On May 21, 2018, the Delaware Court of Chancery denied Petitioners’ motion for reargument in the Aruba Networks appraisal litigation, styled as Verition Partners Master Fund Ltd. v. Aruba Networks Inc., C.A. No. 11448-VCL (Del. Ch. May 21, 2018).  In the Court’s post-trial memorandum opinion, dated February 15, 2018, Vice Chancellor Laster issued a ruling, setting the stock’s fair value at Aruba’s thirty-day average unaffected market price, which was $17.13 per share, which was significantly below the merger price of $24.67.

In denying Petitioner’s motion for reargument, the Vice Chancellor defended the reasoning of the post-trial memorandum opinion, with provided a further discussion of DFC Global and Dell.  In the original Aruba Networks opinion, Vice Chancellor Laster determined that an efficient market existed for the target’s shares, given the following factors: (i) the presence of a significant amount of stockholders, (ii) the absence of a controlling stockholder, (iii) fulsome trading volume for the target’s stock, (iv) the broad dissemination of information about the target to the market, and (v) that the Court found that the target’s sale process had been robust.  The Court also noted that the transaction was an arm’s-length merger.

In light of the above, the Court determined that the transaction was “Dell-compliant” and therefore market-based indicators would provide the best evidence of fair value. Of note, Vice Chancellor Laster found that both the deal price and the unaffected stock price constituted probative evidence of fair value.  However, the Court elected to rely upon the unaffected stock price, in light of synergies that the parties expected the transaction to generate.  The Court found that the unaffected stock price reflected “the collective judgment of the many based on all the publicly available information … and the value of its shares.” (Slip op., at 120.)  Vice Chancellor Laster observed that using the deal price and subtracting synergies would involve judgment and introduce a likelihood of error in the calculation.

Key Takeaway:  Consistent with DFC Global and Dell, Aruba Networks reinforces the notion that the Court may look to the deal price in an arm’s-length merger as part of a robust sale process in determining fair value.  But Aruba Networks also lends support for reliance upon the target’s unaffected stock price in determining fair value, to the detriment of the petitioner given the disparity between deal price and stock price.  Appraisal petitioners beware.

Carl D. Neff is a lawyer with the law firm of Fox Rothschild LLP.  Carl is admitted in the State of Delaware and regularly practices before the Delaware Court of Chancery, with an emphasis on shareholder disputes.  You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.

The Delaware Supreme Court in Corwin v. KKR Financial Holdings LLC, No. 629, 2014 (Del. Oct. 2, 2015), has recently issued an opinion of substantial import in connection with the standard of review utilized by the Court in the context of a merger transaction, which is a must-read for all D&O litigation attorneys practicing in the Court of Chancery.

Specifically, the Court held that in a merger transaction with a party other than a controlling shareholder, the business judgment standard of review will apply where the voluntary informed judgment of the disinterested shareholders to approve the transaction was obtained.

This case is very significant given that claims for breach of fiduciary duty against D&Os, in the merger context (not with a controlling shareholder), will be more vulnerable to dismissal if the transaction is approved by the voluntary informed judgment of disinterested shareholders–regardless of whether the board is disinterested.

Carl D. Neff is a partner with the law firm of Fox Rothschild LLP.  Carl is admitted in the State of Delaware and regularly practices before the Delaware Court of Chancery, with an emphasis on shareholder disputes. You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.

In the recent decision of In re Zale Corporation Stockholders Litigation, C.A. No. 9388-VCP (Del. Ch. Oct. 29, 2015), the Court of Chancery reversed its prior decision in the same case as a result of the Delaware Supreme Court’s decision, Corwin, et al. v. KKR Financial Holdings LLC, et al., C.A. No. 629, 2014 (Del. Oct. 2, 2015).  The Corwin decision held that the business judgment standard of review applies when a merger is approved by a disinterested board and a majority of the fully informed stockholders.  Under the reasoning of Corwin, the Court of Chancery found that the Board’s actions were not grossly negligent.

Carl D. Neff is a partner with the law firm of Fox Rothschild LLP.  Carl is admitted in the State of Delaware and regularly practices before the Delaware Court of Chancery, with an emphasis on shareholder disputes. You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.

