In re Family Dollar Stores, Inc.
(Del. Ch. Dec. 19, 2014)
C&J Energy Services Inc. v. City of Miami General Employees’ and Sanitation Employees’ Retirement Trust (Del. Dec. 19, 2014)
Refresher: Revlon duties
Under Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc.(“Revlon”), when a Delaware corporation’s board of directors considers a transaction that constitutes a sale of corporate control, the court will require a board to “maximiz[e] … the company’s value at a sale for the stockholders’ benefit” and to “get the highest value reasonably attainable for the shareholders.” The Delaware courts have consistently held that Revlon does not create one standard methodology pursuant to which a board must run a sale process. Rather, they recognize that every situation is fact-specific, and that in carrying out the sale process directors must simply have been “adequately informed and acted reasonably” when aiming to achieve stockholder value.
Background: C&J and Dollar Store
In both C&J and Family Dollar, the Supreme Court and Court of Chancery, respectively, call out the important difference between judicial review of the decisions of a conflict-free, independent board and those of a board where independence has been called into question. The agreement included a standard “fiduciary-out” pursuant to which C&J could consider superior offers and, upon payment of a termination fee, terminate the agreement with Nabors. No competing bids emerged either before or after the agreement with Nabors was signed, yet stockholders of C&J sued to enjoin the stockholder vote on the Nabors deal, alleging that the C&J board breached its Revlon duties by failing to actively solicit third party bidders. Although the Chancery Court granted the injunction, the Supreme Court quickly reversed and permitted the vote to go forward.
In Dollar Store, rendered by the Delaware Court of Chancery, Family Dollar Stores, Inc. (“Family Dollar”) and Dollar Tree, Inc. (“Dollar Tree”) entered into a merger agreement pursuant to which Dollar Tree would pay a mix of cash and stock for Family Dollar valued at $74.50 per share of Family Dollar stock. The merger agreement included a requirement for Dollar Tree to divest up to 4,900 of its stores to clear antitrust approval (a divestiture commitment which, according to the board’s legal and investment banking advisors, yielded a 95% chance of antitrust approval), and, as in C&J, included a “fiduciary-out” pursuant to which Family Dollar’s board could entertain a “superior proposal” that was “reasonably likely to be completed on the terms proposed.” Unlike in C&J, however, an unsolicited third party bidder emerged when Family Dollar was approached by Dollar General, Inc. (“General”) with a bid to acquire Family Dollar for cash at a price of $78.50 per share and divestiture commitment of 700 stores. After being refused by Family Dollar’s board, General subsequently increased its offer to $80 per share and a 1,500 store divestiture commitment, which Family Dollar’s board again refused based upon it and its advisors’ judgment that the chances of antitrust approval for the deal were no greater than 40%. General then sued to enjoin Family Dollar’s stockholder vote to approve the Dollar Tree merger, claiming Family Dollar’s board had breached its Revlon duties, in part, by not properly negotiating with General. The Court of Chancery declined to issue an injunction and the vote proceeded.
(1) Maximizing the value of your family dollar: more money (but more problems)
The Court in Family Dollar emphasizes that Revlon does not require a board to accept the bids of, or even engage in active negotiations with, a competing bidder solely because that bidder offers a higher price. To the contrary, the Court noted that:
In short, the Board’s decision reflects the reality that, for the Company’s stockholders, a financially superior offer on paper does not equate to a financially superior transaction in the real world if there is a meaningful risk that the transaction will not close for antitrust reasons.
Thus, despite a higher offer, Family Dollar’s board complied with its Revlon duties to “get the highest value reasonably attainable for the shareholders” (emphasis added) because the lower bid from Dollar Tree was all but certain to be attainable, while the higher bid from General was unlikely to be attainable at all. It is easy for even the most responsible board of directors, eager to do right by its stockholders and to abide by its fiduciary duties, to mistake a higher offer for a better offer. After all, Revlon requires the “highest value.” However, when more money comes with more problems (in this case, likely and unavoidable antitrust problems) more is not necessarily better.
(2) Independence buys you freedom
In both C&J and Family Dollar, the Supreme Court and Court of Chancery, respectively, call out the important difference between judicial review of the decisions of a conflict-free and independent board and those with respect to which independence has been called into question. The Court is hesitant to second-guess the otherwise reasonable decision-making processes of an independent and conflict free board, and although a change of control transaction might implicate Revlon duties, as the Court in Family Dollar notes, “when the record reveals no basis to question a board’s motivations, the Court understandably will be more likely to defer to the board’s judgment in determining how to conduct a corporate sale process.” In his C&J opinion, Chief Justice Leo Strine noted that the facts in the case, as with many cases in which Revlon duties apply, were quite different from Revlon (the case) itself, and thus the results of Revlon shouldn’t determine the results of every case in which Revlon duties are implicated: “Revlon involved a decision by a board of directors to chill the emergence of a higher offer from a bidder because the board’s CEO disliked the new bidder…the majority of C&J’s board is independent, and there is no apparent reason why the board would not be receptive to a transaction that was better for stockholders than the Nabors deal.” Likewise, in Family Dollar, the court noted that “the record here demonstrates that the Board was properly motivated to maximize value for Family [Dollar]’s stockholders. Ten of the eleven members of the Board are outside directors whose independence has not been called into question… None of the ten outside directors will serve as a director in the combined entity if the Merger is approved.” With no good reason to question the motivation of the board as anything other than maximizing the value for its stockholders, the courts in both C&J and Family Dollar limited their inquiries to whether the board in question was “adequately informed and acted reasonably” to achieve that end. Thus, the more independent and free from conflicts a board is, the more freedom it has to craft a sale and decision-making process, and the more deference it will get in a judicial review of that process, even when Revlon applies.
(3) Market Checks Can be Passive (No Aggressive Solicitation Required)
Both C&J and Family Dollar explicitly reject the notion that Revlon requires an auction or otherwise requires a board to actively shop the Company, either before or after a definitive agreement has been signed with a prospective buyer. In C&J, Chief Justice Strine specifically rejected the notion that the C&J board breached its Revlon duties by forgoing an active auction process and relying instead on the passive market check of a “fiduciary-out” in its acquisition agreement with Nabors:
Revlon made clear that when a board engages in a change of control transaction, it must not take actions inconsistent with achieving the highest immediate value reasonably attainable. But Revlon does not require a board to set aside its own view of what is best for the corporation’s stockholders and run an auction whenever the board approves a change of control transaction… In prior cases…this sort of passive market check was deemed sufficient to satisfy Revlon. But as the years go by, people seem to forget that Revlon was largely about a board’s resistance to a particular bidder and its subsequent attempts to prevent market forces from surfacing the highest bid.
The Court’s discussion of the passive market check, or “fiduciary-out” in Family Dollar spanned multiple pages, and the Court noted that “taking into consideration the constraints of Section 5.3(c) of the Merger Agreement, the Board acted reasonably in my opinion to maximize value for Family [Dollar]’s stockholders in accordance with its fiduciary obligations under Revlon when it came to the conclusion, as reflected in the minutes, “that the Revised Dollar General Proposal is not reasonably expected to lead to a Company Superior Proposal that is reasonably likely to be completed on the terms proposed.” Thus the board need not have engaged General in its competing offer, let alone solicited competing offers from unidentified third parties, and the “constraints” contained in the fiduciary-out it negotiated with Dollar Tree did not dilute its effect as a Revlon-compliant market-check mechanism, but rather informed the Court’s analysis of the universe of potential board action to be considered in determining whether the board, in considering other offers, acted “reasonably.” These decisions highlight the importance of a carefully drafted fiduciary-out provision which allows the board an effective passive market check.