damages remedy was inadequate and an equitable one appropriate.  Thus in True North Communications, Inc. v. Publicis, S.A., Del.Ch., 711 A.2d 34, 45, aff'd, Del.Supr., 705 A.2d 244 (1997), the Chancery Court provided a grant of injunctive relief based on a defendant's agreement that an equitable remedy was appropriate and damages an inadequate remedy.  Here, if URI's argument is correct, it is likely the Chancery Court would bar Cerberus from arguing against specific performance due to their contractual agreement.  This is after all a court of equity. 
3. Regardless, specific performance is justified here as there is no adequate damages remedy. Mr. Miller is right that in Delaware a party is never absolutely entitled to specific performance; the remedy is a matter of grace and not of right, and its appropriateness rests in the sound discretion of the court. In general, equity will not grant specific performance of a contract if it cannot “effectively supervise and carry out the enforcement of the order.”  Moreover, the balance of the equities must favor granting specific performance.  A remedy at law, i.e., money damages, will foreclose the equitable relief of specific performance when that remedy is “complete, practical and as efficient to the end of justice as the remedy in equity, and is obtainable as [a matter] of right.”  NAMA Holdings, LLC v. Related World Market Center, LLC 922 A.2d 417 (Del.Ch. 2007).  Here, however, a monetary damages award would be against RAM Holdings (the Cerberus subsidiary).  This is a shell company and, as the Chandler no doubt knows, would not be able to pay any amount.  Rather, again if Chandler awarded a monetary damage award URI could only collect against the $100 million guarantee issued by Cerberus resulting in URI not receiving full recompense for its damages.  Given this, it is hard to see how Chandler can find that monetary damages is a complete remedy as it again results in Cerberus winning a back door victory and URI without full compensation for Cerberus's breach -- a predicate for specific performance even without Cerberus's agreement in sec. 9.10. And, of course, such a decision would fly in the face of the parties' intent to the extent Chandler rules in URI's favor on the breach point.
4. Delaware Precedent supports the grant of specific performance.  In In re IBP, Inc. Shareholders Litigation, 789 A.2d 14 (Del.Ch. 2001), Vice Chancellor Strine found that sellers in a merger agreement were entitled to specific performance.  His decision rested in part on the ability of the sellers to elect to receive stock in the transaction (not an issue here) but also upon the fact that monetary damages would be exceedingly difficult to establish.  The latter point is applicable here even if there was not the issue of the guarantee.  There is also some good dictum in that case which supports URI's case. 
5. The fact that the URI shareholders are not a party to this agreement is not an issue. Mr. Miller's second point is contrary to established case-law.  He is arguing that URI cannot establish damages here because URI's shareholders are not a party to the agreement and are not third party beneficiaries.  But he is conflating a number of issues.  First, under basic contract law URI can itself contract for a benefit to a third party (i.e., its shareholders) and if the other party breaches, the damages remedy is generally the amount URI would have to incur to cure the breach.  So, for example, I hire a music teacher for my child and agree that they will provide lessons at $10 an hour.  If the music teacher breaches and I have to hire a new music teacher at $12 an hour, then my damages against the first music teacher are relatively clear under contract law -- it is the $2 an hour difference.  This is the case here.  The opposite outcome would mean that no contract of this type could ever be truly enforced.  Moreover, numerous cases in Del., New York and federal courts have enforced buyer obligations under merger agreements on this same rationale -- none to my knowledge has ever held Mr. Miller's position to be correct.  Mr. Miller attempts to distinguish IBP on this issue, but again I think he misses the point that Strine treated IBP and its shareholder claims as one and the same.  There appears no jusitification for any different treatment here. 
6. The third party beneficiary clause does not effect this outcome.  This is where Mr. Miller again conflates the issue.  He cites the "no third party beneficiary" clause in the merger agreement and the Con Ed. case to assert that URI has no damages claim with respect to the consideration paid to its shareholders.  But the no third party beneficiary clause and the Con Ed. case merely state that shareholders in this regard have no right to sue in their personal capacity under the merger agreement -- only the company can.  Tooley, the Delaware case he cites, says the same thing.  Here, though, URI is bringing the claim, not the shareholders -- so this is not a problem and as I stated in point 5-- URI is permitted under established case-law to bring this claim.  Again, I challenge anyone to find a case where a seller in a merger contract sues to enforce the contract and the court denies the claim because the damages remedy is to the shareholders.  There isn't one because it just doesn't jibe with basic contract interpretation laws or the parties likely intent and it just doesn't make commercial sense. 

