Here is analysis of a recent decision from Kevin Miller of Alston & Bird: In HLSP Holdings v. Fortune Management, the Delaware Superior Court recently granted a motion for summary judgment by the defendant, Fortune Management, against a claim by plaintiff, HLSP Holdings, based on Fortune’s alleged failure to fulfill its obligations under the acquisition agreement to cause the shares that it had issued to HLSP in exchange for substantially all of HLSP’s assets to be registered and freely tradeable. The Superior Court held that HLSP did not have standing to sue Fortune because HLSP could not show that HLSP, rather than its shareholders, was injured by Fortune’s alleged breach of its obligations under the acquisition agreement.
In July 2005, HLSP Holdings agreed to sell substantially all its assets to a subsidiary of Fortune Management in exchange for shares of Fortune common stock. Pursuant to the acquisition agreement, the parties agreed that (i) HLSP would liquidate and distribute the shares of Fortune stock to HLSP’s shareholders promptly following the closing of the transaction and (ii) Fortune would take all necessary actions to cause the shares to be registered and freely tradable on the Frankfurt Stock Exchange.
The shares of Fortune common stock were issued to HLSP in September 2005 and distributed by HLSP to its five shareholders in March 2006. However, the shares did not become freely tradable and consequently could not be sold until August 2007 at which time the market price for shares of Fortune common stock had fallen below 1 euro per share. In the interim, shares of Fortune common stock had traded for more than 4 euros per share during the fourth quarter of 2006 and the first quarter of 2007.
HLSP sued Fortune alleging that Fortune’s breach of its obligations under the acquisition agreement to take all necessary actions to cause the shares to be registered and freely tradable had resulted in over 40 million euros in damages.
The Court held that “[f]undamental to having standing to bring a cause of action in the Superior Court is the requirement that the plaintiff has suffered monetary injury caused by the party that they are attempting to sue. . . . the Court finds that HLSP is not conferred standing solely by virtue of its status as a contracting party in the absence of any showing of injury.”
According to the Superior Court, the “fundamental flaw of the Plaintiff’s argument [was] that the Stock had no value to [HLSP] as [HLSP was] required to distribute it to the shareholders.” HLSP could not have suffered damages because it never had the right to sell the shares – instead it was required to distribute the shares to its shareholders – and it did not possess the shares during the relevant time period, having distributed the shares in March 2006, well before the value of the shares peaked.
A Reflection on ConEd
This result is strikingly similar to the outcome at the District Court level in ConEd. As you may recall, ConEd involved a suit in the Federal District Court for the Southern District of New York brought by a target corporation seeking monetary damages under New York law for its shareholders’ lost merger premium. Shareholders of the target successfully intervened, claiming that the target’s shareholders rather than the target, itself, were the proper plaintiffs in an action for lost merger premium and the target’s suit was dismissed.
However, upon appeal of the District Court’s refusal to dismiss the shareholder suit for lack of standing, the Second Circuit held that the target shareholders were not intended third-party beneficiaries of the merger agreement prior to the consummation of the merger and consequently lacked standing to pursue their claim for lost merger premium against the acquiror.
For many, the takeaway from the ConEd decisions is that, with respect to monetary damages for lost merger premium (i) the target can’t sue for its shareholders’ lost merger premium under NY law because, though it was a party to the merger agreement, the target was never entitled to the lost merger premium and thus lacked demonstrable damages other than its transaction expenses and (ii) shareholders can’t sue on a merger agreement for their lost merger premium under NY law if they are not intended third-party beneficiaries under the merger agreement at the time the claim arose.
Following the ConEd decisions, commentators questioned whether the ConEd holdings under New York law would be followed by the Delaware Courts applying Delaware law. In addition, they noted that the Second Circuit was not called upon to address, and did not address, whether a target could sue for specific performance – i.e., equitable relief instead of monetary damages – to obtain its shareholders’ lost merger premium or whether such suit should be dismissed because the only alleged harm was to its shareholders who were not intended third party beneficiaries under the merger agreement. See this October 2006 article, entitled “The ConEd Decision – One Year Later: Significant Implications for Public Company Mergers Appear Largely Ignored.”
The HLSP Decision in Relation to ConEd
The HLSP decision appears to indicate that the Delaware Superior Court will follow the District Court’s reasoning in ConEd with respect to actions by a target seeking monetary damages for its shareholders’ lost merger premium.
