M & A Law Prof Blog

Crown jewels making a comeback

Christina Sautter has a new paper - Fleecing the Family Jewels, which is set to appear in the Tulane Law Review.  The paper argues that crown jewel deal protections have made a comeback in recent years and reminds us why courts are often wary of them.  Here's the abstract:

Crown jewel lock-up options, a common deal protection device during the 1980s mergers and acquisitions boom, are back. During their popularity in the 1980s, these options took the form of agreements between a target company and a buyer pursuant to which the buyer was granted the right to purchase certain valuable assets, or crown jewels, of the target corporate family in the event the merger did not close. After both state and federal courts questioned the validity of these lock-ups in the 1980s, lock-ups lost their luster and dealmakers stopped using them. But as the saying goes, “everything old becomes new again,” and crown jewel lock-ups have made a return in recent transactions. This time around, dealmakers and have been quick to distinguish the modernized crown jewel lock-ups from their predecessors. Although there has been limited case law addressing the validity of these lock-ups, courts appear more likely to uphold the lock-up if the lock-up can be attributed to a business purpose other than the merger and if the lock-up could be a standalone agreement, separate and apart from the merger. This Article argues, however, that today’s lock-ups are not significantly different from their predecessors. Practitioners and courts should not lose sight of the 1980s jurisprudence that closely scrutinized the sale process preceding the lock-up as well as the deterrent effects of the lock-up on potential bidders. Failing to consider these factors and not giving these factors proper weight potentially results in companies and their shareholders being fleeced of their corporate family jewels and their value. At the same time, however, dealmakers should not be as quick to shy away from lock-ups as they have done in the past. As the 1980s jurisprudence made clear, lock-ups can be used to enhance shareholder value. In particular, this Article argues that dealmakers may use lock-ups after an extensive sale process to incentivize bidders and extract additional value for shareholders.

-bjmq

Strine weighs in on Don't Ask-Don't Waive

So, the relevant question is - if the world is going to end on Friday, why did I spend the past week in a cocoon grading exams?  Anyway...

On Monday, Chancellor Strine weighed in on Dont Ask-Don't Waive provisions in a bench ruling in the Ancestry.com shareholder litigation.  This issue has come before the court a couple of times in the past few months.  In November, Vice Chancellor Laster was asked to consider the provision in In re Complete Genomics.  He found it troubling.  And before that in Celera Corporation Shareholders Litigation Vice Chancellor Parsons also had an opportunity to weigh in on don't ask-don't waive.  In Celera, Parsons found them troublesome:

Here, the Don't-Ask-Don't-Waive Standstills block at least a handful of once-interested parties from informing the Board of their willingness to bid (including indirectly by asking a third party, such as an investment bank, to do so on their behalf), and the No Solicitation Provision blocks the Board from inquiring further into those parties' interest. Thus, Plaintiffs have at least a colorable argument that these constraints collectively operate to ensure an informational vacuum. Moreover, the increased risk that the Board would outright lack adequate information arguably emasculates whatever protections the No Solicitation Provision's fiduciary out otherwise could have provided. Once resigned to a measure of willful blindness, the Board would lack the information to determine whether continued compliance with the Merger Agreement would violate its fiduciary duty to consider superior offers. Contracting into such a state conceivably could constitute a breach of fiduciary duty.

Bidders aren't allowed to bid and sellers aren't allowed to ask.  To the extent previous Chancery Court rulings have ruled that boards violate their duties to the corporation by engaging in willful blindness, Don't-Ask Don't Waive provisions in standstills do raise legitimate issues.

Chancellor Strine recognized these potential problems on Monday when he considered the same provision in the Ancestry.com Shareholder Litigation.  He noted a couple of important things. First, these provisions are not per se illegal.  There are uses of don't ask-don't waive that are consistent with a director's fiduciary duties under Revlon.  For example, in designing an auction process, directors might want to design credible rules that will generate incentives for bidders to put their best bids on the table right away and thereby avoid potentially lengthy serial negotiations down the road.  The don't ask-don't waive provision signals to bidders (credibly, if it's enforceable) that they get only one shot at the apple.

On the other hand, such provisions as Strine noted, can be used by boards in a way that is inconsistent with their fiduciary duties. If directors lean on such provisions to close their eyes to a materially higher subsequent bid, they may be violating their duties to remained informed in the manner that Vice Chancellor Parsons was worried about in Celera.  

In this case, the board had disclosed to shareholders - who are supposed to vote on December 27 - that the board could terminate the transaction in the event it received a superior proposal.  The board did not disclose to shareholders that the most likely topping bidders were all boxed out by don't ask-don't waive provisions in the standstill agreement.  Strine ordered additional disclosures prior to the planned shareholder meeting, sidestepping for the timebeing the question of the don't ask-don't waive provision.  

I understand what he's trying to accomplish.  On the one hand, shareholders need to know that there isn't effective competition for the seller because of the provision that leaves out the most likely bidders.  On the other hand, if shareholders miss the Dec 27 window, then "fiscal cliff" implications may leave shareholders holding a much bigger tax bill.  Damned if you do, damned if you don't so to speak. So, he let it proceed and left it to shareholders with all the information in their hands, to decide whether or not to accept the offer on the table. 

