Tuesday, November 4, 2014
In the context of a merger and in the making of other decisions, boards are entitled to rely on advice from experts and advisors. When they do so in good faith, board members are "fully protected" to use the words of 141(e). In the wake of Rural Metro, bankers now seem to feel that the target is on them and that they will forever be liable for bad choices of boards. Not so. Chief Justice Leo Strine has posted a paper that lays out some straightforward advice for legal and financial advisors in the wake of Rural Metro. In short, if you do the right thing by your clients, you won't have anything to fear:
This article addresses what legal and financial advisors can do to conduct an M&A process in a manner that: i) promotes making better decisions; ii) reduces conflicts of interests and addresses those that exist more effectively; iii) accurately records what happened so that advisors and their clients will be able to recount events in approximately the same way; and iv) as a result, reduces the target zone for plaintiffs’ lawyers
Chief Justice Strine sums up the problem facing independent directors in going private transactions in the following way:
The worst of all worlds is for independent directors to wake up one day, and find that they not only cannot rely upon the impartiality of management, but that management has also co-opted the company’s long-standing financial and legal advisors, so all of the
most knowledgeable sources of advice are suspect.
When that happens the independent directors must get the strongest possible outside advisors. But often, this does not happen. Instead of getting the best advisors, they often get second- or third-rate financial and legal advisors, while management (advantaged already by its deep knowledge of the company) arms itself with the best.
This is a DANGER SIGNAL, akin to the one at Niagara about the approaching falls. You don’t guard Dwight Howard with Nate Robinson — however much you enjoyed their teamwork in the NBA slam dunk contest a few years ago. If independent directors get weak advisors, they will screw up. They will not do right by the stockholders, they will get sued, and they may lose or at the very least, get publicly embarrassed.
This paper is well worth reading for a number of reasons, including its forthright advice to directors and their advisors. For example, independent directors are well served by examining red-lined versions of the merger agreement. They are also well served by red-lined versions of the financial advisor's power point presentations where changes can happen, but are often overlooked because they are not highlighted or brought to the attention of independent directors:
I am told that the United States of America’s technology capacity is not sufficient to allow for the production of a legible PowerPoint redline or compare rite version. Count me as patriotic. My law clerks over the years have demonstrated an ability to do a compare rite version of most anything. If this is the only hurdle, I believe our nation is capable of vaulting it. Only someone who does not like hot dogs, hamburgers, cheesesteaks, lobster rolls, clam chowder, shrimp and grits, jambalaya, pit beef sandwiches, brisket, barbecue ribs, Good Humor ice cream bars, spaghetti and meatballs, fish tacos, Kentucky Fried Chicken, or things fried at state fairs could question our nation’s ability to do this; in other words, only someone who despises America itself.
Download it and read it for your clients' sake.
Tuesday, April 30, 2013
Thinking about it now, it turns out that the 2011 settlement approval of In re Sauer Danfoss Shareholder Litig is an important case. Why? Did it set out any special new points in the law? No. But it did one thing of real value for the courts. In Appendix A to the opinion, it set out a chart of recent settlements with identification of the work accomplished by plaintiffs counsel, the benefit achieved, and the fee approved by the court. It's a price list. And, like a price list, the Delaware courts are now regularly referring to it when they are reviewing requests for attorneys fees in disclosure only cases. I suppose that's a good thing. The downside? Well, now Vice Chancellor Laster has to remember to update the appendix every now and again!
Monday, October 1, 2012
Whenever a new lawyer asks me the key to being a successful practioner, one thing tops my list. Mark Herrmann lays it out very well here.
His last line is something that has always baffled me, because, as he notes, there's nothing to it. So why do so many people mess this up?
