From TheDeal.com: “Stapled finance has become a favorite product for investment banks auctioning companies. By offering prepackaged financing, they hope to encourage bids and collect a second layer of fees on the deal.
But in a twist, Bally Total Fitness Holding Corp. has turned to Deutsche Bank AG to provide ready-made debt financing in Bally’s auction, sources close to the bank and company said, not J.P. Morgan Chase & Co. and Blackstone Group LP, the banks running the sale of the fitness chain.
Deutsche is offering about $700 million in financing, sources said, made up of senior bank debt and subordinated debt. The choice of an independent debt source was made by a special strategic alternatives committee of Bally’s board comprising management-backed directors plus Don Kornstein, who was installed on Bally’s board by hedge fund Pardus Capital Management LP after a proxy contest at Bally’s annual meeting in January.
Investment banking sources close to the company said that outside counsel to the committee, Robert Wall of Winston & Strawn LLP, recommended finding a third bank to provide the debt financing to avoid the potential impression of a conflict of interest. Wall declined to comment.
Stapled financing emerged as a result of the slump in financing markets in 2001, when financial sponsors found it hard to obtain the debt financing they needed for LBOs. With a stapled package on offer, bidders know going in that they will be able to obtain financing, and at what price. Even if they choose other lenders, the stapled package could serve as a floor when negotiating alternatives.
There are potential conflicts, however. Some bidders fear the bankers handling a sale may have an incentive to favor a bidder that will take advantage of their bank’s financing. And some bidders are wary of working with a lender whose bankers may share information about the bidder with the bankers handling the sale.
Lining up stapled financing from an independent bank is not unheard of, but is not common, says Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware, but it makes sense, he adds. ‘These days the more free from conflict one can be in these situations the better. From a shareholder perspective, you want the highest possible price.'”
From Francis Pileggi’s “Delaware Corporate & Commerical Litigation” Blog: “Though it is not uncommon for Chancery Court decisions to be in the area of 100-pages long, due to its length, my summary will be longer than usual for the blurbs on this blog. Oliver v. Boston University is 105-pages long and deals with a voluminous set of facts and a multitude of legal issues. I have divided the downloadable opinion into 2 parts for the user’s convenience: Part I and Part II.
Specifically, the case involves a financially troubled biotechnology company by the name of Seragen, Inc., which was controlled by Boston University (“BU”), as well as its friends and affiliates, who on several occasions came to its fiscal rescue in transactions implemented without procedures reasonably designed to protect the interests of minority shareholders.
With Seragen on the precipice of financial doom, a company by the name of Ligand offered merger consideration of approximately $75 million to acquire Seragen, but that amount would not satisfy all of the stakeholders because the claims of many stakeholders asserting rights to priority payment exceeded the amount of Ligand’s offer. A group of minority shareholders brought to trial a series of claims challenging certain transactions before the merger between Seragen and Ligand and the process by which the merger proceeds were allocated. This 105-page decision followed that trial.
The court noted that if the merger did not succeed, bankruptcy was the likely result on a very short timetable and that bankruptcy may have necessarily involved sacrificing the interests of the minority shareholders to placate other stakeholders, and it is within that troubled context that the court addressed the corporate governance issues.
Unlike other similar factual settings, this case did not deal with the issue of possible duties that the directors may have owed to creditors, because it was only the minority shareholders who were complaining that their ox was gored, primarily because they did not receive enough of the allocated proceeds of the merger. Among the legal issues addressed were: equity dilution and voting power dilution; business judgment rule; entire fairness standard; duty of loyalty that majority owes to the minority; duty to disclose material facts in proxy; aiding and abetting breaches of duty; and the difference between derivative and direct claims.”
We have posted our schedule for this summer’s “M&A Boot Camp,” which is free for any member of DealLawyers.com. It includes:
– Conducting Due Diligence: Through the Eyes of the Associate (Monday, June 19th)
Deborah Bentley Herzog and Mike Woodard of McGuire Woods will start us off by teaching us the basics of what you need to know about conducting due diligence, with an emphasis on what issues and traps associates should seek to spot and resolve.
