M & A Law Prof Blog

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. 

ACS: The Legal Analysis

It is hard to know where to begin.  That is my first thought when confronting the legal issues arising from the fiasco at Affiliated Computer Services.  When we last left this matter on Friday, the independent directors of ACS had resigned pending the election of new directors, filed suit in Delaware Chancery Court for a declaratory ruling that they did not breach their fiduciary duties in negotiating the potential sale of ACS, and sent a letter to Darwin Deason, Chairman of the Board of ACS and controller of 40% of the voting stock of ACS (but only 10% of the economic interest), accusing him and ACS management of breaching their own fiduciary duties in unduly favoring a deal with Cerberus.  For his part, Deason in his own letter, demanded the ind. directors' “immediate resignations” because of “numerous and egregious breaches of fiduciary duty and other improper conduct,” related to their own running of the Cerberus auction.  Then the lawyers for each of these groups (Weil for the ind. directors/Kasowitz for Lynn Blodgett CEO of ACS) exchanged their own letters making further allegations of inappropriate conduct against the other parties (though Weil alleges Kasowitz's letter was written by Deason's counsel Cravath, although Cravath may also be company counsel?!).  Throwing all of this into the mix, two of the firms involved -- Cravath and Skadden -- are now being accused of acting in a conflicted manner.  Whew, I'm exhausted already. 

Preliminary Observations 

1. The lawsuit by the Cerberus independent directors was a smart tactical move likely to preempt a similar suit against them brought by Deason (read the complaint here).  Now the independent directors can be viewed as the plaintiffs, the good guys and drive the litigation.  Plus, they can now engage in discovery, amend their complaint as necessary and have a bargaining chip against Deason.  And most importantly, since they brought this action in their capacity as directors under Delaware law they can receive indemnification under DGCL 145 and, in fact, under ACS's By-laws (s. 33) automatically are advanced attorney's fees in prosecuting this action.  Nifty.  See Hibbert v. Hollywood Park, Inc., 457 A.2d 339, 343 (Del. 1983) (holding that per the contractual indemnification provisions of the company the directors only needed to be a party to the lawsuit not the defendants to be indemnified).
2. Relatedly, my big question is why didn't the ind. directors here sue Deason and management for breach of their fiduciary duties?  I find this almost certainly intentional omission odd.  Perhaps it was because they need/want to do so on behalf of the company but cannot currently call a board meeting to so act (see the next point).  Although a derivative suit is possible.  Hmmmm.
3. The future governance of ACS is a nightmare.  First, per the By-laws (Art. 16) only Deason or the CEO can call a special meeting of the Board.  In the interim, per DGCL 141(f), they can only act by written consent with the approval of all the directors (there is no By-law or Certificate of Incorporation provision that I saw to the opposite).  So, the ind. directors are stuck, waiting for the next meeting to act.  Deason has a clear incentive here to postpone the holding of the next board meeting until the next shareholder vote in order to prevent the ind. directors from acting and perhaps firing him.  This means board paralysis for months until then; a terrible way to run a company.   
4. Deason's employment agreement gives him unprecedented control over the company.  I've actually never seen anything like this structured in this manner.  Under his employment agreement he is given sole authority for:
   • (i) selecting and appointing the individual(s) to serve in, or to be removed from, the offices of Chief Executive Officer, President, Chief Financial Officer, Executive Vice Presidents, General Counsel, Secretary and Treasurer and (subject to appropriate charter amendment confirming the Executive's authority to fill such vacancies) to fill any director vacancies created in the event any such removal from office, (ii) recommending to the Board individuals for election to, or removal from, the Board itself, (iii) recommending to the Compensation Committee to the Board, or as applicable, to the Special Compensation Committee to the Board, salary, bonus, stock option and other compensation matters for such officers, (iv) approval of 3 4 acquisitions to the extent authority has previously been granted by the Board to the Executive in his capacity as the member of the Special Transactions Committee (except to the extent the Executive had previously delegated authority to the President with respect to such acquisitions which do not exceed $25 million in total consideration), (v) spending commitments in excess of $5 million, and (vi) approval of expense reports for the CEO and CFO.

I love the last two -- he has to approve the expenses of the CEO?!  How independent of him is she?  In any event, hornbook law in Delaware is that, under DGCL 141(a), the business and affairs of every corporation shall be managed by or under the direction of a board of directors, except as may be otherwise provided in its certificate of incorporation. I'm still tracing through all of the (complicated) governance provisions, but my preliminary conclusions are that they didn't put enough of the above in the Certificate, but rather put most of Deason's powers in the By-laws and the rest in the employment agreement itself.  I'll have a longer post on this later this week (I promise) once I'm done with my analysis, but my preliminary view is that these provisions violate 141(a) because to be effective in limiting the board's power they must be in the Certificate.  They are not.  In any event, this is the poorest of the poor in corporate governance to say the least.  This is particularly true when your CEO was famously accused of threatening to kill his personal chef.

4.    This company is a mess.  Only the bravest (or the foolhardy) would invest in this situation. 

The Case Against the Ind Directors

As outlined in Deason's and Kasowitz's letters, the case against the ind. directors is as follows:

1. They refused to accept the Cerberus offer negotiated by Deason with a go-shop and "low" break-up fee and instead insisted on conducting an auction of the company.
2. Relatedly, they failed to present the Cerberus offer to the shareholders directly.   
3. They inappropriately provided proprietary information to a competitor of the company.
4. They received and relied upon the advice of company counsel, Skadden, without authorization of ACS.
5. They paid themselves substantial fees (>100K each) for serving on the ind. committee. 

The Case Against Deason

1. He worked with Cerberus to force their deal through against the will of the special committee.  Specifically, he entered into an initial exclusivity agreement which he refused to waive for three months. 
2. Deason and management worked to ensure that other bidders did not receive full information or management cooperation.
3. Deason and management refused to permit the ind. committee to meet with company counsel.
4. Deason attempted to coerce the ind. directors to resign last Tuesday at a board meeting. 
5. Deason took all of these actions in order for his own personal financial gain through the bid with Cerberus.  Management followed his lead because they were beholden to him and their post-transaction employment depended upon it. 

The Legal Analysis

My opinion is that the ind. directors here did the right thing.  Deason, on the other hand, engaged in conduct that Delaware courts have historically condemned.  There is not enough here for me to give an opinion on management's liability, but to the extent they followed Deason's direction they are also liable. 

This is actually a relatively simple case.  Since Smith v. Van Gorkom, the Delaware courts have been adamant that the sale of the company is something for the board to decide.  It is not something that can be forced upon it by a singe executive (or here Chairman).  Moreover, the Delaware courts most recently in Topps and Lear have repeatedly endorsed the idea that the sale process, whether it be by the Board or a comm. thereof, is something for the board to set, even when the company is in Revlon mode.  Here, the board's refusal to accept a pre-negotiated deal that Deason had a personal financial interest in appears quite justified.  Other bidders would likely be deterred by his and management's involvement and financial interest; something which a go-shop and low break-up fee would not ameliorate.  In particular, it is increasingly recognized that go-shops provide only limited benefits and do not work particularly well when the initial deal is one involving management.  The head start and management participation is too much of a deterrent for bidders. Thus, my hunch is that on these bare facts, Deason is likely in the wrong and a Delaware court would not only rule so but rule Deason (and likely management) breached their fiduciary duties by unduly attempting to influence the auction process.   

As for the other claims:

1. I can't see how wanting to consult with company counsel can ever be a bad thing. 
2. The compensation of the ind. directors here is high but not extraordinary or something that would otherwise disqualify them. 
3. The provision of proprietary information could be troubling.  We need more facts to make this determination. 
4. Deason should ultimately be careful in his crusade here.  As Conrad Black proved, the Delaware courts do not look kindly on mercurial, imperial controlling shareholders. 

