On Friday, March 26, 2010, hedge funds managed by Pentwater Capital Management, L.P. (“Pentwater”) sought a temporary restraining order from Vice Chancellor Strine (i) restraining The Talbots, Inc. (“Talbots”) from closing a pending exchange offer made to the warrant holders of BPW Acquisition Corp. (“BPW”) and (ii) restraining BPW from proceeding with soliciting consents for amendments to the Warrant Agreement governing the outstanding BPW warrants. The Vice Chancellor rejected Pentwater’s application, concluding that Pentwater’s application should have been brought in New York, not Delaware, that its coercion and contract claims were not colorable, that it had not identified irreparable harm that it would suffer if the court failed to restrain Talbots and BPW, and that the balance of the equities weighed against granting any relief.
Talbots’ exchange offer — for 90% of the outstanding BPW warrants — was a condition to a pending merger of Talbots and BPW. The exchange offer crossed the requisite threshold on April 6 and the merger closed on April 7. Following its defeat at the hands of the Vice Chancellor on March 26th, Pentwater voluntarily dismissed its complaint.
The focus in this post is on the contractual claims asserted by Pentwater, including its claim for violation of the implied covenant of good faith and fair dealing inherent in all contracts. While the Vice Chancellor found Pentwater’s contractual claims not colorable, I think the better argument is that they have merit. (Full disclosure: I represented a group of hedge funds that had a position in the BPW warrants but, after Pentwater’s defeat, folded their tent and participated in the exchange offer.)
Pentwater pursued a risky strategy, namely, seeking to enjoin not only BPW’s consent solicitation but also Talbots’ exchange offer. It also confronted substantial questions as to its selection of venue (Delaware v. New York), the question of whether damages were an adequate remedy, and on the balance of the equities. Had these factors not been present, Pentwater’s contractual claims might very well have received a more receptive audience. Perhaps they may still be, by Pentwater (if it retained any BPW warrants) or by those holders of the BPW warrants who did not participate in the exchange offer.
A. Background
BPW was a poor man’s hedge fund, a so called “SPAC” or special purpose acquisition company. The idea of SPACs was to marry money with smart deal finders. The money was raised with no specific investment in mind, other than in a general industry. Once the smart guys found a good investment opportunity (and they had a limited amount of time to do so) they would present it to the shareholders of the SPAC for approval. If a sufficient number of the shareholders did not approve the acquisition, electing instead for a return of their cash, then the company would liquidate and return the offering proceeds (minus expenses) to the shareholders. Needless to say, with the Great Recession and its impact on hedge funds, the bloom is off SPACs.
BPW conducted its offering in February 2008, raising $350 million through the sale of 35 million units (“Units”), consisting of one share of BPW common stock and one warrant. The warrants were designed to trade separately from the common shortly. BPW was sponsored by Perella Weinberg Partners Acquisition LP (“Perella Weinberg”) and BNYH BPW Holdings, LLC (the investment vehicle of the Lerner family of New York). BPW was to focus on one or more deals in the financial services or business services industries but, of course, the prospectus, having been drafted by lawyers, allowed BPW to pick a deal with any business (the consummation of which would require shareholder approval).
The BPW warrants would not be exercisable unless and until BPW did a deal, and would be exercisable from and after that point until six years from the date of the IPO prospectus (or until February 26, 2014). The warrants were exercisable for one share of BPW common at $7.50 per share.
Talbots, the women’s apparel company, had been suffering from declining sales and heavy debt. Its Japanese majority shareholder and primary lender, AEON Co., Ltd. (“AEON”) was chafing. Talbots retained Perella Weinberg in early 2009 to advise it on refinancing its debt. In the fall of 2009, AEON notified Talbots that it wanted to divest its Talbots debt and its equity interest in Talbots. This, of course, meant that Talbots was in play, so Talbots broadened Perella Weinberg’s portfolio to include “alternative strategic transactions” as well as refinancing transactions that would address Talbots’ upcoming debt maturities.
