From John Grossbauer of Potter Anderson: In an en Banc decision, the Delaware Supreme Court affirmed the Court of Chancery’s ruling – The Bank of NY Mellon Trust Co. v. Liberty Media Corp., C.A. No. 5702 (Del. Supreme Ct.; 9/21/11) – that a proposed split-off of assets by Liberty Media was not sufficiently connected to prior transactions to warrant aggregation of the proposed split-off with those prior transactions for purposes of determining whether the proposed split-off would constitute a disposition of substantially all assets under a successor obligor provision in a bond indenture governed by New York law.
In June 2010, Liberty announced its plan to split off the businesses, assets and liabilities attributable to its Capital and Starz tracking stock groups (the “Split-Off”). Counsel for an anonymous bondholder claimed that the transaction might violate the successor obligor provision of the Indenture , which prohibits the disposition of “substantially all” assets unless the entity to which such assets are transferred assumes Liberty’s obligations under the Indenture.
In response, Liberty commenced this action against the Bank of New York Mellon Co. as indenture trustee (the “Trustee”), seeking injunctive and declaratory relief that the proposed Split-Off would not constitute a disposition of “substantially all” of Liberty’s assets. All parties agreed that if considered in isolation, the Split-Off would not constitute a disposition of “substantially all” assets. However, the Trustee argued that the Split-Off must be viewed in conjunction with three prior spin-off and split-off transactions consummated by Liberty over the preceding seven-year period. The Trustee argued that when considered collectively, the four transactions would constitute a disposition of “substantially all” assets.
In making a determination not to aggregate the multiple transactions, the Court of Chancery largely relied on precedent from the Second Circuit case, Sharon Steel Corp. v. Chase Manhattan Bank, N.A. (which it referred to as “the leading decision on aggregating transactions for purposes of a ‘substantially all’ analysis” in the context of a successor obligor provision) and on the step-transaction doctrine, which treats the steps in a series of formally separate but related transactions involving the transfer of property as a single transaction if all the steps are substantially linked.
The Supreme Court acknowledged that “[c]ourts applying New York law have determined that, under appropriate circumstances, multiple transactions can be considered together, i.e., aggregated, when deciding whether a transaction constitutes a sale of all or substantially all of a corporation’s assets.” It further acknowledged that the successor obligor provision at issue recognized that aggregation may occur, in that it states that Liberty can comply with the provision only if “immediately after giving effect to such transaction or series of transactions, no Event of Default . . . shall have occurred.”
Drafters began including the phrase “series of transactions” in successor obligor provisions shortly after the Sharon Steel decision, and the issue was addressed in comments to the 1983 Model Simplified Indenture. The comments warn that “serious consideration must be given to the possibility of accomplishing piecemeal, in a series of transactions, what is specifically precluded if attempted as a single transaction.”
Given this history, and the fact that comments to a later iteration of the Model Simplified Indenture specifically cited Sharon Steel, the Supreme Court concluded that the presence of “series of transactions” language in a post-Sharon Steel successor obligor provision must be “meant to underscore that a disposition of ‘substantially all’ assets may occur by way of either a single transaction or an integrated series of transactions, as occurred in Sharon Steel.” Accordingly, the Supreme Court found that the Second Circuit’s decision in Sharon Steel was particularly instructive in determining whether aggregation of transactions was appropriate in the instant case.
In Sharon Steel, the Second Circuit held that the aggregation of multiple transactions was appropriate when each transaction was part of a “plan of piecemeal liquidation” and an “overall scheme to liquidate.” The Court of Chancery had made factual findings that, unlike in the facts warranting aggregation in Sharon Steel, Liberty had not developed a plan or scheme to dispose of its assets piecemeal with a goal of liquidating nearly all its assets, or removing assets from the corporate structure to evade bondholder claims. Therefore, it found that the four Liberty transactions should not be considered together. The Supreme Court observed that the Court of Chancery could have ended its analysis at that point. However, the Court of Chancery “added a second layer of analysis” by also applying the step-transaction doctrine as an analytical tool to bring further clarity to the issue of aggregation.
On appeal, the Trustee challenged the Court of Chancery’s use of the step-transaction doctrine. The Supreme Court found that it was unnecessary to reach or decide whether the step-transaction doctrine would be adopted under New York law to determine whether to aggregate a series of transactions in a “substantially all” analysis. It found that even if the Court of Chancery had not applied the step-transaction doctrine, its legal conclusion, based on the facts adduced at trial, that the four Liberty transactions were not sufficiently connected to warrant aggregation was supported by and consistent with aggregation principles articulated in Sharon Steel. Therefore, the Court of Chancery’s ruling that the Split-Off would not violate the Indenture’s successor obligor provision was affirmed.
Tune in tomorrow for the webcast – “How to Handle Contested Deals” – to hear Chris Cernich of ISS, Joele Frank of Joele Frank Wilkinson Brimmer Katcher, David Katz of Wachtell Lipton; and Paul Schulman of MacKenzie Partners discuss planning for and responding to deal contests.
This September-October issue of the Deal Lawyers print newsletter was just sent to the printer and includes articles on:
– The Down Economy: Special Negotiating and Diligence Items to Consider
– Changing Due Diligence Practices for Uncertain Times: An In-House Perspective
– Due Diligence: Implications of Dodd-Frank’s Whistleblower Provisions for Acquirors
– $17.50 from Column A and $17.50 from Column B: “50/50 Split” Implicates Revlon
If you’re not yet a subscriber, try a “free for rest of ’11” no-risk trial to get a non-blurred version of this issue on a complimentary basis.