It is less clear whether the Delaware Chancery Court would follow the Second Circuit’s holding in ConEd. In Amirsaleh v. Board of Trade of The City of New York, the Delaware Chancery Court addressed claims by a member of the target that the parties to a merger agreement did not act in good faith in implementing the provisions of the merger agreement permitting members of the target to elect the form of consideration to be received in a merger. As an initial matter, the Delaware Chancery Court had to determine whether or not the member had standing to bring a claim in respect of the merger agreement. Despite unambiguous language in the Amirsaleh merger agreement that “[e]xcept as provided in Section 6.13 (Indemnification; Directors’ and Officers’ Insurance), this Agreement is not intended to, and does not, confer upon any Person other than the parties who are signatories hereto any rights or remedies hereunder,” the Delaware Chancery Court refused to grant defendants’ motion for summary judgment holding that “there is little legitimate question that the members of [the target] were intended beneficiaries of the Merger Agreement.”
Specific Performance: A Separate – But Related – Issue Not Addressed by HLSP or ConEd
It also remains to be seen how the Delaware Courts will rule on actions seeking specific performance as a remedy for breach of a cash merger agreement where the only alleged harm is the target shareholders’ lost merger premium.
Some commentators have worried that if courts are not willing to grant specific performance to prevent a harm to non third party beneficiary shareholders, buyers will be able to breach merger agreements with virtual impunity. Others have raised concerns regarding a strict “contractarian” approach that would require courts to grant specific performance where sophisticated parties to a merger agreement have specifically agreed that such a remedy was appropriate regardless of arguments that the target itself had not been harmed, that target shareholders were not intended third party beneficiaries or that monetary damages would, at least theoretically, be an adequate remedy.
Still others have suggested that the fault, if any, was not with the Second Circuit’s reasoning, but in the way parties have traditionally drafted the merger agreements. The ConEd article referenced above and other subsequent articles discussing the case, have offered various suggestions for revising the third party beneficiary and remedy provisions of merger agreements to clarify whether it is the actual intent of the parties that the target be able to seek specific performance or monetary damages on its shareholders behalf.
However, to date, none of these suggested alternatives have been reviewed by the courts and it remains to be seen whether they would be effective.
An alternative approach that would permit targets to obtain specific performance of a cash merger would be for targets to broaden their complaints to include allegations of direct injuries to the target (e.g., as a result of the announcement of the transaction and/or compliance with the terms of the merger agreement so that they wouldn’t count towards a MAC).
Though not generally commented upon, Genesco, in its Tennessee action against Finish Line seeking specific performance of a cash merger, alleged direct harms to itself, rather than just shareholders’ lost merger premium, as a basis for requesting specific performance. Such claims are easily made in stock for stock mergers where the target will directly benefit from cost savings and synergies but, as evidenced by Genesco, can also be made in connection with cash mergers.
The court in Genesco found that “[t]he testimony established that Genesco’s business has been irreparably harmed as a result of the stalled merger. Genesco’s business is in a state of limbo. Uncertainty has negatively affected its stock price, vendor relationships, employee morale, public perception, and virtually every other aspect of its business during the pendency of the merger and this litigation. Due to restrictions that the Merger Agreement imposes on its activities pending closing, it has been unable to open new stores, make significant capital expenditures, and otherwise engage in ordinary business activities that would be inconsistent with Finish Line’s plan for Genesco but that would be necessary or desirable for an independent Genesco. For example, Genesco had planned to pen a west coast distribution facility that would have reduced the lead time to Genesco’s stores on the West Coast and otherwise improve Genesco’s west coast inventory management, affecting inventory and sales in its stores. . . . These facts proven at trial establish irreparable harm and that the payment of damages is not an adequate remedy.”
To date, it does not appear that targets in actions seeking specific performance of cash mergers under Delaware law (e.g., URI v. RAM and Valassis v. Advo) have similarly alleged direct harms to the target in addition to their shareholders’ lost merger premium to bolster their claims for specific performance.
Recently, a member asked if we had any board committee charters for M&A Committees. We conducted some search and we were able to find a few – that we have posted in our “M&A Board Committees” Practice Area – but it clearly is a pretty rare phenomenon. This is understandable – even for those companies that regularly engage in M&A – as the larger deals would need to come before the full board, and the smaller deals could fall to a group of employees to analyze and negotiate, under a delegation of authority from the full board.
Many of the companies that have established M&A committees don’t appear to have adopted formal charters (or at least they haven’t made them publicly available). Charters for these committees aren’t required under stock exchange rules and formal charters aren’t necessary under state law in order for other directors to rely on a committee’s recommendations.
However, the charters for those committees that do have them make for interesting reading. Some are very detailed and spell out in fairly precise terms the scope of the committee’s authority (see, for example, Cisco Systems and Hewlett Packard’s charters), while others take a more general approach (see, for example, EMC Corporation’s charter). Some charters provide that the members of the committee must be independent, while others do not contain an independence requirement.
