Thursday, June 14, 2007
On the business law professor listserv, the following question was circulated yesterday:
Are Revlon duties triggered if a corporation receives a(n unsolicited) time-sensitive offer for an acquisition (say 3 days) at an obviously large premium (say twice the valuation of the corporation) and the board is convinced that there can possibly be no better deal down the line?
If indeed Revlon duties are triggered, can one say they are satisfied anyway by procedurally structuring the deal to be an arms-length transaction e.g. getting proper fairness opinion that convinces the board it is in the best interests of the shareholders to sell? Differently put, does the board have to actually seek other potential acquirers (or at least spend some reasonable time seeking) for it to discharge its Revlon duties?
The question generated a number of responses, the most comprehensive was from Professor Stephen Bainbridge, and he has kindly posted it here. It's a worthwhile read.
For what its worth on my front, the answer to the first question is almost certainly no. Revlon duties are only triggered if the board affirmatively decides to initiate a sale or break-up process. The only countervailing case law is Chancellor Allen's opinion in City Capital Assocs. Ltd. P’ship v. Inc., 551 A.2d 787, 800 (Del. Ch. 1988) where he forced a board adopting a "just say no" strategy to redeem its poison pill. See also Grand Metro. Pub. Ltd. Co. v. Pillsbury Co., 558 A.2d 1049, 1061–62 (Del. Ch. 1988). But the validity of Interco in light of Paramount and other, subsequent Delaware decisions is dubious at best. So, the board can "just say no" to the offer though it does need to consider it. Here, the board should be mindful of the procedural requisites of Smith v. Van Gorkom, 488 A.2d 858 (Del. 1985) and allow enough time for it and the company's officers to consider the acquisition and the board's financial advisors to analyze the offer. See, e.g, Weinberger v. UOP, 457 A.2d 701, 712 (Del. 1983) (finding a lack of fair dealing where corporation failed to disclose 'cursorily’ prepared fairness opinion which was brought to the board meeting with price left blank). In this case, three days time for the board to properly consider the offer and the financial advisors to prepare their required analysis is likely insufficient. A week would be more appropriate and is a time frame which has previously passed muster with the Delaware courts.
Bainbridge aptly answers the second part of the question concerning the need for a market-check under Delaware law, and so I will not address it here. I will point out, however, that in In re Pennaco Energy, Inc. S'holders Litig, 787 A.2d 691, 705-06 (Del. Ch. 2001) and In re MONY Group S'holder Litig, 852 A.2d 9, 18-24 (Del. Ch. 2004), the Delaware courts held as reasonable deal protection devices non-solicit provisions combined with >3% termination fees by equity value; and in both cases these provisions were agreed to prior to the acquiree’s solicitation of any competing offers. These holdings were effectively reconfirmed in In re Toys "R" Us, Inc. S'holder Litig., 877 A.2d 975 (Del. Ch. 2005) (upholding termination fee of 3.75% of the acquiree’s equity value and 3.25% of the acquiree’s enterprise value). And when I was in private practice, we regularly advised clients that, in light of these decisions, a no solicit and 3% break-up fee was acceptable without shopping the company pre-announcement provided an initial check was established via the mandatory fairness opinion (small comfort, but one of the last relics of Van Gorkom which effectively requires these anyway). So, in the question at hand, the board could likely agree to this deal and also agree to some rather strong transaction defenses under Delaware law without pre-announcement contact of other bidders. Of course, the board would need to negotiate a fiduciary-out, subject to these break-up fees and other transaction defenses, if a higher, competing bid emerges and is superior.
I’ve been thinking that with the rise of the go-shop, the Delaware courts might claw-back on the above, current case-law and incorporate this practitioner-driven development into its jurisprudence, particualrly the practice of certain go-shop deals to have a lower break-up fee during the solictiation period of approximately 1% of equity value. But I do not have anything in particular to stand on for this (other than my own doctrinal thoughts and some direction gleaned from the tangentially related Netsmart case (2007 Del. Ch. LEXIS 35) in which the Chancery Court held that a board breached its Revlon duties by, in the context of a go-shop, limiting its solicitation to private equity buyers and excluding strategic buyers). If anyone has any better thoughts on this, please feel free to comment.