Tuesday, September 9, 2014
Last week Family Dollar received and then rejected an offering from Dollar General opting, rather, to stick with its deal with Dollar Tree. There is, of course, litigation. The stockholders bringing suit are arguing that the FDO board violated its fiduciary duties to the corporation by agreeing to the deal with Dollar Tree and also when they rejected Dollar Genera's competitive bid. Here's the amended complaint.
So, is the board required to chase the nominally higher Dollar General offer? What do their fiduciary duties require? Remember, in QVC, which is probably the best case for laying out how board actions in the context of a sale of control will be reviewed, the Delaware Supreme Court said:
Although an enhanced scrutiny test involves a review of the reasonableness of the substantive merits of a board's actions, a court should not ignore the complexity of the directors' task in a sale of control. There are many business and financial considerations implicated in investigating and selecting the best value reasonably available. The board of directors is the corporate decisionmaking body best equipped to make these judgments. Accordingly, a court applying enhanced judicial scrutiny should be deciding whether the directors made a reasonable decision, not a perfect decision. If a board selected one of several reasonable alternatives, a court should not second-guess that choice even though it might have decided otherwise or subsequent events may have cast doubt on the board's determination. Thus, courts will not substitute their business judgment for that of the directors, but will determine if the directors' decision was, on balance, within a range of reasonableness.
So, if the board has two reasonable alternatives and it chooses one, the court will not second guess. That leaves a lot of discretion in the hands of the board, even when we are in "Revlon mode". So, in the FDO sale, what are the board's choices? And, are they reasonable ones?
The basic outlines of Dollar General's most recent offer are as follows:
- $80 in cash;
- $500 million reverse termination fee payable if the transaction is block by regulators;
- a commitment to divest itself of up to 1,500 stores should the government so require.
OK, that seems pretty good. Against that FDO has a signed amended merger agreement with the following offer:
-$74.50 in cash and stock
- a 'hell or high water' provision that requires Dollar Tree to "propose ... the sale, divestiture, license, holding separate, and other disposition of ... any and all retail stores and any and all assets ... of Parent and its Subsidiaries ... " as required to secure antitrust approval.
Hmm. Not so cut and dry. On the one hand, you have an offer in hand with near on 100% certainty of closing at this point. Sure, it will face regulatory review, but the buyer has taken all that risk. On the other, you have a nominally higher bid, but a lot of the residual risk that antitrust authorities will stop or significantly hamper the deal is left on the shoulders of the FDO stockholders. Sure, the FDO stockholders get compensated for that risk through the higher price and a reverse termination fee, but is that enough? That depends on your estimates of the probabilty of antitrust authorities putting up a stink if you do the Dollar General deal. And here, reasonable people can disagree.
If people can have a reasonable disagreement about the estimate of probabilities of antitrust enforcement against a deal that has not been accepted, well, then any court reviewing the board's decision will give the board plenty of latitude.
Absent other facts, suggesting other motivations to favor Dollar Tree, the FDO board looks on solid ground. Of course, if Dollar General were to offer up a similar 'hell or high water' provision -- and why not? It says it doesn't believe there is any significant antitrust issue -- well, then that might make it difficult for the FDO board to justify its decision to go with the lower offer as reasonable.