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In re Towers Watson & Co. Stockholders Litigation

Court of Chancery of Delaware

July 25, 2019


          Date Submitted: April 11, 2019

          Michael J. Barry, Christine M. Mackintosh, GRANT & EISENHOFER P.A., Wilmington, Delaware; Counsel for Plaintiff Alaska Laborers-Employers Retirement Trust.

          Michael J. Barry, Christine M. Mackintosh, GRANT & EISENHOFER P.A., Wilmington, Delaware; Lee D. Rudy, Geoffrey C. Jarvis, J. Daniel Albert, Stacey A. Greenspan, KESSLER TOPAZ MELTZER & CHECK, LLP, Radnor, Pennsylvania; Counsel for Plaintiff City of Fort Myers General Employees' Pension Fund.

          Bradley R. Aronstam, Roger S. Stronach, ROSS ARONSTAM & MORITZ LLP, Wilmington, Delaware; John A. Neuwirth, Joshua S. Amsel, Matthew S. Connors, Amanda K. Pooler, Sean Moloney, WEIL, GOTSHAL & MANGES LLP, New York, New York; Counsel for Defendants Victor F. Ganzi, John J. Haley, Leslie S. Heisz, Brenda R. O'Neill, Linda D. Rabbitt, Gilbert T. Ray, Paul Thomas, and Wilhelm Zeller.

          Raymond J. DiCamillo, Sarah T. Andrade, RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; Richard S. Horvath, Jr., PAUL HASTINGS LLP, San Francisco, California; Counsel for Defendants ValueAct Capital Management, L.P. and Jeffrey Ubben.


          MCCORMICK, V.C.

         This stockholder class action challenges the $18 billion merger-of-equals between Towers Watson & Co. ("Towers") and Willis Group Holdings plc ("Willis"). After the transaction was publicly announced, multiple stockholders and analysts disparaged the deal as a windfall for Willis. Unsure of whether the Towers stockholders would approve the transaction, the Towers board postponed the stockholder vote. Towers's CEO, who was also Towers's lead negotiator, then renegotiated the transaction, securing a dividend for Towers's stockholders more than double the amount previously agreed upon by the merging parties.

         The defendants have moved to dismiss this action. In briefing, the defendants focused on arguing under the recently fashionable Corwin doctrine that a fully informed stockholder vote restored the business judgment rule.[1] But this decision need not reach Corwin, as long-settled corporate law principles warrant business judgment deference. Namely, the plaintiffs do not argue that the merger, a mostly stock-for-stock transaction between widely held, publicly traded entities, is subject to enhanced scrutiny under Revlon.[2] Nor do they challenge any deal protection devices to trigger enhanced scrutiny under Unocal.[3] The transaction thus is presumptively subject to the business judgment rule, and the plaintiffs must plead facts sufficient to rebut or overcome this presumption in order to state a claim.

         In an effort to rebut the presumption of the business judgment rule, the plaintiffs rely on Cinerama, Inc. v. Technicolor, Inc., arguing that Towers's CEO and lead negotiator suffered a material conflict, which he failed to disclose to the Towers board, and which a reasonable board member would have regarded as significant in evaluating the proposed transaction.[4] The plaintiffs specifically point to a compensation proposal made to the CEO by a holder of 10% of Willis's stock after the initial deal was struck but before the CEO secured a higher dividend. Under the allegedly undisclosed proposal, the CEO would receive materially greater upside in his compensation post-merger than he had received pre-merger. The plaintiffs say that this proposal misaligned the CEO's incentives at a critical juncture in the negotiations, inspiring him to ask for no more of a dividend than he believed necessary to secure Towers's stockholder approval.

         The fact of the allegedly undisclosed compensation proposal fails to rebut the business judgment rule. At bottom, the Towers board knew that the CEO would become CEO of the combined company post-merger, that the combined company would be much larger, and that the CEO thus would be entitled to increased compensation. Knowing this potential conflict, the board nevertheless appointed the CEO as lead negotiator but kept apprised of the negotiations. Further, the compensation proposal was a proposal only; it reflected a theory of compensation and upside potential in the event of pie-in-the-sky outcomes unconnected to any business plan or forecast. Given what the board already knew, and the nature of the compensation proposal at issue, a reasonable board member would not have regarded the proposal as significant when evaluating the proposed transaction. The business judgment rule therefore applies, and this decision grants the defendants' motion to dismiss.


