Delaware Chancery Dismisses Cash-Out Merger Challenge, Holding That Informed Stockholder Vote Triggered Business Judgment Review Notwithstanding “Disquieting” Allegations
On October 12, 2016, Vice Chancellor Joseph R. Slights III of the Delaware Court of Chancery dismissed a putative shareholder class action alleging fiduciary breaches by the board of directors of OM Group, Inc. (“OM”) arising from OM’s cash-out merger with Apollo Global Management, LLC (“Apollo”). In re OM Group, Inc. S’holders Litig., Consol. C.A. No. 11216-VCS (Del. Ch. Oct. 12, 2016). The conduct of directors in cash-out mergers is typically subject to enhanced scrutiny under Revlon. Because OM’s shareholders had voted overwhelmingly to approve the merger in an uncoerced vote that the Court found to be fully informed, the Court found the board’s conduct was protected by the “irrebutable business judgment rule” under Corwin v. KKR Fin. Holdings, LLC, 125 A.3d 304 (Del. 2015), and dismissed the case. The Court reached this conclusion despite allegations of an egregiously flawed sales process that the Court described as “disquieting.”
Plaintiffs claimed that OM’s directors had rushed to sell OM to Apollo in order to avoid the embarrassment and aggravation of a prolonged proxy fight with activist shareholders. Plaintiffs incorporated into their claims allegations (based on discovery taken on an ultimately abandoned preliminary injunction motion) that OM’s financial advisors had recommended a sale of OM’s constituent business units, rather than a sale of the company as a whole. And Plaintiffs further claimed that defendants had disregarded conflicts of interest among OM’s financial advisors and provided those advisors with intentionally flawed financial projections.
Defendants moved to dismiss, noting that OM’s stockholders had voted to approve the merger at a ten to one ratio, thereby cleansing under Corwin any alleged fiduciary breaches. Plaintiffs argued that the vote was not fully informed because the proxy made inadequate disclosures about a purported director conflict, the bankers’ alleged conflicts, and a competing indication of interest during the go-shop period.
The Court focused on whether the allegedly omitted disclosures were “material,” such that the shareholder vote was uninformed and enhanced scrutiny would apply, but found none rose to the level of materiality. Accordingly, the Court applied the business judgment rule and dismissed the claims. This holding reinforces the post-Corwin significance for directors of fully and fairly disclosing the process undertaken in pursuing corporate transactions and obtaining shareholder approval.