-bjmq

No Cross Talking Lawsuit

We noted previously that the no-cross talking provisions in Yahoo's confidentiality agreement made it difficult for bidders to communicate with each other about possibly putting together a joint bid for Yahoo.  At the time, I suggested there might come a time when it might be unreasonable for the Yahoo board to sit on that provision.  Now, Kara Swisher notes that the inevitable lawsuits challenging the no-cross talk provisions have been filed. Here's the complaint in M&C Partners v Yang, et al.

While in some circumstances, a No Cross Talk Provision promotes vigorous competition among a host of interested parties, it can only have the opposite affect in the case ofYahoo, which is the classic “difficult sell.” Indeed, no bids for the entire company had been announced as of December 1, 2011. On November 30, 2011, it was reported that Yahoo had received a bid for a minority stake from private equity firm Silver Lake and several partners (including Microsoft) that values the Company at $16.60 per share, and a somewhat higher bid of about $17.50 per share from TPG Capital. This is far below Yahoo’s fair value. For example, David Loeb of Third Point, LLC (a 5% Yahoo shareholder) has placed Yahoo’s value at $27-28 per share.

The No Cross Talk Provision constitutes an unreasonable anti-takeover device, designed to entrench and favor Yang and the current Board. It tilts the playing field unreasonably in favor of Yang, who is working to attract investors who will take a large minority position in Yahoo (less than 20%, but enough to effectively block any future proxy contest), and who can be expected to support Yang’s desire to retain a disproportionate influence over Yahoo’s business and affairs.[citation] The favoritism toward Yang in this process is both irrational and unreasonable. Since 2000, Yang has been the architect of policies which have driven Yahoo’s market value down by an astounding 85% (from $140 billion in 2000 to the present $19.5billion). Indeed, it is fair to say that Yahoo would be worth little or nothing without minority investments it has made over the years in companies managed by neither Yang nor Yahoo.

The basic argument is that the no-cross talking provision should be analyzed as a defensive measure under the Unocal standard. Plaintiffs are hoping that the court will determine that the no-cross talking provision is an unreasonable defense that precludes any potential joint bid from appearing and thus not grant the board's decision to demand the provision as part of any confidentiality agreement is not subject to the business judgment presumption.  My guess is that while this argument has some merit, we're probably not there, yet. 

-bjmq

 

Steele on Pills and the Intermediate Standard

In early October, Chief Justice Myron Steele participated in a session in Canada about shareholder rights plans in the US and Canada.  The International Law Office has posted summaries of the panel discussion.  Steele's comments are interesting: 

The chief justice suggested that the view that Delaware law allows a board of directors to 'just say no' to a hostile offer has been overstated. In the context of appropriate findings of fact that a poison pill is no longer reasonable or that there is no sufficiently articulated long-term strategy that requires protection, he suggested that a case could be made for a mandatory injunction removing a poison pill under Delaware law. 

When Gilson and Kraakman wrote their paper, Delaware's Intermediate Standard for Defensive Tactics: Is There Substance to Proportionality Review?, they recommended that the court adopt a stance that would inject substance into proportionality review by requiring boards who wished to adopt and maintain defensive measures against an unwanted, but otherwise noncoercive offer, to articulate a long term strategy that they would have to live with. Could it be that Steele is open to a Gilson/Kraakman like approach to proportionality review? That might breathe new life into Unocal. 

But those weren't the only comments made by Steele:

Steele noted that the analysis is determined primarily by the facts found in each decision. Findings of fact made by the Court of Chancery are accepted on review by the Delaware Supreme Court unless they are clearly erroneous. Steele suggested that, with appropriate findings of fact, a pill could be removed under Delaware law. ...

Steele noted that there was a tension between the view, on the one hand, that the board should have power to defeat an inadequate hostile offer and the view, on the other hand, that, once the board has discharged its duty to make clear to shareholders its view of the long-term value of the corporation and there is no likelihood that the poison pill could be used to generate an alternative offer, it should be the shareholders' responsibility to decide whether to accept the board's view of the corporation's value or accept the bidder's offer. Chandler's opinion appeared to show some sympathy for the latter position. However, he described his analysis as "constrained by Delaware Supreme Court precedent". 

Steele took issue with the view that the Chancery is constrained in its ability to remove a pill in the appropriate circumstances. He suggested that if the chancellor had found facts that were inconsistent with it being reasonable to keep the pill in place, an injunction against maintaining the pill could be issued under Delaware law. Where there is a battle of valuations, rather than the defence of a long-term strategy, a case can be made for removing the pill and letting the shareholders decide. 

OK, so if the question is one about the adequacy of a noncoercive offer, is Steele suggesting that a board could be ordered to pull its pill?  That an inadequate offer on its own is not a cognizable threat?  Personally, I tend to agree and would be happy with that result.  But, I'd be surprised if the Supreme Court was already there intellectually and simply waiting for the Chancery Court to hand up an opinion for appellate review.  Could it be that Chandler in Air Products just got it wrong?

-bjmq

 

Hillbilly hand-fishing and Transatlantic Holdings

What!? You thought that just because Chancellor Strine got promoted that Strinisms would go away?  Forget it!  Late last month in a motion to expedite hearing in In re Transatlantic Holdings Chancellor Strine gave us his thoughts on hillbilly hand-fishing, which has apparently replaced Jersey Shore on the top of his DVR playlist.  Oh ... and he made some relevant comments about deal protections, banker conflicts, and standstill agreements, but for now, let's focus on the important stuff:

THE COURT: … And I’m not saying on this third scenario, that you may not have provided, you know, the color that you and Mr. Zimet are providing to the room because you've been, you know, vacationing, or just writing briefs in ties.

