In July 2007, Hexion Specialty Chemicals, a portfolio company of private equity firm Apollo Management, agreed to acquire Huntsman Corporation for $10.6 billion (including assumed debt). Following the signing of the merger agreement, Huntsman’s financial results began to sour. In June 2008, Hexion sought a declaratory judgment from the Delaware Court of Chancery that Huntsman had suffered a “material adverse event” due to, among other things, the deterioration in its financial results.
A finding of an MAE would have permitted Hexion to terminate without paying the $325 million termination fee. In the alternative, Hexion alleged the banks would not fund under their debt commitments because the combined Hexion/Huntsman entity would be insolvent. Even though there was no “out” for a financing failure, if Hexion failed to close under such circumstances, it would only be liable for the $325 million termination fee.
Last month, as we blogged, the Delaware court issued its much anticipated decision, holding among other things that Huntsman had not suffered an MAE, and that Hexion must specifically perform its obligations under the merger agreement. The court noted that the issue of the solvency of the combined entity was not yet ripe. We have posted many memos on this decision in our “MAC Clauses” Practice Area.
Last week, as noted in this WSJ article, the parties received a much-anticipated opinion that the combined company would be a solvent entity. But now the deal has hit another snag. Two of the financiers of the deal, Credit Suisse and Deutsche Bank, told Hexion Monday night that they don’t believe the opinion meets the condition of the deal.
The parties are still trying to close the deal. But it would be ironic indeed if, after Hexion had spent so much time and legal effort trying to get out of the deal, the transaction failed because of a lack of financing.
Steven Davidoff of the “Deal Professor” writes that the financing issues in the Hexion/Huntsman transaction are part of a larger trend of M&A transactions running into financing difficulties.
Recently, FINRA issued Regulatory Notice 08-54, which provides guidance on the structure, trends and broker/dealer conflicts of interest associated with SPACs. The Notice discusses broker/dealer suitability and disclosure obligations in connection with a SPACs initial public offering, after-market trading and any subsequent acquisitions. The Notice also refers to compliance with NASD Rule 2720, the NASD conflict-of-interest rule, in connection with an acquisition by a SPAC.
Recently, the Corp Fin Staff acted on a no-action letter to Procter & Gamble. It builds upon the prior letters in the area of formula pricing in the exchange offer context. Prior letters such as McDonald’s, Weyerhaeuser, TXU and Lazard set the groundwork for this letter. In the P&G situation, they have three companies involved, but they are using the common stock trading price of one (ie. Smucker) to determine the consideration offered.
I don’t think this is moving the needle much as it’s the same basic philosophy on formula pricing, where there is an objective formula that everyone can follow, understand and is objectively applied. Still it’s worth noting each incremental step because that’s what us lawyers do…
Note that you will need your Conference ID and password to access the course materials (if you’ll be in New Orleans, a set will be handed out to you). It’s not too late to register!
Instructions for Those Watching Online Next Week: Come to the home page on the day of the Conference and click the prominent link that will be posted that day. Watch the Conference live by clicking a video link that will be on the Conference page that matches the type of player installed on your computer (ie. Windows Media Player or Flash) and the speed of the connection that you have. Panels will be archived a day after they are shown live.
While the Treasury Department’s Troubled Assets Relief Program – know as “TARP” – does not directly address any state corporate law issues, if history is any guide, it’s probably a safe bet that this dramatic new federal initiative is going to have a significant influence on state law conceptions about what is necessary in order for a director to fulfill his or her fiduciary obligations.
One of the really interesting things about American federalism is the way that actions at the federal level influence what happens at the state level. When it comes to corporate law, the different results in two Delaware cases addressing the issue of director oversight decided a generation apart are perhaps the classic example of how federal actions influence state law requirements.
