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Wednesday, August 29, 2007

The New Zing! in Proxy Battles over Corporate Combinations

The active M&A market, fueled by hedge funds and private equity, has been a hot topic of discussion in the press and corporate circles.  In fact, we are already seeing some of the bloom come off the rose, as interest rates rise and money becomes tight.  But there has also been a quieter sub-development in the last few months surrounding an aspect of these corporate combinations -- namely, the shareholder votes that are (sometimes) required to approve these mergers.

The legal developments, not surprisingly, have come from Delaware, where Vice Chancellor Leo Strine has authored three recent opinions on the subject:

  • In re Topps Co. Inc. Shareholders Litigation (June 14).  Topps had been embroiled in a divisive battle between its long-time family management and a group of dissident shareholders (discussed by Fred Tung last year).  A new board with representatives of both groups had been formed, and the company had engaged in various strategies to sell all or part of the business.  Ultimately, the board had proposed a merger with Tornante, a privately-held company founded by Michael Eisner.  (Yes, him.)  Shareholders sought to enjoin the merger vote on grounds of faulty disclosure.  VC Strine held that the company had failed to disclose several critical factors to shareholders, such as the willingness of Tornante to retain current management as well as the seriousness of a competing bid.  The shareholders' vote was enjoined until they received the appropriate disclosures. 
  • In re Lear Corp Shareholders Litigation (June 15).  In this case, the vice chancellor enjoined a shareholders' vote regarding a proposed cash-buyout merger because the company had failed to disclose the CEO’s financial situation that made a buyout personally favorable to him.  VC Strine concluded that shareholders were “entitled to know that the CEO harbored material economic motivations that differed from their own that could have influenced his negotiating posture”. 
  • Mercier v. Inter-Tel (August 14).  In this case, VC Strine allowed the directors to push back a scheduled proxy vote on an all-cash proposed merger.  Although he recognized that directors have restricted authority under the Blasius standard for actions involving the shareholder franchise, the vice chancellor concluded that the directors had reasonably sought more time in order to persuade shareholders on the wisdom of the deal.  (A Wachtell, Lipton memo believes that Strine creates a new test: the postponement is proper if it served a "legitimate objective" and was "reasonable in relation" to that objective.  However, the M&A Law Prof Blog believes that the vice chancellor "pines here for a 'legitimate objective' test but ultimately acknowledges that this is a reading that cannot currently be wholly jibed with the 'compelling justification' standard of Blasisus/Liquid Audio.")

The Mercier case provided the legal grounds for Monday's announcement by the Topps board that it was postponing tomorrow's scheduled Tornante merger vote.  The justification?  Topps stockholders need more time to "evaluate recent developments when deciding how to vote their shares," including the apparent collapse of the competing bid.

Other commentators have noted the importance of Vice Chancellor Strine's opinions to the process of board decisionmaking.  However, also notable is the respect that these decisions give to the role of shareholders in the mergers and acquisitions process.  In all three cases, the court seeks to protect and enrich the information provided to shareholders in making their decision.  This information is also at the heart of my recent paper, Workers, Information, and Corporate Combinations: The Case for Non-Binding Employee Referenda in Transformative Transactions.   In this paper, I make the case for a non-binding employee vote to be held before the shareholders' vote.  One purpose of this vote would be to give more information to the shareholders, potentially by raising red flags over issues such as those in the Lear and Topps cases.

With exceptions such as the merger between Hewlett-Packard and Compaq, the shareholder vote has not been a critical part of the mergers & acquisitions process.  These recent cases, however, signal a bigger role for shareholders in the future.

Posted by Matt Bodie on August 29, 2007 at 12:25 PM in Corporate | Permalink


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