M & A Law Prof Blog

DG launches proxy contest in FDO

Last week Dollar General  started soliciting "Gold" proxies (like golden tickets?) from Family Dollar shareholders in its campaign to vote down to have FDO shareholders vote down the Dollar Tree deal and accept its tender for Family Dollar.  Dollar General is seeking proxies to vote against the Dollar Tree merger, against the transaction related compensation for managers, as well as against a proposal to adjourn the meeting.  

Why might management's adjournment proposal be important?  If it turns out that the merger vote is going against management, the ability of managers to adjourn a meeting and extend the voting gives managers more time to twist arms and convince shareholders to go their way is an extremely powerful tool.  Dollar General is seeking to take that tool away by forcing the meeting - and thus the voting - to end on date certain. 

Ultimately, the vote on the Dollar Tree merger agreement will be the critical point for Dollar General.  No surprise then that they are putting in effort to win a proxy fight.

-bjmq

Charter prepares for a proxy fight

So, rumors are flying that Charter will nominate its own slate for the Time Warner Cable board today.  This is all part of the ongoing effort by Charter to get the board of Time Warner Cable to the table to negotiate a sale of the corporation.  So far, TWC has said no and sat on its hands, as it's permitted to do.  There is no legal requirement that a fully informed board must depart from its corporate strategy to accept  an unsolicited offer, especially if the board believes it to be unwise. 

TWC hasn't followed the Airgas 'just say no' route - adopt a poison pill and rely on its staggered board to hold off an unwanted suitor.  It hasn't done this so far because frankly it can't.  TWC doesn't have a staggered board.  Its board is up for election every year.    Because TWC can't rely on a staggered board to give it the time to defeat a proposal by Charter, it's vulnerable to a proxy fight.  And without a staggered board, the poison pill isn't much of a defense.

And so no surprise that Charter's next move is the proxy contest.  Charter is seeking to replace TWC's entire board through a proxy contest.  If Charter were to win the contest, that would be a signal from TWC shareholders that they are in favor of a deal with Charter at $132.50.   The new board would face no obstacle to quickly getting a friendly deal done.  Of course, it's a long road between here and there.  Lots of things can happen.

Some have said, well it's possible that shareholders vote out the incumbent board and the new board comes in and does an "Airgas" - that is, the new board decides not to pursue a deal with Charter.  I find that scenario highly unlikely.  Why?  Well, when the short slate of three Air Products nominated directors entered the Airgas board room, the remaining board members were there and able to frame the questions and make all sorts of arguments why the Air Products offer was a bad idea for Airgas.  Those arguments ultimately won the day when the Air Products nominated directors sided with incumbent board members.  

If Charter were to succeed in its proxy contest, the board room atmosphere post-contest would be wholly different.  First, the entire board would be brand new.  There will be no one around the frame questions or argue against a Charter bid.   If Charter learned anything from Airgas, it's probably that they have thoroughly quizzed their nominees and they are convinced that all of them think the acquisition of TWC by Charter is a good idea already.   That's not to say as directors they won't seek to informed themselves before doing a deal, but where you starts affects where you end.

All this being said, I'm confident that Charter would be happier if the effect of the proxy contest were to force the incumbent board to the table to negotiate a friendly deal.

-bjmq

New DGCL 251(h) to eliminate vote in 2 step merger

According to Richards Layton & Finger, Delaware is in the process of amending the DGCL to add a new Sec. 251(h), the purpose of which will be to eliminate a required shareholder vote in the second step of a two-step acquisition:

Under new subsection 251(h), a vote of the target corporation’s stockholders would not be required to authorize the merger if: (1) the merger agreement expressly provides that the merger shall be governed by this new subsection and shall be effected as soon as practicable following the consummation of the offer described below; (2) a corporation consummates a tender or exchange offer for any and all of the outstanding stock of the target corporation on the terms provided in such merger agreement that would otherwise be entitled to vote on the adoption of the merger agreement; (3) following the consummation of the offer, the consummating corporation owns at least the percentage of the stock of the target corporation that otherwise would be required to adopt the merger agreement; (4) at the time the target corporation’s board of directors approves the merger agreement, no other party to the merger agreement is an “interested stockholder” (as defined in Section 203(c) of the DGCL) of the target corporation; (5) the corporation consummating the offer merges with the target corporation pursuant to such merger agreement; and (6) the outstanding shares of the target corporation not canceled in the merger are converted in the merger into the same amount and kind of consideration paid for shares in the offer.

Given the recent proliferation of top-up options, the back end shareholder vote has lost much of its kick, if it ever had any.  Really, by now if a target requires an actual back-end vote it's because it either doesn't have enough shares outstanding to permit a top-up option or there were just really bad lawyers working the deal.

-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

UK seeks binding say-on-pay rules

Apologies for the light blogging.  With summer and travel schedules, it's been slipping.  Back now.  So expect me more often.

