Ares/Allied Agreement Made Public

October 30, 2009

Ares Capital Corporation has filed with the SEC its Agreement and Plan of Merger with Allied Capital Corporation.

On October 26, 2009, Ares Capital Corporation (NASDAQ: ARCC) and Allied Capital Corporation (NYSE: ALD) announced that they had entered into an agreement pursuant to which Ares Capital would acquire Allied Capital.  For more information, go to our 10/26/09 post.  On October 30th, the definitive transaction agreement was filed with the SEC.  For the full agreement, please click here.

Among the many interesting terms contained in this agreement, we took particular notice of the following:

●  The representations and warranties made in this Agreement by both parties are subject to a Material Adverse Effect qualifier.  Article III states that Allied Capital will not be deemed to have breached its representations and warranties (other than certain, specifically excluded fundamental representations and warranties) as a consequence of the existence of any fact, event or circumstance, unless such fact, circumstance or event, has had or is reasonably likely to have a “Material Adverse Effect” on Allied Capital. Ares Capital’s representations and warranties are subject to an analogous qualifier in Article IV.

●  Sections 3.9 and 3.25 contain fund-specific representations and warranties that are indicative of the types of representations and warranties that investment managers and other similar businesses may be expected to make in such transactions. Ares Capital makes analogous representations and warranties in Sections 4.9 and 4.22.

●  Section 6.6(b) requires Ares Capital, for a period of six years, to continue to maintain D&O liability insurance to reimburse present and former directors and officers of Allied Capital or any of its consolidated subsidiaries with respect to proceedings against them arising from pre-Closing facts or events. Despite this obligation, Ares Capital is not required to expend more than 200% of the current amount expended by Allied Capital for comparable insurance.

●  While Allied Capital agrees to a “no-shop” clause in Section 6.7, Allied Capital’s board is given the right in Section 6.7(c) to engage in negotiations with a third party if Allied Capital, in short, receives an unsolicited proposal from such party that it determines in good faith is more favorable than the proposed transaction with Ares Capital, it is advised that failure to consider such proposal would be a violation of its fiduciary duties to Allied Capital’s stockholders, and it provides Ares Capital with 2 business days’ prior notice of the unsolicited proposal.  Upon the determination that a third party proposal constitutes a “superior proposal”, Allied Capital’s board is obligated to provide Ares Capital with at least 5 business days’ notice, during which time it must negotiate in good faith with Ares Capital to make adjustments to the terms of the agreement so that the unsolicited proposal is no longer deemed superior.

●  Ares Capital’s obligations to close are conditioned on, among other things, Allied Capital’s representations and warranties generally being true and correct on the date the agreement was signed and at the Closing.  However, according to the proviso inserted in Section 7.2(a), Allied Capital’s representations and warranties (other than certain, specifically excluded fundamental representations and warranties) will be deemed to be true and correct so long as any failure to be true and correct would not have a “Material Adverse Effect” on Allied Capital and its consolidated subsidiaries.  This proviso makes it more difficult for Ares Capital to walk away from this transaction due to a breach by Allied Capital of a representation or warranty.  Allied Capital’s ability to walk from this transaction is similarly limited by the analogous proviso in Section 7.3(a).

●  According to Section 8.1, the “drop dead” date to close this transaction is June 30, 2010.  Interestingly, the agreement can be terminated by either party if prior to the Closing the board of directors of Ares Capital determines in its reasonable good faith judgment that there is a reasonable likelihood that the liabilities for monetary net losses related to Allied Capital’s portfolio company, Ciena Capital, exceed 66 2/3% of the fair value of Ciena as of September 30, 2009.  In addition, Allied Capital agrees in Section 8.2(a) to pay Ares Capital a “break-up fee” of $15 million if the agreement is terminated prior to Closing because Allied Capital’s stockholders failed to approve the transaction, and $30 million  if the agreement is terminated prior to Closing for certain other reasons (e.g., Allied Capital’s board withdraws its recommendation to its stockholders).  Similarly, Ares Capital agrees in Section 8.2(b) to pay Allied Capital a “reverse break-up fee” of $30 million if the agreement is terminated prior to Closing for certain reasons (e.g., Ares Capital’s stockholders fail to approve the transaction).

●  No representations or warranties survive the Closing according to Section 10.1. Similarly, there are no indemnification provisions in the agreement. As a result, neither party is protected if breaches of representations or warranties are discovered after the Closing.  This is typical when the target is a publicly traded company.


Agreement Terms, Investment Manager M&A, Private Equity M&A