Have you discovered The Alexandria Project?Two days have now passed since Novell announced the high-level terms of its proposed sale, and so far the press has not been able to prize any additional details out of the parties involved. As a result, speculation is rife on several key points, and especially with respect to the 822 patents that Novell proposes to sell to a consortium of companies, only one of which has been disclosed: Microsoft. Given this dearth of information and the fact that I’ve been a transactional lawyer for over 30 years, I’ll use this blog entry to lay out those things that can be known, those that can’t (yet) be known, and when we can expect additional disclosures. (This is a long blog post, so if you have a short attention span and only care about Linux, that bit is at the end.)
First, though, some ground rules and disclaimers: This blog entry is not based on access to the detailed documents summarized in the 8-K. As a result, what I am providing are my assumptions based on typical deal practice as I have experienced it. This means that this blog entry absolutely does not represent legal advice to anyone – and especially not to any Novell stockholder that may be considering whether or not to vote to approve the transactions discussed below, or to buy or sell Novell stock in the meantime.Let’s start by parsing the Report on Form 8-K that Novell filed with the SEC, which is the definitive document available to date. This is the first of a number of public filings that Novell, and perhaps other, parties will be required to file before the transactions are complete (assuming approval by Novell’s stockholders). Structure: The 8-K is a summary of a far more detailed document that has already been signed by Novell and Attachmate called an Agreement and Plan of Merger. While this is the first public disclosure of the deal, in fact it has already been fully negotiated, the terms reflected are in that multi-hundred page (with exhibits) agreement. While the full agreement is not yet available, it will be attached as an exhibit to Novell’s report on Form 10-K, which will be filed with Novell’s Annual Report after the close of its fiscal year. The 8-K begins by describing the structure of the proposed transaction: On November 21, 2010, Novell, Inc., a Delaware corporation (“Novell”), entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Attachmate Corporation, a Washington corporation (“Attachmate”), and Longview Software Acquisition Corp., a Delaware corporation and a wholly owned subsidiary of Attachmate (“Merger Sub”). The Merger Agreement provides that, upon the terms and subject to the conditions set forth in the Merger Agreement, Merger Sub will be merged with and into Novell, with Novell continuing as the surviving corporation and a wholly-owned subsidiary of Attachmate (the “Merger”). This is what is referred to as a “reverse triangular merger.” In this type of transaction, the acquired company continues its corporate existence, since in a merger the parties are free to designate which company will be the “surviving corporation.” Attachmate will therefore form an empty shell company before the closing, all of whose shares will be owned by Attachmate. On the closing date, that company will merge into Novell, rather than the other way around. This transactional structure is usually used to achieve two primary goals: 1. The assets of the acquirer are insulated from any unknown liabilities that the acquired company may have, because the acquired company will operate as a wholly owned subsidiary, rather than be merged into the acquiring company itself. 2. It will lessen a major headache under other structures, which is getting the permission of many hundreds of third parties to assign their contracts from Novell to the acquirer. While every company seeks to limit the number of contracts that it signs that require such permissions, granting this term is sometimes unavoidable (and especially if you want the same right in return). Since Novell will be the surviving legal entity, many of these contracts will not, under their terms, technically be “assigned,” even though the control of Novell will have changed (some contracts, however, will have been drafted more tightly, and will still require consent). As a result of this structure, all of Novell’s existing contracts, licenses, debts and other legal rights and obligations will continue as they were before the transaction occurred. This is in contrast to an asset sale, in which case the acquirer could have negotiated to leave certain liabilities and obligations behind, to be satisfied by the seller out of its proceeds (on which more below, in connection with the patent sale). Approval: Before the transactions can be completed, they must go through a multi-step approval process. Approval by the Novell Board is the first step in this process, and this step has already been completed. The second will be approval by the Novell