The Odd Couple: Majority of Minority Approval and Tender Offers
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In at least two recent opinions, the Delaware Court of Chancery has examined the propriety of tender offers by majority stockholders seeking to eliminate the minority equity interest and, in the course of addressing minority stockholder challenges to the fairness of such offers, has seemed to suggest that it is inclined to take some considerable comfort from the fact that the offeror has conditioned the closing of its offer upon the acceptance of stockholders holding a majority of the shares constituting the outstanding minority interest. This article is intended primarily to examine the conceptual basis for that view; i.e., whether the majority of the minority concept has meaningful application in the context of a tender offer. In the course of that inquiry, it examines the role of the majority of the minority approval condition in the judicial resolution of challenges to the fairness of parent-subsidiary mergers, and questions the current view that it should be accorded the same evidentiary effect in that context as the approval of an independent special committee charged with negotiating on behalf of the minority. It concludes that, notwithstanding the conventional judicial view that such a condition constitutes material evidence of entire fairness with respect to any merger in which the majority holder stands on both sides, it does not follow that such a condition should be judicially deemed to confer a similarly ameliorating effect in the context of a tender offer by a majority stockholder for the minority shares.
The Majority of Minority Condition and the Interested Merger
Even to the intermittent observer, it is stale news that a majority stockholder is well advised to employ at least one of two now-familiar instrumentalities in order to sustain the burden of establishing entire fairness in context of a merger with its subsidiary: 1) the appointment and empowerment of a special committee of the subsidiary board to negotiate at arm's length on behalf of the minority holders of the subsidiary before submitting the proposal for what will be inevitable stockholder approval; or 2) the adoption of a condition to consummation that the merger receive the affirmative vote of a majority of the shares owned by holders unaffiliated with the controlling stockholder. Each of these devices has been judicially recognized as sufficient to neutralize the inherent power of a controlling stockholder to structure and unilaterally direct both board and stockholder approval of the challenged transaction.
For reasons that have never been adequately articulated, this exercise in the approximation of arm's length negotiations has never been deemed to require both a special committee and a majority of the minority vote, a structure that would more closely mirror the twofold approval process that would otherwise apply in truly arm's length merger. Be that as it may, the fact remains that, by aping at least one of these two aspects of a traditional arm's length deal, the Court typically will defer to the resulting terms without scrutinizing them for substantive fairness. This of course falls a little short of the substantive evaluation that the entire fairness test has been traditionally understood to contemplate, particularly with respect to the fair price component of that test. In actual fact, neither of the procedural devices referenced above has anything to do with price, at least in any direct sense. Neither a special committee nor a majority of minority approval will ensure that a price is "fair" in a substantive sense, but only that it was either fairly arrived at or deemed acceptable by a majority of those who do not stand on both sides of the transaction. But this judicial approach is neither accident nor revelation. The Delaware Court of Chancery has never cozied up to the task of conducting a substantive evaluation of fair price, and understandably so. Who among us is prepared to suggest that a court, under any but the most egregious of circumstances, should void a transaction entered into by unaffiliated, willing and fully informed contractual parties on the ground that the price agreed upon fell outside some divinely inspired range of absolute fairness? Fair price is in the end a normative concept, not an absolute one. Whether overtly or otherwise, a sophisticated court is therefore far more likely to concentrate its scrutiny (where scrutiny is indeed required) on the adequacy of the process and, where that is fair, to uphold the transaction. A fair process in turn is merely one that is characterized on both sides by free will, full information and the realistic opportunity to say no. Where those elements are present, the attempt to secure a subsequent invalidation of a deal is called reneging, not justice. In the context of parent-subsidiary mergers, our courts have identified the participation of independent and independently advised special committees, at the negotiation stage, or a majority of the minority stockholder vote, at the approval stage, as critical indicia of the requisite level of procedural fairness. Although the entire fairness standard continues to apply even where one of these devices is employed, the law is clear that such mechanisms will cause the burden of proof to shift from the controlling stockholder to the plaintiff, who must then prove that the transaction was unfair.
The majority of the minority instrumentality appears to be enjoying something of a renaissance of late. In a recent article addressing a number of perceived anomalies in the existing Delaware precedent, two sitting members of the Delaware Court of Chancery and one highly respected former Chancellor jointly offer the view that existing Delaware law fails to fully appreciate the curative effect of a majority of the minority shareholder approval condition, and proposed that it be accorded enhanced evidentiary effect going forward.
