Presidio, Inc. provides digital infrastructure, cloud computing, and information security services. Apollo bought Presidio in 2015. Between late 2017 and early 2019, Apollo sold its stake down to 42%, retaining control over five of nine board seats until the next annual meeting.
In May 2019, Apollo began exploring a sale of the company. For financial advice, Apollo turned to LionTree, with whom they had developed an ongoing business relationship. Apollo and LionTree met with two private equity firms to explore their interest in Presidio: BC Partners (“BCP”) and Clayton Dubilier & Rice (CD&R).
On July 3, Robert Cagnazzi, Presidio’s CEO, introduced LionTree to the Presidio board as the company’s financial advisor, and LionTree reported about its conversations with BCP and CD&R, underselling CD&R’s interest in Presidio. The board sensibly chose to engage with BCP, not CD&R. Within weeks, Presidio and BCP had agreed to a purchase price of $16.00 per share.
One week later, and several weeks after the critical meetings with BCP and CD&R, LionTree made its first conflicts disclosures to the Presidio board. The board reacted meekly and approved the company’s engagement of LionTree despite its relationship with Apollo.
On August 12, the board met to consider the merger agreement. The next day the board approved the merger agreement and increased LionTree’s success fee.
The post-signing go-shop began and CD&R quickly expressed interest. On September 23, CD&R submitted a topping bid of $16.50 per share. CD&R’s bid letter made clear that nothing was to be disclosed to BCP beyond CD&R’s identity as an “Excluded Party.”
On September 24, the company gave the required notice to BCP that CD&R was an Excluded Party. But earlier that morning, LionTree called BCP and told them that CD&R had bid $16.50 per share. LionTree did not have the board’s permission before making that call. Nor did it seek forgiveness afterwards. It never told the board.
BCP exploited the tip. It quickly prepared a revised bid, just $0.10 more than CD&R’s bid. But BCP proposed an increase in the termination fee and also put a short fuse on its offer, hoping to preempt another bid from CD&R.
CD&R came back with an offer of at least $17.00 per share. Still, the board chose BCP’s bid once again. This time, CD&R walked away.
The Court of Chancery’s Decision
The plaintiff sued the members of the Presidio board for breach of fiduciary duty. The plaintiff also sued Apollo for breach of its fiduciary duties as a controlling stockholder. And the plaintiff sued BCP and LionTree for aiding and abetting the alleged breaches of fiduciary duty.
The Court dismissed the claims against Presidio’s directors and Apollo, but not the claims against Cagnazzi, LionTree, or BCP. The court’s analysis is a casebook-ready explanation of the multi-layered analysis required by post-closing M&A litigation.
In an application of Revlon and its progeny, the Court held that enhanced scrutiny supplanted the business judgment rule.
Whether to apply entire fairness proved a closer question. The plaintiff argued that entire fairness applied because the merger provided a controlling stockholder with a unique benefit in the form of liquidity of its large position.
The Court held that these allegations did not rise to the level of conflict of interest. The liquidity-as-conflict theory was felled in part by Apollo’s secondary offerings, which had demonstrated Apollo’s ability to monetize its stake without selling the company.
But the plaintiff fared better on disclosures. As the Court observed, “one [disclosure] violation is sufficient to prevent application of Corwin” because it renders the vote less than fully informed. Here, that one violation was the proxy disclosures about LionTree’s tip to BCP about CD&R’s bid.
The importance of this undisclosed tip to the Court’s conclusions cannot be overstated.
Apart from being a good teaching tool for the multi-layered analysis in M&A litigation, the opinion’s treatment of differently situated defendants provides meaningful guidance for participants in transactions and subsequent litigation.
The full article in its original form can be found here.
S. Michael Sirkin (LAW ’09) is a partner at Ross Aronstam & Moritz LLP in Wilmington, Delaware. His practice includes a special focus on cases arising from mergers and acquisitions and other large corporate transactions. He has substantial experience, including with valuation issues, and advises clients in a variety of transactional and litigation contexts.