Thanks to Steven Davidoff, Eric Talley, and our own Christine and Gordon for sharing insights on the eBay v. Newmark case and other poison pill cases this year. We are closing the forum now, but intend to keep track of this issue as appeals wind there way through the Delaware Supreme Court and new cases on poison pills loom. We'll be sure to invite experts back.
You can read all the posts in our Poison Pill forum here:
City Capital Associates Ltd. Partnership v. Interco Inc. 551 A.2d 787 (Del.Ch. 1988) is one of my favorite Delaware opinions. Written by Chancellor Allen in 1988, Interco was the case in which Unocal was famously labelled "the most innovative and promising case in our recent corporation law." Ironically, Interco earned a red flag in Westlaw when the Delaware Supreme Court described the case as a "narrow and rigid construction of Unocal" and "reject[ed] such approach as not in keeping with a proper Unocal analysis." See Paramount Communications, Inc. v. Time Inc., 571 A.2d 1140, 1153 (Del.,1989). Now, over 20 years after Interco's apparent demise, Steve Davidoff suggests that Delaware's recent poison pill jurisprudence may be making room for Interco again. I agree.
Though Interco is still well known among corporate lawyers as a case in which Chancellor Allen ordered the redemption of a poison pill under Unocal, the case expresses some concern about Unocal's implications:
The danger that [Unocal] poses is, of course, that courts--in exercising some element of substantive judgment--will too readily seek to assert the primacy of their own view on a question upon which reasonable, completely disinterested minds might differ. Thus, inartfully applied, the Unocal form of analysis could permit an unraveling of the well-made fabric of the business judgment rule in this important context. Accordingly, whenever, as in this case, this court is required to apply the Unocal form of review, it should do so cautiously, with a clear appreciation for the risks and special responsibility this approach entails.
In retrospect, this hand wringing seems quaint, as the Delaware courts (particularly the Delaware Supreme Court) have routinely deferred to defensive actions by target directors. Indeed, after Unitrin modified the Unocal standard in 1995, it was hard to imagine a defensive measure that would be invalidated. The Delaware Supreme Court seemed so deferential to target boards that Bob Thompson and I declared Unocal a "dead letter" in 2001, though the Court of Chancery had invalidated a "dead hand" pill and a "no hand" pill a few years earlier. Our point was simply that defensive measures had to be extreme -- "show stoppers" in the parlance of the Delaware courts -- before they would be invalidated. Anything short of that extreme -- even a pill that makes a hostile takeover substantially harder, such as the 5% pill in Selectica, Inc. v. Versata Enterprises, Inc. -- would be approved as a proportionate response to almost any cognizable threat.
Interco offered a more nuanced interpretation of Unocal than the one developed in the subsequent Delaware Supreme Court cases. According to Chancellor Allen, "in the setting of a noncoercive offer, absent unusual facts, there may come a time when a board's fiduciary duty will require it to redeem the rights and to permit the shareholders to choose."
Note that the premise for redemption in Interco is a noncoercive offer. As Professor Davidoff observes, Vice Chancellor Strine seems to invoke the spirit of Interco in Yucaipa American Alliance Fund II, L.P. v. Riggio, decided last month, when he writes: "there is a plausible argument that a rights plan could be considered preclusive, based on an examination of real world market considerations, when a bidder who makes an all shares, structurally non-coercive offer has: (1) won a proxy contest for a third of the seats of a classified board; (2) is not able to proceed with its tender offer for another year because the incumbent board majority will not redeem the rights as to the offer; and (3) is required to take all the various economic risks that would come with maintaining the bid for another year."
The bigger point that I would like to make in this post, however, is that Interco was animated by a sophisticated analysis of the threat prong under Unocal. Where the threat is relatively mild (e.g., "in the setting of a noncoercive offer"), the response should be accordingly muted. The Court of Chancery has been more attentive to this sort of analysis in recent years, and all three recent poison pill cases have something interesting to say on this issue.
- In Selectica the target board of directors was attempting to "prevent the inadvertent fortfeiture of potentially valuable assets, not to proteact against hostile takeover attempts." Vice Chancellor Noble reasoned, "the protection of corporate assets against an outside threat is arguably a more important concern of the Board than restricting who the owners of the Company might be." Given the elevated threat, a more severe defensive action was considered reasonable. (For an argument that the Delaware courts have gone too far, see the latest by Paul Edelman and Randall Thomas.)
