Pure Resources, Printcafe and the Pugnacious Special Committee

Copyright ©2003 The M&A Lawyer. All rights reserved. 
Used with permission of Glasser LegalWorks,
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Introduction

Since the landmark Delaware Supreme Court decision in Weinberger v. UOP, Inc.,[1] the use of special negotiating committees has become commonplace in circumstances where a majority of the board of directors of a Delaware corporation has a disabling conflict of interest or is otherwise controlled by a majority stockholder standing on both sides of the transaction.[2]  Corporate counselors have customarily advised their clients that, in order for a special negotiating committee to secure the requisite credibility and the attending legal benefits[3] that can be deemed to arise from special committee approval of a conflicted transaction, the committee must be composed of disinterested and independent directors[4] who possess “real bargaining power.”[5] 

In the nascent stages of the precedent that has since arisen around this negotiating device, the notion of “real bargaining power” was quite simplistic, requiring only that a special committee be vested with the power to veto the proposed transaction.  This view was succinctly set forth by then Chancellor Allen in In re First Boston, Inc. Shareholders Litigation.  In that case, the Chancellor addressed the shareholders’ assertion that the limited power grudgingly extended to a special committee was far too constricted to warrant legal significance in the context of the entire fairness test.  Rebuffing that claim, the Court stated: 

The special committee of course was constrained by the same circumstances that gave rise to a fiduciary duty in the first place. . . .  It retained, however, the critical power: the power to say no.  It is that power and the recognition of the responsibility it implies by committees of disinterested directors, that gives utility to the device of special board committees in change of control transactions.[6]

Minimal Requirements for Effective Special Committee Authority 

While initially the Delaware courts seemed content to accept this limited charge as sufficient indicia of fairness in the process, that outlook ultimately was replaced by one that required far more in the way of special committee authority and performance in order to shift the entire fairness burden from a conflicted and controlling majority.  In a flurry of decisions, the Court of Chancery began to evince an interest in broader committee mandates that empowered special committees to engage in active negotiations with the controlling stockholder that more accurately approximated arms-length transactions.  For example, the Chancellor’s ensuing decision in In re Republic American Corporation Litigation,[7] explicitly observed that a special committee that had been empowered with the authority of “merely passing upon the fairness of the price” was “too narrow” to permit burden shifting. Similarly, in Freedman v. Restaurant Associates Industries, Inc.,[8] the Court of Chancery again observed that “where a special committee is passive or its charter from the board unduly restricts it, the work of the committee may be accorded no effect.” 

And, in Rabkin v. Olin Corporation,[9] the Court of Chancery stated that, in order to shift the burden of entire fairness, the majority shareholder must not dictate the terms of the merger and that the special committee must have real bargaining power that it can exercise with the majority shareholder on an armslength basis.[10]  Chancellor Allen himself gave a widely heralded address, later published in The Business Lawyer,[11] in which he declined to endorse the view that the special committee device was inherently incapable of resisting the powerful structural bias it was designed to offset.  The Chancellor, though indicating skepticism with respect to the reliability of the device, observed that such committees could serve their intended purpose and, indeed, that they had done so on occasion.

The factor that distinguishes those circumstances in which the decision of a committee of outside directors has been accorded respect and those in which its decision has not, is not mysterious.  The court’s own implicit evaluation of the integrity of the special committee’s process marks that process as deserving respect or condemns it to be ignored.  When a special committee process is perceived as reflecting a good faith, informed attempt to approximate aggressive arm’s-length bargaining, it will be accorded substantial importance by the court.  When, on the other hand, it appears as artifice, ruse or charade, or when the board unduly limits the committee or when the committee fails to correctly perceive its mission—then one can expect that its decision will be accorded no respect.[12] 

In Kahn v. Tremont Corporation,[13] the Delaware Supreme Court took these observations one better.  Kahn involved an interested transaction between a subsidiary and its controlling stockholder pursuant to which the subsidiary, which had a sizeable public minority, would purchase shares held by the controlling stockholder in a 90%-owned subsidiary.  It was alleged that the transaction was part of a scheme perpetrated by the controlling stockholder to transfer stock in a failing subsidiary to another of its subsidiaries for exorbitant consideration in which the losses and the cost of the purchase itself would be borne in large part by a public minority.  In an attempt to insulate the transactions from these obvious conflicts—and to meet the heavy burden imposed by the entire fairness test— the board of the acquiring company appointed a special committee of directors to consider the proposed sale and to recommend a course of action on behalf of the public stockholders.  The committee ultimately approved the deal. 

