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

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subject Pages 17
subject Words 4592
subject Authors Roger LeRoy Miller

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page-pf1
be helpful once he heard about the second proxy fight. But the Proxy
page-pf2
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
page-pf3
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.
page-pf4
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
page-pf5
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
page-pf6
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
page-pf7
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
page-pf8
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
page-pf9
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
page-pfa
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
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

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