Edward McNally notes an interesting new Delaware Chancery Court decision:
In re Plains Exploration & Production Company Stockholder Litigation, C.A. 8090-VCN (May 9, 2013)
As this decision points out again, when a board of directors is disinterested in the transaction, its decision to accept the first offer for its company does not run afoul of the Revlon doctrine just because there was no pre-agreement market check. Instead, their decision is subject to the business judgment rule.
Francis Pileggi elaborates:
Brief Overview
This case addressed the claims that the duties of the directors in connection with the sale of the company, based on the seminal Delaware Supreme Court decision in Revlon, were breached. TheRevlon duties of a board, in essence, are fiduciary duties that require the directors to get the best price for the company when it is determined to be for sale, and the procedures employed by the board in connection with the sale or merger will be scrutinized to determine if they were consistent with the board’s obligations. This case recited the contours and parameters of those obligations, but reiterates that there is no formal script or procedures that the directors need to follow. Certain types of procedures and processes have been addressed over the many years that Revlon has been applied, however, and this opinion builds on that extensive jurisprudence.
Select Highlights of Legal Rulings
This decision provides additional guidance on two points in particular: Neither: (i) absence of a special committee, nor (ii) the absence of a pre-market check, will, per se, amount to a violation ofRevlon duties. Of course, this finding needs to be tethered to the facts of this case which include a board that: (i) was experienced in the oil and gas industry, (ii) was adequately involved in the negotiations, and (iii) had 7 out of 8 directors who were independent and disinterested.
This strikes me as half right. On the one hand,the holding that there is "no formal script or procedures that the directors need to follow" is clearly correct.
On the other hand, I am disappointed to once again see the Chancery Court apply Revlon simply because part of the consideration was paid in cash:
The Defendants do not dispute that Revlon applies to the Plaintiffs’ claim. See In re Smurfit-
Stone Container Corp. S’holder Litig., 2011 WL 2028076, at *11-16 (Del. Ch. May 20, 2011)
(applying the Revlon standard to a 50 percent stock and 50 percent cash merger). (p. 10 n.32)
As I explained at great length in The Geography of Revlon-Land, a transaction does not trigger Revlon simply because a substantial part of the consideration is in the form of cash:
The most directly relevant Delaware Supreme Court precedent
is In re Santa Fe Pac. Corp. S’holders
Litig.[1]
Santa Fe and Burlington were both publicly held Delaware corporations.[2]
After negotiations, they agreed to a complicated deal in which the two
companies would make a joint tender offer for up to 33% of Santa Fe’s shares at
$20 per share in cash.[3]
If successful, the offer would give Burlington 16% of Santa Fe’s remaining
outstanding shares.[4] If
the offer succeeded, a freeze-out merger in which remaining Santa Fe
shareholders would get Burlington shares in exchange for their Santa Fe stock
would follow it.[5]
All the while, Santa Fe’s board of directors was fending off an unsolicited
takeover bid by Union Pacific.[6]
The Supreme Court rejected the plaintiffs’ argument that the
deal triggered Revlon duties for
Santa Fe’s directors, on grounds that plaintiffs “failed to allege that control
of Burlington and Santa Fe after the merger would not remain ‘in a large,
fluid, changeable and changing market.’”[7]
The clear implication is that the form of consideration was not the relevant
issue. Instead, the issue was whether the Burlington shareholders would remain
dispersed “in a large, fluid, changeable and changing market.”
Yet, in NYMEX, the
Chancery Court characterized Santa Fe
as simply setting a floor—33% cash—below which one did not enter Revlon-land.[8]
As for higher ratios, the Chancery Court relied on Lukens for the proposition that the Delaware “Supreme Court has not
set out a black line rule explaining what percentage of the consideration can
be cash without triggering Revlon.”[9]
This characterization of Santa
Fe is hard to square with the Supreme Court’s analysis in the case, which
makes no reference to floors or ceilings, but rather to the post-deal “stock
ownership structure of Burlington.”[10]
It is even more difficult to square with the three checkpoints established by Arnold v. Soc’y for Sav. Bancorp, Inc.[11]
The Smurfit court
finessed Arnold in the first instance
by selective quotation of the key passage setting out the three checkpoints.
The Smurfit court quoted it as
follows:
The[SB1]
Delaware Supreme Court has determined that a board might find itself faced with
such a duty in at least three scenarios: “(1) when a corporation initiates an
active bidding process seeking to sell itself or to effect a business
reorganization involving a clear break-up of the company[ ]; (2) where, in
response to a bidder’s offer, a target abandons its long-term strategy and
seeks an alternative transaction involving the break-up of the company; or (3)
when approval of a transaction results in a sale or change of control [.]”[12]
The observant reader will note that
the Chancery Court thereby omitted the critical qualifier Arnold adds to checkpoint # 3. To emphasize the point, let us quote
the pertinent part of Arnold again in
full: “(3) when approval of a transaction results in a sale or change of
control. In the latter situation, there
is no sale or change in control when [c]ontrol of both [companies] remain[s] in
a large, fluid, changeable and changing market.”[13]
Arnold’s clear
implication is that an acquisition by a publicly held corporation with no
controlling shareholder that results in the combined corporate entity being
owned by dispersed shareholders in the proverbial “large, fluid, changeable and
changing market” does not trigger Revlon
whether the deal is structured as all stock, all cash, or somewhere in the
middle. The form of consideration is simply irrelevant.
