In re Family Dollar Stores, Inc. Stockholder Litigation ( 2014 )

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN RE FAMILY DOLLAR STORES, INC.
Consol. C.A. No. 9985-CB
STOCKHOLDER LITIGATION
MEMORANDUM OPINION
Date Submitted: December 5, 2014
Date Decided: December 19, 2014
Seth D. Rigrodsky, Brian D. Long, Gina M. Serra and Jeremy J. Riley of RIGRODSKY
& LONG, P.A., Wilmington, Delaware; Peter B. Andrews and Craig J. Springer of
ANDREWS & SPRINGER LLC, Wilmington, Delaware; Donald J. Enright and
Elizabeth K. Tripodi of LEVI & KORSINSKY, LLP, Washington, DC; Kent A. Bronson
and Gloria Kui Melwani of MILBERG LLP, New York, New York; Counsel for
Plaintiffs.
William M. Lafferty, John P. DiTomo and Lauren K. Neal of MORRIS, NICHOLS,
ARSHT & TUNNELL LLP, Wilmington, Delaware; Mitchell A. Lowenthal, Meredith
Kotler and Matthew Gurgel of CLEARY GOTTLIEB STEEN & HAMILTON, LLP,
New York, New York; Counsel for Defendants Family Dollar Stores, Inc., Mark R.
Bernstein, Pamela L. Davies, Sharon Allred Decker, Edward C. Dolby, Glenn A.
Eisenberg, Edward P. Garden, Howard R. Levine, George R. Mahoney, Jr., James G.
Martin, Harvey Morgan, Dale C. Pond.
Gregory P. Williams, A. Jacob Werrett, J. Scott Pritchard and Sarah A. Clark of
RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; William Savitt,
Andrew J.H. Cheung and A.J. Martinez of WACHTELL, LIPTON, ROSEN & KATZ,
New York, New York; Counsel for Defendants Dollar Tree, Inc. and Dime Merger Sub,
Inc.
BOUCHARD, C.
I. INTRODUCTION
This action involves a proposed merger between two of the three major players in
the small-box discount retail market where the third major player has surfaced as a
competing bidder. Given the concentrated nature of this market, a critical issue to the
viability of a proposed combination of any of these companies is obtaining antitrust
approval from the Federal Trade Commission (“FTC”).
On July 27, 2014, Family Dollar Stores, Inc. (“Family” or the “Company”) and
Dollar Tree, Inc. (“Tree”) agreed to a merger transaction (the “Merger”) in which Tree
proposes to acquire Family for a combination of cash and Tree stock. As of the date of
the merger agreement, the proposed Merger was valued at $74.50 per share of Family
stock, for aggregate consideration of approximately $8.5 billion. Due to the subsequent
increase in Tree’s stock price, the proposal is now worth over $76 per share. A vote of
Family’s stockholders to consider the proposed Merger is scheduled for December 23,
2014. Although the FTC has not yet approved the Merger, such approval is considered to
be a formality because Tree has agreed to divest as many of its approximately 4,900 retail
stores as necessary to receive antitrust approval.
After Family and Tree agreed to the Merger, Dollar General, Inc. (“General”), the
third major small-box discount retailer, made a bid to acquire Family for $78.50 per share
in cash, which included a commitment to divest up to 700 of General’s more than 11,300
retail stores to obtain antitrust approval. General later increased its bid to $80 per share
in cash and a commitment to divest up to 1,500 of its stores. After Family refused to
engage in discussions with General in the face of this bid, General went directly to
1
Family’s stockholders by commencing a tender offer to acquire their shares for $80 per
share in cash. General’s tender offer cannot close at this time, however, because it has
not received antitrust approval.
In this action, stockholders of Family seek to preliminarily enjoin the stockholder
vote on the proposed Merger until: (1) the Family board of directors (the “Board”) “has
properly engaged” with General and “made a good faith effort to achieve a value-
maximizing transaction” 1 and (2) until Family makes a laundry list of corrective
disclosures in its proxy statement. Plaintiffs challenge the sale process in several
respects, but their core claim is that the Board breached its fiduciary duty to maximize the
value of Family when it declined to engage in negotiations with General after it made its
$80 offer.
In this opinion, I conclude for the reasons explained below that Plaintiffs have
failed to demonstrate a reasonable probability of success on any of their claims.
Regarding Plaintiffs’ core claim, the record shows that the Board was motivated to
maximize Family’s value and acted reasonably within the constraints of the fiduciary out
provision in the merger agreement when it decided not to engage in negotiations with
General because of the antitrust risks associated with that proposal. Of particular
significance, the Board had been specifically advised that General’s $80 offer had only an
approximately 40% chance of obtaining antitrust approval, and further determined that
the level of divestitures General had proposed (1,500 stores) was so far below the level
1
Pls.’ Op. Br. 2.
2
necessary to sufficiently address the antitrust risk of a Family/General combination that it
was not prudent or appropriate to open negotiations with General.
I also conclude that Plaintiffs have failed to demonstrate the existence of
irreparable harm or that the balance of the equities favors the relief they seek. Nothing
prevents General, which has been undeterred from bidding to acquire Family since the
Company agreed to the Merger, from making an improved offer to address the antitrust
risks associated with a Family/General combination if it truly wants to acquire Family.
On the other hand, entry of a preliminary injunction would deprive Family’s stockholders
of the opportunity to decide for themselves whether to approve a transaction that offers
them a significant premium for their shares and apparent deal certainty.
Accordingly, Plaintiffs’ motion for a preliminary injunction is denied.
II. BACKGROUND 2
A. The Parties
Defendant Family Dollar Stores, Inc., a Delaware corporation based in Charlotte,
North Carolina, operates a chain of more than 8,100 merchandise retail discount stores in
46 states, selling products in a general range of $1 to $10. Family’s common stock is
currently listed on the New York Stock Exchange under the symbol “FDO.”
2
The facts recited in this opinion are drawn from the documentary evidence and
testimony the parties submitted in conjunction with Plaintiffs’ preliminary injunction
motion. Plaintiffs deposed three members of the Board: Howard R. Levine (“Levine
Dep.”); Edward P. Garden (“Garden Dep.”); and George Robert Mahoney, Jr. (“Mahoney
Dep.”). Levine submitted an affidavit in which he attests that the “Background of the
Merger” discussion contained on pages 68-99 of the definitive proxy statement issued by
Family Dollar on October 28, 2014, (the “Proxy”) is “true and correct.” Defs.’ Ex. 10.
3
Defendants Howard R. Levine (“Levine”), Mark R. Bernstein, Pamela L. Davis,
Sharon Allred Decker, Edward C. Dolby, Glenn A. Eisenberg, Edward P. Garden
(“Garden”), George R. Mahoney, Jr. (“Mahoney”), James G. Martin, Harvey Morgan,
and Dale C. Pond were the eleven members of the Board during the events in question.
Each has been a member of the Board since at least 2011.
Levine is the son of Family founder Leon Levine. Levine is the Chairman of the
Board, the Company’s President and Chief Executive Officer, and the largest stockholder
of Family, owning nearly 9 million shares. Garden is a founder of the well-known hedge
fund Trian, which owns nearly 8.4 million shares of Family stock. Mahoney owns over
340,000 Family shares. 3 If the Merger is consummated, only Levine will be on the board
of directors of the combined entity.
Defendant Dollar Tree, Inc., a Virginia corporation based in Chesapeake, Virginia,
operates a chain of approximately 4,900 stores selling products for $1 or less. 4 Tree
formed Dime Merger Sub, Inc., a wholly-owned subsidiary of Tree, to effectuate the
acquisition of Family. 5 For simplicity, I refer to these two defendants collectively as
“Tree.”
Non-party Dollar General, Inc., which is based in Tennessee, operates a chain of
more than 11,300 merchandise retail discount stores in 40 states, selling products in a
general range of $1 to $10.
3
Defs.’ Ans. Br. 4.
4
Am. Compl. ¶ 28.
5
Id. ¶ 29.
4
Plaintiffs Darrell Wickert, Shiva Y. Stein, and Stuart Friedman have been Family
stockholders at all relevant times. Plaintiffs bring this lawsuit individually and on behalf
of a class of all Family stockholders, excluding defendants and their affiliates.
B. Family Begins Discussing a Potential Transaction with General
In February 2013, Michael Calbert (“Calbert”), a director of General, contacted
Levine and asked to meet with him. 6 Levine, who knew Calbert from a previous business
relationship, assumed that Calbert might want to discuss a potential transaction involving
Family and General. In preparation for the meeting with Calbert, Levine consulted with
Family’s financial advisor, Morgan Stanley & Co. LLC (“Morgan Stanley”), and its legal
advisor, Cleary Gottlieb Steen & Hamilton LLP (“Cleary”), about what tactics to employ
at the meeting to ensure that any discussions that led to a General proposal would
maximize value for Family stockholders.
On February 28, 2013, Levine met with Calbert and discussed the merits of a
potential combination of Family and General. Levine informed Calbert that Family was
not for sale, and if there were ever to be a strategic combination, Levine “intended to be
chairman and CEO and wanted the headquarters in Charlotte.” 7 Garden testified he
recommended that Levine make these requests upfront as part of a negotiation strategy,
even though Levine “had no desire to run the combined company,” because these “were
6
Levine Dep. 49-50.
7
Id. 52, 57.
5
two things that would be easy to give on in a negotiation.” 8 At some point, Calbert told
Levine that the General board likely would view these requests unfavorably. 9
On April 29, 2013, Levine updated the Board about his February 28 meeting with
Calbert. He explained that no proposals were made or discussed and that no confidential
information was exchanged. The Board told Levine that having these types of meetings
was appropriate so long as he kept the Board updated and did not negotiate any personal
post-closing arrangements.
In July and August 2013, two prominent investment banks published analyst
reports discussing strategic alternatives for Family, including the merits of a potential
combination with General.
On October 15, 2013, Levine and Mahoney met with Calbert and Richard Dreiling
(“Dreiling”), General’s CEO, to “explore the possibility of a potential business
combination transaction.” 10 For tactical reasons, Levine again expressed interest in
serving as CEO of a combined company that would be headquartered in Charlotte, North
Carolina, but quickly “backed off of those two points pretty dramatically.” 11 The
representatives of General responded that they would only have interest in a combination
that saw General acquiring Family with the combined company having General’s existing
headquarters and management, but that they desired that Levine be part of the transition
8
Garden Dep. 30-31, 35; see also Garden Dep. 37 .
9
Levine Dep. 56-57; Tree Ex. 1 at 70 (“Proxy”).
10
Proxy at 71; Defs.’ Ex. 55 at 5 (“General Proxy”).
11
Levine Dep. 124; see also Levine Dep. 122; Garden Dep. 37; Proxy at 71.
6
and assume a leadership role to assist with the integration of the companies. Levine
indicated he would have no problem with such an approach, subject to approval of the
Board, if General paid Family stockholders an appropriate premium. 12 The subject of
potential antitrust risks also was broached at the October 15 meeting, with Family’s
representatives expressing concern about the antitrust risks and General’s representatives
conveying that they believed any antitrust risks were surmountable.
On October 23, 2013, Levine and Mahoney updated the Board about their October
15 meeting with representatives of General. The Board, in consultation with Morgan
Stanley and Cleary, authorized Levine to engage in a follow-up meeting with General and
reconfirmed Levine’s commitment to keep the Board updated and to refrain from
negotiating any personal post-closing arrangements.
In November 2013, General and Family scheduled a follow-up meeting for
December 2013. That meeting was postponed until January 2014. In December 2013,
General postponed the January meeting until the spring of 2014. Garden testified he got
the impression from the delays that General was not “very motivated or anxious to do a
transaction” with Family. 13
C. Tree Makes an Acquisition Proposal
On January 19, 2014, the Board met with senior management to discuss strategic
alternatives, including potential business combinations. The meeting was prompted by
12
Proxy at 71.
13
Garden Dep. 26
7
several disappointing quarters, which had resulted in the termination of Family’s then-
president and chief operating officer Mike Bloom, who had been hired to be Levine’s
successor. 14 At the meeting, the Board established a committee of non-management
directors to oversee the development of a new stand-alone strategic plan and to consider
and explore potential strategic alternatives (the “Advisory Committee”). The Advisory
Committee consisted of four outside directors: Eisenberg, Garden, Mahoney, and
Morgan.
On March 7, 2014, the Advisory Committee met with members of senior
management and representatives of Morgan Stanley and Cleary. Morgan Stanley
identified a number of companies that could engage in a business combination with
Family but noted that it was unlikely that any strategic buyer other than General or Tree
would be interested in such a transaction due to a number of factors, including the risk
and challenges of integrating a company of Family’s magnitude. 15 A representative of
Morgan Stanley also informed the Advisory Committee that a representative of J.P.
Morgan Securities, LLC, Tree’s financial advisor, conveyed that Tree CEO Bob Sasser
would be contacting Levine to set up a time for them to discuss the possibility of a
business combination.
14
Proxy at 72; Levine Dep. 67-68.
15
Proxy at 73. The Advisory Committee and Morgan Stanley also discussed the
possibility of a leveraged buyout by a financial sponsor, noting that such a buyout could
face “serious challenges” given the size of the purchase price and given that a strategic
buyer could reap “materially different levels of synergies” than a financial sponsor. Id.
8
On March 14, 2014, Levine and Sasser met to discuss the possibility of exploring
a business combination. Levine expressed the need for Tree to commit to pay an
appropriate premium in any such transaction if the Board of Family were to consider a
sale of the company. Sasser stated he was not in a position to discuss matters relating to
the consideration Tree might be willing to offer to acquire Family, but that if an
agreement between the companies were to be reached, Levine would need to have a
management role at the combined company to facilitate the transition and integration
following closing. Levine responded that it would be inappropriate to discuss that subject
at that time.
On March 17, 2014, senior management of Family held a telephonic meeting with
the Board, Morgan Stanley, and Cleary, during which the Board was updated on the
recent meeting between Levine and Sasser. The directors discussed that it would be
advisable for the two companies to sign a mutual non-disclosure agreement so that some
initial confidential information could be exchanged to permit Tree to make an initial
indication of the type and amount of consideration that it would be willing to pay in a
transaction. After the meeting, Family informed Tree that it was interested in signing a
mutual non-disclosure agreement to facilitate discussions between them.
On April 7, 2014, Family and Tree entered into a mutual non-disclosure agreement
(the “NDA”) that they had negotiated over the previous three weeks. In relevant part, the
NDA provided that “[e]ach party agrees that without the prior written consent of the other
party . . . neither it nor any of its Representatives will disclose to any other person . . . the
fact that discussions or negotiations concerning a Transaction are or may be taking place,
9
or have taken place.” 16 The NDA defined the term “Transaction” as “a possible
transaction involving the parties hereto or their shareholders.” 17
On April 17, 2014, the Board received updates from Cleary and Morgan Stanley
concerning the Company’s strategic alternatives. According to the Proxy, the directors
discussed with its advisors and senior management the status of discussions
with Dollar Tree and the risk that, if the board were to invite Dollar General
at that time into a more formal process to compete with Dollar Tree for the
right to participate in a business combination transaction with Family
Dollar, Dollar General might decide it was not interested in competing with
Dollar Tree for Family Dollar, and instead pursue a business combination
with Dollar Tree, leaving Family Dollar without a merger partner and
otherwise in a disadvantageous position. 18
On May 14, 2014, Sasser telephoned Levine to outline the terms of a non-binding
proposal pursuant to which Tree would acquire Family for between $68 and $70 per
share, with 75% of the consideration in cash and 25% percent of the consideration in Tree
common stock. Sasser noted that Tree stockholders would not have to approve the
proposed transaction and conditioned the proposal on Levine’s agreement to remain
employed by Family after the closing of the transaction. Levine stated he would not
discuss any such post-closing arrangements until permitted by the Board. Following the
call, Tree sent a letter to the Board confirming the terms of the proposal, in which it
16
Defs.’ Ex. 4 § 3.
17
Defs.’ Ex. 4 at FDO_00028829.
18
Proxy at 76; see also Defs.’ Ex. 21 at FD0_00000412.
10
requested a six-week period of exclusivity to conduct due diligence and negotiate the
transaction. 19
On May 19, 2014, the Advisory Committee held a meeting to discuss the Tree
proposal. Eight members of the Board attended the meeting along with representatives of
Morgan Stanley and Cleary. 20 During this meeting, the directors received an extensive
report from Cleary concerning the antitrust risk associated with a potential combination
between Family and each of Tree and General.
Cleary advised that a Family/Tree transaction involved “a limited risk of
divestitures,” with 2% of Family stores facing a “medium risk of divestiture,” that the
risk of an FTC challenge to block the transaction was small, and that there was an
approximately 65% chance that FTC review would take between four and six months to
complete. 21 By contrast, Cleary advised that a Family/General transaction involved “a
high risk of very significant divestitures or being blocked outright” and that it was
“virtually certain” that FTC review would take between six to eight months or longer. 22
According to the minutes of the May 19 Advisory Committee meeting, when
reviewing “how the FTC would evaluate a potential merger” between Family and either
Tree or General, Cleary and the directors discussed Family’s pricing strategy and how
Family’s “pricing was not significantly impacted by Dollar Tree, given Dollar Tree’s
19
Defs.’ Ex. 22
20
Defs.’ Ex. 23.
21
Defs.’ Ex. 24 at FDO_00000610.
22
Id.
11
different business model and pricing philosophy, but appeared to be impacted by Dollar
General.” 23 On this point, one of the slides in Cleary’s presentation states that General’s
“[d]ocuments on pricing would be crucial to fully understanding” the antitrust risk of a
combination with General. 24
Later in the day on May 19, the Board met to discuss the Tree proposal along with
representatives of Morgan Stanley and Cleary. The directors discussed, among other
things, how the absence of a requirement for approval by Tree’s stockholders meant that
a third party, such as General, could not induce Tree to walk away. According to Garden,
this was important because “if [General] got wind that [Family was] contemplating a
transaction with Dollar Tree, . . . the probability was high that [General] would do a
hostile transaction on Dollar Tree.” 25 At the conclusion of the meeting, the Board
instructed Family’s senior management to inform Tree that its offer was inadequate, that
Family remained not for sale, but that the Board would consider a more competitive
offer. Sasser later responded that Tree was still interested in pursuing a transaction, but
“he felt uncomfortable increasing his offer without further support for doing so.” 26
23
Defs.’ Ex. 23.
24
Id. at FDO_00000621.
25
Garden Dep. 47.
26
Defs.’ Ex. 25 at FDO_00026215.
12
D. Family Adopts a Stockholder Rights Plan in Response to
Icahn’s Emergence, and General Re-emerges
On June 6, 2014, Carl Icahn and certain of his affiliates filed a Schedule 13D
disclosing, among other things, that they beneficially owned approximately 9.39% of the
then-outstanding shares of Family common stock and wished to discuss with Family
strategies to enhance stockholder value, including the potential exploration of strategic
alternatives. On the same day, Icahn telephoned Levine to express an interest in having
discussions with Family’s management regarding the Company’s current operations and
future plans, including potential strategic opportunities. During the discussion, Icahn
mentioned that he may reach out to General.
Also on June 6, 2014, shortly after Icahn’s announcement, General director
Calbert emailed Levine to suggest that they speak. In a telephone conversation the next
day, Calbert indicated interest in continuing discussions regarding a potential business
combination, but that General would be reluctant to participate in negotiations if Icahn
had a role in the process. 27 In the same time frame, Tree CEO Sasser had telephoned
Levine and similarly expressed concern about Icahn being involved in the negotiations of
a potential strategic transaction between Family and Tree. 28
On June 8, 2014, the Board held a telephonic meeting with senior management,
Cleary, and Morgan Stanley to discuss how to respond to Calbert and Sasser and what to
27
Defs.’ Ex. 26 at FDO_00000648.
28
Id.
13
do to alleviate the risk posed by Icahn. 29 The Board determined that Levine “should
encourage Dollar General to re-engage in discussions about, and to pressure Tree to
propose improved terms for, a potential strategic transaction.” 30 The Board agreed
further that Levine should suggest to Calbert that General’s antitrust attorneys meet with
Cleary to determine the significance of the antitrust risks associated with a potential
combination of General and Family and to discuss the willingness of General to bear
those risks. 31 The Board also advised that Levine should reach out to Sasser to express
Family’s continuing interest in a transaction with Tree and that Levine should attempt to
assuage Calbert’s and Sasser’s respective concerns about Icahn’s presence. 32
Also at the June 8 meeting, after discussing the risk that Icahn could acquire
sufficient negative control without paying a premium to Family’s other stockholders, the
Board, by a ten to one vote, adopted a shareholder rights plan (the “Rights Plan”) with a
10% trigger. 33 Garden expressed his opposition to the adoption of the Rights Plan and
voted against it. 34
29
Id. at FDO_00000647.
30
Id. at FDO_00000648.
31
Id.
32
Id.
33
Id. at FDO_00000649.
34
Id.
