TOPPS & LEAR: DELAWARE CHANCERY COURT CONTINUES
RECENT TREND OF DELAYING STOCKHOLDERS’ MEETINGS
DUE TO INADEQUATE PROXY DISCLOSURES
Court Also Continues to Closely Scrutinize
Merger Negotiation Process and Terms
Continuing a trend exemplified by the recent Caremark1 and Netsmart2 decisions, the
Delaware Chancery Court has again issued injunctions in two separate cases – In re The
Topps Company Shareholders Litigation3 and In re Lear Corporation Shareholder Litigation4
– delaying votes by target company stockholders on proposed mergers pending circulation of
revised proxy materials containing court-mandated disclosures. In addition, in each case, the
Court closely scrutinized the specific facts and circumstances surrounding the process by
which each target company negotiated the merger.
These decisions not only point to the importance that Delaware courts place on proxy
statement disclosures, but should also serve to remind deal-makers and practitioners that the
process and terms that may be appropriate in one transaction will not necessarily survive
judicial scrutiny in another. Nevertheless, it is helpful to consider the particular facts and
circumstances of each of the Topps and Lear decisions in order to gain a better understanding
of the Court’s current thinking. It is also worth noting that these decisions focus on two
recent “hot button” issues for the Chancery Court: suspicion of management-led buyouts
funded by private equity groups, and skepticism towards boards of directors who allow
management to spearhead merger negotiations without proper board oversight or
involvement.
The Topps Decision
The Topps Company, a family-run, publicly-traded company, entered into a merger
agreement with a private equity group led by Michael Eisner, the former Disney chief
executive officer, at $9.75 per share. The Topps board did not conduct a formal auction
process prior to entering into the merger agreement with the Eisner group. Shortly before the
signing of the Eisner merger agreement, Upper Deck, Topps’ chief competitor, expressed a
willingness to make a competing bid. However, because of the board’s view that previous
overtures by Upper Deck dating back to 1999 had never led to a serious proposal, Topps
1
Please see our previous Client Alert entitled "Netsmart: Delaware Court Again Addresses Several Important M&A Issues
While Criticizing Company’s Auction Process", dated April 10, 2007.
2
Please see our previous Client Alert entitled "Caremark: Delaware Court Address Several Important M&A Issues From
Appraisal; Rights To Contractual Deal Protections", dated March 16, 2007.
3
Del. Ch., C.A. No. 2563 (June 14, 2007).
4
Del. Ch., C.A. No. 2563 (June 15, 2007).
decided to execute the Eisner merger agreement without responding to Upper Deck. Upper
Deck was not deterred and again approached Topps post-signing, this time towards the end of
the 40-day “go shop”5 period in the Eisner merger agreement. Upper Deck proposed $10.75
per share, subject to several conditions including additional due diligence. The Topps board,
despite having the right under the merger agreement to continue to explore the Upper Deck
bid even beyond the go-shop period, determined that Upper Deck’s bid was not likely to
result in a “superior proposal” because of several execution risks, including anti-trust and
financing concerns. Following expiration of the “go shop” period, Upper Deck submitted
another indication of interest with revised conditions, in an attempt to alleviate Topps’
concerns. Again, the Topps board refused to treat the Upper Deck proposal as a “superior
proposal”. Had the Topps board made such a determination, the Eisner group, pursuant to the
terms of the merger agreement, would either have had to match Upper Deck’s offer or walk
away from the transaction following payment of a break-up fee of approximately 4.3% of the
transaction’s equity value. Left with no alternatives despite having the higher bid, Upper
Deck considered launching an unsolicited tender offer to acquire control of Topps, but was
prohibited from doing so because of the terms of a standstill agreement Upper Deck was
required to sign in order to participate in the Topps sales process.
Lawsuits were filed seeking to enjoin preliminarily the merger vote, contending that
the Topps board breached its fiduciary duties by failing (i) to disclose all material facts
relevant to the stockholders’ decision whether to approve the Eisner merger, and (ii) to take
reasonable efforts, in furtherance of its duties under Revlon6, to secure the highest price
reasonably available to Topps stockholders.
