IN RE FAMILY DOLLAR STORES, INC. STOCKHOLDER LITIGATION
Submitted: December 5, 2014
Seth D. Rigrodsky, Brian D. Long, Gina M. Serra and Jeremy J. Riley of RIGRODSKY & LONG, P.A., Wilmington, Delaware; Peter B. Andrews and Craig J. Springer of ANDREWS & SPRINGER LLC, Wilmington, Delaware; Donald J. Enright and Elizabeth K. Tripodi of LEVI & KORSINSKY, LLP, Washington, DC; Kent A. Bronson and Gloria Kui Melwani of MILBERG LLP, New York, New York; Counsel for Plaintiffs.
William M. Lafferty, John P. DiTomo and Lauren K. Neal of MORRIS, NICHOLS, ARSHT & TUNNELL LLP, Wilmington, Delaware; Mitchell A. Lowenthal, Meredith Kotler and Matthew Gurgel of CLEARY GOTTLIEB STEEN & HAMILTON, LLP, New York, New York; Counsel for Defendants Family Dollar Stores, Inc., Mark R. Bernstein, Pamela L. Davies, Sharon Allred Decker, Edward C. Dolby, Glenn A. Eisenberg, Edward P. Garden, Howard R. Levine, George R. Mahoney, Jr., James G. Martin, Harvey Morgan, Dale C. Pond.
Gregory P. Williams, A. Jacob Werrett, J. Scott Pritchard and Sarah A. Clark of RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; William Savitt, Andrew J.H. Cheung and A.J. Martinez of WACHTELL, LIPTON, ROSEN & KATZ, New York, New York; Counsel for Defendants Dollar Tree, Inc. and Dime Merger Sub, Inc.
This action involves a proposed merger between two of the three major players in the small-box discount retail market where the third major player has surfaced as a competing bidder. Given the concentrated nature of this market, a critical issue to the viability of a proposed combination of any of these companies is obtaining antitrust approval from the Federal Trade Commission ("FTC").
On July 27, 2014, Family Dollar Stores, Inc. ("Family" or the "Company") and Dollar Tree, Inc. ("Tree") agreed to a merger transaction (the "Merger") in which Tree proposes to acquire Family for a combination of cash and Tree stock. As of the date of the merger agreement, the proposed Merger was valued at $74.50 per share of Family stock, for aggregate consideration of approximately $8.5 billion. Due to the subsequent increase in Tree's stock price, the proposal is now worth over $76 per share. A vote of Family's stockholders to consider the proposed Merger is scheduled for December 23, 2014. Although the FTC has not yet approved the Merger, such approval is considered to be a formality because Tree has agreed to divest as many of its approximately 4, 900 retail stores as necessary to receive antitrust approval.
After Family and Tree agreed to the Merger, Dollar General, Inc. ("General"), the third major small-box discount retailer, made a bid to acquire Family for $78.50 per share in cash, which included a commitment to divest up to 700 of General's more than 11, 300 retail stores to obtain antitrust approval. General later increased its bid to $80 per share in cash and a commitment to divest up to 1, 500 of its stores. After Family refused to engage in discussions with General in the face of this bid, General went directly to Family's stockholders by commencing a tender offer to acquire their shares for $80 per share in cash. General's tender offer cannot close at this time, however, because it has not received antitrust approval.
In this action, stockholders of Family seek to preliminarily enjoin the stockholder vote on the proposed Merger until: (1) the Family board of directors (the "Board") "has properly engaged" with General and "made a good faith effort to achieve a value-maximizing transaction" and (2) until Family makes a laundry list of corrective disclosures in its proxy statement. Plaintiffs challenge the sale process in several respects, but their core claim is that the Board breached its fiduciary duty to maximize the value of Family when it declined to engage in negotiations with General after it made its $80 offer.
In this opinion, I conclude for the reasons explained below that Plaintiffs have failed to demonstrate a reasonable probability of success on any of their claims. Regarding Plaintiffs' core claim, the record shows that the Board was motivated to maximize Family's value and acted reasonably within the constraints of the fiduciary out provision in the merger agreement when it decided not to engage in negotiations with General because of the antitrust risks associated with that proposal. Of particular significance, the Board had been specifically advised that General's $80 offer had only an approximately 40% chance of obtaining antitrust approval, and further determined that the level of divestitures General had proposed (1, 500 stores) was so far below the level necessary to sufficiently address the antitrust risk of a Family/General combination that it was not prudent or appropriate to open negotiations with General.
