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Supreme Court Nominee Judge Sonia Sotomayor and Corporate and Securities Law

Elizabeth Nowicki —  26 May 2009

I have been asked a few times today to opine, as a corporate and securities law scholar, on President Obama’s nomination of Judge Sonia Sotomayor for the Supreme Court.  (Cnn.com has a couple of quotes reflecting my thoughts.)

I have three main comments:

First, this is a pivotal time in American securities and corporate law jurisprudence.  Any appointment to the Supreme Court has the potential to significantly influence the evolution of corporate and securities law.  The Supreme Court has recently granted certiorari for a couple of big-ticket securities and corporate law cases, and there is every reason to believe, particularly in light of the SEC’s recently announced rulemaking and Senator Schumer’s recently proposed Shareholder Bill of Rights Act of 2009, that the Supreme Court will continue to handle important business matters like these in the near future.  Federal preemption, Securities and Exchange Commission rule-making authority, corporate governance reform, damages, and the reach of federal securities laws are all incredibly important topics that are certain to come before the Supreme Court in the next few terms.

Second, it is difficult to gauge where exactly Judge Sotomayor falls on the spectrum of pro-management versus pro-investor jurists.  Is she a shareholder primacist, does she defer to the invisible hand of the market, does she interpret Section 10(b) of the Securities Exchange of 1934 broadly or narrowly?  These are questions to which Judge Sotomayor’s judicial writings provide no clear answers.  Sotomayor was nominated to the federal bench by President Bush, so one might have suspected that she would embrace ardent pro-management leanings.  However, the business and securities opinions she has penned have not evinced such a bent.  For example, she penned the Second Circuit’s relatively recent shareholder-friendly opinion in Merrill Lynch v. Dabit (a detailed summary of the case is available here).  Indeed, upon reflection, one recalls that Sotomayor was viewed as a less conservative Bush nominee (proposed by Moynihan) when she was appointed, and it was President Clinton who elevated her to the Second Circuit.  Yet Judge Sotomayor has dismissed numerous cases in favor of management despite her more liberal affiliations.

Third, Judge Sotomayor has a strong background in sophisticated corporate and securities law cases, as she comes from the Second Circuit, a jurisdiction that generates a significant number of these cases (given that Wall Street falls within the jurisdiction of the Second Circuit).  This bodes well, in that pundits often query whether Supreme Court jurists fully appreciate the complex business nuances arising in many securities and corporate matters.  That Judge Sotomayor has been both a district court judge and an appellate judge in a jurisdiction where these difficult business cases arise delights me, and I think she would add a valuable perspective on the Supreme Court.

Taking off the “corporate and securities law scholar” hat, and putting on the “Chair of the American Association of Law Schools Section on Women in Legal Education” hat, I can say that I am thrilled that President Obama has nominated a woman to the Supreme Court.  I was disheartened that Justice O’Connor’s seat was not filled by a woman, but I remain optimistic that someday the number of women on the Supreme Court will mirror, as a percentage, the number of women in the average law school entering class.

Of course, given that, in the almost 30 years since a woman first ascended to the United States Supreme Court, we appear to have reached a plateau, with only two women serving at any one time over the past 16 years, perhaps my optimism is misplaced.  I remain optimistic nevertheless.

In Corporate & Securities Law, Securities , , , , , ,
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"Goldman reports $1.8 billion profit"

Elizabeth Nowicki —  13 April 2009

Cnn.com tells us the good news that “Goldman reports $1.8 billion profit,” but the totality of the information in the cnn.com article strikes me as mildly curious.

While announcing that “Goldman reports $1.8 billion profit,” the article points out that Goldman needed $10 B in TARP funds only a few months ago.  Yet now Goldman is planning to sell stock in order to raise $5 B in order to pay down the TARP obligation.  Further, Goldman reported earnings of $3.39 per share for the quarter ended March 31, which is more than double the earnings per share amount projected by analysts.

All of this together paints a picture that strikes me as mildly curious.  I suppose the fact that Goldman took $10 B in TARP funds but is now, merely months later, parading $1.8 billion in quarterly profit could be chalked up to “short term liquidity problems.”  But the analysts’ 100% miss on Goldman’s earnings per share is a pretty big miss given that usually banks offer enough guidance for the analysts to stay on the ball field.

Goldman’s plan to raise $5 B in a stock offering has me similarly ruminating, given that now would not have struck me as the ideal time for Goldman to tap the stock market for $5 B.

The whole situation harkens back to 1999, and I cannot help but wonder what Arthur Levitt might think of it.

In Truth on the Market
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Citigroup, Wachovia, and Wells Fargo: Round Three

Elizabeth Nowicki —  10 October 2008

For those who have missed it, Citigroup announced almost two weeks ago an agreement in principle with Wachovia to acquire for $2.1 billion Wachovia’s retail banking operations.  Four days later, Wells Fargo jumped the deal, announcing a merger agreement signed by both boards for Wells Fargo to acquire all of Wachovia.  This violated an Exclusivity Agreement signed by Citigroup and Wachovia, so Citigroup marched Wachovia into court.  A flurry of litigious activity ensued that weekend (the first weekend of October), with all parties announcing at the beginning of this past week a standstill agreement, as Wells Fargo and Citigroup tried to hammer out an agreement for each to acquire some of Wachovia’s assets.

