– by Ted Wallace, Director of Research, The Altman Group
A Special Purpose Acquisition Company (SPAC) is a publicly traded shell (or blank check) company formed for the specific purpose of buying an existing company through, usually in a particular industry. At the IPO, investors purchase units of the SPAC, consisting of a combination of shares and warrants, at a relatively low price. The SPAC then generally has 24 months to find a suitable company to purchase through a reverse-merger.
So how would a hedge fund become the target of hedge fund activism? Ask TM Entertainment & Media, Inc. (AMEX: TMI). This SPAC must complete an acquisition before October 17, 2009 or its “corporate existence will cease by operation of law” and its funds and assets will be distributed among its shareholders. This, however, is apparently too long to wait for Phil Goldstein of Bulldog Investors.
On December 17th, Goldstein (d/b/a Opportunity Partners LP) filed preliminary proxy materials to commence a consent solicitation to replace the board of directors with his nominees, who will “promptly dissolve the issuer and cause the cash in the trust account to be distributed to shareholders.” A consent solicitation gives Goldstein the opportunity to end this quickly: in order for his proposals to be deemed “passed” and his directors elected, Goldstein needs the consents of 50% of TMI’s shareholders. Opportunity Partners owns 18.52% of the shares.
Utilizing the ability to act by written consent is different from a “standard” proxy contest. A consent solicitation allows Goldstein to control the timeline: once he has the consents of 50% of TMI’s shareholders, the solicitation is over and his proposals pass. This is balanced, though, by the higher threshold of required votes. Goldstein must acquire the consents of 50% of the outstanding shares, rather than a plurality for each director.
TMI’s management states in its preliminary consent revocation materials that it believes that an acquisition transaction can be completed by October 17, 2009; it cites examples of other SPACs that have recently done so – despite poor market conditions. TMI also states that liquidating early could result in lawsuits from other shareholders – they made an investment and expect TMI to stick to the terms of its incorporation. Here are TMI’s SEC filings.
The Future?
Is TMI a forerunner of a wave of forced-liquidations of SPACs? Or is this just another example for Phil Goldstein’s detractors to cite when they say that he’s only interested in his own pocketbook and doesn’t care how his actions affect value for other shareholders?
It’s obvious that Goldstein wants his money out of TMI – whether because he has better things to do with it, or because he doesn’t believe that TMI will be successful even if a merger is completed. Consent solicitations can be quick and painless or long and drawn out (under state law, Goldstein has 60 days to reach 50%).
I think this will serve as an interesting test-case: if Goldstein is successful early, it may trigger a wave of copy-cat liquidation solicitations (by other hedge funds) at other SPACs. Perhaps, though, “copy-cat” isn’t exactly the right word, because such a wave might be an indicator that Goldstein is in fact representing the feelings of other hedge fund SPAC shareholders – that while the SPAC seemed like a great investment vehicle a year ago, today’s market conditions are just too tough. Hedge funds recently hammered by the market may see this as an easy way to get their cash back.
If Goldstein’s solicitation goes the long and drawn out route, though, it may indicate the opposite – and exactly what TMI is currently saying – that even though it was a year and a half ago, the SPAC’s shareholders made an educated investment decision and expect the shell company to conform to its written mandates. A longer process may indicate more faith in the SPAC setup itself.
For more about SPACs, visit the “SPACs” Practice Area. Here are some interesting Goldstein quotes from his keynote interview at The Deal’s M&A Outlook 2009 conference.
NB: Goldstein is no stranger to the world of SPACs. He has been both an ardent promoter of the investment vehicle and an agitator in the past. In fact, because of Goldstein’s ability to take advantage of loopholes in the SPAC setup, many SPACs now incorporate a “bulldog” provision – preventing any investor (or group) holding more than 10% of the shell company to exercise conversion rights (and thus force the scuttle of an already-approved merger).
Jim Moloney of Gibson Dunn notes: Yesterday, the SEC’s Division of Corporation Finance posted this no-action letter granted to Retalix. In this case, we have a cross-border tender offer transaction involving a bidding group that is making a “partial offer” for the ordinary shares of an Israeli company (target). The offer is structured as one offer designed to comply with both U.S. and Israeli securities laws.
