M & A Law Prof Blog

Court finds fraud in Dole deal

Vice Chancellor Laster just released his post-trial opinion in Dole. You'll remember that in Dole, Murdock,  the CEO, structured the transaction to include all of the structural protections required under then-Chancellor Strine's MFW opinion.  Well, even with all those protections in place, the stockholders got the short end of the stick. From today's opinion:

But what the Committee could not overcome, what the stockholder vote could not cleanse, and what even an arguably fair price does not immunize, is fraud. Before Murdock made his proposal, Carter made false disclosures about the savings Dole could realize after selling approximately half of its business in 2012. He also cancelled a recently adopted stock repurchase program for pretextual reasons. These actions primed the market for the freeze-out by driving down Dole‘s stock price and undermining its validity as a measure of value. Then, after Murdock made his proposal, Carter provided the Committee with lowball management projections. The next day, in a secret meeting that violated the procedures established by the Committee, Carter gave Murdock‘s advisors and financing banks more positive and accurate data. To their credit, the Committee and Lazard recognized that Carter‘s projections were unreliable and engaged in Herculean efforts to overcome the informational deficit, but they could not do so fully. Critically for purposes of the outcome of this litigation, the Committee never obtained accurate information about Dole‘s ability to improve its income by cutting costs and acquiring farms.

By taking these actions, Murdock and Carter deprived the Committee of the ability to negotiate on a fully informed basis and potentially say no to the Merger. Murdock and Carter likewise deprived the stockholders of their ability to consider the Merger on a fully informed basis and potentially vote it down. Murdock and Carter‘s conduct throughout the Committee process, as well as their credibility problems at trial, demonstrated that their actions were not innocent or inadvertent, but rather intentional and in bad faith.

...intentional and in bad faith. Those are rare words.

-bjmq

One year later, Michael Dell is happy

From Bloomberg:

MICHAEL DELL, FOUNDER AND CEO, DELL:  You know, we’re enjoying the freedom and flexibility we have as a private company.  We are not bound by 90-day periods.  We’re focusing on our future out several years from now.

And we have an enormous opportunity and we’ve had a great year.  We’re growing our — all of our businesses, all of our businesses are performing quite well relative to the industry.  And it’s just a lot easier to focus 100 percent on our customers.

And —

SCHATZKER:  Not have to worry about the investors?

MICHAEL DELL:  There you go.

SCHATZKER:  Is it that different, being private versus being public? You’ve had it for a year now.

MICHAEL DELL:  I think about 20 percent of my time has been freed up.

SCHATZKER:  Really?

MICHAEL DELL:  Yes.

SCHATZKER:  Twenty percent of a CEO’s time? That’s pretty remarkable. 

MICHAEL DELL:  Well, you think about all of the time spent dealing with governance and preparing for investor activities and dealing with various shareholder requests.  If I watch your show, I see the constant discussion of should there be a bigger dividend, should there be a share repurchase, should they spin off this, should they split off that, should they merge with this?

This is really — can be quite distracting, right, if you try to grow a business, right, so…

-bjmq

MFW Appeal Heard in Delaware

I took advantage of the brief time between exams and the holidays to hop down to Delaware to sit in on the appellate arguments in MFW Shareholder Litigation.  You'll remember that in MFW Chancellor Strine was presented with a question - in a controlling shareholder transaction which is conditioned on both negotiation and approval by an independent, special committee and a fully-informed, uncoerced vote of the majority of the minority what is the proper standard of review.  Chancellor Strine held that the proper strandard of review for a transaction in which the controller essentially disables itself is business judgment.  

[If you don't need any of this background and just want a quick summary of the argument, feel free to skip down.]

