Appraisal, or dissenters’, rights, long an M&A afterthought, have recently attracted more attention from deal-makers as a result of a number of largely unrelated factors. By way of brief review, appraisal rights are a statutory remedy available to objecting stockholders in certain extraordinary transactions. While the details vary by state (often meaningfully), in Delaware the most common application is in a cash-out merger (including a back-end merger following a tender offer), where dissenting stockholders can petition the Chancery Court for an independent determination of the “fair value” of their stake as an alternative to accepting the offered deal price. The statute mandates that both the petitioning stockholder and the company comply with strict procedural requirements, and the process is usually expensive (often costing millions) and lengthy (often taking years). At the end of the proceedings, the court will determine the fair value of the subject shares (i.e., only those for which appraisal has been sought), with the awarded amount potentially being lower or higher than the deal price received by the balance of the stockholders.

While deal counsel have always addressed the theoretical applicability of appraisal rights where relevant, a number of developments in recent years have contributed to these rights becoming a potential new frontier in deal risk and litigation:

…continue reading: Appraisal Rights — The Next Frontier in Deal Litigation?

In our paper, Do Investors Understand ‘Operational Engineering’ before Management Buyouts?, which was recently made publicly available on SSRN, we use a sample of management buyouts (MBOs) from 1985-2005 and a matched subsample of post-MBO firms to examine three questions. First, we examine whether firms undertake different types of activities to lower earnings before MBOs. Second, to see whether outside investors and the market understand such ‘operational engineering’ activities, we study the impact of these activities on target firms’ stock returns and MBO deal characteristics including deal premium and likelihood of deal completion. Third, we examine the relation between pre-MBO earnings-reducing activities and the post-MBO operating performance.

With the Great Recession of 2007-2009 exposing deficiencies of the world’s most advanced financial markets, leveraged buyouts (LBOs) have ‘reemerged’ as a solution to the many challenges facing corporate sectors. Unlike publicly listed firms, LBO firms are characterized by concentrated ownership, active monitoring and high leverage. A growing strand of literature shows that LBO firms can create value through ‘financial, operational and governance engineering’ (Kaplan and Stromberg, 2009). In fact, Jensen (1989) argues that LBOs should replace publicly held corporations as the dominant corporate organizational form.

…continue reading: Do Investors Understand ‘Operational Engineering’ before Management Buyouts?

On March 27, 2013, Judge Sean Lane of the United States Bankruptcy Court for the Southern District of New York approved the $11 billion merger of US Airways Group and AMR Corporation effective upon confirmation of the AMR debtors’ chapter 11 plan. Upon completion of the merger, a new entity – “Newco,” for present purposes – will survive. In his March 27 ruling, Judge Lane declined to approve a proposed $20 million severance payment by Newco to Thomas Horton, the current Chief Executive Officer of AMR Corporation. Shortly thereafter, Judge Lane issued a written opinion explaining his reasoning for denying the proposed severance payment and in it, foreclosed an attempt to approve a severance package free from the strict standards of Section 503(c) of the Bankruptcy Code.

Background

In connection with the proposed merger, the AMR debtors sought Bankruptcy Court approval of employee compensation and benefit arrangements (the “Employee Arrangements”) falling into three categories (i) Ordinary Course Changes; (ii) Employee Protection Arrangements; and (iii) the CEO severance payment. Though the US Trustee initially objected to all three Employee Arrangements, she eventually withdrew her objections to all but the CEO severance payment.

…continue reading: Bankruptcy Court Denies $20 Million Severance for American Airlines CEO

A record date, often viewed in the merger context as a mere mechanic to be quickly checked off a “to do” list, creates a frozen list of stockholders as of a specified date who are entitled to receive notice of, and to vote at, a stockholders’ meeting. A tactical approach to the timing of the record date can have strategic implications on the prospects for a deal’s success, while the failure to comply with the rules relating to setting a record date could cause a significant delay in holding the vote, leaving the door open for a topping bidder or dissident stockholder to emerge or gather support. As a result, it is important that dealmakers understand the basic mechanics and rules of setting a record date and the tactical repercussions of the record date construct.

Starting first with the legal requirements, there are several key inputs that inform the mechanics of setting a record date, including laws of the company’s state of incorporation, the company’s organizational documents, federal securities laws, rules of the applicable securities exchange and the relevant merger agreement. Taken together, these requirements dictate the necessary procedural and governance steps for setting the record date and establish the minimum and maximum time periods between the record date and the meeting, as well as between the board action setting the record date and the record date itself.

…continue reading: Setting the Record (Date) Straight

In the paper, Takeover Defenses as Drivers of Innovation and Value-Creation, forthcoming in the Strategic Management Journal, I analyze the role of anti-takeover provisions in ameliorating agency conflicts of managerial risk aversion in certain types of companies.

The desirability of anti-takeover provisions (ATPs) is a contentious issue. ATPs can lead to shareholder wealth-destruction by insulating managers from disciplinary takeovers and enabling them to engage in empire building. However, without ATPs, managers of hard-to-value (HTV) firms, which might trade at a discount due to valuation-difficulties, are exposed to ‘opportunistic takeovers’ (which aim to take advantage of low stock prices), potentially causing managerial myopia and under-investment in innovative projects. Thus, in HTV firms, ATPs might serve as credible commitments to encourage managers to make value-creating investments, but in easier-to-value firms, they might lead to inefficient governance.

