March 24, 2008
Posted by Gordon Smith

By now you have heard about the new deal between Bear Stearns and JP Morgan, and you may have been puzzled by this line in the NYT: "Under a Delaware precedent, where the companies are incorporated, a company can sell up to 40 percent without shareholder approval."

Um, no.

This is what is known in the law biz as "wrong." There is no 40% cutoff under Delaware law. My immediate reaction to the story was that the author of the piece (Sorkin) must have been trying to convey one of the supposed lessons on Omnicare. Steve Davidoff confirms that reaction at Dealbook (emphasis added):

In Omnicare v. NCS HealthCare, a uniformly criticized opinion, the Delaware Supreme Court by a 3-2 vote struck down a locked-up deal. There, the court held that under the Unocal standard for testing defensive measures, the agreement of 65 percent of the shareholders to vote for a transaction, together with a force-the-vote provision requiring the company to hold a shareholder vote, was preclusive and coercive. The merger protections were both preclusive and coercive because “any stockholder vote would have been robbed of its effectiveness by … [the] predetermined outcome of the merger without regard to the merits of the Genesis transaction at the time the vote was scheduled to be taken.”

Thereafter, in the Chancery Court case of Cullen v. Orman, the court upheld an agreement for a controlling shareholder to vote in favor of the merger and for 18 months after termination of the agreement to vote against any other transaction. Notably, the shareholder vote was conditioned on approval of a majority of the minority and the judge relied on this fact — that it was not a fait accompli — to make this decision. Since Orman, takeover practitioners have generally advised that as long as a deal was theoretically possible, Omnicare wasn’t implicated. Delaware practitioners have settled on the “40 percent rule” to set a limit on [how] high you could go on a lock-up. Hence the 39.5 percent figure in Monday’s deal with Bear. Of course, none of this has been tested in court.

The bottom line is that JP Morgan is trying to lock up the acquisition of Bear, but it can't be too aggressive without triggering the wrath of the Delaware courts. 39.5% plus the shares of the Bear directors who "have indicated that they intend" to vote for the revised deal should get them to about 45%, and that may be enough to bring the deal home.

Lots of other issues, but that is one mystery solved ...

Corporate Law, Delaware, M&A | Bookmark

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