Chancery Rejects Claim CEO Steered Target Board to Favor Financial-Buyer Bid Over Higher Strategic-Buyer Bid to Retain His Position Post-Merger—Teamsters v. Martell
M&A/PE Briefing | February 21, 2023
In Teamsters Local v. Martell (Feb. 1, 2023), the Delaware Court of Chancery, at the pleading stage of litigation, dismissed claims that the former CEO-director of CoreLogic, Inc. breached his fiduciary duties in connection with the $6 billion sale of the company to Stone Point Capital and Insight Partners (“Stone-Insight”). The plaintiff alleged that the “real reason” the CoreLogic board (the “Board”) chose the bid submitted by Stone-Insight (a financial buyer), over a competing all-stock bid with a higher implied value submitted by CoStar Group, Inc. (a strategic buyer), was that the Board deferred to the CEO’s desire to sell to a financial buyer so that he would retain his job post-merger. The plaintiff relied primarily on public comments by CoStar’s CEO, made after the Stone-Insight merger closed, that suggested that the sale process was infected by what he considered to be a usual preference by senior managers for financial buyers over strategic buyers based on their view that the former often retain senior management while the latter often do not.
- The court dismissed claims that an officer steered an independent board to favor a financial buyer’s bid over a strategic buyer’s bid based solely on speculation that the officer had an implicit entrenchment motive. The court held that the plaintiff had alleged no particularized facts from which it could be inferred that CoreLogic’s CEO had an entrenchment motive; that he had in fact steered the board away from a deal with CoStar; nor, in any event, that he had influenced the independent and unconflicted board. The claims were not sustainable based solely on “speculation and innuendo” arising from the CoStar CEO’s public comments about the sale process, particularly as the plaintiff had conducted a Section 220 investigation of the corporate books and records and had cited nothing in these documents to substantiate the claims.
- The court’s opinion reinforces that a board’s concerns about antitrust-related delay and value uncertainty can justify a determination to select a financial buyer’s cash bid over a nominally higher strategic buyer’s stock bid. The court rejected the plaintiff’s contention that, given that there were no “meaningful” antitrust issues associated with CoStar’s deal, the Board’s purported antitrust concerns about the bid must have been a pretext. The court noted that a deal with no meaningful antitrust issues is different from a deal with no antitrust issues. The court also found no basis on which to reasonably infer that the Board did not actually have a concern about value certainty of CoStar’s stock deal, particularly given that CoStar’s stock, although high, had been steadily declining.
Background. CoreLogic’s board (the “Board”) was comprised of Frank Martell (the company’s CEO) and eleven outside directors. Three of the outside directors had been elected in June 2020 in a proxy contest brought by investment funds that had made an unsolicited proposal to acquire the company, which had been rejected as undervalued. Following the funds’ proxy contest, CoreLogic engaged in a months-long consideration of strategic alternatives and shopping process, which attracted substantial market-wide interest. The Board ultimately narrowed the field to an all-cash bid from Stone-Insight (offering $77 per share) and an all-stock bid from CoStar (offering stock with an implied value of $79 per share). Based on concerns about CoStar’s bid related to (i) uncertainty of value due to volatility in CoStar’s stock price and (ii) possible antitrust issues that the Board had concluded could lead to up to a 15-month delay in closing, the Board made a counter-offer to CoStar (proposing that the stock consideration be increased to an implied value of $85 per share; that CoStar agree to undertake required antitrust remedies; and that the deadline for closing be 12 months instead of CoStar’s proposed 15 months). CoStar ultimately made a final best offer (offering stock with an implied value of $86.30 per share—and no other changes from its earlier bid). Stone-Insight increased its all-cash offer (to $80 per share). The board accepted Stone-Insight’s increased bid and entered into a Merger Agreement.
