From Kevin Miller of Alston & Bird: In a recent Delaware Chancery Court decision – Globis Partners v. Plumtree – the court granted defendants’ motion to dismiss claims alleging, among other things, that Plumtree Software’s board had breached its duty of disclosure by among other things, omitting information from the merger proxy relating to the financial analyses performed by Jeffries, Plumtree’s financial advisor. Here is a copy of the opinion.
Globis contended that Defendants should have disclosed the discount rate and the rationale for using different sets of comparable companies in different analyses but the court concluded that Globis had not shown that the proxy statement did not contain “a fair summary of the substantive work performed by Jefferies.” At best, the court concluded that plaintiffs had merely shown that such omitted information would have been helpful in valuing Plumtree’s stock. But Delaware law does not
require stockholders be “given all the financial data they would need if they were making an independent determination of fair value.”
In particular, citing Skeen v. Jo-Ann Stores and Pure Resources as well as the more recent CheckFree and Netsmart decisions, the court found that:
“None of these claimed omissions is actionable as a matter of law. Plaintiffs conclusory statement, “[w]ithout this information, Plumtree shareholders were unable to determine the true value of Plumtree,” does not meet its burden of proving materiality. Omitted facts are not material simply because they might be helpful. [A] disclosure that does not include all financial data needed to make an independent determination of fair value is not per se misleading or omitting a material fact. The fact that the financial advisors may have considered certain non-disclosed information does not alter this analysis. Given the extensive disclosure of the critical features, purposes, and likely effects of the Merger, none of the omitted information could have been viewed by a reasonable shareholder as significantly altering the total mix of information made available to her. [A] reasonable line has to be drawn or else disclosures in proxy solicitations will become so detailed and voluminous that they will no longer serve their purpose.”
Finally, the plaintiff’s challenged the failure to provide meaningful disclosure regarding Jefferies fees, because the proxy statement merely stated that they were “customary”. However, the court found that: “Without a well-pled allegation of exorbitant or otherwise improper fees, there is no basis to conclude the additional datum of Jefferies’ actual compensation, per se, would significantly alter the total mix of information available to stockholders.”
Court of Chancery Dismisses Revlon and Disclosure Claims Against Third Party Merger
And some thoughts from Travis Laster on the same case: In a decision issued November 30, Vice Chancellor Parsons dismissed the complaint in Globis Partners v. Plumtree Software, a purported stockholder class action alleging that the directors of a software company had breached their fiduciary duties in connection with the sale of the company to an unrelated, strategic buyer. The opinion is noteworthy for several reasons.
First, despite acknowledging that the directors were subject to Revlon duties, the Vice Chancellor evaluated the directors’ conduct with a plain-vanilla application of the business judgment rule. Although this might at first seem puzzling, it appears to have been driven by the plaintiffs’ approach to the case rather than by some new doctrinal twist. The stockholder plaintiffs’ complaint did not focus on the process employed by the directors in selling the company, but instead alleged that the directors’ interests in selling the company were inconsistent with those of the stockholders. It was thus the plaintiffs that chose to frame their attack in terms of rebutting the business judgment rule. The Vice Chancellor ruled on the arguments that the stockholder plaintiffs made.
Second, the Vice Chancellor held that the acceleration of stock options generally will not create a conflict of interest for directors. He noted, however, that a conflict could arise and render the directors interested if the benefit flowing from the acceleration of the stock options is sufficiently substantial. This observation is logical and well taken. In evaluating potential interest from option acceleration, practitioners should consider whether the time value benefit of acceleration is material, whether there is a significant risk that the options might not otherwise vest, and whether there is any concern that the options might otherwise be lost or become worthless due to the financial condition of the company. In the absence of special circumstances, the general rule in Globis should control.
Third, the Vice Chancellor held that the defendants did not breach their disclosure obligations by failing to provide details about their financial advisors’ analysis and compensation. Most significantly, the Vice Chancellor held that it was enough to say that the investment banker’s compensation as “customary” and partially contingent, without disclosing the details. The Vice Chancellor also rejected the argument that the defendants were required to disclose the precise discount rate used by the financial advisor to determine the present value of estimated future share prices. According to the Vice Chancellor, the discount rate was immaterial in light of the defendants’ disclosure of the method used to derive that rate.