– International Deal Considerations (Monday, June 26th)
Elizabeth (“Libby”) Kitslaar and Phil Stamatakos of Jones Day will walk us through the special issues that you will face in a cross-border deal. Learn the essentials of what an international deal is all about, including how to best work with lawyers from other countries and other practice pointers unique to the international deal.
– The Role of Investment Bankers (Monday, July 10th)
Kevin Miller of Alston & Bird LLP – a former in-house investment banking lawyer – will talk about the role of investment bankers in the M&A process, including tips on how to maximize their effectiveness and minimize disappointments.
– Selling the Venture-Backed Company (Monday, July 17th)
Phil Torrence and David Parsigian of Miller Canfield LLP will teach us about “everything you need to know” to understand the basics of the issues typically present in a sale of a venture backed company with multiple class of stock and varying liquidation preferences.
According to ISS’ “Corporate Governance Blog,” the Executive Council of the Delaware State Bar Association’s Corporate Law Section has endorsed draft legislation to amend the Delaware General Corporation Law to enable shareholders to introduce an irrevocable change of bylaws on director elections, as well as provide for an irrevocable resignation of directors who fail to get a requisite number of votes. The proposal does not modify the default plurality standard.
The proposal would amend paragraph 216 of Section 5 of the law to provide that a company bylaw adopted by a vote of stockholders that prescribes a required vote for director elections cannot be altered by the board without shareholder consent.
Another proposed revision seeks to get around the restrictions of Delaware’s “holdover” rule by adding a new provision that a director resignation may be made effective upon the occurrence of a future event or events, coupled with authority granted in the same section to make certain resignations irrevocable.
The proposed bill will be submitted to the Delaware legislature in the next week or two – and then it must be endorsed by the full bar association and then passed by the Delaware legislature before becoming law.
With SEC comment and response letters now available on the SEC’s website, Kevin Miller of Alston & Bird sent over the following example of the level of detail that you sometimes see in SEC comments regarding fairness opinions. In a note to Comment 22 below, Kevin highlights an issue that still seems to catch many companies – and their counsel – by surprise.
The comments and responses below relate to IAC/Interactive’s Form S-4 filed on April 26, 2005 and are excerpted from this response letter (and here is the Amended Form S-4 filed in connection with the responses):
Opinions of Ask Jeeves’ Financial Advisors, page 39
20. Comment: Please disclose why the board chose to hire two financial advisors. Also, disclose the amounts known or estimated to be received by Allen & Company and Citigroup and their affiliates for services rendered to the Company for the previous two years. See Item 1015(b) of Regulation M-A.
Response: In response to the Staff’s comment, the disclosure has been revised on page [•]. [Note: See Risk Factor on Page 26 of amended S-4 regarding Allen & Company conflicts.]
21. Comment: Please supplementally send us a copy of the board book and any other materials prepared by Allen & Company and Citigroup to assist the board in evaluating the transaction. Also, provide us with a copy of the engagement letters.
Response: Ask Jeeves has informed the Company that Allen & Company and Citigroup will be sending to the Staff under separate cover copies of their respective engagement letters and Board Books that were delivered to the Ask Jeeves board of directors.
22. Comment: To the extent Allen & Company and Citigroup relied on management projections in their analyses, these projections should be disclosed in this filing.
Response: Ask Jeeves has informed the Company that although in the course of their respective due diligence each of Allen & Company and Citigroup reviewed certain Ask Jeeves’ projections, Ask Jeeves has been advised by Allen & Company and Citigroup that neither relied upon any of such projections in its analysis.
[Kevin’s Note: The issue here is the SEC’s propensity to seek disclosure of projections even if they were only disclosed to a party’s own financial advisor – In connection with the Sprint/Nextel Merger, the SEC comment read in part: “Please note that disclosure of financial forecasts prepared by management is generally required if the forecasts were provided to a third-party financial advisor, including a merging party’s advisor. Accordingly, please disclose all material projections that were exchanged among Sprint, Nextel and their respective financial advisors, or advise us why they are not material. For example, please disclose the “certain financial forecasts and other information and data relating to Sprint and Nextel which were provided to or otherwise reviewed by or discussed with Citigroup by the respective managements of Sprint and Nextel…” Also disclose the potential pro forma impact of the merger, including cost savings, operating synergies and non-cash purchase accounting adjustments. You may explain the limited purpose of the prepared forecasts and provide other information so that shareholders better understand the forecasts` scope and purpose.”]
