On Monday, the FASB released its proposed FASB Staff Position on FAS 141R standards regarding recognition of contingencies acquired or assumed in a business combination – it’s called “FSP FAS 141(R)-a.” As previously blogged, this FSP will to a large extent restore the accounting for litigation contingencies under the prior standard, FAS 141. In particular, it will eliminate the requirement that “non-contractual” contingencies be recorded at fair value if it is more likely than not that a liability has been incurred. The FASB has requested comments on the proposal, which are due January 15th.
Last week, Corp Fin issued this no-action letter entitled “Her Majesty’s Government.” Is that the coolest name for a government response or what? It’s so “James Bond.”
Corp Fin’s relief allows the United Kingdom to file an “Alternative” Schedule 13D when the UK Treasury takes ownership interests in the UK banks that is taking place due to the recapitalization of the UK banking industry, a recap “scheme” blessed by the Bank of England and the UK Financial Services Authority. For example, the UK Treasury is acquiring a 57.9% interest in the Royal Bank of Scotland’s holding company.
The “Alternative” Schedule 13D is intended to dovetail with the notification required to be filed with the FSA under DTR 5.1.2R (this is in Chapter 5 of the FSA’s “Disclosure & Transparency Rules”). Under Corp Fin’s relief, this alternative 13D will consist of a cover page, the UK notification and the 13D signature page. A form of the alternative Schedule 13D is attached as Annex I of the incoming letter of the no-action request – and here is the alternative Schedule 13D filed by the Royal Bank of Scotland.
Why Hasn’t the US Treasury or Fed Filed Any Schedule 13Ds?
What about Schedule 13Ds filed by the US Treasury or the Federal Reserve for their investments in AIG, Fannie, Freddie, etc.? We looked pretty hard for Schedule 13Ds filed by the US government and didn’t find any. We aren’t the only ones wondering where these filings are – Professor Davidoff mused about this also a while back.
Just like the Professor, at first, the only rationale I could think of was that the Treasury figures nobody is going to sue it for not meeting filing requirements. But then I remembered Section 3(c) of the Exchange Act, which provides an exemption from the provisions of the Exchange Act for “any executive department or independent establishment of the United States, or any lending agency which is wholly owned, directly or indirectly, by the United States, or any officer, agent, or employee of any such department, establishment, or agency, acting in the course of his official duty as such….” Depending on the nature of the entity making the investment, it may be able to rely on Section 3(c) to avoid filing beneficial ownership reports. So that may be what is being relied upon…
While people often think that fairness opinions consist of nothing but boilerplate, that’s not the case when the one of the parties is facing particularly challenging circumstances. Goldman Sachs’ fairness opinion in the PNC/National City deal is a classic example of this point (here is the proxy statement). The pending sale of Cleveland-based National City Corporation to Pittsburgh’s PNC has raised a lot of concern here in Northeast Ohio, and has engendered controversy on Capitol Hill as well.
As a result, National City’s story is fairly well known. Goldman Sachs served as National City’s financial advisor in the PNC transaction – and rendered a fairness opinion to the company’s Board of Directors. While that opinion contains all of the standard assumptions, qualifications and disclaimers that we’ve come to expect in bankers’ opinions, it also contained several deal-specific provisions that are pretty interesting.
For example, in addition to the usual disclaimers typically found in most fairness opinions, Goldman’s opinion specifically notes National City’s expectation that absent a deal like the one proposed with PNC, it would not have the liquidity to meet its obligations, and “would face additional regulatory actions, including intervention by the United States federal banking regulators, and/or be required to seek protection under applicable bankruptcy laws in the very near future.”
After detailing these considerations, Goldman Sachs addressed their influence on its fairness analysis:
You have advised us that, as a result of the foregoing, the Company and its Board of Directors are faced with a narrow set of alternatives, which, at this time, are limited to a transaction such as the Transaction or intervention by United States banking regulators and eventual liquidation of the Company. Accordingly, we also considered recent instances where concerns regarding the liquidity of a bank or financial institution triggered a rapid deterioration of the institution’s financial condition, necessitating government intervention or bankruptcy protection, and as a result of which the common equity holders of the institution are likely to receive substantially diminished value, if any at all, for their equity. In light of the facts and circumstances, and in reliance on the Liquidation Analysis, we have assumed that if the Company’s banking assets were taken over by the United States federal banking regulators and the Company’s non-banking assets liquidated under applicable bankruptcy laws, the Holders would likely receive no material value for the Shares.