Finally, there is one big problem on the specific performance front for URI, and that is the complexity of any such remedy.  In alternative scenarios, Delaware courts have refused to grant specific performance because it would be too complex a remedy for the court to implement.  So, in Carteret Bancorp., Inc. v. Home Group, Inc., 1988 WL 3010 (Del. Ch. 1988), the court refused to issue an injunction requiring defendants to use their best efforts to obtain required regulation approvals and, specifically, to take or refrain from taking certain identified actions in part on the grounds that it was too complex.  This may be the case here -- the remedy URI seeks is certainly a complex one.  And a weakness in URI's brief is their assumption that Chandler can fashion a specific performance remedy in this case --i.e., force Cerberus to fund the equity. I think URI has a good case in Delaware but I simply do not know what happens if they do indeed win at the Dec. mini-trial.  I suppose it all shifts up to New York with URI litigating RAM Holding's claim against Cerberus under the equity commitment letter?  But who knows, and maybe that is why URI didn't address this issue in depth -- they just don't know either.  BTW -- URI's response to Cerberus's N.Y. complaint is due 30 days after they are served (if they are served outside N.Y.) -- this is around Dec. 16 -- I suspect URI will ask Cerberus for more time to respond, though, in order to see how the Delaware action plays out. 

NB.  For those following the Genesco trial many of the principles above apply there under Tennessee law, but the matter is complicated by the solvency issue. 

Merrill Lynch & Co., Inc. v. Allegheny Energy, Inc.

Robert Miller over at Truth on the Market has an excellent post up on the recent Second Circuit decision in Merrill Lynch & Co., Inc. v. Allegheny Energy, Inc.  The case revolves around the sale by Merrill Lynch of its energy trading business to Allegheny.  As Prof. Miller describes it:

After the deal closed, Allegheny discovered that some of the key financial information Merrill provided in due diligence was false. The facts get very complicated at this point, in part because the Merrill employee running the GEM business prior to the transaction had embezzled millions of dollars from Merrill (he’s now in jail) and in part because of disputes about accounting methodologies used in preparing the information. The parties disagree about exactly which statements in the information Merrill produced in due diligence were false, why they were false, and what various of Merrill employees knew or should have known about their falsity at the time the agreement was signed.

Because of these problems, Allegheny subsequently failed to honor a put right in the agreement and make a $115 million payment to Merrill.  Merrill sued to compel this payment and Allegheny counter-claimed for fraudulent inducement and breach of the representations in the agreement.  The lower court dismissed Allegheny's counter-claims after a bench-trial, but the Second Circuit reversed.  I refer you to Prof. Miller's cogent analysis for the reasons why -- but basically the opinion was a straightforward application of New York law on the issues of fraudulent inducement and breach.

The interesting thing is the following representation in the purchase agreement by Merrill warranting that the information provided by Merrill to Allegheny was  “in the aggregate, in [Merrill’s] reasonable judgment exercised in good faith, is appropriate for [Allegheny] to evaluate [GEM’s] trading positions and trading operations.”  As Prof. Miller notes this representation:

should take the breadth away from any practicing . . . . Merrill is representing that the information it provided was “appropriate” for Allegheny’s evaluating the business. At the very least, this means that Merrill is warranting that it reasonably believed that it delivered all the information that Allegheny needed to value the business. Hence, omissions from due diligence will become actionable. If Merrill had any information it did not produce to Allegheny in due diligence, Allegheny will now argue that such information was reasonably necessary for it to value the business and so its non-delivery to Allegheny was a breach.

By agreeing to this warranty Merrill was essentially placing a high burden on itself to justify any omissions from due diligence in the case of any disputes.  The representation can also be reasonably interpreted as warranting the truth of Merrill's due diligence materials, an unbelievably wide-reaching representation.  The provision is very unusual, and it is likely that Merrill agreed to it knowing this fact due to potential abnormal problems in the due diligence process prior to signing.  Nonetheless, as Prof Miller again observes, given its scope it is unlikely Merrill was fully advised by their lawyers of the ramifications of this representation, who themselves may not have realized what they were agreeing to.  Although a charitable view is that Merrill fully knew what it was doing but agreed to this bargain based on its limited liability under the indemnification provisions.  Pure speculation since I have not seen the actual purchase agreement. 

Ultimately, one of the things this dispute and particular representation highlight is the caution M&A lawyers must have in drafting representations.  I was often shocked in private practice to find that M&A lawyers in both the big shops and otherwise often didn't have a full grasp of the scope and ramifications of representations instead preferring to over-rely on the "form".  When they strayed they often agreed to overly broad or vague representations without appreciating the potential liability created.  In addition, many lawyers lacked complete understanding of the relationship between these warranties and the indemnification provisions in private agreements.  For example, they often failed to recognize the need to strip materiality qualifiers out when a de minimis was present, failed to generally appreciate double materiality qualifiers and their effect on closing and indemnification, and often argued vociferously that the limitations on indemnification should apply to the covenants.  I think much of the reason for this is firm incentives to train associates are diminished in the billable hour world and instead the firms tend to over-rely on their form and network effects (i.e., they will learn on the job from other attorneys) to substitute for this needed training.

Prof. Miller and I have had an off-line conversation on this case.  I understand he is going to write a post on it over at Truth on the Market which I will link to when it is up.