During a recent hearing on a motion to expedite litigation involving Validus Holdings’s hostile bid to acquire Transatlantic Holdings, Judge Leo E. Strine, Jr., recently promoted to Chancellor of the Delaware Court of Chancery, made several observations worthy of note by deal lawyers, bankers, and corporate litigators.
Banker Conflicts and Fairness Opinions
Validus’s hostile takeover bid came after Transatlantic signed a friendly deal with Allied World. In the process leading to the Allied World agreement, Transatlantic was advised by Goldman Sachs. Apparently in response to a potential Goldman conflict, Transatlantic obtained a fairness opinion from another bank. Chancellor Strine said, "I don’t understand the idea of a banker running a process ... and not having to back it up with a fairness opinion. It in no way addresses the conflict for the person who plays the operative role to not actually have to put the fairness opinion on the line. In fact, it would seem more vital when someone acts in a conflicted basis to make them render a fairness opinion." Where one banker performs important tasks like "testing the market" and "giving strategic advice," Chancellor Strine thought it "a very strange cure" to a conflict to hand off the job of giving a fairness opinion to another banker who is not compensated as highly. Referencing Smith v. Van Gorkom, Chancellor Strine emphasized the importance of financial advisors in deals and that "conflicts of interest" in the deal process are "taken seriously."
Transatlantic’s agreement with Allied World arguably required Transatlantic to obtain a confidentiality agreement that contained a standstill provision from any later bidder. Transatlantic’s board determined that Validus’s offer was reasonably likely to lead to a superior acquisition proposal, but required that Validus agree to a standstill before granting Validus access to confidential information or moving to a higher level of discussions.
Validus argued that it was improper for Transatlantic to require a standstill. Chancellor Strine expressed doubt about the viability of that claim, but made clear his view that a standstill agreement should not be misused to deter a strong acquisition proposal. "I take seriously this Court’s duty, if people are horsing around with standstills, to be available as a court of equity. … I would expedite [the litigation] in a second if there was actually an exchange of information, something that is arguably a materially higher bid, and [the target is] not letting [the bidder] proceed. That would make perfect sense to me as the grounds for a P[reliminary] I[njunction]."
Deal Protections and Fiduciary Outs
With respect to requiring a later bidder to execute a confidentiality and standstill agreement, Chancellor Strine commented that "it is pretty well understood that part of what you can do as a first-in bidder who is actually binding yourself to buy a company is get some deal protections that insure that ... you won’t be topped lightly; that there aren’t free riders; and then make the target board make certain determinations before they get out of a merger agreement." Because of the first-in bidder’s public and binding commitment to buy the target, it is "an accepted norm of deal negotiation where a merger party insists that later-arriving bidders who are going to have a chance play by certain rules that are as stringent as the rules that apply to them." It is well-understood that "the value of the company [the first-in bidder is] buying could be eroded by the provision of confidential information to other people on a loose circumstance," and that a first-in bidder wants deal protections in a bidding contest as compensation for its binding promise.
The Chancellor seemed to doubt that requiring a later bidder to agree to a confidentiality and standstill agreement needed to be subject to a "fiduciary out." Not "every single thing in a contract has to have an out. In that case, no corporations could function, there would be no value in society, and there would be no expectations." He also said, "Delaware corporations are value-generating machines, historically, and they don’t do it by being able to freely flout their obligations to others. And when a strategic deal is being negotiated and someone has promised contractually to buy a company under certain conditions, it is obviously important … that the confidential information of the target not be given out willy-nilly and the value that they’re buying not be eroded lightly. And the idea that you can’t do that, frankly, it’s just not colorable."
The case is styled In re Transatlantic Holdings, Inc. Shareholders Litigation, C.A. Nos. 6574-CS & 6776-CS.