On the Hot Seat in Delaware
Insights from an Expert Witness and Director
Jon Foster was one of a majority of new directors on the board of Smurfit-Stone Container (SSCC) in 2010, when, shortly after emerging from post-Chapter 11 reorganization, the company faced an unsolicited offer from Rock-Tenn.
Once due diligence, negotiations, and formal documentation were completed, a half-stock, half-cash deal at $35 per share, or a total enterprise value of over $5 billion, was announced on January 23, 2011. Mr. Foster provided deposition testimony in the litigation that followed.
How did a $5 billion deal go from start to finish in less than three weeks?
Rock-Tenn had likely watched Smurfit-Stone for many years, as the companies competed to some extent. In addition, Rock-Tenn had successfully acquired a number of companies. Our Smurfit-Stone board was very knowledgeable about Rock-Tenn, well organized, and advised by high-quality bankers and lawyers. We negotiated hard and substantially improved the price and structure that were initially offered.
What, specifically, did the plaintiffs claim in the litigation that followed the announcement?
A class action complaint alleged that the consideration was inadequate and unfair to our shareholders, the preliminary proxy statement was misleading and inadequate, and that we directors failed to conduct a formal sale process to maximize value. An injunction was sought to delay the Smurfit-Stone stockholder vote and set aside Rock-Tenn’s deal protection devices for Smurfit-Stone to seek superior acquisition proposals.
Did the SSCC board try to settle the litigation?
No. We were confident that we had been well informed and well advised and had negotiated an attractive transaction for shareholders that maximized value. I was a fact witness in the litigation and was deposed at length on these issues.
What were the key reasons behind the board’s decision to support the Rock-Tenn transaction?
In general, we felt strongly that the combined company, which would be the second-biggest producer of North American containerboard and coated recycled board, would be very well positioned. Rock-Tenn had an excellent management team with a strong record of shareholder value creation and integrating acquisitions. And, the blend of cash and stock consideration allowed our shareholders to realize a significant premium and also have the opportunity to continue to have a stake in a more attractive company.
Was there a go-shop provision? Did you solicit other potential buyers?
No. It seemed clear that the market and Wall Street bankers were well aware that Smurfit-Stone would be receptive to an acquisition, since it was a Fortune 500 company in a consolidating industry with more than a dozen Wall Street analysts following it. No other bidders emerged.
What did the Delaware Chancery Court decide?
The court decided that while a 50 percent cash–50 percent stock transaction suggests that the so-called Revlon obligations apply, it denied the plaintiffs’ injunction motion. The court noted that the sale process lasted 19 days, but concluded that our process was a reasonable one and that there were substantial negotiations and no evidence of management influence or bias on the part of the directors. The court also said that SSCC’s recent emergence from bankruptcy was informative about value and options to maximize value – and that our bankers’ detailed analyses and advice were unbiased and based on reasonable and customary valuation methodologies, supporting a fairness opinion that the consideration paid to Smurfit-Stone's stockholders by Rock-Tenn was fair.
Looking back, were there steps you took during the deal process that enabled you to prevail in the litigation that followed? Any advice you would give to board members to limit their companies’ exposure?
Directors need to act in an informed, dispassionate way. Our board was thorough. We were knowledgeable about the company, all but one of us (the CEO) were independent, we were advised by experienced bankers and lawyers, and we negotiated successfully, always focused on maximizing shareholder value. ■
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