I also conclude that Plaintiffs have failed to demonstrate the existence of irreparable harm or that the balance of the equities favors the relief they seek. Nothing prevents General, which has been undeterred from bidding to acquire Family since the Company agreed to the Merger, from making an improved offer to address the antitrust risks associated with a Family/General combination if it truly wants to acquire Family. On the other hand, entry of a preliminary injunction would deprive Family's stockholders of the opportunity to decide for themselves whether to approve a transaction that offers them a significant premium for their shares and apparent deal certainty.
Accordingly, Plaintiffs' motion for a preliminary injunction is denied.
II. BACKGROUND 
A. The Parties
Defendant Family Dollar Stores, Inc., a Delaware corporation based in Charlotte, North Carolina, operates a chain of more than 8, 100 merchandise retail discount stores in 46 states, selling products in a general range of $1 to $10. Family's common stock is currently listed on the New York Stock Exchange under the symbol "FDO."
Defendants Howard R. Levine ("Levine"), Mark R. Bernstein, Pamela L. Davis, Sharon Allred Decker, Edward C. Dolby, Glenn A. Eisenberg, Edward P. Garden ("Garden"), George R. Mahoney, Jr. ("Mahoney"), James G. Martin, Harvey Morgan, and Dale C. Pond were the eleven members of the Board during the events in question. Each has been a member of the Board since at least 2011.
Levine is the son of Family founder Leon Levine. Levine is the Chairman of the Board, the Company's President and Chief Executive Officer, and the largest stockholder of Family, owning nearly 9 million shares. Garden is a founder of the well-known hedge fund Trian, which owns nearly 8.4 million shares of Family stock. Mahoney owns over 340, 000 Family shares. If the Merger is consummated, only Levine will be on the board of directors of the combined entity.
Defendant Dollar Tree, Inc., a Virginia corporation based in Chesapeake, Virginia, operates a chain of approximately 4, 900 stores selling products for $1 or less. Tree formed Dime Merger Sub, Inc., a wholly-owned subsidiary of Tree, to effectuate the acquisition of Family. For simplicity, I refer to these two defendants collectively as "Tree."
Non-party Dollar General, Inc., which is based in Tennessee, operates a chain of more than 11, 300 merchandise retail discount stores in 40 states, selling products in a general range of $1 to $10.
Plaintiffs Darrell Wickert, Shiva Y. Stein, and Stuart Friedman have been Family stockholders at all relevant times. Plaintiffs bring this lawsuit individually and on behalf of a class of all Family stockholders, excluding defendants and their affiliates.
B. Family Begins Discussing a Potential Transaction with General
In February 2013, Michael Calbert ("Calbert"), a director of General, contacted Levine and asked to meet with him. Levine, who knew Calbert from a previous business relationship, assumed that Calbert might want to discuss a potential transaction involving Family and General. In preparation for the meeting with Calbert, Levine consulted with Family's financial advisor, Morgan Stanley & Co. LLC ("Morgan Stanley"), and its legal advisor, Cleary Gottlieb Steen & Hamilton LLP ("Cleary"), about what tactics to employ at the meeting to ensure that any discussions that led to a General proposal would maximize value for Family stockholders.
On February 28, 2013, Levine met with Calbert and discussed the merits of a potential combination of Family and General. Levine informed Calbert that Family was not for sale, and if there were ever to be a strategic combination, Levine "intended to be chairman and CEO and wanted the headquarters in Charlotte." Garden testified he recommended that Levine make these requests upfront as part of a negotiation strategy, even though Levine "had no desire to run the combined company, " because these "were two things that would be easy to give on in a negotiation." At some point, Calbert told Levine that the General board likely would view these requests unfavorably.
On April 29, 2013, Levine updated the Board about his February 28 meeting with Calbert. He explained that no proposals were made or discussed and that no confidential information was exchanged. The Board told Levine that having these types of meetings was appropriate so long as he kept the Board updated and did not negotiate any personal post-closing arrangements.
In July and August 2013, two prominent investment banks published analyst reports discussing strategic alternatives for Family, including the merits of a potential combination with General.
On October 15, 2013, Levine and Mahoney met with Calbert and Richard Dreiling ("Dreiling"), General's CEO, to "explore the possibility of a potential business combination transaction." For tactical reasons, Levine again expressed interest in serving as CEO of a combined company that would be headquartered in Charlotte, North Carolina, but quickly "backed off of those two points pretty dramatically." The representatives of General responded that they would only have interest in a combination that saw General acquiring Family with the combined company having General's existing headquarters and management, but that they desired that Levine be part of the transition and assume a leadership role to assist with the integration of the companies. Levine indicated he would have no problem with such an approach, subject to approval of the Board, if General paid Family stockholders an appropriate premium. The subject of potential antitrust risks also was broached at the October 15 meeting, with Family's representatives expressing concern about the antitrust risks and General's representatives conveying that they believed any antitrust risks were surmountable.
