With several deals unwinding due to the credit crunch, some new law looks inevitable regarding “Materal Adverse Effect” closing condition. One case likely to go to trial in the Delaware Chancery Court relates to the acquisition of Sallie Mae (“SLM”) by a buyout consortium led by JC Flowers.
From Kevin Miller of Alston & Bird: The definition of an MAE in the SLM merger agreement has a carveout for changes in Applicable Law – but there also is a carveout to the carveout for changes in Applicable Law relating to the education finance industry that are in the aggregate more adverse to the Company and its subsidiaries taken as a whole then those disclosed in SLM’s 10-K.
Consider how the carveout to the carveout in the SLM definition might be differently interpreted if it read as follows (changes highlighted):
“changes in Applicable Law” shall not include any changes in Applicable Law relating specifically to the education finance industry [insert – to the extent they] [delete – that] are in the aggregate [insert – materially] more adverse to the Company and its Subsidiaries, taken as a whole, than the legislative and budget proposals described under the heading “Recent Developments” in the Company 10-K, in each case in the form proposed publicly as of the date of the Company 10-K)”
The first modification arguably changes the carveout from a tipping basket to a deductible and the latter arguably increases the trigger threshold.
VC Strine on the Sallie Mae MAC
Kevin Miller also notes: On Monday, a scheduling hearing was held in front of Vice Chancellor Strine in the Delaware Chancery Court regarding the JC Flowers-SLM lawsuit.
Ultimately, VC Strine refused to grant SLM’s request for an expedited hearing after JC Flowers agreed (in response to a proposal made by SLM’s attorney) to waive the interim operating covenants, including the no-shop provision contained in the merger agreement.
Below is an excerpt from the transcript on how to interpret the SLM MAE clause, which is the critical issue in the dispute:
MR. SUSMAN [For SLM]: Your Honor, just a few points. They keep saying — I think they finally admitted that basically, they are not going to close, ever, regardless of what we give them or don’t give them, because in their view, an MAE has taken place, and the only thing that can happen is Congress could all of a sudden magically decide to change its mind.
So that position, that an MAE has taken place, and that they do not have to abide by the contract, is the repudiation, which under traditional contract law excuses our further performance. Why should we have to be doing a lot of things to give them information on and on — except in discovery, of
course we have to give them information — if they have already repudiated their obligation under the contract?
The discovery in this — I mean, again, the interpretation of what the MAE clause means is, I think, a legal matter. We can do briefs and get the Court to resolve that as a matter of law very quickly once you tell us what the rule is, the standard is, for an MAE. The difference between the parties — there are two issues. It’s very, very simple, what it is. They say that if the legislation that was passed is 1 or $2 more adverse, then the legislative proposals described in the 10-K — that then you have to consider the entire impact of that legislation. We say, “No. It’s just the incremental impact that is considered. You knew about the possibility. The baseline was what was disclosed, and the delta is how much more adverse.”
THE COURT: I get that.
A Penny for Your Thoughts, a Nickel for Your Fairness Opinion
And more from Kevin: JC Flower’s attorney’s argued that in addition to the existence of a MAC, the conditions to the closing have not been satisfied because JP Morgan and BofA have not been provided with the “Required Information” [e.g., financial projections and other information] to which they are entitled and which they need to sell the bonds necessary to finance the transaction.
That led to the following exchange regarding the information the buyers/banks need to a finance the transaction versus the information banks need to render a fairness opinion. Below is an excerpt from the transcript:
THE COURT: Aren’t they just going to rely, like when they give fairness opinions — they just rely, without any independent verification, upon
the information given to them.
MR. WOLINSKY [For JC Flowers]: The guys who put their money on the — into the bonds, I’m told they don’t quite do that.
THE COURT: But the bank is saying this. Right?
MR. WOLINSKY: The — JPMorgan and Bank of America are saying, “To sell these bonds, we need more financial information.”
THE COURT: That’s what I’m saying. It’s a different standard than when they give a fairness opinion.
MR. WOLINSKY: Absolutely.
THE COURT: I wanted to be clear.
MR. WOLINSKY: This is real money changing hands.
THE COURT: A fairness opinion is just a fairness opinion.
MR. WOLINSKY: A fairness opinion, you know — it’s the Lucy sitting in the box: “Fairness Opinions, 5 cents.”
Quite a few members have sent me a link to the M&A Law Prof Blog for a more analytical take on FINRA’s new proposed Rule 2290 regarding fairness opinions – here is one excerpt: “the SEC approved the rule on an expedited basis. This is a bit odd — this rule has been pending now for three years, why the rush now?”
