Winter 2009


Focus on Transaction Opinions

Editors for This Issue: James G. Rabe and Lisa H. Tran

Transaction Process Insights

Thought Leadership Article:
Going Private Transactions—An Overview
Darrel A. Rice, Esq.
For public companies, a going private transaction (1) provides a way to eliminate the corporate governance disadvantages associated with being a public company and (2) allows company managements to focus on long-term company performance instead of short-term company performance. The combination of recent negative stock market conditions and the costs of complying with Sarbanes-Oxley make going private an attractive option for certain public companies. This discussion provides an overview of going private transactions, including (1) the structure of going private transactions, (2) the fiduciary duties of corporate directors, (3) the role of the special committee, and (4) the procedures necessary to show the fairness of the going private process and the going private price.

Special Committees—First Do No Harm
Douglas Raymond, Esq.
Under the “entire fairness” doctrine applied by the Delaware courts, the fairness of the process involved in reviewing and approving a conflict-of-interest transaction may protect the transaction from subsequent challenge. The appointment of a special committee to consider a transaction is an important factor that can demonstrate a fair process. However, a flawed special committee process can cause as many problems, or more, as would arise if there was no special committee at all. This discussion presents an overview of two recent judicial decisions. These two decisions remind us that, in order to satisfy the “entire fairness” test, a fair process should be designed in light of the specific issues that may raise the potential conflict.

Transaction Structure Insights

The Structure of Angel Financing
John Kauffman, Esq.
This discussion presents an overview of the typical terms of an “angel” financing conducted by an early-stage company. The topics covered in this angel financing discussion include the following: (1) the security that is typically offered to angel investors, (2) the typical amount of financing that was raised and the assignment of a value for the early-stage company, (3) typical preferred security conversion features, (4) security dividend preference and liquidation preference features, (5) preferred stock voting rights, (6) angel investor information rights, (7) preferred stock registration rights, (8) company executive employment agreements, and (9) the typical size of the executive stock option pool.

The Delaware Court Leaves Unanswered the Question of Disclosures in Merger Proxy Statements
John C. Ramirez
Are management-prepared financial projections required to be disclosed in the definitive proxy statement related to a merger transaction? A recent judicial opinion by the Delaware Court of Chancery has board members, their financial advisers, and their legal counsel re-examining this very question..

Middle-Market M&A Transaction Activity Update
Richard D. Durrett Jr.
This discussion provides an overview of the current status of the merger and acquisition (M&A) market, including consideration of: recent trends in EBITDA transaction pricing multiples, a review of historical transaction volumes, a summary of historical debt to cash flow transaction financing multiples, a review of private equity deal and capital-raising activity, and current M&A deal pricing and structuring strategies.

Health Care System Acquisitions of Medical Practices
Charles A. Wilhoite
Acquisitions of medical practices by health care systems, particularly tax-exempt health care systems, appear to be on the rise currently. This is because health care systems throughout the country are continuing their strategic efforts to position themselves to be more competitive in the markets that they serve. Motivations for such acquisitive transactions vary from circumstance to circumstance. Generally, however, health care systems are driven by the need to develop diverse service delivery capacity at a reasonable and supportable level of economic investment. In addition to economic considerations, physicians often are equally motivated (1) by the desire to relieve administrative and capital investment burdens associated with private practice and (2) by the opportunity to affiliate with large health care systems. Such large systems provide potential for increased collegiality as well as access to advanced technology and related practice support. Regulatory guidelines currently in place mandate the use of generally accepted valuation approaches and methods in order to insure that medical practice transactions occur at a fair market price. Such guidelines, and related generally accepted valuation practices, affect key premises and/or assumptions that can impact the practice transaction pricing and structuring process. Such medical practice transaction pricing and structuring issues include: (1) whether the transaction will be structured as an acquisition of assets or equity, (2) reasonable provider compensation and the related impact on practice value, and (3) post-acquisition physician employment and noncompetition agreements.

