Two-track transaction structure: case of acquisition of Immucor, Inc., by TPG Partners VI, L.P.

This note discusses in brief the two-track transaction structure (TTT Structure) generally employed in the United States for acquisitions of the corporations and for this purpose have considered the case of acquisition of Immucor, Inc., a Georgia corporation (Immucor or Target) by TPG Partners VI, L.P., a Delaware Limited Partnership (TPG Partners) as a base model.  Further, the note also discusses in brief the salient features of the merger agreement signed between Immucor and TPG Partners.

Transaction Structure

Under the terms of the merger agreement (Merger Agreement) signed on 2 July, 2011, between Immucor, IVD Holdings Inc., a Delaware Corporation (IVD Holdings or Parent), which is controlled by TPG Partners and IVD Acquisition Corporation, a Georgia corporation (Purchaser or Merger Sub) (Parent, Merger Sub, Immucor are collectively referred as Parties, and Parent, Merger Sub are collectively referred as Acquirers)) pursuant to consummation of tender offer (Tender Offer) in accordance with procedure laid under the Securities Exchange Act, 1934 (SEA), Merger Sub would acquire the share of Immucor from the shareholders tendering their shares under the Tender Offer at a purchase price of $27 per share and thereafter upon satisfaction or waiver of certain conditions, Merger Sub will be merged with and into Immucor (Merger), with Immucor continuing as the surviving corporation in the merger and a wholly owned indirect subsidiary of Parent.  

TTT Structure under the Merger Agreement

Under the terms of Merger Agreement, the Parties agreed to complete the Merger whether or not the Tender Offer is complete.  If the Tender Offer is not completed, the Parties agreed that the Merger could only be completed after the receipt of shareholder approval of the Merger Agreement at the special meeting.  Under a typical TTT Structure acquisition/ merger, the Tender Offer under SEA and the Merger under the State’s corporation law (here it is Georgia Business Corporation Code) are independent of each other and often runs parallel to each other.  The Target, parallely solicits proxies for the special meeting to obtain shareholder approval of the Merger Agreement to be able to consummate the Merger regardless of the outcome of the Tender Offer.  However, if the Tender Offer bid is successful and the Acquirer acquires more than 90% of the outstanding shares (95% shares in some States) or in certain qualified situation exercises Top-Up Option, discussed below and reach 90% shareholding level and therefore resultantly is in a position of effect short-form merger, then there is no requirement of special meeting of the shareholders to effect Merger.

The TTT Structure for the Tender Offer enables the Target’s shareholders to receive the cash price pursuant to the Tender Offer in a relatively short time-frame (and reduce the uncertainty during the pendency of the transaction), followed by the cash-out Merger in which the Target’s shareholders that do not tender in the Tender Offer will receive the same cash price as is paid in the Tender Offer.  In addition TTT structure permits the use of a one-step Merger, under certain circumstances, in the event the Tender Offer is unable to be effected in a timely manner.

Salient features of the merger agreement signed between the Parties

The Merger Agreement signed between the Parties had several boiler plate provisions typical to a merger agreement.  Among other things, some of the important provisions are discussed below:         

• Top-Up Option: Pursuant to the Merger Agreement, Immucor granted to Purchaser an irrevocable option to purchase at the Offer Price an aggregate number of Shares equal to the lowest number of Shares that, when added to the number of Shares owned by Parent, Purchaser and their affiliates at the time of such exercise (after giving effect to the Offer Closing), will constitute one Share more than 90% of the outstanding Shares on a fully-diluted basis.

• Equity Financing: In connection with the Merger Agreement, Parent received an equity commitment letter from the TPG Fund, dated 2 July, 2011,pursuant to which the TPG Partners has committed to purchase equity securities of Parent, at or prior to the Merger Closing, with an aggregate purchase price of up to $691 million, for the purpose of funding a portion of the aggregate offer price and/or the aggregate per share merger consideration, as applicable, required to be paid pursuant to the Merger Agreement and the transactions contemplated thereby, as well as related fees and expenses.