Join us on December 6th for a webcast – “The Latest on Fairness Opinions” – to hear these experts as they explore the latest trends and developments in this area (not just limited to FINRA’s rulemaking):
– Kevin Miller, Partner, Alston & Bird LLP
– Dan Schleifman, Managing Director and Chairman of the Investment Banking Committee – Advisory, Credit Suisse Securities (USA) LLC
– Ben Buettell, Managing Director and Co-Head Fairness Opinion Practice, Houlihan Lokey Howard & Zukin
– Denise Cerasani, Partner, Dewey & LeBoeuf LLP
After a long wait – and four amendments – the SEC has issued an Order approving FINRA (formerly NASD) Rule 2290 on an accelerated basis (this rule was first proposed in mid-’05). As noted in Amendment No. 4, Rule 2290 addresses disclosures and procedures in connection with the issuance of fairness opinions by a broker/dealer firm. In that amendment, FINRA stated that it will announce an effective date for the new rule in a Notice to Members to be published no later than 60 days following the SEC’s approval and that the effective date will be 30 days following publication of the Notice, so we should know that date soon. Look for a webcast on fairness opinions coming soon…
Here is some good info from Kenneth Adams’ blog: In this December 2006 post, I discussed ways of retrieving contracts that have been filed on the U.S. Securities & Exchange Commission’s EDGAR system. In a comment I mentioned an additional source, RealDealDocs, but noted that I hadn’t kicked their tires.
Well, I still haven’t, because I’m happy doing my own searches on Lexis (Broc’s note: free searches can done on the SEC’s site). But if you’re interested in RealDealDocs, Dennis Kennedy gives some basic information about them in this TechnoLawyer article.
As I said in my original post, the fact that a contract is on EDGAR is—to say the least—no guarantee of quality. Note that Dennis says that a contract retrieved from EDGAR “can serve as an initial prototype, a checklist for issues, or as a useful way to determine how others treat similar deals.” He pointedly doesn’t suggest that after swapping out party information and key deal terms you could safely use an EDGAR contract as your own.
Here is some good stuff from the D&O Diary Blog: As credit market disruption has reached the leveraged buyout world, a number of deals announced earlier this year to great fanfare have been unceremoniously snuffed, while others are on life support. Not too surprisingly, one direct result from this deal derailment has been a spate of lawsuits, as jilted partners and disappointed investors cast blame and seek to recoup their lost expectancy.
The most interesting of these litigation developments is the securities class action lawsuit that a Harman International Industries shareholder filed on October 1, 2007 against the company and three of its officers and directors. (Here is the complaint and the plaintiffs’ lawyers’ press release.) The Harman International lawsuit filing follows hard on the heels of the company’s September 21, 2007 announcement that its erstwhile acquirers, Kohlberg Kravis Roberts and a Goldman Sachs investment fund, had informed the company that they “no longer intend to complete the previously announced acquisition” of the company, and that they “believe a material adverse change in Harman’s business has occurred.” Here is a Wall Street Journal’s article discussing the cancellation of the $8 billion deal.
The lawsuit, filed on behalf of shareholders who bought the company’s stock between the time of the company’s April 26, 2007 merger announcement and the September 24 cancellation announcement, alleges among other things that the company failed to disclose that it had breached the merger agreement; that it had R & D and other capital expenses, as well as inventory levels, above disclosed amounts; and that its relationship with a key customer had deteriorated. The complaint further alleges that Harman’s Chairman and controlling shareholder “had a strong personal motive” for the completion of the merger, from which he would received proceeds of $420 million. The implication is that the company withheld the true information to ensure that the merger would be completed, and that the merger fell apart only when the misrepresentations came to light.
In addition to the possibility of shareholder lawsuits, it may also be anticipated that other disappointed targets will sue their former suitors for breach of contract. The current dustup between Genesco and Finish Line provides an example of what this kind of dispute looks like. On June 18, 2007, Finish Line announced that it would be acquiring Genesco in a transaction valued at approximately $1.5 billion. But something happened on the way to the altar; on September 21, 2007, Genesco sued Finish Line in Tennessee state court seeking an order requiring Finish Line to complete the merger and forcing UBS to fulfill its agreement to finance the deal. Here is a CFO.com article describing the parties’ dispute and the Genesco lawsuit.
