In Books-A-Million, the Delaware Court of Chancery dismissed a complaint challenging a controlling stockholder going-private transaction, holding that the transaction satisfied the standards of M&F Worldwide despite a third party’s 30% higher offer. The Court found no reasonable inference that the Special Committee acted in bad faith and compromised its independence because, among other things, (i) the Special Committee solicited third-party offers to better assess the value of the Company and the attractiveness of the controlling stockholder’s offer, and (ii) the merger consideration offered by the controlling stockholder for the minority of the Company’s shares fell within a rational range of a discount when compared to the third-party offer, which sought control.
In In re Books-A-Million, Inc. Stockholders Litigation, C.A. No. 11343-VCL, 2016 WL 5874974 (Del. Ch. Oct. 10, 2016), the Delaware Court of Chancery applied the principles set forth in Kahn v. M&F Worldwide Corp, 88 A.3d 635 (Del. 2014) and determined that the “business judgment” standard of review should be applied to a controlling stockholder squeeze-out merger. Recognizing that pleading subjective bad faith could theoretically be a viable means of rebutting the independence of the Special Committee (needed to obtain business judgment treatment under M&F Worldwide), the Court (i) reviewed the obligations of a special committee in a controlling stockholder going-private transaction in which the controlling stockholder has no interest in selling its shares and a third party offers a higher price for the entire company as opposed to just the minority shares and (ii) determined that the Special Committee in this instance acted in good faith. In doing so, the Court noted that the Special Committee, despite the controlling stockholder’s position that it was only a buyer, not a seller, solicited third-party offers to compare against the controlling stockholder’s bid and negotiated a higher price for the minority shares.
Books-A-Million, Inc. (“BAM” or the “Company”), a Delaware corporation engaged in the retail book business, was founded in 1917 by Clyde W. Anderson and is still controlled by his descendants (the “Anderson Family”). Before the proposed Merger, the Anderson Family controlled approximately 57.6 percent of the Company’s outstanding voting power. Between 2012 and 2014, the Anderson Family made several proposals to buy out the minority, and a third-party (“Party Y”) made several proposals either to buy out the Andersons or all the stockholders; nothing came of these proposals. In January 2015, the BAM board of directors (the “Board”) received an unsolicited proposal from the Anderson Family to buy out the minority for $2.75 per share in a negotiated transaction. The price represented a 65 percent premium over the average closing price for BAM’s stock for the prior 90 trading days. At the time of the proposal, the Board had five members, including two members of the Anderson Family. The proposal stated that the Anderson Family expected the Board to establish a Special Committee of independent directors and conditioned the transaction on the approval of the Special Committee and a non-waivable majority of the minority stockholder vote. The proposal further stated that the Anderson Family was only interested in acquiring the shares it did not already own and was not interested in selling its shares to a third party. The Board formed a Special Committee, which selected financial and legal advisors, evaluated alternative transaction structures, and solicited offers from three other parties (Parties X, Y, and Z) that had previously expressed an interest in the Company. Party Y submitted an indication of interest to acquire all of the Company’s shares for $4.21 per share subject to due diligence, financing and other conditions. In response, the Anderson Family said it would only buy and not sell, and Party Y said it was not interested in less than control.
After additional inquiries, the Committee decided the best course was to negotiate with the Anderson Family. After several offers and counteroffers, the Anderson Family increased its offer to $3.25 a share. Meanwhile, Party Y reiterated its interest at $4.21 per share, but only if it could acquire 100 percent of the shares. Following presentations to the Committee (including a fairness opinion and a solvency opinion), the Committee approved the Merger with the Anderson Family at $3.25 per share. Members of the Anderson Family and senior management entered into voting agreements in which they committed to vote all of their shares in favor of the Merger. Holders of approximately 66.3 percent of the shares not affiliated with the Anderson Family or senior management voted to approve the Merger.
Challenging the squeeze-out merger, the plaintiffs argued that the defendants breached their fiduciary duties and the Board’s decision should not be reviewed under the “business judgment” rule because (i) one of the Board members, who initially was a member of the Special Committee but resigned, was not independent and tainted the independence of the Committee by sitting in on the fairness opinion presentation to the Committee and (ii) the members of the Special Committee approved the Merger in bad faith, thereby displaying a lack of independence in fact, since the directors did not accept Party Y’s substantially superior offer. The Court disagreed, holding that the allegations did not support a reasonable inference that any of the M&F Worldwide conditions were not met or that the Merger constituted waste.
The Court’s Analysis
The Court noted that the Anderson Family offer from the outset included the dual conditions of M&F Worldwide – approval by a special committee plus a non-waivable approval of a majority of the minority. Thus, the business judgment rule would apply unless plaintiffs’ complaint created a reasonable inference that the transaction did not in fact satisfy M&F Worldwide. The Court reviewed at great length the independence of the Special Committee. The Court commended the Board member who resigned from the Committee at an early stage after self-identifying social and civic relationships with the Anderson Family. The Court noted that even though the Board member subsequently attended the fairness opinion presentation so as to avoid the need of the Committee’s financial advisor to make multiple presentations, he was excused before deliberations began, and the Committee deliberated and ultimately voted to accept the Anderson Family offer without the Board member present. Notably, however, the Court cautioned that under different circumstances the presence of a director whose independence was compromised might be problematic.