Here is some good stuff from the D&O Diary Blog: As credit market disruption has reached the leveraged buyout world, a number of deals announced earlier this year to great fanfare have been unceremoniously snuffed, while others are on life support. Not too surprisingly, one direct result from this deal derailment has been a spate of lawsuits, as jilted partners and disappointed investors cast blame and seek to recoup their lost expectancy.
The most interesting of these litigation developments is the securities class action lawsuit that a Harman International Industries shareholder filed on October 1, 2007 against the company and three of its officers and directors. (Here is the complaint and the plaintiffs’ lawyers’ press release.) The Harman International lawsuit filing follows hard on the heels of the company’s September 21, 2007 announcement that its erstwhile acquirers, Kohlberg Kravis Roberts and a Goldman Sachs investment fund, had informed the company that they "no longer intend to complete the previously announced acquisition" of the company, and that they "believe a material adverse change in Harman’s business has occurred." Here is a Wall Street Journal’s article discussing the cancellation of the $8 billion deal.
The lawsuit, filed on behalf of shareholders who bought the company’s stock between the time of the company’s April 26, 2007 merger announcement and the September 24 cancellation announcement, alleges among other things that the company failed to disclose that it had breached the merger agreement; that it had R & D and other capital expenses, as well as inventory levels, above disclosed amounts; and that its relationship with a key customer had deteriorated. The complaint further alleges that Harman’s Chairman and controlling shareholder "had a strong personal motive" for the completion of the merger, from which he would received proceeds of $420 million. The implication is that the company withheld the true information to ensure that the merger would be completed, and that the merger fell apart only when the misrepresentations came to light.
In addition to the possibility of shareholder lawsuits, it may also be anticipated that other disappointed targets will sue their former suitors for breach of contract. The current dustup between Genesco and Finish Line provides an example of what this kind of dispute looks like. On June 18, 2007, Finish Line announced that it would be acquiring Genesco in a transaction valued at approximately $1.5 billion. But something happened on the way to the altar; on September 21, 2007, Genesco sued Finish Line in Tennessee state court seeking an order requiring Finish Line to complete the merger and forcing UBS to fulfill its agreement to finance the deal. Here is a CFO.com article describing the parties’ dispute and the Genesco lawsuit.
Finish Line, in turn, has filed a counterclaim asking the court, according to news reports, to compel Genesco to "provide information related to their proposed merger or else rule that a materially adverse event has occurred."
To my knowledge, no lawsuit has yet arisen in connection with the other very prominent deal in which the would-be acquirer invoked the "material adverse change" clause to cancel a deal – that would be the $25 billion deal to take over SLM Corp. (better known as Sallie Mae) that J.C. Flowers cancelled last week. Here is a Wall Street Journal article discussing the kibosh put on the Sallie Mae deal. But while there is no lawsuit yet, Sallie Mae did issue a September 26th press release saying that "the buyer group has no contractual basis to repudiate its obligations under the merger agreement and intends to pursue all remedies available to the fullest extent of the law." While there apparently remains some hope that the Sallie Mae deal might be salvaged, Sallie Mae yesterday rejected the would-be buyers latest reduced offer. If the deal dies altogether, keep an eye out for a lawsuit -- by somebody against somebody else.
It seems like only yesterday that the business pages were full of stories about increasing numbers of ever-larger buyout bids. Now the papers are covering the same deals as they fall apart. As the Journal noted, the termination of the Harman deal "represents a severe setback for the overall deal market as it tries to close upward of $350 billion of leveraged buyouts amid tightening credit conditions." If buyers’ remorse or tight credit undermines more deals, the disappointed targets can be expected to launch lawyers. Chances are that the lawsuits will live on long after the buyout bubble has become a distant memory. Posted by broc at October 3, 2007 08:06 AM