The private-equity buyout boom has found critics in Congress and among some investors recently, The Wall Street Journal Reports.
The Delaware Court of Chancery criticised two publicly listed companies that have agreed to sell themselves to private investors. The rulings expressed concern that Topps Co. and Lear Corp. hadn’t disclosed enough information to shareholders about possible incentives the companies’ managements may have to agree to the deals.
The author of both opinions, 43-year-old Vice Chancellor Leo E. Strine Jr., has been an important advocate for shareholder rights on the court. “His opinions carry a lot of weight,” says Francis Pileggi, a partner at Fox Rothschild LLP in Wilmington.
In the case of Lear, an auto-parts maker that billionaire financier Carl Icahn is seeking to buy for $2.9 billion, Mr. Strine faulted the company’s board for letting Chief Executive Robert E. Rossiter negotiate the deal with Mr. Icahn on his own.
The Delaware court’s increased scrutiny of possible conflicts comes amid rising complaints, and more lawsuits, criticising buyout deals for allegedly enriching corporate executives at the expense of the shareholders.
In recent weeks, several major law firms have alerted their corporate clients to the Delaware rulings, saying that boards need to be more attuned to the enhanced scrutiny of private-equity deals.
In the case of Topps, the New York producer of trading cards, collectibles and candy, shareholders have accused the board of breaching its duties to get the highest price for the company when it agreed to a deal with a private-equity consortium led by Michael Eisner, the former Walt Disney Co. chief executive. The court criticised Topps for the way in which it prevented a rival, the Upper Deck Co., from launching a tender offer for the company.
The court issued an order postponing the shareholder vote on the deal until Topps discloses the additional information to shareholders. This week, Topps said that its shareholders should reject a tender offer Upper Deck ended up making, but that it would continue talking with its rival to reach agreement on a higher price.
“When directors bias the process against one bidder and toward another not in a reasoned effort to maximize advantage for the stockholders, but to tilt the process toward the bidder more likely to continue current management, they commit a breach of fiduciary duty,” Mr. Strine warned in his Topps opinion.