Since Weinberger, entire fairness has been the standard for transactions involving controlling shareholders.  In Kahn v Lynch, the Supreme Court provided a gloss on Weinberger's entire fairness standard for controlling shareholder transaction.  Where the controller does the transaction in reliance  on either a special committee or a vote of the majority of the minority, the burden shifts from the controller to plaintiff to prove that the transaction was not entirely fair.   But, as Chancellor Strine noted in Cox Communications, the decision by the Supreme Court to keep the entire fairness standard in play made it impossible to get even weak complaints dismissed at an early stage.   In no small part, Kahn v Lynch was a contributor to the 'litigation industrial complex' - generating almost guaranteed valuable settlement opportunities at the mere announcement of a controlling shareholder transaction no matter how valuable the underlying transaction for minority shareholders.

In MFW, Chancellor Strine had an opportunity to directly address the question of the proper standard of review in a controlling shareholder transaction where the controller conditioned the deal on robust procedural protections that essentially disabled the controller.  The question for the corut was whether additional protections should give the board any credit - perhaps even sufficient credit to get weak claims dismissed early.  Chancellor Strine put the 'credit' problem this way: 

Uncertainty about the answer to a question that had not been put to our Supreme Court thus left controllers with an incentive system all of us who were adolescents (or are now parents or grandparents of adolescents) can understand. Assume you have a teenager with math and English assignments due Monday morning. If you tell the teenager that she can go to the movies Saturday night if she completes her math or English homework Saturday morning, she is unlikely to do both assignments Saturday morning. She is likely to do only that which is necessary to get to go to the movies—i.e., complete one of the assignments—leaving her parents and siblings to endure her stressful last-minute scramble to finish the other Sunday night.

Plaintiffs in MFW improvidently decided not to settle, rather seeking the option of going for post-closing damages.  Their mistake.  That gave Chancellor Strine the opportunity to address the question that eluded him in Cox.  In MFW, Chancellor Strine announced that where a transaction with a controller is conditioned on both negotiation and approval by an independent, special committee and a fully-informed, uncoerced vote of the majority of the minority that business judgment is the proper standard of review.  

[Appeal before Delaware Supreme Court]

OK.  So that brings us to today in Dover where the Supreme Court met en banc to hear the plaintiff's appeal.   I went down to watch the arguments and seem the wheels of corporate justice turn.  Justice Holland sat as acting chief.  Judge Jan Jurden sat by designation (Someone trying her out? Just sayin'...).

Justice Holland noted for the plaintiffs benefit that the court decided to hear the case en banc because, well, maybe the court wanted to write a new rule... Was that big enough of a hint that the court is looking to make some new law here?  Justice Jacobs made the issue more explicit for the plaintiffs - forget about the particular facts of this case, what is the policy reason why the Supreme Court should accept or reject the Chancellor's reasoning.

Unfortunately, the plaintiffs weren't really up to the task of articulating a good reason why the procedural protections in MFW aren't robust enough to generate the business judgment presumption for a special committee.  Plaintiffs asserted that special committees are structurally biased in favor of controllers in almost all circumstances.  OK, so I am generally pretty cynical, but I still believe in the court's presumptions.  Near as I can tell, special committees still get the presumption of independence until plaintiffs present facts that they aren't. Plaintiffs, it seemed, wanted the court to toss the presumption of independence of special committees altoghether in controlling shareholder transactions.  Why? Not sure exactly why.   But, if you are proposing to the court that directors shouldn't have the presumption of independence, then one really should have a strong articulated reason why.  In any event, it didn't seem like the court was entertaining that notion.  

Rather, the court quickly turned to the power of the fully-informed, uncoerced vote of a majority of the minority.  Why isn't that powerful enough - together with the special committee - to get the business judgment presumption Justice Jacobs wondered?  Well, well, because arbs! Oh, wait.  Aren't arbs stockholders?  Yes, but they just want to make money.  So, shareholder votes shouldn't get credit?   Again...the plaintiffs failed to clearly articulate a policy reason why a fully-informed, uncoerced vote of the majority of the minority isn't going to work.     In general the plaintiffs struggled to provide the court with any reasons to overturn Chancellor Strine's reasoning.

