M & A Law Prof Blog

Millennial Rhapsody

 Kudos to LUMA Partners for their very creative re-creation of Queen's Bohemian Rhapsody.  Seriously. It's above and beyond what one might expect for a closing dinner.  I really enjoyed. But, if you listen to the lyrics closely, it's a very melancholy inside look into the recent desperation of online advertisers. It's the kind of melancholy that lead to a sale of the corporation.  It's not all wine and roses in M&A land...

 -bjmq

 

Law firm memos on MFW Shareholders Litigation

[Updated] Here are a handful of law firm memos on the MFW Shareholders Litigation (in which the Delaware Court of Chancery held that the Business Judgment Rule applied to a freeze-out merger that was conditioned on the approval of both an independent Special Committee and a Majority-of-the-Minority stockholder Vote). Brian discussed the same case here.

Davis Polk

Milbank

Morris Nichols

Paul Weiss

Richards Layton

S&C

Wilkie Farr

White & Case

MAW

NetSpend: Interesting Insights on Revlon Process, “Don’t Ask, Don’t Waive” Standstills & Fairness Opinions

The Delaware Chancery court's recent decision in Koehler v. NetSpend Holdings Inc. is worth a read for deal planners.  Vice Chancellor Glasscock criticized the board's Revlon process, stating:

The Plaintiff has demonstrated that a reasonable likelihood exists that the sales process undertaken by the NetSpend Board—which included lack of a pre-agreement market canvass, negotiation with a single potential purchaser, reliance on a weak fairness opinion, agreement to forgo a post-agreement market check, and agreement to deal protection devices including, most significantly, a don’t-ask-don’t-waive provision—was not designed to produce the best price for the stockholders.

Nevertheless, in line with other recent Delaware decisions where the courts have been reluctant to enjoin a deal when there are no other potential bidders, the court denied plaintiff's motion to enjoin the deal.  Still, Vice Chancellor Glassock's criticism of the fairness opinion provided by the company's financial advisor and the board's use of a DADW provision should give sellers some guidance for future deals.

For more info, take a look at this memorandum by Sullivan & Cromwell.

-AA

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

Ghosol and Sokol have recently posted a paper, Compliance, Detection and Mergers & Acquisitions.  They argue that buyers and sellers use regulatory compliance as a signal for quality in the market for corporate control. Because regulatory compiance is costly, firms with unobserveable high quality will separate from lemons by demonstrating third party compliance, while low quality firms will not.  Here's the abstract:  

Abstract: Firms operate under a wide range of rules and regulations. These include, for example, environmental regulations (in which some industries have increased regulatory exposure) and finance and accounting (where all industries have reporting requirements). In other areas, such as antitrust cartels, enforcement is unregulated and antitrust leaves the market as the default tool to police against anti-competitive behavior. In all of these areas, detection of non-compliance by a firm can result in significant penalties. This issue of non-compliance has implications in the merger and acquisitions (M&A) context. In a transaction between an acquiring firm (buyer) and a target firm (seller), there is asymmetric information about the target’s quality. In our framework, we link a target’s quality directly to the strength of its regulatory compliance. In an M&A transaction, an acquirer seeks information about the target’s compliance, as a compliance failure may result in substantial penalties and sanctions, post-acquisition. In the presence of quality (compliance) uncertainty about target firms, low quality targets can masquerade as high quality. This would tend to give rise to a M&A market with Lemons-like characteristics, resulting in low transactions prices and dampening of M&A activity. We examine how M&A transactions in such regulatory areas – environmental, finance and accounting, and antitrust compliance problems – might function to alleviate quality uncertainty. 

-bjmq

SRZ 2012 PE Buyer/Public Target Deal Study

Schulte Roth & Zabel has released this client alert containing the highlights from its most recent study on private equity buyer acquisitions of U.S. public companies with enterprise values in the $100-$500 million range ("middle market" deals) and greater than $500 million ("large market" deals). During the period from January 2010 to Dec. 31, 2012, SRZ identified a total of 40 middle market deals and 50 large market deals that met these parameters.  Here are SRZ's key observations from the study:

1.  Volatility in the number and terms of middle market deals makes it more difficult to identify "market practice" in that segment.

