A Walk Down Memory Lane: Macmillan 20 Years Later

One of the seminal Delaware decisions from the hectic takeover decade of the 1980s is Mills Acquisition Co. v. Macmillan, Inc., decided 20 years ago, 559 A. 2d 1261 (Del. 1989) (the lower court decision, by Vice Chancellor Jacobs, is reported at 1988 WL 108332, 14 Del. J. Corp. L. 772 (Del. Ch. 1988)). The decision makes for fascinating reading. The practices followed by the Macmillan board and its advisors strike one as prehistoric by today’s standards.

Macmillan’s ineptitude certainly cannot be attributed to any lack of competent advisors, as it and its adversaries retained the best and the brightest: Macmillan retained First Boston and then its notable spinoff, Wasserstein Perella (Bruce Wasserstein); the Special Committee of Macmillan’s board retained Lazard Freres & Co. (Steven Golub) and, as its special counsel, the Wachtell firm. So Macmillan’s wayward behavior cannot be attributed to the quality of its advisors but to its domination by a determined CEO and perhaps to the lack of clarity in the applicable corporate governance standards of that time.

A. The Context

Macmillan was a large publishing, educational and informational services company. The Delaware Supreme Court’s decision in Macmillan was the culmination of a determined effort by Edward P. Evans, Macmillan’s Chairman and CEO, to avoid takeover attempts first by Robert M. Bass and then by Robert Maxwell, both “stars” of many 1980s takeover contests. (Maxwell, a Rupert Murdoch rival, had a colorful career, as a youngster escaping the Nazis from Czechoslovakia, serving, with distinction, in the British Army and later as a member of England’s Parliament, and then building a media empire from England. He died in November 1991, at the age of 68, presumably from falling overboard from his luxury yacht off the Canary Islands. The official verdict was accidental drowning, although some commentators have surmised that he may have committed suicide, and others that he was murdered.)

B. Management’s Restructuring Plan

Even before Bass and Maxwell appeared on the scene, Evans had moved preemptively to assume control of Macmillan in 1987 in response to Maxwell’s hostile bid for a Macmillan competitor, Harcourt Brace Jovanovich. Evans developed a restructuring plan comparable to that adopted by HBJ that would have transferred control of Macmillan to him and his management team through the grant of options and restricted stock, the leveraging of Macmillan to pay a special dividend to its shareholders, the breakup of the company in two, and the issuance of two classes of stock, one to management with super voting rights. The restructuring plan was enjoined by Vice Chancellor Jacobs on July 14, 1988 in Robert M. Bass Group, Inc. v. Evans, 552 A. 2d 1227 (Del. Ch. 1988) (“Macmillan I”). Promptly thereafter, Evans and his management team pursued a management buyout of Macmillan (“Macmillan II”) that ultimately led to this decision of the Delaware Supreme Court, in which Evans and his team were dealt their second defeat. Among other notable features of the restructuring plan struck down by Vice Chancellor Jacobs were the following:

• The Macmillan board granted management several hundred thousand restricted Macmillan shares and stock options, to be exchanged for several million shares of the recapitalized company; and

• Macmillan’s ESOP would purchase, with funds borrowed from Macmillan, a large block of Macmillan shares, and the then-existing independent ESOP trustee (CitiBank) would be replaced by management designees, giving them control over all of the ESOP’s unallocated Macmillan shares.

The board also granted Evans and his management team generous golden parachute agreements, and adopted a poison pill, from which the ESOP was exempted.

In approving the restructuring plan, the Chancery Court found that the Macmillan board was dominated by Evans and his management team.

C. The Bass Group

Bass appeared on the scene in October 1997, acquiring 7.5% of Macmillan’s outstanding shares. Management inaccurately characterized Bass to the Macmillan board as a greenmailer. Vice Chancellor Jacobs concluded in Macmillan I that the factual data relied upon by management to criticize Bass was false. As Vice Chancellor Jacobs concluded:

“[t]here is … no evidence that Macmillan management made any effort to accurately inform the board of [the true] facts. On the present record, I must conclude (preliminarily) that management’s pejorative characterization of the Bass Group, even if honestly believed, served more to propagandize the board than to enlighten it.”

