In a recent case the Delaware Court of Chancery held that business judgement review indisputably applies to board decisions in mergers where a majority of the company's outstanding stockholders consent to tender their shares in a two-step merger pursuant to Section 251(h) of the Delaware General Corporation Law.(1) Although such tender offers are not formal stockholder votes, the court held that the acceptance of a tender offer by a majority of the stockholders will have the same cleansing effect on board decisions under Delaware law as the approval of a merger by a majority of stockholders.
The case arose from the acquisition of Volcano Corporation by Phillips Holding USA through a two-step merger pursuant to Section 251(h) of the Delaware General Corporation Law. Certain shareholders of Volcano filed suit, alleging that (among other things) the board breached its duties of care and loyalty because:
- the board members were motivated by certain benefits that they received in the transaction; and
- the board relied on the "flawed advice" of its conflicted financial adviser, Goldman, Sachs & Co, which had previously entered into a series of hedging transactions with Volcano in 2012.
In its analysis of the standard applicable to the board's decision, the chancery court reviewed the recent Delaware Supreme Court decisions in Gantler v Stevens and Corwin v KKR Financial Holdings LLC and determined that business judgement review applies to mergers when a majority of a corporation's fully informed, uncoerced and disinterested stockholders approve the merger through a statutorily required vote.
The court went on to hold that, although there was no formal stockholder vote in this case, a tender offer commenced and consummated pursuant to Section 251(h) had a similar "cleansing effect" as a statutorily required stockholder vote. Citing the policy rationales for applying business judgement review to mergers that are approved by a statutory vote, the Volcano court held that there was no basis for distinguishing between this and a tender offer accepted by the majority of the stockholders pursuant to Section 251(h).
The court's decision in Volcano makes clear that, if properly executed, the tender offer that comprises the first step of a two-step merger pursuant to Section 251(h) will be viewed in the same manner as a statutorily required stockholder vote, with respect to the review standard for board decisions on such transactions. Thus, if a majority of disinterested and fully informed stockholders have accepted such a tender offer, Delaware courts will apply business judgement review when examining the board's decision on the offer.
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For further information on this topic please contact Anne Johnson Palmer or Peter Wang at Ropes & Gray LLP by telephone (+1 415 315 6300) or email (firstname.lastname@example.org or email@example.com). The Ropes & Gray LLP website can be accessed at www.ropesgray.com.
William Shonfeld, summer associate, also contributed to this update.