         The facts are drawn from the Verified First Amended Class Action Complaint (the "Amended Complaint")[5] and documents it incorporates by reference.

         A. The Original Merger Agreement

         Willis, an Ireland corporation, was a publicly traded global advisory, brokering, and solutions company. Willis's second largest stockholder, ValueAct Capital Management, L.P. ("ValueAct"), held over 10% of Willis's shares. ValueAct's founder and CEO, Jeffrey Ubben, sat on the Willis board of directors. In late 2014, at Ubben's recommendation, Willis began a review of strategic alternatives that could provide enhanced scale for the company. One such alternative included a merger with Towers, a publicly traded professional services firm incorporated under Delaware law, with a focus on helping organizations improve performance through risk management, human resources, and actuarial and investment consulting.

         In early 2015, the CEOs for Willis and Towers, Dominic Casserley and John K. Haley respectively, met to discuss a business combination. After meetings in January and February, the pair agreed to explore a transaction and entered into a non-disclosure agreement on March 29, 2015.[6] Each company retained financial advisors. For Towers, Haley engaged Merrill Lynch, Pierce, Fenner & Smith Inc. ("Merrill Lynch").

         For a period of only eleven days in May 2015, the Towers board authorized a special committee to negotiate the Willis transaction.[7] On the tenth day, the special committee met with Haley, who gave the special committee a detailed summary of his conversations with Willis, addressing the strategic rationale for and potential synergies from the transaction. The committee directed Haley to present this information to the full Towers board at a board meeting scheduled for the following day. At that meeting, the directors excused Haley from much of the merger-related discussions and disbanded the special committee. The committee neither evaluated the merger nor helped negotiate it.

         Haley spearheaded negotiations for Towers. The transaction presented a potential "merger of equals," meaning that neither company was "acquiring" the other. The nature of the transaction required negotiating several issues beyond price, including who would lead the combined company, how to structure the transaction, and whether one company was entitled to a premium over its public trading price.

         Leadership of the combined company was decided first. Before the special committee was disbanded, the committee discussed the combined companies' leadership, and independent director Rabbitt was tasked with recommending to Willis's Board Chairman James McCann that Haley run the combined entity. Rabbitt reached out to McCann that same day. McCann then discussed the proposal with Casserley, and Casserley accepted the proposal on May 19, 2015.

         Despite this leadership determination, the Towers board authorized Haley to continue to lead the merger negotiations for Towers. During the discussions held in early 2015, Haley had kept Rabbitt informed. After the parties agreed to name Haley CEO, on two instances, Towers independent director Ganzi joined Haley for negotiations, [8] and Haley continued to update the Towers board on negotiations.[9]

         In the May 2015 negotiations, Haley suggested that the structure of the merger should be based on the companies' respective market capitalization. Willis responded that the pro forma ownership of the combined company should be based on the relative contribution of several different financial metrics; this resulted in Willis stockholders owning a larger percentage of the combined company. Haley and Casserley also discussed the potential form of consideration, along with other merger terms including a pre-merger cash dividend for Towers's stockholders, the exchange ratio, post-merger board composition, and the resulting ownership of the combined company by Towers and Willis stockholders, respectively.

         By June 1, 2015, Haley and Ganzi proposed the following transaction: Willis would pay a $500 million dividend to Towers's stockholders, Willis's stockholders would own approximately 51% of the combined company, and Towers's stockholders would own the remaining 49%.

