M & A Law Prof Blog

Does Revlon Matter?

A star-studded line-up of law profs got together to try to answer this question.  Does Revlon Matter? An Empirical  and Theoretical Study (Cain, Davidoff-Solomon, Griffith, and Jackson) recently posted to SSRN.  Since it came down in 1986, many have tried to make Revlon into more than it was. Revlon was and is a Unocal case, a preliminary inquiry into the question of board motivation in the context of a sale of control. Absent evidence of conflict, courts will grant boards the presumption of business judgment when deciding to sell control (see e.g. QVC).  In any event, Cain et al ask whether notwithstanding Revlon's limited reach if it has an impact  on the way boards negotiate sales of control or structure deals. They conclude it does. 

Abstract: We empirically examine whether and how the doctrine of enhanced judicial scrutiny that emerged from Revlon and its progeny actually affects M&A transactions. Combining hand-coding and machine-learning techniques, we assemble data from the proxy statements of publicly announced mergers over a fifteen year period, 2003-2017, ultimately assembling a dataset of 1,913 unique transactions. Of these, 1,167 transactions are subject to the Revlon standard, and 553 are not. After subjecting this sample to empirical analysis, our results show that Revlon does indeed matter for companies incorporated in Delaware. We find that for Delaware Revlon deals are more intensely negotiated, involve more bidders, and result in higher transaction premiums than non-Revlon deals. However, these results do not hold for target companies incorporated in other jurisdictions that have adopted the Revlon doctrine.

Our results shed light on the implications of the current state of uncertainty surrounding Revlon and provide some direction for courts going forward. We theorize that Revlon is a monitoring standard, the effectiveness of which depends upon the judiciary’s credible commitment to intervene in biased transactions. The precise contours of the doctrine are unimportant provided the judiciary retains a substantive avenue for intervention. Recent Delaware decisions in C&J and Corwin have been criticized for overly restricting Revlon, but we suggest that such concerns are overstated so long as Delaware judges continue to monitor the substance of transactions. Thus, in applying these decisions Delaware judges should focus not on procedural aspects but the substantive component of transactions which Revlon initially sought to regulate.

-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

Canadians reconsider the pill

There was news from up North late last week.  The Canadians are considering some adjustments in their current approach to the poison pill.  Presently, pills are permitted only as temporary devices that be held in place for only so long as to delay a hostile bid so that a target board can educate its shareholders and perhaps put together some sort of alternate strategy or transaction.   Let's call the Canadian approach to rights plans the Interco pill.  In general, Canadian approaches to takeover defenses are very much in line with Chancellor Allen approach in Interco. That is to say, in the face of an unwanted offer, the board should be motivated to either educate the shareholders of the correctness of the board's position or look to develop an acceptable alternative for shareholders.  To the extent boards deploy takeover defenses they should facilitate the ability of the board to engage in either education or in increasing value for shareholders. 

The draft amendments (here) to their rules on shareholder rights plans intend to make a number of subtle, but important changes in approach that nudge them closer to a US styled approach to poison pills. The amendment require approval of a majority of the disinterested shareholders withing 90 days of the pill being adopted.  Any material amendments to the rights plan will require an additional shareholder vote. Then, in order for a board to keep a pill in place, the board will have to go back to shareholders annually to seek approval.  Finally, a majority of disinterested shareholders could vote to terminate the rights plan at any time.

This new draft approach is a step back from the previous Canadian approach, which involved a regulator in the provincial securities regulator making a substantive determination about the reasonableness of director actions to keep a pill in place.  Guided by their Interco-like principles, the question for Canadian regulators was not if a pill should remain in place, but when it should be pulled.  Now, that may change.  Of course, this isn't necessarily a bad thing.  Nor should it necessarily be interpreted as moving towards an American (U.S.) styled approach to pills.  Up in Canada undere the proposed pill regime, disinterested shareholders will have plenty to say about whether or not a pill is permitted to remain in place.  Rather than make arguments to a regulator, boards will be required to make their case directly to the shareholders if they want to keep pills in place.  That's not a bad thing.

-bjmq

 

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

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

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

As a result, Gibson advises that

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

MAW

UK Takeover Guide

Skadden has just released their annual overview of the UK takeover regime.  It's a good read and at 44 pages is just long enough for the train ride home.  Get it here.

-bjmq

TransUnion to be sold by Pritzkers

TransUnion, of Smith v Van Gorkom fame, is to be sold by the Pritzker family and Madison Dearborn Partners to Advent International and Goldman Sachs for $3 billion.  This sale will mark the exit of the Pritzker's from TransUnion.  

Somewhere ... a corporate law geek just shed a tear.

-bjmq

Validus - Transatlantic bylaw litigation

Validus' efforts to acquire Transatlantic Holdings have taken another turn.  When we last checked in on this hostile acquisition attempt, we found out that Chancellor Strine is a fan of Hillbilly Handfishin'.  Oh, and the Chancellor also ruled on the appropriateness of standstill provisions in confidentiality provisions, deal protections and fiduciary outs (In re Transatlantic Holdings).  It's worth reading.

Now, we have  a new turn.  Validus has put forward its own directors in a proxy contest.  In addition to asking shareholder to vote for its three nominees adn to oust the current directors, Validus is asking for shareholders to vote on an amendment to Transatlantic's bylaws.  The bylaw change would permit the shareholders to set the number of directors on the board.  By doing so, it would prohibit the incumbent board from increasing the size of the board and thereby maintain control.  OK, all well and good.