When counsel for the special committee got their chance, they did a much better job of articulating reasons to uphold Chancellor Strine ruling.  Justice Berger asked whether with the procedural safeguards the result  of the special committee/majority of minority process was equivalent to an arm's length deal?  No, was the response, but for the purposes of judicial review the precedural protections that disable the controller put the special committee in the same place as an independent board that would otherwise get the protection of business judgment.  There was some push-back from Justice Berger on that point - particularly that even though the controller disabled itself, it's the controller who is the impetus for the transaction, not the special committee.  

If the plaintiffs manage to get the Supreme Court to overturn the Chancery Court's opinion in MFW Justice Berger's point will likely be the reason.  While, the special committee and the unaffiliated shareholders can still say no, it's the controller (and only the controller) who always gets the ball rolling.  Because only the controller is permitted to 'set the scene' for the sale, the special committee process and the following shareholder votes are irretrievably infected by a structural bias that requires entire fairness to be the standard rather than business judgment.  There, I made the plaintiff's argument for them.

As in previous cases, I won't hazard a guess on the actual outcome of this argument.  However, I will note the old saying that 'you can't win an appeal at oral argument, but you can lose one.' 

-bjmq

 

Dole sneaks through

This just coming in....

The buyout passed with the support of 50.9% of the shares not held by CEO David Murdock, who owns 39.5 percent of Dole and is trying to take it private for the second time in 20 years.

Like Dell, unaffiliated stockholders in Dole seem to be just a little less than enthusiastic about the buyout.  Also like Dell, there's talk of appraisal. Of course, with Dell all that talk was for naught after Carl Icahn took his money and moved on.  No clear sense yet whether the hedge funds in Dole are serious about hanging around.  

-bjmq

 

P.S.  Duck boats on Saturday morning ... Go Sawx!! 

Dell goes dark

In case you missed it, Dell completed its going private transation on Wednesday. On Thursday it requested deregistration of its securities and so...poof. It's gone. Now there's a lengthy blow-by-blow offered up by Bloomberg on the deal went down. I guess it's appropriate that they publish it on Halloween, cause this is how investment banker Jimmy Lee described Dell's going private journey:

“This is a guy from Austin who founded his own technology company and now he is on Wall Street trying to buy it out and he is entering an unknown world,” Lee, 61, said.

“It’s like going into a haunted house,” he said, “and every time you go around a corner some ghost pops up, and then a witch flies down on a broom, and then you go into another room and some devil tries to stab you with a pitchfork.”

Boo!  Happy Halloween to the kiddies.

-bjmq

 

P.S.  Go Sawx!

LBOs and corporate governance

So, this issues gets debated back and forth quite bit.  On the one side are those that argue that LBOs are good corporate governance.  The presence of debt and the high degree of equity ownership by managers pushes managers to improve efficiency and profitability of the firm in order to quickly pay down that debt.  In that way, the LBO structures reduces the agency problems that plague the public corporation.  On the hand there are arguments that the LBO is nothing more than financial mumbo-jumbo that does little more than create opportunities for managers to enrich themselves.  

Cohn, et al have a contribution to the  debate.  Their new paper is The Evolution of Capital Structures and Operating Performance after LBO: Evidence from US Corporate Tax Returns.  Here's the abstract:

This study uses corporate tax return data to examine the evolution of firms' financial structure and performance after leveraged buyouts for a comprehensive sample of 317 LBOs taking place between 1995 and 2007. We find little evidence of operating improvements subsequent to an LBO, although consistent with prior studies, we do observe operating improvements in the set of LBO firms that have public financial statements. We also find that firms do not reduce leverage after LBOs, even if they generate excess cash flow. Our results suggest that effecting a sustained change in capital structure is a conscious objective of the LBO structure.

-bjmq

Dole go-shop expires

Dole announced last night that its go-shop expired without any bidders.  File that under "not surprised."  

You'll remember that Chairman and CEO of Dole David Murdock is taking the company private using a structure that includes all of the procedural safeguards described in MFW.  So, challenges to the transaction are going to be subject to the higher business judgment review standard.

