In this lawsuit challenging a proposed transaction in which 3M agreed to commence a voluntary tender offer for Cogent, Inc. stock, to be followed by a back-end merger at the same price, the Court of Chancery denied plaintiffs’ motion for a preliminary injunction.
Before signing a merger agreement with 3M in August 2010, Cogent spent two years exploring strategic opportunities with the assistance of Credit Suisse and Goldman Sachs. Cogent held discussions with numerous companies, but by Summer 2010 the list of potential suitors had narrowed to 3M and three other companies: Company B, Company C and Company D. Companies B and C had withdrawn from the process by the end of July.
Cogent continued to negotiate with 3M and Company D, and 3M eventually submitted an offer to acquire Cogent for $10.50 a share. 3M’s offer had no financing contingency, and was accompanied by a marked-up draft of Cogent’s proposed merger agreement. A few days later, Company D submitted a nonbinding indication of interest to acquire Cogent for between $11-12 a share. The offer was subject to various contingencies, including completion of satisfactory due diligence. Meanwhile, Cogent’s attempts to deepen its discussions with Company D were not met with success. When 3M indicated that it would withdraw its offer by 5 p.m. on August 20 if it wasn’t accepted, the Cogent board met to consider both offers. The board determined that the 3M offer was less risky and instructed management to negotiate with 3M while continuing to provide information to Company D.
The 3M-Cogent deal was announced on August 30. The merger agreement included several deal protection devices, including a provision affording 3M five days to match a superior proposal, a no-shop clause with a fiduciary out, a $28.3 million termination fee (representing approximately 3% of Cogent’s equity value and 6.6% of its enterprise value), and a top-up option through which 3M had the option to purchase Cogent stock for a tender price of $10.50, which could be financed with a promissory note due in one year. The parties also signed two related agreements: retention agreements with key Cogent employees, including Cogent’s CEO and Chairman, Ming Hsieh, and a voting and tender agreement with Hsieh, who owned almost 39% of Cogent’s shares.
Plaintiffs, shareholders of Cogent, brought suit alleging that Cogent’s directors breached their fiduciary duties under Revlon by failing to pursue the best transaction reasonably available and that the directors made materially misleading statements in Cogent’s 14D-9 statement recommending that shareholders accept 3M’s tender offer. The Court first held that plaintiffs were unlikely to succeed in their claim that the tender offer price was unfair and the result of an inadequate process, reasoning that the board, with the help of two investment bankers, engaged in a lengthy and deliberative process involving the consideration of numerous potential strategic partners. With respect to the $10.50 price, the Court noted that in a voluntary tender offer, neither an inadequate price nor a vigorous disagreement among financial experts is sufficient to support a preliminary injunction. In addition, the board’s selection of a firm offer from 3M with little contingency risk over a non-binding expression of interest from Company D contingent on completion of due diligence was reasonable under the circumstances.
The Court further held that plaintiffs were not likely to succeed on their claims that the deal protections contained in the merger agreement were unreasonable or preclusive. The Court first concluded that the matching rights and no-shop provision in the merger agreement were reasonable and mitigated by the fiduciary out provision. The Court also held that the termination fee representing 3% of Cogent’s equity value and 6.6% of its enterprise value was reasonable for this transaction. In so holding, the Court rejected plaintiffs’ argument that the cash on Cogent’s books should be excluded for purposes of calculating the termination fee (which would have the effect of increasing the percentage of the fee in relation to the transaction). The Court held that the relevant transaction value should be quantified by the amount of consideration flowing to the shareholder, not the amount of money coming exclusively from the bidder. Finally, the Court was not swayed by plaintiffs’ argument that the top-up option was overbroad, a sham transaction, and would adversely affect the appraisal rights of Cogent’s stockholders. The Court held that the top-up option was reasonable, adopted by an informed board, and that any alleged dilutive effect and resulting impact on the stockholders’ appraisal rights was cured by the provision in the merger agreement providing that the fair value of the shares in any appraisal proceeding would be determined without regard to the top-up option, the top-up option shares or any promissory note delivered under the top-up option.
With respect to plaintiffs’ disclosure claims, the Court held that Cogent met its disclosure obligations with respect to the 14D-9 statement, concluding – among other things – that the company had not omitted material information regarding Credit Suisse’s analyses and had adequately described the process undertaken by the board in approving the merger agreement. Having concluded that plaintiffs were unlikely to succeed on the merits of t
heir claim, the Court addressed the remaining two elements necessary for a preliminary injunction: irreparable harm and balancing the equities. The Court held that plaintiffs faced no imminent threat of irreparable harm because there were no deficiencies in the disclosures and Cogent’s shareholders who found the terms of the voluntary tender offer lacking could seek appraisal. The Court further held that enjoining the tender offer was at least as likely to injure Cogent’s shareholders as it was to protect or advance their interests. Accordingly, the Court denied the motion for preliminary injunction.
The full opinion is available here.