In this podcast, Andrew Sherman of Jones Day – and co-author of a new book, “The AMA Handbook of Due Diligence” – provides some insight into how due diligence practices are changing, including:
– How do the deal markets look these days?
– How have due diligence practices changed over the past few years?
– What practices do practitioners often overlook?
– What is the best way to determine if someone doing diligence knows what they are doing?
From John Grossbauer of Potter Anderson: The Delaware Supreme Court’s recent Central Mortgage opinion addressed the implied covenant of good faith and fair dealing. Applying New York law, which governed the contract at issue, the Supreme Court clarified that a claim for breach of the implied covenant had to be based on different factual allegations than the contract breach claims, and could not be “duplicative of a breach of contract claim.”
Using this standard, the Court found that Central Mortgage, a mortgage servicer, stated a valid claim for breach of the implied covenant by alleging that actions taken by Morgan Stanley, the seller and wholesaler of the mortgages, deprived it of the benefit of its bargain and “engaged in a ‘bait and switch’ by inducing CMC to buy servicing rights to its detriment.” The Supreme Court also clarified the standard for use by the Court of Chancery in deciding a motion to dismiss, saying that the traditional Delaware “conceivability” standard had not (at least yet) been modified to be consistent with the “plausibility” standard articulated by the US Supreme Court in Ashcroft v. Iqbal. The Supreme Court found that Central Mortgage’s contract breach claims survived under the more lenient Delaware standard.
From John Grossbauer of Potter Anderson: In Amirsaleh v. Bd. of Trade of the City of New York, No. 75, 2010 (Del. Aug. 16, 2011) (en banc), the Delaware Supreme Court reversed the Chancery Court, finding that a former New York Board of Trade (NYBOT) member whose election to receive stock in a merger of NYBOT with Intercontinental Exchange (ICE) should have had his stock election recognized under the circumstances present there. Applying contract law, the Supreme Court found that NYBOT and its merger partner, ICE, had waived their originally imposed election deadline, and did not properly communicate to plaintiff the revised deadline for accepting elections. Because it utilized a waiver analysis, the Court did not address the implied covenant of good faith and fair dealing issue the parties had briefed and argued in the Court of Chancery and in the Supreme Court.
Professor Coates of Harvard Law has written an interesting paper analyzing how a set of contract terms manages potential disputes. The professor reviewed a group of deal agreements and their dispute provisions to find how they correlate strongly with target ownership, state of incorporation, and industry, and with the experience of the parties’ law firms. His paper summary notes:
For Delaware, there is good and bad news. Delaware dominates choice for forum, whereas outside of Delaware, publicly held targets’ states of incorporation are no more likely to be designated for forum than any other court. However, Delaware’s dominance is limited to deals for publicly held targets incorporated in Delaware, Delaware courts are chosen only 20% of the time in deals for private targets incorporated in Delaware, and they are never chosen for private targets incorporated elsewhere, or in asset purchases.
A forum goes unspecified in deals involving less experienced law firms. Whole contract arbitration is limited to private targets, is absent only in the largest deals, and is more common in cross-border deals. More focused arbitration – covering price-adjustment clauses – is common even in the largest private target bids. Specific performance clauses – prominently featured in recent high-profile M&A litigation – are less common when inexperienced M&A lawyers involved. These findings suggest (a) Delaware courts’ strengths are unique in, but limited to, corporate law, even in the “corporate” context of M&A contracts; (b) the use of arbitration turns as much on the value of appeals, trust in courts, and value-at-risk as litigation costs; and (c) the quality of lawyering varies significantly, even on the most “legal” aspects of an M&A contract.
I saw this on “Harvard’s Corporate Governance Blog” from Klaus Riehmer and Laurent Alpert of Cleary Gottlieb and thought their deck was very useful:
In spite of the crisis relating to state debt in certain European countries, 2011 has so far been a year that has seen a resurgence in the field of mergers and acquisitions in Europe. The proposed merger of the NYSE and Deutsche Börse, Volkswagen’s bid for MAN SE, LVHM’s tender offer for jewel company Bulgari and Stanley Black & Decker’s acquisition of Niscayah are just a few of the more publicized deals that have dominated the headlines of the European financial press in 2011. In a world where most of the transactions are cross-border mergers and may touch various juridictions, it is increasingly imperative that legal professionals engaged in these transactions possess the information to quickly access the required legal information in the respective countries.
Our memorandum, “Preparing for Increased Takeover Activity in Europe – Overview of Key Legal Parameters,” seeks to provide the M&A practitioner (and the M&A academic) with a basic overview, on a country-by-country basis, of the rules pertaining to takeovers in Belgium, France, Germany, Italy, the UK, the Netherlands and Russia. The specific questions addressed are set forth below:
- Can we talk to target without triggering disclosure obligations?
- Stake building – can we buy stock on market?
- Deal certainty – can we lock in reference shareholders? Can we get exclusivity from target?
- Can we make public statements about a possible bid?
- What must we bid for?
- What sort of consideration can we offer?
- Can we make our bid conditional? Is a MAC clause permissible?
- Can we otherwise walk away once we have announced?
- Offer document – how detailed and time consuming is this?
- What’s the regulator and how long does it take to get it approved?
- Can we go hostile?
- What sort of defenses can a target put up? How effective are they?
- May we squeeze-out residual minority? What’s the threshold?
- How do we get target delisted?
While a more in-depth analysis of the particular issues touched upon in this memorandum must be sought from qualified legal counsel of each respective jurisdiction, we hope that this overview will provide the fundamental tools necessary for the cross-border M&A practitioner to begin to assess the intricacies and challenges surrounding takeovers in the jurisdictions covered.