As noted in this press release/fee rate advisory #6 issued yesterday, President Bush signed the appropriations bill that includes funding for the SEC on December 26th. As a result, effective December 31st, the Section 6(b) fee rate applicable to the registration of securities increases to $39.30 per million dollars from the existing rate of $30.70 per million dollars. Get those registration statements filed today or pay more on Monday!
On Friday, in this post-trial opinion, Chancellor Chandler holds that URI cannot compel specific performance of its merger agreement with the RAM entities, which are acquisition subsidiaries for Cerberus. Here are thoughts from the “M&A Law Prof Blog,” “Ideoblog” and the “WSJ.com Law Blog.”
And here is some analysis from Travis Laster: “The Chancellor follows established principles of Delaware law in holding that the merger agreement is ambiguous with respect to the right of specific performance. He finds that URI has proffered a reasonable reading of the agreement in which the right to specific performance is preserved. At the same time, he finds that Cerberus proffered a reasonable reading of the agreement, albeit “barely so,” in which the right to a specific performance remedy was eliminated.
The Chancellor therefore moves to extrinsic evidence. He finds based on the course of drafting and communications between the parties that URI cannot carry its burden of proof to establish its interpretation. He further holds that Cerberus clearly believed that it could walk on the deal for a $100M break fee, that URI knew or should have known that Cerberus had that view but said nothing, and that under the “forthright negotiator principle,” that reading is binding.
Because the Chancellor finds the agreement ambiguous, the opinion is fact heavy. It does not shed light on how MAC clauses will be construed by the Court, and the Chancellor even goes out of his way to caution that the case is not a MAC case, but rather “a good, old fashioned contract case prompted by buyer’s remorse.” The decision will, however, help parties in sharpening their pencils when negotiating specific performance and termination rights.”
URI could have appealed to the Delaware Supreme Court – but decided to take the break up fee instead. Note that the evolution of MAC clause law will be parsed during our upcoming webcast: “MAC Clauses: All the Rage.”
In our “M&A Litigation” Portal, we have posted a copy of this 3-page ruling from Chancellor Chandler in the URI case in which he ruled that significant parts of an expert report from Professor Coates as being inadmissible. Besides chiding Coates for trying to justify poor drafting practices, the Chancellor rebukes the attempt to instruct the court on matters of Delaware corporate law.
According to these league tables, KPMG is a leading middle market financial adviser – with 1,600 investment bankers – operating in 52 countries. Apparently, KPMG’s Corporate Finance practice has ranked first or second on the M&A advisory league tables (by deal volume) for over the past ten years. I believe the corporate practice is owned by KPMG’s UK entity – not the US entity – and is much larger outside the US.
An associate at an LA law firm sent us the following language, found in the governing law/disputes section of a software license agreement:
“This agreement is governed solely and exclusively by the principles written in the Holy Bible. All disputes must be mediated by a mediator nominated by the Institute of Christian Conciliation under the Rules of Procedure for Christian Conciliation.”
Our source asks “Have you ever seen this before? How are disputes resolved? If you don’t pay the other side what you owe, are you going to hell?”
Back on Monday, I blogged some analysis from Kevin Miller of Alston & Bird about why deference is not generally appropriate when granting extraordinary permanent relief such as specific performance.
Then, in his “M&A Law Prof Blog,” Professor Steven Davidoff posted six reasons why he doesn’t necessarily agree with Kevin’s analysis (the NY Times’ DealBook has picked up on this debate).
Below is Kevin’s friendly rebuttal to the Professor:
Fundamentally I am raising two separate issues:
1. Should a voluntary cap on monetary damages make monetary damages “inadequate” for purposes of justifying specific performance; and
2. Is it appropriate to grant specific performance as a remedy to protect the interests of non-third party beneficiaries.
