Mills Acquisition Co. v. MacMillan, Inc.

In this interlocutory appeal from the Court of Chancery, we review the denial of injunctive relief to Mills Acquisition Co., a Delaware corporation, and its affiliates Tendclass Limited and Maxwell Communications Corp., PLC, both United Kingdom corporations substantially controlled by Robert Maxwell. 1 Plaintiffs sought control of Macmillan, Inc. (“Macmillan” or the “company”), and moved to enjoin an asset option agreement — commonly known as a “lockup” — between Macmillan and Kohl-berg Kravis Roberts & Co. (“KKR”), an investment firm specializing in leveraged buyouts. The lockup was granted by Macmillan’s board of directors to KKR, as the purported high bidder, in an “auction” for control of Macmillan.

Although the trial court found that the conduct of the board during the auction was not “evenhanded or neutral,” it declined to enjoin the lockup agreement between KKR and Macmillan. That action had the effect of prematurely ending the auction before the board had achieved the highest price reasonably available for the company. Even though the trial court found that KKR had received improper favor in the auction, including a wrongful “tip” of Maxwell’s bid by Macmillan’s chairman of the board and chief executive officer, and that Macmillan’s board was uninformed as to such clandestine advantages, the Vice Chancellor nevertheless concluded that such misconduct neither misled Maxwell nor deterred it from submitting a prevailing bid.

Given our scope and standard of review under Levitt v. Bouvier, Del.Supr., 287 A.2d 671, 673 (1972), we find that the legal conclusions of the trial court, refusing to enjoin the KKR lockup agreement, are inconsistent with its factual findings respecting the unfairness of the bidding process. Our decision in Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., Del.Supr., 506 A.2d 173 (1986), requires the most scrupulous adherence to ordinary standards of fairness in the interest of promoting the highest values reasonably attainable for the stockholders’ benefit. When conducting an auction for the sale of corporate control, this concept of fairness must be viewed solely from the standpoint of advancing general, rather than individual, shareholder interests. Here, the record reflects breaches of the duties of loyalty and care by various corporate fiduciaries which tainted the evaluative and deliberative processes of the Macmillan board, thus adversely affecting general stockholder inter *1265 ests. With the divided loyalties that existed on the part of certain directors, and the absence of any serious oversight by the allegedly independent directors, the governing standard was one of intrinsic fairness. Weinberger v. UOP, Inc., Del.Supr., 457 A.2d 701, 710-11 (1983). The record here does not meet that rigorous test, and the Court of Chancery failed to apply it. We take it as a cardinal principle of Delaware law that such conduct of an auction for corporate control is insupportable. Accordingly, we reverse. 2

I.

The lengthy factual background and evolution of the present battle for control of Macmillan are found in earlier opinions of the trial court. See Robert M. Bass Group, Inc. v. Evans, Del.Ch., 552 A.2d 1227 (1988) (Macmillan I); Mills Acquisition Co. v. Macmillan, Inc., C.A. No. 10168, 1988 WL 108332 (October 17, 1988) (Macmillan II). However, a detailed review of certain major and other salient facts is essential to a proper understanding and analysis of the issues, and the context in which we address them.

Macmillan is a large publishing, educational and informational services company. It had approximately 27,870,000 common shares listed and traded on the New York Stock Exchange. In May, 1987, Macmillan’s chairman and chief executive officer, Edward P. Evans, and its president and chief operating officer, William F. Reilly, recognized that the company was a likely target of an unsolicited takeover bid. They began exploring various defensive measures, including a corporate restructuring of the company. The genesis of this idea was a plan undertaken by another publishing company, Harcourt Brace Jova-novich, Inc., to defeat an earlier hostile bid by Robert Maxwell in May, 1987. 3 See Macmillan I, 552 A.2d at 1229. Indeed, Macmillan’s management began exploring such a recapitalization or restructuring just one day after the public announcement of Harcourt’s plan. 4 See 552 A.2d at 1229.

As the Vice Chancellor noted in Macmillan I, for one year following the initial study of management’s proposed restructuring plans:

two central concepts remained constant. First Evans, Reilly and certain other members of management would end up owning absolute majority control of the restructured company. Second, management would acquire that majority control, not by investing new capital at prevailing market prices, but by being granted several hundred thousand restricted Macmillan shares and stock options.

