010532 Tyson-IBP Court Battle Is Landmark Case

New York - Can a company spurned by its merger partner force a reconciliation? A landmark court case next week is expected to set important new ground rules for one of the most bitter affairs in corporate America -- merger break-ups.

Next Monday, top executives of Tyson Foods Inc., the No. 1 U.S. chicken producer, and meatpacking firm IBP Inc. will be herded into a Delaware courtroom to find if Tyson's decision to ax its planned IBP acquisition should be allowed to stand -- and if so, under what terms.

The hotly-contested court battle has captured the attention of corporate merger and acquisition attorneys across the country, who believe this case could ultimately reshape the rules governing exactly when firms can decide to walk away from agreed-upon deals.

“In the context of major acquisitions, this is an area that has become more prevalent in the last three or four years and lawyers are paying more attention,” said Arthur Fleischer Jr., head of the merger and acquisition practice at Fried, Franklin, Harris, Shriver & Jacobson.

At the heart of the dispute is the material adverse change provision, commonly known as the MAC clause, included in almost every merger agreement, including Tyson and IBP's. The clause gives parties the right to walk away from a deal if they uncover material information that changes the strategic or financial reasons behind the transaction. The court will have to decide when information is deemed material.

Tyson exercised the clause in late March when it called off plans to acquire IBP for $3.2 billion in cash and stock, citing numerous breaches of the companies' merger agreement.

TYSON BELIEVES IT WAS 'INDUCED' INTO THE MERGER

Specifically, Tyson alleged that IBP withheld information about a federal accounting probe into DFG, a Chicago-based IBP unit that makes hors d'oeuvres and appetizers. The investigation ultimately resulted in a $60.4 million charge against the meatpacking firm's earnings. In short, Tyson believes it was “induced” into the merger.

IBP, however, contends it kept Tyson well apprised of potential financial troubles at DFG, even if it didn't make Tyson aware of the federal probe until 10 days after the merger agreement was signed. Instead, IBP believes Tyson suffered from nothing more than a case of “cold feet.”

“The merger agreement does not give Tyson an 'out' in these circumstances,” IBP claims in its answering brief opposing Tyson's request for summary judgement filed this week.

The case is expected to feature for the first time public statements from several top IBP and Tyson executives -- including IBP Chairman Bob Peterson and Tyson Chairman John Tyson, who just five months ago viewed the merger as a “unique opportunity” that comes along only “every so often in one's business life.”

What Delaware Chancery Court Vice Chancellor Leo Strine must ultimately decide, M&A attorneys say, is whether the problems at DFG fall within the legal context of a material adverse change of the firms' merger agreement.

If, as IBP hopes, Strine rules there was no just cause for Tyson to walk away and upholds the merger agreement, it would represent a landmark decision that could impact hundreds of failed unions down the line, attorneys say.

“The MAC clause allows the buyer to have some level of comfort so if the cover starts coming off the baseball and the seams start to come unglued, they can say, 'Wait a minute, this isn't what we signed up for,' and they have a way to get out,” said Jonathan Layne, co-chair of the corporate transactions group at Gipson, Dunn & Crutcher.

COLD FEET ALONE NOT ENOUGH

“So in cases where the buyer loses confidence in the integrity of the (target's financial statements), the buyer can exercise the MAC clause,” Layne said. “But cold feet alone is not enough to allow a buyer to get out of a contract.”

The stakes for both sides are high. Both IBP and Tyson have watched their earnings and stock prices tumble due to the botched deal as well as low chicken and beef prices. Neither company particularly wants to exacerbate its problems with a highly-public and messy court battle, but neither will either side show any signs of backing down.

IBP specifically is asking Strine to force Tyson to honor its merger agreement, and is claiming an unspecified amount of damages.

Tyson, in addition to asking the court to uphold its decision to break off the marriage, wants IBP to return the $59 million break-up fee Tyson paid to investment bank Donaldson, Lufkin & Jenrette last January when it trumped DLJ's $2.2 billion agreement to acquire IBP in a leveraged buyout.

DLJ, now owned by Credit Suisse First Boston, clearly stands as the only winning party in the whole ordeal. After agreeing to help management buy out IBP for a rock-bottom price, the firm walked away months later with nearly $60 million for its troubles.

Investors too will be keeping a close eye on the case. IBP shares in particular are more than 40% off their 52-week high. If the company is forced to pay out even more in damages, analysts said the market may sour even further on its stock.

“I think that until the dust settles, investors have to follow this thing closely, particularly as damages and that sort of thing get settled in court,” said Jeff Kanter, a food analyst with Prudential Securities Inc.

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