-bjmq

Another Dell Adjournment

No surprise, I guess.  The board seems to be doing what it can to ensure this deal doesn't go down in flames.  I suppose they see the company's future without the deal as so bleak that they are willing to take some extraordinary steps to get it through.  New today: Dell and Silver Lake have "upped" their offer by $0.10. Not much.  Certainly not enough to move some of the loudest critics off their positions.  In any event, here's the new offer:

Our proposed amendments to the merger agreement are as follows:

1. increase the merger consideration to $13.75 in cash per share of Company common stock, representing an increase in the consideration to be paid to unaffiliated stockholders of approximately $150 million; and

2. modify the “Unaffiliated Stockholder Approval” requirement in the merger agreement to provide that the voting requirement is the approval of a majority of the outstanding shares held by the unaffiliated stockholders that are present in person or by proxy and voting for or against approval of the merger agreement at the stockholder meeting.

This is our best and final proposal. We are not willing to discuss any further increase in the merger consideration nor are we willing to increase the merger consideration to $13.75 per share without the change to the Unaffiliated Stockholder Approval requirement described above. If the Special Committee believes that it would be appropriate to reset the record date for the special meeting in connection with this change to the Unaffiliated Stockholder Approval requirement, we would be ready to accept a new record date so long as the resulting delay in the special meeting is the minimum required by law.

We believe our proposed change to the Unaffiliated Stockholder Approval requirement is fair and reasonable to the Company’s unaffiliated stockholders, particularly in the context of our willingness to increase the merger consideration. There is simply no rational basis for shares that are not voted to count as votes against the merger agreement for purposes of the unaffiliated stockholder vote. If a majority of the shares held by unaffiliated stockholders who vote are voted in favor of the merger agreement, it would be unfair to deny these stockholders the merger consideration they wish to accept solely because shares not voting are counted as votes against the transaction.

Hmm. Number 2 is very interesting. A couple of weeks ago, Chancellor Strine was asked to rule on a motion to expedite prior the shareholder vote (Transcript: Motion to Expedite).  His reaction?  No.  He ruled that there were sufficient procedural safeguards ( see e.g. In re MFW) in place such that if unaffiliated shareholders felt that this deal was not in their interests, they had the power to vote the deal down, so no injunction. I wonder what he would say today.  He certainly couldn't be as confident that unaffiliated shareholders now have the power to vote down the deal, because they no longer do.  Now, it may be that the fact that Dell has effectively neutralized his 16% vote through a voting agreement is enough to get them over the line in front of a judge, but it's not a slam dunk.  The Chancellor's confidence stemmed from his feeling that a majority of the minority were "fully able to protect themeselves" given the combination of Dell's neutralized vote and the voting requirements. Now, one of those protections is gone. 

My guess is this transaction will be back in court before August 2.  I suspect it may go less well for the board the next time if the Special Committee agrees to this change in the voting rules, but that is a risk it looks like the board feels it might have to take.  

-bjmq

Dell responds to Icahn warrant offer

Here is the Dell Special Committee's official response to Icahn warrant offer from last week:

“We are today reviewing the fifth proposal from Carl Icahn, which would include issuance of warrants in connection with the self-tender proposal he previously outlined. We are working with our advisors to evaluate whatever benefits might flow to shareholders from the warrant he has proposed to include in his structure. We would note that a portion of any value attributed to the warrants would be offset by a reduction in the value of the recipients’ stub equity, as well as the fact that receipt of the warrant would likely be a taxable event. We have been and remain willing to meet or talk with Mr. Icahn about his various proposals, including at a meeting scheduled earlier this week which he requested and subsequently cancelled.

“More broadly, it is important to note that all of Mr. Icahn’s various proposals require abandoning an all cash transaction at a substantial premium with a high degree of closing certainty that shifts all of the risks of the business to the buying group in exchange for a highly speculative recapitalization concept that relies upon the future value of a leveraged public technology company. We have studied variations on this theme for months and continue to have substantial reservations about that value proposition.

