July 13, 2007
Delaware Chancery Court and Auctions
The most interesting part of the new trilogy of opinions by Vice Chancellor Strine on private equity buyouts are his discussions on what a target board must do to secure the highest price. In Lear the board did not violate its Revlon duties in securing the highest price and in Topps and Netsmart Technologies it did (or was likely to have, they were preliminary injunction motions). The error in Netsmart was in not exploring a deal with "strategic buyers" as well as the private equity fund buyers. The Judge, although asked to do so by the plaintiffs, did not fault the Special Committee's blow- by- blow negotiating strategy with the private equity buyers, however. Similarly in Lear, although critical of the Special Committee's specific negotiations as "far from ideal," the Judge refused say they were a violation of the board's legal duties. Finally, in Topps, the Judge found the negotiations leading up to a merger agreement were reasonable. The mistake the board made was the "go shop" period; the board refused a higher bid and then refused to waive a standstill agreement with the second buyer (so it could not mount a tender offer or make public comment). Again the court focused on structural decisions, not individual bargaining strategy, although the line was closer in the Topps case than the earlier two. Slowly, the court is elaborating a list of "don'ts" for those negotiating private equity buyouts.
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The burden of proof seems to be, disproportionatly, on the target boards to prove why they did not accept the highest bid. Unbelievable, the depth to which the courts will go, in exploring private business stategies.
Posted by: Jack Payne | Jul 20, 2007 3:24:03 PM