Surprise! Perella Weinberg, at the instruction of Talbots’ audit committee, sought out several SPACs, including BPW, for a potential deal with Talbots, since SPACs had what Talbots needed — cash. BPW emerged as Talbots’ merger partner, no doubt in no small part because of Perella Weinberg’s sponsorship of BPW and continued significant influence over it (Joseph Perella himself served as Vice Chairman of the BPW board and other Perella officers served in BPW’s management, including Gary Barancik, BPW’s CEO and a partner of Perella Weinberg).
So Talbots and BPW entered into a merger agreement in December 2009 pursuant to which a wholly-owned subsidiary of Talbots would merge with and into BPW, with BPW as the surviving entity and a wholly-owned subsidiary of Talbots. (For reasons not entirely apparent, on April 6, the day before the merger closed, the parties amended the merger agreement to provide that, immediately following the merger, by a short-form merger, BPW would merge with and into Talbots.) Each BPW shareholder would receive Talbots’ shares, in accordance with a formula, designed to deliver to them Talbots’ shares with a value of approximately $11.25 (BPW’s Units were sold in its IPO at $10 per Unit). (As consummated, the exchange ratio was 0.9853 Talbots’ shares for each common share of BPW.)
What to do with the BPW warrants? The BPW warrants, if simply assumed by Talbots in a merger, would be dilutive to the shareholders of Talbots (a warrant with an exercise price of $7.50 is in-the-money for Talbots’ shares trading at $11.25) but the BPW warrant holders could be muscled since the warrants would expire worthless if BPW did not do a deal by its deal deadline — February 26, 2010 (which was extended by the shareholders of BPW to April 26, 2010 in connection with their approval of the Talbots merger). The upshot was a condition to Talbots’ obligation to proceed with the merger, namely, that at least 90% of the holders of the BPW warrants accept Talbots’ common shares or newly-issued Talbots’ warrants. The Talbots warrants would carry an exercise price greater than the $7.50 exercise price of the BPW warrants (adjusted for the exchange ratio of the Talbots/BPW shares in the merger) — the Talbots warrants were priced to be some 30% out-of-the-money based upon Talbots’ common share price used to determine the exchange ratio. Talbots launched its exchange offer to implement this condition to the merger on March 1, 2010, with the definitive version of the exchange offer prospectus dated March 11, 2010.
Talbots stated in the exchange offer prospectus that those BPW warrant holders who did not participate in the offer would “in accordance with the terms of the existing warrant agreement governing the BPW Warrants, be converted into warrants to purchase the number of shares of Talbots’ common stock that such warrant holder would have received in the merger had the BPW warrants been converted to shares of BPW common stock immediately prior to the completion of the merger.” Exchange Offer Prospectus at p. 46. So, based on an exchange ratio of 0.9853 share of Talbots’ common for each share of BPW’s common, BPW warrant holders who held their warrants would be able to purchase Talbots’ common at $7.61. The holders of such warrants, instead of being out-of-the-money by some 30% if they exchanged for Talbots’ warrants, would be in-the-money by some $3.64 (assuming a Talbots’ common price of $11.25). (Talbots closed on March 14 at $15.17.)
This presented an arbitrage opportunity — buy BPW warrants (perhaps combined with some short selling of Talbots’ common). Undergirding this strategy was the assumption that capturing BPW’s $350 million in cash was simply too attractive to Talbots and its majority shareholder, AEON, so that, when push came to shove, Talbots would waive the 90% condition, purchase whatever number of warrants were tendered into the exchange offer, and close the merger with BPW.
Clearly such arbitrage occurred, to the chagrin of Talbots and its advisors, so they come up with a strategy to “persuade” the holdouts to participate in the exchange offer.
