Mills Acquisition Company v. Macmillan, Inc.
Facts
After Macmillan was put up for sale, senior management, especially Evans and Reilly, pursued a management-backed KKR transaction in which management would receive a substantial equity interest, while the board largely delegated the auction's design and execution to advisors selected through management and provided little oversight. Maxwell made repeated higher or negotiable all-cash offers, but Macmillan management resisted negotiating with Maxwell, gave KKR earlier and fuller access to nonpublic information, imposed short deadlines on Maxwell, and treated KKR more favorably throughout the process. During the final auction, Evans wrongfully tipped Maxwell's bid to KKR, and Macmillan's lead advisor gave KKR additional guidance about how to revise its bid and lockup terms, while Maxwell was left under the mistaken belief that it was already the high bidder. The board, unaware of these clandestine advantages and believing the auction had been conducted on a level playing field, approved KKR's marginally higher blended bid and granted KKR a lockup on valuable subsidiaries plus breakup protections.
Issue
Whether Macmillan's board could validly grant KKR a lockup and related auction-ending protections after an auction process that favored KKR, was manipulated by self-interested management, and was approved by a board misled about the fairness of the process. More specifically, whether the denial of a preliminary injunction was proper under Revlon, Unocal, and entire fairness principles.
Rule
When a corporation is for sale, directors act as auctioneers charged with obtaining the highest value reasonably attainable for shareholders, and they must adhere scrupulously to principles of fairness in the conduct of the auction. If bidders are treated unequally, the court applies enhanced Unocal scrutiny: the board must show that it reasonably perceived shareholder interests were enhanced and that its response was reasonable in relation to the advantage sought or the threat posed. Where self-interested fiduciaries manipulate the board's deliberative process or conceal material facts, the business judgment rule falls away and the challenged transaction must satisfy entire fairness, including fair dealing and fair price. Lockups and no-shop clauses are not per se invalid, but when they end an active auction they must confer a substantial stockholder benefit and cannot survive if approved through an uninformed or tainted process.
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If Alder challenges the board's later approval of Granite Harbor's bid, what is the strongest argument for applying enhanced judicial scrutiny rather than ordinary business judgment review?