Opinion of Allen & Company LLC, page 39
23. Comment: Please describe the relationships, discussed on page 40, between Allen & Company and IAC and Ask Jeeves and the potential conflicts of interest arising from these relationships in the risk factors section.
Response: In response to the Staff’s comment, the disclosure has been revised on page 62.
24. Comment: Please revise the discussion of the various analyses used by Allen & Company so that recipients of the proxy statement/prospectus can understand exactly what each analysis indicates. What are they used to show? We offer some additional guidance in the comments below. As a general matter, for each analysis, please provide sufficient explanation of each step of the analysis and its conclusion such that an investors will understand how this analysis supports a conclusion that the transaction is fair.
Response: In response to the Staff’s comment, the disclosure has been revised. See page 56 through 61 (with respect to the opinion of Allen & Company) and pages 62 through 73 (with respect to the opinion of Citigroup).
25. Comment: Also, for each analysis, indicate what observations or conclusions the Ask Jeeves board reached with respect to the information that these calculations provide.
Response: Ask Jeeves has informed the Company that its board of directors did not make any specific observations or reach any specific conclusions with respect to any of the individual analyses presented by their financial advisors, but rather the board of directors reviewed and digested the analyses in their totality in reaching the board’s conclusions with respect to the advisability of the merger. The disclosure has been revised on page 54 to reflect the foregoing.
Analysis of Historical Trading Activity, page 40
26. Comment: To assist an investors understanding of the Historical Trading Analysis, please revise to use a graphical or tabular format.
Response: In response to the Staff’s comment, the disclosure has been revised on page 56.
Analysis of IAC Based on its Business Segments, page 41
27. Comment: Please clarify what OIBA refers to in the first column.
Response: In response to the Staff’s comment, the disclosure has been revised on page 57.
Analysis of Premium Paid in Comparable Merger Transactions, page 42
28. Comment: When you speak of an implied premium that the instant exchange ratio represents to comparable merger transactions, disclose the price implied by this exchange ratio.
Response: In response to the Staff’s comment, the disclosure has been revised on page 58.
Analysis of Premium Reflected in the Exchange Ratio, page 42
29. Comment: If Allen & Company calculated the premium of the merger consideration in comparison to additional average closing prices besides the 30 day trailing average (for instance, 90 day and 180 day trailing averages), please disclose these figures also.
Response: Ask Jeeves has informed the Company that neither Allen & Company nor Citigroup compared the premium of the merger consideration to the average closing prices for any other or longer period of time than the 30 day trailing average.
30. Comment: Include a textual discussion explaining the point of the graphs on page 43. In particular, describe how the instant transaction compares to others included in the survey. Also, explain what you mean by the statement that the instant exchange ratio indicates a premium “within the range of premiums paid in the comparable merger transactions”—it appears that this transaction falls at the lower end of each of the ranges provided.
Response: In response to the Staff’s comment, the disclosure has been revised. See pages 58 through 59 (with respect to the opinion of Allen & Company) and pages 69 through 71 (with respect to the opinion of Citigroup).
Analysis of Selected Comparable Merger Transactions…, page 44
31. Comment: Describe the criteria used to select comparable companies.
Response: In response to the Staff’s comment, the disclosure has been revised. See page 61 (with respect to the opinion of Allen & Company) and page 66 (with respect to the opinion of Citigroup).
32. Comment: Discuss the results of Allen & Company’s comparable transaction analysis. For instance, how does this transaction compare to the low, mean and high.
Response: In response to the Staff’s comment, the disclosure has been revised. See page 61 (with respect to the opinion of Allen & Company) and page 66 (with respect to the opinion of Citigroup).
Opinion of Citigroup Global Markets Inc., page 46
33. Comment: Please revise to conform with above comments regarding Allen & Company’s opinion. Generally, provide a textual discussion that describes what each of the analyses, including the graphical and tabular content, means to an average investor.
Response: In response to the Staff’s comment, the disclosure has been revised on pages 54-62.
From ISS’ Friday Report: The Pension Fund Association (PFA), which represents Japan’s corporate pension funds, plans to vote against directors who adopt “poison pill” plans and other takeover defenses without seeking shareholder approval.