B. The March 16 Consent Solicitation
Some two weeks after Talbots launched its exchange offer, BPW filed its preliminary proxy statement with the SEC seeking the consent of the BPW warrant holders for amendments to the Warrant Agreement. The amendments clearly were not in the interest of those warrant holders who had elected or would elect not to participate in the exchange offer, as they would (i) defer the exercise period of the BPW warrants for one year after consummation of the merger between Talbots and BPW, and (ii) remove all anti-dilution protection from the BPW Warrant Agreement for post-merger stock splits and like events involving Talbots’ common stock.
Why would any BPW warrant holder in his, her or its right mind consent to these proposed amendments? Answer: Those who had already tendered or who had decided to tender into the exchange offer, believing that Talbots meant it when it conditioned the BPW merger upon satisfaction of the condition that at least 90% of the BPW warrant holders participate in the exchange offer, or those who also owned BPW common stock and wanted the deal done as holders of BPW common, and/or hedge funds and institutional investors who responded to the entreaties of Perella Weinberg. Whatever their motivations, BPW announced, on March 25, that it had received (non-binding) statements of support for the proposed amendments from over 50% of the warrant holders, thereby virtually clinching its proposal to amend the Warrant Agreement and putting significant pressure on the holdouts to tender into the exchange offer.
C. Pentwater Objects
Pentwater was one of the holdouts. It filed suit in Delaware Chancery Court objecting to the consent solicitation, claiming it was coercive and a violation of the Warrant Agreement and BPW’s implied covenant of good faith and fair dealing, inherent in all contracts. At least in hindsight, Pentwater’s decision to seek immediate injunctive relief, including an order enjoining consummation of the exchange offer (scheduled to expire the evening of the hearing) was a mistake. BPW’s able counsel (Wachtell Lipton & Morris Nichols) set the stage well in their brief (prepared in some 24 hours) opposing Pentwater’s application for a TRO:
“Plaintiffs are a group of hedge funds and warrantholders of BPW who seek to extract hold-up value by blocking the proposed merger of BPW and Talbots . . . .
Plaintiffs . . . recently accumulated about 9% of the outstanding BPW warrants. Plaintiffs have explicitly stated that they intend to hold their warrants out from the Exchange Offer. If plaintiffs follow through on that threat and are joined by holders of a relatively small number of additional warrants, then all 35 million public BPW warrants, including plaintiffs’ 3.3 million warrants, will expire worthless. Of course, plaintiffs do not seek that economically irrational result. What plaintiffs want instead is to walk away with a better deal than the other warrantholders — to capture for themselves all ten percent of the warrants that need not be exchanged and to extract still further benefits. As a result, plaintiffs are now playing a game of ‘chicken,’ in which they risk to drive the entire body of warrantholders over the cliff. To use the more familiar law-and-economics metaphor, the case presents a ‘hold up’ problem, in which a single resisting investor seeks to take a value-maximizing deal hostage in order to extract end-gain benefits for itself.”
Defendants’ Corrected Opposition, dated March 25, 2010 (“Opposition”) at pages 1, 3.
To further isolate Pentwater, counsel advised the court that if the merger were to fall apart, “BPW will liquidate according to the terms of its charter on April 26 and Talbots may well be doomed to bankruptcy.” Id. at 2.
It was downhill from there for Pentwater, whose counsel, John Reed of Edwards Angell Plummer & Dodge LLP, faced a decidedly skeptical audience for his claims in Vice Chancellor Strine.
But Pentwater’s contractual claims, and one other that it did not raise, are, to this commentator, persuasive. So let me now address these.
D. The Minority Protection Provisions of BPW’s Warrant Agreement
The BPW Warrant Agreement is amendable by the holders of warrants exercisable for a majority of BPW’s common shares subject to the outstanding warrants. But the amendment provision of the Warrant Agreement (Section 18) does not stop there. It states that approval must be obtained by a majority of the holders whose warrants “would be affected by such amendment; . . .” (emphasis added.)
