Here’s news from Greenberg Traurig’s Cliff Neimeth:
In by far the most direct statement on the subject to date, Delaware Chancellor Strine held yesterday – in In Re MFW Shareholders – that, in the context of a controlled company’s take private by its parent (controller), the business judgment rule standard of judicial review will apply, and not “entire fairness” review , where at the outset of the transaction: (i) the controller conditions the transaction on approval by an uncoerced, fully informed, majority-of-the-minority vote and (ii) the transaction has been negotiated (on the target side) by a properly established, properly authorized (with the power to just say “no”) and well-functioning special committee of independent directors.
The Delaware Court of Chancery in a series of decisions starting with Aquila, Siliconix, Pure Resources, Cox Communications and others over the years has espoused in dicta ( and has encouraged the use of) the two-pronged procedural template for remediating the dichotomy inherent in the application of the business judgment rule for parent take-privates effected by means of tender offer vis-a-vis the application of entire fairness review (and at best “burden shifting”) for parent take-privates effected by means of single-step merger where neither or only one of the structural protections are used.
Chancellor Strine, in recognizing the Delaware Supreme Court’s lack of direct precedent on this issue (the higher court never squarely addressed the issue in Kahn v. Lynch because both procedural protections were not used in that controller take-private transaction), stated that this enabled him to fill the void and answer the question definitively.
The decision is not surprising in terms of its substantive holding and doctrinal analysis – as aforementioned – the Delaware Court of Chancery has been moving the needle (to harmonize Kahn v. Lynch and its progeny with Pure Resources and its progeny). The Delaware Court of Chancery has been trying to encourage the use of both mechanisms in controller take-privates, however effected, and not so quietly urging litigants to brief the issue more extensively and prodding the Delaware Supreme Court to break it’s silence.
The use of an uncoerced, unwaivable, fully informed majority-of-minority voting condition coupled with a properly formed, authorized and well-functioning special committee indeeds replicates arms-length bargaining power of a target board in a third-party merger transaction negotiated under Section 251 of the DGCL. The use, ab initio, of both procedural protections in the context of a controller’s squeeze out transaction effectively eliminates the tensions , conflicts and unequal bargaining power otherwise inherent in such a transaction which requires entire fairness judicial review.
The disjunctive use of either a special committee or a majority-of-the-minority voting condition merely shifts the burden of disproving entire fairness to the plaintiff. Moreover, because of the lack of any direct Delaware Supreme Court precedent on the subject to date, there has been continuing uncertainty over the years whether the use of both mechanisms in a controller take-private does, in fact, alter the standard of judicial review and result in application of the business judgment rule. This was a disincentive for controllers to use both mechanisms.
Yesterday’s decision at a minimum puts the “ball” quite squarely in the hands of the Delaware Supreme Court (whether on appeal of this decision or on a separate future litigation). In the meantime, this decision may further encourage the use of both mechanisms.
Strine’s analysis and this decision is – in my view – correct. That said, there are always practical considerations that need to be analyzed when structuring, strategizing and implementing any public M&A deal and the use of a majority-of-the-minority voting condition (which can cede veto power to the public, non-affiliates) is not always a closing risk that a controller wants to take. Litigation risk vs deal execution risk is always something to consider carefully. Of course, a very robust premium is a powerful elixir.
This May-June issue of the Deal Lawyers print newsletter was just sent to the printer and includes articles on:
– Therapy for “Deal Fever”: An Objective, Disciplined Due Diligence Process
– Proposed DGCL Section 251 Amendments Should Lead to More Negotiated Tender Offers
– Setting the Record (Date) Straight
– How Today’s Technology Simplifies the M&A Agreement Process
– Delaware: Reverse Triangular Mergers Don’t Result in Assignment
– Economic Realism: Impact of Unvested Options on Purchase Price
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.
Here’s news from Greenberg Traurig’s Cliff Neimeth: Vice Chancellor Glasscock’s decision yesterday in Koehler v. Netspend is an interesting read. In certain respects it’s classic Delaware Court of Chancery. Juxtapose it with Vice Chancellor Nobel’s decision last week in In re Plains Exploration & Production Co. Shareholder Litigation.