That said, perhaps a "Shareholder Spring" for the UK?  It looks like the UK is going to take say-on-pay one step further and is now seeking binding shareholder votes.  Vince Cable, the UK's business secretary announced the move last week ago because the government believed that the non-binding votes weren't working.  By working, he meant that where shareholders voted "no", there was an expectation that boards would respond by reevaluating pay practices and adjusting downward.  In fact, that didn't happen and pay went up. Part of that might be traced to board recalcitrance, but I suspect a larger part can be traced to the fact that in the say-on-pay environment there are many more datapoints with respect to what peers are paid that it the rachet effect sends pay up as even responsible boards strive to pay in the top half of the range of selected peers.  From the Guide to Directors Pay:

 

Experience with the say-on-pay votes in the US has been pretty uniform -- shareholders vote them down.  Prof John Coates believes that the fact in the first year or two of implementation that such votes aloready get about 30% opposition is a sign that over time shareholders will turn to negative pay votes as a way to signal discontent to boards.  The UK experience suggests that even negative non-binding votes might not be enough for shareholders to really affect and influence board policy.  Perhaps binding votes are in our future as well?  In that case, best to pay attention to what is happening in the UK now.

-bjmq

Mobility's Change of Control Agreement

Footnoted.com is doing yeoman's work reading lots of corporate filings so you don't have to.  Most recent example is Motorola Mobility's recent filing of a Change of Control Agreement (exhibit to their 10-Q) just a couple of weeks ago in advance of the announcement of transaction.  MMI's CEO stands to do pretty well when the transaction with Google closes. According to Footnoted.com:

Diving into the proxy, the amount that Chairman and CEO Sanjay Jha stands to make is pretty eye-popping: over $90 million, although that number includes a $22 million gross-up for taxes — something that Jha and other Motorola executives apparently agreed to give up earlier this year.

Still, even without the tax gross-up (can I get one of those, please?), $68 million is plenty incentive to get this deal done.  It's worth remembering that Change of Control Agreements are vestiges of the good old days of the hostile takeover movement.  I know it's hard for people to believe this now, but these severance agreements that guarantee huge payouts to managers in the event of a sale were a good governance reform!  They made sense at the time, but things, I think, have changed.  Given the amount of stock and options now used as part of any compensation package, managers are much less likely to have negative knee-jerk responses to acquisition offers.  For the most part, managers probably no longer need the extra kick that many of these severance agreements give - especially given the large amounts of negative attention they can sometime attract.  Remember Home Depot?

-bjmq

Adventures in Shareholder Democracy

It's been an exciting couple of weeks on the proxy fight side.   Yesterday, Barnes & Noble announced the results of the proxy contest instigated by Ron Burkle of Yucaipa.  Management board members were returned and the dissidents lost (WSJ).  But here's the thing - management directors got 44% of the vote and Yucaipa's slate got only 39%.  OK, that's still a win for management under current voting rules for a company without a majority voting provision in its bylaws.  However, given that Riggio undoubtedly voted the 30% or so that he controls in his favor, the fact that management could only come back with 44% of the quorum (not the total shares outstanding) is pretty pathetic.   And Burkle doesn't off easy either - apparently Aletheia sat on the sidelines, not voting a large percentage of its stock (FT.com).   Turns out when Burkle's legal team was arguing at trial over the summer that they hadn't made an agreement - even a wink and a nod - with Aletheia that they were right! Sorry I ever doubted them.  But I bet you Burkle is wishing he might winked and nodded a bit more.

Over at Airgas, the parties are going to court next week to argue over the question of the validity of the bylaw amendment that calls for a shareholder meeting in January 2011.  Air Products won that vote.  Air Products was also successful in getting their slate of directors elected ousting three incumbent Airgas directors, including Peter McCausland, the CEO and Chairman.   Not but a couple of days later the Airgas rump board expanded its size by one and reappointed McCausland to the board.  Sure, I know, the board has the authority to  expand or decrease its size and that it's perfectly within its rights to reappoint McCausland.  But, c'mon. 

All in all, it's been a couple of interesting weeks on the proxy contest front.  I suspect that neither the Barnes & Noble fight nor the Airgas/Air Products contest are near over.  

-bjmq

Every vote counts

Apparently the voting in the B&N proxy fight between the Burkle and management camps is still too close to call (AP story) and voting closes tomorrow.  ISS has lined up with Burkle and the dissidents.  Glass Lewis, Egan Jones and Proxy Governance have all lined up with management. 

-bjmq

Next Steps in BKS Drama

I've been following developments in the Barnes & Noble/Burkle drama for a few months now.  I'll admit I was a little surprised when Burkle and BKS let an opportunity to settle the case fall away last week.  I figured that both sides would have been better off without a decision.  But, hey, I've been wrong before.   So where are we now? 

Yesterday, Burkle and BKS both filed proxy materials with the SEC (BKS filing here and Yucaipa filing here) and the contest for the three contested board seats is on.  BKS has a staggered board so only one-third of the board is up for a vote at any one time.  While Leonard Riggio will run for re-election to the board, Micheal Del Guidice and Lawrence Zilavy will not.  Is it any surprise that Del Giudice will not run for re-election? Although teh BKS board won its court case against Yucaipa to keep its shreaholder rights plan in place, Del Giudice was arguably the loser.  Although Strine ultimately concluded that Del Giudice acted in good faith, it can't help to have the following description of your Lead Independent Director in the record as you enter a proxy contest:

More controversial is the case of Michael Del Giudice. Del Giudice has had a high-profile career as a key staffer in New York politics. He and Riggio are Democrats, and Del Giudice admits that Riggio has regularly contributed, at Del Giudice’s request, to candidates that Del Giudice suggests.  For a political powerbroker, that kind of relationship is valuable. More importantly, Del Giudice’s day job is as the Chairman of Rockland Capital, which co-manages a fund called Midland Cogeneration Venture (“Midland”).  Midland is not a huge fund, being around $164 million in size. Riggio has made sizable investments totaling $4.8 million in Midland in the past, and recently committed $20 million over the next three years to another fund that Rockland manages, which is $275 million in size. Although Del Giudice has crafted a contractual provision that supposedly ensures that he does not directly profit personally from the monies attributable to Riggio’s investments, Del Giudice’s main occupation is running Rockland, which depends heavily on funds under management forits revenues. Indeed, it seems to me obvious that it is material to the success of Del Giudice’s fund that wealthy, prominent people like Riggio entrust their capital to it. The funds Riggio invests relative to the size of the Rockland funds, in my view cannot be viewed as immaterial. 

What makes Del Giudice notable is that he has been determined by the Barnes & Noble board to be independent under the strict NYSE rules that have existed since the Enron-WorldCom meltdown. I do not lightly ignore that determination, but on the limited record before me I cannot conclude that the business and political ties between Del Giudice and Riggio render Del Giudice independent of Riggio. What also makes this issue more piquant is that Del Giudice was the director selected by his colleagues to be the lead director of the Barnes & Noble board. [citations omitted]

Given the Vice Chancellor's conclusion that Del Giudice was not independent of Riggio, it would be hard for BKS to go into a proxy contest arguing that their Lead Independent Director was independent.  Ditto for Zilavy, Riggio's personal financial advisor, but he was admittedly already not an independent director.  So out they both go.  

Yesterday, they were replaced by two independent nominees, David Wilson and David Golden.  BKS' soliciting materials along with Wilson and Golden's bios can be found here.  Against them will be the Yucaipa slate, which includes Burkle, Stephen Bollenbach, and Michael McQuary (bios here).  Not surprisingly, Yucaipa discloses that should its directors win seats, they will immediately seek to be appointed to a special committee to seek out "strategic alternatives" for BKS - that's code for a sale of the company.  

The shareholder meeting is scheduled for Sept 28, so we'll continue to check in on this as it develops. 

-bjmq

[Apologies for not linking to the opinion last week when it came out when I posted about Strine's dig at corporate law geeks.  I was using Typepad's post-by-email function as I was in an undisclosed overseas location ... okay, on vacation in Spain.  Turns out the post-by-email function isn't all that good.  Sorry.  Below is a link to the opinion, care of Dealbook.]

Dealbook has posted Strine's Decision in Burkle's Lawsuit Against Barnes & Noble

Valero adopts Say-on-Pay Policy

It's officially a trend!  In response to a say-on-pay campaign Valero announced yesterday that it was adopting a 'say-on-pay' policy joining Pfizer.  Apparently shareholders at more than 110 companies are considering say-on-pay resolutions this proxy season.

The say on pay proposals, which have increased in number and support since they were first introduced in 2006, are fueled by public outrage over executives who got big bonuses “at the same time their companies were losing lots of money,” said Tim Brennan, chief financial officer of the Boston-based Unitarian Universalist Association, which sponsored the say on pay resolution that Valero shareholders approved in April.

“Valero wasn't selected because we thought there was something egregious about their structure,” Brennan said. “But as a big, visible company, it's a company that could set an example in best practices in corporate governance.”

-bjmq

Wachtell's 2009 Proxy Season Review and Look Ahead

...is available on the NY Law Journal's site, here.  

-bjmq

The Dog Bites: A True Story

Background

This Fall has been remarkable for private equity M&A stories, but yesterday perhaps the most remarkable one unfolded.  It began early in the day when United Rentals, Inc. announced that Cerberus Capital Management, L.P. had informed it that Cerberus was not prepared to proceed with the purchase of United Rentals.  United Rentals stated:

The Company noted that Cerberus has specifically confirmed that there has not been a material adverse change at United Rentals. United Rentals views this repudiation by Cerberus as unwarranted and incompatible with the covenants of the merger agreement. Having fulfilled all the closing conditions under the merger agreement, United Rentals is prepared to complete the transaction promptly.

The Company also pointed out that Cerberus has received binding commitment letters from its banks to provide financing for the transaction through required bridge facilities. The Company currently believes that Cerberus’ banks stand ready to fulfill their contractual obligations.

United Rentals also announced that it had retained boutique litigation firm Orans, Elsen & Lupert LLP to represent it in this matter on potential litigation.  Simpson Thacher represented United Rentals in the transaction but is likely conflicted out from representing United Rentals in any litigation due to the involvement of banks represented by Simpson in financing the transaction and the banks' likely involvement in any litigation arising from this matter (more on their liability later).  United Rentals later that day filed a Form 8-K attaching three letters traded between the parties on this matter.  Cerberus's last letter sent today really says it all and is worth setting out in full: 

Dear Mr. Schwed:

We are writing in connection with the above-captioned Agreement. As you know, as part of the negotiations of the Agreement and the ancillary documentation, the parties agreed that our maximum liability in the event that we elected not to consummate the transaction would be payment of the Parent Termination Fee (as defined in the Agreement) in the amount of $100 million. This aspect of the transaction is memorialized in, among other places, Section 8.2(e) of the Agreement, the final sentence of which reads as follows:

“In no event, whether or not this Agreement has been terminated pursuant to any provision hereof, shall Parent, Merger Sub, Guarantor or the Parent Related Entities, either individually or in the aggregate, be subject to any liability in excess of the Parent Termination Fee [$100 Million] for any or all losses or damages relating to or arising out of this Agreement or the transactions contemplated by this Agreement, including breaches by Parent or Merger Sub of any representations, warranties, covenants or agreements contained in this Agreement, and in no event shall the Company seek equitable relief or seek to recover any money damages in excess of such amount from Parent, Merger Sub, Guarantor or any Parent Related Party or any of their respective Representatives.”

