Guest Authors: Abigail Pickering Bomba, Steven Epstein, Arthur Fleischer, Jr., Peter S. Golden, David B. Hennes, Philip Richter, Robert C. Schwenkel, John E. Sorkin, and Gail Weinstein – Fried, Frank, Harris, Shriver & Jacobson LLP
In In re Family Dollar Stores, Inc. Stockholder Litigation (Dec. 19), the Delaware Court of Chancery continued its trend of increased deference to decisions of independent directors, whether under the business judgment rule or the enhanced scrutiny standard of Revlon. The court concluded that Family Dollar Stores, Inc. (“Family”) did not breach itsRevlon duty to maximize stockholder value when it decided not to negotiate with a competing bidder to seek to improve the terms of the competing bid. The court refused to grant the plaintiffs’ request that the court enjoin the stockholder vote on the proposed merger of Family with Dollar Tree, Inc. (“Tree”) until Family had negotiated in good faith with the competing bidder, Dollar General, Inc. (“Dollar”).
— Negotiations with a competing bidder are not required under Revlon. The court will defer, even in a Revlon situation, to a target board’s decision, made by independent and fully engaged directors, not to engage in negotiations with a competing bidder to try to obtain improved terms after a merger agreement has been signed. Referencing the “fiduciary out” provision of the merger agreement, the court confirmed that a higher-priced bid that had significant uncertainty of closing was not necessarily a bid that was (or would be likely to lead to) a “superior offer that was likely to be completed on its terms”. The other factors supporting the board’s decision were that there was “no hint” of a defensive or entrenchment motive by the board, the board had had earlier discussions with the competing bidder, and the competing bidder had the opportunity but had made no attempts to improve the terms of its bid.
Family had agreed to a merger with Tree, for consideration with a value of $74.50 (comprised 75% of cash and 25% of Tree stock), with the value then increasing to over $76 per share because of increases in Tree’s stock value. After the merger agreement was announced, General made a competing bid to acquire Family for $78.50 per share in cash, which it later increased to $80. The Tree merger agreement included a fiduciary out provision pursuant to which Family could negotiate with a competing bidder if the board believed that the negotiations would likely lead to a superior bid that was likely to be completed on its terms. Family, Tree, and General are the three major players in the small-box discount retail market. The merger agreement with Tree was a “hell or high water” deal (i.e., Tree agreed that it would divest as many of its retail stores as necessary to receive antitrust approval). General’s competing bid initially included a commitment to divest up to 700 stores, which it later increased to 1,500 stores. Family’s legal counsel advised the board that the likelihood of antitrust approval for the Tree deal was over 95% and for the General deal was only 40%. On that basis, Family refused to engage in negotiations with General. General commenced a tender offer to acquire all of the shares of Family (at the $80 offer price), but the tender offer cannot close because antitrust approval has not yet been received.
— A board does not necessarily have to engage in negotiations with a competing bidder to fulfill itsRevlon duties. The court ruled that the Family board was not obligated to negotiate with General because it reasonably viewed General’s competing bid as not even close to being likely to constitute a superior offer. Although the price of the General bid was higher than the price Family had agreed with Tree, the significantly greater uncertainty of closing (a 60% risk of not obtaining antitrust clearance, as compared to a 5% for the agreed merger with Tree, according to Family’s outside legal counsel) was a reasonable basis for Family’s determination that the bid was not close to being superior. “In short,” the Chancellor wrote, “the board’s decision reflects the reality that, for the company’s stockholders, a financially superior offer on paper does not equate to a financially superior transaction in the real world if there is a meaningful risk that the transaction will not close for antitrust reasons.”
The Chancellor noted that, irrespective of Family’s unwillingness to negotiate with General, General had had the opportunity (over several months) to improve its bid to deal with the antitrust uncertainty if it had wanted to, and that it had not done so. The Chancellor’s ruling was made in the context of an independent board that, according to the court, had been fully engaged, had been properly motivated to maximize value for stockholders, had reached reasonable decisions with respect to the sale process, and had been engaged in discussions at various other times with General.