In a nutshell, plaintiff’s motion to enjoin Total System Services’s $16 per share/$1.4 billion (cash) acquisition of Netspend Holdings was denied because the balance of the equities tipped in favor of the defendants (i.e., the court’s perceived risk to the target’s stockholders of a deal that might fail in the face of a MAC or breach when it was the only deal on the table) even though Vice Chancellor Glasscock concluded that it was reasonably likely that at trial the plaintiff would successfully establish that the Netspend board did not conduct a reasonable Revlon value maximizing process.
The key facts and observations in the case included, among others:
– A single-buyer negotiating strategy employed by the Netspend Board with no formal pre-sign check (although a go-shop was asked for several times in the negotiations and repeatedly rejected by the buyer, the repeated asks appear to have helped obtain the $16 per share price.
– An unaffected 45% premium without giving effect to an immediate pre-sign, positive earnings release by Netspend).
– Netspend had prior bad experience with collapsed sale processes and, therefore, it was queasy about undertaking another formal or elongated process.
– Netspend was not “for sale” and responded to Total System’s initial IOI and commenced discussions mainly because Netspend’s 31% stockholder and 16% stockholder wanted to exit an illiquid and volatile stock (Netspend was content to execute management’s stand-alone operating strategy absent a compelling price).
– Appraisal rights are available under DGCL 262; Vice Chancellor Glasscock questioned whether Netspend’s directors had a “reliable body of evidence” and “impeccable knowledge” of the company’s intrinsic value in the absence of a pre-sign market check and despite Netspend’s prior failed sale processes some years before.
– The fairness opinion obtained by the Netspend board was “weak” under all of the circumstances (putting more pressure on the directors’ understanding of the company’s intrinsic value).
– No interloper surfaced even after the transaction litigation delays (putting maximum pressure on plaintiff’s demand for an injunction); the deal protection package was pretty plain vanilla (the break up fee was in the “northern sector” of the range at 3.9% of total equity value, but certainly not preclusive or coercive; matching rights and other buyer protections were customary).
– A reasonable arms-length negotiating strategy was employed to obtain the $16 per share.
– Netspend’s CEO (who led the negotiations with appropriate Board participation and oversight) was not conflicted (in fact, he was found to be aligned with the non-affiliate stockholders in several respects).
– The nominees of Netspend’s 31% stockholder and 16% stockholder constituted a majority of the Netspend Board (but Vice Chancellor Glasscock found that their interests were aligned with the non-affiliate shareholders).
– Two private equity firms had conducted diligence and looked at buying a significant stake in the company from Netspend’s 31% stockholder and 16% stockholder at a materially lower price than Total System’s initial (and final) bid, but they never indicated a desire to buy 100% of Netspend.
– The support agreements entered into between Total Systems and each of the two large stockholders were coterminous with the merger agreement (but were not terminable upon the Netspend Board’s withdrawal of its declaration of advisability of the merger agreement).
In a noteworthy passage, Vice Chancellor Glasscock faulted the decision of the Netspend Board not to waive the “don’t ask-don’t waive” clauses in the confi-standstills with the two private equity firms at the time discussions commenced with Total Systems and, in the case of any post-sign unsolicited “superior offers” that might arise, he noted the ineffectual fiduciary out to the no-shop covenant in the merger agreement which required Netspend to enforce and not waive pre-existing standstills (thus, the private equity firms were precluded from lobbing in a post-sign jumping bid).
Vice Chancellor Glasscock refers to Vice Chancellor Laster’s In re Genomics decision and to Chancellor Strine’s decision in In re Ancestry pointing up, again, the Court’s sensitivity to, and the highly contextual nature of, DADW provisions in pre-sign confi-standstill agreements and perhaps further underscoring the distinction between using a DADW in a single-buyer negotiating strategy vis a via using one in a formal auction setting or where a full pre-sign market check is conducted.
