Jay Parkhill January 31st, 2008
Clients ask me all the time whether they should form their businesses as Delaware corporations, and what the benefits of Delaware are generally. My advice is that for early-stage businesses Delaware is an added, unnecessary expense, but as companies mature, spread out nation-wide and go public, Delaware has a volume of law and litigation history- and a degree of consistency in its decision-making- such that the outcome of a variety of disputes can be predicted with a decent amount of accuracy.
I don’t get to cite many great examples of this, though. Here is one where litigation in a Tennessee court seems likely to end badly. I can’t imagine a Delaware Chancery Court reaching a similar decision.
Clothing retailer Finish Line, Inc., backed by UBS financing, made an offer to buy Genesco, Inc. in a deal valued at $1.5B. Finish Line and UBS then tried to back out of the deal, saying that Genesco had failed to disclose material information that would have made the deal less attractive had it been provided up front.
The Tennessee Chancery Court held that although the merger agreement allowed for termination based on “material adverse events”, the reasons for Genesco’s declining performance were general economic conditions that fell within an exception to the termination right.
The Chancellor went on to hold that the appropriate resolution of the case is to require Finish Line to complete the merger.
This can’t end well for Finish Line, whose market capitalization, at $110M, is about 10% of what it was when the deal was announced in June 2007. That means the purchase price is close to 15x Finish Line’s current value. Ouch.
I can’t say for sure that Delaware would have reached a different decision, but I would be amazed to see it force a merger to go through under circumstances like this.
The other point worth mentioning here is that choice of law provisions are hard to negotiate in contracts. Each party usually wants its home state law to govern, the business principals never want to get involved in that level of detail and the lawyers seldom have enough specific data to make a convincing argument that ___ state will work out badly. In probably 99% of cases *not* arguing the point is probably the right result as well, since so few disputes actually go to litigation.
Sometimes, though, it matters. When I negotiate deals there is a handful of states whose laws I am comfortable with and I try not to let choice of law slow done completion of a transaction. The Finish Line case is a good piece of ammunition for compromising on Delaware when asked to provide for choice of law of a state with which I am not familiar.Tags: choice of law, M&A
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