Friday, June 1, 2012
The Economist has a piece on the issue of transaction-related litigation that's worth reading (here). It starts with that gem of a Vonnegut quote from God Bless You Mr. Rosewater that Ron Gilson used in the introduction to his article on Value Creation:
In every big transaction, there is a magic moment during which a man has surrendered a treasure, and during which the man who is due to receive it has not yet done so. An alert lawyer will make the moment his own, possessing the treasure for a magic microsecond, taking a little of it, passing it on.
The Economist editors leave out the best part, which comes immediately after:
If the man who is to receive the treasure is unused to wealth, has an inferiority complex and shapeless feelings of guilt, as most people do, the lawyer can often take as much as half the bundle, and still receive the recipient’s blubbering thanks.
Monday, November 21, 2011
Yesterday’s New York Times carried another in a long line of articles (which go back at least to the 1980’s) complaining that law schools emphasize the theoretical over the useful and, as a result, don’t teach law students how to be lawyers. As is typical, the author concludes that law schools need to increase their emphasis on skills training.
The article starts off with (and seems to rest on) an example that is pretty lame. Apparently, three first year associates at Drinker Biddle didn’t know that you file a certificate of merger with the secretary of state to effectuate a merger.
Let’s assume for arguments sake that this lack of knowledge is representative of the typical law school graduate going into a transactional practice. So what?
As I have discussed before, law schools have a comparative advantage of teaching certain competencies; law firms have a comparative advantage of teaching others. Each should do what they do best.
Among other things, law schools have a comparative advantage over law firms in teaching deep substantive knowledge of complex subjects necessary to practice law. For example, law firms simply cannot teach securities law the way a law school can (if at all). A thorough understanding of complex material like this requires voluminous outside readings and in-class lectures for a concentrated period of time.
On the other hand, you know what law firms can teach pretty quickly? How to call an outside service to file a certificate of merger.
Of course law schools also may have a comparative advantage in teaching certain practical skills. I’m all for courses in contract drafting and negotiation, and I teach a transactional skills course myself. But the issue is a little more complex than the NYT article suggests.
For more of my thoughts on this perennial topic, see What Law Schools Should Teach Future Transactional Lawyers: Perspectives from Practice.
Thursday, August 25, 2011
Over at the VC, Orinn Kerr reports on an interesting survey of GW alumni regarding which elective courses lawyers wish they had taken in law school and what courses they found most interesting.
I'm not sure how useful the study is, given the small sample size (particularly after breaking down results by practice area, which is the most useful way to look at the data--after all (as an example) a transactional tax lawyer at an AM Law 100 firm and a litigator at a small white collar boutique will find different courses to have been helpful).
That said, it is interesting that alumni did not list negotiations or legal drafting as useful, given the handwringing over law schools failure to teach these types of practical skills.
My thoughts on what courses transactional lawyers should take can be found here.
Tuesday, August 23, 2011
John Coates, IV has posted an interesting new paper Managing Disputes Through Contract: Evidence from M&A. The paper looks at dispute management provisions in a sample of 120 randomly chosen M&A contracts from 2007 and 2008. The paper examines contract terms “aimed at managing litigation, such as (a) clauses mandating and setting the scope for arbitration; (b) choice of law clauses, (c) forum selection clauses, (d) jury waivers, (e) clauses allocating legal costs in the event of a dispute, and (f) clauses attempting to increase or decrease the odds that a court will award specific performance as a remedy in the event of breach.”
Abstract: An important set of contract terms manages potential disputes. In a detailed, hand-coded sample of mergers and acquisition (M&A) contracts from 2007 and 2008, dispute management provisions in correlate strongly with target ownership, state of incorporation, and industry, and with the experience of the parties’ law firms. For Delaware, there is good and bad news. Delaware dominates choice for forum, whereas outside of Delaware, publicly held targets’ states of incorporation are no more likely to be designated for forum than any other court. However, Delaware’s dominance is limited to deals for publicly held targets incorporated in Delaware, Delaware courts are chosen only 20% of the time in deals for private targets incorporated in Delaware, and they are never chosen for private targets incorporated elsewhere, or in asset purchases. A forum goes unspecified in deals involving less experienced law firms. Whole contract arbitration is limited to private targets, is absent only in the largest deals, and is more common in cross-border deals. More focused arbitration – covering price-adjustment clauses – is common even in the largest private target bids. Specific performance clauses – prominently featured in recent high-profile M&A litigation – are less common when inexperienced M&A lawyers involved. These findings suggest (a) Delaware courts’ strengths are unique in, but limited to, corporate law, even in the “corporate” context of M&A contracts; (b) the use of arbitration turns as much on the value of appeals, trust in courts, and value-at-risk as litigation costs; and (c) the quality of lawyering varies significantly, even on the most “legal” aspects of an M&A contract.
