Topps and Bottoms: A Dubious Performance By Dissident Directors

Vice Chancellor Leo Strine last week produced another wonderfully detailed and thoughtful opinion, this time in In re The Topps Company Shareholders Litigation, the case challenging the proposed sale of Topps (think baseball cards) to a private equity firm run by Michael Eisner (think Disney).  There are already a number of descriptions and comments on the opinion (see, for example, here and here), and this case surely is significant even in its obvious ways.  While the Vice Chancellor grants a preliminary injunction halting the transaction in order to permit additional disclosure–a remarkably common remedy of late, as in Netsmart and Caremark, covered here and here–it takes the further and notable step of requiring the Topps board to free a competing bidder (Upper Deck, think baseball cards again) from a standstill agreement it had entered into with Topps during the go-shop period following execution of the Eisner merger agreement.

The Vice Chancellor is particularly critical of the board’s failure to pursue negotiations with Upper Deck once it became clear that Upper Deck could offer a transaction that would be significantly superior to the Eisner deal.  The court evidently concluded that this failure was likely driven–at least in part–by the fact that Eisner had given assurances that Topps’s incumbent managers (including the son of its founder) would continue in office after the merger, while the new bidder, Upper Deck, had made no such assurances.  On the other hand, Vice Chancellor Strine found that the original agreement with Eisner was a reasonable step for the board to take–a step that involved a 40-day go-shop period, a match right, a 3% termination fee for a superior bid accepted during the go-shop period, and a 4.6% termination fee for bids accepted after the go-shop period.  Most notably, the Eisner merger agreement permitted the board to pursue negotiations, even after the go-shop period, with a person the board concluded offered a reasonable probability of presenting a superior bid.

The lessons for M&A practitioners, however, aren’t what caught my attention here.  I was taken, rather, by the interesting and not altogether flattering light shed on the role of dissident directors.  In an environment in which proxy access tops the charts for corporate governance issues, a real-life example of how dissident directors actually performed in the heat of exploring a merger may say a great deal about the desirability of enhancing proxy access.  And the story in the Topps case, at least as told in the Vice Chancellor’s opinion, is not a strong testimonial in support of proxy access.  That story, and my analysis of its implications, follow below.

Topps’s performance had been declining since 2002, and soon a hedge fund started a proxy contest for three of the spots on Topps’s staggered board.  The contest was withdrawn once it appeared that Topps’s directors were committed to exploring a sale or restructuring the company.  After an unsuccessful attempt to sell Topps’s confectionary business, the hedge fund initiated a new contest, this time settling it with an agreement that three of its representatives would be elected to the board, and that the incumbent CEO (Arthur Shorin) would be reelected.

During the proxy contest, Eisner got in touch with Shorin to discuss Topps’s potential interest in a buyout.  Shorin referred Eisner to independent director Stephen Greenberg, who was briefly acquainted with Eisner as a result of Disney’s acquisition of a company Greenberg had founded.  In any event, a sale process ensued, and an ad hoc committee of four directors (two of the three dissidents–Arnaud Ajdler and Timothy Brog–and two independent incumbent directors) was appointed to supervise the process.  This is where the dissident directors’ performance comes into question.

Dissident mistake #1.  In response to Eisner’s suggestion that Topps’s market price (around $9 per share) would likely be the ceiling for any bid, Greenberg suggested instead that $10 would be needed to get a deal done.  Dissident Ajdler criticized Greenberg’s suggestion–not because the $10 figure was too weak a response, but because it might be so rich and aggressive that Eisner would be put off altogether.  At least with the benefit of hindsight, however, we know that Greenberg was right and Ajdler wrong: Eisner, rather than being driven away, came back with a bid at $9.75 per share.

Dissident mistake #2.  When Eisner’s $9.75 proposal came before the ad hoc committee, the dissident directors insisted that there be a public auction process before signing a deal with Eisner.  This position was not necessarily wrong, but again, the other directors’ approach was by no means a bad way to go.  Signing a deal with Eisner would allow the company to lock in a price and then use the go-shop period to test whether there was anything significantly better out there.  In any event, with the ad hoc committee deadlocked, the matter had to go to the full board, which ultimately voted 7-3 to go forward with the Eisner merger agreement, with the dissents, well, dissenting.  As a result, Topps had a bird in the hand–a locked-in price of at least $9.75–and quite a free range of motion to seek out a better deal.

Dissident mistake #3.  Hardening their hearts not in response to plagues but in response to positive developments, the dissident directors continued to object to negotiation with Eisner, such that the ad hoc committee couldn’t function in those negotiations.

Dissident mistake #4.  The dissidents insisted that Greenberg’s prior dealings with Eisner prevented him from being lead director on negotiations, so Greenberg–an evidently savvy negotiator–prudently declined the post.  Rather than accept an invitation–from both Greenberg and the other director who ended up chairing the go-shop process–to assist in handling negotiations, dissident director Ajdler simply refused to get involved, preferring to stay on the outside and criticize the path of the negotiations.

Dissident mistake #5.  When the Eisner deal came to a full board vote, the dissidents opposed it.  It’s hard to see in hindsight that this was a good call, but it was certainly a decision that cemented the rift between the two factions of the board.  With the Eisner deal inked, and the go-shop process underway, the board appointed an executive committee to handle the remainder of the process, and the dissidents were wholly excluded from that committee.  By this time, the dissidents had cried wolf too often–so that when their input was really needed later, when it came time to consider whether to open negotiations with Upper Deck, they had lost credibility and were left out of the picture, except on the ultimate question whether to continue to invoke the Upper Deck standstill agreement.

Dissident mistake #6.  It was on that standstill issue–just when the dissents were needed most–that one of them (Brog) abstained from the vote on whether to treat Upper Deck as an “excluded party” under the standstill, an approach that would have permitted Upper Deck to negotiate a potentially superior bid with Topps.  Only one of the dissidents–Ajdler–voted to do what the Vice Chancellor ultimately said should have been done: negotiate with Upper Deck.  The other dissident apparently didn’t show up for the meeting at all.

People who say that proxy access creates Balkanized, less-effective boards are going to have a field day with this story.  Stubbornly and reflexively negative when they shouldn’t have been, and insufficiently firm (or even present) when they were needed, the dissident directors at Topps didn’t appear to contribute much at all to effective governance at a critical time in the company’s history.

Of course, shareholder-activism advocates might argue that, without a viable threat of a proxy contest, Topps would never have pursued a salutary buyout transaction, and without more effective proxy access, shareholders will be unable to apply pressure to encourage boards to seek such transactions.  Maybe so.  But those concerned about the effect of proxy contests for short slates will, I suspect, point to the performance of Topps’s dissident directors as evidence of the substance of their concerns.