A quarterly recap of mergers and acquisition law news from the M&A team at Ropes & Gray LLP.
NEWS FROM THE COURTS
The Chancery Court Further Advances the "Unified Standard" for Controlling Shareholder Buyouts
In one of the most important decisions from the Delaware Court of Chancery (the "Chancery Court") this year, Chancellor Strine held that the business judgment rule, rather than the more searching entire fairness standard, will apply to controlling shareholder transactions if, from the outset, the merger is subject to both negotiation and approval by a special committee of independent directors fully empowered to say no and approval by an uncoerced, fully informed vote of a majority of the minority investors.
In re MFW arose out of a takeover proposal from the company's controlling stockholder, MacAndrews & Forbes Holdings, Inc. ("M&F"). M&F's initial proposal to the MFW board conditioned its offer on both the approval of a disinterested, fully-empowered special committee and a non-waivable majority-of-the-minority vote in favor of the deal. M&F also informed the MFW board that if the board did not accept its offer, M&F would remain a long-term stockholder of MFW and would not sell into any third party transaction or initiate an alternative attempt at a takeover, including through a tender offer. Shareholders filed suit against MFW and M&F alleging that the deal was unfair and should be enjoined.
The court granted summary judgment for MFW and M&F, rejecting the plaintiff's claim that the Delaware Supreme Court's decision in Kahn v. Lynch Communication Systems, required that the deal be closely scrutinized by the court to decide if it was "entirely fair" to minority shareholders. Instead, Chancellor Strine held that the business judgment rule should apply where a controlling shareholder initially conditions a takeover on both the support of an empowered and independent special committee and a non-waivable majority-of-the-minority vote provision. Under this deferential standard, the court will not second-guess decisions of independent directors so long as they can be attributed to some rational business purpose. If In re MFW survives appeal, the standard of review for freeze-out tender offers (set forth in Pure Resources and CNS Gas) will now mirror that of a freeze-out merger.
This decision maps a promising path to reduce significantly the litigation risk to controlling shareholders in take private transactions.
Already, the Chancellor's suggested process is being used in controlling party buyout transactions. David Murdoch, Dole Food's CEO and controlling shareholder, has proposed to take the company private in a process that adheres closely to the Chancellor's suggested In re MFW framework. (In re MFW S'holders Litig., C.A. No. 6566-CS (Del. Ch. May 29, 2013))
The Unconflicted Board and Revlon Duties
On May 9, 2013, the Chancery Court declined to enjoin the proposed merger of Plains Exploration & Production Company ("Plains") with Freeport-McMoRan Copper & Gold Inc. ("Freeport") in which Plains' shareholders would receive cash and stock of Freeport. In doing so, Vice Chancellor Noble rejected the plaintiffs' allegations that the Plains board of directors failed to discharge its Revlon duties. The case once again exhibited that the Chancery Court will not second guess the business judgment of a sophisticated, independent board and that there is no "one size fits all" approach on how to sell a company.
The plaintiffs claimed that the Plains board of directors failed to satisfy its Revlon duties because it (a) did not organize a special committee to evaluate the potential transaction, (b) did not conduct a pre- and post-signing market check (including by not having a go-shop provision in the merger agreement), (c) allowed the Plains CEO to lead negotiations with Freeport and (d) did not obtain price protection in the form of a collar on the stock component of the merger consideration. The Chancery Court found each of these arguments unpersuasive. It stated that when seven of eight members of a board of directors are independent and disinterested, the need to establish a special committee is obviated. Further, enlisting the Plains CEO to lead the negotiation, under board supervision, was reasonable in this instance despite the potential conflict presented by the CEO negotiating with his possible future employer, because the Plains Board was aware of the conflict and determined that the CEO was "in the best position to advance the interest of the [Plains] stockholders" since he had the best knowledge of Plains' assets, and his significant ownership of Plains stock aligned his interests with shareholders generally. Additionally, the lack of a pre- and post-signing market check was reasonable in light of the fact that the directors had experience and expertise in Plains' industry and that deal protection provisions in the merger agreement were not so onerous as to preclude the emergence of a topping bidder. (In re Plains Exploration & Prod. Co. S'holder Litig., No. 8090-VCN (Del. Ch. May 9. 2013))
Process Makes Perfect
On May 14, 2013, the Chancery Court granted an injunction requiring that Morgans Hotel Group Co. ("Morgans") (a) reinstate its annual meeting and shareholder voting record dates and (b) refrain from moving forward with a strategic transaction with Yucaipaa private equity firm controlled by billionaire Ron Burkle, one of Morgans' largest creditors and a member of Morgans' boarduntil the board approved the transaction pursuant to a proper process.
The litigation arose from a proxy contest initiated by Morgans' largest shareholder, OTK, in March 2013. After the proxy contest was announced, the Morgans board attempted to postpone the annual meeting and record dates and to consummate a transaction with Yucaipa. OTK and a Morgans director affiliated with OTK, Jason Kalisman, filed suit, alleging that the board's actions amounted to an improper attempt to manipulate the shareholder base and place stock into hands friendly to the incumbent directors in order to defeat OTK's proxy contest. Ropes & Gray represented OTK in both its proxy contest and the related litigation.
As part of the proposed transaction, Morgans planned to transfer The Light Group and the Delano Hotel to Yucaipa for its notes, warrants and preferred stock. As a condition to the transaction, Yucaipa agreed to backstop a $100 million rights offering of Morgan stock. To accomplish the transaction, Morgans' poison pill was amended to allow Yucaipa to acquire up to 32% of Morgans' common stock.
In granting the preliminary injunction, Vice Chancellor Laster concluded that Yucaipa and Burkle hold significant influence over Morgans through Yucaipa's contractual veto rights over sale transactions, contractual right to appoint or elect directors and Burkle's personal influence over the board. The court also found that OTK and Kalisman had a reasonable likelihood of establishing at trial that at least six of the eight directors were interested in the transaction due to post-closing board and executive positions and their respective relationships with Yucaipa and Burkle, and that the directors had breached their fiduciary duty of loyalty.
With respect to the board process relating to approval of the proposed transaction, the Morgans bylaws require reasonable notice of board meetings, but Kalisman was only given one day's prior notice of the meeting, with over 350 pages of information provided for such meeting. The court determined that the board did not give Kalisman sufficient notice, particularly in light of the company's past practice of providing directors with over a week to evaluate similar materials. The Vice Chancellor noted that Delaware's board-centric governance model expects that directors will debate and deliberate, holding that even if the board of directors had stitched up the...