Apollo/Cooper: lessons in deal protections

Author: Ashley Lee | Published: 4 Dec 2013
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  • A Delaware court case on Apollo Tyres’ acquisition of Cooper Tire underscores the importance of deal terms in US public company M&A deals;
  • Asian companies looking to US assets must understand the US deal protection system as well as court precedents;
  • In particular, it is very difficult for a buyer to get out of a transaction – particularly if they’re suffering "buyer’s remorse";
  • Acquirers of US public companies must also remember the board’s obligation to find the best possible deal for shareholders;
  • There are deal protection trends, such as matching rights and 'force the vote’ covenants. But standardisation of these terms is more common as they might be challenged in court.

Recent disputes regarding Indian Apollo Tyres’ acquisition of US-listed Cooper Tire underscore why Asian corporates looking to the US must understand its deal protection mechanisms and court precedents.

Apollo’s $2.5 billion acquisition of Cooper, announced in June, has hit hurdles in China and the US. Cooper has filed suit against Apollo and has appealed the Delaware Chancery Court’s original ruling. The case is pending in the Delaware Supreme Court.

But this also serves as a cautionary tale for Asian companies looking to invest in the US. They must understand deal protection mechanisms, especially how certain provisions are viewed by the Delaware courts.

William Mills, a New York-based partner at Cadwalader Wickersham & Taft said that broadly speaking, Asian companies and inbound acquirers are more familiar with the US M&A market and the deal protection system that it has developed over the years.

"It’s well-known, well-established and well-defined in the US, and Asian companies are seizing upon that and using it just like any other acquirer would in the US," he added.

The situation

Apollo’s acquisition of Cooper was announced in June for $35 a share, a 43% premium to its current share price. But the deal soon ran into labour issues in China and the US.

In July, more than 5000 workers at Cooper Changshan Tire (CCT), the company’s joint venture (JV) in China, went on strike to protest the deal. Chengshan asked a local court to dissolve the JV, an action that the local government seemed to support. It was later reported that Chengshan Group had considered a bid for Cooper.

Apollo also encountered US challenges. In August, an arbitrator blocked the sale of two unionised factories because the deal was negotiated without the consent of the workers. Apollo has since been in negotiations with the union.

On September 30, Cooper shareholders voted in favour of the acquisition. The next month, Cooper filed suit in the Delaware Chancery Court to force Apollo to expedite its completion of the deal, alleging that the company was dragging on union negotiations.

Apollo filed a pre-trial motion, saying that Cooper did not satisfy the agreement’s 'reasonable access’ provision by not providing access to its China facility or records. It claimed it could walk away from the deal because Cooper had not fulfilled its covenant– a term not related to deal exit. The court denied this motion because Apollo had not made a request for access to these facilities, and said that the case would have to go to trial.

In a November 8 letter, the court said Apollo did not breach its obligations under the merger agreement, and refused to order the company to complete the deal as it had until December 31 to broker an agreement with the union. Cooper appealed the ruling, asking for an expedited plea from the Delaware Supreme Court so that its case will be heard before the merger agreement expires on December 31.

Cadwalader partner Jason Halper said the court opinion is not that surprising, and is consistent with how Delaware law has been understood.

"If you are a buyer and the court concludes that you are looking for an out, it’s going to make it very difficult for the buyer to get out under those circumstances," he added.

A client note by the firm added that buyers are not likely to be successful in avoiding an agreement by relying on clauses in the merger agreement that are not typically intended to operate as termination rights.

New considerations

In the context of US public company acquisitions, Asian companies must consider the board’s obligations.

Mills said that the key is that the non-US acquirer should be familiar with the system in the US. This balances deal certainty against the legal requirement that a publicly-listed target here cannot have agreed to a deal and then turn a blind eye to any competing or better offer.

"The board cannot be in a position where it cannot pursue what might be a better transaction for shareholders," he said.

This has been an issue in many US-listed ChinaCo take-privates – in particular, Delaware-incorporated AsiaInfo-Linkage’s take-private last July. Shareholder litigation firms have closely scrutinised these transactions and accused boards of not receiving fair value in founder-led buyouts, which has necessitated additional steps such as fairness opinions from financial advisors.

A board’s duty to get the best deal for its shareholders is also an issue when setting of deal terms.

"A key inquiry into deal protection mechanisms is whether they render the outcome a done deal – even notwithstanding a shareholder vote," said Halper. "The trick is how close you can go to that line without going over it, and what price the seller can extract from that."

Certain pre-deal activities might allow for more stringent provisions. For example, Halper added, if a seller’s board has done a meaningful and thorough market check prior to entering a merger agreement, the odds are the board is going to have more latitude to agree to tighter deal protection mechanisms.

Deal term trends

Merger control

Provisions related to merger control have become more important as regimes bolster their merger review regimes.

"In recent years, we have seen more challenges by the US antitrust authorities and the European merger control authorities are becoming much more active – in some cases more so than the US," Mills said.

But if there are antitrust concerns, or if it’s thought that there could be antitrust concerns, he said there are deal protection mechanisms such as specific antitrust-related covenants and reverse break-up fees to negotiate around those issues.

For example, Chinese pork producer Shuanghui’s acquisition of US pork producer Smithfield included a reverse break fee to account for foreign regulatory risk.


What is getting relatively more attention these days are provisions such as matching rights where the buyer typically has three to five days to match a similar acquisition proposal, Halper said. 'Force the vote’ covenants can require a shareholder vote in the face of a better proposal or a board’s change of recommendation.

But the potential for a lawsuit related to merger agreements means that buyers are cautious when considering deal terms.

"We’ve seen a preference for standard provisions over non-standard ones because they’ll have an easier time if they are challenged," he added.

Related links

Australian M&A trends explained

Shuanghui – Smithfield merger explained

How Cnooc’s bid was structured for foreign investment approval