ALI-ABA Course of Study Corporate Mergers and Acquisitions September 30 - October 1, 2010 New York, New York

Transcription

1 381 ALI-ABA Course of Study Corporate Mergers and Acquisitions September 30 - October 1, 2010 New York, New York How to Handle Corporate Distress Sales Transactions By Corinne Ball John K. Kane Jones Day New York, New York

2 382 TABLE OF CONTENTS Page A. Introduction... 1 B. Identifying the Distressed Seller... 1 C. Risks of a Distressed Transaction Without Chapter D. Chapter 11 Sales... 5 E. Advantages of Chapter 11 Sales F. Key Process Points G. Conclusion NYI v5 i

3 383 A. Introduction 1. Economic conditions resulting from the recent financial meltdown have significantly increased the number of distressed companies that are seeking to sell assets to improve their financial condition. Tight credit markets, oil and raw material prices and large legacy costs are some of the contributing factors. These distress sale situations can present both significant risks and significant opportunities for potential buyers. 2. Buyers therefore need to be especially skilled in spotting distressed sellers and conducting the acquisition process in a manner that minimizes those risks and maximizes those opportunities. As discussed below, chapter 11 provides both buyers and sellers with tools that will help them make the best of a distressed merger and acquisition transaction. B. Identifying the Distressed Seller 1. Signs of Distress. The filing of a bankruptcy petition is not the only sign of distress. Others include: a. recent ratings downgrades, which may trigger defaults under financing arrangements, limit access to commercial paper markets and cause turmoil with suppliers, who may be unwilling to continue to extend credit; b. near-term scheduled expiry of credit facilities, which may cause liquidity concerns and unusual cash-preserving behavior; c. a complex capital structure, dominated by multiple affiliated issuers of multiple issues of public debt with covenants limiting the granting of liens, asset sales, and other fund-raising activities, all of which may lead to liquidity problems; d. the pendency of significant regulatory investigations or decisions, which may trigger (or increase) class actions or shareholder derivative actions; e. indications of discord with auditors or expectations of qualified accountant s opinion; Corinne Ball is a partner in the New York City office of Jones Day, practicing in its Business Restructuring and Reorganization Practice. She is a member of the American College of Bankruptcy, the American Bankruptcy Institute, the ABA Business Bankruptcy Committee (formerly chair of the Chapter 11 Subcommittee and the European Insolvency Task Force), and the Advisory Committee on Corporate and Securities Law for the Practicing Law Institute. John K. Kane is a partner in the New York City of office of Jones Day, practicing in its Mergers and Acquisitions Practice. Partner John R. Cornell and associates Joshua Weisser, Ross Barr and Anna Triponel contributed to this article. NYI v5 1

4 384 f. a shift in lender representatives, such as a change in the lender personnel responsible for dealing with the borrower or the retention of professionals; g. debt reduction programs, such as asset sales and equity offerings; h. cost reduction initiatives, such as layoffs, pursuit of union concessions, and rationalization of, or exit from, certain business lines; and i. unexpected changes in senior management, especially in those with responsibility for financial matters. C. Risks of a Distressed Transaction Without Chapter Violation of Fiduciary Duties. Fiduciary duties of seller s officers and directors will shift as the seller approaches insolvency, potentially creating confusing and inconsistent negotiations. When a corporation becomes insolvent, directors duties are to a community of interests: the corporation, creditors, and shareholders. In this situation, creditors can assert derivative claims on behalf of the corporation against directors. The Delaware Supreme Court has made clear that directors of a solvent Delaware corporation that is approaching insolvency a status characterized as the zone of insolvency owe their fiduciary duties to the corporation and its shareholders, and not creditors. N. Am. Catholic Educ. Programming Found., Inc. v. Gheewalla, 930 A.2d 92 (Del. 2007). Irrespective of whether a Delaware corporation is within the zone of insolvency or insolvent, individual creditors cannot assert direct claims for breach of fiduciary duty against directors. The Supreme Court emphasized that [w]hen a solvent corporation is navigating in the zone of insolvency, the focus for Delaware directors does not change: directors must continue to discharge their fiduciary duties to the corporation and its shareholders by exercising their business judgment in the best interests of the corporation for the benefit of its shareholder owners. Id. at 101. Additionally, the majority of courts hold that directors are still protected by the business judgment rule when the company is insolvent. See Prod. Res. Group, LLC v. NCT Group, Inc., 863 A.2d 772, (Del. Ch. 2004) ( the business judgment rule remains important [once the firm is insolvent] and provides directors with the ability to make a range of good faith, prudent judgments about the risks they should undertake on behalf of troubled firms ); Angelo, Gordon & Co. L.P. v. Allied Riser Commc ns Corp., 805 A.2d 221, 229 (Del. Ch. 2002) ( even where the law recognizes that the duties of directors encompass the interests of creditors, there is room for application of the business judgment rule ). a. The Third Circuit has made it easier for bankruptcy trustees and debtors in possession to file suit against corporate directors and officers for alleged breaches of fiduciary duties. See Stanziale v. Nachtomi, 416 F.3d 229 (3d Cir. 2005). The court concluded that the District of Delaware erred by imposing a heightened pleading standard under Delaware s strict Chancery Rule 8 in lieu of the more lenient federal standard under Federal Rule of Civil Procedure 8. Although at first glance these standards appear to mirror one another, Delaware courts have NYI v5 2

