May 03, 2007
Is Dow Jones in Revlon Mode?
Posted by Gordon Smith

Over the past two days, I have seen a couple of commentators suggesting that the board of directors of Dow Jones might be forced to auction the company. For example, Elizabeth Nowicki poses the questions nicely here.

This is a question that has intrigued corporate law scholars (and courts!) for some time. Note this passage from Chancellor Allen's opinion in TW Services, Inc. v. SWT Acquisition Corp. (March 2, 1989):

But what of a situation in which the board resists a sale? May a board find itself thrust involuntarily into a Revlon mode in which it is required to take only steps designed to maximize current share value and in which it must desist from steps that would impede that goal, even if they might otherwise appear sustainable as an arguable step in the promotion of "long term" corporate or share values? Revlon did not address that subject but implied that a board might find itself in such a position when it said that the duty it spoke of arose "when the break-up of the company is inevitable."

More specifically for this case, what of a situation in which the holders of some 88% of the Company's stock in effect declare (by supporting the SWT tender offer either as offeror or as a tendering shareholder) that they do seek a current share value maximizing transaction now? Does a director's duty of loyalty to "the corporation and its shareholders" require a board, in the light of that fact alone, to enter a Revlon mode? In those Delaware cases that have factually involved preponderant shareholder acceptance of a hostile tender offer, boards have, responding to their own view of their duty, proposed an alternative transaction -- a management endorsed breakup transaction that, realistically viewed, constituted a functional alternative to the resisted sale. Those cases, however, offer no judicial opinion on the question when, if ever, will a board's duty to "the corporation and its shareholders" require it to abandon concerns for "long term" values (and other constituencies) and enter a current share value maximizing mode. This, however, is the question referred to above that is raised by this case but need not now be decided in light of the particularities of the circumstances the directors of TW face.

So tantalizingly close to getting an answer! Just months later, however, the Delaware Supreme Court decided Mills Acquisition Co. v. Macmillan, Inc. (May 3, 1989), stating:

Clearly not every offer or transaction affecting the corporate structure invokes the Revlon duties.   A refusal to entertain offers may comport with a valid exercise of business judgment. Circumstances may dictate that an offer be rebuffed, given the nature and timing of the offer; its legality, feasibility and effect on the corporation and the stockholders; the alternatives available and their effect on the various constituencies, particularly the stockholders; the company's long-term strategic plans; and any special factors bearing on stockholder and public interests.

Nevertheless, the Macmillan Court implied that "a subjective disinclination to sell the company will not prevent [the Revlon] duty from arising where an extraordinary transaction including, at a minimum, a change in corporate control is involved." Paramount Communications Inc. v. Time Inc. (Del. Ch. July 14, 1989). That last quotation is from Chancellor Allen's Time opinion, which has an interesting role in the question at hand. Chancellor Allen ultimately concluded that Revlon is triggered by the board's decision to pursue a change of control transaction. He rejected the plaintiff's argument that the Paramount bid triggered Revlon duties, observing, "Plaintiffs can cite no authority compelling or commanding this expansion, which would dramatically restrict the functioning of the board whenever an offer was made."

Allen's opinion was not immediately embraced by the Delaware Supreme Court. Whereas Chancellor Allen held that the Time-Warner merger did not constitute a "change of control," Justice Horsey  wrote, "we premise our rejection of plaintiffs' Revlon claim on different grounds, namely, the absence of any substantial evidence to conclude that Time's board, in negotiating with Warner, made the dissolution or break-up of the corporate entity inevitable." Of course, the Supreme Court backtracked on this formulation in QVC, embracing Allen's earlier opinion, but in Time the Court added, "we decline to extend Revlon 's application to corporate transactions simply because they might be construed as putting a corporation either 'in play' or 'up for sale.'"

Though Time might be read as an endorsement of "just say no," some commentators have suggested that it is not a pure test of that notion because Time's board of directors was pursuing a pre-existing merger with Warner. In other words, Time's board did not just say no to Paramount, but said no in furtherance of an alternative transaction. What if no alternative transaction exists, as with Dow Jones?

The usual citation here is Moore Corp. Ltd. v. Wallace Computer Services, Inc., 907 F.Supp. 1545 (D. Del. 1995), but that is a federal district court decision. And it involved the decision not to redeem a poison pill, which seems quite different from Dow Jones, where members of a single family, albeit with various strands, is resisting the bid.

You may have noticed that I did not refer to the Bancroft family as a "controlling" shareholder. This interesting background from the W$J should make it clear why such a designation is not inevitable in this case:

The company's board consists of 16 members, four of whom represent the Bancroft family. Michael Elefante, the Boston-based trustee who directly represents 46% of the family's voting power and influences even more, has played an active role in recent weeks as the intermediary between the family and the company, according to people familiar with the matter.

There are three branches of the Bancroft family. They come largely from the descendants of Jane Cook, Jessie Cox and Hugh Bancroft Jr. Ms. Cook's branch includes Martha Robes; her sister, Jean Stevenson; and Elizabeth Steele, who is a Dow Jones director. The second branch, descended from Ms. Cox, includes William Cox and his sister, Jane MacElree, and their children. The third branch, represented by Chris Bancroft, who also serves on the board, includes Elisabeth Goth, who voiced her opposition to Dow Jones's management a decade ago.

Within the three branches there are sub-branches and a number of trusts. Unlike the trusts controlling New York Times Co., the Bancroft family trusts are under no obligation to vote together. "This family can be split," said a person familiar with the family's history.

With all of that as background, let's conclude by considering Elizabeth's questions regarding Dow Jones:

What happens if the water starts churning with hungry bidders?  At what point does the Board need to say to the 52% block "you are walking away from a super deal"?  Does the Board ever need to say that?  What about the minority s/h?  Who, if anyone, needs to advocate for them?

The answers here probably do not depend on whether the Bancroft family is a "controlling shareholder." Note that this is not a case in which the controlling shareholder has proposed a self-interested transaction. Rejecting an unsolicited bid for the company is quite different from proposing a squeeze-out of minority shareholders. Thus, News Corp's proposal does not place the Bancroft family in a position of conflict vis-a-vis the minority shareholders. Nor does an unsolicited bid, without more, trigger Revlon duties, for the reasons discussed above. Therefore, in my view, the board of directors of Dow Jones could "just say no" to News Corp's proposal. And if the minority shareholders sued, the decision of the board of directors would be subject to review under business judgment rule.

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