Earlier this month, Spirit Airlines’ board rejected JetBlue’s efforts to persuade it to abandon its deal with Frontier in favor of JetBlue’s competing proposal. Yesterday, JetBlue announced that it had launched a tender offer for Spirit’s outstanding shares. Most media reports characterized the offer as “hostile,” and in a sense that’s true, because the offer certainly wasn’t welcomed by Spirit’s board. But as Ann Lipton noted on her Twitter feed, like most other unsolicited tender offers announced in recent years, this one isn’t really all that hostile. Why? Here’s an excerpt from JetBlue’s Offer to Purchase, which discusses one of the conditions to its offer:
Consummation of the Offer is conditioned upon, among other things . . . JetBlue, the Purchaser and Spirit having entered into a definitive merger agreement (in form and substance satisfactory to JetBlue in its reasonable discretion) with respect to the acquisition of Spirit by JetBlue providing for a second-step merger pursuant to Section 251(h) of the General Corporation Law of the State of Delaware (the “DGCL”), with Spirit surviving as a wholly-owned subsidiary of JetBlue, without the requirement for approval of any stockholder of Spirit. . .
That language indicates that JetBlue’s tender offer is contingent on the Spirit board authorizing it to enter into a merger agreement with Jet Blue. Legally, that’s a big deal, because while Delaware would ordinarily subject a board’s decision to resist a tender offer to heightened scrutiny under the Unocal standard, that isn’t necessarily the case when a deal is conditioned upon a merger agreement.
As we’ve discussed before, when a bidder conditions its offer on a merger agreement, the board’s decision as to whether or not to enter into that agreement generally is subject to business judgment review. 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.”
So, from a purely legal perspective, this offer doesn’t put a lot of pressure on Spirit’s board – its decision not to enter into a merger agreement with JetBlue will likely be evaluated under the lenient business judgment rule standard. But the legal issues are ultimately secondary here. By launching a tender offer, JetBlue may help demonstrate its bona fides to Spirit’s investors, which may in turn increase the likelihood that Spirit’s shareholders will vote against the Frontier deal and increase the pressure on Spirit’s board to consider its competing proposal.
– John Jenkins