Corporate Governance

In re Lear Corp: Delaware Upholds No-Vote Termination Fee (Part 2)

By Laura Almquist

On September 2, 2008 the Delaware Court of Chancery dismissed a claim for breach of fiduciary duty after Lear Corporation?s board agree to pay a potential bidder a no-vote termination fee in exchange for a higher bid. In re Lear Corp. Shareholder Litigation, No. 2728-VCS, 2008 WL 4053221 (Del. Ch. 2008).

The claim stems from an attempted purchase of Lear Corporation, a manufacturer of interior systems for cars and light trucks. Carl Icahn, Lear?s largest shareholder, presented Lear?s CEO, Robert Rossiter, and the board with a ?going private transaction? whereby Icahn would acquire Lear for $35/share. Ultimately, the parties agreed on $36/share, subject to approval by shareholders.

Lear shareholders sought a preliminary injunction after the announcement of the original agreement. The court denied the motion in part. After the court's decision, three proxy advisory services, including ISS, recommended that Lear shareholders reject the merger. The Lear board had formed a special committee to address emerging issues during the merger process. Lear?s chairman, Larry McCurdy, and Rossiter negotiated an increase of $1.25 per share in exchange for a termination fee of $25 million, half payable in cash and the other half payable in stock. The Lear board approved the revised agreement, including the termination fee, but shareholders rejected the merger.

The plaintiffs argued that the board acted in bad faith by agreeing to a No-Vote Termination Fee while knowing that the price increase would likely prevent shareholder approval. Therefore, the plaintiffs argued, the directors' ?conduct amounted to a bad faith abdication of fiduciary duties, and resulted in the Company's entry into a transaction that was tantamount to corporate waste.'  Because Lear?s charter contained an exculpatory charter provision under DE § 102(b)(7), plaintiffs were required to plead particularized facts supporting an inference that the directors committed a breach of the fiduciary duty of loyalty by acting in bad faith.

According to the court, the plaintiffs failed to plead any particularized facts to support the charges of wrongdoing. First, the complaint did not allege facts showing that the board did not use a rational process to consider whether it should approve the agreement. The board held regular meetings to discuss how to handle developments and received advice from reputable advisors. Both financial advisors, JP Morgan and Evercore Partners, presented the board with valuation information suggesting that a $36 per share price was attractive given Lear?s future earnings potential.

Second, the Court held that the facts did not support plaintiffs? claim that the board knew that the agreement was unfair to Lear?s stockholders. The court noted that the board received information from its advisors that the agreement was fair to shareholders, the board had a super-majority of independent directors, and the board knew that no other firm had made a better offer.

The plaintiffs also argued that Lear knew shareholders would not approve the agreement, but agreed to the no-vote termination fee anyway. The court held that the plaintiffs did not plead facts to support an inference that there was no possibility shareholders would approve the revised agreement. The court noted that the plaintiffs were ?making precisely the kind of argument precluded by the business judgment rule.?

The primary materials for this case are available on the DU Corporate Governance website.

Full post as published by The Race to the Bottom on October 07, 2008 (boomark / email).