Takeover cases
•
1
Unocal Corporation v. Mesa Petroleum Co.
493 A.2d 946(Del.1985).
FACTS:
• April 8,1985
Mesa 13%
The two-tier coercive tender offer:
①$54-----------------64 million
②securities--------------remaining
Unocal-----aptly termed such securities
“junk bonds”
( presentation of Goldman Sachs& Dillon.)
The Court of Chancery:
• the Sachs presentation was designed to
apprise the directors of the scope of the
analyses performed rather than the facts
and numbers used in reaching the
conclusion that Mesa’s tender offer price
was inadequate.
•
•
BOD not informed
Defensive measure
April 15
$72 ----remaining 49%
1. Mesa Purchase Condition
64M purchased by Mesa----50M
2. Mesa Exclusion
Mesa can not tender to Unocal
Injunction
FUNDAMENTAL ISSUES
1. Did the Unocal board have the power
and duty to take a defensive measure
to oppose a takeover threat?
2. Is its action here entitled to the
protection of the business judgment
rule?
The legal power of board
8 Del. C. §141(a)
8 Del. C. §160(a)
• A board of directors is not a passive instrumentality.
Five cases
BJR—apply to the takeover situation
Good faith& reasonable investigation
informed + disinterested + independent
• The board’s exercise of corporate power to
forestall a takeover------fiduciary duty.
• The element of balance (nature & effect)
①inadequacy of the price offered
②nature and timing of the offer
③questions of illegality
④impact on “constituencies”
•
•
•
•
•
•
national reputation as a “greenmailer”
stampede shareholders into tendering at the first tier
the director’s duty to ensure that
the minority stockholders receive equal value
Nonsupport of Mesa’s argument
1.
Unlawful--discriminate against one SH.
2. The exclusion permits the directors to
abdicate the fiduciary duties they owe it.
Mesa can also tender after this
Mesa can turn the board out
3. The basis of this action is punitive, and
solely in response to the exercise of its
rights of corporate democracy.
Not the Fisher Case’s facts
The Result
• There was a directorial power to oppose
the Mesa tender offer.
• The selective stock repurchase plan
chosen by Unocal is rational & reasonable.
• The board’s action is entitled to the
protection of the BJR.
The decision of the Court of Chancery:REVERSED
The preliminary injunction:VACATED
ATTENTION:
The reasoning of common law.
The compare of the facts in the
proceed of reasoning.
Takeover cases
•
2
Revlon Case
Appeal from the court of
chancery
• Plaintiff:
Pantry pride
• Defendants: *Revlon
•
*BOD of Revlon
•
*Forstmann
• Injunction:
•
* lock-up option
•
* no-shop provision
•
* $25M cancellation fee
The court of Chancery:
Revlon directors breached duty of care.
Supreme Court of Delaware: Affirm
• Active bidding contest for corporate
control----defensive measures (permitted)
Here------no
• a corporation may consider the impact of a
takeover threat on constituencies other
than SH
Here------no rationally related benefits
accruing to the SH, so no
Facts:
•
•
•
June 1985
$40-50
Mr. Perelman
Mr. Bergerac
Pantry Pride
Revlon (NO)
• August 14
1. Negotiation: $42-$43 per S.
2. Hostile tender offer: $45
Defensive measures
• Lazard Freres--Revlon investment banker
• * $45 per S-----inadequate
• * Pantry Pride use junk bond to finance
•
*break-up of Revlon and deposition of
its assets
•
•
$60-70 Per S return
sale as a whole----$mid 50 range
• 1. repurchase up to 5 M of its nearly
30 M outstanding shares;
• 2. adopt a “Note Purchase Rights Plan”
•
unless
$65 cash for all S
• dividend--one common S = one rights
20% acquired trigger
A $65 principal Revlon note
12%interests per year
BOD 10cents each
redeem
•
Pantry pride
• August 23
• $47.5-common S;26.67-preferred S
•
Revlon
• August 29
• $47.5 Subordinated Note—10Million
•
1995, 11.75% interests/y
•
no additional debt,
•
no assets sale
•
no dividends
• unless approval by independent directors
•
Pantry pride
• Sept. 16 second cash bid----$42
•
•
•
•
•
•
•
increase price if no “rights”
Sept.27
Oct.1
Oct.7
$50
$53
$56.25
Revlon BOD reject all its offers.
Leverage buyout by Forstmann.
• Revlon SH--$56 cash
• waive the Notes covenants
• Finance by:
• Revlon “golden parachutes”
• sell cosmetics and fragrance division for
$905M
• Forstmann assume $475M debts—sell
Revlon’s two divisions for $335M
•
•
Notes from par value$100--$87.5
noteholders----threat to suit
Forstmann’s privileges:
1. Access to certain Revlon financial data;
2. lock-up option:
purchase one divisions for $525M which is $100-175M
below its value if other acquiror get 40% of Revlon’s
shares;
3. Rights and Notes covenants ---removed
4. No-shop provision
5. Cancellation fee
$25M to be placed in escrow if this agreement
terminated or if another acquiror get 19.9% of Revlon’s
shares.
$57.5
No Revlon management involved
support the par value of the Notes
Revlon BOD’s reasons:
1. Higher price than the Pantry Pride
bid;
2. Protect the noteholders;
3. Forstmann’s financing was firmly in
place.