In the recent decision of Cigna Health & Life Ins. Co. v. Audax Health Solutions, Inc., et al., C.A. No. 9405-VCP (Del. Ch. Nov. 26, 2014), the Court of Chancery considered whether merger consideration under 8 Del. C. § 251 can include additional obligations imposed upon stockholders to the company being acquired.  This decision is a recommended read for any party to a corporate merger under Delaware law.

The key takeaway is that in the context of a statutory merger of a Delaware corporation under Section 251 of the Delaware General Corporation Law (“DGCL”), an acquiring company cannot condition payment for shares through the imposition of additional terms upon stockholders—such as indemnification obligations and releases—given that such obligations are not contemplated under the express terms of Section 251.

Background

Plaintiff Cigna Health & Life Ins. Co. (“Cigna”) moved for judgment on the pleadings in this declaratory judgment action, asserting that certain provisions of a merger agreement are contrary to the DGCL. Those provisions relate to a release of claims against the acquiring company, an indemnification requirement, and the appointment of a stockholder representative.

The dispute in this case involves Defendant Optum’s acquisition by merger, via Defendant Audax Holdings, Inc. (the “Acquirer”) of Defendant Audax Health Solutions, Inc. Before the merger, Cigna owned 23,105,430 shares of Audax’s Series B Preferred Stock.

A majority of the Audax board of directors approved the merger with Optum on February 10, 2014 (the “Merger”). On February 14, 2014, the Merger was approved by written consent of 66.9% of Audax stockholders entitled to vote. Cigna did not vote in favor of the Merger. Defendants consummated the Merger on February 14 pursuant to 8 Del. C. § 251.

The written consents were given in the form of Support Agreements. Cigna did not execute a Support Agreement. The Support Agreements included: (1) a release of any claims against the Acquirer (the “Release Obligation”); (2) an agreement to be bound by the terms of the Merger Agreement, specifically including the provisions indemnifying Acquirer for any breaches of the representations and warranties (the “Indemnification Obligation”); and (3) an appointment of SRS as the Stockholder Representative (the “Stockholder Representative Obligation”).

The indemnification makes the former Audax stockholders liable to the Acquirer, up to the pro-rata amount of merger consideration they received, for breaches of certain of the company’s representations and warranties.  Many of the warranties survived the closing of the merger, with most terminating 18 months after the closing date.  However certain warranties survive longer, up to 36 months post-closing, and the indemnification agreement survives indefinitely.

Analysis

Cigna argued that the obligations imposed by the Acquirer ran afoul of 8 Del. C. § 251, which Cigna interprets as requiring the merger consideration be paid upon consummation of the Merger and cancellation of shares. The additional obligations, Cigna contended, are barred by the language of Section 251.  In addition, Cigna argued that the indemnification agreement violated the certificate of incorporation of Audax in that it made stockholders liable for corporate debts.  Generally, stockholders are not personally liable for a corporation’s debts absent a piercing of the corporate veil.

The Court agreed with Cigna and found that the release to the Acquirer was unenforceable because it was a term imposed by the buyer in a contract lacking consideration.  Under the express terms of Section 251 of the DGCL, the stockholders must only cancel their shares to receive merger consideration, not provide additional consideration such as indemnification to the buyer.  The Court relied upon Section 251(b)(5) which allows merger consideration to consist of “cash, property, rights or securities of any other corporation or entity.” Section 251(b). Under this statutory requirement, indemnification obligations could not be included as consideration.

In addition, the Court found that the indemnification obligation, to the extent it is not subject to any monetary cap or limit and is not limited in temporal duration, violates 8 Del. C. § 251 and is void and unenforceable against Cigna.

Finally, the Court rejected Defendants’ “bundle of rights” theory, whereby the rights to receive cash for any cancelled shares is subject to the other provisions of the Merger Agreement.  The Court found this argument to be “on shaky ground”, given that the “rights” considered under the DGCL in the context of a merger setting appear in Section 157 which appears in a list with terms like cash, property, and securities, but not obligations imposed upon stockholders.  Moreover, the Court found  convincing Black’s Law Dictionary’s definition of “rights” as generally benefits, not as obligations.

Conclusion

This decision makes clear that an acquiring party to a merger under Section 251 of the DGCL cannot condition payment for stock in the corporation upon receipt of a release and indemnification obligations by stockholders of the company.  Of note, as discussed in the opinion, if an acquiring company wants to contractually impose obligations upon stockholders, a merger is not the ideal mechanism; instead, if possible the acquiring company should proceed through a stock purchase agreement to obtain such additional obligations.

