Wednesday, April 21, 2021

Value Destruction: Bayer's Acquisition Of Monsanto And The Lawsuit Against Bank of America, Credit Suisse, and Bayer's Board

 From naked capitalism:

Even though Covid has produced clogged courts, cases are still moving forward, including a series of cases using similar, novel legal arguments to storm the barricades of incestuously and poorly managed major European companies. We’ve written the most about Bayer, which is in the dock for its disastrous, executive and banker serving acquisition of Monsanto. Credit Suisse, Deutsche Bank, UBS, Barclays and Volkswagen are also in the crosshairs in parallel cases detailing their corporate dereliction of duty.

Even though the misconduct and the destruction of value has been glaring, European shareholders have an uphill road in trying to gain restitution. However, as we’ll explain below, by virtue of having ADRs and significant US shareholdings and operation, the managements, boards, and advisers to these companies can be hauled into court in the US. And that’s where the fun begins.

We’ve posted the latest round of filings, all rejoinders to arguments made by the defendants in the Bayer case. But the Bayer case, like its siblings, are derivative lawsuits, which make for complicated lawyering. So we’ll review the foundations before continuing to the latest round of jousting.

We’ll start by quoting an August 2020 post:

Each suit targets an epic level of value destruction, but they are not shareholder suits. They are derivative lawsuits, in which a shareholder steps in to act on behalf of a company that has been done wrong, typically by key members of its management and board. Important advisers may also be targets.

The Novel Legal Angle: Using New York Courts for Derivative Cases Against Major European Companies

The novel feature in these cases is suing in New York state court but using the parent company’s governing law, which for Bayer is the German Stock Corporation Act as the basis for asserting causes of action.1 The abstract from a 2015 article by Gerhard Wagner, Officers’ and Directors’ Liability Under German Law: A Potemkin Village:

The liability regime for officers and directors of German companies combines strict and lenient elements. Officers and directors are liable for simple negligence, they bear the burden of proof for establishing diligent conduct, and they are liable for unlimited damages. These elements are worrisome for the reason that managers are confronted with the full downside risk of the enterprise even though they do not internalize the benefits of the corporate venture. This overly strict regime is balanced by other features of the regime, namely comprehensive insurance and systematic under-enforcement. Even though the authority to enforce claims against the management is divided between three different actors – the supervisory board, the shareholders assembly, and individual shareholders – enforcement has remained the exception. Furthermore, under the current system of Directors’ and Officers’ (D&O) liability insurance, board members do not feel the bite of liability as they are protected by an insurance cover that is contracted and paid for by the corporation. Thus, the current German system may combine the worst of two worlds, i.e., the threat of personal liability for excessively high amounts of damages in exceptional cases, and the practical irrelevance of the liability regime in run-of-the-mill cases.

Notice here the low bar for misconduct: simple negligence, plus the managers and board members bear the burden of proof that they behaved well! So the linchpin of these cases is getting a non-captured court to measure corporate conduct against these standards.

Also observe another key feature: extremely generous D&O policies. That is serving as one of the deep pockets for this litigation….

The other deep pockets are the investment banks, Bank of America and Credit Suisse. As the suit explains, they too have duties defined under German law, yet they failed abjectly in acting as independent advisers because they were hopelessly conflicted. In addition to acting as merger advisers, they were also providing financing, since Bayer, to avoid needing to get shareholder approval, did an “all cash” deal. That in turn led to Bayer engaging in over a dozen financings, including pricey bridge loans. That meant the banks had huge incentives to see the deal close, which resulted in them not looking at the Monsanto garbage barge very hard.

Back to the present post. The Bayer purchase of Monsanto has been described as the worst deal of all time, beating even the train wreck of Time Warner’s AOL acquisition. As we wrote in August:

Yes, nearly every penny of the $66 billion that Bayer paid for Monsanto has gone poof. Yes, Bayer is the first time in German corporate history that a public company got a majority vote of no confidence from its shareholders. Yes, Bayer is at risk of bleeding out over seemingly endless Monsanto-related liability claims (Roundup has so taken the center stage that what would ordinarily be a big-deal litigation drain, Dicamba, is treated as an afterthought). Unlike any other company ever facing similar litigation, Bayer has neither taken Roundup off the market, nor reformulated it, nor put a cancer warning on it. It looks like Bayer will eventually declare bankruptcy.

The original filing did a devastating job of describing why Bayer was so keen to do the horrific Monsanto deal, and on such terrible terms: the above-mentioned all cash offer, which it funded by borrowing boatloads of debt. Bayer was small enough in the world of ever-growing chemical and Pharma behemoths to make for a nice meal. Acquisitive Pfizer had just had a big deal scuppered for legal reasons, and Bayer’s management worried it might be the next target. It settled quickly on Monsanto despite or one might argue because of its terrible reputation; it served as a poisoned pill....