- In today's environment there is insufficient justification for giving less than full cleansing effect to a self-interested merger that is conditioned on approval of a majority of the minority stockholders.
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- At the very least, the burden-shifting rule of Rosenblatt and Lynch Communications should be altered in the case of self-interested mergers that are conditioned expressly on "majority of the minority" shareholder approval.
These highly distinguished authors point out that there are inherent dangers in according such deference in connection with transactions that rely solely on the special disinterested committee process, noting that suspicions over structural bias might justify the current view that the business judgment rule is inapplicable to transactions approved in this fashion. They acknowledge no such defect with respect to majority of the minority stockholder approval, however.
- "Majority of the minority" shareholder approval, on the other hand, stands on a different footing, because by definition minority stockholders are not "conflicted" and their approval of an interested merger could not be challenged on that ground. The only basis to challenge the integrity of such a stockholder vote is by attacking the sufficiency of the proxy disclosures or by showing that the vote was coerced. If the disclosures were faulty or the voters were coerced, then the shareholder vote should create no standard-of-review-changing benefit. If, however, the vote is uncoerced and is fully informed, there is no reason why the shareholder vote should not be given that effect, particularly given the Supreme Court's rightful emphasis on the importance of the shareholder franchise and its exercise. Under current law, however, entire fairness remains the standard of review, and the only benefit of "majority of the minority" stockholder approval is to shift the burden of proof (to show unfairness) to the plaintiffs.
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- The better policy, we think, is to afford business judgment review treatment to self-interested mergers that are approved by either an effective independent director committee or by a majority of the minority stockholder vote. At a minimum, that treatment should be afforded to approval by an informed "majority of the minority" of the shareholders.
Maybe. Some of this may simply be chalked up to the Chancery Court's increasingly obvious and entirely understandable disdain for the legal analysis that requires it to second-guess the substantive "fairness" of a price deemed acceptable to both sides through a process that assures full information and freedom from coercion. This is a point of view worthy of consideration. We continue to await the case, after all, in which fair dealing is demonstrated through the equitable employment of either of these two instrumentalities only to have the Court conclude that the resulting price is unfair. And we are likely to be waiting for such a case for quite a long time.
But in the end the suggestion that majority of minority approval and special committee negotiation are functionally equivalent, much less that the former is a more effective indicator of fairness than the latter, simply does not bear scrutiny. In a society that regards majority rule as the indispensable lubricant of civil process, it may amount to sacrilege to suggest as much, but it would seem that, as between the two, the majority of the minority device is the weaker method of assuring the fairness of a parent-subsidiary merger.
As any average golfer can attest, there comes a point in every round when one must decide whether to pitch out of the woods and into the fairway or to try to hit it through that unfortunately placed tree that stands between you and the green. As you ponder your dilemma, one of your playing partners can be counted on to offer the following familiar bit of advice: "They say that trees are 90% air." True enough, but so is a screen door, and I doubt "they" would recommend trying to hit your ball through that. Trees and screen doors are at once similar and very different. And so it is with majority of the minority approval and the special committee. Both may broadly be said to give important voice to the minority's point of view in a way that would otherwise be sadly lacking in an interested transaction of this sort. Both may be said to neutralize the majority stockholder's otherwise absolute capacity to structure and effect the transaction on its own terms. But while one offers the opportunity to shape the transaction and to take advantage of an array of alternative bargaining options on an equally broad array of deal points, the other offers an all or nothing dilemma. While one equips the representatives of the minority with the power to pursue discrete trade-offs in the pursuit of an equitable compromise, the other is by its very nature the antithesis of compromise, presenting only stark choice between taking or leaving the deal unilaterally prepackaged by the interested offeror. It is the difference between a Swiss Army knife and a meat ax.