In evaluating the performance of the committee and its effects upon the fairness of the challenged deal, the Court of Chancery expressed reservations with regard to the independence of the dominant member of the committee and the fact that the financial advisors, on whom much reliance was necessarily placed by the committee, in light of the complexity of the deal, had previously engaged in lucrative dealings with the controlling stockholder.  Despite this, the Court of Chancery concluded that the committee process was sufficiently thorough and objective to shift the burden of proof to the plaintiff to prove that the transaction was unfair.  The Supreme Court reversed, however, finding that these same infirmities, including in particular the failure of two of the directors to participate in meetings with their financial advisors regarding the terms that the board should demand in order to make the purchase more beneficial to the company, required the conclusion that the committee “did not operate in a manner which entitled the defendants to shift from themselves the burden which encumbers a controlled transaction.”[14]

Inherent Limits on Special Committee’s Authority

These cases served fair, if incremental, warning that both the authority and the actions of special committees would be scrutinized with increased judicial enthusiasm and that the potentially insulating effect of their participation would be extended only upon a persuasive showing that the committee’s capacity and performance accurately approximated arm’s length negotiations. 

But the case law also acknowledged that there were limits upon such committee action.  In the case of Freedman v. Restaurant Associates Industries, Inc.,[15] for example, a management group that held 48% of the outstanding voting shares proposed to take the company private at a price that fell within the fairness range identified by the special committee appointed to consider the transaction, but less than that proposed by a third party.  The management group advised the committee that it would not sell into the higher offer, that it would vote against it, and that it would withdraw its proposal unless it was accepted immediately. 

The committee proposed that the board grant a ten-day option to the third party suitor to acquire a block of shares that would dilute the management group’s voting power to a level regarded as sufficiently low to render approval of the higher bid a feasible option.  The full board received this proposal with skepticism, questioning the committee’s authority to negotiate such an arrangement and the propriety of issuing shares for the purpose of dilution.  The strategy was disapproved, but resulted in negotiations that increased the value of the management proposal, which the board ultimately approved.  Hoping to trigger the fiduciary out, the third party bidder renewed its offer at a price 10% higher than management’s bid, but conditioned on the grant of the dilutive option.  This time the committee refused, citing the conditional nature of the third party’s proposal and its fear that the extraordinarily high price would not survive the due diligence on which the bidder had also conditioned its offer.  The shareholders filed suit and sought a preliminary injunction to require the board to extend the option. 

Chancellor Allen rejected the requested relief.  Praising the committee for its aggressive attempts to maximize value for the public shareholders,[16] the Court refused to second-guess its decision to accept the lower—but more certain—offer by management.  In so holding, the Chancellor ventured the view that a board might well be justified in issuing an option that would have the effect of diluting the voting power of an existing block if the purpose were to achieve the highest available price for the shareholders, but the Chancellor’s holding did not require the conclusion that a board must do so. 

A similar analysis prevailed in Mendel v. Carroll,[17] another decision by Chancellor Allen rendered several years after Freedman.  In Mendel, the family that together controlled between 48% and 52% of the voting stock of the target proposed to cash out the minority holders.  A third party bidder offered to acquire the company at a considerably higher price, but the family announced that while it was a buyer, it was not a seller under any circumstances.  The family withdrew its offer but, true to its word, vowed to block any other acquisition attempts.  The third party suitor persisted with its offer, conditioned for obvious reasons on the grant of a dilutive option that would reduce the family’s voting power to approximately 40% and rendering it mathematically possible to approve a transaction without its support.  The special committee appointed to deal with these proposals declined to recommend the issuance of the option, and the shareholders of the target promptly sought an order requiring that they do so. 