Wednesday, January 6, 2010
Yesterday, over at Ideoblog, Larry Ribstein had another in a series of thoughtful musings on the future of Big Law. His post, "The Cloudy Future of Big Law" responded to this post at Above the Law, which primarily focused on the unprecedented layoffs in 2009 and went on to suggest that "[t]here is reason to be hopeful that 2010 will be much better than 2009." Professor Ribstein is somewhat more pessimistic, pointing out that "there are also reasons not to be hopeful." Indeed, he believes that, although the economic "crisis may be over and there may be a lot of regulatory and other work for lawyers, . . . that doesn't necessarily translate into a rosy future for Big Law." This is territory Professor Ribstein has covered before—here he is in the abstract from his article on the subject, The Death of Big Law: Large law firms face unprecedented stress. Many have dissolved, gone bankrupt or significantly downsized in recent years. These events reflect more than just a shrinking economy: the basic business model of the large U.S. law firm is failing and needs fundamental restructuring. I’d like to focus on just one of the trends Professor Ribstein believes to be "very relevant to the future of Big Law." In his post he points to: The pressure on hourly billing, which has been a major profit generator for big firms. Although I keep hearing that reports of its demise are premature, don't bet on that. Professor Ribstein may be right. Perhaps the recent push to replace the billable hour reflects more than just a shrinking economy and will continue even after economic conditions improve. If so, it could certainly be a blow to the current Big Law business model. But I wonder if this is really a trend rather than a temporary response to current circumstances. Here are a few headlines—guess what they have in common: The Vanishing Hourly Fee, ABA Journal The New Value Billing, The American Lawyer The Rise and Fall of the Billable Hour, New York State Bar Journal Time to Question the Billable Hour, Connecticut Law Tribune Value Pricing: The Billable Hour Death Knell, Accounting Today Preparing a Requium for the Billable Hour, New York Law Journal
Yesterday, over at Ideoblog, Larry Ribstein had another in a series of thoughtful musings on the future of Big Law. His post, "The Cloudy Future of Big Law" responded to this post at Above the Law, which primarily focused on the unprecedented layoffs in 2009 and went on to suggest that "[t]here is reason to be hopeful that 2010 will be much better than 2009."
Professor Ribstein is somewhat more pessimistic, pointing out that "there are also reasons not to be hopeful." Indeed, he believes that, although the economic "crisis may be over and there may be a lot of regulatory and other work for lawyers, . . . that doesn't necessarily translate into a rosy future for Big Law."
This is territory Professor Ribstein has covered before—here he is in the abstract from his article on the subject, The Death of Big Law:
Large law firms face unprecedented stress. Many have dissolved, gone bankrupt or significantly downsized in recent years. These events reflect more than just a shrinking economy: the basic business model of the large U.S. law firm is failing and needs fundamental restructuring.
I’d like to focus on just one of the trends Professor Ribstein believes to be "very relevant to the future of Big Law." In his post he points to:
The pressure on hourly billing, which has been a major profit generator for big firms. Although I keep hearing that reports of its demise are premature, don't bet on that.
Professor Ribstein may be right. Perhaps the recent push to replace the billable hour reflects more than just a shrinking economy and will continue even after economic conditions improve. If so, it could certainly be a blow to the current Big Law business model.