In light of the foregoing, and after giving the matter careful consideration, this is to advise that Parent and Merger Sub are not prepared to proceed with the acquisition of URI on the terms contemplated by the Agreement.

Given this position and the rights and obligations of the parties under the Agreement and the ancillary documentation, we see two paths forward. If URI is interested in exploring a transaction between our companies on revised terms, we would be happy to engage in a constructive dialogue with you and representatives of your choosing at your earliest convenience. We could be available to meet in person or telephonically with URI and its representatives for this purpose immediately. In order to pursue this path, we would need to reach resolution on revised terms within a matter of days. If, however, you are not interested in pursuing such discussions, we are prepared to make arrangements, subject to appropriate documentation, for the payment of the $100 million Parent Termination Fee. We look forward to your response.

We should all save this one for our files.   

Cerberus's Gumption

Back in August when I first warned in my post, Private Equity's Option to Buy, on the dangers of reverse termination fees, I speculated that it would be a long Fall as private equity firms decided whether or not to walk on deals that were no longer as economically viable and which had reverse termination fees.  I further theorized that one of the biggest barriers to the exercise of these provisions was the reputational issue.  Private equity firms would be reluctant to break their commitments due to the adverse impact on their reputational capital and future deal stream.  This proved true throughout the Fall as time and again in Acxiom, Harman, SLM, etc. private equity firms claimed material adverse change events to exit deals refusing to simply invoke the reverse termination fee structure and be seen as repudiating their agreements.  I believe this was due to the reputational issue (not to mention the need to avoid paying these fees). 

Cerberus is completely different.  Nowhere is Cerberus claiming a material adverse change.  Cerberus is straight out stating they are exercising their option to pay the reverse termination fee, breaking their contractual commitment and repudiating their agreement.  Cerberus has decided that the reputational impact of their actions is overcome in this instance by the economics.  And this is now the second deal, after Affiliated Computer Services, that Cerberus has walked on in the past month.  The dog not only bites, it bites hard.  Any target dealing with them in the future would now be irresponsible to agree to a reverse termination provision.  Nonetheless, Cerberus is smart money; clearly, they think walking from this deal outweighs any adverse impact on their ability to agree to and complete future transactions. 

It Gets Complicated 

It is actually not that simple, though.  United Rental's lawyers did not negotiate a straight reverse termination fee.  Instead, and unlike in Harman for example, there is a specific performance clause in the merger agreement. Section 9.10 of the United Rentals/Cerberus merger agreement states:

The parties agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. Accordingly . . . . (b) the Company shall be entitled to seek an injunction or injunctions to prevent breaches of this Agreement by Parent or Merger Sub or to enforce specifically the terms and provisions of this Agreement and the Guarantee to prevent breaches of or enforce compliance with those covenants of Parent or Merger Sub that require Parent or Merger Sub to (i) use its reasonable best efforts to obtain the Financing and satisfy the conditions to closing set forth in Section 7.1 and Section 7.3, including the covenants set forth in Section 6.8 and Section 6.10 and (ii) consummate the transactions contemplated by this Agreement, if in the case of this clause (ii), the Financing (or Alternative Financing obtained in accordance with Section 6.10(b)) is available to be drawn down by Parent pursuant to the terms of the applicable agreements but is not so drawn down solely as a result of Parent or Merger Sub refusing to do so in breach of this Agreement. The provisions of this Section 9.10 shall be subject in all respects to Section 8.2(e) hereof, which Section shall govern the rights and obligations of the parties hereto (and of the Guarantor, the Parent Related Parties, and the Company Related Parties) under the circumstances provided therein.

If this provision were viewed in isolation, then I would predict that United Rentals will shortly sue in Delaware to force Cerberus to specifically perform and enforce its financing letters.  Cerberus would then defend itself by claiming that financing is not available to be drawn under the commitment letters and implead the financing banks (akin to what is going on with Genesco/Finish Line/UBS).  In short, Cerberus would use the banks as cover to walk from the agreement.  And based solely upon this provision, United Rentals would have a very good case for specific performance, provided that the banks were still required to finance the deal under their commitment letters.  Something United Rentals claims they are indeed required to do. 