Id. at 1229.

Management’s plan was to “exchange” these options and shares granted by the company into “several million shares of the recapitalized company.” See id. at 1229-30 & n. 5. In addition, a Macmillan Employee Stock Option Plan (“ESOP”) would purchase, with borrowed funds provided by the company, a large block of Macmillan shares. The then-existing independent ESOP trustee would be replaced by Evans, Reilly, Beverly C. Chell, Vice President, General Counsel, and Secretary, and John *1266 D. Limpitlaw, Vice President — Personnel and Administration. Id. at 1230. This arrangement would have given these persons voting control over all of the unallocated ESOP shares.

At a meeting held on June 11, 1987, the Macmillan board authorized the above transactions. During the pendency of Macmillan I, the directors maintained that no relationship existed between the management-proposed restructuring and the June 11 approval of the ESOP transactions along with the grant of options and restricted shares to management. In rejecting this claim the Vice Chancellor observed that “[i]f the directors were unaware of the implications of their actions for the restructuring, it can only be because management failed appropriately to disclose those implications.” Id. at 1230 n. 7. This apparent domination of the allegedly “independent” board by the financially interested members of management, coupled with the directors’ evident passivity in the face of their fiduciary duties, which so marked Macmillan I, continued unchanged throughout Macmillan II.

After the June 11 board meeting, management initiated various anti-takeover measures, including new lucrative severance contracts, known as “golden parachute” agreements, for several top executives in the event of a hostile takeover. Earlier, at the June 11 meeting, the board had approved generous five year “golden parachute” agreements for Evans and Reilly. The board also approved the adoption of a rights plan, commonly known as a “poison pill”, from which the management-controlled ESOP was exempted. Id. at 1230-31 & n. 9.

Until August, 1987, the restructuring plan contemplated a “one company” surviving entity. This concept was changed, however, to provide for the company to be split into two distinct and separately traded parts: the Information business (“Information”) and the Publishing business (“Publishing”). Id. at 1231. Many “business related” reasons were advanced by management for the two company concept. It appears, however, that the real reason for this move was to greatly enhance management’s control over the entities, thus making a hostile acquisition even more difficult. See id. at 1231 & n. 10.

As initially planned, Information would trade two classes of common stock. One class, wholly owned by management, would be entitled to ten votes per share (constituting absolute voting control). Id. at 1231. The second class would have one vote per share and would be held by the public stockholders. The management owned shares were all to be deposited in a voting trust designating Evans as the sole voting trustee. Further, Information would hold a “blocking preferred” stock in Publishing (constituting 20% of Publishing’s voting power). Id.

At the September 22,1987 board meeting the directors were informed of the new two company restructuring concept, including its anti-takeover features and management’s substantial voting and equity participation in Information. The board approved the plan without objection. 5 Id. at 1231-32.

On October 21, 1987, the Robert M. Bass Group, Inc., a Texas corporation controlled by Robert M. Bass, together with certain affiliates (hereafter collectively, “the Bass Group” or “Bass”), emerged as a potential bidder. By then, Bass had acquired approximately 7.5% of Macmillan’s common stock. Management immediately called a special board meeting on October 29, where a rather grim and uncomplimentary picture of Bass and its supposed “modus operan-di” in prior investments was painted by management. Bass was portrayed, among other things, as a “greenmailer.” Id. at 1232. At the meeting, the previously adopted poison pill was modified to reduce *1267 the “flip-in” trigger from 30% to 15%. 6 Id.

In its decisions the Macmillan board completely relied on management’s portrayal of Bass. As it turned out, and the Vice Chancellor so found in Macmillan I, management’s characterization of the Bass Group, including most if not all of the underlying “factual” data in support thereof, was “less than accurate.” Id. at 1232 & n. 15. Indeed, it was false. As the Vice Chancellor found: “[t]here is ... no evidence that Macmillan management made any effort to accurately inform the board of [the true] facts. On the present record, I must conclude (preliminarily) that management’s pejorative characterization of the Bass Group, even if honestly believed, served more to propagandize the board than to enlighten it.” 7 Id. at 1232.