Possible Legal Conflicts Claims

1. Skadden provided advice to the ind. directors when it was company counsel.
2. Cravath is now company counsel when it had previously been Deason's counsel.

As I said, I'm not sure I see the problem in the first.  The second may be more problematical to the extent ACS may have a claim against Deason.  Moreover, what is Cravath, a nice, reputable firm doing sullying its name in this mess?  They likely realize the same thing which is why Kasowitz is taking the public lead here. 

Cerberus's Sad Goodbye

Affiliated Computer Services has admirably filed today on a Form 8-K the letter it received from Cerberus.  ACS had no other comment.  Obviously, there is a back story here which will come out over the next few weeks.  In any event, here it is (and I wish my exes had been as nice to me when we broke up)

Special Committee of the Board of Directors

Affiliated Computer Services, Inc.

Gentlemen:

We are very impressed with the management, business and opportunities of Affiliated Computer Services, Inc. (the “Company”) and continue to believe that the Company represents an attractive investment opportunity. We regret that we must withdraw our offer to acquire the Company due to the continuation of poor conditions in the debt financing markets. We are very focused on our ability to complete transactions that we initiate. From March 20, 2007, the date of our first offer letter, to the date hereof, Cerberus Capital Management, L.P. (“Cerberus”) and its affiliated funds have completed a significant number of transactions, including our acquisition of Chrysler LLC.

We believe that our proposal was in the best interests of the Company’s shareholders and that, had our proposal been put to a shareholder vote, it would have received approval by an overwhelming majority of the Company’s unaffiliated shareholders. Had the Special Committee engaged with Cerberus and Mr. Darwin Deason on the schedule we proposed in our offer letter, we are confident that our acquisition of the Company would have been approved and closed, and unaffliated shareholders would have been paid a substantial premium for their shares, some months ago. If market conditions change, we may consider proposing another transaction with the Company.

Very truly yours, CERBERUS CAPITAL MANAGEMENT, L.P.

Lessons From Cablevision: It's all in the 13D

I've been meaning to jot down a few of my thoughts on possible lessons learned from the failed Cablevision take-private. 

1. Gabelli's 13D Filings.  Mario Gabelli's funds eschew 13G filings and always file their holdings on 13Ds.  The reason is obvious -- it provides significantly more latitude to an institutional investor to influence management and lobby against takeover transactions.  These days, this is something almost every institutional investor should allow for.  And, in the case of Cablevision, it was a successful strategy -- Gabelli's activist position and use of the 13D amendment process to disclose its opposition to the deal facilitated its defeat.  Given this, most institutional investors should strongly consider adopting a similar policy and filing 13Ds instead of a 13G for passive holders.  It is clearly a hassle because you need to constantly amend it for changed information, but a 13D provides much wider latitude to act.  It can also avoid possible future SEC trouble for a failure by the filer to convert from a 13G to a 13D when influencing activity is taking place.  This is particularly important since the Wall Street Journal Deal Journal noted last week that the SEC is investigating a number of 13G filers for failing to act as passive investors and taking 13D like "activities".
2. The Majority of the Minority.  The Cablevision deal was one of those rare takeover transactions which was actually voted down by the shareholders.  Lear earlier this year was another one.  However, while some papers cited this as a victory for institutional shareholders and once again signaling a new age of shareholder activism, I wouldn't make too much of it.  This is because, the Cablevision deal was required to be approved by a majority of the minority.  The minority here held only 35.4% of Cablevision.  This meant only 17.7% of the Cablevision shares needed to vote against the merger for it to be defeated (and Gabelli held 8.25%).  This was a much lower threshold than a simple majority and also meant defeat was easier. 
3. The Stink Stays on a Bad Deal.  Given their past bids, the Dolans had significant pre-existing adverse opinion to effect in this third attempt to take Cablevision private.  It likely made shareholders more skeptical and less willing to trust that the Dolans were acting fairly here.  Their quick settlement of the shareholder litigation for a $30 million increase in the consideration and payment by Cablevision of approximately $30 million in plaintiffs' attorneys fees did not help.

Applebee's and the New, New Thing: Appraisal Rights

The Applebee's shareholder meeting to vote on its acquisition by IHOP is today at 10:00 a.m. (Kansas time). The meeting will be held at the Doubletree Hotel, 10100 College Blvd., Overland Park, Kansas 66210 for those who wish to attend (pancakes anyone?).  The vote is likely to be a close one.    Applebee's senior management, which holds about 5.1% of the company's shares, is probably going to vote against the transaction; they previously voted against it on the company's board.  Burton "Skip" Sack, Applebee's largest individual shareholder, with about 3.2% of the stock, has also exercised his dissenter's rights and filed for an appraisal proceeding in Delaware Chancery Court if the transaction goes through.  Sowing some confusion, the proxy services have split on the deal.  Institutional Shareholder Services and Glass, Lewis & Co. favor the deal; Proxy Governance and Egan-Jones Proxy Services are against it.

Sack's exercise of appraisal rights is the third such maneuver in a troubled deal in recent months.  Crescendo Partners exercised appraisal rights in the acquisition of Topps by Michael Eisner's Tornante and MDP Partners with respect to 6.9% of the total number of outstanding Topps shares.   And Mario Gabelli's GAMCO exercised appraisal rights in the failed Cablevision take-private with respect to 8.25% of the total number of outstanding Cablevision shares.

I would expect these events to happen more often as institutional and other significant investors flex their muscles in troubled deals.  In addition, exercising appraisal rights sets up the investor nicely If no one else has exercised appraisal rights.  There will now be no free-rider problem or multiple litigants for the dissenter to negotiate with.  Instead, it can now negotiate a private one-on-one deal with the buyer as to the purchase price for its shares under the shadow of its appraisal rights litigation.  This is a benefit typically unavailable to the average shareholder who cannot afford the litigation expenses and free rider problems of appraisal rights.  Of course, this highlights the problems of appraisal rights generally in Delaware. 

Note, the Wall Street Journal Deal Journal noted this trend last week in a post and incorrectly attributed it to the recent Delaware decision in In re: Appraisal of Transkaryotic Therapies, Inc. (access the opinion here; see my blog post on it here).  This case held that investors who buy target company shares after the record date and own them beneficially rather than of record may assert appraisal rights so long as the aggregate number of shares for which appraisal is being sought is less than the aggregate number of shares held by the record holder that either voted no on the merger or didn’t vote on the merger.  As Chancellor Chandler stated:

[a] corporation need not and should not delve into the intricacies of the relationship between the record holder and the beneficial holder and, instead, must rely on its records as the sole determinant of membership in the context of appraisal.

The court ultimately held that since the "actions of the beneficial holders are irrelevant in appraisal matters, the inquiry ends here."  [NB.  most shareholders own their shares beneficially rather than of record with one or two industry record-holders so this decision will apply to almost all shares held by Applebee's and in fact any other public company]

Post-Transkaryotic a number of academics and practitioners raised the concern that this holding would encourage aggressive investors (read hedge funds) to create post-record date/pre-vote positions in companies in order to assert appraisal rights with respect to their shares.  This would be particularly the case where the transaction was one being criticized for a low offered price.  [NB. Lawrence Hamermesh, a well-known professor at Widener University School of Law, disagreed with such thoughts on the Harvard Law School Corporate Governance Blog].

But the Wall Street Journal was incorrect to attribute the emergent trend of appraisal rights to Transkaryotic since in the three cases above we are not dealing with an arbitrage or post-record date acquisition exercise of appraisal rights.  Here, the exercise of appraisal rights were by long-term shareholders who have not been effected (or even aided) by the Transkaryotic decision. 

