978-1285770178 Case Printout Case CPC-06-08 Part 2

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be helpful once he heard about the second proxy fight. But the Proxy

a management-friendly bidder who used Shorin’s perceived vulnerability as

an opening to make a bid. Contrary to the Stockholder Plaintiffs, I think

reasonable stockholders can come up with four when the equation 2 + 2 is

written out for them in crayon.

The deal left a Topps board comprised of seven directors who had served

Topps for many years (the “Incumbent Directors”) and the three Dissident

independent directors under the NASDAQ’s criteria. But all were close to

served not only as director but as lead outside counsel for Topps, through

his law firm Wilkie Farr & Gallagher.

2. The Eisner Negotiations

The Proxy Statement indicates that during the second proxy contest, there

suggested that the two should meet. On June 12, 2006, Shorin and

offers. The Proxy Statement does not disclose that Shorin sent out a

different public message, issuing a letter in July 2006 stating that Topps

May and June 2006, Topps received unsolicited indications of interest in a

potential transaction from two financial buyers at $9.00 to $9.75 per share

Silverstein met with Eisner and had a general discussion about the nature

agreed to stay in touch. Shorin understood Eisner to mean that he might

propose a going private transaction.

Network, to ESPN, which was a subsidiary of the Walt Disney Company, of

which Eisner was then CEO and Chairman. Greenberg remained

employed by ESPN for about a year after the sale, during which time he

had some discussions, and at least one lunch meeting, with Eisner. Eisner

Statement fairly discloses all those facts and makes it plain that Eisner was

hosted by Greenberg‘s new employer, Allen & Company, in Sun Valley,

Idaho in July 2006. At that time, Greenberg told Eisner that, in light of the

yet-unresolved proxy contest, Topps’s board was not in a position to

discuss a sale of the company. On August 3, 2006, after the proxy contest

had been settled, Eisner telephoned Greenberg to inquire again about a

from the proxy contest settlement. As part of the settlement process,

Topps formed an “Ad Hoc Committee” to explore and evaluate strategic

alternatives for Topps. The Ad Hoc Committee consisted of Greenberg,

another Incumbent Director, Allan Feder, and two of the Dissident

Directors, Brog and Ajdler. Greenberg wanted the Ad Hoc Committee to

not be an acceptable offer and Eisner inquired as to what would be an

acceptable price. Greenberg responded that in his view, $10 per share

would likely garner support among Topps’s Incumbent Directors, but that

Greenberg did not know what price would be acceptable to the newly-

elected Dissident Directors. After this conversation, Eisner expanded his

was not worth anywhere near that price level.

In addition to a potential sale of the company, the Ad Hoc Committee

considered a number of potential uses for a substantial amount of cash

that Topps had on hand (about $85 million), including a special dividend to

stockholders and a stock buyback program. The Ad Hoc Committee met

On December 22, 2006, Eisner submitted a formal indication of interest to

acquire Topps at a price of $9.24 per share, which represented a 5.7%

premium over Topps’s then-current trading price. The Topps board met to

discuss Eisner’s proposal on January 9. At that meeting, Brog and Ajdler,

the two Dissident Directors on the Ad Hoc Committee, recommended

efforts to acquire Topps if Topps commenced an auction. Greenberg and

Feder also expressed concern about the effect of a failed auction on

Topps, citing internal problems that had arisen as a result of the company’s

failed efforts a year earlier to auction off its Confectionary Business. At the

end of the meeting, the Topps board declined to begin an auction process

day exclusivity period in which to negotiate a definitive merger agreement.

The board authorized the Ad Hoc Committee to continue to negotiate the

general terms of such an agreement and an appropriate exclusivity period.

