Recent Delaware Case Addresses Board Duties In Merger Situation
Kelley Drye Client Advisory
IntroductionWhen a Delaware company is for sale, its board of directors has various responsibilities in navigating the selling process. Among those responsibilities are fiduciary duties, which include the business judgment rule, the duty of care and the duty of loyalty. While exercising these fiduciary duties, a board may voluntarily appoint an independent committee comprised of non-management directors with no financial interest in the transaction, particularly when one or more directors have a conflict of interest – meaning a material personal financial interest – arising from the transaction. The board or independent committee may reject a potential acquirer’s proposal if it is determined to not be in the company’s best interests, and Delaware courts generally will uphold such decisions so long as the proposal was properly addressed and considered by the board or committee.
A board’s decision to sell or merge the company triggers additional responsibilities known as the “Revlon Duties.” The Revlon Duties require that a board consider alternative opportunities, if any, and obtain the highest value reasonably available to shareholders. Ensuring that the board fulfills its obligations under the Revlon Duties, particularly with respect to maximizing the value of the target company, requires the careful evaluation of all proposals and their implications of each proposal for the target company. The Delaware Court of Chancery recently addressed the topic of evaluating competing offers and confirmed its prior position that the process undertaken by the board of directors, rather than the particular outcome chosen by the board, is what matters most in its review.
Family Dollar Case StudyIn In re Family Dollar Stores, Inc. Stockholder Litigation, C.A. No. 9985-CB (Del. Ch. Dec. 19, 2014), the Delaware Court of Chancery recently upheld Family Dollar Stores, Inc.’s (“Family Dollar”) rejection of Dollar General Corp.’s (“Dollar General”) $80 per share cash offer, finding that Family Dollar’s board of directors acted reasonably in declining to negotiate with Dollar General. The ruling permits Family Dollar to move forward with a stockholder vote on the $8.5 million cash and stock offer from Dollar Tree Inc. (“Dollar Tree”), approved by Family Dollar’s board in July 2014. The case originated with Family Dollar stockholders seeking to postpone the vote until the board “properly engaged” with Dollar General, whose cash offer was $4 per share higher than that of Dollar Tree’s. Family Dollar rejected Dollar General’s repeated, increasingly higher cash offers due to the significantly higher risk of the transaction being blocked on antitrust grounds.
Family Dollar’s stockholders alleged breach of fiduciary duty by its board for declining to negotiate with Dollar General, but the Court disagreed in light of the board’s consideration of factors other than merely the per share cash value of Dollar General’s offer. The Court cited Family Dollar’s board’s evaluation of the relative antitrust risks of selling to either Dollar General or Dollar Tree as a key factor in Family Dollar’s rejection of the Dollar General offer. Specifically, the Court noted the following facts as part of this evaluation: Family Dollar’s chairman, president and CEO consulted with the company’s legal and financial advisors prior to meeting with a Dollar General director regarding a buyout. Legal counsel for Family Dollar advised the board that, from an antitrust perspective, a transaction with Dollar General carried high risk of requiring significant store divestitures or being prohibited outright by the Federal Trade Commission (“FTC”). Despite Dollar General’s increase in cash value upon its second offer and its offer to voluntarily divest some stores, Family Dollar’s counsel advised the board that there was only a 40% likelihood of attaining antitrust clearance from the FTC, making the board hesitant to pursue a transaction with Dollar General. There was no comparable risk with respect to the Dollar Tree proposal. The Court found that the board’s decision was “reasonable as a fiduciary matter” and declined to disturb the board’s decision.
Other factors cited by the Court included that (i) during the offer process, Family Dollar’s chairman, president and CEO met several times with a Dollar General director and Dollar General’s CEO and indicated the Family Dollar board’s initial willingness to consider an offer from Dollar General, and (ii) Family Dollar’s chairman, president and CEO, who agreed to remain with the company for two years after the transaction closed for $5 million a year and to join the post-merger board of directors, did not negotiate any personal role with Dollar Tree until after Family Dollar and Dollar Tree had reached agreement on the merger terms, so that he acted as an unbiased negotiator with no “entrenchment motive” and instead sought to maximize the value of the Family Dollar company for its stockholders. In sum, the Court upheld the board’s process in determining how it maximized value for its stockholders, taking into consideration more factors than merely the per share value of the accepted transaction.
Practice TipsThe Delaware decision in the Family Dollar case is instructive for target companies navigating the proposal stage of negotiations. Boards of directors should be careful to be actively engaged in the review and consideration of any proposals, including all circumstances and factors at play, so that they can make reasoned and fully-informed decisions. The Delaware Court of Chancery will often accord deference to a board’s decision if it finds the process undertaken by the board to have been adequate to provide protection for the stockholders.
For more information on this advisory, please contact: