Mighty Machines Corp., an American company and Tracteur, a French company, have long been competitors in the building of construction equipment.
Due to COVID-19, Mighty Machines’ business has struggled a great deal – to the point that they are rapidly approaching banktuptcy. Mighty Machines is also suffering from a number of lawsuits alleging that Mighty Machines’ bulldozers are defective and caused injury. The parties suing under these lawsuits are asking for $100 million in damages.
Meanwhile, Tracteur has actually done quite well since the pandemic has started, and is looking to expand in Canada (where Mighty Machines does a lot of business). Mighty Machines has several contracts with Canadian distributors who help sell their construction equipment, and Tracteur thinks those distributors could help.
Mighty Machines has the following agreements with Canadian distributors:
- Gretzkyco – comprising 20% of their Canadian business – contract signed in 2018
- Lemieux – 20% of their Canadian business – contract signed in 2010
- Howe – 15% of their Canadian business – contract signed in 2017
- Crosby – 10% of their Canadian business – contract signed in 2012
- 100 other distributors – remaining 35% of their business – 50 of these distributors (representing 17.5% of their Canadian business) signed during or after 2015, the other 50 distributors signed before 2015 (representing 17.5% of their Canadian business)
Mighty Machines has had two different kinds of distributor contracts – one used for contracts with distributors signed in 2015 and after, one used for contracts signed with distributors before 2015. Their assignment language is as follows:
Pre-2015 Contracts:
Section 15 – Assignment. This Agreement may not be assigned by Mighty Machines or Distributor to a third party without 30 days’ prior written notice to the other party. (NOTE: What this means is that if Mighty Machines wants to assign the agreement, they need to let Distributor know at least 30 days before the agreement is actually assigned).
2015 and after Contracts
Section 15 – Assignment. This Agreement may not be assigned by Mighty Machines or a Distributor to a third party without prior written consent of the other party, provided that a sale of the majority of the stock of Mighty Machines to a 3rd party will be considered an assignment under Section 10.
YOUR TASK: Agree on the best purchase price and structure (asset or stock) for the transaction, and if an asset deal, which distributor contracts (as mentioned in items 1-5 above – i.e. Gretzkyco, Lemieux, the 100 distributors, etc.) would be acquired by Tracteur. (Read your client instructions carefully!!)
Your client instructions (Mighty Machines)
You are in-house counsel for Mighty Machines. As you know, the company is very close to bankruptcy. The ideal situation is for Tracteur to buy 100% of the stock of Mighty Machines but you know that the $100 million in lawsuits is going to be a concern for Tracteur). An asset deal might be OK but Mighty Machines really needs a deal to close within no more than 60 days of today, otherwise we go into bankruptcy. The goal for Mighty Machines is to close a deal with as much cash and as quickly possible! We need at least $580M in purchase price, no less.
Try for the stock deal. Outside counsel has told us that the chances of success of the plaintiffs in the lawsuit is around 30% – not high but not low either. Try to convince Tracteur the lawsuits are not a big deal – but understand doing an asset deal is not a deal-killer!
Re: the asset deal (i.e. selling our distribution contracts): Tracteur likely will want to make sure they are able to acquire contracts with distributors that make up a certain percentage of their Canadian business (you’ll need to ask them).
Some notes:
- Gretzkyco –we think they would probably take 30-45 days to get their approval (so within our 60 day deadline).
- Lemieux – Mighty Machines will never get their approval, and we don’t even want to send them a notice of a potential acquisition because they might leak a potential acquisition to other distributors.
- Howe – IF we need their approval, it would take at least 75 days. OK sending them a notice, though if that’s all that is required.
- Crosby – If we need to get their approval, it would take 120 days. OK sending them a notice, though if that’s all that is required.
- 100 other distributors – Would take much more than 90 days to get approvals (for those contracts that need approval). OK to send them notices about the acquisition (if only notice is required).
ANSWER
- Pre-2015 CONTRACTS
The Distributors that signed contracts before 2015 form the minority, they are:
- Crosby-10%
- Lemieux-20%
- 50 other distributors-17.5%
The total percentage is 47.5%. The Contracts pre-2015 require that 30 days written notice is given before either party, Mighty Machines and the Distributor may assign the agreement.
These contracts have the following advantages and disadvantages;
Advantages
The notice period is defined as 30-days, parties are therefore guaranteed that within 30 days, they may assign the agreement whether the other party consents or not.
Disadvantages
- The 30-days written notice period confines the parties to having to wait for no less than 30 days.
- There is only one option of assignment i.e through the 30 days written notice.
- POST 2015 CONTRACTS
The majority of the Distributors signed the contracts after 2015. These are:
- Gretzkyco -20%
- Howe-15%
- 50 other distributors -17.5
The total percentage is 52.5%. Unlike the pre-2015 contracts, the contacts entered into after 2015 do not require any notice to be sent before an assignment can occur, only written consent is required to authorize the assignment; moreover, the sale of majority of the stock of Mighty Machines constitutes an assignment.
These contracts have the following advantages and disadvantages;
Advantages
- They have more percentage (52.5%) unlike with the pre-2015 contracts (47.5%).
- There are two options of assignment ie through the written consent and through buying the majority of the stock (52.5%).
Disadvantages
- They require a written consent whose period has not been specified. Therefore, the consent may take a period shorter or longer than 30 days.
- The option to acquire the majority of stock will mean that being liable for the possible $100 million in damages.
- CONCLUSION
The option of acquiring the pre-2015 contracts is on the table whether or not the parties’ consent because it is not the consent of the parties that is needed, only 30 days written consent is needed. Therefore, it does not matter that Lemieux will never get their approval or that they would leak a potential acquisition to other distributors (even if information got to the post-2015 distributors, there is an option of purchasing the majority stock which does not require consent of the post-2015 distributors). Neither does it matter that Crosby’s approval would take 120 days or that the approval of the 50 distributors would take more than 90 days.
To acquire interest in the post-2015 contracts, the only available option is for purchase of the majority of the stock. This is because it is the Distributors’ consent, and not notice, that is needed within the 60 days deadline. With Gretzkyco, it is not guaranteed that they would take the 30-45 days to get their approval; Howe’s approval is projected beyond the 60 days period to at least 75 days and the other 50 Distributors are projected to take more than 90 days which is also beyond the 60 days’ timeline.
The best purchase price will be taking into account the 30% chance of the Plaintiff’s suit in the potential $100 million in damages. This would mean deducting 70 million from the $100 million bringing a total of $30 million and not 100 million as liability to be accounted for when negotiating the purchase price. This 30 million deficit will be compensated once Tracteur starts doing business with the distributors.
The best structure will be for Tracteur to buy stocks and not assets. This is because buying stock will mean that Tracteur will be liable for Mighty Machines’ debts which will include the potential $30 million in damages, and other liabilities that Mighty Machines may have thereby reducing some of the financial burden for Mighty Machines. Tracteur needs to acquire the stocks in the pre- and post-2015 contracts listed above. They will acquire the pre-2015 stock through sending the 30-days written notice and they will be assured that they only need to wait for 30 days, for the assignment to be made. For the post-2015 contracts, they will acquire the stocks through owning majority of the stock (52.5%).
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