14
On June 9, 2014, Levine emailed Calbert to inform him of the adoption of the
Rights Plan and to suggest a call between Family’s and General’s antitrust counsel. 35
Calbert responded in an email that “getting outside council [sic] going on [antitrust] at
this point is a bit premature,” but that General would refine its thinking “on
price/structure and diligence plan (including [antitrust])” and get back to Family. 36
Calbert later agreed to meet with Levine on June 19.
E. Tree Increases its Acquisition Proposal
On June 13, 2014, Sasser telephoned Levine to increase Tree’s offer to $72 per
share of common stock, with 75% of the consideration to be paid in cash and 25% to be
paid in Tree common stock.
On June 16, 2014, the Board held a meeting with senior management and
representatives from Cleary and Morgan Stanley, at which time Levine informed the
Board of Tree’s improved offer. 37 According to the minutes, the Board determined that
Levine should inform Tree that its proposal continued to be inadequate, but that Family
would be willing to begin negotiating a merger agreement if Tree could offer a price in
the “mid-$70s.” 38
35
General Proxy at 6.
36
Defs.’ Ex. 29 at FDO_00026613.
37
Defs.’ Ex. 30 at FDO_00000673.
38
Id. at FDO_00000675.
15
F. Family Continues to Engage with General
On June 19, 2014, Levine and Mahoney again met with Dreiling and Calbert of
General. At the meeting, Levine informed General’s representatives that he and Icahn
had dinner the night before and that Icahn had referred to a possible transaction involving
Family and either General or another, unspecified company. Asked by Dreiling what
other company Icahn was referring to, Levine stated that he was not sure, but that he
thought Icahn possibly was referring to Tree. Dreiling told Levine that he did not think it
would be economically possible for Tree to acquire Family. 39
Levine testified he did not inform General at this meeting that Family was having
discussions with Tree about a potential strategic transaction because he had been advised
he could not do so under the terms of the NDA between Family and Tree. 40 Garden
testified that the Board did not want General to know that Family was in discussions with
Tree because he was concerned that, if General did know, it may “do something to hurt
Family Dollar, such as make a hostile bid for Dollar Tree, or make a public
announcement that they were not interested in buying Family Dollar.” 41
During their June 19 meeting, Levine advised General’s representatives that
General should make an offer and that any offer would be taken to the Board. According
to Levine, he told Calbert:
39
Levine Dep. 274-76; Proxy at 80.
40
Levine Dep. 234; see also Garden Dep. 132-33, Mahoney Dep. 31-32.
41
Garden Dep. 83.
16
I’m embarrassed. I feel like I’m being desperate. But I feel I need to tell
you that since you asked, you should make an offer. And I am not telling
you we would accept the offer. But I will tell you that we will take it to the
board. It will be fully vetted and we will respond back to you. 42
Calbert responded that General did not intend to make an offer at that time because the
timing was not right for General and that General’s interest likely would be at a modest
premium to Family’s then-current stock price of $68.14. 43
G. Continued Discussions with Tree Lead to a Merger Agreement
On June 20, 2014, the Board met, with senior management, Cleary, and Morgan
Stanley in attendance, at which time Levine reported on the previous day’s dinner with
General. Later that day, Sasser telephoned Levine to increase Tree’s offer from $72 to
$74 per share. Levine countered at $75 per share. When Sasser refused, Levine
suggested that they split the different at $74.50 per share. Sasser agreed, conditioned on,
among other things, Family and Tree agreeing to a six-week exclusivity period.
42
Levine Dep. 235.
43
General Proxy at 7; Levine Dep. 235. Dreiling and Calbert stated that Family’s stock
was currently trading at a premium due to speculation that there would eventually be a
deal and that General planned to take steps to end that speculation and thereby depress
Family’s stock price by issuing a press release making clear that General had no present
interest in acquiring Family, privately calling major investors with the same message, or
announcing a major stock buyback (thereby depleting assets available for an acquisition).
Mahoney Dep. 164-65. A week later, General issued a press release announcing
Dreiling’s retirement as General’s CEO effective May 30, 2015, which some interpreted
to mean that General would be unlikely to pursue a strategic transaction with Family. See
Defs.’ Exs. 31-32. Dreiling’s retirement caught Family by surprise because, according
to Levine, Dreiling had informed Levine and Mahoney that he was a “young 60” and
intended to lead the combined companies. Levine Dep. 267. Dreiling has since delayed
his retirement plans.
17
The Board reconvened that afternoon, with senior management, Cleary, and
Morgan Stanley present, to discuss Tree’s revised offer. After reviewing its options with
its advisors, the Board instructed Family’s senior management and advisors to begin
negotiating the terms of a merger agreement with Tree pursuant to which Tree would
acquire Family for $74.50 per share in cash and stock, and to negotiate an exclusivity
agreement.
On June 25, 2014, Family and Tree entered into an exclusivity agreement, which
provided for an exclusivity period expiring on July 28, 2014.
Negotiations over the terms of a merger agreement between Family and Tree
began promptly. In particular, the parties discussed potential antitrust risks and the
number of stores that Tree was willing to divest if necessary to secure FTC approval.
Tree ultimately agreed to divest up to 500 stores, a level Cleary later opined has a 95%
likelihood of obtaining FTC approval. 44
On July 25, 2014, after the parties had reached agreement on all material terms of
the merger agreement, Tree sent Levine a proposal concerning his post-closing
employment with the combined company. 45 Agreement on Levine’s post-closing
employment was reached on July 27: Levine would head Family as a subsidiary of Tree
44
See, e.g., Defs.’ Ex. 41 at FDO_00043678.
45
Proxy at 83; see also Levine Dep. 261.
18
for two years, would report to Sasser, would be nominated to Tree’s board of directors,
and would receive total compensation of up to approximately $5 million per year. 46
On July 27, 2014, the Board met to discuss the proposed transaction. Morgan
Stanley reviewed the financial terms with the Board and discussed the analyses
underlying its opinion that the $74.50 per share in cash and stock consideration offered in
the proposed transaction was fair, from a financial point of view, to Family stockholders.
The Board then unanimously approved the Tree merger agreement (the “Merger
Agreement”). The Board also amended the Rights Plan to render it inapplicable to the
Merger Agreement. 47
H. Key Terms of Merger Agreement
Under the terms of the Merger Agreement, Family stockholders will receive
$59.60 in cash and 0.2484 shares of Tree stock per share if at closing Tree’s “average
stock price” is greater than or equal to $59.98. 48 If Tree’s average stock price is greater
than $49.08 and less than $59.98 per share, Family stockholders will receive $59.60 in
cash and Tree shares equal to the quotient of $14.90 divided by the average stock price
46
Defs.’ Ex. 34; Levine Dep. 262-64.
47
Defs.’ Ex. 35; Proxy at 84.
48
Defs.’ Ex. 35 at FDO_00025149. The “average stock price” depends on the 20-day
volume weighted average of Tree stock ending three days before the closing date. Id. At
the time of the Merger Agreement, the implied value of the per share merger
consideration of $74.50 represented a premium of 22.8% against Family’s stock price
immediately before the Merger Agreement was announced and a 28.4% premium
measured against the closing price immediately before Icahn began accumulating Family
stock. Proxy at 113.
19
per share. If Tree’s average stock price is less than $49.08 per share, Family stockholders
will receive $59.60 in cash and 0.3036 shares of Tree stock per share.
The Merger Agreement contains a $305 million termination fee (representing
approximately 3.6% of the equity value of the proposed transaction as of July 28) 49 and a
“naked no-vote” fee of $90 million (payable if Family stockholders do not approve the
Merger Agreement). 50 It also contains a “fiduciary out” provision which, in general
terms, enables the Board to respond to an unsolicited superior proposal. 51
I. General Makes an Initial Offer to Acquire Family
On August 18, 2014, General sent a letter to the Board proposing to acquire
Family for $78.50 per share in cash subject to certain conditions, including the
completion of confirmatory due diligence (the “Initial Offer”). 52 In its Initial Offer,
General offered to divest “up to” 700 stores, which, according to General, was
“approximately the same percentage of the total combined stores represented by the 500
store divestiture commitment in the Dollar Tree merger agreement.” 53 General also
stated it would agree to fund the $305 million termination fee should Family become
obligated to pay that fee under the Merger Agreement. 54
49
Defs.’ Ex. 2 § 7.3(c).
50
Defs.’ Ex. 2 § 7.3(a).
51
Defs.’ Ex. 2 § 5.3(c).
52
Defs.’ Ex. 37 at 4.
53
Id. at 3.
54
Id. at 4.
20
J. The Board Rejects General’s Initial Offer
On August 19, 2014, the Advisory Committee met telephonically with Morgan
Stanley and Cleary to discuss General’s Initial Offer. The Advisory Committee
“considered whether the Dollar General Proposal represented a serious proposal,
particularly in light of the continued antitrust risk, and questioned whether Dollar General
was attempting simply to break up the Dollar Tree transaction, by causing Family Dollar
stockholders to refrain from approving the Dollar Tree merger.” 55 Morgan Stanley
advised that if the Board determined that General’s Initial Offer is reasonably expected to
lead to a Company Superior Proposal, that would signal to the market “that the Dollar
General Proposal’s antitrust commitments are within the zone of the number of
divestitures that the Board believes necessary for the Company to sign a definitive
agreement with Dollar General.” 56
Cleary advised that General’s Initial Offer was only approximately 30% likely to
clear the FTC’s antitrust review process but that, by contrast, the Merger Agreement with
Tree was approximately 95% likely to clear the FTC’s antitrust review process. 57 The
Advisory Committee also was advised of the number of stores Cleary believed General
would need to agree to divest in order to offer the level of certainty provided by the
55
Defs.’ Ex. 38 at FDO_00043674.
56
Id.
57
Id. at FDO_00043675.
21
Merger Agreement. 58 The Advisory Committee recommended that “the Board determine
that the Dollar General Proposal was not reasonably expected to lead to a Company
Superior Proposal that was reasonably likely to be completed on the terms proposed.” 59
The next day, the full Board met telephonically with Morgan Stanley and Cleary.
The Board was provided with the same antitrust analysis that had been provided to the
Advisory Committee the previous day. 60 Thereafter, the Board unanimously determined
to adopt the Advisory Committee’s recommendation to reject General’s Initial Offer as
“not reasonably expected to lead to a Company Superior Proposal that is reasonably
likely to be completed on the terms proposed . . . on the basis of antitrust
considerations.” 61
On August 21, 2014, Family issued a press release announcing that the Board had
unanimously rejected General’s Initial Offer. In the press release, Garden expressed
concern over the antitrust risks presented by General’s Initial Offer:
The CEO of [General] said that he believes that antitrust is not a risk but
did not put forth a proposal that eliminates regulatory risk for shareholders.
