Publications

(Article from Securities Law Alert, July 2016) 

For more information, please visit the Securities Law Alert Resource Center

Pursuant to Section 251(h) of the Delaware General Corporation Law (“DGCL”), companies may complete two-step mergers without a stockholder vote if the acquiring corporation consummates a first-step tender offer.

On June 30, 2016, the Delaware Chancery Court held that “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) has the same cleansing effect under” the Delaware Supreme Court’s decision in Corwin v. KKR Financial Holdings LLC, 125 A.3d 304 (Del. 2015),[1] “as a vote in favor of a merger by a fully informed, disinterested, uncoerced stockholder majority.” In re Volcano Corporation S’holder Litig., 2016 WL 3583704 (Del. Ch. 2016) (Montgomery-Reeves, V.C.). Under Corwin, claims of fiduciary duty breaches against the target corporation’s directors must be dismissed absent allegations of waste.

Background

On December 16, 2014, Volcano Corporation's board approved a cash-out merger by Philips Holding USA, to be consummated as a two-step merger under Section 251(h) of the DGCL.

Volcano’s stockholders tendered 89.1% of the company’s outstanding shares into the first-step tender offer.  On February 17, 2015, after the expiration of the tender offer, Volcano and Philips consummated the merger without a stockholder vote, as permitted under Section 251(h).

Volcano stockholders subsequently brought suit alleging the Volcano board breached its duties of care and loyalty in connection with the merger. Defendants moved to dismiss the complaint.

Chancery Court Holds the Business Judgment Rule Applies Because Volcano’s Fully-Informed, Uncoerced Stockholders Approved the Merger by Tendering a Majority of the Company’s Shares  

The court first considered “what standard of review to apply in evaluating [d]efendants’ alleged fiduciary duty breaches.” The court determined “the business judgment rule irrebuttably applie[d] to the [m]erger because Volcano’s disinterested, uncoerced, fully informed stockholders tendered a majority of the [c]ompany’s outstanding shares into the [t]ender [o]ffer.”

The Volcano court explained that “recent [Delaware] Supreme Court decisions confirm that the approval of a merger by a majority of a corporation’s outstanding shares pursuant to a statutorily required vote of the corporation’s fully informed, uncoerced, disinterested [stockholders] renders the business judgment rule irrebuttable.” Id. (citing Corwin, 125 A.3d 304, and Singh v. Attenborough, 2016 WL 2765312 (May 6, 2016)[2]).  The Volcano court further noted “such an approved transaction can only be challenged on the basis that it constituted waste.” Id. (citing Attenborough, 2016 WL 2765312).

The Volcano court “conclude[d] that stockholder approval of a merger under Section 251(h) by accepting a tender offer has the same cleansing effect as a vote in favor of that merger.” The court rejected plaintiffs’ contention that “stockholder acceptance of a tender offer and a stockholder vote differ in a manner that should preclude the cleansing effect articulated by the [Delaware] Supreme Court in Corwin from applying to tender offers.”

First, the court found meritless plaintiffs’ claim that there is no explicit role for a target corporation’s board of directors in responding to a tender offer. The court explained that “[a] target board’s role in negotiating a two-step merger subject to a first-step tender offer under Section 251(h) . . . is substantially similar to its role in a merger subject to a stockholder vote under Section 251(c) of the DGCL.” A target corporation’s board must “negotiate, agree to, and declare the advisability of the terms of both the first-step tender offer and the second-step merger in a Section 251(h) merger, just as a target corporation’s board must negotiate, agree to, and declare the advisability of a merger involving a stockholder vote under Section 251(c).” Moreover, “[t]he target board also is subject to the same common law fiduciary duties, regardless of the subsection under which the merger is consummated.”

The Volcano court found similarly baseless plaintiffs’ suggestion that “a first-step tender offer in a two-step merger . . is more coercive than a stockholder vote in a one-step merger.”  The court explained that “Section 251(h) . . . alleviates the coercion that stockholders might otherwise be subject to in a tender offer because (1) the first-step tender offer must be for all the target company’s outstanding stock, (2) the second-step merger must ‘be effected as soon as practicable following the consummation of the’ first-step tender offer, (3) the consideration paid in the second-step merger must be of ‘the same amount and kind’ as that paid in the first-step tender offer, and (4) appraisal rights are available in all Section 251(h) mergers, subject to the conditions and requirements of Section 262 of the DGCL.” Id. (quoting Del. C. tit. 8 § 251(h)).

Finally, the Volcano court found “the policy considerations underlying the [Delaware Supreme Court’s] holding in Corwin do not provide any basis for distinguishing between a stockholder vote and a tender offer.” The Volcano court reasoned that “[a] stockholder is no less exercising her ‘free and informed choice to decide on the economic merits of a transaction’ simply by virtue of accepting a tender offer rather than casting a vote.” Id. (quoting Corwin, 125 A.3d 304). The Volcano court further noted that “judges are just as ‘poorly positioned to evaluate the wisdom of’ stockholder-approved mergers under Section 251(h) as they are in the context of corporate transactions with statutorily required stockholder votes.” Id. (quoting Corwin, 125 A.3d 304). In concluding that “the [Delaware] Supreme Court did not intend that its holding in Corwin be limited to stockholder votes only,” the Volcano court found it significant that the Corwin court included a case involving a two-step merger with a first-step tender offer among the cases it cited as support for its decision.

Court Holds Plaintiffs Failed to State Breach of Fiduciary Duty Claims Against Volcano’s Board 

Because the court found “the business judgment rule irrebuttably applie[d]” to the Volcano-Philips merger, the court determined the transaction could “only . . . be challenged on the basis that it constituted waste.” The court noted that it was “logically difficult to conceptualize how a plaintiff [could]  ultimately prove a waste . . . claim in the face of a decision by fully informed, uncoerced, independent stockholders to ratify the transaction, given that the [t]est for waste is whether any person of ordinary sound business judgment could view the transaction as fair.” The court held that “[b]ecause the [m]erger did not constitute waste, the [c]omplaint fail[ed] to state a valid breach of fiduciary duty claim against the [Volcano] [b]oard.”