In re Toys “R” Us, Inc., Shareholder Litigation

Toys “R” Us, Inc. (defendant) (Toys) was a retail corporation that operated three divisions: toys, products for babies and expectant mothers, and a Japanese toy-store chain. Toys’ board of directors comprised nine independent members and one inside member, the chief executive officer, John H. Eyler, Jr. In January 2002, Toys traded for $12.00 a share. The board of directors conducted a publicly announced search for strategic alternatives for Toys with the advice of expert advisors, and the board settled on the sale of the toys division. The board of directors sought bids from buyers, and four competing bids emerged. The board of directors placed the bidders in two final rounds of bids, and one of the bidders emerged with an interest to buy the whole company, not just the toy division. The board of directors decided to stick to selling only the toys division. The bidder increased its bid for the whole company, and the bid was more than originally projected by the expert advisors. Toys’ executive committee, recognizing the need to act quickly to preserve bids, approved soliciting bids for the entire company. The winning bid was a merger proposal of $26.75 per share from Kohlberg Kravis Roberts & Co. (KKR), which was $1.50 more per share or $350 million more in total than the next bidder. Based on the board’s information regarding the value of Toys, it decided the KKR merger bid was the best way to maximize stockholder value. Iron Workers of Western Pennsylvania Pension and Profit Plans and Jolly Roger Fund L.P. (collectively, the shareholders) (plaintiffs) filed a preliminary injunction to enjoin a Toys stockholders’ vote on approving the KKR merger. The shareholders alleged that the board of directors failed in its duty to act reasonably in pursuit of attaining the highest value for the Toys stockholders. The shareholders also alleged the brief auction was unreasonable and that the board of directors should have conducted a full-blown search for buyers. The shareholders alleged that the board of directors unreasonably locked up the $26.75 price, agreeing to a draconian deal that precluded any topping bid.