When his hedge fund, Paulson & Co., purchased piano maker Steinway musical instruments inc., it was sweet music to John Paulson, who owns three Steinways himself. For Paulson’s lawyer, Patrick Dooley of Akin Gump Strauss Hauer & Feld, the agreement ended a hectic buyout process that included three rival bidders issuing multiple topping offers and, ultimately, the first use of a newly implemented Delaware statute, Section 251(h), that allows contested deals to close more quickly.
Before Paulson could become the first buyer to take advantage of the new rule, though, Dooley had to steer the client through a bidding war that started in early July with investment firm Kohlberg & Company’s agreement to buy Steinway for $35 per share. That deal included a 45-day go-shop window, during which Dooley says Paulson was one of several parties whom Steinway contacted in search of a sweeter offer.
In August, with less than a week remaining in the go-shop period, Paulson jumped in with a $38-per- share offer for the musical instruments manufacturer. Kohlberg opted not to match Paulson’s bid, but before Paulson could execute a definitive merger agreement, South Korean company Samick stepped in with its own topping offer of $39 per share. Steinway’s largest investor, with a 32 percent stake, Samick had not signed a voting agreement in support of the original Kohlberg deal and waited until after Paulson had made its bid to make a play of its own. Needing to best yet another rival bid, Paulson increased its offer to $40 per share—an offer that Samick declined to top.
Paulson’s signed agreement with Steinway, which called for the buyer to pay the required $6.7 million termination fee to Kohlberg, was mostly the same as the original between Kohlberg and Steinway, except for the share value and the addition of the newly implemented time-saving 251(h) provision, which had been proposed by the Delaware state bar in March. “The statute came into effect for merger agreements signed after August 1, so we were right in the time period where we would have the ability to use that,” Dooley says.
Previously, buyers attempting two-step transactions would first obtain a majority of a public target’s shares via a tender offer. Then—in order to complete a full takeover immediately without waiting for a shareholder vote—they would still need to reach a threshold of 90 percent of shares tendered. The new rule requires that buyers only get more than 50 percent of the voting shares to close the deal as soon as the tender offer expires.
Paulson also included a fallback option, a top-up option that had been commonly used to complete back-end mergers: It forces the target to issue new shares so the buyer can reach the 90 percent threshold.
“If there was some problem with [251(h)] or some unanticipated issue, since it was the very first time it was being used, we did not want to give up this other mechanism to ensure that we could close very, very quickly,” Dooley says of Akin’s decision to keep the top-up option, which ultimately was unnecessary.
The new law eventually allowed Paulson to close out its leveraged buyout of Steinway, which is incorporated in Delaware, immediately after its $40 per share tender offer expired in September, with more than 80 percent of the company’s shareholders tendering their shares. Without the law, Dooley says, Paulson would have been stuck indefinitely between the 50 percent and 90 percent marks in “never-never land.”
Lisa Chun, Paulson’s assistant general counsel, worked closely on the deal with Dooley, whom she lauds for his business sense and responsiveness. Chun also appreciated Dooley’s quick absorption of a law that had only been in effect for a couple of weeks when the deal signed. “Generally, you don’t want to be the test case. … But in this situation, because of the time frame we were working in and the speed the deal was moving at, it was really a great opportunity for us to be able to take advantage of the new law.”
For Dooley—who left Akin in January to become general counsel of former client Corvex Management—it was an exciting challenge: “It’s always fun,” he says, “to be the first to do something.”