Will the Courts Determine What is a “Merger of Equals”? The Kirk Kerkorian Suit Against DaimlerChrysler Is One of Two Key Bids for Merger Rescission

Lawyers and other dealmakers have a pet phrase for trying to undo a merger once it’s completed. They call it “unscrambling the eggs.” And that describes just how hard it is for one of the parties to seek a breakup after the corporate knot has been tied. Since judges historically don’t like to get involved in postmerger hassles between partners, litigation seeking to rescind mergers is rare. And experienced lawyers say they know of not one single case in which a court actually has ordered a rescission. Imagine then the surprise that erupted in the m&a field in November when irate sellers filed controversial rescission suits in not one but two high-profile mergers of recent years. In the more publicized of the complaints, heavyweight investor Kirk Kerkorian asked the U.S. District Court in Delaware to bust the 1998 merger of Daimler-Benz AG and Chrysler Corp. that formed the troubled auto-making giant DaimlerChrysler AG. In a case that may be even messier, New York-based private equity firm Stonington Partners petitioned the Delaware Chancery Court to rescind its sale in early 2000 of Dictaphone Corp., for $500 million worth of stock, to Lernout & Hauspie Speech Products NV. The suit was filed just before L&H, a Belgian-based onetime software star, crashed into bankruptcy under the weight of financial scandals in late November. Experienced m&a attorneys say both plaintiffs are going to have trouble getting courts to side with them, although for different reasons. Kerkorian puzzled many attorneys with his allegation that the DaimlerChrysler officials committed fraud by billing the deal as a “merger of equals.” They point out that there is no legal definition of a merger of equals and that it is considered largely a turn of phrase to make the merger partners feel good. Stonington’s problem is that its complaint, filed on November 27, is inextricably linked with the L&H bankruptcy case filed in Delaware Bankruptcy Court two days later and may be hard to separate. William G. Lawlor, of the Philadelphia-base law firm Dechert, pointed out that the bankruptcy petition stays any other litigation. He and other lawyers suggested that Stonington may be jockeying for a position at the creditors’ table with its lawsuit. Kerkorian, who had been a major stockholder in Chrysler when the deal was made, coupled his complaint with a bid for $8 billion in damages supposedly suffered in the decline of DaimlerChrysler’s stock when its postmerger performance went sour. Some legal observers suggested that was the key thrust of his suit, although they believed allegations on misrepresenting a legally undefined “merger of equals” were shaky. A barrage of additional shareholder suits issuing allegations similar to Kerkorian’s exploded after his complaint. “There is no definition,” Lawlor notes. “It’s just financial state of the art.” Charles Elson, professor of law at the Stetson University, says he knows of no legal definition but points out that the nub of the case could be argued on the basis of whether there were misstatements in the merger proxy statement mailed to shareholders. “Number one, were there false statements in the proxy statement?” he comments. “And number two, were they material enough so that people would have voted differently?” But given the grounds, he adds, “It’s hard to show damages and it’s hard to defend.” “The odds of rescission are almost impossible at this point,” he says. The phrase merger of equals often is a source of chuckles among dealmaking professionals who believe that the phrase is an overused bit of hype to placate the junior partner. The concept is considered a nightmare for merger integration professionals who know that one side ultimately is dominant in the typical combination, and it is almost impossible to structure a merger of equals under accounting rules. Fraud allegations are hurled Some lawyers say Stonington may have had better grounds for a rescission before it was braked by the bankruptcy. In a rare instance for a leveraged seller, Stonington unloaded portfolio holding Dictaphone for about 9 million L&H shares, which plummeted in value after charges were made of financial irregularities at the Belgian-based concern. Stonington alleged that it was defrauded by L&H. “The odds on rescission are pretty slim,” Elson says, although he avers that payment of damages may depend on how the case unfolds. Although they have never been judicially ordered, there were a few merger rescissions in the 1960s and early 1970s – no one can recall what they were – that were worked out between buyer and seller. In those cases, the target became a wholly owned subsidiary of the acquirer. The prior owners regained control of the business by surrendering the shares of the buyer that they were issued. That is similar to the “hold separate” structures that antitrust authorities demand while they review a deal.