In re Family Dollar Stores, Inc. Stockholder Litigation: Reasonable Probability of Success Under Revlon

In In re Family Dollar Stores, Inc. Stockholder Litigation, the shareholders of Family Dollar Stores, Inc. (“Plaintiffs”) sued the Family Dollar Stores, Inc. board of directors (“Family”) and Dollar Tree Inc. (“Tree”) (collectively the “Defendants”), with a core claim of breach of fiduciary duty. The court found the Plaintiffs failed to demonstrate a reasonable probability of success on any of their claims, the existence of irreparable harm, or that the balance of the equities favored the relief sought.   

According to the complaint, Family and General began discussing a potential merger in 2013, although testimony suggested that “General was not ‘very motivated or anxious to do a transaction” with Family.’” In the Spring of 2014, Tree and Family entered into merger discussions. Any merger would require antitrust approval by the Federal Trade Commission (“FTC”), a significant concern. In July 2014, Family and Tree executed a merger agreement in which Tree would acquire Family for a price that eventually reached $76 per share.

To ensure FTC approval, Tree agreed to divest as many of its retail stores as necessary. Shortly thereafter, General made two bids to acquire Family, with the second including a price of $80 per share and a commitment to divest up to 1,500 of its stores in order to facilitate FTC approval. At the advice of its financial and legal counsel, Family did not engage General in discussions regarding its offer. In response, General commenced a tender offer at $80 per share.

The stockholders of Family then filed suit seeking a preliminary injunction of the Family stockholder vote on the proposed merger until: (1) the Board properly engaged and made a good faith effort to achieve a value-maximizing transaction with General; and (2) corrective disclosures were made. With regard to the first basis for injunctive relief, Plaintiffs asserted the Board breached its fiduciary duties under the Revlon standard in three ways: (1) running the sales process with minimum supervision; (2) entering a merger agreement with Tree before informing General; and (3) failing to negotiate with General after receiving its revised offer. Plaintiffs’ premised their second basis for injunctive relief on the Defendants’ failure to disclose seven categories of purportedly material information in its Proxy.

To obtain a preliminary injunction a plaintiff must demonstrate (i) a reasonable probability of success on the merits; (ii) irreparable harm absent interim relief; and (iii) that the balance of the equities favors the relief requested. Allegations of a breach of fiduciary duties in the context of a sale of corporate control by the directors of a Delaware corporation requires analysis under Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc.’s enhanced scrutiny standard. This standard charges directors with acting in a manner necessary to obtain the highest value reasonably attainable for shareholders. Directors bear the burden of proving they were adequately informed and acted reasonably.

The court found the board had proper motivation to maximize value for Family’s stockholders. The court took particular notice of the fact that ten of the eleven Family directors were independent, and that Levine’s ownership of 9 million Family shares was economic incentive to maximize company value. Finally, the court noted Family’s numerous discussions with General dating back to 2013 exploring a potential transaction.

Addressing Plaintiffs’ first basis for injunction, the court held the Plaintiffs did not demonstrate a reasonable probability of success on the merits of their Revlon claims. First, the court quickly dismissed the Plaintiffs’ arguments concerning supervision and the failure to inform General of the sales process. The court then found that Defendant acted reasonably in not engaging General in discussions.  The Court reasoned that the antitrust risks associated with General’s offer made it a financially superior offer on paper, but a financially inferior transaction “in the real world.” The court noted, among other things, the advice of the Family board’s financial advisor giving the General offer a 60% chance of failing the FTC’s antitrust review. The court found that the General revised offer failed to adequately address the concerns over the antitrust issues. 

Addressing the second basis for injunction, the court found the Plaintiffs failed to demonstrate a reasonable probability of success. The court reasoned the disclosure claims lacked merit because the statements identified by the Plaintiffs as “omissions and misleading statements” were “misapprehensions of the record, speculation, self-flagellation, or immaterial minutiae.”

Finally, the court found no threat of irreparable harm because there was no preclusive or coercive provision in the Family-Tree merger agreement preventing General or other third-parties from submitting a better proposal. The court also determined the risks of a preliminary injunction outweighed any benefits of delaying the stockholder vote on the Family-Tree transaction.

Accordingly, the court denied the Plaintiffs’ motion for preliminary injunction.

The primary material for this case can be found on the DU Corporate Governance website

Philip Nickerson