Important Delaware decision

Wayne County Employees v. Corti. The Court of Chancery has confirmed that judicial review in the corporate sales context is limited to the boards' "decision making process," not to the substance of what the board decided.

Wayne County Employees' Retirement System, the pension fund for the named Michigan county (which includes the city of Detroit) was invested in Activism in 2007, when that company, a video game producer, developer of Guitar Hero and Call of Duty, agreed to combine with Vivendi Games, of World of Warcraft fame. Both W of W and Guitar Hero have inspired memorable South Park episodes, but I suppose that is neither here nor there, legally. Sigh.

To simplify just a bit: Activism agreed to sell itself to Vivendi, and the pension fund managers in Michigan didn't think they as shareholders were were getting a very good deal. In the usual phrasing, they objected that the shareholders weren't getting a "control premium," and tha the failure to insist on one in negotiations was a breach of their duty of loyalty. Nor (since shareholders had to vote on the combination) did they believe all the crucial information about the deal had been disclosed prior to that vote.

The first-named defendant is Robert Corti, one of the members of the board of directors.

The Court dismissed all of the counts of the complaint. It dismissed the substantive (control-premium related) counts because there is no rule of law requiring a premium for a change of control, and making that a test for satisfaction of the duty of loyalty.

The court's objection to the process-based claim of the same complaint apparently was that the allegedly undisclosed facts were not material.

"Materiality is the essence of a successful disclosure claim, and
plaintiff has failed to demonstrate how any of the alleged omissions
would significantly alter the total mix of information that is already
available in the nearly 300-page definitive proxy released by the
Company."

So Delaware once again polishes its reputation as the great management-friendly state. I think there are counter-pressures in existence that will over time weaken Delaware's dominance, but IMHO this decision shows its institutionalized determination to hang onto it.

What's a "scroll compressor"?

Tecumseh Products, a Michigan-based manufacturer of compressors for heat pumps and refrigeration products, especially for the commercial and industrial markets, is seeking to put a chill into a bid for control by the Herrick Foundation. The matter will come to a head at a special meeting on November 21.

The proxy advisory firm Glass Lewis has come to Tecumseh's aid with a report that says among much else: “We see no reason to believe that the replacement of current directors with the [Herrick Foundation] nominees would provide more meaningful returns to shareholders than management’s current strategy.”

Glass Lewis praised the company's improvements in "operational performance," its recent asset sales, and its cost reduction efforts.

This proxy fight has a nearly two-year time line. It was in February 2007 that Herrick informed Tecumseh that it would be nominating three candidates for director. This was a bid for control, since the board has only five seats.

Tecumseh replied by expanding its board to seven seats. After some back-and-forth over the following weeks, the parties reached a one-year standstill agreement in April. This agreement left Herrick with two of the seven seats.

So in the spring of this year, that agreement came to its end and the back-and-forth manuveuring resumed. In April 2008, the Tecumseh board amended the company by-laws to make it very difficult for shareholders to call a special meeting. Herrick sued.

In August,the circuit court in Lenawee County, Michigan, ordered a special meeting for November 21. The purpose of the meeting is to consider the removal of two directors and the election of new directors to fill the vacancy if removal is approved. The two directors that Herrick has targeted for removal are Tecumseh's longest-serving directors, Peter M. Banks and David M. Risley.

Obviously, if Herrick manages to replace Messrs Banks and Risley with two directors more favorable to itself, its share of the seven member board rises from two seats to a majority four.

An intriguing but rather isolated line in Herrick's proxy materials says, "The industry trend is toward the use of scroll compressors, which competitors have had for some time, but Tecumseh is in the early stages of offering."

What's a scroll compressor and how does it differ from the sort of thing Tecumseh does offer? A homework assignment!