Monthly Archives: April 2007

April 27, 2007

Status Update: Proposed NASD Rule 2290 Re: Fairness Opinions

Earlier this week, the NASD filed an extension for the SEC to consider its proposal on fairness opinions; this extension runs until July 23rd. It’s extension #6!

April 16, 2007

Antitrust Modernization Commission Issues Report

From a Wilson Sonsini memo: After three years of research and deliberation, the Antitrust Modernization Commission issued its report on April 2nd. This highly anticipated report recognizes that, for the most part, the antitrust laws are working well. The report proposes no changes to the substantive statutory provisions of Sections 1 and 2 of the Sherman Act, Sections 3 and 7 of the Clayton Act, and Section 5 of the FTC Act.

However, significant recommendations were made, including the repeal of the Robinson-Patman Act, the reform of indirect purchaser litigation, the repeal of existing judicial rules forbidding claim reduction and contribution by alleged joint tortfeasors, the reform of merger clearance and the process for issuing “second requests” under the Hart-Scott-Rodino Act, and narrowing the number and scope of antitrust exemptions and immunities. Given that the complete set of recommendations is extensive, this Client Alert provides a brief overview of some of the most significant proposed changes.

We have posted additional memos on this development in our “Antitrust” Practice Area.

April 13, 2007

Campbell Soup Mixes Up a Leveraged Spin

Geoff Parnass is doing some great stuff on his new “Private Equity Law Review” Blog; here is a recent entry:

“The Third Circuit Court of Appeals in Philadelphia recently decided an important case concerning whether a leverage spin-off can be attacked under fraudulent conveyance rules in bankruptcy.

In 1998 Campbell Soup Co. dropped the assets of its Vlasic pickle and Swanson dinner businesses into a newly formed subsidiary, and paid itself a $500 million cash dividend with funds borrowed against the assets. Campbell then spun out the new company to its stockholders, and Vlasic became a free-standing public company. Unfortunately, the pickle and frozen dinner businesses suffered and within 3 years of the spin off, Vlasic was in bankruptcy.

The trade creditors of Vlasic argued that the payment of the dividend to Campbell at the time of the spin off was a “constructively fraudulent transfer”.

In orchestrating the spin-off, Campbell “negotiated” with the people who were to manage the business, but it would not take less than a $500 million cash payout. There was lots of evidence that Campbell massaged the businesses before the spin out to achieve the biggest cash payout possible. Vlasic had to restructure its debt shortly after the spin off, but went on for a year or so to operate relatively well. In fact, the public markets valued the equity of Vlasic at $1 billion, even with the $500 million debt.

As the court said, the company did not collapse, but rather slowly declined. The game ended a little more than 2 years after the spin off. At trial, the issue was whether the assets of Vlasic were “reasonably equivalent value” for the $500 million payment made to Campbell. Based on the fact that Vlasic traded at a $1 billion market value after the spin off, the trial court answered “yes”.

The bankruptcy creditors tried to argue that Campbell’s prior manipulations had a lingering effect on the market value of the company after the spin off. The Court of Appeals didn’t buy the argument, referring repeatedly to the fact that public investors valued the company at $1 billion after the spin off. Soup’s on!”

April 10, 2007

When a Bank Works Both Sides

In Sunday’s NY Times, Andy Sorkin writes in his column: Was the auction for Tribune rigged in Samuel Zell’s favor? After the company’s $8.2 billion sale was announced last week, some Tribune insiders whispered that the board’s clubby Chicago directors always preferred selling the company to Mr. Zell, their local flamboyant real estate tycoon, over a rival deal for exactly the same price from a team of out-of-town Los Angeles billionaires, Eli Broad and Ronald W. Burkle.

That may seem plausible, but there may be an even more perverse explanation: Two of the investment banks advising Tribune — Merrill Lynch and Citigroup — also financed Mr. Zell’s bid.

In a happy coincidence, Merrill Lynch, which wrote a “fairness opinion” blessing the deal for Tribune, also just happened to represent Mr. Zell in his $39 billion sale of Equity Office Properties to the Blackstone Group this year.

These types of conflicts on Wall Street are hardly new, but the Tribune deal illustrates them writ large. As Robert Kindler, vice chairman for investment banking at Morgan Stanley, recently said on a panel at the Corporate Law Institute at Tulane University: “We are all totally conflicted — get used to it.” (Morgan Stanley advised Tribune’s special committee of independent directors, but more on that later.)