What can this limitation mean? It must mean, at a minimum, that not all amendments to the Warrant Agreement are subject to approval by a majority in interest of all warrant holders. The question is how to separate those warrant holders who would be “affected” by a proposed amendment and those who would not. Black’s Law Dictionary (8th edition) defines “affect” as “[m]ost generally to produce an effect on; to influence in some way.”
BPW launched its consent solicitation, seeking approval of the warrant holders to amend the Warrant Agreement, after Talbots commenced its exchange offer (on March 1): How would the warrants of warrant holders who had tendered their warrants to Talbots be “affected” by any amendment of the Warrant Agreement? As warrant holders, tendering warrant holders no longer had any interest in the old warrants, so arguably they could not be “affected” by any amendment of the Warrant Agreement (the consent solicitation was conditional upon occurrence of the merger, so no amendments would be made to the Warrant Agreement if the Talbots/BPW deal fell apart.)
Should the word “adversely” be read into “affected” by the amendment? Assume only two warrant holders, one whose surname begins with the letter “A” and a second whose surname begins with the letter “B.” Assume A owns a majority of the outstanding warrants. What an amendment that deferred the exercise period of the warrants of all warrant holders whose surname begins with a “B” by one year (but adding a year of exercise to the back-end of the warrant exercise period) be valid if approved by “A”?
It strikes this observer that a good argument can be made, based solely on the text of the BPW Warrant Agreement requiring approval for amendments from a majority in interest of those warrant holders “affected” by the amendment, that the BPW warrant holders who tendered into the Talbots exchange offer were not within that class of warrant holders “affected” by the proposed amendments and that therefore the proposed amendments to the BPW Warrant Agreement should only have been decided by the warrant holders who elected not to tender, since they were the only warrant holders, qua warrant holders, who would be affected by the proposed amendments.
Vice Chancellor Strine himself, during the hearing on March 26th on Pentwater’s application for a TRO, highlighted this very issue, although not in the context of an argument that this observer makes here (since Pentwater did not make the argument):
“. . . I guess what they’re saying [Pentwater’s counsel] is, that people are voting [on the amendments to the Warrant Agreement] without any interest in being subject themselves to the contractual change that they’re making.”
Transcript at 60:5-8.
Pentwater did not make the “affected” argument, perhaps because it would not have supported a TRO, but, to this observer, the argument is a good one, and, if made, would have focused the court’s attention on the fact that, by the very provisions of Section 18 of the Warrant Agreement, governing amendments, not all BPW warrant holders are to vote on all proposed amendments to the Warrant Agreement.
But there is more. Section 18 of the BPW Warrant Agreement prohibits any amendment without the consent of the “affected” warrant holders that would, among other things, “reduce” the warrant exercise period or “reduce” the number of BPW common shares issuable upon exercise of a warrant.
Under the Warrant Agreement, the exercise period of the BPW warrants was to commence upon the consummation of any deal and terminate on the earlier of February 26, 2014 or any earlier redemption of the warrants. (The BPW warrants were redeemable at $0.01 per warrant (thus forcing exercise of the warrants) when the share price of BPW’s common equaled or exceeded $13.25 per share for 20 trading days.)
BPW proposed, by its amendments to the Warrant Agreement, to delay the warrant exercise period for 12 months and to add a year to the back-end of the warrant exercise period, thus preserving the length of the warrant exercise period. So, naturally, it argued before Vice Chancellor Strine that there had been no “reduction” in the length of the warrant exercise period, citing the definition of “reduce” in Merriam Webster’s Collegiate Dictionary, as meaning “to diminish in size, amount, extent, or number.” Opposition Brief at 14.
Pentwater responded by arguing that “to remove a particular year from a defined term of years is to ‘reduce’ or ‘diminish’ that term of years by one year.” Pentwater’s Reply Brief at 3. Moreover, as Pentwater noted, BPW’s position would lead to the absurd conclusion that it could have proposed amending the warrant exercise period to delay its commencement for several decades and not, under this interpretation of reduction, run afoul of Section 18 of the Warrant Agreement.