But, Transatlantic has filed a suit against Validus seeking a declatory ruling from the court that Validus' proposed bylaw amendment is illegal.  Specifically, Transatlantic's certificate of incorporation reads:

Article Fifth, para 1: The number of directors of the Corporation shall be such as from time to time shall be fixed solely by the Board of Directors. 

The Transatlantic board is arguing that only the board has the right to set the size of the board, and that an effort by shareholders to set the number of directors is contrary to the articles and thus not permisssible.  In that regard, the directors have the better argument.  Of course, if the incumbent board were simply to increase its size for the sole purpose of thwarting outsiders from obtaining control via a proxy contest, that would raise all sorts of Blasius-related issues.  For that reason, this case is an interesting one to start to follow. Here's the complaint in the bylaw litigation.

-bjmq

Will the 'Just Say No' Defense Ever Get Litigated?

I'm of the mind that the answer to that question is likely no.    In his Stanford Law Review paper of a few years ago (Professorial Bear Hug), Vice Chancellor Strine made it clear that ... well ... it wasn't clear.  Of course we professors would like a court to rule once and for all on the question of whether a classified board can simply sit on its poison pill in the face of an unsolicited offer.  The courts, I think, are happy with this constructive ambiguity as it relates to  the limits of the uses of a pill.  For example, the Federal District Court in Delaware suggested in Moore v Wallace (persuasive, but not precedent) that a Delaware state court might permit the defense.  Vice Chancellor Allen in Interco, on the other hand, made it clear that there were limits to such a defense and employed a Unocal analysis with respect to 'threats' facing the corporation.  Allen understood threats to be of only of two types: threats to voluntariness and the threat of a inadequate price.    In context of a single-tier, all-cash bid, there is no threat to voluntariness, there is just the threat that the bid is inadequate.  In any event, the Supreme Court rejected that analysis in  Paramount v Time leaving us really at sea as to the limits of a 'just say no' defense.  The 'just say no' defense really lies at the heart of the most crucial discussion in the corporate law - who should make the decision about the fundamental future of the corporation: the board or the stockholders.  You'd think it would eventually get litigated once and for all.

 A few months ago it looked like we might have a chance to see it happen.  Air Products launched an all cash tender offer for Airgas.  Airgas just sat on its pill and said 'no.'   Air Products then filed suit.   Here's a copy of the complaint.  I came to the realization last week that this case would never get before a chancellor.  It's scheduled in the Chancery Court for October 1, but that it turns out is just creative scheduling.  In fact, it will likely never get that far.  

Airgas' shareholder's meeting at which shareholders will likely decide the fate of Air Products' offer is scheduled for September 15.   Over the weekend, Air Products upped its offer to $65.50, a whopping 50% premium over the prebid price for Airgas.  Air Products also announced that if it is unsuccessful in its proxy contest, it will walk away and not pursue Airgas further.  And just like that, the challenge to the 'just say no' defense will go away.   Litigating this issue will likely have to wait for another day, unless of course Air Products succeeds in the proxy contest and elects three of its own directors and the remaining directors continue to fight.

-bjmq

Richards Layton on Freeze-outs

Richards Layton just released this client alert on In re CNX Gas Corp. Shareholders Litigation, in which the Delaware Chancery Court attempts to clarify the standard applicable to controlling stockholder freeze-outs (a first-step tender offer followed by a second-step short-form merger).  In short, the Court held that the presumption of the business judgment rule applies to a controlling stockholder freeze out only if the first-step tender offer is both

(i) negotiated and recommended by a special committee of independent directors and

(ii) conditioned on a majority-of-the-minority tender or vote.

MAW

Overview of Indian Takeover Regulation

Sandeep Parekh at IIM recently posted a paper that includes a short introduction to takeover regulation in India, Indian Takeover Regulation - Under Reformed and Over Modified.  Given the recent increase in cross-border transactions involving India, this paper is worth taking a look at. 

Abstract: The takeover of substantial number of shares, voting rights or control in a listed Indian company attracts the provision of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 1997. The regulations have been amended nearly 20 times since inception, though the amendments have mainly concentrated on areas which needed no amendment. At the same time a vast number of obvious problems have not been rectified in the regulations. The large number of amendments have also created requirement of a compulsory tender offer of such unnecessary complexity as to make it virtually unintelligible to even a well qualified professional.

This paper argues that the complexity in the trigger points for disclosure and tender offer introduced over the years lacks a philosophy, and most of the amendments can not only be deleted but a very simple structure can be introduced making compliance of the regulations straight forward and easy to understand by management of listed companies. Certain other areas which need amendments have also been discussed. Chief amongst these are the provisions relating to consolidation of holdings, conditional tender offers, hostility to hostile acquisitions, definitional oddities, payment of control premium in the guise of non compete fees, treatment of differential voting rights, treatment of Global Depository Receipts and disclosure enhancements.

This paper does not try to portray a particular combination of numbers as the best possible set of trigger points and compulsory acquisition numbers but advocates that whatever numbers are adopted should not be changed for several decades. Arguments that state that the changing economic condition requires constant changes with these numbers, it is argued is wrong.