Last night, Citigroup announced they were abandoning those efforts and resuming their legal wrangling.  How will this play out?

1.  The parties still have a date in New York state court for today, I believe.  This court date was set by Justice Ramos in last weekend’s litigious festival.  This court date is at the behest of Citigroup, regarding its claims against Wachovia (and WF) for violation of the Exclusivity Agreement.

2.  Citigroup is claiming tortious interference against WF and tort and contract claims against Wachovia.  For reasons I blogged about earlier, I think the tortious interference claims against WF are non-starters under the new bailout act.  I believe Citigroup absolutely has claims against Wachovia, however.  See #3.

3.  We now know, based on Wachovia CEO Robert Steel’s court-filed affidavit, that Wachovia had two options when faced with Citigroup’s bid:  Take the bid or be taken into receivership by the FDIC.   The Citigroup option was clearly the best.  However, the Citigroup bid was made after Wells Fargo had made a lot of noise about wanting to acquire Wachovia, only to bow out at the last minute.  *If* Steel took the Citigroup bid, signed an Exclusivity Agreement with Citigroup, and negotiated with Citigroup all week while knowing that, if Wells Fargo circled back, Citigroup was not going to get a second glance, that is a problem.  That stinks of bad faith behavior by Wachovia.

4.  Courts have no problem holding boards to weak deals if the weak deal was the best possible deal in a dire situation.  While I do not imagine a court will force Wachovia to sell its assets to Citigroup, I absolutely believe a court will impose damages on Wachovia for leading Citigroup to make a genuine bid while secretly waiting for a way out.  Not. In. Good. Faith. Behavior.

5.  Were I a betting woman, I would bet Citigroup will get a settlement from Wachovia of some amount over $100 million.  Had Wachovia and Citigroup signed a binding Letter of Intent with a termination fee provision, Wachovia would likely have had to pay $50 million or so (2-3 % of the deal value) to walk away.  But no such termination fee provision had been negotiated or agreed upon.  Moreover, Citigroup is clearly miffed at this point.  I think $100 million to walk away is a fair amount for Wachovia to pay for having created a “jilted lover” situation for Citigroup, which both damaged Citigroup’s market valuation and short-term credibility in the bidding market (not to mention having drained resources, time, and lawyers’ fees).

Stay tuned.

In Banking, Financial Regulation, Truth on the Market
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Everything you wanted to know about the Citigroup-Wachovia-Wells Fargo Debacle

Elizabeth Nowicki —  6 October 2008

Coverage of the Citigroup-Wachovia-Wells Fargo situation has revealed many fundamental misunderstandings of various aspects of the debacle, such that I wanted to offer my thoughts on a few points that have been curiously misstated:

1.           A discussion of “fiduciary outs” is a bit of a non sequitur here. Across the ‘net, legal experts have been opining about how Wachovia has the fiduciary obligation to take the best deal available.  I have two responses to that:  (A)  The Citigroup deal is different in form than the Wells Fargo deal, so we cannot compare them both on price alone and claim the Wells Fargo deal is “better” than the Citigroup deal.  Citigroup only proposed to acquire SOME of Wachovia’s assets, leaving Wachovia with a viable business.  The combined value of what Citigroup was paying and what Wachovia was retaining may well be higher than what Wells Fargo was offering for all of Citigroup.  Particularly since Citigroup was willing to bid up its price.  Therefore, it is not an “apples to apples” comparison in this case that would allow armchair quarterbacks to simply say “the Wells Fargo deal is better – Wachovia board has a fiduciary out.”  (B)  Courts have not always let boards out of a deal when a better deal presents.  If the board signed the best deal they could get under dire circumstances, courts will support the deal.  Think of the uncertainty that courts would create if such was *not* the case.  No bidder would ever risk making a bid for a troubled target.

2.            The Wells Fargo deal does indeed involve government or taxpayer subsidization. Part of how Wells Fargo is touting its offer as better is by claiming it does not burden the taxpayer or the government.  That is a bit disingenuous, however.  Part of the reason why Wells Fargo is now willing to acquire Wachovia is because the IRS announced last week that it will allow Wells Fargo to offset its income by all of Wachovia’s losses.  Wells Fargo has the income available to do this; Citigroup does not.  You tell me – isn’t there a government and/or taxpayer cost to Wells Fargo paying a whole lot less in taxes than it normally would due to the new IRS rule allowing for the deduction of all of Wachovia’s losses?  Who is going to make up that tax shortfall?  I imagine either the government or other taxpayers.  Therefore, it is disingenuous for Wells Fargo to say its deal has no government or taxpayer cost.