The influential PFA manages 12 trillion yen in assets (approximately $104 billion), 4 trillion yen of which are invested in major domestic, exchange-listed corporations. While the association’s investments represent only a small fraction of Japanese corporate pensions, it acts as a manager of last resort for insolvent funds.
Beginning with annual meetings in May, the PFA said it will vote against incumbent directors at companies that adopt poison pills without seeking shareholder approval of such provisions. The PFA also will oppose takeover defenses that can be implemented at the sole discretion of the board of directors, according to the Nihon Keizai Shimbun.
The PFA is responding to the increasing number of Japanese companies that have implemented takeover defenses or have announced plans to do so this year.
The PFA is focusing on companies with the “advance notice” (or “advance warning”) poison pill, such as the defense announced by Matsushita Electric in March. These defenses may or may not appear on corporate ballots, and contain limited detail on how options or other securities would be used to dilute the value of a raider’s equity position, or precisely what would trigger the issuance. Following court rulings last year that invalidated more detailed poison pill plans at Nireco and other firms, the “advance notice” model appears to be gaining currency among a small but growing number of Japanese firms.
In the past, the PFA has supported “chewable” plans–those put forth for shareholder approval, that have a sunset provision of at most three years, and other features designed not to deter well-financed bids that an “independent committee” deems to be in the interest of shareholders. But the new advance notice pills appear to leave considerable discretion to the board of directors to determine whether and how to deploy the pill.
So far, there have been seven advance notice pills and one “trust type” pill (where warrants are issued to a trustee) among the 265 firms that held their meetings during the first three months of the year, according to ISS data. Of those eight firms, five put their defenses in place without a shareholder vote. Approximately 80 percent of Japanese firms will not hold their annual meeting until June.
The PFA is calling on companies to provide a full description of their plans and to put them to a shareholder vote at their annual meetings. The association has set four conditions for supporting any poison pill, but those standards still leave the PFA with significant discretion that may invite corporate lobbying:
– Management must provide “adequate explanation” of how the defense would be “useful” in boosting long-term shareholder value.
– The firm must seek advance shareholder approval of the pill plan’s details.
– The pill plan must clearly spell out what would actually trigger the action to dilute a raider’s position, as well as conditions that would preclude such action, “such as oversight by a committee of non-executive directors.”
– Any plan must have a two- to three-year sunset provision.
In addition, the PFA said it will “in principle oppose” these other defensive proposals by management:
– Issuance of “golden shares” (a share class with veto power over major company policies), shares with multiple voting rights, or any “dead hand” takeover defenses.
– Increases in authorized shares outstanding, or changes to the bylaws giving the board discretion to move the record date for the right to vote at shareholder meetings. However, the PFA said it would consider voting for these resolutions if management provides an “adequate explanation” that the changes would not be used as a takeover defense.
The PFA is also opposing article changes that would make it more difficult for shareholders to oust directors. Japan’s Company Law was recently amended to allow shareholders to oust a director by a simple majority. However, companies may alter their bylaws to restore the two-thirds requirement that applied before April. There have been four such proposals this year–at Senshu Electric, SBS Co., Internet service provider GMO Internet and network equipment manufacturer Allied Telesis Holdings–as well as 11 such bylaw changes in late 2005.
This report updates my blog from Monday on this topic: Earlier this week, several news reports suggested that Goldman Sachs had sworn off financing hostile takeovers because of concern that its recent participation in some uninvited bids was hurting its relations with clients. A spokesman for the securities firm, however, is making the case that Goldman’s policy has not changed.
Here is how the spokesman, Lucas van Praag, was quoted by Bloomberg News.
“We have a longstanding policy that we will not invest as a principal in the takeover of a public company without a board recommendation,” Mr. van Praag said in an interview. “That policy remains unchanged.”
But Mr. van Praag’s statements also acknowledged that there a fine line between unsolicited bids — which Goldman will help finance — and hostile bids — which it says it will not.
He explained it this way to Dow Jones Newswires:
“Some boards have a view that any unsolicited approach constitutes hostility. We don’t want our franchise to be damaged because other people mischaracterize what we’re doing.”