The Vice Chancellor’s analysis of the disclosure issues appears to have been significantly influenced by the Chancellor’s recent decision in Checkfree, in which the Chancellor expressed concern about overly voluminous and detailed disclosures. As I noted in commenting on that decision, Checkfree’s ruling on the non-disclosure of banker compensation stands in tension with other recent disclosure decisions, such as Express Scripts/Caremark. A company faces injunction risk if fails to fully disclose the details of the analysis undertaken by its financial advisors, the information on which that analysis was based, and the compensation the financial advisors received. A company may decide to run the risk, and it is certainly true that supplemental disclosures on these issues can provide handy settlement currency. A company should not, however, assume that minimalist disclosures will always be upheld.
Reading between the lines in Globis suggests that the outcome was influenced by key contextual factors such as (i) the third party, arms’ length nature of the deal, (ii) the post-closing posture of the ruling, (iii) the difficulty in crafting an adequate disclosure remedy, and (iv) the absence of a topping bid. Similar issues might play out differently in an MBO or controlling stockholder transaction, if the claims were pursued vigorously in the injunction context, or if the plaintiff was a topping bidder.
– Fairness Opinions after Revised NASD Rule 2290: Models & Analysis
– Navigating a Loan-to-Own Transaction: 11 Steps
– Practical Guidelines for Special Committees
– Perspectives from an Industry Insider: Understanding Activist Hedge Funds
– M&A Implications of New Changes to Rules 144 & 145
As all subscriptions are on a calendar year basis, it is time for you to renew your subscription. If you are missing these critical issues, try a 2008 no-risk trial to get a non-blurred version of this issue for free.
Last week, the Federal Trade Commission – the agency charged with administering the Hart-Scott-Rodino Act – approved the new annual HSR Act notification thresholds, by nudging them up a little bit (see this chart). The new thresholds will be published in the Federal Register soon and will become effective 30 days after publication. We have posted a number of memos on this development in our “Antitrust” Practice Area.
In addition, antitrust enforcement agencies in both the U.S. and Europe announced enforcement actions at the end of 2007. Here is a description from Morrison & Foerster: “The U.S. Federal Trade Commission on December 19, 2007, announced it settled a federal district court action against ValueAct Capital Partners, L.P. for failure to file an HSR Act notification in connection with three earlier acquisitions by ValueAct. In settling the complaint, ValueAct agreed to pay civil penalty of $1.1 million. Also during December, the European Commission carried out “dawn raids” on two PVC manufacturers in the UK for violations of the prohibition on pre-clearance implementation of M&A transactions. This represents the first time that the European Commission has taken action against pre-clearance implementation activities since the 1990s, and the first time the Commission has ever used its dawn raid authority in connection with a suspected merger violation.”
As noted in this press release, the IASB completed the second phase of its business combinations project last week by issuing a revised version of IFRS 3 and an amended version of IAS 27. Here is an explanation of how IFRS 3 and IAS 27 have been changed (unfortunately, you have to pay to see the new standards). And here is an explanation of how these revised standards differ from US GAAP.
The new requirements take effect on July 1st, 2009, although entities are permitted to adopt them earlier. Here is a related article from CFO.com.
We have just announced a webcast – “The New Business Combination Accounting” – during which partners from KPMG’s and PwC’s National Office, among others, will discuss the new FASB and IASB business combination rules.
Yesterday’s WSJ ran this provocative article about a recent study that suggests that some investment banks are trading on deals they are working on – before the deals are announced. The article notes that study’s statistical pattern could be no more than a series of coincidences, reflecting unconnected events in disparate parts of large investment banks – but that the statistical likelihood of that is challenged by the study.
In the study – “The Dark Role of Investment Banks in the Market for Corporate Control” – three European finance professors examined more than 1,600 US merger deals between 1984 and 2003, along with quarterly 13F filings of institutional stock ownership. They found that during the last quarter before a merger announcement, large investment banks serving as lead advisers to acquirers accumulated shares in target companies just over 19% of the time – either by taking new stakes or significantly increasing existing stakes. That’s nearly double the 10.5% rate of investment banks not serving in that role. Look for FINRA and the SEC to be closely behind…
M&A: The ‘Former’ SEC Staff Speaks
Catch the DealLawyers.com webcast tomorrow – “The ‘Former’ SEC Staff Speaks” – to hear former Senior Staffers from the SEC’s Office of Mergers & Acquisitions weigh in on the latest rulemakings – and interpretations – from the SEC. This webcast will provide a complete “bring-down” of what’s happening at the SEC – and provide practical guidance about what you should be doing as a result. Join:
– Dennis Garris, Partner, Alston & Bird LLP and former Head, SEC’s Office of Mergers & Acquisitions
– Jim Moloney, Partner, Gibson Dunn & Crutcher LLP and former Special Counsel, SEC’s Office of Mergers & Acquisitions
The grace period for DealLawyers.com has expired. As all memberships are on a calendar-year basis, if you haven’t renewed, you won’t be able to catch this webcast or this upcoming one: “MAC Clauses: All the Rage.” So renew your membership today!