Neither BPW’s counsel nor Vice Chancellor Strine addressed this “reductio ad absurdum” claim, but it should have been addressed. An interpretation of “reduce” in Section 18 of the Warrant Agreement is not tenable if it does not foreclose the possibility that a delay in the warrant exercise period for years (as long as coupled with an extension of the back-end of the warrant exercise period by a like amount) would be permitted by Section 18. The only way to eliminate this absurd possibility is to define reduce by reference to the back-end of the warrant exercise period, namely, that “reduce” should refer to any shortening of the termination date to a date earlier than February 26, 2014.
One reply might be that the condition that amendments be approved by a majority in interest of the warrant holders is sufficient protection against amendments that would lead to an absurd result such as that posited by Pentwater, e.g., a delay in the warrant exercise period for decades. But then that confronts the provision of Section 18 of the Warrant Agreement that stipulates that only “affected” warrant holders are to vote on proposed amendments — a “majority” of the warrant holders who are not affected by a proposed amendment should not be permitted to vote on the amendment. In the above example of “A” and “B,” just as “A” should not be allowed to vote on an amendment that would further its interest at the expense of “B,” so those warrant holders who tendered into the Talbots exchange offer should not have been permitted to vote on an amendment that would have absolutely no effect on them, as warrant holders.
Similarly, it strikes this observer that Pentwater had the better argument that Section 18’s prohibition on amendments that would reduce the number of shares issuable upon exercise of the BPW warrants prohibited BPW’s proposed elimination of the anti-dilution protections of Section 11 of the Warrant Agreement. BPW argued that any amendments to Section 11 were not within the scope of Section 18’s protective provisions: “Nothing in section 18 of the Warrant Agreement prevents modification of the anti-dilution provisions in section 11.” Opposition at 15.
That may be true, but it should be irrelevant. Any amendment that would reduce the number of shares issuable upon exercise of the BPW warrants should fall within the scope of the protective provisions of Section 18 whether by amendment to Section 11 of the Warrant Agreement or to any other provision of the Warrant Agreement. BPW made clear in its consent solicitation that the effect of removing anti-dilution protection from the BPW Warrant Agreement would be to permit, among other things, stock splits of the common stock of Talbots (into which warrants not tendered to Talbots would be exercisable after the completion of the merger) with “no corresponding increase to the number of shares . . . issuable on exercise of unexchanged BPW Warrants . . .” Consent Solicitation Statement, dated March 16, 2010, Barancik’s cover letter, page 1.
E. BPW’s Alleged Violation of the Covenant of Good Faith and Fair Dealing
Pentwater asserted in its complaint that the proposed amendments to the Warrant Agreement not only breached its explicit terms but also BPW’s implied covenant of good faith and fair dealing, inherent in all contracts. By proposing to reduce the warrant exercise period and the number of shares issuable upon exercise of the warrants, without the consent of all “affected” warrant holders, BPW would be frustrating the “reasonable commercial expectations” of the warrant holders and the intended purpose of the Warrant Agreement. In support of its assertion, Pentwater pointed to, among other provisions, Section 11(g) of the Warrant Agreement. This provision, the last subsection of Section 11 of the Warrant Agreement addressing the circumstances in which adjustments to the terms of the warrants were to be adjusted to protect the warrant holders, states:
“(g) Other Events. If any event occurs as to which the foregoing provisions of this Section 11 are not strictly applicable or, if strictly applicable, would not, in the good faith judgment of the Board, fairly and adequately protect the purchase rights of the registered holders of the Warrants in accordance with the essential intent and principles of such provisions, then the Board shall make such adjustments in the application of such provisions, in accordance with such essential intent and principles, as shall be reasonably necessary, in the good faith opinion of the Board, to protect such purchase rights as aforesaid and shall give written notice to the Warrant Agent [Mellon Investor Services LLC] with respect to such determinations.”