There is irony in the suggestion that the limited power to veto the transaction through a stockholder vote is sufficient to level the playing field given the steady evolution of the case law away from that very conclusion with respect to the special committee. In the years immediately following Weinberger v. UOP, Inc., which gave birth to the special committee process in a footnote, the Delaware courts seemed content to accept the participation of a special committee as sufficient evidence of fair dealing even if its powers were strictly limited to either an endorsement or a flat veto of the transaction proposed by the majority holder. Most Delaware practitioners will tell you today, however, that this is probably not enough. Delaware law now seems to require that the committee be fully empowered to represent the interests of the minority actively in connection with the structuring and pricing of the deal and that its members diligently pursue those responsibilities. Any less than this is highly likely to result in a judicial refusal to afford the committee process any of the hoped-for cleansing effect on the otherwise interested transaction. In light of the trend toward requiring broader participation on the part of special committees, it is counterintuitive to suggest that majority of the minority approval, which is merely a simple veto mechanism that mimics the primitive and outmoded special committee model, should be judicially regarded not merely as the evidentiary equivalent of, but as functionally superior to a special committee in connection with the judicial evaluation of the entire fairness of an interested merger.
It is true of course that because special committees are composed of directors who have and presumably will be required to interact with their fellow interested directors when the transaction is done and that their decision is therefore open to the possibility of structural bias -- i.e. that the committee members will be influenced indirectly by the inclination to accommodate conflicted friends and colleagues on the board at the expense of the committee's fiduciary responsibilities to the minority. It is also true that this mild form of cronyism is not susceptible of easy proof. But this hardly seems a persuasive basis on which to conclude that the committee process is a less reliable one than the ratifying vote of an otherwise unrepresented minority. That which has been said of structural bias can be said as well with respect to the concept of domination and control of the board by an interested minority of directors - it is in fact much the same thing writ small -- yet we seem content to subject the latter allegation of board room influence to a rather rigid test of proof without apparent apprehension that such an approach has permitted the rampant domination of directors to go undetected in America's board rooms. The problem with the suggestion that we should simply accept that structural bias is a given and embrace majority of the minority approval as a preferable indicator of fair dealing is that it is a theory that runs directly counter to another presumption that is far more fundamental to our law - namely the presumption that directors act in good faith and in the honest belief that their decisions serve the best interests of the corporation. That presumption, the bedrock of the business judgment rule, requires that the law refuse to assume dishonesty or unfaithfulness or bias on the part of directors -- indeed that it presume precisely the opposite -- in the absence of no little showing to the contrary. Until we choose no longer to indulge that presumption, a prospect that may be happily regarded as remote, the expressed concern over structural bias should prompt little worry. To say that it is not the subject of judicial presumption is not to say that it cannot be accounted for or that the Delaware courts, skilled in perceiving subtle conflicts of interests, are not capable of dealing with it in the context of the existing analytical framework.
But we digress. Regardless of the view of either author or reader as to the relative evidentiary value that should be accorded majority of minority approval in the interested merger context, the central question to be considered here is whether such a deal condition should be accorded equivalent evidentiary effect in the judicial assessment of the "fairness" of a tender offer by a controlling stockholder for the minority shares. There are a few recent decisions that suggest that the Court of Chancery believes that the answer to this question is yes. Those decisions are examined below.
The Relevant Precedent
Prior to 2001, there had been little judicial occasion to address the effect of a majority of the minority condition upon the fairness of a tender offer by a controlling stockholder for the shares it did not own. Surely, as addressed above, there had been much discussion of the effect of such a condition on a parent-subsidiary merger subject to analysis pursuant to the entire fairness test, but the question whether such a condition enhanced the fairness of an otherwise non-coercive tender offer seems not to have been resolved or squarely presented even during the 1980's, when tender offer mania and attending litigation raged.
The existing precedent did contain a smattering of casual references to the issue, though, most of which seems to offer vague support for the proposition that the tender by the holders of a majority of the minority shares should be viewed as a functional equivalent of a fully-informed, disinterested vote in the context of an interested merger. By way of example, the Delaware Supreme Court considered the validity of a two step cash-out transaction by a controlling shareholder under the entire fairness test in Kahn v. Lynch Communication Systems, Inc. Upholding the finding below of fair dealing, including adequate disclosure, the court concluded that the case was one in which the issue of price should be the preponderant consideration in resolving the fairness issue. Convinced that the record reflected a sufficient showing to satisfy the burden of proof borne by the acquiror, the Court observed in a related aside that, "although the merger was not conditioned on a majority of the minority vote, we note that more than 94 percent of the shares were tendered in response to Alcatel's [first step tender] offer."
