M & A Law Prof Blog

Law firm memos on MFW Shareholders Litigation

[Updated] Here are a handful of law firm memos on the MFW Shareholders Litigation (in which the Delaware Court of Chancery held that the Business Judgment Rule applied to a freeze-out merger that was conditioned on the approval of both an independent Special Committee and a Majority-of-the-Minority stockholder Vote). Brian discussed the same case here.

Davis Polk

Milbank

Morris Nichols

Paul Weiss

Richards Layton

S&C

Wilkie Farr

White & Case

MAW

Weil, Gotshal 2012 survey of sponsor-backed going private transactions

Weil, Gotshal & Manges recently published its sixth survey of sponsor-backed going private transactions, which analyzes and summarizes the material transaction terms of going private transactions involving a private equity sponsor in the United States, Europe, and Asia-Pacific. (We covered last years survey here.)

The survey covers 40 sponsor-backed going private transactions with a transaction value (i.e., enterprise value) of at least $100 million announced during calendar 2012. Twenty-four of the transactions involved a target company in the United States, 10 involved a target company in Europe, and 6 involved a target company in Asia-Pacific.

Here are some of the key conclusions Weil draws from the survey:

• The number and size of sponsor-backed going private transactions were each lower in 2012 than in 2011 and 2010; . . . .
• Specific performance "lite" has become the predominant market remedy with respect to allocating financing failure and closing risk . . . . Specific performance lite means that the target is only entitled to specific performance to cause the sponsor to fund its equity commitment and close the transaction in the event that all of the closing conditions are satisfied, the target is ready, willing, and able to close the transaction, and the debt financing is available.
• Reverse termination fees appeared in all debt-financed going private transactions in 2012, . . .with reverse termination fees of roughly double the company termination fee becoming the norm.
• . . . no sponsor-backed going private transaction in 2012 contained a financing out (i.e., a provision that allows the buyer to get out of the deal without the payment of a fee or other recourse in the event debt financing is unavailable).
• Some of the financial-crisis-driven provisions, such as the sponsors’ express contractual requirement to sue their lenders upon a financing failure, have diminished in frequency. However, the majority of deals are silent on this, and such agreements may require the acquiror to use its reasonable best efforts to enforce its rights under the debt commitment letter, which could include suing a lender.
• Go-shops remain a common (albeit not predominant) feature in going private transactions, and are starting to become more specifically tailored to particular deal circumstances.
• Tender offers continue to be used in a minority of going private transactions as a way for targets to shorten the time period between signing and closing.

MAW

SRZ 2012 PE Buyer/Public Target Deal Study

Schulte Roth & Zabel has released this client alert containing the highlights from its most recent study on private equity buyer acquisitions of U.S. public companies with enterprise values in the $100-$500 million range ("middle market" deals) and greater than $500 million ("large market" deals). During the period from January 2010 to Dec. 31, 2012, SRZ identified a total of 40 middle market deals and 50 large market deals that met these parameters.  Here are SRZ's key observations from the study:

1.  Volatility in the number and terms of middle market deals makes it more difficult to identify "market practice" in that segment.

2. Overall, middle market deals took significantly longer to get signed than large market deals.

3. "Go-shop" provisions were used more frequently in large market deals, even though, overall, the percentages of middle market and large market deals in which a pre-signing market check was used are comparable.

4.  While it is virtually the rule (92% of the time in 2012) in large market deals that the target will have a limited specific performance right against the buyer, the full specific performance remedy is still used quite often (44% of the time in 2012) in middle market deals.

5.  While the frequency with which middle market deals use reverse termination fees ("RTFs") has converged on large market practice, the size of RTFs has not.

6.  Large market deals are much more likely than middle market deals to limit damages for buyer’s willful breach to the amount of the RTF.

MAW

Summly? Wastely?

What's up with the Summly acqui-hire over at Yahoo!? (from BizInsider):

• Summly never had many users or any revenues. Yahoo is shutting the app down. Yahoo is saying the point of the deal is to have Summly's CEO help lead the company in mobile.
• But Summly's CEO lives in London, where he is staying to finish school
• The CEO has only promised to stay at Yahoo for the next 18 months.  
• The CEO is 17-years-old. We don't buy that he's going to be able to lead or inspire adult Yahoo engineers and designers.

If that's not bad enough:

Sirer writes: "Summly licensed its core technology from SRI, which, previously, spun out Siri and sold it to Apple.

Whaddya!?  Somehow, somewhere, there is arrare waste claim brewing in connection with this transaction...

