-
Delaware Chancery Court Declines To Apply Revlon Or Unocal Scrutiny To Board Adoption Of Dissolution Plan
10/11/2016On September 29, 2016, Vice Chancellor Joseph R. Slights III of the Delaware Court of Chancery dismissed a shareholder action against the directors and officers of Longview Energy Company (“Longview”) in connection with a board decision to dissolve the company following the sale of a significant portion of its assets. The Huff Energy Fund, L.P., v. Robert D. Gershen, et al., C.A. No. 11116-VCS (Del. Ch. Sept. 29, 2016). The Court held that defendants had not breached their fiduciary duties after rejecting plaintiff’s request to apply Revlon or Unocal scrutiny to the dissolution and finding in any event that the approval by stockholder vote “irrebutably reinstat[es] the business judgment rule.”
The Longview board determined to sell the majority of the company’s revenue-generating oil and gas assets. In connection with the sale, the board also adopted a plan of dissolution. The plan was approved by a stockholder vote. Plaintiff, Longview’s largest shareholder, brought claims for breaches of fiduciary duty arguing that the director defendants acted in their own self-interest in approving the plan and that the plan must be reviewed under the enhanced scrutiny of Revlon or Unocal.
The Court first rejected plaintiff’s claims that the dissolution breached a shareholders agreement, finding plaintiff’s arguments unsupported by the plain language of the agreement. The Court next ruled that plaintiff had failed to rebut the business judgment presumption to which the directors were entitled because plaintiff had not pled facts demonstrating that a majority of the board was not disinterested.
The Court also concluded that Revlon’s enhanced scrutiny—which applies to “final stage” transactions and requires defendants to prove they “act[ed] reasonably to seek the transaction offering the best value reasonably available to the stockholders”—did not apply to the plan of dissolution. The Court explained that the “formal act of dissolution” begins the winding up process but that process is to continue for three or more years during which directors have the authority to determine the means by which dissolution is to be accomplished and are still bound by their fiduciary duties. Thus, following the adoption of the plan for dissolution, the board “retained its duty to act in the best interests of Longview’s stockholders and creditors.” Therefore, according to the Court, Revlon concerns were not implicated. The Court also found that Unocal scrutiny—typically applicable to board adoption of defensive measures out of concerns regarding entrenchment—was inapposite inasmuch as dissolution itself “avoids any specter of entrenchment.”
Additionally, the Court cited Corwin v. KKR Financial Holdings LLC, 125 A.3d 304 (Del. 2015) holding that even if plaintiff had pled facts that invoked enhanced scrutiny, the fully informed stockholder vote “cleansed the transaction thereby irrebuttably reinstating the business judgment rule.” In this regard, the Court refused to find that “a proxy statement’s omission of the fact that a board’s approval of a transaction was other than unanimous, much less that the only dissent was one director’s abstention, is a material omission.”
The decision is thus significant for at least two reasons. First, it refuses to apply enhanced scrutiny to a dissolution plan. Second, it appears to hold that the business judgment presumption invoked under Corwin is not rebuttable.