As the Bass Group increased its holdings in the company, the Macmillan board’s executive committee, at the behest of management, examined two charts (initially) outlining the proposed restructuring. The first chart contemplated management’s ownership in Information at 50.6%. The second chart, prepared two days later, increased Evans, Reilly and Chell’s share to 60%. The committee studied other such charts at a later date, but according to the Vice Chancellor: “[a]ll restructuring proposals clearly contemplated that management would own an absolute majority of Information’s stock.” Id. at 1233.

At a regularly scheduled board meeting on March 22, 1988, the Macmillan directors voted to: (1) grant 130,000 more shares of restricted stock to Evans, Reilly, Chell and Charles G. McCurdy, Vice President — Corporate Finance; (2) seek shareholder approval of a “1988 stock option and incentive plan” and the issuance of “blank check” preferred stock “having disparate voting rights;” (3) increase the directors’ compensation by some 25% per year; and (4) adopt a “non-Employee Director Retirement Plan.” 8 Id.

Due to the significant financial interests of Evans, Reilly, Chell, McCurdy and other managers in the proposed restructuring, management decided in February or March to establish a “Special Committee” of the Board to serve as an “independent” evaluator of the plan. The Special Committee was hand picked by Evans, but not actually formed until the May 18, 1988 board meeting. See id. This fact is significant because the events that transpired between the time that the Special Committee was conceived and the time it was formed illuminate the actual working relationship between management and the allegedly “independent” directors. It calls into serious question the actual independence of the board in Macmillan I and II.

As the Vice Chancellor observed, starting in April, 1988, Evans and others in management interviewed, and for four weeks thereafter maintained intensive contact with, the investment banking firm of Lazard Freres & Co. (“Lazard”), which was *1268 to eventually become the Special Commit-\ssi’s financial advisor. Id. On April 14 representatives of Laiard met alone with Evans, and later with Evans, Chell and McCurdy. A few days liter, Evans, Reilly, Chell, McCurdy and Samuel Bell, a Macmillan executive, again met with Lazard. All of these meetings involved extensive discussions concerning the proposed recapitalization. Id.

Thus, the Vice Chancellor found that “[i]n total, Lazard professionals worked with management on the proposed restructuring for over 500 hours before their ‘client’, the Special Committee, formally came into existence and retained them.” Id. at 1233-34. Further, the restructuring plan that was resented to Lazard was chosen by Evans \lone — with management owning 55% of tie planned Information company. Id. at 1183.

On May 17, the daybefore the Macmillan annual stockholders’ meeting, Evans received a letter from the Bass Group offering to purchase, eonsersually, all of Macmillan’s common stock for $64 per share. The offer was left open for further negotiation. On May 18, the annud meeting was held at which the board recommended, and the shareholders approved, the previously mentioned 1988 Stock Option Plan and the “blank check” preferred stock. The Bass offer was not disclosed to the shareholders, although Bass had made the offer public in a filing with the Securities and Exchange Commission, which occurred simultaneously with the delivery of Bass’ offer to Evans. II at 1234.

The Macmillan board convened immediately after the shareholders’ meeting. Evans disclosed the Bass offer to the board. He then described the proposed restructuring, including the management group’s planned equity position in Information. Thereafter, the Special Committee was selected. 9 However, the Committee was not given any negotiating authority regarding the terms of the restructuring. Evans apparently designated himself to “negotiate” that-matter with the board.

At this May 18 meeting, the directors also amended the earlier “golden parachute” agreements; authorized a $125 million mortgage on Macmillan’s building in New York City in order to finance the contemplated restructuring; and further amended the “Retirement Plan” to include severance benefits for spouses of directors. Id. However, the board deferred discussion of the Bass proposal.