Macmillan I, 552 A. 2d at 1232.

In the course of implementing the restructuring plan (before it was enjoined in July 1988), the board, among other things, adopted the Macmillan Non-Employee Director Retirement Plan, which provided lifetime benefits to seven of the Macmillan directors (including three of the five members on its Special Committee considering the restructuring) equal to the director’s fees being paid at the time of termination. (The plan was later amended to pay such benefits to the surviving spouses of board members.)

Almost as an afterthought, management decided in February or March of 1988 to appoint a Special Committee of the board to evaluate the restructuring plan. The members of the Special Committee were hand-picked by Evans. The Special Committee was not actually formed until May 1988, after management had conducted intensive discussions and negotiations over the restructuring plan with the “Committee’s” investment bank, Lazard. Representatives of Lazard spent over 500 hours with management on the proposed restructuring before the Special Committee came into existence and retained Lazard.

The annual meeting of Macmillan shareholders was held May 18, 1988. The day before the meeting, the Bass Group offered a friendly deal for all of Macmillan, at $64 per share, in cash, in an offer left open for further negotiation. The offer was publicly disclosed by the Bass Group in an SEC filing, although it was not mentioned by management at the annual meeting of shareholders the following day.

The Bass Group’s offer was disclosed to the board following the annual meeting. It was at this meeting of the board that the Special Committee was selected (one of whose members never attended a single committee meeting). Evans presented the restructuring proposal to the Special Committee, but the Committee was not given any negotiating authority regarding the terms of the restructuring. The board deferred discussion of the Bass Group proposal.

The Special Committee met for the first time on May 24, 1988. Evans selected the Wachtell firm to represent the Committee. None of the members of the Special Committee had met with either Lazard or Wachtell before the meeting at which they were appointed as the Committee’s advisors, and the Committee was not advised of management’s extensive contact with Lazard on the restructuring proposal over the preceding months. The Committee directed Lazard to evaluate management’s restructuring plan, along with the Bass Group’s offer.

Evans subsequently directed another member of management to meet with the Bass Group, but the officer was directed to tell the Bass Group to go away. No further substantive negotiations were conducted between Macmillan and the Bass Group, and the Special Committee did not press for negotiations between Macmillan and the Bass Group.

The Special Committee met on May 28, 1988 to hear Lazard’s presentation on management’s restructuring plan. By this point Macmillan had hired its own financial advisor, Wasserstein Perella. (In the small world department, Bruce Wasserstein is now Chairman and CEO of Lazard (NYSE: LAZ).) The restructuring plan was valued at $64.15 per share, which Lazard advised the Committee was fair, notwithstanding its valuation of Macmillan at $72.57 per share. Lazard recommended rejection of the Bass Group’s $64 all-cash “fully-negotiable” offer, as “inadequate.” Wasserstein Perella valued management’s restructuring proposal at between $63 and $68 per share, and made the same recommendation as Lazard concerning the Bass offer.

The Special Committee recommended that the board adopt management’s restructuring proposal and reject the Bass offer. The Special Committee had not negotiated any aspect of the restructuring with management.

Following the public announcement of the restructuring, on May 31, 1988, the Bass Group made a second offer for all of Macmillan’s stock at $73 per share. Alternatively, the Bass Group proposed a restructuring similar to the restructuring approved by the Macmillan board, differing only in that it would offer $5.65 in cash per share more to the stockholders of Macmillan.

On June 7, 1988, at a joint meeting of the Special Committee and the Macmillan board, Lazard advised the board that the Bass Group’s $73 cash offer was inadequate, given its previous evaluation of Macmillan at between $72 and $80 per share. Wasserstein Perella agreed, and so the board again rejected the revised Bass offer and reaffirmed its approval of management’s restructuring plan.

As noted, on July 14, 1988, Vice Chancellor Jacobs preliminarily enjoined the management restructuring and held that both of the Bass offers were “clearly superior” to the restructuring proposal.