- In Yucaipa, Vice Chancellor Strine identified the "threat that the corporation's stockholders would relinquish control through a creeping acquisition without the benefit of receiving a control premium." This does not seem like a terribly severe threat, given the existence of 13D filings that would place the market on alert for creeping acquisitions. Nevertheless, the defensive action in this case was not severe. Yucaipa conceded that the Rights Plan was not preclusive, which left only the issue of whether the Rights Plan fell within the "range of reasonableness" -- a business judgment rule-like inquiry that target boards rarely fail to satisfy.
- In eBay v. Newmark, as noted in my earlier post, Chancellor Chandler held that the target directors did not reasonably perceive a threat to the corporation's policy and effectiveness. Thus, the poison pill was unjustified.
While we might debate the correctness of any of these decisions, I applaud the Court of Chancery for continuing to develop its Unocal jurisprudence. Like Chancellor Allen, I have long thought that Unocal has great potential to calibrate the actions of incumbent directors. The question remains: will the Delaware Supreme Court embrace this more nuanced analysis?
He ends the column by engaging our own Conglomerate forum topic on poison pills. He starts with a comment that eBay isn't all that interesting as a poison pill case. To follow Christine's analysis (and to borrow from craigslist lingo), perhaps we should flag Chancellor Chandler's posting as "miscategorized" -- is the case really about takeovers or about minority shareholder oppression or disenfranchisement?
Steven then gives a nice summary of what two cases that clearly do change poison pill jurisprudence -- Selectica and the Vice Chancellor Strine's opinion in the Barnes & Noble litigation -- mean for the looming legal battle over Air Product's takeover attempt on Airgas.
I don’t have a lot to add to Gordon’s and Christine’s earlier posts – which are both terrific and capture things well. But two aspects of the eBay case (and subsequent discussion) have stood out to me:
First, like a few others, I took note of (and was a bit perplexed by) how Chancellor Chandler segregated the fiduciary duty claims against the board from ordinary breach of contract / implied covenant of good faith claims. Evidently, eBay had only pressed on the former set of claims and not the latter, and ultimately
Second, Chancellor Chandler’s analysis of the Unocal claim will likely invite months or years of analytical navel gazing about Delaware’s view of shareholder primacy (well, at least for those of us who can still see their navels). In particular, much has already been made about
Having chosen a for-profit corporate form, the craigslist directors are bound by the fiduciary duties and standards that accompany that form. Those standards include acting to promote the value of the corporation for the benefit of its stockholders. The “Inc.” after the company name has to mean at least that.
Some pundits (here) have opined that this excerpt makes clear that corporate fiduciaries in Delaware are not permitted to take account of non-shareholder constituencies in discharging their duties. Frankly, I don’t see it, either in the text of this passage itself (“Those standards include…”), or as a conceptual matter. As to the conceptual part, this may be as much an issue of framing effects as anything else. Perhaps craigslist’s key strategic miscalculation was to lean so heavily on a general and unadorned concept such as “corporate culture” – too abstract and indeterminate on its own terms to provide much jurisprudential traction. One can wonder whether
“Unlike eBay, craigslist’s business plan envisions growing a vast population of customers, who are attracted by free listings and remain loyal because of them. The resulting army of users represents a stable and durable network, which in turn enhances craigslist’s name recognition and scale economies, and makes it possible to extract substantial revenue from the subset of users who are required to pay for listings. Over the long term, the directors have come to conclude, this strategy is will serve the interests of shareholder return handsomely”
I don’t know for sure, but I’d speculate
I have a few thoughts about Chancellor Chandler's opinion in eBay v. Newmark:
1. Since when does Delaware care about oppressed minority shareholders? My senior English teacher (who later went to law school) tended to digress some (like me), and when we studied Hamlet, she warned us that kids could deal with good parents and with bad parents, but got really screwed up if parents were good sometimes and bad sometimes. So, she told us, if you're bad, be consistent. I was reminded of this when reading the eBay opinion. I could deal if Delaware just didn't recognize oppression doctrine, but here the Court seems to use the policies of shareholder oppression to come to a doctrinal conclusion that favors the minority shareholder (eBay).
