Acquisition of Motorola Mobility Holdings, Inc. by Google Inc.

This note provides a brief overview of  the ongoing merger deal- acquisition  of shares (Merger Deal) of Motorola Mobility Holdings, Inc. (Motorola or the Target) by Google, Inc. (Google or the Buyer or Acquirer) through its wholly owned subsidiary (WoS), RB98 Inc. (RB98) and discusses in brief, (a) the structure of the deal, (b) time lines involved in structuring and negotiating the merger agreement (Merger Agreement), (c) procedure involved under Delaware General Corporation Law (DGCL), Securities Act, 1934 (Exchange Act) and Hart–Scott–Rodino Antitrust Improvements Act, 1976 (HSR Act) for Merger Deal to go through, (d) business strategy behind the Merger Deal, and (e) the salient feature of the Merger Agreement signed between RB98, Motorola and Google (collectively referred as Parties) dated 15 August, 2011.

Structure of the Merger Deal

For the purpose of facilitating Google’s acquisition of Motorola, Google formed/ incorporated RB98 in the state of Delaware under DGCL (it must be noted that Google and Motorola both are incorporated under the laws of state of Delaware under DGCL).  Under the terms of the Merger Agreement (Terms of Agreement), upon consummation of proposed merger, RB98 will merge with and into Motorola and as a result of the merger, the separate corporate existence of RB98 will cease and Motorola would be the surviving corporation in the merger and will continue as a WoS of Google. Further under the Terms of Agreement, if the merger is completed, by virtue of the merger, each share of the Motorola common stock issued and outstanding immediately prior to the effective time of the merger will be cancelled and converted into the right to receive $40 per equity in cash (without interest and less any applicable tax withholdings).

Following the completion of merger, among other things:

•  Current shareholders of Motorola would cease to have direct or indirect ownership interest in Motorola;
• Motorola common stock will be de-listed from the New York Stock Exchange (NYSE) and deregistered under the securities laws and as a result Motorola will become a privately held corporation; and
• Each share of common stock of RB98 will constitute the only outstanding shares of capital stock of the surviving corporation i.e., Motorola.
  

Time lines involved in structuring and negotiating the Merger Agreement

As per the preliminary special proxy statement (Proxy Statement) filed with the U.S. Securities and Exchange Commission (SEC) pursuant to the section 14(a) of the Exchange Act on 13 September, 2011, the Parties of the Merger Deal expects the merger to be completed by the end of 2011 or early 2012.  As regards timelines, the exact dates cannot be predicted as the closing of Merger Deal is dependent upon hosts of factor including absence of any order issued by courts against the transaction, affirmative votes of the majority shareholders of Motorola, Anti-trust approvals (national and international) etc., however, based on the Proxy Statement and the Merger Agreement (assuming all the closing requirements are fully met) following may be the timeline involved in the Merger Deal [from start (approaching of Google) to finish (consummation of all the legal requirements under the applicable laws)]:-

Procedure involved under DGCL, HSR Act and Exchange Act for the Merger Deal to go through

• Under section 251 of the DGCL, for a corporation to be acquired in a merger, the transaction first must be approved by the board and thereafter approved by the stock holders.  In a publically traded corporation, there typically will be a time lag on no less than 30-60 days from the date of the board action until the date of the stock holder vote.  In the present Merger Deal, after considering the proposed Terms of the Merger Agreement, the board unanimously on 14-15 August, 2011 determined that the transaction contemplated under the Merger Agreement are advisable and fair to, and in the best interest of the shareholders of Motorola.

• Further, those shareholders who do not vote in favor of the Merger Agreement and the merger will have the right to seek appraisal (under section 262 of the DGCL) of the fair value of their shares of Motorola common stock as determined by the Delaware Court of Chancery if the merger is completed, but only if they submit a written demand for such an appraisal prior to the vote on the Merger Agreement and the merger and comply with the other DGCL procedures.