The Delaware Supreme Court went a little further in Cinerama, Inc. v. Technicolor, Inc. That decision also upheld the Court of Chancery's determination that the two-stage acquisition comprising a tender offer and a second-step, cash-out merger satisfied the entire fairness test. Dutifully making its way through the various components of the fair dealing analysis, the court satisfied itself as to the adequacy of the timing, initiation, negotiation, structure and disclosure of the transaction. In the course of this discussion, it also addressed the method by which the approval of shareholders had been approved. Again, as in Kahn, the shareholder vote on the second stage merger had not been conditioned on majority of the minority approval. The Court nonetheless found unquantified reassurance in the strong response to the first-step tender offer.
- The record reflects that 'more than seventy-five percent of [Technicolor's] shares were tendered in the transaction' to MAF. …. Generally, 'where a majority of fully informed stockholders ratify action of even interested directors, an attack on the ratified transaction must fail." Accordingly, in the absence of a disclosure violation, the Court of Chancery properly found the tender by an overwhelming majority of Technicolor's stockholders to be tacit approval and, therefore, constituted substantial evidence of fairness.
More recently, in Kohls v. Duthie, the Court of Chancery refused to enjoin a management buy-out of Kenetech Corporation in which the company's CEO, who owned 35% of the common, participated in the buy-out with a third party venture capital fund. The two-step acquisition, negotiated and approved by a special committee of the target board, included a first step tender offer that was conditioned on the tender of 85% of the shares owned by stockholders unaffiliated with the buyers. Defendants argued that this factor alone was sufficient to invoke the business judgment rule because the minimum tender condition should be given the same legal effect as a ratifying vote by disinterested stockholders. The Court focused instead on the special committee, finding that its activities were likely to give rise to a business judgment standard of review. The Court went on to observe, however, that the fact that the transaction was conditioned on the fully-informed approval of a majority of the unaffiliated stockholders, who therefore had been given the power to approve or disapprove the transaction as a group, gave rise to a forceful argument that such a tender should be accorded the same effect as a ratifying stockholder vote.
These decisions, most issued in the context of a challenge to the back-end of a two step acquisition, merely hinted at the legal effect that a Delaware Court might accord to the inclusion of a majority of the minority condition in a tender offer pursued by a conflicted fiduciary. In two recent decisions issued approximately six months apart, however, the Delaware Court of Chancery addressed the question more directly.
The representatives of Vishay were stymied. They had been charged with striking a deal with the board of Siliconix, Vishay's 80% subsidiary to acquire the publicly held minority interest in Siliconix and bring it in house in order to stop the financial bleeding. They had honored conventional wisdom, tried and true, by urging the Siliconix board to appoint a special committee to negotiate on behalf of the public minority the terms of Vishay's tender offer for the minority shares. They had thereafter offered what they believed to be a fair price and had engaged in arduous negotiations with the Siliconix Special Committee with regard to a variety of deal terms. Yet there had been precious little progress to evidence their efforts.
It may be safely observed that such a committee seldom adopts an utterly obstructionist posture or even credibly attempts to threaten to scuttle the transaction proposed for its consideration. No matter how hard-fought the negotiations, or how tenaciously the committee members may cleave to their fiduciary obligations, the practicalities dictate an implicit assumption by all parties that a deal ultimately will be done, an assumption that is often absent, and critically so, from the transactional negotiations between unaffiliated corporations. Those who prefer majority of the minority to special committees in the merger context may well find support in this often-unacknowledged fact. But whether one refers to it as structural bias or simply an implicit acknowledgment of the inevitable, the likelihood that a committee of this sort will simply say "no, thank you," and shut the process down is quite low in the typical parent-subsidiary merger discussions. The Siliconix Special Committee, however, seemed oblivious to this subtle reality.
In February of 2001, Vishay, interested in hastening the consummation of a deal, had announced an all-cash tender offer for the Siliconix shares that it did not already own at a price that reflected a 10% premium over the existing market price. This announcement was accompanied by Vishay's request that it be extended the opportunity to discuss the terms of the offer with an independent special committee of the Siliconix Board. The Board complied by designating its two most independent directors to serve on the committee, which thereupon retained its own legal and financial advisors. The committee then set about the task of negotiating improvements in the terms of the original Vishay offer.