Again, the Chancellor concluded that such relief was inappropriate under the circumstances.  In so concluding, however, the Court stated that “[w]here … a board of directors acts in good faith and on the reasonable belief that a controlling shareholder is abusing its power and is exploiting or threatening to exploit the vulnerability of minority shareholders, … the board might permissibly take such action.”[18]  Noting that “[n]o part of [the family’s] fiduciary duty requires them to sell their interest,” the Chancellor stated: 

The board’s fiduciary obligation to the corporation and its shareholder, in this setting, requires it to be a protective guardian of the rightful interest of the public shareholders.  But while that obligation may authorize the board to take extraordinary steps to protect the minority from plain overreaching, it does not authorize the board to deploy corporate power against the majority stockholders, in the absence of a threatened serious breach of fiduciary duty by the controlling stock. 

* * * * * * 

Thus, while I continue to hold open the possibility that a situation might arise in which a board could, consistently with its fiduciary duties, issue a dilutive option in order to protect the corporation or its minority shareholders from exploitation by a controlling shareholder who was in the process or threatening to violate his fiduciary duties to the corporation, such a situation does not at all appear to have been faced by the Katy board of directors.  In my opinion, the Katy board could not, consistent with its fiduciary obligations to all of the stockholders of Katy Industries, have issued the dilutive option for the purpose sought in this instance.  Therefore, that the board considered the matter and declined to do so could in no event be considered to constitute a breach of duty to the minority shareholders. [19] 

Unanswered Questions Regarding Appropriate Committee Behavior 

On the basis of this precedent, practitioners who found themselves representing special committees were able to glean several lessons.  They were encouraged to seek the broadest possible authority for the committee, because the original “yea-or-nay” model no longer seemed sufficient to ensure that the insulating effect that special committees were intended to secure would be judicially bestowed.  Instead, it appeared likely that the reviewing court would wish to be assured that the committee in question had been adequately equipped with sufficient power and authority by the full and presumably interested board. 

Moreover, practitioners were sensitized by this precedent for the need to exhort the members of the committee to pursue their collective assignment in a fully informed and diligent fashion. 

Finally, practitioners could be expected to conclude that the committee need not effect a perfect imitation of a third party arms-length seller in order to secure a burden-shifting effect for purposes of the applicable entire fairness test.  Presumably in recognition of the unique bundle of rights to which a majority holder is necessarily entitled, courts would not require the committee to go to war with such a holder in order to block the proposal or to squeeze out the highest conceivable bid.  Indeed, at least when it came to the most extreme and aggressive tactics, such as those designed to deprive the stockholder of its majority status, the Court of Chancery had indicated not only that it would not require such action by the committee but that they were likely prohibited except in the most egregious of circumstances. 

Left unanswered by this line of authority was the extent to which a committee would be permitted to take aggressive actions on behalf of the minority merely to secure a higher bid or more favorable terms, but not in the face of acts of egregious overreaching by the majority holder.  The Mendel decision seemed to make clear that a committee could not consider the issuance of a dilutive option that would deprive the holder of majority status in order to permit the minority to receive a higher bid from another suitor.  This conclusion was entirely consistent with longstanding Delaware case law that characterized majority status as a unique asset that warranted considerable legal respect and protection.[20] 

Short of that, however, the question remained how far a committee could—and would—be expected to go in carrying out its charge once having determined that a higher bid was either required by its identification of an appropriate fairness range, or available in the face of sufficient leverage.  Could—or should—the committee adopt a specially tailored pill to enhance its negotiating leverage?  Or was it enough that the committee simply refused to endorse the majority holder’s proposal and leaving it open to what would presumably be withering judicial scrutiny under the entire fairness test if the majority holder chose to proceed. 

The Last Word? 

Two more recent decisions from the Delaware Court of Chancery seem to foreshadow a partial answer.  These cases suggest that such a committee not only may—but should—take affirmative and aggressive steps to thwart any proposed transaction the committee deems to be unfair to the minority by implementing defensive measures as contemplated by Unocal.[21] 

The Pure Resources Committee 

The first of these cases was the Delaware Court of Chancery decision of In re Pure Resources, Inc. Shareholders Litigation[22] The board of directors of Pure Resources, Inc. (“Pure”) established a special negotiating committee to respond to a tender offer by Unocal Corporation (“Unocal”), the holder of more than 65% of the outstanding common stock of Pure, for the shares of Pure that Unocal did not own.  Pursuant to the Unocal offer, the Pure stockholders (other than Unocal) were to receive 0.6527 shares of Unocal common stock for each outstanding share of Pure common stock tendered.  The issue of the appropriate authority of the special negotiating committee to act on behalf of Pure in response to the Unocal offer arose almost immediately. 

