Lock-Up in Limbo

Tyson's Fight for Holly Farms

You win a preliminary injunction against a crown jewel lockup that your target has granted to its white knight. You celebrate your victory. You expect that the other side will ask the court either for a trial on the issue or an appeal to a higher court. They'll want to get the preliminary injunction overturned so that they can enforce their rights under the asset option agreement. You're hoping the judge who granted the injunction, or the higher court, will support your cause. In either case, you expect a final adjudication on the merits. But what do you do if they don't appeal? You're stuck.

This happened in the battle between Tyson Foods and ConAgra for Holly Farms.

It is the spring of 1989. The fax machine hums to life at the offices of Wachtell, Lipton, Rosen & Katz, then at 299 Park Avenue. It is just minutes before the 5 p.m. deadline for offers to be submitted for Holly Farms Corporation. ConAgra is sending in its bid aimed at clinching its seven-month acrimonious fight against Tyson Foods for control of Holly Farms. Two pages emerge from the fax machine, with 31 pages to follow. Then--nothing. ConAgra's chairman, Charles Harper, has abruptly cut off the transmission. The fax machine comes alive again an hour later, this time disgorging the full text of the offer. The target's team has no way of knowing what has happened.

Harper and his rival Donald Tyson were in the midst of a telephone slanging match. The two sides had agreed that Tyson would pay ConAgra $50 million to withdraw from the fight, leaving Tyson with the target. The Holly Farms board and their advisors at Wachtell were waiting for final bids in the third auction for the company. ConAgra was not going to make an offer this time and planned on walking away with its $50 million instead. But Harper decided to throw in another bid when, his side says, Tyson cut the $50 million down to $5.5 million, roughly equivalent to ConAgra's expenses, based on advice from Tyson's lawyers at Skadden. After two pages had gone through, Harper got a phone call from Tyson putting the $50 million back on the table, so Harper ended the fax. He asked Tyson to indemnify ConAgra for any liability that might ensue from the two-page transmission. When Tyson refused, the ConAgra chairman sent in his full bid to the Wachtell offices.

The Tyson group maintains that payment of the full $50 million was not in dispute. It was ConAgra, they say, who demanded half of the $50 million settlement before Tyson closed its deal for Holly Farms. There is no dispute over the fact that it would be another month, and another $113 million, plus the $50 million settlement, for a total of $1.45 billion, before Tyson could declare victory.

The Lock-Up
ConAgra had always been the favored bidder. Harper and Holly Farms CEO R. Lee Taylor II first explored the possibility of a stock swap in the spring of 1988. Harper wanted a crown-jewel lockup but before the matter could come to a head, the Holly Farms board decided to stay independent and the talks ended. Then, after the board rejected Tyson's initial approach, as well as his $49 per share bear-hug letter in October, and then recommended that shareholders reject his $52-per-share tender offer, ConAgra reemerged as a white knight.

In mid-November 1988, the nine-member target board and around a dozen representatives from Wachtell and Morgan Stanley, Holly Farms's investment banker, gathered in a conference room at Wachtell's office to examine the options. The meeting lasted into the early hours of the next day. At this first auction, the target had two bids before it: Tyson's all-cash tender offer that had been raised to $54 per share, and ConAgra's stock-swap proposal valued at $57.75 per share.

The target board had four choices, recalls one advisor present at the meeting: it could approve Tyson's all-cash tender offer valued at around $1.08 billion; it could approve ConAgra's stock-swap proposal under which Holly Farms shareholders would receive between 1.8 and 2 ConAgra shares for each of Holly Farms's 20 million outstanding shares, a deal valued at $1.16 billion; it could recommend that the shareholders approve a leveraged recapitalization valued by Morgan Stanley at between $56 and $57 per share, for a total of $1.13 billion; or it could do nothing.

The target board turned to ConAgra as its white knight. The two sides signed a merger agreement that would determine the future course of the takeover fight. The contract had no fiduciary out clause, which permits a target to rescind the agreement in favor of a higher offer. The target agreed to a $15-million termination fee and reimbursement of expenses. But most importantly, Holly Farms granted ConAgra a crown-jewel lockup that particularly infuriated Tyson. Should a majority of Holly Farms voting stock be acquired by a third party, ConAgra would have the right to buy a key subsidiary and two chicken-processing plants for $425 million.