The incoming no-action letter describes the level of U.S. ownership in the Israeli target as less than 40% (i.e., Tier II). In this case the bidding group only seeks to increase its total ownership by 5% to bring their total ownership slightly below 20%. Under the applicable Israeli securities laws a bidder is required to hold its offer open for an additional 4 business days (the additional offering period), without withdrawal rights once all conditions are satisfied and the initial offer expires.
Normally, such an additional offering period would be viewed as a “subsequent offering period” that is permitted under Rule 14d-11. However, Rule 14d-11 requires that the tender offer be for “any and all” outstanding securities. In this case, the offer is a partial one and the bidding group is seeking an additional 5% only. The SEC granted the requested exemption from Rule 14d-7(a)(1) which requires bidders to provide withdrawal rights during the entire offering period to provide for a four day additional offering period without withdrawal rights.
Last month, The Deal ran this interesting article entitled “Change comes to Chancery.” Sounds like the four out of five of the justices – Chandler, Lamb, Strine and Parsons – may be moving on this year. With big regulatory reform likely coming out of Washington, these changes in Delaware really will make this a big year of change!
The financial and economic crisis may spur large and potentially transformational acquisitions that could radically alter the corporate landscape, according to a survey of more than 160 CEOs and senior managers of publicly listed companies in Europe – believed to be the first study of its kind.
Conducted by UBS Investment Bank and The Boston Consulting Group (BCG) during one of the most challenging financial periods in living memory–within six weeks of the collapse of Lehman Brothers – the UBS-BCG CEO/Senior Management M&A Survey reveals a remarkably resilient attitude to mergers and acquisitions given the current capital market constraints and economic outlook.
Nevertheless, it won’t be easy for companies to realize the undoubted opportunities that the current crisis presents. More than half of the firms surveyed face internal and external obstacles to executing a larger deal, including the need to focus on profitability, rather than growth, as well as funding limitations.
Key findings from the survey include:
– Nearly one third of firms (29 percent) expect to make a sizable acquisition over the next year and 21 percent of companies intend to make a large transaction.
– More significantly, 43 percent of companies believe there will be deals that will transform the shape of their respective industries, echoing the experiences of previous crises such as the 1930s and 1970s.
– In addition, 58 percent of firms expect the number of restructuring transactions to increase, potentially leading to a substantial rise in the number of divestitures and closures of business units.
– 73 percent of companies have either stuck to their M&A plans (51 percent) or increased their level of planned deal activity (22 percent) over the last 12 months.
– Only 15 percent of firms believe it is too risky to do an M&A at the moment.
The Antitrust Division (“AD”) of the Department of Justice recently issued revised model conditional leniency letters for companies seeking to avoid criminal prosecution for antitrust violations in the wake of a U.S. Court of Appeals decision to dismiss an indictment against a company the AD removed from the Leniency Program. The AD has now made it easier to revoke a company’s amnesty if it determines that there was a significant gap in time between when the company first discovered the anticompetitive activity and when it ultimately terminated its involvement in the alleged antitrust scheme.
The Stolt-Nielsen Case
Stolt-Nielsen Transportation Group, Ltd., an international shipping company, disclosed to the AD its involvement in an illegal market-division plan and obtained an amnesty agreement for all of its behavior prior to the date of the agreement. After conducting its own investigation, however, the AD alleged that Stolt-Nielsen continued to engage in the customer-allocation conspiracy months after the scheme was first discovered by the company’s general counsel.
For the first time in the leniency program’s thirty-year history, the AD revoked Stolt-Nielsen’s amnesty and indicted Stolt-Nielsen and its two subsidiaries (even after a federal district court had ruled that Stolt-Nielsen substantially performed its end of the amnesty agreement). After the Court of Appeals for the Third Circuit had ruled that the lower court could not enjoin the AD from issuing an indictment, on remand Stolt still succeeded in securing dismissal of the indictment on breach-of-contract grounds.
The DOJ’s Leniency Program After Stolt-Nielsen
The three fundamental aspects of the leniency program are not affected by the AD’s recent revisions to the conditional leniency letter: (1) amnesty is automatic if there is no pre-existing investigation; (2) amnesty may still be available even if cooperation begins after the DOJ’s investigation is underway; and (3) all officers, directors, and employees who cooperate are protected from criminal prosecution.
By the addition of footnote two to the model conditional leniency letter, however, the AD has effectively shifted the burden to the company seeking amnesty to prove that it promptly terminated the anticompetitive activity after the company’s general counsel or board of directors discovers the activity.