But there is a big catch here.  Remember Cerberus's letter up above?  It is worth repeating now that the last sentence of Section 8.1(e) of the merger agreement states:

In no event, whether or not this Agreement has been terminated pursuant to any provision hereof, shall Parent, Merger Sub, Guarantor or the Parent Related Parties, either individually or in the aggregate, be subject to any liability in excess of the Parent Termination Fee for any or all losses or damages relating to or arising out of this Agreement or the transactions contemplated by this Agreement, including breaches by Parent or Merger Sub of any representations, warranties, covenants or agreements contained in this Agreement, and in no event shall the Company seek equitable relief or seek to recover any money damages in excess of such amount from Parent, Merger Sub, Guarantor or any Parent Related Party or any of their respective Representatives.

Note the underlined/bold language:  under Section 8.1(e) equitable relief is specifically subject to the $100,000,000 cap.  As every first year law student knows, specific performance is a type of equitable relief.  Furthermore, Section 9.10 is specifically made subject to 8.1(e) which in fact begins with the clause "Notwithstanding anything to the contrary in this Agreement, including with respect to Sections 7.4 and 9.10 . . . ."

Thus, Cerberus is almost certainly going to argue that Section 8.1(e) qualifies Section 9.10 and that specific performance of the merger agreement can only be limited to $100,000,000.  Conversely, United Rentals is going to argue that "equitable relief" here refers to other types of equitable relief than set out in Section 9.10 and that to read Section 8.1(e) any other way would render Section 9.10 meaningless. United Rentals will also argue that specific performance of the financing commitment letters here is at no cost to Cerberus and so the limit is not even met. 

So, who has the better argument?  First, the contract is vague enough that the Delaware Chancery Court will likely have to look at parol evidence -- evidence outside the contract to make a determination.  What this evidence will show is unknown.  Nonetheless, I think United Rentals still has the better argument.  Why negotiate Section 9.10 unless it was otherwise required to make Cerberus enforce its financing commitment letters?  To read the contract Cerberus's way is to render the clause meaningless.  This goes against basic rules of contract interpretation. And the qualification at the beginning of Section 8.1(e) "Notwithstanding anything to the contrary in this Agreement, including with respect to Sections 7.4 and 9.10 . . . ." can be argued to only qualify the first sentence not the last sentence referred to above.  Ultimately, Gary Horowitz at Simpson who represented United Rentals is a smart guy -- I can't believe he would have negotiated with an understanding any other way. 

The Bottom-Line

The bottom-line is that this is almost certainly going to litigation in Delaware.  Because of the specter and claims that United Rental will make for specific performance, Cerberus will almost certainly then implead the financing banks.  And as I wrote above, it appears that right now, based on public information, United Rentals has the better though not certain argument.  Of course, even if they can gain specific performance, the terms of the bank financing may still allow Cerberus to walk.  That is, the financing letters may provide the banks an out -- an out they almost certainly will claim they can exercise here.  I don't have the copies of the letters and so can't make any assessment of their ability to walk as of now, though United Rentals is claiming in their press release above that the banks are still required under their letters to finance this transaction. 

Ultimately, Cerberus is positioning for a renegotiation.  But unlike SLM and Harman, Cerberus has the real specter of having to do more than pay a reverse termination fee:  they may actually be required to complete the transaction.  Like the Accredited Home Lenders/Lone Star MAC litigation, this is likely to push them more forcefully to negotiate a price at which they will acquire the company.  United Rentals is also likely to negotiate in order to eliminate the uncertainty and move on with a transaction.  But, they are in a much stronger position than SLM which only has the reverse termination fee as leverage.  M&A lawyers representing targets should note the difference to their clients before they agree to only a reverse termination fee.  In United Rental's case, though, it still likely means a settlement as with most MAC cases.  The uncertainties I outline above likely make a trial too risky for United Rental's directors to contemplate provided Cerberus offers an adequate amount of consideration. 

Coda on Possible Securities Fraud Claims

According to one of Cerberus's letters filed today, Cerberus requested on August 29 to renegotiate the transaction. They also expressed concerns in that letter that their comments on United Rentals merger proxy weren’t taken.  United Rentals responded that they were politely considered and disregarded.  It's a good bet that the comments disregarded were Cerberus requesting United Rentals to disclose in the proxy statement that United Rentals cannot get specific performance and United Rentals ignoring them.  To say the least it was a bit risky for Untied Rentals to mail a proxy statement that does not disclose in the history of the transaction that the other side is trying to renegotiate the deal, and has specifically disagreed with your disclosure as to specific performance rights.  Here come the plaintiff's lawyers. 

Washington Group International Postpones Shareholder Meeting

Washington Group International today announced that it had postponed its shareholder meeting from today until November 9, 2007.   The meeting is being held to vote on the proposed acquisition of Washington Group by URS Corporation. In WGI's words, "[t]he meeting has been postponed to allow for the solicitation of additional votes in favor of the transaction in light of the fact that the transaction has, to date, received insufficient votes for approval."

We've now seen at least two postponements of shareholder meetings (Topps and here) since Strine's recent decision in Mercier, et al. v. Inter-Tel.  Inter-tel permitted a board to to post-pone its shareholder meeting itself in order to gain time for stockholders to approve a proposed takeover transaction.  Strine permitted this postponement despite the almost certain defeat of the takeover proposal if the meeting were not postponed (for a more thorough explanation of Inter-tel and its meaning for Blasius review see my post here).  In both Topps and the Inter-tel deals the maneuver was ultimately successful and the deals approved.  I expect it to be the same here.  And again the proxy advisory firms are split -- Glass Lewis, Proxy Governance, and Egan-Jones -- have recommended that in favor of the transaction. Institutional Shareholder Services* -- has recommended against.  Someone would write a paper on this phenomenon and the reasons for it. 