MR. ZIMET: Fishing.

THE COURT:  Did you catch something?

MR. ZIMET: Always.

THE COURT: Always?

MR. OFFENHART:  That's a little optimistic.

MR. ZIMET: It's shooting fish in a barrel. A little pond behind the house.

THE COURT: I thought you hired associates to go under the water and put them on the hook. It's a new Skadden summer associate program. I was so excited.  

“What did you do today?”

“I put a five-and-a-half-pound large-mouth bass on Mr. Zimet's hook.”

Do you do any hillbilly hand-fishing?

MR. ZIMET: What's that?

THE COURT: It's my son's new favorite show.

MR. ZIMET: Wrestling the catfish?

THE COURT:  They go and they surround these holes, and put their hand in there, and the fish bite at them, and they pull it out.  No other nation has anything like that.  We may not be able to pay our debts, but we can pull a catfish out of a hole!

So back to I guess more serious things than hillbilly hand-fishing, but it's taken very seriously by those who participate in it …

For those of you not in the know - here it is! As Chancellor Strine noted, we may not be able to pay our debts, but we can do this:

-bjmq

 

 

Sellers and deal certainty

Today's WSJ has a good example of why sellers are so focused on deal certainty:

Kirk Brundage opened his first T-Mobile store while he was still in college, added seven more in Idaho and Utah over the next half decade, and contemplated expanding into other states.

But by the end of next week, he'll be out of the wireless business.

Mr. Brundage's plans changed after AT&T Inc. unveiled its $39 billion deal to acquire T-Mobile USA. His business was already struggling, and he had considered getting out of it. But once the merger was announced, he decided it was time to sell quickly rather than try to turn the company around.

You hear this argument all the time and there is a certain amount of salience to it.  Once a deal is announced, customers, distributors, suppliers, employees all start doing internal calculations about what the future will hold for them with a combined company.  Some will decide that the future won't include them and will leave -- customers won't place orders, employees may look for other employment, and distributors, well, if they're like Mr. Brundage, they may decide that the distributorship isn't very valuable anymore.  That's the essence of the 'damaged goods' argument that sellers will use to negotiate for deal certainty and why they are so often focused on getting the deal done once it's announced.  Can't blame them.

-bjmq 

Hertz takes another bite at the Dollar apple

Hertz announced this morning that it was giving the acquisition of Dollar Thrifty another go.  You'll remember that last year, Dollar terminated its agreement with Hertz after Dollar shareholders voted no on its $50/share offer.   The sharehodler vote followed sharehiolder litigation in Delaware to try to get the deal protections in the Hertz-Dollar deal invalidated (In re Dollar Thrifty), resulting in a termination of the merger agreement.  Following which Dollar and Avis entered into protracted - and so far unsuccessful = talks amongst themselves and the antitrust authorities about getting a deal done.  

Apparently, Hertz has decided enough is enough and has decided to jump back in - hoping that Dollar shareholders will think differently this time around. Here's a summary of the new offer from the Hertz press release:

Hertz will offer Dollar Thrifty shareholders $72.00 per share (based on Hertz’s closing stock price on May 6, 2011), consisting of $57.60 in cash and 0.8546 shares of Hertz.  The offer represents:

   

    * a 26% premium and 18% premium to Dollar Thrifty’s 90-day and 60-day average share price, respectively;

    * a 7.6x multiple of Dollar Thrifty’s LTM EBITDA for the period ended March 31, 2011; and

a 24% premium to the value of the entirely hypothetical price announced by Avis Budget Group, Inc. (“Avis Budget”) over seven months ago.

 

In an e-mail to employees, Hertz's CEO Mark Frissora provides a little more information about their reasons for giving the acquisition of Dollar one more try.

You may wonder why we are moving forward now after the unsuccessful Dollar Thrifty shareholder vote last fall.  First, the vote did not prevent Hertz from re-engaging at any time of our choosing.  Additionally, economic conditions continue to improve, creating revenue growth opportunities over the next several years.  Moreover, Avis has been trying unsuccessfully for the past 12 months to secure government approval to buy Dollar Thrifty and all they have to show for their year-long efforts are “constructive discussions” with U.S. regulators.  We don’t believe Avis can get a deal done and the time is right to resolve this matter once and for all to our and Dollar Thrifty’s satisfaction.

In contrast with Avis, we’ve picked up where we left off with the government last fall and we are confident we can secure its consent to proceed.  Unfortunately, that will mean divesting Advantage Rent-a-Car in the U.S., which is not our preference, but it’s clear that a merger with Dollar Thrifty becomes far more difficult if the government opposes the transaction.

For its part, Hertz appears to be taking an aggressive stance towards offering Dollar's shareholders a deal they can't refuse.  It's offering an improved bid and is committing to  sell its Advantage rental brand (e-mail to Advantage employees)- to help clear the way for regulators to provide clearance to the proposed transaction. We'll see how Doolar II proceeds and whether shareholders have a different view on the transaction given what they've seen over the past few months. 

-bjmq

Update: Reuters has a timeline for this deal here.