The following day, management set in motion a course of action that led to the opinion of the Delaware Supreme Court in Macmillan II.

D. A Management Buyout; Maxwell Enters the Fray

Once Vice Chancellor Jacobs opened the field for the Bass Group’s offer, management immediately pursued defensive measures to thwart it, focusing primarily on a management buyout sponsored by the granddaddy of all buyout firms, Kohlberg Kravis Roberts & Co. The effort was launched by Evans without prior consultation or approval by the Macmillan board. Evans and his COO, William Reilly, directed Macmillan’s financial advisors to pursue a possible sale of the company. As characterized by the Delaware Supreme Court, the process was motivated by two primary objectives:

• To repel any third-party suitors unacceptable to Evans and Reilly; and

• To transfer an enhanced equity position in a restructured Macmillan to Evans and his management group.

559 A. 2d at 1272.

On July 20, 1988, the Bass Group was eclipsed when Maxwell entered the scene, proposing to Evans a consensual merger in a buyout offer of $80 per share. Maxwell indicated he was prepared to retain Macmillan’s management.

Macmillan did not respond to Maxwell’s overture for five weeks. Instead, management accelerated its discussions with KKR over a management buyout, which included, after execution of a confidentiality agreement with KKR, the provision of substantial non-public financial and other information to KKR.

Maxwell was not prepared to wait, so, after three weeks, on August 12, 1988, he made an $80 per share, all-cash tender offer to Macmillan’s stockholders. That same day, Maxwell sent another letter to Evans confirming the making of the tender offer and reiterating his desire to reach a friendly accord with Macmillan. “Significantly,” observed the Delaware Supreme Court, “no Macmillan representative ever attempted to negotiate with Maxwell on any of these matters.” 559 A. 2d at 1272.

Notwithstanding their earlier opinions that management’s restructuring, which would have delivered $64.15 per share to the stockholders of Macmillan (as determined by Lazard) (in a combination of cash and debt securities) was fair to the Macmillan stockholders and that Macmillan had a maximum breakup value of $80 per share, both Wasserstein Perella and Lazard issued new opinions on August 25 that Maxwell’s $80 per share offer “was unfair and inadequate.” Id. at 1273. Accordingly, the Macmillan board rejected Maxwell’s offer.
Evans and Maxwell met on August 30, 1988. Evans informed Maxwell that “he was an unwelcome bidder for the whole company….” Id.

Management continued its negotiations with KKR, and committed to KKR, on September 6, 1988, to a management buyout in which they would, of course, participate, even though KKR had not yet disclosed to Evans and his group the amount of its bid! KKR did commit to making a firm offer by the end of the week — September 9, 1988. And so Evans instructed Macmillan’s financial advisors to notify all remaining interested parties, including Maxwell, that final bids for Macmillan were due by the afternoon of September 9. The day before the deadline, Evans informed Maxwell that management would recommend the KKR leveraged buyout to the Macmillan board, and that he, Evans, “would not consider Maxwell’s outstanding offer [of $80 per share] despite Maxwell’s stated claim that he would pay ‘top dollar’ for the entire company.” Id. Evans also informed Maxwell that “senior management” would leave the company if any bidder other than KKR prevailed over a management-sponsored buyout offer. Maxwell repeated his offer to negotiate the purchase price.

During this period of time, Macmillan continued to drag its feet on providing complete information to Maxwell, notwithstanding that it had already been provided to KKR.

By the deadline, September 9, 1998, Maxwell sent another letter to Evans offering to increase his all-cash bid for the company to $84 per share.

Notwithstanding the deadline, Macmillan’s representatives continued to negotiate overnight with KKR until its offer was reduced to writing the next day, September 10. KKR offered to acquire 94% of Macmillan’s shares through a complicated, highly-leveraged, two-tiered transaction, with a “face value” of $85 per share, payable in a mix of cash and subordinated debt securities. It included a requirement that Macmillan pay KKR’s expenses and an additional $29.3 million breakup fee if its deal were busted up by virtue of a higher bid for the company.