-bjmq

K&E on "Just Say No"

According to this client memo from K&E, recent takeover battles are bringing into question the continued vitality of the “just say no” defense, which allows the board of a target company to refuse to negotiate (and waive structural defenses) to frustrate advances from unwanted suitors.

According to the authors, "just say no" is more properly viewed as a tactic rather than an end, and when viewed this way,

it is apparent that the vitality of the “just say no” defense is not and will not be the subject of a simple “yes or no” answer from the Delaware courts. Instead, the specific facts and circumstances of each case will likely determine the extent to which (and for how long) a court will countenance a target’s board continuing refusal to negotiate with, or waive structural defenses for the benefit of, a hostile suitor.

MAW

 

Simple Theory of Takovers

Continuing the theme of comparative takeover regulation: here's a new paper, A Simple Theory of Takeover Regulation in the United States and Europe, from Ferrarini and Miller forthcoming in the Cornell International Law Journal investigating a federal approach to takeover regulation in teh US and Europe.    

Abstract: This paper presents a simple model of takeover regulation in a federal system. The theory has two parts. First, the model predicts that the rules applicable at more general political levels will be more favorable to takeover bids than will the rules applicable at local levels. The reason is that unlike bidders, who do not know ex ante where they will find targets, targets can concentrate their political activities knowing that the law of their jurisdiction will apply to any attempt to take them over. On the other hand, at more general political levels this advantage for target firms disappears, so the rules are expected to be less target-friendly. This is in fact the pattern we observe both in the United States and the European Union. Second, the model predicts that rules on takeovers will reflect the degree of concern that targets have about potential hostile bids. Where firms are well-protected against unfriendly takeovers – for example, in jurisdictions where companies are under family control – takeover regulation is likely to be less target-friendly than in jurisdictions where potential targets are more exposed to a hostile acquisition. This pattern is also observed in takeover regulation.

-bjmq

Mandatory Rules in the Takeover Market, A Lesson from Down Under

The UK-styled approach to takeover regulation relies heavily (although not exclusively) on brightline rules for delimiting what is permitted in the context of an offer and a response to an offer.   The upside of this structure is that it leaves the decision whether to accept or reject an offer in the hands of the shareholders. 

Contrast this approach with Delaware where the corporate code and the courts leave directors with a high degree of discretion whether to accept or reject offers.  To the sometimes chagrin of academics (myself included) Delaware courts are loathe to set out brightline rules governing the takeover process.   One of the selling points of the Delaware approach is that the fact-intensive approach allows for directors and courts reviewing directors actions to recognize that there may not be a one-size-fits-all solution and to take into account the specific issues in every case.

In Australia today we have an example why Delaware might be right to eschew many mandatory rules.  Australia's Takeovers Panel is modeled on the UK Takeover Panel.  EWC, a private Australian company in the process of going public, announced a bid for NewSat, publicly-traded Australian company.  The details of the back-and-forth between the two companies can by found here care of The Brisbane Times newspaper.   In any event, the talk of a take-over triggered a required Bidder's Statement to be filed by EWC.  After some delay, EWC just filed its statement along with a surprising recommendation: 

On behalf of the directors of EWC Payments Pty Ltd (EWC), I am pleased to enclose an offer by EWC to acquire all of your shares in NewSat Ltd (NewSat). 

However, in light of unexpected action taken by the Commonwealth Bank AFTER the Takeover Offer was made, and which the Commonwealth Bank set aside prior to a Court Hearing, I very sadly recommend that your do NOT accept this offer from EWC ...

The details of the bidder's dispute with the Commonwealth Bank are laid out in Section 10.8 (or, reasons why you should not accept the offer I just made you).  It's kind of odd.  The offer itself is bookended with exhortations by the offerer for shareholders not to make the mistake of taking the offerer up on his own offer.   For their part, management of NewSat called the offer a "sham" and dug the knife in a bit further:  

While this is certainly a very good reason for NewSat shareholders to reject the EWC offer, there are many other equally good reasons...

This episode points out a shortcoming, though not disabling, of the mandatory rules approach to takeover regulation. When facts on the ground change such that it makes no sense for an offer to go forward, why should parties -- a reluctant seller and a now-incapable buyer --be forced to go forward with the offer once its clear to both sides that it's a bad idea.  It seems an unnecessary expense at that point.   

-bjmq

What must a Board do to satisfy its Revlon duties?

Milbank, Tweed reviews the decision of the Delaware Court of Chancery in Police & Fire Ret. Sys. of the City of Detroit v. Bernal, et al. and concludes

 [The Delaware Supreme Court’s recent decision in Lyondell Chemical Company v. Ryan] confirmed that directors may aggressively pursue a transaction that they determine in good faith to be beneficial to shareholders, despite the absence of an auction process, so long as their actions are reasonable and aimed at obtaining the best available price for shareholders. However, . . . the language used by the Court in Bernal certainly suggests that when a company has attracted more than one bidder, the best way for a board to satisfy its Revlon duties and maximize shareholder value is to follow a robust sale or auction process that avoids taking actions that could be perceived as favoring one bidder over another. As Court of Chancery decisions in recent years have demonstrated, when only one bidder exists, Delaware Courts are reluctant to upset the deal and risk losing an attractive opportunity for target company shareholders. In contrast, when more than one bidder is involved, Delaware Courts are more comfortable scrutinizing a deal and taking steps to permit an auction to continue.

Get the full story here.

