As is often the case with publicly announced mergers, the recent blending of Journal Communications Inc. and E.W. Scripps Co. resulted in the immediate filing of lawsuits for breach of fiduciary duties.
The July deal saw the companies agree to merge their broadcast operations and spin off and merge their respective newspaper operations. Both Journal and Scripps touted the proposed transaction as an opportunity to create two focused and separately traded public companies that offer long-term opportunities to create value for shareholders. In essence, the companies have suggested the value of the two individual parts will be greater than the sum of such parts.
But the plaintiffs allege the board breached fiduciary duties owed to Journal stockholders by agreeing to sell too cheaply as a result of an unfair process; i.e., not as a result of an adequate auction process.
Shareholders challenge more than 90 percent of mergers and acquisitions, according to a forthcoming article in the Texas Law Review, often driven by aggressive plaintiffs’ firm seeking settlements to cover their own fees.
In the Journal case, the question of whether the board undervalued Journal shares when agreeing to the transaction is a complicated question that merits thorough review and clearly signifies a key question for shareholders deciding whether to vote in favor of the transaction.
Stock market prices of the two entities prior to signing could be indicative of value but may not accurately capture the relative value of the two enterprises. Journal Communications’ shareholders will own approximately 31 percent of E.W. Scripps’ total shares following the merger. Scripps shareholders will retain approximately 69 percent ownership. The Scripps family will retain its controlling interest in E.W. Scripps through its ownership of common voting shares. Scripps shareholders will own 59 percent of the new newspaper company, Journal Media Group, and Journal Communications shareholders will own 41 percent. Journal Media Group will have one class of stock and no controlling shareholder.
Given that Journal’s publishing revenues have been in decline each year since 2004 and presently make up approximately one-third of Journal total revenues year-to-date (but only make up approximately 10 percent of operating earnings), one can only imagine that Journal’s board heavily discounted the publishing assets.
However, newspaper revenues for Scripps, which are all tied to relatively small markets, also have been in decline and represent nearly half of its total revenues.
With the relative value of the two companies being, to some extent, unclear, an auction process where Journal could test the waters with several bidders could have been a valuable method of assessment.
Under Wisconsin law, a board’s decisions are governed by the business judgment rule, under which courts generally presume that directors have acted in good faith and in the best interests of the company. A court “will not substitute its judgment for that of the board of directors and assume to appraise the wisdom of any corporate action,” Reget v. Paige, 2001 WI App 73, ¶17, 242 Wis. 2d 278, 293, 626 N.W.2d 302, 310.
In some jurisdictions, including Delaware, the duties of a board of directors are heightened when a board makes a decision with respect to a transaction that involves a change of control. In such circumstances, in addition to its ordinary duties to act in good faith and with candor, loyalty and due care, the board must compare the transaction to alternatives, be diligent and vigilant in critically examining the transaction and any alternatives, and actively negotiate to obtain the best transaction reasonably available for stockholders.
These heightened duties often are referred to as “Revlon duties” from the Delaware Supreme Court decision, Revlon Inc. v. MacAndrews & Forbes Holdings Inc.
However, a series of cases in Wisconsin courts have determined that Revlon duties are not applicable under Wisconsin law. These court cases have largely centered on the conflict between Revlon duties and statutory provisions that permit directors to consider factors other than shareholder interests when discharging their duties, including employees, suppliers, customers, communities in which the corporation operates, and any other factors that the director or officer considers pertinent.
As a result, in the absence of specific factual allegations of bad faith or a breach of the duty of loyalty, a breach of fiduciary duty claim challenging a merger or acquisition transaction generally cannot survive.
With no present allegations of bad faith or a breach of the duty of loyalty other than conclusory complaints of change of control payments for senior management (including Journal’s chairman) being too high, it is unlikely that the Journal board will have to explain its decision in court.
Although Wisconsin courts also have suggested that the same analytical framework may apply to the judicial review of proxy materials, it is fortunate for investors that the SEC likely will require that full disclosure be made to shareholders so they can make an informed voting decision.
Clyde Tinnen is a partner in the Chicago office of Kelley Drye & Warren LLP. He lives and works in Brookfield, where he focuses his practice on corporate law matters. Any questions regarding this article may be directed to the author at [email protected].