NB. The post-ponement here is different than the successful strategies used by Bioenvision and OSI to gain approval of their takeovers -- to instead adjourn the shareholder meeting.  For an explanation of the two different strategies and the pros and cons of each see my post here.

3Com -- The Proxy Statement

3Com filed its preliminary proxy statement yesterday.  After having read through it I still can't determine whether the deal is conditioned on clearance by CFIUS under the Exon-Florio amendment (for more on this see here).  In the description to the merger section 3Com states that the merger is conditioned upon: 

any waiting period (and any extension thereof) under the HSR Act shall have expired or been terminated, any waiting period (and any extension thereof) under the antitrust laws of various other jurisdictions shall have expired or been terminated, and clearances, consents, approvals, orders and authorizations from certain government authorities shall have been obtained . . . .

The only other disclosure on this matter in the proxy is this:

The parties have agreed to make a joint voluntary filing of the transaction with the Committee on Foreign Investment in the United States (“CFIUS”).

Except for these filings and the filing of a certificate of merger in Delaware at or before the effective date of the Merger, we are unaware of any material federal, state or foreign regulatory requirements or approvals required for the execution of the Merger Agreement or completion of the Merger.

This would imply that, under the above condition, Exon-Florio clearance is indeed required for the merger to go through.  But my conclusion is only an inference.  Given the controversy this deal is generating and congressional interest on this point, I can't believe that 3Com's counsel Wilson, Sonsini would draft such intentionally non-descript disclosure.  I do believe that this failure is a material omission under the federal securities laws and I hope the SEC reviews the proxy and comments upon this forcing 3Com to clairfy the issue  (Note well shareholder class action attorneys who are currently suing 3Com in Delaware and Massachusetts).  I am suspect of the congressional interest in this deal and the hostility Congress sometimes displays to foreign investment, but I believe 3Com is not helping its case here. 

Bioenvision and DGCL 231(c)

When I posted on Bioenvision last week, the Bioenvision board had adjourned its shareholder meeting to approve a merger with Genzyme by one day; a meeting which had just been held.  Bioenvision did so because only 47% of the Bioenvision shareholders had voted in favor of the transaction.  I remarked at the time that:

The additional day adjournment was a pure Board maneuver to buy time for stockholders to vote in favor or change their votes in favor of the deal. . . . . The next day the Bioenvision stockholder meeting was again adjourned a second time to Oct 10 at the Friday meeting for the proxy tabulator to calculate the exact shareholder vote.  I'm a bit puzzled by this maneuver and find it suspect, even bizarre, given the situation.  But time will tell.

Things got a bit odder from there.  On Tuesday, Bioenvision filed a petition under DGCL 231(c) with the Delaware Chancery Court to reopen the shareholder voting.  Bioenvision claimed this was necessary because:

[M]ultiple errors resulted in the potential disenfranchisement of Bioenvision shareholders. First, the parties received a report that mistakenly stated that Bioenvision was approximately 935,635 votes short of the majority. Second, the parties fully expected SG to vote 1.3 million shares in favor of the Merger and were unaware at the time SG submitted its ballot that it was able to only vote 916,000 shares in favor of the Merger – again, far fewer than expected. Third, the proxy from the JPMorgan Client voting in favor of the Merger was intended to be submitted prior to the closing of the polls. In fact, the JPMorgan Client communicated to Bioenvision that it would be voting its entire position in favor of the Merger and instructed JPMorgan to do so. As already noted, at 11:15 am on October 5, JPMorgan called Broadridge with this voting instruction, which Broadridge asked JPMorgan to confirm in writing via facsimile. At some point between 11:15 am and 11:30 am, JPMorgan faxed written confirmation to Broadridge. AST did not receive a transmission of the JPMorgan Client’s vote from Broadridge until 12:12 pm. Fourth, having mistakenly believed that the vote was secured, based on inaccurate information, the polls were prematurely closed.

The result of these errors was that instead of passing by 55% of the shareholder vote, Bioenvision came up short by 0.43%.  I'm pretty sure most of you never learned of DGCL 231(c) in corporations class.  It states:

No ballot, proxies or votes nor any revocations thereof or changes thereto, shall be accepted by the inspectors after the closing of the polls unless the Court of Chancery upon application by a stockholder shall determine otherwise.

One day after the petition was filed Chancellor Chandler issued an order without opinion granting Bioenvision's request.  Under the Chancery Court's order, Bioenvision will reconvene the special meeting of stockholders on October 22, 2007 for all Bioenvision stockholders as of the record date of September 5, 2007 to again vote on the transaction. 

I'm not sure what to make of all this.  I think the decision of the Chancery Court was the right one, but given Bioenvision's previous postponements, the prior tender offer by Genzyme which only yielded 15.3% of the common stock, and the opposition to the deal by a number of shareholders and proxy services, I am still a little unsettled by it.  Nonetheless, if the merger would actually have been approved I do still think it is the right decision. 

Bioenvision: Pulling a Topps or an OSI?