The Pure Board, which was dominated by Unocal, initially adopted an authorizing resolution that vested the committee with the power to retain independent advisors, to formulate a recommendation on the offer’s advisability, and to negotiate with Unocal to increase its bid.  While this charge plainly fell short of conferring plenary corporate authority on the committee, it was by no means extraordinarily restrictive.  The committee and its counsel dutifully asked for broader authority, but this request was rejected.  The committee’s enthusiasm for its task was undiminished, however.  It met with Unocal repeatedly in an attempt to persuade it to increase its offer, but to no avail.  As a result, armed with the analysis and advice of its financial advisors, the Pure special committee determined to recommend that Pure stockholders not tender their shares into the Unocal offer. 

In connection with the several inevitable representative actions directed at Unocal’s proposal, a motion to enjoin the tender offer was filed on behalf of the public stockholders of Pure.  In ruling on the preliminary injunction motion, Vice Chancellor Strine declined plaintiffs’ invitation to overturn the existing precedent that established that the entire fairness test did not apply with respect to a majority holder’s tender offer if the offer was non-coercive and fully disclosed.[23]  It did determine, however, that the judicial definition of a non-coercive offer should be expanded so as to require an absence of retributive acts by the offeror, a closing condition that the offer be accepted by a majority of the minority holders, and an irrevocable commitment that if successful, the offer would be followed by a short form merger at the same price.[24]  Because the offer in question was held to satisfy this newly articulated standard, the injunction was denied (except for the direction that certain supplemental disclosures be issued in advance of closing, including additional disclosures with respect to the full board’s refusal of the committee’s request for broader authority).

In the course of its ruling—and despite the fact that the committee’s negative recommendation was apparently sufficient to doom the Unocal offer to failure—the Court was openly critical of the Pure special committee for failing to obtain and to deploy the plenary corporate authority necessary to defend against the Unocal offer.  The Vice Chancellor disparaged the committee in particular for having failed to fashion and adopt a stockholder rights plan that would have frozen Unocal in place upon pain of significant dilution, thus significantly increasing the committee’s leverage to insist upon a higher bid. 

[t]he Special Committee sought to, in its words, ‘clarify’ its authority.  The clarity it sought was clear: the Special Committee wanted to be delegated the full authority of the board under Delaware law to respond to the Offer.  With such authority, the Special Committee could have searched for alternative transactions, speeded up consummation of the Royalty Trust, evaluated the feasibility of a self-tender, and put in place a shareholder rights plan (a.k.a., a poison pill) to block the Offer.

 * * * * * * * * 

After discussions between Counsel for Unocal and the Special Committee, the bold resolution drafted by Special Committee counsel was whittled down to take out any ability on the part of the Special Committee to do anything other than study the Offer, negotiate it, and make a recommendation on behalf of Pure in the required 14D-9.  The record does not illuminate exactly why the Special Committee did not make this their Alamo.  It is certain that the Special Committee never pressed the issue to a board vote and it appears that the Pure directors never seriously debated the issue at the board table itself….  As to their failure to insist on the power to deploy a poison pill—the by-now de rigueur tool of a board responding to a third-party tender offer—the record is obscure[25] 

It is important to note that the Court explicitly declined to rule that the committee was legally mandated to take defensive action or that its members should be deemed faithless fiduciaries for having failed to do so.  Nonetheless, the Court not only criticized the committee for failing to insist upon and deploy full defensive power, but inferred from that failure that the committee—despite its manifest hostility to the subject offer and its forthright declaration to that effect—had been cowed. 

