Delaware Court Of Chancery Dismisses Post-Merger Claims For Alleged Violation Of DGCL § 203 And Breach Of Fiduciary Duty
On August 16, 2021, Vice Chancellor Joseph R. Slights III of the Delaware Court of Chancery dismissed breach of fiduciary duty and other claims brought by a stockholder of Genomic Health, Inc. (the “Company”) in connection with its acquisition by Exact Sciences Corp. Flannery v. Genomic Health Inc., et al., C.A. No. 2020-0492-JRS (Del. Ch. Aug. 16, 2021). The Court held that the transaction did not violate Delaware General Corporation Law (“DGCL”) § 203, entire fairness did not apply because there was no conflicted controlling stockholder, and enhanced scrutiny under Revlon did not apply because the merger was not a change in control transaction. Accordingly, the Court found that plaintiff failed to overcome the presumption of the business judgment rule.
DGCL § 203 generally prohibits business combinations with an interested stockholder for three years after the counterparty becomes an interested stockholder, unless the board in advance of that approves the merger or the transaction that renders the counterparty an interested stockholder. Plaintiff asserted that the merger violated DGCL § 203 because the acquiror became an interested stockholder before the Company’s board approved the merger when the Company’s largest stockholder group—holding 25% of the Company’s shares in advance of the deal—indicated their willingness to vote in favor of the transaction. But the Court noted that the stockholder group as of that time had rejected certain terms in a voting agreement proposed by the acquiror and only executed a voting agreement after the board approved the merger. The Court further held that allegations demonstrating a “then-present, non-binding intent” by the stockholder group to support the merger did not render the acquiror an interested stockholder before board approval.
The Court also rejected plaintiff’s argument that the merger was subject to entire fairness review. Plaintiff contended that the 25% stockholder group controlled the Company and obtained a non-ratable benefit in the form of increased liquidity. But the Court found that the complaint lacked any well-pled allegations demonstrating control, as the group held a “mere 25% voting interest, [held] only two of the eight Board seats and [did] not meddle in the day-to-day operations of the Company.” The Court also concluded that the complaint failed to demonstrate that the group acted under a conflict of interest with respect to the deal because the allegation that the group wanted liquidity was insufficient to “support an inference they were incentivized to cause the Board to deprive other stockholders of the fair value of their shares.”
The Court also declined to apply enhanced scrutiny under Revlon v. MacAndrews & Forbes Holdings., Inc., 506 A.2d 173 (Del. 1986). The Court found that Revlon scrutiny was not implicated because the consideration was comprised of 58% stock (in addition to 42% cash) and the merger did not result in a “change of control.” The Court highlighted that the complaint did not include allegations demonstrating that the stock component of the deal and the resulting capital structure “compromised the . . . stockholders’ opportunity to secure a control premium for their shares in the future.”
The Court further found that even if the transaction had triggered Revlon, the exculpatory provision in the Company’s charter precluded liability here because the complaint did not sufficiently allege that the board “failed to obtain the best value available for shareholders in bad faith.” The Court rejected plaintiff’s “laundry list” of challenged decisions—including, for example, the failure to capitalize on the Company’s increase in value during negotiations or to conduct a post-signing market check—as reflecting “mere disagreements” with how the board conducted the negotiations rather than bad faith.