 

MAW

Rehoboth Beach Reading

Wondering what to read during your next weekend at the beach?  The latest Nora Roberts or Catherine Colter novels not attracting your attention?  Or maybe like me, your local bookstore for some reason doesn't carry the latest Glenn Beck tome?  OK, that's probably a sign that your weekend might be better spent catching up on recent developments in the Delaware corporate law.  So how about the 2009 Developments in Delaware Corporation Law (James Holzman at Prickett, Jones, & Elliott)?  It's a nice 60 page overview of everything you missed over the past year while you were struggling just to keep up with the day's headlines.  Print it out and bring it to the beach. 

-bjmq  

The Original Shareholder Activists

The proposed shareholder access rules and the debate surrounding the role of shareholder activists got me thinking.  Some opposed to increased shareholder power paint pictures of the end of capitalism that will come when shareholders force boards to adopt unwise business positions motivated by political and other interests.  Of course, this is not the first time we’ve had this debate.  Long before cheap credit fueled the private equity bubble of the past few years and before Mike Milken and the junk bonds made the buyout craze of the 1980’s possible, there were a set a characters who started the modern takeover movement and were the original shareholder activists.  

The first corporate raiders of the post-World War II era were Thomas Mellon Evans, Robert Young and Louis Wolfson among others.  They were called pirates and financial hooligans for their attacks on the comfortable life of corporate boards that typified the 1950s.   The takeover tactics that these raiders developed would later become commonplace.  They used cumulative voting to get minority board representation, they successfully challenged staggered boards, they used leverage to increase their influence, and they sought to make the market more efficient by buying up underperformers and turning them around.   

I just finished reading Diana Henriques’ White Sharks of Wall Street.  White Sharks is a portrait of these raiders and Thomas Evans in particular.  Evans, Wolfson, and Young all looked to acquire underperforming “businesses run by boards devoid of any meaningful ownership” and underperforming family-owned businesses where the genetic lottery resulted in an uninterested group of founders’ children trying to manage the business. They bought these businesses and shook them up – sometimes by turning them around and other times by breaking them up and selling them off.

Evans and the other “activists” of the 1950s were the face of the nascent takeover market.  They were also a threat to the social and political fabric of the day.  By forcing boards to face facts, they undid all the stability of the business in the 1950s.  Notwithstanding this threat from activist shareholders, boards and the system stood up reasonably well, adapted and thrived for many years.  One wonders what parallels we can learn from that experience that might inform how we think about shareholder access rules.

-bjmq

Activision: Game Over?

Activision, Inc. and Vivendi yesterday announced that they have signed a definitive agreement to combine Vivendi Games with Activision.  The transaction is structured as follows:

• Vivendi Games will be acquired by Activision via a reverse subsidiary merger. In the merger, Vivendi will receive 295.3 million new shares of Activision common stock.  The transaction implies a value of approximately $8.1 billion for Vivendi Games.
• Concurrently with the merger, Vivendi will purchase 62.9 million Activision shares at a price of $27.50 per share for a total of $1.7 billion in cash.
• Within five business days after closing the above transaction, Activision Blizzard (the newly renamed combined entity) will launch a $4 billion all-cash tender offer to purchase up to 146.5 million Activision Blizzard common shares at $27.50 per share.
• Vivendi will also acquire from Activision Blizzard additional newly issued shares for up to an additional $700 million of Activision common stock at $27.50 per share, the proceeds of which would also be used to fund the tender offer.

Upon consummation of all of these transactions, it is expected that Vivendi will own an approximate 68% ownership stake in Activision Blizzard on a fully diluted basis. The parties have yet to file all of the transaction documents with the SEC -- I'll have a full analysis once they are -- but there are already a number of issues raised, including:

1. Activision, a Delaware company, is selling control of the company to Vivendi.  As such, they are subject to Revlon duties and the board of Activision is now under the duty to obtain the highest price reasonably available for Activision.  It remains to be seen if any subsequent bidders will emerge, but if they do, the value of Blizzard and its strategic contribution will provide the Activision board some leeway in valuing alternative offers.  How much -- that is unknown. 
   Bottom-line:  Activision is now in play (get it?).   
2. If this deal is indeed completed, Vivendi will become a majority holder of Activision.  It will be interesting to see what protections the Activision board has negotiated for the minority shareholding position they are creating.  At a minimum, this should include a standstill, and possibly voting restrictions and restrictions on minority freeze-outs depending upon how hard the Activision board bargained. 
3. As with any acquisitions of private companies, valuing Vivendi Games it is quite hard and subject to criticism for under or more likely, over-valuation.  Expect there to be a fair bit of cirticism either way on the valuation assigned to Vivendi Games.  [Addendum:  See here Deal Journal's excellent post on this point]
4. In the same vein, the deal could get significantly delayed due to the significant time need to the prepare the proxy statement for this transaction.  Here, Vivendi Games is material to Activision-- full financial statements and MD&A must therefore prepared for Vivendi Games for inclusion in the Activision proxy-- Vivendi recently terminated its reporting obligations to the SEC, but presumably since it has been historically reporting in U.S. GAAP this should ease the preparation of these financials. 

