David Fox is a partner at Kirkland & Ellis LLP, focusing on complex mergers and acquisitions as a member of the firm’s Corporate Practice Group. This post is based on a Kirkland & Ellis M&A Update by Mr. Fox, Yosef J. Riemer, and Daniel E. Wolf. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.
Delaware courts often take an expansive approach to decision-making, offering detailed commentary on the facts and the underlying law in many key M&A cases. While these lengthy opinions can offer market participants useful insights into best practices for future deals, it is equally important that dealmakers not overreact to observations that should, and no doubt are intended to, be read within the context of the specific circumstances before the court. In seeking guidance from court decisions, readers should be mindful that, more often than not, it is only the cases with the worst, or at least most complicated, facts that make it to a final court decision, exacerbating the risk reflected in the old legal adage that “hard cases make bad law”. A few examples may be useful.
Stapled Financing In his 2005 Toys “R” Us, Inc. decision, then VC Strine was critical of the decision to allow one of the target board’s financial advisers to offer financing to the winning bidder after the merger agreement was signed. Some commentators interpreted the court’s comments as blanket discouragement of the practice of “stapled financing” being offered to bidders by a target adviser. However, VC Strine himself later publicly commented that such a reading “misconstrued” his opinion and that there were situations where it would be appropriate for a seller, through its banker, to offer financing to potential bidders (for example, in order to stimulate interest among buyers, to reduce the risk of leaks or to set a valuation floor for an auction). His criticism in Toys was directed at the risk of appearance of conflict generated by the request of the adviser (and agreement by the board) to offer financing once the deal was already signed, meaning the financing role served to only generate fees for the lending bank as opposed to any useful function for the target. A similar nuanced reading is required of VC Laster’s recent commentary on stapled financing that played a significant role in the fairly scathing Del Monte decision. Rather than suggesting that stapled financing is per se problematic, VC Laster implied that the court will seek evidence that allowing a sell-side adviser to offer a buyer financing had “some justification reasonably relating to advancing stockholder interests”. Instead of the reflexive avoidance of stapled financing that occurred in the aftermath of each of these two decisions, a more refined reaction requires principals and their advisers to critically assess whether such financing could in fact advance the target’s interests and, if such financing is in fact offered, to ensure that it is done with the full knowledge of the board with appropriate protections in place to address any resulting potential conflicts (e.g., by early engagement of a second, non-financing adviser).
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