September2009 / Volume 1, Number 9
In This Issue
(click titles...)
Courts Signal that Financial Advisors Issue Fairness Opinions
President’sReport
Coming Events
September 24 – Panel Discussion: Is ‘Loan to Own’ the new workout strategy?
October 29 - TMA - NEON/IWIRC joint meeting: The Fundamentals Still Apply
November 13 – Annual TMA Ohio Workshop (see page6 for full agenda)
See page 2 for event details and the complete 2009 meeting schedule. For event signup, see our Chapter Website.
About TMA
TMA is the premier national organization of professionals dedicated to corporate renewal and turnaround management. / Courts Signal that Financial Advisors Issue Fairness Opinions, Not Insurance Policies
By Steven H. Goldberg and Douglas M. Nevin, Baker Hostetler
In recent years the role of financial advisors in M&A transactions has garnered increased attention. Traditionally viewed as a sort of insurance policy for disappointed buyers, financial advisors are now more commonly viewed as service providers responsible for specified duties. The courts have reinforced this position with a string of opinions which both narrowly tailor the role of financial advisors in such transactions and appear to limit their duties of disclosure in connection with financial analyses and the issuance of fairness opinions.
Role of Financial Advisors: HA-LO
In HA2003 Liquidating Trust v. Credit Suisse Securities (USA) LLC,[1] the U.S. Court of Appeals for the Seventh Circuit recently held that financial advisors are only liable for damages resulting from specifically contracted duties. The opinion absolved Credit Suisse First Boston ("Credit Suisse") of liability arising out of its engagement as financial advisor to HA-LO Industries ("HA-LO") in connection with HA-LO's acquisition of Starbelly.com ("Starbelly").
HA-LO, a "promotional products" retailer looking to expand into online commerce, had agreed to purchase startup e-commerce company Starbelly at a price of $240 million. HA-LO had engaged Credit Suisse for investment bank services and Ernst & Young ("E&Y") as a business consultant in connection with the transaction. As a part of its duties to HA-LO, Credit Suisse negotiated pricing, structured payments, and arranged for new credit facilities to cover HA-LO's purchase of Starbelly. It also issued a fairness opinion to HA-LO which stated that Credit Suisse was relying on given financial information that it was neither required nor expected to verify. Based on the given information Credit Suisse issued a fairness opinion stating that "the Merger Consideration is fair to HA-LO from a financial point of view." Subsequent to the issuance of the fairness opinion E&Y discovered that Starbelly's financial projections were unrealistic and the company was unlikely to generate its projected revenue stream. HA-LO's board of directors was fully aware of this discrepancy when it issued proxy solicitations to shareholders proposing the acquisition. The merger was subsequently approved and the transaction was completed.
Continues…(Feature Article, p. 4)
President’s Reportby Nancy Terrill
Dear Ohio TMA members and friends:
I would like to start this month’s newsletter with a continuing thank you to Louise Walsh who assists our organization with every detail of our planning and without whom we would be hard pressed to provide our quality programming and networking events. Louise is the organization in our organization! Thank you very much for your wonderful support.
Continues... (page 3)
A Note from this Month’s Featured Sponsor
/ First Business Capital Corp. (FBCC) is a bank owned asset-based lending company providing secured loans of $1,000,000 to $7,000,000 to privately held businesses in transition. FBCC is headquartered in Madison, Wisconsin with business development offices in Milwaukee, Chicago, Minneapolis, St. Louis, Cleveland, and Detroit. Contact Joseph Cillian at First Business Capital, 5005 Rockside Road #600, Independence OH 44131 (216) 573-3792 or visit the firm at
Ohio TMA Corporate Sponsors
Aurora Management Partners
Baker & Hostetler LLP
Calfee Halter & Griswold LLP
Centrus Group, Inc.
First Business Capital Corporation
Huron Consulting Group
Inglewood Associates
McDonald Hopkins LLC
Morris-Anderson & Associates
The Parkland Group
Wells Fargo Business Credit, Inc. / 2009 Meeting Schedule
For more information, contact Louise Walsh, Chapter Administrator, at 216 861-5627 or
September 24, 2009 – NEW topic! Distressed Debt Transactions by Angel “Vulture” Investors – Is “Loan to Own” the new workout strategy?
