A stockholder complaining about a merger transaction materially enhances her prospects of overcoming a motion to dismiss if she can allege self-dealing by a controlling stockholder or that the transaction involves a change of control, thereby invoking the entire fairness standard of review or enhanced scrutiny. Failing that, properly alleging a violation of a statute could also state a claim. In Flannery v. Genomic Health, Inc., C. A. No. 2020-0492-JRS (Del. Ch. August 16, 2021), the Court of Chancery found plaintiffs failed properly to allege that the transaction at issue involved a self-dealing controlling stockholder, or that Revlon duties applied or that the buyer’s entry into a voting agreement with a stockholder with more than a 15% ownership stake after the execution of a merger agreement violated Section 203 of the Delaware General Corporation Law (“DGCL”). For these reasons, the Court of Chancery granted defendants’ motions to dismiss plaintiff’s attack on Exact Sciences Corp.’s (“Buyer” or “Exact”) acquisition by merger of Genomic Health , Inc. (“Genomic” or “the Company”) for cash and stock (“the Merger”).
Court of Chancery Rejects Plaintiff’s Attempt to Plead that the Merger Involved a Self-Dealing Controller
The Court had little trouble disposing of plaintiff’s claim that entities which held a 25% voting interest, with only two of eight Board seats and no history of meddling in the Company’s day-to day operations, exercised general control of Genomic. The Court found equally unavailing plaintiff’s allegations that that minority stockholder nonetheless controlled the Company’s decision-making for the Merger. Problematic for plaintiff was her allegation that the Buyer “showed up unsolicited and unannounced”, and therefore not at the behest of the minority stockholder, and the lack of well-pled allegations that the minority stockholder thereafter exercised control over the merger negotiations. The Court found lacking as well plaintiff’s attempts to convert relationships the minority stockholder had at other companies with five members of the Board into sufficient allegations of dominance and control when the allegations did not suggest unilateral power or even substantial sway over the directors’ livelihoods. Finally, even were that not so, the Court found that plaintiff’s allegations that the minority stockholder wanted, as opposed to needed, to sell insufficient to reflect a divergent interest in liquidity such that the minority stockholder did not share an interest in obtaining the highest possible price in the transaction. Therefore, the Court found those allegations insufficient to require an entire fairness standard of review.
Court of Chancery Rejects Plaintiff’s Claim for Enhanced Scrutiny under Revlon
The Court found that plaintiff had failed to plead anything about the capital structure of the Buyer after the Merger. The Court thus had no basis from which to infer that “the stock component of the Merger compromised the Genomic stockholders’ opportunity to secure a control premium for their shares in the future.” Id. at 61. With plaintiff having failed to plead that Exact would not trade in a large, fluid, changeable and changing market post-Merger, and with all of Genomic’s stockholders receiving 58% of the Merger consideration in Exact stock, the Court held that plaintiff had failed adequately to plead that “Genomic abandoned its long-term strategy, triggering a duty to maximize short-term gain … .”Id. at 64. Accordingly the Court held that plaintiff had failed to plead that the Merger warranted enhanced scrutiny under Revlon.
Court of Chancery Rejects Plaintiff’s Claim that the Company Violated Section 203 of the DGCL
Section 203 of the DGCL seeks to prevent abusive takeover tactics by prohibiting for three years a corporation from engaging in a business combination with an interested stockholder holding more than 15% of the company’s shares unless the board approves either the business combination or the transaction by which the stockholder acquired their 15% or greater interest. This statute was inapplicable because, after a careful examination of the pleaded facts, the Court found that plaintiff failed to plead that the Buyer and the Company had reached an “agreement, arrangement or understanding” regarding the voting of the Company’s shares prior to the Merger Agreement being signed. Moreover, because plaintiff pleaded facts reflecting that the Genomic Board expected that the minority stockholder would enter into a voting agreement with the Buyer, the only reasonable inference was that the Board approved of the transaction by which Exact became an Interested Stockholder. For these reasons the Court rejected plaintiff’s claim that the Company had violated Section 203 of the DGCL.
If a plaintiff is unable to allege facts sufficient to overcome the business judgement rule, it is unlikely that a claim attacking a merger transaction will survive a motion to dismiss. The Court of Chancery will not apply the entire fairness standard of review when the pleaded facts do not support that a self-dealing controlling stockholder dictated the terms of the transaction. Nor will enhanced scrutiny apply when the factual predicate to apply Revlon is missing from a complaint. Finally, the Court will not find a violation of Section 203 if the pleaded facts do not reflect a failure by the Board to approve the transaction by which the Buyer became an Interested Stockholder. Flannery demonstrates that the Court of Chancery likely will dismiss a complaint attacking a merger based on alleged disloyalty by a controlling stockholder, a failure to run an appropriate sale process, or a violation of Section 203 if plaintiff cannot adequately plead facts sufficient to support her claims.