When Delphi Automotive plc tapped Davis Polk & Wardwell’s Michael Kaplan at the end of 2010 to help it go public, Kaplan knew that the company would face some unusual hurdles. Davis Polk (though not Kaplan) had represented the banks that financed Delphi during its bankruptcy from 2005 to 2009, so he was familiar with the company’s struggles. Kaplan also knew that nothing in Delphi’s recent history had been easy, and that the auto part maker’s IPO would be no exception.
Bankruptcy had left the company with baggage, including a byzantine and unwieldy governance and capital structure. Some 200 stakeholders held four distinct classes of shares in an uneasy partnership. “The capital structure was about as screwy as it gets,” Kaplan says.
Behind the scenes, the interests of Delphi’s largest stakeholders diverged. They included General Motors Company (Delphi’s largest customer and a primary lender through its bankruptcy), the Pension Benefit Guaranty Corporation (the government agency that took over Delphi’s pension obligations), Silverpoint Capital Partners, LLC, and Elliott Management Corporation (the hedge funds that brought the company out of Chapter 11), and Paulson & Co. (a hedge fund that had built up a 22 percent stake in Delphi after its emergence from Chapter 11).
Paulson’s principal, John Paulson, was interested in cashing out his Delphi stake early in the IPO. In contrast, Silverpoint and Elliott, jointly represented by Cravath, Swaine & Moore’s Andrew Thompson, wanted to hold on to their shares longer, since they expected the price of Delphi shares to surge after an IPO. Silverpoint and Elliott had real clout: Under Delphi’s partnership agreement, they could veto the IPO itself or any other deal.
Kaplan’s first task was to reduce the number of people at the table. In April he helped Delphi negotiate a $4.4 billion buyback of GM’s and PBGC’s stakes. At the same time, to pave the way for the IPO filing, Kaplan, leading a 15-lawyer team, worked with the remaining stakeholders to simplify the capital structure. On March 31 the hedge funds agreed to forfeit their veto rights, and a single class of shares was formed. Kaplan then advised Delphi on a debt offering, helping it replace the bridge loan the company had used to finance the buyback with a lower-cost $1 billion high-yield note offering.
Finally, Kaplan had to find a way to ensure that enough stakeholders would sell into the IPO to make the offering a success—the inverse of the issue that IPO lawyers generally face. Usually, “people want to sell into IPOs,” Kaplan notes, and the issue is who gets to go to the head of the selling line. “This time, there was this visceral reaction: ‘Who are you to tell me to sell my stock now?’ “
The solution was a “drag-along” provision that bound all shareholders to sell if a majority agreed to sell a specified percent of stock—a provision that Davis Polk believes had never been used before in an IPO. To help make it palatable, stakeholders got some flexibility: They could sell more than the specified percentage, sell exactly the specified percentage, or keep their shares if others sold enough to make their participation unnecessary. “Our problem was, ‘How do we get these shareholders’ interests aligned effectively to a place where it’s a win-win?’ And Michael was very good at that,” says Delphi CFO Kevin Clark.
On May 25 Kaplan filed Delphi’s S-1 registration statement, but it would take until July 11 to obtain the final signatures that were needed to enact the drag-along agreement. But then, the European credit crisis intervened, delaying pricing until a window in the capital markets opened in November.
With $529.7 million in proceeds, Delphi’s was one of the few large industrial IPOs in the United States in 2011. Ironically, none of the reluctant hedge funds were forced to sell under the drag-along provision; Paulson sold enough of its stake to give the others the option of holding on to theirs.
Kaplan, cohead of Davis Polk’s capital markets group, says Delphi was in a league of its own both in terms of its complexity and the big personalities involved. Richard Aftanas, the Skadden, Arps, Slate, Meagher & Flom partner who advised the underwriters, agrees. “These transactions tend to be cooperative, not adversarial,” he says. “We both had a lot of people pulling on us.” Kaplan, he adds, kept his cool throughout. “He was unflappable,” Aftanas says. “He’s just a no-nonsense guy.”
Deal In Brief
Value $530 million
Firm’s Role Issuer’s Counsel