Upper Deck Co. v. Topps Co. Shareholders Litigation
926 A.2d 58, 2007 Del. Ch. LEXIS 82, 2007 WL 1732586 (2007)
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Rule of Law:
When a board of directors has decided to sell the company for cash, it has a fiduciary duty to maximize shareholder value and cannot use a contractual standstill agreement to foreclose a higher-priced offer from a competing bidder in order to favor a lower-priced, management-friendly transaction.
Facts:
- The Topps Company, Inc. (Topps), led by CEO Arthur Shorin, faced pressure from activist investors, leading to a settlement that added insurgent directors to its board.
- Amidst this pressure, former Disney CEO Michael Eisner expressed interest in a management-friendly, going-private transaction and communicated his intention to retain Topps's existing senior management.
- The Topps board, divided between 'Incumbent Directors' loyal to management and 'Dissident Directors' from the activist slate, approved a merger agreement with Eisner for $9.75 per share, which included a 40-day 'go-shop' period.
- Topps's main competitor, The Upper Deck Company (Upper Deck), had previously expressed interest in acquiring Topps on multiple occasions.
- During the go-shop period, Topps required Upper Deck to sign a restrictive standstill agreement to receive confidential information, which prohibited Upper Deck from making a tender offer or public statements without Topps's consent.
- Upper Deck eventually expressed a willingness to acquire Topps for $10.75 per share, a materially higher price than Eisner's offer.
- The Topps board, controlled by the Incumbent Directors, created obstacles for Upper Deck, did not negotiate in good faith, and publicly disparaged the seriousness and viability of Upper Deck's higher-priced offer.
- The Topps board refused Upper Deck's request to be released from the standstill agreement, which prevented Upper Deck from making a tender offer directly to shareholders and from publicly correcting the board's disparaging statements.
Procedural Posture:
- A group of Topps stockholders and The Upper Deck Company (the moving parties) filed suit against the Topps board of directors in the Delaware Court of Chancery.
- The moving parties filed a motion for a preliminary injunction to prevent the shareholder vote on the proposed merger with Michael Eisner's company.
- The motion also requested that the court order Topps to issue corrective disclosures and release Upper Deck from the standstill agreement to permit it to make a tender offer.
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Issue:
Does a board of directors breach its fiduciary duties under Revlon by enforcing a standstill agreement against a competing bidder to prevent it from making a tender offer and communicating with shareholders, while simultaneously misrepresenting the competing bid and favoring a lower-priced offer that ensures the retention of current management?
Opinions:
Majority - Vice Chancellor Strine
Yes, the board's actions likely constitute a breach of its fiduciary duties. When a board decides to sell the company, its primary duty under Revlon is to secure the highest value reasonably attainable for the stockholders. The Topps board is not using the standstill agreement as a tool to extract higher value from Upper Deck, but rather as a weapon to foreclose a superior bid and protect a preferred, management-friendly deal with Eisner. By publicly disparaging Upper Deck's bid while simultaneously using the standstill to prevent Upper Deck from responding or presenting its higher offer to shareholders, the board is preventing an informed shareholder vote and chilling the auction process. Furthermore, the board failed to disclose material facts to shareholders, including Eisner's assurances of management retention and an earlier, more favorable valuation analysis, rendering the proxy statement misleading.
Analysis:
This decision reinforces the high bar boards face under the Revlon standard of enhanced scrutiny once a sale of the company is inevitable. It clarifies that defensive or contractual measures, such as standstill agreements, must be used to enhance the auction process and maximize shareholder value, not to entrench management or favor a preferred bidder. The court demonstrated a willingness to look past the board's stated rationale and examine its actions, finding that pretextual concerns about a competing bid cannot justify foreclosing a higher-value alternative. This case serves as a key precedent on the improper use of standstills and highlights the judiciary's role in ensuring that stockholders, not a conflicted board, get to decide between competing, non-coercive offers.
