DEAL POINTS (PDF download)

							M&A “Nugget” – Stapled Financing                             is losing not only the financing fee but also the
                                                             M&A fee.
        Recently, Wilson Chu, Rick Climan and Joel                   From the sellers’ side, there is a concern that
Greenberg participated in a webcast for                      stapled financing may give the target company’s
DealLawyers.com in which they presented a series             investment bank an incentive to recommend that a
of M&A “nuggets.” An edited transcript of one of             deal be done even if it’s not a particularly good one
the “nuggets” presented by Joel Greenberg is set             because the bank has both an M&A fee and a
forth below.                                                 financing fee at stake. There is also a concern that
        Stapled financing is a technique sometimes           the bank in its advisory role may favor a buyer (for
used in an auction of a company. The investment              example, a private equity buyer) that the bank
banker conducting the auction offers prospective             expects to use the financing (as contrasted to a
buyers – often private equity funds – a package of           strategic buyer that won’t need the financing).
financing that they can use to consummate the                        One way in which these potential conflicts
acquisition.                                                 become judicially cognizable is when bank fairness
        There are a lot of positive things about             opinions are involved because it is not at all unusual
stapled financing but there are some negative things         for a sell-side investment banker to give the board
as well. The positive elements from the sellers’             of the target company an opinion that the
side is that it expedites the process and adds               consideration to be received in the acquisition by
certainty; when bids are received, since there is            the target company’s stockholders is fair from a
already a – at least partial – financing package             financial point of view.
which the sellers can confidently expect to be                       I’m not aware of a case that directly
available for closing.                                       addresses that conflict in the context of stapled
        From the perspective of the investment bank          financing, but in the Toys “R” Us decision last year,
handling the auction, stapled financing provides a           the Delaware Court of Chancery gave us a preview
very sizable fee opportunity. Typically, in a private        of its views on the subject. In the course of
equity acquisition, the financing fees payable by the        discussing the Toys “R” Us auction process and
buyer will exceed by a considerable margin the               ultimately validating what the board had done, Vice
M&A advisory fee payable by the target company.              Chancellor Strine took the occasion to criticize the
                                                             sell-side investment bank for having provided
       From the buyer’s perspective, stapled                 financing to the buyer in the transaction and
financing simplifies the process of trying to                suggested that doing so compromised the fairness
consummate an acquisition because financing is               opinion that the board had relied upon.
supplied that it can either accept or try to improve.
                                                                     One interesting aspect of the Toys “R” Us
        So those are all positives. What’s the               situation was that, at the time the opinion was
negative? The biggest negative is that the                   delivered, there was no contemplation that the sell-
investment bank conducting the auction is subject to         side banker would provide financing. That’s
a series of conflicts of interest – both internal and        something that came up after the deal was accepted
with respect to its obligations to its initial client, the   by the board and after the opinion was delivered —
seller. The internal conflicts relate to the fact that       but before the closing of the transaction.
the investment bank’s M&A fee may be dependent
on the availability of the financing that it offers. It             And even in that case, Vice Chancellor
could be very hard for the lending side of the bank          Strine said that the mere fact that the banker
to exercise dispassionate judgment not to fund               accepted the financing fee compromised the
under its financing commitment if the consequence            independence of the banker – or at least



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                                                                                                      Fall 2006
compromised the appearance of independence – in         Considering the robust discussion and the excellent
rendering the fairness opinion. One could argue         quality of Mike’s draft, we agreed that a Spring or
that if independence was compromised in that            Summer 2007 program on exclusivity letters would
situation, a stapled financing arrangement in which     be a good idea. The Chairs will contact the
the ability to earn the financing fee was known at      Programs Subcommittee to schedule this program.
the time the opinion was delivered would receive an             We have had a goal for some time to add
even less favorable reception. However, in a            more substantive content to our Task Force
footnote to his Toys “R” Us opinion and in              discussions relative to public company M&A
subsequent public remarks, Vice Chancellor Strine       practice. For example, in addition to our regular
recognized that stapled financing may provide           meeting in Wilmington focused on Delaware issues,
benefits to the target that a board could conclude      and our August discussion of recent trends in MAC
outweighed the potential conflict. He noted that        clauses, we had a review of the best price rule
such a role could be “wholly consistent with the        amendments at our Wilmington meeting in
best interests of the primary client company.”          February 2006. In the interest of continuing this
        One product of this debate is that some         trend of presentations particularly focused on public
bankers who do not want to give up their stapled        company M&A, we have invited Dennis Berman of
financing role have been suggesting to their sell-      the Wall Street Journal, who spoke at the
side clients that they permit stapled financing but     Committee meeting in Honolulu, to visit us during
hire an independent banker to render a fairness         our Spring meeting in Washington, D.C. We have
opinion. Although it’s clumsy (since the new            also invited Dan Burch of Mackenzie Partners to
banker has to get into the process and review the       the Spring meeting. Dan will discuss the role of
transaction that the sell-side banker has already       hedge funds and the advisory groups like ISS to the
recommended), this structure does have the virtue       stockholder approval process. We expect this
of creating a relatively unconflicted fairness          segment of the March Task Force meeting to take
opinion.                                                about 60 minutes. We have warned Dennis and
                                                        Dan to expect a lot of questions since we will be in
                                                        a much smaller venue than the full Committee
                                                        meeting. Please feel free to suggest other topics for
     TASK FORCE REPORTS                                 discussion at the Summer 2007 meeting and
                                                        beyond.
         Task Force on Acquisitions                             In Dallas, we will turn to Henry Lesser’s
            of Public Companies                         revisions to Sections 3.2 and 4.6 of the Model
                                                        Agreement relating to the buyer’s need to get a vote
        The Task Force on Acquisitions of Public        of its stockholders and to Joel Greenberg’s and
Companies had a lively meeting in Honolulu,             Leigh Walton’s draft representations and
Hawaii in August. Henry Lesser led a discussion         warranties. We also will discuss Byron Egan’s
on the impact of the stock option controversy on the    revised discussion of the miscellaneous provisions
MAC clause and we reviewed a few recent                 of third party beneficiaries and Keith Flaum’s
examples. Mike O’Bryan then led a discussion of         commentary about the right of a target board to
the revised exclusivity letter and commentary. We       withdraw its recommendation. In addition, we will
focused in part on (i) whether the duty to negotiate    have a first look at the revised commentary for the
in good faith arose on signing an exclusivity letter,   termination sections, including Delaware counsel’s
(ii) the disclosure requirements for such an            input. Mark Morton will lead a discussion on the
agreement, and (iii) when such agreements were          Delaware components of the revised commentary.
appropriate from a fiduciary duty standpoint.


Page 9                                                                                  Volume XI, Issue 3
                                                                                                Fall 2006