3.            The Citigroup deal will not directly cost taxpayers money, nor does it necessarily involve government help. Wachovia is claiming that the Wells Fargo deal is the better deal because it does not burden the government or the taxpayers like the Citigroup deal does.  That is a misstatement, if not a falsehood.  In addition to my above point about the Wells Fargo deal’s burden, the Citigroup “burden” is only hypothetical at this point.  The FDIC agreed to backstop Wachovia’s losses if they occur.  Some say the magnitude of losses Wachovia will have to take due to mortgage defaults is grossly overstated, so the FDIC might not have to backstop anything.  Further, even if the FDIC has to make good and cover for Citigroup some of Wachovia’s losses, this does not involve the taxpayer’s money, contrary to the media (and Wachovia’s) hype.  The FDIC is funded by BANKS who pay insurance.  The money is collected and pooled by the FDIC to cover situations exactly like this.  It is not taxpayer money that is being spent any more than it is taxpayer money being spent when you get into a car accident and ask your insurance company to pay your claim.  FDIC stands for “Federal Deposit INSURANCE Corporation.”

4.            Section 126(c) of TARP (the federal bail-out act) does not void the Wachovia-Citigroup Exclusivity Agreement. All Section 126(c) does is preclude an exclusivity agreement from imposing liability on a third party (deal jumper, second bidder for a target) for jumping the deal that is subject to the exclusivity agreement.  Wachovia’s argument that 126(c) provides the basis on which a court can invalidate the Exclusivity Agreement is contrary to the text of the statutory provision.  The confusing point, however, is that the statutory provision at issue is titled “Unenforceability of Certain Agreements.”  It should have been titled “Unenforceability of Certain Agreements Against Deal Jumpers.”

5.            Wachovia desperately needed Citigroup a week ago, and Citigroup helped Wachovia stay afloat last week. If a court sends Citigroup away with nothing despite the fact that Wachovia clearly breached its Exclusivity Agreement, that will send a message to other solvent banks not to be the first to step in to save a failing bank.  That is not a good message to send to solvent banks in this economy, where it is likely that more banks will fail before the year is out.  According to the complaint Wachovia filed in federal court over the weekend, the FDIC told Wachovia a week ago it was going to seize the bank if a suitor did not buy it out.  Wells Fargo, which had indicated interest in Wachovia that weekend, walked away at the end of the weekend.  Robert Steel, the CEO of Wachovia, said he then went to the board with two options:  (1) file for bankruptcy or (2) accept a Citigroup offer.

6.            Wachovia and Citigroup had more than merely the hope of a deal. The media and some commentators harp on the fact that Citigroup and Wachovia had only a “mere term sheet.”  The FDIC obviously thought Wachovia and Citigroup had something more than a hope of a deal as the FDIC held off seizing Wachovia on Citigroup’s word that it would try to hammer out the details of a final deal by October 6, 2008.

7.            There are three lawsuits pending in this case (or there will be as soon as complaints are officially filed), and none of them are determinative. Citigroup asked New York State courts for relief this weekend.  Justice Ramos issued an order extending the Exclusivity Agreement, and an appellate judge reversed that order because Ramos signed the order at his Connecticut home.  Then Wachovia sought relief from the Exclusivity Agreement in the Southern District of New York late Saturday night, and Judge Koeltl set a hearing for Tuesday.  Late Sunday, Wachovia investors filed suit in Mecklenburg county in North Carolina, and a state judge there issued an injunction prohibiting Citigroup from trying to enforce the Exclusivity Agreement on the basis that it was destabilizing Wachovia’s Wells Fargo deal and therefore Wachovia’s viability.  I have not yet seen this North Carolina order, but I am scandalized.  Apparently North Carolina state judges have no respect for the law of contracts and simply have a sense of rough justice.  Rough justice is fine for the People’s Court on t.v., but it is not fine for big bank deals involving sophisticated parties.

8.            Section 126(c) was in the bill pending the ultimately failed vote a week ago when the Citigroup-Wachovia deal was announced. Rodg Cohen from Sullivan & Cromwell surely knew the provision was pending (he represented Wachovia).  Word on the street is that Citigroup officials were caught off guard when this provision was adopted on Friday, essentially undercutting their tortious interference claims against Wells Fargo.  If the Citigroup officials were caught off guard, dare I suggest Davis Polk (who represented Citigroup) was asleep at the wheel?  In light of last year’s United Rentals case, the spate of failed private equity deals, and last year’s litigation raising these exact same issues, how could Davis Polk missed this point?

In Apple, Corporate & Securities Law, Platforms, Taxes, Truth on the Market
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Exclusivity Agreements, the Bailout Act, and Section 126(c)

Elizabeth Nowicki —  5 October 2008

The Wachovia-Citigroup-Wells Fargo dance continues.  Now, however, it seems to involve confusion about Section 126(c) of the newly adopted Emergency Economic Stabilization Act (“EESA”).  Allow me to take a stab at clarifying.

