John O’Toole writes:

In In re Volcano Corporation Stockholder Litigation, the Court of Chancery held that stockholders’ acceptance of tender offers as part of mergers accomplished under  § 251(h) of the Delaware General Corporation Law (“DGCL”) “has the same cleansing effect as a stockholder vote in favor of a transaction.” C.A. No. 10485-VCMR, 2016 WL 3583704, at *11 (Del. Ch. June 30, 2016).  Thus, as “the business judgment rule irrebuttably applies” to a transaction approved by the “fully informed vote [of] a majority of a company’s disinterested, uncoerced stockholders,” the same result obtains upon “the acceptance of a first-step tender offer by fully informed, disinterested, uncoerced stockholders representing a majority of a corporation’s outstanding shares in a two-step merger under section 251(h)….”

Copyright: bbourdages / 123RF Stock Photo
Copyright: bbourdages / 123RF Stock Photo

The Court’s decision in Volcano is particularly noteworthy for two reasons.  First, Vice Chancellor Montgomery-Reeves determined that the fully informed, disinterested, uncoerced acceptance of a tender offer done pursuant to § 251(h) is functionally identical to a fully informed, disinterested, uncoerced stockholder vote.  Second, the Court’s determination that the  acceptance of tender offers and stockholder votes are, at least in this context, the same, extends the irrebuttable application of the business judgment rule as discussed in the line of Supreme Court cases from Corwin to Attenborough, to § 251(h) tender offers and mergers.

In equating § 251(h) tender offers to stockholder votes, the Vice Chancellor determined that § 251(h) sufficiently protects stockholder interests and that the policy analysis undertaken by the Supreme Court in Corwin as to stockholder votes applies equally to § 251(h) tender offers.  The Court held that because § 251(h) requires merger agreements, which in turn activate directors’ disclosure obligations and fiduciary duties, and prohibits structural coercion, stockholder interests are no less protected than if a vote were required.  Further, where the Supreme Court in Corwin held that, in the context of a vote, “stockholders [should] have…the free and informed chance to decide on the economic merits of a transaction for themselves” and “that judges are poorly positioned to evaluate the wisdom of business decisions,” the Court here found such policy “equally applicable to a tender offer in a Section 251(h) merger.”  Vice Chancellor Montgomery-Reeves held that “a stockholder is no less exercising her ‘free and informed chance to decide on the economic merits of a transaction’ simply by virtue of accepting a tender offer rather than casting a vote.”  Thus, the Court held that because of such statutory protections and policy considerations, there is no “basis for distinguishing between a stockholder vote and a [§ 251(h)] tender offer.”

It follows then, and the Court held, that mergers approved by the acceptance of § 251(h) tender offers should be afforded the same “cleansing effect” as mergers approved by stockholder votes.  Thus, for both § 251(h) mergers and mergers approved by stockholder votes, the business judgment standard of review irrebuttably applies.  In so holding, the Court clarified and expanded upon the recent line of Chancery and Supreme Court opinions discussing the effect of fully informed, disinterested, uncoerced stockholder votes.  Vice Chancellor Montgomery-Reeves explained that “[i]n this context, if the business judgment rule is ‘irrebuttable,’ then a plaintiff only can challenge a transaction on the basis of waste….If, by contrast, the business judgment rule is ‘rebuttable,’ then a board’s violation of either the duty of care or duty of loyalty…would render the business judgment rule inapplicable.”  By expanding the irrebuttable application of the business judgment rule, the Court necessarily expanded the types and number of mergers that will now be, at least practically speaking, insulated from stockholder challenges.

John O’Toole is a summer associate, resident in the firm’s Wilmington office.

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.