On October 23, 2013, Levine and Mahoney updated the Board about their October 15 meeting with representatives of General. The Board, in consultation with Morgan Stanley and Cleary, authorized Levine to engage in a follow-up meeting with General and reconfirmed Levine's commitment to keep the Board updated and to refrain from negotiating any personal post-closing arrangements.
In November 2013, General and Family scheduled a follow-up meeting for December 2013. That meeting was postponed until January 2014. In December 2013, General postponed the January meeting until the spring of 2014. Garden testified he got the impression from the delays that General was not "very motivated or anxious to do a transaction" with Family.
C. Tree Makes an Acquisition Proposal
On January 19, 2014, the Board met with senior management to discuss strategic alternatives, including potential business combinations. The meeting was prompted by several disappointing quarters, which had resulted in the termination of Family's then-president and chief operating officer Mike Bloom, who had been hired to be Levine's successor. At the meeting, the Board established a committee of non-management directors to oversee the development of a new stand-alone strategic plan and to consider and explore potential strategic alternatives (the "Advisory Committee"). The Advisory Committee consisted of four outside directors: Eisenberg, Garden, Mahoney, and Morgan.
On March 7, 2014, the Advisory Committee met with members of senior management and representatives of Morgan Stanley and Cleary. Morgan Stanley identified a number of companies that could engage in a business combination with Family but noted that it was unlikely that any strategic buyer other than General or Tree would be interested in such a transaction due to a number of factors, including the risk and challenges of integrating a company of Family's magnitude. A representative of Morgan Stanley also informed the Advisory Committee that a representative of J.P. Morgan Securities, LLC, Tree's financial advisor, conveyed that Tree CEO Bob Sasser would be contacting Levine to set up a time for them to discuss the possibility of a business combination.
On March 14, 2014, Levine and Sasser met to discuss the possibility of exploring a business combination. Levine expressed the need for Tree to commit to pay an appropriate premium in any such transaction if the Board of Family were to consider a sale of the company. Sasser stated he was not in a position to discuss matters relating to the consideration Tree might be willing to offer to acquire Family, but that if an agreement between the companies were to be reached, Levine would need to have a management role at the combined company to facilitate the transition and integration following closing. Levine responded that it would be inappropriate to discuss that subject at that time.
On March 17, 2014, senior management of Family held a telephonic meeting with the Board, Morgan Stanley, and Cleary, during which the Board was updated on the recent meeting between Levine and Sasser. The directors discussed that it would be advisable for the two companies to sign a mutual non-disclosure agreement so that some initial confidential information could be exchanged to permit Tree to make an initial indication of the type and amount of consideration that it would be willing to pay in a transaction. After the meeting, Family informed Tree that it was interested in signing a mutual non-disclosure agreement to facilitate discussions between them.
On April 7, 2014, Family and Tree entered into a mutual non-disclosure agreement (the "NDA") that they had negotiated over the previous three weeks. In relevant part, the NDA provided that "[e]ach party agrees that without the prior written consent of the other party . . . neither it nor any of its Representatives will disclose to any other person . . . the fact that discussions or negotiations concerning a Transaction are or may be taking place, or have taken place." The NDA defined the term "Transaction" as "a possible transaction involving the parties hereto or their shareholders."
On April 17, 2014, the Board received updates from Cleary and Morgan Stanley concerning the Company's strategic alternatives. According to the Proxy, the directors
discussed with its advisors and senior management the status of discussions with Dollar Tree and the risk that, if the board were to invite Dollar General at that time into a more formal process to compete with Dollar Tree for the right to participate in a business combination transaction with Family Dollar, Dollar General might decide it was not interested in competing with Dollar Tree for Family Dollar, and instead pursue a business combination with Dollar Tree, leaving Family Dollar without a merger partner and otherwise in a disadvantageous position.
On May 14, 2014, Sasser telephoned Levine to outline the terms of a non-binding proposal pursuant to which Tree would acquire Family for between $68 and $70 per share, with 75% of the consideration in cash and 25% percent of the consideration in Tree common stock. Sasser noted that Tree stockholders would not have to approve the proposed transaction and conditioned the proposal on Levine's agreement to remain employed by Family after the closing of the transaction. Levine stated he would not discuss any such post-closing arrangements until permitted by the Board. Following the call, Tree sent a letter to the Board confirming the terms of the proposal, in which it requested a six-week period of exclusivity to conduct due diligence and negotiate the transaction.