It is not all that unusual for a company that is looking at a large potential acquisition to form a special board committee to oversee that process. Often, there is a subset of directors who have unique skills or expertise that makes them well suited to take the lead on the board’s behalf in such a transaction. Standing M&A committees take this concept a bit further, and are a tool that some corporations have opted to use to formalize and help define the board’s oversight role in corporate acquisition efforts.
While the use of standing M&A committees doesn’t appear to be widespread, it should be noted that some commentators have advocated far more aggressive approaches to oversight of corporate M&A. For example, Prof. Sam Thompson of UCLA Law School has suggested the use of an SEC-appointed committee of outsiders – a “Change-in-Control Board”— to oversee significant corporate M&A by a public company.
In support of this idea, Prof. Thompson cites empirical data suggesting that buyers frequently overpay in corporate acquisitions. He states that this could result from, among other thngs, “the hubris of [the buyer’s] managers or the desire of its managers to enhance their compensation by operating a larger firm.” Prof. Thompson contends that these potential conflicts of interest, together with what he views as the inadequate remedies available to a buyer’s shareholders under state corporate law, make the far-reaching changes to M&A oversight that he advocates appropriate. Thanks to John Jenkins of Calfee Halter & Griswold for his thoughts on this one!
If you are involved with teaching mergers & acquisitions, either internally in your firm or at a college (or wish to do so in the future), I strongly recommend reading Karl’s work as I believe there is no better way to learn than to actually experience the topic at hand (or watch a deal lawyer at work). As the paper notes, to learn transactional lawyering is to learn the “craft” of it, rather than black letter law. Hear, hear!
I started practicing law in 1986, but so much has changed since then that I often feel like I’m a complete relic. For instance, it boggles my mind when I think about the fact that there’s an entire generation of lawyers out there who’ve never hand-marked an SEC filing, never dealt with trying to clear Blue Sky merit review, and never hand-delivered a filing package to the SEC reviewer and then raced to the bank of pay phones next to the file room to let the rest of the team know that the deal was effective.
Those events were rites of passage for generations of young deal lawyers, and I think that today’s lawyers have actually missed out on something by not being able to take part in them. Sitting bleary-eyed in the Judiciary Plaza Roy Rogers forcing down another cup of coffee while waiting for the SEC’s file desk to open – along with a bunch of other sleepy junior associates toting overstuffed deal bags – was a shared experience that built a kind of camaraderie among young deal lawyers. Regardless of where you worked, misery loved company, and after a couple of all nighters at the printer, those early mornings at Judiciary Plaza were definitely miserable!
But I think the biggest thing that most young lawyers miss out on today is what an epic event a deal closing used to be. Today, it seems every closing is done by e-mail and overnight delivery. I can’t tell you the last time that I went to a closing or sent someone to physically attend a closing. Closings with actual people signing actual documents are increasingly rare events. Things were sure different back in the day.
Closing a public offering wasn’t a big deal — the closing was over in a couple of hours at most, and was pretty anti-climactic in light of everything that came before it. However, there was nothing anticlimactic about the closing of a big M&A transaction. These closings were elaborate, multi-day, round-the-clock affairs that involved lots of paper, little sleep, all the boredom, stress, caffeine, and nicotine that you could handle, and all the cold pizza and warm deli trays you could eat.
Oh yeah, I almost forgot – this drama usually played itself out across a bunch of dreary conference rooms that featured fluorescent lighting that sometimes looked like it came straight out of the office scene in Joe Versus the Volcano (okay, maybe it just seemed that way at the time). The M&A people were in one room, the Bank people were in another, then there were often war rooms and usually a much nicer room where the client’s executives were ensconced. This last room was definitely for the grownups. Aside from the client’s senior people, nobody who wasn’t a senior investment banker or partner spent much time in this sanctuary. You only went into this room to get signature pages signed, and you rarely spoke above a whisper.
Today, closing a deal still involves a tremendous amount of work, but most of the time is spent writing and responding to e-mails, revising closing documents at your desk and generally staring at a computer screen. Sure, there may be cold pizza and caffeine involved, but there’s definitely no nicotine unless it’s contained in a stick of gum. What’s more, there’s just not the commotion. No conference rooms full of people, nobody rushing around calling back to their office to find out what happened to the tax clearance certificate from Massachusetts, no big shot partners arguing face-to-face over last minute changes to somebody’s legal opinion (or an eleventh hour request for a new opinion).
Of course, all of those things still happen; it’s just that they happen in cyberspace or on conference calls. In many respects, that’s a real benefit. Don’t get me wrong; 99% of everything I’ve just described stunk worse than Battlefield Earth, but the other one percent represents the kind of shared experience that helps lawyers develop a little empathy for one another. Personally, I think we could use more of those kinds of experiences.
