LawFuel – Business & Finance Law – Reuters reported that billionaire Kirk Kerkorian’s Tracinda Corp. has written an exclusivity clause into its $4.5 billion offer to buy Chrysler that industry experts call a shrewd move but a potentially troublesome one for the auto maker’s board.
DaimlerChrysler, which confirmed on Wednesday that it was talking with prospective buyers of the money-losing Chrysler unit, could run into problems with irate rival bidders and disgruntled shareholders if it accepts an exclusive arrangement with just one buyer, academics said.
Kerkorian, who was once Chrysler’s largest single shareholder, is seeking 60 days’ exclusive rights to conduct due diligence on Chrysler.
“It’s classic Kerkorian — it’s shrewd, smart, excellent business,” said Anthony Sabino, attorney for Sabino & Sabino and a professor of law and business at St. John’s University.
“He knows Chrysler very well. He’s trying to move in and snag it, or a significant interest in it …,” Sabino said.
“But Chrysler’s board has to be very careful here because, as is well established under American corporate law, once you’re on the block, you have to keep yourself open to all bidders.”
Tracinda, Kerkorian’s investment vehicle, said in a letter addressed to DaimlerChrysler’s Supervisory Board, dated and made public on Thursday, that in order to secure exclusivity it was willing to put down a $100 million deposit. It offered to forfeit $25 million of that if if fails to pursue a deal.
Sabino argues that while DaimlerChrysler could give a certain amount of exclusivity to one bidder, it will have to eventually allow everyone to do due diligence and make bids.
The offer comes as private equity firms Blackstone Group, Cerberus Capital Management, and Canadian auto parts maker Magna International are pursuing their own bids for Chrysler, a source previously told Reuters.
A spokesman for DaimlerChrysler declined to comment when asked if the automaker could in theory participate in such an exclusivity agreement.
Kerkorian’s offer is unique in that with most auctions, potential buyers get in line with the rest of the suitors, hoping their bid wins approval from the company and its advisers. Investment banking advisors typically try to keep an auction as open as possible.
Allen Michel, professor of finance and economics at Boston University’s School of Management, said an exclusivity deal could potentially result in litigation against DaimlerChrysler’s board from rival bidders and shareholders, although he declined to speculate on how likely such litigation would succeed.
“Anytime you are putting restraints on an auction process, some of the parties are going to feel as though they were deprived of an opportunity,” Michel added.
“You have to look at all the circumstances — how many other bidders are there, where do you think those bidders are likely to come in relative to the bidder that is seeking exclusivity and where does $4.5 billion stand relative to what you’d like to get for the asset?” said Morton Pierce, partner and chairman of the firm’s Mergers and Acquisitions group at law firm Dewey Ballantine.