A Legal Pox On the “Numb Hand”

A North Carolina judge added the phrase “numb hand” to the language of m&a deal restrictions – and then proceeded to demolish it legally as an unreasonable curb on shareholder voting rights. The numb hand was Superior Court Judge Ben F. Tennille’s term for an acquisition contract provision more familiarly know to deal lawyers as the non-termination clause or the “lock-out.” If allowed to stand, it literally means that a deal isn’t over even when it looks like it’s over. Tennille kayoed the lock-out in a less publicized part of his decision that received the most attention for the way it rejected a legal move by SunTrust Banks Inc. to snag the merger of First Union Corp. and Wachovia Corp. by challenging the deal’s breakup fee. Tennille said that SunTrust hadn’t shown that the breakup fee setup was unreasonable (see Mergers & Acquisitions, July 2001, page 13). Wachovia shareholders approved the acquisition by First Union at an August 3 meeting. The lock-out, which drew harsh words from the judge but didn’t upset the First Union/Wachovia timetable, would have insulated Wachovia from the m&a market for five months had its shareholders rejected the deal. Wachovia’s board would have been precluded from consummating a deal with another partner during that period. Tennille called the condition “cryonic,” an “abrogation of duties” by Wachovia directors, and “an actionably coercive condition” that impeded the “free exercise” of shareholder voting rights. While Tennille’s decision could be used as a touchstone by m&a lawyers in future cases, its applicability is limited only to North Carolina. Ironically, it also created a potential conflict because a Pennsylvania court found a lock-out to be valid in the acquisition of Conrail Corp. by CSX Corp. and Norfolk Southern Corp. There was a major point of demarcation, however, since the Conrail lock-out extended the life of the deal beyond a possible rejection by regulators and not shareholders. William G. Lawlor, an m&a lawyer at the Philadelphia-based law firm of Dechert, says that lock-outs are a common feature in long-lead-time deals in regulated industries. The “extension” is supposed to provide time for the merger partners to fix the deal to the regulators’ liking and resubmit a new proposal, without either or both being sniped at by other bidders. Linking the grace period to a shareholder vote appears to be a new wrinkle that didn’t sit well with the judge. Tennille suggested that the lock-out froze out competing bids and created “uncertainty” that pressured shareholders to vote for First Union. The holders, he said, can either vote for the merger “or run the risk that something will happen in the ensuing five months that will be disadvantageous in light of the directors’ inability to respond to offers.” Thus, First Union’s “option” to do the deal is stretched out, and “the longer the option is effective, the more likely that shareholders are going to vote for the bird in the hand.” Given the differing decisions in the two states, Lawlor says, “the best approach is to tie the lock-out period to the regulatory process so that a rational nexus is formed.” He also suggests that dealmakers take care in the sometimes-tricky decision of timing shareholder votes either before or after the regulators sign off. While the legal stakes may suggest that it is best to wait for regulatory clearance, he notes that this timetable “may invite later bids that the shareholders can act on.” In the most closely watched part of the decision, Tennille upheld the $780 million breakup fee agreed to by Wachovia and First Union. SunTrust had challenged the arrangement and unsuccessfully asked for an injunction to stop the deal so that it could press its competing bid.