URI could address the first point by alleging nonmontary damages, though it hasn’t yet and it may be it can’t. I don’t think URI can necessarily address point 2 unless it alleges damages to URI. The points are separate and distinct and I believe either one could be the basis for a motion to dismiss before getting to the summary judgment issue as to whether 9.10 or the last sentence of 8.2(e) controls.
The bottom line is that I don’t think a voluntarily agreed cap on monetary damages makes monetary relief inadequate and if monetary damages are not inadequate, a court should not exercise its equitable powers to grant extraordinary permanent relief like specific performance. For example, even without an exclusive remedy provision, I don’t think a court should or would grant equitable relief to a buyer solely because an agreed cap on an indemnity provision prevented the buyer from being fully compensated for a breach of warranty or covenant.
My argument is not that the URI specific performance provision is not enforceable or meaningless (subject to the 8.2(e) issue), it’s just that it is only enforceable if URI alleges damages that are difficult to quantify in dollars and the only damages URI has alleged so far relate to RAM’s failure to pay the merger consideration – a clearly quantifiable damage.
Kevin’s rebuttal of Professor Davidoff’s specific criticisms:
With regard to 1, 2 and 3 – The key point, as you later acknowledge, is that you can’t negotiate or contract for a “right” to specific performance as it is a remedy solely within the grace and discretion of the court to be granted only as a last resort upon a showing of no other appropriate remedy.
In my world, the Court could just say (i) yes, RAM breached; (ii) the “harm” resulting from the alleged breach is difference between the value of the merger consideration and, lets say, the cover bid; (iii) such damages are calculable and equal to $X; (iv) money damages, being easily measured, are the preferred remedy; and (iv) to the extent $X exceeds a voluntary limitation on money damages you can’t now complain that a damages award will not make you whole; (v) you can collect up to that voluntary cap through the Cerberus limited guarantee, consequently monetary damages are appropriate and practicable. Injunctive relief – e.g., prohibiting a rival bidder from interfering with a shareholder vote is different from ordering specific performance in order to force payment of a specified amount of cash. The former clearly has no remedy at law while the latter does.
As previously indicated in this blog, I am concerned that RAM may be precluded from challenging URI’s right to specific performance because of 9.10. I think that’s what happened in IBP, but I think a court recognizing the issues has to address them of its own volition.
4. The fact that IBP was a cash and stock deal was critically important. Monetary damages were not easy to calculate in IBP specifically because it would have required a guesstimate as to the value of the synergies that would have benefited IBP shareholders had they elected to receive stock. Where the merger consideration is solely cash, damages should not be that difficult to calculate.
As the IBP court said: “I start with a fundamental question: is this a truly unique opportunity that cannot be adequately monetized?…In the more typical situation, an acquiror argues that it cannot be made whole unless it can specifically enforce the acquisition agreement, because the target company is unique and will yield value of an unquantifiable nature, once combined with the acquiring company. In this case, the sell-side of the transaction is able to make the same argument, because the Merger Agreement provides the IBP stockholders with a choice of cash or Tyson stock, or a combination of both. Through this choice, the IBP stockholders were offered a chance to share in the upside of what was touted by Tyson as a unique, synergistic combination. This court has not found, and Tyson has not advanced, any compelling reason why sellers in mergers and acquisitions transactions should have less of a right to demand specific performance than buyers, and none has independently come to mind.”
I think the Second Circuit in the ConEd case discussed below answered the IBP court’s rhetorical question – because target shareholders are not parties or third party beneficiaries of the contract. Note: Not a big point, but IBP is not a Delaware precedent, it is a Delaware court applying NY law.
5. I agree that the third party beneficiary defense is a weaker defense though I think your music teacher story fails to address the real issue.