Still, it will be interesting to see what will happen in the Applebee's transaction and whether the strategy hypothesized in Transkaryotic  will come to pass.  It didn't happen in either Topps or Cablevision but perhaps we will be third time lucky. Applebee's, after all, is the perfect situation for such an exercise. 

Practice Point:  Given the rise in appraisal rights, buyers would do well to include an appraisal rights condition in their merger agreement which conditions the closing on no more than x% of the shareholders dissenting from the transaction.  Topps and Cablevision had the provision, Applebee's does not.  By not including it, IHOP has risked a situation similar to what occurred in Transkaryotic.  There approximately 34.6 percent of Transkaryotic shareholders sought appraisal rights.  Yikes. 

On Hiatus Today/Goodman Global

I'll be back on Monday.  For weekend reading, here is the Goodman Global merger agreement with Hellman & Friedman via Chill Acquisition Corp.  Some fun things in it which I will talk about next week, including the following atypical condition to H&F's completion of the merger:

The Company and its Subsidiaries, on a consolidated basis, shall have realized not less than $255 million in EBITDA (as hereinafter defined) for the fiscal year ended December 31, 2007. “EBITDA” shall mean EBITDA as defined in the existing indenture, dated as of December 23, 2004, governing the 7 7/8% Senior Subordinated Notes due 2012 of Holdings modified as follows: (i) business optimization expenses and other restructuring charges under clause (4) thereof shall only be permitted to be added back up to an aggregate amount of $5,000,000 for the twelve -month period ended December 31, 2007 and (2) EBITDA for the 3-month period ended March 31, 2007 and June 30, 2007, respectively, shall be deemed to be $32,700,000 and $88,300,000, respectively.

Funny, they didn't put that in their Monday press release.   

Harman: Bad to the Bone

Well, not surprisingly Harman waited the maximum four business days allowed under the Form 8-K rules to file the agreements related to its settlement with its former purchasers, KKR and GSCP.  Here they are:

Termination and Settlement Agreement

Indenture for $400 million Notes

First, the settlement agreement.  And once I started reading, it didn't take long for me to be shocked.  Right there in the recitals the agreement states:

WHEREAS, Parent and Merger Sub have determined that they are not obligated to proceed with the Merger based on their belief that a Company Material Adverse Effect has occurred and their belief that the Company has violated the capital expenditures covenant in the Merger Agreement.

WHEREAS, the Company steadfastly denies that a Company Material Adverse Effect has occurred or that the Company violated the capital expenditures covenant in the Merger Agreement.

I had heard street rumors that Harman had allegedly violated the cap ex requirement in their merger agreement but I had refused to believe it as too far-fetched.  Nonetheless, there is hte allegation (underlined).  But to see why I am so schocked, let's take a look at the actual cap ex requirement in Section 5.01(b)(vi) of the Harman merger agreement.  It requires that Harman shall not:

(vi) make any capital expenditures (or authorization or commitment with respect thereto) in a manner reasonably expected to cause expenditures (x) to exceed the capital expenditure budget for the 2007 fiscal year previously provided to Parent or (y) for the 2008 fiscal year to exceed the 2008 capital expenditure budget taking into account reasonably anticipated expenditures for the balance of the year as well as expenditures already committed or made (assuming for this purpose that fiscal 2008 capital expenditure budget will not exceed 111% of the fiscal 2007 capital expenditure budget);

This is a bright line test.  Typically, right after the merger agreement is signed the M&A attorneys will sit down with the CFO and other financial officer and point this restriction out (actually these officers are also involved in the negotiation of this restriction since this is their bailiwick).  Since there is a set dollar amount in this covenant it is very easy to follow and thus for a company not to exceed its dollar limitations.  The CFO or other financial officer simply puts in place systems to make sure that the company does not violate the covenant by spending more than that amount.  This is no different than my wife telling me I can't spend more than $500 this month on entertainment.  It is a direction I can easily follow and I know there are consequences if I do not (Oh, and I do follow it).  This is no different here -- a violation of the cap ex covenant provides grounds for the buyers to terminate the agreement.  But this is and should be a problem for sellers.

Because of all this, if your attorneys have done their job and informed you of this covenant and included you in its negotiation, to violate it is really just plain old gross negligence.  And such a violation is just the allegation made by the buyers here.  Harman denies them, but if it is true people should be fired over this.  Also expect the class action attorneys to amend their pending suits to include this claim to the extent it is not already in there. 

I also spent a fair bit of time this morning trying to work out the value of these $400 million notes.  To do so you need to add on the value of the option to convert the notes into Harman shares.  The formula in the indenture for this conversion is a bit complicated, so I want to check my math.  It is also an American option so Black-Scholes can't be used.  In any event, I'll post my back of the envelope calculations tomorrow.  If anyone else does this exercise, send me your results and we'll cross-check. 

Also note that the Indenture has a substantial kicker in Section 10.13(c) if there is a change in control in Harman.  That is a nice bonus:  lucky limited partners of KKR and GSCP. 

The notes were purchased as follows:

KKR I-H Limited $ 171,428,000.00

GS Capital Partners VI Fund, L.P. $ 26,674,000.00

GS Capital Partners VI Parallel, L.P. $ 7,335,000.00

GS Capital Partners VI Offshore Fund, L.P. $ 22,187,000.00

GS Capital Partners VI Gmbh & Co. KG $ 948,000.00

Citibank, N.A $ 85,714,000.00

HSBC USA, Inc. $ 85,714,000.00

But Citibank and HSBC have quickly hedged (really disposed of) their ownership risks and benefits under the notes per the following language in the Form 8-K:

Concurrently with the purchase of the Notes by Citibank and HSBC, each of them entered into an arrangement with an affiliate of KKR pursuant to which the KKR affiliate will have substantial economic benefit and risk associated with such Notes

And for those who love MAC definitions (who doesn't), just for fun I blacklined the new definition in the note purchase agreement against the old one in the merger agreement.  Here it is:

“Material Adverse Effect” means any fact, circumstance, event, change, effect or occurrence that, individually or in the aggregate with all other facts, circumstances, events, changes, effects, or occurrences, (1) has or would be reasonably expected to have a material adverse effect on or with respect to the business, results of operation or financial condition of the Company and its Subsidiaries taken as a whole, or (2) that prevents or materially delays or materially impairs the ability of the Company to consummate the Mergertransactions contemplated by the Transaction Agreements, provided, however, that a Company Material Adverse Effect shall not include facts, circumstances, events, changes, effects or occurrences (i) generally affecting the consumer or professional audio, automotive audio, information, entertainment or infotainment industries, or the economy or the financial, credit or securities markets, in the United States or other countries in which the Company or its Subsidiaries operate, including effects on such industries, economy or markets resulting from any regulatory and political conditions or developments in general, or any outbreak or escalation of hostilities, declared or undeclared acts of war or terrorism (other than any of the foregoing that causes any damage or destruction to or renders physically unusable or inaccessible any facility or property of the Company or any of its Subsidiaries); (ii) reflecting or resulting from changes in Law or GAAP (or authoritative interpretations thereof); (iii) resulting from actions of the Company or any of its Subsidiaries which ) to the extent resulting from the determination of KHI Parent has expressly requested or to which Parent has expressly consented; (iv) to the extent resulting from the announcement of the Inc. and KHI Merger Sub Inc. that they were not obligated to proceed with the merger under the Merger or the proposal thereof or this Agreement and the transactions contemplated herebyAgreement or any of the facts or circumstances underlying that decision, including any lawsuit related thereto (including the pending putative class action in the Federal District Court in the District of Columbia) or any loss or threatened loss of or adverse change or threatened adverse change in, in each case resulting therefrom, in the relationship of the Company or its Subsidiaries with its customers, suppliers, employees, shareholders or others; (iv) resulting from actions of the Company or any of its Subsidiaries which a Sponsor or any of their Controlled Affiliates has expressly requested or to which a Sponsor or any of their Controlled Affiliates has expressly consented; (v) to the extent resulting from the announcement of the termination of the Merger Agreement, the purchase of the Notes pursuant to this Agreement, or the proposal thereof, or this Agreement or the Termination and Settlement Agreement and the transactions contemplated hereby or thereby, including any lawsuit related thereto or any loss or threatened loss of or adverse change or threatened adverse change, in each case resulting therefrom, in the relationship of the Company or its Subsidiaries with its customers, suppliers, employees or others; (vi) resulting from changes in the market price or trading volume of the Company’s securities or from the failure of the Company to meet internal or public projections, forecasts or estimates provided that the exceptions in this clause (vi) are strictly limited to any such change or failure in and of itself and shall not prevent or otherwise affect a determination that any fact, circumstance, event, change, effect or occurrence underlying such change or such failure has resulted in, or contributed to, a Company Material Adverse Effect; or (vi) i) resulting from the suspension of trading in securities generally on the NYSE; except to the extent that, with respect to clauses (i) and (ii), the impact of such fact, circumstance, event, change, effect or occurrence is disproportionately adverse to the Company and its Subsidiaries, taken as a whole. 

