Volume 116, Issue 3, Winter 2012
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Introduction
Introduction: The Deal Lawyers’ Guide to Public and Private Company Acquisitions
By H. Rodgin Cohen and Samuel C. Thompson, Jr.116 Penn St. L. Rev. 605.
We are the Co-Chairs of the Eighth Annual Institute on Corporate, Securities, and Related Aspects of Mergers and Acquisitions (the “M&A Institute”), which was jointly sponsored by the Penn State Center for the Study of Mergers and Acquisitions and the Center for CLE of the New York City Bar. The Institute was held at the New York City Bar on October 13 and 14, 2011.
This Symposium Issue of the Penn State Law Review contains (1) annotated transcripts of three of the panels at the M&A Institute, and (2) five articles based on, and extensions of, several of the many presentations made at the Institute. It gives us great pleasure to introduce the transcripts and articles contained in this Symposium Issue.
Transcripts
Negotiating Acquisitions of Public Companies in Transactions Structured as Friendly Tender Offers
Moderated by Richard E. Climan.116 Penn St. L. Rev. 615
As the title of this segment suggests, we’re going to be confining our discussions this morning to acquisitions of publicly traded companies. More specifically, we’re going to limit our focus to acquisitions of U.S.-based Delaware corporations with shares listed on a U.S. securities exchange. We will not be addressing acquisitions of privately held companies, which will be covered in a separate panel this afternoon.
With cash remaining the acquisition currency of choice in today’s M&A marketplace, we’re going to further limit our discussions this morning to deals in which the acquisition currency used to pay the purchase price consists exclusively of cold, hard cash on the barrelhead, as distinct from, say, shares of the buyer’s stock or some other form of non-cash consideration.
Private Company Acquisitions: A Mock Negotiation
Moderated by Byron F. Egan.116 Penn St. L. Rev. 743.
We are going to frame our discussion around a hypothetical fact situation. The buyer is an acquisition entity (“Buyer”) organized by a Texas private equity financial buyer. The target corporation is a Delaware corporation (“Target”) headquartered in Manhattan and owned by an extended and disjointed family (now approximately 30 stockholders). Target manufactures equipment at an old facility, which it leases in Brooklyn. The term sheet that the parties initially discussed, without the benefit of counsel, contemplated a negotiated sale for cash of all of the stock of Target to Buyer.
Now, as often happens, Buyer has looked at the term sheet with the benefit of counsel and has realized that the transaction, as set forth in that term sheet, is problematic from Buyer’s perspective. Based on my recommendations, Buyer is going to propose that we restructure this transaction from a stock sale to a sale of assets, or perhaps some combination of both, and is going to submit its form of asset purchase agreement (the “Proposed Agreement”).
Oral Arguments in a Hypothetical Appeal of Air Products v. Airgas to the Delaware Supreme Court
Samuel C. Thompson, Jr., Moderator
Stephen P. Lamb, Presiding Justice
William M. Lafferty, Counsel for Petitioner
Kevin R. Shannon, Counsel for Respondent116 Penn St. L. Rev. 811
As indicated earlier, our luncheon program is a mock argument before a fictitious Delaware Supreme Court consisting of you, our audience, of an appeal of the Airgas case. In Airgas, Chancellor Chandler of the Delaware Court of Chancery upheld Airgas’s poison pill.
Air Products and Airgas are both Delaware corporations. Both corporations are headquartered in Pennsylvania and are in the industrial gas business. Between October 2009 and February 2010, Air Products made a series of purchase offers to the Airgas Board, first at $60 per share and then at $62. Airgas rejected each offer. Air Products followed up on February 11, 2010, with a $60 all-cash, all-share tender offer to the Airgas stockholders. The Airgas Board recommended against the offer as inadequate and refused to redeem its poison pill.
Articles
A Brief Introduction to the Fiduciary Duties of Directors Under Delaware Law
By William M. Lafferty, Lisa A. Schmidt, and Donald J. Wolfe, Jr. 116 Penn St. L. Rev. 837
The negotiation of a high-profile merger transaction often bears surprising similarity to a romantic courtship.
Mergers often start innocently enough—a text message, a phone call, or perhaps an e-mail between rival CEOs. In one way or another, the “ask” is made. Are you interested? Available? Can we work something out? The exact words are not really important. On at least one occasion, simple doggerel has been used to start the conversation.
If the answer is “no,” the parties typically will go their separate ways, perhaps leaving open the possibility of revisiting the idea at some point in the future. On occasion, however, a rejection can prompt hard feelings.
On the other hand, if the answer is “yes,” the situation can often advance quickly. If the target and the suitor are a match, a deal can be agreed to and consummated in a matter of months or even weeks. If word should spread that the target corporation is not averse to courtship, other potential suitors may come forward and complications can ensue. In such circumstances, the directors of the target corporation often opt to resolve the choice presented by putting the fitness of the competing suitors to the test before making their decision. Secure in its knowledge of the available partners, and in order to evidence its commitment to the relationship, the target corporation may agree to terms designed to discourage third-party advances by including in the merger agreement defensive provisions such as termination fees, match rights, or “force-the-vote” provisions. Such provisions add a layer of protection to the declared relationship and proclaim the intent to go steady. The target that fears that the initial expression of interest could dissipate while an extensive search is undertaken may instead choose to sign an agreement that is subject to a condition subsequent. This allows the target to play the field by way of a post-signing market check or go-shop process, at least for a while before things get too serious.
