Tuesday, August 21, 2007
On August 14 in Mercier, et al. v. Inter-Tel, Vice Chancellor Strine upheld the decision of a special committee to postpone a shareholder meeting to vote on an acquisition proposal which was made on the day of that meeting. In his opinion, Strine held that postponement was appropriate under the "compelling justification" test of Blasius Industries, Inc. v. Atlas Corp., 564 A.2d 651 (Del. Ch. 1988), since "compelling circumstances are presented when independent directors believe that: (1) stockholders are about to reject a third-party merger proposal that the independent directors believe is in their best interests; (2) information useful to the stockholders' decision-making process has not been considered adequately or not yet been publicly disclosed; and (3) if the stockholders vote no... the opportunity to receive the bid will be irretrievably lost."
The opinion is important for three reasons. First, Strine is the first to hold the "compelling justification" test of Blasius to be met [Ed. Note -- this is actually the second case see the correction below]. Second, this being a Strine opinion, he uses the opportunity presented to attempt a rewrite of the Blasius standard. Third, the opinion provides important guidance for a board wishing to postpone a shareholder meeting on an acquisition proposal. Ultimately, the decision increases a target board's ability to control an acquisition process and influence its outcome.
The summary facts are these: Inter-Tel had agreed to be acquired by Mitel Networks Corporation for $25.60 a share in a cash merger. A competing proposal was put forth for a recapitalization of Inter-Tel by the founder of the company who was also a director. Institutional Shareholder Services and several shareholders also subsequently came out in opposition to the Mitel merger. Faced with certain defeat, the special committee of the board of Inter-Tel voted on the actual day of the meeting to postpone it in order to attempt to persuade sufficient shareholders to change their vote. In the postponed meeting, the shareholders voted to approve the merger based in part on the changed recommendation of ISS and subsequent deteriorated financial condition of Inter-Tel.
First, the technical points in the opinion concerning the shareholder meeting postponement:
- The board here "postponed" the meeting rather than adjourning it once it had been convened. The Delaware General Corporation Law does not address this practice, but practitioners have generally believed that this is permissible. Strine's acceptance of this postponement without comment in his opinion implicitly confirms this. This, together with Strine's ultimate holding, opens up a wide technical loop-hole for future boards to "postpone" shareholder meetings when faced with an uncertain vote rather than adjourning them. Given today's market volatility and the uncertainty behind a number of deals, expect this option to be exercised in the near-future (e.g., a likely candidate is Topps).
- Inter-Tel ultimately set the new shareholder meeting date twenty days after the old one. The Delaware long form merger statute (DGCL 251(c)) requires twenty days notice prior to the date of the meeting. The opinion thus leaves the question open whether a postponed meeting is a new one for these purposes such that the full twenty days notice period starts anew.
- Inter-Tel's proxy had included a provision granting the board the power to "adjourn or postpone the special meeting" to solicit more proxies. This provision was included due to informal SEC proxy requirements that shareholders must approve any adjournment. In the case of Inter-Tel there were insufficient votes voting to adjourn the meeting. In footnote 38 of the opinion, Strine stated that "[i]f the special meeting had actually been convened, Inter-Tel's bylaws would seem to have required stockholder consent to adjourn." Section 2.8 of Inter-Tel's By-laws states that "The stockholders entitled to vote at the meeting, present in person or represented by proxy, shall have the power to adjourn the meeting form time to time." Thus, Inter-Tel side-stepped this dilemma through a postponement. Note that a separate by-law would have been required to give the Chair of the meeting power to adjourn the board in the absence of the necessary shareholder vote.
Now for the more interesting part, the doctrinal issues:
In his opinion, Strine first distinguished the holding of In re Mony Group, 853 A.2d 661 (Del.Ch. 2004); there the Delaware Chancery Court applied the business judgment rule to analyze a board decision to postpone a shareholder meeting on an acquisition proposal and set a new record date(NB. I've always thought this decision to be doctrinally problematical). Strine found Mony distinguishable since there the merger was going to be approved; the directors would therefore be removed if the vote went through and so were disinterested and the shareholders still free to accept or reject the merger. Here, Blasius was applicable since the merger would likely not be approved, an event which would keep the directors in office. Strine then proceeded into an analysis of the Blasius standard invoking adjectives such as "bizarre" and "crude" to describe it. He concluded by stating that the Blasius approach should be "reserved largely for director election contests or election contests having consequences for corporate control.” Here, Strine judicially constricted the reach of Blasius from that decision itself and the Delaware Supreme Court's decision in MM Companies, Inc. v. Liquid Audio, Inc., 813 A.2d. 1118 (Del. 2003) which speak of applying the standard to board actions which have "the primary purpose of interfering with or impeding the effective exercise of a shareholder vote." Accordingly, his holding here may not be one the Delaware Supreme Court ultimately agrees with.
Strine then attempted to recast Blaisus as interpreted by Liquid Audio itself:
Although it does not use those precise words, Liquid Audio can be viewed as requiring the directors to show that their actions were reasonably necessary to advance a compelling corporate interest . . . . Consistent with the directional impulse of Liquid Audio, I believe that the standard of review that ought to be employed in this case is a reasonableness standard consistent with the Unocal standard.
Strine pines here for a "legitimate objective" test but ultimately acknowledges that this is a reading that cannot currently be wholly jibed with the "compelling justification" standard of Blasisus/Liquid Audio. So, he concludes by applying this "compelling justification" standard to the facts at hand to find that the following factors were sufficient to justify a same-day meeting postponement: (i) ISS's suggestion that it might change its negative recommendation if it had more time to study recent market events (including the debt market's volatility and the bidder's refusal to increase the consideration), (ii) the founder's competing proxy proposal for a recapitalization that was still being reviewed by the SEC, and (iii) the desire to announce the company's negative second-quarter results. Strine found that the directors acted with "honesty of purpose" and noted that they did not have any entrenchment motive because they would not serve with the surviving entity. Thus, the Blasisus standard was satisfied and the plaintiff's request for a preliminary injunction of the merger denied.
There is obviously more to this opinion and commentators will rush to fit this within the various doctrinal standards of the Delaware courts (hint: start with Strine's own article on the subject). Moreover, the opinion contains the usual Strine nuggets including an aside that we Americans have more words for money than Eskimos for snow. But perhaps the most interesting point in the opinion was Strine's observations on arbitrageurs and their effect on acquisition proposals. Here, the board had specifically based its postponement in part to permit arbitrageurs more time to increase their positions so as to vote in favor of the merger, though, ultimately it appears that they did not effect the vote. Strine addressed this issue by specifically refusing to:
premise an injunction on the notion that some stockholders are 'good' and others are 'bad short-termers . . . . .
And while Strine left open the door for future challenges if arbitrageurs do indeed effect the outcome in such circumstances, the difficulty of proving who are the shareholders voting may open a small gate here for undue influence. Hopefully, this is a gate that the Delaware courts will police thoroughly so as to prevent boards from unduly shifting a shareholder vote.
Thanks and credit for some of the observations on this post to J. Travis Laster & Steven M. Haas of Abrams & Laster LLP who have put together a superb client alert on this opinion.
Correction: Steven M. Haas helpfully wrote to correct a point above: "Strine actually found a compelling justification in Hollinger. There, like Inter-Tel, he found a compelling justification . . . .That reminds me of one of my favorite Strinisms from the ABRY Partners oral argument: "What happens in Dover.... Sometimes gets remanded back to Wilmington...."