To bring everyone up to speed, last weekend, after Lehman was allowed to go belly-up and Washington Mutual was seized by the FDIC, the FDIC came knocking on Wachovia’s door. To stave off being seized, Wachovia’s looked for a buyer. As of last Sunday evening, Wells Fargo and Citigroup were the two most likely buyers/saviors for Wachovia, but Wells Fargo bowed out at the last minute. According to the CEO of Wachovia, Robert Steel, Wachovia’s two options then became (a) file for bankruptcy or (b) agree to sell its banking assets to Citigroup in a deal in which the FDIC agreed to backstop Citigroup’s losses on Wachovia’s bad debts. Wachovia’s board agreed to the latter option, and, on Monday, the “agreement-in-principle” with Citigroup was announced.

Four days later, on Friday morning, Wachovia announced its board was abandoning the Citigroup deal in favor of a complete acquisition by Wells Fargo. Citigroup responded with outrage, particularly given that Wachovia had signed a binding Exclusivity Agreement with Citigroup which precluded Wachovia from talking to other suitors until October 6th. Over the weekend, on Saturday night, Citigroup secured an order from New York State Justice Ramos extending the Exclusivity Agreement through this coming Friday. Apparently this order was reversed on appeal this evening because it was signed at Ramos’s Connecticut home. (Why does a New York State Justice live in Connecticut? I digress.)   In the meanwhile, Wachovia filed in New York federal district court for an injunction striking down the Exclusivity Agreement. As I understand it, Federal District Judge Koeltl, after a hearing today, set a hearing for Tuesday, to resolve the issue of whether Section 126(c) of the newly adopted Emergency Economic Stabilization Act voids the entire Exclusivity Agreement.

Wachovia is arguing that EESA Section 126(c) voids the Exclusivity Agreement such that Wachovia is free to negotiate with anyone and pursue the Wells Fargo deal. But a simple reading of 126(c) confounds that argument.  This newly adopted statutory provision amends Section 13 of the Federal Deposit Insurance Act by adding at the end the following new paragraph:

(11) UNENFORCEABILITYOFCERTAINAGREEMENTS.—No provision contained in any existing or future standstill, confidentiality, or other agreement that, directly or indirectly—

(A) affects, restricts, or limits the ability of any person to offer to acquire or acquire,

(B) prohibits any person from offering to acquire or acquiring, or

(C) prohibits any person from using any previously disclosed information in connection with any such offer to acquire or acquisition of,

all or part of any insured depository institution, including any liabilities, assets, or interest therein, in connection with any transaction in which the [FDIC] exercises its authority under section 11 or 13, shall be enforceable against or impose any liability on such person, as such enforcement or liability shall be contrary to public policy.

This new provision only says that DEAL JUMPERS – third parties –cannot face liability for violating an exclusivity or standstill agreement in another buyer’s acquisition agreement with a target.  This provision, in effect, precludes a buyer from bringing a tortious interference claim against a deal jumper.  This new provision does not say such exclusivity agreements will automatically be completely null and void. Quite the opposite. The amendment only says that no exclusivity agreement can “be enforceable against or impose any liability” on any person offering to acquire a target otherwise bound by the exclusivity agreement.

The title of this new provision – “UNENFORCEABILITY OF CERTAIN AGREEMENTS” – is misleading, because the text of the provision does not make certain agreements unenforceable. Rather, it makes certain agreements unenforceable against DEAL JUMPERS. Got it?

In Banking, Corporate & Securities Law, Financial Regulation, Mergers & Acquisitions
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Wachovia Complaint and Status Check

Elizabeth Nowicki —  5 October 2008

The Wachovia and Citigroup litigators have been working overtime this weekend.  As I reported earlier, Citigroup convinced New York State Justice Ramos late last night to toll the expiration of the Citigroup-Wachovia exclusivity agreement that was set to expire tomorrow, October 6, 2008.  As of last night, the Exclusivity Agreement was revived through a hearing before Justice Ramos on Friday.  About an hour after Justice Ramos issued his ruling, Wachovia filed suit in federal district court, asking for injunctive relief from its agreement with Citigroup.  The Wachovia complaint can be found here, and it is well-worth reading, as it describes how Citigroup pulled Wachovia from the grasp of the Fed.

At 4 p.m. today, Federal District Judge Koeltl had a hearing on this filing, and I have not yet been apprised of the outcome of this hearing.  At 5:30 ET today, a New York State appellate court is hearing an appeal of Justice Ramos’s order from yesterday.

I am stunned at the speed with which this debacle is evolving.

In Truth on the Market
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Wachovia, Wells Fargo, and Citigroup – Score one for Citigroup!

Elizabeth Nowicki —  5 October 2008

Last last night, a New York judge issued an injunction tolling the termination of Wachovia’s Exclusivity Agreement with Citigroup.  In addition, the judge set a show cause hearing date for next Friday to sort out the issue of whether Wachovia’s pending merger with Wells Fargo should be enjoined as a violation of Wachovia’s exclusivity agreement with Citigroup.

I blogged about this disfunctional three-party dance on Friday, and the WSJ Deal Journal reported some of my thoughts as well.  I took the position that Citigroup is in a nice bargaining position, and the court’s order only strengthens Citigroup’s position.