But market forces soon intruded on the negotiations. The price of Siliconix stock crept above the original tender offer price. In response to the Committee's resulting expressions of concern, Vishay, unwilling to pay a higher price in cash, proposed a stock-for-stock merger. The negotiations stretched into May. Increasingly frustrated at the slow pace of the negotiations, and mindful of the continuing potential for the deterioration of the Siliconix business prospects, Vishay decided that it needed to act unilaterally. In late May, it announced an exchange offer pursuant to which it proposed to exchange 1.5 shares of Vishay for each tendered share of Siliconix common. The exchange ratio no longer reflected the original premium over the market price of Siliconix stock, but instead merely mirrored the ratio between the per share market prices of the two stocks as of the date of the announcement by Vishay of the original tender offer. The Special Committee was not offered the opportunity to evaluate or comment on the offer in advance. The offer stated that it was irrevocably conditioned on the tender of a majority of the outstanding minority shares, a condition that, if satisfied, would result in the ownership by Vishay of in excess of 90% of the outstanding Siliconix shares and the attending option to conclude a short-form merger under Section 253 of the Delaware General Corporation Law. In early June, Siliconix filed its Schedule 14D-9 in response to this offer. It announced that the Committee would take no position with respect to the offer and that it would offer no recommendation to stockholders as to its fairness.
In the ensuing (some might say inevitable) legal challenge, those representing the Siliconix minority asserted with some heat and no lack of hyperbole that the fiduciary responsibilities of fairness owed by Vishay as the majority stockholder of Siliconix had been reduced to tatters by its unilateral emasculation of the negotiation process, that its blatant brutalization of the minority was subject to the entire fairness standard and that Vishay could not meet its burden pursuant to that test either with respect to its fair dealing obligation or its duty to offer a fair price under such circumstances. In dealing with plaintiff's motion for preliminary injunction with respect to the consummation of the exchange offer, the Court addressed the issue in a somewhat less breathless fashion.
If the tender offer was free of improper coercion, and was the subject of full disclosure, the Court observed, stockholders were free to accept or reject that offer, each pursuant to his or her individual investment objectives. By the same token, the offeror, even though a majority stockholder subject to fiduciary duties, was under no duty to offer a fair price to the minority as that term is employed and understood in entire fairness analyses applicable in parent-subsidiary mergers. Rather, the Court stated, it is within the unfettered discretion of each individual stockholder in such a circumstance to decide what is or is not "fair" and whether or not to accept or reject the offer, free of improper coercion and armed with all information material to that decision. Where full disclosure is present and no inequitable coercion is applied by the interested fiduciary, the question as to the fairness of the transaction is a matter best left to traditional market forces and to the prospective intersection of the personal interests of the buyer and the seller.
This seems pretty solid stuff. Anyone finding such an analysis surprising has simply failed to grasp the critical conceptual distinction between a tender offer and a merger. To explain why the fiduciary responsibility obligation to offer a fair price and to engage in fair dealing have no application in the context of a non-coercive, fully disclosed tender offer, the Court invoked and relied upon the thoughtful analysis of Chancellor Allen in the T.W. Services decision, in the course of which the Chancellor observed:
- Public tender offers are, or rather can be, change in control transactions that are functionally similar to merger transactions with respect to the critical question of control over the corporate enterprise. Yet, under the corporation law, a board of directors which is given the critical role of initiating and recommending a merger to the shareholders … traditionally has been accorded no statutory role whatsoever with respect to a public tender offer for even a controlling number of shares. This distinctive treatment of board power with respect to merger and tender offers is not satisfactorily explained by the observation that the corporation law statutes were basically designed in a period when large scale public tender offers were rarities; our statutes are too constantly and carefully massaged for such an explanation to account for much of the story. More likely, one would suppose, is that conceptual notion that tender offers essentially represent the sale of shareholders' separate property and such sales - even aggregated into a single change in control transaction - require no "corporate" action and do not involve distinctively "corporate" interests.