Last week Bioenvision engaged in similar maneuvers as OSI Restaurant Group took earlier this Spring in attempting to gain stockholder approval of Bioenvision's troubled deal to be acquired by Genzyme.  The Bioenvision board convened the meeting on Oct. 4 and then promptly obtained a shareholder vote to adjourn the meeting to the next day on Friday, Oct 5 (here is the similarity with OSI which did a similar thing).  The reason why?  Only 47% of the Bioenvision shareholders had voted in favor of the transaction.  The additional day adjournment was a pure Board maneuver to buy time for stockholders to vote in favor or change their votes in favor of the deal.  Under Delaware law Bioenvision needs an absolute 50% majority to approve the transaction.  And as a technical matter, this is different than what Topps did.  The Topps Board relied on Strine's recent decision in Mercier, et al. v. Inter-Tel to post-pone its shareholder meeting itself in order to (successfully) gain time for stockholders to approve its transaction.  This is different than Bioenvision where the stockholders themselves voted to adjourn the meeting.  Accordingly, Bioenvision's maneuver was less egregious than Topps's in that the shareholders here acted under Bioenvision's by-laws and this was not an act of the Board.  To explain why these companies took these different tacts start with the by-law provision which Bioenvision relied upon:

1.7 Adjournments. Any meeting of stockholders may be adjourned to any other time and to any other place at which a meeting of stockholders may be held under these Amended and Restated Bylaws by the stockholders present or represented at the meeting and entitled to vote, although less than a quorum, or, if no stockholder is present, by any officer entitled to preside at or to act as Secretary of such meeting. It shall not be necessary to notify any stockholder of any adjournment of less than 30 days if the time and place of the adjourned meeting are announced at the meeting at which adjournment is taken, unless after the adjournment a new record date is fixed for the adjourned meeting. At the adjourned meeting, the Corporation may transact any business which might have been transacted at the original meeting.

This is a rather flexible version of this by-law.  Compare this with the Topps's by-laws which contain no provision for shareholder adjournment of meetings except in the absence of a quorum.  And since the Delaware General Corporation Law contains no default rule as to how to handle adjournments outside the no quorum context, Topps was left with some uncertainty as to how to go this route and in particular the required vote to adjourn the meeting (i.e., absolute majority or majority of quorum, etc.).  Topps attempted to address this in their proxy statement by including an item that:

To approve the adjournment of the special meeting for, among other things, the solicitation of additional proxies in the event that there are not sufficient votes at the time of the special meeting to approve and adopt the Merger Agreement and the transactions contemplated thereby, including the merger . . . .

Nonetheless, the uncertainty on the threshold vote required to adjourn may explain why Topps opted for the more problematical option of the Board post-poning this meeting rather than the stockholders.  I say problematical because post-Mercier these decisions are still subject to a higher standard of Blasius review under Delaware law for these Board-initiated postponements albeit with wide latitude under the specific holding of the Mercier opinion.  In contrast, the Bioenvision postponement was a simple exercise of discretion under the by-laws. 

Accordingly, M&A lawyers conducting target takeover reviews would be well advised to revise their client's by-laws to include a provision similar to one in Bioenvision's by-laws to provide their boards with maximum latitude to protect agreed deals and avoid a Mercier problem.  I know, this goes against my general pro-stockholder stance but still, this is the way it works.   

The Bioenvision stockholder meeting was again adjourned to Oct 10 at the Friday meeting for the proxy tabulator to calculate the exact shareholder vote.  I'm a bit puzzled by this maneuver and find it suspect, even bizarre, given the situation.  But time will tell. 

Topps's Predictable Postponement

Earlier this week Topps announced that it would postpone the special meeting of Topps’ stockholders to consider and vote on the proposed merger agreement with affiliates of The Tornante Company LLC and Madison Dearborn Partners, LLC  to Wednesday, September 19, 2007.  The meeting was to have been held on August 30.  (NB. the postponement is 20 days so as to avoid problems with the Delaware long form merger statute (DGCL 251(c)) which requires twenty days notice prior to the date of the meeting.)

In the press release, Topps disclosed its belief that the merger was likely be voted down if the meeting was held on August 30. Topps also justified delaying the meeting by stating that:

the Executive Committee believes that stockholders should have the opportunity to consider the fact that Upper Deck has very recently withdrawn its tender offer and ceased negotiating with Topps to reach a consensual agreement, and that no other bidder has emerged to acquire Topps. In addition, as a result of the developments with Upper Deck, Topps would like additional time to communicate with investors about the proposed $9.75 all cash merger with Tornante-MDP . . . .Finally, given the recent turmoil in the credit markets and the impact that this turmoil may have on alternatives to the merger (including alternatives proposed by Crescendo Partners), Topps believes stockholders should be provided with additional time to consider whether to vote in favor the transaction.

The postponement was not a surprise.  When VC Strine's issued his decision earlier this month in Mercier, et al. v. Inter-Tel, upholding the Inter-Tel's board's decision to postpone a shareholder meeting under certain defeat, I predicted that postponement of the shareholder meeting would now be a tool more extensively utilized by boards to attempt to salvage troubled deals and permit arbitrageurs to exercise greater influence on M&A deals.   But, in Topps's case they have kept the record date at August 10, so that arbs will not be able to influence the outcome as much; a practice I hope becomes common in these situations.  This is particularly true given the posture of the Topps deal; the stock is now trading well below the price it was when the Upper Deck offer was pending and the prevailing arb position is more likely short because of it (though this is speculation from a lawyer not an arb, if anyone has more concrete information please let me know).   