-bjmq

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

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

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

As a result, Gibson advises that

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

MAW

The fog of deal-making

Our friend the Deal Professor had an interesting piece yesterday about the M&A activity heating up among cellphone companies. He warns that

"We’ve seen this story before — in the battle over RJR Nabisco that was made famous by “Barbarians at the Gate” and in deal-making frenzy during the dot-com boom. When faced with a changing competitive landscape, executives spend billions because they believe they have no other choice. The cost to the company — and to shareholders — can be immense. In this world, executive hubris tends to dominate as overconfidence and the need to be the biggest on the block cloud reason.
. . .

The rush to complete deals is an investment banker’s dream.

But the hunt may lead these companies to not only overpay but acquire companies that are underperforming or otherwise don’t fit well. Then they have to find a way to run them profitably."

Investors in these companies, and the people running them, should carefully consider his warnings.

As I explored in a recent paper, various empirical studies on the overall return to acquisitions find that they may lead to destruction of value, particularly for shareholders of the acquiring firm, who suffer significant losses. Finance and legal scholars who have evaluated the roots of bidder overpayment have pointed both to agency problems and to behavioral biases. The paper has a somewhat long overview of recent studies which suggest that, in many transactions, the acquirer’s directors and management benefit significantly from the deal, whether it is through increased power, prestige, or compensation—including bonuses and/or stock options. Other studies confirm a long-held view that managements’ acquisition decisions can be affected by various behavioral biases such as overconfidence about the value of the deal or managements’ overestimation of and over-optimism regarding their ability to execute the deal successfully.

In addition, last year Don Langevoort published a terrific essay in the journal Transactions which explored the behavioral economics of M&A deals. In the same issue, Joan Heminway published a thought-provoking essay which explored whether "fairness opinions, nearly ubiquitous in M&A transactions, can be better used in the M&A transactional process to mitigate or foreclose the negative effects of prevalent adverse behavioral norms." Both essays are worth a read!

-AA

Comparison of One-Step and Two-Step Mergers

Haynes and Boone has a short summary of the pros and cons of each here.

MAW

Shnader on Squeeze-out Mergers in Pennsylvania

Standard learning has long held that a minority shareholder of a Pennsylvania corporation who was deprived of his stock by a "cash-out" or "squeeze-out" merger had no remedy after the merger was completed other than to take what the merger gave or demand statutory appraisal and be paid the "fair value" for his shares. No other post-merger remedy, whether based in statute or common law, was thought to be available to a minority shareholder to address the actions of the majority in a "squeeze-out." Now, after the Pennsylvania Supreme Court’s holding in Mitchell Partners, L.P. v. Irex Corporation, minority shareholders may pursue common law claims on the basis of fraud or fundamental unfairness against the majority shareholders that squeezed them out.

The full client alert can be found here.

MAW

Dechert on Transaction Insurance

The potential post-closing erosion of value (either of the consideration received by the seller or the business acquired by the buyer) is an issue in almost every M&A transaction. This article by attorneys at Dechert LLP discusses a few of the popular types of transaction insurance currently available to help address this issue.

MAW

Weil, Gotshal survey of sponsor-backed going private transactions

Weil, Gotshal has just released its fifth annual survey of sponsor-backed going private transactions, analyzing and summarizing the material transaction terms of going private transactions involving a private equity sponsor in the United States, Europe and Asia-Pacific.  Have a look.

MAW

 

Interesting new reads in M&A

For anyone who missed it, the latest issue of Transactions has several papers related to M&A deal-making.  The issue includes Don Langevoort's insightful essay on The Behavioral Economics of Mergers and Acquisitions about which we blogged previously.  The issue also includes an interesting response by Joan Heminway entitled A More Critical Use of Fairness Opinions as a Practical Approach to the Behavioral Economics of Mergers and Acquisitions. 

Abstract: This paper responds to Professor Donald C. Langevoort's essay entitled "The Behavioral Economics of Mergers and Acquisitions" (12 Transactions: Tenn. J. Bus. L. 65 (2011)). Together with Professor Langevoort's essay and another responsive work written from the standpoint of behavioral psychology – Eric Sundstrom's "Tall Steps, Slippery Slopes & Learning Curves in the Behavioral Economics of Mergers & Acquisitions" (12 Transactions: Tenn. J. Bus. L. 65 (2011)) – this paper preliminarily explores solutions to behavioral issues in the context of mergers and acquisitions.