After the meeting, a letter of intent was prepared agreeing to the 30-day

exclusivity period and outlining the basic merger terms. The Ad Hoc

On January 25, the Topps board met again to consider a valuation

analysis presentation from Lehman Brothers. After that presentation, the

Incumbent Directors resisted the Dissident Directors’ request that

negotiations with Eisner cease. The Incumbent Directors voted to continue

negotiating with the goal of getting Eisner to increase the price of his bid.

conflict of interest that would prevent him from obtaining the best deal

possible for the Topps stockholders. As a result of Brog and Ajdler’s

objections, Greenberg declined the request to serve as lead director. The

board then asked Feder to serve in that role and Feder agreed to do so. In

the last week of January, Topps and Eisner executed a letter of intent,

opinion from Lehman Brothers that the merger consideration was fair, the

Topps board approved the Merger by 7-3 vote with the Dissident Directors

again dissenting.

3. The Go Shop Process And The Upper Deck Bid

Based on the disapproval of the Eisner Merger by the Dissident Directors,

now-defunct Ad Hoc Committee, and two other Incumbent Directors. The

Executive Committee was charged with fulfilling all of the responsibilities of

the Topps board, except with respect to deciding whether a competing

offer would constitute a Superior Proposal or would be likely to lead to one.

That responsibility remained with the entire board. Essentially, as Topps

make a serious offer to acquire Topps. The one potential bidder who did

continue to seriously pursue an acquisition was Upper Deck.

Upper Deck’s initial pursuit of a transaction with Topps went slowly and

Upper Deck did not make a formal proposal until April 12, 2007, two days

before the expiration of the Go Shop Period. Upper Deck’s proposal was a

assets in order to obtain approval of the transaction by antitrust or other

regulators and the insertion of an affirmative right not to be required to

divest itself of any assets in order to obtain regulatory approvals; (3)

addition of a “due diligence out,” under which Upper Deck would be

entitled to any additional information about Topps that it might request and

do so. According to the Proxy Statement, Topps was also concerned about

Upper Deck’s failure to assume the antitrust risks inherent in the

transaction.

Upper Deck initially balked at providing Topps with its financial information

and did not express a willingness to negotiate on this issue until less than

met, with several members absent, to consider Upper Deck’s proposal and

to determine whether to treat it as an Excluded Party under the Eisner

Merger Agreement, which would have allowed talks between Topps and

Upper Deck to continue past the expiration of the Go Shop Period. By a

vote of 5-1, the Topps board decided not to treat Upper Deck as an

Eisner: (1) Upper Deck’s failure to provide evidence of its ability to finance

the transaction despite Topps’s repeated efforts to confirm its ability to do

so during the final days of the Go Shop period; (2) the risk that the

transaction could be delayed or prevented by antitrust authorities and

Upper Deck’s failure to sufficiently assume that risk; and (3) the small ($12

buyer like Upper Deck, especially in light of the additional risks inherent in

a transaction between two competitors, which is much more likely to face

regulatory obstacles and because Upper Deck has not provided sufficient

evidence of its ability to finance the deal.

FN11. This rationale is worth noting. Apparently, financial buyers argue

damages caused if they fail to close, even if the reason for not closing is

based on financing, not a risk unique to a strategic buyer. This is an

interesting asymmetry, and the factors driving it seem to include both

economically rational ones and ones that are less rational.

Deck’s financial advisor and potential lender, which stated that CIBC was

“highly confident” that it could deliver financing for the proposed Upper

Deck-Topps transaction.

Topps again did not treat Upper Deck’s proposal as a Superior Proposal

under the Merger Agreement. Topps indicated in its public disclosure that

liability to $12 million under any definitive agreement.

4. The Dissident Directors Publicly Denounce The Eisner Merger

Following the execution of the Eisner Merger Agreement and the shutting

out of the Dissident Directors, the Dissidents, especially Ajdler, have been

quite vocal about their opposition to the Merger. Ajdler has formed an

E to the Topps Proxy Statement contains some of these letters, which

make clear that the Dissident Directors strongly oppose the Eisner Merger,

have serious problems with the way it was negotiated, and were not given

an opportunity to review or comment on the company’s disclosures about

it, including the Proxy Statement itself.

summary of events must-a number of facts. The Stockholder Plaintiffs and

Upper Deck allege, however, that some of the omitted facts are clearly

material and should have been included in the Proxy Statement. As

urgently, Upper Deck contends that the Proxy Statement makes materially

misleading representations of fact, which warrant correction. It would be

the moving parties have identified an omission or alleged

misrepresentation of fact that rises to a material level. I also indicate when

I believe that the moving parties have simply identified omitted facts that

are either immaterial, or already disclosed in substance.

