October 2008

MAE, BUT NOT FOR THEE:

DELAWARE CHANCERY COURT PROVIDES CLARITY IN ANALYZING MAE CLAUSES, BUT MAINTAINS A HIGH THRESHOLD FOR INVOKING THEM

In a much anticipated opinion in a case involving a buyer’s attempt to terminate a merger agreement based, among other things, on a material adverse effect (MAE) purportedly suffered by the seller, the Delaware Court of Chancery ruled in late September that the seller did not suffer an MAE, that the buyer knowingly breached various interim period covenants in the merger agreement in an attempt to avoid performing under the agreement and that the buyer must specifically perform its obligations under the merger agreement.

The court’s opinion in Hexion Specialty Chemicals, Inc. et al v. Huntsman Corp., building off its prior IBP and Frontier decisions, further clarifies the manner in which it analyzes MAE clauses and reinforces the court’s strong proclivity towards enforcing the contractual obligations of sophisticated parties as bargained for and written and not as they might wish them to be interpreted in hindsight.

For our readers, we have prepared a brief article on the outcome of Hexion.

Please read the article here.

OTHER DELAWARE DECISIONS OF NOTE


In the past three months, Delaware has issued a number of noteworthy opinions on topics that will affect M&A practitioners.

In re Loral Space and Communications, Inc. (September 19, 2008). In this case, a significant minority stockholder with effective board control caused the company to engage in a convertible preferred stock financing with the stockholder that not only gave the stockholder favorable financial terms, but also gave it, through its covenants, a “unilateral veto” over any future strategic initiatives that the company might seek to undertake. After reviewing in detail the stockholder’s and the special committee’s egregious behavior during the course of the transaction, and finding that the transaction was unfair to the company, the court exercised its “broad remedial powers to address breaches of the duty of loyalty” to reform the stockholder’s investment and cause its convertible preferred stock to be converted into non-voting common stock.

Sun-Times Media Group, Inc. v. Black (July 30, 2008). In this case, the Delaware Chancery Court analyzed the meaning of the words “the final disposition of such action, suit or proceeding” that appear in the Sun-Times bylaws and in Section 145(e) of the Delaware General Corporation Law in the context of determining at what point a company has satisfied its obligation to continue advancing fees and expenses to defendants under the advancement provisions that often appear in corporate bylaws and indemnification agreements. Contrary to the Sun-Times argument that the final disposition of a criminal proceeding occurs at the time of sentencing at the trial court level, the court found that, for purposes of Section 145 and bylaw and contractual provisions that follow its language, the final disposition of a proceeding, in either the civil or criminal context, is “the final, non-appealable conclusion to that proceeding.”

Optima International of Miami, Inc. v. WCI Steel (July 14, 2008). This case is the first Delaware decision to pass upon the propriety of using a written consent executed by the holders of a majority of a target’s voting power pursuant to Section 228 of the Delaware General Corporation to obtain stockholder adoption of a merger agreement. In this case, in lieu of holding a special meeting of stockholders to approve the merger, the merger agreement required the seller’s board to seek a written consent from the holders of a majority of the seller’s outstanding voting stock promptly after the board’s approval.

The court distinguished this written consent requirement from the lockups at issue in the Omnicare case (which the court noted “is of questionable continued vitality”) and held that “nothing in the DGCL requires any particular period of time between a board’s authorization of a merger agreement and the necessary stockholder vote.” This case supports an approval technique that has long been used in private company M&A transactions and may now be expected to be utilized in public company M&A transactions in situations where a target has a few controlling stockholders and its bylaws allow for action by written consent of stockholders.

LEAGUE TABLES


“DLA Piper stole the show with the dominant positions in global M&A when ranked by deal volume,” stated mergermarket, an independent mergers and acquisitions intelligence service. For 3Q 2008, we are ranked #2 by mergermarket and Bloomberg with 236 global announced deals and a total deal value of over $42 billion. Thomson Reuters rankings for 3Q 2008 came in at #3 with 202 worldwide deals completed and a total deal value of over $12 billion. DLA Piper US ranked in the top 5 by Thomson Reuters, Bloomberg and mergermarket for 3Q 2008.

DEALS

Net 1 UEPS Technologies, Inc.

DLA Piper represented NASDAQ-listed Net 1 UEPS Technologies, Inc., in its US$110 million acquisition of 80.1 percent of the outstanding shares of BGS Smartcard Systems AG, an Austrian private company that provides smart card-based payment systems to banks, enterprises and government authorities in Russia, Ukraine, Uzbekistan, India and Oman. Net 1 provides its universal electronic payment system, or UEPS, as an alternative payment system for the unbanked and under-banked populations of South Africa and other developing economies. The acquisition marks the first step in the implementation of Net 1’s international expansion strategy. Net 1 financed the acquisition with the proceeds of bank financing provided by Investec Bank (UK) Limited.