Holly Farms and its advisors said that Tyson had missed one of several tantalizing chances to capture its prey. Had Tyson only raised its offer to $57 in cash at this point, which it later did, target advisors said at the time that Holly Farms would have had little choice but to acquiesce. "They would have had the company and we would never have done the lockup," a senior investment banker advising the target recalls. Said David McDonald, then a Wachtell partner on the target's side: "The lesson is that a strategic bidder should put its best foot forward immediately. Nickel-and-dime bidding is a false economy."

But Tyson and its team insisted not only that they had no way of knowing that another bidder had joined the November 16 auction but also that they were deliberately misled into thinking that they were the only contender and that to raise their offer would only mean a bid against themselves. Said Jonathan Lerner, a partner at Skadden who helped advise Tyson: "All [Holly Farms] had to do was pick up the phone and tell us we should bid higher and we would have bid our $57. But why should we do that when they are implying that to do so would mean bidding against ourselves, when they never said the company was for sale nor that there was another bidder?"

The Preliminary Injunction
Tyson raced to the courthouse in Wilmington and asked for a preliminary injunction against the crown-jewel lockup. Vice-Chancellor Maurice Hartnett granted their request and reprimanded Holly Farms for the way it conducted the auction. In his December 30 opinion, he wrote: "[T]he Board refused to tell Tyson Foods, in the face of direct questioning from it, whether Holly Farms was to be sold. Nor did Tyson Foods's numerous inquiries as to the adequacy of its $54 proposal receive any meaningful response, let alone any real encouragement to submit an improved bid. The record also is undisputed that Tyson Foods was prepared to make a higher bid that evening." He found that Holly Farms had clearly sided with ConAgra because of that bidder's avowed intention to keep the target intact. The vice-chancellor issued a preliminary injunction against the expense reimbursement and termination fee provisions, and the lockup itself.

Tyson then waited for ConAgra and Holly Farms to appeal the decision. But they did not. This was on the advice of two Delaware lawyers counseling the target, Lawrence Hamermesh, now a professor at Widener University School of Law, and Kenneth Nachbar, both then partners at Morris, Nichols, Arsht & Tunnel. Recalls Hamermesh: "It would have been the conventional thing to do--appeal and get a final adjudication. But we said if they did not have the blessing of the Supreme Court, they would never proceed. Let them twist. So [Holly Farms] basically said to Tyson: 'You've got your injunction; you got what you wanted; now go ahead and buy through it.' "

For the rest of the fight, there would be no final ruling on the defense tactic. "Without a final adjudication of the legality of the lockup, it was far too great a risk to just go ahead and buy through it. Our bank lenders would not let us do it," one Skadden attorney maintained at the time.

Holly Farms, meanwhile, with the vice-chancellor's criticisms of its first auction spurring it on, decided it had no choice but to hold another auction. This second round of bidding was held on January 18 and 19, 1989. This time, ConAgra simply resubmitted its November merger agreement and lockup. Tyson offered $63.50 per share and by 4 p.m. on January 19 the two sides agreed that Holly Farms would be sold to Tyson at that price. Harper and Don Tyson left the details to their lawyers.

At 8:30 a.m. the next morning, the target board gathered again on the 29th floor of Wachtell's offices. Two problems remained from the lawyers' negotiations the night before: Holly Farms wanted Tyson to indemnify target directors for any liability that might arise from a breach of the merger agreement with ConAgra; and the target demanded that Tyson Foods raise its floor price from $52 per share, set in November in return for access to confidential information in connection with the first auction, to the agreed purchase price of $63.50. Said one Holly Farms attorney: "We would have looked like village idiots if we had agreed to let Tyson Foods have the company for $63.50 and then, after ConAgra had walked, Tyson dropped its price."

Skadden lawyers pointed out that the proposed merger agreement did not allow Tyson to change the purchase price, but it was precisely such a document that Holly Farms was trying to find a way to avoid signing lest it breach the existing contract with ConAgra. Tyson Foods was also exceedingly skittish about the possibility of incurring massive liability for any alleged interference with the existing agreement. Skadden's Michael Schell said: "That was a roadmap to Texaco," referring to the November 1985 Texas state court decision in which Texaco Inc. was found liable for disrupting a handshake agreement between Pennzoil Company and Getty Petroleum. "Here, there was a signed merger agreement," one Tyson lawyer says. "We could not give them that sort of blank check."

