Delaware Courts: Stuck between a Fed and a Hard Place

By now I'm sure that everyone has read about the JP. Morgan bid to aquire Bear Sterns. JP Morgan is set to bid for 39.5% of the Bear Sterns outstanding shares, and recently increased the offer from $2 per share to $10. Presumably, JP. Morgan thought this would alleviate any concerns by shareholders in approving the transaction.

However, several organization including pension plans has filed a tempory restraining order against Bear Sterns alleging that the deal is "preclusive and coercive" and in essence avoids a shareholder vote and entrenches management. The action was filed in DE chancery court because Bear is a DE company.

Ultimately, the Delaware courts are faced with a tough decision. Apply the law or do what the Fed wants. On one hand the DE law dictates that if the deal is preclusive of other deals then the transaction should be overturned. On the face, the deal seems preclusive becuase JP Morgan is given the option to buy the Bear Sterns building as an asset acquisition even if the deal falls through. Additionally, JP Morgan has pushed the deal through swiftly as a result of the Fed backing the deal. Furthermore, Bear is precluded of looking for other bidders.

However, the Fed is promoting the deal. In fact trading hit highs after the announcement of the deal. However, I wonder if another bidder could be found. JP Morgan agreed to acquire Bear as a result of the Fed promoting the transaction. Did such Federal promotion squeeze out other potential bidders that now believe they can't acquire Bear? Should Bear executive at least be allowed to shop for higher offers? It would seem not considering the deal is set to close very quickly, and many Bear executives want to approve the deal. However, this squeezes out minority owners. The last time I checked, directors owe a duty to all shareholders.

It seems that the Fed. might have over meddled, and might force DE law to change. I wonder is someday in the future, I will be reading another acquisiton attempting to apply the "Bear Sterns Exemption"