Olson v. ev3, Inc., et al.: Court of Chancery Addresses Validity of Top-Up Option
April 28, 2011
In Olson v. ev3, Inc., et al., C.A. No. 5583-VCL (Del. Ch. Feb. 21, 2011), the Court of Chancery awarded plaintiff’s counsel the full amount of attorneys’ fees and expenses requested—$1.1 million—for what was, according to the Court, “the first meaningful full-scale challenge to the use of a top-up option.” Under the terms of the merger agreement entered into between defendant ev3, Inc. (“ev3”) and Covidien Group S.a.r.l. (“Covidien”), Covidien would acquire ev3 pursuant to a standard two-step acquisition, facilitated by a top-up option if certain conditions were met. Plaintiff Joanne Olson (the “Plaintiff”) brought an action challenging the use of the top-up option. Specifically, the Plaintiff had advanced four arguments in seeking a preliminary injunction to block the transaction: (i) the top-up option failed to comply with Sections 152, 153, and 157 of the Delaware General Corporation Law (the “DGCL”); (ii) the exercise of the top-up option would be coercive, forcing stockholders to tender under the threat of “appraisal dilution”; (iii) the ev3 directors breached their fiduciary duties in granting the top-up option; and (iv) Covidien aided and abetted such breach of fiduciary duties by the ev3 directors.
The Court had previously granted the Plaintiff’s motion to expedite because the Plaintiff “advanced a strong claim” regarding the purported failure of the top-up option to comply with Sections 152, 153, and 157 of the DGCL. Reaffirming prior cases where the Delaware courts emphasized strict statutory compliance with respect to matters involving a corporation’s capital structure, the Court noted that if the second-step of the acquisition were to be effected using shares received through the exercise of an invalid top-up option, then the merger itself would be subject to attack as ultra vires and void. The Court had further granted the motion to expedite because, at the time of the hearing, limited Delaware authority existed on top-up options, none of which addressed the concept of “appraisal dilution.” Shortly after the motion to expedite was granted, the parties entered into a memorandum of understanding (the “MOU”) which the Court found “provided the plaintiff with all the relief she could have hoped to achieve on the merits.” Pursuant to the MOU, certain terms of the merger agreement and top-up option were amended to correct the statutory defects, and the parties agreed that no shares issued under the top-up option would be considered in an appraisal proceeding.
In ruling on the Plaintiff’s contested fee application, the Court applied the factors established in Sugarland Industries, Inc. v. Thomas, 420 A.2d 142 (Del. 1980). With regard to the benefits achieved, the Court first found that the agreement between the parties that no shares issued under the top-up option would be considered in an appraisal proceeding completely alleviated the threat of appraisal dilution. The Court noted, however, that this benefit was “ephemeral at best” given that any legal uncertainty could have been addressed by an agreement of the constituent corporations in their disclosure documents that the top-up option shares would not be considered in any appraisal proceeding. In contrast, by correcting the statutory issues with respect to the top-up option, the Court found that the settlement conferred a “meaningful benefit” on ev3 and its stockholders. In particular, the settlement required that the merger agreement specify the terms of the promissory note to be issued in exchange for the top-up shares, ensuring that the instrument evidencing the option, the merger agreement, set forth the option terms and the consideration to be paid for the shares as required by Section 157(b). The settlement also required the ev3 board’s approval of the amended merger agreement, ensuring that that board had approved the option terms and determined the sufficiency of the consideration to be received for the top-up shares as required by Sections 152, 153(a), and 157(d). The ev3 board was further required to adopt an implementing resolution for the creation and issuance of the top-up option, as required by Section 157(b). In its analysis of these statutory provisions, the Court pointed out that Sections 152, 153 and 153 of the DGCL were to be read narrowly and that these provisions do not contain similar grants of statutory authority to condition terms on facts ascertainable outside the governing instrument, such as is found in the provisions of Sections 151(a) (the terms of a class or series of stock) or Section 251(b) (the terms of a merger agreement). Accordingly, knowing the generalities of a transaction is not sufficient for a board of directors to satisfy the requirements of Sections 152, 153 and 157(b) and (d). Finally, the merger agreement was amended to require Covidien to pay, in cash, the par value of any top-up shares, thus eliminating any question as to whether the value of the consideration for the top-up shares was less than the par value of those shares in violation of Section 153(a). The Court concluded that because the top-up option and any shares issued pursuant to it likely were void under the merger agreement as originally structured, this litigation and subsequent settlement “prevented the seeds of a future legal crisis from germinating,” thus the Plaintiff’s counsel was entitled to its full fee award that it submitted.