Because the AD grants amnesty only to the first company that reports the illegal activity, the revised leniency policy now provides a marker system to compensate for the tension between being the first to disclose and the necessity of approaching the AD with freshly cleaned hands. Under this approach, the AD will hold a leniency applicant’s place in the front of the line for a finite period in order for the applicant to perform the due diligence necessary to perfect its application.
Being the second to disclose can – and has – cost companies tens of millions of dollars and resulted in prison sentences for their top executives. A “reform first, repent later” approach can therefore be extremely counter-productive. Timing is thus more important than ever under the AD’s revised leniency program.
On Monday, the FASB released its proposed FASB Staff Position on FAS 141R standards regarding recognition of contingencies acquired or assumed in a business combination – it’s called “FSP FAS 141(R)-a.” As previously blogged, this FSP will to a large extent restore the accounting for litigation contingencies under the prior standard, FAS 141. In particular, it will eliminate the requirement that “non-contractual” contingencies be recorded at fair value if it is more likely than not that a liability has been incurred. The FASB has requested comments on the proposal, which are due January 15th.
Last week, Corp Fin issued this no-action letter entitled “Her Majesty’s Government.” Is that the coolest name for a government response or what? It’s so “James Bond.”
Corp Fin’s relief allows the United Kingdom to file an “Alternative” Schedule 13D when the UK Treasury takes ownership interests in the UK banks that is taking place due to the recapitalization of the UK banking industry, a recap “scheme” blessed by the Bank of England and the UK Financial Services Authority. For example, the UK Treasury is acquiring a 57.9% interest in the Royal Bank of Scotland’s holding company.
The “Alternative” Schedule 13D is intended to dovetail with the notification required to be filed with the FSA under DTR 5.1.2R (this is in Chapter 5 of the FSA’s “Disclosure & Transparency Rules”). Under Corp Fin’s relief, this alternative 13D will consist of a cover page, the UK notification and the 13D signature page. A form of the alternative Schedule 13D is attached as Annex I of the incoming letter of the no-action request – and here is the alternative Schedule 13D filed by the Royal Bank of Scotland.
Why Hasn’t the US Treasury or Fed Filed Any Schedule 13Ds?
What about Schedule 13Ds filed by the US Treasury or the Federal Reserve for their investments in AIG, Fannie, Freddie, etc.? We looked pretty hard for Schedule 13Ds filed by the US government and didn’t find any. We aren’t the only ones wondering where these filings are – Professor Davidoff mused about this also a while back.
Just like the Professor, at first, the only rationale I could think of was that the Treasury figures nobody is going to sue it for not meeting filing requirements. But then I remembered Section 3(c) of the Exchange Act, which provides an exemption from the provisions of the Exchange Act for “any executive department or independent establishment of the United States, or any lending agency which is wholly owned, directly or indirectly, by the United States, or any officer, agent, or employee of any such department, establishment, or agency, acting in the course of his official duty as such….” Depending on the nature of the entity making the investment, it may be able to rely on Section 3(c) to avoid filing beneficial ownership reports. So that may be what is being relied upon…
While people often think that fairness opinions consist of nothing but boilerplate, that’s not the case when the one of the parties is facing particularly challenging circumstances. Goldman Sachs’ fairness opinion in the PNC/National City deal is a classic example of this point (here is the proxy statement). The pending sale of Cleveland-based National City Corporation to Pittsburgh’s PNC has raised a lot of concern here in Northeast Ohio, and has engendered controversy on Capitol Hill as well.
As a result, National City’s story is fairly well known. Goldman Sachs served as National City’s financial advisor in the PNC transaction – and rendered a fairness opinion to the company’s Board of Directors. While that opinion contains all of the standard assumptions, qualifications and disclaimers that we’ve come to expect in bankers’ opinions, it also contained several deal-specific provisions that are pretty interesting.
For example, in addition to the usual disclaimers typically found in most fairness opinions, Goldman’s opinion specifically notes National City’s expectation that absent a deal like the one proposed with PNC, it would not have the liquidity to meet its obligations, and “would face additional regulatory actions, including intervention by the United States federal banking regulators, and/or be required to seek protection under applicable bankruptcy laws in the very near future.”