Do I think Citigroup will ultimately acquire Wachovia’s banking assets?  No.  Do I think Citigroup will get a nice “go away, please” payment from Wachovia, with a kick-in from Wells Fargo?  Yes.

I reserve the right to change this opinion, however, after I finish going through the 478 pages of bailout legislation passed on Friday to see if I am missing any hidden value Citigroup could get from Wachovia’s assets.

In Banking, Financial Regulation, Truth on the Market
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Citigroup, Wachovia, Wells Fargo, the Exclusivity Agreement, and Specific Performance… and the Huntsman Opinion

Elizabeth Nowicki —  3 October 2008

On Monday, Citigroup announced that it had reached an agreement in principle to acquire some of Wachovia’s assets.  Today, Wachovia announced it was being wholly acquired by Wells Fargo in a stock deal.

Citigroup responded with outrage, announcing that Wachovia was in breach of its Exclusivity Agreement with Citigroup.  If you read the Exclusivity Agreement, you see that Citigroup is right – Wachovia had the obligation to exclusively negotiate with only Citigroup until October 6, 2008.  Moreover, the Exclusivity Agreement gives Citigroup the right to “Specific Performance” if Wachovia breaches this agreement.  But *what* is required by that Specific Performance seems unclear.

I read the Specific Performance requirement in the Exclusivity Agreement to mean that Citigroup can force Wachovia to specifically perform the terms of the Exclusivity Agreement, which requires that Wachovia “continue to proceed to negotiate definitive agreements… relating to the Transaction in form and substance satisfactory” to Wachovia and Citigroup.  Steven Davidoff reads the specific performance requirement to allow Citigroup to try to force performance of the actual deal itself.

If I am correct in my reading, an outcome for this matter is unclear.  While Citigroup can force Wachovia to sit down and negotiate (specific performance of the Exclusivity Agreement), can Wachovia just say “no” to everything Citigroup offers now that a much better Wells Fargo deal is on the table?  Normally, I might imagine so.  Given the Huntsman v. Hexion opinion from Vice Chancellor Lamb, issued late Monday night (Septemeber 29th), however, I am not so clear that Wachovia can.

Where does this leave things, then, in the Citigroup, Wachovia, Wells Fargo dance?  Look for a second post on this topic later today.

In Truth on the Market
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Hexion v. Huntsman: Vice Chancellor Lamb’s Must-Read Opinion For Deal Lawyers

Elizabeth Nowicki —  1 October 2008

On Monday night, Delaware Vice Chancellor Lamb issued an opinion in the epic Hexion v. Huntsman battle, ordering Hexion to perform its obligations under its 2007 agreement to acquire Huntsman.  The opinion is well worth reading for deal lawyers – it offers a good tutorial on how private equity deals can fall apart, how merger agreements can impact the unraveling of a deal, how Wachtell Lipton lawyers lawyer, and how much tom-foolery Vice Chancellor Lamb will tolerate before getting disgusted.

The Backstory:

In July of 2007, just before the credit markets imploded, Hexion, which is 92% privately owned by Apollo private-equity entities backed by Leon Black and Joshua Harris, entered into a merger agreement to acquire Huntsman Corporation for $28 per share in cash.  (Huntsman is now trading at around $12 per share.)  The deal was to be financed by Credit Suisse and Deutsche Bank, both of whom proffered commitment letters when the deal was signed and vouched to finance provided Huntsman could offer a “customary and reasonably satisfactory” solvency certificate prior to closing the financing.

The merger agreement in this deal was tight, with a narrowly drawn material adverse change escape for Hexion, with a provision obligating Hexion to exercise its reasonable best efforts to finance the deal, with an antitrust hell-or-high water provision obligating Hexion to do almost anything required by the FTC/DOJ to close the deal, and with a clause specifying that Huntsman can sue Hexion for economic damages for “a knowing and intentional breach” of any of the covenants in the merger agreement (as opposed to a liquidated damages provision).  The agreement was so favorable for the target because Hexion was in a bidding war with Basell to acquire Huntsman when the agreement was signed.  Basell had offered slightly less money for Huntsman, maintaining that its offer was still better than Hexion’s because the Hexion offer was fully financed and therefore not certain to close.  In response, to offer Hexion certainty, Huntsman agreed to a very pro-target agreement, and the deal between Huntsman and Hexion was signed on July 12, 2007.

Fast Forward:

Like many buyers who signed merger agreements in the spring and summer of 2007 to buy targets under highly-financed conditions, Hexion quickly had buyer’s remorse.  The credit markets tightened in August 2007, the stock market softened, and Huntsman had a disappointing first quarter of 2008.  Hexion therefore began looking for ways to exit this merger agreement.  According to Vice Chancellor Lamb’s opinion from Monday, Hexion, Apollo, and Wachtell Lipton (their counsel) considered whether a “material adverse change” argument was available, ultimately concluding that such an argument was very weak.  Hexion, Apollo, and Wachtell then considered whether an insolvency argument could be used to try to exit the agreement, although VC Lamb noted that “Hexion had no right to terminate the [merger]agreement based on potential insolvency of the combined company or due to lack of financing.”

