Special Committees Dealing with the Difficult Situations

Transcription

1 Special Committees Dealing with the Difficult Situations Al Hudec Farris, Vaughan, Wills & Murphy LLP Blair Horn Fasken Martineau LLP Mergers and Acquisitions 2011 The Continuing Legal Education Society of British Columbia June 16, 2011

2 Dealing with the Difficult Situations 1. Transactions with a majority shareholder 2. Defending against a corporate raider 3. Dealing with conflicted advisors 4. Management buy-outs

3 Important New Cases 1. Magna International and The Stronach Trust OSC Reasons for Decision published Jan 31, 2011 (and related decisions of the Superior Court and Divisional Court (Ontario)) 2. Icahn Partners and Lions Gate Entertainment BC Supreme Court, Nov 1, Del Monte Foods Shareholder Litigation Delaware Chancery Court, Feb 14, J Crew Management Buy-Out Litigation Settlement Jan 18, 2011

4 Transactions with a Majority Shareholder: Magna: Background Shareholder approved, dual-class share structure with multiple voting shares and no coat-tail protection for subordinate voting shares Stronach Trust controlled Magna (66% of voting rights) with less than 1% of the equity Magna Class A shares traded at a discount to industry peers for many years Management proposed collapse of Magna s dual class share structure in exchange for combination of consideration valued at approximately $860M Implied premium of 1800% on the value of the Class A Shares

5 Magna: Background (cont d) Subordinate voting shareholders would experience substantial dilution, but reduction or elimination of Magna s trading discount would mean shareholders would benefit from an increase in the value of the Class A Shares Magna board established a special committee of independent directors to review the proposal Proposal structured as plan of arrangement requiring approval of minority Class A shareholders voting as a separate class (exempt from MI because value less than 25% of market cap)

6 Magna: Background (cont d) Financial advisor to the committee was not able to provide a fairness opinion Special Committee was unable to recommend in favour or against the proposal so the full board decided to put the deal to the shareholders with no recommendation Proposal was announced on May 6, 2010, prior to Magna s AGM and the same day that Magna announced that its Q1 earnings for that year had exceeded targets Closing price of Magna s Class A Shares on May 6 substantially higher than closing price of the Class A Shares on May 5

7 Magna: Shareholder Challenge Proposal challenged by institutional shareholders and proceedings brought before the OSC to cease-trade the Proposal OSC found the transaction not abusive, but ordered Magna to provide shareholders with enhanced disclosure given the absence of both a fairness opinion and a recommendation from the Special Committee or the Board At the special shareholders meeting, Magna s Class A Shareholders approved the arrangement by a three-to-one margin

8 Magna: Shareholder Challenge (cont d) At the contested fairness hearing on the arrangement, the Ontario Superior Court of Justice approved the plan of arrangement Court found that arrangement resolved conflicting rights of Class A and Class B shareholders in a fair and balanced way Court need not make an objective determination or precise calculation of its own regarding the financial costs and benefits of a plan of arrangement While certain traditional indicia of fairness were not present, the Court relied on shareholder vote, market reaction and market liquidity

9 Magna: Shareholder Challenge (cont d) On appeal, the Ontario Divisional Court unanimously upheld the Superior Court decision Approval of arrangement is fact-specific Class A shareholders given opportunity to acquire control Class A shareholders had veto Value of bargain, and underlying rationale, would fall to be determined in the future by market forces Unprecedented level of disclosure to shareholders Sophistication of majority of Class A shareholders, 80% of which were large institutional investors

10 Magna: Lessons Learned The Special Committee was given a limited mandate: To review and consider the Proposal as it was developed by executive management and to report to the Magna Board as to whether the Proposal should be submitted to the Class A Shareholders for their consideration OSC held that the mandate and terms of reference were too narrow and fundamentally flawed and that the Special Committee should have had a broader authority: To consider alternative proposals beyond the one developed by management who were conflicted in negotiating with Stronach To negotiate the terms, not just review and consider To consider the key question the desirability or fairness of the Proposal to Class A Shareholders (not just whether or not to refer the Proposal to Shareholders for a vote)