It was this important distinction, the Court held, that differentiated this case from McMullin v. Beran and similar precedents of recent vintage that had recognized the fiduciary responsibilities of both majority stockholders and subsidiary boards to protect the minority in the context of mergers supported by a controlling stockholder. The Court in Siliconix accordingly declined not only to recognize the application of the entire fairness test with respect to the exchange offer, but also refused to find that the Siliconix Special Committee had breached its duties in failing to take a position with respect to the Vishay exchange offer. It was in connection with this latter holding, and in its attempt to further distinguish the decisions that found the entire fairness test applicable to interested mergers, that the Court made the following observation:
- In addition, the minority shareholders in McMullin were powerless; the parent was voting for the merger and it did not matter how they voted. Here, the Siliconix minority shareholders have the power to thwart the tender offer because it will go forward only if a majority of the minority shares are tendered. Accordingly, I conclude that McMullin cannot be read to require application of the entire fairness test to evaluate the proposed transaction.
This holding marks the point at which the majority of the minority condition first began to creep into the court's substantive analysis of tender offers by majority shareholders.
There were no members of the board of Aquila who were not subject to material conflicts of interest with respect to any transaction between Aquila and Utilicorp United, Inc., Aquila's 80% stockholder. As a result, when UtiliCorp announced its tender offer for the 20% minority interest of Aquila that UtiliCorp did not already own, the Aquila board was simply not in a position to engage in arm's length negotiations, whether by way of the typical special committee process or otherwise, nor was it able objectively to recommend a course of action to its shareholders in response to that offer. The offer to exchange each tendered share of Aquila for approximately .7 of a share of UtiliCorp therefore came essentially unvarnished to the Aquila shareholders. The opinion states that, in light of the conflicts of each of its members, "the Aquila Board remained neutral and made no recommendation to Aquila's stockholders on whether to tender their shares in the exchange offer." While the Board's Schedule 14D-9 contained an analysis by an independent financial advisor of historical stock price performance, and other typical valuation techniques that tended to show the price at the low end of the fairness range, the board did not request a fairness opinion.
In disposing of the motion for preliminary injunction brought on in the name of the Aquila minority, the Court began with the observation that "Delaware law does not impose a duty of entire fairness on controlling stockholders making a non-coercive tender or exchange offer to acquire shares directly from the minority holders," citing Siliconix and Solomon v. Pathe Communications Corp. The Court found the offer to be a voluntary one. It buttressed this conclusion with reference to the fact that the offer contained a majority of the minority condition, which required that at least a majority of Aquila's shares had to be tendered for the offer to succeed. As in Siliconix, satisfaction of this condition would place UtiliCorp in a position to accomplish the promised short form merger. The Court described this provision as an "important safeguard" that helped to ensure that the offer would not be coercive for Aquila shareholders. "The offer is clearly a voluntary one," the Vice Chancellor observed, "because the terms and conditions of the exchange offer are structured so that the decision whether or not to accept the offer is firmly entrusted to a majority of the minority stockholders." Having thus found the offer to be free of coercion, largely by reference to the existence of the majority of the minority condition, and there being no claims of inadequate disclosure, the Vice Chancellor had little trouble finding that neither the absence of any pretense of "fair dealing" in connection with the fashioning of the terms and price of the offer nor the fact that all of the members of the Aquila board suffered material conflicts of interest by reason of their material affiliations with UtiliCorp had any impact on its analysis.
The Odd Couple
The cases above conclude, quite soundly in the author's view, that a majority stockholder has no fiduciary responsibility to offer a fair price or to engage in fair dealing in connection with a fully disclosed and otherwise non-coercive tender offer for the shares of the minority. In light of this, of what conceivable relevance is it to the court's analysis that the offer is conditioned upon acceptance of a majority of the shares not already owned by the offeror? In the context of an interested merger, where the controlling stockholder stands on both sides of the transaction, there is every reason for the courts to presume that the approved transaction will disfavor the majority and to impose fairness where necessary. In such a context, the majority of the minority condition is intended to alleviate the Court's concern that the transaction is one-sided, and to approximate instead an arm's length merger by eliminating the power of the controlling party to ensure the approval of the deal. This is deemed to be strong evidence of compliance with the controlling stockholder's fiduciary duty to engage in fair dealing and, where the condition is satisfied, suggestive of the conclusion that the price is, if not substantively fair, at least acceptable to most, thus eliminating the need for the need for judicial intervention to ensure fairness.