The Macmillan board then met to consider the two remaining offers — Maxwell’s and the KKR/management proposal — on September 10 and 11, 1988. The financial advisors opined that KKR’s offer was both higher than Maxwell’s bid and fair to Macmillan’s stockholders from a financial point of view. The board thereupon approved the KKR offer and agreed to recommend it to Macmillan’s shareholders. A public announcement of the acceptance soon followed.

But Maxwell was not done. On September 15, 1988, Maxwell announced that he was increasing his all-cash offer to $86.60 per share. In the light of this move, the Macmillan board withdrew its recommendation of the KKR offer, and instructed Macmillan’s investment advisors to attempt to solicit higher bids from Maxwell, KKR, and any others.

At this point, Wasserstein Perella took over the bidding process, notwithstanding that Lazard, not Wasserstein Perella, served as the Special Committee’s financial advisor. The remaining bidders were instructed that final bids were due by the close of business on September 26, 1988. By the deadline, Maxwell made an all-cash offer of $89 per share. KKR submitted another “blended” offer of $89.50 per share, consisting of $82 in cash and the balance in subordinated securities. KKR’s offer included three conditions designed to end the auction: (i) the imposition of a “no-shop” covenant, (ii) the grant to KKR of a lockup option to purchase eight Macmillan subsidiaries for $950 million, and (iii) the execution of a definitive merger agreement by noon the following day, September 27, 1988.

Given the closeness of the offers, and the nature of KKR’s offer, Macmillan’s advisors concluded it was a toss-up and that the auction should therefore continue.

Notwithstanding their obvious interest in the process, Macmillan’s financial advisors (the exact culprit is not identified) advised Evans and Reilly of the state of play, informing them of both bids. Evans promptly tipped KKR to Maxwell’s bid. In addition, Bruce Wasserstein varied his instructions as to the final round of bidding, impressing upon KKR (but not Maxwell) “the need to go as high as [KKR] could go” in terms of price, and discouraging a lockup or advising care in the character of any lockup KKR should propose. 559 A. 2d at 1275-1276.

Shortly before the deadline, KKR submitted a final revised offer with a face value of $90 per share, again conditioned, but with a revised lockup reduced to the grant of an option on four subsidiaries for a purchase price of $775 million.

Macmillan’s advisors negotiated overnight with both Maxwell and KKR over the terms of their merger agreements. No representative suggested to Maxwell that it increase its bid (from $89 per share). “On the other hand, for almost eight hours Macmillan and KKR negotiated to increase KKR’s offer.” Id. at 1277. KKR did so, by five cents (!), to $90.05, but KKR extracted concessions for the increase.

On the morning of September 27, 1988, the Macmillan board met to consider the competing bids. The meeting was chaired by Evans. Wasserstein spoke for the financial advisors. The board was assured that the advisors had run a level playing field for the two bidders. Evans did not disclose to the board that he had tipped KKR to Maxwell’s bid. Wasserstein, management’s financial advisor, opined that the KKR offer was the higher of the two bids. The Lazard representative concurred in Wasserstein’s assessment.

The Macmillan board accepted the KKR proposal, and granted KKR the lockup option.

Showing that he was not a quitter, Maxwell, on September 29, 1988, the very day that KKR filed documents with the SEC amending its tender offer to reflect the final deal, announced that he had amended his cash tender offer to $90.25 per share. But this was too late: the Macmillan board rejected it, and the focus turned to the litigation.

E. The Supreme Court’s Decision

It should come as no surprise that the Delaware Supreme Court came down like a ton of bricks on Macmillan and its advisors. The condemnatory language of the Court is as strong as one gets from what are normally staid jurists.