Two weeks after the Merger Agreement was signed, CoStar publicly submitted a competing bid (the “Competing Bid”) (offering stock with an implied value of $95.76 per share). The Board determined that the Competing Bid could reasonably be expected to lead to a “Superior Proposal” under the Merger Agreement, and authorized negotiations with CoStar to seek (i) a cash component to reduce value uncertainty and (ii) a response addressing the Board’s antitrust concerns. CoStar revised its Competing Bid (to provide a $6 cash component, and stock with an implied value of $86 per share), and reiterated its view that the transaction would pose “no meaningful antitrust issues.” The Board then requested that the cash component be increased further and that the antitrust concerns be addressed. CoStar did not respond.
CoreLogic’s stockholders overwhelmingly approved the Merger, which represented a 51% premium over the unaffected stock price. The Merger closed in June 2021. On the date of closing, Stone-Insight announced that CoreLogic’s senior management team would be retained post-closing.
BisNow magazine interviewed CoStar’s CEO, Andrew Florance, about the CoreLogic sale process. In the BisNow article (the “BisNow Article”), Florance suggested that CoStar’s bid was not accepted because CoreLogic’s senior management favored a sale to a financial buyer so that they could keep their jobs post-transaction. The plaintiff then brought a Section 220 action to investigate possible fiduciary breaches in connection with the sale process, following which it filed suit against Martell. At the pleading stage, Vice Chancellor Cook granted Martell’s motion to dismiss.
The BisNow Article. The subject of the BisNow Article was CoStar’s recent series of failed attempts to acquire various companies, including CoreLogic. In response to questions about the CoreLogic sale process, Florance reportedly said that he believed that antitrust issues had nothing to do with the Board’s decision not to accept CoStar’s offer and that, in fact, CoreLogic’s executives did not want the company to be acquired by CoStar because some of them would have lost their jobs. The article quoted Florance as saying: “Most of the senior management team there might earn eight digits a year in compensation, and in a merger, especially a strategic merger, inevitably some of those jobs go away….That’s a powerful motive to not do a deal.”
The plaintiff’s claims. The crux of the plaintiff’s complaint was that Martell had “spearheaded” the CoreLogic sale process and led the negotiations, and that the “supine” Board had favored a deal with Stone-Insight over CoStar in deference to Martell’s interest in pursuing a deal that would guarantee his continued employment post-merger. Plaintiff’s counsel acknowledged in remarks to the court that the suit would not have been brought but for Florance’s statements in the BisNow Article. The plaintiff argued that the statements by Florance, who was a first-hand participant in the sale process negotiations, were more reliable (at least at the pleading stage, where any reasonable competing inferences are to be decided in favor of the plaintiff) than the “thirdhand” board minutes and proxy statement disclosures that had been reviewed and edited by however many lawyers.” The plaintiff alleged that, because the proxy statement did not disclose the “real reason” for the Board’s disfavoring CoStar’s bid, and did not disclose Martell’s conflict in wanting to ensure post-merger employment, the stockholder approval of the Merger was not “fully informed” and the court should apply heightened scrutiny rather than Corwin business judgement review.
The effect of the BisNow Article. The court emphasized that the plaintiff, to support its disclosure claims, had relied exclusively on Florance’s statements in the BisNow Article to argue that the Board’s minutes and identified sale considerations must have been false and that the real reason behind the Merger was an undisclosed conflict Martell had in protecting his job. Vice Chancellor Cook wrote: “In this way, Plaintiff tries to generate a disclosure claim concerning otherwise facially appropriate proxy disclosures made by an independent board with its independent advisors. According to Plaintiff, I must shut my eyes to everything but a handful of statements on the Internet attributed to a senior executive of an entity that was publicly unsuccessful in making a topping bid. One might imagine scenarios where a post-process statement made by a bidder could support a sale process claim. But this is not one of them.” Moreover, the Vice Chancellor observed (at various points in the opinion) that Florance’s reported statements in the BisNow Article stated his beliefs only; were “framed generically and seemed to express a normative view about the consequences of strategic mergers that may or may not have been applicable to the factual circumstances surrounding [the CoreLogic sale process]”; were inconsistent with CoStar’s press release issued upon the Merger’s closing, in which Florance praised CoreLogic’s sale process and congratulated the Board and management on having achieved “a strong valuation” for the stockholders; and, perhaps, “smacked of sour grapes.”
