Delaware Court Of Chancery Holds That Business Judgment Rule Applies When Informed Majority Of Stockholders Tenders Shares In A Two-Step Merger
On June 30, 2016, Vice Chancellor Tamika Montgomery-Reeves of the Delaware Court of Chancery dismissed a breach of fiduciary duty action brought by former shareholders of Volcano Corporation against the company’s board of directors and financial advisor. In re Volcano Corp. Stockholder Litig., No. CV 10485-VCMR, 2016 WL 3583704 (Del. Ch. June 30, 2016). The Court held that because a fully informed majority of stockholders had tendered their shares during the first step of a two-step merger, the business judgment rule applied to the board’s decision to approve the merger.
On February 17, 2015, Phillips Holding USA Inc. acquired Volcano for $18 per share in a two-step all-cash tender offer and merger pursuant to Delaware General Corporation Law (“DGCL”) Section 251(h). In the first step, more than 90% of Volcano’s outstanding shares were tendered or were subject to notices of guaranteed delivery. In the second, the non-tendering shareholders received the same consideration as the tendering shareholders in a cash-out merger. Notably, five months earlier, Volcano had declined an offer of $24 per share from Phillips.
Plaintiffs alleged that the board had acted in an uninformed manner in approving the merger and was motivated by other benefits that board members stood to receive as a result of the merger. Plaintiffs further alleged that Volcano’s financial advisor was conflicted because it stood to gain from the sale of certain Volcano warrants in the event of a change of control transaction. Plaintiffs asserted claims against the Volcano board for breaches of the fiduciary duties of care and loyalty and against the financial advisor for aiding and abetting those alleged breaches.
Vice Chancellor Montgomery-Reeves examined the Delaware Supreme Court’s recent decisions in Corwin v. KKR Financial Holdings LLC, 125 A.3d 304 (Del. 2015), and Singh v. Attenborough, 2016 WL 2765312 (Del. May 6, 2016). In those cases, the Supreme Court held that upon a fully informed vote by a majority of a company’s disinterested, uncoerced stockholders, the business judgment rule applied to a court’s review of the transaction except in cases of waste (which the Singh court acknowledged as a vestigial exception with “little real-world relevance”).
Vice Chancellor Montgomery-Reeves found that this rule applies equally to a tender of a majority of shares in a two-step merger because: (1) a target board’s negotiation and disclosure duties are substantially similar in a two-step merger and a merger requiring a shareholder vote; and (2) Delaware law provides protections against coercive tender offers, so there is no relevant reason to treat the “approval” of the shareholders who tender their shares differently from an approval of shareholders in a statutorily required stockholder vote. Finally, the Vice Chancellor found that the policy concerns underlying the holding in Corwin—that judges should not second-guess the judgment of business decisions that disinterested stockholders have approved freely and with full information—applied equally to tender offers. Therefore, the Court held that the business judgment rule irrebuttably applied and dismissed the claims.