Note the addition of a litigation exclusion for the pending shareholders class actions.  Smart move.

Bioenvision Deal Approved

Bioenvision, Inc. announced yesterday that its stockholders had voted to approve the acquisition of the company by Genzyme at a reconvened meeting of its shareholders. Fifty-six percent of Bioenvision's shares of common stock and preferred stock supported the merger. This represented approximately 67 percent of the total shares voted. 

For my prior posts on this deal see:

Bioenvision and DGCL 231(c)

Bioenvision: Wins in Delaware?!

Bioenvision: Pulling a Topps or an OSI?

Dow Jones/News Corp.: The History

Dow Jones filed a revised proxy statement yesterday.  For those who love their corporate intrigue, I recommend you read the background to the transaction section -- lots of back and forth and interesting nuggets.  It is great weekend reading. 

Allocating the Potential Liability of the Flowers Group

The WSJ Deal Journal had a post yesterday on the Flowers group's allocated liability for the $900 million break fee in connection the SLM merger agreement.  The post quoted a source who stated that:

“It has been difficult to get information out of Flowers on this one,” one investor told PE Hub. “We aren’t even sure how the $900 million breakup fee will be allocated among the syndicate.”

The post then linked to a Breakingviews post asserting that the Flowers group was only on the hook for $200 million of the $900 million fee if it was required to be paid (that is a big if). 

I'm not sure where these figures come from.  In the SLM complaint, SLM states that Flowers has guaranteed $451,800,000, JP Morgan $224,100,000, and BofA $224,100,000 of the $900 million termination fee.  So, again, I don't know how breakingviews got from $451 million to $200 million. 

Of course, internally and privately the parties may have reordered these guarantees.  This may very well be the case as some public reports have stated that JP Morgan and BofA are driving this renegotiation and stand to lose a much greater amount than the termination fee if the deal goes through.  It would not be a surprise if they agreed to cover some of Flowers potential liability here in case SLM is successful on its claims in Delaware. 

Topps Closes

Topps issued the following press release on Friday:

The Topps Company, Inc. (Nasdaq: TOPP) today announced the closing of the acquisition of Topps by Michael Eisner's The Tornante Company LLC and Madison Dearborn Partners, LLC. Under the terms of the agreement, Topps stockholders will receive $9.75 in cash for each share of Topps common stock held, for a total aggregate purchase price of approximately $385 million payable to stockholders.

"This is a great day for Topps and its shareholders," said Arthur T. Shorin, Chief Executive Officer of Topps. "This transaction provides our former investors with full value for their shares and ensures the further success of our iconic company."

Topps President and Chief Operating Officer Scott Silverstein added, "We are pleased to have an experienced and talented group of investors who are committed to growing our company and to delivering added value to our partners, the people who enjoy our products every day, and our terrific team of employees whose efforts have made this transaction possible."

"Topps is a wonderful company with a rich history and a strong brand portfolio. We look forward to working with the company's outstanding management and employees to grow Topps in new and innovative ways," Eisner said on behalf of the investors.

Given the way the Topps board manipulated the takeover process and spurned a higher offer from Upper Deck, both over vociferous shareholder objections, I'm not sure how great a day it was for Topps' shareholders.  They have now lost out on the potential upside Eisner et al. have purchased.  Eisner wins again for now. 

There was also no mention in the above release of the final number of dissenting shareholders, but it must have been below the 15% condition set in the merger agreement.  Still, Crescendo Partners has delivered to Topps a written demand for the appraisal of 2,684,700 shares of Topps common stock (or approximately 6.9% of the total number of outstanding shares of Topps common stock).  In a nice maneuver, they will not get to negotiate for a higher price outside the takeover process. 

Despite the loss of Topps as a public company we will still have a Delaware decision (In re Topps Shareholders Litigation, 2007 WL 1732586 (Del.Ch. June 14, 2007)) and a great case study in how not to run a takeover process.  Sayanora Topps.  For my prior posts on the Topps deal see the following:

Topps: The End Game of Dissenters' Rights

Topps and In re: Appraisal of Transkaryotic...

Topps: Not Over Yet

Topps Shareholder Meeting Tomorrow

Topps's Predictable Postponement

Topps's Car Wreck

Upper Deck Extends Tender Offer

Topps's Dilemma

Upper Deck Ducks a Second Request

Topps Postpones Shareholder Meeting

Upper Deck Tries to Buy Time

Topps and Upper Deck: The Antitrust Risk

More on Topps

In Re Topps Company Shareholders Litigation/In...

The Battle for Topps

Trading Baseball Card Companies

3Com -- Surprise. Surprise.

Yesterday, 3Com filed its merger agreement.  As I read it, I felt like one of those cult members who predicts the end of the Earth on a date certain and wakes the day after to find everything still there.  Do they repent?  No, they fit the new facts into their situation and keep their belief. 

Well, 3Com did not go the Avaya route as I predicted.  Instead, they kept to the old private equity structure and included a highly negotiated reverse termination fee structure.  Essentially, 3Com and their lawyers (Wilson Sonsini) agreed that the buyers (Bain and Huawei) have a pure walk right if they pay a termination fee of $110,000,000 (Section 8(j) of the merger agreement).  This is about 5% of the transaction value of $2.2 billion.  And in certain situations, such as if the debt financing falls through, the buyers would only be liable for $66,000,000 if they breach the merger agreement and walk (I spell out these situations at the end of this post).

So, how do we explain this?  Well, one of the other interesting things about the 3Com merger agreement is that it is not conditioned upon financing; a fact 3Com did not even publicize in its press release or make an explicit condition in the merger agreement.  So, I think the conversation went something like this:  3Com -- we can't agree to this reverse termination fee as it will give you too much optionality.  Bain -- OK, well we can't expose our investors to liability for the full purchase price; if you won't agree to this then we need a financing condition.  Plus, we are really nice people and would never do that to you.  Banks piling on -- we won't finance this deal if there is specific performance on our commitment letters.  3Com -- OK -- no financing condition -- but we want a high termination fee of 5% to compensate us if you do indeed walk without a reason.  So, like the cult survivor this is my best explanation in order to keep my belief in rational negotiating, although there is a lower termination fee if the financing falls through, so I am still struggling to see the logic of the terms here.  In their conference call on Friday, 3Com was particularly unhelpful in talking about the terms of the agreement -- refusing to answer questions on the amount of the Huawei investment and instead stating "you’re going to have to wait a couple days or a little while before you can get specific answers to those questions."  They were also a bit defensive about the fact that one analyst suggested that if you exclude 3Com's ownership of H3C it values the remainder of 3Com at "$0.75, $0.80" a share.  Ouch. 

