Opinion ID: 2301005
Heading Depth: 3
Heading Rank: 2

Heading: Quantitative Factors

Text: As reported in its annual report on Form 10-K for the year ended December 31, 2010, the most recent annual filing before the announcement of the Sale Transaction, Bancorp's assets as of that date had a book value of $338.8 million. Bancorp's 100% ownership of the stock of BankAtlantic had a book value of $286.6 million. Using these figures, Bancorp will convey 85% of its assets in the Sale Transaction. As reported in its annual report on Form 10-Q for the quarter ended September 30, 2011, the most recent quarterly filing before the Sale Transaction, the corresponding book value for all of Bancorp's assets was $341.4 million. The book value for all of Bancorp's BankAtlantic stock was $306 million. Using these figures, Bancorp will convey 90% of its assets in the Sale Transaction. Measuring Bancorp's ownership of BankAtlantic on a book value basis applies a conservative metric by ignoring BankAtlantic's value as a going concern. Nothing in New York law suggests that a court is limited to book value when evaluating a parent corporation's 100% equity interest in an operating subsidiary. A court readily could value a 100% equity interest using other methodologies, such as a discounted cash flow analysis, comparable transactions analysis, or comparable company analysis. A court could take into account factors such as earnings potential and goodwill. Yet even under the conservative book value metric, Bancorp will transfer 85-90% of its assets. Bancorp objects to these calculations because they use figures for BankAtlantic that include the value of the Retained Assets. Bancorp points out that in the Sale Transaction, it will sell BankAtlantic but keep the Retained Assets. Having structured the Sale Transaction in this manner, Bancorp takes the view that BankAtlantic's stock has negative value at the time of the Sale Transaction and that BB & T is paying zero for BankAtlantic. This theory forms the centerpiece of Bancorp's case. [7] To get this result, Bancorp starts with a pre-closing book value for BankAtlantic's stock of $306 million. Bancorp then subtracts the $606.9 million net book value of the Retained Assets that will leave BankAtlantic an instant before BB & T acquires its shares, causing BankAtlantic's equity at that climactic moment to have a book value of negative $301 million. Because no cash or other asset will come directly from BB & T's balance sheet, Bancorp argues that BB & T will not pay anything. Consequently, Bancorp concludes it must be conveying zero percent of its assets. As a threshold matter, Bancorp's position rests on the illogical and counter-factual premise that BankAtlantic (the good bank) is worth nothing, while Retained Assets LLC (the bad bank) is worth $606.9 million. Bancorp has it precisely backwards. Buyers actually wanted and were willing to pay a premium for BankAtlantic. Buyers were scared away from and did not want to purchase the Retained Assets. The idea that BankAtlantic will be made less valuable, rather than more valuable, by shedding the Retained Assets is counterintuitive and inherently suspect. In reality, the Retained Assets constitute the consideration for the Sale Transaction. The evidence at trial established this point. Levan, the architect of the transaction, explained in a July 7, 2011, email to his son Jarett and CFO Toalson that the transfer of the [c]lassified loans to Bancorp would be the [p]urchase price consideration. JX 119. In a July 13, 2011, memorandum explaining the structure in greater detail, Levan again stated that Bancorp would retain all the classified loans as part of the purchase consideration. JX 121. At trial, Levan testified that the purchase price consideration that BB & T was paying [was] the retained assets that they were allowing Bancorp to obtain at the same time that the deal closed. Tr. 852. Jarett Levan testified that the transfer of Retained Assets LLC was the purchase price that's being paid by BB & T. Tr. 35. He elaborated: [T]hey're not paying cash; they're paying with retained assets. . . . They're just transferring the retained assets as the effective purchase price. Id. at 36. Bancorp's financial advisors understood this fact as well. Cantor Fitzgerald rendered an opinion on the financial fairness of the transaction to Bancorp's stockholders. Its underlying analyses confirm[ed] the fairness of the consideration to be received across a variety of metrics, and Cantor Fitzgerald concluded that the consideration reflected a [h]igh premium to book value. JX 186 at 9. Cantor Fitzgerald calculated the premium by dividing the net book value of the Retained Assets (computed to be $607 million) by the $306 million book value of Bancorp's investment in BankAtlantic, yielding a Price/Book ratio of 198% ($607 million/$306 million). According to Cantor Fitzgerald, the Sale Transaction favored Bancorp because, in exchange for selling a subsidiary with a positive book value of $306 million, Bancorp received assets with a value that implied an above-market premium based on comparable companies and precedent transactions. Cantor Fitzgerald did not think that Bancorp was getting zero for BankAtlantic. Sandler O'Neill also rendered an opinion on the financial fairness of the transaction to Bancorp's stockholders. It too understood that Bancorp was receiving positive value from BB & T. When describing the transaction, Sandler O'Neill noted that BB & T bears the cost of filling the negative asset value of ($300.9) million plus the cost to recapitalize the balance sheet of $224.3 million (assuming a [Tangible Common Equity/Tangible Assets] ratio of 6.84%) or