In re Family Dollar Stores, Inc. Stockholder Litig., C.A. No. 9985-CB (Del. Ch. Dec. 19, 2014) (Bouchard, C)
In this memorandum opinion, the Court of Chancery denied the plaintiffs’ motion seeking to preliminarily enjoin an acquisition (the “Merger”) of Family Dollar Stores, Inc. (“Family Dollar”) by Dollar Tree, Inc. (“Dollar Tree”). The plaintiffs challenged the Merger on two grounds: (1) Family Dollar’s board of directors (the “Board”) allegedly breached its fiduciary duties by failing to engage in negotiations with Dollar General, Inc. (“Dollar General”) after Dollar General launched a tender offer for a higher price per share than the consideration for the Merger; and (2) the Board allegedly breached its fiduciary duties by failing to make certain material disclosures in the proxy statement for the Merger. The Court of Chancery found that both claims lacked a reasonable probability of success and that the plaintiffs failed to demonstrate irreparable harm or that the balance of equities favored the granting of a preliminary injunction. The Court accordingly denied the motion for a preliminary injunction.
Family Dollar and Dollar Tree entered into the merger agreement governing the Merger (the “Merger Agreement”) on July 27, 2014. As of the date of the Merger Agreement, the consideration for the Merger, comprised of a combination of cash and stock, was valued at $74.50 per share and $8.5 billion in aggregate. Under the Merger Agreement, Dollar Tree agreed to divest as many of its retail stores as necessary to obtain antitrust approval.
After Family Dollar and Dollar Tree entered into the Merger, Dollar General made a competing bid to acquire Family Dollar for $78.50 per share in cash. Dollar General, however, only committed to divest up to 700 retail stores to obtain antitrust approval. Dollar General then increased its bid to $80 per share and commitment to divest up to 1,500 stores. Family Dollar declined to negotiate with Dollar General regarding this offer due to perceived risk of failure to obtain antitrust approval. Dollar General then commenced a tender offer to acquire Family Dollar’s shares for $80 in cash, but the offer could not close because Dollar General could not timely obtain antitrust approval.
The Court of Chancery first found that the plaintiffs’ claim that the Board breached its fiduciary duties by failing to negotiate with Dollar General after its higher bid was not reasonably likely to succeed on the merits. The Court of Chancery applied Revlon scrutiny to the Board’s actions and found those actions to be reasonable. First, the Court found no basis to question the Board’s motivation to maximize value for Family Dollar’s stockholders and accordingly afforded additional deference to the Board’s business judgment. The Court noted that ten of the eleven members of the Board were independent outside directors, and several of the directors had significant equity holdings in Family Dollar, thereby aligning their interests with those of the company’s stockholders. The Court also noted that none of the ten outside directors would serve on the board of the combined entity.
The Court rejected several factual arguments that individual members of the Board were self-interested and tainted the sale process. First, the Court denied the plaintiffs’ contention that Levine, the only executive on the Board, had an entrenchment motive. The Court noted that Levine was retiring, and context revealed that his statements to Dollar Tree regarding a potential position with the combined company were a negotiation tactic. Similarly, the Board’s expressed desire to retain Family Dollar’s headquarters in North Carolina was another negotiation tactic. The Court also noted that Family Dollar had directly solicited a bid from Dollar General before entering into the Merger Agreement, but Dollar General did not respond at that time.
Second, the Court rejected the plaintiffs’ argument that the Merger was negotiated by an interested executive with minimal Board supervision. The record revealed otherwise. Board minutes and other evidence demonstrated that the Board was actively engaged in the sale process and received regular updates from the negotiating executive. The Court also noted that the plaintiffs failed to identify any material information withheld from the Board.
Third, the Court rejected the plaintiffs’ assertion that the Board acted unreasonably by failing to inform Dollar General during a June 19 meeting that Family Dollar was undergoing a sale process. The Court found the Board’s decision not to notify Dollar General to be reasonable for two reasons. First, the Board reasonably feared that Dollar General would launch a hostile bid if it discovered that it was negotiating with Dollar Tree. Second, the Board reasonably believed that it would violate the terms of its nondisclosure agreement with Dollar Tree if it revealed that it was considering a strategic transaction.
Fourth, the Court found Family Dollar’s decision not to negotiate with Dollar General in response to Dollar General’s $80 per share offer to be reasonable. The Court concluded that the Merger Agreement’s fiduciary out provision afforded enough latitude to the Board to consider the offer consistently with its fiduciary duties because it allowed the Board to evaluate and respond to a “Company Superior Proposal.” Under the Merger Agreement, a “Company Superior Proposal” was an offer for a transaction that would be both financially more favorable than the Merger and reasonably likely to be completed on the terms proposed. The Board determined that Dollar General’s offer, however, providing for divestment of only 1,500 stores, had only an approximately 40% chance of receiving antitrust approval and was not reasonably likely to be completed on the terms proposed. The Court thus held that the Board reasonably concluded that Dollar General’s offer was not a “Company Superior Proposal” and rejected it consistent with the Board’s fiduciary duties.
The Court then rejected each of the plaintiffs’ seven disclosure claims. First, the Court rejected the plaintiffs’ claim that the proxy failed to disclose when Levine began negotiating for a position on the board of the combined entity because a draft of the Merger Agreement revealed that such negotiations began before the Merger Agreement was signed. Second, the Court declined to require disclosure that the Board acted without pricing information that would be helpful for evaluating the antitrust risk of Dollar General’s proposal because such a disclosure would constitute immaterial self-flagellation. Third, the Board was not required to disclose information regarding the potential synergies of the two transactions because such synergies were incalculable given the uncertainty of divestments required for antitrust approval. Fourth, the Court did not require defining the term “non-GAAP EPS” because the input was immaterial and could be calculated with information already disclosed. Fifth, the Court dismissed the plaintiffs’ claim that the Board failed to disclose its own projections and projections of Wall Street analysts that the financial advisor relied upon; the Board did disclose its own projections, and the Wall Street projections were immaterial and publicly available. Sixth, the Court rejected a claim that the proxy was misleading regarding the cut-off date for information accounted for in the Board’s projections because the proxy was not misleading if properly read. Seventh, the Court did not require disclosure of information underlying the Board’s synergy projections because such information was immaterial minutiae.
Finally, the Court found that the plaintiffs failed to demonstrate irreparable harm and that the balance of hardships favored an injunction. The transaction between Family Dollar and Dollar Tree offered a meaningful premium and apparent deal certainty, and the Merger Agreement contained a fiduciary out provision that adequately allowed the Board to consider superior proposals. Further, the plaintiffs failed to identify any materially false or misleading disclosures or omissions in the proxy, and thus the stockholder vote would likely be fully informed. Given these factors, the Court determined that the risks of preliminarily enjoining the Merger outweighed the benefits of the injunction and accordingly denied the plaintiffs’ motion.