As set forth in the Delaware Supreme Court decision of Corwin v. KKR Fin. Holdings LLC, 125 A.3d 304 (Del., 2015), a board’s decision to approve a merger transaction is subject to business judgment rule presumption when the merger was approved by a disinterested majority of the company’s stockholders in a fully-informed and uncoerced vote.

This rationale was applied in the recent decision of In re Solera Holdings, Inc. S’holder Litig., Cons. C.A. No. 11524-CB (Del. Ch. Jan. 5, 2017).  There, a former stockholder of Solera Holdings, Inc. (“Solera” or the “Company”) challenged a private equity firm’s acquisition of the Company for $55.85 per share (a total of approximately $3.7 billion) in a merger that closed in March 2016, at which time Solera merged with an affiliate of Vista Equity Partners (“Vista”) in the transaction that is the subject of this action (the “Merger”)

The complaint alleged a single claim for breach of fiduciary duty against the eight members of Solera’s board who approved the transaction (of which seven were outside directors).  Specifically, the complaint alleged that the defendants improperly favored the interests of Company’s management, failed to establish an effective special committee or to extract the highest price possible for the Company, implemented preclusive deal protection devices, and failed to disclose material information about the value of the Company’s stock.

Plaintiff did not contend that the transaction is subject to entire fairness review, given that the transaction did not involve a controlling stockholder and the disinterestedness of the outside directors was not challenged.  However, plaintiff asserted that the enhanced scrutiny standard under Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. Supr., 1985) and its progeny should be applied.

Chancellor Bouchard noted that, as explained Supreme Court explained in Corwin:

Revlon was ‘primarily designed to give stockholders and the Court of Chancery the tool of injunctive relief to address important M&A decisions in real time, before closing,’ and was not a tool ‘designed with post-closing money damages claims in mind.’

In the post-closing context, the Supreme Court held in Corwin that ‘when a transaction not subject to the entire fairness standard is approved by a fully informed, uncoerced vote of the disinterested stockholders, the business judgment rule applies.’ This rule flows from our ‘long-standing policy . . . to avoid the uncertainties and costs of judicial second-guessing when the disinterested stockholders have had the free and informed chance to decide on the economic merits of a transaction for themselves.’

The Court found there was no question that a majority of Solera’s stockholders approved the transaction in an uncoerced vote after receiving a definitive proxy statement dated Oct. 30, 2015.  Moreover, the complaint did not allege that the act of approving the merger was an act of waste.  Thus, the claim could only survive the motion to dismiss if it was demonstrated that the Solera stockholders who approved the transaction were not fully informed.

The Court further found that the Solera stockholders’ approval of the transaction was fully informed.  In making this analysis, the Court stated as follows:

Under Delaware law, when directors solicit stockholder action, they must “disclose fully and fairly all material information within the board’s control.” The essential inquiry is whether the alleged omission or misrepresentation is material. Delaware has adopted the standard of materiality used under federal securities laws. Under that standard, information is “not material simply because [it] might be helpful.” Rather, it is material only “if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote.” In other words, information is material if, from the perspective of a reasonable stockholder, there is a substantial likelihood that it “significantly alter[s] the ‘total mix’ of information made available.”

The Court disagreed with plaintiff’s insinuation that defendants were obligated to disclose “all troubling facts regarding director behavior” irrespective of their materiality.  Rather, the Corwin Court made clear that “troubling facts regarding director behavior . . . that would have been material to a voting stockholder” must be disclosed when seeking stockholder approval of a transaction.

For these reasons, the Court of Chancery granted defendant’s motion to dismiss, and dismissed plaintiff’s complaint with prejudice.

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 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.