a total of $538.8 million. JX 194. Sandler O'Neill treated the $538.8 million as an alternative measure of the purchase price that Bancorp received. I therefore find as a factual matter that the Retained Assets represent the consideration paid by BB & T, just as Levan and his advisors understood it. I would reach the same conclusion as a matter of economic substance. The Sale Transaction is a single, integrated transaction, as Bancorp finally conceded in its post-trial brief. See BPTB 1 n. 2 (this is an integrated transaction). At the effective time, during the lifespan of a decaying muon, three interrelated transactions will happen sequentially: first, BankAtlantic will transfer the Retained Assets to Retained Assets LLC; second, BankAtlantic will distribute membership interests in Retained Assets LLC to Bancorp; and third, Bancorp will transfer shares of stock in BankAtlantic to BB & T. Contractually under the Stock Purchase Agreement and legally under the Cease and Desist Orders, none of the transactions can take place unless all three take place. In this integrated transaction, Bancorp gives the stock of BankAtlantic and gets membership interests in Retained Assets LLC. One is consideration for the other. To make this fact plainer, assume that in lieu of criticized assets with a book value of $606 million, the Retained Assets will consist of $606 million in cash. In other words, at closing BankAtlantic would transfer $606 million in cash to Retained Assets LLC, then distribute the equity of Retained Assets LLC to Bancorp an instant before Bancorp would transfer the stock of BankAtlantic to BB & T. Compare this scenario with a sale transaction in which the only events to take place at closing would be the transfer of BankAtlantic stock to BB & T in return for the transfer of $606 million in cash from BB & T to Bancorp. No one would be fooled into thinking there was any difference in the economic substance of these transactions. Everyone would see that cash was exchanged for stock with the only differences being timing and route. In the first scenario, the cash transfer would occur just before stock transfer, come from BankAtlantic's balance sheet, and be replaced by BB & T post-closing. In the second scenario, the cash transfer would occur just after stock transfer and come directly from BB & T's balance sheet. The same $606 million would change hands in each case. In the Sale Transaction as actually structured, Retained Assets LLC will own criticized assets with a book value of $606 million rather than $606 million of cash. Reasonable minds can debate whether the Retained Assets are worth $606 million, but no one can legitimately dispute that the Retained Assets are the consideration for the sale of BankAtlantic, just as Levan envisioned and the financial advisors understood. But see BPTB 2 (asserting that treating the Retained Assets as consideration has no factual foundation). With the Retained Assets properly recognized as consideration for the sale of BankAtlantic's stock, it becomes clear that the percentage of assets sold on a book value basis must be calculated by comparing the book value of Bancorp's BankAtlantic stock including the Retained Assets with the book value of all of Bancorp's assets. To use the book value of BankAtlantic's stock without the Retained Assets would incorporate into the calculation the consideration that Bancorp received. Under New York law, a court cannot count the consideration the seller received when determining whether a transaction constitutes a sale of substantially all of the seller's assets. Indeed, if the percentage of assets sold were to be calculated as the difference between the value of pre-sale assets, on the one hand, and the value of post-sale assets plus sale proceeds, on the other, an entity would almost never be deemed to have sold substantially all of its assets.... HFTP, 2004 WL 5641710, at ; accord Sharon Steel, 691 F.2d at 1049 (rejecting literalist interpretation that proceeds from sale of assets are assets such that after a transaction a company would continue[] to own `all' its `assets'... since the proceeds ... went into the [company] treasury). That the currency for the transaction took a form other than cash ( viz., ownership interest in Retained Assets LLC) does not change this principle. If accepted, Bancorp's zero consideration argument would pave an easily traveled superhighway around the substantially all test. Bancorp has conceded that if it sold BankAtlantic to BB & T for $606 million in cash, the transaction would constitute a sale of substantially all its assets. As previously explained, there is no economic difference between a direct stock-for-cash transfer and the Sale Transaction. If routing the consideration through the subsidiary enabled a seller to circumvent a successor obligor provision, future transaction planners could sidestep the restriction whenever a subsidiary had sufficient assets to distribute consideration to the parent. Moreover, transaction planners could create a gift subsidiary with sufficient assets for distribution through the simple expedient of having the subsidiary borrow funds. The subsidiary then would have cash to transfer to Retained Cash LLC, and the subsidiary could distribute the equity in Retained Cash LLC to its parent just before the parent transferred the stock of the subsidiary to the acquirer. At the moment of transfer, by dint of the outstanding loan, the subsidiary conveniently would have negative book value. Channeling the consideration through a subsidiary does not change the nature of the deal. From a quantitative standpoint, Bancorp is selling 85-90% of its assets in the Sale Transaction.