"Can you have angst without a soul?" – Delaware Vice Chancellor Leo Strine

Elizabeth Nowicki —  29 March 2007

As promised, I am reporting back from Tulane’s Corporate Law Institute qua “Who’s Who in the M&A World” gathering.  Leo Strine did indeed query today: “can you have angst without a soul?”  (He asked in response to the statement that initial bidders fear deal-jumpers when waiting out a go shop period.)  Though the WSJ was the first to give you the Strine quote, allow me to give you a few more substantive details from Strine’s panel, which was a super one.  The panel was titled “The Challenges of Representing a Private Equity Target,” and the panel included moderators Jim Morphy and Eileen Nugent, and speakers Vice Chancellor Leo Strine, Creighton Condon, Jesse Finkelstein, Robert Kindler, Ted Mirvis, and David Sorkin.  (Morphy sat next to Kindler, who sat next to Mirvis, who sat next to Strine – it is unclear to me how *that* seating chart got put together….)

One of the hot sub-topics on the panel was the question of whether or not a target BOD has to shop the target if it is considering a private equity offer.  As a general matter, the Revlon rule requires that, any time a sale or change of control is inevitable, the BOD of the target corporation has the obligation to “maximize shareholder value.”  When dealing with a “strategic” transaction, this obligation basically requires the BOD of the target to conduct an auction to try to get the highest possible bid for the target.  But when dealing with a going-private transaction, the BOD of the target has historically been held to an “entire fairness” standard.  That is to say, when a private equity bidder makes an offer for a target, and the target’s BOD moves forward on the bid, the courts will later review the BOD’s actions for the purpose of assessing whether the transaction was entirely fair: Was the transaction fair both in ultimate price paid and procedure used to review the offer and get to the price?  There is no obligation to basically conduct a public auction for the target. Yet a going-private transaction is clearly a change-of-control transaction (ala Revlon), such that one would *think* the Revlon rule of maximizing shareholder value should apply (instead of the entire fairness review).  The question came up on the panel, then, as to whether a target who was moving toward a private equity offer or who was retaining an investment bank to gauge interest from other private equity groups needed to publicly announce itself up for sale.  Kindler raised the very good point that often private equity groups come after the weak and sick targets.  So announcing that the target is weak and sick and considering bids really does not do a lot for the target in terms of market strength.  Moreover, if the private equity transaction falls through, the target will be left having admitted it was an injured animal.  Kindler then made the very good point – with which the entire panel seemed to concur – that sometimes conducting a true Revlon auction does not actually work to the s/h benefit.

Vice Chancellor Strine chimed in to say something like “Revlon is a reasonableness test.”  (I think that those were his exact words, actually.)  What I am hoping he meant was that the *way* a target BOD decides to maximize s/h value (with conducting a public auction, making focused inquiries to private equity groups, doing a market test, etc.) was up for business judgment rule protection.  If the way the BOD of the target chose to get the best value did NOT involve a public auction (to keep secret their compromised status or some such), as long as the process used – whatever it was – was designed to ensure maximization of s/h value,  assuring itself the price taken maximized s/h value, the BOD would be fulfilling their fiduciary duties.

Good to know, because, quite frankly, it has never been clear why Revlon comes up in strategic transactions and not going private transactions.  Hopefully, however, this does not lead to the Revlon rule losing its rigidity in the context of plain vanilla public strategic transactions.  It was nice to have a Delaware rule that was clear:  If up for sale, conduct an auction.