Carl D. Neff is a lawyer with the law firm of Fox Rothschild LLP.  Carl is admitted in the State of Delaware and regularly practices before the Delaware Court of Chancery, with an emphasis on shareholder disputes.  You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.

In the recent decision of Ehlen v. Conceptus, Inc., C.A. No. 8560-VCG (Del. Ch. May 24, 2013), the Court of Chancery ruled on a motion to expedite filed by Plaintiff Ehlen, in connection with his request to preliminarily enjoin a merger. Through the Complaint, Plaintiff alleged that the Conceptus directors breached their fiduciary duties of care, loyalty, and candor in approving a merger and in filing the accompanying 14D-9 with the SEC. The Complaint alleges three types of claims: a Revlon claim, a challenge to the merger agreement’s package of deal protections, and numerous disclosure claims.

Analysis

The Court recited the standard of review for a motion to expedite, stating that the plaintiff has the burden of demonstrating that good cause exists to “justify imposing on the defendants and the public the extra (and sometimes substantial) costs of an expedited preliminary injunction proceeding.” The Court further explained that a plaintiff meets this burden if he is able to demonstrate “a sufficient possibility of threatened irreparable injury” and a “colorable claim.”

In denying Ehlen’s motion to expedite, the Court found that Ehlen failed to state a colorable claim and improperly delayed in filing his motion.  While Ehlen initially asserted numerous causes of action through the Complaint, between the filing of the Complaint and the motion to expedite (8 days), Plaintiff determined that only the disclosure counts were colorable, and therefore only advocated those counts before the Court at the hearing on the motion to expedite. 

The Court was not persuaded by Ehlen’s disclosure claims in connection with the merger.  In analyzing the claims, the Court reiterated that Delaware directors have a duty of candor, under which they must fully and adequately disclose all material information to stockholders when seeking stockholder action.  Under Delaware law, an omitted fact is material “if a reasonable stockholder would consider it important in a decision pertaining to his or her stock.”  The Court determined that each of Ehlen’s disclosure claims were not colorable, and therefore denied the motion to expedite.

Of significance, the Court also found that Plaintiff’s 8 day delay in filing his motion to expedite after filing the Complaint added to Plaintiff’s burden in demonstrating the necessity in expediting the proceedings.  The Court found that with only three weeks before the filing of the Complaint and the closing of the merger, an eight day delay is significant.  The Court went on to state that while it did not deny the motion based on this delay, it added to the burden of expedition, an added burden created by the Plaintiff which he must overcome through the strength of his allegations of wrongdoing.

Conclusion

This decision demonstrates the importance of immediately seeking a motion to expedite a proceeding.  Here, the Court found that Plaintiff’s 8 day delay was significant given the timing of the closing of the merger, and that such delay added to Plaintiff’s burden in seeking expedited consideration of the lawsuit.  Accordingly, a plaintiff should take all steps necessary to file a motion to expedite contemporaneously with its complaint.

In the case of In re: Paetec Holding Corp. Shareholders Litigation, C.A. No. 6771-VCG (Del. Ch. Mar. 19, 2013), the Court of Chancery awarded attorneys’ fees in the amount of $500,000 in connection with a settlement of a challenge to a merger resulting in additional disclosures prior to the closing of such deal.

Of note, the Court made clear that despite the fact that the fee request was unopposed, the Court still must engage in close judicial scrutiny of the requested fees.  The Court reviewed the fee request under the “common benefit” doctrine, and determined that fees were warranted in this situation.  Specifically, the Court indicated that the standard by which it examines the appropriate amount of attorneys’ fees was set forth by the Delaware Supreme Court in Sugarland Industries, Inc. v. Thomas, 420 A.2d 142 (Del. 1980). The relevant factors are:

(i) the amount of time and effort applied to the case by counsel for the plaintiffs; (ii) the relative complexities of the litigation; (iii) the standing and ability of petitioning counsel; (iv) the contingent nature of the litigation; (v) the stage at which the litigation ended; (vi) whether the plaintiff can rightly receive all the credit for the benefit conferred or only a portion thereof; and (vii) the size of the benefit conferred.

