September 30, 2007
Topps: The End Game of Dissenters' Rights
I continue to remain fascinated by the Topps deal and the possibilities that were raised by Crescendo Partners exercise of dissenters' rights. On the day Topps's shareholders approved the takeover of Topps by Michael Eisner's The Tornante Company LLC and Madison Dearborn Partners for $9.75 per share in cash, Crescendo Partners delivered to Topps a written demand for the appraisal of 2,684,700 shares of Topps common stock (or approximately 6.9% of the total number of outstanding shares of Topps common stock). Under DGCL 262, the Delaware law governing appraisal rights, a shareholder dissenting from the Topps transaction was required to deliver notice thereof prior to Topps's shareholder vote. Thus far, Topps has only disclosed that Crescendo Partners has dissented from the merger (though there may still be others Topps has not disclosed).
Assuming that no more than 8.1% of Topps's remaining shares are subject to dissent, Topps will satisfy the condition in the Topps merger agreement that:
holders of no more than 15% of the outstanding shares of our common stock exercise their appraisal rights under Section 262 of the DGCL in connection with the merger . . . .
Given Topps non-disclosure thus far on this point and the fact that it would know by now if this condition is not fulfilled, its silence almost certainly means that the condition was so fulfilled and no more than 15% of the shares dissented.
But, if there were other dissenting shareholders, the dissenter arbitrage possibilities raised with respect to the recent Delaware decision in In re: Appraisal of Transkaryotic Therapies, Inc. may still come to pass albeit on a lower level (access the opinion here; see my blog post on it here). Post-Transkaryotic a number of academics and practitioners raised the concern that this holding would encourage aggressive investors (read hedge funds) to create post-record date/pre-vote positions in companies in order to assert appraisal rights with respect to their shares. This would be particularly the case where the transaction was one being criticized for a low offered price. As outlined in a previous post, I thought Topps was a good candidate for this strategy. It remains to be seen if this was the case.
In any event, Crescendo Partners has now set itself up nicely If no one else has exercised dissenters' rights. There will now be no free-rider problem or multiple litigants for Eisner et al. to negotiate with. Instead, Crescendo can now negotiate a private one-on-one deal with Eisner as to the purchase price for its shares under the shadow of its dissenters' rights litigation. This is a benefit typically unavailable to the average shareholder who cannot afford the litigation expenses and free rider problems of dissenters' rights. Of course, this highlights the problems of dissenters' rights generally in Delaware. Still, expect a press release in a year or two announcing a negotiated disposition of this litigation. While the Delaware courts can technically award a lower price in dissenters' rights litigation, anecdotally they more often split the baby and award a higher amount than the original share price offered. I believe this practically compensates the dissenting shareholders for their extraordinary efforts and highlights the problem of financial valuation in the Delaware courts where each side will put on experts showing a marked disparity in valuation forcing the courts to rectify this difference by again splitting the difference. It also gives Eisner and his cohorts an incentive to settle. Crescendo also has similar incentives to settle given the less likely risk it will receive less than the current offer price.
NB. For more on the problems of Delaware courts and their struggle with valuation practice in dissenters' rights cases see my article Fairness Opinions at pp 1580- 86 where I deconstruct the valuation opinion in Andaloro v. PFPC Worldwide, Inc., 2005 WL 2045640 (Del. Ch. 2005). I do so to illustrate the essential problems of subjectivity and conflicting valuation standards in financial valuation generally and particularly in the Delaware courts amidst a battle of the experts.
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