FT: Takeover Panel set to ban break fees

The Takeover Panel in the UK is moving forward with reforms adopted in the wake of Kraft's acquisition of Cadbury.  One of the reforms is a near ban on termination fees.  

Among the biggest changes will be a tightened “put up or shut up” period, requiring a publicly named bidder to declare its formal intentions within 28 days, from a system where the clock starts ticking at the request of the target company.

Other changes include banning incentives that give special protection to the first bidder, commonly known as break fees.

This move highlights two different directions that regulatory bodies have moved with respect to the question of deal protections.  On the one hand, we have Delaware.  It's reasonableness standard with respect to any ex post review of deal protections is pretty deferential of board action. Absent allegations of loyalty conflicts, a board acting in good faith basically has a green light to grant deal protection measures.  On the other, we have an series of ex ante rules that govern what a board can or cannot do in advance of an acquisition, including setting strict limits on termination fees.  These are two very different ways of looking at the world.  If you were to only read Delaware case law, you'd think that no bidder would ever come forward absent strong deal protection measures.  But, when you look at the UK's takeover market you know that it's just not the case.  There is room for diversity in regulatory approaches.

-bjmq

Compellent's poison pill

In a real belt-and-suspenders approach to making sure there isn't another bidding contest, Dell is requiring its most recent target, Compellent, to adopt a shareholder rights plan as a condition of its merger.  On Dec. 13, Dell announced that it will be acquiring Compellent for $27.75/share in cash.  In a little twist that intended to give more teeth to what is now a relatively standard window shop provision, the merger agreement requires that Compellent adopt a shareholder rights plan:

 4.2 Operation of the Company’s Business. ... (e) Promptly (but no later than three days) after the date of this Agreement, the Company shall adopt a stockholder rights plan in the form previously approved by Parent (and otherwise satisfactory in form and substance to Parent). The Company shall not, without Parent’s prior written consent, amend or waive any provision of such rights plan or redeem any of the rights issued under such rights plan; provided, however, that the board of directors of the Company may amend or waive any provision of such rights plan or redeem such rights if: (i) (A) neither any Acquired Corporation nor any Representative of any Acquired Corporation shall have breached or taken any action inconsistent with any of the provisions set forth in Section 4.3, in Section 5.2 or in the Confidentiality Agreement, (B) the Company’s board of directors determines in good faith, after having consulted with the Company’s outside legal counsel, that the failure to amend such rights plan, waive such provision or redeem such rights would constitute a breach by the Company’s board of directors of its fiduciary obligations to the Company’s stockholders under applicable Delaware law, and (C) the Company provides Parent with written notice of the Company’s intent to take such action at least four business days before taking such action; or (ii) a court of competent jurisdiction orders the Company to take such action or issues an injunction mandating such action.

On cue, Compellent's board adopted a rights plan yesterday.  The plan is available here.  Now, is this rights plan going to stop a topping bid from coming in? No, it's not likely going to stop a motivated bidder. And, since Compellent's board has Revlon obligations (cash consideration for its sale triggered them), they are not going to be able to sit very long on a pill in the face of a plausible topping bid.   So, what's it all about?   That's a good question.  Perhaps Dell is using the adoption of the plan to signal to everyone else that they should stay away.  Unlike 3Par, Dell might actually want to buy this company!

-bjmq

 

-Update:  The Deal Prof thinks that the real target of this pill is not potential second bidders, but shareholder activists who might try to jump in to disrupt the sale.  That rings very true.  Although a board may not use a pill to prevent a topping bid and still comport with their obligations under Revlon, if the bidder were not a "real" bidder but a shareholder activist looking to blow up a deal, courts might not be so amenable to a challenge.    It's an interesting question, I'll give it some more thought over the holiday break.

Airgas bylaw reversed by Supreme Court

See that there?  That's egg on my face (ARG-DelSupCtOpinion).  It's a total victory for Ted Mirvis and Wachtell.  The Supreme Court even cited approvingly to the ABA's form book.  

The Supreme Court overturned the Chancery Court, basically holding that since everyone has always assumed the language "in the third year following the year of their election" means a "three year term" for directors, then four months between annual meetings is too truncated to count as an annual meeting.  So a  bylaw that moves the annual meeting to a date that isn't near the "traditional" date, but still "in the third year following the year of their election" is invalid.  That seems like a victory for poor (or sloppy) drafting: "in the third year following the year of their election" or "three year term" ... whatev's.  

Of course, the court leaves unanswered the next question - okay, so what's the minimum amount of time between annual meetings?  Five months?  Six months?  More?  

So the good news?  By ruling against the bylaw, the Supreme Court has given new life to Air Products challenge to Airgas' "just-say-no" defense.   Could it be that we might finally get "just-say-no" litigated?  We'll see.  Air Products' challenge to Airgas' poison pill is next up in the docket.

-bjmq

 

Appraisal - Arbs and top-up options

Last week following the decision in In re Cogent, I moved on.  I mean, why not, right?  The court passed on the deal and it can now proceed to close.  Well, not everybody is like me.  Who is like a dog with a bone?  Appraisal arbs, that's who.  Take a look at this press release from Koyote Trading to Cogent shareholders. (The Deal Prof noticed this, too.)  In it they write the following: 

“We are pleased that 3M acquired a 52% stake in Cogent last week principally through the acquisition of a 38.8% stake owned by the CEO Mr. Ming Hsieh. However, as we and other owners of Cogent have been saying for some time, the $10.50 valuation is clearly inadequate by any number of metrics,” stated Zachary Prensky, co-manager of the Special Situations desk at Koyote. As stated by 3M in a press release dated Friday, October 8^th, 2010, less than 15% of the outstanding publically-owned common stock of Cogent was tendered to 3M. ...