The most reasonable inference that can be drawn from the record is that the Special Committee was unwilling to confront Unocal as aggressively as it would have confronted a third-party bidder.  No doubt Unocal’s talented counsel made much of its client’s majority status and argued that Pure would be on uncertain legal ground in interposing itself—by way of a rights plan—between Unocal and Pure’s stockholders.[26] 

This judicial admonition was a notable departure from the approach taken by existing precedent.  Pure Resources arose in the context of a tender offer, which the Delaware courts have traditionally regarded, in the absence of unusual circumstances, as a more inherently voluntary transaction than a merger.  Indeed, recent decisions, such as In re Siliconix Inc. Shareholders Litigation[27] and In re Aquila, Inc.,[28] had pointedly declined to interfere with majority stockholder tender offers for precisely this reason and in so holding had accorded little legal importance to the participation or views of the committee. 

In Aquila, for example, the conflicted target board failed to appoint a committee to evaluate the offer on behalf of the minority because the Aquila board did not have any independent directors.  Because the Court viewed the tender offer as inherently non-coercive and fully disclosed, it concluded that stockholders were free to accept or decline the offer as their personal circumstance might dictate, the fact that no committee had been appointed was deemed as unimportant to the result. 

In Siliconix, the Court of Chancery upheld a tender offer by its majority stockholder although the special negotiating committee of the target board chose to make no substantive recommendation of any kind to its stockholders with respect to a tender offer, opting instead merely to pass along financial information relevant to the shareholders’ choice.[29]  Unlike the Siliconix special committee, the Pure Resources special negotiating committee had taken rather bold action consistent with its charge, by explicitly advising its stockholders that they should not tender into Unocal’s inadequately priced offer. The Court nonetheless found its efforts less than heroic. 

While the differing results in these cases may be attributed in part to the Court’s innovative determination in Pure Resources that a majority holder’s tender for the minority and a squeeze out merger conditioned upon majority of the minority approval are functional equivalents, that fact merely serves to suggest that the Court’s analysis going forward is likely to be deemed to apply to special committees in both circumstances.  Query whether the Court might have been more demanding and less willing to excuse what it appeared to regard as the committee’s submissive posture had it occurred in the context of an inherently coercive transaction, such as a cash-out merger. 

The inescapable lesson appears to be that committees faced with an acquisitive majority stockholder are well-advised to seek expansive powers and to employ those powers aggressively so as to protect its stockholders from an acquisition proposal that it regards as inadequate, even when the proposal is structured as a non-coercive tender offer that leaves each stockholder free to accept or reject it on an individual basis.  Anything less risks judicial disdain for the committee’s participation in the process, a circumstance that does not bode well for the curative effects that any such process is intended to achieve in the context of the entire fairness test.

The ensuing decision in Printcafe seems to lend further credence to these observations.  While Pure Resources criticized a special committee for a lack of temerity, Printcafe seems to evidence the Court’s disinclination to rein in a very aggressive committee plan of action, albeit in a procedurally limited ruling.  Taken together, these cases seem to foreshadow a judicial preference for committees that press their assignments toward the outer limit delineated in Freedman and Mendel. 

The Printcafe Committee 

In the fall of 2002, Printcafe Software, Inc. (“Printcafe”) found itself in severe financial difficulty.  In November, the Printcafe board met to consider its options and determined that the board needed to refinance Printcafe’s outstanding debt promptly or seriously consider its “strategic alternatives.”  At that time, the Printcafe board was composed of six directors, two of whom were appointed at the behest of the company’s largest stockholder, Creo, Inc. (“Creo”).  Creo held approximately 30% of the issued and outstanding stock of Printcafe and one of its affiliates, Iris Graphics, Inc., held a large percentage of Printcafe’s debt, making Creo a formidable stockholder, although not technically a controlling one. 

Following the board’s decision to take drastic action, and unbeknownst to the other directors of Printcafe, Creo began negotiating with holders of significant blocks of Printcafe shares to purchase their shares.  These negotiations, however, were not revealed to the Printcafe board until January 23, 2003, when Creo publicly announced that it had entered into agreements with two other Printcafe stockholders to buy additional shares of Printcafe stock at $1.30 per share.  Upon the closing of these contracts, Creo’s ownership interest in Printcafe would increase from 30% to approximately 55%.  But Creo’s intentions went beyond mere majority control.  Contemporaneously with this announcement, Creo delivered to the Printcafe board a proposal to acquire by merger the shares of Printcafe shares Creo did not already own in exchange for $1.30 per share in Creo stock. 

