Lessons from Topps
June 19, 2007
On June 14, 2007, Vice Chancellor Strine of the Delaware Chancery Court preliminarily enjoined a meeting of shareholders of The Topps Company to consider an acquisition of Topps by a financial buyer (an affiliate of Michael Eisner). The injunction was the result of (1) alleged misstatements and omissions in the proxy statement regarding a competing bid for Topps from The Upper Deck Company and (2) the alleged failure by the Topps Board to treat Upper Deck in an even-handed manner during a "go shop" period included in the merger agreement with Eisner's company. Among other things, the injunction prohibits Topps from holding its shareholder meeting until it has released Upper Deck from its standstill to permit Upper Deck to make a non-coercive tender offer for Topps.
Although there is much to be learned from a review of the specific conduct of the Topps Board, this note summarizes a few of the lessons with broader application that can be derived from the Vice Chancellor's opinion.
Endorsement of Go Shops. Although the Vice Chancellor concluded that the Topps Board may have violated its Revlon duty to "take reasonable measures to receive the highest value reasonably attainable", it is important to note that the Board's failures were attributable to the manner it exercised its rights during and after the "go shop" period. Indeed, the Board's original decision, even after it had received an unsolicited indication of interest from Upper Deck, to negotiate with Eisner and sign a merger agreement with the Eisner company with a "go shop" provision was endorsed by the Vice Chancellor. The Eisner agreement included a 40-day "go shop" period, a right to match for the original bidder, a 3.0% termination fee during the "go shop" period and a 4.6% termination fee thereafter. (The court noted that the termination fee payable after the "go shop" period was "a bit high in percentage terms . . . and can be explained by the relatively small size of the deal".)
In commenting on the "go shop", the Vice Chancellor noted that announcing a deal with "a credible buying group" can create "circumstances where other bidders would feel comfortable paying [more]". In these circumstances, it is reasonable for a Board to use a "go shop" to maximize the possibility of a subsequent higher bid. (We do not believe, however, the Vice Chancellor was suggesting that a "go shop" is required whenever there has not been a full auction in advance of signing the merger agreement.)
Use and Abuse of Standstills. One of the bases for the preliminary injunction was the allegation that the Topps Board has violated its Revlon duties by favoring the Eisner bid and failing to release Upper Deck from its standstill agreement to permit it to make a competing bid. In reaching this conclusion, the Vice Chancellor made two important points. First, if the original merger agreement is not the result of a "shopping process", the target Board should preserve its right to waive standstill agreements obtained from other bidders. Equally importantly, the decision noted that one of the benefits of standstills is the ability of the target Board to use them "as leverage to extract concessions from the parties who seek to make a bid" and that in certain circumstances (e.g., after a full auction) it may be appropriate for the target to agree with the high bidder not to waive standstills for other bidders.
Disclosure of Projections and Financial Advisor Valuations. The Topps decision underscores the importance of comprehensive disclosure of projections and financial advisor valuations that have been presented to the target Board. The Vice Chancellor noted that, although the proxy statement summarized a March 1, 2007 valuation analysis from Topps' financial advisor indicating that the price for the Eisner deal was at the higher end of a "conservative range" of value, the proxy statement did not include any information from an earlier (January 25) analysis from the same financial advisor that used lower discount rates and higher terminal value multiples. As a result, this earlier analysis had higher valuation ranges than the March 1 analysis and indicated that the price for the Eisner deal was at the very low end of the range. Most troubling to the Chancellor was the failure of Topps to present "any confidence-inspiring reason for [the] analytical change".
Are Financial Buyers Really Different? Vice Chancellor Strine noted that it is typical for a financial buyer's liability under a merger agreement to be limited to the amount of a negotiated reverse break-up fee and that sellers do not normally accept these types of limitations from strategic buyers. In a footnote that is not central to his decision, the Vice Chancellor notes that this "is an interesting asymmetry, and the factors driving it seem to include both economically rational ones and ones that are less rational". It is not clear whether the Vice Chancellor was inviting target Boards to resist limitations of liability for financial buyers or predicting that such limitations may become more common in proposals from strategic buyers.
Please feel free to contact any of your regular contacts at the firm or any of our partners and counsel listed under Mergers, Acquisitions and Joint Ventures in the "Our Practice" section of this website if you have any questions.
CLEARY GOTTLIEB STEEN & HAMILTON LLP