What I was predicting we would see is the usual argument: "eBay knew that it was investing as a minority shareholder in a Delaware corporation and at that time could negotiate for all the protections it needed. In fact, it negotiated for an agreement that held certain protections, but agreed that those protections would disappear should eBay choose to compete with craigslist. In choosing to compete with craigslist, eBay, a sophisticated player with ample legal and business counsel, made its bed." However, the Court doesn't say that. In fact, it hints that it would have liked to have pursued a breach of the duty of good faith and fair dealing as applied to their shareholder agreement. Wow. The next thing I'm waiting for is the word "unconscionability."
If anything, the Court's "suck it up rational actor in a nexus of contracts" speech is saved for craigslist, who "opted to form craigslist, Inc. as a for-profit Delaware corporation and voluntarily accepted millions of dolalrs from eBay as part of a transaction whereby eBay became a stockholder."
2. Since when does Delaware care about takeover offerors? (And someone come up with a good noun for those who would like to launch a takeover.) If you were an attorney consulting with a board of directors who were going to institute a rights plan, then you would show them lines of precedent in which Delaware has upheld right plans against takeover shareholders. As long as you don't jump from the poison pill cases to the "interference with the shareholder franchise" Blasius-type cases, then you're ok. But, here, the rights plan breaches fiduciary duties. Why?
Perhaps because it isn't necessary. Unocal is actually a very circular standard, which almost promises that the board will win. For the Unocal heightened scrutiny to kick in, the board has to be acting defensively against a takeover threat. The board action (rights plan) will be upheld if it is proportional to that threat and for a proper corporate purpose. So, if there is a real threat, heightened scrutiny will kick in, but that real threat will also provide the defense the board needs to act defensively.
The eBay case is an odd duck because there is no takeover threat. At best, eBay owns less than 30% of the shares, and ALL THE OTHER SHARES are owned by "Jim" and "Craig" as the Court refers to them. (Mostly so we can call their agreement the "Jim-Craig Agreement.") Without stating the obvious, craigslist is a privately-held company; it cannot be subject to a hostile takeover as long as Jim and Craig don't sell their shares.
So, if there is no real or perceived takeover threat, then why does Unocal kick in at all? The Court seems to say that Unocal has to apply because this is a rights plan, rights plans are defensive measures, and Unocal applies to rights plans and defensive measures. OK, but there is no takeover to get defensive about! Here, Jim and Craig are probably actually acting offensively -- trying to diminish the value of eBay's holdings so that eBay will sell out and go home. There may be a flipside argument that Jim and Craig are acting defensively -- they want to diminish the value of eBay's holdings so that eBay won't be able to make their lives so miserable that they sell out to eBay broken people. But surely they can steel themselves against that. The only thing they can be defending against is having to constantly fight with eBay about the corporate culture of craigslist, and the Court will make mincemeat of that. (And, with the new staggered board, eBay won't have a rep on the board, so this fighting will be relegated out of the boardroom.)
If Unocal doesn't kick in, then Jim and Craig's rights plan actions are judged under the BJR, so they win, unless Delaware wants to suddenly embrace the shareholder oppression doctrine. So, the Court must find that Unocal applies in order to find for eBay without completely changing minority shareholder rights forever in Delaware.
Except that Unocal becomes unwieldy here. So now we have to ask a completely inapposite question in this context: was the rights plan a reasonable action in response to the perceived threat? And so then now, under the inapplicable question, Jim and Craig lose because they "in fact did not adopt the Rights Plan in response to a reasonably perceived threat or for a proper corporate purpose."
So, we keep the shareholder oppression doctrine neat and clean, and we also keep the Unocal progeny line clean. The next rights plan case involving a publicly-held corporation with an actual takeover situation will be easily distinguishable from eBay v. Newmark. And the next shareholder oppression case won't have a poison pill. This case will stand on its own.
That's enough for me. I'll leave it to our corporate governance experts to correct my errors and provide able commentary.
Today and tomorrow, the Conglomerate will be hosting an online forum on recent poison pill cases, from Selectica, through this summers' Barnes & Noble litigation, through last week's Delaware decision in eBay v. Newmark (the subject of a post by Gordon at the end of last week).
Tune in, as we invite several corporate law experts to share insights along with contributions from some of our permanent bloggers.