We applaud 3M’s long term commitment to a business that we are excited about. But the price offered is inadequate to 48% of Cogent shareholders that declined to participate in 3M’s tender. With the senior management and Board of Cogent committed to the $10.50 valuation, we have no choice but to explore the possible formation of a committee of shareholders to negotiate directly with 3M for a fair and adequate price for our stake. If 3M works with us, we believe we can find a middle ground that rewards minority shareholders for their long-term support of Cogent’s business plan,” added Mr. Prensky.

So, do they really think that the Cogent board will sit down and negotiate a higher price when a court has already given its blessing to the merger agreement?  I doubt it.   No, what they are probably up it is organizing a committee to pursue appraisal.  Meet the appraisal arbs.  A memo from Latham & Watkins issued way back in 2007 outlines the strategy. 

[T]he Delaware Chancery Court issued its opinion in the Transkaryotic appraisal proceedings. The issue was whether some 10 million Transkaryotic shares acquired afterthe record date largely by hedge funds and arbitragers were entitled to appraisal even though the beneficial owners could not demonstrate that the particular shares had, in fact, either been voted against the merger transaction or had not voted at all—a statutory prerequisite for assertingappraisal rights.

The effect is to create a post-deal announcement market for target shares.  Arbs who believe that there might be some real value in an appraisal proceeding can bid the price up and pursue and action - the reasonable costs of which may be borne by the surviving company.   Looks like Koyote is thinking of something along these lines with respect to Cogent.  Of course, the thing about an appraisal proceeding - it's a battle of experts and in the end the court determines the fair value of the shares - excluding any value created by the announced transaction.  That's a little like when a student comes back to me asking for their exam to be re-graded.  If you're lucky, it might go up.  Then again, it could go down.

On a related matter, there is an open issue with top-up options and appraisal that will receive more attention as deal-makers continue their push toward ever lower and lower triggers for the top-up option.  That issue has to do with the dilutive effect of the top-up on shares that may seek appraisal.  If Cede tells us anything, it's that a court will analyze the top-up as an integrated part of the entire transaction.  That could be troublesome if a diluted appraisal arb challenges a top-up option as part of an appraisal action.

This issue was a live one in Cogent.  The plaintiffs made the following argument: 

The last argument Plaintiffs make regarding the Top-Up Option is that the appraisal rights of Cogent stockholders will be adversely affected by the potential issuance of 139 million additional shares.  They claim that the value of current stockholder’s shares may be significantly reduced as a result of the dilutive effect of a substantial increase in shares outstanding and the “questionable value” of the promissory note.  Plaintiffs argue that the Top-Up Option will result in the issuance of numerous shares at less than their fair value. As a result, when the Company’s assets are valued in a subsequent appraisal proceeding following the execution of the Top-Up Option, the resulting valuation will be less than it would have been before the Option’s exercise.

It looks like deal lawyers saw this coming, so the Cogent merger agreement included a protective provision as part of the top-up:

Plaintiffs admit that Defendants have attempted to mitigate any potential devaluation that might occur by agreeing, in § 2.2(c) of the Merger Agreement, that “the fair value of the Appraisal Shares shall be determined in accordance with DGCL § 262 without regard to the Top-Up Option, the Top-Up Option Shares or any promissory note delivered by the Merger Sub.”  Plaintiffs question, however, the ability of this provision to protect the stockholders because, they argue, a private contract cannot alter the statutory fair value or limit what the Court of Chancery can consider in an appraisal.(66) Because DGCL § 262’s fair value standard requires that appraisal be based on all relevant factors, Plaintiffs contend the Merger Agreement cannot preclude a court from taking into account the total number of outstanding shares, including those distributed upon the exercise of the Top-Up Option.  In addition, they argue that even if the parties contractually could provide such protection to the stockholders, § 2.2 of the Merger Agreement fails to accomplish that purpose because the Merger Agreement does not designate stockholders as third-party beneficiaries with enforceable rights.

 While the issue of whether DGCL § 262 allows merger parties to define the conditions under which appraisal will take place has not been decided conclusively, there are indications from the Court of Chancery that it is permissible.(67) The analysis in the cited decisions indicates there is a strong argument in favor of the parties’ ability to stipulate to certain conditions under which an appraisal will be conducted—certainly to the extent that it would benefit dissenting stockholders and not be inconsistent with the purpose of the statute. In this case, I find that § 2.2(c) of the Merger Agreement, which states that “the fair value of theAppraisal Shares shall be determined in accordance with Section 262 without regard to the Top-Up Option . . . or any promissory note,” is sufficient to overcome Plaintiffs’ professed concerns about protecting the Company’s stockholders from the potential dilutive effects of the Top-Up Option.  Accordingly, I find that Plaintiffs have not shown that they are likely to succeed on the merits of their claims based on the Top-Up Option.