The Special Committee remained dormant for one week following its formation, and met for the first time on May 24,1988. Before its first meeting, Evans and Reilly again met with Lazard, allegedly the Special Committee’s advisor, and Wasserstein, Perella, apparently to discuss the recapitalization plan. Evans, Reilly, Chell and McCurdy attended the May 24 Special Committee meeting, at which Lazard, as financial advisor, and the law firm of Wachtell, Lipton, Rosen & Katz were formally retained, having been invited to the meeting by Evans. 10 Significantly, Evans and his management colleagues did not inform the Committee of their substantial prior discus *1269 sions with Lazard over the preceding month. 11 One of the outside directors, Thomas J. Neff, testified that if he had known of the extent of the activities between Lazard and management, it would have raised “serious doubts” concerning Lazard’s independence. Id. at 1234-1235 & n. 22. The restructuring plan, including management’s proposed 55% ownership of Information, was presented to the Committee, which then directed Lazard to “evaluate” it further, along with the Bass offer.

Concurrent with the Special Committee meeting of May 24, Evans directed McCur-dy to meet with John Scully, a Bass representative, that same day in Chicago. As the Vice Chancellor found, however, “Evans [had so] limited McCurdy’s authority as to make it a foregone conclusion that the meeting would yield no meaningful result.” Id. at 1235. In fact, the Vice Chancellor termed the meeting “little more than a charade”, Id. at 1240, since McCurdy’s only mission was to tell Scully that “Evans wanted the Bass Group to go away.” Id. at 1235. The Vice Chancellor also observed that “[management ... had no desire to negotiate. They chose to close their eyes and to treat the Bass offer as firm and unalterable. The Board and the Special Committee followed in lockstep. Neither took reasonable efforts to uncover the facts. ” Id. at 1240-41. (Emphasis added).

Notwithstanding this fruitless approach, Scully, Bass’ representative, explained the background of the prior Bass investments about which the Macmillan board' had been misinformed. Scully even offered to make other Bass representatives available to resolve these concerns. However, Scully’s offer was never accepted, and the May 24 meeting was the only time that a Macmillan representative would meet with a Bass delegate until after the final board approval of the restructuring on May 30. Id. at 1235.

At the May 27 Macmillan board meeting, McCurdy reported on his meeting with Scully. The Vice Chancellor found that *1270 “[a]t least one director developed the mis-impression from McCurdy’s report that McCurdy had tried unsuccessfully to get Scully to amplify or clarify the terms of the Bass offer.” Id.

The Special Committee met on May 28 to hear Lazard’s presentation. Evans, Reilly, Chell and McCurdy attended. Id. at 1235 n. 23. Lazard reported that management would ultimately own 39% of Information, instead of the previous 55%. This reduction occurred, ostensibly, to prevent the restructuring from being “regarded as a transfer of corporate control from the public shareholders to management.” Id. at 1235. The Vice Chancellor found, however, that: “[d]oeuments internally generated by Macmillan reported that the management group would have effective control over Information even with less than 50% of its stock.” Id. at 1242-43. In addition: “the conclusion that effective control will pass to management is consistent with the intent and historical evolution of the restructuring which, in every proposed permutation, had management owning over 50% of Information.” 12 Id. at 1243.

Macmillan’s financial advisors valued the recapitalization at $64.15 per share. La-zard valued Macmillan at $72.57 per share, on a pre-tax basis, but advised the “independent” directors that it found the restructuring, valued at $64.15 per share, to be “fair.” Lazard also recommended rejection of the $64 Bass offer because it was “inadequate.” Wasserstein, Perella valued Macmillan at between $63 and $68 per ■ share and made the same recommendations as Lazard concerning the restructuring and the Bass offer. All of these valuations will gain added significance in Macmillan II.

On the Special Committee’s recommendation, the Macmillan board adopted the restructuring and rejected the Bass offer. The committee, however, had not negotiated any aspect of the transaction with management. Id. at 1236.

On May 31, Macmillan publicly announced the May 30 approval of the restructuring. This was the first disclosure to the shareholders of Evans’ plans to significantly benefit himself and others in management at the stockholders’ expense.

The restructuring that was approved, and later preliminarily enjoined, treated the public shareholders and the management group differently. In exchange for their Macmillan shares, the public stockholders were to receive a dividend of $52.35 cash, a $4.50 debenture, a “stub share” of Publishing ($5.10) and a one-half share of Information ($2.20). The management group, and the ESOP, would not receive the cash and debenture components. Instead, they would “exchange” their restricted stock and options for restricted shares of Information, representing a 39.2% stake in that company. Id.