• Under the provisions of the HSR Act and the rules and regulations promulgated thereunder by the Federal Trade Commission (FTC), the merger may not be completed until notification and report forms have been filed with the Antitrust Division of the United States Department of Justice (Antitrust Division) and the FTC by each of Motorola and Google, and the applicable waiting period has expired or been terminated.  Under the Terms of the Merger Agreement, Motorola and Google filed their respective notification and report forms with the Antitrust Division and the FTC under the HSR Act on 29 August, 2011.  The waiting period under the HSR Act, therefore, will expire at 11:59 p.m., New York City time, on 28 September, 2011 unless earlier terminated or extended by a request for additional information and documentary material, which we refer to herein as a “second request.”
• If within the 30-day waiting period the Antitrust Division or the FTC were to issue a second request (which in the present Merger Deal was made on 28 September, 2011), the waiting period under the HSR Act would be extended until 30 days following the date on which both Google and Motorola certify substantial compliance with the second request, unless the Antitrust Division or the FTC terminates the additional waiting period before its expiration.  Google, RB98 and Motorola have agreed to use reasonable best efforts to certify compliance with any “second request” within four months after its receipt and to produce documents as required on a rolling basis. If the Antitrust Division or the FTC believes the merger would violate the U.S. federal antitrust laws by substantially lessening competition in any line of commerce affecting U.S. consumers, it has the authority to challenge the transaction by seeking a federal court order to enjoin the merger. U.S. state attorneys general or private parties could also bring legal action.  Further, Google and Motorola plan to submit filings in other jurisdictions as necessary in due course. On 29 August, 2011, Motorola and Google agreed that, in addition to those in the United States and European Commission, pre-closing antitrust clearances in Canada, China, Israel, Russia, Taiwan and Turkey are required and applicable to the merger. Foreign antitrust authorities in these or other jurisdictions may take action under the antitrust laws of their jurisdictions, which could include seeking to enjoin the completion of the merger.

•  With respect to antitrust clearances, each of Motorola, Google and RB98 has agreed to:  

• use its reasonable best efforts to obtain termination or expiration of any waiting periods under the HSR Act, clearance under the EC Merger Regulation and such other approvals, consents and clearances as may be necessary, proper or advisable to effectuate the merger under the antitrust laws and to remove any court or regulatory orders under the antitrust laws impeding the ability to consummate the merger by the outside date; and

• use reasonable best efforts to certify compliance with any “second request” for additional information or documentary material from the Department of Justice or the FTC pursuant to the HSR Act within four months after receipt of such second request and to produce documents as required on a rolling basis.

• Google will have the unilateral right to determine whether or not the parties will litigate with any governmental entities to oppose any enforcement action or remove any court or regulatory orders impeding the ability to consummate the merger. Google will also control and lead all communications and strategy relating to the antitrust laws and litigation matters relating to the antitrust laws, subject to good faith consultations with Motorola and the inclusion of Motorola at meetings with governmental entities with respect to any discussion related to the merger under the antitrust laws.

• Securities laws in US are based on disclosure for regulating the public listed companies, if any material information comes up the board is required to promptly disclose it to the stock exchanges.  Pursuant to this, (a) under section 14(a) of the Exchange Act, Motorola filed Proxy Statement in the specified format with the SEC; (b) Motorola is obligated to file current report in Form 8-K as prescribed under the Exchange Rate

Business strategy behind the Merger Deal

Apart from the text-book explanations of the Merger Deal, in my view the main driving forces behind the present Merger Deal are:

• Mr. Carl C. Icahn (through its various US and Cayman Island based funds) have 11.39% equity shares in the Target and he wanted liquidate his shareholdings; and

•  Dr. Sanjay Jha, CEO of the Target, has about 1.84% equity shares of the Target and he also wanted to liquidate his shareholdings and perhaps, Google happens to be the only Acquirer who have agreed on the ‘Golden Parachute’ clause under the Merger Deal and additionally, Dr. Jha along with other officers of the Target would be beneficiary of cash severance payment, bonus payment, LRIP replacements, perquisites etc.

In my view, the shareholders of the Target may bring derivative suits or class action suits against the directors and officers of the Target for approving the Merger Agreement, as these directors and officers have failed in their fiduciary duties and instead to running the company steadily, they have chosen to sell the Target to an outside raider.

As per the Proxy Statement filed with the SEC, among other things, board of Motorola has cited following reasons for approving the proposed merger:

•  Terms of the Agreement are more favorable to Motorola Stockholders, like per share consideration payable (which is in full cash);
• There is a risk that Motorola’s performance may not meet market expectations, which could adversely impact Motorola’s trading range/ internal forecasts;
• If Google does not use its reasonable best efforts to complete the deal, it would be liable for $2.5 billion termination fee;
• Motorola may face certain risks related to (i) intellectual property litigation and claims; and (ii) intellectual property infringement claims; and
• Opinion of Qatalyst Partners LP and Centerview Partners LLC was tilted towards approval of the Merger Deal.

Salient feature of the Merger Agreement signed between the Parties

The Merger Agreement and plan of merger was signed among the Parties on 15 August, 2011.  Among other things, some of the important features of the Merger Agreement are as follows:

Conversion of shares clause: Typically, in a merger agreement such as the present Merger Deal, at effective time (generally a time after all closing conditions are met), all the outstanding shares of some par value (it could be any number) shall no longer be outstanding and shall cease to exist, and each holder of such shares shall cease to have any rights with respect to shares, except the right to receive the merger consideration (which is $40 in the present case).

