M & focus AUGUSTA 2005, NO.4 in this issue DaimlerChrysler Prevails Use of German GmbH Against Kerkorian Challenge Shelf and Shell Companies BY ALBERTO LUZÁRRAGA BY HEINO RÜCK Discussion of the recent court ruling in the case The (re-)commencing of a business activity brought by Kirk Kerkorian based on statements by a German shelf or shell GmbH is considered made by management of DaimlerChrysler in to be an “economic incorporation,” with the connection with its merger. PAGE 2 consequence that strict rules regarding the contribution of capital in German corporate law are (once again) applied. PAGE 5 “[one of] the top performing The Growing Influence of Hedge Funds BY AZAM H. AZIZ law firms, ranking by dollar Recent market events and a regulatory change have paved the way for hedge fund managers volume globally” to become increasingly common participants in —The Wall Street Journal the acquisitions market and to exercise greater April 1, 2005 influence over the management of companies in which they invest. PAGE 8 SHEARMAN & STERLING focus [see back page for details] Representing Legg Mason, Inc. in Representing Dresdner Bank AG in Representing Citigroup Inc. in the its US$3.7 billion acquisition of the sale of its North American and US$6.6 billion acquisition of Federated substantially all of the worldwide European private equity investment Department Stores, Inc.’s private label asset management business of fund holdings to American and co-branded credit card business. Citigroup Inc. International Group, Inc. Representing Eurazeo S.A. in connection Representing The Permal Group in Representing Hunan Valin Iron & with Eutelsat S.A.’s €2.4 billion leveraged its US$1.386 billion acquisition by Steel Group Co., Ltd. in the sale of recapitalization. Legg Mason, Inc. its 37% interest in Hunan Valin Steel Tube & Wire Co., Ltd. to Mittal Steel Representing France Télécom S.A. Company N.V. in the sale of its 27.3% stake in MobilCom AG to Texas Pacific Group. DaimlerChrysler Prevails Against Kerkorian Challenge BY ALBERTO LUZÁRRAGA | NEW YORK n April 7, the United States District Court of Following the announcement of the Merger, a Delaware ruled in favor of DaimlerChrysler proxy/prospectus was prepared, filed with the SEC and O AG in the case brought by Kirk Kerkorian mailed to Chrysler’s shareholders with a cover letter based on statements made by management of from Robert Eaton, chief executive officer and chairman DaimlerChrysler in connection with the merger (the of Daimler-Benz, seeking their approval for the “Merger”) of Daimler-Benz AG and the Chrysler transaction. The proxy/prospectus described the 1 Corporation. In dismissing Kerkorian’s claims, the terms of the Merger, the jurisdiction of incorporation court found that the statements did not represent for the new company, the corporate form to be fraudulent statements and, even if they had been utilized and the governance structure. Although the misrepresentations, Kerkorian had not relied on such proxy/prospectus used the term “merger of equals” at statements in deciding to support the Merger. least 13 times, it was never defined. In September 1998, the shareholders of Daimler-Benz Background and Chrysler, including Tracinda, voted overwhelmingly This case represents the final chapter in a tumultuous to approve the merger of these two companies to create relationship between Kerkorian and Chrysler. Their DaimlerChrysler AG. At that time, the media reported disputes appeared to be settled in 1996 when Chrysler the Merger as being a “merger of equals” with Chrysler reached an agreement with Tracinda Corporation, and Daimler-Benz’s shareholders receiving approximately Kerkorian’s holding company, by which Tracinda, 42% and 58%, respectively, of the shares in the new among other things, agreed to maintain its Chrysler company. Under the merger agreement, the chief exec- stockholding below 13.5% in exchange for a seat on utive officer and chairman of Daimler-Benz, Juergen Chrysler’s board. When Chrysler and Daimler-Benz Schrempp, and the chief executive officer and chairman began discussing the proposed Merger in the late 1997 of Chrysler, Eaton, also agreed to share the office of and early 1998, Kerkorian was kept apprised of the chairman of DaimlerChrysler’s board. negotiations given the size of Tracinda’s shareholdings Unfortunately, the Merger did not prove successful. and its history with Chrysler. Kerkorian’s lawyers and In the face of worsening results, a series of changes was advisors reviewed the business combination agreement made to the board of management and administration of before it was executed. On May 6, 1998, however, DaimlerChrysler leading the press to speculate that the while the Chrysler and Daimler-Benz boards executed Merger in reality had been an acquisition not a merger this agreement, Tracinda, Kerkorian, Chrysler and of equals. At that time, Eaton and Schrempp publicly Daimler-Benz finalized and signed a separate stockholder asserted that these changes did not undermine the agreement that, among other things, obligated merger of