In our “Auctions” Practice Area, we have posted the Toys R Us Shareholder Litigation opinion and there are some interesting comments on management retention negotiations in the context of a deal. Pages 47-51 (particularly 50-51) deal favorably with the CEO/director’s involvement in the transaction and the refusal to negotiate with bidders regarding management agreements. There is also mention in a footnote
regarding accelerating vesting of director options to correspond with the acceleration of employee options. A large portion of the discussion in the case deals with termination fees and the auction process.
Join us on September 21st for a webcast – “Winning Strategies in Auctions” – featuring David Katz of Wachtell Lipton and Eileen Nugent of Skadden Arps as they discuss the auction process, such as steps to reduce the impact of the “Winner’s Curse,” including analysis of the Toys R Us opinion.
Today, we have posted the next installment of DealLawyers.com “M&A Boot Camp.” This segment is brought by Wilson Chu of The Deal Guys’ Blog fame, doing his bit on negotiating tactics, such as:
– Gentleman Dealmaking
– Win-Win Does Not Mean: I Win Twice
– Negotiating Reps and Warranties
– Schedules Really Matter
– LOIs as Upfront Ego Management
– Take a Seventh Inning Stretch
– Use of Undermining Words and Phrases
– The Longer You Sit on a Problem, the More You’ll Own it
– Limitations of Emails and Conference Calls
– Educating Your Client to Support Your Position
– Go Deep – Be Prepared for Multiple Levels of Arguments
– Driving the Deal
– Always, Always be Prepared
Last month, the FASB and IASB proposed a standard — one of the most ambitious under the FASB/IASB convergence agenda — that would replace the existing requirements of FASB Statement No. 141, Business Combinations, and IFRS 3. FASB and IASB made their proposals in separate exposure drafts (here is the FASB’s exposure draft); the comment period ends October 28.
The proposals retain the fundamental requirement of IFRS 3 and Statement 141 that all business combinations be accounted for using a single method in which one party is always identified as acquiring the other. The major changes include a proposal that the acquired company must be measured at fair value; that goodwill attributable to any noncontrolling interests (not just the portion attributable to the acquirer) must be recognized; and that there would be fewer exceptions to measuring at fair value
Back on July 11th, the New York Times ran a Dealbook column by Andrew Sorkin that the then upcoming shareholder vote on the acquisition of Gillette would test the validity of so-called “fairness opinions.” Given that P&G shareholders approved the merger with an overwhelming level of support – 96%, according to this article – I wonder where that leads us on fairness opinions?
To learn more on this topic, see this thoughtful memo from Wachtell Lipton regarding conflicts in fairness opinions – as well as the transcript from our recent webcast: “Conflicts of Interest and Dicey Engagements.”
You just knew I couldn’t resist jumping into the fray caused by CNOOC’s bid for Unocal. First, it’s IBM, then Maytag, now Unocal. If all this has you wondering if China’s going to be the 21st Century’s version of Japan, Inc’s buying spree of US companies, I think the answer if yes .. and then some.
So what else might China, Inc be eyeing? You’ll be interested to know that last year, the Chinese government actually telegraphed its intent by publishing a list of preferred industries that China wants its companies to pursue. The list is called the “External Investment in Various Countries Indistrial Guidance Catalogue.” With the compliments of Jean-Marc Deschandol, Managing Partner of the Bejing office of Norton Rose, this so-called “Outbound Catalogue” is attached for your reading pleasure. I can hear the scintillating conversation you’ll be having on your July 4th BBQ.
If you look at the US targeted industries, you won’t find energy. Maybe China left it out on purpose because energy’s so politically sensitive. Or it’s just a reminder that the Catalogue merely a non-exclusive list.
Now you’re one step closer to getting on board the China, Inc. Love Train…
Looks like more and more companies these days are being sold through an auction process. With strategic buyers coming back with a vengeance, and buyout shops – who despite already sitting on mountains of “dry powder” – trumping each other with new world record funds (for example, Goldman’s recent $8.5B fund closing in April which topped Carlyle’s $7.85 fund closed in March), and with hedge funds “converging” into the buyout space, it’s safe to say that we’re in a seller’s market.
