Monday, June 25, 2007
On June 14, 2007, Vice Chancellor Strine issued an opinion in In re Topps Shareholders Litigation, 2007 WL 1732586 (Del.Ch. June 14, 2007). Vice Chancellor Strine, a well-respected member of the Delaware Chancery Court, preliminarily enjoined the shareholders meeting of The Topps Company to vote on Topps´s agreement to be acquired by a group consisting of The Tornante Company LLC and Madison Dearborn Partners, LLC for $9.75 per share in cash. The Tornante Company is headed by former Disney CEO Michael Eisner. Topps is also subject to a competing proposal to be acquired by The Upper Deck Company for $416 million offer or $10.75 per share. (For a history of this transaction so far, see my prior posts The Battle for Topps and Trading Baseball Card Companies).
In his opinion, Vice Chancellor Strine issued a preliminary injunction against the holding of a vote on the Eisner acquisition agreement until such time as:
(1) the Topps board discloses several material facts not contained in the corporation's “Proxy Statement,” including facts regarding Eisner's assurances that he would retain existing management after the Merger; and (2) Upper Deck is released from the standstill for purposes of: (a) publicly commenting on its negotiations with Topps; and (b) making a non-coercive tender offer on conditions as favorable or more favorable than those it has offered to the Topps board.
The opinion is 67 pages and worth a full read for the nuggets it contains, but I want to point out two important parts:
Go-Shops. In the opinion, Vice Chancellor Strine broadly endorses the use of ¨go-shops¨ as a way to meet Revlon´s requirement that in a sale the board must take reasonable measures to ensure that the stockholders receive the highest value reasonably attainable. Here, the Eisner merger agreement had contained a 40-day "go-shop" period with a lower 3.0% termination fee during the "go-shop" period and matching rights for the Eisner group. Thereafter, the fee rose to 4.6%. Vice Chancellor Strine stated:
Most important, I do not believe that the substantive terms of the Merger Agreement suggest an unreasonable approach to value maximization. . . . Critical, of course, to my determination is that the Topps board recognized that they had not done a pre-signing market check. Therefore, they secured a 40-day Go Shop Period and the right to continue discussions with any bidder arising during that time who was deemed by the board likely to make a Superior Proposal. Furthermore, the advantage given to Eisner over later arriving bidders is difficult to see as unreasonable. He was given a match right, a useful deal protection for him, but one that has frequently been overcome in other real-world situations. Likewise, the termination fee and expense reimbursement he was to receive if Topps terminated and accepted another deal-an eventuality more likely to occur after the Go Shop Period expired than during it-was around 4.3% of the total deal value. Although this is a bit high in percentage terms, it includes Eisner's expenses, and therefore can be explained by the relatively small size of the deal. . . . Although a target might desire a longer Go Shop Period or a lower break fee, the deal protections the Topps board agreed to in the Merger Agreement seem to have left reasonable room for an effective post-signing market check. For 40 days, the Topps board could shop like Paris Hilton. Even after the Go Shop Period expired, the Topps board could entertain an unsolicited bid, and, subject to Eisner's match right, accept a Superior Proposal. The 40-day Go Shop Period and this later right work together . . . .In finding that this approach to value maximization was likely a reasonable one, I also take into account the potential utility of having the proverbial bird in hand.
The important point here is that Strine is merely endorsing the use of a ¨go-shop¨as one way to satisfy Revlon duties. But it does not appear that he is going so far as to suggest that this is a requirement that a "go-shop" be included any time there has not been a full auction in advance of signing a merger agreement when Revlon duties apply. However, as ¨go-shops¨become increasingly common, it may be likely that at some point the Delaware courts more firmly embrace their use under Revlon (though this is my own conjecture).
Standstills. Vice Chancellor Strine found that the Topps Board had violated its Revlon duties by favoring the Eisner bid by, among other things, continuing to require Upper Deck to honor its standstill agreement. In making this ruling, Strine emphasized that it is important for a board which has not previously engaged in a shopping process to reserve the right to waive a standstill if its fiduciary duties require. However, Strine also noted that standstills provide "leverage to extract concessions from the parties who seek to make a bid" and in a footnote contemplated that in certain circumstances such as a full auction it may be appropriate for a target to agree not to waive standstills for the losing bidders. Strine then held that the Topps board´s refusal to waive Upper Deck´s standstill likely was a breach of its Revlon duties since the:
refusal not only keeps the stockholders from having the chance to accept a potentially more attractive higher priced deal, it keeps them in the dark about Upper Deck's version of important events, and it keeps Upper Deck from obtaining antitrust clearance, because it cannot begin the process without either a signed merger agreement or a formal tender offer.
The opinion is also notable as another instance where a Delaware court found the proxy disclosure concerning a financial advisor´s fairness opinion to be deficient. I´ll post more on this point later in the week.
The Topps opinion was followed the next day by In re Lear Corporation Shareholders Litigation, 2007 WL 1732588 (Del. Ch., June 15, 2007). Here, the Chancery Court also granted preliminary injunctive relief because the Lear ¨proxy statement [did] not disclose that shortly before Icahn expressed an interest in making a going private offer, the CEO had asked the Lear board to change his employment arrangements to allow him to cash in his retirement benefits while continuing to run the company.¨ However, the Court refused to grant injunctive relief on the plaintiffs´other claims stating that ¨the Lear Special Committee made an infelicitous decision to permit the CEO to negotiate the merger terms outside the presence of Special Committee supervision, [but] there is no evidence that that decision adversely affected the overall reasonableness of the board's efforts to secure the highest possible value.¨