stockholders. In between, the Novell attorneys will prepare detailed disclosure documents which will be filed with the SEC and sent to each stockholder, describing the transaction. This, together with a Form 10-K report (discussed below) will be the most detailed public disclosures relating to the transaction that will be filed by Novell (since Attachmate Corporation is privately held, it is not required to make filings with the SEC). Financial terms: One off the most intriguing pieces of news disclosed relates to how little the Novell stockholders have gained as a result of the public bidding process, once Novell was put in play by the unsolicited bid tendered by Elliott Associates last March. On this, the 8-K discloses as follows: Pursuant to the terms of the Merger Agreement, at the time the Merger is effective, each issued and outstanding share of Novell’s common stock, other than treasury shares, shares held by Attachmate, Merger Sub or any other direct or indirect wholly owned subsidiary of Attachmate or Novell and shares held by stockholders who perfect their appraisal rights, will be converted into the right to receive $6.10 in cash, without interest and less any applicable withholding taxes (the “Merger Consideration”). Elliott’s original offer was $5.75 a share, and that was for all of Novell. But as noted later in the 8-K, 822 patents will be broken out of Novell at the time of the sale, and sold independently for $450 million. Absent these included proceeds, the price paid at closing would be less than Elliott’s original bid. Whether or not Elliott had assumed it could sell the patents for as much is impossible to tell, but apparently Attachmate valued the remainder of Novell’s business and assets at substantially less than Novell’s cash and short term securities, which currently stand at $1.09 billion. The math is as follows: 1. Starting point: $2.2 billion is the the total proceeds to be received by Novell shareholders; 2. From this, subtract $450 million, which is the amount to be paid by CPTN, the Microsoft consortium, which leaves $1,750,000;
3. $1,750,000 is therefore the amount to be paid by Attachmate, but the assets that Attachmate is acquiring includes $1.09 billion in cash and short term securities; 4. So subtract that amount from the amount Attachmate is paying, and this leaves a paltry $660 million as the value of all of the business and assets of Novell after the value of the patents bought by CPNT and the cash have been separated out. And if, as I’ve read elsewhere, Elliott Associates is going to become a stockholder in Attachmate, presumably paying back the same amount it recieves for its Novell shares to Attachmate in exchange for Attachmate shares. That means that after the dust settles, Attachmate will have put up even less, since it won’t, on a net basis, have had to pay anything for Elliott’s substantial stake. [Test in this paragraph has been updated]
Omitted details: The 8-K next describes standard mechanics for handling the conversion of options, including “retention program restricted stock units,” which presumably refers to options issued, or to be issued, to key Novell employees to provide incentives for them to stay with the Company during the uncertainty of the next several months. Interim restrictions: The 8-K next describes traditional restrictions on Novell’s operations pending consummation or abandonment of the transaction. Under the Merger Agreement, Novell has agreed, among other things and subject to certain exceptions, (i) to conduct its business in the ordinary course of business during the interim period between the execution of the Merger Agreement and consummation of the Merger; (ii) to cause a stockholder meeting to be held to consider adoption of the Merger Agreement; (iii) subject to certain limited exceptions to permit the board of directors to comply with their fiduciary duties, that Novell’s board of directors will recommend that Novell stockholders adopt the Merger Agreement and thereby approve the Merger; and (iv) not to solicit proposals relating to alternative transactions and, subject to certain limited exceptions, to permit the board of directors to comply with their fiduciary duties, not to enter into discussions or negotiations concerning, or to provide information in connection with, alternative transactions. The intention of (i) is to freeze the facts upon which Attachmate’s offer was based so that the value of Novell does not deteriorate. (ii) - (iv) bind Novell’s board of directors to proceed in good faith to consummate the transactions, while giving them an out in case an unsolicited bid tops the Attachmate offer. Otherwise, the Board might be liable to a stockholder suit claiming that they had sold the Company on the cheap. This thread is picked up again two sentences later: In certain specified circumstances upon termination of the Merger Agreement, including a termination by Novell to enter into an agreement for