— The board’s motivation was proper. The court found that the record demonstrated that the board was properly motivated to maximize value for the stockholders. Ten of the eleven directors were outside directors whose independence was not questioned. The court noted, further, that one of the directors was a co-founder of a well-known hedge fund, which held a 10% stake in Family and so “plainly had every incentive to maximize the value of Family”. The court concluded that the one Family executive on the board, the CEO, had no entrenchment motive as he had intended to retire and, moreover, with an almost 10% ownership stake in the company, he “had a significant economic incentive to pursue maximum value for his shares….” The court found further support for proper motivation in the fact that, after Tree’s proposal had been received, Family had not entered into an exclusivity agreement with Tree until after it had tried to re-engage in discussions it had earlier had with General and had concluded that no offer was forthcoming from General.
— The board’s sale process decisions were reasonable.
- CEO’s control of the process. The court rejected the plaintiffs’ claims that the board had unreasonably permitted the CEO to control the negotiations, with minimal supervision. The court found “easily” that the board, with the assistance of its advisors, had been fully engaged and had been kept fully informed, including “regular updates” from the CEO. The court noted that the plaintiffs had identified no material information that was kept from the board. (The court acknowledged, in a footnote, that “there are risks to having a CEO take the lead in a sale process, and the decision to do so should be made carefully based on the particular facts and circumstances.”)
- Not informing potential competing bidder that a sale process was underway. The court rejected the plaintiffs’ claim that the CEO acted unreasonably when he failed to inform General (after approaching General to re-engage in prior discussions about a possible bid from General) that Family was then engaged in a sale process (as it was then negotiating a deal with Tree). The court stated that “reasonable minds could differ” on the issue, but concluded that in these circumstances the decision was “eminently reasonable”. The court noted the board’s concern that, because there were only three players in Family’s market, if Family told General that Family was in a sale process, General would know that Family was contemplating a deal with Tree and would try to derail it (for example, by making a hostile bid for Tree or publicly announcing that General was not interested in acquiring Family). The court noted, further, that in any event it was now clear that General’s not having been involved in the sale process did not prevent it from making a bid after the Tree deal had been signed.
- Not engaging in negotiations with General after its increased bid was received. The court rejected the plaintiffs’ claim that the board had acted unreasonably in not at least seeking to obtain an improved commitment from General to divest stores in order to eliminate the antitrust risk the board perceived in the proposal—on the theory that there was nothing to lose and potentially much to gain. The court found that Family’s decision not to engage was reasonable because General’s proposal was not “sufficiently close to something the board believed was viable from an antitrust perspective to warrant engaging”. The court noted that the fiduciary out provision in the merger agreement with Tree permitted Family to engage in negotiations with a person making a proposal that was reasonably expected to lead to a superior proposal—i.e., “a financially more favorable offer… [that was] reasonably likely to be completed on the terms proposed”. With a 60% chance of not closing for antitrust reasons (as had been advised by Family’s outside legal counsel), the proposal was not reasonably likely to occur on the terms proposed, the court concluded. Moreover, the court noted, the Family board had concluded that General would not be open to a stronger divestiture commitment because it was committed to its view (which was wrong, in Family’s view) that the antitrust risk was minimal. In addition, the court noted that the board believed there was a risk involved with engagement—i.e., that a “counterproductive message” would be sent to the target stockholders and the market that the antitrust commitment made by General was “in the zone of being satisfactory” when the board believed it was not. The court’s conclusions were “bolstered”, the court said, by the board’s “numerous good faith efforts to engage with General” over a period of time that preceded the Tree proposal, as well as the board’s generally having “appeared to have been genuinely motivated to maximize the value of Family.”
- Not having “full” information as to the antitrust risk. The court rejected plaintiff’s claim that the Family board was not “fully informed” about the antitrust risk because it did not have General’s pricing information, which General’s counsel had said was critical to a full understanding of the antitrust risk posed by a combination with General. The General pricing data was not necessarily any more relevant than Family’s own pricing data and, in any event, as a practical matter, the General data was confidential and not available to Family, the court stated. The court characterized the directors as having been “adequately” informed” (even if not “fully informed”) about the antitrust risk as they had obtained and considered all material information reasonably available to them.
— Certainty of closing is a critical factor in the evaluation of a competing bid. When comparing bids for a company, the board should take into account not only the price but the closing certainty associated with each bid.Closing certainty issues typically arise in the context of antitrust issues (as in Family), other regulatory issues, financing conditions or issues, and bidder stockholder approval requirements.