The Information stock received by management could not be sold, pledged, or • transferred for two years, and would not fully vest for five years. The management holders could, however, vote the shares and receive dividends. Management.would also own 3.2% of Publishing. The ESOP would own 26% of Publishing. 13 Id.

The effect of all this would increase management’s then-combined holdings of 4.5% in Macmillan to 39% in Information. Additionally, management would receive substantial cash and other benefits from the transaction. See id. at 1237 n. 28.

*1271 Following the board’s public announcement on May 31, the Bass Group made a second offer for all Macmillan stock at $73 per share. In the alternative, Bass proposed a restructuring, much like the one the board had approved, differing only in the respect that it would offer $5.65 per share more, and management would be treated the same as the public stockholders. 14

Two days after the revised offer was announced, Lazard concluded that it could furnish an ‘adequacy’ opinion that would enable the Special Committee to reject the $73 per share cash portion of Bass’ offer. They gave an oral opinion the following day, June 7, at a joint meeting of the Special Committee and the board that the Bass $73 cash offer, as distinguished from Bass’ alternative restructuring proposal, was inadequate, given Lazard’s earlier opinion that the “pre-tax break up” value of Macmillan was between $72 and $80 per share. Wasserstein, Perella expressed a similar opinion, having previously valued the company at between $66 and $80 per share. Id. at 1237-38. These valuation ranges, obviously intended to accord with management’s restructuring in Macmillan I, will assume an interesting significance in Macmillan II, when less than three months later, on August 25, these same advisors, at Evans’ behest, found Maxwell’s $80 all cash offer inadequate.

Upon the Special Committee’s recommendation, the board again rejected the revised Bass offer and reaffirmed its approval of the management restructuring. It is noteworthy that Bass’ alternative restructuring proposal was never determined to be financially inadequate or unfair by Lazard or Wasserstein, Perella. Id. at 1238.

However, after suit was filed in Macmillan I, and in an apparent effort to lessen the appearance of impropriety surrounding the restructuring, Evans, Reilly, Chell and McCurdy agreed in writing that “they would vote Information shares for a slate of nominees, a majority of which are independent directors.” Id. at 1238 n. 29. However, the Vice Chancellor noted that “the record indisputably shows that these individuals have always acted in unison, and that Reilly, Chell, and McCurdy will have strong incentives to remain on good terms with Evans, who would be their immediate supervisor and Information’s largest single stockholder.” Id. at 1245. Further, “the undertaking to elect independent directors has been carefully drafted, so that its terms would permit the management group to select directors that might not act independently of management, but would prevent the selection of directors who would be likely to act independently.” 15 Id.

On July 14, 1988, the Vice Chancellor preliminarily enjoined the Evans designed restructuring, and held that both of the revised Bass offers were “clearly superior to the restructuring.” The Court further inferred that the only real “threat” posed by the Bass offers was to the incumbency of the board “or to the management group’s expectation of garnering a 39% ownership interest in Information on extremely favorable terms.” 16 Id. at 1241 & n. 34.

*1272 Thus, Macmillan I essentially ended on July 14, 1988. However, it only set the stage for the saga of Macmillan II to begin that same day. It opened with Macmillan’s senior management holding extensive discussions with KKR in an attempt to develop defensive measures to thwart the Bass Group offer. This included a management-sponsored buyout of the company by KKR. There is nothing in the record to suggest that this was done pursuant to board action. If anything, it was Evans acting alone in his own personal interest.

Within a few hours after the Court of Chancery issued its preliminary injunction, Evans and Reilly formally authorized Macmillan’s investment advisors to explore a possible sale of the entire company. This procedure eventually identified six potential bidders. 17 That search process appears to have been motivated by two primary objectives: (1) to repel any third party suitors unacceptable to Evans and Reilly, and (2) to transfer an enhanced equity position in a restructured Macmillan to Evans and his management group. While these goals may not have constituted prima facie breaches of the duty of loyalty owed by senior management to the company and its shareholders, it is evident that such objectives undoubtedly led to the tainted process which we now confront.