The potential conflict in the Tribune sale stems from a practice known as “staple financing” — in which the adviser to the seller also offers financing to prospective buyers, putting the investment bank on both sides of the deal. This column has written about the issue before. I have called it “Wall Street’s version of vendor financing — or, potentially, conflict-ridden double dipping.” But within the last year, staple financing has become so commonplace that the obvious conflicts are regularly overlooked and may need to be re-examined.

Staple financing is called that because its paperwork is often stapled onto the deal’s term sheet to help a seller develop a robust auction by offering on-the-spot financing to all suitors. The practice is often seen as a way for sellers to prevent bidders from trying to tie up financing from other sources to hinder rival bids. It also helps keep auctions more confidential because bidders don’t have to bring in their own army of bankers to rifle through all the books and records.

And staple financing often sets a floor on a company’s valuation. Still, staple financing is only offered as an option, not a requirement, so bidders who can find their own financing at better rates are free to do so.

There are times when staple financing may make sense. For example, Credit Suisse, the adviser to TXU on its $45 billion sale to the Texas Pacific Group and Kohlberg Kravis Roberts & Company, is offering to finance any potential bidder that would seek to top that deal. If a higher bidder emerged as a result, the arrangement would clearly be beneficial.

Sometimes it is impossible to find an adviser with the necessary experience that isn’t conflicted. Vice Chancellor Leo E. Strine Jr., who often presides over big deal-related cases at the Delaware Court of Chancery, said at the Tulane conference, “The idea that you get someone who’s unconflicted and has no experience is an idiotic notion.”

In the case of Tribune, however, the jumble of intertwining relationships and different options that the company was considering made the prospect of an adviser playing both sides of a deal more than a bit uncomfortable. The Tribune auction was different from many because the company was considering more than just selling to the highest bidder. It was also considering whether to sell at all, and if it didn’t, what to do. Tribune declined to comment, as did Citigroup and Merrill Lynch.

Until just a few weeks ago, the company seemed to be leaning toward a self-help plan that would involve revamping itself and taking on billions in debt. (Merrill and Citigroup planned to finance that deal, too.) On top of that, Merrill and Citigroup were offering to finance the bid by Mr. Burkle and Mr. Broad.

With so many options under consideration and Merrill and Citigroup financing virtually all of them, it is unclear why they had a seat at the negotiating table. For Merrill and Citigroup, Mr. Zell’s bid was clearly worth more in fees than Tribune’s self-help plan, and the bid from Mr. Burkle and Mr. Broad was less certain.

To their credit, Tribune’s independent directors formed a special committee and hired an outside adviser, Morgan Stanley, to guide them through the drawn-out auction and to act as a buffer between the interests of the not-so-disinterested board members.

But with so many members of the board in favor of keeping the company in Chicago hands (and Merrill and Citigroup campaigning for that deal for the last couple of weeks), it was hard for the committee to squeeze more money out of Mr. Zell when he knew he was the favorite.

Under the circumstances, Morgan Stanley, which also provided a fairness opinion, actually did a pretty good job of extracting an extra dollar a share from Mr. Zell at the 11th hour. Of course, it is hard to say what would have happened if Merrill and Citigroup didn’t provide the financing to Mr. Zell. And shareholders are hardly complaining; it is almost a miracle the company got sold at all, let alone for $34 a share.

But with so much financing available across Wall Street these days, it makes you wonder whether it is worth it for corporate boards to overlook all the potential conflicts to play the staple financing game.

April 2, 2007

ABA Spring Meeting Notes: Environmental Issues Don’t Have to Tank a Deal

In our “Conference Notes” Practice Area, we posted some notes from the recent Spring Meeting of the ABA’s Business Law Section panel on “Environmental Issues Don’t Have to Tank a Deal: Managing Environmental Risk and Closing Deals.”

Tackling Global Warming: Even Corporate Lawyers Need to Take Heed

With climate control becoming an inevitable issue that we all will have to deal with – both in our personal and professional lives – we have launched a new website to help you navigate how global warming will impact the corporate & securities laws. Sponsored by and the National Council for Science and the Environment, this full-day June 12th webconference is free to all – and the agenda is listed on Here is a snapshot of that agenda:

– Due Diligence Considerations When Doing Deals
– What the Studies Show: A Tutorial
– The Business Case for Tackling Global Warming
– The Board’s Perspective: Strategic Opportunities and Fiduciary Duties
– Why You Need to Re-Examine Your D&O Insurance Policy
– The Investor’s Perspective: What They Seek and Their Own Duties
– Disclosure Obligations under SEC and Other Regulatory Frameworks
– How (and Why) to Modify Your Contracts: Force Majeure and Much More