In Graham v. Allis Chalmers, 188 A.2d 125 (Del. 1963), the Delaware Suprme Court held that “absent cause for suspicion there is no duty upon directors to install and operate a corporate system of espionage to ferret out wrongdoing which they have no reason to suspect exists.” While acknowledging that precedent, Chancellor Allen nevertheless decided in 1996 that a “director’s obligation includes a duty to attempt in good faith to assure that a corporate information and reporting system, which the board concludes is adequate, exists.” In re Caremark Derivative Litigation, 698 A.2d 959, 967 (Del. Ch. 1996):
What happened in between these two decisions? Most notably, the U.S. Sentencing Commission adopted organizational sentencing guidelines that provided strong incentives for companies to implement corporate compliance programs designed to detect and report violations of law.
More recently, we’ve seen Delaware and other courts grapple with the fallout from Sarbanes-Oxley and other federal reactions to the corporate scandals of the early part of this decade. Unlike the situation with the sentencing guidelines, the reaction by the Delaware courts to the corporate governance crisis was immediate and dramatic. During the first year after Sarbanes-Oxley’s passage, the Delaware Supreme Court addressed six cases involving alleged breaches of fiduciary duties by corporate directors, and the director defendants lost each and every one of them.
Since that time, directors have fared much better in the Delaware courts, but to this observer, it seems that those courts remain less willing to defer to board decisions and more willing to countenance plaintiffs’ allegations of director misconduct than they were in the past, at least during the early stages of litigation. The post Sarbanes-Oxley era has also seen the emergence of “good faith” based litigation, which has been the subject of two Delaware Supreme Court decisions (In re The Walt Disney Company Derivative Litigation and Stone v. Ritter) and which has produced this past summer’s most controversial chancery court decision. Ryan v. Lyondell Chemical Company, (Del. Ch., July 29, 2008).
How will TARP influence corporate law? At this point, it seems that the program could well result in changes in the way courts look at the board’s compensation decisions. Section 111 of the Emergency Economic Stablization Act of 2008 (the TARP program’s enabling legislation) imposes several compensation-related obligations on companies receiving federal assistance, including a prohibition on golden parachutes and an open-ended requirement obligating companies to impose limits on compensation that “exclude incentives for senior executive officers of a financial institution to take unnecessary and excessive risks that threaten the value of the financial institution.”
What is intriguing about this provision is that much of corporate law, including bedrock concepts like the Business Judgment Rule, have developed in part to encourage companies to take risks, because that presumably is what equity holders want. Obviously, the situation is a little different in the context of troubled financial institutions receiving a massive infusion of taxpayer money, and the events of recent months make it very clear why Congress would want to require companies to focus on the relationship between corporate risk and executive incentives. Nevertheless, this kind of focus is a marked departure from the approach that corporate law has traditionally taken, and its implications could be quite profound if it influences how courts look at compensation decisions under corporate law generally.
Fred Houwen of Reed Smith recently wrote this in a firm alert:
In the current economic climate, businesses are likely to take a keen interest in the ability of their suppliers and customers to meet their obligations. This can extend beyond purely financial obligations to include the protection of critical links in the supply chain. A manufacturer may, for instance, be very dependent on one of its suppliers for a specialist part that cannot readily be obtained elsewhere, or a supplier may rely heavily on an intermediary to reach ultimate consumers.
In such circumstances, it may be tempting for businesses to confer with competitors exposed to the same risks by the potential insolvency of a common supplier, customer or other trading partner. Such discussions might typically arise in the context of a trade association meeting, or in more informal situations. Topics might include the possibility of taking coordinated action to prevent their common trading partner from going out of business.
It should be borne in mind, however, that the ordinary antitrust rules continue to apply in such situations. The disclosure to competitors of competitively sensitive information–such as trading terms with the troubled business, likely future orders, or the common agreement of future trading terms–is likely to be considered to be a serious breach of the antitrust rules, notwithstanding the context.
Companies may well be able to take steps to try to prevent their trading partners from becoming insolvent, on an individual basis, but should be particularly wary of getting too close to their competitors without first examining the antitrust implications. Deciding what course to take when faced with the potential insolvency of a trading partner is never straightforward. Antitrust concerns that may arise from contacts with competitors in this connection further complicate the issues. The safest course of action is therefore to seek legal advice at an early stage.