There continues to be a lot of commentary regarding the recent decision in the Finish Line/UBS Securities LLC litigation, decided by the Tennessee Court of Chancery (Chancellor Ellen Hobbs Lyle). We have posted a number of memos in these two Practice Areas: “MAC Clauses” and “Break-Up/Termination Fees.”
Below are some thoughts and analysis from Cliff Neimeth of Greenberg Traurig:
Although various unsuccessful claims were asserted by Finish Line and UBS to avoid consummating the $1.5 billion cash merger (including alleged fraudulent inducement and securities fraud), the issue followed most closely by the public M&A bar was Finish Line’s MAC claim asserted in the context of a significant fall off in Genesco’s earnings and EBITDA performance for Fiscal Q2 (i.e., May 1 – July 31, 2007) and continuing through Fiscal Q3. (NB: The decision also addresses the MAC claim relating to Genesco’s missed projections – covered by an express carve out from the Merger Agreement definition, but with the usual “underlying cause” reinsertion exception thereto – and the MAC claim relating to the securities fraud investigation of Genesco and the companion class action lawsuit filed in Tennessee federal court).
Since the execution of the Merger Agreement on June 17, 2007, the “street” and certain institutional Finish Line stockholders regarded the $1.5 billion price tag as significantly overvalued (especially in a sluggish industry where Genesco’s comparables were sustaining reduced customer orders and consumer demand, declining revenues and operating cash flows, and where Finish Line similarly was operating in a weakening sector). Moreover, with only a sliver of (cash) equity being contributed by Finish Line to fund the strategic acquisition of a larger company with few overlapping customers and business segments (i.e., largely non-core to Finish Line), substantial debt financing for the deal was to be provided by UBS in a very difficult and materially worsening credit environment with UBS already starting to take big hits to its balance sheet and P&L as a consequence of $ multi-billion losses suffered in subprime mortgage investments and substantial write downs in its underperforming fixed income securities investments.
When the deal was announced, it was publicly rolled out as a (pro forma) strategic combination creating a $3 billion enterprise with (i) significant economies of scale, (ii) diversity of concepts, brands and products to hedge against changing consumer tastes and preferences for outdoor and athletic shoes, apparel and accessories, and (iii) increased bargaining power and strength with vendors, landlords and REITs.
Chancellor Hobbs decision briefly excerpts the pre-sign course of dealing between the parties, including the financial diligence preceding the execution of the merger agreement. She also recites the (interrelated) merger agreement provisions and definitions relevant to Finish Line’s and UBS’ MAC and fraudulent inducement claims and Genesco’s demand for specific performance. This, as in all of these cases, makes for interesting reading of provisions that sometimes are dealt with either too casually by M&A practitioners or, as was the case in United Rentals, are “hyper-negotiated” to the point where the result is conflicting provisions, inadvertent waivers of remedies, contractual ambiguity and obfuscation of the parties’ intent.
Unlike the URI case (which, of course, involved different facts, claims and legal contexts), the operative provisions in the Finish Line-Genesco Merger Agreement did not require a compass for the Court to navigate them. With respect to the core financial performance MAC claim, Chancellor Hobbs concluded that a MAC event had, in fact literally occurred, but that Finish Line was not excused from its obligation to perform the Merger Agreement because such event was the result of general economic conditions and Genesco had not suffered any disproportionate impact therefrom in relation to that suffered by its industry peers (See clause (B) to Section 3.1 (a) of the Merger Agreement which contains one permutation of this typical MAC carve out sought by sellers and the exception to such carve out typically reinserted by buyers).
Chancellor Hobbs attached considerable significance to the testimony of Genesco’s retail industry expert that Genesco’s performance problems were attributable to escalating heating oil, gas and food prices, the slumping housing market and the mortgage credit meltdown. The testimony of the parties’ respective retail industry and economic experts (contained in the trial exhibits referenced in the opinion and the relative credibility of which was highly influential in Chancellor Hobb’s decision) provide an interesting insight into the distinctions drawn between intra-industry conditions and macro-economic conditions, the proper construction of a “peer group” for purposes of applying the “disproportionate impact” exception to
the MAC carve out and the manner in which clause (B) to Section 3.1 (a) and other portions of Section 3.1(a) were negotiated and drafted. The trial record also underscores the relevance to the judicial review of a post-sign MAC claim of adverse results, events and conditions that were known or should have been anticipated by the parties (in this case, Finish Line) prior to signing a merger agreement.