Shortly following this announcement, Electronics For Imaging, Inc. (“EFI”) delivered a proposal to the Printcafe board to acquire all of the outstanding Printcafe shares for $2.60 per share in cash or EFI stock, at the holder’s election, a bid exactly twice that being offered by Creo.  That evening, the Printcafe board met to consider these developments and to review its options.  Although a majority of the Printcafe directors had no affiliation with Creo, the board nevertheless appointed a committee of directors, largely in order to allow strategic deliberations to proceed outside the presence of the Creo designees on the board.  Given that a majority of the Printcafe board was independent, the Printcafe committee was afforded broader power than that of the Pure Resources committee. 

Specifically, the Printcafe committee was granted the power and authority to, among other things, evaluate all proposals for the purchase of the company’s stock and/or assets, consider alternatives to any such proposals received by the company or the committee, negotiate on behalf of the company definitive agreements with any party or parties making any such proposal to the company or the committee.  In addition, the committee was authorized to take all actions it deemed necessary to respond to any offer to purchase the company’s stock or assets including, without limitation, the issuance of capital stock, the adoption of a rights plan, and the designation of the terms of the company’s preferred stock (and the issuance thereof).  Although not a special negotiating committee in the classic sense of the term, the committee also hired its own independent bankers and financial advisors.  While the committee’s financial advisors conducted a market test for other potential bidders for the company and its legal advisors commenced negotiations with EFI, the central concern of the Printcafe committee was the very real possibility that Creo would close on its share purchase contracts, assume absolute control of Printcafe and prevent the committee from pursuing the EFI proposal or any other offer for Printcafe, leaving as the company’s only alternative Creo’s own demonstrably inadequate merger proposal at $1.30 per share.  These fears were not mere idle hand wringing.  Creo closed its first stock purchase agreement on January 30, 2003, raising its ownership interest to a nearly preclusive 45%.  Consummation of the second sale transaction, scheduled to close on February 24, 2003, would give Creo outright majority control of Printcafe. 

In the interim, Creo continued to pursue an aggressive strategy.  The litigation record reflects the defendants’ assertions that Creo repeatedly attempted to chide other stockholders into selling their Printcafe shares, threatening retribution if they failed to acquiesce, and offering assurances that the higher EFI offer would never be consummated as a practical matter given Creo’s imminent majority status.  In the meantime, Creo never increased its offer for Printcafe, despite EFI’s far higher proposal.  The Printcafe committee was understandably concerned that Creo was or would soon be in a position to thwart any attempt to conduct an effective sale process for the company and to acquire control of Printcafe without paying a control premium to the remaining stockholders.  Mindful of the Chancery Court’s admonition in Pure Resources, the committee considered the adoption of a stockholder rights plan to block Creo’s imminent acquisition of absolute control and to conserve for the committee some hope of securing maximum value. 

The adoption of a stockholder rights plan was laden with complications from the outset.  To be effective, the rights plan needed to be drafted so as to prevent Creo from acquiring majority control of the company, thus depriving them of the ability to force a transaction upon the remaining Printcafe stockholders at a demonstrably inadequate price.  To that end, the committee considered adoption of a rights plan that contained a “grandfather provision” that had the effect of limiting Creo’s ownership to those shares it already owned (i.e. 45% of the Printcafe shares) and of effectively precluding the consummation of Creo’s second stock purchase agreement.  Despite Creo’s continuing advances upon the corporation, EFI remained interested in pursuing its proposal if approval remained feasible as a practical matter in the face of the Creo block.  In addition, the committee believed that other bidders might well emerge if Creo’s march to majority status were to be stopped short.  Although novel and legally untested, such a rights plan was viewed by the committee to be a necessary risk in order to make the playing field somewhat less obviously tilted in Creo’s favor and to hold open the chance that the Printcafe stockholders might receive a higher price then $1.30 per share. 

At this point, yet another complication emerged, however.  The committee became aware that the issuance of the rights under the rights plan could be characterized as a technical default under Printcafe’s existing loan agreement with Creo’s affiliate, Iris.  Unable to deal financially with the acceleration of an obligation of this size, an event that would likely have enhanced rather than deflected Creo’s already considerable leverage, the committee sought an alternative source of credit that would insulate the company from the potential declaration by Creo, through its affiliate Iris, that Printcafe was in default as a result of the adoption of the plan. 