Given the significant antitrust issues involved with [General’s] proposal,
58
Id. In discovery, Defendants redacted the number of stores Cleary thought General
would need to divest and the corresponding probability of antitrust approval above the
level of divestitures specified in General’s proposals. Plaintiffs apparently considered but
did not pursue a motion to compel this information. See Oral Argument Tr. 29 (Dec. 5,
2014).
59
Defs.’ Ex. 38 at FDO_00043676.
60
Defs.’ Ex. 41 at FDO_00043679.
61
Id. at FDO_00043680.
22
we will not jeopardize the [Tree] deal for a transaction with [General] that
has a high likelihood of not closing due to antitrust considerations. 62
K. General Revises Its Offer
On September 2, 2014, General made a revised proposal to acquire Family at $80
per share in cash (the “Revised Offer”) based on the same terms and conditions as its
Initial Offer except that General would agree to divest “up to 1,500 stores” to secure FTC
approval and to pay Family a $500 million “reverse break-up” fee if the transaction was
not completed for antitrust reasons. 63 In its offer letter, General reiterated its belief,
based on the analysis of its antitrust counsel, that “the 700 store divestiture commitment
in its prior proposal provided more than sufficient cushion to clear any FTC review.” 64
Later in the day on September 2, 2014, Sasser wrote to Family to express Tree’s
view that General’s Revised Offer did not provide a basis under the Merger Agreement
for Family to engage in negotiations with General because the Revised Offer was subject
to due diligence and because General’s commitment to divest up to 1,500 stores was not
sufficient for the Board to conclude that General’s Revised Offer was “reasonably
expected to lead to a Company Superior Proposal” in light of the serious antitrust risks
associated with a strategic combination of General and Family. 65 Sasser stated that Tree
was willing to amend the Merger Agreement to provide for a “hell or high water”
62
Defs.’ Ex. 42 at 1-2.
63
Defs.’ Ex. 45 at 1, 3.
64
Id. at 1.
65
Defs.’ Ex. 43 at FDO_00025263.
23
antitrust commitment, which, as Sasser explained in a subsequent letter, meant that Tree
would “divest any and all stores required by the [antitrust] regulators.” 66
L. The Board Rejects General’s Revised Offer
On September 2, 2014, the Advisory Committee met and on September 4, 2014,
the full Board met telephonically, in each case with Cleary and Morgan Stanley in
attendance. 67 The directors received an updated antitrust analysis. Although Cleary
previously had stated in a May 19 presentation that understanding General’s pricing
strategy would be “crucial” to “fully understanding” the antitrust risk of a transaction
with General, Cleary that the argument that General’s pricing information was more
relevant to the antitrust analysis than Family’s own pricing information had “no basis . . .
in economics, merger guidelines [or] court/FTC precedent.” 68
Focusing on the terms of the Revised Offer, Cleary advised that General’s
willingness to divest up to 1,500 stores provided an approximately 40% chance of
success that the proposed transaction would clear the FTC’s antitrust review process. 69
Cleary again opined on the number of stores it believed General would be required to
divest to get close to the level of certainty provided by the Merger Agreement. 70
66
Id. at FDO_00025264; Defs.’ Ex. 48 at FDO_00025276. On September 4, 2014, the
Merger Agreement was amended to reflect Tree’s commitment to divest as many of its
stores as necessary to achieve antitrust clearance. Defs.’ Ex. 47 at FDO_00043691.
67
Defs.’ Exs. 44, 47.
68
Defs.’ Ex. 46 at FDO_00025297.
69
Defs.’ Ex. 44 at FDO_00043683; Defs.’ Ex. 47 at FDO_00043688.
70
Defs.’ Ex. 44 at FDO_00043683; Defs.’ Ex. 47 at FDO_00043688.
24
Although these figures were redacted from documents produced in discovery, 71 Garden
testified that General would need to agree to divest a number of stores “materially higher
than 1,500” – which he explained to mean a “multiple of 1,500” – for him not to be
skeptical of the sincerity of General’s proposal. 72
On September 4, 2014, the Board, consistent with the recommendation it had
received from the Advisory Committee, “unanimously determined . . . that the Revised
Dollar General Proposal is not reasonably expected to lead to a Company Superior
Proposal that is reasonably likely to be completed on the terms proposed . . . on the basis
of antitrust considerations.” 73
On September 5, 2014, Family issued a press release announcing the Board’s
rejection of General’s Revised Offer. The press release outlined in considerable detail
the Board’s antitrust review of a potential General/Family combination and noted that
Family already was deeply involved in the FTC’s review of its transaction with Tree and
had “seen first-hand the issues and types of evidence that the FTC is focusing on, all of
which have completely confirmed [Family’s] regulatory analysis.” 74
71
See supra note 58.
72
Levine Dep. 98-102.
73
Defs.’ Ex. 47 at FDO_00043691.
74
Defs.’ Ex. 49 at 2-3.
25
M. General Commences a Tender Offer
On September 10, 2014, General commenced a tender offer to acquire all
outstanding Family shares for $80 per share in cash. Similar to General’s Revised Offer,
its tender offer includes a willingness to divest up to 1,500 stores if required by the FTC
and to pay Family a $500 million reverse break-up fee if the transaction does not close
for antitrust reasons. 75 The tender offer, which has been extended twice, is currently set
to expire on December 31, 2014. Under the Hart-Scott-Rodino Act, General is not
permitted to acquire more than $75.9 million, or less than 1%, of Family stock without
first obtaining FTC clearance. 76
On September 17, 2014, Family filed with the Securities and Exchange
Commission (“SEC”) a solicitation/recommendation statement in which the Board
unanimously recommended that Family’s stockholders not tender their shares to General.
N. Subsequent Developments
On October 21, 2014, and November 7, 2014, Family and Tree, respectively,
certified substantial compliance with the FTC’s second request for information. 77
On October 31, 2014, General filed a definitive Schedule 14A with the SEC so
that it could solicit Family stockholders to reject the Merger Agreement. 78
75
Defs.’ Ex. 50.
76
See 15 U.S.C. §18a(a) (2014); 16 C.F.R. § 801.1(h) (2014).
77
Defs.’ Ans. Br. at 32.
78
Defs.’ Ex. 55.
26
O. Procedural History
On July 31, 2014, the first of three putative class action lawsuits challenging the
Merger was filed in this Court. On August 22, 2014, the operative complaint in this
action was amended. On August 26, 2014, I granted Plaintiffs’ motion for consolidation
and appointment of co-lead counsel. On August 28, 2014, Plaintiffs moved for expedited
proceedings and to preliminarily enjoin the meeting of Family stockholders to consider
the proposed Merger. That meeting is currently scheduled for December 23, 2014.
III. LEGAL ANALYSIS
Plaintiffs seek to preliminarily enjoin the vote of Family stockholders scheduled
for December 23, 2014, “[1] until the Board has properly engaged with [General] and
made a good faith effort to achieve a value-maximizing transaction, and [2] until
corrective disclosures have been made.” 79 The first aspect of Plaintiffs’ application for
injunctive relief is based on their assertion that the Board breached its fiduciary duties
under Revlon in essentially three respects: (1) by allowing Levine to run the sale process
with minimum supervision, (2) by failing to inform General that Family was engaged in a
sale process before entering the Merger Agreement with Tree, and (3) by failing to
negotiate with General after receiving its Revised Offer. 80 These issues are addressed in
79
Pls.’ Op. Br. 2. Although not a direct focus of Defendants’ opposition, Plaintiffs’
requested form of preliminary injunction gives me great pause because it would be an
open-ended injunction of indefinite duration that would readily permit further litigation
challenges.
80
Plaintiffs acknowledged at oral argument that they are not seeking to enjoin the
application of the Rights Plan to General’s outstanding tender offer because General
cannot accept shares under that offer until antitrust review of its proposal to acquire
27
Sections D-F. The second aspect of Plaintiffs’ application for injunctive relief is based
on Plaintiffs’ assertion that the Proxy fails to disclose seven categories of purportedly
material information. These issues are addressed in Section G.
A. The Procedural Standard
To obtain a preliminary injunction, Plaintiffs must establish three elements: (i) a
reasonable probability of success on the merits; (ii) irreparable harm absent interim relief;
and (iii) that the balance of the equities favors the relief requested. 81 “This burden is not
a light one, and an ‘extraordinary remedy’ like a preliminary injunction ‘will never be
granted unless earned.’” 82 Although “[a] strong showing on one element may overcome
a weak showing on another element,” Plaintiffs must still demonstrate all three
elements. 83
Family has been completed. See Oral Argument Tr. 31 (Dec. 5, 2014). Without citing
any legal authority, Plaintiffs half-heartedly challenged in their briefs the $305
termination fee (equating to 3.6% of the equity value when the Merger Agreement was
entered) and the $90 million “naked no-vote termination fee” (equating to 1.05% of the
equity value) in the Merger Agreement. These provisions, individually and together, are
unremarkable and do not, in my view, provide a basis to enjoin the stockholder vote. See
In re 3Com S’holders Litig., 2009 WL 5173804, at *7 (Del. Ch. Dec. 18, 2009)
(upholding termination fee greater than 4% of equity value); In re Lear Corp. S’holder
Litig., 967 A.2d 640, 656-67 (Del. Ch. 2008) (noting that this court has approved no-vote
fees of up to 1.4% of transaction value).
81
See Revlon, Inc. v. MacAndrews & Forbes Hldgs., Inc., 506 A.2d 173, 179 (Del. 1986).
82
Wayne Cty. Empls.’ Ret. Sys v. Corti, 954 A.2d 319, 329 (Del. Ch. 2008) (quoting
Lenahan v. Nat’l Computer Analysts Corp., 310 A.2d 661, 664 (Del. Ch. 1973)).
83
See Cantor Fitzgerald, L.P. v. Cantor, 724 A.2d 571, 579 (Del. Ch. 1998).
28
B. Revlon Obligations of the Board
Delaware courts review claims for breach of fiduciary duty under a doctrinal
standard of review. Where a stockholder alleges that the directors of a Delaware
corporation breached their fiduciary duties in the context of a sale of corporate control,
this Court analyzes those allegations under the enhanced scrutiny standard of Revlon, Inc.
v. MacAndrews & Forbes Holdings, Inc. 84 In this context, the goal of directors is to
“maximiz[e] . . . the company’s value at a sale for the stockholders’ benefit.” 85 Thus,
during the sale process, the directors are charged with acting to “get the highest value
reasonably attainable for the shareholders.” 86
There is no “single blueprint” for directors to act to obtain the highest value
reasonably attainable. 87 “No court can tell directors exactly how to accomplish that goal,
because they will be facing a unique combination of circumstances, many of which will
be outside their control.” 88 Under Revlon, “directors are generally free to select the path
to value maximization, so long as they choose a reasonable route to get there.” 89 The
84
506 A.2d 173 (Del. 1986).
85
Id. at 182.
