It is not uncommon in sell-side auctions for the target board to make decisions on whether a particular bidder is capable of reaching the “finish line”, many times due to the perceived willingness or capability of the particular bidder to meet a certain price point or to agree to certain deal terms. This sometimes manifests itself in the target board making the rational decision to focus its energy on one bidder who is likely or “favored” to win, to the exclusion of one or more other bidders.
The recent Delaware Court of Chancery decision in In re Novell, Inc. Shareholder Litigationhighlights the potential risks to a target board of a claim of breach of the duty of care, and possibly even breach of the duty of loyalty, for actions taken by a target board in Revlon-mode that go too far in favoring one bidder over another in a sell-side process.
In Novell, the court identified a number of target board actions as troubling. These included refusing to waive for the loser a “no partnering with other bidders” provision (although waiving it for other bidders), granting the winner exclusivity with multiple extensions, having discussions with the winner (but not the loser) as to the price necessary to win and inbound interest for target patents, and failing to respond to the loser’s last bid to see if it would increase its price.
The court noted that these actions potentially breached the target board’s duty of care, although they were subject to exculpation by a Section 102(b)(7) provision in the target’s charter and the court’s finding that the board acted reasonably in its pursuit of the best value reasonably available to its stockholders. More troubling was the court’s consideration of whether these actions breached the target board’s duty of loyalty, which was ultimately denied because the plaintiffs had not provided a factual basis to support the claim.
Most M&A lawyers would not have viewed the target board’s actions in Novell as being a cause for concern. Many times target boards and their advisers instinctively, through experience and otherwise, sense which bidder is likely to be the winner. In light thereof, target boards normally make the rational judgment to focus effort on the likely winner and not to expend the same time and other resources with an also-ran.
Nevertheless, Novell provides a few practical takeaways that target boards in a Revlonsituation can use to defend against these types of claims going forward. While Novellreiterates that Delaware law does not require all bidders to be treated equally or suggest that the failure to do so amounts to bad faith, target boards should nevertheless carefully consider actions that significantly favor one bidder over other bidders when there may still be an active bidding process. While exclusivity was not in and of itself a problem in Novell, target boards should consider granting exclusivity to a bidder who the board believes in good faith will present the best overall deal (i.e., price, terms and closing certainty), and not simply to one bidder who is favored over another in the absence of other factors. In other words, if a significant advantage is given to one bidder, it should be a reasonable and sensible action designed to pursue the best interests of the target’s stockholders. The record of any sale process matters greatly, and the record should reflect how the target board went about trying to extract the best entire deal without any overall bias toward any particular bidder that was unrelated to obtaining the most favorable result for the target’s stockholders, and the careful deliberation the target board undertook. And, of course, a few extra phone calls or emails to also-rans to see if they are willing to meet the winner’s price and terms is never a bad thing, even when the likelihood of receiving improved terms may be low.
One final practical takeaway demonstrated by Novell is the continued protective value of multiple board meetings in any sale process. Delaware courts have long viewed multiple board meetings as meaningful indicia of a target board discharging its fiduciary duties. TheNovell court noted approvingly that the target board had met many times with its legal and financial advisors, which had the effect of casting the board in a favorable light. An engaged target board holding multiple meetings to consider a sale transaction will continue to be extremely important in light of litigation challenging almost every public company M&A transaction.