To avoid being distracted by issues relating to the provision of personal services, let’s assume you ordered an xbox 360 from seller A for $350 as a present for your kid but for some reason – lets say they’re big fans of Ohio State – seller A refused to deliver an xbox 360 to Michigan even though Seller A had sufficient product, forcing you to cover by paying $400 to obtain the same product from seller B. And suppose further that the contract with seller A had a provisions stating that (i) the parties agreed in advance that a breach would result in irreparable harm and that equitable relief including specific performance would be appropriate and (ii) under no circumstances would seller A be liable for money damages in excess of $25 for breaches of the agreement. I honestly don’t think a court should require specific performance solely because you couldn’t collect the full $50 in money damages from Seller A. On the other hand, if everyone was sold out of xbox 360’s, specific performance might be the only appropriate remedy and the court would be required to balance the equities.
But the foregoing example as well as your music teacher example focus on the easy case – protecting the interests of a party to an agreement – not a demand for equitable relief to effectively compensate a non-third party beneficiary.
There is a huge difference between (i) a court specifically enforcing a buyer’s rights to buy a product or a service at a specific price, even where that product or service will be delivered or rendered to a third party and (ii) a court specifically enforcing a buyer’s “obligation” to pay cash consideration to a non-third party beneficiary.
The more relevant example would be, suppose you agree that I can buy your brother’s old X-Box for $10 provided your brother agrees (analogous to the requisite shareholder vote), but later I say I don’t want to buy your brother’s old xbox for $10 but will still pay $8. Can you sue me in equity and force me to pay your brother $10 for his xbox. I don’t think that’s the right answer. Certainly your brother can’t sue me (ConEd). Similarly he couldn’t sue you for agreeing to take $8 instead $10 (essentially Tooley) or even for voluntarily terminating the agreement in its entirety.
The court in IBP didn’t see the point because it wasn’t briefed. “Although Tyson’s voluminous post-trial briefs argue the merits fully, its briefs fail to argue that a remedy of specific performance is unwarranted in the event that its position on the merits [of whether there had been a MAC] is rejected. This gap in the briefing is troubling.”
6. The Second Circuit effectively held that neither the target nor its shareholders could sue for lost merger premium as the shareholders were not third party beneficiaries. In ConEd, the claim for lost profits was originally brought by NU. The federal district court held that NU’s shareholders were clearly third party beneficiaries of the merger agreement and denied ConEd’s motion to dismiss. Later, a competing shareholder class action for lost profits was brought and the federal district court ended up ruling that the shareholder class plaintiffs could more effectively represent the interests of NU shareholders at the time of the breach and granted summary judgment against NU’s claim for lost profit. Thus, on appeal, the second circuit was effectively asked whether NU or the shareholder class plaintiff’s acting on behalf of shareholders at the time of the breach were the better plaintiff/plaintiff representative. The second circuit’s answer was essentially “neither” as shareholders were not third party beneficiaries under the merger agreement.
This generated a fair amount of discussion among M&A lawyers though no one seemed to come up with a solution that many thought practicable. A few lawyers have sought to include provisions in merger agreements governed by NY law making target stockholders third party beneficiaries with rights solely enforceable by the target, including some very large deals – see Berkshire Hathaway’s acquisition of Russell Corp.; Brookfield Properties acquisition of Trizec; Phelps Dodge’s proposed acquisition of Inco; and Aviva’s proposed acquisition of AmerUs (all referenced in the ConEd article cited in my original DealLawyers’ blog). See also a more recent article by Victor Lewkow and Neil Whoriskey of Clearly Gottlieb in the October 2007 issue of The M&A Lawyer).
Based on anecdotal evidence, I think the practical effect is that most M&A lawyers are avoiding the ConEd issue by agreeing to Delaware rather than New York choice of law provisions in merger agreements – in effect, hoping for a different answer from the Delaware courts, with no guarantee of success.