I'm also a bit troubled by some of the other terms which 3Com and its lawyers negotiated.  First, there is no go-shop in the transaction.  Even though these provisions have their problems (see my post on this here), it does provide some opportunity for other bidders to emerge and shields the seller from claims of favoritism, so I am a bit surprised 3Com did not include it.  In addition, if 3Com shareholders vote down the transaction, 3Com agreed in clause 8.3(b)(v) to reimburse the buyers for their fees and expenses up to $20 million.  This is unusual and an excessive amount of money for 3Com to pay merely because its shareholders exercised their statutory voting rights to reject the deal.  The termination fee in case of a competing bid is a market standard of $66 million (3% of the deal value) and does not require that the company pay the fees and expenses of the buyers. 

I think the most annoying part of the agreement from my perspective was this clause 7.1(b) which conditioned the merger occurring on:

(b) Requisite Regulatory Approvals. (i) Any waiting period (and extensions thereof) applicable to the transactions contemplated by this Agreement under the HSR Act shall have expired or been terminated, (ii) any waiting periods (and extensions thereof) applicable to the transactions contemplated by this Agreement under the Antitrust Laws set forth in Schedule 7.1(b) shall have expired or been terminated, and (iii) the clearances, consents, approvals, orders and authorizations of Governmental Authorities set forth in Schedule 7.1(b) shall have been obtained.

Read the highlighted condition.  Of course, 3Com did not disclose Schedule 7.1(b) and refused to answer questions on the agreement on their conference call yesterday.  So, investors at this point still don't know all of the conditions to the deal.  I can't see how this is not a material omission in violation of the federal securities laws (read my post on the SEC action against Titan).   I really wish the SEC would crack down on this practice since a shareholder action on this claim is a loser because of the holding in Dura Pharmaceuticals (see my post on this here).  It is particularly important here because the inclusion of a Chinese buyer might lead to an Exon-Florio filing for this deal.  And the condition that we can't see might be exactly that -- a condition that Exon-Florio clearance is required to complete the deal.  Given that this is a Chinese buyer it is bound to attract CFIUS scrutiny whether justified or not.  In this case, it may be justified -- apparently sharing 3Com's networking technology with the Chinese does raise national security concerns.  (By the way, for an explanation of the Exon-Florio process and the term CFIUS see my first post today here).  Shame on 3Com for not disclosing the condition immediately or even informing the public of the amount of the Chinese investment at this time.  If 3Com is indeed going to clear Exon-Florio in this transaction they need to handle their public relations better.

Finally the MAC clause is in the definitions and states: 

“Company Material Adverse Effect” shall mean any effect, circumstance, change, event or development (each an “Effect”, and collectively, “Effects”), individually or in the aggregate, and taken together with all other Effects, that is (or are) materially adverse to the business, operations, condition (financial or otherwise) or results of operations of the Company and its Subsidiaries, taken as a whole; provided, however, that no Effect (by itself or when aggregated or taken together with any and all other Effects) resulting from or arising out of any of the following shall be deemed to be or constitute a “Company Material Adverse Effect,” and no Effect (by itself or when aggregated or taken together with any and all other such Effects) resulting from or arising out of any of the following shall be taken into account when determining whether a “Company Material Adverse Effect” has occurred or may, would or could occur: (i) general economic conditions in the United States, China or any other country (or changes therein), general conditions in the financial markets in the United States, China or any other country (or changes therein) or general political conditions in the United States, China or any other country (or changes therein), in any such case to the extent that such changes, effects, events or circumstances do not affect the Company and its Subsidiaries in a disproportionate manner relative to other participants in the industries in which the Company and its Subsidiaries conduct business; (ii) general conditions in the industries in which the Company and its Subsidiaries conduct business (or changes therein) to the extent that such changes, effects, events or circumstances do not affect the Company and its Subsidiaries in a disproportionate manner relative to other participants in the industries in which the Company and its Subsidiaries conduct business; (iii) any conditions arising out of acts of terrorism, war or armed hostilities to the extent that such conditions do not affect the Company and its Subsidiaries in a disproportionate manner relative to other participants in the industries in which the Company and its Subsidiaries conduct business; (iv) the announcement of this Agreement or the pendency or consummation of the transactions contemplated hereby, including the impact thereof on relationships (contractual or otherwise) with suppliers, distributors, partners, customers or employees; (v) any action taken by the Company or its Subsidiaries that is required by this Agreement, or the failure by the Company or its Subsidiaries to take any action that is prohibited by this Agreement; (vi) any action that is taken, or any failure to take action, by the Company or its Subsidiaries in either case to which Newco has approved, consented to or requested in writing; (vii) any changes in Law or GAAP (or the interpretation thereof); (viii) changes in the Company’s stock price or change in the trading volume of the Company’s stock, in and of itself (it being understood that the underlying cause of, and the facts, circumstances or occurrences giving rise or contributing to such circumstance may be deemed to constitute a “Company Material Adverse Effect” (unless otherwise excluded) and shall not be excluded from and may be deemed to constitute or be taken into account in determining whether there has been, is, or would be a Company Material Adverse Effect; (ix) any failure by the Company to meet any internal or public projections, forecasts or estimates of revenues or earnings in and of itself (for the avoidance of doubt, the exception in this clause (ix) shall not prevent or otherwise affect a determination that the underlying cause of such failure is a Company Material Adverse Effect); or (x) any legal proceedings made or brought by any of the current or former stockholders of the Company (on their own behalf or on behalf of the Company) resulting from, relating to or arising out of this Agreement or any of the transactions contemplated hereby.

For those of you who have better things to do than slog through this definition, it is favorable to 3COM -- it contains no forward-looking element and specifically excludes failure to meet projections from the definition among other things. 

Final Conclusion:  3Com is an unusual deal for a variety of reasons.  In addition, the model in 3Com is one that Wilson Sonsini has negotiated in other deals (see, e.g., Acxiom). It may indeed signal that past practices here with respect to private equity deals and reverse termination fees will continue as the norm albeit with higher buyer reverse termination fees.  But, like the cult survivor, for now I'm going to keep my belief and hope that its singularity will not effect future practice and that the Avaya model will become the standard.   Or at least that firms other than Wilson Sonsini might learn quicker and go that route. 

Addendum:  Reverse Termination Fee.

The relevant termination clause here is clause 8.1(g) which permits termination:

   (g) by the Company, in the event that (i) all of the conditions to the obligations of Newco and Merger Sub to consummate the Merger set forth in Section 7.1 and Section 7.2 have been satisfied or waived (to the extent permitted hereunder), (ii) the Debt Financing contemplated by the Debt Commitment Letters, Senior Secured Credit Agreement and/or Bridge Agreement (or any replacement, amended, modified or alternative Debt Commitment Letters, Senior Secured Credit Agreement and/or Bridge Agreement permitted by Section 6.4(b)) has funded or would be funded pursuant to the terms and conditions set forth in such Debt Commitment Letters, Senior Secured Credit Agreement and/or Bridge Agreement upon funding of the Equity Financing contemplated by the Equity Commitment Letters; (iii) Newco and Merger Sub shall have breached their obligation to cause the Merger to be consummated pursuant to Section 2.2 and (iv) a U.S. Federal regulatory agency (that is not an antitrust regulatory agency) has not informed Newco, Merger Sub or the Company that it is considering taking action to prevent the Merger unless the parties or any of their Affiliates agree to satisfy specified conditions (which may but need not include divestiture of a material portion of the Company’s business) other than as contemplated by Section 5.5 of the Company Disclosure Schedule, or such regulatory agency has informed the parties that it is no longer considering such action; or

If the agreement is terminated under this clause then the buyers are required to pay the Newco Default Fee ($110 million).  The clause limiting the buyers to paying this amount is in 8.3(g) (Limitation of Remedies) and  9.7 (Specific Performance).  Of particular importance, note that the debt financing must be funded for this termination provision to be triggered.  If the debt financing or other conditions above are not met, the buyers are then liable for the lesser amount of $66 million for breaching the agreement (clause 8.3(c)(i)).   

