The unraveling of the Bear deal

As I pointed out a week ago:

[Bear] shareholders. . . will have the last word – they get to vote on the deal. A Bear shareholder who got in on last night's conference call said he'll vote against. He's probably not alone, particularly if things calm down and Bear's value increases before the vote. Another possible issue here is the the extent of the Bear directors' obligation to shop the company and the nature of any deal protection provisions. * * * Does this mean that Bear might end up getting its cake (Morgan stops the run on the bank) and eating it too (no fire sale to Morgan)?

Today’s NYT reports:

JPMorgan Chase was in talks on Sunday night for a deal that would quintuple its offer for Bear Stearns, the beleaguered investment bank, in an effort to pacify angry Bear shareholders, according to people involved in the negotiations. The sweetened offer is intended to win over stockholders who vowed to fight the original fire-sale deal. . . .JPMorgan would pay $10 a share in stock for Bear, up from its initial offer of $2 a share. . .

Among other things, the article notes that “[s]ome shareholders could seek to file lawsuits to block the deal, claiming that the unusual board vote was an act of coercion.

Meanwhile, the Fed is balking. It’s especially sensitive to mounting accusations of a bailout favoring Bear shareholders that would increase the political pressure for a homeowner bailout. But if the Fed refuses, then the Bear shareholders will scream.

And Bear’s board is trying to protect the deal though a sale of 39.5 % of the firm to Morgan, which it’s hypothesizing won’t require shareholder approval (I wonder about that).

A really interesting aspect of all this is that part of the move to renegotiate the agreement is apparently because the sale agreement “inadvertently included” a provision requiring Morgan to guarantee Bear’s trades even if shareholders voted down the deal.

Steve Davidoff analyzes the agreement.

Under the merger agreement, if Bear’s shareholders vote down the takeover deal for a year, Bear can terminate the agreement. This we already knew. But it also appears that, in such circumstances, JPMorgan’s guarantee to backstop Bear’s liabilities stays in place — forever. That is, even after the rejection from Bear’s shareholders, JPMorgan’s guarantee would continue to apply to any liabilities Bear accrued up to the termination of the agreement. This provision could allow Bear’s shareholders to seek a higher bid while still forcing JPMorgan to honor its guarantee.

The basic problem is that Morgan gets to terminate the agreement if Bear’s directors change their recommendation, but not if the Bear shareholders vote it down. But Morgan could use its power to run the company “to prevent Bear from incurring new liabilities [not covered by the guarantee] if the deal appeared on the verge of collapse. This would likely be questionable under Delaware law, but JPMorgan might still try it.”

If the deal does collapse, there will likely be litigation in which Wachtell and the banks point fingers at each other.

Two lessons: agree in haste, repent in leisure; and it's not over until the fat lady sings.  In this case the fat lady could be the Bear shareholders, the Delaware courts, or both.

Update: In the above post I said “I wonder about” the assertion in the Times article that a 39.5% sale would avoid a shareholder vote. According to this Steve Davidoff followup, I had reason to wonder.