When the top-up option was simply a cleaning up device to help tidy up a tender, I suspect that few merger agreements included protective provisions as part of the top-up.  If we are moving toward lower and lower top-up triggers, then this kind of protective provision will become required, lest a challenge get some traction in the courts.

-bjmq

Cogent - matching rights and termination fees

I just want to add a couple of things to Afra and The Deal Professor's posts on the recent In re Cogent opinion from Vice Chancellor Parsons.  In addition to providing clarity on the question of top-up options, the opinion provides more data points in at least two other areas of interest.  First, Vice Chancellor Parsons signs up to the "sucker's insurance" school with respect to matching rights in merger agreements. Here's the relevant portion of the opinion on the plaintiff's matching rights argument.   

    The first two items challenged by Plaintiffs are the no-shop provision and thematching rights provision, both of which are included in §6.8 of the Merger Agreement.The no-shop provision, according to Plaintiffs, impermissibly restricts the ability of the Board to consider any offers other than 3M’s. It also prohibits Cogent from providing nonpublic information to any prospective bidder. Similarly, Plaintiffs object to the matching rights provided for in the Merger Agreement, under which 3M has five days tomatch or exceed any offer the Board deems to be a Superior Proposal. Plaintiffs arguethat these two provisions, taken together, give potential buyers little incentive to engagewith the Cogent Board because they tilt the playing field heavily towards 3M. As a result, according to Plaintiffs, prospective bidders would not incur the costs involved withcompiling such a Superior Proposal because their chance of success would be too low.

    After reviewing the arguments and relevant case law, I conclude Plaintiffs are not likely to succeed in showing that the no-shop and matching rights provisions are unreasonable either separately or in combination.  Potential suitors often have a legitimate concern that they are being used merely to draw others into a bidding war. Therefore, in an effort to entice an acquirer to make a strong offer, it is reasonable for a seller to provide a buyer some level of assurance that he will be given adequate opportunity to buy the seller, even if a higher bid later emerges.

I tend to disagree that providing a first bidder with strong matching rights along the lines of those in the Cogent merger agreement is going to be a strategy that will maximize value for shareholders (previous posts here).  Will it encourage an initial bid where there otherwise might not be one?   Probably, but that's a different story.  If a seller is looking to generate initial bids there are other ways to do so that don't deter second bidders.  Vice Chancellor Strine and now Vice Chancellor Parsons, I suppose, think the fact that matching rights are so common in merger agreements and the fact that we see the occasional jumped bid means that matching rights are not a deterrent to second bids.  I don't think that's right, but let's let that sit for another day.

The second additional point interest in the Cogent opinion is the fact that Parsons gives dealmakers some guidance on calculating termination fees.  In a few opinions, Vice Chancellor Strine has asked whether it might make sense to calculate termination fees as a percentage of enterprise value and not equity or deal value (In re Dollar Thrifty, In re Toys r Us and In re Netsmart).   Vice Chancellor Parsons makes it pretty clear where he stands on this question.  If you're going to be in his court, best to talk equity value when calculating termination fees.  Plaintiffs argued that although the termination fee was only 3% when using equity or transaction value, it was 6.6% when calculated as percentage of the enterprise value.  Parsons was happy relying on equity value in determining that the termination was not unreasonable. 

-bjmq

 

Genzyme's Defenses

Today's Lex column in the FT.com has a quickie review of some of the potential defenses available to Genzyme in its fight to stave of Sanofi - the pacman defense*, the macaroni defense**, the poison pill, scorched earth tactics, and then the sandbag.   Lex doesn't seem to think much of Genzyme's options.

-bjmq

 

### ### ###

Definitions from the Latham Book of Jargon: 

* Pac-Man Strategy: in a hostile takeover situation, when a takeover Target company launches a tender offer for the company that is trying to acquire it.

** Macaroni Defense:  a tactic used by a corporation that is the Target of a hostile takeover bid in which the Target issues a large number of Bonds that must be redeemed at a higher value if the company is acquired. In the event of a takeover, the debt will expand, just as macaroni expands when cooking.

3Par Bidding Contest

And off they go. You'll notice that Dell is engaged in incremental bidding, while HP is jump bidding.  That's because, HP has no way of knowing what Dell's private valuation of 3Par is so it's trying to use a version of "shock and awe" to knock Dell out of the bidding.  Dell, on the other hand, is confident that it will always have the last look, so it need do no more than add $0.10 to HP's last bid.   A week ago, this company was trading for about $9/share.  Last bid was $30 a bid.- something like $2 billion.  I suppose it's only money.

The Lex Column at the FT has this just about right:

Few things inspire a loss of rationality quite so much as the fear of missing out. The phenomenon is apparent around buffet tables, in one-day sales, and now in the pursuit of computer storage company 3Par.

...

Hypothetically matching HP’s latest $1.8bn offer, Dell would have to generate profits after tax of $180m from 3Par in order to make a respectable return of, say, 10 per cent in five years. At Dell’s current 29 per cent tax rate, that would require 2015 revenues of $1.2bn: a sixfold sales increase in five years, not to mention spectacular profitability. Who needs rationality when desperation and blind optimism conspire so well?

-bjmq

BTW:  The Deal Professor has an excellent post on this bidding contest and matching rights that you should read if you haven't already.