With respect to the disclosure allegations, the lawsuits claimed that Topps’ failure to
disclose (i) Eisner’s assurances to Topps management that they would be able to continue in
their positions post-merger, (ii) a valuation presentation by Topps’ investment bankers that
casts doubt on the fairness opinion provided to the Topps board and (iii) remarks by Topps
regarding Upper Deck’s proposed bids that presented Upper Deck’s proposal in a negative
light each rendered the Topps proxy materials materially misleading. In short, the Court
agreed with each of the plaintiffs’ disclosure allegations and ordered Topps to revise its proxy
statement accordingly. In order to permit adequate time for circulation and stockholder
consideration of corrective disclosures, the Court enjoined the Topps stockholders’ meeting.
The Revlon claims were premised on two allegations:
¾
the Topps directors were motivated by a desire to ensure that Topps remain
under the control of someone friendly to the founding family of Topps and, as
a result, Topps tilted the process in favor of the Eisner group (which had
expressed its allegiance to Topps management) by, among other things,
resisting a public auction and, once a deal was reached with the Eisner group,
agreeing to deal protection provisions in the merger agreement that precluded
an effective post-signing market check; and
¾
the Topps board failed to respond properly to Upper Deck’s bid by, among
other things, delaying access to due diligence materials, claiming that the
5
In general, a “go shop” provision entitles the target company’s board to actively solicit third party bidders post-signing.
The plaintiffs alleged that the directors breached their duties under the Revlon doctrine, which requires a board, once it has
decided to sell a company for cash, to act in a reasonable manner in order to secure the highest price reasonably available.
6
2
Upper Deck bid did not constitute a “superior proposal” because of due
diligence and anti-trust concerns and refusing to waive provisions of the
standstill agreement with Upper Deck to enable Upper Deck to present a tender
offer directly to Topps stockholders and to respond publicly to Topps’ public
statements concerning Upper Deck’s bid.
The Court concluded that the Topps board breached its Revlon obligations by failing
to consider the competing Upper Deck bid in good faith, determine whether it was a “superior
proposal” and pursue the highest price reasonably attainable. Instead, the Court determined
that the board’s post-signing actions suggested that the Topps directors favored the Eisner
group, who they perceived as a friendly suitor, rather than pursue a process designed to
maximize value. According to the Court, such favoritism for the lower Eisner bid was
exemplified by the Topps board’s unwillingness to reasonably resolve any concerns over
Upper Deck’s financing and anti-trust issues. Based on the foregoing, and in order to ensure
that Topps stockholders were presented with a bid that could be materially more favorable,
the Court enjoined Topps’ use of the Upper Deck standstill agreement to block Upper Deck
from commencing a tender offer and making public statements concerning its negotiations
with Topps.
On the other hand, the Court noted that a higher price than originally offered by the
Eisner group had been negotiated, and found that certain other actions taken by the Topps
board did not unreasonably interfere with value maximization under the circumstances,
including:
¾
The decision not to conduct a public auction prior to signing the Eisner merger
agreement, especially in light of a recent failed auction for a significant part of
Topps’ business.
¾
The 40-day “go shop” provision, which provided the Topps board with
reasonable room for an effective post-signing market check, as well as a
“window shop” provision, which allowed the board to consider “superior
proposals” following the end of the 40-day “go shop” period.
¾
The match right included in the “go shop” provision, which essentially enabled
the Eisner group, as the initial bidder, to match any competing bid, but did not
present an obstacle to a competing proposal that had not “frequently been
overcome in other real-world situations”.
¾
The 4.3% deal value termination fee, which was “a bit high”, but included
expenses and “can be explained by the relatively small size of the deal”.
