Monthly Archives: May 2012

May 31, 2012

Another Delaware NDA Case: Private Equity Buyers

Thanks to this Kaye Scholer memo, we have news of another Delaware confidentiality agreement-related case in recent days, RAA Management LLC v. Savage Sports Holdings – first one was Martin Marietta Materials – where the Delaware Supreme Court affirmed enforceability of non-reliance and waiver provisions in a non-disclosure agreement to bar claims by a would-be buyer of a business based on alleged fraudulently omitted or misstated information in due diligence.

And here’s some analysis from John Grossbauer of Potter Anderson:

Recently, the Delaware Supreme Court affirmed the Superior Court’s dismissal of a complaint brought by RAA Management, LLC against Savage Sports Holdings. RAA, once a potential bidder for Savage, alleged that Savage fraudulently misled RAA into incurring $1.2 million in due diligence and negotiation costs by falsely claiming at the outset of discussions that there were “no significant unrecorded liabilities or claims against Savage.”

The Court held that non-reliance disclaimer language in the non-disclosure agreement executed by the parties prevented RAA from bringing such claims. Although the Court decided the matter under New York law, it confirmed that the results would be the same under Delaware law. A key point is that the Court rejected the attempt to read some disclosure obligation into an NDA that expressly disclaimed any reliance on anything other than final agreement representations.

May 30, 2012

Prison Time for Altering Documents Submitted During Merger Investigation

As noted in this Weil alert, a corporate executive has pled guilty to criminal felony charges in connection with a company’s HSR premerger notification. He has agreed to serve five months in prison for obstruction of justice charges in connection with altering documents submitted to the DOJ and FTC as part of the premerger investigation of a proposed acquisition. The penalties obtained by DOJ against the executive, and previously against the company, highlight the caution and diligence entities should use in drafting documents in connection with an acquisition and preparing HSR filings and responses to DOJ and FTC information requests.

May 23, 2012

Transcript: “LLCs: Understanding Capital Account and Allocation Concepts for M&A”

We have posted the transcript for our recent webcast: “LLCs: Understanding Capital Account and Allocation Concepts for M&A.”

May 21, 2012

May-June Issue: Deal Lawyers Print Newsletter

This May-June issue of the Deal Lawyers print newsletter was just sent to the printer and includes articles on:

– Lessons Learned: Martin Marietta Materials vs. Vulcan Materials
– Delaware Chancery Enjoins Hostile Bid Based on Confidentiality Agreement Breach
– The JOBS Act: Implications for Private Company Acquisitions and M&A Professionals
– After the JOBS Act: The Increased Need for Common Sense
– Groping for Gold: $305 Million in Plaintiff Attorney Fee Awards Under Grupo México

If you’re not yet a subscriber, try a no-risk trial to get a non-blurred version of this issue on a complimentary basis.

May 17, 2012

Benchmarking Merger Agreements

In this podcast, Paul Koenig of Shareholder Representative Services explains how his company’s novel initiative SRS MAX™ that allows for M&A analysis of merger agreements, including:

– What is the problem that the SRS MAX product is solving?
– How does it work and what do the users of the product receive?
– Do you charge for this, and if so, how much?

May 15, 2012

Federal Reserve Makes First CCS Determination for a Chinese Bank

Here’s news culled from this Sullivan & Cromwell memo:

On May 9, 2012, the Board of Governors of the Federal Reserve System issued an order approving the acquisition of 80% of the shares of common stock of The Bank of East Asia (U.S.A.) National Association, by Industrial and Commercial Bank of China Limited. This Order marks the first occasion on which the FRB approved the acquisition of a U.S. bank by a Chinese bank since the Bank Holding Company Act of 1956 was amended by the Foreign Bank Supervision Enhancement Act of 1991. The FBSEA, which increased federal supervision of foreign banks operating in the United States, requires the FRB to make a finding that a foreign bank seeking to acquire control of a U.S. bank is subject to comprehensive supervision on a consolidated basis (“CCS”) by its home country supervisor. The Order marks the first time that the FRB has made a full and unqualified CCS determination for a Chinese bank to acquire control of a U.S. bank.

The Order should create the opportunity for other leading Chinese banks to acquire U.S. banks of a relatively modest size. Although the CCS determination is nominally bank-specific, in practice a CCS determination for one bank in a country is typically precedential for all similarly-situated banks in that country. In addition, because the FRB takes the position that a CCS determination is required before a foreign banking organization can obtain financial holding company status, the Order should pave the way for Chinese banks and their holding companies that are subject to the BHC Act to become FHCs.

May 10, 2012

Allegations of Empty Voting, Vote Buying and Secret Share Accumulations: Nothing New

I found this recent Dealbook piece entitled “The Curious Case of the Telus Proxy Battle” because I have long been fascinated by the problems of overvoting and similar anomalies in the shareholder meeting process that impedes the integrity of a meeting’s voting results. Another case in point is the article that Carl Hagberg mentioned in the his Shareholder Service Optimizer recently about the hedgie who inadvertently let slip that he was planning to vote both his own shares – plus a nearly equal number that he “borrowed”…from himself. Hopefully, the SEC will get around to fixing these serious problems as its proxy plumbing rulemaking gets off the ground. A few days ago, Telus withdrew its proposal in the face of the allegations…

May 8, 2012

Common Misunderstandings Regarding Fairness Opinions

Here are some interesting thoughts from Kevin Miller of Alston & Bird related to this blog about a recent WSJ article entitled “Shortcomings of Valuation Opinion in Great Wolf Buyout”:

1. Myth: Fairness Opinions are Valuations

Reality: The financial analyses underlying fairness opinions are not valuations or appraisals, they are merely financial analyses performed by a financial advisor to assess whether it is appropriate to render a fairness opinion. Financial advisors are not engaged to provide valuations and the financial analyses they perform often result in divergent implied valuation reference ranges, not all of which may individually appear to be supportive of the proposed purchase price. However, viewed in their entirety, with different subjective emphases placed on the various analyses based on the financial advisor’s experience and judgment, the financial analyses may be viewed as supporting a fairness conclusion. How do we know that the financial analyses performed by a financial advisor are not valuations or appraisals? Because the opinion and the associated proxy disclosure are unambiguous on that point:

“Any estimates contained in these analyses are not necessarily indicative of actual values or predictive of future results or values, which may be significantly more or less favorable than as set forth below. In addition, analyses relating to the value of the businesses do not purport to be appraisals or to reflect the prices at which the businesses could actually be sold.”

2. Myth: LBO Analyses are Valuation Analyses

Reality: LBO analyses only reflect a private equity firm’s capacity to pay. In contrast to more traditional valuation analyses based on (i) a discounted cash flow analysis, (ii) selected company analyses and (iii) selected transaction analyses, an LBO analysis does not purport to provide any indication of the intrinsic or inherent value of a business but instead merely indicates the price that a private equity firm might be willing to pay based on several critical assumptions including, without limitation, (a) an assumed capital structure; (b) a PE firm’s cost of debt financing, (c) a PE firms cost of equity financing (often expressed as a hurdle rate of return below which the PE firm will generally not make an investment), (d) anticipated cost savings and synergies, and (d) a hypothetical exit multiple.

Financial advisors to the target will often be required to make guesses based on experience and professional judgment with respect to many of these and other assumptions and those guesses may not accurately reflect the private equity firm’s actual proposed capital structure, cost of debt or equity financing or anticipated cost savings and synergies, etc. Such analyses tend to be more useful as negotiating tools – do we think their bid reflects the most they may be willing to pay? – and not as an indication of intrinsic or inherent value. Private equity firms are not always the best buyers and the price they are willing to pay may not fully reflect the intrinsic or inherent value of a business. Among other things, many financial advisors keep reference ranges generated by an LBO analysis off their football fields or otherwise distinguish them from the other more traditional types of financial analyses used to support the rendering of a fairness opinion.

3. Myth: If a Buyer is willing to pay a lot more than the ranges of values indicated by the seller’s financial advisor’s analyses, then the Seller’s financial advisor got it wrong

Reality: Though not relevant to the Great Wolf transaction, sellside financial advisors in a cash transaction do not generally include the potential cost savings and synergies a buyer expects to achieve as a result of the merger in the financial analyses performed to support the rendering of a fairness opinion. Those cost savings and synergies are generally treated as an asset of the buyer and consequently not something that should be taken into account in assessing the fairness of a proposed purchase price to the seller. That can lead to anomalous results as was seen in the 3Par transaction where two bidders, both of which could achieve substantial synergies made bids substantially in excess of the ranges of values indicated by the financial analyses performed by the seller’s financial advisor.

The magnitude of the bids did not indicate that the seller’s financial advisor got it wrong but merely that the competing bidders were willing to share a portion of their potential synergies with the target’s stockholders. The ability of a seller’s board to extract a significant portion of a buyer’s expected synergies in a competitive bidding process is another reason that advisors will often caution a board that merely because a price is fair, doesn’t mean it should be accepted.

May 7, 2012

Delaware Chancery Upholds Confidentiality Agreements and Temporarily Enjoins Hostile Bid

Here’s news culled from this Richards Layton memo: In Martin Marietta Materials, Inc. v. Vulcan Materials Co., C.A. 7102-CS (Del. Ch. May 4, 2012), the Court of Chancery upheld a pair of confidentiality agreements and temporarily enjoined Martin Marietta Materials from prosecuting a proxy contest and proceeding with a hostile bid for its industry rival Vulcan Materials Company.

For years, Vulcan had expressed interest in a friendly transaction with Martin Marietta. In the spring of 2010, the parties executed two stringent confidentiality agreements to enable their merger and antitrust discussions. Both parties were seeking to avoid being the target of an unsolicited offer by the other or by another buyer when they entered into the confidentiality agreements. Accordingly, the agreements protected from disclosure the companies’ confidential information as well as the fact that the parties had merger discussions.

After its economic position improved relative to Vulcan, Martin Marietta decided to make a hostile bid for Vulcan; it also launched a proxy contest designed to make Vulcan more receptive to its offer. The Court found that Martin Marietta used protected confidential material in making and launching its hostile bid and proxy contest.

The Court then construed the language of the confidentiality agreements to determine that Martin Marietta had breached those agreements by (1) using protected information in formulating a hostile bid, since the information was only to be used in an agreed-to business combination; (2) selectively disclosing protected information in one-sided securities filings related to its hostile bid, when such information was not disclosed in response to a third-party demand and when Martin Marietta failed to comply with the agreements’ notice and consent process; and (3) disclosing protected information in non-SEC communications in an effort to “sell” its hostile bid.

The Court held that, although the confidentiality agreements did not expressly include a standstill provision, Martin Marietta’s breaches entitled Vulcan to specific performance of the agreements and an injunction. The Court therefore enjoined Martin Marietta, for four months, from prosecuting a proxy contest, making an exchange or tender offer, or otherwise taking steps to acquire control of Vulcan’s shares or assets.

May 3, 2012

Great Wolf Shows Shortcomings of Banker Valuation Opinions

Last week, the WSJ Blog ran this interesting analysis entitled “Great Wolf Shows Shortcomings of Banker Valuation Opinions.” Check it out!