11 Magna: Lessons Learned (cont d) Be careful with involvement of management Consider the scope of disclosure on potential alternatives considered and the laundry list of the factors considered by the Committee. The OSC frowned on the concept of the board not struggling with the weighting of the various factors considered Think of the Circular as an evidentiary record on how the Committee/Board concluded the deal is fair and reasonable under BCE Some commentators have suggested that the OSC reasons may lead to the increased use of fairness opinions in significant transactions

12 Defending Against a Corporate Raider: Lions Gate The Lions Gate Special Committee and Board implemented a deleveraging transaction which simultaneously improved the Company s financial condition and diluted Icahn at a time when he was mounting a second takeover bid and threatening a proxy battle Justice Savage in Lions Gate assessed the Board s independence Board members were persons of substance with independent means Nothing to suggest that they do not function independently of management Nothing to suggest that independent members are financially or otherwise beholden to management or that they are financially dependent on Board remuneration Live in diverse locations nothing to suggest that they are tied by personal or financial relationships

13 Lions Gate: Sequence of Events October 20, Karl Ichan commences a creeping takeover bid February 16, 2010 Ichan commences unsolicited partial bid March 10, 2010 Bid amended to become a bid for all of the shares of Lions Gate June 30, 2010 Icahn s stake increased to 33.9% of Lions Gate

14 Lions Gate: Sequence of Events (cont d) July 9, 2010 Icahn and Lions Gate agree to a 10 day standstill in which Icahn agrees not to acquire further shares and Lions Gate agrees not to engage in any transaction that would issue more than 4.9% of its current outstanding shares purpose is to give Lions Gate time to negotiate a merger with a third party July 19, 2010 Immediately after the Standstill Agreement expires (12:01 a.m.), the Lions Gate Special Committee and Board approve amendments to outstanding notes to increase coupon, reduce conversion price and extend put date

15 Lions Gate: Legal Analysis Even if the Board acts in good faith with a view to the best interests of the company, their actions can be impugned if they are oppressive or unfairly prejudicial to the reasonable expectations of a plaintiff with standing to pursue an oppression remedy Rely on Teck to hold that a Board can thwart a takeover if in good faith and acting reasonably it believes that to be in the best interests of the Company If the Board decide, on reasonable grounds, that a takeover would cause substantial damage to the Company s interests, they can use their powers to protect the Company

16 Lions Gate: Oppression Analysis Icahn s expectation that the Board would not act to dilute him not reasonable: General Commercial Practice: The fact that they negotiated a standstill is evidence that the reasonable commercial expectation is that without it, they would be diluted Nature of Corporation: Analysts were concerned about overleveraging and lauded the deleveraging Relationship of the Parties: In a hostile situation, Icahn should expect no more than that the Company recognize its minimum legal obligations to him Past Practice: Lions Gate had previously pursued deleveraging transactions Steps Available to Protect Itself : Enter into another standstill, or buy the convertible notes Fair Resolution of Conflicting Interests: Deleveraging was of clear benefit to the Company Conclusion Deleverage was primary motivation and Board reasonably believed both the deleveraging and the dilution to be in the best interests of the Company

17 Dealing with Conflicted Advisors: Del Monte Background $5.3 billion leveraged buy-out transaction Delaware court postponed shareholder vote for 20 days and prohibited the PE buyer group from exercising most of its deal protections set out in the merger agreement over concerns regarding a breach of fiduciary duties on the part of the Board and certain activities of the financial advisor and the PE group

18 Del Monte: Activities of the Financial Advisor Barclays orchestrated buy-side activities that put Del Monte in play before they were retained by Del Monte and continued after they were told by the Special Committee to shut down the process Barclays hid the fact that they steered KKR and Vestar into a club deal notwithstanding that such a deal was prohibited by a no teaming clause in Del Monte s confidentiality agreements Pursued a buy-side financing mandate from the outset and continued to negotiate the purchase price on behalf of Del Monte even after they were representing the buyers with respect to financing

