Professor Bainbridge...on law, politics, religion, culture & food

Can a Target Just Say No?

In a fine column analyzing Yahoo’s tin parachute, the NY Times’ Deal Professor (a.k.a. Steven Davidoff) opines that:

… the Yahoo board here is permitted under Delaware law to reject Microsoft’s bid and just say no.

I’m a long-time skeptic that the just say no defense is really viable or authorized under Delaware law. As I explain in Unocal at 20:

… many commentators concluded Time validated the so-called “just say no” defense, pursuant to which the target’s board simply refuses to allow the firm to be acquired, and backs up that refusal by a poison pill or other takeover defenses. I find this reading of Time unpersuasive. At the chancery court level, Chancellor Allen’s analysis hinged on his observation that Time’s acquisition of Warner “[did] not legally preclude the successful prosecution of a hostile tender offer” for the resulting entity. More importantly, he also indicated that defensive tactics used against a hostile offer by Paramount or some other bidder for the combined entity after Time’s acquisition of Warner would present a different issue.

The supreme court’s opinion is similarly limited. While it is true the court rejected any inference that directors are obliged to abandon a pre-existing business plan in order to permit short-term shareholder gains, Time’s plan was deemed reasonable and proportionate to the Paramount threat precisely because it was “not aimed at ‘cramming down’ on its shareholders a management-sponsored alternative,” but was only intended to carry forward “a pre-existing transaction in an altered form.” The supreme court also expressly affirmed Chancellor Allen’s finding that Time’s actions “did not preclude Paramount from making an offer for the combined Time-Warner company.”

These limitations on the court’s holding are important because they eliminate the “just say no” defense, as well as some of the other more apocalyptic interpretations of Time. The “just say no” defense does cram down a particular result—independence—on the shareholders, and also attempts to preclude anyone from making an offer for the combined company, both of which the court said management could not do. Therefore, Time does not necessarily compel one to conclude that the “just say no” defense will be deemed to be proportional to an adequate, noncoercive offer.