MA 2-25

2/25/2014 8:27:00 AM

Atheros: Disclosure questions are really important now o What is said by the board to the sh Danger in letting mgmt. do this? o CEO working for Qualcom: he has already set up his position; maybe he wont negotiate or get the best price possible Postpone actual terms of position and compensation until after the agreement is reached on principal terms o Ideally you wait until merger agreement is signed, but at least price and mgmt. succession Board moves forward engages a financial advisor o They make it largely contingent (the fee) If youre the board of the tgt: it will save you money if the deal doesnt progress Incentivizes Qualtalyst to do the deal Protracted negotiations board is over it o They look at 11 other potential matches, and then narrow it down to 2-3 Deal protections o No solicitation clause, matching rights provision, termination fee (3.3% of total value of trxn) Sufficient to stop a competing bid? NO Issues: o Fee for the IB is contingent, they said that; but they didnt say that it was 50x what they get paid if the deal didnt go through Why is this material: We are worried about the negotiation process about whether to accept the deal price o When you have this level of premium it is difficult to persuade sh to not approve the deal You dont anticipate that disclosure claims will dramatically effect voting by sh Pg 9 o Disclosure claims:

Read the summary of what constitutes material information Disclose: all that within the boards control Burden of establishing materiality rests with P Substantial likelihood that disclosure would have been viewed as having altered total mix of info avail (Northways) If you make a misleading statement, you have to supplement Duty to speak, and duty to speak fully, fairly and accurately

El Paso Pipeline business Exploration and Production (E and P) Complicated facts o GS is the IB for both Morgan and El Paso GS owns 19% of Morgan and controls 2 board members GS partner that works for El Paso has a small investment in Morgan's stock (340k) o CEO gone wild Foshee is trying to do a LBO of E and P Trxns: sale of entire company, and a spin off of E and P o Question for board: what is the best way to proceed? Fn 31

Olson vs. EB3 P is challenging the use of a top up option in an arms length 3rd party merger o Top up option: stock option issued by the tgt that gives the holder of a greater than 50% block, the ability to acquire 90% for the merger possibility o Why want this? They can easily get to 90% and can do short form which saves time and money Doesnt req sh vote Cannot bring a breach of duty

SH gets money sooner; this is super attractive 2nd step of merger happens faster Reduces potential risk that some bad event might occur between the first trxn and the 2nd step trxn What is the downside of the top up option? o They limit sh remedies to rights Breach of duty claim would now be moot o Appraisal dilution P says that since theyre giving up 170 million shares that it will dilute the sh shares and they try to exercise rights Since you have to issue a chunk of new stock, the value of a sh in the company is going to decline and if I seek appraisal I will get a lower price What does the court say? It isnt a terribly strong claim; the appraisals happen before the merger goes through 262h statutory claim: anything prior to the consummation of the merger, anything

done to facilitate, is excluded from calculation in an appraisal case o The shares wouldnt be counted o You can include language that simply excludes them in the merger agreement Deal price exceeding the appraisal value of the stock? o Percentage of reduction in agency costs o Court: it is very likely that any addtl shares issued, if counted as part of appraisal would actually lead to an increase in the appraised value of a sh stock o But they don't address: If I know that I only need 51% of a tgts stock, and that I can expect based on sh valuation of shares that some value it higher than others (supply curve is upward sloping), I might be able to get this %age at 15/sh, but

if I want 80% Id have to raise my premium to like, 20/sh Could lead to lower premiums in trxn Specific problem in the case: o In the option there was a pay for by promissory note and the terms of this note were really vague DE requires that you have to have concrete terms for payment/repayment Pg 22 Here they didn't specify the terms here at all Why? Short time frame The amt of shares issued: 22 million Which is a shit ton So potentially the buyer might have to come up with at least awhile, a large amt of money So they need to have a meeting 152 of the board So they meet, and they pass a resolution authorizing the issuance in the appropriate manner P gets a substantial fee for their work in doing this What is the justification? o These problems were a big deal and they could have invalidated the short form merger, so they prevented a legal battle the company saved

money in the long run, so they should pay out this million dollars These are very common, used in almost all trxn now

Openlane Control block of stock o Openlane thinks their mkt will deteriorate in the future, and the sh decide to initiate a sale

90 million bid: considered and rejected December: still considering sale, but not an actual valuation performed Range of values is really large Not useful information nd 2 Company A bid: rejected as well May: KAR makes a higher bid Written indication of interest between 200-210 million Not what the board wants counter Board contacts another buyer Company B: 200 million offer they wont raise June: KAR and openlane enter into an exclusivity agreement August: They reach an agreement about doing a deal merger agreement executed maj of stock executes a consent approving trxn Consent: a vote before the vote; it is basically a done deal at this point

Maj of sh would vote yes Independent action Waivable condition: at least 75% of sh execute consents Satisfied o How do you treat stock options that are unvested when a company is acquired in a merger trxn They accelerate and conditions eliminate (all options become exercisable at what the price would have been if they had been vested) when the change of control actually happens From executive perspective this could be a windfall gain This is universal, but does it create some kind of conflict because execs have an incentive at this point to do a deal?

