Thompson And Schwartz On In re Toys ‘R’ Us, Inc. Shareholder Litigation And Revlon Duties

Under In re Toys "R" Us, Inc. Shareholder Litigation, corporate directors must follow a reasonable process once their Revlon duties have been triggered. In this commentary, the authors discuss this decision by the Court of Chancery of Delaware, which held that while directors must take reasonable efforts to fulfill their obligation to secure the best available price, they are not require to perform flawlessly. The authors further explain how deference to reasonable actions also extends to the decision to include deal protection provisions in acquisition agreements.
 
Authors Kenneth R. Thompson II, Senior Vice President and Global Chief Legal Officer for LexisNexis, a division of Reed Elsevier Inc., and Michael G. Schwartz, a partner at Vorys, Sater, Seymour and Pease LLP in Cincinnati, write:
 
 “[T]he Delaware judiciary has examined the application of Revlon duties in a variety of circumstances, however, the broad array of possible fact patterns left numerous unresolved issues. In the case, In re Toys "R" Us, Inc. Shareholder Litigation, 877 A.2d 975, 1000 (Del Ch. 2005), the Court of Chancery of Delaware summarized the applicable standards of review when examining the processes followed by a board of directors once Revlon Duties have been triggered. The Chancery Court also examined the reasonableness of the board's actions regarding deal protection provisions included in a merger agreement. . . .

“In Toys "R" Us, the court held that the [bidding] process employed by the board was reasonable, even if mistakes were made along the way. Nine of the ten members on the board were independent, belying the plaintiffs' claim that the board's actions were controlled by insiders. During the strategic review process, the board met 14 times and the Executive Committee met 18 times contradicting the plaintiffs' claim that the board was not actively engaged in the process. The court concluded the decision to accept the final bid was the result of a reasonable deliberative process, and thus not subject to challenge by the plaintiffs. . . .

“In the Toys "R" Us decision, the court agreed the deal protection provisions were reasonable. The court noted that the next highest bid was materially less than the winning bid, the board was successful in negotiating a lower termination fee, and the 3.75% termination fee was reasonable in view of the other benefits the board obtained in separate portions of the merger agreement.
 
“The Toys "R" Us decision provides valuable court guidance regarding a board's Revlon duties in a change of control situation. First, the Delaware Chancery Court confirms that even under an enhanced scrutiny test, a board has leeway provided it follows a reasonable process in the sale of a company. Second, the court confirmed that deal protection terms in acquisition agreements are acceptable, however they are subject to close examination and must be reasonable in light of other benefits obtained in the transaction.”

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