No
should consider time value of money
Court of Chancery
• Injunctive relief
• Temporary restraining order
•
breach the duty of loyalty
• prohibit: the transfer of assets
•
•
•
•
lock-up
no-shop
cancellation fee
concern the liability to the noteholders (No)
•
Maximizing the sale price of the company for
the shareholders (Yes)
Regarding the preliminary
injunction
• 1. Plaintiff must demonstrate a
reasonable probability of success on
the merits;
• 2.some irreparable harm would occur
if absent the injuntion.
Revlon board negotiate
a merger or buyout with
Forstmann
Preservation of Revlon
as a corporate entity
BOD role
• Defenders
•
recognition
Change to
Revlon for sale
Maximize the company
value at a sale for SH
benefits
auctioneers
no Unocal test here
Lock-up
• Legal under Delaware Law
•
Citing Thompson V. Enstar Corp.
1. Some lock-up options may be beneficial to
the SH
Such as those that induce a bidder to compete for the
control of a corporation
2. Some may be harmful
Such as those that effectively preclude the bidders
from competing with the optionee bidder
Not to foster bidding----but destroy it
(here, illegal)
• Preferring the noteholders
•At the expense
of the SH
rights of noteholders were
fixed by contract, need no
further protection
• Ignoring the duty of loyalty to the SH
intent
protect the directors against
a perceived litigation threat
from the creditors
No-shop provision
• Like the lock-up, not per se illegal.
• Impermissible under the Unocal
standards when a board’s primary
duty becomes that of an auctioneer
responsible for selling the company
to the highest bidder.
consider a no-shop agreement
Ironic here
Forsemann
Justifiable
1. Cooperation from management
2. Access to financial data
3. The exclusive opportunity to
present merger proposals directly
to the BOD
no
ok
Offer adversely
affect SH’s interests
deal
preferentially
BOD remain free to negotiate
When bidders make
relatively similar offers
Dissolution of the company
is inevitable
Best price for SH’s equity
Takeover cases
•
3
Paramount v.
Time
Brief
Paramount
SH of Time
Fail on Merits
Chancery: Deny the motion
Supreme: Affirm
preliminary
injunction
Time
tender
$70 cash
Walner
51%
Two important facts
(1)
Inside
Directors
(2)
Since 1983-1989
considerable time study the merger
Best fit
4
Time
Warner
8
outside
dominated by directors
Henry R. Luce III
Time control
the BOD
Preserve a management
culture (journalistic
integrity)
Care Profits (no)
Not report to
top officer
Report to a
committee of BOD
Time’s resolution with Warner
• No-shop agreement
• Dry-up fee
• Lock-up exchange agreement
(each hold 9-11 percent of other’s shares )
Structure of Time-Warner
Time SH vote (June 1989)
Time
Stock-for-stock merger
Warner
39 %
Time-Warner
61%
Premium for
(1) 50% of BOD
(2) Time culture
Time’s defense--Paramount
Paramount offer
“smoke and mirrors”
inadequate price
$175
Time
stock
$182.75
$170
$44
$200
protect the Time-Warner combination
Still (no)
51%
Cash bid
Time BOD meet 3times in 8days
$70 cash
(56% premium of
Warner stock)
Avoid SH vote
Remaining combined
cash and security
= $70
accelerate the combination?
Shareholder Plaintiff assert:
(1) Paramount’s bid for Time
BOD should enhance shortterm shareholder value and to
treat all other interested
acquirors on an equal basis.
place Time “for sale”
trigger
Revlon duties
(2) Time’s transaction with Warner
result in Transfer of control
(3) Combined Time-Warner is not large
preclude the possibility of SH
receiving a future control premium.
Chancery and Supreme court:
(1) Del 141(a):
No fixed investment horizon
BOD has conferred authority to
manage corporation business to
enhance profitability
Not put the corporation’s
future in the hands of its SH
(2) If not under Revlon
BOD should act in an
informed manner
no duty to maximize SH
value in the short term
Pivotal Issue: Time—”up for sale”?
No Revlon here:
(1) Corporation initiate an active bidding process
seeking to sell or reorganization involving a clear
break-up of the company. (here no)
(2) In response to a bidder’s offer, a target
abandons its long-term strategy and seeks an
alternative transaction also involving the breakup of the company. (here no)
Here: control of the corporation existed in a fluid
aggregation of unaffiliated SH
(Control in the Market)
Apply Unocal here:
Safety
devices
Lock-up
No-shop
Dry-up fee
Not prevent SH from
a control premium
Properly subject to
a Unocal analysis
Merger agreement before Mar.3----BJR ok
Revised transaction on June 16----Under Unocal
Plaintiff: two-tier offer ---------- threat
all cash, all share offer------- no
threat
Court:
Wrong
Unocal
how to
evaluating threat:
*inadequacy of the price
*nature and timing of the offer
*questions of illegality
*the impact on contingencies other than SH
*The risk of nonconsummation
*quality of securities
Unocal 1: where is the threat
Threat:
(1) Paramount’s 11 hour offer upset the SH to
consider the Time-Warner merger vote
(2) Paramount offer a degree of uncertainty
BOD informed
(1) long time investigation for Warner
(2) 12/ 16 are outside directors
Unocal 2:
Is this a reasonable defensive action?
Paramount:
Assuming threat there, Time’s response was
unreasonable in precluding SH accepting the a
control premium.
Court:
Directors are not obliged to abandon a deliberately
conceived corporate plan for a short-term SH
Profit unless there is clearly no basis to sustain
the corporate strategy.
Paramount can still
make an offer for the
combined TimeWarner
Heavy debts incur to
finance the acquisition
of Warner----Fine