Despite this, Lamb observes, “it appears that … Apollo and its counsel began to follow a carefully designed plan to obtain an insolvency opinion, publish that opinion (which it knew, or reasonably should have known, would frustrate the financing), and claim Hexion did not “knowingly and intentionally” breach its contractual obligations to close (due to the impossibility of obtaining financing without a solvency certificate).” Indeed, on behalf of Hexion/Apollo, Wachtell Lipton engaged a valuation firm in May 2008, who issued an insolvency letter, which Hexion then used to file a lawsuit in Delaware seeking to exit the merger agreement.

Late Monday night, Lamb issued his post-trial opinion in that lawsuit,  concluding that “Hexion had knowingly and intentionally breached its covenants and obligations under the merger agreement” by failing to try to secure financing and antitrust approval for this deal and instead engaging in the insolvency-based actions to try to stymie the deal and any potential for financing the deal.  Lamb issued an order compelling Hexion to “specifically perform its obligations under the merger agreement, other than the obligation to close.”  These obligations include the obligation to try to secure antitrust approval for the deal and the obligation to use reasonable best efforts to finance the deal.  While Lamb recognized there is still a chance that Hexion might not be able to finance this deal, Hexion must try.

A few notes:

1.  Lamb’s opinion is a fascinating read, describing Wachtell Lipton’s machinations on Hexion/Apollo’s behalf to try to escape this merger agreement.

2.  The opinion, in addition to being a good read, is also noteworthy because it is the first opinion from the failed deals fall-out of 2007 in which a jurist really seems annoyed with a buyer’s shenanigans to try to exit a deal.  Vice Chancellor Lamb clearly was not amused by the creative efforts undertaken by Hexion/Apollo/Wachtell to avoid this deal.

3.  The lesson to be learned here is that a buyer and target had better like the merger agreement they sign because jurists – or VC Lamb, at least – are going to hold them to it.  Lamb has basically said to all buyers and deal lawyers “if you sign a merger agreement that does not have a reverse termination clause saying you can get out of the deal whenever you want for whatever reason you want, you need to actually give a good faith effort and try to perform the deal.”  While that might not strike most people as a novel proposition, I do not recall another failed deal opinion in which the buyer (and, arguably, implicitly its deal lawyers) were chastised for trying to wiggle out of the deal before trying to close the deal.

How will this story end?

The Huntsman/Hexion saga does not end here.  Lamb only ordered Hexion to fulfill their contractual obligations, and the merger agreement does not give Huntsman the right to force Hexion to close.  This means that, though I am sure Hexion and Wachtell Lipton are on their phones as I type, trying their very best to close this deal, they may not be able to do it.  How, then, might this story end?  The likely endings include:

1.  No deal, due to insolvency:  The merger agreement provides that CS and DB can refuse to finance this deal if they do not get insolvency opinions.  Although Huntsman was able to get a solvency opinion this past weekend, that opinion might not hold if it takes much more time to close/finance this deal.

2.  No deal, due to refusal to finance:  CS and DB could refuse to finance this deal, even with the solvency opinions, taking the calculated risk to breach their financing agreement with Hexion.  (Note that there is litigation in Texas against CS and DB related to this issue, with a Texas court yesterday enjoining the banks from acting in a way to stymie the Huntsman/Hexion deal, pending a hearing on this matter.)  From the banks’ standpoint, this deal is a disaster in light of the current markets.  Presumably the banks were going to lend the money to Hexion/Apollo and syndicate the debt to unload the risk and make money.  It is very unlikely they can do that in this environment.  CS and DB, then, might decide it is cheaper to refuse to finance and wait to be sued.  While Hexion has the obligation to try to find another lender willing to lend on terms as good as CS/DB offered in the commitment letter, Hexion is unlikely to be successful in that regard in this economy.  Hexion seems to have the obligation to sue CS or DB to perform, but that is neither pretty nor cheap for any of Hexion, CS, or DB.

3.  No deal, due to Hexion’s refusal to close:  Even with solvency opinions and financing in place, Hexion/Apollo has the power to refuse to close.  The merger agreement does not give Huntsman the right to specific performance.  Hexion can refuse to close and then be sued by Huntsman for damages.  The complicating factor, however, is that the damages in such a suit could be huge – equal to the full premium Huntsman would have received had the deal closed, plus expenses.  To that end, it is worth noting that Huntsman has sued Apollo and private equity partners Black and Harris, alleging that they essentially fraudulently induced Huntsman to walk away from the merger agreement Huntsman had with Basell back in June/July of 2007.  A refusal to close this deal will not help Apollo, Black, and Harris in their Texas litigation.