a superior proposal, Novell will be required to pay Attachmate a termination fee equal to $60 million. In certain other circumstances upon termination of the Merger Agreement by Novell, Attachmate will be required to pay Novell a reverse termination fee equal to $120 million. These termination, or “bust up” fees are intended to perform two functions: first, they provide a substantial disincentive to either side to back out, and second, they allow the disappointed party to recoup its expenses and some or all of its indirect losses (e.g., in the case of Novell, lost business). For Attachmate, it also means that a new suitor would have to value Novell at a price at least $60 million more than did Attachmate, since that amount would immediately disappear at closing to Attachmate. Note that despite these terms, Pamela Jones reports at Groklaw that at least two stockholder actions (“strike suits”) have already been filed against Novell’s board of directors alleging that the Board breached its fiduciary duty by accepting an offer to sell the Company for less than its fair value. Since the price offered for Novell is within the range of similar transactions when revenues, profits and similar factors are taken into account, Novell’s board was placed in the difficult position of having an offer they needed to take seriously, while not having the luxury of accepting one at such a premium that no one could second guess their judgment. In such a situation, strike suits are very common. Closing conditions: A number of usual closing conditions follow, including approval by the Novell stockholders and antitrust regulators, and no unexpected liabilities arising between now and closing. Two conditions bear comment: (v) the closing of the transactions contemplated by the Patent Purchase Agreement (as defined below);…(viii) the availability to Novell and its subsidiaries of cash and cash equivalents equal to approximately $1.03 billion. The first is significant, in that Attachmate is basically using $450 million of someone else’s money (Microsoft and unnamed parties) to buy Novell. While Elliot Associates would presumably have sold certain unwanted assets as well, in this case, capitalizing on assets not needed for current operations will occur simultaneous with close, emphasizing what a hard company Novell, with its somewhat polyglot collection of technology assets, was to sell at a desirable price. Indeed, absent all of its cash in the bank, Novell would have been almost immune from unsolicited offers at a price the Board would have needed to take seriously. Whether Attachmate brought Microsoft in or vis-versa is unknown, but given Microsoft’s preexisting agreements with Novell, and especially the fact that the important patent cross licensing agreement it entered into with Novell four years ago is up for renewal in one year, it seems safe to assume that Microsoft would have been in discussions with Novell since the Company was first put into play. The mysterious and intriguing part, on which more below, is why Microsoft is not acting alone. There are a number of possibilities, including possible concerns on Microsoft’s part that antitrust regulators might not have approved a purchase by it alone and that (as would appear to be the case) the patent acquisition is part of a larger, but still undisclosed, business plan. The second provision is common in acquisitions, but the monetary details vary. On the one hand, the Novell Board wants to be sure that Attachmate can actually meet its bid, since Novell has now been taken off the market. If Attachmate cannot complete the deal and the value of Novell declines, the Novell board would be at risk to a strike suit contending that it should have accepted another offer – such as Elliott’s instead. Further details then follow, describing the proof that Attachmate has already supplied to provide the Novell Board with the basis to justify their decision: Subject to the terms and conditions of the Merger Agreement, Attachmate has agreed to use its reasonable best efforts to arrange and obtain financing, consisting of equity financing in an aggregate amount of $425 million and debt financing in the aggregate amount of $1.09 billion, to pay the aggregate Merger Consideration. Given that Novell’s current liquid assets equal the debt financing promised by Attachmate, the acquirer would not have had to visit many banks to get a commitment. In effect, Attachmate will be acquiring Novell for only $425 million (some of which will be coming from “certain equity investors”), plus any additional operating funds needed to sustain its operations after the closing. Presumably further asset sales will follow, which may allow Attachmate to repay itself from sale proceeds to the extent it provides operating capital rather than acquiring it under new bank lines. Timing: The 8-K assumes a 2011 Q1 closing, assuming regulatory approvals and the receipt by Attachmate of the Novell