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Court Of Chancery Denies Corwin Defense

In re Saba Software Inc. Stockholder Litigation, C.A. 10697-VCS (March 31, 2017, revised April 11, 2017)

This is a significant decision because it is the first to find that a stockholder vote did not invoke business judgment review under Corwin because the vote was coerced and not fully informed. Under Corwin, a transaction approved by a majority of the disinterested stockholders in an informed, uncoerced vote is subject to business judgment rule protection. A Corwin-qualifying vote practically means an early dismissal. Thus, the key question on a motion to dismiss under Corwin is whether the stockholder vote was both informed and uncoerced.

The subject of what needs to be disclosed to make a stockholder vote sufficiently informed is dealt with in a score of Delaware opinions. The subject of what constitutes inequitable "coercion" is dealt with in several Delaware opinions as well, but this decision is the first time a Delaware court has addressed that question under Corwin. In short, the Court of Chancery applied the Williams test to find the stockholder vote was coerced based on the circumstances surrounding the vote: because the board was bent on selling the company in the midst of the company's self-imposed regulatory crisis, the stockholders were stuck choosing between an allegedly under priced deal, or being stuck with now-deregistered, illiquid stock.

Finally, the opinion also is worth reading for its discussion of when a claim: (1) is direct and not extinguished by a merger, and (2) states a breach of the duty of loyalty or (3) adequately alleges an act is in bad faith.

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