How TPG bought Exactech, 2017–2018

analysisAccording to the Settlement Trust's complaint, Daniel Hann, a TPG consultant reporting to Michael Tepatti and Kendall Garrison, contacted Exactech's chief executive and president on April 4, 2017 about meeting members of TPG. The merger proxy records that on May 1, 2017 Executive Chairman William Petty, chief executive David Petty and senior vice president Bruce Thompson met Hann and Jeffrey Binder, the former president and chief executive of Biomet and a TPG advisor, at the Gainesville headquarters. Information exchanged afterwards was covered by an August 7, 2017 confidentiality agreement between TPG Global, LLC and Exactech, and on August 29 and 30 TPG advisors reviewed regulatory affairs, clinical research, quality and manufacturing with Joel Phillips, Bruce Thompson, Donna Edwards and the company's managers. The trust alleges that at a September 13, 2017 board meeting TPG, led by Todd Sisitsky, Binder, John Schilling and Garrison, offered $39.00 a share in a written non-binding indication of interest. ^{1 2}

analysisThe Agreement and Plan of Merger of October 22, 2017, amended on December 3, 2017, was among Exactech, Osteon Holdings, L.P. ("Parent", a Delaware limited partnership the proxy describes as affiliated with TPG, a global alternative asset firm founded in 1992) and its wholly owned Florida subsidiary Osteon Merger Sub, Inc. Shareholders other than the rollover investors were to receive $49.25 a share in cash, a premium of about 53.9% over the $32.00 closing price before the announcement and 16.3% over the $42.35 price before the amendment; Exactech would owe Parent a $25,797,000 termination fee in specified circumstances, such as accepting a superior proposal. TPG Partners VII, L.P. (the "Fund") committed to buy up to $737,057,000 of Parent's equity, and the proxy describes Parent and Merger Sub as jointly owned by the Fund, which signs through its general partner TPG Genpar VII, L.P., whose own general partner is TPG Genpar VII Advisors, LLC, with Michael LaGatta signing as vice president. ^{1 2}

analysisJ.P. Morgan, engaged on October 13, 2017, told the board on December 2 that the price was fair to the shareholders from a financial point of view. Exactech and Parent filed their Hart-Scott-Rodino notification on November 9, 2017 and received early termination of the waiting period on November 17. ¹

analysisUnder a rollover and voting agreement of October 22, 2017, William Petty, David Petty, Betty Petty, Prima Investments, Limited Partnership, Miller Family Holdings, LLC, Bruce Thompson, Joel Phillips, Donna Edwards, Chris Roche and Steve Szabo agreed to contribute 2,711,584 Exactech shares to Osteon Holdings, L.P. just before the merger in exchange for new equity of Parent. A schedule lists Prima's 2,300,000 shares for 130,757,376 Class B shares, William Petty's 102,400 for 5,821,546 Class B shares, Betty Petty's 75,400 for 3,713,450 Class A shares and David Petty's 50,000 for 2,462,500 Class A shares, among others. The founders, the chief executive and other management holders, with about 25.1% of the stock, agreed to vote for the merger, waived appraisal rights and agreed to end their existing shareholders agreements; in Parent they were to vote with the Fund on director nominations, share increases, drag-along sales and mergers. ¹

analysisPrima Investments, Limited Partnership, a Florida partnership holding 3,080,271 Exactech shares, was controlled through its general partner Prima Investments, Inc., wholly owned by Dr. and Mrs. Petty, who with their children held all the partnership interests; Prima Investments, Inc.'s 2019 Florida annual report names Roy William Petty as registered agent. Miller Family Holdings, LLC held 142,370 shares; its principal member, Miller Family Holdings, Inc., was wholly owned by Gary Miller, his wife and children. ^{1 2}

analysisThe proxy's ownership table lists William Petty with 3,589,188 shares (24.3%), Prima Investments with 3,080,271 (21.4%), David Petty with 169,772 (1.2%), Joel Phillips with 245,876 (1.7%) and Gary Miller with 243,859 (1.7%); GAMCO Investors reported 12.9% as an investment adviser, BlackRock 5.5% and Dimensional Fund Advisors 5.2%. Its table of cash consideration, which applies the merger price to every listed share without deducting the shares rolled over, values William Petty's 3,258,071 shares at $160,459,997, Miller's at $8,769,406, Phillips's at $5,559,143 and David Petty's at $3,231,884. The Settlement Trust instead alleges that William Petty received over $46 million and David Petty over $2.8 million as a result of the acquisition. ^{1 2}

analysisThe merger was approved by a majority of the directors who were not company employees; William and David Petty, as rollover investors, recused themselves. The independent directors were to receive up to $1,200,000 in additional cash for negotiating the sale, $400,000 for the lead independent director and $200,000 for each of the others, whether or not the merger closed, and severance of up to $600,000. At the time the officers and directors were William Petty, David Petty, Joel Phillips, Gary Miller, Bruce Thompson, Betty Petty and Donna Edwards, with directors James G. Binch, William B. Locander (a director since May 2003), Richard C. Smith, Fern S. Watts and W. Andrew Krusen, Jr. ¹

analysisOn February 14, 2018 Exactech announced the completion of the merger, under which TPG acquired its stock for $49.25 a share in cash apart from the shares the founders and managers exchanged, about 18.8% of the total; it valued the deal at about $737 million. Articles of Merger filed with Florida that day record Osteon Merger Sub, Inc. merging into Exactech, Inc., the survivor, and the final Schedule 13E-3 names Osteon Holdings, Inc., a Delaware corporation, as Parent, with Exactech as its indirect wholly owned subsidiary and TPG Partners VII as its affiliate. Osteon Holdings, Inc., formed in 2017 with an address at TPG's Fort Worth office, reported in a Form D that it sold $616,971,937 of securities to 11 accredited investors from February 14, 2018, listing Kendall Garrison, Todd Sisitsky, John Schilling, Jeffrey Binder, David Petty and William Petty as directors and Michael LaGatta and Adam Fliss among its officers. ^{1 2 3 4}

analysisThe Settlement Trust alleges that TPG paid Binder a $1 million success fee that appears to have been for the acquisition, invoiced two days before the closing; the allegation has not been adjudicated. ⁵

analysisTwo putative class actions were filed in the Northern District of Florida in December 2017, Pappalardo v. Exactech, Inc. (No. 1:17-cv-00303) on December 14 and a second on December 22, against Exactech and its directors, with Parent, Merger Sub and TPG also named; the first claimed violations of Sections 14(a) and 20(a) of the Exchange Act. Exactech and the director defendants denied the allegations and said they would defend vigorously. In The Arbitrage Fund v. William Petty, et al., a shareholder's Florida suit for breach of fiduciary duty against the Pettys, their Prima companies and five directors, the Third District Court of Appeal on July 22, 2020 reversed an order denying class certification, holding that the shareholder could sue directly; the ruling concerned standing, not the merits, and no later ruling is in the retained record. ^{1 2}

analysisThe appellate opinion recounts the shareholder's allegations that a losing bidder had offered $54 a share and to reimburse any termination fee, asking only that the Pettys commit in writing to support it, that the Pettys refused and the rest of the board rejected the offer on that basis, while the prevailing bidder countered with $49.25 and a higher termination fee. These are the plaintiff's allegations as summarised by the court; the proxy gives the board's reasons separately and no finding on them is in the record. ²