DealLawyers.com Blog

In January, VC Zurn denied a Comerica stockholder’s motion for a temporary restraining order enjoining the closing of the stock-for-stock merger with Fifth Third Bancorp. Later that month, she issued a letter opinion explaining the reasoning in advance of the merger closing. In HoldCo Opportunities Fund V v. Arthur G. Angulo et al. (Del. Ch.; 1/26), the stockholder alleged, among other things, that Comerica’s fiduciaries agreed to unenforceable deal protection provisions that were invalid under DGCL Section 141(a).

HoldCo contends the force-the-vote provision, the no-shop and fiduciary out, the mandatory renegotiation provision, the one-year outside date, and the 4.7% termination fee locked Comerica into the Fifth Third deal for a year without the right to terminate it for a better deal. HoldCo sought to enjoin closing the Merger—but not the stockholder vote—until Defendants redrafted the Merger Agreement to relax its deal protection provisions [. . .] HoldCo asserts the deal protections are illegal under [DGCL Section] 141(a) and Omnicare, as per se invalid constraints on the Comerica board’s authority, and unreasonable under Unocal, in that they forced upon stockholders a deal that entrenched Comerica fiduciaries in Fifth Third roles.

You already know VC Zurn didn’t find these arguments persuasive.

Boards are required to bargain for effective fiduciary out clauses permitting them to discharge their managerial authority in fidelity to stockholders, [but . . .] a fiduciary out need not be coupled with a termination right, or be free of a break fee, to give the board the necessary freedom to exercise its fiduciary duties [. . .] The one-year outside date does not strip the board of its managerial authority to decide if the Merger is best for stockholders: it defines how long the board must work to close the highly regulated Merger once stockholders approve it.

In her blog post on this letter opinion, Law Prof Ann Lipton asks whether the DGCL 141(a) challenge to these deal protections survives after the adoption of Section 122(18). Put another way, she asks “Does 122(18) apply to deal protections?” She points out the many references to Moelis in the briefings and notes, “Certainly, an acquirer is a ‘prospective stockholder,’ so doesn’t that mean the board has at least the authority to tie its own hands in a merger agreement?”

In its alert about the “market practice” DGCL amendments, Fried Frank referred to merger agreements when discussing the effectiveness of Section 122(18). VC Laster has written about the potential implications of Section 122(18) in the context of a merger (but focusing on the extent to which a contract can require a board to recommend a merger under Section 251).

– Meredith Ervine