Finally, for legal geeks, the press release contained the following boilerplate: 

This communication is being made in respect of the proposed business combination involving Activision, Vivendi and Vivendi Games. In connection with the proposed transactions, Activision plans to file with the SEC a Registration Statement on Form S-4 containing a Proxy Statement as well as other documents regarding the proposed transactions. The definitive Proxy Statement will be mailed to stockholders of Activision. INVESTORS AND SECURITY HOLDERS OF ACTIVISION ARE URGED TO READ THE REGISTRATION STATEMENT, PROXY STATEMENT AND OTHER DOCUMENTS FILED WITH THE SEC CAREFULLY AND IN THEIR ENTIRETY WHEN THEY BECOME AVAILABLE BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION ABOUT THE PROPOSED TRANSACTIONS.

I think this is a mistake.  Historically, the SEC has not permitted Form S-4 to be utilized to issue shares to a single shareholder in an agreed transaction as there is no offer to sell under Rule 145.  I suspect someone just shoved in the wrong boilerplate -- the transaction documents should contemplate solely a proxy statement and, possibly, a registration rights agreement for Vivendi's shares. 

Finaly note:  Vivendi's counsel was Gibson, Dunn & Crutcher LLP -- a coup for that firm.  Congratulations. 

The Hard Road of a Delaware Bidder (Restoration Hardware & Tesoro)

It is not easy to be an unsolicited bidder for a Delaware company. 

A target board has wide latitude to implement takeover and transaction defenses against an unsolicited bid.  This can be as part of a "just say no" defense -- the board can refuse to accept an offer and adopt a shareholder rights plan (aka poison pill) in order to force a hostile bidder to wage a proxy contest to take over the company.  If the target has a staggered board this can necessitate multiple proxy contests over several years. 

A board has less defensive latitude once it enters "Revlon" mode -- that is, a sale or break-up of the company becomes inevitable.  In that case, the target board has the duty to obtain the highest price reasonably available.  However, the Delaware courts have repeatedly said that there is no "single road" map in Revlon-land to obtaining the highest price reasonably available and has repeatedly permitted boards a large measure of freedom in designing their sale or break-up process. 

Recent developments in two deals illustrate the difficulties bidders have under either mode of review.

Restoration Hardware/Sears

Restoration Hardware comes under the second heading -- the company has agreed to be acquired by an affiliate of Catterton Partners.  It is in Revlon mode and now has a duty to obtain the highest price reasonably available.  In this light, Sears Holding Corporation has disclosed a 13.67% stake in Restoration Hardware and subsequently stated that Sears "would be prepared to enter into an agreement to offer your stockholders $6.75 per share in cash via tender offer."  But yesterday, Restoration Hardware stated that it will not provide any confidential information to Sears unless "Sears will agree to execute the customary confidentiality and standstill agreement on substantially the same terms that other parties have signed . . . ."  Sears at this time does not appear willing to agree to such a standstill. 

So, the question is whether a company in Revlon mode can require a standstill from a prospective bidder in order to provide confidential information to them.  The answer is a qualified yes.  In In re J.P. Stevens & Co., Inc. Shareholders Litigation, 542 A.2d 770 (Del.Ch.1988), Chancellor Allen held that a target in Revlon mode subject to an agreed transaction could require another prospective bidder to enter into a standstill agreement prior to providing confidential information so long as the requirement was not for "inequitable purposes" such as favoring the other bidder over the interests of the target's stockholders. 
The Delaware courts have subsequently affirmed this holding.  See, e.g., Golden Cycle, LLC v. Allan, 1998 WL 276224 (Del.Ch.1998). 

So, Restoration is on acceptable ground here so long as it has a legitimate purpose -- here the fact all bidders are required to enter into the standstill likely provides it with enough cover despite the fact the chosen bidder has partnered with management and Restoration's controlling shareholder.  Nonetheless, in the recent decision in In re Topps Shareholders Litigation, 2007 WL 1732586 (Del.Ch. June 14, 2007), VC Strine enjoined enforcement by Topps (the target) of a standstill against unsolicited bidder Upper Deck because he found Topps's actions favored its preferred bidder, a buy-out group led by Michael Eisner.  VC Strine stated:

Topps went public with statements disparaging Upper Deck's bid and its seriousness but continues to use the Standstill to prevent Upper Deck from telling its own side of the story. The Topps board seeks to have the Topps stockholders accept Eisner's bid without hearing the full story.

Thus, Restoration can only go so far in its demands for a standstill, and if Sears subsequently puts a legitimate offer on the table Restoration will likely be unable to escape waiving the standstill (if Sears ultimately agrees to one).  Nonetheless, even then Restoration can still affect the due diligence process here in order to attempt to influence the bidding.  For those who want an trenchant example, note that subsequently Upper Deck withdrew its bid for Topps citing Topps failure to cooperate in the due diligence process -- Topps was ultimately acquired by Eisner's group with the cooperation of its management.  Nonetheless, Upper Deck may have had other reasons to withdraw its bid and Sears now has a big stake in Restoration so it may have more staying power. 

Tesoro

Tesoro on the other hand is not in Revlon-mode.  On November 7, Tracinda Corporation announced a cash tender offer to purchase up to 21,875,000 shares of Tesoro (approximately 16 percent) at a price of $64 per share.  Tesoro responded with a neutral position (neither recommending for or against this offer) and adopted a poison pill.   Yesterday, Tracinda announced that it was withdrawing its tender offer stating that:

[t]he rights plan recently adopted by the Tesoro Board of Directors inhibits value for all Tesoro shareholders by, among other things, restricting the ability of shareholders to vote, sell or acquire Tesoro shares freely without fear of triggering the draconian provisions of the rights plan.

