Carve-Outs Defeat Fraud and "Material Adverse Effect" Defenses to Merger Deal
Will a merger finish Finish Line?
Blawgletter read this morning that a Tennessee trial judge yesterday ordered footwear-retailer Finish Line to keep its promise to buy rival Genesco for $1.5 billion. WSJ article here; Bloomberg here.
Then we read the court's 43-page Memorandum Opinion and Order, which Genesco kindly posted on its website. Our conclusions? Let's just say that Chancellor Ellen Hobbs Lyle didn't earn Phi Beta Kappa and Tennessee Law Review honors for nothing.
Her Honor found and concluded that:
- Genesco and its adviser Goldman Sachs chose not to volunteer to Finish Line and its adviser UBS information about a sizable dip in Genesco's financial performance during May 2007. But the parties' Merger Agreement, and the procedures the parties followed in due diligence, excused Genesco from any obligation to correct misimpressions by Finish Line. Thus no fraud defense.
- Genesco had, but failed to carry, the burden of showing that no "Material Adverse Effect" happened after the parties inked the Merger Agreement on June 17, 2007. The MAE didn't matter because the Merger Agreement included a carve-out for an MAE that resulted from a downturn in general economic conditions instead of circumstances specific to Genesco. Because Genesco's problems stemmed from a general economic downturn, Finish Line had no MAE defense.
The gist of the decision gets this summation near the end:
The transaction in issue is not a handshake deal; it does not come within the Lonesome Dove frontier standards of dealing. The merger in this case was a highly negotiated transaction, with teams of lawyers, advisors and handlers being paid enormous sums to orchestrate the procedure for obtaining information, the production of information, and the use and reliability of information. This milieu is UBS's home territory. UBS was advising Finish Line. There was, then, no inequality of bargaining power nor oppression. As Professor Hitscherich testified, the provisions contained in the Merger Agreement are standard. Under these circumstances, the Court finds it[] does not offend the conscience to enforce performance of the Merger Agreement.
Genesco, Inc. v. The Finish Line, Inc., No. 07-2137-II(III), slip op. at 41-42 (Tenn. Chanc. Ct. Dec. 27, 2007).
Finish Line may yet walk the deal. Chancellor Lyle acknowledged the possibility that "the combined companies would result in an insolvent entity" but left that question of insolvency to a court in New York.
Congratulations to our former partner Jonathan Shaw for his part in the big trial win. Also to our friend Jonathan Schiller.
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