In approving the settlement, the Delaware Chancery Court found that the settlement’s modification to the terms of the transaction as well as defendants’ agreement to withdraw a shareholder rights plan, or “poison pill,” provided substantial benefits to Safeway stockholders that it valued at approximately $230 million.
Safeway, the second largest grocery chain in the United States, announced on March 6, 2014, that it had entered into a definitive agreement to be acquired by Cerberus for $32.50 per share in cash and the distribution of two contingent value rights (“CVRs”). These CVRs entitled the holders to the pro rata proceeds from the future sales of certain Safeway assets that Cerberus did not want to acquire. Specifically, the two CVRs related to Safeway’s 49% minority interest in Mexican grocery chain Casa Ley and certain real estate assets held by Safeway subsidiary Property Development Centers (“PDC”).
However, the CVRs had numerous terms that rendered their value highly questionable. For example, the Casa Ley CVR provided for a four year term to sell Safeway’s Casa Ley interest after which time there would be an appraisal of the “fair market value” of the interest, which would then be distributed to holders of the CVR. By definition “fair market value” would incorporate substantial discounts because of Safeway’s minority interest in Casa Ley, which was majority owned by a single family in Mexico. Additionally, the PDC CVR carried only a two-year sales term after which time any properties that had not been sold would revert back to Safeway and Cerberus, and PDC CVR holders would receive nothing for those assets.
Also, in connection with the transaction, Safeway purported to engage in a post-announcement shopping process in an attempt to generate a higher acquisition offer for the Company. However, the Safeway Board of Directors (the “Board”) continued to maintain a shareholder rights plan that they had adopted in 2013 in response to agitation by an activist investor. The shareholder rights plan had the effect of diluting any stockholder that acquired more than 10% of the Company by permitting all other stockholders to acquire Safeway shares of stock at a discounted value. Cerberus was exempted from the poison pill, but any competing bidder had to secure permission from the Board to make an offer to acquire the Company rather than being able to make an acquisition offer directly to Safeway stockholders. The poison pill would therefore discourage competing bidders from making a superior offer to acquire the Company.
Considering the speculative terms of the CVRs and the prohibitive effects of the poison pill on a third-party bidder making an acquisition offer, Kessler Topaz filed class action litigation on behalf of Oklahoma Firefighters’ Pension and Retirement System as a representative for the class of all Safeway stockholders.
Kessler Topaz was appointed as Co-Lead Counsel by the Court, and immediately thereafter engaged in expedited document and deposition discovery. During this discovery, Kessler Topaz uncovered certain conflicts of interest between the Company’s financial advisor Goldman Sachs & Co. and Cerberus, and that Safeway’s CEO had been promised early on in negotiations that he would be CEO of the combined company, as well as information concerning the Company’s shopping process and the Company’s negotiations with Cerberus and other potential acquirers.
Kessler Topaz then moved to enjoin the transaction, and an injunction hearing was scheduled before the Court for July 11, 2014. However, in the midst of briefing the motion for preliminary injunction, the parties entered into hard-fought negotiations concerning a possible settlement of the litigation. Kessler Topaz refused to settle the litigation without substantive modifications to the CVRs that would create real value for Safeway stockholders and the elimination of the poison pill to give a third-party the opportunity to make an acquisition offer for the Company.
In the end, after weeks of negotiations, the defendants agreed to withdraw the poison pill and to make substantial modifications to the CVRs. Specifically, the settlement provided for a reduction in the sales period of the Casa Ley CVR from four years to three years after which an appraisal of the “fair value” rather than “fair market value” would occur. This change ensured that substantial discounts for Safeway’s minority interest in Casa Ley and the marketability of that interest would not be applied, increasing the appraisal value by tens of millions of dollars. The settlement also required that Safeway undertake a similar appraisal process for any real estate assets not sold during the two year sales period for PDC, so that no assets would revert to Safeway and Cerberus if they were not sold during the sales period.
At a hearing on September 17, 2014, the Court approved the settlement, stating that it provided “meaningful” and “material” improvements to the CVRs that “together add up to north of $160 million” in value to Safeway stockholders. The Court also praised the settlement for terminating the poison pill, noting that: “The removal of the stockholder rights plan, in a transaction like this with an $8 billion transaction value, although it is contingent value represented by a potential for a topping bid, it still comes up to a meaningful number, in the vicinity of $70 million” in value to Safeway stockholders.
Kessler Topaz is very proud of this settlement, because it eliminated the defendants’ ability to manipulate the process and ensured that Safeway stockholders will get real value for their CVRs.