On July 20, a most significant development occurred when Maxwell intervened in the Bass-Macmillan bidding contest by proposing to Evans a consensual merger between Macmillan and Maxwell at an all-cash price of $80 per share. This was $5.00 higher than any other outstanding offer for the company. 18 Maxwell further stated his intention to retain the company’s management, and additionally, to negotiate appropriate programs of executive incentives and compensation.

Macmillan did not respond to Maxwell’s overture for five weeks. Instead, during this period, Macmillan’s management intensified their discussions with KKR concerning a buyout in which senior management, particularly Evans and Reilly, would have a substantial ownership interest in the new company. Upon execution of a confidentiality agreement, KKR was given detailed internal, non-public, financial information of Macmillan, culminating in a series of formal “due diligence” presentations to KKR representatives by Macmillan senior management on August 4 and 5, 1988.

On August 12, 1988, after more than three weeks of silence from the company, Maxwell made an $80 per share, all-cash tender offer for Macmillan, conditioned solely upon receiving the same nonpublic information which Macmillan had given to KKR three weeks earlier. Additionally, Maxwell filed this action in the Court of Chancery seeking a declaration that the Delaware Takeover statute, 8 Del. C. § 203, was inapplicable to the tender offer. 19

Later that day, Evans received a letter from Maxwell confirming that he had initiated a tender offer, but also reiterating his desire to reach a friendly accord with Macmillan’s management. Alternatively, Maxwell offered to purchase Information from the company for $1.1 billion. Significantly, no Macmillan representative ever attempted to negotiate with Maxwell on any of these matters. Notwithstanding the fact that on May 30 both Wasserstein, Perella and Lazard had given opinions that the management restructuring, with a value of $64.15, was fair, and on June 7 had advised *1273 the board that the company had a maximum breakup value of $80 per share, Was-serstein, Perella and Lazard issued new opinions on August 25 that $80 was unfair and inadequate. Accordingly, the Maxwell offer was rejected by the Macmillan board.

On August 30 a meeting was arranged with Maxwell at Evans’ request at which Maxwell executed a confidentiality agreement, and was furnished with some, but not all, of the confidential financial information that KKR had received. At this meeting, Evans told Robert Maxwell that he was an unwelcome bidder for the whole company, but that a sale to Maxwell of up to $1 billion of Macmillan’s assets would be considered. Undeterred, Maxwell indicated his intent and ability to prevail in an auction for the company, as “nobody could afford” to top a Maxwell bid due to the operational economies and synergies available through a merger of Maxwell’s companies with Macmillan.

Nonetheless, on September 6, 1988, representatives of Macmillan and KKR met to negotiate and finalize KKR’s buyout of the company. In this transaction Macmillan senior management would receive up to 20% ownership in the newly formed company. During this meeting, Evans and his senior managers suggested that they would endorse the concept and structure of the buyout to the board of directors, even though KKR had not yet disclosed to Evans and his group the amount of its bid. With this extraordinary commitment, KKR indicated that it would submit a firm offer by the end of the week — September 9. Following this meeting with KKR, Macmillan’s financial advisors were instructed by Evans to notify the six remaining potential bidders, during September 7 and 8, that “the process seems to be coming to a close” and that any bids for Macmillan were due by Friday afternoon, September 9. It is particularly noteworthy that Maxwell was given less than 24 hours to prepare its bid, not having received this notification until the night of September 8.

In a September 8 meeting with Robert Maxwell and his representatives, Evans announced that the company s management planned to recommend a management-KKR leveraged buyout to the directors of Macmillan, and that he would not consider Maxwell’s outstanding offer despite Maxwell’s stated claim that he would pay “top dollar” for the entire company. Evans then declared that now he would only discuss the possible sale of up to $750 million worth of assets to Maxwell in order to facilitate this buyout. Furthermore, Evans flatly told Maxwell that senior management would leave the company if any other bidder prevailed over the management sponsored buyout offer. Following this meeting, Robert Maxwell expressed his concern to Evans that no lockup or other “break up” arrangements should be made until Macmillan had properly considered his proposal. Additionally, he volunteered to either negotiate his offering price or to purchase Information for $1.4 billion, subject to a minimal due diligence investigation.