Specifically, this paper contends that changes in the contents, construction, use, and assessment of fairness opinions may better enable fairness opinions to counteract the potential and actual biases of corporate management and shareholders in M&A decision-making. The paper begins by briefly reviewing the nature (attributes, benefits and detriments), regulation, and utilization of fairness opinions in the M&A transactional process, including the ways in which fairness opinions manifest, support, and attempt to counteract behavioral norms. Next, the paper suggests best practices in the construction and use of fairness opinions that take into account our knowledge of behavioral psychology as it relates to M&A transactions. The net effect of these best practices is to transform what may be unconscious behavioral norms into conscious biases that, once exposed, can be confronted and, as desired, mitigated.

- AA

Kelley & Ervine on anti-Sandbagging

When negotiating an acquisition agreement, it often appears that the other side is negotiationg language without any real knowledge of what the law actually is.  One area where this is often the case is anti-sandbagging provisions.  This article frames the sandbagging/anti-sanbagging issue and provides a useful summary of the law in several of the most relevant jurisdictions:

In Delaware, the buyer is not precluded from recovery based on pre-closing knowledge of the breach because reliance is not an element of a breach of contract claim. The same is true for Massachusetts and, effectively, Illinois (where knowledge is relevant only when the existence of the warranty is in dispute). But in California, the buyer is precluded from recovery because reliance is an element of a breach of warranty claim, and in turn, the buyer must have believed the warranty to be true. New York is less straightforward: reliance is an element of a breach of contract claim, but the buyer does not need to show that it believed the truth of the representation if the court believes the express warranties at issue were bargained-for contractual terms.

In New York, it depends on how and when the buyer came to have knowledge of the breach. If the buyer learned of facts constituting a breach from the seller, the claim is precluded, but the buyer will not be precluded from recovery where the facts were learned by the buyer from a third party (other than an agent of the seller) or the facts were common knowledge.

Given the mixed bag of legal precedent and little published law on the subject, if parties want to ensure a particular outcome, they should be explicit. When the contract is explicit, courts in California, Delaware, Massachusetts and New York have either enforced such provisions or suggested that they would. Presumably Illinois courts would enforce them as well, but there is very little or no case law to rely upon.

MAW

AALS Section on Transactional Law and Skills

As Gordon Smith announced yesterday, under the leadership of Tina Stark, who will be heading the Transactional Law Program at Boston University, an ad hoc committee of transactional lawyering professors proposed a new section on transactional law and skills to the Association of American Law Schools. The AALS has approved the new section, and we will have our first section meeting at the annual meeting in Washington D.C. on Saturday, January 7, 2012 from 3:30-5:15 pm.

Officers

Chair: Tina L. Stark, Boston University School of Law
Chair-elect: Joan MacLeod Heminway, The University of Tennessee College of Law
Secretary: Eric J. Gouvin, Western New England University School of Law
Treasurer: Afra Afsharipour, University of California, Davis, School of Law

Executive Committee

Lyman P.Q. Johnson: Washington and Lee University School of Law
Therese H. Maynard: Loyola Law School Los Angeles
D. Gordon Smith: Brigham Young University Law School

More information about the annual meeting program will be forthcoming soon.

I think that the formation of this new section offers exciting opportunities for those of us who study transactional lawyering.

 -AA

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.

K&E Survey of Recent Developments in Public M&A Deal Terms

K&E just published this "survey" of recent developments in public M&A deal terms.  Unlike the broad, quantitative surveys put out by oganizations like the ABA or PLC, this one seems more impressionistic, so it may be biased by the universe of deals the authors were exposed to.  Still, a worthwhile read.

MAW

Sanofi thinks earnout is "interesting"

Sounds like a negotiation! 

"A contingent value right would be a way to bridge a gap when different parties have different ideas on valuations," Sanofi Chief Financial Officer Jerome Contamine told Reuters on Wednesday.

"It's an interesting idea in principle," Contamine said, speaking on the sidelines of the FT Global Pharmaceutical and Biotechnology Conference.

Contaime says "CVR," but he means an earnout.  He's French so we forgive him.  Of course, an earnout should not replace the hard work of coming to agreement on valuation.  This should be especially true with respect to Genzyme where there is a lot of public information already out there.

-bjmq 

Thomson Reuters acquires Pangea3

I rarely link to Above the Law - I'm not a snob or anything, it's just that they rarely talk about anything relevant to this blog.  Today is different.  ATL notes that Thomson Reuters is looking to sell its BarBri unit, because training future American lawyers "no longer fits [Thomson Reuters'] long-term strategic vision."  