Last night, Citigroup announced that it had ended negotiations with Wells Fargo over Wachovia, citing “dramatic differences in the parties’ transaction structures and their views of the risks involved.” Citigroup states that it “remains willing” to complete its previously announced FDIC-assisted acquisition of Wachovia’s banking operations, but has “decided not to ask that the Wells Fargo-Wachovia merger be enjoined.” Citigroup stated that it intends to continue to pursue its lawsuit seeking $20 billion in compensatory damages and $40 billion of punitive damages, noting that “Without our willingness to engage in this transaction, hundreds of billions of dollars of value would have been seriously threatened. We stood by while others walked away. Now, our shareholders have been unjustly and illegally deprived of the opportunity the transaction created.”
Wachovia and Wells Fargo issued a joint press release stating that Wells Fargo had “reaffirmed” its commitment to acquire Wachovia and that it had filed its application to the Federal Reserve “seeking expedited approval of the merger and the share exchange agreement previously entered into between Wachovia and Wells Fargo.” Under the share exchange agreement, Wells Fargo would acquire shares of a new series of Wachovia preferred stock that votes as a single class with Wachovia’s common stock representing 39.9% of Wachovia’s total voting power.
Separately, the Federal Reserve issued a statement acknowledging the efforts of the parties to “reach an accord” and Citigroup’s decision not to seek an injunction.
This September-October issue of the Deal Lawyers print newsletter was just sent to the printer and includes articles on:
– Boards Can’t Watch a Sale Unfold from the Balcony: Nine Take-Aways from Lyondell
– Dealing with State Anti-Takeover Statutes in Negotiated Acquisitions
– Cross-Border M&A: Checklist for Successful Acquisitions in the US
– Outside Termination Dates: No Way Out from a Purchase Agreement
– Broken Deals: Validation of Naked No-Vote Termination Fee
– Lessons Learned: Seeking Block Bids as Schedule 13D Discloseable Events
– The Shareholder Activist Corner: Spotlight on Steel Partners
Try a 2009 no-risk trial to get a non-blurred version of this issue (and the rest of ’08) for free.
Delaware Chancery Court Procedures for eFiling Confidential Documents
Recently, the Delaware Court of Chancery issued a Standing Order – effective October 10th – that addresses the more secure handling of confidential documents eFiled with the court. Hat tip to Francis Pileggi and his “Delaware Corporate and Commercial Litigation Blog.”
Yesterday, John Jenkins blogged on the battle between Citigroup and Wells Fargo for Wachovia. Yesterday, Citi filed a $60 billion lawsuit over the battle. Here are a thoughts on Wells Fargo’s exclusivity agreement:
1. Wachovia apparently didn’t violate any of the no-shop provisions in the exclusivity agreement (e.g., soliciting, facilitating, discussing, negotiating, waiving a standstill) other than clause (iv) – by entering into a merger agreement with Wells Fargo – but Wachovia’s board may have a strong argument that it was required to accept the Wells Fargo offer in order to fulfill its fiduciary duties and that any contractual provision that purports to prevent a board from fulfilling its fiduciary duties is void and unenforceable. That would seem a reasonably likely result in Delaware but not sure about how a New York court will apply North Carolina law.
2. Citi has the right to seek specific enforcement of the exclusivity agreement not the nonbinding term sheet regarding Citi’s proposed asset acquisition – at most that might mean a judge could delay the agreement with Wells Fargo till the end of the exclusivity period on Monday, which isn’t very meaningful relief.
3. In any event, monetary damages might be viewed as speculative because there was no guarantee that a definitive deal would have been struck with Citi and the Citi transaction required Wachovia shareholder approval and they wouldn’t have approved in light of a significantly higher offer for the whole bank.
