Chancery Sustains Claims Against Target’s CEO, Target’s Financial Advisor, and Acquirer for Allegedly Covertly Steering Merger Bidding Process
Presidio illustrates potential pitfalls for parties in the M&A process, including executives managing personal interests in potential post-transaction employment while negotiating a deal, financial advisors with future business interests in mind while controlling competitive offer information, and acquirers potentially aware of a bidding process being steered in their direction.
Here, following a merger of a controlled company to an unaffiliated third party, the Court of Chancery upheld a breach of fiduciary duty claim against an executive who allegedly tilted the sale process and withheld material information from the board, as well as aiding and abetting claims against the target’s financial advisor and the acquirer regarding the tilted sale process. In doing so, the Court determined that Corwin cleansing based on stockholder approval was available because the plaintiff did not sufficiently allege a conflict for the target’s controller arising out a desire to liquidate its investment. But the Court declined to invoke cleansing due to deficient disclosures to the stockholders regarding bidding information tipped to the acquirer during the sales process. The Court also held that enhanced scrutiny under Revlon applied to the final-stage transaction notwithstanding the absence of the controller’s conflict, rejecting defendants’ argument that business judgment review was appropriate under Synthes.
Applying Revlon scrutiny, the Court concluded that plaintiff’s allegations both supported a finding that the sale process fell outside the required range of reasonableness due to a tilted sale process and stated fiduciary duty damages claims. Plaintiff alleged that the company’s chairman and CEO breached his duty of loyalty by preferring the bidder that planned to retain him to lead the post-transaction entity on lucrative terms over the bidder that did not need his services post-transaction. Facing this conflict, the executive allegedly steered the sales process towards the winning bidder, including with help from the target’s financial advisor, such as by downplaying to the board the competing bidder’s level of interest. With an alleged incentive to keep as many parties happy and interested in its future services, the target’s financial advisor covertly tipped off the winning bidder as to the terms of the competing bidder’s offer. The winning bidder was able to structure its winning bid accordingly, which included a successful demand for an increased termination fee that gave the competing bidder less incentive to increase its offer. Further, the complaint’s allegations made it reasonable to infer that the winning bidder knew the tip was wrongful and yet still used the wrongfully obtained information to its advantage.
The Court, however, dismissed the claims against the controlling stockholder and the other members of the board. Even though they had approved the changes to the termination fee that chilled additional bidding, there was no allegation that they were aware of the executive’s allegedly disloyal conduct. As to the board, the claims were exculpated and, as to the controlling stockholder, the claims did not involve sufficient allegations of recklessness to support a gross negligence duty of care theory.