From Steven Haas of Hunton & Williams: On September 30th, in In re Openlane, Inc. S’holders Litig., the Delaware Court of Chancery upheld a “sign-and-consent” M&A structure. The sign-and-consent structure – where the merger agreement is signed by the company and a majority of the stockholders promptly (or even immediately) deliver written consents approving the merger – has been used in response to the Delaware Supreme Court’s 2003 decision in Omnicare. In Omnicare, the court held that the target’s board had breached its fiduciary duties by approving a merger agreement with a force-the-vote provision when a majority of the stockholders had already entered into voting agreements, thus rendering the merger a fait accompli.
The sign-and-consent structure first received approval in Delaware in a 2008 transcript ruling in the Optima case, where Vice Chancellor Lamb noted that “[n]othing in the DGCL requires any particular period of time between a board’s authorization of a merger agreement and the necessary stockholder vote.” (Read more from Cliff Neimeth on Optima.) There is no fait accompli in these situations as contemplated in Omnicare if there are no voting agreements in place that lock up the requisite stockholder approval. As the Openlane court explained, “[t]he Merger Agreement neither forced a transaction on the shareholders, nor deprived them of the right to receive alternative offers [before the shareholders approved the merger] …. This may simply be a matter of majority rule by shareholders who were under no obligation to act in any particular way” (emphasis added).
Openlane is interesting on a few other points. First, the sign-and-consent structure has been used frequently in private company M&A. Openlane, however, involved a public company (OTC), though it’s not the first public company to utilize the structure. It also is a rare example of a public company M&A transaction that involved an escrow agent and a stockholders’ representative. After the consents were delivered on the day after the merger agreement was signed, the company mailed an information statement to the non-consenting stockholders asking them to sign a Stockholder Acknowledgement to ratify the merger agreement, waive their appraisal rights, and consent to the appointment of the stockholders’ representative. The buyer had a waivable closing condition requiring that 75% of the stockholders had executed the written consent or Stockholder Acknowledgment. Here’s the company’s Information Statement and Stockholder Acknowledgment (Annex B).
Another interesting aspect of Openlane is that there was no fiduciary out for a superior proposal. Instead, either party could terminate the merger agreement if the requisite written consents were not delivered by the end of the first business day following the signing of the merger agreement. The two-way termination right prevented the board from having its hands tied: in the court’s words, it was “one short-lived defensive measure.” At the same time, the recognized that, “as a practical matter, approval by a majority of shares within the day after the signing of the Merger Agreement was a virtual certainty” since the directors and officers (and their affiliates) owned 68% of the company.
The court also indicated that while Omnicare can be read to require a fiduciary out, it does not follow that a Delaware court should enjoin a merger per se because there is no explicit out (see footnote 53 of opinion). In contrast, many sign-and-consent structures have included a target fiduciary out while giving the buyer (but not the target) the ability to terminate the agreement if the consents are not delivered within a short time period. Note that in reaching its conclusion, however, the Openlane court found that the board had fulfilled its Revlon duties.
Openlane takes another step toward burying the Omnicare decision, which involved a rare 3-2 split on the Delaware Supreme Court. For more on that, you can read Steven Davidoff’s piece about the Optima case.
Last week, in a closely watched shareholders’ lawsuit, Del Monte and Barclays agreed to pay $89.4 million to Del Monte shareholders who challenged the 2010 private equity buyout of Del Monte by a group of investors led by KKR in a settlement. The deal closed this past March. The payment is one of the largest cash settlements on record in Delaware Chancery Court – Del Monte will contribute $65.7 million while Barclays will pay $23.7 million. Read more in this Reuters article
Yesterday brought the announcement of a proposed $89.4 million settlement of shareholder claims arising out of the buyout of Del Monte Foods Company. The shareholders had alleged that the sales process was tainted by collusion between the buyers and Del Monte’s banker, which had sought to provide financing to the buyout group. The settlement follows the closing of the transaction and will be funded by both the new owners of the company and the banker.
The $89.4 million payment is one of the larger settlements to occur in Delaware shareholder litigation. The driver of the settlement was the Court of Chancery’s February ruling granting a motion for a preliminary injunction. The case highlights the following considerations relevant to sale-of-a-company processes:
– When financial advisors play a dual role–both acting as the seller’s advisor and also seeking to provide financing to the buyer–issues of conflict arise. The Delaware courts have recognized that, in some contexts, stapled financing offered by sell-side advisors can be permissible as a benefit to shareholders of the seller by inducing prospective bidders to compete for the target. But, recognizing the potential for divided loyalties, the courts require good reasons for allowing such an arrangement and close oversight by the board. In Del Monte, both were found lacking, as the record demonstrated (1) no need for or benefit from the target banker’s participation in the financing and (2) the target board found out about its banker’s interest in providing buy-side financing after the prospective buyers did.