7/8 board members didnt even have their options accelerated Not a domination and control issue (the 1 board dude) It doesnt contaminate all the other directors Incentives: Court isnt concerned It seems to view it as a positive things We want deals to happen

o Part of the deal price is stuck in an escrow account Escrow account: it puts money that youd be paying into a third party hands to control released based on conditions antecedent Double edged sword: the acquirer will like this because it gives them a way to take back some of the consideration if something fails tgt: delays receipt of consideration if acquirer has a lot of reservations about tgt value, they might pay more up front if they have an assurance that if a bad event happens they wont be out additional money Can serve a valuable function Why are they almost never used in public co deals? Greater knowledge and more info in the mkt in a public co deal o Strict no solicitation provision This is pretty weird You want to get the best price, when selling (Revlon), so you would want to see what others are willing to pay Look at Omni Care: it is a forced deal that sh have no way to get out of o Why is this a Revlon case? They initiate a sale process

o Basic

Although this isnt a CoC process SH will not have a subsequent opp to get a control premium Assume that block held by board is a control block Do minority sh expect a CoC premium: no; because they have control right now Revlon claims of sh Nonsolicitation sucks They didn't like the number of companies negotiated with No financial buyers considered Whether the board satisfied its oblig to be informed abt the value of the co No mkt test (no go shop) No auction But the court says that theyre informed: they have an impeccable knowledge of value of co But the sh are actively involved in mgmt. of company, this is super probative about value The control block is owned by the ppl running the company --> they're well informed since theyre hands on in control as opposed to the common board Private equity firm Helps them know what price a financial buyer would be willing to give them This is an independent way/expertise valuation ability o Not a classic candidate for an LBO; so they really only focus on strategic bidders This is the opposite of what we almost always see; mgmt. always wants PE bidders

because it figures it will be hired by them post trxn Omnicare: Why isnt the no solicitation and lock up invalid under Unocal? Voting consents not actually linked to agreement itself They only need a one day no solicitation period here; that is super brief o The likelihood of anything happening in this window is pretty close to zero The fact that the co has the right to walk during this window makes a difference in terms of its ability to do an alt trxn if something should happen before consent Ancestry: Chancery court opinions are rad. 12 parties confidentiality agreements with Ancestry as a condition to undertaking due diligence o These contain standstill restrictions I wont be hostile and etc. o Dont ask dont waive provisions Prohibits the prospective buyer for a period of usually a year, from directly or indirectly requesting the board to waive the standstill provisions unless they are expressly invited to do so by the board Only 3 highest bidders advance to the 2nd round o Ultimately a PE firm was the winner 32/sh bid cash Complicating fact: IB for board, based on mgmt. projections we cannot issue a fairness opinion o But mgmt. projections usually have at least a little bit of credibility

o Mgmt promptly revises them, lowers them, they IB uses these to give a fairness opinion P files suit challenging reasonableness o Dont ask dont waive precludes the board impermissibly from being fully informed about possible superior offers since the effect is to knock out topping bids o The use of the revised projections for fairness opinion Dont ask dont waive is invalid o They impermissibly limit stat and fid obligations to properly evaluate competing offers; because they preclude losing bidders from making topping bids Per se invalid Strine shows up: o They shouldnt be per se invalid, there could be circumstances that they could be used to max sh value Could be used to force bidders to make best bid in initial round of bids o However, you evaluate them on a case by case basis because it could be the case that boards like in Ancestry, werent informed by counsel of the effect of the provision and in some cases maybe counsel didnt know the effect themselves so that if the board was uninformed it might be precluding addtl bids Damages still unlikely because of 102b7 Disclosure holding o Strine says that if you use these things youve got to make full disclosure about them to your shareholders, and the board didnt do that, proxy statement deficient, deal enjoined until curative disclosures happen o Strine doesn't like the revised projections, he enjoins them, this isnt disclosed either

2/25/2014 8:27:00 AM

2/25/2014 8:27:00 AM