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Court of Chancery Addresses Stockholder Standing to Enforce Corporate Contracts, Declines to Dismiss Claim for Breach of Anti-Takeover Protections Akin to Section 203 of the DGCL

Posted In M&A

Ark. Teacher Ret. Sys. v. Alon USA Energy, Inc., C.A. No. 2017-0453-KSJM (Del. Ch. Jun. 28, 2019).

Section 203 of the Delaware General Corporation Law, an anti-takeover statute, prohibits a target from entering into a business combination with an acquirer for three years from the date that the acquirer first obtains 15% or more of the target’s stock, unless the target’s board pre-approves the transaction crossing the 15% threshold.  Here, to avoid Section 203’s three-year anti-takeover period, an acquirer sought pre-approval of its acquisition of a 48% block of shares.  The target’s board agreed, but on the condition that the acquirer enter into an agreement that retained Section 203’s three-year standstill period for one year.  A stockholder-plaintiff later brought suit arguing the acquirer failed to comply with the one-year standstill, and thus breached the agreement.  It also argued the acquirer’s breach of the agreement to shorten Section 203’s three-year standstill period to one year in effect revived the longer period, such that the merger was void ab initio under the DGCL.  When the defendants moved to dismiss claiming the stockholder-plaintiff lacked standing to enforce the target corporation’s agreement with the acquirer, the Court held that the stockholder sufficiently alleged it had standing as an intended third-party beneficiary.  The Court reasoned that provisions of the Delaware General Corporation Law have been likened to a contract that stockholders may enforce by suing directly.  Section 203 in particular was enacted to benefit stockholders by limiting hostile takeovers and encouraging fair, non-coercive acquisition offers.  Here, the target’s agreement with the acquirer adopted those protections for the same apparent purpose of directly benefitting stockholders.

In addition, addressing the plaintiff’s fiduciary duty claims against the target’s directors, the Court declined to invoke deferential business judgment review, because the 48% holder conceivably was a controlling stockholder, and the parties failed to timely establish the procedural safeguards endorsed by Delaware Supreme Court’s 2014 MFW decision (i.e., conditioning any transaction upon approval by a special committee and a majority of the minority vote).  While a special committee was used, the plaintiff alleged it was formed without a clear delineation of its powers, and that it engaged in discussions with the acquirer over the form of consideration, the exchange ratio and price terms for months before the MFW protections were put in place with the first formal exchange of offers.  The special committee also already had hired legal and financial advisors and entered into a confidentiality agreement to allow the exchange of non-public information with the target. The Court reasoned that, under the Delaware Supreme Court’s recent decisions in Flood v. Synutra Int’l, Inc. (2018) and Olenik v. Lodzinski (2019), the plaintiff adequately alleged that the conditions were imposed after “the germination stage” of the special committee process, and after “substantive economic negotiations” had occurred.  The director-defendants’ motions to dismiss accordingly were denied.

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