On the morning of September 9, Maxwell representatives were granted a limited due diligence review with respect to certain divisions of the company. However, during these sessions Macmillan provided little additional material information to Maxwell. Indeed, throughout the bidding process, and despite its repeated requests Maxwell was not given complete information until September 25 — almost two months after such data had been furnished to KKR.

In the late afternoon of September 9, Evans received another letter from Robert Maxwell, offering to increase his all-cash bid for the company to $84 per share. This revised offer was conditioned solely upon Maxwell receiving a clear understanding of which managers would be leaving Macmillan upon his acquisition of the company. However, Maxwell ended this correspondence with the statement:

If you have a financed binding alternative proposal which will generate a greater present value for shareholders, I will withdraw my bid.

In their deliberations that weekend, Macmillan’s advisors inferred from this remark *1274 that Maxwell was unwilling to bid over $84 per share for the company.

By 5:30 p.m. on September 9, two bidders remained in the auction: Maxwell, by virtue of his written $84 all-cash offer, and KKR, which had submitted only an oral bid to Macmillan’s advisors. However, Macmillan representatives continued to negotiate overnight with KKR until an offer was reduced to writing on the next day, September 10, despite the bid deadline previously mandated by the company. In their written bid, KKR offered to acquire 94% of Macmillan’s shares through a management participation, highly-leveraged, two-tier, transaction, with a “face value” of $85 per share and payable in a mix of cash and subordinated debt securities. Additionally, this offer was strictly conditioned upon the payment of KKR’s expenses and an additional $29.3 million “break up” fee if a merger agreement between KKR and Macmillan was terminated by virtue of a higher bid for the company.

On September 10 and 11, Macmillan’s directors met to consider Maxwell’s all-cash $84 bid and KKR’s blended bid of $85. Although Macmillan’s financial advisors discounted KKR’s offer at $84.76 per share, they nevertheless formally opined that the KKR offer was both higher than Maxwell’s bid and was fair to Macmillan shareholders from a financial point of view. The Macmillan board, inferring from Maxwell’s September 9 letter that he would not top a bid higher than $84 per share, approved the KKR offer and agreed to recommend KKR’s offer to the shareholders. The Macmillan-KKR merger agreement was publicly announced the following day, accompanied by Macmillan’s affirmation that it would take all action necessary to insure the inapplicability of its shareholder rights plan, i.e., “poison pill,” to the KKR offer.

Subsequently, on September 15 — and in seeming contradiction to his September 9 statement that he would not top his previous offer — Maxwell announced that he was increasing his all-cash offer to $86.60 per share. Additionally, Maxwell asked the Court of Chancery to enjoin the operation of Macmillan’s “poison pill” rights plan against the revised Maxwell offer.

After considering the increased Maxwell bid, on September 22 the Macmillan board withdrew its recommendation of the KKR offer to shareholders, and declared its willingness to consider higher bids for the company. The board therefore instructed its investment advisors to attempt to solicit higher bids from Maxwell, KKR or any other potential bidders, in an effort to maximize the company’s value for shareholders. Additionally, the board directed that the shareholder rights plan be applied to all bidders in order to enhance the auction process.

On September 23, 1988, Wasserstein, Perella began establishing the procedures for submission of the Maxwell and KKR final bids. In partial deference to Maxwell’s vocal belief that the auction would be “rigged” in KKR’s favor, and in order to promote an appearance of fairness in the bidding process, a “script” was developed which would be read over the telephone to both KKR and Maxwell. According to this script, both bidders were called and advised on September 24 that “the process appears to be drawing to a close” and that any final amended bids were due by 5:30 p.m., September 26.

