Mills Acquisition Co. v. MacMillan, Inc.

Rule of Law:

When a corporation's board of directors decides to sell the company, its fiduciary duties shift to maximizing shareholder value through a fair and evenhanded auction process; preferential treatment of a bidder, especially when management is self-interested and the board fails to exercise proper oversight, constitutes a breach of the duties of loyalty and care and will not withstand heightened judicial scrutiny.

Facts:

• In May 1987, Macmillan's chairman Edward P. Evans and president William F. Reilly explored defensive measures against potential takeovers, including a corporate restructuring designed to give management majority control of a new 'Information' company without investing new capital.
• On October 21, 1987, the Robert M. Bass Group, Inc. began acquiring Macmillan stock, becoming a potential bidder.
• Macmillan's board, relying on management's inaccurate and pejorative portrayal of the Bass Group, adopted anti-takeover measures and approved the management-controlled restructuring plan, which would have given management substantial ownership in a new Information company and management control over another new Publishing company.
• On May 17, 1988, the Bass Group offered to buy all of Macmillan's common stock for $64 per share; Evans did not disclose this offer to shareholders at the annual meeting the next day.
• On July 20, 1988, Robert Maxwell, through Mills Acquisition Co., proposed a consensual merger at an all-cash price of $80 per share, which Macmillan's management largely ignored while intensifying discussions with Kohlberg Kravis Roberts & Co. (KKR) for a management-sponsored buyout.
• On September 6, 1988, Evans and other senior managers met with KKR, indicating they would endorse a KKR buyout even before KKR disclosed its bid amount, while Evans' financial advisors were instructed to notify other bidders of a September 9 deadline, giving Maxwell less than 24 hours.
• In the first round of a renewed bidding process on September 26, Maxwell offered $89 all-cash, and KKR offered a blended bid of $89.50 (cash and securities); Macmillan's financial advisors deemed the bids too close to recommend either.
• Evans secretly telephoned a KKR representative, informing him that Maxwell had offered '$89, all cash' and that the bids were 'a little close', a tip that KKR immediately recognized as improper.
• Later that evening, Macmillan's lead financial advisor, Bruce Wasserstein, spoke to KKR, impressing upon them 'the need to go as high as [KKR] could go' and advising them on the conditions for a lockup, while intentionally misleading Maxwell into believing its bid was higher and not informing Maxwell of KKR's higher bid or the additional information given to KKR.
• KKR submitted a final revised offer of $90 per share, contingent on a 'no-shop' clause and a lockup option to purchase four Macmillan subsidiaries for $775 million, structured to create a $250 million tax liability for Macmillan, effectively ending the auction.

Procedural Posture:

• Macmillan's board approved a restructuring plan (the 'Evans designed restructuring').
• The Bass Group filed suit against Evans and Macmillan challenging the restructuring.
• The Delaware Court of Chancery (in Macmillan I) preliminarily enjoined the Evans-designed restructuring, finding it inferior to Bass's offers and that the 'threat' it addressed was primarily to management's incumbency.
• Maxwell initiated a tender offer for Macmillan and filed an action in the Court of Chancery seeking a declaration that the Delaware Takeover statute, 8 Del. C. § 203, was inapplicable.
• After Macmillan's board accepted KKR's offer and granted a lockup, Maxwell amended its complaint in the Court of Chancery, adding KKR as a co-defendant, and sought to enjoin the lockup agreement, break-up fees, and expenses granted to KKR.
• On October 17, 1988, the Court of Chancery denied Maxwell's request to enjoin the lockup, break-up fees, and expenses, finding that while KKR was favored, Maxwell was not deterred from bidding higher, but did enjoin the 'poison pill' shareholder rights plan against Maxwell.
• Mills Acquisition Co. (Maxwell) filed an interlocutory appeal from the Court of Chancery's denial of injunctive relief regarding the lockup agreement to the Delaware Supreme Court.