On one hand, strategic as well as financial buyers generally don’t like being a competing buyer in an auction. (Ah yes, the dreaded “Winner’s Curse”). On the other hand, whether it’s a Fortune 500 divesting a business unit or even a financial sponsor seeking an exit for a portfolio company, an auction seems to be the best environment to stir up competitive bidding to take advantage of a seller’s market.
With auctions being a fact of life in today’s deal environment, I thought it’ll be interesting (at least to me) to think about some recent developments in auctions:
1. Virtual Data Rooms. No, I’m not talking about eBay. I’m talking about online versions of those paper filled document rooms typically guarded by our trusty and fearsome first year associates. These VDRs (or sometimes, called EDRs for Electronic Virtual Data Rooms) seem to be popping up more and more in auctions in the US and abroad. There are third party providers like:
There are even proprietary systems housed on law firm extranets.
Some of the advantages of VDRs:
· 24/7, anywhere-in-the-world access via the internet
· VDRs are password protected, with some more sensitive documents further fire walled for even more limited set of eyes, even view-only access
· can easily accommodate multiple bidders simultaneously
· search features
· ability to monitor usage on a per-document basis
On the other hand, some disadvantages include:
· 24/7, anywhere-in-the-world access via the internet – for hackers, i.e., is anything truly hack proof?
· Cost, with it making sense for bigger deals, especially with multiple bidders
· If you’re a bidder, do you really want seller knowing what you looked at (and otherwise, figure out what’s important to you?)
2. Staple Financing. This is the wonderful development brought to us by your friendly “Conflict? What conflict” investment bankers, who, in addition to representing seller in an auction, benevolently offer to provide the financing to buyer. This pre-arranged financing package is commonly called “staple financing.” (Do you think bankers are subliminally sending a message by using “staple”, as in “What’s the staple of an investment banker’s bonus? Fees and more fees…). The popularity of staple financing is surging in today’s auction-packed market.
Bankers pitch staple financing as an efficient way to get the target sold because the financing’s in the bag (i.e,, no more financing contingencies or delays in buyer scurrying around to find money). Even if buyer doesn’t bite, the fact that a financing package is already in place show potential buyers that the deal’s finance-able (i.e., the target’s really worth seller’s rich asking price).
Conflicts? Did I mention conflicts? If the same banker’s collecting fees to sell the company as well as provide money to buyer, how comfortable can seller really be that its banker is truly looking out for seller’s best interest. (Hmm, let’s see: I make money on a success fee if I get target sold and I make money lending to buyer? Can you spell N-E-W-T-E-S-T-A-R-0-S-A??). If prospects for seller’s repeat business is low (i.e, the banker’s losing a client in the sale), what’s the likelihood that the banker’s licking his chops at the prospects of a new relationship as lender to buyer?
Fairness opinions get even trickier. Smart banks tell people to get a second (from another bank) fairness opinion when they’re sitting on both sides of the deal. Even smarter banks simply decline giving fairness opinions altogether.
It’s a question of allegiance. I’m sure no respectable banker would cross that line, but Eve’s apple is always out there.
3. Vendor Due Diligence Reports. From across The Pond comes this practice of seller engaging an independent (usually) accounting firm to provide a financial due diligence report on target. The reports are then offered to potential bidders as part of the information package in the data room. This practice is getting picked up by law firm on both sides of the Atlantic. See www.debevoise.com/db30/cgi-bin/pubs/Copy%20of%20PE%20Report%20Winter%202005.pdf for a good overview of the legal issues.
On the buy side, I’m not sure I’d tell a client that since there’s a VDD, there’s no need for further due diligence. On the other hand, it sounds like a great idea to streamline the sale process – and for law firms who provide the VDDs to get their piece of the auction.
If anyone has any other new developments in auction strategies, please feel free to share.
