As I’m sure most readers are aware, JetBlue made a move last week to “deal jump” Frontier Airlines’ pending acquisition of Spirit Airlines. In February, the parties announced that Frontier would acquire Spirit in a stock & cash transaction valued at $25.83 per share, based on Frontier’s market price on the date of the announcement. On April 5, JetBlue announced its own all-cash $33 per share bid for Spirit. On Friday, Spirit announced that its board had determined that JetBlue’s offer could reasonably be expected to lead to a “Superior Proposal” and that it intends to “engage in discussions with JetBlue with respect to JetBlue’s proposal in accordance with the terms of the Company’s merger agreement with Frontier.”
I took a look at the language in the merger agreement surrounding Spirit’s ability to respond to an unsolicited overture, which appears as part of the deal’s no-shop clause in Section 5.4, and about the only thing that’s remarkable about it is how unremarkable it is. It’s pretty standard stuff. Still, there’s one aspect of these clauses that I’ve always found interesting, and that’s the underlined language laid out in this excerpt from Section 5.4(d), which permits Spirit to engage in negotiations with a prospective suitor if, among other things:
the Company Board determines in good faith, after consultation with its financial advisor and outside counsel, that such Acquisition Proposal constitutes or could reasonably be likely to lead to a Superior Proposal, (iv) after consultation with its outside counsel, the Company Board determines in good faith that the failure to take such actions would reasonably be expected to be inconsistent with the fiduciary duties owed by the directors of the Company to the stockholders of the Company under applicable Law. . .
When it comes to a decision to negotiate with someone who is putting forward a potentially superior proposal, the fiduciary duty hurdle imposed by the merger agreement seems pretty low. The deal protections cases of the late 1990s made it clear that while a board may under appropriate circumstances refuse to negotiate with a competing bidder, that decision must be an informed one, and refusing to talk with someone that’s submitted a potential Superior Proposal could well be inconsistent with the directors’ fiduciary duties. See, e.g., ACE Limited v. Capital Re, 747 A.2d 95 (Del. Ch. 1999).
But that same phrase is used in Section 5.4(f), which gives Spirit the right to terminate the agreement in order to accept a Superior Proposal. Again, this is a pretty standard formulation of what’s necessary to exercise a Superior Proposal out, but I think it involves a more complicated inquiry than the one involved in determining whether or not the board has an obligation to speak with another bidder.
Spirit’s deal with Frontier is primarily a stock-for-stock transaction and is unlikely to trigger an obligation to maximize immediate shareholder value under Revlon. In contrast, the deal that JetBlue has put on the table is all cash and would trigger Revlon. When Revlon applies, the board’s obligation to maximize immediate shareholder value means that it can’t consider the long-term value associated with an alternative transaction. That’s usually justified by an argument that a Revlon transaction involves a change in control, and that it represents the only chance that existing shareholders will have to extract a control premium for their ownership interest.
Since Spirit’s deal with Frontier doesn’t involve a change in control, under Delaware law the Spirit board was permitted to consider potential long-term value creation when it entered into it. Now, JetBlue is offering a competing all-cash transaction. Just because that cash deal is on the table, Spirit’s board isn’t automatically compelled to go into Revlon-mode and abandon its deal with Frontier, but under what circumstances might its fiduciary duties require it to do that?
It seems to me that the most straightforward way for the Spirit board to determine that failing to accept JetBlue’s proposal “would reasonably be expected to be inconsistent” with its fiduciary duties is if it concluded that the immediate value represented by JetBlue’s deal exceeds the long-term value likely to be created by the existing deal with Frontier. That’s not just a matter of doing the math, because the board could also consider the risks associated with achieving the long-term value associated with the Frontier transaction, as well as the execution risk associated with the JetBlue proposal, in making this assessment.
In any event, my point is that while both the clause permitting Spirit to negotiate and the one allowing it to terminate the deal use the same language, what the board has to do to exercise the merger agreement’s Superior Proposal out and accept JetBlue’s competing proposal involves a more complex analysis than the one involved with a decision to negotiate with JetBlue in the first place.
– John Jenkins