Transaction Procedure Insights Professional Standards and Practices Insights

Delaware Court Denies Ruling in Favor of Approved Merger, Based on Breach of Duty
Scott R. Miller
The Lyondell Chemical Company board of directors received an unsolicited—but very attractive—tender offer for its publicly traded stock. However, even after negotiating an even greater price increase, deliberating over the offer, and receiving a fairness opinion from a prominent investment banker, the board can be second- guessed by dissenting shareholders. In this case, the Delaware Court of Chancery held that a substantial price premium to market price attained by the target company’s board of directors did not necessarily satisfy the board’s duty to find the best possible price available.

Ten Traps for Entrepreneurs to Avoid
Erich Merrill, Esq.
The owners of growing companies are regularly faced with many decisions that will determine whether the value of the business ultimately increases or decreases. Many of these decisions relate to capital structure, intellectual property ownership, and contract documentation issues. In other words, these decisions involve legal issues that may have financing, ownership transition, and shareholder rights implications. This discussion presents a list of ten common traps for entrepreneurs to avoid.

The Effect of the SEC Approval of Rule 2290 on Transactional Fairness Opinions
Scott Cobb and Nguyen “Wen” Ho
This discussion presents an overview of the Securities and Exchange Commission (SEC) approval of Rule 2290. Rule 2290 places additional disclosure and procedural requirements on FINRA members that issue fairness opinions. As a note to corporation directors: Rule 2290 has not significantly reduced the potential conflicts of interests that exist with respect to certain investment banker fairness opinion issuers. Rather, Rule 2290 has simply increased the disclosures regarding any existing conflicts of interest. Fairness opinions by themselves are not an automatic defense in shareholder litigation. This is because the corporation directors are ultimately accountable for using good judgment in retaining an independent financial adviser.

Financial Adviser Insights

Factors to Consider in Performing a Valuation Analysis for a Fairness Opinion
Craig A. Jacobson
Valuation analyses are at the core of any fairness opinion analysis. There are several factors that should be considered in performing valuation analyses for a fairness opinion that do not apply in a normal business/security valuation engagement. An understanding of these factors will better enable the financial adviser to prepare a more useful fairness opinion.

The Role of the Independent Financial Adviser in M&A Fairness Opinions
Chip Brown and Steve Whittington
Corporation boards of directors (and not-for-profit institution trustees, securities lawyers, and other parties) often rely on fairness opinions when evaluating merger and acquisition (M&A) transactions. In many instances, these fairness opinions are issued by the same investment banker/financial intermediary that structured and priced the pending M&A transaction. This discussion summarizes the typical content and intent of fairness opinions in M&A transactions. And, this discussion contrasts the role of the deal financial intermediary with the role of the independent financial adviser with respect to the probity and objectivity of the M&A transaction fairness opinion.

Solvency Analysis in Leveraged Transactions
James G. Rabe
Solvency analysis and solvency opinions are typically provided by financial advisers in leveraged acquisition transactions. The solvency opinions are typically provided to (1) the transaction lenders and/or (2) the board of directors of the corporate buyer or the corporate seller. The purpose of these solvency opinions is to assure the directors and/or the lenders that the company will not be subject to undue financial distress as a result of the leveraged acquisition transaction. Solvency opinions may also be prepared for various bankruptcy-related reasons. For example, solvency opinions may be prepared in matters related to fraudulent conveyance allegations and preference payment claims. This discussion provides (1) an overview of solvency opinions and (2) a review of a recent bankruptcy-related judicial decision in which a solvency analysis provided by an experienced financial adviser provided substantial credibility.

Transaction Accounting Insights

Business Combinations and the Related Financial Accounting Standards
Hestian Stoica and Lisa H. Tran
The issuance of several Financial Accounting Standards Board (FASB) statements relating to business combinations has created some implementation challenges for corporate financial managers. And, the implementation of these FASB statements often requires the expertise of valuation specialists. This discussion summarizes (1) the FASB statements related to the business combination purchase price allocation process and (2) the treatment of acquired intangible assets after the acquisition date. In addition, the discussion summarizes a recent study conducted by Willamette Management Associates that analyzed approximately 200 purchase price allocations in the prepackaged software industry.

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