Another 'Road Map' Direction from Delaware Chancery to Management Buyout Sponsors

Joseph W. Bartlett, Special Counsel, McCarter & English, LLP

The lesson of Vice Chancellor Strine's opinion in Netsmart Technologies Inc.[1] is loud and clear. Even if management and the board follow the Delaware 'road map' cases outlining the procedures established to meet the Revlon duties, once management has proposed a buyout of a public company, extra effort is required to make sure the transaction is not viewed as an inside trade and vulnerable to the usual complaints . fiduciary duties; unfair; etc.[2]

In the Netsmart transaction, an independent board was in charge of the procedure, and an auction was conducted with the assistance of an investment bank selected by the independent directors. Once the agreement was signed with the financial buyer, Allied Management, the window shop provision allowed the company to negotiate and accept unsolicited offers from investors willing to pay more. Judge Strine, however, deeming the transaction small enough that it may have escaped the radar of potential strategic investors required that the board proceed with an auction aimed at strategic investors so that the Revlon duty was satisfied in that all possible players were on notice of the pending trade.

Again, Delaware is defining the road map: if you have a management buyout on deck, you constitute the committee of independent directors; you hire an investment banker; you conduct an auction; and you make sure that the auction invitation is circulated amongst all the known potential strategic investors. Only then one can file a pleading in Delaware Chancery Court that 100 percent of the precincts have been canvassed.

[1] In Re Netsmart Technologies, Inc. ) Shareholders Litigation. C.A. No. 2563-VCS. Opini¢n. Date Submitted: March 6, 2007. Date Decided: March 14, 2007

[2] See Rowe, " Delaware Court of Chancery Addresses Defects in Board Process Approving Sale to Private Equity Buyer," Wachtell Lipton Rosen & Katz Client Memorandum, March 15, 2007:

" . [t]he Court found that the committee "proceeded in an appropriately price-driven manner," and rejected the argument that management had favored on bidder over another.

Despite these findings and despite the typicality of the process, the Court ruled that the Netsmart board erred by contacting only private-equity buyers (who all offered management an equity stake, as strategic buyers would presumably not have). The Court found that the board had no informational basis to conclude that strategic buyers would have had no interest in buying the company, and thus had failed in its duty to run a process reasonably designed to achieve the highest price. The opinion rejects the argument that a "window shop" provision was sufficient to elicit post-signing bids from strategic buyers, given that Netsmart was a "micro-cap" company. Accordingly, "the board's failure to engage in any logical efforts to examine the universe of possible strategic buyers and to identify a select group for targeted sales overtures was unreasonable and a breach of their Revlon duties.

Joseph W. Bartlett, Special Counsel,

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