Analysis: Endeavor's $13 billion deal highlights push to sidestep minority shareholders

Endeavor group

17/05/2024 11:00

By Anirban Sen and Tom Hals
       May 17 (Reuters) - Endeavor Group's  EDR.N  decision to
deny minority shareholders the ability to veto a $13 billion
deal to take the entertainment conglomerate private is the
latest example of a company's controlling investors risking
lawsuits to avoid paying a higher deal price.
    At stake is a corporate governance safeguard that reassures
minority investors they are getting a fair price and protects
companies' stock market valuations from taking a hit on concerns
a deal would undervalue them, corporate lawyers and investment
bankers say.
    Endeavor agreed last month to be taken private by a
consortium of its investors, led by private equity firm Silver
Lake, which holds 71% of the voting stock in the company. It
inked the deal without agreeing to hold a vote where a majority
of the investors not participating in the consortium would have
to approve it.
    Without such a "majority-of-the-minority-investors"
threshold, a deal vote becomes a formality, since the
shareholders that control the company are also the ones buying
out the minority investors. 
    A special committee of independent board directors that
negotiated the deal on behalf of Endeavor tried unsuccessfully
to convince Silver Lake to sign off on a majority-of-minorities
shareholder vote, people familiar with the matter told Reuters.
    Nearly a dozen lawyers and bankers told Reuters there is a
growing realization among the controlling investors of companies
that the financial benefit of depriving minority shareholders of
a deal veto outweighs the legal risks.
    "(The shareholder vote) opens the door to an activist who
can say, 'I know you're negotiating with the special committee,
but now you're going to negotiate with me, and I'm going to
squeeze a second bite'," said Phillip Mills, an M&A partner at
law firm Davis Polk.
    Endeavor did not respond to requests for comment on the
decision not to stage a shareholder vote on the deal. Silver
Lake declined to comment.
    Endeavor, run by Hollywood power broker Ari Emanuel, is
well-known for representing film and television talent. It has
grown to become a sports and entertainment behemoth through more
than 20 acquisitions.
    At least three other U.S. companies were taken private by
majority shareholders over the last two years without seeking
approval by minority investors. 
    These include buyout firm Thomas H. Lee's $2.5 billion deal
in February to take medical equipment management company Agiliti
 AGTI.N  private, and grill maker Weber's controlling
shareholders led by BDT Capital acquiring it last year for $3.7
billion.
    If this trend of controlled companies denying minority
shareholder vetoes to take-private deals continues, it could
weigh on these companies' valuations as investors bet they would
be sold at a lower premium, investment bankers and analysts say.

    HIGHER COST OF SETTLEMENT
    Swedish bank Handelsbanken, which is suing Endeavor for
selling itself too cheap, cited the omission of a shareholder
vote in its lawsuit as evidence of the company trying to
shortchange investors.
    Endeavor said in a regulatory filing last week it has also
received multiple shareholder requests seeking internal records
of the deliberations on the deal. 
    The lawyers who are advising companies against giving
minority shareholders a deal vote argue the worst that can
happen, based on court precedent in Delaware where most
companies are incorporated, is that the controlling shareholders
may be ordered in court to pay 5% to 10% over the deal price,
possibly years after the transaction has closed. 
    Skipping the vote, on the other hand, prevents hedge funds
and other activist shareholders from making deal price demands
and allows a transaction to close more quickly, the lawyers say.
    "It is not unusual for controlling shareholders to take on
this burden rather than the execution risk of a special minority
shareholder approval," said Ethan Klingsberg, co-head of U.S.
corporate and M&A at law firm Freshfields Bruckhaus Deringer.
    Freshfields advised Endeavor chairman Patrick Whitesell on
the deal, but Klingsberg said he was not involved in it and was
not commenting specifically on the Endeavor transaction. 
    To be sure, some controlled companies still give a veto to
minority shareholders on deals involving insiders to minimize
litigation risk. Website designing platform Squarespace  SQSP.N 
said on Monday it would hold a vote for its minority
shareholders on its $6.9 billion sale to private equity firm
Permira and its controlling investors, including CEO Anthony
Casalena and investment firms General Atlantic and Accel. 
    Silver Lake has experience with investors trying to squeeze
it for more money on a deal. It opted for a vote for minority
shareholders when it inked a $24.4 billion deal in 2013 to take
Michael Dell's eponymous computer maker private.
    This resulted in the private equity firm offering a small
price sweetener, some $350 million, to complete the deal, after
Carl Icahn and other activist investors agitated for more money.
    "Having a vote may be helpful from a business judgment rule
perspective, but may inject real unpredictability into the
transaction itself. Once a transaction is announced, you have
merger arbs and other parties moving into the stock, so the
voters at the time of the special meeting are not necessarily
long-term holders of your stock," said Iliana Ongun, an M&A
partner at law firm Milbank. 

 (Reporting by Anirban Sen in New York and Tom Hals in
Wilmington, Delaware
Editing by Greg Roumeliotis and Rod Nickel)
 ((Anirban.Sen@thomsonreuters.com; Twitter: @asenjourno; Reuters
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