 



Match Rights and Incremental Bidding - 3Par

So, after three days Dell has come back with a bid to match that of HP in the contest acquisition of 3Par (previous post here).  Dell originally offered $18/share.  HP jumped in to bid $24.  And now, Dell has come back with a bid of $24.30.  If they continue to bid up the price, Dell will always have the option to bid just a penny (or 30) more 3Par.  The WSJ notes:

The original merger agreement between Dell and 3PAR gives Dell perpetual matching rights—or the ability to match any counter-offer within three days. For that reason, Dell is unlikely to raise its offer by a large amount, a person familiar with the matter said. Rather, if H-P raises its offer above $24.30, Dell will match it rather than bump it by several dollars, the person said.

And that's where matching rights become tricky.  If I'm sitting in the C-Suite at HP I should anticipate this kind of outcome going in.  Incremental bidding isn't a good thing for the second bidder.  You have to expend all sorts of time and resources and will only win in the event the first bidder decides you're paying too much.  Worse -- Dell has a termination fee in place, so HP's bid must be high enough to pay both the its private valuation of 3Par as well as the termination fee.  That's to say, HP is subsidizing Dell's bidding.  (See Ian Ayres article on lockups to walk through how a termination fee can result in the second bidder subsidizing a bidding contest).

Of course, the same might be true without a match right, but the presence of the explicit match right that the initial bidder will always get a last look and that the second bidder will never be able to sweep up the target with the initial bidder nodding happily as the second bidder overpays.

 

-bjmq

HP and the Winner's Curse?

Last week Dell announced that it would acquire 3PAR.  This morning, HP announced that it would be topping Dell's bid by some 33%.  HP's bid is an anecdotal data-point in favor of Vice Chancellor Strine's thesis that matching rights are not anti-competitive (see Toys r Us).  You see, Dell's agreement with 3PAR includes a series of strong matching rights of the type I written about before (here, here).(The Deal Professor has also recently written about this issue - here.)  That's to say, it includes information rights as well as a good faith obligation on the part of 3PAR to negotiate with Dell (from the Dell/3PAR merger agreement):  

6.3(b) … Notwithstanding the foregoing or anything to the contrary set forth in this Agreement, if, at any time prior to the Appointment Time, the Company Board receives a Superior Proposal or there occurs an Intervening Event, the Company Board may effect a Company Board Recommendation Change provided that (i) the Company Board determines in good faith (after consultation with outside legal counsel) that the failure to effect a Company Board Recommendation Change would reasonably be expected to be a breach of its fiduciary duties to the Company Stockholders under applicable Delaware Law, and in the case of a Superior Proposal, the Company Board approves or recommends such Superior Proposal; (ii) the Company has notified Parent in writing that it intends to effect a Company Board Recommendation Change, describing in reasonable detail the reasons, including the material terms and conditions of any such Superior Proposal and a copy of the final form of any related agreements or a description in reasonable detail of such Intervening Event, as the case may be, for such Company Board Recommendation Change (a “Recommendation Change Notice”) (it being understood that the Recommendation Change Notice shall not constitute a Company Board Recommendation Change for purposes of this Agreement);  (iii) if requested by Parent, the Company shall have made its Representatives available to discuss and negotiate in good faith with Parent’s Representatives any proposed modifications to the terms and conditions of this Agreement during the three (3) Business Day period following delivery by the Company to Parent of such Recommendation Change Notice; and (iv) if Parent shall have delivered to the Company a written proposal capable of being accepted by the Company to alter the terms or conditions of this Agreement during such three (3) Business Day period, the Company Board shall have determined in good faith (after consultation with outside legal counsel), after considering the terms of such proposal by Parent, that a Company Board Recommendation Change is still necessary in light of such Superior Proposal or Intervening Event in order to comply with its fiduciary duties to the Company Stockholders under applicable Delaware Law. Any material amendment or modification to any Superior Proposal will be deemed to be a new Superior Proposal for purposes of this Section 6.3. The Company shall keep confidential any proposals made by Parent to revise the terms of this Agreement, other than in the event of any amendment to this Agreement and to the extent required to be disclosed in any Company SEC Reports.

Now starts an interesting dynamic.   Presumably, now that 3PAR has received an offer from HP (here), they are already talking with Dell.  One expects that inside Dell people are asking themselves if 3PAR is really worth it.  

Truth be told, I have no idea.  In fact, that's the point here.  No one really knows how much someone else values a target, you can guess, but you can't be sure.  All you can know (or estimate) is what your own private valuation of the target is.   In any event, Dell is undoubtedly going through the exercise of reassessing its valuation of 3PAR.  Did it undervalue 3PAR initially?  If its valuation was correct, did Dell underbid for 3PAR in hopes of getting a good deal?  Now, Dell has to decide whether 3PAR is worth a bidding contest.  

This is where things get tricky.  Unless run by a disciplined executive, bidding contests can get emotional and parties can confuse the true goal of acquiring something with residual value for the acquirer with simply winning the contest.  We'll see how the Dell side of this plays out. 

If Dell decides not to match HP's bid, people in Palo Alto will no doubt congratulate themselves.  But, I'm sure someone will also ask whether or not HP had just paid too much.   

-bjmq

Intel, McAfee, and Matching Rights

I've posted on matching rights in merger agreements before.  And, over at The Deal Professor, just yesterday Steven did a nice post on deal making innovations with the observation that matching rights are becoming more and more common.  Almost as if on cue, Intel announced its acquisition of McAfee.  The merger agreement is loaded with matching rights for Intel that make it extremely difficult to imagine how a third party might justify putting together a competing bid.  