Basic Tax Issues in Acquisition Transactions
By Michael L. Schler. 116 Penn St. L. Rev. 879
This article discusses basic U.S. tax issues that arise in an acquisition transaction. It is intended primarily for readers who are corporate lawyers rather than tax lawyers. The discussion is written in general terms and does not include every exception to the general rules (and exception to exception, and so on).
Most importantly, it is vital for the corporate lawyer to consult a tax lawyer at every stage of an acquisition transaction. The tax rules are detailed, often counterintuitive, and always changing. Details that are minor from a corporate point of view, such as which corporation survives a merger, can have vast consequences from a tax point of view. The particular structure of a transaction can mean that one party might achieve a significant tax benefit at the expense of the other party (e.g., your client), or even worse, both parties could end up significantly worse off than if a different corporate structure had been used. In addition, it is not enough merely to rely on the Internal Revenue Code and regulations, because there is a large body of Internal Revenue Service (“IRS”) rulings, judicial decisions, and nonstatutory doctrines.
It is also essential that the tax lawyer begin to participate in a transaction at the very beginning. This is usually when the basic structural elements of the transaction are determined. It is much easier to propose a particular structure at the time an initial term sheet is being negotiated than it is to propose a change in structure after both sides (with or without their respective tax lawyers) have agreed to it. Likewise, detailed ongoing participation by the tax lawyer is necessary to be sure that changes in documentation do not change the tax results that are important to the client.
Asset Acquisitions: Assuming and Avoiding Liabilities
By Byron F. Egan. 116 Penn St. L. Rev. 913
Buying or selling a closely held business, including the purchase of a division or a subsidiary, can be structured as (i) a statutory combination such as a statutory merger or share exchange, (ii) a negotiated purchase of outstanding stock from existing shareholders, or (iii) a purchase of assets from the business. The transaction typically revolves around an agreement between the buyer and the selling entity, and sometimes its owners, setting forth the terms of the deal.
Purchases of assets are characterized by the acquisition by the buyer of specified assets from an entity, which may or may not represent all or substantially all of its assets, and the assumption by the buyer of specified liabilities of the seller, which typically do not represent all of the liabilities of the seller. When the parties choose to structure an acquisition as an asset purchase, there are unique drafting and negotiating issues regarding the specification of which assets and liabilities are transferred to the buyer, as well as the representations, closing conditions, indemnification, and other provisions essential to memorializing the bargain reached by the parties. There are also statutory (e.g., bulk sales and fraudulent transfer statutes) and common law issues (e.g., de facto merger and other successor liability theories) unique to asset purchase transactions that could result in an asset purchaser being held liable for liabilities of the seller which it did not agree to assume.
Judge and Banker—Valuation Analyses in the Delaware Courts
By William A. Groll and David Leinwand. 116 Penn St. L. Rev. 957
Litigation challenging public company merger and acquisition transactions is on the increase. Whereas, not too long ago, only transactions involving director conflicts of interest or other potentially troubling facts would bring forth the plaintiffs’ lawyers, today, lawsuits can be expected challenging even those transactions in which a board of directors has, by all readily apparent views, pursued a reasonable process in fulfillment of its fiduciary duties, garnering a significant premium for its shareholders. In such merger and acquisition litigation, the financial advisor to the board of directors often finds itself in the center of the lawyers’ fray with its valuation analyses a crucial factor in the case. Senior bankers are in depositions and before judges more often than in the past, and now, more than ever, financial advisors should expect their analyses to be subject to close scrutiny in the course of deal litigation.
Recent cases decided in the state courts of Delaware, where most merger and acquisition litigation historically has been brought, provide useful guidance for lawyers who counsel financial advisors as well as those who advise principals to transactions regarding how to mitigate litigation risk arising out of a financial advisor’s opinion and analyses. The cases helpful to practitioners can be divided roughly into two groups—appraisal/entire fairness cases and disclosure cases.
The appraisal and entire fairness cases provide guidance regarding the substance and application of valuation analyses. In a typical appraisal action, for instance, the court must determine the “fair value” of the shares at issue, and such determination usually is based on a review of competing valuation analyses submitted by the parties. Similarly, the entire fairness standard, which is applied to certain conflict of interest transactions, requires the court to determine whether an “entirely fair price” was paid to shareholders. In the course of such determination, the court often will closely scrutinize the valuation work performed by the financial advisor for the subject company’s board of directors.
Exchange Consolidations: Help or Hospice?
By Philip McBride Johnson. 116 Penn St. L. Rev. 977.
Two blacksmiths who had competed to shoe the horses of the townspeople for 30 years watched as the first automobile drove down the main street. Recognizing that something big was occurring, they set aside their rivalry and met to discuss a response. When the blacksmiths emerged, they announced that they were merging their blacksmith business.
Might this be the future for the growing number of central financial markets that have announced interest in combining forces, often across national lines? In both the securities and derivatives worlds, new rivals have emerged to offer comparable services for similar transactions. This article raises the question whether exchange mergers can stem or reverse the gains made by those alternative execution methodologies. The article is based in part on my own experience working with markets for over 50 years, and incorporates a generous dose of conjecture. Unfortunately, if there are empirical data that resolve this matter definitively, I have been unable to locate them.
Markets for financial instruments and commodities have evolved over the centuries from the occasional get-together of nearby producers and buyers to nanosecond electronic execution facilities that operate from anywhere with lightning speed (“flash trades”), and often operate beyond the berm (read “dark pools”). The preeminence of even the mature central exchanges has been challenged by these new systems. Like the blacksmiths, one might wonder why, instead of merging with each other, they do not either acquire or create competitive mechanisms to confront these rivals head-on.