Goldman in recent weeks participated in a spate of unsolicited offers for British companies. The offers weren’t hostile, because Goldman didn’t bypass the companies’ boards and directly solicit shareholders, van Praag said.
Given “heightened sensitivities in London,” however, Goldman Sachs’ chief executive, Henry Paulson, felt it worth restating Goldman’s philosophy on hostile deals. “We will act as an adviser and provide debt financing, but our longstanding policy is that we will not invest as a principal in the takeover of a public company without a recommendation of that company’s board,” Van Praag said.
Meanwhile, The Financial Times is giving some background to Goldman Sachs’ decision to drop out of the consortium bidding for British pub chain Mitchells & Butlers. The newspaper reports that the move was prompted by the chairman of Mitchells & Butlers after he told the investment bank its proposed offer was “hostile and inappropriate.”
_________________________________________________________
April 18, 2006 11:40 PM ET
Goldman exit triggered by ‘hostile’ comment
FINANCIAL TIMES
Goldman Sachs’ withdrawal from the consortium bidding for Mitchells & Butlers was triggered by the chairman of the UK pub chain after he told the investment bank its proposed offer was “hostile and inappropriate”.
According to people familiar with the matter, Roger Carr delivered his message to Goldman last week after the bank approached M&B with a £4.6bn debt-and-equity offer on behalf of a consortium in which it was one of the largest participants.
Since then Hank Paulson, Goldman’s chairman and chief executive, has told bankers that the bank’s principal investment funds should not be used in hostile situations.
The warning follows several setbacks in which Goldman was a participant in consortia that made unsolicited approaches to UK companies including ITV, Associated British Ports and BAA. Mr Paulson’s move highlights the need for Goldman to balance private equity investments with long-established corporate client relationships.
Mr Carr is also chairman of Centrica, the UK energy supplier, and deputy chairman of Cadbury Schweppes, the food and soft drink group. Goldman acts as corporate broker to both Centrica and Cadbury. Last year it advised Cadbury on the sale of its European beverages arm.
There had been concerns that even though none of the bids in which Goldman was recently involved in turned fully hostile, they were perceived as such.
Goldman insiders on Tuesday stressed the bank would not invest in hostile bids. “If a chairman of a company we have made an approach to says he is not interested then we go away,” said one executive. “We do not engage our equity in hostile public bids.” Nevertheless, Mr Paulson’s intervention signals concerns that Goldman’s involvement in recent bids for public companies was straining relationships with corporate clients.
The bank has been at the vanguard of pursuing private equity investments on its own account, many of which have been highly profitable. Last year Goldman raised a $8.5bn fund, making it one of the largest players in the private equity industry.
Goldman’s withdrawal has left R20, the private equity investment vehicle being used in the bid for M&B, looking for an adviser and a debt provider to fully finance a formal approach.
R20 said last week it intended to follow its informal approach with a formal offer. However, Mr Carr said that, in the interests of transparency and clarity, he would only consider a formal written offer – something the consortium is currently unable to provide.
The NY Times’ DealBook has this interesting story: Goldman Sachs‘ C.E.O. has reportedly ordered an end — with some exceptions — to the firm’s financing of hostile takeovers, a move that suggests the investment bank is not immune to the kinds of conflicts of interest that have snagged its peers.
The Financial Times reported on Tuesday that Henry Paulson told Goldman executives that funding unsolicited takeovers “threatened the bank’s standing with corporate clients, which he said was more important than profits from any single deal.”
Reuters, confirming the general gist of the story, reported that Mr. Paulson had “asked bankers in the firm to consider carefully its actions when it is putting its money behind unsolicited or hostile transactions.”
Goldman has taken a role in several large, unsolicited bids of late, including a proposal to buy British airport operator BAA. Though that approach was portrayed as a “white knight” effort to fend off hostile suitor Ferrovial, BAA did not welcome the move. Goldman Sachs also backed bids for United Kingdom-based television network ITV and Associated British Ports.
One potential danger of participating in these kind of deals is that Goldman may seem to be competing, as a bidder, with the same clients it advises on mergers and acquisitions.