For example, in section 6.3 the agreement provides Intel with information rights in the event a Superior Proposal is received by McAfee.  That's to say if Symantec were to throw an unsolicited proposal over the transom, McAfee would have to share it with Intel and provide Intel two days notice before it began negotiations with the second bidder.  Of course, that gives Intel a leg-up on any brewing bidding contest.  But if that were not enough, the merger agreement gives Intel an explicit match.  The matching right prevents McAfee's board from changing its recommendation in favor of the Intel transaction in the event it receives a Superior Proposal until it has: 

(A) provided to Parent five (5) business days’ prior written notice that it intends to take a such action... (B) during such five (5) business day period, if requested by Parent, engaged in good faith negotiations with Parent to amend this Agreement in such a manner that the Acquisition Proposal that was determined to constitute a Superior Proposal no longer is a Superior Proposal ...

Explicit matching provisions like this have only one purpose - to shut out potential second bidders by ensuring the only way they will win a potential bidding contest is by overpaying.  That's not a position a second bidder likes to be in.  The presence of such rights thus weakens the power of a post-signing market check.  Prior to the Delaware Supreme Court's decision in Lyondell, I might have been worried that by shutting down a post-signing market check and not conducting a pre-signing market check that a board might be in some danger of running afoul of its Revlon obligations.   I'm less worried about that now, but am still uneasy that the prevalence of explicit matching rights in merger agreements where board's have Revlon obligations makes it difficult for a board to argue that it took reasonable steps to maximize shareholder value upon a sale for cash.

-bjmq

Australians Hate Termination Fees

Apparently, Australians hate termination fees.  That's the word at least from an Australian research firm.  

More than 60 per cent [of respondents] said their companies should not agree to either break fees with an acquirer or success-based fees for investment bank advisers who are retained to help in the negotiations.  ''Success'' in this context can mean an adviser helping a company fend off an unwanted takeover.

Now remember that the Australian Takeovers Panel generally limits termination fees in merger agreements to no more than 1% of transaction value, so termination fees are already pretty small when compared to Delaware's more generous levels.  

I suppose it's all in the way you ask the question.  The survey asked if respondents approved of "break fees, or financial penalties." If someone asked me that, I probably say no, too.  If they asked, on the other hand, if I approved of "break fees to compensate bidders for their search costs in the event the target walked away to take a better deal" I'd say yes.  

-bjmq

Burkle Sues BKS to Pull Pill

Investor Ron Burkle has had an ongoing dispute with the Barnes & Noble board over the shareholder rights plan it put in place recently.  Burkle claims the board adopted it to prevent him from making running a proxy contest.  Let’s leave aside for the moment whether or not the BKS pill actually prevents a proxy contest from being successful.  Now, Burkle has filed suit in the Delaware Chancery Court (complaint).  In his complaint, Burkle alleges that the Riggio family have used BKS as their “personal piggy bank”, alleging a series of self-dealing transactions.  

In my corporations class I often use the following hypothetical to describe the quintessential self-dealing transaction:  The controlling shareholder of the corporation causes the corporation to hire his brother’s transportation company to handle all the transportation needs of the corporation.  Wouldn’t you know it, that’s the fourth of a series of self-dealing transaction that Burkle alleges! 

In any event, the heart of this suit is Burkle’s challenge to the pill.  Burkle plans to run a short slate of three directors at the next annual meeting.   In his challenge, he is focused on the language in the rights plan that would trigger it in the event shareholders “cooperate” to influence control of BKS.   Burkle’s basic argument is that anyone who might agree to vote with him could be  construed as “cooperating” and thus be subject to dilution.  The effect he argues would be to dissuade anyone from voting for his short slate for fear that their vote would constitute cooperation. 

I took a quick look at the Lions Gate rights plan to get a sense whether the cooperation language is common.  That plan extends the dilutive effects of the pill to the Acquiring Person and anyone “acting jointly or in concert with the Acquiring Person.”  I don’t know…cooperating…acting in concert…it’s a close call.  The argument that Burkle is making is not that the pill will prevent him from running, or even succeeding to win, a proxy contest.  The courts have already examined this question (Moran v Household) and found that the pill does not significantly deter a proxy contest from going forward.  

In essence, the Rights Agreement provides that the Rights are triggered when someone becomes the “beneficial owner” of 20% or more of Household stock. Although a literal reading of the Rights Agreement definition of “beneficial owner” would seem to include those shares which one has the right to vote, it has long been recognized that the relationship between grantor and recipient of a proxy is one of agency, and the agency is revocable by the grantor at any time. Henn, Corporations § 196, at 518. Therefore, the holder of a proxy is not the “beneficial owner” of the stock. As a result, the mere acquisition of the right to vote 20% of the shares does not trigger the Rights.

Now, it may be that the trigger for the Moran pill did not extend the trigger to persons “cooperating” with a beneficial owner or “acting in concert” with a beneficial owner, but I guess we’ll see.

-bjmq

K&E on Poison Pill Plumbing

Following the recent uptick in implementation of poison pills, K&E has published this client alert that nicely details the mechanics of various provisions of a shareholders rights plan.

MAW.