         ValueAct's Ubben was dissatisfied with Towers's proposal and the progress of negotiations. By email, Ubben demanded that Willis press Towers harder and "use ValueAct in this negotiation" by telling Towers that (1) ValueAct would not approve the merger without a reasonable premium; (2) there was no merger without ValueAct's support; and (3) ValueAct must meet Haley.[10] If the negotiators failed to follow these demands, Ubben threatened to break up and sell Willis.[11]

         Days later, on June 5, 2015, Willis counteroffered with terms that did not include a dividend. The counteroffer provided that Willis's stockholders would own approximately 50.1% of the combined company while Towers's stockholders would own the remaining 49.9%.

         In response, on June 7, 2015, Haley and Ganzi proposed a $337 million dividend (about $4.87/share) to Towers's stockholders and adopted Willis's June 5 proposal on stockholder ownership structure, with Willis's stockholders owning the majority. Casserley agreed in principle to the counteroffer on June 10, 2015. The parties then engaged in diligence.

         As the parties conducted diligence, the Towers board met multiple times with their advisors and Towers management to discuss the status of the transaction, requesting detailed follow-up on synergies, which management provided at subsequent meetings.

         On June 27, 2015, Towers and Willis agreed in principle, subject to their respective boards' approval. The terms mirrored those reached by Haley and Casserley just weeks earlier. That same day, the Towers board convened to review the transaction. The board members discussed the transaction terms, due diligence, potential synergies, and their legal obligations as directors. Over the next few days, Towers's outside counsel fielded additional questions from the Towers board.

         As a condition to entering into the merger agreement, Towers required that ValueAct enter into a voting agreement in support of the merger. Willis consulted with ValueAct and Ubben to ensure that ValueAct supported the merger and was willing to enter into the voting agreement. Representatives of ValueAct, including Ubben, discussed the proposed merger internally and with Willis. They also offered to meet with Haley and other Towers representatives.

         The Towers board met on June 29, 2015, to review Merrill Lynch's financial analyses. Merrill Lynch rendered an oral fairness opinion and later confirmed its opinion in writing. The Towers board unanimously approved the terms outlined in the merger agreement, which the parties executed later that day.

         Under the merger agreement, Towers's stockholders would receive a dividend of $4.87/share and following the closing of the merger, own approximately 49.9% of the combined company. Based on the trading price of Willis shares, Haley's counteroffer valued each share of Towers stock at $125.13, or a 9% discount to the $137.98 closing price of Towers stock on June 28, 2015.

         B. Reactions to the Initial Merger Agreement

         Towers and Willis announced the merger on June 30, 2015. Towers's stockholders reacted negatively to the announcement. In the months before the merger, Willis's financial condition had worsened, and Towers's financial condition had strengthened. Regarding the merger, analysts noted that Willis "appears to be extracting more value from the transaction than" Towers.[12] By the close of trading on the day the merger was announced, Towers's stock price had dropped 9%.

         Negative reactions continued into September 2015. Willis's financial woes exacerbated the issue. Willis missed earnings in July. In contrast, Towers reported in August earnings that beat street expectations and set a record-breaking fiscal year. Analysts remarked, and the plaintiffs allege, that the market reaction imperiled the deal by decreasing the likelihood that Towers would obtain the majority stockholder approval necessary to close.

         C. The Compensation Proposal

         In early September 2015, ValueAct's Ubben presented Haley with a three-page document entitled "Towers [] Compensation Review September 2015."[13] The presentation showed Haley's long-term incentive compensation under three scenarios: (1) Haley's then-current plan at Towers, worth around $24 million; (2) Haley's then-current plan applied at the combined entity, worth around $48 million; and (3) ValueAct's incentive-based compensation proposal reflecting ValueAct's compensation philosophy.

         ValueAct's compensation philosophy aimed to tie Haley's compensation to comparable peer performance. Haley would earn below executives of peer companies for below average or average performance, and above executives of peer companies for outperformance, defined to mean an annualized 30% internal rate of return or higher.

         Haley did not inform the Towers board of ValueAct's compensation proposal, according to the plaintiffs. But the plaintiffs do not allege that Haley remained silent or engaged in negotiations with ValueAct. The plaintiffs allege that Haley told ValueAct to discuss the proposal with Gene Wickes, Towers's managing director of benefits.

