December 22, 2014

Delaware’s C&J Energy Services: Boards Can Decide How to Conduct a Sale of the Company Process

Here’s news from Friday as reflected in this Wachtell Lipton memo (there are more memos on this case in our “Go-Shop” Practice Area):

Earlier today, the Delaware Supreme Court issued a landmark decision strongly reaffirming two basic principles of Delaware merger law: first, that a board of directors has wide latitude to craft a sales process, including to choose a single-bidder strategy; and, second, that the Delaware courts, even if they find that a board erred in decision-making, cannot rewrite the merger contract in a way that reduces the buyer’s rights. C&J Energy Servs., Inc. v. City of Miami Gen. Emps.’ & Sanitation Emps.’ Ret. Trust, No. 655/657, 2014 (Del. Dec. 19, 2014) (en banc).

At a preliminary hearing last month, the Court of Chancery enjoined a proposed merger transaction involving C&J Energy Services and Nabors Industries, because the C&J board did not affirmatively shop the company either before or after signing the deal. The court’s order required C&J to run a go-shop process notwithstanding the merger agreement’s no-shop provision, and it ruled that Nabors could not treat C&J’s solicitation efforts as a basis to walk away.

The Supreme Court unanimously reversed, emphatically rejecting the premise that Revlon duties require an auction or other proactive market check. To the contrary, Chief Justice Strine wrote, “Revlon does not require a board to set aside its own view of what is best for the corporation’s stockholders and run an auction whenever the board approves a change of control transaction.” Independent and well-informed directors may choose any reasonable path when selling a company, “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.” Thus, for example, a board may choose to conduct discussions with only a single potential buyer, and then sign up a merger agreement with customary “no shop” and “break fee” provisions, provided that there is an opportunity, through a fiduciary out, for a new bidder to challenge the agreed transaction by offering superior terms.

The Court also held that judges may not “blue-pencil an agreement to excise a provision beneficial to” a buyer while simultaneously barring the buyer from “regard[ing] the excision as a basis for relieving it of its own contractual duties.”

C&J thus offers practical guidance for transaction planners by reaffirming that Revlon does not mandate any specific sales procedure. It is an important decision that recognizes stockholder value is best served by legal rules that give well-motivated and engaged boards the discretion necessary to craft effective sales processes.