DealLawyers.com Blog

August 22, 2007

VC Strine on Appropriate Conditions for Permissive Advancement Rights

Following up on Monday’s blog, here is more analysis from Travis Laster: On Tuesday, August 14, Vice Chancellor Leo E. Strine, Jr. issued his ruling in Mercier v. Inter-Tel (Delaware), Inc. This very significant opinion upheld a special committee’s decision to postpone a stockholder meeting on the day of the meeting so that the company could solicit more support for a pending merger. At the time the special committee acted, the directors knew with mathematical certainty that the merger otherwise would have been voted down.

As a doctrinal matter, Inter-Tel will stir much debate. VC Strine holds that the reasonableness standard from Unocal should be the sole standard of review for M&A and meeting issues and that Blasius is unnecessary, ill-suited and should be limited to director elections. VC Strine previously suggested this approach in Chesapeake v. Shore, and then outlined it in the article he co-wrote with Chancellor William T. Allen and now Justice Jack Jacobs. Applying Unocal, VC Strine held that the directors’ actions were “reasonable in relation” to a “legitimate corporate objective.”

After conducting his Unocal-style analysis, VC Strine also found a “compelling justification” under Blasius: “compelling circumstances are presented when independent directors believe that: (1) stockholders are about to reject a third-party merger proposal that the independent directors believe is in their best interests; (2) information useful to the stockholders’ decision-making process has not been considered adequately or not yet been publicly disclosed; and (3) if the stockholders vote no… the opportunity to receive the bid will be irretrievably lost.”

The larger Unocal vs. Blasius debate is too grand for this quick update. Here are some other highlights of the opinion that focus on more mundane issues:

1. VC Strine did not appear troubled by and did not comment on the fact that the Board “postponed” the meeting (i.e. moved the date without convening the meeting) rather than convening the meeting for the sole purpose of adjournment. The DGCL speaks only of adjournment, not of postponement. It has nevertheless been the widespread practice that a meeting can also be “postponed” without being convened and adjourned. Inter-Tel supports this approach.

2. Inter-Tel does not resolve whether for notice purposes, the “postponed” meeting must be treated as a new meeting for purposes of the notice to stockholders required under the DGCL. For a merger vote under Section 251, notice must be given at least 20 days in advance of the meeting. For an adjourned meeting, a new notice is not required if the date of the meeting is moved in a single adjournment by less than 30 days. The issue of sufficient notice for the postponement may have been raised by the parties but mooted when the Board again reset the date of the meeting so there would be enough time to satisfy a 20 day minimum notice requirement. The argument that a “postponed” meeting should be treated as an “adjourned” meeting for purposes of notice therefore remains unaddressed.

3. Consistent with SEC guidance, the proxy included a proposal seeking stockholder authority to “adjourn or postpone the special meeting” to solicit more proxies. A majority of the proxies voted had not granted authority for this issue. VC Strine had no trouble permitting the board to postpone the meeting, although he noted that the issue had not been challenged.

4. In a footnote, VC Strine observed that “[i]f the special meeting had actually been convened, Inter-Tel’s bylaws would seem to have required stockholder consent to adjourn.” Section 2.8 of Inter-Tel’s bylaws contains standard language providing that “The stockholders entitled to vote at the meeting, present in person or represented by proxy, shall have the power to adjourn the meeting form time to time.” The bylaws did not give the meeting chair the specific power to adjourn a meeting without a vote of stockholders. While Inter-Tel’s comment is dictum, it may now be more difficult to assert that the chair of a meeting has inherent authority to adjourn without a vote of stockholders. Corporations who wish to preserve the power of the chair to adjourn a meeting without a vote of stockholders should make that authority express in their bylaws.

5. VC Strine recognized that directors are entitled to take steps to promote and obtain approval of the matters they recommend, such as the merger. “Here’s a news flash: directors are not supposed to be neutral with regard to matters they propose for stockholder action.”

6. VC Strine agreed that the following factors were sufficient to justify a same-day meeting postponement at a time when the directors knew the merger would be voted down and had been advised by their proxy advisor that a delay might change the outcome: (i) ISS’s suggestion that it might change its negative recommendation if it had more time to study recent market events (including the debt market’s volatility and the bidder’s refusal to increase the consideration), (ii) a founder’s competing proxy proposal for a recapitalization that was still being reviewed by the SEC, and (iii) the desire to announce the company’s negative second-quarter results. The Court found that the directors acted with “honesty of purpose” and noted that they did not have any entrenchment motive because they would not serve with the surviving entity. It does not appear that the directors stood to receive material amounts from director options or other payments that would vest or accelerate in connection with the merger.

7. The court recognized the possibility that, by setting a new record date, the special committee permitted arbs to purchase more shares and ensure approval of the merger. Noting his reluctance to “premise an injunction on the notion that some stockholders are ‘good’ and others are ‘bad short-termers,'” VC Strine ultimately found that “the reason why the vote came out differently… was not because the stockholders eligible to vote were different, but because stockholder sentiment regarding the advisability of the Merger had changed.” VC Strine left room for future challenges where arbs materially influence the outcome of merger votes when a record date is changed.

8. VC Strine criticized the “coy nature” of the directors’ disclosures surrounding the postponement, which failed to disclose the potential arb-related results from a new record date or that the merger would have been voted down at the original meeting. He nevertheless held that those facts were immaterial to the merits of the merger and/or obvious as a matter of common sense to reasonable investors.