Application of Corwin. The court found no reasonable basis on which to infer that the disclosure in the proxy statement was false or inadequate, and therefore applied Corwin business judgment review and dismissed the plaintiff’s claims. The court emphasized that: (i) the Board and its advisors were independent and unconflicted, (ii) the plaintiff had made no particularized allegations that Martell had, or had acted on, an entrenchment motive, nor that the Board had been influenced by Martell; and (iii) the Board appeared to have had valid concerns about CoStar’s bid (namely, antitrust-related delay and value uncertainty).
The court found no basis on which to infer that the Board’s disclosure that it had antitrust concerns about CoStar’s bid was false. The plaintiff argued that the antitrust concerns must have been a pretext, as CoStar’s proposed transaction did not present any meaningful antitrust issues. The court wrote: “But ‘no meaningful antitrust concerns’ does not reasonably mean ‘no antitrust concerns.’” Also, the court noted that CoStar had identified antitrust as a “material condition” to its bid; that the Board had been informed about antitrust issues by its independent and unconflicted advisors; and that the Board had considered that CoStar was facing antitrust liability in another deal at the time and had been engaged in litigation over its refusal to pay a substantial reverse termination fee. The court concluded: “Under these circumstances, it is not reasonably conceivable that the Board—let alone Martell—fabricated a regulatory basis for choosing the Merger, which contained strong antitrust assurances, over CoStar’s offers, which did not.”
The court found no basis on which to infer that the Board’s disclosure that it had concerns about the value certainty of CoStar’s bid was false. The court noted that the Board and its advisors had observed that CoStar’s stock price, although high, had been declining steadily—for example, a 19% drop during a recent two-week period, based on which CoStar’s Competing Bid had an implied value of $83.73 per share including the $6 cash component, “not the $90 per share that CoStar advertised.” The court also noted that the Board had encouraged CoStar to substantially increase the cash component of its bid to mitigate future volatility but, “rather than renegotiate, CoStar walked.”
The court rejected the plaintiff’s contention that Martell must have had discussions with Stone-Insight about post-merger employment before the Merger closing and that these discussions should have been disclosed in the proxy statement. The plaintiff argued that it would be “preposterous to presume” that discussions had not taken place pre-closing, given that (i) Stone-Insight announced on the date of closing that management was being retained and (ii) financial buyers often retain management post-closing. The court held that the plaintiff had pled no particularized facts indicating that such discussions had actually taken place—“The court cannot infer the existence of undisclosed, intra-process employment discussions between a target executive and an acquiror from speculation and innuendo.” Moreover, the court stated, it would only be discussions that took place during the sale process (not after signing and before closing) that would be material information required to be disclosed in the proxy statement.
The court rejected the plaintiff’s contention that Florance’s statements in the BisNow Article substantiated that Martell would have lost his job if the CoStar bid had been selected. The court observed that Florance’s statements did not reference Martell, and “were framed generically and seem[ed] to express a normative view about the consequences of strategic mergers that may or may not have been applicable to the factual circumstances surrounding this case.” Further, the court stressed that the plaintiff pointed to nothing in the books and records it had obtained in its Section 220 investigation as support for an inference that Florance or CoStar had suggested during the sale process that Martell would be terminated—“quite the opposite,” the court stated, as the Board minutes reflected that Martell told the board that Florance had told him that Florance wanted him to play a significant role post-merger and, further, CoStar’s bid letters stated that CoStar envisioned ongoing roles for management.
The court stated that, even if Corwin were not applicable, the plaintiff had failed to state a claim against Martell for breach of the duty of loyalty. The court found that no specific facts were alleged from which it was reasonable to infer that Martell actually had a desire to entrench himself; had “spearheaded” the sale process (“[t]he Board did that,” the court wrote); or had influenced the independent board (“improperly or otherwise,” the court wrote). Moreover, the court stressed, the Board had valid concerns about the CoStar bids and, “[i]f anything, the Complaint supports a reasonable inference that the Board desired a deal with CoStar, but on terms CoStar was unwilling to accept.” The court also observed: “[I]t [was] not clear from the complaint what role Martell played in the Merger…. Save for isolated scenes, he barely appears. In many ways, he is depicted as the Mr. Godot who never arrives.”
