- Chancery Court Declines to Enjoin Merger; The Pendulum Swings Back
- June 3, 2013
- Law Firm: Jones Day - Cleveland Office
After any big market break, Delaware courts tend to send a message to Delaware corporations to be careful in judicial decisions that appear to be critical of, and even nitpick, board processes. The Chancery Court's decisions in In re El Paso Corp. S'Holder Litig. and In re Del Monte Foods Co. S'holder Litig. are, in our view, examples of this after the Financial Crisis.
The recent decision in In re Plains Exploration & Production Co. S'Holder Litig. provides hope that the pendulum may be swinging back to normal. In that case, Vice Chancellor Noble deferred to the judgment of directors and refrained from criticizing what plaintiffs asserted was a seriously flawed sale process. Plains reaffirms that, as long as the directors are independent and informed and allow for flexibility to respond to subsequent bids, Delaware courts will give boards broad leeway to conduct a sale process on such terms as they determine to be best.
In the first quarter of 2012, the CEOs of Freeport-McMoran Copper & Gold and Plains Exploration & Production Company had preliminary discussions regarding a possible merger. The Plains board decided not to form a special committee, and the Plains CEO led the negotiations, despite the fact that he was expected to become the CEO of Freeport's newly acquired oil and gas operations and stood to receive $120 million in Freeport stock upon completion of the $6.5 billion merger. On December 5, 2012, Freeport and Plains entered into a merger agreement pursuant to which Plains' stockholders would receive a combination of cash and stock consideration valued at $50 per share.
The merger agreement contained various customary deal protections, including a no-shop provision with a fiduciary out and a three percent break-up fee. Plaintiffs attempted to enjoin the merger, claiming the Plains board breached its so-called Revlon duties by failing to maximize the sales price.
A Quick Review of the Revlon Standard
Under Revlon, a board's actions are reviewed under an enhanced scrutiny standard, rather than the normal deferential business judgment standard, and the board's fiduciary duties require it to engage in a process designed to obtain the best value reasonably available for stockholders. Delaware courts review Revlon claims under a two-part enhanced scrutiny test that includes (i) a judicial determination regarding the adequacy of the decision-making process employed by the board, including the information on which it based its decision, and (ii) a judicial examination of the reasonableness of the board's actions in light of then-existing circumstances. While a board bears the burden of showing that it was adequately informed and acted reasonably, it is not required to show that it made a perfect decision, only a reasonable one.
Chancery Court's Analysis
Vice Chancellor Noble denied the plaintiffs' motion to enjoin the merger, finding that:
The Board's Decision Not to Form a Special Committee Was Reasonable. Vice Chancellor Noble found that a special committee, while "powerful evidence of fair dealing," was not required because seven out of the eight directors on the Plains board were independent and disinterested.
The Board's Decision to Allow the CEO to Run Negotiations Was Reasonable. Vice Chancellor Noble noted that, while a board must continue to oversee the process, "Delaware law is clear that in certain circumstances it is appropriate to enlist the efforts of management in negotiating a sale of control." Although the Plains CEO arguably had a separate interest in the transaction, given his prospective employment with Freeport, the court found that the board reasonably believed that the CEO was in the "best position to advance the interests of stockholders," given the depth of his experience and knowledge about Plains' business. Further, the court noted that the board was aware of and discussed the issue, but ultimately concluded that the CEO's interests were aligned with those of stockholders, given his significant ownership of Plains stock.
The Board's Decision Not to Undertake a Market Check or Implement a Go-Shop Was Reasonable. Vice Chancellor Noble noted that when "directors possess a body of reliable evidence with which to evaluate the fairness of a transaction, they may approve that transaction without conducting an active survey of the market." In Vice Chancellor Noble's view, the directors' expertise and experience in the oil and gas industry supported a reasonable inference that the board was informed and able to make an appropriate decision.
The Merger Agreement's Deal Protections were Reasonable. Vice Chancellor Noble found that the no-shop, combined with a fiduciary out, provided the board with enough flexibility should another party make a superior proposal. Moreover, the three percent break-up fee and matching rights were also deemed to be reasonable because neither would unduly impede another bidder from proposing a better deal (or the board from entertaining one).
Directors and Active Boards. When a board is made up of independent and disinterested directors, Delaware courts should be willing to defer to their reasonable judgment. The key here is documenting the board process.
Conflicts of Interests. A CEO may lead a negotiation even if the CEO's interests are arguably different from those of other stockholders, as long as those interests are disclosed to and discussed with the board, which continues to oversee the negotiations. The existence of divergent interests is a fact of life and not necessarily fatal to the process.
Evidence of Real Negotiation. Where, as in Plains, a company negotiates for a higher price, pursues alternative strategies, and shows a willingness to walk away from a deal, the courts should be willing to take a deferential view even where there is no pre-deal market check or go-shop period.
Practical View of the Court. A board's decision not to conduct a market check is within its discretion as long as the deal protections are not onerous and the target is free to respond to an unsolicited offer. In what is perhaps the most important takeaway from Plains, Vice Chancellor Noble acknowledged that concessions always come at a price, and judicial second-guessing of whether or not to make those concessions during negotiations is not appropriate. Delaware courts will look at a deal's total package and not isolate a single provision to make a judgment as to the adequacy of a sale process.
In Plains, the Chancery Court refused to second-guess the strategic decisions made by an informed and independent board. That is, Vice Chancellor Noble, satisfied that the board was independent and on the job, refused to engage in the type of Monday-morning quarterbacking arguably evident in El Paso and Del Monte. Those two cases seemed focused on purported imperfections in the process and perceived conflicts of interest, without regard to whether stockholders were actually harmed. Our sense is that Plains reflects the passage of time since the Financial Crisis and that we are getting back to an environment in which every aspect of the deal process will not be scrutinized with the benefit of hindsight. As we move forward, one hopes courts will continue to afford boards deference to make rational decisions tailored to the circumstances.
 C.A. No. 6949-CS (Del. Ch. Feb. 29, 2012).
 C.A. No. 6027-VCL (Del. Ch. Feb. 14, 2011).
 C.A. No. 8090-VCN (Del. Ch. May 9, 2013).
 Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986).
 A similar trend can be seen in the progression of cases following the bursting of the dot-com bubble. Compare Omnicare v. NCS Healthcare, Inc., 818 A.2d 914 (Del. 2003) with In Re Toys "R" Us, Inc. S'holder Litig., 877 A.2d 975 (Del. Ch. 2005).