But I wonder if this is really a trend rather than a temporary response to current circumstances. Here are a few headlines—guess what they have in common:
The Vanishing Hourly Fee, ABA Journal
The New Value Billing, The American Lawyer
The Rise and Fall of the Billable Hour, New York State Bar Journal
Time to Question the Billable Hour, Connecticut Law Tribune
Value Pricing: The Billable Hour Death Knell, Accounting Today
Preparing a Requium for the Billable Hour, New York Law Journal
The first 3 were written following the economic slowdown of 1991-1992 and the last 3 were written following the bursting of the tech bubble in 2000, in each case following the unprecedented stress faced by law firms at the time. In hindsight we now know that, in each instance, the death of the billable hour was greatly exaggerated. Once demand for lawyers recovered there was less pressure on fees and, consequently, less focus on how they were calculated.
I’m not saying this time will be the same. I just think it’s a little too early to tell.
Friday, November 6, 2009
Don't trade options. Yes, that's right, but it turns out these guys weren't as smart as they thought. Best not to share confidential information about your client's transaction with anyone. From the DOJ's criminal complaint:
Thursday, November 5, 2009
The Securities and Exchange Commission today announced insider trading charges against nine defendants in a case involving serial insider trading by a ring of Wall Street traders and hedge funds who made over $20 million trading ahead of corporate acquisition announcements using inside information tipped by an attorney at the international law firm of Ropes & Gray LLP, in exchange for kickbacks. The SEC alleges that Arthur J. Cutillo, an attorney in the New York office of Ropes & Gray, misappropriated from his law firm material, nonpublic information concerning at least four corporate acquisitions or bids involving Ropes & Gray clients — the 2007 acquisitions of Alliance Data Systems Corp. ("ADS"), Avaya Inc. ("Avaya"), 3Com Corp. ("3Com"), and Axcan Pharma Inc. ("Axcan").
I like the bit about the cell phones. Clearly, these guys have been watching TV. One thing they didn't do was pay attention in law school when they should have learned about their obligations to clients and the insider trading rules. Cutillo is a 2005 law school grad - four years. That's a very short legal career. I wonder what he'll do with the rest of his life.
Arthur Cutillo is an attorney at the international law firm of Ropes & Gray. He has worked in the firm's New York office since 2005. Throughout 2007, he had access to, and learned of material nonpublic information concerning corporate acquisitions in which Ropes & Gray represented acquirers or bidders in proposed acquisitions. Cutillo owed a fiduciary or other duty of trust and confidence to Ropes & Gray and its clients to keep this information confidential and not to disclose or personally use this information.
Zvi [Goffer, former Galleon employee] traded on-this inside information and had numerous downstream tippees who also traded. As part of this illegal trading scheme, Cutillo, [Jason] Goldfarb, and Zvi at times used disposable cell phones in an attempt to conceal the scheme. For example, prior to the announcement of the 3Com acquisition, Zvi gave one of his tippees a disposable cell phone that had two numbers programmed in it labeled "you" and "me." After the announcement of the 3Com acquisition, Zvi destroyed the disposable cell phone he had provided the tippee by removing the 8IM card, biting it, breaking the phone in half) throwing away half of the phone, and instructing his tippee to get rid of the other half of the phone.
Thursday, September 17, 2009
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.
Friday, July 10, 2009
Over at Akron Law Café, Professor Stefan Padfield blogs about my remarks on training transactional lawyers given at the AALS's midyear meeting focusing on business law. (Usha Rodrigues previously commented on these remarks over at TheConglomerate).
Unrelated to my remarks, there’s been a flurry of recent posts related to lawyer training and the utility of law schools. Several of these have been in reponse to this post by Paul Lippe. See here and here (same post, different comments), here, here and here. Gordon Smith has been thoughtfully commenting on the topic for quite some time (for a small sample, see here, here, here, here and here).
Many critics of the current law school model point to medical school as the way things should be done. I have to say, I don't find atempts to analogize law school to medical school persuasive. Among other things, to get into medical school, a student has to have already taken a significant number of substantive courses. For example, most medical schools require applicants to have completed at least one full year of each of Biology and Physics and two full years of Chemistry (including Organic Chemistry), together with associated lab work. In law school, many students are, in effect, starting from scratch, with no prior legal or business training or experience. As a result, more substantive training is necessary, leaving less time for practical training. In addition, those holding medical school up as a model of hands-on practical training often skip over the fact that medical school is four years, the first two of which are devoted to teaching substantive courses.
Tuesday, October 2, 2007
I wanted to reiterate a point that may have been lost in my long post on 3Com yesterday concerning the role of Wilson Sonsini in that deal and in the failed Acxiom/Silver Lake & ValueAct transaction. In both deals Wilson Sonsini represented the targets. So, I was doubly surprised that Wilson negotiated the same reverse termination fee structure in 3Com as it did in Acxiom. In both cases it provides the private equity buyer an absolute right to walk from the transaction if it pays a termination fee, a fee which is substantially reduced if the buyer walks due to the financing banks failure to fund committed debt financing. As a base-line matter, I was a bit put-off that in such an unstable credit market, any lawyer would advise their clients to agree to the reverse termination fee structure 3Com did. And it essentially means that the buyer will have a right to walk by paying the lower fee -- an excuse will always come that the credit could not come from.
But I was doubly surprised that this would come from Wilson. In the midst of negotiating 3Com and aware of the significant credit market problems, Wilson was also negotiating the termination of the Acxiom deal under the same fee structure, a fee structure agreed to before the August troubles. I cannot see how they would not at least point 3Com to the publicly available information about Acxiom and highlight the problems this structure creates and was creating for Acxiom. If so, I would also be surprised 3Com would still agree to these terms, particularly the staggered fee. I am still struggling to justify the logic here. Did Wilson merely take its last private equity deal off the shelf and push the auto-pilot button? I'd like to think other factors were at work, but I'm finding it hard to do. Hopefully, target lawyers in future private equity deals will avoid Wilson's path by and convince their clients to forgo this very risky structure.
And, as I outlined in my post yesterday, this is the most significant but clearly not the only problem with the legal terms of the 3Com deal negotiated by Wilson for its client.
Friday, September 28, 2007
On Wednesday Fremont General Corporation, the savings and loan and former sub-prime mortgage lender, announced that it has been advised by Mr. Gerald J. Ford that "he is not prepared to consummate the transactions contemplated by the Investment Agreement entered into on May 21, 2007 among the Company, FIL and an entity controlled by Mr. Ford on the terms set forth in that agreement." The Investment Agreement provides for the acquisition by an investor group led by Ford of a combination of approximately $80 million in exchangeable non-cumulative preferred stock of FIL and warrants to acquire additional common stock of Fremont. Fremont stated that the reason for Mr. Ford's new-found hesitance was "in light of certain developments pertaining to the Company and FIL." Well, that is helpful disclosure. But, I surmise that this could be another material adverse change case, and that is how it is being spun in the press.