- Target boards are advantaged by engaging in a careful sale process, led by independent directors assisted by independent advisors. The court’s ready dismissal, at the pleading stage, of the plaintiff’s claims in Martell was grounded in the overall factual context, which included: an independent, non-conflicted board assisted by independent, non-conflicted advisors; a months-long shopping process; the Board having negotiated with CoStar and “persisted” in encouraging CoStar to respond to its concerns; a record supporting that the Board had valid concerns about CoStar’s, had carefully considered the concerns, and had disclosed them; and a management team that had not indicated any entrenchment motive or attempts to influence the Board.
- A board should maintain a good record (such as in board minutes) of sale process developments and the board’s careful consideration of factors supporting its choice to favor a bid (especially if a competing bid has a higher nominal value). As Martell highlights, the court will be inclined to reject a plaintiff’s challenge to the truth and accuracy of board minutes and proxy statement disclosures based only on a plaintiff’s suppositions or speculation. In particular, the court will be skeptical of a plaintiff’s allegations that are not supported in any way in documents the plaintiff obtained in a pre-suit Section 220 investigation. A potential plaintiff should keep in mind that, while a Section 220 investigation can reveal information based on which more particularized allegations can be made (thus increasing the likelihood of success for a plaintiff at the pleading stage of litigation), the failure to find information in the investigation that is supportive of the plaintiff’s claims may well increase the court’s skepticism as to the possible validity of the claims.
- A board can select a lower-valued bid over a higher-valued bid if it has valid reasons to do so. Those reasons should be carefully considered and documented. As highlighted in Martell, value uncertainty (relating to a stock bid) or antitrust delay or uncertainty (relating to a strategic bid), or other factors relating to value or closing certainty (including, for example, a bidder’s transaction and litigation history), are valid bases on which a board might determine to select a lower competing bid. Also as highlighted in Martell, a bidder generally should try to address valid concerns the board may raise about its bid, and a refusal to address such concerns can disadvantage the bid. A bidder could, depending on the circumstances, address a concern about value certainty by adding a (or increasing the) cash component of the consideration, agreeing to collar provisions to protect the value of the stock portion, and/or raising the offer price; and could address a concern about antitrust delay or uncertainty by agreeing to a shorter “end date” for closing, undertaking to implement necessary antitrust remedial actions, and/or agreeing to a reverse termination fee.
- Target boards should be careful not to permit management interest in post-transaction employment to infect a sale process. It is not problematic for a bidder to indicate that it intends to retain management post-closing; but, to avoid an actual or potential conflict of interest, an officer or director generally should not engage in negotiations with a bidder during a sale process with respect to post-transaction employment. When possible, such discussions should not occur until after at least the economic and other key deal terms of the acquisition are largely finalized.
- Details of director or management discussions relating to post-transaction employment should be reported to, and then monitored by, the board. If, during the sale process, a director or officer engages in any discussions regarding potential post-closing employment, those discussions and the details of the potential compensation should be disclosed to the board. (A board should be proactive in becoming informed whether any such discussions may be occurring, rather than relying solely on directors’ and managers’ self-reporting.) The board should monitor any such discussions and impose any restrictions appropriate to address the potential conflict of interest. Such restrictions could include, for example, depending on the circumstances, designating a different person as the lead negotiator in the sale process; designating another person to act together with this person as lead negotiator in the sale process; establishing a framework for frequent reporting on such discussions by such person to the board; designating a director to be present for and monitor any such discussions; requiring frequent and specific reporting from the person to the board with respect to such discussions; and the like. Also, management and the board should consider to what extent disclosure to stockholders relating to such discussions and a potential conflict would be appropriate.
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