In an earlier post, I indicated my agreement with Vice Chancellor Travis' application of the Unocal standard of review in the recent Chen v. Howard-Anderson decision. Having said that, however, I disagree with his conclusion that the enhanced scrutiny standard applies to these facts. In my article The Geography of Revlon-Land, I discuss the facts of this case:
Occam Networks proposed to acquire Calix in a merger in which the latter’s shareholders would receive a package of 50% cash and 50% stock valued at $7.75 per share. If the transaction went through, the former target shareholders own between 15% and 19% of the post-transaction combined entity’s voting stock.
[In an earlier decision in this litigation,] Vice Chancellor Laster held that the transaction should be reviewed using an “enhanced scrutiny” standard, which in context appears to be a reference to the QVC formulation of the unified standard of review applicable to both Unocal and Revlon cases. If the Vice Chancellor had hung his holding on Lukens, the case could be dismissed as simply moving the trigger at which Revlon comes into play from 60% cash down to 50% cash. In fact, however, Vice Chancellor Laster focused on the act that after the merger the former target shareholders would own only approximately 15% of the stock of the combined entity. As a result, he worried, this was the last opportunity the target directors and managers would have to maximize the target shareholders’ share of a control premium. If the combined entity someday were to be sold, Laster opined, the Occam Network shareholders would “only get 15 percent” of any control premium paid in that later transaction.
In the latest opinion, Travis devotes very little attention to the question of whether the enhanced scrutiny test applies. Here's the relevant passage:
In this case, the Board approved a merger in which each publicly held share of Occam common stock would be converted into the right to receive $3.83 in cash plus 0.2925 shares of Calix common stock. On September 15, 2010, when the directors approved the Merger, the relative value of the two components was approximately 49.6% cash and 50.4% stock. At the preliminary injunction stage, this court applied enhanced scrutiny, citing the divergent interests created in an M&A scenario by the final period problem. See Dkt. 70 at 86. See generally J. Travis Laster, Revlon is a Standard of Review: Why It’s True and What It Means, 19 Fordham J. Corp. & Fin. L. 5, 8-18 (2013) [hereinafter Standard of Review].
That's it. Period.
So let's go back to my article and my critique of Laster's opinion at the preliminary injunction stage:
If the Vice Chancellor had hung his holding on Lukens, the case could be dismissed as simply moving the trigger at which Revlon comes into play from 60% cash down to 50% cash. In fact, however, Vice Chancellor Laster focused on the act that after the merger the former target shareholders would own only approximately 15% of the stock of the combined entity. As a result, he worried, this was the last opportunity the target directors and managers would have to maximize the target shareholders’ share of a control premium.[1] If the combined entity someday were to be sold, Laster opined, the Occam Network shareholders would “only get 15 percent” of any control premium paid in that later transaction.[2]
As discussed below, Vice Chancellor Laster’s analysis is problematic in the first instance because the controlling Supreme Court precedents do not premise Revlon’s applicability on the ability of target shareholders to participate in future takeover premia. Second, the Vice Chancellor’s analysis overlooks many key facts. If Calix were to be acquired in the future, any former target shareholders would now get the benefit of Calix’s directors’ and officers’ fiduciary duties. By the time Calix was acquired in the future, moreover, many of the former target shareholders presumably long since would have sold their Calix shares. If those shareholders are unlikely to be around when future takeover premia are divided, why should the prospect of such premia determine the fiduciary duties of the target’s board and management?
Third, why rest the analysis on the possibility that the acquirer might be acquired in the future? Many companies are never subjected to a takeover offer, let alone actually acquired. In addition, assuming the companies least likely to be acquired in the future are those with a controlling shareholder, Vice Chancellor Laster’s analysis would imply that there is no reason to apply Revlon. Yet, of course, that is precisely the context in which Revlon most clearly applies.
Finally, and most disturbingly, because Vice Chancellor Laster’s analysis does not depend on the percentage of the consideration paid in cash, that analysis would apply equally well to a stock-for-stock merger. Yet, both Chancellor Allen and the Delaware Supreme Court’s opinions in Time made clear that Revlon does not apply to such mergers. This doctrinal conflict suggests that the Vice Chancellor Laster’s approach ought to be rejected.
Nothing in the new opinion changes my mind about that conclusion. This is not a case for enhanced scrutiny. This is a case for business judgment rule analysis.
[2] Id.