Here is an article from “The Deal“:
Corporate directors and their outside advisers would seem to have fulfilled their fiduciary duties to shareholders handsomely by agreeing to sell a company for a 37% premium. That did not turn out to be true for the directors of Rural/Metro Corp. or their investment bankers at Moelis & Co. LLC and RBC Capital Markets LLC after the ambulance service business’ $438 million sale to Warburg Pincus LLC two years ago.
Instead, a shareholder suit against RBC went to trial before Vice Chancellor J. Travis Laster of the Delaware Court of Chancery from May 6 to May 9 after Moelis agreed to settle the claims against them for $5 million on April 25 and the directors settled for $6.6 million on April 30, though they will likely be indemnified by insurance and Moelis should be indemnified by Rural/Metro.
Even though the directors settled, three of them testified before Laster: Christopher Shackleton, who owned 12% of the company when it was sold; CEO Michael DiMino, who was hired less than a year before the sale and stayed on under Warburg Pincus; and Henry Walker, who had served on the board since 1997. RBC relationship banker Anthony Munoz also testified, as did Marc Daniel, at the time of the deal RBC’s head of healthcare M&A. (He has since moved to SunTrust Robinson Humphrey.) The trial thus offered a detailed picture of the sales process and suggested the Rural/Metro board cut a very good deal for the shareholders.
The case against RBC bears a strong resemblance to the 2011 shareholder suit against Del Monte Corp., another instance in which the investment bank was told by Laster that it hadn’t done right by the shareholders even though the company it was shopping sold at a high premium. There, Laster wrote an opinion blasting Del Monte banker Barclays plc for offering stapled financing as it was running an auction for the food production and distribution company. Even though Del Monte sold to Kohlberg Kravis Roberts & Co. LP, Vestar Capital Partners and Centerview Partners for $5.3 billion, a 23% premium to the target’s price before news of its potential sale broke, Laster found that Barclays “secretly and selfishly manipulated the sale process to engineer a transaction that would permit Barclays to obtain lucrative buy-side financing fees.”
The opinion, seen by many lawyers as a stern warning against using the staple in many circumstances, came down as the Rural/Metro auction was reaching its conclusion. The company’s directors and its bankers were aware of the decision, but RBC persisted in trying to offer stapled financing, an effort that ended up failing.
Laster aggressively managed the plaintiffs’ lawyers in both cases by opting for plaintiffs’ counsel who would litigate vigorously rather than settle.
The judge awarded lead counsel status in the Del Monte case to Wilmington’s Grant & Eisenhofer PA and Robbins Geller Rudman & Dowd LLP even though their client owned just 25,000 shares while a shareholder with 1.9 million shares had hired other firms. Laster attributed his move to Grant & Eisenhofer’s “track record” and Robbins Geller’s “significant success in Delaware.”
“Reputational capital,” as the judge has called it elsewhere, also came into play in Rural/Metro. After the company announced its sale, the inevitable shareholder litigation followed, and Juan Monteverde of Faruqi & Faruqi LLP garnered lead counsel status and negotiated a proposed settlement that would have required the company only to make additional disclosures to shareholders about the deal. Joel Friedlander of Wilmington’s Bouchard Margules & Friedlander PA and Randall Baron of Robbins Geller challenged that settlement, and Laster rejected it in a Jan. 12, 2012, hearing where he appointed Friedlander and Baron as lead counsel.
Friedlander began his presentation by pointing to cases in which he and Baron had successfully opposed other disclosure-only settlements. He went on to criticize the fairness opinions that RBC and Moelis produced, claiming that the banks dramatically reworked their analysis just before the March 27 meeting at which the Rural/Metro board approved the sale to Warburg Pincus.
Friedlander and Baron also went after the Rural/Metro directors. They asserted in their briefs that Shackleton desperately wanted to sell the company because his investment vehicle, Coliseum Capital Management LLC, was overly concentrated in the stock at a time when it was trying to raise money for another fund. They also argued that DiMino, who initially opposed the sale of the company because he wanted time to expand the business, came to favor it once he realized that he would likely continue to run the company after a sale, and that Eugene Davis had to leave the board by the end of March 2011 and therefore also wanted a quick sale.