Everyone knows that even the most elegantly drafted earnout provisions can generate some unintended consequences in their actual implementation. A common earnout scenario involves the requirement that (i) at least one of the target’s officers (the “TO”) be an officer of the buyer (usually in charge of running the post acquisition target) and (ii) an audit be conducted by the buyer’s independent public accounting firm (the “BIPA”) regarding some or all of the earnout period. What many TOs don’t contemplate is that, as an officer in charge of the target’s post acquisition operations, the BIPA is, in all likelihood, going to require the TO is sign the BIPA’s management representation letter (“MRL”) as a prerequisite to the BIPA releasing the audit. The problem here is that the buyer may take positions regarding certain accounting issues regarding the earnout that the target would like to dispute, but with the TO signing the MRL, the target has at least tacitly concurred with the BIPA’s and buyer’s accounting treatment, thereby leaving the target to argue “I know I signed the MRL saying that I concurred with everything in the MRL and that everything in the MRL was accurate but now that we’re having this earnout discussion I disagree with some of the items I previously said I agreed with in the MRL…” Of course, the parties can agree that the MRL isn’t going “to be used against the target in any dispute” but the optics are difficult and you have to deal with the issue of inherent bias created with the mere presence of the TO’s signature to the MRL. The real solution is to have the parties agree when the deal is signed up that the TO will not have to sign a MRL. Because the BIPA can be the real stumbling block here (i.e., refusing to release the audit without a fully executed MRL) it’s a good idea to get them onboard at the same time.
Today, May 10, 2005, R. Hewitt Pate, Assistant Attorney General of the U.S. Department of Justice (AAG), and the chief enforcer of the country’s antitrust laws, resigned after completing a nearly two-year stint as AAG. http://www.usdoj.gov/atr/public/press_releases/2005/208940.htm. Pate will leave his position at the end of June.
Under Pate’s stewardship, the DOJ primarily focused on prosecuting bid rigging and other cartel arrangements under the antitrust laws, and was quite successful in that area. In the area of merger enforcement, though, the record of the DOJ under Pate is decidedly more mixed. Although the DOJ successfully negotiated merger remedies in several high-profile transactions–including First Data / Concord, Nestle/Dreyers, and Connors/BumbleBee–the Division also lost a high-profile merger challenge under Pate’s watch (U.S. v. Oracle Corporation), and suffered another high-profile loss in its challenge to the consolidation of school milk producers in Kentucky and Tennessee (U.S. v. Dairy Farmers of America).
Pate also emphasized the importance of intellectual property. His strong belief in the importance of protecting IP rights (even when directly in conflict with the antitrust laws) was evidenced in several significant amicus appellate briefs (most notably in Trinko v. Verizon) and speeches that he gave during his tenure as AAG. It will be interesting to see whether his successor places such a high premium on IP rights.
Will antitrust enforcement change fundamentally after Pate leaves? Doubtful. During the period before a permanent successor is announced, any interim antitrust chief will likely not take a radically different approach to antitrust enforcement. Any successor likely will come either from the ranks of the current DOJ leadership (the WSJ mentions Makam Delrahim, current one of Pate’s deputies) or someone hand-picked by the President’s circle of advisors. Until the next election, we’re likely to see more of the same from the DOJ.
Good news for us American lawyers, U.S. M&A law and practices are taking over the world. This really runs the gamut from acquisition strategies to due diligence to documentation practice.
Now admittedly, the examples that I’m going to cite are Asian-related deals, but you’ve got to look at who is talking.
Japan’s clubby boardrooms are all buzzing lately with odd words like “poison pills,” “greenmail,” and “hostile takeovers.” Check out that crumpled Japanese newspaper in your next sushi takeout and you’ll see stories of a maverick Japanese internet company that’s shaking up the Tokyo, Inc.
How? Looks like this web portal called Livedoor used some stealthy off-hours trading to snatch up one-third of Nippon Broadcasting System. Only problem is that Nippon Broadcasting was in the process of being acquired by its affiliate, Fuji Television Network. After some nasty litigation, Livedoor sold its interest in the target after cutting a sweet deal with Fuji.