I suspect this fiasco will end with the banks and Hexion refusing to close and instead negotiating a settlement of a size we have not yet seen from the existing 2007 failed deals pool.  Huntsman is in a freakishly strong bargaining position, with a merger agreement specifically allowing for economic damages, an opinion from Lamb saying “Hexion had knowingly and intentionally breached its covenants and obligations under the merger agreement,” banks presumably sweating the current economic situation and the absence of a government bail-out plan, and a buyer clearly completely adverse to buying.  I predict that Hexion, CS, DB, Apollo, Black, Harris, and likely others will together offer Huntsman a settlement somewhere between $325 million (the reverse termination fee provision in the merger agreement which is limited to very narrow circumstances) and the full premium for this deal (approx. $3 or 4 billion).  By rights, the settlement should be closer to $3 billion than $325 million, though that is hard to envision as a reality.

In China, International, Justice Department
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The Fed’s Bail-out of AIG and Shareholder Equity

Elizabeth Nowicki —  18 September 2008

The Federal Reserve Bank of New York’s announcement of an $85 billion bail-out of AIG came as a shock to many of us, and the precise terms of the lending agreement underlying the bail-out are still unclear.

In an e-mail to the BIZLAW listserv, Professor Bainbridge rightly queried how AIG could have offered the Fed secured status for the credit facility given the likelihood that some of AIG’s existing debt instruments have debt-related covenants or are secured by the same assets the Fed is using.  Elliott Manning, Tom Joo, Steven Davidoff, and myself all chimed in, and it is not clear we have a final answer, but it is likely that either (a) such covenants do not exist in the older debt instruments (they obviously do not exist in the 2007 unsecured subordinated debt, but I have not seen the documents for the older secured debt), (b) if these covenants do, they can be waived, and (c) if they cannot be waived, AIG can violate the covenants with a slim likelihood of being sued by priority debt-holders as suing AIG would essentially amount to nudging them toward insolvency.  If any of our readers have thoughts on this topic, please post them.

Another issue, and the more interesting issue in my view (and perhaps in David Zaring’s view), regarding the Fed bail-out of AIG involves the equity stake in AIG that the Fed claims to be getting in return for the $85 B credit facility.  The Fed’s press release says “The [$85B] loan is collateralized by all the assets of AIG, and of its primary non-regulated subsidiaries…. The U.S. government will receive a 79.9 percent equity interest in AIG.”  This equity interest, I am told, takes the form of warrants given to the government, and one commenter on Zaring’s post states that the equity interest is contingent, only to be taken if AIG defaults.

I am unclear as to how AIG can issue an 80% equity stake without the approval of their existing shareholders whose interests will thereby be severely diluted.  Surely AIG does not have 80% of their authorized, issued, and outstanding common stock on hand to use.  Where, then, do they get the authority to issue that much new stock without shareholder approval, … unless the stock is of a different class and the press release is simply conveniently omitting that important fact?

In Truth on the Market
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And the Clear Channel litigation will not continue….

Elizabeth Nowicki —  13 May 2008

The news just broke that the Clear Channel acquisition litigation – both in Texas and New York – is on the road to being settled, with the parties having penned a new set of agreements tonight, providing for the acquisition of Clear Channel by Thomas H. Lee Partners and Bain Capital, with the Clear Channel shareholders getting $36 per share (or the option for equity in the post-acquisition entity).

The Clear Channel press release provides that:

The banks, the private equity investors, Clear Channel, certain shareholders, and Bank of New York (serving as escrow agent) have entered into an Escrow Agreement pursuant to which the private equity investors and the banks [a bank syndicate consisting of Citigroup, Deutsche Bank, Morgan Stanley, Credit Suisse, Royal Bank of Scotland and Wachovia] have agreed to fund into escrow the total amount of their respective equity and debt obligations, in a combination of cash and/or letters of credit, within ten and seven business days, respectively.  Certain shareholders also have agreed to deposit into escrow securities of Clear Channel that these parties have agreed to exchange for Class A common stock of CC Media Holdings.  Following deposit of funds and other property into escrow, each party to the merger related litigation pending in New York and Texas will file all papers necessary to terminate the litigation, with prejudice.

Thus ends the long drama of the seller chasing the buyer chasing the lender.  It appears we will walk away not having learned how a court in New York would have dealt with the specific performance aspect of forcing lenders to finance a private equity dea.  This assumes, of course, that the Clear Channel revised acquisition ultimately closes by the third quarter of 2008, as tonight’s press release promises.  Stay tuned.

In Mergers & Acquisitions
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Clear Channel Litigation Is Going To Trial! Or not….

Elizabeth Nowicki —  13 May 2008

I have just been told by someone who attended the 10:45 a.m. hearing this morning in Justice Helen Freedman’s courtroom in New York state court that the Clear Channel litigation brought by private equity buyers against their lenders – the litigation that the media kept saying over the past two days was *about* to settle – is going to trial at 2 p.m. today.  Ha!  What happened to the settlement?  Will this litigation settle in the next few days or are the lenders going to roll the dice and gut through a trial in New York state court?