A few weeks ago, the Tulane Corporate Law Institute was held and it’s still the most well-covered annual M&A event, despite a dearth of deals these days (as well a declining number of lawyers practicing this type of law these days).
Below are links to pieces that covered specific panels during the Conference:
It’s also notable that DealBook tweeted during the Conference – the problem is they picked the tag of “#tulane” to follow their tweets and that hash tag is already being used for other matters related to the school (note here is a compilation of DealBook’s full coverage, although it’s missing the musings on Huntsman that I link to above).
Recently, Ira Millstein of Weil Gotshal blogged about his firm’s 3rd annual survey of sponsor-backed going private transactions. The survey analyzes and summarizes the material transaction terms of going private transactions involving a private equity sponsor in the United States, Europe and Asia-Pacific.
The survey’s key conclusions for the US transactions include the following:
– 2008 witnessed a 97% collapse in aggregate transaction value for sponsor-backed going private transactions when compared to 2007. The largest transaction announced in 2008 had a transaction value of approximately $2.1 billion, a 95% decline from the largest transaction announced in 2007. There was also a 76% decline in transaction volume when compared to 2007.
– The percentage of club deals involving two or more private equity sponsors declined significantly in all transaction sizes in 2008. Only 7% of the 2008 transactions constituted a club deal whereas 37% of the 2007 transactions did so.
– The tender offer again made an appearance in 2008, continuing a trend that started in 2006. The same cannot be said for stub equity. There was no transaction in 2008 in which the sponsor offered stub equity to the target’s public shareholders.
– Not surprisingly, the credit crisis continued to adversely impact the debt-to-equity ratios of sponsor-backed going private transactions. Equity accounted for an average of 64% of acquiror capitalization for transactions between $100 million and $1 billion in value and 51% of acquiror capitalization for transactions greater than $1 billion in value.
– The go-shop provision continued to be a common feature of going private transactions in 2008 with 53% of surveyed transactions including this form of post-signing market check. Interestingly, sponsors were more resistant this year to giving a significantly reduced go-shop break-up fee (only one transaction had a go-shop break-up fee of less than 50% of the normal break-up fee).
– Although far from the norm, there was an increase in 2008 in sponsor-backed going private transactions with a financing out (20% in 2008 compared to 3% in 2007).
– When compared to pre-credit crunch transactions, the 2008 transactions reveal a material decrease in the number of MAE exceptions.
– Reverse break-up fees were again the norm in 2008, appearing in 87% of all surveyed transactions (a slight increase from 84% in 2007). In an effort to limit the optionality built-in to the reverse break-up fee structure and incentivize sponsors to consummate the transaction, target boards in a significant minority of surveyed transactions negotiated for a higher second-tier reverse break-up fee or a higher cap on monetary damages.
– Interestingly, specific performance provisions enforceable against the buyer were very rare in 2008. Only 7% of the 2008 transactions permitted the seller to seek specific performance against the buyer rather than be limited to a reverse break-up fee or monetary damages (whereas 33% of the surveyed transactions in 2007 allowed the seller to seek specific performance).
A few weeks ago, I blogged about the FASB agreeing to issue a Staff Position that modifies FAS 141R on the accounting for business combinations (essentially leaving the FAS 5 regime in place for asset and loss contingencies acquired in business combimations). Yesterday, the FASB finally posted FSP 141(R)-1.
Recently, Carl Icahn and Eastbourne Capital Management each sent a similar no-action request to Corp Fin that is quite interesting. I can’t recall seeing anything quite like it before. Summarizing the gist of the Staff’s no-action response given on Monday, Icahn not only will be able to solicit votes for his own minority slate at Amylin Pharmaceuticals – but he can seek authority to vote for another minority slate offered by Eastbourne. Eastbourne also received it’s own response permitting them to do the same.
As I understand it, here is how the “rounding out process works. Either shareholder can seek general authority to vote for the other shareholder’s nominees, as well as the company’s nominees. Technically, the shareholder does not include the names of the other shareholder’s or the company’s nominees on its ballot. Instead, they just seek to vote for the other nominees generally and only list the names of the persons for whom the shareholder will not vote.
Under the Staff’s responses, each shareholder will be able to “round out” a short slate as long as the two shareholders are not forming a group and not agreeing to act together. The Staff’s relief includes other controls limiting the activities of the shareholders, including that each will not recommend the election of the other’s nominees.
As noted in Icahn’s incoming request (here is Eastbourne’s incoming request), Rule 14a-4(d) doesn’t deal with a situation where there are two separate shareholder-proposed minority slates. On a policy basis, Icahn argued that there is no evidence from past SEC actions that shareholders offering a short-slate must “round out” their nominees from management’s candidates.
I imagine this unique scenario might become a little more common going forward as shareholders turn increasingly active…