Investment banks Moelis and RBC aided and abetted these violations of fiduciary duty, the plaintiffs claimed, by producing fairness opinions supported by financial analysis that was dramatically overhauled in the days before the Rural/Metro directors voted to approve the transaction. Both banks stood to receive a hefty fee for their M&A work, and RBC had the chance to earn millions more by providing financing to the buyer.
Much of the plaintiffs’ case should have seemed dubious given the premium on the deal, and the Rural/Metro directors came off well at trial. The plaintiffs cast aspersions on the company’s decision to run an auction while larger rival Emergency Medical Services Corp. was also up for sale. But Rural/Metro itself had previously tried to buy EMS’s American Medical Response Inc. division, a deal Shackleton said he would have supported enthusiastically, so combining the companies made some sense. At the very least the timing of the auction would have been within the board’s business judgment.
So too would have been the board’s decision to sell even though it had just adopted a growth strategy in the fall of 2010. As Munoz said at trial, “The company had no track record of making acquisitions.” DiMino pointed out that Rural/Metro has completed only two $50 million acquisitions since being sold to Warburg Pincus and that one of those has turned out badly. Many of the bidders for the business were skeptical about Rural/Metro’s growth prospects, and they turned out to be correct, since the company has struggled since being sold.
RBC’s Munoz did not come off as well. The Del Monte decision notwithstanding, he and RBC’s head of U.S. investment banking Blair Fleming schemed to provide stapled financing to Warburg Pincus even after the PE shop declined the offer. Both bankers were focused on RBC’s relationship with Warburg Pincus and on signing up a deal that would have been RBC’s largest deal ever for a healthcare company. And RBC stood to receive an M&A advisory fee only if Rural/Metro agreed to a sale, though that’s true in the vast majority of sell-side assignments.
But RBC and Moelis also ran an auction in which they contacted 28 potential buyers, entered into 21 confidentiality agreements, secured 6 indications of interest, conducted 5 management presentations and ended up with a strong bid from Warburg Pincus. RBC didn’t force a deal on a reluctant or supine or ignorant Rural/Metro board.
The board might not have known everything Munoz and his colleagues at RBC were up to, but they were under no illusions about their bank’s incentives. Baron asked DiMino at trial if he knew that RBC was pitching Warburg Pincus on a revolving loan rather than stapled financing on the Rural/Metro deal. “I just knew Tony had several products,” DiMino answered in words that provoked laughter in the courtroom. “He’s always trying to sell something. So it would make sense — you know, he was trying to pitch something to somebody.”
That’s what bankers do.
John Grossbauer of Potter Anderson notes: In In re Plains Exploration & Production Co. Shareholder Litigation, Delaware Vice Chancellor Noble rejected claims for breach of duty based on alleged Revlon breaches and alleged disclosure violations in connection with a merger approved by the board of directors of Plains consisting of 7 independent directors and the CEO, who stood to receive a large payout as well as to become a senior officer of the combined company if the proposed transaction with Freeport-McMoRan Copper & Gold is approved.
The Court found no Revlon breach in the Board failing to form a special committee and in letting the CEO lead the negotiations with Freeport. Likewise, the failure to engage in a pre-signing market check or go-shop and the failure to negotiate a collar on the stock component of the consideration or obtain an equity “kicker” did not rise to the level of a breach of duty. The Court found the deal protections to be reasonable as well.
On the disclosures, the Court rejected claims that, among other things, unlevered free cash flow number be disclosed, because the Company did not provide them to its financial adviser, and that other alleged omissions about the banker’s methodology were “quibbles.” The Court also rejected claims concerning alleged omissions about conflicts by the CEO and bankers, saying they were adequately disclosed (including the fact the financial advisor may have holding in Freeport).