• Debt Financing : Purchaser received a debt commitment letter, from Citigroup Global Markets Inc., which, JPMorgan Chase Bank, N.A., and J.P. Morgan Securities LLC, to provide $1.1 billion in Debt Financing, consisting of a $600 million senior secured term loan facility, a $400 million senior unsecured bridge facility and a $100 million senior secured revolving facility.

• Limited Guaranty: In connection with the Merger Agreement, the TPG Partners executed and delivered to the Target a limited guaranty (Guaranty), dated 2 July, 2011.  Pursuant to the Guaranty, the TPG Partners has irrevocably and unconditionally guaranteed the due and punctual payment by Parent to the Target of $90.0 million, when required to be paid under the terms of the Merger Agreement.

Highly leveraged takeover deal backed by KKR to acquire Yageo rejected by Investment Commission, Taiwan

Asia is living in exciting times.  Ministry of Economic Affairs’ Investment Commission (IC) rejected private equity (PE) fund Orion Investment Co (Orion) US$ 1.6 billion buyout of Yageo Corp (Yageo).  The reasons for rejection given by IC are:

• lack of transparency in deciding acquisition price;
• minority stakeholders’ interests could be at risk because of a lack of transparency in the stake-buying prospectus;
• the debt ratio of the new company (as per the prospectus, after the takeover, Orion planned to delist Yageo from the Taiwan Stock Exchange (TWE) and thereafter merge with it), would surge, given that Orion had borrowed money to buy the shares (this being highly leveraged debt borrowing to the extent of NT$28 billion).

Structure of the proposed deal

Just like many other PE funded deals, in the present deal (Yageo deal), Orion in which Mr. Chen Tie-min holds 54.36% and KKR owns the remaining 45.64%, was planning to take Yageo (a manufacturer of passive components used in electronics) private from the TWE after the acquisition.  Orion was planning to spin off Yageo’s deferent component divisions after delisting and take these divisions to public in the future.

Structure of the Yageo deal is described below in a diagram.

The financing of Yageo deal is a bit-complex and  in stricto sensu, it’s a classic leverage buy-out (LBO) deal- and that’s what was opposed by the IC.  The Yageo deal was financed by- (a) own funds of the offeror; (b) shareholder loans; and (c) loans from local (loans from local Taiwan Banks and foreign banks in Taiwan upto NT$28 billion) and foreign financial institutions (UBS AG and Nomura International were roped in for loans upto US$ 957,745,000). 

Transaction Agreement for financing the Yageo deal

As per the transaction agreement (Transaction Agreement) dated 5 April, 2011 between (a) Mr. Chen Tie-min (Chairman and GM of the Target), HCHEL, SHDL, STHE, HTHL, HTL, Mr. Yoshiro Kubota and TMPC Holdings Limited (Founder Shareholders); (b) CHIL Parent (a holding company established by KKR) (CHIL Parent); and (c) AIHL (a JV between Founder Shareholders (through TMPC Holdings Limited) and CHIL Parent):

(a) On First Closing

• Founder Shareholders to invest US$ 35,566,000 in TMPC Holdings Limited (TMPC HL), and cause TMPC HL to acquire loans from offshore financial institutions in an amount of approx US$ 218,064,000 (Founder Bridge).  TMPC HL to further invest the borrowed money and other cash (equivalent to US$ 253,630,000) in shares issued by AIHL.
• CHIL Parent shall make it investment in AHIL by (i) 145,961,000 P-Notes issued by Citigroup Markets Global Holdings (P-Note Issuer) issued by Yageo; and (ii) all shares of CIHL held by CIHL Parent (CIHL holds 227,700,000 offshore convertible bonds issued by Yageo).
• AHIL, to further take loan (debt financing) from offshore financial institutions through bridge loan agreements to fund the sale of shares in the tender offer.

(b) On Second Closing

After the tendered shares reach minimum shares requirement, prior to the closing of tender offer:

• Further investment by CIHL Parent and TMPC HL and other relevant payments by CHIL Parent.

      (c) On Third Closing

Prior to the record date of merger between Yageo and Orion:

• Further investment by CIHL Parent and TMPC HL and other relevant payments by CHIL Parent.

The Offeror shall further seek debt financing from domestic financial institutions.  Subject to availability and credit limit of such debt financing from domestic financial institutions, Alphard Investments Netherlands, may borrow funds from offshore financial institutions and provide such funds to the Offeror in the form of shareholder loan so as to pay a part of purchase price of the tender offer.