The Lear Decision
In January 2007, Carl Icahn, a 24% stockholder of Lear Corporation, suggested to
Lear’s CEO that Icahn take Lear private. Following a week of discussions with Icahn, Lear’s
CEO informed Lear’s board for the first time about Icahn’s indication of interest. Shortly
thereafter, Lear’s board formed a special committee; however, the special committee
permitted Lear’s CEO to continue to spearhead the discussions with Icahn. The parties finally
agreed to a $36 per share purchase price (representing a $1 increase over Icahn’s original bid)
3
and signed a merger agreement. The merger agreement contained several deal protection
provisions, including (i) a “go shop” period of 45 days to permit Lear’s board to actively
solicit interest from third parties post-signing and a “window shop” period thereafter for the
board to consider unsolicited third party proposals, (ii) a fiduciary out that permitted the Lear
board to accept a “superior proposal”, (iii) a match right for Icahn if the board decided to
accept a “superior proposal” and a 3% termination fee payable to Icahn if he did not elect to
match and (iv) a reverse termination fee payable if Icahn breached the merger agreement.
Following execution of the Icahn merger agreement, a lawsuit was filed seeking to
preliminarily enjoin the merger vote, contending that the board breached its fiduciary duties
by failing (i) to disclose all material facts relevant to the stockholders’ decision whether to
approve the Icahn merger and (ii) to take reasonable efforts, in furtherance of its Revlon
duties, to secure the highest price reasonably available to Lear stockholders.
In considering the plaintiffs’ disclosure claims, the Court made much of the fact that,
in the closing months of 2006 and prior to Icahn expressing an interest in acquiring Lear,
Lear’s CEO sought to secure his personal financial position, much of which was tied up in
Lear equity. To that end, the CEO approached Lear’s compensation committee about the
possibility of accelerating his retirement payments in order to allow him to liquidate a
substantial portion of his equity stake. However, it was recognized by both Lear and the CEO
that he could not easily liquidate his position due to management black-out periods as well as
the negative signal that such sales would send to the market, thereby further diminishing the
value of his stock. Following consultation with an outside expert, the CEO decided not to
pursue this course of action further.
The Court found that Lear’s failure to disclose the CEO’s negotiations at the end of
2006 with Lear’s compensation committee regarding his retirement benefits rendered Lear’s
proxy disclosures materially misleading. Particularly in light of the CEO’s singular role in
negotiating with Icahn, the Court determined that a reasonable stockholder would want to
know the economic motivation of the CEO. Having abandoned his plan to accelerate and
liquidate a large portion of his equity stake, the Court reasoned that the CEO might view the
Icahn cash-out merger offer as a means of addressing his concerns regarding his financial
security by concluding a deal with Icahn quickly, although at a less than an optimal price,
rather than risking the “bird in the hand” by negotiating hard to maximize the return to
stockholders. As a result, the Court enjoined the stockholders’ meeting to permit corrective
disclosure concerning the CEO’s potentially conflicting motivations.
The plaintiffs’ Revlon claims were premised on the allegation that because Lear’s
special committee permitted the CEO to negotiate the merger terms outside the presence of
the special committee, the board’s efforts to secure the highest possible value were adversely
affected. The Court held that while Lear’s negotiation process was far from ideal, the process
neither represented “a disaster warranting the issuance of an injunction” nor did it raise
concerns about the integrity and skill of those trying to represent Lear’s stockholders. The
Court noted that it would have been preferable for the special committee (or its chairman) or
Lear’s lead investment banker to participate in the negotiations, or at least to have provided
the CEO with more substantial guidance about Lear’s overall strategy. However, rather than
focusing on this one shortcoming, the Court considered the entirety of Lear’s actions in
attempting to secure the highest price reasonably available, noting that “reasonableness, not
perfection measured in business terms relevant to value creation, rather than by what creates
4
the most sterile smell, is the metric…[and] when that metric is applied … the overall
approach to obtaining the best price … appears … to have been reasonable”. Specifically, the
Court considered the following facts and circumstances in determining that Lear’s action were
reasonable in attempting to maximize value for stockholders:
¾
Lear had abandoned its stockholders rights plan, which signaled to the market
a willingness to consider the merits of unsolicited offers;
¾
In addition, Icahn’s investment in Lear stock to 2006, prior to his proposing to
acquire the remaining interests, had further “stirred the pot”;
¾
Based on the foregoing and because no credible bidders had surfaced despite
such market signals, Lear’s decision not to pursue a public auction due to risks
of losing Icahn’s bid was reasonable;
¾
The reasonableness of the substantive terms of the merger agreement itself,
including:
•
A termination fee of 3.5% of equity value (2.4% of enterprise value),
which the Court found was “hardly of the magnitude that should deter a
serious rival bid”; and
•
Icahn’s match right, which the Court determined was “hardly novel”
and not an unreasonable obstacle to a competing bid in light of the
“undisputed reality that second bidders have been able to succeed in the
face of a termination fee/matching right combination of this potency”.