I haven't had time of late to write more generally on the Topps deal.  But, it is hard not to blame the Topps board here.  The Topps board has been heavily criticized by its shareholders for accepting the Tornante bid and for undue management influence in this process.  This made resistance to the Upper Deck bid appear illegitimate in many shareholders eyes, even if Topps was right and Upper Deck's bid was merely an illusory one made by a competitor to obtain confidential information.    With the Upper Deck bid withdrawn, the Topps board is now locked in a vicious fight with the Crescendo Partners-led The Committee to Enhance Topps to obtain Topps shareholder approval.  But with three proxy advising firms, including ISS, now recommending against the transaction, Topps still has a long way to go.  By the way, the proxy letters going back and forth between the parties are fantastic -- check them out here. 

The Battle for Topps

The battle for Topps Company, Inc. continues to heat up.  On May 24, 2007, the company announced that it had received a $416 million offer from its rival, The Upper Deck Company, to acquire Topps for a price of $10.75 per share.  Topps currently has an agreement to be acquired by a group consisting of The Tornante Company LLC and Madison Dearborn Partners, LLC for $9.75 per share in cash.  The Tornante Company is headed by former Disney CEO Michael Eisner.

Last week, Deal Book reported that the hedge fund Crescendo Partners, owner of 6.6% of Topps, was alleging that certain Topps board members have conflicts of interest that prevent the company from negotiating in good faith with, Upper Deck.  Deal Book reported that "[i]n a letter sent to the company’s board of directors, a Crescendo Partners managing director Arnaud Ajdler, who is also a Topps board member, said the chief executive of Topps, Arthur Shorin, “does not want to see the company started by his father and uncles fall into the hands of a longtime rival.”

Crescendo today sent a second letter to the Topps board which states in part:

Finally, in your communications, you like to repeat that Crescendo wants to take over Topps without paying stockholders for their shares. Once again, you are misleading your stockholders. When a buyer wants to take a company private, as Mr. Eisner and Madison Dearborn are attempting to do, the buyer pays stockholders a premium for their shares. While this premium is typically 20 to 30%, you have approved a transaction that would pay stockholders a meager 3% premium and a significant discount to where the shares are currently trading. As you well know, Crescendo is NOT trying to take the Company private. If the ill-advised Eisner merger is voted down, Crescendo will ask its fellow stockholders, the true owners of Topps, to replace seven of the incumbent directors on the Board with a new slate. This well-qualified slate is committed to taking all necessary actions to improve the company's capital structure and operations for the benefit of ALL the stockholders. As detailed in our proxy statement, we believe that the Company could be worth conservatively between $16 and $18 per share if managed properly.

This is yet another example of the increasing potential for conflict between private equity and hedge funds as hedge funds emerge as activist investors in search of extraordinary returns and the private equity bubble rages.  But more immediately, the Topps Board now has a competing bid and a hostile proxy contest on its hands formented by one of its own members.  Stay-tuned. 

The Bloomin' Onion (Part III)

OSI Restaurant Partners, Inc., owner of the Outback Steakhouse and Cheeseburger in Paradise restaurant chains, today announced that it agreed to an increased offer from a consortium led by Bain Capital Partners, LLC and Catterton Management Company, LLC.  The buy-out group will now pay $41.15 per share in cash up from $40.00 per share.  OSI's founders who are part of the acquiring group have agreed to receive only $40 per share for their stakes.  Bloomberg reports that many shareholders are likely to still view the consideration as insufficient, but that analysts believe the raise should be enough to obtain necessary shareholder approval.

In connection with the new agreement, OSI today also postponed for the third time to May 25, 2007 its shareholder meeting to consider the proposal.  It was supposed to be held today.  I've blogged before about the perils of management-led buy-outs and the OSI one in particular (see here and here).  OSI's CEO, CFO, COO and Chief Legal Counsel as well as its founders are all participating in the buy-out and have exercised what appears to be inappropriate influence and activity in this transaction.  The postponement of the meeting for three times in order to make sure that the proposal has sufficient votes speaks to these issues.    

NB.  If the transaction were structured as a tender offer, the payment of differential consideration here to the OSI founders would not be permitted due to the requirements of the all-holders/best price rule.  This rule does not apply to mergers.  Hopefully, if the SEC ever decides to update its tender offer and merger rules for the modern age, it will end this no longer justified disparity by applying the rule to both structures or neither.  For more on this and other no longer jusitifed SEC merger/tender offer distinctions, see my soon to be published article, The SEC and the Failure of Federal Takeover Regulation.      

Lessons from the Motorola/Carl Icahn Proxy Contest

Theodore Mirvis of Wachtell, Lipton, Rosen & Katz has posted to the Harvard Law School Corporate Governance Blog Wachtell's memo on lessons from the Motorola/Carl Icahn proxy contest.  Icahn, who owns 2.9% of Motorola, recently lost a short-slate proxy contest for one seat on the Motorola board despite obtaining the endorsement of Institutional Shareholder Services.  Since this is Wachtell, the lessons are for targeted corporations, not insurgent shareholders.