After receiving this information on September 24, Robert Pirie, Maxwell’s financial advisor, once again expressed concern to Macmillan that KKR would be favored in the auction process, and would receive “break up” fees or a lockup agreement without Maxwell first being allowed to increase its bid. Perhaps as a result of this concern, Robert Maxwell stated unequivocally in a September 25 letter to Macmillan that he was prepared, if necessary, to exceed a higher competing offer from KKR. 20

*1275 KKR had further discussions with Macmillan’s advisors during the afternoon of September 25. One of the primary topics was an agreement that KKR’s amended offer would include a “no-shop” clause. KKR’s stated interpretation of this “blanket prohibition” was that disclosure by Macmillan of any element of KKR’s bid, including price, would automatically revoke the offer. 21 Macmillan’s advisors thus knew that KKR would insist upon conditions that could hinder maximization of the auction process to the detriment of Macmillan’s shareholders.

On September 26, the Court of Chancery heard Maxwell’s application for a temporary restraining order, seeking to prevent Macmillan from acting unfairly in the auction to be held later that evening. Although the Vice Chancellor observed that the auction process should be fair, he denied Maxwell’s motion, based in part upon Macmillan’s representation that there would be “no irrevocable scrambling of transactions” in the auction.

By the auction deadline on that evening, both Maxwell and KKR had submitted bids. Maxwell made an all-cash offer, consistent with its previous bids, of $89 per share. Like its past bids, KKR submitted another “blended”, front-loaded offer of $89.50 per share, consisting of $82 in cash and the balance in subordinated securities. However, this nominally higher KKR bid was subject to three conditions effectively designed to end the auction: (1) imposition of the “no-shop” rule, (2) the grant to KKR of a lockup option to purchase eight Macmillan subsidiaries for $950 million, and (3) the execution of a definitive merger agreement by 12:00 noon, the following day, September 27.

While Macmillan’s financial analysts considered the value of KKR’s bid to be slightly higher, they decided that the bids were too close to permit the recommendation of either offer, and that the auction should therefore continue. However, shortly after the bids were received, Evans and Reilly, who were present in the Macmillan offices at the time, asked unidentified financial advisors about the status of the auction process. Inexplicably, these advisors told Evans and Reilly that both bids had been received, informed them of the respective price and forms of the bids, and stated that the financial advisors were unable to recommend either bid to the board. 22

Thereafter, in the presence of Reilly and Charles J. Queenan, a Pittsburgh lawyer previously mentioned in note 10, supra., but who did not appear before us in this action, Evans telephoned a KKR representative and “tipped” Maxwell’s bid to him. In this call, Evans informed KKR that Maxwell had offered “$89, all cash” for the company and that the respective bids were considered “a little close.” After a few minutes of conversation, the KKR representative realized the impropriety of the call and abruptly terminated it. 23

Meanwhile, Macmillan’s financial advis-ors, apparently ignorant of Evans’ “tip” to KKR, began developing procedures for a supplemental round of bidding. Bruce Wasserstein, the leading financial advisor to Macmillan management, who primarily orchestrated the auction process, developed a second “script” which was to be read over the telephone to both bidders. It stated:

We are not in a position at this time to recommend any bid. If you would like to *1276 increase your bid price, let us know by 10:00 p.m.

At approximately 8:15 p.m., Wasserstein first read this prepared text to a Maxwell representative, and then relayed the same message to KKR. However, the actual document in evidence, which purports to be the “script”, significantly varies in what was said to KKR. Allegedly in response to questions from KKR, Wasserstein and other financial advisors impressed upon KKR “the need to go as high as [KKR] could go” in terms of price. Additionally, the Was-serstein “script” discloses the further statement:

To KKR: Focus on price but be advised that we do not want to give a lockup. If we granted a lockup, we would need: (1) a significant gap in your bid over the competing bid; (2) a smaller group of assets to be bought; and (3) a higher price for the assets to be bought.

At approximately 10:00 p.m., near the auction deadline of midnight, Pirie on behalf of Maxwell telephoned Wasserstein to inquire whether Macmillan had received a bid higher than the Maxwell offer. During the call, Pirie flatly stated that upon being informed that a higher bid had been received by Macmillan, Maxwell would promptly notify the company whether it would increase its standing offer. Pirie also said that if Maxwell had already submitted the highest bid for the company, he would not “bid against himself” by increasing his offer.

While Wasserstein could reasonably infer from this message that Maxwell intended to top any KKR offer, it is clear that Pirie wanted to know whether KKR had in fact submitted a higher bid. Wasserstein claims to have believed that such a rev