86
Mills Acq. Co. v. Macmillan, Inc., 559 A.2d 1261, 1288 (Del. 1989).
87
See Barkan v. Amsted Indus., Inc., 567 A.2d 1279, 1286 (Del. 1989).
88
Lyondell Chem. Co. v. Ryan, 970 A.2d 235, 242 (Del. 2009).
89
In re Dollar Thrifty S’holder Litig., 14 A.3d 573, 595-96 (Del. Ch. 2010)); see also In
re Toys “R” Us, Inc. S’holder Litig., 877 A.2d 975, 1000 (Del. Ch. 2005) (“[T]he
enhanced judicial review Revlon requires is not a license for law-trained courts to second-
guess reasonable, but debatable, tactical choices that directors have made in good faith.”).
29
burden is on the defendant directors to show that, when they made the decision(s) at
issue, they “were adequately informed and acted reasonably.” 90
C. The Motivations of the Family Board
Before addressing the three aspects of the Board’s conduct upon which Plaintiffs
focus their Revlon claims, it is helpful to consider first the Board’s general motivations
during the sale process. For when the record reveals no basis to question a board’s
motivations, the Court understandably will be more likely to defer to the board’s
judgment in determining how to conduct a corporate sale process. As Chief Justice
Strine, then a Vice Chancellor, explained:
In a situation where heightened scrutiny applies, the predicate question of
what the board’s true motivation was comes into play. The court must take
a nuanced and realistic look at the possibility that personal interests short of
pure self-dealing have influenced the board to block a bid or to steer a deal
to one bidder rather than another. . . . [T]he reasonableness standard
requires the court to consider for itself whether the board is truly well
motivated (i.e, is it acting for the proper ends?) before ultimately
determining whether its means were themselves a reasonable way of
advancing those ends. 91
The record here demonstrates that the Board was properly motivated to maximize
value for Family’s stockholders. Ten of the eleven members of the Board are outside
directors whose independence has not been called into question. One of them, Garden, is
a co-founder of a well-known hedge fund (Trian) who joined the Board in 2011 as part of
a standstill arrangement with Trian, which holds almost 8.4 million shares of Family
90
Paramount Commc’ns Inc. v. QVC Network Inc., 637 A.2d 34, 45 (Del. 1994).
91
Dollar Thrifty, 14 A.3d at 598-600.
30
stock. 92 He plainly had every incentive to maximize the value of Family and, as shown
by his lone vote against adoption of the Rights Plan, has demonstrated his independence.
None of the ten outside directors will serve as a director in the combined entity if the
Merger is approved.
Despite Plaintiffs’ contentions to the contrary, the record fails to demonstrate that
Levine, the only Family executive on the Board, harbored any entrenchment motivation.
To the contrary, the record shows that Levine had been planning his retirement since
2011 and had no desire to run a combined company after the transaction, but was advised
to express a desire to do so as a negotiating tactic; 93 that Tree insisted that Levine stay on
post-closing to help with integration of the companies; 94 and that General made the same
request. 95 Levine, moreover, personally held almost 9 million shares of Family stock and
thus, similar to Garden, had a significant economic incentive to pursue maximum value
for his shares of Family. 96
92
In 2011, Family agreed to appoint a Trian representative to the Board in exchange for
Trian agreeing not to purchase more than 9.9% of Family’s outstanding stock. Am.
Compl. ¶ 58.
93
Levine Dep. 67-68; Garden Dep. 35 (“I’ll be clear. Mr. Levine had no desire to run
either company post-deal. Mr. Levine broached the idea of running the company at
Dollar General as a negotiating tactic that I recommended because it was an easy give
because he had no desire to run the combined business.”).
94
See Defs.’ Ex. 22 at FDO_00026209; Garden Dep. 36 (“Dollar Tree insisted that
[Levine] be involved post-transaction. That should be very clear.”).
95
Levine Dep. 101, 130; Mahoney Dep. 62.
96
The $5.50 difference between the Tree offer of $74.50 (as of the date of the Merger
Agreement) and the General offer of $80 represents approximately $48 million to Levine.
The value of Tree’s offer has since appreciated to approximately $76.50 due to the
31
Plaintiffs further contend that the Board was improperly motivated to favor Tree
because the directors wanted to maintain Family’s presence in North Carolina. The
testimony shows, however, that Levine told General that the headquarters of a combined
entity should remain in Charlotte as a negotiating ploy. 97 The only other evidence
Plaintiffs offer in support of this contention is a March 17, 2014, email from one Family
director, Sharon Decker, North Carolina’s Secretary of Commerce, to Levine in which
she expresses support for pursuing discussions with Tree “as long as [the company] is
headquartered in NC! :).” 98 The smiley face in the email supports a reasonable inference
that the comment was made in jest. What is far more telling of the Board’s motivations
insofar as geographic considerations are concerned, is that the Merger Agreement does
not obligate Tree to maintain Family’s headquarters (or any other particular facilities) in
North Carolina.
Finally, the preliminary record shows that Family had engaged in a number of
discussions with General dating back to early 2013 in an effort to explore a transaction
between Family and General. Of particular note, in June 2014, after Icahn had surfaced
and Tree had made a proposal of $72 per share but not yet entered into an exclusivity
arrangement with Family, the Board instructed Levine to encourage General to re-engage
in discussions in an effort to obtain a higher offer. Levine did so and directly solicited an
appreciation of Tree’s stock price. A $3.50 per share difference equates to approximately
$30 million to Levine.
97
See supra note 8.
98
Defs.’ Ex. 20.
32
offer from General. When no offer was forthcoming from General, the Board continued
its discussions with Tree, resulting in an offer of $74.50 per share. Only then did Family
commit to an exclusivity arrangement with Tree. These actions do not suggest any
favoritism of Tree over General based on an improper motivation. To the contrary, the
record, albeit preliminary, demonstrates to me that the Board was motivated to maximize
the value of Family.
D. Levine’s Role in the Sale Process
Plaintiffs argue that the Board abdicated its responsibilities by allowing Levine to
conduct much of the sale process “with minimal supervision.” 99 This argument can be
disposed of easily. The Board’s minutes and other evidence of record instead show that
the Advisory Committee and the Board, with the assistance of its financial and legal
advisors, were actively engaged in the sale process and received regular updates from
Levine. The deposition testimony of Garden is particularly noteworthy. It shows an
engaged Board making the important decisions with a full understanding of the Board’s
options and the rationale for the decisions being made. Critically, furthermore, Plaintiffs
have identified no material information that was kept from the Board. 100
99
Pls.’ Op. Br. 22.
100
Quoting the Court’s decision in In re Ply Gem Indus., Inc. S’holders Litig., 2001 WL
755133, at *10 (Del. Ch. June 26, 2001), Defendants assert “[t]here is nothing inherently
wrong with an interested chief executive officer negotiating a merger transaction. In
most instances, the chief executive officer is the person most knowledgeable about the
company, its value, and the industry in which it operates.” Although I agree with these
observations, there are risks to having a CEO take the lead in a sale process, and the
decision to do so should be made carefully based on the particular facts and
33
E. The Decision Not to Inform General that Family was in a
Sale Process
Plaintiffs next argue that Levine acted unreasonably when he failed to inform
General during his June 19 meeting with Dreiling and Calbert that Family was
undergoing a sale process. According to Plaintiffs, “[b]ased on a specious and unduly
narrow and restrictive interpretation of the NDA with [Tree],” Levine “played coy” with
General during the meeting to give the “false impression” that Family “was not talking to
any other potential suitors.” 101 Relying on public statements General made after the fact,
Plaintiffs assert that, had Levine suggested the presence of another bidder or an active
sale process, General would have made a bid. 102
Although reasonable minds may differ on whether it would have been more
advantageous to tell General explicitly during the June 19 meeting that Family was
engaged in discussions concerning a sale of control, I conclude that the decision not to do
so was eminently reasonable under the circumstances for two reasons. First, the record
shows that the Board was concerned that if General learned that Family was speaking
circumstances facing a company. Here, Plaintiffs have provided no evidence that
Levine’s role in the sale process resulted in an abdication or breach of duty.
101
Pls.’ Op. Br. 31.
102
See General Proxy at 7 (“If at any time during the June 19th meeting the
representatives of Family Dollar had indicated that Family Dollar might be in discussions
with another party or that there was otherwise any urgency to make a proposal at that
time, Dollar General would have promptly sought to do so prior to the announcement of
the Dollar Tree Merger Agreement.”); Defs.’ Ex. 40 (August 20, 2014, letter from
General stating that had General left the June 19 meeting “with the belief that a sale of
Family Dollar was imminent, we assure you that our course of action would have been
different.”).
34
with another bidder about a potential strategic combination, General would assume that
Family was talking to Tree and would make a hostile bid for Tree or take some other
action adverse to Family. As Garden testified, “[i]t was my belief given the competition
between Dollar General and Family Dollar, that if they got wind that we were
contemplating a transaction with Dollar Tree, that the probability was high that they
would do a hostile transaction on Dollar Tree” or that General might “make a public
announcement that they were not interested in buying Family Dollar.” 103
Second, members of the Board were concerned they would violate the terms of the
NDA if they revealed that Family was having discussions concerning a potential strategic
transaction. Levine testified he had been advised by counsel before the June 19 meeting
that he could not inform General that Family was having discussions concerning a
potential strategic transaction even if he did not specifically identify Tree. 104 Mahoney
(who also attended the June 19 meeting along with Levine) and Garden were similarly
under the impression that the NDA precluded Family from informing General that Family
was talking to another party about a potential strategic transaction. 105 Plaintiffs may
103
Garden Dep. 43-44, 83; see also Proxy at 76 (summarizing April 17, 2014, Board
discussion of risks of inviting General “into a more formal process to compete with
Dollar Tree for the right to participate in a business combination transaction with Family
Dollar.”).
104
Levine Dep. 234;
105
Garden Dep. 132-33, Mahoney Dep. 31.
35
disagree with the advice the directors received, but that advice was not plainly erroneous
and the directors were entitled to rely on it. 106
Additionally, it can never be known, of course, whether General would have made
a better offer for Family than Tree did at the time if General had known in mid-June that
Family was engaged in sale discussions. What is known is that execution of the Merger
Agreement did not deter General from later making its own acquisition proposals, and
that General remains free to make an improved offer now. Thus, it is difficult to see how
Family’s stockholders could be said to have been harmed by the Board’s tactical decision
not to disclose to General that it was engaged in a sale process in mid-June.