Since no competing proposal had emerged as a result of market test performed by its financial advisors, the committee approached EFI and invited it to provide Printcafe with standby credit in the event of a claim of default arising from the adoption of the rights plan.  EFI agreed to do so, but requested in exchange that Printcafe agree to enter into exclusive negotiations with EFI for a limited period of time to seek agreement on the terms of a merger at $2.60 per share and that it grant EFI an option to acquire up to 19.9% of Printcafe’s common stock.[30]  Like the proposed adoption of the rights plan, the use of a dilutive option as a defensive measure carried a certain degree of risk,[31] but the special committee concluded that Creo’s surreptitious acquisition of shares, its otherwise imminent acquisition of absolute voting control, and the need to create a level playing field in order to avoid losing EFI’s superior $2.60 per share offer provided the committee with compelling justification for its actions.  On February 13, 2003, the committee implemented the rights plan and entered into the exclusivity, stock option, and standby credit agreements with EFI. 

Creo thereafter commenced an action in the Court of Chancery.  Because the closing date contemplated by the agreement was only days away, Creo sought a temporary restraining order to enjoin Printcafe from enforcing the stockholder rights plan so as to preclude it from closing on the purchase of the shares under contract.  It also sought injunctive relief to prevent Printcafe from taking any actions to enforce the option agreement or to pursue a merger transaction with EFI.  As legal support for this requested relief, Creo alleged that the Printcafe board had violated its fiduciary responsibilities, that it had adopted an unprecedented rights plan that was invalid as a matter of law and that it had tortiously interfered with its contractual right and obligation to purchase the critical block of Printcafe shares which would give it absolute control of Printcafe, all resulting in imminent and irreparable injury.  After expedited briefing and argument, the Court declined to grant injunctive relief on the grounds that Creo had failed to demonstrate that it would suffer imminent irreparable harm if it were unable to complete its sale contract to acquire control of Printcafe and that the balancing of the equities tipped strongly in favor of allowing the highly fluid bidding process to proceed without judicial intervention.  Although the bench ruling by Chancellor Chandler did not resolve or even extensively address the merits of the case, the opinion does provide a glimpse of the Court’s views regarding the actions of this extremely aggressive committee: 

the record . . . gives me no indication that the four Printcafe board members, or the three who formed the 8 Del. Code 141(c) committee in this case, have acted in any way other than in good faith to do what is right and to maximize the financial return for the shareholders of Printcafe. 

Stated somewhat differently, nothing in this record at this early stage suggests that the Printcafe directors have acted in a way that was either selfinterested or designed to entrench themselves or protect their positions in some way or protect the positions of senior management at Printcafe.  On the contrary, all of the record, as I at least see it now, indicates that they were acting consistent with their obligations and fiduciary duties to achieve the highest and best value reasonably obtainable for the Printcafe shareholders if in fact the company is going to be sold.[32] 

While hardly dispositive, the Court’s ruling seems clearly to imply a strong judicial endorsement of the confrontational strategy pursued by the Printcafe committee. 

The Emerging Judicial Trend 

If these recent decisions fairly can be taken to foreshadow a judicial trend, that trend is clearly in the direction of increasing judicial support for expanded special committee authority and aggressiveness in response to a majority holder’s acquisition proposal.  While the Court of Chancery has by no means scuttled the holdings in Freedman and Mendel, which appears to continue to mark the outer boundaries of permissible committee defensive action, more recent decisions appear not only to permit—but to encourage— the adoption of defensive measures that fall only barely short of the limits those two opinions have been viewed to proscribe.  Indeed, they seem to offer gentle rebuke when such measures are not pursued. 

These statements have given rise to no landmark holdings that raise the bar for the acceptable performance of special committees.  Nonetheless, it does not greatly strain the implication of these judicial pronouncements to envision them serving as the basis for the imposition of a new and more demanding legal requirement for special committee conduct to shift the burden of proof.  As we await further decisional developments, careful practitioners will be inclined to counsel their committees to be bold.  If the policy of the law is indeed to approximate arm’s-length bargaining in conflict-of-interest circumstances, this may prove a welcome result. 

Notes