2. Overall, middle market deals took significantly longer to get signed than large market deals.

3. "Go-shop" provisions were used more frequently in large market deals, even though, overall, the percentages of middle market and large market deals in which a pre-signing market check was used are comparable.

4.  While it is virtually the rule (92% of the time in 2012) in large market deals that the target will have a limited specific performance right against the buyer, the full specific performance remedy is still used quite often (44% of the time in 2012) in middle market deals.

5.  While the frequency with which middle market deals use reverse termination fees ("RTFs") has converged on large market practice, the size of RTFs has not.

6.  Large market deals are much more likely than middle market deals to limit damages for buyer’s willful breach to the amount of the RTF.

MAW

GD&C on Chancellor Strine's rejection of disclosure only settlement of M&A stockholder lawsuit

This client alert from Gibson Dunn discusses Chancellor Strine's bench ruling rejecting a disclosure-only, negotiated settlement of an M&A stockholder lawsuit. According to the authors,

The decision, in In re Transatlantic Holdings Inc. Shareholders Litigation , Case No. 6574-CS, signals that the Chancery Court will carefully scrutinize the terms of negotiated settlements to ensure that named stockholder plaintiffs are adequate class representatives and that the additional disclosures provided some benefit to the purported stockholder class. At the same time, the decision represents an unmistakable warning to plaintiffs’ firms that they cannot continue to count on paydays through the settlement of meritless lawsuits filed in the wake of announced deals.

MAW

Icahn throws wrench in Dell works

Carl Icahn has been very busy over the past year.  Now, he has moved on to Dell.  In a letter to the board (see Sched 14A with lett and board response), Icahn made an offer to the board that he hopes they take - and then threatens to run a proxy contest and start "years of litigation" if they don't: 

However, if this Board will not promise to implement our proposal in the event that the Dell shareholders vote down the Going Private Transaction, then we request that the Board announce that it will combine the vote on the Going Private Transaction with an annual meeting to elect a new board of directors. We then intend to run a slate of directors that, if elected, will implement our proposal for a leveraged recapitalization and $9 per share dividend at Dell, as set forth above. In that way shareholders will have a real choice between the Going Private Transaction and our proposal. To assure shareholders of the availability of sufficient funds for the prompt payment of the dividend, if our slate of directors is elected, Icahn Enterprises would provide a $2 billion bridge loan and I would personally provide a $3.25 billion bridge loan to Dell, each on commercially reasonable terms, if that bridge financing is necessary.

Like the “go shop” period provided in the Going Private Transaction, your fiduciary duties as directors require you to call the annual meeting as contemplated above in order to provide shareholders with a true alternative to the Going Private Transaction. As you know, last year’s annual meeting was held on July 13, 2012 (and indeed for the past 20 years Dell’s annual meetings have been held in this time frame) and so it would be appropriate to hold the 2013 annual meeting together with the meeting for the Going Private Transaction, which you have disclosed will be held in June or early July.

If you fail to agree promptly to combine the vote on the Going Private Transaction with the vote on the annual meeting, we anticipate years of litigation will follow challenging the transaction and the actions of those directors that participated in it. The Going Private Transaction is a related party transaction with the largest shareholder of the company and advantaging existing management as well, and as such it will be subject to intense judicial review and potential challenges by shareholders and strike suitors. But you have the opportunity to avoid this situation by following the fair and reasonable path set forth in this letter.

Now, I think he has a real point here.  And that's the special dividend. He proposes the board use $7.4 billion in cash that it has covented to bring back from offshore to finance the going-private transaction as the main source of cash for the dividend.  Think about it this way, there is a grand public policy discussion about corporate taxes and how the present structure of corporate taxes causes firms to stockpile cash off-shore.  This cash has to be left there - the argument goes - lest it come back and be taxed at punitive rates.  

OK, I am not going to take sides in that whole debate, but I will say this.  Dell is content to leave it's large pile of cash offshore and away from the shareholders because of the tax issue. However, if the cash is necessary to finance an acquisition of the company by Michael Dell, well then, paying all those taxes to bring the cash back onshore isn't all that big a deal and is well worth the effort.