…continue reading: Takeover Defenses as Drivers of Innovation and Value-Creation

No less than two years ago, had one tried to initiate a conversation with a Private Equity Sponsor or an M&A lawyer regarding M&A “reps and warranties” insurance (i.e., insurance designed to expressly provide insurance coverage for the breach of a representation or a warranty contained in a Purchase and Sale Agreement, in addition to or as a replacement for a contractual indemnity), one might have gotten a shrug of the shoulders or a polite response to the effect of “let’s try to negotiate around the problem instead.” Perhaps because it was misunderstood or perhaps because it had not yet hit its stride in terms of breadth of coverage, reps and warranties insurance was hardly ever used to close deals. Like Harry Potter, it was the poor stepchild often left in the closet.

Today that is no longer the case. One global insurance broker with whom we work notes that over $4 billion in reps and warranties insurance worldwide was bound last year, of which $1.4 billion thereof was bound in the US and $2.1 billion thereof was bound in the EU. Such broker’s US-based reps and warranties writings nearly doubled from 2011 and 2012. Reps and warranties insurance has become an important tool to close deals that might not otherwise get done. This post is meant to highlight how reps and warranties insurance may be of use to you in winning bids and finding means of closing deals in today’s challenging environment.

…continue reading: M&A Representations and Warranties Insurance: Tips for Buyers and Sellers

Overview

Schulte Roth & Zabel regularly conducts studies on private equity buyer acquisitions of U.S. public companies with enterprise values in the $100 million to $500 million range (“middle market” deals) and greater than $500 million (“large market” deals) to monitor market practice and deal trends reflected by these transactions. During the period from January 2010 to Dec. 31, 2012, there were a total of 40 middle market deals and 50 large market deals that met these parameters.

…continue reading: Large and Middle Market PE/Public Target Deals: 2012 Review

Recent news coverage has suggested that the Staff of the U.S. Securities and Exchange Commission (the “SEC”) has taken a position interpreting its tender offer rules that represents a significant new development. In actuality, however, the Staff has for some time taken the position that the satisfaction of a financing condition in a tender offer for an equity security subject to Regulation 14D constitutes a material change to the tender offer requiring that it remain open for at least five business days following this change. Though nothing new, the Staff’s recent reiteration of this position serves as a reminder to bidders who are financing their offers that they may be required to extend the tender offer period and that their financing papers and merger agreement should be drafted to take this into account.

…continue reading: Got Financing? You May Have to Extend Your Tender Offer

In this issue, we discuss several cases of significance to the M&A practice, including In re Ancestry.com, In re Bioclinica, In re BJ’s Wholesale Club, Kallick v. Sandridge Energy and Meso Scale Diagnostics v. Roche Diagnostics, as well as some market trends that may be of interest.

Board Enjoined From Impeding Consent Solicitation Until It Approves Insurgent Slate for Purposes of Credit Agreement

In Kallick v. SandRidge Energy, Inc., the Delaware Court of Chancery, in an opinion by Chancellor Strine, enjoined the incumbent board of SandRidge Energy, which faced a consent solicitation initiated by a large stockholder seeking to de-stagger and replace the board, from, among other things, soliciting against or otherwise impeding the consent solicitation until the board approved the rival slate for purposes of a “proxy put” provision in SandRidge’s credit agreements. The Kallick decision, along with the Court of Chancery’s earlier decision in San Antonio Fire & Police Pension Fund v. Amylin Pharmaceuticals, confirm that corporations, as a matter of process, should carefully consider and review whether proxy put and other similar change-of- control provisions in credit agreements and indentures are truly in the best interests of the stockholders. For more detail, click here.

…continue reading: Delaware M&A Quarterly

Freeze-outs have been subject to different standards of judicial review in Delaware since 2001, when the Delaware Chancery Court, in In re Siliconix Inc. Shareholders Litigation, Civ. A. No. 18700, 2001 WL 716787 (Del. June 19, 2001), introduced a distinction based on the form in which the transaction is executed. In particular, in Siliconix, the chancery court held that, unlike freeze-outs executed as a merger (which have been subject to “entire fairness review” since 1952), freeze-outs executed as a tender offer were exempted from that standard of review. According to the court, tender offers do not warrant entire fairness because, in these transactions, in contrast to a merger, minority shareholders are protected by the decision itself of tendering or not tendering. Moreover, one month after Siliconix, in Glassman v. Unocal Exploration Corporation, 777 A.2d. 242 (Del 2001), the Delaware Supreme Court held that a short-form merger is also excluded from entire fairness review. As a result of these two decisions, a controlling shareholder was allowed to completely avoid entire fairness by acquiring the remaining shares from minority shareholders through a tender offer followed by a short-form merger.

…continue reading: Judicial Review and Gains of Minority Shareholders in Freeze-Out Transactions