Wednesday, June 08, 2011

Revlon Duties Satisfied, Delaware Chancery Court Refuses to Enjoin Half-Stock, Half-Cash Merger

A target company’s board and a special committee of the board fulfilled their Revlon duties to maximize shareholder value in a transaction that was 50 percent cash and 50 percent stock in the acquiror. Thus, the Delaware Chancery court refused to delay the target shareholders’ vote on the merger or enjoin the no-shop provision and other deal protections in the merger agreement. In re Smurfit-Stone Container Corp. Shareholder Litigation, May 20, 2011, CA No. 6164-VCP.

A threshold question was whether the merger should be considered under the business judgment rule or the Revlon doctrine. This was more than semantical. Unlike the informed and rational decision standard applied under the business judgment rule, the Revlon doctrine requires a judicial examination of whether the directors acted reasonably to maximize shareholder value. The Delaware Supreme Court has not yet clarified the precise bounds of Revlon in a merger consisting of an equal split of cash and stock. Vice Chancellor Parsons decided to apply Revlon to this merger because it constituted an end game for a substantial part of a shareholder’s investment in the target company. There is no tomorrow for 50 percent of each shareholder’s investment in the company.

There is no single path that a board must follow in order to maximize stockholder value, noted the court, but directors must follow a path of reasonableness which leads toward that end. Importantly, a board’s actions are not reviewed upon the basis of price alone. In reviewing a board’s actions under Revlon, the court must determine whether the information relied upon in the decision-making process was adequate and examine the reasonableness of the directors’ decision viewed from the point in time during which theys acted. The directors have the burden of proving they ere adequately informed and acted reasonably.

The merger was negotiated by a special committee of the board composed of sophisticated business persons of broad experience with mergers and acquisitions and assisted by competent advisors. For example, the legal counsel retained by the special committee is an established leader in the M&A space. The court found that the special committee was assertive and devoid of management undue influence. The committee engaged in real arms-length negotiations.

Further, the board did not breach its fiduciary duties by agreeing to deal
exclusively with the acquiror and failing to conduct a presigning market check. In the context of a merger transaction, directors have a duty to maximize stockholder value, but they are under no duty to employ a specific device such as the auction or market check. Even without such a market check, the court found that the members of the special committee had enough information by the time they received the best and final offer reasonably to determine that a topping bid was unlikely.

Further, the board possessed a sufficient amount of reliable evidence from which it reasonably could conclude that a market check was not worth the risk of
jeopardizing the transaction and that dealing exclusively with this acquiror would maximize stockholder value

The court rejected challenges to three deal protection devices: no-shop provision, matching rights provision, and termination fee. No-shop and matching rights clauses are customary in public company mergers, said the court, since potential suitors often have a legitimate concern that they are being used as a stalking horse merely to draw others into a bidding war. The termination fee was generally within the range previously found to be reasonable and appears to have resulted from good faith, arm’s length negotiations.

In addition, the court said that the merger agreement’s three deal protections did not collectively unreasonably inhibit another bidder from making a better offer. The challenged provisions are relatively standard in form and have not been shown to be preclusive or coercive, whether they are considered separately or collectively

Finally, the court rejected the contention that the conflicted nature of the special committee’s financial advisor contributed to the unreasonableness of their conduct under Revlon. The court said that a sales process is not unreasonable under Revlon merely because a special committee is advised by a financial advisor who might receive a large contingent success fee, even if the special committee is considering only one bidder. Rather, the court can take that fact into consideration in determining whether the financial advisor failed to assist the committee in maximizing stockholder value or whether the committee failed to oversee adequately the advisor’s work.

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