Richards Layton & Finger
 

In re The Topps Company Shareholders Litigation

June 15, 2007

In In re The Topps Company Shareholders Litigation, C.A. Nos. 2786-VCS & C.A. No. 2998-VCS (Del Ch. June 14, 2007), the Court granted plaintiffs’ motions for a preliminary injunction, blocking stockholders of The Topps Company from voting on a merger with private-equity buyers aligned with Michael Eisner, Disney’s former CEO.

After a process criticized by three directors (insurgents elected in a prior proxy contest), Topps inked a merger agreement at $9.75 per share with Eisner; the merger agreement provided for a 40-day go-shop period. Upper Deck, a major Topps competitor, offered an unsolicited $10.75 per share after the go-shop period expired. Upper Deck was, however, constrained by a standstill agreement from commenting on its bid or from launching a tender offer. The Topps board opted not to release Upper Deck from the standstill agreement, and Upper Deck sued to enjoin the Topps–Eisner merger, arguing that the Topps board had violated its fiduciary duties on disclosure and Revlon grounds and had breached the standstill agreement.

Topps stockholders had also sued to enjoin the merger on disclosure and Revlon grounds, challenging Topps’ proxy statement and claiming that the Topps board (led by Arthur Shorin, son of a Topps founder) had been motivated to take the Eisner deal because, as a financial buyer, Eisner was planning to leave management (including Scott Silverstein, Shorin’s son-in-law) in charge at Topps.

The Court first addressed the disclosure issues, holding that Topps’ proxy statement should have disclosed the following “undisputed” facts: (1) Eisner’s friendly overtures to Topps management and plans to retain them; (2) facts about changes made to Topps projections after the negotiations with Eisner; and (3) facts about Upper Deck’s bid. The Court’s principal concern was that Topps’ refusal to release Upper Deck from the standstill created an informational imbalance harmful to stockholders. The Court discarded other disclosure claims, holding that the proxy need not have included the version of events as perceived by the three dissenting directors.

The Court then addressed the Revlon claims, holding that the deal-protection measures were generally reasonable, including a 40-day post-signing go-shop, a match right, and a 4.3% termination fee. The Court also held that Topps’ decision to enter into the merger agreement with Eisner despite having received an unsolicited indication of interest from Upper Deck was likely not unreasonable, considering that Topps had reason to be suspicious of Upper Deck’s sincerity.

On the other hand, the Court held that Upper Deck was likely to succeed on its claims that the Topps board had breached its fiduciary duties by failing to negotiate a better deal with Upper Deck, to release Upper Deck from the standstill, or to give the Topps stockholders a choice between the Eisner transaction or the Upper Deck proposal. Because the Topps board had decided to sell the company and was not using the standstill agreement for a legitimate purpose, the board’s refusal to release Upper Deck from the standstill justified an injunction. Moreover, the Topps board’s use of the standstill to prevent Upper Deck from telling its side of the story justified an injunction because it threatened the stockholders with making an important decision on an uninformed basis.

The Court therefore held that a preliminary injunction should issue to stop the vote on the Eisner merger until (1) the Topps board discloses the material facts omitted from the proxy and (2) Upper Deck is released from its standstill so that it may publicly comment on its negotiations with Topps and make a non-coercive tender offer for Topps on conditions at least as favorable as the ones it has already offered to Topps.

The Topps case therefore provides guidance in structuring deal protections and in using standstill agreements to police competing bidders.