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Court of Chancery Denies Motion for Temporary Injunction Where Breakup Fee Is Alleged To Be Too High

In re Toys "R" Us Shareholder Litigation, C.A. No. 1212-N, 877 A.2d 975 (Del. Ch. June 24, 2005) The Court of Chancery considered a motion to enjoin a vote of the stockholders of Toys "R" Us, Inc. to consider approving a merger with an acquisition vehicle formed by a group led by Kohlberg Kravis Roberts & Co. Pursuant to the terms of the merger agreement, the Toys "R" Us stockholders would receive $26.75 per share for their shares. The $26.75 per share merger consideration constituted a 123% premium over the price of TRU stock when merger negotiations began in January 2004. Plaintiffs charged the board did not act reasonably in pursuit of the highest attainable value. The Court of Chancery denied the motion to enjoin a stockholder vote on the proposed merger, saying stockholders could stop the merger by voting if they thought it was unfair Shareholder plaintiff brought a motion to a preliminary injunction to halt a shareholder vote on the $6.6 billion sale of Toys "R" Us, Inc. ("Toys") to a consortium of three private equity firms. In support of their motion, Plaintiffs made two key arguments. First, they argued that the Toys board's decision to sell the entire company for $26.75 per share was improper because that price was the product of a lengthy auction process designed to sell just one of Toys' business divisions -- the global toys business. Second, Plaintiffs claimed that the deal protection devices agreed to by the board were unreasonable and that, the Toys board should have bargained harder with the potential buyers for more favorable deal protection terms, despite the fact that the offer presented to shareholders beat the next highest (and only other) offer for the entire company by $300 million. In deciding the motion for a preliminary injunction, the Court upheld the Toys board's decision to conduct a brief auction for the entire company, and to invite bids only from the final bidders in the global toys auction, rather than take the time to conduct a full-blown search for other potential buyers. In particular, the Court held that
"[a] hard look at the board's decisions reveals that it made reasonable choices in confronting the real world circumstances it faced. That the board was supple in reacting to new circumstances and adroit in responding to a new development that promised, in its view, greater value to the stockholders is not evidence of infidelity or imprudence; it is consistent with the sort of difficult business decisions that corporate fiduciaries are required to make all the time. Having taken so much time to educate itself and having signaled publicly at the outset an openness to strategic alternatives, the Toys "R" Us board was well-positioned to make a reasoned decision to accept the $26.75 per share offer."
The Court found no breach of ficuciary duties by the Board in consenting to the following: a termination fee worth 3.75% of the transaction's equity value coupled with matching rights and a "superior proposal" fiduciary-out provision; allowing two buyers, already engaged in the auction process for the global toys division, to present a joint bid for the entire company. The Court also rejected plaintiffs' contention that the sale process was tainted because the CEO, an inside director, played a significant role throughout the process. In doing so, the Court noted that
"to be an inside or non-independent director is not a crime, it is a status. And that fact cannot be forgotten by those who apply, or those who make, corporate law. To do otherwise is to risk boardrooms devoid of the very members with the best capacity to help management craft and implement a sound business plan."
The Court also remarked that the fact that the CEO
"played a key moment-to-moment role" with the company's financial and legal advisors at the final stages of the negotiations "is not problematic. . . . It was [the CEO's] duty to bring his managerial and financial savvy to bear on the auction process. That is what he was paid to do."
The Court further held that the CEO was not improperly motivated to recommend the transaction even though he stood to gain more than $60 million from the merger. Specifically, the Court held that because the CEO's personal interests were aligned with those of the shareholders because his stake in the merger "results from the stock and options he holds...he therefore had more incentive than almost anyone to make sure that the board did the best risk-adjusted job it could of getting the best price." Finally, the Court held that the company's financial advisor was not improperly motivated to recommend the transaction even though it stood to earn approximately $7 million more in fees if the entire company was sold, (rather than just the global toys division), because
"this feature of the contract was designed to provide an incentive for [financial advisors] to seek higher value [for shareholders], and has been recognized as proper by our courts."
Accordingly, the Court of Chancery denied the motion for temporary injunction. To be sent a PDF copy of this opionion, please click here. Authored by: Liza H. Sherman 302.888.6940 lsherman@morrisjames.com