We are discussing In re Del Monte, where shareholders succeeded in obtaining an injunction that delayed the acquistion of Del Monte for 20 days, providing an opportunity for a "topping" bid.
In granting the injunction, the court found that shareholders confronted the risk of irreparable harm.
- Absent an injunction, the Del Monte stockholders will be deprived forever of the opportunity to receive a pre-vote topping bid in a process free of taint from Barclays’ improper activities. The threatened foreclosure of this unique opportunity constitutes irreparable injury.
Without the pre-acquisition cure, shareholders would be left only with a suit for monetary damages. But, as the court noted, "[e]xculpation under Section 102(b)(7) can render empty the promise of post-closing damages."
While plaintiffs sought an injunction for 30 - 45 days, the court awarded only 20. The court took into account the fact that Del Monte had already been thoroughly shopped.
- The reality is that although a conflicted banker conducted the go-shop process, the Del Monte transaction was shopped actively for 45 days. Since the go-shop process ended on January 10, 2011, the Company has been subject to an additional passive market check. A further delay of 30 to 45 days ignores the fact that many potential bidders have already evaluated this opportunity. I will therefore enjoin the merger vote for a period of only 20 days, which should provide ample time for a serious and motivated bidder to emerge.
The court did, however, enjoin the "deal protection measures" including the termination fee payable to KKR but left in place the reverse termination fee applicable to KKR.
Despite having granted the injunction, the court viewed the likelihood of a higher bid as slight.
- The likelihood of a topping bid, however, is low. With KKR as the buyer and a market check (albeit a tainted one) already completed, a topping bid seems all the less likely. I will not be surprised if no one emerges.
With plaintiffs having won the case (albeit over the skepticism of the Vice Chancellor) and obtained the injunction, the court went on to take an extraordinary step.
Relying on Chancery Court Rule 65(c), the court required plaintiffs to post a bond of $1.2 million. The rule, which had a federal counterpart, permits a court to require a bond in the case of an injunction in an amount as the court "deems proper." In Delaware, parties wrongfully enjoined may recover an amount not more than the amount of the posted bond. See Guzzetta v. Serv. Corp. of Westover Hills, 7 A.3d 467, 469 (Del. Ch. 2010).
In requiring the bond, the court acknowledged that the parties "have not presented evidence on this issue." Moreover, the court concluded that "this Court has required at most a nominal bond." See Levco Alternative Fund, Ltd. v. Reader’s Digest Ass’n, 2002 WL 31835461, at *1 (Del. Ch. Aug. 14, 2002) (conditioning injunction against 54 recapitalization on bond of $5,000); Solar Cells, Inc. v. True N. P’rs, LLC, 2002 WL 749163, at *8 (Del. Ch. Apr. 25, 2002) (conditioning injunction against merger on bond of $2,500).
Not all of the cases involved bonds with amounts that low. The court in Emerald Partner's set the bond at $500,000. See Emerald P’rs v. Berlin, 726 A.2d 1215, 1218 & n.1 (Del. 1999). But see Gimbel v. Signal Co., 316 A.2d 599 (Del. Ch. 1974), aff’d, 316 A.2d 619 (Del. 1974). VC Laster ultimately imposed an obligation that was far from nominal. Shareholders were required to post a bond of $1.2 million.
The method of calculating the amount was convoluted. The court reasoned that the "harm" that could arise out of the injunction was the loss to KKR of its $120 million termination fee. The court, however, took into account "low probability of harm" (arising from the low likelihood of a topping bid) and the desire not to chill "the socially-beneficial and wealth-enhancing efforts of responsible plaintiffs’ counsel to remedy and deter breaches of fiduciary duty" while at the same time taking into account "the problem of over-incentivizing deal litigation by giving entrepreneurial law firms a free option to enjoin transactions." In the absence of "guidance from the paties," VC Laster set the bond at 1% of the enjoined termination fee.
If ever there was a case that justified no bond or at most a highly nominal one, it was this one. Shareholders made a strong case and the court adopted an appropriate remedy that largely eliminated the harm of any potential malfeasance. Moreover, there is little likelihood that the injunction will be reversed on appeal (it would likely expire before any appeal could even be completed) or reversed by the trial judge. In other words, the bond is not needed (although it does represent a form of continued exposures for shareholders).
What it does do, however, is add to plaintiffs' costs and make these kind of actions more expensive to bring. For law firms without deep pockets, it could cause them to avoid bringing actions, even meritorious ones like the injunction in this case.
The only thing that can be said is that it could have been worse. At least the Vice Chancellor saw fit not to require the bond sought by defendants. How much did they suggest? $1,076,612,698.80.
The primary materials are, as usual, posted on the DU Corporate Governance web site.