Monthly Archives: January 2015

January 9, 2015

Judge Rules in Favor of Hedge Fund ‘Appraisal Arbitrage’ Strategy

Here’s news from this WSJ article entitled “Merion Capital’s Victory in Fight With Could Mean Higher Payouts in Corporate Buyouts”:

Hedge funds looking for higher payouts in corporate buyouts scored a win this week. In a case stemming from the 2012 buyout of Inc., a judge on Monday ruled shareholder Merion Capital LP didn’t have to prove it voted its shares against the family-tree website’s buyout to challenge the deal’s $1.6 billion price tag in court. The decision keeps open what has become an increasingly popular strategy—known as “appraisal arbitrage”—for these investors: buying up shares of companies on the cusp of a takeover, opposing the deal and then seeking more in court in a legal process known as appraisal.

At issue in the case was whether Merion could prove its shares weren’t voted in favor of the sale to European private-equity firm Permira. Appraisal seekers must abstain or vote “no” on a deal. Merion had bought its 3% stake too late in the process—just days before the buyout vote—to be eligible to vote them itself. Instead, its shares were nominally held by Cede & Co., a centralized warehouse for stock certificates. In a buyout, Cede acts as an aggregator, collecting ballots from shareholders and then voting its stock in bulk accordingly. Cede held 29 million shares of, of which about 10 million either voted “no” or abstained, according to court filings. said Merion couldn’t prove its shares were among them, and indeed, when asked in a deposition, a Merion executive said he couldn’t be sure.
But the judge said there were enough Cede votes against the buyout to “cover” Merion, which only own 1.3 million shares. Historically, courts didn’t scrutinize the issue as long as the total number of shares seeking appraisal didn’t exceed the number of shares that abstained or voted “no”—as was the case here. The ruling’s takeaway also applies to a similar defense mounted by BMC Software Inc. against Merion in pending appraisal litigation over BMC’s 2013 buyout. The judge on Monday let Merion’s claims, valued at some $350 million based on the buyout price, go forward. A decision the other way would have complicated appraisals by forcing hedge funds to buy their shares far earlier in the process. That increases their risk of the deal going bust and crimps their annualized returns by tying up their money longer.

The appraisal strategy has gained popularity in recent years on the heels of several big wins for shareholders. A record 33 appraisal claims stemming from public-company takeovers were filed last year in Delaware, the legal home to most U.S. listed firms, according to a Wall Street Journal review of court documents.
And the strategy is attracting new and larger players. Pennsylvania-based Merion has nearly $1 billion under management, according to a person familiar with the matter, and some $750 million tied up in pending lawsuits. Magnetar Financial LLC, Fortress Investment Group LLC and Gabelli Funds all have active appraisal cases. “Sophisticated investors are seeing significant valuation gaps in certain deal prices,” said Kevin Abrams, a lawyer for Merion, adding that he expects more to come.

About 81% of Delaware appraisals that went to trial since 1993 have yielded higher prices, according to law firm Fish & Richardson PC. Merion has averaged an 18.5% annualized return across five completed appraisals, four of which settled, according to documents reviewed by the Journal.

January 8, 2015

2014: “Year of the Wolf Pack”

In this Wachtell Lipton memo, there is a nice list of bullets of reasons why 2014 could be considered the “Year of the Wolf Pack”…

January 7, 2015

Sell-Side Auctions: Be Careful with Playing Favorites

Here’s news culled from this memo by O’Melveny & Myers’ Paul Scrivano & Sarah Young:

It is not uncommon in sell-side auctions for the target board to make decisions on whether a particular bidder is capable of reaching the “finish line”, many times due to the perceived willingness or capability of the particular bidder to meet a certain price point or to agree to certain deal terms. This sometimes manifests itself in the target board making the rational decision to focus its energy on one bidder who is likely or “favored” to win, to the exclusion of one or more other bidders.

The recent Delaware Court of Chancery decision in In re Novell, Inc. Shareholder Litigation highlights the potential risks to a target board of a claim of breach of the duty of care, and possibly even breach of the duty of loyalty, for actions taken by a target board in Revlon-mode that go too far in favoring one bidder over another in a sell-side process.

In Novell, the court identified a number of target board actions as troubling. These included refusing to waive for the loser a “no partnering with other bidders” provision (although waiving it for other bidders), granting the winner exclusivity with multiple extensions, having discussions with the winner (but not the loser) as to the price necessary to win and inbound interest for target patents, and failing to respond to the loser’s last bid to see if it would increase its price.

January 6, 2015

A Bird in the Hand Trumps Uncertainty

Here’s analysis from Cliff Neimeth of Greenberg Traurig:

A few weeks ago, the Delaware Court of Chancery denied plaintiffs’ motion to enjoin the pending vote (scheduled for December 23, 2014) on Dollar Tree’s $76 per share cash and stock acquisition of Family Dollar Stores. Back in September 2014, Interloper and Family Dollar direct competitor, Dollar General, commenced an unsolicited tender offer to acquire Family Dollar at (a now-revised) $80.00 net per share in cash. The July 27, 2014 merger agreement between Family Dollar and Dollar contains a relatively unremarkable package of deal protections and fiduciary outs and related covenants.

Importantly (due to substantive antitrust risk and as a tactical knock out punch to Dollar General), Dollar Tree has agreed to “hell or high water” provisions, effectively requiring it to divest as many stores as necessary to obtain FTC approval of the deal, whereas, to date, Dollar General merely has offered to divest up to 1,500 stores as necessary to obtain FTC approval and to pay Family Dollar a $500 million reverse break up fee in the event FTC approval of its offer would not be obtained.

Moreover, Dollar General’s tender offer, which cannot be consummated even if sufficiently valid tenders are deposited (due to HSR voting stock $$$ purchase limits and Family Dollar’s rights plan currently in effect), remains subject to Dollar General’s completion of confirmatory due diligence. Dollar General has not indicated a willingness to match Dollar Tree’s hell or high water approach, and Family Dollar’s counsel has advised the board that Dollar General’s offer has a 60% chance of failing to obtain FTC approval.

In short, after consultation with counsel and its financial advisor, Family Dollar has declined, to date, to furnish information to and engage in discussions with Dollar General pursuant to the “window shop” exceptions to the no-solicitation covenant in the merger agreement. Plaintiffs’ asserted, among other things, that Dollar Family’s directors have acted unreasonably under Revlon by failing to determine under the window shop clause that Dollar General’s offer is “reasonably likely to lead to a Superior Proposal.”

Without detailing here the factual findings and analyses of the Chancery Court (please read the decision for these – there are some interesting touch points), Chancellor Bouchard determined that plaintiffs’ failed to demonstrate a reasonable probability of success on the merits, and further failed to find irreparable harm or that the balance of the equities under the circumstances warranted injunctive relief.

This decision illustrates, yet again, that under Revlon, it is not unreasonable for a target board to avoid risking a premium bid with a high degree of closing certainty (thus, a known “bird in the hand”) and potentially breach the no-shop covenants in a merger agreement, to pursue a nominally higher, yet highly conditional, bid with uncertain consummation certainty.

Once again, this decision underscores that the courts will not lightly second guess the decisions of independent and disinterested directors who act properly to seek to obtain the highest immediate value in a sale of control. Such directors are generally free to select the timing and pathway to achieve value maximization and they are (and should be) the architects and overseers of a target’s negotiating strategy. Revlon does not require perfection; it does, however, require substantive reasonableness with respect to the decision to sell control and the process utilized to seek price maximization (including the information obtained and relied on).