Our starting point on these things, as always, is the MAC clause itself which is defined in the Investment Agreement as follows:
“Material Adverse Effect” means any material adverse effect on the retail deposit business or financial condition of the Company and its Subsidiaries taken as a whole; provided, however, that none of the following shall be deemed to constitute or shall be taken into account in determining whether there has been a “Material Adverse Effect”: any event, circumstance, change or effect arising out of or attributable to (a) any decrease in the market price of the Common Stock (excluding any event, circumstance, change or effect that is the basis for such decrease), (b) any changes in the United States or global economy or capital, financial or securities markets generally, including changes in interest or exchange rates, (c) any changes in general economic, legal, regulatory or political conditions in the geographic regions in which the Company and its Subsidiaries operate, (d) any events, circumstances, changes or effects arising from the consummation or anticipation of the transactions contemplated by this Agreement or the Sale Transactions or the announcement of the execution of this Agreement or the announcement of the Sale Transactions, (e) any events, circumstances, changes or effects arising from the compliance with the terms of, or the taking of any action required by, this Agreement, (f) any action taken by the Company or any of its Subsidiaries at the request or with the consent of the Investor, (g) any litigation brought or threatened by the stockholders of the Company arising out of or in connection with the existence, announcement or performance of this Agreement or the transactions contemplated hereby or the Sale Transactions, (h) changes in law, GAAP or applicable regulatory accounting requirements, or changes in interpretations thereof by any Governmental Entity, (i) any outbreak of major hostilities in which the United States is involved or any act of terrorism within the United States or directed against its facilities or citizens, wherever located, (j) earthquakes, hurricanes, floods or other natural disasters, (k) a failure by the Company to report earnings or revenue results in any quarter ending on or after the date hereof consistent with the Company’s historic earnings or revenue results in any previous fiscal quarter, including any failure to file with the Commission audited or unaudited financial statements for the year ended December 31, 2006 or any subsequent period, (l) any loss, liability or expense arising out of or relating to the contractual rights of third parties relating to the sale of residential mortgage loans prior to the date of this Agreement, or (m) any matter set forth in Section 1.1(a) of the Company Disclosure Schedule, except in the case of the foregoing clauses (i) and (j), to the extent such changes or developments referred to therein would reasonably be expected to have a materially disproportionate impact on the retail deposit business or financial condition of the Company and its Subsidiaries, taken as a whole, relative to other industry participants or enterprises (solely with respect to clause (i), located in the same geographic region as the Company and its Subsidiaries).
First off, read exclusion clause (m). As an initial matter, placing exclusions in the Disclosure Schedule from the MAC clause is a pet peeve of mine. Since disclosure schedules are not publicly disclosed this allows the parties to maintain these items as confidential. But the practice may in some cases violate the federal securities anti-fraud rules. This is because the merger agreement is considered by the SEC to be public disclosure; Fremont is therefore liable for material omissions -- and these non-disclosed items on the disclosure schedule may arise to that. Whether they do or not we don't know since we can't see them, but the fact that Fremont didn't want them disclosed is telling. Fremont's lawyers would do well to read this article which describes the SEC enforcement case against Titan Corp. on grounds of non-disclosure of items in the disclosure schedule.
More importantly, after exclusion (m) there is a qualifier for clauses (i) and (j). This qualifier states that these exclusions do not count: "except in the case of the foregoing clauses (i) and (j), to the extent such changes or developments referred to therein would reasonably be expected to have a materially disproportionate impact on the retail deposit business or financial condition of the Company and its Subsidiaries, taken as a whole, relative to other industry participants or enterprises (solely with respect to clause (i), located in the same geographic region as the Company and its Subsidiaries)." First, note that unlike SLM, here the lawyers negotiated a materiality qualifier to the requirement of disproportionality. Gold star for that one. But, now read clauses (i) and (j). These clauses deal with an outbreak of hostilities or natural disasters. It is hard to believe that the parties wanted these exclusions to be qualified by disproportionality. For example, under the clause as drafted, any earthquake that effected Fremont materially and disproportionally is still a MAC? It can't be.
This appears to be a mistake by the lawyers on the deal -- Skadden and Gibson, Dunn. Instead, the qualifier was likely meant to qualify clauses (c) and (d) which address industry events. This would be the standard qualifier to these exclusions; the ones where a disproportionality standard is typically applied. I didn't see any amendment correcting this "mistake". The result is to make the MAC much tighter than desired by Ford. Be careful out there folks -- these mistakes do matter, significantly.