After, due consideration the IC took the view that the Yageo deal is a highly leveraged transaction where load to pay the debt would fall on Yageo after the merger between Yageo and Orion and if any default happens Yageo could not be saved (it must be noted Yageo is one of the leading passive manufacturer of passive electronic component in Taiwan, and perhaps, Taiwanese authority do not want a debt default like situation in Taiwan); and another reason could be that Taiwanese authority wants to protect the shareholders particularly the minority shareholders-who would be forced out of the company pursuant to merger between Yageo and Orion.

Scenario in Indian takeover deals

In a takeover deal involving Indian listed company, provisions of Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (Takeover Code) would be applicable.  Under regulation 16 (xiv) of the Takeover Code: (Contents of the Public Announcements) disclosure to the effect that firm arrangement for financial resources required to implement the offer is already in place, including details regarding the sources of the funds whether domestic, i.e., from banks, financial institutions or otherwise or foreign, i.e., from Non-Resident Indians or otherwise.

Indian regulations are more of disclosure oriented regulations, however in practise the SEBI, may ask for details from the acquirer about the funding sources and if found highly leveraged- I am not sure what and how would SEBI react to this.  As a market practise, in the public announcements made by the acquirer a standard clause is put, which is worded like:

The Acquirers and the PAC propose to finance the Offer through internal accruals, equity infusion and bank borrowings

Further as a market practice, the acquirer takes a certificate from the chartered accountants stating that the acquirers are financially fit to acquire the target company.  In my opinion, SEBI might take the view as taken by IC in the Yageo deal and the LBO structured buyouts might not work in India, given the current market situation and regulatory regime in India.  Additionally, the acquisition financing is not allowed/ permissible under the Indian laws (Indian regulations impose restrictions on the ability of banks in India in relation to acquisition financing, prohibiting them from lending to a borrower, irrespective of whether the borrower is located offshore or onshore).

If suppose, Yageo structured like deal as above comes to SEBI (but removing the aspects of debt financing), SEBI might not take block the deal, as in numerous occasions SEBI has cleared the deals (where the public announcement) states (for e.g., acquisition of Patni Computers by iGate):

The Acquirers and the PAC reserve the right to streamline/restructure the operations, assets, liabilities and/or businesses of the Target Company through arrangement/reconstruction, restructuring, merger (including but not limited to merger with itself or any of its subsidiaries), demerger/delisting of the Shares of the Target Company from the Stock Exchanges and/or sale of assets or undertakings, at a later date. Such decisions will be taken by the boards of Directors of Acquirers and the PAC and/or the Board of the Target Company in accordance with procedures set out by applicable law, and pursuant to business requirements and in line with opportunities or changes in the economic scenario, from time to time. The Acquirers and the PAC will evaluate and consider such proposals from time to time in accordance with the business requirements, if appropriate.

Cairn-Vedanta deal: Takeaways for a Takeover lawyer

This year no other takeover deal is as widely publicized as acquisition of Cairn India Limited by Vedanta.  With Vedanta as a party- there is always a problem and publicity.  I am sure takeover lawyers acting for Vedanta (and Cairn-to an extent) must be having a great time, as they are the ones who are witnessing and experiencing the glitches of this famous-rocked deal.  Some of the important transactional aspects of this deal are discussed below:

No Put-option, Call-option arrangements and RoFR clause should be there in the SPA

Under the SPA signed between Vedanta and Cairn (relevant clause produced verbatim from the letter of offer dated 1 April, 2011):