         D. The Proxy

         On October 13, 2015, Towers and Willis jointly filed a proxy soliciting votes in favor of the merger (the "Proxy").[14] About two weeks later, Haley and ValueAct presented to Institutional Shareholder Services ("ISS") regarding the merger. They also worked together to solicit support for the merger from Towers's largest stockholders, including The Vanguard Group and BlackRock, Inc.

         One stockholder launched a public campaign against the transaction in mid-September. Driehaus Capital Management ("Driehaus") sent an opposition letter to stockholders (also filed with the SEC) noting that Haley was likely in line for a pay raise commensurate with the increased size of the post-merger entity. Over the next two months, Driehaus filed five additional opposition letters against the merger. One of Driehaus's letters pointedly asked whether Towers "management ha[s] 'skin in the game?' Are incentives aligned?"[15]

         Towers publicly responded to Driehaus on November 3, 2015, filing an investor presentation with the SEC that sought to "set the record straight" and that touted Towers's existing compensation practices.[16] It did not refer to ValueAct's compensation proposal.

         Driehaus emailed his response to Towers six days later, asking about Haley and ValueAct's communications, including whether they had discussed Haley's post-merger compensation. Driehaus explained: "[S]hareholders are concerned that [Haley's] relationship with [ValueAct] has impaired-and, more importantly, continues to impair-Mr. Haley's ability to negotiate in good faith on behalf of Towers . . . shareholders."[17]

         Towers replied to Driehaus's email, copying Ubben: "[T]here have been various discussions between [Towers] representatives and members of the Willis board, as well as large shareholders, including ValueAct, all of which were appropriate."[18] In November 2015, ISS recommended that Towers stockholders reject the merger.

         E. Renegotiated Terms

         In light of the negative market reaction, Towers determined to propose new terms to Willis. On November 10, 2015, Haley proposed increasing the special dividend to $10.00 per share. Willis rejected Haley's proposal and instructed Haley to focus on soliciting Towers stockholders rather than renegotiating the merger consideration.

         At a special meeting held on November 17, 2019, the Towers board voted to adjourn the stockholder meeting scheduled for November 18, 2015, and determined to renew the $10.00 per share dividend demand. Haley had consulted with Ubben prior to the meeting. According to handwritten notes of the November 17, 2015 Towers board meeting, Haley recounted his conversation with Ubben to the Towers board, and further told the board that the $10.00 amount "[d]idn't trouble [Ubben]."[19]

         After the November 17, 2015 Towers board meeting, Haley renewed the proposal to Willis for a $10.00 per share special dividend. In this meeting, Haley allegedly informed Casserley that the $10.00 per share dividend would be the minimum increase necessary to get the deal done. This time, the Willis board accepted the proposal. By the close of business on November 18, 2015, Haley and Willis had agreed upon the renegotiated terms, and Haley updated the board at another special meeting.

         The day after the parties reached the renegotiated terms, on November 19, 2015, the Towers board convened the third special meeting of November. Merrill Lynch rendered an oral opinion, later confirmed in writing, that the renegotiated terms were fair, from a financial point of view, to Towers's stockholders. The Towers board then unanimously voted to approve attendant amendments to the merger agreement, and publicly announced the changes the next day. Towers then filed a supplemental proxy on November 27, 2015.

         At the stockholder vote held on December 11, 2015, 62% of the Towers stockholders voted in favor of the merger. The merger closed on January 4, 2016, to form Willis Towers plc ("Willis Towers").

         F. Haley's Compensation Agreement

         Days after the stockholder vote, Willis's compensation committee chair Wendy Lane contacted ValueAct "to catch up on the conversations" between Ubben and Haley over compensation.[20] ValueAct sent Lane the "analysis" of slides from Ubben's pitch to Haley[21] stating that ValueAct would "tweak[]" the compensation proposal to make it more in depth before sharing it with Haley and the Willis Towers board.[22]

         Post-closing, Ubben sat on Willis Towers's board and compensation committee, and Lane chaired the Willis Towers's compensation committee. The compensation committee engaged ...

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