Finish Line, in turn, has filed a counterclaim asking the court, according to news reports, to compel Genesco to “provide information related to their proposed merger or else rule that a materially adverse event has occurred.”
To my knowledge, no lawsuit has yet arisen in connection with the other very prominent deal in which the would-be acquirer invoked the “material adverse change” clause to cancel a deal – that would be the $25 billion deal to take over SLM Corp. (better known as Sallie Mae) that J.C. Flowers cancelled last week. Here is a Wall Street Journal article discussing the kibosh put on the Sallie Mae deal. But while there is no lawsuit yet, Sallie Mae did issue a September 26th press release saying that “the buyer group has no contractual basis to repudiate its obligations under the merger agreement and intends to pursue all remedies available to the fullest extent of the law.” While there apparently remains some hope that the Sallie Mae deal might be salvaged, Sallie Mae yesterday rejected the would-be buyers latest reduced offer. If the deal dies altogether, keep an eye out for a lawsuit — by somebody against somebody else.
It seems like only yesterday that the business pages were full of stories about increasing numbers of ever-larger buyout bids. Now the papers are covering the same deals as they fall apart. As the Journal noted, the termination of the Harman deal “represents a severe setback for the overall deal market as it tries to close upward of $350 billion of leveraged buyouts amid tightening credit conditions.” If buyers’ remorse or tight credit undermines more deals, the disappointed targets can be expected to launch lawyers. Chances are that the lawsuits will live on long after the buyout bubble has become a distant memory.
Our new quizzes have been very popular on TheCorporateCounsel.net, so we have duplicated the format on this site. It will take you less than a minute to complete this five-question quiz: “Pro” or “Troll”? Test Your Knowledge. It will score your answers as you go—and let you know how you compare against your peers.
Simply read each statement and decide whether you agree with it (by clicking “Ah Yes”) or disagree (by clicking “That’s Ridiculous”). Then, you will be told whether you were correct—and we also provide some analysis if you wish to learn more about each answer.
Despite the Fed’s reduction in interest rates last week, a number of deals are in trouble and have produced some interesting developments and disclosures. As a result, caselaw regarding MAC clauses and other merger provisions will likely be fleshed out over the next year (remember the September-October issue of the Deal Lawyers print newsletter opens with a related piece: “The ‘Downturn’ Roadmap: Parsing the Shift in Deal Terms”).
Here are some of the notable developments and disclosures:
1. Harman International’s Form 8-K – According to this article, late Friday, Goldman Sachs and Kohlberg Kravis Roberts scuttled their pending $8 billion buyout of Harman International after discovering details about Harman that raised concerns about its business. You may recall that this deal was one of the first to introduce “stub equity.”
2. Genesco’s Form 8-K (filed 9/20/07) – As noted in this article, Genesco is suing to force Finish Line and UBS to complete the deal it made to buy Genesco (here is the Form 8-K regarding the lawsuit filed Friday).
3. Reddy Ice Holding’s Proxy Statement (filed 9/12/07) – As noted in this article, Morgan Stanley, the deal’s solo underwriting bank, claimed in late August that the financing agreements had been breached and said that it was “reserving its rights.” According to the proxy, Morgan Stanley argued that GSO Capital Partners, the buyout’s equity sponsor, and a special committee altered some dates in the original deal agreement and, specifically, stretched out the debt marketing period without Morgan Stanley’s consent. Morgan Stanley insisted that GSO had breached the debt financing contract by doing that.
5. SLM Corp.’s Additional Soliciting Material (filed 8/7/07) – As noted in this article, Sallie Mae’s purchase by a consortium led by JC Flowers & Co. might tank as the buyers are having second thoughts.
Maximizing Value (and Controlling Risk) in Distressed and Special Situations Investing
Join us tomorrow for a webcast – “Maximizing Value (and Controlling Risk) in Distressed and Special Situations Investing” – to hear Tim O’Connor of Imperial Capital, and Mark Palmer and Jonathan Gill of Bracewell Giuliani discuss the latest trends and developments regarding the opportunities and strategies available in distressed situations. Given what’s happening in the credit markets – this program is particularly timely!
– The “Downturn” Roadmap: Parsing the Shift in Deal Terms
– The “Downturn” Roadmap: A European Perspective
– What Does “Material” Mean?
– Four Things Buyers Need to Know About Successor Liability
– Some Thoughts on Appraisal Under Delaware Law
– The SEC Staff’s Comment Letters: Termination and Change-in-Control Arrangements
That there is much trouble in the private equity market is clear and well-documented. No credit available for signed deals. Private equity partners suing each other. Shareholders suing funds. The troubles will likely continue for some time.