But how to proceed? Advisors were still trying to find a way to sidestep the ConAgra merger agreement. By this time, Wachtell and Skadden lawyers had narrowed their options down to two: a shareholder referendum on a Tyson Foods offer recommended by the target board; or foiling the ConAgra agreement by simply failing to fulfill certain of its conditions. One solution would be a full trial in Delaware that it was hoped would end up declaring that lockup illegal, replacing the ruling that merely held it in abeyance. Recalls one Tyson Foods lawyer: "We knew if we could get rid of that asset option that the company would be ours. So, from January on, we were begging him to hold a trial."

Vice-Chancellor Hartnett was in a difficult position. The Delaware Supreme Court had recently overruled him in Stroud v. Milliken Enterprises, Inc. In that case, which involved the legality of proposals management was considering putting to a shareholder vote, the Supreme Court cautioned the Chancery Court against issuing opinions when the parties were not committed to a course of action, and therefore when the issues were not ripe for adjudication.

Says Professor Hamermesh: "There is always a question with a preliminary injunction about the ripeness of the issue. In many respects, a motion for a preliminary injunction is a request for an advisory opinion. This is not an instance where you're asking the court to stop someone from taking an action. There is a somewhat metaphysical quality to a preliminary injunction. You're not saying, 'Don't take this action.' You're saying, 'Don't enforce your rights under this agreement'--that is far more abstract. In this case, Hartnett may well have been more skittish since he was the one who had had his wrist slapped in Stroud."

Limbo
With the target's shareholder meeting rapidly approaching, the Tyson lawyers begged the vice-chancellor to enjoin the vote. Vice-Chancellor Hartnett refused to do so, but he did say that he would block a merger with ConAgra should the shareholders approve it until he made a final decision on the validity of the lockup.

On April 14, Holly Farms owners turned down the ConAgra deal. Tyson Foods made no further bid. All was silent. The target was in play with no current offers on the table. Finally, the vice-chancellor agreed to hold an expedited trial on the lockup. Said one Skadden litigator: "By that time, the lockup issue was more than ripe. It was rotten." Lawyers from Skadden and Wachtell and from Omaha's McGrath, North, Mullin & Kratz, counsel to ConAgra, came together on Friday, May 12 at Skadden's offices in Wilmington. They agreed to submit a joint request to the vice-chancellor for a June 1 trial date.

Hours later, at 6 p.m., however, Holly Farms announced its third auction and said it would be held over the weekend. The Tyson side remembers this with some annoyance. "This was typical," recalls one lawyer. "Every time we submitted a bid or it looked like we were closing in, they'd hold an auction. Every time ConAgra came close, they signed an agreement." The target's team relented somewhat, and agreed to postpone the auction for one week. Tyson again turned to the vice-chancellor, asking him to enjoin the third auction. The vice-chancellor showed some sympathy, again chastising Holly Farms for its favoritism, but he refused to issue an injunction. The only harm Tyson Foods could show, according to the vice-chancellor, was the necessity of a return to court to block any merger agreement that might result from a bid other than its own.

ConAgra and Tyson continued to argue over the proposed $50 million settlement and the talks again came to a halt over the issue of indemnification for the two-page truncated offer submitted to Wachtell's offices. Tyson did not submit a bid at the third auction, and again Holly Farms accepted ConAgra's offer, this time a stock swap set at 2.1 ConAgra shares, valued at between $66 and $67 per share, for a total of around $1.32 billion. And, again, Tyson Foods asked the vice-chancellor to enjoin the latest Holly Farms and ConAgra merger agreement and, again, the court refused to step in. All Tyson had to do, Hartnett declared, was raise its own offer. This, Tyson did, bringing its tender offer up to $70 per share, or $1.45 billion, and agreeing to pay ConAgra its $50-million settlement fee.

Said Warren Stephens, president of Little Rock, Arkansas-based Stephens Inc., Tyson Foods's investment advisor: "This was an impossible deal."

Much of the frustration felt by Tyson, and much of the credit for the greatly increased price, can go to the lockup and to the fact that the target did not seek a final adjudication of its validity. Says one lawyer on the Holly Farms side: "They were mightily pissed off."

MA