Not unexpectedly, Chancellor Hobbs referenced the recent IBP and Frontier Oil decisions of Delaware’s Chancery Court for the proposition that (at least in a strategic business combination or non-financial buyer acquisition) there must be demonstrated an unexpected and durationally significant adverse event to properly assert a MAC claim and that a short-term earnings “blip”, without more, will not suffice.
Worthy of note, Chancellor Hobbs effectively concluded that Genesco’s poor Q2 (and continuing Q3) poor performance was not just a “blip” (in the parlance of Delaware Chancery Court Vice Chancellor Leo Strine) because the parties in one of the closing conditions to the Merger Agreement (i.e., Section 7.2(b)) provided that the occurrence of a Genesco MAC would not provide a basis for Finish Line to walk from the transaction if the MAC event was capable of being cured by the Merger Agreement outside termination date (December 31, 2007).
Acknowledging UBS’ trial argument, the Court reasoned that the cure provision seemed to constitute an express acknowledgement by the parties that a Genesco MAC could occur in as little as a three or four- month time frame and an event spanning Genesco’s Q2 – Q3 was, therefore, was intended by the parties to be durationally significant in the context of the Merger Agreement (even if it otherwise would not be under the general teachings of IBP and Frontier Oil).
Chancellor Hobbs (as articulated in IBP and Frontier Oil) reaffirmed that in considering whether the MAC event at issue undermined the benefit of the bargain (or fundamental purpose) the parties sought to achieve by entering into the Merger Agreement, the correct “looking-glass” is that worn by a long-term strategic purchaser or investor. In this regard, the purposes and goals of the merger disclosed by the parties when and after the deal was announced and as evidenced in the testimony and notes of the parties indicated that Finish Line’s acquisition was all about product and customer diversification, creating operating synergies, achieving cost reductions, and maximizing growth opportunities and other long-term objectives – not short-term financial gains, exits or flips. That said, especially in a highly levered transaction such as here, the Court took care not to minimize the importance of Genesco’s Q2 and Q3 deteriorating earnings and EBITDA performance (Genesco’s lowest in 10 years) to servicing the significant debt being incurred to finance the merger and to fund continuing combined company operations. (In fact, the contribution model indicated that 70% of such debt service and working capital was expected to be funded from Genesco’s earnings from operations).
Lastly, Chancellor Hobbs decision contains an interesting discussion of the common law surrounding fraudulent inducement (tort) claims and the remedy of specific performance. As (if) you read the decision (together with decisions such as URI, Abry Partners, IBP, Frontier Oil, etc.) it underscores the importance of so-called “boilerplate” and “miscellaneous” clauses such as: no reliance, exclusive remedy and entire agreement provisions, the use of express closing conditions vis a vis those implicitly brought down (through general representation and warranty-accuracy and covenant-performance provisions), and that simple (often obscure and missed) nuances in drafting can operate to decouple or conflate concepts that were meant (or not meant) to be disjunctive, conjunctive or multi-layered.
A few months ago, the Committee on Negotiated Acquisitions of the American Bar Association’s Section of Business Law released its “2007 Strategic Buyer/Public Target M&A Deal Points Study.” We have posted a copy of the study in our “Negotiation Tactics” Practice Area.
As Keith Flaum, Chair of the Committee’s M&A Market Trends Subcommittee, notes in this entry in Harvard Law School Corporate Governance Blog. Here is an excerpt from that blog:
“The Study examines key deal points in acquisitions of publicly traded companies by strategic buyers announced in 2005 and 2006. Among the many interesting findings of the Study is that almost 50% of the acquisition agreements in the sample contained provisions precluding the Board of Directors from changing its recommendation in favor of the acquisition absent a topping bid. (Those provisions are described on pages 47 and 48 of the Study.) This would seem to cut against the views of many practitioners (supported, to some extent, by language in Chancery’s 2005 decision in Frontier Oil v. Holly Corp., as well as comments made publicly in early 2006 by a leading Delaware jurist) that such a limitation could violate the fiduciary duties of the Board of Directors under Delaware law.”