This high profile contested deal had Tokyo’s boardrooms wondering if a little “corporate fugu” and other takeover defenses should be on the menu (“fugu”, otherwise known to us burger bubbas as “blowfish”, is that fish that gets the last laugh by poisoning itself as a way to fend off predators; it’s a delicacy in Japan). In fact, Matsushita Electric (the Panasonic people) just adopted a poison pill last week.
But Japan, Inc.’s heartburn really started last year when two unprecedented, at least in Japan, and very American developments occurred in contested acquisition involving three Japanese banks (I’m referring to that $41B UFJ/Mitsubishi/Sumitomo cat fight to create the world’s biggest bank). One involved a no-shop clause and the other one involved a hostile bid. To keep things simple, I’ll refer to the parties as Target, Suitor Number 1 and Suitor Number 2.
Last July, a Tokyo court surprisingly granted an injunction in Suitor Number 1’s favor, enforcing a no-shop, actually a no-talk, clause that barred Target from pursuing its later-announced merger with Suitor Number 2. It was unprecedented – at least in Japan – that someone would sue to enforce a no-shop and even more unprecedented that a Japanese court would enforce it. Such a dispute sounds very American. What is even more interesting is that in the appeals process, one of the parties relied heavily on U.S. law on no-shops as well as related issues as authoritative precedent. Remember this is a purely Japanese deal. But because U.S. M&A law and practice is considered the best developed in the world, it was considered influential authority on how a Japanese court should rule.
As it turned out, Target prevailed in having the lower court’s injunction vacated. (The Tokyo Supreme Court held that the no-shop’s 2-year term was unenforceable, which would be the same conclusion in the US). In response to that move, Suitor Number 2 promptly announced that it was going to launch a hostile bid, yet another unprecedented U.S. oldie but goodie for Japanese banks.
One other example of American M&A tactics is the good old tortious interference claim. A couple years ago, the buyout group Texas Pacific Group sued a Taiwanese conglomerate for tortious interference with TPG’s proposed acquisition of a Chinese bank. It certainly got a lot of people’s attention, especially since TPG played its home town card by filing in Ft. Worth, Texas. As a Dallas lawyer, I can tell you that even we have concerns about being home-towned when we venturing the mere 30 miles to Ft. Worth. So how do you think the Taiwanese guys felt? You’ll also find high penetration of U.S. style M&A practice and documentation throughout the rest of Asia including, obviously, all the former British colonies, Korea and China.
One important caveat, sometimes the non-U.S. lawyers adopting our practice can turn things into a man-bites-dog situation. For example, in a recent deal with one of the top firms in China, I was presented with an opinion request by this Chinese lawyer that “The company’s financial statements are accurate.” So after picking myself off the floor, I did my best to explain no way, no how. To which the Chinese lawyer responded that he gets this requested of him all the time by U.S. lawyers, so why should I refuse? My reply was something along the lines of: if you see a toddler running with scissors, does it mean that it’s a good idea to let your kids do likewise?
Bottom line, globalization of American deal making is a beautiful thing. With any luck (at least for us American deal lawyers), our US M&A laws and practices will continue to follow a Starbucks-ian march around the world. Have passport – and Marty Lipton on Takeovers – in hand, will travel.
Without much fanfare or press, staffers are being moved “group-by-group” into the SEC’s new headquarters at Station Place — near Union Station on Capitol Hill. The big move was announced earlier this month in Capitol Hill’s Roll Call . I understand the new building will be accessible via underground tunnel from Union Station. The physical task of moving an entire governmental agency across town is estimated to take at least six weeks.
The first wave of personnel to move into Station Place came from the Division of Corporation Finance, including the Office of Mergers & Acquisitions, which moved in this past weekend. Without doubt the transition of employees, files and equipment is likely to cause some unavoidable delay in staff review time of filings as well as some increased difficulty in reaching examiners by telephone.
To assist you, here is OM&A’s new phone number: 202/551-3440. Note the “942” exchange has gone the way of the dinosaur!