Background: The Wall Street Journal recently reported that Distressed Debt transactions are up 40% in 2009. It would appear that “Loan to Own” transactions are increasing partly froma lack of lending from traditional banks. What does this bode for companies seeking investment, for the workout community, and for traditional banks?
Panelists are Ravi Bhagavatula – Marlin Equity Partners, LLC and Kenneth A. Hirsch – Western Reserve Partners. Hear these experts discuss the transactions happening in the market right now! Networking and registration begin at 11:30AM, lunch at noon. Union Club, 1211 Euclid Avenue, Cleveland Ohio.
October 29, 2009 –TMA - NEON/IWIRC joint meeting / The Fundamentals Still Apply: Using Settled Rules in the New Economic Game
Yes, the economy is in trouble and the problems are complex. But the best response is to get back to the basics because that lets us develop strategies based on rules we know and with which we are comfortable, making the complexity manageable. This program will look at those basics, giving you more than an explanation of what they are and how they work. Our panel of experts will also walk you through scenarios across specific asset classes and industries using various available remedies including receivership, bankruptcy, assignment and foreclosure. The discussion will be highly interactive and is certain to entertain as well as inform.
November 13, 2009 – NEW date! Annual Workshop at The Forum
Continuing education credits and breakout sessions. Starts with 11:30AM lunch featuring keynote speaker Aric Newhouse, Senior Vice President of Policy and Government Relations of the National Association of Manufacturers. Aric will provide an update on key legislation in Washington regarding issues affecting manufacturing, labor, climate, health and taxes.
Two and a half hours of continuing education creditscovering theFuture of Real Estate, Bank Counsel’s View on the Outside Professionals and Litigation in the Aftermath
The half day event ends with a 4:30 to 5:30 PM Networking Reception
One Cleveland Center - 1375 East Ninth Street. Cleveland, OH 44114.
December 17, 2009– NEW Location!! Holiday Party
Begins at 5:30PM at the Ponte Vecchio restaurant–2100 Superior Viaduct, Suite 520, Cleveland, Ohio 44113. Check out the website for directions and information regarding our exciting new Holiday Party venue:
Preliminary 2010 TMA Schedule of Programs
January 22, 2010 (tentative date) – Economic Update
February 25, 2010 (tentative date) - TBD
March 25, 2010 (tentative date) - Workout Banker Panel
April 22, 2010 (tentative date) - Chancellor University – a study of a successful workout
May 27, 2010 (tentative date) - Book Author Luncheon
NOTE: Exact locations and times for each event will be announced well in advance of each meeting. While it is anticipated that this schedule will be held throughout 2009, material events or other unforeseeable events could result in changes. For the most current information about meetings and events, and to sign up, visit the TMA Ohio website.
Ohio TMA
Board Members
President
Nancy Terrill (216-858-3577)
Vice President
John Lane (216-839-6700)
Secretary
Mark Kozel (216-621-1985)
Treasurer
Mark Kutylowski (216-248-8787)
Publicity
Daniel DeMarco (216-274-2432)
Membership
Scott Opincar (216-348-5400)
Education
Robert Folland (216-566-5813)
Sponsorship
Gregory Pike (440-338-3744)
Scholarship
Sally Barton (216-689-0590)
Pro Bono
David Wehrle (330-255-2484)
Special Events
Kelly Burgan (216-861-7395)
Programming
Bryan Farkas (216-479-6156)
Neil Kelly, (216-222-3956)
Liz Lynch (614-734-2717)
Sharon Rader (216-222-3009
Past President
Joseph Hutchison (216-861-7701)
Administration
Louise Walsh (216-861-5627)
To subscribe, visit TMAon the Web / President’s report (continued)
We have some exciting programs planned for the rest of 2009 including the September distressed debt panel focused on the loan-to-own transactions that are taking place across the country. Learn what the investment banking community is seeing the banks do in workouts in today’s market!
