The Delaware courts apply a high standard of review in sale transactions where a plaintiff pleads a conflict of interest. Where a board sells to a third party and the plaintiff pleads no conflict of interest, however, the Delaware Supreme Court has noted that "an extreme set of facts" is "required to sustain a disloyalty claim premised on the notion that disinterested directors were intentionally disregarding their duties." Lyondell Chemical v. Ryan, 970 A.2d 235, 243 (Del. 2009). Only where a plaintiff pleads facts showing a conscious disregard of duties would a plaintiff be able to allege that the directors had acted in bad faith in approving a sale transaction. And if a plaintiff cannot plead facts showing disloyalty or bad faith, and assuming the board is protected by a Section 102(b)(7) provision, then a plaintiff will not be able to plead any non-exculpated conduct and hence the court will dismiss at the pleadings stage any claim for monetary damages. The recent case of Dent v. Ramtron International, C. A. No. 7950-VCP (Del. Ch. June 30, 2014), illustrates these principles and provides guidance as well into the court's application of the materiality standard in assessing claims of breach of the duty of candor that might give rise to a quasi-appraisal remedy.
Plaintiff Paul Dent was a stockholder of Ramtron International Corp. when his shares were acquired in November 2012 for $3.10 per share in a merger with a subsidiary of Cypress Semiconductor Corp. The merger was the culmination of a nearly two-year process in which "the individual defendants, among other things, retained outside legal and financial advisers, rejected two Cypress offers as inadequate, contacted 24 potential purchasers with the assistance of their legal and financial advisers, and negotiated an increase in Cypress' offer price from $2.88 to $3.10 per share." The company's financial adviser conducted four valuation analyses, one of which was a discounted cash flow (DCF), and the merger price fell within the value range of three of the analyses, but below the $3.57 to $5.10 per share range of the DCF analysis. The price represented a 71 percent premium over the unaffected stock price.
Plaintiff Fails to Plead a Revlon Claim
Delaware law has long held that there is no one blueprint for how to conduct a sale process. Similarly, merely because a board could arguably in hindsight have done something different or better does not mean that it acted in bad faith or disloyally. Context matters. Thus, a plaintiff's allegation that the Ramtron board should have acted more aggressively to pursue negotiations with Cypress when it first approached in 2011 did not suffice to show bad faith because the board had not yet determined to sell the company. Its decision to reject Cypress' initial advances was protected by the business judgment rule. And even if its negotiation strategy in 2012 when the company was for sale was imperfect, that does not, without more, make it reasonably conceivable that the board acted in bad faith. Finally, even if the board elected to sell at a price below the bottom end of the DCF fairness range, that does not demonstrate bad faith when the board negotiated for a higher price from the original June 2012 bid of $2.48, and the $3.10 per share merger price was within the fairness range of three other valuation analyses.
Deal Protection Devices Do Not Reflect Bad Faith
The plaintiff also attacked the deal protection devices as preclusive and draconian. Those devices were "(1) a no-solicitation provision; (2) a standstill provision; (3) a change in recommendation provision; (4) information rights for Cypress; and (5) a $5 million termination fee" that equated to 4.5 percent of the total equity value. Context matters here as well. For several months prior to the Cypress/Ramtron deal, the company was known to be in play when there were no deal protection devices in place. The Chancery Court noted that "there was nothing preventing or inhibiting any of the 24 entities that Ramtron contacted from making a viable offer for the company or any other entity from making an unsolicited offer." Yet none came. The court found that the plaintiff failed to supply any well-pleaded facts that the deal protection devices were unreasonable or so outside the bounds as to demonstrate bad faith. By way of example, the court noted that the no-solicitation clause was accompanied with a reasonable "fiduciary out" clause that mitigated its "preclusive" or "draconian" effects.
Failure to Plead Material Misdisclosure or Omission
With no viable duty of loyalty or bad-faith claims, the plaintiff was left to argue that the company's proxy statement was deficient such that stockholders were unable to determine whether to accept the merger consideration or pursue appraisal. Among other alleged omissions, the disclosures in the company's proxy statement omitted management projections provided to the company's financial adviser, the multiples for each of the eight companies used in the financial adviser's "selected company analysis" and "selected transaction analysis," and the identities of the 22 companies the financial adviser used in its "stock price premium analysis." The court found that none of these alleged omissions would have sufficiently altered the total mix of information to be material. In that regard, the court noted that information is not material just because it may have been helpful.
Of greatest interest is the court's finding that the company was not required to disclose management projections that had been shared with the company's financial adviser. The court noted that Delaware law imposes no per se duty "to disclose to stockholders financial projections given to and relied on by a financial adviser." The court also took into account that because Cypress already owned 78 percent of the company's stock the merger was a foregone conclusion. In that context, the stockholders were not being asked to evaluate whether to accept the merger transaction or remain independent. The sole issue was whether the disclosures were adequate to permit the stockholders to determine whether to accept the merger consideration or seek appraisal. The court held that "because the stockholders were informed that the transaction consideration was lower than the DCF range, by how much it was lower, and that the DCF range was based on management projections, a reasonable stockholder could infer that the transaction consideration was lower than the company's estimate of its own future earning potential." For that primary reason, the court held that "disclosing the projections themselves would not provide stockholders with any meaningful additional information or insight as to whether they should tender their shares or seek appraisal." Another factor supporting the court's conclusion was that in preliminary injunction-related discovery the plaintiff obtained a copy of the projections yet failed to allege in his amended complaint that the undisclosed projections were inconsistent with or significantly different from the information that was disclosed.
The Dent case provides useful guidance. First, the case reaffirms the difficulty of pleading a Revlon claim when the board is not conflicted, the transaction is with a third-party strategic acquirer, and the board runs a process, however imperfect, that reflects legal and financial advice and efforts to solicit interest from multiple potential buyers, and results in a transaction at a substantial premium to the last unaffected stock price. Second, conclusory assertions that deal protection devices are preclusive or draconian will not suffice. Finally, context matters in assessing disclosure claims such that management projections relied upon by a financial adviser are not always material. The case affirms that the success of allegations of unfairness or nondisclosure depend upon the context in which the parties are able to frame the issues.