The Delaware Supreme Court’s more recent opinion in Lyondell confirms this reading of both Santa Fe and Arnold. In addition to the substantive errors made by the Chancery
Court in Lyondell,[14]
the Chancery Court also took too expansive an approach to when Revlon-duties are triggered by holding
that the target board enters Revlon-land
when it “undertakes a sale of the company for cash.”[15]
Checkpoint # 1 was inapplicable on Lyondell’s facts, because the target board had not initiated “an
active bidding process,” let alone one that would involve a break up of the
company. Checkpoint # 2 was inapplicable because the transaction did not
involve a hostile offer or an abandonment of the target’s long-term strategy or
a break up of the company.
Checkpoint # 3, however, was triggered once the target board
decided to sell the company to Access, because Access was a privately held
corporation. The transaction therefore would have involved a change of control
from disperse public shareholders in “a large, fluid, changeable and changing
market” to a single controlling shareholder. Although the Supreme Court did not
quote that now proverbial standard, it did hold that one does not enter Revlon-land simply because a prospective target company is “in
play.”[16]
Instead, one does so “ only when a company embarks on a transaction—on its own
initiative or in response to an unsolicited offer—that will result in a change
of control.”[17]
Fairly read, this confirms that in the phrase “sale or
change of control,” as used in checkpoint # 3, control must be understood to
modify both the words sale and change. Accordingly, Lyondell confirms that the interpretation of Arnold and Santa Fe set
out above is the correct one rather than that offered by the Chancery Court.
The logic of the Chancery Court decisions rests on the
policy that target shareholders who get cash have no opportunity to participate
in the potential post-acquisition gains that may accrue to shareholders of the
combined company:
Defendants[SB2]
emphasize that no Smurfit–Stone stockholder involuntarily or voluntarily can be
cashed out completely and, after consummation of the Proposed Transaction, the
stockholders will own slightly less than half of Rock–Tenn. … Defendants lose
sight of the fact that while no Smurfit–Stone stockholder will be cashed out
100%, 100% of its stockholders who elect to participate in the merger will see
approximately 50% of their Smurfit–Stone investment cashed out. As such, like
Vice Chancellor Lamb’s concern that potentially there was no “tomorrow” for a
substantial majority of Lukens stockholders, the concern here is that there is
no “tomorrow” for approximately 50% of each stockholder’s investment in
Smurfit–Stone. That each stockholder may retain a portion of her investment
after the merger is insufficient to distinguish the reasoning of Lukens, which concerns the need for the
Court to scrutinize under Revlon a
transaction that constitutes an end-game for all or a substantial part of a
stockholder’s investment in a Delaware corporation.[18]
As we have seen, however, this concern
makes no sense.[19]
As long as the acquirer is publicly held, shareholders who get cash could
simply turn around and buy stock in the post-acquisition company. They would
then participate in any post-transaction gains, including any future takeover
premium. Only if there has been a change of control is that option foreclosed.
In any event, as the discussion in Part III.C makes clear,
the relevant policy concern is not whether there is a tomorrow. To be sure, QVC spoke of “an asset belonging to
public shareholders”; i.e., “a control premium.”[20] As we saw above, although he did not
cite QVC, Vice Chancellor Laster
implicated this concern by holding that Revlon
was triggered because the transaction at issue was the “only chance [the
target shareholders would] have to have their fiduciaries bargain for a premium
for their shares.”[21]
If QVC is properly
understood, however, the Supreme Court was not showing concern for whether
there will be a tomorrow for the shareholders. Instead, as discussed above, the
court was concerned in QVC with the
division of gains between target and acquirer shareholders because the
post-transaction company would have a dominating controlling shareholder.[22]
As the analysis of QVC
in Part III.C.2
explained, the relevant concern thus is the potential that conflicted interests
will affect the target’s board of directors’ decisions.[23]
Indeed, as we have seen, even Vice Chancellor Lamb’s opinion in Lukens recognized that the motivating
concern underlying Revlon is “the
omnipresent specter that a board may be acting primarily in its own interest,
rather than those of the corporation and its shareholders.”[24]
Curiously, however, Vice Chancellor Lamb brought that policy concern into play
only with respect to whether the directors had satisfied their Revlon duties, while ignoring it when deciding
whether those duties have triggered. But nothing in Revlon or QVC suggests
that that policy is limited to the former issue rather than both inquiries.
Because the conflict of interest policy concern is the
underlying driver of both aspects of Revlon,
the Chancery Court in Lukens and its
progeny should have considered whether the all- or partial-cash transactions
necessarily implicate conflicts of interest akin to those at issue in Revlon and QVC. If the various Vice Chancellors had done so, they would have
recognized that, so long as acquisitions of publicly held corporations are
conducted by other publicly held corporations, diversified shareholders will be
indifferent as to the allocations of gains between the parties.[25]
In turn, those shareholders also will be indifferent as to the form of
consideration.
In contrast, if the transaction results in a privately held
entity, a diversified shareholder cannot be on both sides of the transaction.
If the post-transaction entity remains publicly held, but will be dominated by
a controlling shareholder, there is a substantial risk that the control
shareholder will be able to extract non-pro rata benefits in the future and get
a sweetheart deal from target directors in the initial acquisition. In either
situation, the division of gain matters a lot. As such, investors would prefer
to see gains in such transactions allocated to the target.[26]
It is in these situations that Revlon
therefore should come into play.
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