financial information required by its lenders, although the shareholder meeting date has not yet been set. However, the closing will not be earlier than January 23. Undisclosed terms: There are many other terms and provisions that are not described in detail that are standard (their exact wording aside) in transactions such as this. Most significantly, they will have included scores of “representations and warranties” under which Novell will be required to state that it has no liabilities of any kind, and has assets as described, except as described in lengthy, attached “disclosure schedules.” The 8-K refers to these in part as follows: Certain of the representations and warranties have been made for the purposes of allocating contractual risk between the parties to the Merger Agreement instead of establishing these matters as facts. In addition, the representations and warranties contained in the Merger Agreement (i) are qualified by information in a confidential disclosure schedule that the parties have exchanged, (ii) were made only as of the dates specified in the Merger Agreement or the confidential disclosure schedule, and (iii) in some cases are subject to qualifications with respect to materiality, knowledge and/or other matters, including standards of materiality applicable to the contracting parties that differ from those applicable to investors. The Patent Purchase Agreement: The 8-K then describes the related transaction that makes the Attachmate purchase economically feasible: Also on November 21, 2010, Novell entered into a Patent Purchase Agreement (the “Patent Purchase Agreement”) with CPTN Holdings LLC, a Delaware limited liability company and consortium of technology companies organized by Microsoft Corporation (“CPTN”). The Patent Purchase Agreement provides that, upon the terms and subject to the conditions set forth in the Patent Purchase Agreement, Novell will sell to CPTN all of Novell’s right, title and interest in 882 patents (the “Assigned Patents”) for $450 million in cash (the “Patent Sale”). This agreement will in general mirror the Attachmate agreement, in that it will cover what is sold, disclosures relating to these assets, how much will be paid and when, and so on. However, there will be some differences due to the nature of the assets and the structure of the transaction. To begin with, this will be an asset sale. As noted above, this means that rights and obligations can be apportioned as between the buyer and the seller. To the extent that CPTN refused to assume any liabilities relating to the patents it purchased, those liabilities would be left behind, and therefore would become liabilities of New Novell. Accordingly, while Novell would have had to conduct a three way negotiation with both Attachmate and the consortium led by Microsoft leading up to signing the two deals, with each of these two parties in effect needing to sign off on some of the conditions required by the other. The representations and warranties in the patent agreement are categorically more limited than those in the Attachmate agreement, but doubtless very similar in their language where they overlap, since many patents will remain the property of Novell. The 8-K describes them as follows: The Patent Purchase Agreement contains representations and warranties of the parties, including with respect to Novell’s title to the Assigned Patents, existing licenses and rights with respect to the Assigned Patents, restrictions on rights to the Assigned Patents, the validity and enforceability of the Assigned Patents and the equity commitments of the members of CPTN to fund CPTN in an aggregate amount equal to or exceeding $450 million. The right to recover for breaches of representations and warranties is usually negotiated (e.g., it may only last for a certain period of time, may only kick in once losses top a certain amount, and may have a cap), but in the case of intellectual property infringement, the right to recover is often perpetual. [The text in this paragraph has been updated]
Contingency plans: What follows is the summary of what happens to the patent deal if the Attachmate deal does not close. This is the most interesting part of the disclosures to date. The Patent Purchase Agreement will, by its terms, automatically terminate upon the termination of the Merger Agreement, except that, if Novell receives an acquisition proposal that contemplates an acquisition of Novell other than by an acquirer whose acquisition proposal contemplates that Novell will retain all of the Assigned Patents, Novell deems such a proposal to be a superior proposal to the Merger, and CPTN elects to continue the Patent Purchase Agreement, the Patent Purchase Agreement will remain in full force and effect. The first statement is somewhat misleading, and states that if the Attachmate deal doesn’t close, then Novell has no obligation to sell, and the Microsoft consortium has no obligation to buy, the patents.