(Emphasis added.)
Talbots and BPW, in their opposition to Pentwater’s application for a TRO, mocked Pentwater’s covenant claims as the “last refuge of the contractually unprotected,” Opposition at 5, asserting that, since Pentwater’s claims did not fit within the “narrow language” of Section 18 requiring individual warrant holder consent for amendments to the Agreement, Pentwater was seeking to “re-write” the Warrant Agreement. Opposition at 16-17.
The Warrant Agreement is governed by New York law, and BPW heavily relied upon the New York Court of Appeals’ (New York’s highest court) decision in Reiss v. Financial Performance Corp., 97 N.Y.2d 195, 64 N.E.2d 958 (2001) in support of its position. Reiss involved an objection by an issuer to the attempted exercise of warrants following the issuer’s one-for-five reverse stock split. Unfortunately for the issuer, the warrant agreement did not provide for any adjustment in the number of shares issuable upon exercise of the warrants upon a reverse (or forward) stock split; the reverse stock split therefore made the warrants more valuable. Making matters more difficult for the issuer, it had, before entering into the warrant agreement in question, issued a warrant with provisions addressing stock splits.
The New York Court of Appeals essentially concluded that the issuer had made its bed and now must lie in it. An omission or mistake, observed the Court, “does not constitute an ambiguity,” and courts may not, by construction, “add or excise terms,” or “make a new contract for the parties under the guise of interpreting the writing . . . .” 97 N.Y.2d at 199.
But Reiss is not the solid foundation BPW cites it to be. Somewhat surprisingly, the New York Court of Appeals observed, at the end of its decision, that, had the tables been reversed, and the warrant holder were before the court objecting to a forward stock split, the warrant holder might be entitled to a remedy “if Financial [the issuer] performed a forward stock split, on the theory that he [the warrant holder] ‘did not intend to acquire nothing.’” Reiss, 97 N.Y.2d at 201. “We should not assume,” observed the Court, “that one party intended to be placed at the mercy of the other . . . .” Id.
Delaware most recently articulated the content of the implied covenant of good faith and fair dealing in the Supreme Court’s April 6, 2010 decision in Nemec v. Shrader, 2010 WL 1320918, a 3-2 decision affirming Chancellor Chandler’s rejection of a covenant claim brought by two former stockholders of Booz Allen. As explained by the majority of the Supreme Court:
“The implied covenant of good faith and fair dealing involves a ‘cautious enterprise,’ inferring contractual terms to handle developments or contractual gaps that the asserting party pleads neither party anticipated. ‘[O]ne generally cannot base a claim for breach of the implied covenant on conduct authorized by the agreement.’ We will only imply contract terms when the party asserting the implied covenant proves that the other party has acted arbitrarily or unreasonably, thereby frustrating the fruits of the bargain that the asserting party reasonably expected. When conducting this analysis, we must assess the parties’ reasonable expectations at the time of contracting and not rewrite the contract to appease a party who later wishes to rewrite a contract he now believes to have been a bad deal. Parties have a right to enter into good and bad contracts, the law enforces both.”
Slip Opinion at 10 (footnotes and citation omitted).
The best guidance on Pentwater’s covenant claim is that provided by one of the most celebrated jurists who have sat on the Delaware Chancery Court, Chancellor Allen, in his decision in Katz v. Oak Industries Inc., 508 A.2d 873 (Del. Ch. 1986). The facts of Katz were similar to those challenged by Pentwater: Oak Industries, in financial distress, proposed an exchange offer to its debt holders offering to exchange outstanding debentures for newly-issued notes, stock and warrants. At the same time, Oak arranged the sale of one of its businesses to Allied Signal and an equity investment by Allied Signal, contingent upon successful completion of the exchange offer.