On Tuesday, the FASB issued FAS 141(R), Business Combinations. Here is an excerpt from the FASB’s press release:
“The new standards represent the completion of the FASB’s first major joint project with the International Accounting Standards Board (IASB), as well as a significant convergence milestone,” states FASB member G. Michael Crooch. “These standards and the counterpart standards issued by the IASB will improve reporting while eliminating a source of some of the most significant and pervasive differences between International Financial Reporting Standards (IFRS) and U.S. Generally Accepted Accounting Principles (GAAP).” The IASB plans to issue its counterpart standards IFRS 3 (revised), Business Combinations, and IAS 27 (as revised in 2007), Consolidated and Separate Financial Statements, early next year.
Statement 141(R) improves reporting by creating greater consistency in the accounting and financial reporting of business combinations, resulting in more complete, comparable, and relevant information for investors and other users of financial statements. To achieve this goal, the new standard requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction; establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose to investors and other users all of the information they need to evaluate and understand the nature and financial effect of the business combination.
Statement 141(R) also will reduce the complexity of existing GAAP. The newly issued standard includes both core principles and pertinent application guidance, eliminating the need for numerous EITF issues and other interpretative guidance.”
The Latest on Fairness Opinions
With new rules from FINRA impacting fairness opinion practices (and a host of new cases addressing management conflicts), the dynamics – and processes – of preparing fairness opinions have been changing. Join these experts tomorrow as they explore the latest trends and developments in this webcast: “The Latest on Fairness Opinions” (print out these “Course Materials” in advance):
– Kevin Miller, Partner, Alston & Bird LLP
– Dan Schleifman, Managing Director and Chairman of the Investment Banking Committee – Advisory, Credit Suisse Securities (USA) LLC
– Ben Buettell, Managing Director and Co-Head Fairness Opinion Practice, Houlihan Lokey Howard & Zukin
– Denise Cerasani, Partner, Dewey & LeBoeuf LLP
This program will cover:
– Recently approved FINRA Rule 2290 – what impact will it have on fairness opinion practices?
– Fairness Opinions: Their Uses and Abuses – How should (and do) boards use fairness opinions?
– What are the implications of recent case law developments regarding investment banking conflicts, including the disclosure of fees (Caremark) and discovery regarding material relationships (Orstman)
– What are the latest issues raised by SEC Staff comments regarding fairness opinion disclosure
From Kevin Miller of Alston & Bird: With the recent spate of busted buyouts, the legal and financial community – as well as the press – have devoted significant time to dissecting the provisions of the relevant merger agreements and other transaction documents. Unfortunately, a critical issue has been overlooked.
While the Delaware courts may respect provisions in contracts in which the parties agree that irreparable harm would result from a breach of their agreement when considering motions for injunctive relief, such deference is not generally appropriate when granting extraordinary permanent relief such as specific performance.
In a recent case involving the sale of real property, Vice Chancellor Noble wrote:
“Specific performance is an equitable remedy designed to protect a party’s expectations under a contract by compelling the other party to perform its agreed upon obligation. Specific performance is an extraordinary remedy, appropriate where assessing money damages would be impracticable or would fail to do complete justice. . . . The party seeking specific performance must show that there is no adequate remedy at law. A party is never absolutely entitled to specific performance; the remedy is a matter of grace and not of right, and its appropriateness rests in the sound discretion of the court” (footnotes omitted, emphasis added).
URI’s brief fails to justify specific performance for two reasons, both relating to the alleged harms it claims: (i) the defendants’ failure to pay the agreed cash merger consideration and (ii) the decline in the value of URI shares as a result of the defendants’ allegedly manipulative disclosures.
First, to the extent the alleged harms solely relate to the fact that URI’s shareholders will not receive the agreed cash merger consideration or that the value of the URI shares they hold has declined, money damages would appear to be a practicable and therefor more appropriate remedy. URI voluntarily agreed to a cap on money damages – and should not now be permitted to claim that money damages are inadequate as a remedy because of that agreed limitation.
Second, and more importantly, the alleged harms are not harms to URI. They are only harms to URI’s shareholders who are not third party beneficiaries under the merger agreement and are consequently not entitled to protection or relief against such harms (see Consolidated Edison v. Northeast Utilities, 426 F.3d 524 (2d Cir. 2005) applying New York law and holding that shareholders cannot sue for lost merger premium; see also Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031 (Del. 2004) applying Delaware law in analogous circumstances).