However, the terms then fork, with the discussion first following the possibility that the Attachmate deal does not occur because another offeror places a higher bid, which the Board then accepts, before the Attachmate deal can close. In this case, there (again) are two alternatives: 1. If the new suitor makes an offer for all of the Novell assets, then the Board can take the higher offer – a key right to shield the Board from liability, since otherwise the potential field of late bidders would be more restricted. If this happens, then Microsoft consortium’s rights to obtain the patents would die. 2. A new offeror decides to “piggy back” on the structure of the current deal. In this case, Microsoft has the right – but not the obligation - to require the sale to go through on the original price and terms (although realistically some renegotiation might occur between Microsoft and the new bidder). But what happens if the Attachmate deal just doesn’t close, whether because of a deterioration in Novell’s business, a failure of the Attachmate funding, or whatever? The 8-K covers the contingency as follows: In addition, CPTN may also elect to continue the Patent Purchase Agreement in the event that the Merger Agreement is terminated for any other reason than Novell’s receipt of an acquisition proposal for the entire company that it deems to be a superior proposal to the Merger, in which case the Patent Purchase Agreement will remain in full force and effect and references in the Patent Purchase Agreement to the Merger Agreement shall automatically be deemed to be of no force or effect. Here is where the Novell Board did not fare so well. What this means is that if neither Attachmate nor a higher bidder steps in, CPTN has the right to cherry pick the Novell patent portfolio. Of course, Novell will also have $450 million in cash, so assuming that this is fair value, the Novell stockholders should be happy. Or maybe not. Presumably the Attachmate deal includes the right of Attachmate to license the right to use whatever patents CPTN is buying for the purpose of continuing Novell’s historical businesses. But according to the language above, all references to the Merger Agreement (and therefore, presumably, to any such license rights) would disappear. Would this leave Novell dramatically less valuable? The answer is yes and no. After describing various unilateral termination rights, the 8-K addresses this issue as follows: In the event that CPTN has elected to continue the Patent Purchase Agreement following a termination of the Merger Agreement as described above, Novell and CPTN will enter into a royalty-free, fully paid-up patent cross license for no additional consideration, effective as of the closing, with respect to all patents and patent applications owned or controlled by them on mutually acceptable terms that are no less favorable in the aggregate to either party than the terms of any other patent cross license offered by CPTN to any other person (other than any member of CPTN or an affiliate of any such member). These few sentences offer a comparative gold mine. First, note that not only the 882 patents covered by the patent sale are covered. Instead, the parties will negotiate a cross-license to all of the patents, and patent applications, owned by each party. Next, note that if the Attachmate deal dies and the CPTN deal goes through, then the price Novell will have to pay to continue to conduct its patent-based business will be to license all of its patents to CPTN – for no additional compensation. The second interesting word is “cross license,” suggesting that perhaps CPTN will be holding patents in addition to those it purchases from Novell. If so, then Novell will in fact get something back in exchange for free access to the rest of its patents. This may also indicate that Microsoft has formed CPTN not to split the cost of the acquisition (unlikely in any event, given its enormous cash reserves), but instead to create a larger pool of patents, or cross license rights, among itself and its unnamed partners (the question, of course, is what patents, and for what purpose?) The final term of note is that while Novell would get “most favored nation” terms with other licensees of CPTN, it would not necessarily get terms as favorable as the CPTN members. One wonders why? Wouldn’t it have been simpler to state that in the event the Merger Agreement terminates, Novell would have the right to become a CPTN member (or at least have the option to do so)? Conditions to Close: The 8-K summarizes a variety of other terms, similar to those in the Attachmate summary, such as conditions to close, including approval by antitrust regulators. While traditional, they are particularly interesting in the current context, beginning with the following: Consummation of the Patent Sale is subject to certain conditions to closing, including, among others: (i) the expiration or termination of the waiting period applicable to the consummation of the Patent Sale under the HSR Act and certain other antitrust laws; (ii) all required governmental approvals under applicable law shall have been obtained; (iii) the absence of any law, order or other action enjoining or otherwise prohibiting consummation of the Patent Sale; (iv) the absence of any threatened or pending action by any governmental entity challenging or seeking to prevent, alter or materially delay the Patent Sale, seeking to restrain or interfere with the operation of CPTN or the Assigned Patents or seeking to require CPTN or any of its members or affiliates to divest any assets (including any Assigned Patents) or businesses or to agree to restrictions or limitations on its assets (including any Assigned Patents) or businesses;… Any such government analysis would necessarily require prior disclosure of both the names of the CPTN members, as well as the patents involved. I haven’t had time to look into whether all parts of an HSR filing would need to be public, and/or whether they could remain confidential unless or until permission to proceed was granted, but presumably at least the names and patents would need to be publicly disclosed. The following additional conditions are also interesting, in light of the fact that SCO