559 A.2d 174 (Del. 1989)
Macmillan, Inc. is a publishing, educational and informational services company with approximately 27,870,000 common shares traded on the New York Stock Exchange.1 In May 1987 its chairman and CEO Edward P. Evans and president and COO William F. Reilly began exploring defensive measures including a restructuring that would give management majority control of a restructured entity through restricted shares, options and an ESOP whose trustee they would control.2 The board approved related transactions on June 11, 1987, including golden parachute agreements for Evans and Reilly and a poison pill exempting the ESOP.3
The Robert M. Bass Group acquired 7.5 percent of Macmillan stock and made an initial $64 per share offer in May 1988.4 After the board rejected that offer and approved a management restructuring valued at $64.15 per share, Bass raised its bid to $73 per share.5 On July 14, 1988 the Court of Chancery preliminarily enjoined the restructuring in Macmillan I.6 Hours later Evans and Reilly authorized investment advisors to explore a sale of the company and began discussions with KKR for a management-sponsored leveraged buyout.7
On July 20, 1988 Robert Maxwell proposed an $80 all-cash merger and later made an $80 per share tender offer conditioned on receiving the same non-public information previously given to KKR.8 Maxwell increased its bid to $84, then $86.60, and then $89 per share.9 KKR submitted competing blended bids of $85, $89.50 and finally $90.05 per share.10 Throughout the process Evans and Reilly met repeatedly with KKR, provided KKR detailed due diligence information weeks before Maxwell received equivalent data, and on September 26 Evans telephoned KKR to disclose the price and form of Maxwell's $89 bid.11
On September 27, 1988 the Macmillan board approved a merger agreement with KKR that included a lockup option to purchase seven subsidiaries for $865 million, a $29.3 million breakup fee, and a no-shop clause.12 The next day Maxwell raised its cash offer to $90.25 per share conditioned on invalidation of the lockup.13 On October 4 the board rejected the new Maxwell bid.14 After a hearing the Court of Chancery on October 17, 1988 denied Maxwell's motion to enjoin the lockup, breakup fees and expenses, finding that KKR had been favored but that Maxwell had not been prevented from submitting a higher bid.15 Maxwell appealed.16
The Supreme Court of Delaware accepted the interlocutory appeal and on November 2, 1988 announced its decision reversing the denial of injunctive relief, with the full opinion issued May 3, 1989.17
Whether the Macmillan board breached its fiduciary duties of care and loyalty by conducting an auction process that favored KKR over Maxwell?18
When directors authorize management to negotiate a sale of the company, their duty changes from preserving the corporate entity to maximizing shareholder value at a sale.19 This requires the most scrupulous adherence to ordinary principles of fairness so that stockholder interests are enhanced rather than diminished.20 The board may not allow any impermissible influence inconsistent with shareholder interests to alter the strict fulfillment of these duties.21 Favoritism for one bidder to the total exclusion of another is impermissible unless the latter's offer adversely affects shareholder interests.22
Yes. The Macmillan board breached its duties of care and loyalty.23 Evans and Reilly, as participants in the KKR leveraged buyout, held significant self-interest in ensuring KKR's success.24 Yet the board wholly delegated creation and administration of the auction to Evans' handpicked advisors without oversight.25
This allowed Evans to meet repeatedly with KKR, furnish KKR detailed non-public financial information weeks before Maxwell received equivalent data, and on September 26 telephone KKR to disclose the price and form of Maxwell's $89 all-cash bid.26 The board remained torpid in the face of this misconduct, approving the KKR merger on September 27 without knowledge of the tip or the extended script that gave KKR additional bidding guidance denied to Maxwell.27 Thereby the board failed to treat bidders evenhandedly and violated the Revlon mandate that directors act solely for the shareholders' benefit in an active auction for corporate control.28
The Macmillan board breached its fiduciary duties of care and loyalty.29
Whether the lockup option and related agreements granted to KKR are valid when granted in the context of an active auction for corporate control?30
Although lockup agreements are not per se unlawful, those that end an active auction and foreclose further bidding operate to the shareholders' detriment.31 Such measures cannot survive exacting scrutiny when the decision to grant them was not informed or was induced by breaches of fiduciary duties.32 A lockup is permissible only if it confers a substantial benefit upon stockholders, draws bidders into the contest, or produces a material enhancement in the final bid.33 Crown-jewel lockups in particular demand careful board scrutiny and negotiation of alternative bids before grant.34
No. The lockup option and related agreements granted to KKR are invalid.3536 The agreement was not necessary to draw any bidder into the contest.37 KKR's final $90.05 bid represented only a nominal $0.05 per share improvement over its prior offer.38 The lockup covered seven of Macmillan's most valued subsidiaries for $865 million on a cash basis that immediately triggered a $250 million tax liability.39
This functioned as a de facto financial poison pill that ended the auction.40 Maxwell had offered $900 million for the same four divisions originally sought by KKR for $775 million.41 Yet the board granted the lockup without negotiating with Maxwell or obtaining any material benefit for shareholders beyond the de minimis price increase.42
The lockup option and related agreements granted to KKR are invalid.
Whether the Court of Chancery erred in denying injunctive relief against the KKR lockup agreement despite findings of unequal treatment of bidders?43
When a court reviews board action challenged as a breach of duty in a sale of corporate control, it applies enhanced scrutiny.44 The plaintiff must show disparate treatment of bidders.45 After that showing the court must examine whether the directors properly perceived that shareholder interests were enhanced.46 The court must also determine whether the board's action was reasonable in relation to the advantage sought.47 If the enhanced Unocal test is not met, the transaction cannot withstand rigorous judicial scrutiny under the exacting standards of entire fairness.48
Yes. The Court of Chancery erred in denying injunctive relief.49 Although the trial court found that KKR was consistently and deliberately favored throughout the auction process, including through the Evans tip and unequal information access, it applied an incorrect standard by requiring proof that the deficiencies actually deterred a higher Maxwell bid.50 Under the proper Revlon and Unocal framework the board's deception of its own directors and the resulting taint of the deliberative process rendered the lockup voidable.51
The Court of Chancery's refusal to enjoin it was inconsistent with its own factual findings of unfairness.52
The Court of Chancery erred in denying injunctive relief against the KKR lockup agreement.53
Whether the board's delegation of the auction process to management advisors without oversight satisfied the enhanced scrutiny required when a company is for sale?54
Directors may rely in good faith upon information and opinions presented by officers, employees, and experts selected with reasonable care.55 But they may not avoid their active and direct duty of oversight in a matter as significant as the sale of corporate control, particularly where insiders are among the bidders.56 When a board removes itself from the design and execution of an auction, the resulting unchecked human temptations render the process insupportable under the enhanced scrutiny mandated by Revlon and Unocal.57
No. The board's delegation of the auction process to management advisors without oversight did not satisfy the enhanced scrutiny required when a company is for sale.5859 Although the board formally concluded on September 11 that selling the company would serve stockholder interests, it placed the entire process in the hands of Evans through his chosen financial advisors with little or no board oversight.60 This allowed Wasserstein to conduct a skewed auction in which Maxwell alone was kept blind while KKR received preferential treatment.61 This abdication of the independent directors' responsibility to ensure a fair process free of self-interested interference violated the requirement of intense scrutiny and participation by independent directors under the standards of Aronson v. Lewis.62
The board's delegation of the auction process to management advisors without oversight did not satisfy the enhanced scrutiny required when a company is for sale.