Print
E-MailVice Chancellor Leo Strine, who teaches at Harvard Law each fall, last week issued an opinion with potentially significant implications for shareholder challenges to going-private transactions in In re Netsmart Technologies, Inc. The opinion holds that a board may fail to meet its Revlon duties when it considers only bids from financial buyers–to the exclusion of strategic acquirers–and that a firm must disclose valuation opinions suggesting that the firm is worth more as a standalone entity in the merger proxy.
Netsmart‘s board considered only bids from financial buyers before signing a merger agreement with a window shopping provision. (Although Netsmart was prohibited from soliciting a higher bid, the window shopping clause authorized them to accept an unsolicited bid.) In cases involving larger firms, Chancery has suggested that window shopping clauses ensure that the board accepted the highest bid, for other bidders are free to step in and pay more. But Netsmart is quite small, and the Vice Chancellor concludes on these facts that a window shopping provision offers little market assurance for small firms because other buyers might not know that the firm is in play and the company is prohibited from actively soliciting a higher bid.
Paul Rowe, a member of the Program on Corporate Governance‘s Advisory Board and a partner at Wachtell, Lipton, Rosen & Katz, has authored a Memorandum on the decision. The Memorandum notes that the Netsmart board used an increasingly common approach to the auction, and that previous Delaware cases had approved window shopping provisions under different circumstances. Emphasizing the fact-specific nature of the opinion, Paul concludes that Chancery will probably continue to defer to the judgment of boards in structuring the auction process, but that boards must ensure that the auction procedure they establish is appropriate in light of the particular circumstances of the merger market for the firm.
I agree with Paul that the opinion is quite fact-specific; there is considerable emphasis on Netsmart’s size and its corresponding likelihood of drawing a competitive bid without being able actively to shop the company. But the opinion also evinces growing skepticism at Chancery with respect to the incentives of management, boards, and even financial advisors to sell to a financial buyer rather than a strategic acquirer. As I noted in describing Vice Chancellor Lamb‘s decision in In re SS&C Technologies, Chancery seems acutely aware of the fact that managers seeking to preserve themselves in office might prefer to sell to a private equity firm rather than to a strategic buyer–and the court seems prepared to demand that boards design auction processes that do not favor management’s preferred result.