is to some extent still on life support: (v) the absence of any threatened or pending action with respect to CPTN by any person (other than a party to the Merger Agreement or its affiliate) that CPTN reasonably believes is reasonably likely to prevail in preventing, enjoining or materially altering or delaying the closing of the Patent Sale beyond a reasonable period of time under the circumstances and that, if successful, would reasonably be expected to adversely affect the benefits of the Patent Sale to CPTN in any material respect;… Who is CPTN, and what does it want? So what does all of this tell us about what Microsoft and CPTN may be seeking to accomplish by their patent purchase, and when may we learn more? So far, all we know is that Microsoft “organized” CPTN, and that it is a Delaware LLC – a Limited Liability Corporation. Under the laws of Delaware, only a simple one page certificate must be filed as a public record, and that certificate need not include the names of those holding an interest in the entity. The names, the governance provisions, the economic sharing terms, and more will all appear in an “Operating Agreement.” There will almost certainly be another major agreement of note that will include licensing terms from CPTN to its members (and perhaps cross-licensing among the members, either directly, or via CPTN). These agreements could become public in a number of ways, most obviously in connection with an HSR filing, or as exhibits to public reporting documents filed by one or more CPTN members, if they are material to the businesses of those members. What patents, and for what purpose? Besides the identity of the CPTN members, the question of which Novell patents are involved is the most intriguing unknown. Assuming that the deal goes through, the identity of the patents and patent applications will become public early next year, because they will need to be identified in assignment documents that Novell will file with the Patent and Trademark Office (in the U.S.) and with other patent offices abroad. The mere disclosure of the patents themselves, however, will not definitively suggest the purposes for which they were acquired. Patent claim language is obscure, and until a claim has been asserted by its owner against an alleged infringer, it may not be obvious in which situations it may be so used. In fact, patent owners often go to great lengths to avoid stating which specific claim would be infringed by which particular product or service. The reason is that once they do, the potential defendant can go to court to seek to have the patent determined to be not relevant to their own products and services. They may also petition the PTO to have the patent declared invalid. What about Microsoft and Linux? This is the approach that Microsoft has followed in the past with respect to the patents it owns that it alleges are infringed by Linux vendors and users. The specific patent claims have only been revealed by Microsoft to date under non-disclosure agreements, and presumably the same process would be followed with respect to any patents acquired from Novell. If one assumes for the sake of argument that Microsoft does, indeed, already own patents that would be infringed by Linux, then this new development does not meaningfully change the landscape. At most it means that Microsoft could claim greater royalties in a given situation. The Novell Board’s position: One can’t avoid the impression that being a member of Novell’s Board of Directors has not been a pleasant experience since Elliott Associates put Novell in play. On the one hand, they would have taken a great chance to accept Elliott’s offer without shopping the market for a better offer. But unfortunately for them, Novell’s eclectic businesses and assets proved to be a hard basket to sell to a single buyer for a single price. Having gone through all of the usual motions and secured a deal that is meaningfully, if not greatly, higher, they must now defend themselves against the opportunistic litigation that in the end will likely benefit no one other than the attorneys that are now inviting Novell stockholders to join in the actions. What next? As noted above, many of the details of the transactions will become available with time, although not all of the business goals will be readily apparent. In this latter regard, the detail that I will be watching for with greatest interest will be the revelation of the identities of the CPTN members. While this will not necessarily make all things clear, it will certainly provide useful clues to why the specific patents in question have been purchased, and to what use they will be put. Be that as it may, I’ll look forward to providing my best guesses when the opportunity arises.
Update: While I was writing this blog entry, Novell posted a brief notice at its Web site stating that New Novell would continue to own the UNIX copyrights. It also contains a link to a new 8-K filing with the full text of the Merger Agreement (but not the related exhibits) attached.While this fact should have already been assumed (patents are patents and everything else is not a patent), it may be reassuring to some to know that the high level terms disclosed did not get down to this level of detail. The Novell post also includes details on how and where to obtain copies of additional transaction-related securities filings as Novell makes them. Does this new disclosure have any implications to Linux? The answer should be no, since copyrights cover the actual code, and not any underlying “inventions” that might be infringed by Linux (which is what patents cover). Despite strenuous efforts, SCO was never able to prove that Linux included any UNIX code, and therefore ownership of the UNIX copyright would not provide any rights against Linux developers, distro vendors or users. The ownership of the UNIX copyright, as compared to any UNIX-related patents that might also be infringed by Linux, should therefore not be germane to anyone other than UNIX vendors and users. Stated another way, the fact that CPTN was interested in buying patents, but not the UNIX copyright, does not indicate that CPTN desires, or does not desire, to take any action against Linux vendors or users.