5 385 interpreted Chancery Rule 8 to require pleading facts with specificity [which] is not the federal notice pleading standard. Id. at 236. Under the federal notice pleading standard, a plaintiff must allege supporting facts, but only those necessary to provide the defendant fair notice of the plaintiff s claim and the grounds upon which it rests. Id. at 237; see also Boles v. Filipowski (In re Enivid, Inc.), 345 B.R. 426, 451 (Bankr. D. Mass. 2006); In re Nat'l Century Fin. Enters., Inv. Litig., 504 F. Supp. 2d 287, 312 (S.D. Ohio 2007). These decisions allow many more claims involving allegations of breaches of fiduciary duties to proceed to the discovery stage of litigation. b. A recent decision by the Delaware Chancery Court has established the possibility that a financial advisor may be held liable for aiding and abetting a breach of fiduciary duty by a Delaware board of directors or controlling shareholder. In Shandler v. DLJ Merchant Banking, Inc., No VCS (Del. Ch. July 26, 2010), the bankruptcy trustee brought claims for breach of fiduciary duty on behalf of Insilco Technologies, Inc. ( Insilco ) against Insilco s controlling shareholder DLJ Merchant Banking, Inc. and related funds ( DLJ ) and DLJ-affiliated directors in connection with the sale of an Insilco subsidiary to another DLJ-controlled entity prior to Insilco filing for chapter 11 protection. The trustee argued that the DJL directors caused the subsidiary to be sold at an unfair price due in part to the fact that the one-man special committee who approved the sale made no effort to obtain better terms or shop the subsidiary to other potential buyers and also had ties to DJL that were not disclosed in the board resolution appointing him. The bankruptcy trustee also claimed that KeyBanc Capital Markets, Inc. ( KeyBanc ), Insilco s financial advisor in sale, aided and abetted these breaches of fiduciary duty by knowingly using an unfair financial analysis which placed too low of a value on the subsidiary. Furthermore, the bankruptcy trustee showed that KeyBanc had been retained by DJL to render an opinion that the transaction was fair to DLJ just three weeks before KeyBanc was retained to perform its fairness analysis on behalf of the special committee. The court refused to dismiss the fiduciary claims against certain directors or the aiding and abetting claim against KeyBanc. Though KeyBanc had moved to dismiss the claim based partly on the ground that its contractual dealings with Insilco were governed by Ohio law, which does not recognize aiding and abetting claims, the court concluded that because the alleged aiding and abetting was against a Delaware corporation, Delaware s interest was paramount and thus Delaware law governed the claim. c. Revlon Duties: Seller s board, having decided to sell the company for cash, has a duty to undertake reasonable efforts to secure the highest price realistically achievable. Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173, 184 n. 16 (Del. 1986). A variety of sales approaches may be sufficient, depending on the particular circumstances of the case. Barkan v. Amsted Indus., Inc., 567 A.2d 1279, (Del. 1989). Recently, the Delaware courts have emphasized that there is no single blueprint directors must follow to fulfill their Revlon duties. Lyondell Chem. Co. v. Ryan, 970 A.2d 235 (Del. Mar. 25, 2009); Wayne County Employees' Ret. Sys. v. Corti, No CC, NYI v5 3