In re Lear: Its Tough to Be a Proxy Advisory Service In VC Strine's Court

We are discussing In re Lear, an opinion by VC Strine.  

As we have noted, he describes plaintiffs' claims as "inflammatory and conclusory charges of wrongdoing."   What are these inflammatory and conclusory charges?  As he describes:

• "Facing likely defeat on the $36 merger at the polls, the Lear board bargained to get another $1.25 per share.  In exchange, the bidder demanded $25 million in compensation contingent solely upon a no vote, in contrast to the rogianl termination fee, the bulk of which was payoable only if Lear consummated an alternative transactions within twelve months.  The $25 million represented only 0.9% of the total value deal.  According to the amended complaint, the Lear board approved the "Revised Merger Agreement" knowing that it was improbable that its stockholders would agree to the enhanced deal.  And, in fact, the shareholders did not approve, and the Merger was defeated.  

In other words, plaintiffs alleged that the board knew an offer for $36 would be defeated.  As a result, although negotiating a modest increase in the price, the board was allegedly aware that the revised offer was also likely to be defeated.  Only this time, unlike the first offer, the defeat would cost the company $25 million.

There is no question that this would be a difficult case to bring for breach of fiduciary duties.  The plaintiffs would have to show that the risk of defeat was so great as to make submission to shareholders, and the attendant payment of $25 million, a breach of the board's fiduciary obligations.   Resolution would turn on what the board knew and the likelihood of defeat.

There are several things to note here.  First, plenty of evidence suggesting that the sale price for Lear was woefully inadequate.  Shortly after Lear announced the original merger offer at $36, a Morningstar Analyst described it as "not such a great deal for shareholders."  A 10% shareholder of Lear wrote to the board of directors and stated that "we believe the company's value to be closer to $60 per share."  4th Complaint, at 41.   A letter from CalSTRS stated:  "We do not believe that the $36.00 per share offer . . . is adequate or even close to the true value of Lear."  4th Complaint, at 73.   The merger was opposed by ISS, Proxy Governance, and Glass Lewis.  4th Complaint, at 72. 

The merger terms were amended, with the offering price increased to $37.25 per share.  Two days later (July 10), ISS issued an updated negative recommendation.  On July 16, when the vote was taken, "[s]lightly over 50% of Lear's shareholders voted against the Amended Merger Agreement, and 29% voted in favor".  4th Complaint, at 85.