After detailing these considerations, Goldman Sachs addressed their influence on its fairness analysis:
You have advised us that, as a result of the foregoing, the Company and its Board of Directors are faced with a narrow set of alternatives, which, at this time, are limited to a transaction such as the Transaction or intervention by United States banking regulators and eventual liquidation of the Company. Accordingly, we also considered recent instances where concerns regarding the liquidity of a bank or financial institution triggered a rapid deterioration of the institution’s financial condition, necessitating government intervention or bankruptcy protection, and as a result of which the common equity holders of the institution are likely to receive substantially diminished value, if any at all, for their equity. In light of the facts and circumstances, and in reliance on the Liquidation Analysis, we have assumed that if the Company’s banking assets were taken over by the United States federal banking regulators and the Company’s non-banking assets liquidated under applicable bankruptcy laws, the Holders would likely receive no material value for the Shares.
In English, that means that Goldman’s assuming that the only alternatives available to the board are a deal like the one offered by PNC – or a government takeover or bankruptcy filing in which its shareholders would get nothing. This is not pleasant reading if you’re a National City shareholder, but it gets worse. A few paragraphs later, Goldman Sachs tacks on a sentence to one of its standard disclaimer paragraphs that makes sure nobody misses what National City’s dire condition and the unique circumstances confronting it are likely to mean from PNC’s perspective:
We do not express any opinion as to the value of any asset of the Company, whether at current market prices or in the future. We note, however, that, under the ownership of a company with adequate liquidity and capital, such as Parent, the value of the Company and its subsidiaries could substantially improve, resulting in significant returns to Parent if the Transaction is consummated.”
Unfortunately, given the likelihood that survival may well be a driving force in M&A deals over the next several months at least, it’s unlikely that National City’s shareholders are going to be the last ones to receive a message like this one.
In our “Negotiation Tactics” Practice Area, we have posted the “2008 Strategic Buyer/Public Company Deal Point Study,” which was recently compiled by the Market Trends Subcommittee of the ABA’s Mergers and Acquisitions Committee. The study tests deal points found in agreements involving public company targets entered into during 2007 with transaction values in excess of $100 million – and
compares those deal points to the Subcommittee’s previous studies of agreements in 2004 and 2005/2006. Some of the new deal points evaluated in the Study includes “go-shops” in strategic deals, specific performance clauses and buyer match rights.
As noted by Keith Flaum’s entry on Harvard Law School’s Corporate Governance Blog:
Among the many interesting findings of the Study is that 48% of the acquisition agreements in the Study sample contained a non-reliance clause—a clause to the effect that the target is not making, and the buyer is not relying on, any representations regarding the target’s business except for the specific representations expressly provided in the acquisition agreement. By comparison, only 18% of the acquisition agreements for deals announced in 2005 and 2006 included a non-reliance clause.
So why the significant increase? One possible explanation might be found in the February 2006 decision of the Delaware Court of Chancery in ABRY Partners, and the extensive discussion of that case by leading M&A practitioners throughout the country. In ABRY Partners, Vice Chancellor Strine underscored the effectiveness of a non-reliance clause in limiting a buyer’s fraud-based remedies in the context of an acquisition of a privately-held company.
Even though ABRY Partners involved a privately-held target, the extensive discussion that followed also focused on the potential usefulness of non-reliance clauses in deals involving publicly-traded target companies. Then, in late 2007, the Tennessee Chancery Court decided Genesco, Inc. v The Finish Line, Inc. In that case, a non-reliance clause in the merger agreement was viewed by the Court as an important element in its determination that Finish Line failed to prove that the publicly traded target company, Genesco, fraudulently induced Finish Line to enter into the merger agreement.
My colleague, Rick Climan, former Chair of the Committee on Mergers & Acquisitions, who acted as special advisor on the Deal Points Studies, points out that some of the targets involved in the 52% of the acquisition agreements in the Study sample that did not include a non-reliance clause may nonetheless have enjoyed the protection afforded by a non-reliance clause, in those cases where such a clause was included in the confidentiality agreement between the buyer and the target. In fact, in Genesco, the Court pointed to non-reliance clauses in both the confidentiality agreement and the merger agreement to support its decision.
I’ve also wondered if practitioners placed much stock in the ABA’s popular deal studies. Here is a poll to see what you think:
Last week, Justice Cahn of the New York State Supreme Court – in In Re: Bear Stearns Litigation – granted summary judgment in dismissing a shareholder challenge to the fairness of JPMorgan’s purchase of Bear Stearns. The decision represents a strong endorsement of the protections that the business judgment rule. In our “M&A Litigation” Portal, we have posted the order denying the motion.