But there could be other reasons to dial back such activities, according to Breakingviews. For one thing, these kinds of private equity-backed “bear hugs” often fail because, ironically, the players are afraid to go fully hostile. For another, Goldman might end up offending its private equity co-investors — also important clients — if it drops out of the running while they want to press on.
From an ISS article: Media giant News Corp. and an international group of institutional shareholders have settled a lawsuit concerning the company’s poison pill takeover defense, according to an April 6 announcement by lawyers representing the shareholders.
The investors’ suit, filed in October by U.S., European, and Australian pension funds, including the Connecticut Retirement Plans and Trust Funds and the Australian Council of Super Investors (ACSI), argued that the media company broke a promise to shareholders when it decided in August 2005 to extend its poison pill for another two years. In 2004, management, seeking shareholder approval to incorporate in Delaware, pledged that the company would refrain from activating a pill for more than 12 months without the prior approval of shareholders.
The settlement averts a trial in Delaware Chancery Court that was to start April 24. Under the accord, News Corp. will put a management proposal on the ballot at its October annual meeting to extend the pill by two years. That proposal would also allow management to extend the pill by an additional year, but only if necessary to address concerns over moves by Liberty Media to acquire a controlling interest in News Corp. The company has said the pill was extended without shareholder approval to ward off the possibility of a hostile takeover by Liberty.
Lawyers representing the investor plaintiffs also said the proposal would give shareholders the “right to vote on subsequent poison pill provisions for the next 20 years.”
“Concerns about conflicts of interest and the current buoyant state of the debt markets have meant fewer M&A deals so far this year have come with much-criticized, but lucrative “stapled” financing attached, according to M&A professionals. “Banks are moving away from stapled financing,” said Philip Richter, a corporate partner with Fried Frank in New York.
Shifting free dynamics make this quite clear. Financing has been generating a growing share of the total fees in LBOs-up to 50% in 2005 from 38% in 2003, according to Freeman & Co., which estimates fees. But in deals in which advisers offer stapled financing, that financing accounted for 34% of total fees in 2005, down from 52% in 2003, according to Freeman.
Stapled financing is an offer to finance an acquisition made by an adviser to the target. The name comes from a sheet offering financing that is sometimes literally stapled to the term sheet of the deal.
By providing stapled financing, the adviser stands to collect both advisory fees from the target and financing fees from the buyer, which are usually larger. However, the staple generally offers less aggressive terms than the buyers could get by going to other banks, so many say that in the current easy financing market, a staple is often more trouble than it’s worth.
One reason that companies and banks are pulling back is that the practice recently has attracted some legal scrutiny, most prominently from a Delaware judge in a shareholder lawsuit over the buyout of Toys R Us, in which Credit Suisse worked both sides of the deal. The bank advised Toys R Us on its sale to a consortium of private equity funds, and also took part in the financing. While the Delaware judge did not say there was a conflict, he said the bank’s work raised eyebrows as it gave the appearance of conflict.
Critics, mostly independent boutiques, say that the practice can be downright harmful to the target. Because the fees on the staple are lucrative, the target’s bankers may show preference to the buyer that opts for the stapled package. And because the package is usually less aggressive, some argue that the target could end up being valued for less than it would be had a different buyer with a competing bid won the deal.
In fact, this argument also can be used against boards that go along with a stapled deal-some M&A lawyers now advise boards of companies that consider selling themselves to turn down stapled financing offers for fear of shareholder suits. In fact, shareholders in the Toys R Us case claimed that the company did not get as high a price as it could have.
In any event, lawyers believe a board offered a staple by its adviser should protect itself by getting another opinion. “If a bank provides stapled financing, the board will almost always bring another adviser because the target adviser may be conflicted,” said Richter.
That is not to say stapled financing is dead. One recent deal that has caught Wall Street’s attention is the $3 billion buyout of Education Management by a private equity consortium. It is not clear whether a formal stapled financing package is attached to the deal, but Merrill Lynch, which is advising the target, is reported to be also part of the financing group for the buyers. Merrill Lynch did not return a call.
Some large investment banks, such as Goldman Sachs and Morgan Stanley, say they continue to offer staples, but only when the client stands to benefit. Sometimes a staple can be used strategically to establish a floor for the financing, and buyers will then take the terms and shop around. Or it can be used when a company has a unique market niche or product that is not widely understood.”