In Re Lear Corp. Shareholder Litigation
926 A.2d 94, 2007 Del. Ch. LEXIS 88, 2007 WL 1732588 (2007)
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Rule of Law:
A board's decision to enter a merger agreement may be reasonable under Revlon even with a flawed, management-led negotiation process, provided there is an effective post-signing market check. However, directors have an overriding duty to disclose all material facts, including a key negotiator's personal financial motivations that differ from those of the stockholders, and a failure to do so will warrant an injunction.
Facts:
- Lear Corporation, a major automotive supplier, was in a financially difficult position due to a struggling US auto industry.
- In early 2006, investor Carl Icahn began acquiring a large stake in Lear, eventually reaching 24% by October 2006.
- In late 2006, Lear's CEO, Robert Rossiter, concerned about his personal wealth being tied to the struggling company, approached the board's compensation committee seeking to accelerate his retirement benefits (SERP) without having to retire.
- The board was willing to accommodate Rossiter, but he hesitated due to the potential for negative publicity from institutional investors if Lear remained a public company.
- In January 2007, Icahn proposed a going-private transaction to Rossiter, which Rossiter discussed with Icahn for a week before informing the full board.
- The Lear board formed a Special Committee but delegated the crucial price negotiations solely to Rossiter, who had a personal interest in a going-private deal as a way to achieve his desired SERP payout and stock liquidity without public scrutiny.
- Rossiter negotiated with Icahn, who made a 'best and final' offer of $36 per share. The board accepted this offer.
- The signed merger agreement included a 45-day 'go-shop' period, during which Lear's financial advisors contacted 41 potential buyers but failed to generate any superior offers.
Procedural Posture:
- Lear Corporation shareholders (plaintiffs) initiated a lawsuit against the Lear board of directors (defendants) in the Delaware Court of Chancery.
- The plaintiffs moved for a preliminary injunction to prevent the shareholder vote on the proposed merger with an entity controlled by Carl Icahn.
- The Court of Chancery considered the plaintiffs' motion for a preliminary injunction.
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Issue:
Did the Lear board breach its fiduciary duties by failing to act reasonably to secure the highest available value for shareholders in a merger transaction and by failing to disclose material facts concerning the CEO's conflicting financial motivations?
Opinions:
Majority - Strine, Vice Chancellor
No, as to the Revlon claim; Yes, as to the disclosure claim. The board's sale process was reasonable under the circumstances, but its failure to disclose the CEO's material conflict of interest warrants an injunction. The board's overall approach to maximizing value was reasonable because it locked in a firm $36 per share offer from a serious buyer while retaining the ability to search for a higher bid through a robust post-signing market check. Given the risks of conducting a full pre-signing auction, such as Icahn withdrawing his bid, this strategy was a permissible business judgment. The deal protection measures, including the termination fee and matching rights, were not preclusive and fell within a reasonable range seen in other transactions. However, the board breached its duty of disclosure by failing to inform shareholders that the CEO, to whom it had delegated sole negotiating authority, had a material personal economic motivation to see a going-private deal consummated. Shortly before the merger talks, the CEO had sought to liquidate his retirement benefits while remaining employed, an objective that a going-private transaction would uniquely allow him to achieve without the public scrutiny he would otherwise face. A reasonable stockholder would find this conflict of interest, which could rationally lead the negotiator to favor a deal at a less than optimal price, important in deciding how to vote on the merger.
Analysis:
This decision emphasizes that while Delaware courts grant boards flexibility in designing a sale process under Revlon, this deference is not absolute. An effective post-signing market check can cure deficiencies in a pre-signing process, but it cannot cure a failure of disclosure. The case critically underscores that the personal financial motivations of key executives negotiating a deal are almost always material facts that must be disclosed to shareholders. It signals to boards that delegating negotiations to a conflicted manager without robust oversight and failing to disclose that conflict creates significant legal risk, even if the final deal price appears reasonable.
