Post-Corwin: Delaware Courts, Consistently Applying Corwin, Reinforce Long-Standing Policy of Delaware Law to Avoid Uncertainties and Costs of Judicial Second-Guessing in Merger Transactions
January 12, 2017
Following the Delaware Supreme Court decision in Corwin v. KKR Financial Holdings LLC, 125 A.3d 304 (Del. 2015), the Delaware courts have clarified and extended the application of the decision. In Corwin, the Delaware Supreme Court affirmed the Court of Chancery’s ruling that the business judgment rule is the appropriate standard of review for a merger transaction that is not subject to the entire fairness standard of review and is approved by a fully informed, uncoerced vote of the disinterested stockholders. In so holding, the Delaware Supreme Court cited the “long-standing policy of [Delaware] law . . . to avoid the uncertainties and costs of judicial second-guessing” in such situations. In 2016 and early 2017, the Delaware courts have consistently applied Corwin, reinforcing that long-standing policy.
In Singh v. Attenborough, 137 A.3d 151 (Del. 2016), for example, the Delaware Supreme Court clarified that the business judgment rule irrebuttably applies to post-closing judicial review of a merger transaction that receives the fully informed, uncoerced vote of the disinterested stockholders. Although the Delaware Supreme Court in Singh noted that the Court of Chancery correctly found that a fully informed, uncoerced vote of disinterested stockholders invoked the business judgment rule, the Court held that the Court of Chancery erred by next proceeding to consider whether plaintiffs stated a claim for breach of the duty of care. In so doing, the Court explained that the Court of Chancery failed to “give [the] standard-of-review-shifting effect to the vote.” When the business judgment rule standard of review is invoked because of a fully informed, uncoerced vote of disinterested stockholders approving a transaction, a post-closing action for monetary damages will be dismissed absent a well-pled waste claim.
The Delaware courts next grappled with the extent to which Corwin applied to so-called “intermediate form mergers” accomplished under Section 251(h) of the General Corporation Law of the State of Delaware (“Section 251(h)”). Under Section 251(h), subject to the satisfaction of certain specified statutory conditions, a merger can be consummated without a vote of the target stockholders where, immediately following the consummation of a tender or exchange offer, the stock irrevocably accepted for purchase or exchange pursuant to such offer and received by the depositary prior to the expiration of such offer, together with the stock otherwise owned by the consummating corporation or its affiliates and any rollover stock, equals at least such percentage of the shares of stock of the target corporation that, absent Section 251(h), would be required to adopt the merger agreement. Thus, in contrast with the Corwin and Attenborough mergers, mergers approved under Section 251(h) do not require a stockholder vote.
In In re Volcano Corporation Stockholder Litigation, 143 A.3d 727 (Del. Ch. 2016), the Court of Chancery held that when the fully informed, uncoerced and disinterested stockholders approve a merger under Section 251(h) by tendering their shares pursuant to the tender offer, that approval has the same cleansing effect under Corwin, and the business judgment rule irrebuttably applies to the merger. In Volcano, upon the expiration of the tender offer constituting the first step in a Section 251(h) merger, stockholders representing the holders of 89.1% of the issued and outstanding shares of common stock of the target corporation had validly tendered and not withdrawn their shares. Plaintiffs contended, in relevant part, that the board of directors approved the merger in an uninformed manner and the directors were motivated by certain benefits they received as a result of the merger, including the vesting of stock options and restricted stock units and the execution of a consulting agreement between one of the directors and the buyer. The defendants moved for dismissal for failure to state a claim and argued for an extension of Corwin to preclude judicial review of the board’s conduct in negotiating and approving the Section 251(h) merger. The Court held that, in the context of a Section 251(h) merger, the acceptance of the tender offer by a majority of fully informed, disinterested stockholders has the same cleansing effect as a vote in favor of the merger. In reaching its holding, the Court reasoned that there is no basis for distinguishing a stockholder’s acceptance of a tender offer as part of a Section 251(h) merger from a stockholder’s vote in favor of a long form merger. The Court noted that in a Section 251(h) merger, the board of directors retains its involvement (and concomitant fiduciary duties) in negotiating the terms of the tender offer under Section 251(h), and such a tender offer has built-in protections against coercion: the tender offer must be for all outstanding stock and the back-end merger must be accomplished as soon as practicable. After determining that Corwin applied, the Court ruled that plaintiffs failed to adequately plead that the stockholders were uninformed, and, in the absence of a waste claim, the Court dismissed the complaint. The Volcano opinion has been appealed to the Delaware Supreme Court.
