Delaware Business Litigation Report

Majority of Fully-Informed, Disinterested Stockholders Insulated Merger from Attack

The Delaware Supreme Court held in Corwin v. KKR Financial Holdings, that "when a transaction not subject to the entire fairness standard is approved by a fully-informed, uncoerced vote of the disinterested stockholders, the business judgment rule applies," even when a stockholder vote is statutorily required and the transaction is otherwise subject to the Revlon, 125 A.3d 304, 308-09 (Del. 2015),standard of review.

Subsequently, on May 6, the Delaware Supreme Court clarified in Singh v. Attenborough, that the business judgment rule applies irrebuttably to review of a transaction approved by a vote of the majority of the outstanding, fully-informed, uncoerced, disinterested stockholders. Therefore, inAttenborough, the Supreme Court concluded that this standard of review insulates the transaction from challenge, except on the ground of waste—which typically results in dismissal because stockholders are unlikely to approve a "wasteful" transaction where directors are irrationally squandering or giving away corporate assets.

In its recent decision, In re Volcano Corp. Stockholders Litigation, C.A. No. 10485-VCMR (Del. Ch. June 30, 2016) (Montgomery-Reeves, V.C.), the Delaware Court of Chancery held that a majority of the outstanding, fully-informed, uncoerced, disinterested stockholders’ tender of their shares also renders the business judgment rule “irrebuttable,” insulating a merger from challenge on any ground except for waste. The court reasoned that the acceptance of a tender offer by a majority of the stockholders in the first step of a two-step merger has the same cleansing effect as a vote by a majority of the stockholders in favor of a merger under the Delaware Supreme Court’s decisions inCorwin and Attenborough. Accordingly, the Court of Chancery concluded that because a majority of Volcano’s fully-informed, uncoerced, disinterested stockholders tendered their shares, the business judgment rule applied irrebuttably to protect the merger from challenge, and dismissed the action.

BACKGROUND

The plaintiff former stockholders of Volcano brought fiduciary duty claims against the Volcano board, and aiding and abetting claims against its financial advisor, in connection with the all-cash merger of Volcano. The first step was a tender offer of $18 per share to purchase the majority of the outstanding shares of Volcano stockholders, followed by a second-step merger of the remaining shares under Section 251(h) of the Delaware General Corporation Law.

The plaintiffs alleged that in approving the Merger, the board breached its fiduciary duties of care and loyalty because the board was uninformed, and motivated by its self-interest in a consulting agreement and stock-option benefits that other stockholders would not receive in the merger. Further, the plaintiffs asserted that the board relied on “flawed advice” provided by its “highly conflicted financial adviser,” Goldman Sachs, which allegedly profited by options and warrants on the other side of call-spread transactions as a counter-party to Volcano upon consummation of the merger. The plaintiffs also alleged that the conflicts of interest of Goldman Sachs were concealed from the board and its stockholders.

TENDER BY A MAJORITY OF THE STOCKHOLDERS INVOKED IRREBUTTABLE PRESUMPTION OF BUSINESS JUDGMENT RULE

First, relying on the Delaware Supreme Court’s decisions in Corwin and Attenborough, the Court of Chancery ruled that approval of a transaction by a majority of the outstanding, fully-informed, uncoerced, disinterested stockholders renders the business judgment rule irrebuttable, insulating the merger from challenge on any ground except for waste. The court explained that the cleansing effect of stockholder ratification under Corwin and Attenborough applies to its review of an approved transaction even when a stockholder vote is statutorily required, and the transaction would otherwise be subject to the Revlon standard of review applicable to a predominantly cash sale of a company.

Second, the court ruled that the acceptance of a tender offer by a majority of the stockholders in the first-step of a two-step merger under Section 251(h) of the Delaware General Corporation Law has the same cleansing effect as a vote by a majority of the stockholders in favor of a merger under the Delaware Supreme Court’s decisions in Corwin and Attenborough. Section 251(h) eliminates the requirement of a stockholder vote to approve a merger if the tender offer results in the buyer owning a majority, or the percentage, of shares necessary to approve the merger under the company’s organizational documents. The court reasoned that just like a board must negotiate, agree to, and declare the advisability to stockholders of a merger requiring a stockholder vote under Section 251(c) of the Delaware General Corporation Law, the board must also negotiate, agree to, and declare the advisability to stockholders of the first-step tender offer and second-step merger in a two-step merger under Section 251(h). The court further explained that the first-step tender offer essentially replicates a statutorily-required stockholder vote in favor of a merger because a stockholder’s acceptance of a tender offer is no less a “free and informed chance to decide on the economic merits of a transaction” than casting a vote to approve the transaction. Therefore, the court concluded that like a stockholder vote, a majority of the outstanding, fully-informed, uncoerced, disinterested stockholders’ tender of their shares also renders the business judgment rule irrebuttable, insulating a merger from challenge on any ground except for waste. Finally, the court found that a majority of the outstanding Volcano stockholders, who accepted the tender offer, were fully-informed, uncoerced, and disinterested. Thus, the business judgment rule applied irrebuttably to protect the merger from challenge, except for waste, which was not pled in the complaint. Accordingly, the court concluded that plaintiffs had failed to state a claim for breach of fiduciary duties against the board, and granted defendants’ motion to dismiss the Action.

DECISION IMPACT

Volcano Corp. is a very important development under Delaware Corporate Law that extends the cleansing effect of a stockholder vote, representing a majority of the outstanding, fully-informed, uncoerced, disinterested shares, to acceptance of a tender offer by a majority of the outstanding stockholders in a two-step merger. The tender by a majority of the stockholders of their shares invokes an “irrebuttable” presumption that the business judgment rule applies, insulating the merger from challenge on any ground except for waste, which is almost impossible to successfully allege under Delaware law. Accordingly, to obtain the cleansing effect of stockholder ratification, the disclosure of accurate and complete material information to stockholders is all the more important to insulate a transaction from challenge under the standard of review set forth by the Delaware Supreme Court in Corwin and Attenborough.

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