“Most important, we believe it is critical that Dell shareholders not be distracted from the clear choice they must make next week – take $13.65 per share in cash or bear the risks of continuing to hold their Dell shares.”

Shorter version:  We are thinking about it because our fiduciary obligations require us to, but there is nothing really here of any interest to us. Move along. 

-bjmq

Civil penalty for Revlon

The SEC has just imposed an $850,000 civil penalty on Revlon for misleading disclosures in the run up to its going-private transaction that were the subject of litigation (2009-2010) before the Chancery Court.  Vice Chancellor Laster's opinion in In re Revlon S'holder Litig got a lot of attention - in part because of his tongue-lashing of plaintiff's counsel as well as his approval in dicta of forum selection clauses.  

The original Revlon transaction called for MacAndrews & Forbes to acquire 100% of the publicly-traded Class A shares.  Public shareholders wouldn't receive cash in the transaction.  Rather, they would get new Series A Preferred Stock (unlisted) instead.   The board was unable to get Barclays to issue a fairness opinion, prompting a change in the structure.  Rather than a merger, the board restructured the transasction to be an exchange offer, thus doing away for the messy necessity of special committees and fairness opinions.  Vice Chancellor Laster didn't agree.  

Turns out the SEC, which scrutinizes 13e-3 disclosures,  didn't either.  In its order the SEC laid out what it thought was misleading about Revlon's 13e-3 disclosures:

49. Revlon’s third amended exchange offer filing included a section, prominently displayed in bold, entitled “Position of Revlon as to the Fairness of the Exchange Offer.” As a general matter, Revlon disclosed in this section the view of its Independent Board members concerning the fairness of the transaction.

...

52. Revlon disclosed: “The Board of Directors approved the Exchange Offer and related transactions based upon the totality of the information presented to and considered by its members.” Second, in a related disclosure, Revlon, in disclosing the positive factors it considered for the exchange offer, noted that “the exchange offer . . . [was] unanimously approved by the Independent Directors . . . who were granted full authority to evaluate and negotiate the Exchange Offer and related transactions.”

53. As represented by Revlon to its minority shareholders, the Board’s process in evaluating and approving the exchange offer was full, fair, and complete. The Board’s process, however, was not full, fair, and complete. In particular, the Board’s process was compromised because Revlon concealed – both from minority shareholders and its Independent Board members – that it had engaged in a course of conduct to “ring-fence” the adequate consideration determination.

54. Accordingly, Revlon’s disclosures about the Board’s evaluation of the exchange offer were materially misleading to minority shareholders. Moreover, Revlon’s “ring-fencing” deprived the Board, and in turn, minority shareholders of the opportunity to receive revised, qualified, or supplemental disclosures, including any that might have informed them of the third party financial adviser’s determination that the transaction consideration to be received by 401(k) members in connection with the transaction was inadequate.

55. Third, Revlon materially misled minority shareholders when it stated that unaffiliated shareholders – which included Revlon’s 401(k) members – could decide whether to voluntarily tender their shares. Revlon cited the voluntary nature of the exchange as a positive factor on which the Board relied in approving the exchange offer.

56. In fact, all minority shareholders – as well as its Independent Board members – were unaware that Revlon’s 401(k) members would not be able to tender their shares if an adviser found that the consideration offered for their shares was inadequate. Moreover, Revlon’s non-401(k) minority shareholders were not on equal footing with Revlon’s 401(k) members because Revlon’s 401(k) members received protection as a result of the adviser’s finding that 401(k) members were not provided adequate consideration.

OK, so that's not very pretty.  Although the SEC does give 13e-3 filings extra scrutiny, it's not as often that they come in after a transaction and impose fines, so an administrative proceeding here is uncommon.   Plaintiff's counsel in Delaware ultimately settled claims in this case for $9.2 million.  Fidelity settled its claims with the company on its own got $19.9 million.  Now, tack onto that an addtional $850,000 for the SEC.  

