Facts
- SWT Acquisition Corp. (SWT) acquired approximately 19% of TW Services, Inc.’s (TW) outstanding shares.
- SWT then issued a hostile tender offer to buy TW’s remaining shares.
- Completion of SWT’s acquisition plan contemplated a second-step merger and required TW’s board of directors to approve an agreement to merge TW into SWT.
- Although SWT’s offer was financially attractive in the short term for TW stockholders, TW’s board had concerns based on SWT’s background and SWT’s recent dealings with TW.
- TW’s board viewed SWT’s tender offer as a bad-faith attempt either (i) to increase the value of SWT’s existing 19% position at TW’s expense, or (ii) to pressure TW into paying “greenmail” to buy out SWT at a premium.
- The board concluded that either outcome threatened TW’s long-term financial stability and corporate strategy.
- TW adopted a shareholder rights plan (poison pill) that would make it materially more difficult and expensive for SWT to acquire control without board approval.
- SWT demanded that TW redeem the pill so SWT’s tender offer could proceed; TW refused.
- SWT sought a preliminary injunction in the Delaware Court of Chancery compelling TW to redeem the poison pill.
Issues
- Whether SWT was entitled to a preliminary injunction requiring TW’s board to redeem the poison pill in response to SWT’s tender offer.
- Whether, consistent with directors’ fiduciary duties, TW’s board could refuse to facilitate SWT’s bid when the board, acting in good faith and on an informed basis, concluded the bid posed a threat to TW’s long-term stockholder value (including a risk of greenmail).
Decision
- The Court of Chancery denied SWT’s motion for a preliminary injunction.
- The court concluded SWT failed to show a sufficient likelihood of success on the merits that TW’s directors breached fiduciary duties by maintaining the poison pill and refusing to approve a merger agreement needed to complete SWT’s acquisition plan.
- The court credited the board’s good-faith view—formed in light of SWT’s conduct and relationships with TW—that SWT’s tender offer presented a threat to TW and its stockholders beyond the immediate premium offered.
- Because a mandatory injunction ordering redemption would substantially alter the status quo and effectively decide the control contest at an early stage, the court declined to grant that relief on a preliminary record.
Legal Principles
- Directors’ duty of loyalty requires that they manage the corporation “within the law, with due care and in a way intended to maximize the long run interests of shareholders.”
- A board is not required to accept a bid solely because it offers a short-term premium; directors may consider long-run value and the bidder’s tactics and intentions when deciding how to respond.
- Where directors act in good faith and without disabling self-interest, courts generally defer to board decisions about whether to pursue a stand-alone course rather than a sale, and a bidder faces a heavy burden to obtain an order forcing board action.
- Preliminary injunctive relief, particularly relief compelling affirmative action such as redeeming a pill, requires a strong showing on the merits and is typically denied when it would resolve the dispute before a full adjudication.
Conclusion
The Delaware Court of Chancery refused to order TW to redeem its poison pill, holding that SWT had not shown a basis for mandatory preliminary relief where TW’s board, acting with due care, within the law, and in good faith, determined that SWT’s bid and tactics threatened TW’s long-run stockholder interests, including the risk of greenmail.