Icahn is pointing to that and saying in effect, "Hey, wait a minute. Why bring the cash back to finance a going private deal?!  If Michael Dell is just buying cash with cash, doesn't that undervalue what's left of the company?  Why not bring the cash back to the US, pay the taxes, and then distribute it to shareholders?"  

I tend to sympathize with that view.  If the taxes are really so onerous that the board has refused to bring the cash back until now, why isn't it a corporate waste to use them to finance a going-private transaction by the founder?  The board will have to deal with that question at some point.

-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

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

The fog of deal-making

Our friend the Deal Professor had an interesting piece yesterday about the M&A activity heating up among cellphone companies. He warns that

"We’ve seen this story before — in the battle over RJR Nabisco that was made famous by “Barbarians at the Gate” and in deal-making frenzy during the dot-com boom. When faced with a changing competitive landscape, executives spend billions because they believe they have no other choice. The cost to the company — and to shareholders — can be immense. In this world, executive hubris tends to dominate as overconfidence and the need to be the biggest on the block cloud reason.
. . .

The rush to complete deals is an investment banker’s dream.

But the hunt may lead these companies to not only overpay but acquire companies that are underperforming or otherwise don’t fit well. Then they have to find a way to run them profitably."

Investors in these companies, and the people running them, should carefully consider his warnings.

As I explored in a recent paper, various empirical studies on the overall return to acquisitions find that they may lead to destruction of value, particularly for shareholders of the acquiring firm, who suffer significant losses. Finance and legal scholars who have evaluated the roots of bidder overpayment have pointed both to agency problems and to behavioral biases. The paper has a somewhat long overview of recent studies which suggest that, in many transactions, the acquirer’s directors and management benefit significantly from the deal, whether it is through increased power, prestige, or compensation—including bonuses and/or stock options. Other studies confirm a long-held view that managements’ acquisition decisions can be affected by various behavioral biases such as overconfidence about the value of the deal or managements’ overestimation of and over-optimism regarding their ability to execute the deal successfully.

In addition, last year Don Langevoort published a terrific essay in the journal Transactions which explored the behavioral economics of M&A deals. In the same issue, Joan Heminway published a thought-provoking essay which explored whether "fairness opinions, nearly ubiquitous in M&A transactions, can be better used in the M&A transactional process to mitigate or foreclose the negative effects of prevalent adverse behavioral norms." Both essays are worth a read!

-AA

Navigating Conflicts in Change of Control Transactions

Peter D. Lyons, David P. Connolly and Zhak S. Cohen of Shearman & Sterling analyze a series of recently decided high-profile cases involving conflicts of interest in change of control transactions and conclude that these cases

have not changed our guidance for handling conflicts: identify them early, disclose them appropriately, determine whether they are disqualifying or can be mitigated and, when mitigation is possible, mitigate them effectively.

You can read the whole thing here.

MAW

Comparison of One-Step and Two-Step Mergers

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

MAW

Shnader on Squeeze-out Mergers in Pennsylvania

Standard learning has long held that a minority shareholder of a Pennsylvania corporation who was deprived of his stock by a "cash-out" or "squeeze-out" merger had no remedy after the merger was completed other than to take what the merger gave or demand statutory appraisal and be paid the "fair value" for his shares. No other post-merger remedy, whether based in statute or common law, was thought to be available to a minority shareholder to address the actions of the majority in a "squeeze-out." Now, after the Pennsylvania Supreme Court’s holding in Mitchell Partners, L.P. v. Irex Corporation, minority shareholders may pursue common law claims on the basis of fraud or fundamental unfairness against the majority shareholders that squeezed them out.

The full client alert can be found here.

MAW

Milken Institute Private Equity Panel

Another interesting panel from the Molken Institute conference:

Speakers:

Leon Black, Founding Partner, Apollo Management, LP

David Bonderman, Founding Partner, TPG Capital

Jonathan Nelson, CEO and Founder, Providence Equity Partners

Jonathan Sokoloff, Managing Partner, Leonard Green & Partners

Scott Sperling, Co-President, Thomas H. Lee Partners, L.P.