Requisite stockholder approval clause: In terms of section 251, DGCL, the stockholders of Motorola are required to adopt the Merger Agreement and approve the merger by affirmative vote of the holders of not less than a majority of the outstanding shares in favor of the merger.

No Solicitation; Company Recommendation clause: Motorola shall and shall cause each of its subsidiaries to, and shall instruct each of its and their respective directors, officers, employees, financial advisors, legal counsels, auditors, accountant or other agents to, immediately cease any solicitation, knowing encouragement, discussions or negotiations with any persons that may be ongoing with respect to any acquisition proposal and immediately instruct any person (including that person’s representatives) that has confidential information about Motorola that was furnished by or on behalf of Motorola in connection with any actual or potential acquisition proposal to return or destroy all such information. In addition, Motorola has agreed that neither it nor its subsidiaries will, nor will they authorize or knowingly permit their representatives to, directly or indirectly:

• solicit, initiate, propose or induce the making, submission or announcement of, or knowingly encourage or assist, an acquisition proposal;
• furnish to any person any non-public information relating to Motorola or its subsidiaries in connection with any acquisition proposal;
• furnish to any person any non-public information relating to Motorola or its subsidiaries in response to any other proposal or inquiry for a potential transaction that on its face is one of the specified transactions;
• afford to any person access to the business, properties, assets, books, records or other non-public information, or to any personnel of Motorola Mobility or any of its subsidiaries in connection with any acquisition proposal;
• afford to any person access to the business, properties, assets, books, records or other non-public information, or to any personnel of Motorola or any of its subsidiaries in response to any other proposal or inquiry for a potential transaction;
• enter into, participate, engage in or continue or renew discussions or negotiations with any person with respect to any acquisition proposal; or
• enter into, or authorize Motorola or any of its subsidiaries to enter into, any letter of intent, agreement or understanding of any kind providing for, or deliberately intended to facilitate an acquisition transaction.

However, until Motorola stockholder approval has been obtained, if the Motorola Board of Directors receives an acquisition proposal that it determines in good faith (after consultation with its financial advisor and outside legal counsel) either constitutes a superior proposal or could reasonably be expected to result in a superior proposal (and at the time of taking the following action, the acquisition proposal continues to constitute or remains reasonably expected to result in a superior proposal), the Motorola Board of Directors may:

• participate or engage in discussions or negotiations with the person that has made the bona fide unsolicited written acquisition proposal (which must not have resulted from a knowing breach of the non-solicitation provisions of the merger agreement);
• furnish to the person that has made the bona fide unsolicited written acquisition proposal (which must not have resulted from a knowing breach of the non-solicitation provisions of the merger agreement) any non-public information relating to Motorola or any of its subsidiaries, pursuant to a confidentiality agreement that contains provisions restricting disclosure and use that are no less favorable in the aggregate to Motorola than those in the confidentiality agreement entered into between Motorola and Google; and/or
• afford to the person that has made the bona fide unsolicited written acquisition proposal (which must not have resulted from a knowing breach of the non-solicitation provisions of the merger agreement) access to the business, properties, assets, books, records or other non-public information, or to the personnel, of Motorola or any of its subsidiaries, pursuant to a confidentiality agreement that contains provisions restricting disclosure and use that are no less favorable in the aggregate to Motorola than those in the confidentiality agreement entered into between Motorola and Google.

Reasonable Best Efforts clause: This is a standard clause, under which the parties to the merger agreement shows their willingness and uprightness to complete the transaction and perform their reasonable best effort to fulfill the requirements as contemplated under the merger agreement for e.g., anti-trust clearances, consents, approvals, registrations, furnishing of information etc.  In the Merger Agreement signed between the Parties, there is a standard reasonable best efforts clause.

Termination Fees clause: This is a relief clause, and one of party is compensated for the wrong committed by the other party.  In the instant Merger Agreement, Motorola has agreed to pay $375 million to Google under some conditions and Google has agreed to pay Motorola a fee of 4 2.5 billion if some of the specified conditions/ events occurs.  Further, if Google fails to make reasonable best efforts to effectuate merger under antitrust laws, it is liable upto the tune of $3.5 billion.

Golden Parachute Compensation (GPC) clause: GPC means compensation that may be paid or become payable to its named executive officers in connection with the merger and the agreements and understandings pursuant to which such compensation may be paid or become payable.   Under the Merger Agreement, the executive officers of Motorola will receive GPC (in the form of severance amount, Bonuses, LRIP Replacements, Equity, Perquisites, Tax Reimbursement) 

Further, following completion of the merger, Motorola Mobility common stock will be delisted from the NYSE and deregistered under the Exchange Act. As a result, Motorola Mobility will be a privately held corporation, and there will be no public market for shares of Motorola Mobility common stock.