Here’s an excerpt from this Skadden Arps’ memo about Japanese M&A:
The Nikkei has skyrocketed more than 50 percent over the last six months. Goldman Sachs has issued a report predicting a further 20 percent gain in the index before year-end. Japanese companies were the third-most active group of acquirers in the world in 2012, behind only the U.S. and virtually tied with Canada for second place.
This ferment of activity is taking place largely under the radar — as global attention is far more focused on the potential economic effects accompanying China’s emergence on the world stage.
What are the drivers of this uptick in Japanese outbound M&A activity? Is it sustainable? What are the challenges for the Japanese economy and its private sector? What are some practical tips for bridging the inevitable cultural gaps associated with Japanese company dealmaking? The following discusses what is happening in Japan to magnify its participation in the global M&A marketplace and what the future may hold.
Trending Upward: A Look at Record Japanese Activity
From the vantage point of the U.S. M&A market, Japan was the top inbound acquirer of U.S. targets in 2012, with more than one-quarter of the market share of deal value. By contrast, China represented about 7 percent of deal value and was only the fifth-most active acquirer of U.S. companies last year. While Japan’s 2012 figure certainly was impacted by the $20.1 billion Softbank/Sprint megadeal announced in October, the country’s participation in the U.S. M&A market has been trending steadily upward since 2009. Viewed over a longer period of time, Japanese outbound M&A activity is at an all-time high, far surpassing the late 1980s when Japanese investors were buying Rockefeller Center, Pebble Beach, Columbia Pictures and other high-profile assets worldwide. In fact, the deal value of outbound Japanese M&A in 2012 was more than three times that of 1990, considered the peak year of that era. Yet this resurgence of deal flow has not been a center of focus in the news media today, reflecting our view that Japanese companies appear to be welcome buyers in today’s environment.
Tune in today for the webcast – “FCPA Issues in Deals Today” – to hear Mauricio Espana and Derek Winokur of Dechert and Rebekah Poston of Squire Sanders explain how FCPA diligence is being conducted, how reps & warranties related to FCPA violations are being negotiated, and more. Please print off these course materials in advance.
This academic study is food for thought regarding the time spent negotiating walk-away rights in public M&A deals. Here is the abstract:
Practitioners and academics have long assumed that the legal terms of acquisition agreements add value to mergers, yet legal scholarship has failed to subject this premise to empirical scrutiny. The conventional wisdom is that markets must value the tremendous amount of time and money that M&A lawyers invest in negotiating and tailoring the legal provisions of acquisition agreements to address the distinctive risks facing each merger. Otherwise, the merging parties would not spend so much on legal fees. But the empirical question remains of whether the legal terms of acquisition agreements add any value beyond the financial terms of mergers (negotiated by investment bankers). For this reason we designed a modified event study of target company stock prices that shows that M&A lawyers’ extensive negotiations on the legal terms of acquisition agreements do not add significant value to mergers.
Our analysis of target company stock prices leverages the fact that merger announcements (which lay out the financial terms) are generally disclosed one to four trading days before the disclosure of acquisition agreements (which delineate the legal terms). We focused on a data set of cash-only public company mergers spanning the decade from 2002 to 2011 to ensure that the primary influence on target company stock prices is the expected value of whether a legal condition will prevent the deal from closing.
Our analysis shows that there is no economically consequential market reaction to the disclosure of the acquisition agreement. Markets appear to recognize that parties publicly committed to a merger have strong incentives to complete the deal regardless of what legal contingencies are triggered. We argue that the results suggest that M&A lawyers are fixated on the wrong problems by focusing too much on negotiating “contingent closings” that allow clients to call off a deal, rather than “contingent consideration” that compensates clients for closing deals that are less advantageous than expected. This approach can enable M&A lawyers to protect clients against the effects of the clients’ own managerial hubris in pursuing mergers that may (and often do) fall short of expectations.
Hats off to Kevin LaCroix for another fine blog entitled “Takeover Litigation in 2012” discussing Professors Davidoff & Cain’s new paper showing litigation over deals continued at a high rate last year…