In C&J Energy Services Inc. v. City of Miami (Del. Dec. 19, 2014) (en banc) the Delaware Supreme Court issued a significant decision strongly affirming the notions that a board of directors has the flexibility to craft its own sales process and that Delaware courts should be reluctant to rewrite negotiated provisions of a merger agreement.
The case centered around a merger between C&J and a division of its competitor, Nabors Industries Ltd. C&J, a U.S. corporation, was acquiring a subsidiary of Nabors, which is domiciled in Bermuda, but Nabors would retain a majority of the equity in the surviving company. To obtain more favorable tax rates, the surviving entity, C&J Energy Services, Ltd., would be based in Bermuda, and thus be subject to lower corporate tax rates.
Although the Court of Chancery found that the C&J board harbored no conflict of interest and was fully informed about its own company’s value, the court determined there was a “plausible” violation of the board’s Revlon duties because the board did not affirmatively shop the company either before or after signing with Nabors. On that basis the court enjoined the stockholder vote for 30 days, required C&J to shop itself in violation of the merger agreement between C&J and Nabors, which prohibited C&J from soliciting other bids, and ruled that Nabors could not treat C&J’s solicitation efforts as a basis to walk away from the deal.
On appeal, the Delaware Supreme Court unanimously reversed the decision, rejecting the idea that Revlon duties require specific actions such as an auction or proactive market check. To the contrary, the court held that Revlon and its progeny do not set out a specific route that a board must follow when fulfilling its fiduciary duties, and an independent board is “entitled to use its business judgment to decide to enter into a strategic transaction that promises great benefit,” so long as the transaction is subject to an effective market check that allows another bidder to offer superior terms. Thus, a board may choose to enter into negotiations with only a single potential buyer so long as a new bidder could challenge the agreed transaction by offering to pay more. The court also noted that, “It is too often forgotten that Revlon, and later cases like QVC, primarily involved board resistance to a competing bid after the board had agreed to a change of control, which threatened to impede the emergence of another higher-priced deal.” The record did not support a finding of a similarly “defensive, entrenching motive” in this case.
C&J ultimately offers practical guidance by confirming that Revlon and its progeny do not demand any specific sales procedures to fulfill fiduciary duties. C&J is a decision that recognizes the importance of board discretion with respect to maximizing stockholder value.