In English, that means that Goldman’s assuming that the only alternatives available to the board are a deal like the one offered by PNC – or a government takeover or bankruptcy filing in which its shareholders would get nothing. This is not pleasant reading if you’re a National City shareholder, but it gets worse. A few paragraphs later, Goldman Sachs tacks on a sentence to one of its standard disclaimer paragraphs that makes sure nobody misses what National City’s dire condition and the unique circumstances confronting it are likely to mean from PNC’s perspective:
We do not express any opinion as to the value of any asset of the Company, whether at current market prices or in the future. We note, however, that, under the ownership of a company with adequate liquidity and capital, such as Parent, the value of the Company and its subsidiaries could substantially improve, resulting in significant returns to Parent if the Transaction is consummated.”
Unfortunately, given the likelihood that survival may well be a driving force in M&A deals over the next several months at least, it’s unlikely that National City’s shareholders are going to be the last ones to receive a message like this one.
In our “Negotiation Tactics” Practice Area, we have posted the “2008 Strategic Buyer/Public Company Deal Point Study,” which was recently compiled by the Market Trends Subcommittee of the ABA’s Mergers and Acquisitions Committee. The study tests deal points found in agreements involving public company targets entered into during 2007 with transaction values in excess of $100 million – and
compares those deal points to the Subcommittee’s previous studies of agreements in 2004 and 2005/2006. Some of the new deal points evaluated in the Study includes “go-shops” in strategic deals, specific performance clauses and buyer match rights.
As noted by Keith Flaum’s entry on Harvard Law School’s Corporate Governance Blog:
Among the many interesting findings of the Study is that 48% of the acquisition agreements in the Study sample contained a non-reliance clause—a clause to the effect that the target is not making, and the buyer is not relying on, any representations regarding the target’s business except for the specific representations expressly provided in the acquisition agreement. By comparison, only 18% of the acquisition agreements for deals announced in 2005 and 2006 included a non-reliance clause.
So why the significant increase? One possible explanation might be found in the February 2006 decision of the Delaware Court of Chancery in ABRY Partners, and the extensive discussion of that case by leading M&A practitioners throughout the country. In ABRY Partners, Vice Chancellor Strine underscored the effectiveness of a non-reliance clause in limiting a buyer’s fraud-based remedies in the context of an acquisition of a privately-held company.
Even though ABRY Partners involved a privately-held target, the extensive discussion that followed also focused on the potential usefulness of non-reliance clauses in deals involving publicly-traded target companies. Then, in late 2007, the Tennessee Chancery Court decided Genesco, Inc. v The Finish Line, Inc. In that case, a non-reliance clause in the merger agreement was viewed by the Court as an important element in its determination that Finish Line failed to prove that the publicly traded target company, Genesco, fraudulently induced Finish Line to enter into the merger agreement.
My colleague, Rick Climan, former Chair of the Committee on Mergers & Acquisitions, who acted as special advisor on the Deal Points Studies, points out that some of the targets involved in the 52% of the acquisition agreements in the Study sample that did not include a non-reliance clause may nonetheless have enjoyed the protection afforded by a non-reliance clause, in those cases where such a clause was included in the confidentiality agreement between the buyer and the target. In fact, in Genesco, the Court pointed to non-reliance clauses in both the confidentiality agreement and the merger agreement to support its decision.
I’ve also wondered if practitioners placed much stock in the ABA’s popular deal studies. Here is a poll to see what you think:
Last week, Justice Cahn of the New York State Supreme Court – in In Re: Bear Stearns Litigation – granted summary judgment in dismissing a shareholder challenge to the fairness of JPMorgan’s purchase of Bear Stearns. The decision represents a strong endorsement of the protections that the business judgment rule. In our “M&A Litigation” Portal, we have posted the order denying the motion.
Recently, Corp Fin issued a new set of “’33 Act Compliance and Disclosure Interpretations.” Question 239.13 addresses the application of the ’33 Act to written consents by a target company’s shareholders approving a merger or other business combination transaction in which the acquiring company intends to register the transaction securities with the SEC.
In the new CDI, the Staff stated that the approval of such a transaction by written consent in lieu of a meeting of the target company’s shareholders involves a private offering of the acquiror’s securities that will preclude the acquiror from later registering an offering of the securities on Form S-4. Here is a memo from our “Written Consents” Practice Area that discusses the Staff’s interpretive position and its application to stock merger transactions.
