Yesterday while I was freaking out about the apparent abdication of responsibility by Bear Stearns' directors, Larry Ribstein was observing that it's not over 'til it's over -- that is, the Bear shareholders still have to approve the deal. Meanwhile, Steve Davidoff was looking at the merger agreement and commenting on an unusual provision that he calls "Bear's Put." Here is the provision:
Restructuring Efforts. If Company shall have failed to obtain the requisite vote or votes of its stockholders for the consummation of the transactions contemplated by this Agreement at a duly held meeting of its stockholders or at any adjournment or postponement thereof, then, unless this Agreement shall have been terminated pursuant to its terms, each of the parties shall in good faith use its reasonable best efforts to negotiate a restructuring of the transaction provided for herein (it being understood that neither party shall have any obligation to alter or change the amount or kind of the Merger Consideration, or the Tax treatment of the Merger, in a manner adverse to such party or its stockholders) and to resubmit the transaction to Company’s stockholders for approval, with the timing of such resubmission to be determined at the reasonable request of Parent.
And here is Steve's analysis:
Bear’s shareholders will have a vote on the transaction. However, if Bear’s shareholders vote down the agreement, the companies have the obligation under Section 6.10 of the agreement to negotiate a restructuring of the transaction but not a change in the consideration and to resubmit it to Bear’s shareholders for approval. This obligation lasts until the agreement is terminated. The way the agreement works in these circumstances Bear could not terminate the agreement until the drop-dead date of March 16, 2009
The provision appears drafted quickly, and it is unclear what type of restructuring would happen (perhaps an asset purchase?), but it effectively gives Bear shareholders a put right for a year to JPMorgan. During that time Bear’s shareholders could theoretically keep voting while waiting for a better option. Whether this would actually work is uncertain, and commentators were skeptical that one would come along, but a year is a long time. About a year ago, the largest private equity buyout of all time, that of TXU for $43.7 billion, was announced. Remember that?
In any event, I’m not sure that, in normal times, the Delaware courts would uphold this type of arrangement — a repeat force-the-vote provision — but this is not a normal deal.
As of today, this provision suddenly got more interesting, as Bear's shares are now trading at almost $6 -- three times the original purchase price. Some of that increase is explained by the fact that the Morgan deal is denominated in stock and Morgan's stock price has increased since Sunday. But what about the remaining premium? Are investors expecting a new bidder? (For competing hypotheses, see here.)
That's where the provision on "Restructuring Efforts" would become more interesting. Morgan has negotiated for the right to go back to Bear's shareholders with a restructured transaction. And they can do this until the merger agreement expires a year from now!* Today this looks less like "Bear's Put" and more like "Morgan's Call" (well, not exactly, but that sentence has nice symmetry).
Would the Delaware courts enforce this provision? The directors of Bear Stearns provided for a fiduciary out in the event of a superior proposal, but that "out" merely allows the board to change its recommendation to Bear's shareholders. Morgan still has its rights under the provision quoted above, which means that a competing bidder is foreclosed for the next year.
This provision has an effect similar to a "no hands" poison pill, which the Delaware Supreme Court invalidated in Quickturn Design Systems, Inc. v. Shapiro, 721 A.2d 1281 (Del. 1998). That effect would be to preclude a takeover for a specified period of time. In the case of Bear Stearns, the mechanism for producing this effect is a deal protection provision in a merger agreement, not a poison pill, but the Delaware Supreme Court's decision in Omnicare, Inc. v. NCS Healthcare, Inc., 818 A.2d 914 (Del. 2003) tells us that this is a distinction without a difference.
Even if Quickturn wouldn't decide the matter, Omnicare might seal the merger agreement's fate. The Bear Stearns-Morgan deal is not exactly like Omnicare, where the parties effectively ensured the result, but the Bear Stearns directors may have crossed the line by "completely prevent[ing] the board from discharging its fiduciary responsibilities to the minority stockholders when [a competing bidder] presented its superior transaction."
UPDATE: It's possible that the Delaware courts would recognize this circumstance as sufficiently unusual to justify the offending provision. As Steve observes above, "this is not a normal deal." The wild card here is the Fed, which inserted itself into negotiations fairly aggressively, by all reports. Does that excuse Bear Stearns' board from its obligation to shareholders? No. Though I can't swear that the Delaware judges would view it this way.
* Can they take multiple bites at this apple? The merger agreement is not clear, but the calendar works against them, as each bite requires substantial lead time.
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