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Bear Stearns Lawsuits

Gordon Smith reports:

Here we go ... the Wayne County Employees’ Retirement System of Michigan and the Police and Fire Retirement System of the City of Detroit have filed an application for a TRO in the Delaware Court of Chancery. (Bloomberg) The Bear Stearns shareholders are trying to stop the sale of 95 million new voting shares to JP Morgan, which is projected to close on April 8.

Gordon then offers up a lengthy and thoughtful analysis of the fiduciary duty issues. An initial question is whether Blasius or Omnicare will control. If the latter, will the Delaware Supreme Court use this opportunity to gut Omnicare the way QVC gutted Time?

Larry Ribstein comments:

In my view, in both cases the essential issue should be whether the board exercised its fiduciary obligations to preserve shareholder value, which is what the shareholders as a whole wanted them to do. And in both cases it arguably did, because the deal protection move secured the only promising deal in sight – in Omnicare, the Genesis bid, and in Bear, the quintupling of the Morgan bid.

As dissenting Justice (now Chief Justice) Steele observed in Omnicare:

We should not encourage proscriptive rules that invalidate or render unenforceable precommitment strategies negotiated between two parties to a contract who will presumably, in the absence of conflicted interest, bargain intensely over every meaningful provision of a contract after a careful cost benefit analysis.

I agree with Larry about the precommitment issues. See my article Dead Hand and No Hand Pills: Precommitment Strategies in Corporate Law:

Corporations frequently make use of precommitment strategies. Examples include such widely used devices as negative pledge covenants and change of control clauses in bond indentures, fair price shark repellents, no shop and other exclusivity provisions in merger agreements, mandatory indemnification bylaws, and so on. This paper argues that poison pills also can be understood as a form of precommitment, by which the board of directors commits to a policy intended either to negotiate a high acquisition price or to maintain the corporation’s independence.

In Quickturn Design Sys., Inc. v. Mentor Graphics Corp., the Delaware supreme court invalidated a no hand poison pill on grounds that a board of directors lacks authority to adopt such devices. In doing so, the court misinterpreted relevant Delaware law. It unjustifiably called into question the validity of a host of corporate precommitment strategies. Finally, and perhaps most troublingly, it called into question the central tenet of Delaware corporate law; namely, the plenary authority of the board of directors.

This article argues that the Delaware supreme court’s decision was wrong both as a doctrinal and a policy matter. There simply is no firebreak between the sorts of board self-disablement deemed invalid by Quickturn and the host of other precommitment strategies routinely used by corporate boards of directors. The Delaware supreme court’s conclusion that the former are invalid for lack of statutory authority thus threatens to invalidate all of the latter. The article concludes by arguing that the Delaware supreme court should have analyzed the no hand pill under standard fiduciary duty principles rather than creating a new prophylactic ban on precommitment strategies