-bjmq

Dole CEO looking for BJR

So it looks like David Murdock, Dole's CEO and 40% shareholder, is putting in an offer to take Dole Foods private at $12/share.  According to the WSJ, this offer is subject to two conditions:  1) that a najority of the disinterested directors approve it; and 2) that it be approved by a majority of the minority shareholders.  

Why would Murdock make it clear in his initial offer to the board that he has those two conditions?  Isn't that for the board to decide?  Well, it looks like Murdock's lawyers have been up late reading.  Remember In re MFW S'holders Litigation from 10 days ago.  Chancellor Strine is trying to bring some order to the question of standards of review of transactions involving controlling shareholders.  In MFW he provided Murdock and his lawyers the following bit of help:

When a controlling stockholder merger has, from the time of the controller’s first overture, been subject to: 

(i) negotiation and approval by a special committee of independent directors fully empowered to say no, and 
(ii) approval by an uncoerced, fully informed vote of a majority of the minority investors,

the business judgment rule standard of review applies.

And that's what Murdock is setting up for here.  By relying on robust procedural protections Murdock is hoping to get the deferential business judgement standard to apply to his deal to take Dole private.  So will will this get litigated?  Well, yes.  So, a very quick first test for Chancellor Strine's unified approach.

-bjmq

More stock for Dell

Paul Hodgson at Forbes questions the Dell board's reasoning behind issuing Michael Dell more stock as part of his new compensation package.  He has a point.  The reason we might like stock compensation for managers is that we believe that ownership of equity, even substantial blocks of it, increases alignment of the managers' long-term interests with that of stockholders.  They rise and fall with us, the regular stockholders.  So far, so good.  Mostly.  Anyway.  What about Dell? 

Well in its proxy, it disclosed Michael Dell's compensation package for the fiscal year ending just a few days before announcement of the going private transaction.  It turns out that last year - during the period in which the board knew or should have known that Dell was negotiating to buy the company - most of his compensation was stock.  I guess I would question the wisdom of granting more long-term equity compensation to a CEO when he is in the process of collecting votes to take the company private.  At that point, his interests and the interests of the stockholders are no longer in alignment and it doesn't matter how many more shares he is issued, they won't be. 

-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

Strine revisits Kahn v Lynch and the unified standard

Chancellor Strine broke some new ground with respect to the question of what is the approrpriate standard of review in a going provate transaction with a controller.  This issue has been percolating around for for some years and has gone unresolved (In re Cox, In re CNX Gas Corp., among others). In an opinion just handed down in MFW Shareholders Litigation Strine explains why the Supreme Court's Kahn v Lynch jurisprudence with respect to standards of review in going private transactions with controllers is deficient:

The question of what standard of review should apply to a going private merger conditioned upfront by the controlling stockholder on approval by both a properly empowered, independent committee and an informed, uncoerced majority of the minority vote has been a subject of debate for decades now. For various reasons, the question has never been put directly to this court or, more important, to our Supreme Court.

This is in part due to uncertainty arising from a question that has been answered.  Almost twenty years ago, in Kahn v. Lynch, our Supreme Court held that the approval by either a special committee or the majority of the noncontrolling stockholders of a merger with a buying controlling stockholder would shift the burden of proof under the entire fairness standard from the defendant to the plaintiff. …

Uncertainty about the answer to a question that had not been put to our Supreme Court thus left controllers with an incentive system all of us who were adolescents (or are now parents or grandparents of adolescents) can understand. Assume you have a teenager with math and English assignments due Monday morning. If you tell the teenager that she can go to the movies Saturday night if she completes her math or English homework Saturday morning, she is unlikely to do both assignments Saturday morning. She is likely to do only that which is necessary to get to go to the movies (i.e. complete one of the assignments) leaving her parents and siblings to endure her stressful last minute scramble to finish the other Sunday night.

For controlling stockholders who knew that they would get a burden shift if they did one of the procedural protections, but who did not know if they would get any additional benefit for taking the certain business risk of assenting to an additional and potent procedural protection for the minority stockholders, the incentive to use both procedural devices and thus replicate the key elements of the arm’s length merger process was therefore minimal to downright discouraging.