Telestream Inc.

DLA Piper represented Telestream Inc. of Grass Valley, California, in its acquisition of Vara Software, Ltd, a UK-based company, in August 2008. Terms of the transaction were not publicly disclosed. Vara Software’s suite of webcasting and screencasting products is expected to complement Telestream's encoding-based media workflow solutions for leading broadcast, media and entertainment companies, creating powerful tools for real-time creation and distribution of video content over the Web for a broad range of businesses.

Forward Air Corporation

DLA Piper represented Forward Air Corporation (NASDAQ: FWRD) in its acquisition of certain assets of privately held distributor Service Express Inc., which generated roughly US$39 million in revenue last year. Forward Air is a contractor to the air cargo industry, providing time-definite ground transportation services through a network of terminals located near major airports throughout the US and Canada. This acquisition marked the fourth time since July 2007 that DLA Piper has represented Forward Air in an acquisition of assets.

Westshore Capital Partners

DLA Piper represented Westshore Capital Partners, a Florida-based private equity investment firm, in its acquisition of United Rotary Brush Corporation, a manufacturer and distributor of sweeper brushes for road, construction site and airport runway maintenance, and engineering brushes for finishing wood, metal and plastic products, with operations in the United States and Canada.

Syndicated Communications

DLA Piper represented Syndicated Communications, Inc. and its fund as the owner of approximately 33 percent of Iridium Holdings, LLC, which in September 2008 entered into a definitive agreement with a special purpose acquisition corporation (SPAC) affiliated with Greenhill & Co., pursuant to which Iridium will be acquired by the SPAC in exchange for cash and stock valued at over $500 million.

PostPath

DLA Piper represented PostPath, Inc. in its September 2008 acquisition by Cisco Systems, Inc., for approximately $215 million in cash. PostPath, whose investors included Worldview, Matrix Partners and JAFCO Ventures, offers a Linux-based email and collaboration server.

Med-Data

DLA Piper represented Med-Data, Incorporated, a Washington-based medical billing and coding company that is a portfolio company of Baird Capital Partners, in its US$15 million add-on acquisition of substantially all of the assets of Prime Receivables, LLC (dba Summit Healthcare Services), a medical billing and coding company with operations in Brecksville, Ohio. Med-Data financed this transaction through a loan from Associated Bank, and a sale of preferred and common units by its parent company, BCP MedData Holdings, LLC, to existing unitholders. DLA Piper had previously advised Baird Capital in its acquisition of Med-Data and the creation of the MedData platform.

China Merchants Bank

DLA Piper represented China Merchants Bank in its acquisition of 53.12 percent of Wing Lung Bank at the total acquisition price of HK$19.3 billion. The sale and purchase agreement was signed in May 2008, and the transaction was finalized in September 2008. China Merchants Bank will, in compliance with the Takeover Code, make an unconditional cash offer to acquire the rest of the issued shares of Wing Lung Bank at the same price. This deal represents the largest acquisition by a Chinese bank of a Hong Kong financial acquisition.

Quantum Engineering

DLA Piper represented Quantum Engineering, Inc., a manufacturer of railroad equipment, in its acquisition by Safetran Systems, Inc., a subsidiary of Invensys plc (a UK company publicly traded on the London Stock Exchange), in September 2008. The transaction was structured as a stock purchase in which the two shareholders of Quantum received US$38 million in cash.

Intertek Group

DLA Piper represented Intertek Testing Services NA, Inc., a subsidiary of Intertek Group plc and the leading international provider of quality and safety services to a wide range of industries, in its US$36.9 million acquisition of all of the stock of H.P. White Laboratory, Inc., a company providing ballistic resistance testing and certification programs for personal protective equipment (PPE). PPE includes vests, visors and helmets, and composite materials used in vehicular protection by governments in domestic enforcement and security and the private security sector. A deferred consideration payment of up to US$6 million is payable in 2009 if certain financial performance goals are achieved.

HCL Technologies

DLA Piper represented HCL Technologies Ltd., one of India’s leading global IT services companies, in connection with its US$20.8 million acquisition of Control Point Solutions, Inc., a New Jersey company and a leading provider of voice, data and wireless Telecommunications Expense Management (TEM) services. As part of the transaction, HCL Technologies acquired four delivery centers in the US with more than 200 professionals. HCL Technologies is part of the HCL Enterprise, which has annual revenues of US$4.9 billion and 56,000 professionals across 19 countries, including 360 points of presence in India.