Addendum: I haven't looked more particularly at the facts of the Frontier case, but note that this is a very tight MAC without a forward looking element and with wide exclusions, including an exemption from the MAC clause for a failure to meet projections and for a failure to file audited and unaudited financial reports. If Ford is indeed proclaiming a MAC, it will have to be an event which has already occurred and is particularly adverse and unique to Frontier to be sustained. Nonetheless, in its press release Frontier may be admitting that such an event has indeed occurred by its willingness to negotiate with Ford for new terms.
Of course, this all assumes that it is indeed the MAC clause upon which Ford is basing his claims that he is not required to close the transaction. Stay tuned.
Sunday, August 26, 2007
It is being reported that LeBoeuf, Lamb, Greene & MacRae LLP and Dewey Ballantine LLP are in advanced merger talks and that a deal could be announced as soon as tomorrow. Last year, Dewey walked away from an agreed combination with San Francisco-based Orrick, Herrington & Sutcliffe LLP.
LeBoeuf is particularly known for its Central European/Russian M&A practice led by Oleg Berger and Mark Banovich. Nonetheless, Dewey has the stronger M&A practice, though it has suffered of late from a number of departures including Michael Aiello to Weil, Gotshal & Manges.
Monday, August 20, 2007
RARE Hospitality International, Inc. announced on Friday that it will be acquired by Darden Restaurants, Inc. for $38.15 per share in cash in a transaction valued at approximately $1.4 billion. The acquisition will be effected via tender offer, showing yet again that the cash tender offer is reemerging as a transaction structure (see my post the Return of the Tender Offer). Darden is financing the acquisition through cash and newly committed credit facilities. And the deal is the latest in the super-hot M&A restaurant-chain deal sector.
A perusal of the merger agreement shows a rather standard industry agreement. RARE's main restaurant chain is LoneHorn Steakhouse, and so merger sub is called Surf & Turf Corp. -- the bounds of creativity in M&A. There is a top-up which is also fast becoming a standard procedure in cash tender offers. This top-up provision provides that so long as a majority of RARE’s shares are tendered in the offer, RARE will issue the remaining shares to put Darden over the 90% squeeze-out threshold. RARE's stock issuance here cannot be more than 19.9% of the target's outstanding shares due to stock exchange rules, and cannot exceed the authorized number of outstanding shares in RARE’s certificate of incorporation.
I looked for any new gloss on the Material Adverse Change clause to address current market conditions. There was nothing that appeared to address the particular situation, although any non-disproportionate "increase in the price of beef" is a MAC-clause trigger; apropos for a steakhouse chain. Finally, for those interested in topping Darden’s bid, the termination fee is $39.6 million. If another bidder makes a superior proposal, then under Section 5.02(b) of the merger agreement, RARE cannot terminate the agreement "unless concurrently with such termination the Company pays to Parent the Termination Fee and the Expenses payable pursuant to Section 6.06(b)". The only problem? Expenses is used repeatedly throughout the Agreement as a defined term everywhere except 6.06(b) -- which makes no references to Expenses or even expenses. In fact, it appears that nowhere does the agreement define Expenses. Transaction expenses can sometimes be 1-2% of additional deal value, a significant amount that any subsequent bidder must account for. So how much should a subsequent bidder budget here? Or to rephrase, what expenses must RARE pay if a higher bid emerges? And how can RARE terminate the deal to enter into an agreement with another bidder if RARE does not know which expenses it is so required to pay? Darden may also want similar certainty as to its reimbursed expenses, if any, in such a paradigm. Lots of questions in this ambiguity. Not the biggest mistake in the world, but Wachtell, attorneys for the buyer, and Alston & Bird, attorneys for the seller, both have incentives to fix this one.
Monday, June 11, 2007
Vice Chancellor Noble has issued an opinion in Metcap Securities LLC v. Pearl Senior Care Inc., 2007 WL 1498989 (Del. Ch., May 2007). The case concerns the perils of serving as deal counsel and highlights the potential problems with the common practice of having clients sign signature pages so that the deal can be completed in their absence.