In October we will again do a joint program with the IWIRC (International Women in Restructuring) NEON group who will take us “Back to Basics” with an evening program at the House of Blues. The panel offers a lively discussion of how to handle highly troubled situations with receiverships and bankruptcy. They promise details on specific industries and specific asset categories.
While certified turnaround professionals can get continuing education credits at any of our panel programs, once a year in November we sponsor a half day education program that also provides CLE and CTP for lawyers and accountants, respectively. Rob Folland from Thompson Hine LLC is coordinating the education program this year starting with lunch keynote speaker Aric Newhouse, the Senior Vice President for Policy and Government Relations at the National Association of Manufacturers. Aric will provide an update on the key legislation in Washington and issues affecting manufacturing focusing on labor, energy/climate change, health, and tax policy.
Education panels will cover meaningful current topics of real estate, outside professional utilization and distressed business litigation. As always, the program will end with an hour-long networking reception.
Finally we will complete the year with a very special holiday party overlooking the Cuyahoga River from the West bank at Ponte Vecchio restaurant. Kelly Burgan from Baker & Hostetler LLP is this year’s events program coordinator and she identified the D’Vine Wine Bar for the very successful Young Professionals Event in August. The holiday party overlooking the river and holiday lights will be spectacular. Do not miss it!
We are beginning our planning for 2010 and as you can see on our calendar on the next page, we plan to begin 2010 with a program focused on the economy. While everyone has their own examples of the weakness in our 2009 economy, I again look forward to a macroeconomic look at what we are all living on a micro economic level!
Our 2010 planning includes sponsorship promotions. We are offering a limit of 12 Gold Corporate Sponsorships in 2010. Gold sponsors will be listed in each monthly newsletter, listed and thanked at each event, and will be featured in one newsletter as the sponsor of the month including the opportunity to write the featured article. In addition we will seek special event sponsors for high profile programs, including author and the networking events such as the Shoreby and the holiday party as well as the 2010 education program. If interested, please contact Gregory Pike, our board member in charge of sponsorships 440-338-3744. Don’t miss the opportunity to associate your firm’s name with the quality programs at the Ohio TMA in 2010!
Best regards,
Nancy Terrill,president of Ohio TMA
Feature article (continued)
Shortly after closing and due in part to the financial strain placed upon it by the acquisition of Starbelly, HA-LO was forced into bankruptcy. The trustee of HA-LO's Liquidating Trust brought suit against Credit Suisse for damages resulting from the merger.
In claiming that Credit Suisse had been grossly negligent in preparing and issuing its fairness opinion, the Trust argued that Credit Suisse should have relied on E&Y's evaluation of Starbelly's prospects rather than on the given information and projections supplied by HA-LO's board. It further argued that Credit Suisse should have revised or withdrawn its fairness opinion in anticipation of a market downturn once the price of other dot-com stocks began to plunge.
The Seventh Circuit rejected these arguments, holding that Credit Suisse was engaged only to conduct an analysis of given and available information and that it had performed its clearly articulated duties. More significantly, the court "found it impossible to label as 'grossly negligent' [Credit Suisse's] decision to do what [its] contract required it to do: use the figures and projections furnished by its client." The opinion chastised the Trust stating "[t]his suit is nothing but an attempt to find a deep pocket to reimburse investors for the costs of managers' blunders," and "[Credit Suisse] did not write an insurance policy against managers' error of business judgment." The court would not expand the contractual obligations and liabilities of Credit Suisse as a financial advisor, because to do so would be to "throw out the detailed contract that HA-LO and [Credit Suisse] had negotiated and to make up a set of duties as if this were tort litigation." Finally, the court concluded that "[t]he Trust's belief that [Credit Suisse] should have been hired to do something different is not a basis of liability."
Disclosure Obligations: Globis and Merrill Lynch
In a line of similar cases the Court of Chancery of Delaware defined in further detail the disclosure obligations of financial advisors in M&A transactions. In each of these cases, plaintiffs alleged inadequate disclosure of information by the respective Board of Directors and inadequate analyses of financial information by engaged financial advisors. The Delaware Court dismissed a majority of these claims, effectively limiting the disclosure obligations of both boards and financial advisors in connection with such transactions.
