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 Yucaipa—a private equity firm controlled by billionaire Ron Burkle, one of Morgans’ largest creditors and a member of Morgans’ board—until 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 requisite number of votes to approve the deal, a board cannot simply ram through the approval. By not providing Kalisman with sufficient notice, the board deprived him of his rights as a director, deprived all of the directors of the benefit of an open debate on the issues, and deprived the shareholders of the informed judgment of their board.
A month after the injunction was issued, the annual meeting of Morgans’ shareholders was held as directed by the court. At that meeting, and after an intense and highly publicized proxy contest, Morgans’ shareholders voted overwhelmingly in favor of OTK’s slate and removed the board members that had supported the deal with Yucaipa. (Kalisman v. Friedman, No. 8447-VCL, 2013 WL 1668205 (Del. Ch. Apr. 17, 2013))
The Limits of Revlon
In Koehler v. NetSpend Holdings Inc., Vice Chancellor Glasscock continued a trend of refusing to enjoin deal votes where shareholders are offered a substantial premium. Analyzing a motion to enjoin the deal, the Vice Chancellor held that the NetSpend board of directors likely breached their Revlon duties in a single-bidder sale process characterized by (1) the lack of either a pre-signing or a post-signing market check, (2) a “weak” fairness opinion and (3) a decision not to waive “don’t ask don’t waive” standstill agreements with two private equity investors interested in buying a block of shares from the majority shareholder (even though these private equity investors expressed no interest in buying the entire company). Nevertheless, the Vice Chancellor declined to enjoin the transaction on the grounds that any harm was monetary and he noted that stopping the deal would deprive shareholders of the opportunity to take a 45% premium at a time when no other suitor had appeared. (Koehler v. NetSpend Holdings Inc., C.A. No. 8373-VCG (Del. Ch. May 21, 2013))