January 6, 2015

A Bird in the Hand Trumps Uncertainty

Here’s analysis from Cliff Neimeth of Greenberg Traurig:

A few weeks ago, the Delaware Court of Chancery denied plaintiffs’ motion to enjoin the pending vote (scheduled for December 23, 2014) on Dollar Tree’s $76 per share cash and stock acquisition of Family Dollar Stores. Back in September 2014, Interloper and Family Dollar direct competitor, Dollar General, commenced an unsolicited tender offer to acquire Family Dollar at (a now-revised) $80.00 net per share in cash. The July 27, 2014 merger agreement between Family Dollar and Dollar contains a relatively unremarkable package of deal protections and fiduciary outs and related covenants.

Importantly (due to substantive antitrust risk and as a tactical knock out punch to Dollar General), Dollar Tree has agreed to “hell or high water” provisions, effectively requiring it to divest as many stores as necessary to obtain FTC approval of the deal, whereas, to date, Dollar General merely has offered to divest up to 1,500 stores as necessary to obtain FTC approval and to pay Family Dollar a $500 million reverse break up fee in the event FTC approval of its offer would not be obtained.

Moreover, Dollar General’s tender offer, which cannot be consummated even if sufficiently valid tenders are deposited (due to HSR voting stock $$$ purchase limits and Family Dollar’s rights plan currently in effect), remains subject to Dollar General’s completion of confirmatory due diligence. Dollar General has not indicated a willingness to match Dollar Tree’s hell or high water approach, and Family Dollar’s counsel has advised the board that Dollar General’s offer has a 60% chance of failing to obtain FTC approval.

In short, after consultation with counsel and its financial advisor, Family Dollar has declined, to date, to furnish information to and engage in discussions with Dollar General pursuant to the “window shop” exceptions to the no-solicitation covenant in the merger agreement. Plaintiffs’ asserted, among other things, that Dollar Family’s directors have acted unreasonably under Revlon by failing to determine under the window shop clause that Dollar General’s offer is “reasonably likely to lead to a Superior Proposal.”

Without detailing here the factual findings and analyses of the Chancery Court (please read the decision for these – there are some interesting touch points), Chancellor Bouchard determined that plaintiffs’ failed to demonstrate a reasonable probability of success on the merits, and further failed to find irreparable harm or that the balance of the equities under the circumstances warranted injunctive relief.

This decision illustrates, yet again, that under Revlon, it is not unreasonable for a target board to avoid risking a premium bid with a high degree of closing certainty (thus, a known “bird in the hand”) and potentially breach the no-shop covenants in a merger agreement, to pursue a nominally higher, yet highly conditional, bid with uncertain consummation certainty.

Once again, this decision underscores that the courts will not lightly second guess the decisions of independent and disinterested directors who act properly to seek to obtain the highest immediate value in a sale of control. Such directors are generally free to select the timing and pathway to achieve value maximization and they are (and should be) the architects and overseers of a target’s negotiating strategy. Revlon does not require perfection; it does, however, require substantive reasonableness with respect to the decision to sell control and the process utilized to seek price maximization (including the information obtained and relied on).