Corp Fin has posted the job opening (if you click this, give it a few seconds to go to the posting) for the spot vacated by Brian Breheny – Chief of the Office of Mergers and Acquisitions. In the job posting, I was amused by how the SEC plugs it’s been voted the “3rd Best” place to work in the federal government. Since Brian got the job from outside the SEC, it’s not inconceivable that the SEC would hire from outside again. The posting closes on January 22nd.
Bebchuk v. Lipton
Recently, Directorship ran this interesting article on the debate between Marty Lipton and Lucian Bebchuk on the role of shareholders in corporations.
Marty also recently addressed the “Mergers, Acquisitions, and Split-Ups” course at Harvard Law School regarding “The Future of M&A.” The “Harvard Law School Corporate Governance Blog” has a link to this multiple hour address.
Last week – just after a Delaware court denied specific performance in the Cerberus–United Rentals decision – an opposite conclusion was found in Genesco v. Finish Line, 07-2137, Chancery Court for the State of Tennessee (Nashville). We have posted a copy of this opinion in our “M&A Litigation” portal.
Here is some analysis of these contrasting cases from Davis Polk & Wardwell:
“In contrasting rulings over the holidays, the Delaware Chancery Court upheld the right of certain affiliates of Cerberus Partners, L.P. to walk away from their $4 billion buyout of United Rentals, Inc. (“URI”) by paying a $100 million reverse termination fee, while the Tennessee Chancery Court ordered Finish Line Inc. to complete its $1.5 billion acquisition of rival retailer Genesco Inc.
The URI dispute arose in November when the Cerberus affiliates notified URI that they were unwilling to proceed with the acquisition on the terms stated in the July 22nd merger agreement, but would be prepared to enter into discussions about revised terms or to pay the reverse termination fee. URI sued in Delaware, seeking to enforce a provision in the agreement that entitled URI to compel the Cerberus affiliates to specifically perform by drawing down on their financing agreements and consummating the merger. The Cerberus affiliates argued in response that a separate provision in the merger agreement plainly provided that URI’s sole and exclusive remedy is the reverse termination fee and that “in no event shall [URI] seek equitable relief.”
Examining these two conflicting provisions on URI’s motion for summary judgment, Chancellor William Chandler found that the agreement was susceptible to two reasonable interpretations and that summary judgment was therefore not appropriate. He went on to find that the extrinsic evidence of the parties’ negotiation process did not support URI’s argument that its interpretation of the agreement represented the common understanding of the parties. Instead, he found that the Cerberus affiliates had made clear that they understood the agreement to eliminate any right to specific performance and that URI either knew or should have known of their understanding. Under the “forthright negotiator principle,” Chancellor Chandler held, “if URI disagreed with that understanding, it had an affirmative duty to clarify its position in the face of an ambiguous contract with glaringly conflicting provisions.”
By contrast, the Finish Line-Genesco merger agreement had no reverse termination fee and clearly stipulated that either party was entitled to an injunction to prevent breach of the agreement. Genesco invoked this provision when it filed suit in Tennessee state court in September 2007, seeking to compel Finish Line and UBS, the investment bank providing financing for the transaction, to complete the merger. Finish Line and UBS countered that Genesco had suffered a Material Adverse Effect (“MAE”) as defined in the merger agreement, such that Finish Line’s performance was excused.
Following a seven-day trial, Chancellor Ellen Hobbs found that Genesco had suffered an MAE but that it was due to general economic conditions and Genesco’s decline in performance was not disproportionate to its peers in the industry. The decline therefore fell within one of several carve-outs to the definition of MAE in the merger agreement, and did not excuse performance on the part of Finish Line.
Chancellor Hobbs also rejected Finish Line’s defense that Genesco had fraudulently induced Finish Line to enter into the deal by not providing material information concerning Genesco’s sharply declining May performance data to Finish Line prior to the signing of the merger agreement. On this issue, Chancellor Hobbs found that Genesco’s May results had not been calculated at the time UBS requested them on behalf of Finish Line and that neither the law nor the parties’ agreements required Genesco or its advisor, Goldman Sachs, to voluntarily provide the information once it became available. Under the parties’ due diligence procedures, the onus was on Finish Line and its advisor to renew their request, which they failed to do.
The Tennessee court expressly declined to analyze the solvency of the merged Finish Line-Genesco entity. UBS has filed a separate lawsuit in federal district court in New York, seeking to void its financing commitment letter on the grounds that Finish Line will not be able to deliver the solvency certificate required to close the financing.”