March 4, 2020

Frenemies: Xerox’s Not Particularly Hostile Bid for HP

Xerox finally launched its long-threatened tender offer for HP earlier this week. The tender offer involves a combination of cash and stock, and while it certainly ratchets up the market pressure on HP’s board, it really doesn’t put much legal pressure on them.  That’s because, as Prof. Ann Lipton pointed out in this tweet, Xerox has conditioned its offer on being able to engage in a back-end merger without shareholder approval under Section 251(h) of the DGCL.

This excerpt from Xerox’s Form S-4 registration statement explains that this means the deal is effectively conditioned on HP’s board agreeing to enter into a merger agreement with Xerox:

Under Section 251(h) of the DGCL, if (a) HP and Purchaser have entered into a merger agreement approving the offer and second-step merger under Section 203 of the DGCL and opting into Section 251(h) of the DGCL before consummation of the offer and (b) Purchaser acquires shares of HP common stock pursuant to the offer and, following consummation of the offer, owns a majority of the outstanding shares of HP common stock, Purchaser will be able to effect the second-step merger as a “short form” merger without further approval of the HP Board or a vote of the remaining HP stockholders. The offer is effectively conditioned on those events occurring. . . .

There’s nothing prohibiting a bidder from conditioning a tender offer on the target’s agreement to enter into a merger agreement, but under Delaware law, that means that the target’s decision about whether to enter into such an agreement is likely to be evaluated under the business judgment standard, instead of being subject to enhanced scrutiny under Unocal. Here’s an excerpt from Chancellor Allen’s opinion in TW Services, Inc. v. SWT Acquisition Corp., (Del. Ch.; 3/89):

“The offer of SWT involves both a proposal to negotiate a merger and a conditional tender offer precluded by a poison pill. Insofar as it constitutes a proposal to negotiate a merger, I understand the law to permit the board to decline it, with no threat of judicial sanction providing it functions on the question in good faith pursuit of legitimate corporate interests and advisedly.”

When I tweeted the point that HP’s board doesn’t face much heat under Delaware law, Ann Lipton responded with the observation that there’s at least one legal obligation resulting from Xerox’s bid that may turn up the heat. That’s because as a result of Xerox’s filing, the HP board will have to file a Schedule 14D-9 with the SEC taking a position on the proposal sooner than might be the case in a proxy fight.

John Jenkins