DealLawyers.com Blog

Here is some nice analysis on MACs from Cliff Neimeth of Greenberg Traurig: Capital One reaffirmed last week its planned business combination with New Orleans, LA-based Hibernia. The original $33 cash and stock transaction received shareholder approval by a whopping 94% of total votes cast at the shareholder meeting in August. The transaction was scheduled to close last week and was delayed because of the Katrina catastrophe. Hibernia’s headquarters (are) in New Orleans.

Reportedly, 33% (or some 107) of Hibernia’s 321 branch banks sustained damage due to Katrina. Many branches remain closed, and of only the 47 that reopened, approximately 20% suffered “significant damage”

While the overall earnings prospects, loan portfolio impact, and potential for capital withdrawals and credit transaction cancellations is still being assesed, Capital One reported that it remains committed to the long-term strategic value of the business combination and the parties have agreed to reprice the transaction at $30.49 per share (in cash and stock). This represents a 7.6% (or $350mm) purchase price reduction from the previously approved deal.

Revised proxy materials will be distributed to shareholders and a new record date for a “revote” has not yet been announced.

A few initial observations from Cliff:

* Capital One’s decision to complete the deal underscores the long-term perspective of a strategic purchaser in a transaction that has been styled to the marketplace and to each shareholder constituency as a true business combination. Thus, the importance of not rushing into a deal (whether it be a straight sale of control or a strategic “Time-Warner”- like combination) without having a very well considered, documented and developed rationale for the transaction that is properly communicated and strategized.

* The fact that the original deal won overwhelming shareholder support certainly was an influential factor in moving forward. (Query whether the considerations would have been different if the vote was at the margins or if the Katrina disaster occurred earlier in the post-sign/pre-close period and, in any case, prior to the shareholder vote?)

* The agreement contained a very “plain vanilla” MAC clause and as most recently confirmed in the IBP (NY law) and Frontier Oil (Delaware law) decisions, short-term “hiccups” in stock price or temporary earnings interruptions will not satisfy a “standard” MAC clause threshold. We’ve seen more fine tuning and negotiation of MAC clauses in public deals post-9/11 and perhaps Katrina will cause some to revisit these provisions in certain circumstances.

* The speed at which the deal price was reset (and the metrics used therefor) is interesting in that the parties admit that, given the magnitude and uncertainty surrounding Katrina, including the availability of insurance, degree of physical asset damage, loss of capital, credit transaction cancellations etc., is reasonably speculative at the present time. Somehow this translated into a very precise $350mm price and valuation impact?

* Will the shareholder approval response be the same (or as overwhelmingly favorable) this time around?

* it’s important to remember that fairness opinions (buy and sale side) speak as of their delivery date (I.e., the date the Board approves and signs up the deal), and unless (in the infrequent case) a reissuance (or true “bringdown”) is requested as a condition to closing, the more usual requirement is that the original opinion shall not have been withdrawn. (Don’t confuse this with republication requirements). Here, the target value certainly was diminished as a result of post-sign (and post-shareholder approval) changed (presumably unforseeable) circumstances outside of the parties’ control.

* Although not applicable in the Capital One-Hibernia transaction because of the unique timing of the events, Katrina disaster generally underscores the importance of the target Board’s ability to withdraw its deal recommendation for reasons unrelated to a “Superior Proposal” if, “upon the advice and after consultation with counsel, the Board in good faith concludes that the failure to do so is [reasonably likely to] [would] result in a violation of the Board’s fiduciary duties under applicable law” (or one of the many permutations of the foregoing that is typically heavily negotiated, including the interplay with bust-up fees).