Stockholder Merger Vote Sets High Bar for Post-Closing Claims
The Delaware Supreme Court's decision in Corwin v. KKR Financial Holdings , 125 A.3d 304 (Del. 2015), reaffirmed the power of fully-informed, uncoerced, disinterested stockholder approval to immunize M&A transactions against stockholder challenge. Under Corwin, where a noncontrolling stockholder transaction "has been approved by a fully informed, uncoerced majority of the disinterested stockholders," the business judgment rule applies irrebuttably, leaving plaintiffs with a claim for waste. Since waste requires stockholder approval of an irrational deal, a Corwin-qualifying vote will likely result in dismissal. Corwin therefore sets a high bar for plaintiffs in post-closing fiduciary duty claims challenging M&A transactions.
The Delaware Court of Chancery has now dismissed numerous post-closing fiduciary duty claims under Corwin firmly establishing under Delaware corporate law the protection that stockholder approval affords M&A transactions. In its most-recent decision applying Corwin, In re Merge Healthcare Stockholders Litigation, C.A. No. 11388-VCG (Del. Ch. Jan. 30) (Glasscock, V.C.), the Court of Chancery held that a merger was approved by a fully-informed, uncoerced vote of a disinterested majority of the target company's stockholders without the presence of a controller who extracted personal benefits. Accordingly, based on the Corwin-qualifying vote, the court dismissed the plaintiff stockholders' post-closing fiduciary duty claims against the company's directors.
IBM acquired Merge Healthcare Inc. through a merger that was approved by approximately 80 percent of Merge's stockholders. The plaintiff stockholders asserted post-closing fiduciary duty claims against Merge's defendant directors based on an alleged improper sales process in the merger. To rebut the cleansing effect of the stockholder vote under Corwin, plaintiffs asserted: that the merger involved a conflicted-controlling stockholder, who extracted personal benefits; and that the stockholder vote was not fully informed.
The court ruled that the plaintiffs had failed to allege that the controlling stockholder extracted personal benefits. While conceding that stock ownership generally aligns a director or officer's interests with other stockholders when they own material amounts of stock, the plaintiffs asserted that those interests diverge when "exigent" circumstances are present that require a controller to dump the stock for liquidity purposes at less than full value. The court found, however, that plaintiffs had failed to allege a "crisis" or "fire sale" necessary to "satisfy an exigent need." Thus, the court reasoned that even if there was a controlling stockholder, he was neither conflicted as a counter party, nor the recipient of personal benefits in the merger. Accordingly, the plaintiffs failed to rebut the cleansing effect of the stockholder vote based on the merger involving a controlling stockholder who received personal benefits.
The court next ruled that the stockholder vote was fully informed. To rebut the cleansing effect of the stockholder vote, the plaintiffs had the burden at the pleadings stage to allege facts that "make it reasonably conceivable that the disclosures were materially misleading in some regard; thus leading to an uninformed vote." The plaintiffs asserted disclosure violations concerning the financial analysis of Merge's financial adviser, Goldman Sachs, and the alleged controller's decision to waive a consulting fee that Merge contractually owed to him.
First, the court found that the proxy adequately disclosed that in creating revenue projections, management used GAAP earnings, which requires the treatment of stock-based compensation as a cash expense, and thus, management was not required to further expressly state that such compensation was treated as a cash expense. The court next explained that "all financial data needed to make an independent determination of fair value is not required" even if a financial adviser may have considered the non-disclosed data. Because the proxy provided a detailed summary of Goldman's financial analysis, including projections for revenue, profits, EBITDA, EBIT, net income, and earnings per share, additional disclosures concerning stock-based compensation projections or the present value of NOLs were not material for stockholders to have a "fair summary" of Goldman's financial analysis. Lastly, the court found that the proxy adequately disclosed that Merge's board considered a special committee due to the alleged controller's consulting fee and that he had subsequently waived the consulting fee. The alleged controller's subjective motivation for waiving the consulting fee was not material to the stockholders' decision to approve the merger.
In sum, the court concluded that the merger was approved by a fully-informed, uncoerced vote of a disinterested majority of Merge's stockholders without the presence of a controller who extracted personal benefits. Accordingly, the court dismissed the plaintiff stockholders' post-closing fiduciary duty claims under Corwin.
Merge Healthcare explained who has the burdens of pleading and proof on the sufficiency of disclosures for the stockholder vote to be fully informed under Corwin: the plaintiff must first sufficiently plead a disclosure violation, and then the burden shifts to the defendants to show that the stockholders were fully informed. Therefore, to rebut the cleansing effect of a stockholder vote at the motion-to-dismiss stage, plaintiffs have the burden to plead facts that "make it reasonably conceivable that the disclosures were materially misleading."