The Sellers and the Acquirers have also entered into put and call arrangements in relation to a portion of the Sale Shares of the Target that may be retained by the Sellers on account of the adjustments mentioned in (a) above. The put and call obligations relate to a number of the Target Equity Shares equal to the difference between (A) 51% of the Voting Capital and (B) aggregate of (i) the number of Equity Shares actually acquired by the Acquirers at completion as defined under the SPD, (ii) the number of Equity Shares sold by the Sellers to any person at any price provided they were first offered to the Acquirers or its nominees at a price of Rs.405 per Equity Shares with a period of acceptance of at least 21 days and such offer was made to the Acquirers after a period of 6 months from completion as defined under the SPD and (iii) number of Equity Shares acquired pursuant to the exercise of the options mentioned herein. The put and call options are subject to a maximum of 10% (exercisable in two tranches of up to 5% each) of the issued share capital of the Company as at the date of exercise of options in terms of the SPD. The first tranche becomes exercisable from July 31, 2012 for a period of six months for up to 5% of the issued share capital of the Target at the time. The second tranche is exercisable from July 31, 2013 for a period of six months for up to 5% of the issued share capital of the Target at the time. The exercise price for the put and call obligations for both tranches is US$ equivalent of Rs. 405/- per Equity Share. The exchange rate has been fixed under the SPD as 1 US$ = Rs. 46.765. The SPD further provides that the Acquirers would not be required to purchase under the put options as mentioned above any Equity Shares of the Target where such acquisition would require the Acquirer or any member of its group to make any offer under the SEBI (SAST) Regulations.

Under the public announcement made on 16 August 2010, under the section ‘background of the offer’, it was mentioned:

g. The Sellers and the Acquirers have also entered into put and call arrangements in relation to a portion of the Equity Shares of the Target that may be retained by the Sellers. The put and call obligations relate to a number of the Target shares equal to the shortfall between the number of Equity Shares actually acquired by the Acquirers at Closing as defined under the SPD and 51% of the Voting Capital, subject to a maximum of 10% of the Voting Capital of the Target (“Balance Shares”).

In addition to the options, if the Sellers propose to transfer any of the Balance Shares after the expiry of 6 months from the date of consummation of the transactions under the SPA, the Acquirers will have right of first refusal in respect of those shares at Rs. 405 per Equity Share. The Sellers have agreed to give the Acquirer a pre-emption right over any subsequent disposal of Equity Shares where such disposal would result in the recipient of the shares holding more than 20% of the issued share capital of the Target.

h. As regards the Equity Shares other than the Balance Shares, the Sellers have agreed to give the Acquirers a preemption right over any subsequent disposal of Equity Shares where such disposal would result in the recipient of the shares holding more than 20% of the then issued equity share capital of the Target.

In this context, it may be noted that SEBI vide its letter no. CD/DCR/TO/BV/OW/9093/2011, dated March 18, 2011 has communicated that in its view the above-mentioned put option and call option arrangements and the Right of First Refusal do not conform to the requirements of a spot delivery contract nor with that of a contract of Derivatives as provided under section 18A of the Securities Contracts (Regulation) Act, 1956. Therefore, SEBI is of the view that the above-mentioned put option and call option arrangement along with the right of first refusal are in violation of Notification No. SO 184(E) dated March 1, 2000 issued by SEBI. In view of this, the Acquirers and Sellers have agreed that the call and put option arrangement between the Sellers and the Acquirers and the right of first refusal to the Acquirers as provided in the SPD shall not be exercisable or enforceable. Hence the Acquirers and Sellers will be unable to act on the call and put option arrangement and right of first refusal.

It would be helpful to understand, (a) what are put-option and call-option agreements, (b) what are the requirements of spot delivery contract, (c) meaning and scope of section 18A of SCRA and (d) the scope of Notification No. SO 184(E) dated March 1, 2000 issued by SEBI.

(a)     put-option and call-option agreement: put and call options are generally used terminologies in business jurisprudence to mean the holder of this option (put sometimes also referred as forced purchase) has the right to sell but not the obligation to sell the shares of an entity and the holder of this option (call) has the right to call for shares (or purchase shares) but has no obligation to call the shares of an entity respectively.

(b)     requirements of spot delivery contract: Under section 2 (i) (a) of the SCRA, spot delivery means a contract which provides for:

(i) actual delivery of securities and the payment of a price therefore either on the same day as the date of the contract or on the next day, the actual period taken for the dispatch of the securities or the remittance of money therefore through the post being excluded from the computation of the period aforesaid if the parties to the contract do not reside in the same town or locality;

(ii) transfer of the securities by the depository from the account of a beneficial owner to the account of another beneficial owner when such securities are dealt with by a depository.

