Failed talks

HIDDEN AGENDA (The Philippine Star) - August 11, 2015 - 10:00am

Everybody thought it was already a done deal and it was just a matter of time before the transaction is completed.

At end-June, publicly listed GMA Network informed the Philippine Stock Exchange the negotiations between its majority shareholders and businessman Ramon Ang “on the sale and purchase of a participating minority interest in the company’s outstanding capital stock is now deemed terminated.”

According to Mr. Ang, who is president of conglomerate San Miguel Corporation. he was surprised by the disclosure since they were in the middle of negotiations.

Before we begin to try to understand what happened, let us first go through the stages which a typical merger and acquisition goes through.

First, somebody brings up the idea of a sale, either the prospective buyer tells the prospective seller or the latter’s shareholders that it wants to merge, buy the assets, or acquire the shares of the seller; or it is the seller who puts up the company, or just its assets for sale; or it is Seller’s shareholders who want to sell their shares. The buyer can also make a tender offer for the shares of the seller, or the buyer can just buy the shares from the market.

Assuming that we are talking about a friendly acquisition, not a hostile takeover. Buyer makes an offer to the seller, usually after the buyer secures board approval to make the offer, subject to the conduct of due diligence investigations.

Prior to due diligence, a document known as a letter of intent or term sheet is signed by the parties that lays the groundwork for the conduct of the negotiations, the due diligence, and the preparation of a definitive sale/purchase agreement.

The acquisition agreement would contain a description of the structure of the transaction, whether it be an asset or stock purchase or a merger; terms of the purchase price and the payment, target’s and bidder’s respective representations and warranties; target’s and bidder’s respective pre-closing covenants; provisions governing the termination of the acquisition agreement; indemnification clauses; among others.

But before the acquisition agreement, there is the LOI or term sheet, which is usually a non-binding document, except for provisions which the parties would specify as binding.

But an important content of the LOI or term sheet are the respective representations and warranties of the buyer and the seller (or bidder and target) which have to be true only in material respects at the time of the signing of the LOI/term sheet unless there is a bring-down provision, in which case these reps and warranties also have to be true at the time of closing, in which case any material breach of these reps and warranties can allow either party to walk-away from the deal or be entitled to a termination fee (to be paid by the seller to the buyer) or a reverse termination fee (to be paid by the buyer to the seller).

And for most parties to these transactions, the LOI/term sheet would contain a confidentiality or non-disclosure agreement so that any non-public information the parties learn during the course of the negotiations or the due diligence investigations cannot be disclosed without meeting certain conditions. Otherwise, the party violating the NDA can be liable for breach.

Going back to the GMA 7- Ramon Ang failed talks. We will probably not know what really happened because the parties are bound by confidentiality or non-disclosure agreements.

The majority shareholders of GMA, namely the Gozon, Jimenez, and Duavit groups, clarified immediately after announcing that the talks have been terminated that they were constrained to end negotiations with Mr. Ang as the latter kept on revising proposals up to the last minute after more than one year of negotiations.

But Mr. Ang denied this and instead claimed it was GMA that kept on sending revised drafts.

Then last Aug. 4, the SMC chief executive filed a syndicated estafa complaint with the Department of Justice against top executives of GMA 7 for their alleged failure to return the P1-billion down payment given by Mr. Ang.

GMA Network chairman and CEO lawyer Felipe Gozon on the other hand, argues he kept the P1 billion “to answer for the damages that the Gozon Group has sustained by reason of Ang’s violation of his obligation to negotiate in good faith, to execute and conclude the transaction documents, and close the transaction pursuant to the term sheet dated June 23, 2014.”

Gozon claims it was Mr. Ang who terminated the deal when he said in an e-mail dated March 26, 2015 that he will not proceed with the transaction, raising certain issues about the company.

Gozon added his group (the Jimenez and Duavit groups have waived their rights over the downpayment and did not want to participate in any dispute over the money) had the right to retain the money for its claims for damages for opportunity loss pursuant to the law and the term sheet.

Again, we do not know what rights the term sheet gave the parties in case one of them walks away from the negotiations or breaches any of the reps and warranties or negotiates in bad faith.

But what I know is the term sheet has to be clear that there was a right to retain the P1 billion, and that the buyer’s walk away right was legitimately triggered by a material adverse change in the seller’s business, financial condition, or there was a violation of the seller’s reps and warranties, among others.

Maybe during the hearings in connection with the syndicated estafa case, we will be able to piece together the events that led to this falling out. After all, this is not the first time that a proposed deal for the purchase of shares in GMA 7 has failed. There were, of course, the earlier talks with the Metro Pacific Group for the acquisition of a majority stake in GMA. And the much earlier interest expressed by the Ayala group in GMA 7.

Well, given the perceived difficulty in acquiring a stake in GMA 7 through friendly negotiations, there is always the hostile takeover route that any interested buyer can take. We’ve heard (again this is not confirmed) the Duavit and Jimenez groups are still interested to sell. And since GMA Network is publicly listed, the buyer can also undertake a creeping acquisition (purchases done over a period of 12 months from the market) which can trigger a mandatory tender offer, or make an outright tender offer. (A tender offer is defined as a broad solicitation by a company or a third party to purchase a substantial percentage of a company’s registered equity shares or units for a limited period of time).

Soon, all these major or huge mergers and acquisition will have to go through an additional regulatory hurdle – anti trust, with the recent passage of our very own anti-trust legislation.

What do we learn from all these? That in any negotiations involving mergers and acquisitions, it is important the term sheet or letter of intent be carefully and meticulously prepared so the parties do not leave it to the courts to determine the respective rights and remedies of the parties in case of breach.

For comments, e-mail at maryannreyesphilstar@gmail.com.

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