Those noteholders who wish to participate in the exchange offer were required, as a condition to the exchange, to consent to amendments to the underlying indentures that would remove many of Oak’s financial covenants. Katz, a holdout, objected to this feature of the exchange offer as coercive, a violation of the contractual provisions of the indentures, and a violation of the implied covenant of good faith and fair dealing.
In his analysis, Chancellor Allen viewed the dispute as one of contract, not as a question of fairness or breach of fiduciary duty: “The terms of the contractual relationship agreed to and not broad concepts such as fairness define the corporation’s obligations to its bondholders.” 508 A.2d at 879 (footnote omitted). (The same test applies to relations between an issuer and holders of its outstanding warrants and options.)
Moreover, that the Oak board proposed the exchange offer to benefit Oak’s common stockholders at the possible expense of its bondholders “does not itself appear to allege a cognizable legal wrong.”
“It is the obligation of directors to attempt, within the law, to maximize the long-run interests of the corporation’s stockholders; that they may sometimes do so ‘at the expense’ of others . . . does not for that reason constitute a breach of duty.”
508 A.2d at 879.
In addressing Katz’s allegations of “coercion,” Chancellor Allen tied the concept to the specific allegations of breach of contract made by Katz and not to any stand alone concept of “coercion,” that is to say, the “relevant legal norm that will support the judgment whether such ‘coercion’ is wrongful or not will . . . be derived from the law of contacts.” Id. at 880.
Chancellor Allen viewed the implied covenant as follows:
“Modern contract law has generally recognized an implied covenant to the effect that each party to a contract will act with good faith towards the other with respect to the subject matter of the contract.”
For him, the appropriate legal test was the following:
“ . . . is it clear from what was expressly agreed upon that the parties who negotiated the express terms of the contract would have agreed to proscribe the act later complained of as a breach of the implied covenant of good faith — had they thought to negotiate with respect to the matter. If the answer to this question is yes, then, in my opinion, a court is justified in concluding that such act constitutes a breach of the implied covenant of good faith.”
508 A.2d at 880.
If this is the test, it is hard to see how it would not apply to a claim by a BPW warrant holder who did not participate in the Talbots exchange offer that delaying by one year the commencement of his or her warrant exercise period or eliminating the anti-dilution protections of the BPW Warrant Agreement, without that warrant holder’s consent, is not a breach of the covenant. The whole purpose of the BPW warrants, which were designed to trade separately from BPW’s common stock, was to grant the warrant holders an upside kicker once BPW did a deal. To delay the exercise period for one year is fundamentally at odds with the investment appeal of the warrants in the first place. It is hardly conceivable that any rational warrant holder would have agreed to such provision back in February 2008 when the warrants were issued. The same argument holds true for the amendment eliminating anti-dilution protections.
F. The Stronger Case
Pentwater’s challenge to BPW’s consent solicitation was weighted with too much baggage to succeed. In seeking a TRO enjoining not only the consent solicitation but Talbots’ exchange offer, Pentwater sought to hold up a merger that had been approved by the shareholders of both Talbots and BPW. Had Pentwater had the courage of its convictions (and a lot of money to spend on litigation), it would have voted against the consent solicitation, awaited the merger’s close, and then sued for contractual damages. Since Pentwater, like all hedge funds, is in the business of making money and not litigating, it would be entirely understandable if, having suffered defeat at the hands of Vice Chancellor Strine, it tendered into Talbots’ exchange offer and moved on.
But not all warrant holders did so. That may well be explained by inertia, uninformed warrant holders, etc. But any warrant holder who might challenge the amendments approved by (a bare majority) of the warrant holders would have a stronger case than Pentwater, since that case would focus solely on the contractual provisions of the Warrant Agreement and the covenant of good faith and fair dealing.
Otherwise, the lessons for hedge funds and arbitrageurs seeking to exploit opportunities involving warrants is clear: buyer beware.
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