A&O and Slaughters head for court with Lincoln and Charter

Allen & Overy and Slaughter and May are drafting in litigation heavyweights as the collapsed deal between engineering companies Lincoln Electric and Charter teeters on the brink of court action.

It is believed to be the first time a target company has considered bringing legal proceedings against a potential buyer on a recommended bid.

The row centres around the fact that US-based Lincoln allowed its £386m offer for UK engineering group Charter to lapse on 20 October, 21 days after a revised offer was first posted.

Charter claims that Lincoln had given a contractual undertaking that it would not allow its offer to lapse if it had not received the requisite number of shareholder acceptances on day 21 of the takeover timetable, and that it would continue to day 60, at which point a bid becomes unconditional as to acceptances.

Commenting on the reason for the undertaking, one source says: “Charter wouldn’t want to let in a rival to do due diligence and to let it look at a competitor. Once it launched the offer there had to be completion.”

In response to Lincoln’s actions on 20 October, Charter has since stated that it “reserves the right to seek legal redress”.

Lincoln, however, issued a statement on 23 October, which said: “Lincoln Electric Global was entitled to lapse the offer, and Charter and its advisers were made fully aware of its reasons for doing so.”

Slaughter and May, which counts Charter as one of its long-term clients, has brought in the head of commercial litigation and arbitration Richard Grandison on the same day that Lincoln allowed the offer to lapse.

He joins head of corporate Nigel Boardman, corporate partner Andy Ryde, senior corporate assistant Chris Brown and competition partner Malcolm Nicholson. Investment bank Lazard is acting as financial adviser to Charter.

The highly respected commercial litigation partner Tim House is joining the Allen & Overy team representing Lincoln. The line-up also includes corporate partners Mark Wippell and Alan Paul, banking partners Stephen Kensell and Ian Annetts and competition partner Mark Friend. Credit Suisse First Boston is the financial adviser to Lincoln.

One senior corporate lawyer says: “It’s particularly unusual to litigate against a bidder, although it’s not unusual in a hostile situation. But this is very odd.”

Lincoln’s bid for Charter has been dogged by problems since the initial announcement of the deal on 26 April, which was originally priced at £471m, or 500p per share.

The deadline for submitting the offer document, which is 28 days after an announcement has been made, was extended twice by the takeover panel due to the fact that the parties had to secure regulatory approval from 12 countries to allow the bid to proceed.

Approval was sought because Charter and Lincoln hold extensive market shares of the engineering sector, specifically through their welding businesses.

Slaughters and A&O sought US regulatory advice from Thomas McGrath at Shearman & Sterling and Tom Smith at Jones Day Reavis & Pogue respectively.

The takeover panel case officers assigned to the Charter-Lincoln bid are Richard Hough and Russell Newton, both currently on secondment from A&O and KPMG respectively.

Both parties had agreed that the offer document would initially be posted by 23 June, but because of the need to prepare for anti-trust filings, the deadline was again extended to 26 July. Approval was secured from all but US regulatory body the Federal Trade Commission (FTC), which required that certain North American operations should be sold off before granting consent.

Commenting on the takeover panel’s decision to extend the deadline for the posting of the offer document, one lawyer says: “There are circumstances where I’ve had delays in the past. It isn’t unusual.”

However, he says that the double extension shows that the panel is becoming more flexible in the way it handles bid situations.

A City insider says: “[The takeover panel] is always fairly niggardly when it come to people posting on the 28th day. But the target company didn’t mind.”

Although, in defence of the panel, another source says: “The panel isn’t trying to stop bids going through – if there’s a good reason, then it will extend the deadline.”

Due to the disposals required by the FTC, the offer price for Charter was revised and subsequently dropped to 410p per share, which was announced on 22 September. With the initial offer of 500p per share, Lincoln had received an 82 per cent shareholder acceptance; but with the revised offer, just 48.05 per cent support had been gained by the US company by day 21 of the takeover timetable.

However, one source says: “Normally by day 21 you get a low level of acceptances, so the bidder can then say it wants to extend by 14 days. You keep looking at the acceptances and keep doing it until you get to day 60. It’s extremely rare for a bidder to go to all the expense of going through an offer only to then allow it to lapse.”

While Lincoln issued its statement, it is still unclear as to why it allowed the bid to lapse. City speculation suggests that the decision could be connected to its attempt to sell off North American operations, as required by the FTC.

Sources state, however, that at present it is still too early to say what the outcome of the situation will be.

Slaughters and A&O were unavailable for comment.