First, the backstory:  In May of last year, private equity buyers signed a merger agreement to acquire Clear Channel Communications, Inc.  The private equity buyers (entities affiliated with Bain Capital Partners and Thomas H. Lee Partners) were to borrow about $22 billion to fund this deal, and their lenders included Wachovia, RBS, Citigroup, and Deutsche Bank.  The lenders and the buyers executed a commitment letter, addressed to Clear Channel, which spelled out the lenders’ basic commitment to finance the deal for the private equity buyers.

When the credit markets tightened this past summer, we saw a range of lenders trying to get out of their obligations to finance various deals.  The lenders in the Clear Channel acquisition were no different, and in the fall or winter of 2007, the lenders tried both to renegotiate the terms of their obligation to finance the private equity buyers’ Clear Channel purchase and to get out of the deal entirely.  Apparently the lenders tried to push the private equity buyers to accept some unacceptable terms, such that, on March 26, 2008, the private equity buyers filed suit in New York state court against the lenders for various claims including breach of contract and fraud.  Basically the buyers maintained that the lenders had committed “anticipatory breach” of their obligation to lend the money to finance the Clear Channel purchase.  The lenders made a motion for summary judgment in this case.

On the same day, in Texas state court, Clear Channel filed suit against the banks for tortious interference of contract, maintaining that the lenders were interfering with the merger agreement between Clear Channel and the buyers by refusing (or threatening to refuse) to finance the deal.

On May 7, 2008, Justice Helen Freedman in the New York State Supreme Court, denied in part the defendant lenders’ motion for summary judgment, such that trial became inevitable.  While Justice Freedman dismissed the private equity buyers’ claims of fraud, Justice Freedman left open the issue of anticipatory breach of contract.  Moreover, Justice Freedman left open the issue of specific performance – the buyers maintained that they were entitled to specific performance under the lending agreement, such that the banks should be forced to finance the $22 billion acquisition.  Justice Freedman, in her May 7 opinion, said that she could not decide the issue of whether specific performance was available based on the limited pleadings before her, but she said the issue could be revisited after trial, if the lenders were found to have breached their lending obligations.  So anticipatory breach and specific performance as a remedy were left as unanswered questions for resolution after trial.

This past weekend, word on the Street was that the lenders, buyers, and Clear Channel were trying to negotiate a new deal whereby the private equity buyers would acquire Clear Channel at a reduced price, to settle the litigation, consummate the acquisition and avoid trial.  Indeed, terms of the “settlement” had been produced by the media.

Yet, at a 10:45 a.m. hearing today in court in New York, Justice Freedman said trial in this case will begin today at 2 p.m., indicating that the widely-touted settlement has not been forged.

What does this mean?  Will there be a settlement inked at 1:59 p.m. today?  Or did the media miss the boat on this one?  Or will there be a settlement in a few days, but before the end of the trial?

From the standpoint of the lenders, there is not a whole lot to lose other than the cost of litigation from going to trial.  According to the lenders, if they are forced to do this deal, they will lose a huge amount of money.  So, if they settle this matter in the way the media has reported – by financing a deal at a slightly cheaper price ($36 per Clear Channel share versus $39 per share) – it seems that the lenders will lose at least a significant portion of the money they stood to lose by financing the deal they originally agreed to support.  Settlement – of the sort the WSJ indicated was looming – was not a great option for the lenders.  However, if the lenders go to trial, one of three things can happen:

(a) The lenders can win, with Freedman finding that there was no anticipatory breach, such that the banks can continue to negotiate aggressively with the buyers over the terms of the financing generally sketched out in the commitment letter from May 2007 and the banks might even be able to drive the buyers away,

(b) The lenders can lose, with Freedman finding that there was anticipatory breach, and the lenders are liable for damages, which might be tied to the increased price of financing the buyers will be forced to seek from other lenders, or

( c) The lenders can lose, with Freedman finding that there was anticipatory breach *and* the buyers are entitled to specific performance, such that the lenders will have to finance the original deal that is only incrementally worse than the settlement the Street was reporting to have been reached this weekend.

From the lenders’ standpoint, options “a” and “b” are better than the settlement that was rumored over the past couple of days.  Since two out of three possible outcomes at trial are better than the settlement that was reported in the media today and yesterday, and the third outcome is only marginally worse, I would not be surprised if this case does not settle and goes straight through trial. Moreover, even if option “c” above is marginally worse than what the lenders were reported to have achieved in settlement over the weekend, option “c” above will give the lenders the intangible benefit of certainty.  Meaning, the lenders will walk away from this particular deal burned, but they will walk away knowing that, from now on, they can insist on an iron-clad provision in any commitment letter making clear that specific performance is not even remotely an option.  Moreover, lenders in the future will be on good footing to insist on a letter from the target/seller wherein the target is forced to certify that it understands, prior to receiving a commitment letter, that its remedies against the lenders (if any) will not include specific performance.

It will be interesting to see how this plays out….

Edited at the end of the day on Tuesday: This just in – the parties *have* reached a deal in principle, though the deal has not yet been announced by anyone other than Reuters (e.g. no press releases from the companies that I have seen).

In Truth on the Market
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