The Topps and Lear cases are, in one sense, an interesting study in contrasts. In each case,
the board of directors employed a typical panoply of deal protection measures and used a goshop to compensate for their limited shopping before the signing of the deal. However,
despite the similarity in their arsenals, the Court found that the way that the Topps board
employed the go-shop revealed a desire to avoid selling to Topps’ chief competitor. Thus, as
in Netsmart, the Court found that a board’s exclusion of a bidder or class of bidders was
violative of Revlon. The cases also are a reminder to boards of directors to be careful about
the role of management in transactions where it is anticipated that management will retain
their positions with the surviving entity. Boards should consider the use of special
committees and other structural devices to make certain that the sale process is appropriately
monitored by independent directors.
*
*
*
5
Please feel free to discuss any aspect of this Client Alert with your regular Milbank
contacts or with any of the members of our Corporate Governance Group, whose names and
contact information are provided below.
New York
Scott Edelman
Roland Hlawaty
Thomas Janson
Robert Reder
Alan Stone
Douglas Tanner
Phone
212-530-5149
212-530-5735
212-530-5921
212-530-5680
212-530-5285
212-530-5505
E-Mail
sedelman@milbank.com
rhlawaty@milbank.com
tjanson@milbank.com
rreder@milbank.com
astone@milbank.com
dtanner@milbank.com
Los Angeles
Ken Baronsky
213-892-4333
kbaronsky@milbank.com
Beijing
Edward Sun
8610-5123-5120
esun@milbank.com
Hong Kong
Anthony Root
852-2971-4842
aroot@milbank.com
Singapore
David Zemans
65-6428-2555
dzemans@milbank.com
Tokyo
Darrel Holstein
813-3504-2167
dholstein@milbank.com
In addition, if you would like copies of our other Client Alerts or the Delaware cases
discussed herein, please contact any of the attorneys listed above. You can also obtain this
and our other Client Alerts by visiting our website at http://www.milbank.com and choosing
the “Client Alerts & Newsletters” link under “Newsroom / Events”.
September 10, 2007
This Client Alert is a source of general information for clients and friends of Milbank, Tweed, Hadley &
McCloy LLP. Its content should not be construed as legal advice, and readers should not act upon the
information in this Client Alert without consulting counsel. © Copyright 2007, Milbank, Tweed, Hadley &
McCloy LLP. All rights reserved.
NY1:#3461010v2
6
New York
One Chase Manhattan Plaza
New York, NY 10005-1413
212-530-5000
Los Angeles
601 South Figueroa Street, 30th Floor
Los Angeles, CA 90017
213-892-4000
Washington, D.C.
International Square Building
1850 K Street, N.W., Suite 1100
Washington, D.C. 20006
202-835-7500
London
10 Gresham Street
London EC2V 7JD England
44-207-615-3000
Frankfurt
Taunusanlage 15
60325 Frankfurt am Main
Germany
49-69-71914-3400
Munich
Maximilianstrasse 15
(Maximilianhoefe)
80539 Munich, Germany
49-89-25559-3600
Tokyo
Fokoku Seimei Building
2-2, Uchisaiwaicho 2-chome
Chiyoda-ku, Tokyo 100-0011
Japan
813-3504-1050
Hong Kong
3007 Alexandra House
18 Chater Road
Central, Hong Kong
852-2971-4888
Singapore
30 Raffles Place
#14-00 Caltex House
Singapore 048622
65-6428-2400
Beijing
Twin Towers (East)
B 12 Jianguomenwai Avenue
10th Floor, Suites 29-31
Beijing 100022, China
8610-5123-5112