Other recent decisions from the Court of Chancery address whether Corwin applies when the board’s approval of a transaction is alleged to have resulted from a tainted process. In City of Miami General Employees’ & Sanitation Employees’ Retirement Trust v. Comstock, 2016 WL 4464156 (Del. Ch. Aug. 24, 2016), the Court dismissed a complaint for failure to state a claim after applying Corwin to a merger transaction that garnered the approval of holders of 97.6% of the shares that voted and 81.7% of all shares. Plaintiffs brought a post-closing damages action alleging breaches of the duties of disclosure and loyalty. Plaintiffs argued that a majority of the directors were interested in a transaction with the buyer because they hoped to serve as directors of the surviving entity, and that the chief executive officer and chairman tainted the process by which the board considered the transaction through certain alleged deceptions. After dismissing the disclosure claim, the Court analyzed the loyalty claim by first ruling that the complaint failed to allege that a majority of the directors were interested and failed to allege adequately that the chief executive officer and chairman tainted the board’s process by deception. Although the Court ultimately dismissed the complaint under Corwin, the fact that the Court considered the potential conflicts among the corporation’s directors suggested that Corwin may not preclude judicial review of a tainted sales process.
In Larkin v. Shah, 2016 WL 4485447 (Del. Ch. Aug. 25, 2016), plaintiffs filed a post-closing breach of fiduciary duty action seeking damages as compensation for an allegedly flawed sales process that netted inadequate consideration. The merger was accomplished under Section 251(h), and the stockholders approved the transaction by tendering approximately 78% of the shares into the tender offer. The Court of Chancery determined that “the business judgment rule irrebuttably applies if a majority of disinterested, uncoerced stockholders approve a transaction absent a looming conflicted controller” (emphasis in original). Stated differently, “[i]n the absence of a controlling stockholder that extracted personal benefits, the effect of disinterested stockholder approval of the merger is review under the irrebuttable business judgment rule, even if the transaction might otherwise have been subject to the entire fairness standard due to conflicts faced by individual directors.” In Larkin, the Court rejected the assertion that venture capital funds holding a 23.1% block of common stock constituted a control group in the absence of any facts suggesting that those stockholders influenced the board’s free exercise of judgment. Thus, finding that there was no controlling stockholder that extracted personal, non-ratable benefits, the Court held that the acceptance of the tender offer by stockholders holding approximately 70% of the shares not contractually bound to tender invoked Corwin.
Most recently, in In re Solera Holdings, Inc. Stockholder Litigation, 2017 WL 57839 (Del. Ch. Jan. 5, 2017), the Court of Chancery applied Corwin to dismiss a complaint alleging a breach of fiduciary duty claim against the directors who approved the acquisition of a corporation by a private equity firm. Before reaching the merits as to whether the uncoerced vote of the disinterested stockholders to approve the merger was fully informed, the Court clarified how the burden of proof operates when applying Corwin to a merger transaction. Distinguishing between the burden of proving that a vote is fully informed (which burden the Court found was properly allocated to defendants) from the burden of pleading disclosure deficiencies, the Court explained that allocating the burden of pleading disclosure deficiencies to defendants would “create an unworkable standard, putting a litigant in the proverbially impossible position of proving a negative.” As such, the Court explained that “a plaintiff challenging the decision to approve a transaction must first identify a deficiency in the operative disclosure document, at which point the burden would fall to defendants to establish that the alleged deficiency fails as a matter of law in order to secure the cleansing effect” of the stockholder vote under Corwin. Rejecting concerns about the fairness of requiring a plaintiff to plead disclosure deficiencies before obtaining discovery, the Court noted the ability of a plaintiff to conduct a books and records inspection under Section 220 of the General Corporation Law of the State of Delaware in non-expedited stockholder litigation to uncover information in support of such disclosure claims, as well as the ability of plaintiffs to avail themselves of the relatively low “colorability” pleading standard to obtain discovery in respect of such disclosure claims before a stockholder vote is taken on the transaction.
Download Related files
Read the Opinion: In re Solera Holdings, Inc. Stockholder Litigation
Read the Opinion: Larkin v. Shah
Read the Opinion: City of Miami General Employees' & Sanitation Employees' Retirement Trust v. Comstock
Read the Opinion: In re Volcano Corporation Stockholder Litigation
Read the Opinion: Singh v. Attenborough
Read the Opinion: Corwin v. KKR Financial Holdings LLC
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