The use of confis in hostile situations has generated little Delaware case law aside from Chancellor Leo E. Strine Jr.'s 2007 decision in the buyout of Topps Co., where the judge voided a standstill. But Strine and colleague Vice Chancellor J. Travis Laster recently addressed the issue in hearings in two separate cases.
Strine heard a case arising from Validus Holdings Ltd.'s hostile bid for Transatlantic Holdings Ltd. The target had agreed in June to sell to Allied World Assurance Co. Holdings AG for $2.9 billion in stock before Validus lobbed an unsolicited $3.2 billion cash-and-stock bid. Even though Validus offered more than Allied World, Transatlantic refused to talk to Validus unless it signed a confi similar to the one that Allied World consented to and incorporated into its merger agreement with Transatlantic. That confi included a standstill.
National Indemnity Co., a subsidiary of Berkshire Hathaway Inc., signed such a confi after it made an unsolicited bid for Transatlantic a few days after Validus. But Berkshire never makes hostile bids, so the standstill wasn't an issue for National Indemnity.
Validus rejected Transatlantic's request, since signing the confi, which included a standstill, would have barred it from going ahead with its hostile exchange offer. Instead, Validus made a hostile bid on July 25 and sued to challenge Transatlantic's takeover defenses. At an Aug. 22 hearing, Strine rejected Validus' argument that the Transatlantic board could not sign a merger agreement that required a topping bidder to sign a confi with a standstill to be able to engage with the target board.
The judge said: "It is pretty well understood that part of what you can do as a first-in bidder who is binding yourself to buy a company is get some deal protections that insure you won't be topped lightly; that there aren't free riders; and then make the target board make certain determinations before they get out of a merger agreement." Strine said the target board has to use the standstill requirement in good faith, an oblique reference to his ruling in Topps.
Allied World and Transatlantic abandoned their deal Sept. 15, with the target paying the scorned suitor a $35 million breakup fee and $13.3 million in expenses. Transatlantic would pay $66.7 million if it entered into any other deal within a year. National Indemnity pulled its offer on Sept. 19, and Validus signed a confi on Sept. 23, thereby putting on hold its fight for control of Transatlantic's board.
Laster emphasized the vulnerability of standstills to judicial challenge at a Sept. 8 hearing where he approved the settlement of litigation brought by shareholders of RehabCare Group Inc. who challenged the company's $1.3 billion sale to Kindred Healthcare Inc. "I do think it is weird that people persist in the 'agree not to ask' in the standstill," said Laster, referring to a standard clause in confis that bars the bidder from asking the target for a waiver of the standstill so that the bidder can make a hostile bid. "When is that ever going to hold up if it's actually litigated?"
Laster pointed to Strine's decision in the 2007 litigation arising from the bidding for Topps. In that case, Topps agreed to sell to a buyout group led by management and former Walt Disney Co. CEO Michael Eisner. The merger agreement provided for a go-shop process. As part of that process, potential bidders had to sign a confi that included a standstill. A reluctant Upper Deck Co. agreed to the confi but later sued to challenge Topps' refusal to waive the standstill.
Strine enjoined the vote and released Upper Deck from the standstill. The judge held that standstills have a legitimate function in auctions but "are subject to abuse" if the target board uses them "improperly to favor one bidder over another, not for reasons consistent with stockholder interest, but because managers prefer one bidder for their own motives."
Strine was skeptical of the Topps board because management did not want to sell to its longtime archrival and very much hoped to preserve its own deal. His different responses in Topps and Transatlantic suggest that his suspicion of a target board's motives -- rather than a general skepticism toward confis and standstills -- drove the result in Topps.
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