– Especially as to private equity buyers, boards should pay close attention to how a sales process is managed to avoid findings of favoritism. The board should lead any sales process and actively supervise company advisors. In Del Monte, the preliminary record led the court to believe that the investment banker, without the board’s knowledge, had crafted a collusive sales process and pursued its own self- interest in seeking to provide financing to the favored buyer without obtaining the board’s prior approval. The board was faulted for failing to take sufficiently strong measures to restore a fair process or oversee its advisor.
Hello, my name is Matt Farber, and I’ll periodically be contributing to the DealLawyers.com Blog as a guest blogger. My contributions will focus on topics relevant to transactional associates, ranging from book reviews and researching suggestions to legal developments and overviews of transactional law. I recently graduated magna cum laude from Loyola University Chicago School of Law, where I was the Editor-in-Chief of the Loyola Law Journal. Enjoy!
What’s the difference between a forward merger, a forward triangular merger, and a reverse triangular merger? Let’s first address how forward mergers differ from triangular mergers. In a forward merger, the target merges with and into the buyer, eliminating the target’s existence. The buyer consequently assumes the target’s rights and liabilities by operation of law.
By contrast, a forward triangular merger (also known as an indirect merger) is a transaction that requires a third entity, a merger subsidiary, or a shell company. This subsidiary company is capitalized with the consideration for purchasing the target company. Similar to a forward merger, the target merges with and into the merger subsidiary, with the subsidiary assuming all the target’s assets and liabilities.
A reverse triangular merger has a similar structure to a forward triangular merger, but the buyer’s subsidiary is merged with and into the target company, leaving the target company as the buyer’s subsidiary. Thus, whether the merger takes the form of a reverse triangular merger or a triangular merger, the consequence is the same: the target is now a wholly owned subsidiary of the buyer.
Basic Advantages of Each Deal Structure
Different merger structures provide different advantages and disadvantages, providing deal lawyers with the flexibility to satisfy their clients’ needs:
– Buyer protection from target’s liabilities: Buyers are protected in both forward triangular and reverse triangular mergers, but generally not in a forward merger.
– Tax: Forward mergers and forward triangular mergers are usually taxed as an asset acquisition, rather than a stock acquisition, which is how most reverse triangular mergers are assessed. Forward mergers also are tricky from a tax point of view with often severe consequences for blowing the reorganization.
– Third-party issues: Most forward mergers and forward triangular mergers raise anti-assignment and third-party consent issues, but reverse triangular mergers generally do not.
Helpful Resources for Researching Merger Structures:
– “Corporate Acquisitions and Mergers” by Peter F.C. Begg (Aspen; 2011)
– “Corporate Acquisitions, Mergers, and Divestitures” by Aaron Rachelson (Thomson; 2010)
– “M&A Practice Guide” by Stephen Glover (Matthew Bender; 2008)
From John Grossbauer of Potter Anderson: Recently, Vice Chancellor Laster issued this decision in Johnston v. Pedersen. In this case, Plaintiffs brought an action pursuant to 8 Del. C. ยง 225 to determine whether action taken by written consent of a majority of the outstanding voting power of the capital stock of Xurex, voting together as a single class, validly and effectively removed and replaced the incumbent defendant directors of the company. At issue before the Court was whether such removal was effective without the consent of a majority of the Series B Preferred Stock, voting as a separate class.
After reviewing the circumstances upon which the Board adopted the terms of the Series B Preferred Stock and applying enhanced scrutiny, the Court of Chancery concluded that although the defendant directors honestly believed they were acting in the best interest of the Company, they nevertheless breached their duty of loyalty by structuring the issuance of the Series B Preferred Stock in a manner designed to entrench themselves. Because the defendants adopted the class vote provision in breach of their duty of loyalty, the Court declined to give effect to the class vote provision and found the written consents removing the incumbents and electing the new slate of directors to be valid.
The opinion is particularly interesting because the Court essentially applied the Blasius standard, but under the more generic label of “enhanced scrutiny. ” Chancellor Strine had taken a similar approach to Blasius in Mercier v. Inter-Tel.
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
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?