In MFW, the board conditioned the transaction on approval by a special  committee and approval of a majority of the minority.  The question for the court was whether by using both protective devices under these facts, does a board get the additional protection of business judgment review rather than simply a shifting of hte burden under entire fairness review.  Granting BJR with additional protective devices would go some way to resolving the "homework" incentives described by Strine.  

Strine provides the following guidance for transaction planners:

When a controlling stockholder merger has, from the time of the controller’s first overture, been subject to: 

(i) negotiation and approval by a special committee of independent directors fully empowered to say no, and
(ii) approval by an uncoerced, fully informed vote of a majority of the minority investors,

the business judgment rule standard of review applies.

This result makes sense.  If transaction planners are able to replicate in form and substance an arm's length transaction, then they should get the benefit of BJR.  To the extent minority shareholders are guaranteed through these procedural protections the right to a fully informed and uncoerced vote, then worries about controllers abusing their position to take companies private at the expense of minority shareholders should be mitigated.  Now, we'll see if the Supreme Court decides to jump in and take a side on this question.

-bjmq

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

Dell paying Blackstone's bills

Acording to Dan Primack at Fortune, Dell's independent directors agreed to reimburse Blackstone the cost of its bid as part of the go-shop process.  This is a real positive, and I am surprised that more sellers with go-shop provisions don't do this as a matter of course. With an incumbent bidder in place, there are real disincentives for a second bidder to make the transaction specific investments required to put together a competing bid.  

This is especially true given the fact that the incumbent bidder has more time to digest the information related to the target and almost always has a matching right in place.  Rational second bidders fear that they will invest resources into making a bid only to have lose it to the incumbent - or worse overpay when the incumbent walks away.  (Aside, my matching rights paper is here for those who might be interested.)

By agreeing to reimburse second bidders if they enter into a go-shop process, the independent directors lower the bars to generating second bids and increase the likelihood that the go-shop will be more than just window dressing.  That's a good thing.  Smart counsel for independent directors will be looking at Dell and fighting hard for reimbursement provisions in future deals.  

-bjmq

Dell's go-shop to produce results?

As we close in on March 22 and the end of Dell's go-shop period, we're starting to hear rumors that the process might actually produce a second bid in the $15 range.  Although H-P and Lenovo are apparently also rummaging through Dell's books, if there is going to be a bid, Bloomberg is reporting that it would come from Blackstone. That would be an interesting development.  I wonder if they would be able to bring Michael Dell on board as part of a competing deal.  Just a couple more days.

-bjmq

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

MBOs and Dell's opportunity

Dennis Berman at the WSJ has a piece at WSJ.com that asks the right question about the now simmering Dell going private transaction.  Who is Dell working for? 

Management buyouts are always fraught, precisely for this reason. Prodded by court rulings, boards have taken steps to minimize the most flagrant problems. Should a deal be announced, be prepared for a barrage of reminders about "independent committees," "go shops" and the like.

But these steps are ultimately cosmetic. No one will say it this way, but it's the way deals happen: The conflict is the opportunity.

For example, without Mr. Dell's stake, it would be nearly impossible to assemble the $22 billion to $25 billion needed to buy the company. It's also unlikely that another buyout shop or industry player would make a competing bid without Mr. Dell's consent.

In these situations, a powerful executive like Mr. Dell can effectively act as his own poison pill, guarding against outcomes he doesn't like.

Make no mistake.  Once this deal is announced there will be multiple suits.  So of course, the lawyers are being attentive to the requirements.  But if the J Crew transaction from last year is any guide the deal will pasts muster.  However, these going private transactions always raise a question with me.  If Dell (or whoever is the continuing management) have such good ideas about how to run the company, why don't they just go ahead and implement them now for the public shareholders?  Why keep all the good ideas and strong management for when the business goes private?  It's a question without a real answer.

-bjmq

 

Comparison of One-Step and Two-Step Mergers

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

MAW