Leo E. Strine Jr. didn't make new legal doctrine in dismissing Alliance Data Systems Corp.'s suit against two Blackstone Group LP entities that agreed to buy the Dallas data marketing firm. But the Delaware vice chancellor did illustrate the challenges private equity firms face in buying financial services firms.
Alliance sued a Blackstone fund and the shell company the fund established to complete its proposed $7.8 billion acquisition on the grounds that the Blackstone entities didn't do enough to secure approvals from the Office of the Comptroller of the Currency. The OCC needed to vet the deal because Alliance owns a bank. Alliance didn't sue Blackstone Group itself because the parent wasn't a signatory to the merger agreement between Alliance and two Blackstone shell companies; the Blackstone fund also wasn't a party to the agreement.
The distinction was critical to Strine's decision to dismiss the case. He noted several times in his 42-page opinion that the shell companies -- Aladdin Solutions Inc. and Aladdin Merger Sub Inc. -- promised in the merger agreement they would use their "reasonable best efforts" to win OCC approval for the deal but that the shells bound Blackstone Group only to avoid "taking action to impede its closing."
The OCC wanted Blackstone itself to backstop the deal. The regulator, Strine wrote, "was wary of the high leverage with which private equity firms manage their operating companies, and it wished to establish that the ultimate private equity parent of any bank the OCC regulated was on the hook to support that deal." Blackstone didn't want the responsibility and never came to an agreement with the OCC. Aladdin walked away from the deal, and Alliance sued to claim a $170 million breakup fee.
The judge had little trouble dismissing the case, since he found Alliance had no contractual basis for its claim. At the end of his ruling, he pointed out that Delaware law respects "the use of distinct entities by corporate parents to conduct business" because it "allows parents to engage in risky endeavors precisely because parents can cabin the amount of risk they are undertaking."
The OCC worried about the proposed structure of the Alliance deal for that very reason -- the agency feared that Blackstone would capture the upside of the risk it was taking by buying Alliance while shedding the downside. The issue will exist in every deal where a PE shop or hedge fund wants to buy a financial institution and only becomes more acute when the federal government is backing troubled banks and brings in private investors, which raises the distinct possibility that those investors will capture the benefits of the government bailout.
The Federal Deposit Insurance Corp. apparently accepted limited parent company liability in agreeing to sell IndyMac Federal Bank FSB to seven investment shops for $13.9 billion on Dec. 31. The buyers will acquire IndyMac through a holding company that they will capitalize with $1.3 billion, meaning they'll have $15.2 billion in the venture. The FDIC may well have decided that was enough risk for the buyers, but the agency probably had far less leeway in evaluating the bid than the OCC did in Blackstone's deal for Alliance.
Members of the M&A bar will ponder the tumult they've faced over the last several months at the 21st annual Tulane Corporate Law Institute in New Orleans on April 2 and 3. The keynote speaker will be William Poole, the former president of the Federal Reserve Bank of St. Louis whom Fortune magazine recently lauded for predicting this fall's financial crisis. Poole said in 2002 that Fannie Mae and Freddie Mac would be vulnerable in an economic downturn. A native of Wilmington, Poole, 61, is now a scholar in residence at the University of Delaware.
Tulane traditionally has focused on Delaware law, but this year it will open with an international panel moderated by Delaware Supreme Court Justice Jack Jacobs and Davis Polk & Wardwell's George "Gar" Bason Jr., and featuring Stephen Cooke of Slaughter and May in London; Edward Waitzer of Stikeman Elliott LLP in Toronto and Olivier Assant of Bredin Prat in Paris. Other panels will cover corporate governance and shareholder activism; developments in Delaware law; the move to uniform international accounting standards; and Securities and Exchange Commission enforcement issues.
David Marcus is senior writer at Corporate Control Alert.