It seems reasonably clear that we don’t want to have to worry about claims by other non-third party beneficiaries – e.g., executive officers, customers, suppliers, municipalities, etc. – that their expected or specifically contemplated benefits from a proposed merger constitute protectable interests justifying specific enforcement of a merger agreement (see “The ConEd Decision – One Year Later: Significant Implications for Public Company Mergers Appear Largely Ignored”).
Nowhere in URI’s brief do they set forth the standards for granting specific performance of a contract under Delaware law. Instead, they rely solely on the agreement of the parties in the merger agreement: “Section 9.10 is enforceable under Delaware law, establishes irreparable harm, and warrants specific performance and an injunction.”
But as noted by Vice Chancellor Noble, that is not enough to justify such extraordinary permanent relief – there is never a legal entitlement to such relief, it is a matter of grace and discretion for the court. Furthermore, nowhere in the URI brief do they identify any damages to URI. The only identified damages are damages to URI shareholders, who are not parties to the merger agreement: “RAM’s decision to back out of the Agreement is nothing more than a naked ploy to extract a lower price to the irreparable harm of URI’s stockholders” and “If ever there was a case for a court of equity to intervene and order specific performance and an injunction, for which the contract here expressly provides, in order to prevent irreparable harm to stockholders, this is the case.”
[Note: URI might not have these issues if it had agreed to be acquired by a competitor – see the Genesco amended complaint in which it alleges irreparable harm resulting from Finish Line’s misuse of competitively sensitive information obtained in the course of integration planning.]
URI’s most interesting argument is its reference to the IBP/Tyson case in which the Delaware Chancery Court, applying New York law, granted specific performance to a target in a cash and stock deal. URI pointedly cites IBP for the proposition that there is no compelling reason why sellers “should have less of a right to demand specific performance than buyers” but fails to put the quote in context:
“I start with a fundamental question: is this a truly unique opportunity that cannot be adequately monetized?…In the more typical situation, an acquiror argues that it cannot be made whole unless it can specifically enforce the acquisition agreement, because the target company is unique and will yield value of an unquantifiable nature, once combined with the acquiring company. In this case, the sell-side of the transaction is able to make the same argument, because the Merger Agreement provides the IBP stockholders with a choice of cash or Tyson stock, or a combination of both. Through this choice, the IBP stockholders were offered a chance to share in the upside of what was touted by Tyson as a unique, synergistic combination. This court has not found, and Tyson has not advanced, any compelling reason why sellers in mergers and acquisitions transactions should have less of a right to demand specific performance than buyers, and none has independently come to mind.”
Thus, the court in IBP was clearly focused on the irreparable harm to IBP shareholders resulting from their inability to share in the difficult to quantify synergistic benefits of a stock election merger. URI is a cash deal and its shareholders are not being deprived of the ability to share in any synergistic benefits by RAM’s alleged breach.
Furthermore, the court in IBP missed the point that IBP shareholders were not third party beneficiaries of the Tyson Merger Agreement and consequently didn’t have protectable rights under that agreement – the point made by the Second Circuit in ConEd/NU – an error best explained by the IBP court when it noted that: “Although Tyson’s voluminous post-trial briefs argue the merits fully, its briefs fail to argue that a remedy of specific performance is unwarranted in the event that its position on the merits [of whether there had been a MAC] is rejected. This gap in the briefing is troubling.”
A final interesting question is whether RAM is precluded from making these points in its reply brief because of its agreement in Section 9.10 of the merger agreement that specific performance is an appropriate remedy – thus preventing the URI court, like the court in IBP/Tyson, from being properly briefed on this critical issue. Given the parties’ disagreement as to whether Section 9.10 is controlling, I think not.