Megan Muir

M&A, joint ventures and hidden landmines: the threatened blowout of the Apollo Tyres/Cooper Tires merger

In an unusual oral bench opinion, supplemented the following day with a Saturday letter to affected counsel, Vice Chancellor Sam Glasscock III of the Delaware Chancery court has found that Apollo Tyre Limited, a US$39 billion behemoth in India, continued to be under contract to acquire Cooper Tire & Rubber Company (NYSE: CTB), the second largest US tire manufacturer, for US$35 per share or US$2.5 billion, despite Cooper’s claims that Apollo was in breach of the agreement.

Cooper sought an immediate appeal, which as of the date of this alert remains pending in Delaware.

On its surface, the case seems a test of the limits of a requirement that Apollo use “reasonable best efforts,” which is a relatively opaque standard – an intermediate stop between “commercially reasonable efforts” and “best efforts” – the standard by which Apollo is bound to negotiate labor contracts with the United Steel Workers (USW).  On November 8, Vice Chancellor Glasscock found that Apollo was using “reasonable best efforts” – even if the negotiations were not being conducted in the manner preferred by Cooper and even further if Apollo’s proposals to the USW were explicitly predicated on a deal price reduction by Cooper.  He further found that the parties have “ample” time before a merger agreement drop-dead date of December 31 for Apollo to reach an accord with the USW, as a binding arbitrator found is required under Cooper’s labor agreements with the USW before the acquisition may close.

However, the deeper story lies in the tale of Cooper, and it is heavy reliance for approximately 25 percent of its revenue on a joint venture in the People’s Republic of China with the Chengshan Group.  While the Apollo bid was under consideration, Chengshan was exploring its own bid to acquire its US joint venture partner.  After the Apollo deal was announced, according to court testimony, Chengshan’s chairman complained of not receiving anything from the acquisition and further accused Cooper of divorcing its “son” and replacing it with Apollo as a “stepfather.”  Apollo offered US$150-200 million to buy out Chengshan after the closing; Chengsan in return demanded US$400 million.  Given that one would think the value could likely be bridged one way or another, it would seem reasonable to think that a non-compete in Cooper’s favor was lacking in these terms.  Chengsan then promptly threw out Cooper managers from the Chinese plants after posting guards at the doors; its workers halted production of any Cooper branded tires; and the joint venture has since refused to supply to any financial information to its US parent.

This last piece of the puzzle is critical.  The joint venture quagmire is apparently foremost in the minds of Apollo’s banks, at least according to e-mails produced in court. To no one’s surprise, those banks appear eager find a way to avoid moving forward with the proposed debt facilities.

Although Apollo’s bid is not subject to a financing condition (or “out”), the merger agreement does require Cooper to provide quarterly financial statements, in this case by Thursday, November 14.  Cooper, by its own assessment, will almost certainly be unable to do so by this deadline, given its Chinese stalemate.  Assuming Cooper breaches the information requirements, the acquisition financing evaporates and Cooper can find no other legal grounds on which to object, then Apollo would be relieved of having to rely solely on claiming a “material adverse effect” (MAE) to either terminate the acquisition or insist on a price renegotiation.  Such a dance on MAE is not clear cut for Apollo, since Cooper claims Apollo was put on clear notice prior to entering into the acquisition contract that the Chinese joint venture could become problematic.

In sum, the Apollo/Cooper case has not become a seminal case on the limits of “reasonable best efforts.”  Vice Chancellor Glasscock was acutely aware that Cooper could be accused of trying to avoid the specter of breaching the November 14 financial statement requirements by asserting the violation of Apollo’s “reasonable best efforts” requirements.  Rather, this case instead has shone a bright spotlight on the perils and pitfalls of joint ventures.    Although 25 percent is a healthy portion of an enterprise’s revenue, it remains a minority – a minority which in this case has thrown an otherwise viable company into legal chaos.  Cooper’s board had not gone looking for a deal with Apollo – there was no auction process or even entreaties to put the company in play.  However, if the Apollo deal at its current US$35 per share now disappears, it will be clear to all sorts of acquirers that Cooper is in play, and Cooper will in all likelihood be left in a less than optimal defensive state.

SEC staff members informally comment on disclosure and compliance issues

At a recent meeting, staff members of the Securities and Exchange Commission offered their views on a variety of public company disclosure and compliance issues.

As is customary, the Staff comments were on a non-attribution basis and were represented to be personal views only and not those of the SEC as a whole.  Nonetheless, such informal commentary offers contextual perspective on both current matters and, equally important, indicates areas of less current significance at the SEC.

Currency and consistency in disclosures

The Staff continued to emphasize the need to avoid “boilerplate” disclosure. They noted that too often public reports (especially more generally staid language, such as that covering risk factors) are not reviewed afresh on a regular basis.  Staff suggested that public disclosure teams (both legal and finance) convene at least quarterly to scrub disclosure and not take regular quarterly disclosures for granted.  The process should not be relegated to an “it’s just another quarter” attitude.

In addition, following a recurring theme over the years, Staff members indicated the need for consistency among (1)  press releases, (2) earnings releases and earnings call comments, (3) an issuer’s website and (4) periodic reports.  To the extent that, for example, management goes into significant detail or emphasis during an earnings call on a particular issue, the expectation would be that the issue would also be addressed within the management discussion and analysis (MD&A) section of a periodic report.

Cybersecurity disclosure?

Cybersecurity is receiving almost feverish regulatory attention these days. In the wake of several high-profile computer system breaches against major corporations, commentators have observed an upswing in Staff comments on periodic reports focused on cybersecurity.

The Staff informally reaffirmed that the trend was likely to continue, whether or not an issuer’s business was technology oriented.  The SEC expects that a material breach of cybersecurity will be discussed in risk factors, particularly if the breach received public attention.  Any prior incidents that may not have become public knowledge should be mentioned too.

Accordingly, issuers would be well advised to first determine whether mention of a cybersecurity risk factor on its own is warranted, separate from the typical generic risk factor bucket list dealing with the usual specter of calamities and business interruptions.  In addition, any actual breach of cybersecurity and privacy information should be examined for public disclosure ramifications.

Proxy plumbing

Although it is near the two-year mark since the SEC issued a concept release on the underpinnings of the proxy voting system used for publicly traded companies (colloquially referred to by the SEC and others as proxy plumbing), the SEC has failed to propose any clear rules. In fact, the Staff indicated that in light of other regulatory developments, including in particular the Jumpstart Our Business Start-Ups (JOBS) Act, it is unlikely that the SEC will have sufficient bandwidth to prioritize an omnibus concrete proxy plumbing rule proposal in the immediate future.  This is unsurprising, given (1) the spaghetti-chart complexity of the current system, (2) the long tenure of the current system and thus its understanding among broad constituent groups and (3) the strong views of entrenched members of the current system, in particular the primary proxy intermediary.

However, the Staff did indicate that the SEC would likely take on the narrower subject of enhancing disclosure by proxy solicitation firms of commercial relationships among issuers and such firms.  For example, there has been much public debate on the appropriateness of a solicitation firm, the most prominent example being RiskMetrics, providing consulting services to issuers on the same corporate governance topics for which it grades issuers for its financial firm customers.  It would seem that, at the very least, the SEC will require that such proxy solitication firms will need to disclose their financial ties with issuers.  Even more may be required.

That said, the subject is low-hanging fruit and will not provoke discussions anywhere as dramatic as those surrounding some of the current outside proxy plumbing proposals that approach proxy voting from a more generalized systemic viewpoint.