As the number and magnitude of buyout deals has continued to grow, shareholders have become increasingly restive. Shareholders seem increasingly inclined to demand, and in some cases successfully compel, a larger acquisition price for the target company. For example, Biomet shareholders successfully compelled the company’s would-be private equity acquirers to increase their $10.9 billion buyout bid by $500 million (refer here).
Some shareholders are upset about more than the buyout price alone. In some instances, shareholders are employing lawsuits on the grounds that a proposed buyout is fundamentally unfair. A June 7, 2007 Washington Post article entitled “Lifting the Lid: Investors Sue Over Cozy Deals” (here) reports that shareholders have filed “a string of lawsuits claiming that the deals are unfair to investors and sometimes only serve to enrich top executives.” In these cases the shareholders argue that “managers accept low ball offers because they have cut lucrative deals for themselves with the buyers that might allow them to continue running the company.” The article specifically mentions lawsuits filed in connection with buyouts at Lear, Topps and Ceridian.
But while lawsuits surrounding buyout transactions have proliferated, the more interesting question may be whether a second round of litigation may lie ahead, as some of the recent buyout deals start to strain and threaten to fail. A June 8, 2007 Wall Street Journal article entitled “Boom Aside, Not All LBOs Look So Hot” (here) reports that “a number of recent high profile deals are already showing signs of strain.” Significant debt fueled many of the buyout deals “potentially causing problems as bond yields climb and the U.S. economy runs into new obstacles.” While none of the deals mentioned in the Journal article have failed altogether, the article notes that “it is striking how quickly a few deals have run into problems.”
A default or other failure could trigger a wave of recriminations, from bondholders, lenders, creditors or fund investors, against the buyout firms or company management. The extraordinarily generous terms of the debt instruments (for example, the absence of any kinds of covenants) could lead to accusations against the banks that structured the deals, or by investors whose portfolio managers invested in the debt.
While my crystal ball is no better than anyone else’s, the number of high-profile merger failures in the recent past (think AOL Time Warner and Daimler Chryser) suggests that the inevitable end of the current buyout boom may involve at least a few significant casualties. If the buyout funds or debt investors lose money, which would be hard to avoid in the event of a significant default, the recriminations will follow as day follows night. Ironically, the current push to drive up buyout prices could set the stage for later problems, as the higher buyout prices necessitate increased debt, leading to a smaller margin for error. Some deals may end in tears – and lawsuits.
Conflict Control: An interesting effort to control the conflicts that can arise in a management-led buyout is reflected in a June 7, 2007 “Guidance Note” from Australia’s Takeovers Panel, entitled “Insider Participation in Control Transaction” (here). (According to its website, the Takeovers Panel is “the primary forum for resolving disputes about a takeover bid until the bid period has ended. The Panel is a peer review body, with part time members appointed from the active members of Australia’s takeovers and business communities.”).
The Note provides that when a board or company becomes aware of a takeover bid that is likely to involve the participation of insiders, the board should appoint an “independent board committee” and “establish protocols” regarding who should communicate on the target company’s behalf and what limitations should restrict the participating insider. Essentially the Note recommends that the participating insider be quarantined from the transaction. Significantly, the guidelines are not meant to be exhaustive, nor even meant to encompass all the legal duties any particular situation may require.
Hat tip to the SOX First blog (here) for the link to the Guidance Note.
Global Warming and D & O Coverage: In prior posts (most recently here), I have commented on the D & O insurance exposure arising from global climate change. A recent paper by Joe Monteleone of the Tressler, Soderstrom, Maloney & Priess law firm entitled “Global Warming – Will There Be Exposures for Directors and Officers and Will It Be Covered?” (here) takes a deeper look at these issues, with particular emphasis on the relevant D & O policy provisions. Special thanks to Joe for allowing me to link to this timely and well-written article.