F. The Decision Not to Engage in Negotiations with General in Response
to its Revised Offer
As their third and most vigorous line of attack under Revlon, Plaintiffs argue that
the Board acted unreasonably when it refused to engage with General after it made its
Revised Offer of $80 per share in cash and a expressed a willingness to divest up to 1,500
stores. Specifically, Plaintiffs contend that the Board’s failure to negotiate with General
at this point was “premised on a misinterpretation and unduly restrictive reading of the
106
8 Del. C. § 141(e). Plaintiffs contend that the NDA did not prevent Levine “from
disclosing to [General] that [Family] was conducting a broader sales process” if Tree was
not identified by name. Pls.’ Op. Br. 32. However, if Levine or Mahoney had disclosed
to General on June 19 that Family was involved in a sale process, that easily may have
implied that it was in discussions with Tree since Tree was viewed as a leading (if not the
only realistic) bidder for Family other than General. See Proxy at 73.
36
Merger Agreement terms, as well as an [] incomplete and uninformed antitrust
analysis.” 107
Regarding the former contention, Plaintiffs argue it was unreasonable for the
Board not to at least seek to obtain an improved commitment from General to divest a
sufficient number of stores to eliminate the antitrust risk the Board perceived in its
proposal given that General already had increased its divestiture cap from 700 to 1,500
stores. Regarding the latter contention, Plaintiffs rely heavily on the fact that the Board
did not have access to General’s pricing information, which Cleary had described in its
May 19, 2014, antitrust presentation as “crucial to fully understanding” the antitrust risk
of a transaction with General. 108
Evaluating whether the Board’s decision not to engage with General after it made
the Revised Offer was reasonable as a fiduciary matter under Revlon implicates the
fiduciary out provision in Section 5.3(c) of the Merger Agreement. Section 5.3(c)
provides that, if Family receives a bona fide, unsolicited written acquisition proposal
from another bidder (defined as a Company Takeover Proposal), Family may engage in
negotiations with the person making such proposal if the Board determines that the
proposal is reasonably expected to lead to a “Company Superior Proposal” and if the
failure to engage in such negotiations would be inconsistent with the directors’ fiduciary
duties:
107
Pls.’ Op. Br. 33.
108
Pls.’ Reply Br. 16 (citing Defs.’ Ex. 24 at FDO_00000621).
37
[I]f . . . the Company or any of its Representatives, receives a bona fide,
unsolicited written Company Takeover Proposal . . . and if the Company
Board of Directors determines in good faith, after consultation with its
financial advisor and outside legal counsel, that such Company Takeover
Proposal constitutes or is reasonably expected to lead to a Company
Superior Proposal and that the failure to take such action would be
inconsistent with the directors’ fiduciary duties under applicable Law, then
the Company and its Representatives may . . . (B) engage in or otherwise
participate in discussions or negotiations with the person making such
Company Takeover Proposal and its Representatives regarding such
Company Takeover Proposal. 109
The Merger Agreement defines a “Company Superior Proposal” as a financially more
favorable proposal than the Merger that, among other things, is reasonably likely to be
completed on the terms proposed:
“Company Superior Proposal” means a bona fide, unsolicited written
Company Takeover Proposal . . . that the Company Board of Directors
determines in good faith, after consultation with its financial advisor and
outside legal counsel, taking into account all financial, legal, regulatory and
other aspects of such proposal, including all conditions contained therein
and the person making such Company Takeover Proposal, is reasonably
likely to be completed on the terms proposed, is not subject to any due
diligence investigation or financing condition, and . . . is more favorable to
the stockholders of the Company from a financial point of view than the
Merger. 110
Read together, these provisions generally provide that the Board may negotiate with a
third party who makes a proposal (1) if the Board determines in good faith after
consulting with its advisors that the proposal is reasonably expected to lead to a
transaction that is (a) financially more favorable than the Merger and (b) reasonably
109
Defs.’ Ex. 2 § 5.3(c) (emphasis added).
110
Defs.’ Ex. 2 § 8.15(b)(v) (emphasis added).
38
likely to be completed on the terms proposed and (2) if failure to engage in such
negotiations would be inconsistent with the directors’ fiduciary duties.
Considering the evidence in the record, and taking into account the framework of
the fiduciary out provision in the Merger Agreement, I conclude that the Board’s decision
not to engage in discussions with General in response to its Revised Offer was a
reasonable exercise of judgment consistent with the directors’ obligations under Revlon
to maximize value for Family’s stockholders. In short, the Board’s decision reflects the
reality that, for the Company’s stockholders, a financially superior offer on paper does
not equate to a financially superior transaction in the real world if there is a meaningful
risk that the transaction will not close for antitrust reasons.
Although the face value of General’s Revised Offer ($80 per share) was higher
than the expected per share value of the Merger, the Board, after consulting with its legal
and financial advisors as it was required to do under Section 5.3(c), determined that
General’s proposal was not reasonably likely to be completed on the terms proposed, i.e.,
with divestitures not to exceed 1,500 stores. In particular, Cleary specifically advised the
Board “that the Revised Dollar General Proposal provided for approximately a 40%
chance of success of the proposed combination clearing the FTC’s antitrust review
process.” 111 Something with an approximately 60% chance of failure, in my view, is not
“reasonably likely” to occur.
111
Defs.’ Ex. 47 at FDO_00043688.
39
The Board did not end its inquiry there. It went further to consider whether
General seemed open to reducing the antitrust risk associated with its proposal and
whether it would be prudent and appropriate to engage General to attempt to do so.
On the first issue, the Board determined that General appeared unwilling to go
beyond the 1,500 store cap in its Revised Offer. As stated in the Board’s September 4,
2014 minutes:
The Directors noted that Dollar General had not indicated any openness to
increasing the cap on divestitures over 1,500 stores and that Dollar General
had stated that the reason for discussions to take place was not to bridge
differences, but solely to convince Family Dollar that Dollar General’s
position is the correct one and that Family Dollar is fundamentally
misunderstanding the risk. 112
This determination was reasonable in my view given how General, a sophisticated party
working with highly experienced financial and legal advisors of its own, had chosen to
communicate the divestiture component of its Revised Offer in its offer letter:
As discussed above, based on the extensive work and analysis performed
by our experienced antitrust counsel and economist, we do not believe that
we would be ordered to divest more than the number of stores contained in
our original offer (i.e., 700), if that many, and we believe that after we have
shared that analysis with your counsel, you will agree. Nonetheless, to
provide you with a concrete proposal that indisputably allows you to
engage with us under the terms of your existing merger agreement and to
demonstrate our commitment to this proposed transaction and the value it
brings to Family Dollar shareholders, we are willing to agree to divest up to
1,500 stores, a commitment that provides you with even greater assurance
that this transaction is capable of being completed on the terms proposed. 113
112
Id.; see also Mahoney Dep. 194.
113
Defs.’ Ex. 45 at 3. The offer letter notes that Goldman Sachs & Co. was acting as
General’s financial advisor and Simpson Thacher & Bartlett LLP was acting as its legal
counsel. Id. at 2.
40
General could have written its Revised Offer to indicate some level of flexibility to divest
more than 1,500 stores, but it chose not to do so.
Despite reasonably concluding that General appeared unwilling to divest more
than 1,500 stores, the Board considered whether General’s Revised Offer nonetheless
warranted further discussion. In making this assessment, the Board had been advised that
engaging in discussions with General might signal that “the Revised Dollar General
Proposal’s antitrust commitments are within the zone of the number of divestitures that
the Board believes necessary for the Company to sign a definitive agreement with Dollar
General.” 114 The Board ultimately concluded that the level of divestitures to which
General had committed so far was insufficient to risk sending this message. As Garden
testified:
What I agreed with was that by engaging, we would be sending a message
to the market and to Dollar General that 1,500 stores was in the zip code of
the type of number that we would accept in terms of a definitive agreement
to be acquired. And I personally felt that 1,500 wasn’t in the right zip
code. 115
Garden’s view of the necessary “zip code” to warrant engaging with General, moreover,
had been the subject of extensive discussion with antitrust counsel. 116 Ostensibly based
on those discussions, Garden testified that General would have needed to divest “[a]
number materially higher than 1,500” stores – meaning a “multiple of 1,500” – to
114
Defs. Ex. 44 at FDO_00043683.
115
Levine Dep. 120.
116
See, e.g., Defs.’ Exs. 23-24, 46-47.
41
sufficiently reduce the conditionality of its proposal to warrant opening up negotiations
with General. 117
Based on this evidence, and taking into consideration the constraints of Section
5.3(c) of the Merger Agreement, the Board acted reasonably in my opinion to maximize
value for Family’s stockholders in accordance with its fiduciary obligations under Revlon
when it came to the conclusion, as reflected in the minutes, “that the Revised Dollar
General Proposal is not reasonably expected to lead to a Company Superior Proposal that
is reasonably likely to be completed on the terms proposed.” My conclusion is bolstered
by the fact that the Board had made numerous good faith efforts to engage with General
(going back to early 2013) and appears to have been genuinely motivated to maximize
the value of Family. 118
It is too facile, in my view, to jump to the conclusion Plaintiffs suggest: that the
Board was obligated to engage with General simply because it had shown a willingness
to increase the divestiture cap in its proposals from 700 to 1,500 stores. That may have
been little more than an easy give. The harder, real world question the Family directors
faced was whether General’s $80 proposal – in which General showed no apparent
willingness to divest more than 1,500 stores – was sufficiently close to something the
117
Garden Dep. 99-102. As noted above, Defendants blocked discovery into the specific
advice the Board had received concerning the probability of antitrust approval involving
store divestitures above the levels specified in General’s proposals. Although this
information would have been useful to the Court’s assessment of the reasonableness of
the Board’s conduct, I am satisfied based on Garden’s testimony that the Board’s actions
in the face of a proposal with a divestiture cap of 1,500 stores were reasonable.
118
See supra Section III.C.
42
Board believed was viable from an antitrust perspective to warrant engaging with
General. Given the record before me, I see no basis to second guess the Board’s
judgment that it was not.
