MONTH-IN-BRIEF: Mergers & Acquisitions

Ryan Thomas, Chauncey Lane

Mergers & Acquisition Law

Overlooked Deadline Leads to Termination of $1.37B Merger

By Ericka Simpson Conner

On March 14, 2019, the Delaware Chancery Court (the “Court”) approved Rent-A-Center’s request to terminate its $1.37 billion merger with Vintage Capital Management (“Vintage”). In June 2018, Vintage offered to buy 2,350 rent-to-own furniture, appliance and electronics stores. The merger, however, required antitrust clearance from the Federal Trade Commission because Vintage owns competing rent-to-own retail store chains. Both parties agreed that if the merger was not approved by December 17, 2018, either party could submit a notice to the other party unilaterally extending the agreement for an additional 90 days. Vintage failed to submit an extension notice and Rent-A-Center terminated the merger on December 18, 2018.

According to Vintage, Rent-A-Center was looking for a way out of the merger because its business had improved upon the announcement of the merger. Vintage also argued Rent-A-Center did not mention the approaching notice deadline in meetings and alleged Rent-A-Center’s management partially sought the merger to obtain business and operations information about Vintage’s competing business. Finally, Vintage argued that Rent-A-Center was deceptive because it continued to work with Vintage to secure regulatory approval from the FTC up to the date of the deadline and had agreed to an antitrust approval date in 2019. 

Approving the termination of the merger, the Court found no duty between sophisticated parties to remind each other of impending deadlines. The Court also found that allowing the parties’ joint dealings with the FTC to act as substantial compliance would essentially rewrite the terms of the agreement.

The Court’s decision concerning Rent-A-Center’s claim for a termination fee of $126.5 million triggered by Vintage’s failure is pending supplemental briefing. The termination fee is 15.75% of the value of the deal. Typically termination fees are 3% of the value of the deal.

Directors Who Approved Acquisition Could Face Personal Liability

By George Khoukaz

On March 15, 2019, the Delaware Chancery Court (the “Court”) found that directors of Pilgrim’s Pride Corp. (the “Company”) could face potential liability for the Company’s decision to acquire Moy Park.  This decision arose out of a derivative claim brought by a minority stockholder of the Company against the controlling investor, alleging that the acquisition of Moy Park was orchestrated by the Company’s parent company to raise cash in order to satisfy a $3.2 billion fine levied on the Company by the Brazilian government.  

In their claim, the minority stockholder alleged that the board of the Company, including five interested directors, approved the acquisition without subjecting the deal to the approval of a majority of minority stockholders —a best practice and cleansing framework enunciated by the Court in In re MFW Shareholders Litigation (the “MWF Case”)In the MWF Case, the Delaware Supreme Court unanimously affirmed the Court’s decision, holding that the business judgment rule standard of review applies to squeeze-out mergers with controlling stockholders, so long as the controlling stockholders commit to proceed with the merger only if the merger is subject to both (i) negotiation and approval by a special committee of independent directors and (ii) approval by a vote of a majority of the minority stockholders. The Delaware Supreme Court went on to indicate that if the procedure outlined above is not followed, then a squeeze-out merger should not be subject to the business judgment standard, but rather the stricter entire fairness standard.

In the acquisition of Moy Park, the minority stockholder went on to argue that by failing to abide by this best practice and cleansing process, the directors should not be afforded the protections of the business judgment standard.  However, the interested directors argued that they adopted a hands-off approach to the deal by appointing a special committee to handle the acquisition.  The Court found that some of directors were directly involved in the acquisition negotiations, exposing the directors to personal liability if the transaction is found not to meet the stricter entire fairness standard of review.

Court Denies Bid for $21.6 Million in Damages

By Michael Caine

The U.S. District Court for the Middle District of Tennessee (the “Court”) denied a request for $21.6 million in damages related to a breach of an exclusivity provision in a non-binding Letter of Intent (the “LOI”) between PSC Metals, Inc. (“PSC”) and Southern Recycling, LLC (“Southern”). The LOI included a provision that provided PSC with exclusive negotiation rights with Southern.  However, shortly after the parties signed the LOI, Southern engaged with a third party interested in buying Southern’s assets.   Although the Court agreed Southern breached the LOI, the Court ruled expectancy damages sought by Southern were excessive and should not be equal to the proposed purchase price of the assets in the LOI. 

Generally, expectancy damages are recoverable when they are actually foreseen or reasonably foreseeable, caused by the breach of the other party, and proven with reasonable certainty.  In addition to failing to meet this standard, the Court found Southern could not reasonably have foreseen that it might be liable for expectancy damages based on the terms of the LOI because Southern did not agree in any legal sense to the substantive terms of the LOI. Further, the LOI did not require the parties to negotiate in good faith.  As a result, the Court only approved $90,000 in expectancy damages.                                   

International M&A

Itochu Successfully Completes Hostile Takeover Bid for Descente

By Lora Wuerdeman

On March 15, 2019, Itochu Corporation (“Itochu”), announced it had successfully completed its hostile tender offer for sportswear maker, Descente Ltd. (“Descente”) after accumulating a 40% stake in Descente. In January, Itochu announced its tender offer, without prior notice to Descente, citing issues in Descente’s overseas strategy and the need to reform the management structure and restructure the existing corporate governance system.  Descente’s board of directors warned that after Itochu acquired more shares there would be a danger that the business priority would shift to focus on the interests of Itochu’s group over the corporate value of Descente and the common interests of the shareholders. Additionally, Descente challenged Itochu’s proposal regarding Descente’s overseas strategy, arguing Itochu’s strategy is not significantly different from the measures already taken by Descente.  Nonetheless, Itochu’s successful takeover will allow the company to move forward with its plan to overhaul Descente’s overseas strategy and corporate governance system.

Ryan Thomas

Counsel, Bass Berry & Sims PLC

As mergers and acquisitions (M&A) and securities counsel to numerous national companies and private equity firms, Ryan Thomas has closed more than $50 billion in M&A transactions, and more than $60 billion in overall transactions, including both the largest domestic LBO, and the largest private equity-backed IPO at the time. Ryan’s practice focuses on public and private companies within the healthcare, media, retail, government services, life sciences and technology industries, among others.

Chauncey Lane

Counsel; Husch Blackwell, LLP

Boards and senior executives of public and private companies and investment management firms call on Chauncey for his knowledge and experience in mergers and acquisitions and capital market transactions. In this role, Chauncey regularly assists domestic and international clients with buy-side and sell-side mergers, divestitures, asset acquisitions, going-private transactions, debt and equity offerings, corporate governance and corporate restructurings. Chauncey is an active member of the Business Law Section’s Mergers and Acquisitions Committee and Federal Regulation of Securities Committee.