19 Del Monte: The Board s mistakes Allowed Vestar, the highest bidder in a previous effort to sell the company, to team with KKR the Special Committee did not seem to have considered whether it would have been better to team Vestar with another potential purchaser to induce some competitive tension in the process or whether it could extract a price increase for waiver of the no teaming covenant Permitting Barclays to provide buy-side financing to KKR No evidence that Barclay s participation in the financing was necessary to get the deal done or to maximize price; in fact the Special Committee had to spend another $3 million to hire another independent fairness advisor No meaningful Board consideration or informed decision making; unreasonable to sign off on conflicts without some reasonable justification relating to shareholder interests Tainted go shop process since Barclays had the incentive to maintain the existing deal

20 Del Monte: Practice points Special Committees must be careful to explore all possible conflicts when retaining a financial advisor ABA has prepared draft language for financial advisor engagement letters for representations and warranties, covenants and indemnities dealing with past and future relationships of the financial advisor that could create conflicts Boards should be careful about waiving teaming provisions unless there appears to be a benefit to doing so (competition among buyers is presumed to lead to a higher price) Consider financial advisor conflicts on buy-side financing requirements

21 Management Buy-Outs: J Crew US $3 billion Buy-out of J Crew by TPG Capital and Leonard Green Partners Proxy circular published Dec, 2010 revealed a flawed process CEO, Millard Drexler discussed the sale with TPG for 7 weeks before informing the Board of discussions Special Committee never did take control of the process

22 J Crew: Sequence of Events October 15, 2010 Special Committee appointed October 20, 2010 Cravath s appointed as counsel to special committee - halted talks so that committee could get up to speed October 25, 2010 TPG asks that Leonard Green join the process November 16, 2010 Confidentiality Agreements signed November 22, 2010 Day before transaction to be announced, TPG drops bid price from $45.50 to $43 Potential other bidders did appear on two occasions but essentially no follow-up Drexler made clear he would not work with other bidders

23 J Crew: Problems with the Deal Drexler, the CEO, was extremely conflicted $200 million cash and 8.8% stake in new company Published financial analysis of Perella Weinberg showed a value range of $40-$52 Why didn t Special Committee throw the process open and hold an auction? they never stabilized a process that was out of control Special Committee seemed to put sole reliance on a go shop but no evidence that they actively negotiated terms or break fee

24 J Crew: Are Go Shops Adequate? Is a go shop adequate to compensate for a Special Committee s failure to fully canvass other possible third-party bidders prior to the transaction s announcement? In the US now used in about 50% of private equity buyouts with transaction value over $100 million (compared with 3.3% in other deals) - Factset Mergermetrics Empirical evidence that they are largely ineffective in inducing further bids Guhan Subramanian

25 J Crew: The Litigation Settlement Provides template for a model go shop provision for Special Committees Key terms Go shop extended another 30 days (total 85 days) Termination fee reduced to $27 million (less than 1% of transaction value No matching right if competing bidder bids $45.50 or higher $3 million expense reimbursement for bidder who makes a superior proposal and is then outbid Rights of first bidder to information about the go shop process and other bidders limited 2 year non-compete from CEO Drexler No competing bids over the full 85 day go shop period Do bidders want to get involved with a CEO who clearly doesn t want to work with them?

26 Conclusions The theme throughout is run a careful, thorough process If you are able to demonstrate that the process was handled appropriately, the courts will be reluctant to second-guess the conclusions of a Board Has the bar been raised in transactions with challenging issues: OSC commentary on circular disclosure in Magna? Scope of interested parties under BCE? Increased reliance on fairness opinions?

27 Special Committees Dealing with the Difficult Situations Al Hudec Blair Horn Farris, Vaughan, Wills & Murphy LLP Fasken Martineau LLP (604) (604) Mergers and Acquisitions 2011 The Continuing Legal Education Society of British Columbia June 16, 2011