Wednesday, November 28, 2007
It is not easy to be an unsolicited bidder for a Delaware company.
A target board has wide latitude to implement takeover and transaction defenses against an unsolicited bid. This can be as part of a "just say no" defense -- the board can refuse to accept an offer and adopt a shareholder rights plan (aka poison pill) in order to force a hostile bidder to wage a proxy contest to take over the company. If the target has a staggered board this can necessitate multiple proxy contests over several years.
A board has less defensive latitude once it enters "Revlon" mode -- that is, a sale or break-up of the company becomes inevitable. In that case, the target board has the duty to obtain the highest price reasonably available. However, the Delaware courts have repeatedly said that there is no "single road" map in Revlon-land to obtaining the highest price reasonably available and has repeatedly permitted boards a large measure of freedom in designing their sale or break-up process.
Recent developments in two deals illustrate the difficulties bidders have under either mode of review.
Restoration Hardware comes under the second heading -- the company has agreed to be acquired by an affiliate of Catterton Partners. It is in Revlon mode and now has a duty to obtain the highest price reasonably available. In this light, Sears Holding Corporation has disclosed
a 13.67% stake in Restoration Hardware and subsequently stated that Sears "would be prepared to enter into an agreement to offer your stockholders $6.75 per share in cash via tender offer." But yesterday, Restoration Hardware stated that it will not provide any confidential information to Sears unless "Sears will agree to execute the customary confidentiality and standstill agreement on substantially the same terms that other parties have signed . . . ." Sears at this time does not appear willing to agree to such a standstill.
So, the question is whether a company in Revlon mode can require a standstill from a prospective bidder in order to provide confidential information to them. The answer is a qualified yes. In In re J.P. Stevens & Co., Inc. Shareholders Litigation,
542 A.2d 770
(Del.Ch.1988), Chancellor Allen held that a target in Revlon mode subject to an agreed transaction could require another prospective bidder to enter into a standstill agreement prior to providing confidential information so long as the requirement was not for "inequitable purposes" such as favoring the other bidder over the interests of the target's stockholders.
The Delaware courts have subsequently affirmed this holding. See, e.g., Golden Cycle, LLC v. Allan, 1998 WL 276224 (Del.Ch.1998).
So, Restoration is on acceptable ground here so long as it has a legitimate purpose -- here the fact all bidders are required to enter into the standstill likely provides it with enough cover despite the fact the chosen bidder has partnered with management and Restoration's controlling shareholder. Nonetheless, in the recent decision in In re Topps Shareholders Litigation, 2007 WL 1732586 (Del.Ch. June 14, 2007), VC Strine enjoined enforcement by Topps (the target) of a standstill against unsolicited bidder Upper Deck because he found Topps's actions favored its preferred bidder, a buy-out group led by Michael Eisner. VC Strine stated:
Topps went public with statements disparaging Upper Deck's bid and its seriousness but continues to use the Standstill to prevent Upper Deck from telling its own side of the story. The Topps board seeks to have the Topps stockholders accept Eisner's bid without hearing the full story.
Thus, Restoration can only go so far in its demands for a standstill, and if Sears subsequently puts a legitimate offer on the table Restoration will likely be unable to escape waiving the standstill (if Sears ultimately agrees to one). Nonetheless, even then Restoration can still affect the due diligence process here in order to attempt to influence the bidding. For those who want an trenchant example, note that subsequently Upper Deck withdrew its bid for Topps citing Topps failure to cooperate in the due diligence process -- Topps was ultimately acquired by Eisner's group with the cooperation of its management. Nonetheless, Upper Deck may have had other reasons to withdraw its bid and Sears now has a big stake in Restoration so it may have more staying power.
Tesoro on the other hand is not in Revlon-mode. On November 7, Tracinda Corporation announced a cash tender offer to purchase up to 21,875,000 shares of Tesoro (approximately 16 percent) at a price of $64 per share. Tesoro responded with a neutral position (neither recommending for or against this offer) and adopted a poison pill. Yesterday, Tracinda announced that it was withdrawing its tender offer stating that:
[t]he rights plan recently adopted by the Tesoro Board of Directors inhibits value for all Tesoro shareholders by, among other things, restricting the ability of shareholders to vote, sell or acquire Tesoro shares freely without fear of triggering the draconian provisions of the rights plan.
I find Tracinda's statement hard to believe. The poison pill adopted by Tracinda had a high trigger threshold of 20% -- it was specifically set so as not to be triggered by completion of the Tracinda offer. Tesoro was likely able under Delaware law to set an even lower threshold of 15% and possibly down to 10% and was even further accommodating by providing a neutral recommendation. Moreover, Tracinda specifically stated in its Schedule TO that it:
does not have any current plans, proposals or negotiations that relate to or would result in: (1) any extraordinary transaction, such as a merger, reorganization or liquidation involving Tesoro or any of its subsidiaries . . . .
This is a boiler-plate response, but still it is required to be truthful. Moreover, Tracinda is a highly sophisticated takeover machine --- it surely knew that Tesoro's response would be to adopt a poison pill (for more see John Coates's article: Takeover Defenses in the Shadow of the Pill: A Critique of the Scientific Evidence). Thus, it is hard to make sense of Tracinda's tactics here, but I would strongly suspect that they will be back. In such circumstances Tesoro may be less accommodating -- an option available under Delaware law.