In Globis Partners, L.P. v. Plumtree Software, Inc., [2] plaintiff Globis Partners L.P. ("Globis") sued defendants Plumtree Software, Inc. ("Plumtree") and BEA Systems, Inc. ("BEA") over BEA's acquisition of Plumtree. Globis was a major shareholder of Plumtree stock and it was dissatisfied with BEA's purchase price of Plumtree. Globis claimed that the proxy disseminated by Plumtree to its shareholders over the merger was flawed and that the fairness opinion issued by Plumtree's financial advisor Jeffries Broadview ("Jeffries") was deficient and misleading. Globis alleged that "the discount rate used in the Present Value of Future Share Price Analysis was not disclosed.'" Globis also argued that the "Proxy was materially false and misleading," and that Plumtree "should have disclosed additional details on the private transactions used in Jeffries' analyses." Globis further contended that Plumtree directors disseminated a "materially false and misleading Proxy," leading to an uninformed shareholder vote over the merger between Plumtree and BEA.
The Court of Chancery of Delaware dismissed all of these claims, holding instead that Globis must demonstrate "a substantial likelihood that the disclosure of the omitted fact[s] would have been viewed by the reasonable investor as having significantly altered the 'total mix' of information made available." The court further held that "Directors must give stockholders financial information material to their decision. Stockholders are entitled to a fair summary of the substantive work performed by the investment bankers upon whose advice the recommendations of their board as to how to vote on a merger or tender rely. This duty does not require directors to provide financial information merely 'helpful or cumulative to other information that was provided,' and the duty does not require the provision of information to permit stockholders to make 'an independent determination of fair value.'" The sort of "quibble" that Globis had over the substance of Jeffries' fairness opinion and the way in which it conducted its financial analyses did not constitute a disclosure claim. Jeffries was deemed to have performed a fair and competent analysis of available information and issued a clear and sufficient fairness opinion. The court noted that "Delaware law does not require disclosure of all the data underlying a fairness opinion such that a shareholder can make an independent determination of value," and "[s]tockholders who disagreed with Jeffries' analyses had sufficient information to make an informed decision." This opinion reaffirmed the responsibility of financial advisors to conduct their duties accordingly while quashing attempts by dissatisfied shareholders to expand the duties and obligations of financial advisors beyond their actual scope.
Continues (Feature article p.5)
Feature article (continued)
Similarly, County of York Employees Retirement Plan v. Merrill Lynch & Co. [3] arose out of a failed merger between Merrill Lynch ("Merrill") and Bank of America ("BofA"). County of York Employees Retirement Plan ("County of York") asserted that the merger between defendants Merrill and BofA was reached "because directors of Merrill failed to satisfy their fiduciary duties," and the preliminary proxy that was disseminated contained an inadequate disclosure of material information. County of York claimed that there were material deficiencies in the disseminated proxy because it did not discuss certain specific and particular aspects of the financial analyses conducted by the financial advisors engaged for the merger. Although the court held that some of the other claims against Merrill and BofA were colorable, it dismissed all of the disclosure claims against Merrill and its financial advisor. The court emphasized that boards "need not disclose specific details of the analysis underlying a financial advisor's opinion," and that "pursuant to Delaware law, Merrill was not required to disclose all financial projections considered by [their financial advisor]."
[1]HA2003 Liquidating Trust v. Credit Suisse Securities (USA) LLC, 517 F.3d 454 (7th Cir. 2008).
[2]Globis Partners, L.P. v. Plumtree Software, Inc., 2007 WL 4292024 (Del. Ch.).
[3]County of York Employees Retirement Plan v. Merrill Lynch & Co., 2008 WL 4824053 (Del. Ch.).
Steven H. Goldberg is a partner in Baker Hostetler’s New York office and is Co-Chairman of the firm’s Transactions Practice Team. Contact Steven at 212-589-4219or .
Douglas M. Nevin is a corporate associate in Baker Hostetler's New York office, and can be reached at 212-589-4637 or .