In challenging the Board’s conduct, Plaintiffs also incorrectly seem to assume
there was no downside to engaging with General. Engaging at this point, however, could
have sent a counterproductive message that the antitrust commitment in the Revised
Offer was in the zone of being satisfactory from an antitrust perspective when, as Garden
testified, it was not. The Board, moreover, was (and remains) bound by the terms of the
Merger Agreement and had to be cognizant of the risk that Tree could assert a claim for
breach of contract if Family opened up discussions with General. Shortly after General
conveyed the Revised Offer, in fact, Sasser sent a letter to Levine in which Tree asserted
that the terms General had proposed failed to satisfy the fiduciary out provision in the
Merger Agreement and expressly reserved “all of [its] rights.” 119
Finally, I disagree with Plaintiffs’ assertion that the Board was inadequately
informed in its consideration of the antitrust risks posed by the Revised Offer simply
because Family did not have access to General’s pricing information. Under Section
5.3(c) of the Merger Agreement, the directors were required to consult with their
financial and legal advisors, and they did so. Under Delaware law, Family’s directors
were obligated to “inform themselves, prior to making a business decision, of all material
119
Defs.’ Ex. 39 at FDO_00025217; Defs.’ Ex. 43 at FDO_00025263.
43
information reasonably available to them,” 120 and they did so. The fact of the matter is
that General’s pricing information is confidential and was not available to the Board
when it considered the Revised Offer. And the fact that Cleary viewed this information
to be “crucial to fully understanding” the antitrust risks posed by a combination with
General in May 2014, does not mean that the Board was not adequately informed about
the antitrust risks several months later, in September 2014. Indeed, Cleary’s September
3, 2014 presentation, which was provided after Family had been engaged in discussions
with the FTC concerning the Merger and had developed a better understanding of the
FTC’s perspective on the antitrust issues, 121 noted that there was no basis in “economics,
merger guidelines, [or] court/FTC precedent” for the argument that General’s pricing data
was more relevant than Family’s pricing data. 122
* * *
Under Revlon, a board of directors may, as the Board did here, “pursue the
transaction it reasonably views as most valuable to stockholders, so long as the
transaction is subject to an effective market check under circumstances in which any
bidder interested in paying more has a reasonable opportunity to do so.” 123 On the
preliminary record, the Company’s market check is effective because, under the Merger
120
Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984) (emphasis added).
121
See Defs.’ Ex. 49 at 2.
122
See Defs.’ Ex. 46 at FDO_00025297.
123
C&J Energy Servs., Inc. v. City of Miami General Emps.’ and Sanitation Emps.’ Ret.
Trust, No. 655/657, 2014, slip op. at 28 (Del. Dec. 19, 2014).
44
Agreement, “interested bidders have a fair opportunity to present a higher-value
alternative, and the [B]oard has the flexibility to eschew the original transaction and
accept the higher-value deal.” 124 For all the foregoing reasons, I find that Plaintiffs have
not demonstrated a reasonable probability of success on the merits of their Revlon claims.
G. Plaintiffs’ Disclosure Claims
Independent of their Revlon claims, Plaintiffs seek to enjoin the December 23,
2014, stockholder vote on the basis that the members of the Board breached their
fiduciary duties by failing to disclose in the Proxy seven items of information they claim
are material. Defendants contend, in opposition, that the seven items were “either already
disclosed or immaterial.” 125 For the reasons set forth below, I conclude that Plaintiffs’
disclosure claims are without merit because the purported omissions or misleading
statements Plaintiffs have identified are either misapprehensions of the record,
speculation, self-flagellation, or immaterial minutiae.
Under Delaware law, when directors solicit stockholder action, they must
“disclose fully and fairly all material information within the board’s control.” 126
Information is material “if there is a substantial likelihood that a reasonable shareholder
would consider it important in deciding how to vote.” 127 In other words, information is
124
Id. at 28-29.
125
Defs.’ Ans. Br. 39.
126
Stroud v. Grace, 606 A.2d 75, 84 (Del. 1992).
127
Rosenblatt v. Getty Oil Co., 493 A.2d 929, 944 (Del. 1985).
45
material if, from the perspective of a reasonable stockholder, there is a substantial
likelihood that it “significantly alter[s] the ‘total mix’ of information made available.” 128
I will address each of Plaintiffs’ seven disclosure claims in turn. 129
First, Plaintiffs contend that the Proxy does not disclose exactly when in the
negotiations Tree mentioned the possibility that Levine would have a seat on the board of
Tree post-Merger. For support, Plaintiffs cite to Maric Capital Master Fund, Ltd. v.
Plato Learning, Inc. 130 and In re Atheros Communications, Inc. Shareholder Litigation131
for the general proposition that the pre-signing negotiation of post-closing employment
terms for the target’s management with the acquirer must be disclosed. Defendants
contend that the Proxy adequately discloses that (i) during the negotiations, Tree desired
for Levine to have a post-closing role with the combined company; and (ii) after the
Merger, Levine will become a director of Tree. 132
Plaintiffs’ first disclosure claim is meritless in my view. The Proxy discloses not
only that Tree wanted Levine to have a role with the combined company, 133 but that
128
Arnold v. Soc’y for Sav. Bancorp, Inc., 650 A.2d 1270, 1277 (Del. 1994) (emphasis
added).
129
At the outset, I note that submitting what is effectively a laundry list of disclosure
claims is not a persuasive framework in which to argue that a proxy statement fails to
disclose all material information.
130
11 A.3d 1175, 1179 (Del. Ch. 2010).
131
2011 WL 864928 (Del. Ch. Mar. 4, 2011)
132
Defs.’ Ans. Br. 40-41.
133
Proxy at 74 (referring, on March 14, 2014, to Levine’s potential “management role at
the combined company”), 77 (referring, on May 14, 2014, to a desired “contractual
46
Levine will become a director of Tree after the Merger and that this term was included in
a June 30, 2014, draft of the Merger Agreement. 134 Additionally, Plaintiffs have not
offered any evidence of exactly when Tree first intimated to Levine the possibility of a
post-closing directorship. Thus, it is unclear what additional information could even be
disclosed on this subject. 135
Relying on Maric Capital and Atheros does not save Plaintiffs’ claim. In those
cases, the issue was whether the relevant proxy statement was misleading by disclosing
(or at least implying) that there were no negotiations between the acquirer and the target’s
management about post-closing employment where the record reflected that the acquirer
had given management an expectation about their post-closing positions. The obvious
concern animating those decisions was that stockholders should receive full and fair
disclosures about whether a negotiator for the target had, by virtue of an expectation of
post-closing employment with the acquirer, incentives that might conflict with those of
the target’s stockholders. The record here is plainly distinguishable. Unlike in Maric
Capital, the Proxy fully and fairly discloses that Tree had given Levine an expectation
during the negotiations that he could have a management role with the combined
commitment [for Levine] to remain employed by Family Dollar following the closing of
the transaction”), 81 (referring, on June 21, 2014, to the possibility for Levine to “remain
with the company following the closing”).
134
Id. at 82, 135, 165.
135
At his deposition, Levine testified that his joining the Tree board was part of “some of
the initial conversations” with Tree. Levine Dep. 259. This testimony, without more, is
too vague and indefinite to support Plaintiffs’ contention that the possibility that Levine
could become a director of Tree post-closing was raised earlier than June 30.
47
company. 136 Similarly, unlike in Atheros, the Proxy fully and fairly discloses Tree’s
March 14, May 14, and June 21 overtures to Levine and Levine’s refusal on each of those
dates to negotiate any post-closing role while material terms of the Merger Agreement
remained open. 137
Second, in what they described as their “best” disclosure claim, 138 Plaintiffs
contend that the Proxy omits the material fact that the Board and Cleary “were without
information they believed was ‘crucial’ to an informed assessment of the antitrust risks
attendant to a potential merger” of Family and General. 139 Defendants contend that
Plaintiffs mischaracterize the record because Cleary’s May 19 presentation, which was
early in the Board’s evaluation of its strategic alternatives, merely stated that this
136
Maric Capital, 11 A.3d at 1179 (concluding there was a reasonable likelihood that the
proxy statement was misleading because it stated that, in deciding to approve the merger
agreement, the board considered “the fact that [the acquirer] did not negotiate terms of
employment, including any compensation arrangements or equity participation in the
surviving corporation, with [the target’s] management,” where the preliminary record
reflected that the acquirer had given the target’s CEO an expectation regarding how
management would be treated post-closing).
137
Proxy at 81; see also Atheros, 2011 WL 864928, at *11-12 (concluding that there was
a reasonable likelihood that the proxy statement was misleading because it stated that, as
of a particular date, the target company’s CEO had “not had any discussions with [the
acquirer] regarding the terms of his potential employment by [the acquirer]” where the
preliminary record reflected that the CEO had an understanding before that date about his
post-closing employment).
138
Oral Argument Tr. 33 (Dec. 5, 2014).
139
Pls.’ Op. Br. 49.
48
information would be crucial to “fully understanding” the antitrust risks, not that it was
crucial to adequately understanding those risks. 140
As discussed above, the fact that General’s pricing information was unavailable to
the Board did not mean, in my view, that the Board was not adequately informed under
Revlon about the antitrust risks of a transaction with General. Because it is obvious that
Family did not have the pricing information of General—its competitor, after all—a
disclosure to that effect would not significantly alter the total mix of information
available in the Proxy. Delaware law, moreover, does not require directors to disclose
what is effectively Plaintiffs’ “characterization of the facts.” 141 If the Board were to
disclose that, even though it was adequately informed about antitrust risks, the directors
did not fully understand those risks because they did not have their competitor’s pricing
information, such a disclosure would amount to “self-flagellation,” which is not a proper
subject for the Proxy. 142
Third, Plaintiffs seek “information regarding potential synergies in a transaction
with [Tree] or [General]” in light of Cleary’s advice that “potential synergies or, in FTC
terminology, ‘efficiencies’ would play an important part of an FTC analysis.” 143
140
Defs.’ Ans. Br. 41 (emphasis added); see also Defs.’ Ex. 24 at FDO00000621
(“[General’s] documents on pricing would be crucial to fully understanding its [antitrust]
risk”).
141
In re MONY Gp., Inc. S’holder Litig., 853 A.2d 661, 682 (Del. Ch. 2004) (“[A]s a
general rule, proxy materials are not required to state ‘opinions or possibilities, legal
theories or plaintiff's characterization of the facts.’”) (citation omitted).
142
See Stroud, 606 A.2d at 84 n.1.
143
Pls.’ Op. Br. 49-50.