Acxiom: DOA

The Acxiom deal was terminated yesterday.  It is the second post-market crisis deal termination after MGIC/Radian and the first private equity one.  In the merger agreement, the maximum damages payable by the buyers in case of breach of the agreement was $111.25 million, although in certain circumstances, such as a falling through of debt financing, the buyers could pay a reduced reverse termination fee of $66.75 million (a similar structure to 3Com -- hmm Wilson Sonsini was counsel for the targets on this deal and 3Com also -- shocking I know).  The fact that the parties agreed that the buyers only needed to pay $65 million to terminate the deal likely reflects the parties assessment of their chances of success in litigation over a material adverse change dispute and the continuing availability of financing for the transaction.  It would also be interesting to know which of the buyers, Silver Lake or ValueAct was driving the termination here.  This is because ValueAct still owns 12.8% of Acxiom; the termination must have particularly hurt them.   But, in any event, Acxiom now begins the hard task of restoring market credibility and proving that it is no longer "damaged goods".  Silver Lake's likely reaction, "best of luck in your endeavors."  The press release follows:

LITTLE ROCK, Ark.--(BUSINESS WIRE)--Acxiom® Corporation (NASDAQ: ACXM; www.acxiom.com) announced today that it has reached an agreement with Silver Lake and ValueAct Capital to terminate the previously announced acquisition of Acxiom by Axio Holdings, LLC, a company controlled by Silver Lake and ValueAct Partners. Acxiom, Silver Lake and ValueAct Partners have signed a settlement agreement pursuant to which Acxiom will receive $65 million in cash to terminate the merger agreement. Charles Morgan, Acxiom Chairman and Company Leader, said, "Acxiom has been an industry leader for over three decades, and we will continue to execute on our long-term strategy to remain the market leader in database marketing, services and data products. While I am disappointed that we could not conclude the merger, we have renewed energy and remain focused and committed to delivering value for our shareholders and clients." About Acxiom Corporation Acxiom Corporation (NASDAQ: ACXM - News) integrates data, services and technology to create and deliver customer and information management solutions for many of the largest, most respected companies in the world. The core components of Acxiom's innovative solutions are Customer Data Integration (CDI) technology, data, database services, IT outsourcing, consulting and analytics, and privacy leadership. Founded in 1969, Acxiom is headquartered in Little Rock, Ark., with locations throughout the United States and Europe, and in Australia, China, and Canada. For more information, visit www.acxiom.com. Acxiom is a registered trademark of Acxiom Corporation.

Addendum:  Acxiom refers to the $111.25 million fee above as a cap on damages.   They do so because it is phrased as a limitation on the maximum amount Acxiom can collect if the buyers breach their agreement and walk.  They argue it is not a reverse termination fee per se because they affirmatively have to sue and prove damages up to the cap to collect on it rather than a notice provision where the buyers need to sue.  In contrast, the $66.75 million is specifically contemplated as a break fee if financing isn't available. 

Topps and In re: Appraisal of Transkaryotic Therapies

On Wednesday, Crescendo Partners announced in a press release that it would elect to exercise appraisal rights with respect to its 6.9% share ownership in Topps.  I noted yesterday that Crescendo's action might spur other shareholders to exercise appraisal rights in this deal.  The reason why is that unlike entire fairness litigation in Delaware, which is typically contingency fee based, shareholders in appraisal proceedings shareholders must front the costs. This creates a collective action problem among others -- shareholders, particularly smaller ones, do not want to bear these expenses, do not have the wherewithal to bring an appraisal action and are unable to coordinate their actions to do so.  I wrote yesterday that this is a problem ameliorated in the Topps deal now since shareholders know Crescendo will be bearing some, if not all, of these costs.  The consequence may be a higher than ordinary number of shareholders exercising appraisal rights.  And, the Topps merger agreement is conditioned on no more than 15% of shareholders exercising appraisal rights, so if a sufficient number exercise these rights it will give Eisner's Tornante Company and Madison Dearborn Partners a walk right and put the deal in jeopardy. Topps shareholders opposed to this deal now have an incentive to exercise their rights in order to attempt to crater it. 

There is another factor here which may raise the number of shareholders asserting appraisal rights:  The recent Delaware decision in In re: Appraisal of Transkaryotic Therapies, Inc. (access the opinion here; see my blog post on it here).  This case held that investors who buy target company shares after the record date and own them beneficially rather than of record may assert appraisal rights so long as the aggregate number of shares for which appraisal is being sought is less than the aggregate number of shares held by the record holder that either voted no on the merger or didn’t vote on the merger.  As Chancellor Chandler stated:

[a] corporation need not and should not delve into the intricacies of the relationship between the record holder and the beneficial holder and, instead, must rely on its records as the sole determinant of membership in the context of appraisal.

The court ultimately held that since the "actions of the beneficial holders are irrelevant in appraisal matters, the inquiry ends here."  [NB.  most shareholders own their shares beneficially rather than of record with one or two industry record-holders so this decision will apply to almost all shares held by Topps and in fact any other public company]

Post-Transkaryotic a number of academics and practitioners raised the concern that this holding would encourage aggressive investors (read hedge funds) to create post-record date/pre-vote positions in companies in order to assert appraisal rights with respect to their shares.  This would be particularly the case where the transaction was one being criticized for a low offered price. 

Topps appears to be a good candidate for this strategy.  The price offered by Michale Eisner's  consortium has been criticized extensively for being too "low" and led a number of proxy service firms to recommend against the merger.  In addition, the record date on the transaction was August 10, which provided a long period for investors adopting this strategy to purchase their shares.  Ultimately, it appears that we are watching the first test of the Transkaryotic opinion.  It will be interesting to see whether the potential concerns raised by this decision come to pass.  And perhaps food for thought for the Delaware Supreme Court if, and when, it ever considers the holding of the Transkaryotic case.

Topps: Not Over Yet

The Topps shareholder meeting occurred yesterday, and it was yet again mired in controversy and accusations of manipulative practices by the Topps board.  According to Topps's press release issued yesterday, Topps's shareholders approved the proposal to be acquired by Michael Eisner's Tornante Group and Madison Dearborn Partners.   The press release was notable for not mentioning the preliminary count of votes.  But, the vote was likely exceedingly close.  Earlier in the day, Topps actually postponed the meeting yet again for a few hours because: 

Based on preliminary estimates of the vote count and discussions with a number of the Company's stockholders, the Company believes that substantially more votes are in favor of the transaction than against it, including stockholders who are in the process of voting or changing their votes to "FOR." However, at this time, the number of votes cast in favor of the transaction is not sufficient to approve the transaction under Delaware law. The Company has postponed the special meeting in order to provide an opportunity for these stockholders' votes to be received and for additional stockholders to vote "FOR" the merger. The Company intends to continue to solicit votes and proxies in favor of the merger during the postponement. During this time, stockholders will continue to be able to vote their shares for or against the merger, or to change their previously cast votes.

This raises a host of questions, including:  who were these shareholders?  Why did they not vote favorably the first time around?  And what did Topps say or do to get these shareholders to change their minds?  In addition, Topps's repeated postponement of the shareholder meeting to gain approval yet again shows their bias as well as the pernicious effects of Strine's recent decision in Mercier, et al. v. Inter-Tel which provided much wider latitude for Boards to postpone shareholder meetings in the takeover context in order to solicit more votes (more on that here). 