But a tender offer by its nature is a very different transactional vehicle. It is not a collective judgment that can be approved solely by the act of an interested majority, but an assemblage of individual transactions in which each individual stockholder is free to apply its own definition of fairness and to accept or reject the offer accordingly. Unlike a merger, the decision of its fellow stockholders is of absolutely no consequence to that decision, unless the offeror (or the courts) insist on making it so. Unlike an interested merger, the controlling stockholder is in no position to control or influence those individual decisions by virtue of its controlling interest in the corporate entity (at least in the absence of inequitable coercion or outright fraud) because the power to control a collective decision is simply irrelevant. This neutralization of the power of the majority stockholder to control both sides of the transaction is not the result of legalistic artifice. It is the necessary effect of the tender offer vehicle itself.
What inherent inequity is addressed by a majority of the minority condition in such a context? The reason that a majority stockholder has no fiduciary duty to engage in fair dealing or to offer a fair price in such a circumstance, the reason that the entire fairness test simply has no application and that there is no burden of proof for the offeror to satisfy is that there is no inherent power to control both sides of the transaction. The offending power to effect the outcome, and the attending presumption that it will do so in a way that favors its own interests to the detriment of the minority is no longer present and no longer worthy of judicial suspicion or attention. So long as all material information is made available and stockholders are left to their individual discretion, free of inequitable coercion, there is nothing more that need be shown to warrant judicial deference to the holder's voluntary decision. Reference to a tally of the outcome of the other individual and voluntary decisions appears particularly unhelpful. It follows that there is no reason to require offerors to employ or to contort our legal analysis by inviting reliance upon the existence of artifices that were created for the very purpose of establishing that nonexistent duties have been satisfied.
Some might suggest that the presence of such a condition is relevant to the applicable judicial analysis not because it constitutes evidence of procedural fairness but because it evidences the absence of coercion, a condition that serves as an essential premise for the foregoing discussion in its entirety. Certainly no one would argue that a coercive tender offer by a majority shareholder should be freed of judicial scrutiny or rendered invulnerable to invalidation, for such coercion replicates, albeit indirectly, the potentially abusive power of the controlling stockholder to ensure the approval of its own transaction. But is it true that acceptance by a majority of the minority is conclusive or even persuasive evidence of a lack of coercion? To the contrary, it can be argued with at least equal force that such approval is as likely to constitute conclusive evidence of coercion as it is to its absence -- the higher the level of acceptance, the more successfully coercive the offer. In all events, there are far more reliable ways to detect the existence of inequitable coercion, most prominent among them an examination of the structure of the deal and of the adequacy of the disclosures. Simply counting the number of people who accepted the offer provides little assurance that the decision to accept was voluntary. Majority of the minority approval is a symptom of coercion, not a mechanism for protecting against it.
The fact is that majority of minority approval is monumentally irrelevant to the legal analysis that our courts have quite correctly identified as applicable to the judicial review of majority stockholder tender offers. It is an inapt analogy drawn from the very different legal analysis applicable to parent subsidiary mergers. Taking comfort in the presence of such a mechanism in an otherwise voluntary tender offer is not unlike insisting on the participation and approval of an independent special committee of directors in connection with an arm's length merger - it is utterly unnecessary and justifies no alteration of the otherwise applicable judicial standard of review of the board's conduct as fiduciaries.
It is probably fair to say that the inclusion of this factor in the judicial analysis of the parent/offeror's conduct threatens no significant harm to the policy of the law; that is unless, like some, you regard clarity of analysis as among the most useful characteristics of corporate common law, particularly Delaware corporate common law, and regard its much vaunted predictability as undermined by any institutionalization of untidy legal analysis. That may not be the stuff that emergencies or impending disasters are made of - by no means - but it is worth noting that, for the corporate practitioner, this highly valuable predictability derives directly from clarity of judicial analysis and the resulting ability to analogize existing precedent to problems of first impression. This in turn depends upon the precision of the precedent from which the analogy is to be drawn. Refashioning the judicial calculus to eliminate reliance upon a majority of minority condition in the context of parent tender offers would serve that purpose.
1 Mr. Wolfe is a partner in the Wilmington, Delaware law firm of Potter Anderson & Corroon LLP and the co-author of a treatise on litigation practice -- D. J. Wolfe, Jr. and M. A. Pittenger, Corporate and Commercial Practice in the Delaware Court of Chancery (Lexis Law Publishing). He is the current Chair of the Board of Bar Examiners of the Delaware Supreme Court and a member of the Board of Trustees of the Delaware Bar Foundation.