On Sunday, the NY Times ran this column with some interesting remarks from Michael Jensen, professor emeritus at the Harvard Business School, leading scholar in finance and management, and the man whom many consider to be the intellectual father of private equity. Here is an excerpt:
“We are going to see bad deals that have been done that are not publicly known as bad deals yet, we will have scandals, reputations will decline and people are going to be left with a bad taste in their mouths,” Mr. Jensen said in an interview last week. “The whole sector will decline.”
Mr. Jensen was elaborating on the trenchant comments he made last month in a forum on private equity convened by the Academy of Management. There, he excoriated private equity titans who sell stock in their companies to the public — a non sequitur in both language and economics, he said — and warned that industry “innovations,” like deal fees that encourage private equity managers to overpay for companies, will destroy value at these firms, not create it.
He also said that private equity managers who sell overvalued company shares to the public, whether in their own entities or in businesses they have bought and are repeddling, are breaching their duties to those buying the stocks.
“The owners who are selling the equity are in effect giving their word to the market that the equity is really worth what it is being priced at,” he said. “But the attitude on Wall Street is that there is no responsibility to the buyers of the equity on the part of the managers who are doing the selling. And that’s a recipe for nonworkability and value destruction.”
In this podcast, Joel Lessem, the CEO of Firmex, explains how deal rooms are evolving, including:
– How are your deal rooms different from your competitors?
– How do you see the use of deal rooms evolving?
– What are some surprising ways that deal rooms are being used?
Board Committee Can Reschedule Merger Vote, SEC Unwritten Policy Noted
From Jim Hamilton’s World of Securities Regulation Blog: The Delaware Chancery court has ruled that a special committee of independent directors can reschedule an imminent meeting of stockholders to consider an all cash, all shares offer from a third-party acquirer when they believe that the merger is in the best interests of the stockholders and know that if the meeting proceeds the stockholders will vote down the merger and the acquiror will irrevocably walk away from the deal and the company’s stock price will plummet.
The special committee also wanted more time to provide information to the stockholders before their vote on the merger. Finally, the meeting was rescheduled within a reasonable time period and the committee did not preclude or coerce the stockholders from freely voting on the merger. (Mercier v. Inter-Tel Inc., Del. Chancery Court, Aug 14, 2007, CA No. 2226).
In finding that the committee acted in good faith, Vice Chancellor Strine found no evidence that it failed to explore the possibility of a more valuable alternative takeover bid from interested parties. By contrast, it appears that the special committee diligently responded to all interested parties and tried to facilitate attractive bids.
Thus, the court rejected a request for a preliminary injunction based on the argument that the directors had no discretion as fiduciaries to reschedule a vote once a stockholder meeting is imminent and they know that the vote would not go their way if it was held as originally scheduled.
In an interesting aspect of the ruling, the court noted that the proxy materials also indicated that the stockholders would vote on a second ballot item, which involved a proposal to adjourn the special meeting to solicit additional proxies if there were not sufficient votes in favor of the adoption of the merger. Apparently, the second ballot item was included as a result of a general practice of the SEC that encourages issuers to seek stockholder pre-approval for an adjournment. Here, the court cited an SEC roundtable discussion on the proxy rules and state corporation laws held on May 7, 2007 discussing the fact that the SEC has some unwritten policies regarding shareholder voting on adjournments of meetings.
The fact that, at the SEC’s prodding, the company included on its proxy ballot a proposal regarding whether or not to adjourn the special meeting if there were not sufficient votes to approve the merger, and that a majority of stockholders voted against an adjournment, did not put the special committee in a graceful position to seek to justify its actions in calling a time out on the merger vote. But as a formal matter, noted the court, the special meeting was not adjourned because it was never convened in the first place. Rather, the committee postponed the special meeting on the morning it was scheduled, and their legal authority to do so was unquestioned.
Apparently, the court’s cite to the SEC roundtable was to remarks by panelist James Hanks of the Venable firm, who expressed concern that there is a lot of confusion among the corporate bar and among state corporate lawyers on the SEC’s view of voting for adjournments of meetings. He noted that the SEC has some unwritten policies that some people know about and some people don’t know about. Adjournments are becoming an increasingly important thing in corporate governance, said Mr. Hanks, adjournments to win, adjournments for other purposes. If the SEC has a policy on adjournments or on the use of proxies to vote for adjournment, he urged that such policy be published in the usual way.