The Court begins with a statement of the relevant decisional framework:

“We have held that when a court reviews a board action, challenged as a breach of duty, it should decline to evaluate the wisdom and merits of a business decision unless sufficient facts are alleged with particularity, or the record otherwise demonstrates, that the decision was not the product of an informed, disinterested, and independent board. …. Yet, this judicial reluctance to assess the merits of a business decision ends in the face of illicit manipulation of a board’s deliberative process by self-interested corporate fiduciaries. Here, not only was there such deception, but the board’s own lack of oversight in structuring and directing the auction afforded management the opportunity to indulge in the misconduct which occurred. In such a context, the challenged transaction must withstand rigorous judicial scrutiny under the exacting standards of entire fairness. …. What occurred here cannot survive that analysis.”

559 A. 2d at 1279 (footnote and citations omitted).

The Court smoked Evans and Reilly, condemning their conduct as “resolutely intended to deliver the company to themselves in Macmillan I, and to their favored bidder, KKR, and thus to themselves, in Macmillan II.” Id. at 1279-1280. On the record, it is no surprise that the Court found the board to be “torpid, if not supine, in its efforts to establish a truly independent auction, free of Evans’ interference and access to confidential data.”

“By placing the entire process in the hands of Evans, through his own chosen financial advisors, with little or no board oversight, the board materially contributed to the unprincipled conduct of those upon whom it looked with a blind eye.”

Id. at 1280.

The Court condemned Macmillan’s conduct as failing “all basic standards of fairness.” Id. Indeed, one can catalog major errors made by the Macmillan board from the record, errors it is safe to say no competently counseled board of directors of a public company would make today:

• Macmillan’s management met with KKR to discuss a management-sponsored buyout, without prior notice to or approval of the Macmillan board;

• The Special Committee’s financial and legal advisors were chosen by management, not by the Special Committee of the board appointed to review management’s restructuring proposal and oversee the auction;

• The Special Committee delegated the creation and administration of the auction to Evans’ advisors, not to those of the Committee; and

• The Special Committee and the board as a whole conducted minimal oversight of the auction.

The integrity of the process becomes acute when insiders are among the bidders. The Court condemned the skewing of the process in favor of KKR:

“Clearly, this auction was clandestinely and impermissibly skewed in favor of KKR. The record amply demonstrates that KKR repeatedly received significant material advantages to the exclusion and detriment of Maxwell to stymie, rather than enhance, the bidding process.”

559 A. 2d at 1281.

Referring to its Revlon principles (decided in 1986), the Court emphasized that once the Macmillan board decided, in September 1988, to abandon further restructuring attempts and to sell the company, further “discriminatory treatment of a bidder, without any rational benefit to the shareholders, was unwarranted.” Id. at 1282. At that point in time, the Macmillan board’s obligation was to obtain the highest price reasonably available for the company, provided that it was offered by a “reputable and responsible bidder.”

Aside: This qualification is important, as the Court cites factors that a board may consider in evaluating a bidder, including

“… the adequacy and terms of the offer; its fairness and feasibility; the proposed or actual financing for the offer, and the consequences of that financing; questions of illegality; the impact of both the bid and the potential acquisition on other constituencies, provided that it bears some reasonable relationship to general shareholder interests; the risk of non-consummation; the basic stockholder interests at stake; the bidder’s identity, prior background and other business venture experiences; and the bidder’s business plans for the corporation and their effects on stockholder interests.”

559 A. 2d at 1282 n. 29.

The Court was apoplectic over Evans’ tip to KKR of Maxwell’s $89 all-cash offer following the first round of bidding, compounded by Evans’ and Reilly’s “knowing concealment of the tip at the critical board meeting of September 27,” conduct that “utterly destroys their credibility.” Id. at 1282. Indeed, the Court goes so far as to say that the tip and the failure to disclose it “was a fraud upon the [Macmillan] board.” Id. at 1283!

While the grant of a lockup is not a per se violation of a board’s fiduciary duties, and can play a function in a contest for corporate control, in this instance the Court concluded that the lockup granted to KKR “was not necessary to draw any other bidders into the contest.” Accordingly, the Court reversed the Chancery Court and sent the case back down with instructions to enjoin the lockup.
___________________

Macmillan is instructive in illustrating how far corporate practice has evolved in a relatively short period of time. Reading it today makes clear the shift in power over M&A transactions that has occurred in the past 20 years from management to the board and, within the board, to the independent directors. It is inconceivable that any M&A transaction involving a public company would be managed today as the change of control in Macmillan was “managed” in 1988.