On May 19, 2014, the Advisory Committee held a meeting to discuss the Tree proposal. Eight members of the Board attended the meeting along with representatives of Morgan Stanley and Cleary. During this meeting, the directors received an extensive report from Cleary concerning the antitrust risk associated with a potential combination between Family and each of Tree and General.
Cleary advised that a Family/Tree transaction involved "a limited risk of divestitures, " with 2% of Family stores facing a "medium risk of divestiture, " that the risk of an FTC challenge to block the transaction was small, and that there was an approximately 65% chance that FTC review would take between four and six months to complete. By contrast, Cleary advised that a Family/General transaction involved "a high risk of very significant divestitures or being blocked outright" and that it was "virtually certain" that FTC review would take between six to eight months or longer.
According to the minutes of the May 19 Advisory Committee meeting, when reviewing "how the FTC would evaluate a potential merger" between Family and either Tree or General, Cleary and the directors discussed Family's pricing strategy and how Family's "pricing was not significantly impacted by Dollar Tree, given Dollar Tree's different business model and pricing philosophy, but appeared to be impacted by Dollar General." On this point, one of the slides in Cleary's presentation states that General's "[d]ocuments on pricing would be crucial to fully understanding" the antitrust risk of a combination with General.
Later in the day on May 19, the Board met to discuss the Tree proposal along with representatives of Morgan Stanley and Cleary. The directors discussed, among other things, how the absence of a requirement for approval by Tree's stockholders meant that a third party, such as General, could not induce Tree to walk away. According to Garden, this was important because "if [General] got wind that [Family was] contemplating a transaction with Dollar Tree, . . . the probability was high that [General] would do a hostile transaction on Dollar Tree." At the conclusion of the meeting, the Board instructed Family's senior management to inform Tree that its offer was inadequate, that Family remained not for sale, but that the Board would consider a more competitive offer. Sasser later responded that Tree was still interested in pursuing a transaction, but "he felt uncomfortable increasing his offer without further support for doing so."
D. Family Adopts a Stockholder Rights Plan in Response to Icahn's Emergence, and General Re-emerges
On June 6, 2014, Carl Icahn and certain of his affiliates filed a Schedule 13D disclosing, among other things, that they beneficially owned approximately 9.39% of the then-outstanding shares of Family common stock and wished to discuss with Family strategies to enhance stockholder value, including the potential exploration of strategic alternatives. On the same day, Icahn telephoned Levine to express an interest in having discussions with Family's management regarding the Company's current operations and future plans, including potential strategic opportunities. During the discussion, Icahn mentioned that he may reach out to General.
Also on June 6, 2014, shortly after Icahn's announcement, General director Calbert emailed Levine to suggest that they speak. In a telephone conversation the next day, Calbert indicated interest in continuing discussions regarding a potential business combination, but that General would be reluctant to participate in negotiations if Icahn had a role in the process. In the same time frame, Tree CEO Sasser had telephoned Levine and similarly expressed concern about Icahn being involved in the negotiations of a potential strategic transaction between Family and Tree.
On June 8, 2014, the Board held a telephonic meeting with senior management, Cleary, and Morgan Stanley to discuss how to respond to Calbert and Sasser and what to do to alleviate the risk posed by Icahn. The Board determined that Levine "should encourage Dollar General to re-engage in discussions about, and to pressure Tree to propose improved terms for, a potential strategic transaction." The Board agreed further that Levine should suggest to Calbert that General's antitrust attorneys meet with Cleary to determine the significance of the antitrust risks associated with a potential combination of General and Family and to discuss the willingness of General to bear those risks. The Board also advised that Levine should reach out to Sasser to express Family's continuing interest in a transaction with Tree and that Levine should attempt to assuage Calbert's and Sasser's respective concerns about Icahn's presence.
Also at the June 8 meeting, after discussing the risk that Icahn could acquire sufficient negative control without paying a premium to Family's other stockholders, the Board, by a ten to one vote, adopted a shareholder rights plan (the "Rights Plan") with a 10% trigger. Garden expressed his opposition to the adoption of the Rights Plan and voted against it.
On June 9, 2014, Levine emailed Calbert to inform him of the adoption of the Rights Plan and to suggest a call between Family's and General's antitrust counsel.Calbert responded in an email that "getting outside council [sic] going on [antitrust] at this point is a bit premature, " but that General would refine its thinking "on price/structure and diligence plan (including ...