(c)  meaning and scope of section 18A of SCRA: Under section 18A of the SCRA, contracts in derivate shall be legal and valid if such contracts are—

(i) traded on a recognised stock exchange;

(ii) settled on the clearing house of the recognised stock exchange, in accordance with the rules and bye-laws of such stock exchange.

This means any other derivative contracts apart from as stated above are illegal and without the authority of law.  However, this view is not accepted by most of the law-firms in India and the market-practice is to insert put-option or call-option clauses in a share purchase agreement or any other share deal.

(d) scope of Notification No. SO 184(E) dated March 1, 2000 issued by SEBI: Under the notification, no person in the territory to which the said SCRA extends , shall, save with the permission of the Board, enter into any contract for sale or purchase of securities other than such (i) spot delivery contract or (ii) contract for cash or (iii) hand delivery or (iv) special delivery or (v) contract in derivatives as permissible under the securities laws.

Now, considering the present Cairn-Vedanta deal- SEBI was of the view that the put option and call option arrangement along with the right of first refusal are in violation of Notification No. SO 184(E) dated March 1, 2000 issued by SEBI.

I have not seen the letter issued by SEBI (as it is not public), however, under the letter of offer issued by Vedanta dated 1 April, 2011, it appears that the (i) put option and call option arrangement; (ii) ROFR clause; and (iii) pre-emption rights clause under the SPA are not valid under the terms of the SEBI notification No. SO 184(E) dated 1 March, 2000.  This also means that put option and call option arrangement and ROFR clause are not (i) spot delivery contract or (ii) contract for cash or (iii) hand delivery or (iv) special delivery or (v) contract in derivatives.

So, from now-onwards (unless appealed before the court of law by Vedanta or Cairn or any other interested party-which is not foreseeable as of now), it is desirable that the takeover lawyers or the bankers transacting a takeover deal should not include put option and call option arrangement, and ROFR clause in the SPA as SEBI may disallow such SPAs and this may elongate/ delay the takeover process if such clauses are inserted in the SPA.

Domain of Statutory approvals

The approvals required under the Cairn-Vedanta deal are manifold which includes (i) approval from UK Listing Authority rules and (ii) approval from RBI.  It was clarified that as per the corrigendum to the PA dated 5 April, 2011, the statutory approval only includes approval from RBI and not the UK Listing Authority as stated under the SEBI Takeover code.  This certifies the fact the domain of SEBI Takeover code is national or domestic in nature and the domain of the word statutory approval under regulation 27 of the SEBI Takeover code, is only limited to the Indian Statutory bodies. It appears that SEBI has approved this interpretation of ‘statutory approval’ by Vedanda as there are no press-reports or other communication from SEBI to nullify this approach taken by Vedanta.  Vedanta’s interpretation of ‘statutory approval’ also gains approval from regulation 16(xvi) of the takeover code, under which statutory approvals, if any, required to be obtained for the purpose of acquiring the shares under the Companies Act, 1956, the Monopolies and Restrictive Trade Practices Act, 1969, the Foreign Exchange Regulation Act, 1973 (46 of 1973), and/or any other applicable laws. However, the word ‘applicable law’ is not defined and is generally understood to mean domestic Indian laws.

Insertion of new PACs after the PA and LOO

It can be done. Under the Cairn-Vedanta deal, after the PA (dated 16 August, 20100 and LOO (1 April, 2011) (filed with SEBI and sent to the shareholders), there was a new PAC i.e., Sesa Resource Limited (“SRL”) was added to the bunch of acquirers and PACs on 5 April, 2011.

No restriction on acquirers to purchase shares during the offer period

From the various press reports published and regulation 7 SEBI Takeover code filing, I understand that there was a further acquisition of 10.51% shares/ voting rights of the target company (Cairn) by a PAC of Vedanta- Sesa Goa Limited by way of bulk deal (purchased from Petronas International Corp Limited). 

Corporate strategy

It appears that Vedanta is desperate to gain control over Cairns India by acquiring 51% or more shares or voting rights of Cairns India.  So, the above-mentioned acquisition will result in shareholding of about 51%, thereby giving Vedanta the control over Cairns India.  This strategic move by Vedanta would make open offer inconsequential.