Antitrust Law Daily Wrap Up, ACQUISITIONS & MERGERS—Del. Ch.: Family Dollar’s rejection of Dollar General’s offer based on antitrust concerns found reasonable, (Dec 22, 2014)

By Matthew Garza, J.D.

An attempt by shareholders of Family Dollar Stores (Family) to stop a shareholder vote in a proposed merger between Family and Dollar Tree, Inc. (Tree) was rejected by the Delaware Court of Chancery. The vote on the proposed merger, scheduled for tomorrow, will not be blocked by the court (In re Family Dollar Stores, Inc. Stockholder Litigation, December 19, 2014, Bouchard, A.).

The shareholders claimed that the Board of Directors breached its Revlon duties by refusing to engage in discussions with Dollar General (General) after it offered $80 per share for Family, compared to Tree’s bid of $76 per share. Family cited predicted difficulty obtaining approval from the FTC for the higher offer, having been advised by counsel that General’s offer carried a 60 percent chance of rejection on antitrust grounds. Family asserted that General’s offer to divest 1500 stores was far below the level necessary to sufficiently address the antitrust risk presented by the merger.

“Regarding Plaintiffs’ core claim, the record shows that the Board was motivated to maximize Family’s value and acted reasonably within the constraints of the fiduciary out provision in the merger agreement when it decided not to engage in negotiations with General because of the antitrust risks associated with that proposal,” the court found.

The court said a preliminary injunction would deprive Family’s shareholders of the opportunity to decide whether the merger with Tree, which provided “deal certainty” in addition to a premium for their shares, was the right choice. Besides, wrote Chancellor Bouchard, “Nothing prevents General, which has been undeterred from bidding to acquire Family since the Company agreed to the Merger, from making an improved offer to address the antitrust risks associated with a Family/General combination if it truly wants to acquire Family.”

Negotiations. Preliminary negotiations for a merger began when Family was approached by General in February 2013, but the deal discussions never advanced, prompting a hedge fund investor and Family board member to remark that he believed that General was not “very motivated or anxious to do a transaction.”

In January 2014, after several quarters of disappointing financial results, the Family board terminated its President and CEO and formed an advisory committee to pursue a business combination. Discussions were soon underway with Tree. In May, Tree set forth an offer for between $68 and $70 per share in a non-binding proposal. By June, the offer was up to $74.50 per share, now valued at $76 per share due to an increase in Tree’s stock price. The parties then signed an agreement providing that Family and Tree would negotiate terms exclusively until July. In August, General offered $78.50 per share, which was rejected by Family. A revised offer for $80 per share was again rejected by Family in September.

Antitrust risk. Family said General’s commitment included an offer to divest up to 1,500 stores, which it considered insufficient to clear FTC review, and Tree offered a superior “hell or high water” antitrust commitment, meaning it would divest any and all stores required by regulators.

Family’s legal advisor, Cleary Gottlieb Steen & Hamilton, advised on the antitrust risks posed by Family’s combination with both Tree and General and found a much lower risk in the Family/Tree merger. That transaction involved “a limited risk of divestitures” and a small risk of an FTC challenge to block the merger, whereas the transaction between Family and General involved “a high risk of very significant divestitures or being blocked outright.”

Revlon duties. Analyzing the Family board’s obligation under Revlon to maximize the company’s value in a sale for the benefit of shareholders, the court noted that there is no “single blueprint” to obtaining the highest consideration for the company. The court said that Revlon allows directors to choose their own path to value maximization, as long their chosen route is reasonable. Nothing on the record indicated that the board, including Family’s CEO Howard Levine, harbored any “entrenchment motivation,” found the court. “To the contrary, the record shows that Levine had been planning his retirement since 2011 and had no desire to run a combined company after the transaction, but was advised to express a desire to do so as a negotiating tactic,” the court wrote.

Also insufficient were shareholder claims that the Family board was improperly motivated to favor Tree’s offer because the directors wanted to remain headquartered in North Carolina. The merger agreement in fact did not require Family’s headquarters to remain in North Carolina, and the only evidence of such a desire, the court said, was Levine’s statement to General that the company should remain in Charlotte. The court said this was a “negotiating ploy,” as was an email from a Family director to Levine in which she expressed support for the discussions with Tree “as long as [the company] is headquartered in NC! :).” The smiley face, the court said, supported a reasonable inference that the comment was made in jest.

The Board’s decision to not negotiate with General, concluded the court, reflected the reality that, for company stockholders, a financially superior offer on paper does not equate to a financially superior transaction in the real world if there is a meaningful risk that the transaction will not close for antitrust reasons.

The case is Consol. C.A. No. 9985-CB.

Attorneys: Seth D. Rigrodsky (Rigrodsky & Long, P.A.), Peter B. Andrews (Andrews & Springer LLC) and Donald J. Enright of (Levi & Korsinsky, LLP) for Darrell Wickert, Shiva Y. Stein, and Stuart Friedman. William M. Lafferty (Morris, Nichols, Arsht & Tunnell LLP) and Mitchell A. Lowenthal (Cleary Gottlieb Steen & Hamilton LLP) for Family Dollar Stores, Inc., Mark R. Bernstein, Pamela L. Davies, Sharon Allred Decker, Edward C. Dolby, Glenn A. Eisenberg, Edward P. Garden, Howard R. Levine, George R. Mahoney, Jr., James G. Martin, Harvey Morgan, Dale C. Pond. Gregory P. Williams (Richards, Layton & Finger, P.A.) and William Savitt (Wachtell, Lipton, Rosen & Katz) for Dollar Tree, Inc. and Dime Merger Sub, Inc.

Companies: Family Dollar Stores, Inc.; Dollar Tree, Inc.; Dollar General, Inc.

Cases: AcquisitionsMergers Antitrust DelawareNews