4. Wells Fargo may have statutory protection against tortious interferance claims – see pages 82 (begin on line 20) and 83 of the Emergency Economic Stabilization Act of 2008, which states:
(c) UNENFORCEABILITY OF CERTAIN AGREEMENTS
21 Section 13(c) of the Federal Deposit Insurance
22 Act (12 U.S.C. 1823(c)) is amended by adding at the end
23 the following new paragraph:
24 No provision contained in any existing or
1 future standstill, confidentiality, or other agreement
2 that, directly or indirectly-
3 ”(A) affects, restricts, or limits the ability
4 of any person to offer to acquire or acquire,
5 ”(B) prohibits any person from offering to
6 acquire or acquiring, or
7 ”(C) prohibits any person from using any
8 previously disclosed information in connection
9 with any such offer to acquire or acquisition of,
10 all or part of any insured depository institution, in
11 cluding any liabilities, assets, or interest therein, in
12 connection with any transaction in which the Cor
13 poration exercises its authority under section 11 or
14 13, shall be enforceable against or impose any liabil
15 ity on such person, as such enforcement or liability
16 shall be contrary to public policy.”.
A fascinating showdown appears to be brewing between Citigroup and Wachovia over the decision by Wachovia’s board to abandon talks with Citigroup and embrace a $15.1 billion takeover proposal from Wells Fargo. Citi has issued a statement accusing Wachovia of a “clear breach” of the parties’ exclusivity agreement. As noted in this WSJ article today, the Fed is trying to resolve the dispute and perhaps “split the baby” – ie. Wachovia would be split among the two suitors. (Also note that Wells Fargo’s offer was made feasible by a new IRS position on losses after an ownership change; memos on this IRS position are posted in the “Tax” Practice Area).
Citi says that “the agreement provides, among other things, that Wachovia will not enter into any transaction with any party other than Citi, and will not participate in any discussions or negotiations with any third party.” Citi has demanded that Wachovia and Wells Fargo terminate their proposed deal, and asserts that it has “substantial legal rights regarding Wachovia and this transaction.”
A generation of M&A case law about directors’ fiduciary duties has made most public companies very reluctant to enter into any kind of an exclusivity agreement with a potential buyer that does not provide them with some ability to respond to competing proposals. But then again, most public companies don’t find themselves with regulators breathing down their necks in quite the way that companies like Bear Stearns and Wachovia have in recent months.
Enforcement of Air-Tight Exclusivity Agreements
The situation involving Wells Fargo’s effort to “deal jump” Citi (and the FDIC) with respect to Wachovia raises all sorts of interesting questions. The first one that comes to mind is whether a court would enforce an air-tight exclusivity agreement under these circumstances, or whether it would instead read a fiduciary out into it.
It seems to me that in order to answer that question, a court may well have to decide the extent to which the authority of a federal regulator influences what a board’s fiduciary duties require of it. That’s a question that courts have managed to avoid so far, but as the government becomes a more active player in attempting to address the financial crisis, it seems likely to be one that will increasingly be at the forefront of M&A litigation.
Wells Fargos’ Potential Exposure to Citi
Another potentially interesting aspect of this situation is what exposure Wells Fargo might have to Citi. After all, Citi does apparently have a contract with Wachovia, and efforts to disrupt that agreement might give rise to a tortuous interference claim. In 2006, the ABA’s Negotiated Acquisitions Committee (which recently recently changed its name to the “Committee on Mergers and Acquisitions”) prepared an indispensable survey on the law of tortious interference with merger agreements, exclusivity agreements and letters of intent. Here is a copy of that survey.
One of the things that the Negotiated Acquisitions Committee’s survey makes clear is that while deal jumping may make the original bidder as mad as a hornet, just lobbing in a better offer generally isn’t enough to expose the deal jumper to a tortuous interference claim. Under the Restatement (Second) of Torts, a third party bidder may be liable if its conduct involves interference with the existing agreement that is both intentional and improper.
In determining whether conduct is improper, the Negotiated Acquisitions Committee’s survey concluded that it frequently boils down to a court’s assessment of whether the third party’s efforts “to pursue its legitimate competitive interest go beyond what is generally held as acceptable or reasonable under the circumstances in the business community and where he violates the rules of fair play.” It will be very interesting to see how this plays out.