— Target board decision not to engage with competing bidder to try to obtain improved terms. The following factors will be relevant when a target board that has entered into a merger agreement, in a Revlon situation, considers whether or not to engage post-signing with a competing bidder to try to obtain improved terms from the competing bidder:
- the terms of the merger agreement;
- whether the bid is financially more or less favorable, and by how much;
- whether the certainty of closing is higher or lower, and by how much (including taking into account the commitment of the competing bidder to resolve any antitrust or other regulatory issues as compared to the commitment of the merger agreement partner);
- how likely it is that the competing bidder will be open to improving the terms;
- whether there are disadvantages or risks associated with engaging with the competing bidder;
- the extent to which the competing bidder has had the opportunity to choose to improve the terms of its bid;
- the type and extent of any deal protections in place; and
- the board’s independence and disinterestedness, proper motivation to maximize value for stockholders, and reasonableness with respect to the sale process generally.
— Directors’ obtaining and considering all materials reasonably available to them is sufficient even if not “full” information. The court found that the target board was “adequately” informed even though it lacked certain potentially important information that was confidential and not reasonably available to it under the circumstances.
— Competing bid made by a business competitor. When a competing bidder is a significant competitor of the target company, the target board should be sensitive to whether the competing bid is for a bona fide deal purpose or, instead, to disrupt a competitor or obtain confidential information. The Family board, for example, considered whether General’s primary interest, both before and after Family entered into the merger agreement with Tree, may have been to negatively affect the business and prospects of one or both of its two major competitors rather than to acquire Family.
— Alignment of interests with stockholders. When one or more directors own, or represent a stockholder that owns, a significant equity stake in the company, the court will tend toward greater deference to the directors’ decisions because their interests are aligned with those of the stockholders.
Abigail Pickering Bomba, Partner, Corporate, firstname.lastname@example.org
Abigail Pickering Bomba is a corporate partner resident in Fried Frank’s New York office. She joined the Firm in 2003.
Steven Epstein, Partner, Corporate, email@example.com
Steven Epstein is a partner in the Corporate Department, resident in the New York Office, and Co-Head of the Firm’s Mergers & Acquisitions practice.
Arthur Fleischer, Jr., Senior Counsel, Corporate, firstname.lastname@example.org
Arthur Fleischer, Jr. is senior counsel, resident in the Firm’s New York office. He joined the Firm in 1958 and became partner in 1967.
Peter S. Golden, Partner, Corporate, email@example.com
Peter S. Golden is a corporate partner resident in Fried Frank’s New York office. He joined the Firm in 1980 and became a partner in 1986.
Philip Richter, Partner, Corporate, firstname.lastname@example.org
Philip Richter is co-head of the Firm’s Mergers and Acquisitions Practice. He joined the Firm in 1994 and became a partner in 2002.
Robert C. Schwenkel, Partner, Corporate, email@example.com
Robert C. Schwenkel is co-chair of Fried Frank’s Corporate Department and global head of the Firm’s M&A and Private Equity Practices. He joined the Firm in 1982 and became a partner in 1989.
David B. Hennes, Partner, Litigation, firstname.lastname@example.org
David B. Hennes is a litigation partner resident in Fried Frank’s New York office. He joined the Firm in 1996, became a partner in 2003 and serves as one of the Firm’s two hiring partners.
John E. Sorkin, Partner, Corporate, email@example.com
John E. Sorkin is a corporate partner resident in Fried Frank’s New York office. He joined the Firm as partner in 2007.
Gail Weinstein, Senior Counsel, Corporate, firstname.lastname@example.org
Gail Weinstein, as lead legal counsel on many of the seminal contested and negotiated transactions during the advent of M&A, has been at the forefront of market-shaping transactions. With over 25 years of M&A-related experience, Ms. Weinstein, who was a partner in the Corporate Department for almost two decades, has returned to the firm after having taken a leave from practicing law for several years.
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Material in this work is for general educational purposes only, and should not be construed as legal advice or legal opinion on any specific facts or circumstances, and reflects personal views of the authors and not necessarily those of their firm or any of its clients. For legal advice, please consult your personal lawyer or other appropriate professional. Reproduced with permission from Withers Bergman. This work reflects the law at the time of writing.