Last week, Corp Fin posted a “Compliance Guide” covering the new rules on cross-border business combinations, exchange offers and rights offering, which are effective today.
Despite the “Small Entity” title, the Guide provides a helpful short summary of the new rules that can be used by all companies. The Guide also highlights the rule changes that apply to domestic transactions, including the expanded availability of early commencement to all registered exchange offers, and the elimination of the old 20-day limit on subsequent offering periods for tender offers.
Recently, the Federal Trade Commission sought to unwind an M&A transaction completed more than six months ago that was not subject to HSR notification requirements. This is the latest in a string of antitrust challenges to consummated transactions. As recently as 2006, the FTC challenged the Hologic/Fischer transaction, which resulted in the near complete divestiture of the acquired business. Learn more from some memos in our “Antitrust” Practice Area.
Issuing FDIC-Guaranteed Debt under the TLGP
About ten days ago, the FDIC issued its Final Rule regarding its Temporary Liquidity Guarantee Program (known as “TLGP”), which includes the debt guarantee program under which the FDIC is guaranteeing the unsecured senior debt of eligible entities. The TLGP is an opt-out program with an opt-out deadline of December 5th.
In connection with the FDIC’s final rule, Corp Fin has issued an interpretive letter clarifying that offerings of TLGP-guaranteed debt don’t need to be registered under the ’33 Act (since the guaranteed debt will be exempt under Section 3(a)(2)).
The first offerings of debt guaranteed under the program have already been launched – and it has been estimated that as much as $300 billion of debt may ultimately be issued under the TLGP. To help you prepare for this wave, we have just announced a new webcast for TheCorporateCounsel.net members – “How to Issue FDIC-Guaranteed Debt under the TLGP” – to be held on December 17th. With all the big issues being hashed out right now, our panel of Wall Street lawyers will be able to give you the latest developments. This is a “biggie.”
If you’re not a member of TheCorporateCounsel.net, try a ’09 no-risk trial to access this webcast for free. If you are a member, please renew your membership today since all memberships are on a calendar-year basis.
Last week, the FDIC announced a modified bidder qualification process that allows non-banks to bid on failed financial institutions. This new process is important given that the number of failed banks is likely to skyrocket, as noted recently in the “D&O Diary” Blog. We have posted memos on this development in our “Bank M&A” Practice Area.
OCC Announces Conditional Approval of First National Bank “Shelf Charter”
From Latham & Watkins: Recently, the Office of the Comptroller of the Currency announced the conditional approval of the first National Bank “shelf charter.” This first shelf charter was conditionally approved for Ford Group Bank, National Association. Significantly, the Ford Group Bank application apparently stated that the business plan was to acquire assets and assume liabilities from the FDIC acting as Receiver of a depository institution. The investors behind this application were well known to the bank regulators and experienced in acquiring assets and deposits from the FDIC as well as in operating banks. In this specific first example, the approval noted that the bank will have to apply for membership in the Federal Reserve and that certain of the owners would have to apply to the Federal Reserve System to become bank holding companies.
In effect, the shelf charter creates a new, optional, two-step process for obtaining national bank charters in certain circumstances.
1. Apply for a national bank charter and develop a business plan detailing a) the management; b) sources and amount of capital to be committed to the ultimate bank; and c) how the bank is to be operated and what its business is to be. Successful applications will receive preliminary approval from the OCC to charter a national bank. Once approved for such a charter, the charter remains “on the shelf” for 18 months from the date of approval.
2. Become a bidder for purchasing the assets and assuming the liabilities of a bank in FDIC Receivership. If that bid is successful, the shelf charter holders must return to the OCC with the details of the “bank” or assets and liabilities it is acquiring from the FDIC, comply with all the pre-opening requirements of the OCC, and execute a written Operating Agreement with the OCC. The OCC also will require the bank to submit a Comprehensive Business Plan. Written non-objection to the Plan will be essential to the receipt of final approval.
The OCC announced that it believes the shelf charter option will make it easier for investors to bid for and acquire troubled institutions or to purchase assets and assume deposits from the FDIC as Receiver by permitting them to be included in lists of bidders able to review such proposed transactions. With this new approach, the OCC has signaled a willingness to encourage the chartering of shelf institutions which can be used to take advantage of such opportunities.