I find Tracinda's statement hard to believe.  The poison pill adopted by Tracinda had a high trigger threshold of 20% -- it was specifically set so as not to be triggered by completion of the Tracinda offer.  Tesoro was likely able under Delaware law to set an even lower threshold of 15% and possibly down to 10% and was even further accommodating by providing a neutral recommendation.  Moreover, Tracinda specifically stated in its Schedule TO that it:

does not have any current plans, proposals or negotiations that relate to or would result in: (1) any extraordinary transaction, such as a merger, reorganization or liquidation involving Tesoro or any of its subsidiaries . . . .

This is a boiler-plate response, but still it is required to be truthful.  Moreover, Tracinda is a highly sophisticated takeover machine --- it surely knew that Tesoro's response would be to adopt a poison pill (for more see John Coates's article: Takeover Defenses in the Shadow of the Pill: A Critique of the Scientific Evidence). Thus, it is hard to make sense of Tracinda's tactics here, but I would strongly suspect that they will be back.   In such circumstances Tesoro may be less accommodating -- an option available under Delaware law.   

Hell is Other People: Genesco/Finish Line/UBS

Background

The Genesco/Finish Line material adverse change dispute is now about as ugly as it gets.  First, early last week Genesco filed an amended complaint.  The amended complaint was largely unremarkable and unchanged from the original, although in addition to a specific performance claim, Genesco amended its complaint to include an alternative claim for damages relief (this is important -- I'll get to it below under the heading Solvency).  Later in the week, Finish Line answered.  Finish Line, now having the benefit of discovery, counter-claimed "against Genesco for having intentionally, or negligently, misrepresented its financial condition in order to induce Finish Line into entering" the transaction.  Shifting tactics, Finish Line also baldly asserted that a material adverse change had occurred to Genesco under the terms of the merger agreement.  Moreover, Finish Line asserted that "[t]his fundamental change in Genesco's financial position also raises serious doubts that Finish Line and the combined company will be solvent following the Merger."  Finish Line concluded its answer and counter-claim by stating:

As a result, Finish Line suffered injury by entering into the Merger Agreement while unaware that Genesco was in the midst of a financial free-fall, for which there still appears to be no bottom.

It actually got worse after this.  On Friday, UBS counter-claimed in the Tennessee Court.  UBS didn't assert a claim of "intentional, or negligent, misrepresentation".  Instead they threw down a counter-claim of fraud against Genesco.  Things are real bad when your ostensible banker is accusing you of fraud.  Not content with that charge, UBS also sued both Finish Line and Genesco in the Southern District of New York seeking to void its financing commitment letter since Finish Line could not deliver the solvency certificate required to close the financing.   The reason UBS asserted was that "[d]ue to Finish Line's earnings difficulties and Genesco's disastrous financial condition, the combined Finish Line-Genesco entity would be insolvent . . . . "  Clearly, Finish Line's specially hired uber-banker Ken Moelis was unable to perform his expected job of reigning in UBS.  [update here is the UBS N.Y. complaint]

This is a mess.

Material Adverse Change Clause

First, the material adverse change issue.  My first thought is that this case is a very good example of the fact-based nature of MAC disputes.  When we first looked at this deal back on August 31, I noted that I thought Genesco had a good legal case based on the tight MAC clause it had negotiated.  But I also stated that my conclusions at that time were based on the public evidence and that discovery would flesh out the validity of Finish Line's claims.  It now appears that Finish Line's claim is premising its MAC claim on Genesco's earnings drop -- a decline of 100% to $0.0 earnings per share compared to the same period from the previous year when Genesco's earnings per share were $0.24. 

As we know under Delaware law a  "short-term hiccup in earnings should not suffice; rather the Material Adverse Effect should be material when viewed from the longer-term perspective of a reasonable acquiror."  In re IBP, Inc. Shareholders Litigation (“IBP”), 789 A.2d 14 (Del. Ch. 2001).  Thus, it is interesting to note that Finish Line's only support for this assertion appears to be the following:

What is more, there is no indication Genesco's decline has bottomed out. Genesco's most recent financials instead indicate that it is poised to suffer another substantial drop in earnings in the third quarter.

Finish Line still hasn't factually asserted anything longer term than two quarters of adverse performance.  Thus, to the extent the Tennessee court adopts Delaware law on this issue, Finish Line is going to have to show at trial that this is an adverse change that is going to continue.  They have a good start with the two-quarter drop, if indeed Genesco's results announced later this month show such a drop, but at trial Finish Line will still need to prove the long term nature of this change.  Moreover, the MAC clause in the merger agreement excludes out a failure to meet projections as well as: 

(B) changes in the national or world economy or financial markets as a whole or changes in general economic conditions that affect the industries in which the Company and the Company Subsidiaries conduct their business, so long as such changes or conditions do not adversely affect the Company and the Company Subsidiaries, taken as a whole, in a materially disproportionate manner relative to other similarly situated participants in the industries or markets in which they operate;

Nowhere does Finish Line comprehensively address this argument.  My bet is, given the of-late poor performance of Finish Line itself, the definitive MAC issue at the Tennessee trial is going to revolve substantially around whether this sub-clause (B) excludes out any MAC.  Here, note the materially disproportionate requirement, something notably absent in the SLM/Flowers MAC (to their detriment).  Thus, Finish Line still has a high hurdle to meet in order to prove a MAC-- it must prove the long term nature of this claim beyond two quarters and that it is materially disproportionate to what is occurring in the industry generally.