equals. However, two years later, Schrempp Tracinda to vote in favor of the Merger. told the Financial Times that “the structure we have now with Chrysler (as a standalone division) was always the 1 Tracinda Corporation v. DaimlerChrysler AG, 364 F. Supp. 2nd 362 | 2 | S HEARMAN & STERLING LLP | M&A FOCUS | Analysis “Noting Tracinda’s clear In its decision, the court recounted the long history between Chrysler and Kerkorian and then evaluated access to the parties by each of the elements needed to bring claims for common law fraud and violations of Sections 10(b) and virtue of its seat on the 14(a) of the U.S. Securities Exchange Act of 1934 and Rules 10b-5 and 14a-9 promulgated thereunder. Chrysler board, the court Specifically, the court focused on three broad questions: ■ Did the Defendants use Eaton to make misleading was unable to ignore the statements? ■ Did the statements constitute misrepresentations? sophistication of Tracinda ■ Did Kerkorian actually rely on such statements? as an investor ...” First, with respect to the statements made by Eaton to Kerkorian, the court found that the Defendants did structure I wanted. … We had to go a roundabout way. not use Mr. Eaton to communicate misrepresentations … If I had gone and said Chrysler would be a division, to Tracinda. The court found that the Defendants everybody on their side would have said: ‘There is no “exercised no control over Eaton or the statements he 2 way we’ll do a deal.’” made to Kerkorian” and noted that the Defendants’ Soon afterwards, Kerkorian filed a lawsuit against knowledge of the communication coupled with their DaimlerChrysler, Daimler-Benz, and Schrempp (the desire for Chrysler’s shareholders to support the “Defendants”) alleging violations of securities laws, Merger did not “establish that Schrempp knew or common law fraud and conspiracy. He claimed that he controlled the substance” of the exchange between was told by Eaton that the proposed transaction would Eaton and Kerkorian. be a “merger of equals,” that the board of management Second, with respect to these statements, the court of the new company would be evenly split and that held that, even if the Defendants were responsible for Schrempp and Eaton would be co-chairmen of the these statements, Tracinda failed to prove that combined company with the Chrysler team playing a actionable, oral misrepresentations were actually made significant role in the new company as equal partners. to Kerkorian. Upon reviewing the testimony, the court Kerkorian cited Schrempp’s statement as direct evidence concluded that the statements made by Eaton were that he and the other Chrysler shareholders were misled “vague, indefinite and that type of general optimism to believe that this transaction was a merger of equals which is insufficient to support a fraud or federal securi- and not an acquisition. ties violation claim.” [cont’d on next page] 2 Financial Times, Oct. 30, 2000 | S HEARMAN & STERLING LLP | M&A FOCUS | 3 | Kerkorian Challenge [cont’d from previous page] equals” label since Mr. Kerkorian supported the Merger “... the court found that before he had any discussions about corporate governance. Finally, after dismissing these elements with respect to Tracinda entered into the the oral statements, the court addressed Tracinda’s claims that the written statements in the proxy/prospectus stockholder agreement for and accompanying letter from Eaton were false and misleading and thereby constituted separate violations of its own reasons without the U.S. securities laws. Once again, the court concluded that each of the written statements regarding the any fraudulent inducement, “merger of equals,” the composition of the board, the selection of the German AG form and the voting status and, as a result, Tracinda of the management members were not actionable misrepresentations. In addition, the court held that, even became obligated to vote if these statements had been incorrect, Tracinda had not “demonstrated the materiality and reliance elements in favor of the Merger necessary to prove its claims for violation of the securities laws” as these corporate governance points were not prior to the filing of the significant to Tracinda when it decided to agree to support the Merger. On the contrary, the court found proxy/prospectus.” that Tracinda entered into the stockholder agreement for its own reasons without any fraudulent inducement, Third, the court found that Tracinda was not fraudulently and, as a result, Tracinda became obligated to vote in induced to enter into the stockholder agreement and did not favor of the Merger prior to the filing of the rely on the oral representations allegedly made by Eaton. proxy/prospectus. Due to this pre-existing contractual Noting Tracinda’s clear access to the parties by virtue of its commitment, Tracinda was unable to prove that it had seat on the Chrysler board, the court was unable to ignore relied on the proxy/prospectus or other documents in the sophistication of Tracinda as an investor – one that deciding to vote its shares in favor of the Merger.