Fiduciary Outs for Intervening Events: Are They Necessary?

Fiduciary outs to permit a target board to accept a superior proposal are now virtually universal in public M&A deals, particularly after Omnicare (Omnicare, Inc. v. NCS Healthcare, Inc., 818 A. 2d 914 (Del. 2003)), but how about a fiduciary out that permits a target board to change its recommendation in favor of a deal by reason of “intervening” events? The Committee on Mergers and Acquisitions of the ABA’s Section of Business Law gives an example of such a provision in its 2008 “Target Deal Points Study” (M&A Negotiation Trends Involving Public Targets: Insights from the 2008 Strategic Buyer/Public Company Target Deal Points Study):

“Notwithstanding anything to the contrary contained in Section 5.2(b), at any time prior to the approval of this Agreement by the Required Target Stockholder Vote, the Target Board Recommendation may be withdrawn or modified in a manner adverse to the Buyer if: (A)(i) an unsolicited, bona fide written offer… is made to the Target and is not withdrawn… and the Target’s board of directors determines in good faith (based upon a written opinion of an independent financial advisor of nationally recognized reputation) that such offer constitutes a Superior Offer; or (ii) a material development or change in circumstances occurs or arises after the date of this Agreement [that was not known by the Target’s board of directors as of the date of this Agreement] (such material development or change in circumstances being referred to as an “Intervening Event”), and (B) the Target’s board of directors determines in good faith … that, in light of such Superior Offer or such Intervening Event, the withdrawal or modification of the Target Board Recommendation is required in order for the Target’s board of directors to comply with its fiduciary obligations to the Target’s stockholders under applicable law …”

Slide 50 (emphasis in original).

Based upon a sample of 152 transactions studied (of acquisitions of publicly-traded targets by publicly-traded and other strategic buyers for transactions announced in 2007, excluding acquisitions by private equity buyers), the M&A Committee reports that 52% of the deals permitted the target board to change its recommendation in the exercise of its fiduciary duties (7% based upon the occurrence of an intervening event or superior offer and 45% in the exercise of the board’s fiduciary duties and not limited solely to a superior offer or the occurrence of an intervening event). Deal Points Study, slide 51.

A. What’s the Point?

A deal is a deal. Why permit a target board to change its recommendation (and presumably torpedo stockholder approval of the deal) on such nebulous grounds as the occurrence of a “material development” or a “change in circumstances” since the deal was inked, particularly given the amount of time and effort that goes into negotiating a merger agreement and preparing the necessary disclosures? This out strikes one as bordering on the ridiculous.

The source of this provision lies in the nature of a merger agreement (including a two-step merger agreement involving first a tender offer and then a back-end merger). A merger agreement requires stockholder approval (unless the target is 90% or more owned by the acquiring corporation). By reason of this requirement, “[t]he directors of [the target are] under continuing fiduciary duties to the shareholders to evaluate the proposed transaction.” Frontier Oil Corporation v. Holly Corporation, 2005 WL 1039027 at * 27 (Del. Ch. 2005). As Vice Chancellor Noble emphasized in this decision:

“Revisiting the commitment to recommend the Merger was not merely something that the Merger Agreement allowed the Holly Board [the target] to do; it was the duty of the Holly Board to review the transaction to confirm that a favorable recommendation would continue to be consistent with its fiduciary duties.”

Id. at * 28. See also id. at * 29 (“They [Holly’s Board], of course, will require, as a matter of fiduciary duty, to continue their assessment of whether to recommend the Merger to Holly’s shareholders.”).

If, then, a target board’s recommendation to stockholders to approve a deal speaks not only as of the date the board met to approve the merger agreement, but also continues to the actual vote of stockholders on the deal, then the board has no choice but to take into account events that have transpired or “intervened” since the date of the meeting at which the board approved the transaction.

