In re BJ’s Wholesale Club Shareholders Litigation: Court of Chancery Dismisses Claim That Directors Breached Revlon Duties
March 11, 2013
In In re BJ’s Wholesale Club Shareholders Litigation, 2013 WL 396202 (Del.Ch. Jan. 31, 2013), Vice Chancellor Noble of the Court of Chancery dismissed claims that the board of directors (the “Board”) of BJ’s Wholesale Club, Inc. (“BJ’s”) breached its fiduciary duties in a going-private transaction by consciously disregarding its so-called Revlon duties, and that acquirors Leonard Green & Partners, L.P. (“LGP”) and CVC Capital Partners (“CVC”) (together, the “Buyout Group”) aided and abetted those breaches. In dismissing the claims of former stockholder plaintiffs (the “Plaintiffs”), the Court reiterated the difficulty of adequately pleading a duty of loyalty claim where disinterested and independent directors, with the assistance of independent financial and legal advisors, actively solicit interest from other bidders and establish procedural safeguards and where no other topping bids emerge after a lengthy public sales process.
On July 1, 2010, LGP signaled its interest in a private buyout of BJ’s by disclosing its 9.5 percent beneficial ownership interest in BJ’s on Schedule 13D. In response to LGP’s filing, the Board engaged a financial advisor and formed a special committee of the Board (the “Special Committee”) charged with evaluating potential strategic alternatives.
Shortly after announcing that the Special Committee had decided to explore strategic alternatives, BJ’s received an expression of interest from Party A, a strategic competitor of BJ’s. The Board discussed Party A’s interest and determined that it was not comfortable sharing material, non-public information with a competitor at that stage of the process. Despite not providing confidential information to Party A, the Board provided a confidential offering memorandum to 23 private equity firms. A few months later, Party A sent a letter to BJ’s proposing to acquire BJ’s in an all-cash transaction at a purchase price in the range of $55 to $60 per share, subject to certain conditions. Upon receipt of the letter, and on Party A’s request, BJ’s regulatory counsel met with Party A’s counsel to discuss regulatory concerns. Thereafter, BJ’s representatives, including members of the Special Committee, met with representatives of Party A, after which BJ’s determined that it was not in the best interest of BJ’s to pursue the expression of interest.
In addition to the proposal from Party A, BJ’s also received a proposal from Party B, who proposed a hybrid transaction that valued BJ’s between $62 to $70 per share. The proposed transaction contemplated a one-time $20 per share dividend and BJ’s acquisition of Party B’s warehouse club franchise. The Board rejected the proposal two days following its receipt, after which Party B proposed to acquire BJ’s in an all-cash transaction at a price range of $50 to $53 per share. Despite this offer, Party B did not advance to the final round of bidding.
The Special Committee engaged in extensive negotiations with the Buyout Group, wherein the Special Committee rejected the Buyout Group’s initial proposal of $50 per share in an all-cash transaction before finally accepting a “best and final” offer of $51.25 per share. BJ’s publicly announced that it had agreed to be acquired by the Buyout Group on June 28, 2011. After the announcement of the transaction, Plaintiffs filed claims alleging that the Board breached its fiduciary duties by agreeing to a buyout that did not provide the best value to BJ’s former stockholders on the basis that, among other things, the directors intentionally shunned Party A and Party B and were improperly motivated to support the Buyout Group in order to benefit management.
Upon finding that the transaction had been approved by a majority of disinterested and independent directors, the Court analyzed whether the Plaintiffs alleged sufficient facts to support a reasonable inference that the Board consciously disregarded its obligation to maximize stockholder value under Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986). Key to the Court’s analysis, and also to its conclusion that the Plaintiffs had failed to plead adequately that the Board had disregarded its Revlon duties, was the process in which the Board considered, negotiated and approved the transaction. Importantly, the Court noted that the Board met regularly to discuss strategic alternatives and formed the Special Committee to lead the process. Additionally, once formed, the Special Committee retained its own advisors, conducted a publicized review of strategic alternatives, and met with every party that made a serious overture. The Court stressed that the Board drove up the price of the Buyout Group’s offer and negotiated favorable deal terms, including a fiduciary out clause and a reverse termination fee. The Board also relied upon its financial advisor’s opinion that the price was fair.
Having concluded that the Board had not consciously disregarded its Revlon duties, the Court explained that in order for the Plaintiffs to succeed on their claim that the Board acted in bad faith, they must allege that the decision to sell BJ’s on the agreed-upon terms was “so far beyond the bounds of reasonable judgment that it seems essentially inexplicable on any ground other than bad faith.” Applying this standard, the Court rejected Plaintiffs’ claims that the Board had acted in bad faith by failing to sufficiently explore preliminary expressions of interest by Party A and Party B.
Acknowledging the Court’s recent decision in Novell, the Court noted that the Board’s disparate treatment of Party A and Party B was explained by facts that tended to show that the Board’s actions were reasonable. Namely, the Court found that the Board’s decision not to pursue a transaction with Party B was reasonable because Party B’s hybrid proposal was a “fundamentally different” transaction than what the Board was considering and was based upon Party B’s speculative estimation of what the value of such a transaction would be worth to BJ’s stockholders. Additionally, despite Party B’s submission of a preliminary offer, it had failed to submit a formal proposal after being given access to BJ’s confidential information. Additionally, the Board’s decision not to pursue a transaction with Party A was reasonable because (i) Party A was a competitor of BJ’s that had no history of acquiring domestic companies, and a transaction with Party A would raise serious regulatory issues, and (ii) the Special Committee’s financial advisor, upon which the Board was entitled to rely, advised that Party A’s expression of interest was not likely to lead to serious offer. Distinguishing In re Novell, Inc. Shareholders Litig., 2013 WL 322560 (Del. Ch. Jan. 3, 2013), the Court explained that “[p]erhaps the crucial difference is that in Novell the board’s actions, which resulted in an asymmetrical distribution of information, occurred after the board had determined that the bidder was a serious participant. In this case, however, the Board was making an initial assessment, in its business judgment, whether the pursuit of Party A’s expression of interest was in the best interest of the Company….”
Following the Court’s determination that the Plaintiffs had failed to plead a claim for bad faith conduct by the Board, the Court addressed Plaintiffs’ argument that directors Herbert Zarkin, the non-executive chairman of the board, and Laura Sen, the chief executive officer (both of whom the Court assumed for the purposes of its analysis were interested), manipulated the sales process in favor of the Buyout Group and that the remaining independent directors knowingly acquiesced. Reiterating the extensiveness of the process that the Board undertook in approving the transaction, the Court rejected Plaintiffs’ allegation of manipulation of the process, noting, “In sum, the Plaintiffs would have this Court hold that it is reasonably conceivable that the Defendant Directors’ year-long sales process, in which they solicited over twenty-three buyers, and met with all interested acquirors, was nothing but ‘window dressing’ to legitimize the Company’s sale to the Buyout Group at a wholly disproportionate price.”
Accordingly, because it was not reasonably conceivable based on the facts of the complaint that the Board breached its fiduciary duty of loyalty, or that the Buyout Group knowingly participated in such a breach, the Court dismissed the complaint.