In the same post, ATL calls attention to the fact that Thomson Reuters will be acquiring India-based legal process out-sourcer Pangea3.  Pangea3's press release is here.  According to the CEO of Thomson Reuters: 

"Pangea3 is true to our mission to help the legal system perform better, every day, worldwide; we will now bring to the legal marketplace a responsive, high-quality, transformative resource for a broad range of legal support work. This is particularly important as law firms and general counsel adjust to the realities of the 'new normal,' where efficiency, quality and responsiveness are paramount."

Yikes.   I think it's been pretty clear for some time that things would be moving this way.  The globalization of services is in all honesty an unstoppable force.  The only question is how quickly might the moves come.  It looks like some of the big information providers have heard from clients that they'd like the move to come sooner rather than later.  

I'm starting to think that Afra's focus legal developments in India is going to pay off bigtime!  

OK, go back to work.

-bjmq

More on BHP/Potash deal

For readers who are following our posts (here and here) on BHP Billiton’s hostile bid for Potash, you should take a look at this post by the Deal Professor which considers the possible steps that Potash can take to deter BHP.  There is a lot of uncertainty in this transaction, including a host of regulatory and political issues.  For now, Potash’s sideshow litigation is moving along in U.S. federal court.  Potash has the opportunity to at least drag this out a bit with a ruling allowing the discovery process to proceed. 

-AA

More on the Potash Litigation

I'll just add this brief comment to Afra's good post on the state of the proposed Potash/BHP transaction. Potash has sued BHP in federal court over this BHP's hostile offer (Download Potash complaint). It's worth noting that since the complaint alleges various violations of the Williams Act, which you'll remember is the disclosure regime that governs tender offers, Potash is limited in the remedies that it can ask for.  The best remedy for inadequate or incorrect disclosure is .... well ... disclosure.  That's why the injunction that Potash is asking for is tied to slowing the offer down until the disclosure can be corrected.  In the real world of large NY law firms, that isn't a whole lot of time ... 24, 48 hours to kick out an amended Schedule TO?  

I have no doubt that if Potash could get an injunction preventing the offer from going forward, it would.  In fact, they hint at it in the complaint - suggesting the tender is coercive because BHP is only seeking 51% has not conditioned the offer on receiving more than 67% of the outstanding shares.  I think they're hoping that a judge will agree with them and enjoin the whole deal.  Well, that's not going to happen.  There's no obligation under the Williams Act that an offerer buy 100% of the outstanding shares, and buying less than all, without more, is just not coercive.   In any event, the courts have regularly ruled that the Williams Act is not intended to be a defensive weapon to protect management from unwanted bids.  A plaintiff is only going to get an injunction to block a bid if the preferred remedy - disclosure - isn't enough to avoid irreparable harm (see Rondeau v Mosinee Paper), and I don't see the irreparable harm here.

-bjmq

Whatever ... it's only money

With Mark Hurd now out of the way, it seems that HP has unleashed its acquisition crew and given it almost a blank check.  There was 3Par for which HP paid 325 times EBITDA ... catch me, I just fainted ... Now, there's ArcSight.  At $1.5bn, the valuation for this target is almost as rich according to Bloomberg:

The offer also values ArcSight at 57 times the company’s Ebitda, compared with a median 11.5 times Ebitda in 10 comparable deals tracked by Bloomberg.

Seeking Alpha also has some thoughts on the valuation:

HP put the enterprise value of the transaction, which is slated to close by the end of the year, at $1.5bn. That means the tech giant is paying 7.5 times ArcSight’s trailing sales of $200m. (For the current fiscal year, ArcSight is expected to put up about $225m in sales, meaning HP is paying about 6.7x projected sales.) On a trailing basis, both McAfee (MFE) and VeriSign’s (VRSN) identity and authentication business garnered 3.5x sales in their respective sales to Intel (INTC) and Symantec (SYMC). (Morgan Stanley advised both McAfee and ArcSight, while JP Morgan Securities advised VeriSign.)

But this isn't really a new direction for HP.  Actually, they've been in the market buying for some time now ... remember Palm?  They paid $1.2 billion for that company just last April.  Before that it was 3Com.  Now, I've got nothing against HP.  Really, I don't.  In fact, it's great news for shareholders of the sellers.  Clearly it's a make or buy decision and HP has decided to buy.  I'm just a little mystified at why HP appears to insist on overpaying for almost everything.   

-bjmq