Perhaps as a comment on the Finish Line MAC claim, UBS in its own complaint makes the following statement about the Material Adverse Change to Genesco:

UBS denies that there necessarily has been no Material Adverse Effect with respect to Genesco's business.

UBS has yet to claim a MAC occurred in the merger agreement.  And, I have not read UBS's N.Y. complaint but it appears that they have not asserted the mirror-image MAC clause in their financing commitment letter to justify not financing the deal.  Rather, their argument appears centered on fraud by Genesco and the insolvency of the combined entity. 

The one monkey-wrench here is the solvency claim which may in and of itself justify a MAC claim. 

Solvency!?

The issue had been rumored on the Street for a while, but still the solvency claim is amazing.  Finish Line is clearly frantically trying to avoid a doomsday scenario where it is required to complete the Genesco deal but lacks the financing to do so.  Thus, Finish Line claims that "[t]he ability of Finish Line and the combined enterprise to emerge solvent from the Merger is an additional condition precedent to the Merger Agreement under Sections 4.9 and 7.3."  However, Section 4.9 is Finish Line's own representation to Genesco as to its solvency post-closing.  Section 7.3 is the condition that Finish Line's own representations must be true in order for Finish Line to require Genesco to close.  But, Genesco can waive this condition and the breach of this representation!  Moreover, Finish Line appears to be aware of this snafu; so it also claims that if the post-combination company is insolvent it would violate Genesco's representation in 3.17 that the merger will not violate any law applicable to Genesco.  I think this final argument is a stretch -- the violative conduct would be that of Finish Line -- if the parties had wanted to pick up this type of conduct they would have had Genesco make the representation rather than Finish Line.

Still, any judge would be loathe to order specific performance of a merger that would render the other party insolvent -- which is why I suspect Genesco is now asking for a monetary award.  This is an alternative to this issue.  Nonetheless,  I want to emphasize that any judge in the face of this insolvency may find it to be MAC.  I don't believe that this is what the MAC is intended to encompass or that the plain language is designed to address such events -- it is merely changes to Genesco.  If the parties had wanted they could have negotiated a solvency condition.  But they didn't.  Nonetheless, the event is so horrific a judge may find a way to read the MAC clause this way. 

The bottom line is that even if this combination would indeed render Finish Line insolvent, I'm not sure they get out of this agreement unless the judge stretches in interpreting the MAC clause.  There is no specific solvency condition and the agreement does not contain any specific out for such circumstances. 

Unfortunately for Finish Line, UBS has a better case to escape its financing commitments.  Under the financing commitment letter, it is a condition to closing that UBS receive:

all customary opinions, certificates and closing documentation as UBS shall reasonably request, including but not limited to a solvency certificate.

If the combined company is indeed going to be insolvent UBS can get out of its financing commitment.  But as I've said, it is unclear if Finish Line can also get out of its own agreement.  Given this, Finish Line must clearly be desperate to raise this issue in its own filings.  But I suppose it has nothing to lose at this point. 

Financing

It is at this point that I will quote Finish Lines representation at Section 4.6:

For avoidance of doubt, it shall not be a condition to Closing for Parent or Merger Sub to obtain the Financing or any alternative financing.

While I tut-tut the lawyers for putting this as a representation (it is more appropriate to include as a covenant or in the conditions to closing), it bears repeating that there is no financing condition in this merger agreement. 

As an aside, in Section 6.9 Finish Line agrees that: 

In the event any portion of the Financing becomes unavailable on the terms and conditions contemplated in the Commitment Letter, Parent shall use its reasonable best efforts to arrange to obtain alternative financing from alternative sources in an amount sufficient to consummate the transactions contemplated by this Agreement on terms and conditions not materially less favorable to Parent in the aggregate (as determined in the good faith reasonable judgment of Parent) than the Financing as promptly as practicable following the occurrence of such event but in all cases at or prior to Closing. Parent shall give the Company prompt notice of any material breach by any party to the Commitment Letter of which Parent or Merger Sub becomes aware or any termination of the Commitment Letter. Parent shall keep the Company informed on a reasonably current basis in reasonable detail of the status of its efforts to arrange the Financing.

This doesn't mean particularly much for Genesco as there is no way that any bank is going to give financing to Finish Line on the same terms as UBS has.  Any financing will be much less favorable, so Genesco can't get much from this.  I note this only as a possible rabbit hole. 

Fraud

The fraud claim by UBS and intentional or negligent misrepresentation claim by Finish Line are much more interesting.  Finish Line alleges that: 

On top of this, by its own admission, Genesco also knew by at least early June that its second quarter projections were based on the erroneous assumption that certain state's back-to-school dates and tax holidays fell during the second quarter. Despite this, Genesco intentionally, or negligently, failed to provide Defendants, prior to execution of the Merger Agreement, with its May operating results or tell Defendants that Genesco's second quarter projections mistakenly relied on certain back-to-school dates and tax holidays occurring in the quarter.

UBS's fraud claim relies on similar non-disclosure. 

