On January 30, 2017, Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery dismissed a shareholder suit for alleged breaches of fiduciary duty by the directors of Merge Healthcare, Inc. (“Merge”) in connection with its acquisition by IBM.
In re Merge Healthcare Inc. Stockholders Litigation, C.A. No. 11388-VCG (Del. Ch. Jan. 30, 2017). Specifically, the Court found that “a fully informed, uncoerced vote of the [c]ompany’s disinterested stockholders cleansed the [m]erger here, resulting in the application of the business judgment rule.” The Court applied this analysis even though it assumed (without finding) that the chairman of the board was a controlling stockholder because the Court found that the chairman “did not extract any personal benefits because his interests were fully aligned with the other common stockholders.”
IBM acquired Merge in a cash transaction that was completed on October 13, 2015. Shareholders holding 77% of the shares had voted in favor of the merger. Following the merger, plaintiffs alleged that the directors had breached (1) their fiduciary “duties of care, loyalty, and independence” by engaging in a self-interested and unfair merger process, thereby depriving shareholders of the “true value” of their shares, and (2) their fiduciary duties of disclosure by failing to disclose material information in the merger proxy. Plaintiffs sought a “quasi-appraisal remedy” and compensatory damages.
Specifically, plaintiffs alleged that (a) the chairman was a controlling shareholder, holding a 26% interest; (b) he “desire[d] to exit his Merge investment” (allegedly receiving $188 million in “immediate liquidity”); and (c) a majority of the board was conflicted because all but one of the other directors were “beholden” to the chairman. Thus, argued plaintiffs, the transaction was subject to an “entire fairness” review and could not be cleansed even by a fully informed vote of the disinterested shareholders. Plaintiffs also contended that alleged omissions in the merger proxy also precluded the application of any “cleansing effect” of the shareholder vote.
Vice Chancellor Glasscock dismissed the complaint, concluding that the business judgment rule applied because “the [m]erger was approved by an uncoerced majority of the [c]ompany’s disinterested stock, without the presence of a controller who extracted personal benefits.” The Vice Chancellor explained:
Importantly, the mere presence of a controller does not trigger entire fairness per se. . . . The crux of rebutting a cleansing vote at the pleading stage, however, lies not merely in showing that a controller exists, but in pleading facts making it reasonably conceivable that a controller’s interest was adverse to the other stockholders, as where the controller “extracted personal benefits.”
(quoting
Larkin v. Shah, 2016 WL 4485447, at *1 (Del. Ch. Aug. 25, 2016)). According to the Vice Chancellor, the allegation of a “simple interest in selling stock on the part of the controller . . . is insufficient to demonstrate divergent interests.” Instead, “[i]n order for such a situation to constitute a disabling conflict . . . the circumstances . . . must be akin to a ‘crisis’ or a ‘fire sale’ to ‘satisfy an exigent need.’” Here, the Court found that no such financial distress was alleged.
As to plaintiffs’ allegations that the merger proxy was deficient, Vice Chancellor Glasscock explained that the alleged omissions were not material. Specifically, among other things, the Court highlighted that the required “fair summary” of the analysis done by the company’s financial advisor “is just that, a summary,” and “must be sufficient for the stockholders to usefully comprehend, not recreate, the analysis.” In sum, according to the Court, the shareholder vote was “fully informed.”