 

MAW

Outlook on M&A

The always interesting Annual Milken Institue Global Conference is happening now.  Here is the panel on the outlook for M&A.

Speakers:

Anthony Armstrong, Co-head, Americas M&A, Credit Suisse

Maria Boyazny, Founder and CEO, MB Global Partners

James Casey, Co-Head of Global Debt Capital Markets, JP Morgan Securities LLC

Tilman Fertitta, Owner, Chairman and CEO, Landry's Inc.

Raymond McGuire, Global Head, Corporate & Investment Banking, Citi

Moderator:

Robert Harteveldt, Global Co-Head of Fixed Income and Global Head of Fixed Income Origination, Jefferies & Co. Inc.

 

MAW

Facebook's Billion Dollar Bet on Instagram

Facebook's billion dollar bet on Instagram is one of those deals that keeps me up at night.  A billion dollars for a company with no revenues, hmmmm... I am even more worried now that reports indicate that the Facebook board was essentially absent in advising Zuckerberg on the decision to purchase Instagram.

Acquirer overpayment often occurs in these large transactions. While some papers connect these losses to classic agency cost problems, numerous finance scholars have studied the role that non-economic forces, such as ego and hubris, play in corporate transactions (for just some of these pieces, see here and here).  Several of these studies find that empire-building preferences and overconfidence predict heightened managerial acquisitiveness, including acquisitions that result in losses in acquirer shareholder wealth. This is particularly true when managers have significant internal resources. Ulrike Malmendier and Geoffrey Tate demonstrate how CEOs can overestimate their abilities to generate returns and create value. In particular, they illustrate how overconfident CEOs are associated with an increased likelihood of conducting M&A transactions, and also poorer deals for their shareholders as measured by bid announcement returns.  Simlilarly, Mathew Hayward and Donald Hambrick examined hubris as a determinant of the size of premiums that CEOs will pay for acquisitions.  In their examination of 106 large acquisitions, Hayward and Hambrick find “losses in acquiring firms’ shareholder wealth following an acquisition, and the greater the CEO hubris and acquisition premiums, the greater the shareholder losses [following an acquisition].”  Moreover, the study also indicates that the relationship between acquisition premiums and CEO hubris is stronger in cases where board vigilance is lacking, i.e. when the board has a high proportion of inside directors and a CEO who also serves as chair of the board. More recent papers build on these results.  In an unpublished manuscript, John, Liu, and Taffler find that overconfident CEOs pay higher bid premiums and that this effect is reinforced when the target CEO is also overconfident. Similar findings are reported by Chatterjee and Hambrick who show that narcissistic CEOs in the computer industry carry out more and larger acquisitions.

None of this bodes well for Facebook's Instagram deal.  It may be that at the end of the day the deal turns out ok.  But I would be cautious when a young star CEO runs around spending the company's resources without any board involvment. 

-AA

 

Will M&A Heat Up in 2012?

Practical Law Company held a nicely done webinar today reviewing the major Public M&A trends in 2011. As most M&A experts know, deal activity was down the second half of 2011. Nevertheless, experts appear hopeful that there will be some deal growth in 2012.  Cleary Gottlieb's recently released advisory for board members spends a lot of time focusing on M&A risks and opportunities.  It predicts that "There is reason to expect growth in deal activity in 2012, despite current market and economic challenges. Prospective acquirers have substantial cash resources and reasonable or even strong stock prices, banks are willing to lend for at least some acquisitions, private equity firms have significant unused investor commitments, and hedge funds are actively seeking positive results." Cleary's memo is definitely worth a read and a useful overview of risks that board members may face in the M&A realm. Other sources have also predicted an uptick in deal activity in 2012, see here and here. We will wait and see...

HT: TCB Governance Center Blog

- AA

Dechert on Transaction Insurance

The potential post-closing erosion of value (either of the consideration received by the seller or the business acquired by the buyer) is an issue in almost every M&A transaction. This article by attorneys at Dechert LLP discusses a few of the popular types of transaction insurance currently available to help address this issue.

MAW