The Court found that the Sugarland factors weighed in favor of the request for attorneys’ fees.  The settlement produced a single supplemental material disclosure, and was obtained by competent counsel.  Accordingly, the request for fees was approved.

On January 10, 2012, in the case of In Re Appraisal of the Aristotle Corporation, the Delaware Court of Chancery addressed an issue of first impression with respect to the standing of stockholders, who dissented to a short form merger under Section 253 of the Delaware General Corporation Law (“DGCL”) and perfected their appraisal rights, to bring an additional claim alleging that the directors breached their fiduciary duty to disclose the material facts necessary for the stockholders to determine whether to seek appraisal.

In connection with a short form merger, the petitioners filed an appraisal action under Section 262 of the DGCL seeking the fair value of their shares. Despite the fact that the appraisal action was pending, on the eve of trial and eighteen months into their appraisal case, the petitioners filed a separate complaint for breach of fiduciary duty of disclosure in connection with the merger seeking the difference between the fair value of their shares and the price of the merger.  The defendants moved to dismiss the fiduciary complaint for lack of standing.

Because there were no prior cases that squarely addressed this issue, the Court relied on its prior decision of Andra v. Blount, 772 A.2d 183 (Del. Ch. 2000) by analogy.  There, the Court was faced with an action for breach of the duty of disclosure in connection with a tender offer, which culminated in a cash out of remaining shareholders through a short form merger.  The plaintiff initially moved for expedited proceedings to enjoin the consummation of the tender offer until corrective disclosures were issued.  Thereafter, the plaintiff withdrew her request to enjoin the tender offer and instead waited to bring a post-closing action for money damages in the form of an appraisal proceeding.  After the short form merger was consummated, in which plaintiff refused to accept the merger consideration and preserved her appraisal rights, plaintiff renewed her fiduciary duty challenge to the disclosures.  The Court ruled that plaintiff did not have standing to pursue her disclosure claim because she did not tender her shares and thus, could not have been injured by the allegedly misleading disclosures.

Importantly, the Andra Court noted that a different result might have been obtained if the plaintiff had timely sought to enjoin her disclosure claim before her decision to tender.  This would have given the Court an opportunity to order corrective disclosures, a remedy that would inure to the benefit of all the stockholders contemplating the decision to tender.  The Court refused to look at the potential injury to the other shareholders because the plaintiff withdrew her injunction motion through which she could have sought to demonstrate collective injury to other investors. Instead, plaintiff chose to press her disclosure claim only after the merger closed. As a result, the Court held plaintiff to the traditional standing requirement that she show individual injury as a result of the misleading disclosures—a burden plaintiff could not satisfy, because she chose not to tender.

“When a litigant files a new claim that, if proven, would not entitle it to any relief that it does not already have a right to receive, that litigant in my view has no proper standing.”

Relying on the reasoning in Andra, the Chancellor in the instant case ruled that the petitioners did not have standing to pursue their disclosure claim because the petitioners never sought to represent other investors, did not promptly seek to enjoin the merger and thus, did not suffer any cognizable individual injury that could be redressed by the Court of Chancery. The Court further found this to be particularly true because the relief sought in the fiduciary duty action is the same as the exclusive remedy afforded in a Section 262 appraisal action—a fair value determination.

The Chancellor reasoned that “when a litigant files a new claim that, if proven, would not entitle it to any relief that it does not already have a right to receive, that litigant in my view has no proper standing.”  In other words, the alleged disclosure inadequacies did not in any way impair the petitioners’ ability to seek appraisal, and addressing the fiduciary duty claim could at best result in the petitioners’ “right to a ‘quasi’ version of something they already possess in its actual form.”  Such a moot court determination, according the Chancellor, would result in an advisory opinion, against which the Delaware Supreme Court has warned.

The Court further found that there was no need to evaluate the possibility of nominal damages in connection with the fiduciary duty action, because the petitioners’ voting interests were not harmed, and they will receive a fair value determination in connection with the appraisal action.

This case is important to shareholders who seek appraisal in connection with a short form merger but also choose to bring a subsequent action for breach of the duty of disclosure in connection with merger.  If the stockholder refuses to tender in connection with the short form merger, thereby preserving their appraisal rights, but fails to seek an injunction of the merger, he will not be able to demonstrate cognizable injury to bring a fiduciary action for breach of the directors’ duty of disclosure after the closing of the short form merger transaction.