From Kevin Miller of Alston & Bird, a member of our Advisory Board:
Here is the transcript of a September 3rd oral argument on plaintiffs’ motion for a preliminary injunction in Forgo v. Health Grades. Plaintiffs sought to enjoin the pending acquisition of Health Grades by affiliates of Vestar Capital, a private equity firm with portfolio companies in the health care industry, based on alleged violations of the board’s Revlon duties. The question squarely put by plaintiffs was “how little can a board do and still comply with its duties to get the best price under Revlon when it is attempting to sell the company.”
Ultimately, the transcript can be read two ways: (i) for the proposition that the Delaware Court of Chancery will not enjoin a transaction on Revlon grounds absent a topping bid, coercive structure or disclosure violation and (ii) a cautionary tale regarding appropriate process, particularly relating to single private equity bidder negotiations. The Court discusses in detail its concerns regarding the motivations of management in the context of a potential sale to a private equity firm – the risk that management will only negotiate a reasonable but not too aggressive sale price in order to preserve the opportunity to benefit from the increase in value on any rollover or newly granted equity.
In the absence of a topping bid, and despite the Court’s view that the plaintiffs have a reasonable probability of success on the merits of their Revlon claim, the Court declined to issue an injunction based on its assessment of the potential harms of granting the injunction vs. declining to grant the injunction. Given the transcript is 178-pages long, I have included a few noteworthy quotes:
THE COURT: I remain concerned about the extent to which [other ]private equity buyers really do vigorously come in when the management team seems to be happy and that they say “Well, there’s no deals with management.” Well, except management has agreed to vote their stock in favor of the deal — and that’s a pretty good signal of happiness — and they’ve signed the deal and, you know, they seem to be all — all enamored with each other.
THE COURT [addressing Plaintiffs’ counsel]: . . . name some situations where this Court enjoined transactions in a situation where there was no apparent coerciveness to the vote [e.g., a termination fee payable upon naked no vote] or lack of informedness about the vote simply because it found a reasonable probability of success on the merits on the Revlon claim.
PLAINTIFFS’ COUNSEL: We’re moving down the scale. If this is okay — Your Honor knows that this transcript is going to go around the Internet by this afternoon or over the weekend or something, and Your Honor’s decision will be read by everybody.
PLAINTIFFS’ COUNSEL: The investment bankers and the deal counsel who read this are going to say “If we can get away with this, we can get [away] with anything.”
THE COURT: Isn’t one of the things, though, that’s little different here about — in terms of Vestar, to give them some credit, they did offer up closing certainty more typical of a strategic buyer than a traditional private equity buyer; right? . . . I mean, they’re willing to be subject to a specific performance remedy. And there is no — as I understand it, no financing contingencies at all; right? . . . . And, in fact, the target is a third-party beneficiary of the financing commitment papers?
THE COURT: What I’m trying to figure out, you know, how I endorse in some way a model where you now move to basically single-bidder negotiations with private equity firms, because private equity firms, they have such a scary capacity to walk away, that you entrust to someone whose financial interests are tremendously different from the stockholders the primary negotiating role. You allow them to go out and have unsupervised communications. The only expression of interest during the process is not supervised by the independent directors or the financial or legal advisors of the company. And then the Court is supposed to take assurance in a market test that is done at the height of summer vacation season, is only 30 to 40 days long, during a difficult financing period, when all the body language to the strategic — to the private equity marketplace is the Hicks brothers and their pals are very happy with the deal they have. It’s pretty low bar.
THE COURT’S RULING: . . . today what I’m being asked to do is to grant a preliminary injunction against the procession of a tender offer. And that makes me have to consider whether there’s a reasonable probability of success on the merits for the plaintiffs, which is essentially what will — what does the record show about what I would likely find as to the merits after trial. Then I have to see whether there would be any irreparable injury from the — if — if the plaintiffs are not granted an injunction; and then I have to weigh the relative balancing of the harms.
. . . so at bottom, my primary basis, I cannot under the balance of the harms in good conscience drop the injunction flag, because, in my view, that would be an act of arrogance in which I take out of the hands of people who really have money at stake the ability to make this determination for themselves. And because there are other remedies [i.e., appraisal], I think that’s the thing.
So I deliver unto the plaintiffs somewhat of a Pyrrhic victory.