2 Rosenblatt v. Getty Oil, 493 A.2d 929 (Del. 1985).
3 Kahn v. Lynch Communications Systems, Inc., 638 A.2d 1110 (Del. 1994).
4 W.T. Allen, J.B. Jacobs, L.E. Strine, Jr., Function Over Form: A Reassessment of Standards of Review in Delaware Corporation Law, 26 Del. J. Corp. Law 859, 880-81 (2001).
5 Id., 26 Del. J. Corp. L. at 881, 882 (footnotes omitted).
6 See D.J. Wolfe, Jr., The Special Negotiating Committee and the Business Judgment Rule: A Modest Proposal, The M&A Lawyer, Volume 5, No. 10 (April, 2002).
7 457 A.2d 701 (Del. 1983).
8 Compare in this regard the holding of In re First Boston, Inc. Shareholders Litigation, Del. Ch., C.A. No. 10338, Allen, C. (June 7, 1990) (finding that a decision by an allegedly hamstrung special committee should be upheld because it nonetheless retained "the critical power: the power to say no. It is that power and the recognition of the responsibility it implies by committees of disinterested directors, that gives utility to the device of special board committees in charge of control transactions."), with Chancellor Allen's analysis in Independent Directors In MBO Transactions: Are They Fact or Fantasy? 45 Bus L. 2055 (August, 1990) and the language of the Delaware Supreme Court on this subject Kahn v. Tremont Corp., 694 A.2d 422 (Del. 1997).
9 638 A.2d 1110 (Del. 1994).
10 669 A.2d 79, 89 (Del. 1995).
11 663 A.2d 1156, 1176 (Del. 1995) (citations omitted). See also Lowenschuss v. Option Clearing Corp., Del Ch., C.A. No. 7922, Brown, C. (March 27, 1985) (taking solace in the fact that "the shareholders have indirectly been given an opportunity to pass on the propriety of the exchange offer by being given the option to tender or refuse to tender their shares after disclosure in the exchange material of the increase in long term debt and the decrease in shareholder equity that will remain following the exchange, and the record indicates that over 90% of all shares have been tendered.")
12 Del. Ch., C.A. No. 17762, Lamb, V.C. (Dec. 11. 2000), mem. op. at 21.
13 In re Siliconix Incorporated Shareholders Litigation, Del. Ch., C.A. No. 18700, Noble, V.C. (June 21, 2001). Mr. Wolfe's firm represented the special committee in the Siliconix matter. The discussion of that action here is limited in its entirety to matters of public record.
14 T.W. Services, Inc. v. SWT Acquisition Corp., Del. Ch., C.A. No. 10427, mem. op. at 28-30, Allen C. (Mar. 2,1989) (footnotes omitted).
15 T.W. Services, mem. op. at 28-30, quoted in Siliconix, supra. See also, the ensuing holding of the Delaware Supreme Court to much the same effect in Solomon v. Pathe Communications Corp., 672 A.2d 35, 39-40 (Del. 1996) ("In the case of totally voluntary tender offers … courts do not impose any right of the shareholders to receive a particular price …. [I]n the absence of coercion or disclosure violations, the adequacy of the price in a voluntary tender offer cannot be an issue.")
16 765 A.2d 910 (Del. 2000).
17 Siliconix, mem. op. at 24.
18 In re Aquila Inc. Shareholders Litigation, Del. Ch., C.A. No.19237, Lamb, V.C. (Jan 2, 2002). Mr. Wolfe's firm represented Aquila and its directors in the Aquila matter. The discussion of that action here is limited in its entirety to matters of public record.
19 672 A.2d 35 (Del. 1996).
20 This raises the question, yet to be addressed by the Delaware courts, whether the fact that a special committee actively negotiates with the controlling stockholder and ultimately approves the terms of a tender offer takes the transaction out of the Siliconix analysis and instead subjects the offer to an entire fairness analysis. Cf. Hartley v. Peapod, Inc., Del. Ch., C.A. No. 19025, Tr. at 4-7, Lamb, V.C. (Feb. 27, 2002) (Hearing) (Court suggesting in a settlement hearing that a negotiated tender offer transaction between a majority stockholder and a special committee of the subsidiary board that was not conditioned on acceptance by the majority of the stockholders would be an entire fairness case).