There is still substantial uncertainty that this deal will close.  Almost immediately after the announcement of the shareholder vote, Crescendo Partners issued its own press release announcing that it intended to "assert appraisal rights with respect to the shares it owns of The Topps Company, Inc. in connection with the merger agreement between Topps and entities owned by Michael D. Eisner and Madison Dearborn Partners, LLC."  The merger agreement is conditioned upon:

holders of no more than 15% of the outstanding shares of our common stock exercis[ing] their appraisal rights under Section 262 of the DGCL in connection with the merger

According to a recent 13D/A, Crescendo owns 6.9% of Topps.  However, assertion of appraisal rights in Delaware tends to be an exercise in herd behavior.  Crescendo's steps are likely to lead to more dissident shareholders exercising their appraisal rights, hoping to free-ride on Crescendo's efforts.  In any event. given the hostility and distrust of many shareholders of the Topps board's practices here and their criticism of the perceived low price, I would expect there to be significantly more shareholders taking the appraisal route than normal.  This may lead to the 15% condition not being satisfied thus putting Eisner & Co. in the position of facing litigation in Delaware with a very uncertain outcome.  Topps has already lost once in Delaware court; Eisner may not want to take that chance again by waiving the condition if it is not fulfilled.  The Topps board may still lose here. 

Topps Shareholder Meeting Tomorrow

In advance of the Topps shareholder meeting tomorrow, Michael Eisner's Tornante and Madison Dearborn issued a helpful press release entitled "Tornante and Madison Dearborn Will Not Raise Price for Topps Company Group Reiterates Final Price Prior to Wednesday’s Shareholder Vote".  In it they state that:

Topps is a wonderful company with a rich history, and we are prepared to buy it at the price of $9.75 per share set forth in our agreement. We thoroughly analyzed the value of Topps prior to entering into our deal with the company in March. We believed $9.75 per share was more than a full and fair price for the company then, and we continue to believe that to be the case now especially considering the current economic environment.  If Topps shareholders feel differently and vote against our deal this week, we wish them well, but our price is final and we will not increase it.

The statement comes on the heels of the recommendations by ISS, Glass, Lewis and Proxy Governance, Inc. that shareholders reject Eisner's merger proposal.  The ISS one is particular was interesting as it rested in part on the fact that "the original sales process exhibited something less than M&A 'best practices,' an opinion apparently shared by the Delaware courts."  ISS's focus on these issues for its recommendations is admirable.   

Topps had previously postponed its meeting based on VC Strine's recently issued decision in Mercier, et al. v. Inter-Tel, upholding the Inter-Tel's board's decision to postpone a shareholder meeting in circumstances of almost certain defeat.  It appears that the postponement still hasn't done Topps much good and the shareholders are likely to still vote down this transaction. 

Ultimately, the Topps board has done a disservice to its shareholders -- it has run this process in a biased manner, raised questions with respect to its dealings with Upper Deck, and been chastised in Delaware court for its failings in In Re Topps Shareholder Litigation.  A no vote will likely lead to a subsequent proxy contest by Crescendo Partners to remove the board members who supported this transaction.  In the meantime, under the merger agreement, Eisner would walk away with a payment of up to $4.5 million as reimbursement for his expenses. 

The Topps meeting is tomorrow, September 19, 2007 at 11:00 a.m., local time, at Topps' executive offices located at One Whitehall Street, New York, NY 10004.  If anyone attends and has some interesting information please let me know and I will post it.  Perhaps Topps will even give out souvenir cards -- shareholders would then at least have something to show for the deal.

Morgan Stanley's Big Freeze

I previously celebrated the Reddy Ice deal and the joys of M&A by proclaiming Reddy Ice's slogan "Good Times are in the Bag", the day the company announced that it would be acquired by GSO Capital Partners for $681.5 million in a deal valued at $1.1 billion including debt.  I should have known better -- it now appears that the celebration might have been a bit too soon.  Last week Reddy Ice filed its definitive proxy statement for the transaction.  The transaction history discloses a deal in crisis with Reddy Ice being hit by shareholder protests against the deal by Noonday Asset Management, L.P. and Shamrock Activist Value Fund L.P., the company's results for July coming below budget and recent guidance for 2007, and GSO proclaiming that it needed more time to finance the deal given the state of the debt markets and Reddy Ice.

In light of these problems, the parties ultimately agreed to amend the merger agreement to cap the future dividends Reddy Ice could pay while the transaction was pending, extend GSO's marketing period for the debt financing, move up the date of the Reddy Ice shareholder meeting to October 15, 2007, and reduce the maximum fee payable to GSO if Reddy Ice's shareholders rejected the transaction from $7 million to $3.5 million. Notably, Reddy Ice backed away from its initial position vis-a-vis GSO that it required an extension of the go-shop period and a postponement of the shareholder meeting in exchange for these amendments.  For those who don't believe that private equity reverse termination provisions will be a factor in this Fall's deal renegotiations, I suggest you read this transaction history very carefully.  The Reddy Ice board specifically cites its fears that GSO would simply walk from the transaction by paying the reverse termination fee of $21 million as a factor in its renegotiation.  Note that this amendment still preserves this option. 

Now Morgan Stanley is objecting to the amendment.  MS has agreed to provide GCO with debt financing for this transaction, and MS is claiming that the merger amendment was entered into without its consent thereby disabling its obligations under the commitment letter, a fact MS is reserving its rights with respect thereto.  MS agreed to a $485 million term loan facility, an $80 million revolving credit facility, and a $290 million senior secured second-lien term loan facility.  GSO and RI are disputing MS's claim and the transaction is not contingent on financing, i.e., unless it claims a MAC GSO has no other choice but to take this position.  The MS debt commitment letter is not publicly available but they are likely relying on the following relatively standard clause: 

[Bank] shall have reviewed, and be satisfied with, the final structure of the Acquisition and the terms and conditions of the Acquisition Agreement (it being understood that [Bank] is satisfied with the execution version of the Acquisition Agreement received by [Bank] and the structure of the Acquisition reflected therein and the disclosure schedules to the Acquisition Agreement received by [Bank]). The Acquisition and the other Transactions shall be consummated concurrently with the initial funding of the Facilities in accordance with the Acquisition Agreement without giving effect to any waivers or amendments thereof that is material and adverse to the interests of the Lenders, unless consented to by [Bank] in its reasonable discretion. Immediately following the Transactions, none of Borrower, the Acquired Business nor any of their subsidiaries shall have any indebtedness or preferred equity other than as set forth in the Commitment Letter.

I am not involved in the bank finance industry these days, but still, it is hard to see how this amendment is adverse to the position of MS (assuming that the clause in their debt commitment letter is similar to the one above).  If anything, the extension of the marketing period is beneficial to MS.  The remainder of the amendment does not appear to effect MS except perhaps the dividend provision, but GSO can always fund that if necessary.  But, Marty Lipton -- a man much smarter than me -- was recently on the wrong side of this debate when he made a similar argument in the context of the Home Depot supply deal, though that deal was more substantially renegotiated.  Ultimately, MS's position is likely similar to one taken by banks in the recent Home Depot and Genesco deals -- they are using ostensible contractual claims to attempt to renegotiate deals that no longer are attractive and they are likely to lose money on.  Here, based on a number of big assumptions, MS's claims seem a bit over-stated, though it may be enough to engender a further renegotiation of the deal premised upon MS's implicit threat to walk.  Good Times are NOT in the Bag. 

Final Note:  In a developing market with a number of situationa like this, MS is taking a shot at this strategy with a lower priority client first.  I doubt they would take the same position with KKR. 