49
Defendants contend this information did not need to be disclosed because “it is
impossible to even know (and thus to accurately disclose) what the synergies—with
either [Tree] or [General]—will be, as required divestitures affect the calculation.” 144 I
agree. The record reflects that, in the small-box discount retail market in which Family,
Tree, and General compete, a transaction between any two of those competitors likely
would require divestitures to receive FTC approval. Because the magnitude of potential
synergies is dependent, at least in part, on the magnitude of divestitures, and because the
required divestitures are not currently known, any statement in the Proxy about potential
synergies would amount to speculation, which “is not an appropriate subject for a proxy
disclosure.” 145
Fourth, Plaintiffs contend that the Proxy’s summation of Morgan Stanley’s
comparable public company analysis is “deficient because in analyzing company
statistics, it fails to define a key term, ‘non-GAAP EPS.’” 146 As disclosed in the Proxy,
Morgan Stanley derived a range of implied share prices for the Company based on the
stock price to estimated earnings per share (EPS) ratio, or P/E ratio, for comparable
public companies. The Proxy defines the P/E ratio as the “closing stock price per share
on July 25, 2014 divided by the estimated non-GAAP EPS, for standardized year
2014.” 147 Plaintiffs insist that without a definition of “non-GAAP EPS” or information
144
Defs.’ Ans. Br. 43.
145
Loudon v. Archer-Daniels-Midland Co., 700 A.2d 135, 145 (Del. 1997).
146
Pls.’ Op. Br. 50.
147
Proxy at 114-15.
50
about how that figure was calculated for the comparable public companies, the
Company’s stockholders “are not fully informed so as to be able to assess the sufficiency
of the analysis performed and, in turn, to adequately gauge the reliability of Morgan
Stanley’s fairness opinion.” 148 In response, Defendants argue that, under In re Pure
Resources, Inc. Stockholders Litigation, 149 this granular information is beyond a “fair
summary” of Morgan Stanley’s analysis and thus need not be disclosed. 150
In Pure Resources, the parties presented Chief Justice Strine, then a Vice
Chancellor, with case law suggesting “conflicting impulses” about whether, when
seeking stockholder action, directors must disclose “investment banker analyses in
circumstances in which the bankers’ views about value have been cited as justifying the
recommendation of the board.” 151 The Chief Justice held that, under Delaware law, when
the board relies on the advice of a financial advisor in making a decision that requires
stockholder action, those stockholders are entitled to receive in the proxy statement “a
fair summary of the substantive work performed by the investment bankers upon whose
advice the recommendations of their board as to how to vote . . . rely.” 152 This “fair
summary” standard has been the guiding principle for the decision of this Court in this
area for over ten years.
148
Pls.’ Op. Br. 51.
149
808 A.2d 421 (Del. Ch. 2002).
150
Defs.’ Ans. Br. 44.
151
Pure Res., 808 A.2d at 449.
152
Id.
51
In my view, the key terms in this aspect of Morgan Stanley’s financial analysis are
the actual metrics used to derive a range of implied share prices for the Company—the
P/E ratios—and not specific inputs used to determine those metrics. Thus, under Pure
Resources, a disclosure about the non-GAAP EPS values for the listed comparable
companies is more than is required for the Proxy to disclose a fair summary of Morgan
Stanley’s analysis. In any event, the non-GAAP EPS values can easily be derived from
the disclosed P/E ratios and the publicly available closing stock prices for the comparable
companies.
Fifth, Plaintiffs submit that the Proxy “fails to disclose the projections prepared
and provided by [the Company’s] management, as well as the Wall Street analyst
projections that [the Company] instructed Morgan Stanley to consult.” 153 The Proxy
discloses that Morgan Stanley used three sets of projections in deriving several ranges of
implied share prices for the Company: (i) a base case of management projections; (ii) a
“sensitivity” case, which was identical to the base case “except that the EBITDA margin
following the 2016 fiscal year was held constant with the 2016 fiscal year”; 154 and (iii) a
“Wall Street” case representing “certain publicly available Wall Street projections of [the
Company], which Morgan Stanley used and relied on with the consent of the [Board].”155
Defendants describe this claim as baseless because the base case and sensitivity case
153
Pls.’ Op. Br. 51.
154
Proxy at 128.
155
Proxy at 112.
52
financial projections are fully disclosed, and the basis for the Wall Street case projections
is also adequately disclosed. 156
Plaintiffs’ contention that the Board failed to disclose the base case or sensitivity
case projections is without merit because the Proxy fully and fairly discloses that
information. 157 As to the Wall Street case, Plaintiffs have not shown a reasonable
probability that a reasonable stockholder would think that the undisclosed (but publicly
available) analyst projections—as opposed to the disclosed ranges of implied share prices
derived from them—would significantly alter the total mix of information available in the
Proxy. In my view, analyst projections generally are far less important than management
projections. 158 This is especially the case here where the Wall Street case projections,
although the Board approved Morgan Stanley’s use of them, imply a lower (and often
significantly lower) share price range than implied by either the management base case or
sensitivity case projections. 159 For these reasons, I am hard pressed to see how a
156
Defs.’ Ans. Br. 44.
157
Proxy at 130.
158
See In re BioClinica, Inc. S’holder Litig., 2013 WL 673736, at *5 (Del. Ch. Feb. 25,
2013) (citing In re Netsmart Techs., Inc. S’holders Litig., 924 A.2d 171, 203 (Del. Ch.
2007)) (“Generally, the failure of a company to disclose management’s financial
projections in its proxy materials, when those projections have been relied on by a
financial advisor to render a fairness opinion, is a material omission that will sustain
injunctive relief if not corrected.”).
159
See Proxy at 115-18.
53
reasonable stockholder would find the specific analyst projections Morgan Stanley used
to be material in deciding whether to vote in favor of the Merger. 160
Sixth, Plaintiffs assert that, when read in concert, two statements in the Proxy are
misleading as to “the cut-off date for [the Company’s projections] considered” by
Morgan Stanley in its financial analysis. 161 Those two statements are:
• On page 111, the Proxy states that, in relying on the Company’s
projections, Morgan Stanley assumed that they “had been reasonably
prepared on bases reflecting the best currently available estimates and
judgments of the . . . management[] of [Family] . . . of the future financial
performance of [Family]”; and
• On page 129, the Proxy states that “[t]he prospective financial information
does not reflect [the Company’s] current estimates and does not take into
account any circumstances or events occurring after the date it was
prepared.”
In my opinion, no reasonable stockholder could view these statements as misleading:
they simply reflect that the projections relied upon by Morgan Stanley were reflective of
management’s best estimates of future performance as of the date they were prepared—
not as of the date of the Proxy.
Seventh, and finally, Plaintiffs contend that the Proxy “fails to disclose the
projected costs to be expended to achieve synergies with [Tree] . . . [and] the sources for
160
See Dent v. Ramtron Int’l Corp., 2014 WL 2931180, at *13 (Del. Ch. June 30, 2014)
(“This is simply a ‘tell me more’ request that, unlike a viable disclosure claim, fails to
identify how the analysis is misleading or incomplete if it does not disclose specifically
which publicly available source of information [the company’s financial advisor] used to
do its work.”).
161
Pls.’ Reply Br. 21.
54
the respective synergy projections.” 162 Plaintiffs’ also seek an explanation for “the
‘additional run-rate synergies’ of $50mm in both bases.” 163 Defendants argue that
Plaintiffs have not cited any authority that such “minutiae underlying synergies” must be
disclosed. 164 In my opinion, this category of information is immaterial minutiae that no
reasonable stockholder would view as actually important in deciding how to vote.
In sum, Plaintiffs have failed to demonstrate a reasonable probability of success
that a reasonable stockholder would view any of these seven categories of information as
material—i.e., as significantly altering the total mix of information made available—in
deciding how to vote at the December 23 special meeting.
H. Irreparable Harm and the Balance of the Equities
Absent Court intervention, Plaintiffs and Family’s other stockholders will have the
opportunity to decide for themselves on December 23, 2014, whether they want to
approve the proposed Merger. The Merger offers a meaningful premium and apparent
deal certainty. I see no reason why the Court should deprive the Company’s stockholders
of the opportunity to choose between the proverbial “bird in the hand or the two in the
bush.”
In entering the Merger Agreement, including the fiduciary out provision in Section
5.3(c), the Board made an informed decision that, to obtain the highest value reasonably
available for the Company’s stockholders, the Board should not risk losing the
162
Pls.’ Op. Br. 53.
163
Id.
164
Defs.’ Ans. Br. 43 n.110.
55
consideration offered in the Merger unless a third-party bidder submitted a financially
superior proposal that, among other terms, was reasonably expected to lead to a
transaction that is reasonably likely to be completed. In other words, the Board decided
to maximize stockholder value by focusing on the financial terms and deal certainty, not
the financial terms in isolation. There is no threat of irreparable harm because there is no
preclusive or coercive provision in the Merger Agreement or any ancillary agreement that
prevents General or any other third-party from submitting a proposal that, in the Board’s
good faith judgment, offers better value to stockholders than the Merger—i.e., a
financially superior proposal that offers a level of antitrust assurances comparable to that
of the Merger Agreement. Plaintiffs, moreover, have failed to establish that the Proxy is
missing any material information such that the stockholder vote would be uninformed. 165
Finally, from the standpoint of the Company’s stockholders, the risks of a
preliminary injunction far outweigh the possible benefits from delaying the stockholder
vote on a premium-generating transaction. This is not a case in which the Board has
unreasonably prevented the stockholders from choosing between two offers. 166 Rather,
the Board has reasonably decided not to engage in discussions with General because
General has not, in the Board’s informed and good faith judgment, offered a better value
for the Company’s stockholders. Using the Chief Justice’s words from Dollar Thrifty, I
165
See, e.g., In re Plains Exploration & Prod. Co. S’holder Litig., 2013 WL 1909124, at
*11 (Del. Ch. May 9, 2013).
166
See, e.g., Paramount Commc’ns Inc. v. QVC Network Inc., 637 A.2d 34 (Del. 1994)
(affirming the issuance of a preliminary injunction to permit the target company’s
stockholders to consider two competing tender offers).
56
conclude that “the balance of harms tilts against an injunction, especially because the
[Family] stockholders are free to turn down the [Tree] deal for themselves if they are
confident that either the company will thrive on its own or that [General] will actually
come through with a higher binding deal, secure antitrust approval, and pay the promised
consideration.” 167
IV. CONCLUSION
For the foregoing reasons, Plaintiffs’ motion for a preliminary injunction is
DENIED.
IT IS SO ORDERED.
167
Dollar Thrifty, 14 A.3d at 618. In addition to making a tender offer, General is
actively soliciting proxies against the Merger. “[W]hen the arsenals of all parties have
been unleashed so as to fully and completely educate the shareholders of their choices, it
is not for this Court to ride to their rescue.” Phelps Dodge Corp. v. Cyprus Amax
Minerals Co., 1999 WL 1054255, at *2 (Del. Ch. Sept. 27, 1999).
57