The facts of the dispute are complicated and the opinion should be read in full to completely grasp the situation but sum into this: an entity with no assets of its own, named North American Senior Care, Inc. or NASC, was formed specifically to acquire a nursing home chain. It then retained an investment bank, Metcap Securities, and agreed to pay it a standard success fee upon completion of a transaction. NASC, along with two other acquiring entities, eventually entered into a merger agreement with a target company. Three months later, the parties agreed that the three acquiring entities would be exchanged for three other acquiring entities, who would assume the obligations of the original group of acquirers. The agreement initially required that the new group also assume Metcap's success fee. But according to the facts of the complaint, as summarized by Vice Chancellor Noble, this would soon change:
Late into the final evening of negotiation of the last set of amendments to the merger agreement, the two principals representing the original acquiring entities, who had previously delivered their signature pages to a fellow law partner, left the negotiations and went home. They gave him no instructions, limitations, or conditions on which to proceed during the negotiations. A few hours later, another partner, still negotiating the terms of the amendment, would agree to delete the merger agreement’s one reference to the financial advisor’s fee. The practical effect of this amendment was that the obligation to pay the success fee was neither assigned to nor assumed by the second group of acquirers.
Both Metcap and NASC brought suit for reformation. Metcap also brought several other claims related to its lost fee. In the part of relevance here, the Chancery Court denied a motion to dismiss NASC's cause of action to reform the contract. The Court stated:
The Complaint carefully and somewhat flimsily—but sufficiently—alleges facts that would support an inference—one that must be given in the “plaintiff-friendly” confines of Court of Chancery Rule 12(b)(6)—that, during the evening of November 20, Dickerson [deal-counsel] was somehow conflicted because of his role as “deal counsel” and the payment of his fees by Pearl (or its related entities) [Ed. Note: Pearl was the second acquirer and a defendant in the action].
Of particular note, the Court in footnote 71 continued:
The Complaint was carefully drafted with respect to Dickerson’s role. It alleges that he did not have the authority to bind NASC. It alleges that he was paid for some of his work by Pearl or its related entities. It alleges that he was “deal counsel,” but it provides no basis for gaining a full understanding of Dickerson’s role. Without an understanding of Dickerson’s actual role, it is difficult for the Court, within the confines imposed by Court of Chancery Rule 12(b)(6), to determine whether or not Dickerson had the authority to do what he did or, more importantly, whether Dickerson’s knowledge may be imputed to NASC. Because the Court must give NASC the benefit of any reasonable inference that can be drawn from the allegations of the Complaint, the Complaint must be read to suggest that Dickerson was somehow conflicted and that his conflicted status would make it improper or inequitable to attribute his conduct or his knowledge to NASC, even though the Complaint scrupulously avoids any such express allegation and that inference is far from the one most likely to be drawn from the allegations of the Complaint. Ultimately, Dickerson’s role will be a factual matter, one informed by an understanding of the ethics of the practice of law, and, if NASC has no more to offer than what has been set forth in its Complaint, its claim for reformation might fail not only because it is fairly charged with Dickerson’s knowledge, but also because it is bound by Dickerson’s conduct. NASC’s position must be something more than a whine that it did not like what its lawyer did during the final hours of negotiation of the Third Amendment. Parties to a transaction and their counsel must be able to rely—and to act accordingly—on the negotiating authority generally accorded transactional attorneys. This is especially true when the negotiations are ongoing and the principals have abandoned the negotiation field after leaving signature pages. Nothing in this Memorandum Opinion should be viewed as undercutting that dynamic. The result here is more the product of Court of Chancery Rule 12(b)(6) than it is of substantive law.
While the Court's language is comforting it still means that the case will proceed. And while the case is likely to be limited to its very complicated set of facts which I have only provided a flavor of here, it is a clear warning to lawyers of the general hazards of serving as deal counsel and the particular complications which can arise with having clients pre-sign agreements.