I'm going to wait and see Genesco's response before responding to this as it is a pure question of fact.  If the court finds this true, it would generally justify excusing Finish Line's performance.  The New York law on this is actually more developed -- I am not sure off-hand what the Tennessee law is.  Again, though, this is really just something that will depend on how each judge rules.  Ultimately since the Tennessee judge is ruling first, the New York one will likely follow.

But I will say this, Finish Line clearly wants out of this agreement at all cost and is playing a scorched earth policy.  It has now completely alienated the employees and officers of a company it may have to acquire.  Quite a risk and perhaps why they did not allege fraud but rather negligent misrepresentation (though again I am not up on Tennessee law on this point so there may be real differences and reasons for this -- I'll look into it). 

Bottom-Line

The bottom-line is that this deal still has a long way to go before it closes.  Although Genesco still has a decent defense against a MAC claim, the solvency and fraud claims could still strongly work to Finish Line's favor.  This is something we just don't know until we see Genesco's response, and even then much of this will be determined at trial as a question of fact.  Also, do not forget that even if Genesco wins in Tennessee, there is still now a New York action to face (and UBS can further amend its complaint there to litigate a MAC claim under N.Y. law in the financing commitment letter).  This may ultimately be Finish Line's problem but still has the potential to mean no deal for Genesco or a damages remedy it can only enforce in bankruptcy court (Finish Line's bankruptcy that is) if Finish Line is unable to enforce its financing commitment.  Of course, the lawyers could have avoided this final complexity by siting the choice of forum clauses in the financing commitment letter and the merger agreement in the same states.  M&A lawyers should take note. 

Ultimately given the risks, if I was Genesco the good business decision would be to settle this out for a lump sum payment -- but the parties appear too intractable at this point for such a disposition.  Though there is a very real scenario here where Genesco actually ends up controlling Finish Line -- talk about payback. 

Cerberus's 13D

It is now day three of the United Rentals/Cerberus saga.  Still no lawsuit by United Rentals.  I'm a bit surprised -- I would have thought that they had the complaint ready to go and would have filed yesterday to keep momentum. 

Yesterday's big development in the dispute was Cerberus's filing of a 13D amendment.  The filing included a copy of Cerberus's limited guarantee.  The guarantee had not previously been made public, Cerberus clearly included this agreement in its filing in order to publicly reinforce its argument that Cerberus is only liable for the $100 million termination fee and not a dollar more.  The guarantee specifically limits Cerberus's liability to $100 million and contains a no recourse clause.  This clause provides in part: 

The Company hereby covenants and agrees that it shall not institute, and shall cause its controlled affiliates not to institute, any proceeding or bring any other claim arising under, or in connection with, the Merger Agreement or the transactions contemplated thereby, against the Guarantor [Cerberus] or any Guarantor/Parent Affiliates except for claims against the Guarantor under this Limited Guarantee.

NB. the definition of Guarantor/Parent Affiliates above specifically excludes the Merger Sub. 

I have no doubt that Cerberus is going to argue that this limited guarantee, when read with the merger agreement, reinforces its interpretation of the agreement that specific performance is NOT available.  Again, unfortunately, there is vagueness here.  The integration clause of the limited guarantee states: 

Entire Agreement. This Limited Guarantee constitutes the entire agreement with respect to the subject matter hereof and supersedes any and all prior discussions, negotiations, proposals, undertakings, understandings and agreements, whether written or oral, among Parent, Merger Sub and the Guarantor or any of their affiliates on the one hand, and the Company or any of its affiliates on the other hand, except for the Merger Agreement.

So, this means that when interpreting the limited guarantee a judge will also look to the merger agreement for context and guidance.  I put forth my analysis of the merger agreement yesterday (read it here).  Nonetheless, it would appear that this limited guarantee creates more uncertainty, though to the extent it is given any reading it reinforces Cerberus's position, with one possible exception.

This exception is Merger Sub -- the acquisition vehicle created by Cerberus to complete the transaction.  Essentially, this guarantee says nothing about what merger sub can and cannot do.  So, a possible United Rentals argument is that merger sub can be ordered by the court to specifically enforce the financing letters against Cerberus and the Banks.  To the extent that the merger agreement permits specific performance (a big if) this would side-step the guarantee issue. 

Ultimately, though, the vagueness means that a Delaware judge will need to look at the parol evidence -- that is the evidence outside the contract -- to find what the parties intended here.  What this will reveal we don't know right now -- so I must emphasize strongly that, while I tend to favor United Rental's position, it is impossible to make any definitive conclusions on who has the better legal argument at this point. 

Note:  The Limited Guarantee has a New York choice of law clause and has an exclusive jurisdiction clause siting any dispute over tis terms in New York County.  The merger agreement has a Delaware choice of law and selects Delaware as the exclusive forum for any dispute.  This mismatch is sloppy lawyering -- it is akin to what happened in Genesco/Finish Line.  And while I have not seen the financing letters for the United Rentals deal, my hunch is that the bank financing letters have similar N.Y. choice of forum and law provisions.  This very much complicates the case for United Rentals and Cerberus as any lawsuit in Delaware will inevitably end up with Cerberus attempting to implead the banks or United Rentals suing the banks outright (if they can under the letters).  If the financing letters have a different jurisdictional and law choice it makes things that much more complicated.  M&A lawyers should be acutely aware of this issue for future deals. 

Final Note:  Weekend reading for everyone is the United Rentals proxy (access it here).  Let's really find out what they did and did not disclose about the terms of this agreement and the deal generally.