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Summary
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 Lawsuit
over
Toys R Us LBO
- Deal page:
Toys R Us LBO
- Delaware Chancery denied shareholders' motion for
a preliminary injunction to block the deal
- VC Strine upheld the Board's auction process
- Rejected Revlon claim that the Board should have
used an entirely new auction when the proposed deal switched from a sale of
TOY's largest division to a sale of the entire company
- Upheld deal protection provisions that included a
break up fee of 3.75% of equity value
- Court was critical of sell-side adviser providing
buy-side financing to winning bidder
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Delaware Chancery Opinion June 2005
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Opinion
- Del Ch 2005
Hyperlinked outline
Introduction
I
Facts
II
- Plaintiffs
II.A
- Company
II.B
- Management - Board
II.C
- Exploration of strategic alternatives
II.D
- Alternatives considered
II.E
- Valuation presentations
II.F
- Plans to sell Toys division
II.G
- Toys division put on the block
II.H
- Final bids for Toys division
II.I
- "Final" final bids for Toys division
II.J
- Cerberus offer for whole company
II.K
- KKR wins bidding for whole company
II.L
- KKR deal protection
II.M
- Effect on Board and financial advisor
II.N
Procedural
standard
III Merits
IV
- Reviewing a Revlon claim
IV.A
- Plaintiff's argue breach of Revlon duties
IV.B
- Neither CEO nor financial advisor tainted process
IV.C
- KKR deal was result of reasonable process
IV.D
- KKR deal protection wasn't unreasonable
IV.E
- Plaintiffs not entitled to an injunction
IV.F
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Facts
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Sources
TOY
initially planned to sell its Global Toys business
- Would have kept its Babies R Us business
- Following an evaluation of other alternatives
- Including a spin-off of Babies R Us
- TOY stock had been trading below $11 per share
- Investment bankers solicited 29 potential buyers
- Four bidders went through two rounds of final
bids
- KKR
- Cerberus-led group
- Apollo-led group
- Bain-Vornado joint bid
Process
shifted to a sale of the entire company
- As Cerberus made increasingly compelling offers
for the entire company
- Board asked the four bidders to hold their bids
for
Global Toys and asked for bids on entire company
- Board allowed KKR to make a joint bid with
Bain-Vornado
- KKR-Bain-Vornado bid was the highest
- $26.75 per share
- At high-end of TOY banker's valuation ranges
- $1.50 per share higher than Cerberus ($350mm
total)
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Auction Process
SEC_CODE_REF_0090001192884
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Shareholders
alleged a breach of Revlon duties
- Claiming that the Board should have re-opened the
bidding when process shifted to a sale of the entire company
- Instead of limiting process to the four remaining
bidders for Global Toys
- Instead of granting the winning bidder deal
protection
- Plaintiffs initially sought to enjoin the deal
- Later sought to have bidding reopened,
shareholder meeting delayed,
and deal protection invalidated
Court
upheld Board's management of auction process
- "A hard look at the boards decisions reveals
that it made reasonable choices in confronting the real world circumstances it
faced. That the board was supple in reacting to new circumstances and adroit in
responding to a new development that promised, in its view, greater value to the
stockholders is not evidence of infidelity or imprudence; it is consistent with
the sort of difficult business decisions that corporate fiduciaries are required
to make all the time."
- Court noted the lengthy, public auction process
and the risk that bids for Global Toys could be lost if process was reopened
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Deal Protection
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Sources
As
winning bidder in an auction, KKR Group demanded
- 3.75% of equity value
- 3.25% of enterprise value
- No-shop
provision that precluded TOY from soliciting offers
- But permitted TOY to consider a superior
proposal for
more than 50% of the Company
- Matching right to allow KKR Group to
match any superior proposal, so long as it acted within three business
days
Court
upheld deal protection provisions
- Valid under the circumstances
- Based on review of the process leading to the
underlying deal and the result obtained for shareholders
- Court rejected use of a bright-line test
- Plaintiffs had argued that any break-up fee
in excess of 3% was per se excessive
- Noted Phelps Dodge criticism of a 6.3% break-up
fee
- But said that a fee below 3% could be excessive
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Commentary
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