B. What Kind of “Intervening Events” Matter?

This observer is not aware of any cases that directly address what kind of “intervening events” (other than a superior proposal) would justify a board in changing its recommendation to stockholders to approve a contractually agreed-upon deal. The Frontier/Holly case itself offers two potential candidates, namely, litigation involving the acquiror (Frontier Oil) which, while the parties were aware was a potential claim on signing, blew up into major litigation after signing, and a discovery, post-signing, that Holly’s assets were much more valuable than understood by the Holly board at the time of signing. Vice Chancellor Noble appears to assume, in his decision, that these two events would have justified the Holly board in withdrawing its recommendation to the Holly stockholders to approve the Frontier/Holly deal. However, he concluded, nevertheless, that neither the blowup of the litigation nor Frontier’s failure to disclose a guaranty of its subsidiary’s lease obligations (thus leading to Frontier’s being named as a defendant in the litigation) constituted a “material adverse effect” or a material rep and warranty breach that would have justified Holly in terminating the merger agreement.

Another potential candidate for an “intervening event” justifying a change in an approval recommendation would be positive news for a drug company conducting clinical trials of a new drug. A good example is Genentech’s Avastin (colon cancer), whose clinical trials clearly motivated the Genentech board in “slow playing” its negotiations with Roche. Once the parties resolved their differences, the final two-step merger agreement between the parties explicitly excluded from the definition of a Genentech “material adverse effect,” “the results of the Avastin … adjuvant colon cancer trial ….”

C. What Difference Does the Board Recommendation Make?

With a truly positive “intervening event” a board recommendation for approval of a deal would be beside the point. If, say, Holly, between signing and the Holly stockholder vote, announced a mega oil discovery, with the result that its stock price quintupled, what difference would a board recommendation to approve the deal with Frontier make? Stockholders would vote the deal down, particularly if, as is typically the case, arbs come to own a significant percentage of the target’s stock. So in this sense a provision allowing a board, in obeisance to its fiduciary duties, to change its approval recommendation by reason of intervening events simply acknowledges the obvious: if the world changes between signing and the stockholder vote, the change will affect the stockholder vote.

C. Interplay of MAE Condition and Fiduciary Out

There is also a sense that the broad-form fiduciary out is simply the converse of allowing an acquiror to withdraw from a deal by reason of the occurrence of a material adverse effect. If by reason of events occurring subsequent to signing (I ignore, for this purpose, breaches of reps and warranties), that materially and adversely affect the target disproportionally the buyer can walk, why not allow the seller to do the same if the opposite occurs, e.g., the wonder drug is approved or the giant oil and/or gas field is proved up?

D. But at What Cost?

A change in board recommendation will typically allow the buyer to terminate the agreement and collect a breakup fee. The typical fee is payable by reason of a termination due to the acceptance of a superior offer, such as just happened with Data Domain and NetApp when EMC busted up their deal. But how about payment of a greater termination fee if a target board changes its recommendation solely based upon an intervening event not involving a superior proposal? That would appear problematic, because it could be viewed as coercive to the stockholders of the target (“approve our deal or else”), and because it might be construed as undercutting the target board’s exercise of its fiduciary duties, as articulated by Vice Chancellor Noble in the Frontier decision.

E. Breaking Up is Easier Said Than Done

As the Frontier case itself demonstrates, and as emphasized by the Delaware Chancery Court’s decisions in Hexion v. Huntsman and IBP, the sensible course to follow in trying to extricate oneself from one of these deals is to let the stockholders do it, i.e., if a target board modifies its recommendation in favor of a deal by reason of an intervening event, the prudent course for the target board (assuming the buyer doesn’t terminate and collect the breakup fee) is to take the deal to the stockholders and let them reject it, if they so choose. Seeking a declaratory judgment from the Delaware Chancery Court permitting a party (buyer or seller) to extricate itself from a fully negotiated contract is, based on the Chancery Court’s decisions to date, an uphill battle.