1. The Failure To Disclose Eisner’s Assurances To Topps Management

Proxy Statement obscures the extent of Eisner’s assurances that a result

of that type will obtain if the Eisner Merger is consummated. To that point,

they note that the Proxy Statement goes out of its way to stress that the

Topps board “instructed the Company’s management not to have any

discussions with [Eisner] … [before a merger agreement was signed]

indication of interest submitted on December 22, 2006 at $9.24 per share

and his subsequent proposal at $9.75 per share, Eisner explicitly stated

that his proposal was “designed to” retain “substantially all of [Topps’s]

existing senior management and key employees.”

Nor does the Proxy Statement disclose that Eisner had continually

personally reiterate the assurances about management’s likely future that

he had conveyed to Feder.

To be direct, the Proxy Statement should have disclosed these facts. As it

currently stands, the Proxy Statement creates a misleading impression that

Topps managers have been given no assurances about their future by

The Proxy Statement has a detailed description of the financial analyses

that Lehman Brothers undertook in connection with advising Topps. The

Stockholder Plaintiffs raise several points about the valuation disclosure.

But one point is a substantial one.

In the Proxy Statement, two sets of financial projections are disclosed

arguments, that is a fair suggestion borne out by the record. The other set

of financial projections, however, was prepared to be a more conservative,

realistic projection of what Topps could achieve. That set also projected

improved performance but at more modest levels than the selling

projections.

was offering a very attractive price.

The problem that the Stockholder Plaintiffs point out is that on January 25,

2007, a mere month or so beforehand, Lehman had made a detailed

presentation to the Topps board containing similar analyses. In that

analysis, the DCF range using the aggressive case, which that

those objections, says the Proxy Statement, because they “had the goal of

increasing the price beyond $9.75 if possible.” It was only after this that

Topps agreed to an exclusivity period with Eisner. During that period,

Feder was charged with negotiating, and the Proxy Statement says he

twice tried without success to get, a price increase. By the end of

What was not modest were changes that Lehman itself made. In the

January 25 presentation, Lehman used a cost of capital between 11 % and

12% to perform its Moderate Case DCF. It premised that range on the

reasonable basis that Topps’s actual cost of capital was then 11.6%. But in

the March 1 presentation, Lehman used a range of 11.5% to 13.5% to

At oral argument, counsel for Topps explained another change that

Lehman made that is, if true, difficult to fathom as the product of rational

thinking. According to counsel, Lehman will not base a fairness opinion on

projections that have not been prepared entirely by management. In the

January 25 case, Lehman used the full five years of projections-the same

and not its own drove the DCF analysis. Of course, this method-which puts

even more weight on the terminal value calculation-does not rationally

achieve that objective. The terminal value calculation embeds hugely

important subjective judgments about the corporation’s future, including its

likely future cash flows. Notably in this regard, Lehman accompanied its

Lehman to use a lower rather than higher range of exit multiples.

FN13. The projections underlying Lehman’s January 25 cases were to a

large extent disclosed in the Proxy Statement and oddly coupled with

disclosure of Lehman’s March 1 value ranges, which used modestly

different projections. Thus, the Proxy Statement seems to contain a

that made the projections more realistic based on more current

information; indeed, the very modest nature of those changes-reducing

expected compound annual sales growth in the Moderate Case from 5.8%

to 5.6%, and in the Aggressive Case from 9.3% to 9.0%-inspires some

confidence. What is not at all clear is why these modest changes were