February 4, 2008

Guttman v. McGinnis (or Netsmart Through the Looking Glass)

From Kevin Miller of Alston & Bird: A couple of weeks ago, Vice Chancellor Lamb of the Delaware Chancery Court ruled on a Motion to Schedule a Preliminary Injunction Hearing and for Expedited Discovery. Here is a copy of the ruling.

Background: Respironics engaged in a sale process last fall following which it agreed to be acquired by Koninklijke Philips Electronics N.V. for $66 in cash per share or aggregated consideration of approximately $5.1 billion – a 30% to 48% premium over the preceding market price, depending on the time period used as the base.

As part of the sales process, 8 potential buyers were contacted, five signed confidentiality agreements and two provided indications of interest. In contrast to Netsmart, where the company only contacted financial buyers, all of the potential buyers that were approached by Respironics were strategic buyers. In the course of negotiations Philips raised its bid from $60 to $64 and then to $66.

Towards the end of the negotiations, Philips insisted on speaking with senior management to ensure that, even though the two most senior officers would be receiving $30 million and $13 million, respectively, in the event the transaction closed, they would be willing to enter into employment agreements to facilitate post transaction integration.

The proposed merger was announced on December 21, 2007 and structured as a two step transaction, a first step tender offer commenced on January 3, 2008 and scheduled to close on February 1, 2008, followed by a second step merger.

Apparently, the plaintiff shareholders alleged that the directors of Respironics violated their Revlon duties by not contacting financial buyers (turning Netsmart on its head) and permitting the two most senior officers of the company to lead negotiations with Philips while they were negotiating their retention employment agreements. They also alleged disclosure violations.

Selected Comments from the Ruling:

VC Lamb denied plaintiffs motion and refused to schedule a preliminary injunction application. The following are selected comments from the ruling:

1. I am forced to agree with the defendants, that there is really no colorable claim asserted in the complaint or discussed in the plaintiff’s papers. And there is also, I think, certainly on the Revlon claim, no likelihood that the Court would seriously consider or entertain the idea of entering an injunction.

2. Now that we are here in January of 2008, as everyone knows, the period of intense activity by private equity companies in taking a company private, in transactions in which the company managers often were significant participants in the equity of the surviving entity, seems to have come to a screeching halt.

3. Yet, when I read the complaint and the papers that the plaintiffs submitted, the arguments advanced really are sort of weak echos of concerns the court has expressed in connection with the private equity transactions.

4. The complaint turns those concerns right on their heads, in advancing arguments that at least to my mind don’t really make sense.

5. For example, the complaint alleges, and the argument is made, that the process followed was flawed becauseā€¦[the financial advisors] didn’t — or at least didn’t appear to have contacted private equity buyers, but rather, concentrated their efforts on strategic buyers. The inverse of that argument is one that had some currency and made some sense when the transactions being done were ones where the only contacts made were with private equity buyers.

6. Dealing exclusively with strategic buyers assuages, rather than heightens, concerns about managers’ conflicts of interest.

7. I also note that there is no competing offer. It’s also a third-party transaction at a substantial premium to the preexisting market price.

8. Thus, there is essentially no likelihood, on Revlon grounds, that I would ever enjoin the transaction and, by doing that, threaten the stockholders with the loss of what appears to be a very valuable opportunity.

9. [O]n the dislcosure issues, there is nothing in the complaint that suggests or alleges that the disclousre materials are materially false and misleading.