MetroPCS's Takeover "motives"

Why M&A deals happen has been the subject of much study.  In the case of MetroPCS Communications, Inc.'s announced offer to merge with Leap Wireless International, there appear to be a number of rationales including synergies, cost-savings and the strategic one of creating a new, flat rate national wireless carrier with licenses covering nearly all of the top 200 markets.  But there may be another reason.  Here is a risk factor included in MetroPCS's S-1 filed earlier this year:

On June 14, 2006, Leap Wireless International, Inc. and Cricket Communications, Inc., or collectively Leap, filed suit against us in the United States District Court for the Eastern District of Texas, Marshall Division, Civil Action No. 2-06CV-240-TJW and amended on June 16, 2006, for infringement of U.S. Patent No. 6,813,497 “Method for Providing Wireless Communication Services and Network and System for Delivering of Same,” or the ’497 Patent, issued to Leap. The complaint seeks both injunctive relief and monetary damages for our alleged infringement and alleged continued infringement of such patent.

If Leap is successful in its claim for injunctive relief, we could be enjoined from operating our business in the manner we operate currently, which could require us to redesign our current networks, to expend additional capital to change certain of our technologies and operating practices, or could prevent us from offering some or all of our services using some or all of our existing systems. In addition, if Leap is successful in its claim for monetary damage, we could be forced to pay Leap substantial damages for past infringement and/or ongoing royalties on a portion of our revenues, which could materially adversely impact our financial performance. If Leap prevails in its action, it could have a material adverse effect on our business, financial condition and results of operations. Moreover, the actions may consume valuable management time, may be very costly to defend and may distract management attention away from our business.

The risk factor discloses a parade of horribles which could arise if Leap is successful in litigation.  Part of this is the nature of risk-factors, but despite the tendency of this disclosure to be over-dramatic there is always some truth in them.  With its offer, perhaps MetroPCS is looking to forestall a potentially adverse ruling by simply making a strategically sound acquisition thereby saving a few dollars.  I understand that the trial is scheduled for next August with a construction hearing scheduled for December.  If you can't beat 'em, buy 'em is the phrase; especially on the cheap -- MetroPCS's offer was only a four percent premium. 

Leap Wireless also responded to the offer today with the expected statement that they will now proceed to review it.  For those who read tea leaves, Leap has hired Wachtell, Lipton, Rosen & Katz, and Latham & Watkins, LLP as legal advisors; hiring Wachtell perhaps indicates they are spoiling for a fight.

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. 

Topps's Car Wreck

Earlier this week Upper Deck withdrew in a huff its competing tender offer for Topps leaving Topps with only a heavily criticized merger agreement with Michael Eisner's Tornante and MDP.  I'll write more tomorrow and in-depth on the upcoming Topps shareholder vote on that transaction and the current shareholder opposition.  But for now, I thought I would share this amazing letter Topps filed this morning.  It's long for a blog post, but I'm going to put most of it up since it is really one of those you have to read (at least for those people who slow down to watch car crashes).  I'll also post tomorrow my thoughts on a potential lawsuit by Topps's and their chance at success under the Williams Act and other grounds.

Mr. Richard McWilliam, Chief Executive Officer, The Upper Deck Company

Dear Mr. McWilliam:

We are extremely disappointed for our stockholders that you withdrew your tender offer.

You have misled our Board, our stockholders, the Delaware court and the regulators.  As a result, our stock price has gyrated wildly based on your false and misleading statements to the public. 

Our Board and management team have been intensely focused on maximizing value and, notwithstanding your self-serving statements to the contrary, we did indeed hope to reach an agreement by which Topps stockholders would receive $10.75 per share.  While we negotiated in good faith and used our best efforts to arrive at a transaction with you, given the lame excuses you assert in your letter of August 21 for taking such action, we believe it is now apparent to everyone that your tender offer was illusory.  Your conduct has been shameful, indefensible and, in my judgment, manipulative.

Your claim that you could not continue to proceed with your tender offer and finalize a transaction because the due diligence issues could not be resolved is specious.  You should have read our letter of August 20 with greater care.  In that letter, I stated that the Board was prepared to respond to every diligence request prior to signing a merger agreement, including those received recently. 

So that there is no confusion, the letter, which was publicly filed, stated: "we have told you time and again (and reiterate again for the record) that once we conclude a consensual agreement with you (but prior to signing, of course), we will provide you with every missing piece of information you have requested.”

Notwithstanding your additional diligence requests, which we publicly confirmed we would satisfy, a cursory look at your specific requests demonstrates that they would not contain any information that was necessary for you to determine whether to proceed with your tender offer. . . . .   

Time and again, Topps provided Upper Deck with a clear roadmap to a definitive agreement.  Upper Deck never once indicated a strong desire to get a deal done, other than through its misleading communications to the public.  We were stunned that we didn’t hear from you immediately after the HSR waiting period expired.  Frankly, we had expected a call at midnight from your advisors suggesting a meeting within a day or so to get a deal done.  That call never came (not at midnight, not over the weekend nor even the following week).  Instead, our advisors had to reach out to yours to ask when and if we could discuss a merger agreement. 

The details of your neglect have already been stated in my last letter so I won’t repeat them again here, but the fact is Topps pushed and pushed and Upper Deck delayed and delayed.  Never once did Upper Deck request a meeting to discuss any outstanding business issues.  Never once did Upper Deck offer to get in a room with business people and advisors to resolve differences.  Never once did you or your business people pick up the phone and call me or anyone else at Topps (other than in response to our calls to you).  All of the initiatives came from Topps - we had to send you drafts and then call or email repeatedly to get your advisors to focus.  We had to call and email to push the process forward.  We wrote letters to try to stimulate some kind of action on the part of Upper Deck.  All in all, no one could possibly believe that Upper Deck’s behavior resembled the behavior of a motivated buyer. 

All a legitimate buyer would have needed to do was to complete the tender on the terms you stated - buy whatever shares were tendered and then deal with the back-end either through a short-form or long-form merger.  You had the requisite regulatory approvals and claimed to have all of the financing.  All of the so-called conditions to your offer were, in fact, wholly within your control when you terminated your offer.  In any case, if Upper Deck had followed through on its tender offer, it could have acquired a majority of the shares in short order (and, we suspect, would have received overwhelming support for the offer from the stockholders), obtained control of the Board immediately and thereby thwarted any further efforts by any third party to acquire control of Topps or the Board.  That’s what a real buyer would have done.

Furthermore, given your lack of experience in the confectionery business, we find it more than curious that during the 5½ months since you have had access to our data room, you only performed a limited review of the hundreds of documents made available on Topps Confectionery, had no follow-up questions on the business, did not ask to speak with the supplier that manufactures most of our confectionery products and did not ask to speak with management to get clarity on the recent softening in performance.  We believe that any buyer would want to assess the value of Topps’ Confectionery business regardless of their plans for the business.  Topps Confectionery represents approximately half of the Company’s revenues and earnings and is the division that faces the most challenging strategic and financial conditions going forward. 

Finally, on August 21, we filed a merger agreement, which we believed our Board was prepared to recommend, subject only to Topps’ obligations under the existing merger agreement with Tornante-MDP.  Incredibly, rather than contact us or our advisors to finalize a transaction that would benefit our stockholders, you withdrew your tender offer.  It appears that you were using your tender offer as a Trojan horse to gain access to our confidential information, disrupt our business and interfere with our pending merger transaction, the consummation of which could threaten the success of your business. 

We intend to hold Upper Deck fully responsible for the damages you have caused Topps and its stockholders, and hope that our stockholders, or representatives acting on their behalf, and appropriate regulators will do likewise.; We will now turn our attention to completing the Tornante – Madison Dearborn Partners transaction.

Sincerely,

Allan A. Feder

Lead Director