In re Orchid Cellmark Inc. S'holder Litig., C.A. No. 6373-VCN (Del. Ch. May 12, 2011) The Delaware Court of Chancery recently addressed an issue of particular significance to M&A practitioners: Where is the point beyond which deal protection devices become invalid? Although the court found that the deal protection devices at issue were reasonable under the circumstances, it noted that "one of these days some judge is going to say 'no more.'" Perhaps in the future, this remark will be recognized in retrospect as a warning of things to come. In the meantime, this article provides some guidance to avoid crossing this elusive line.
Orchid Board Agrees to Deal Protection DevicesShareholders of Orchid Cellmark Inc. filed a motion to enjoin a proposed two-step tender offer pursuant to which Orchid would be acquired by Laboratory Corporation of America Holdings, Inc. They alleged, among other things, that the deal protection devices in the acquisition agreement were not reasonably calculated to increase shareholder value. The deal protection devices included:
Devices Were Reasonable, Individually and in the AggregateThe court first determined that none of the devices, standing alone, unreasonably deterred other bidders from coming forward. It concluded that the poison pill provision was reasonable because it did not trigger payment of the termination fee and a "sophisticated and serious" bidder would understand that the board "would likely eventually be required by Delaware law to pull the pill in response to a [s]uperior [o]ffer." Orchid at 20. The court also rejected the plaintiffs' use of Orchid's enterprise value as the basis for assessing the termination fee, noting that "Delaware's case law . . . teaches that such termination fees are generally measured according to a [c]ompany's equity value." Id. at 21. For a more detailed discussion of equity value vs. enterprise value as the basis for assessing a termination fee, click here and view the table entitled "Termination Fees." The court then evaluated the aggregate deterrent effect of the devices in light of the circumstances surrounding the proposed transaction, finding that a sophisticated buyer desiring to make a serious bid could overcome these obstacles. It also found that Orchid's board was informed, independent, and disinterested. Accordingly, the board's approval of the devices was reasonable and survived scrutiny under Revlon, Inc. v. MacAndrews & Forbes Hldgs., Inc., 506 A.2d 173 (Del. 1986). Based on these factors, the court declined to enjoin the transaction.
At What Point Are Deal Protections Too Much?Although it found that "the line ha[d] not been crossed here," the court warned that such a line does exist: [O]ne of these days some judge is going to say "no more" and, when the drafting lawyer looks back, she will be challenged to figure out how or why the incremental enhancement mattered. It will be yet another instance of the straw and the poor camel's back. At some point, aggressive deal protection devices—amalgamated as they are—run the risk of being deemed so burdensome and costly as to render the "fiduciary out" illusory. Id. at 22-23. There is no bright-line test to avoid crossing this line, but some guidance may be gleaned from prior case law and recent comments by Vice Chancellor Laster:
Legal Topics:Deal Protections Negotiated Transactions
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