On December 19, 2014, the Delaware Supreme Court issued important guidance on a board of directors’ Revlon duties when it reversed a Chancery Court order enjoining a merger and imposing a mandatory 30-day go-shop period. In C&J Energy Services, Inc. v. City of Miami General Employees’ and Sanitation Employees’ Retirement Trust, No. 655/657 (Del. Dec. 19, 2014), the Court emphasized the importance of allowing rival bidders to submit alternative proposals while re-affirming that “Revlon and its progeny do not set out a specific route that a board must follow when fulfilling its fiduciary duties.” In particular, the Court held thatRevlon does not require an active market check such as a go-shop period in all cases.
The dispute in the case arose out of an agreed merger between C&J Energy Services, Ltd. and a Bermuda-based subsidiary of Nabors Industries, Ltd. The transaction was structured as a tax inversion through which C&J would acquire Nabors’ subsidiary and continue in its managerial role, but Nabors would retain a majority stake in the surviving entity. The merger agreement included a standard “fiduciary out” clause allowing the C&J board to negotiate with rival bidders under certain circumstances, but C&J did not conduct an active market check, such as a go-shop period, before entering the deal.
On November 24, 2014, the Delaware Court of Chancery issued a preliminary injunction ordering C&J to actively shop itself for 30 days and enjoining C&J from holding its stockholders meeting for the same period. The Chancery Court’s decision focused on the fact that C&J approached the merger as a strategic acquisition instead of a sale. The Court observed that C&J took no steps to shop the company in order to find the best value for its stockholders. The Court further noted that the C&J board did not have “impeccable” knowledge of the assets of the Nabors subsidiary. As a result, the Court concluded that the plaintiffs had a valid claim that the C&J board violated its duties under Revlon.
The Delaware Supreme Court reversed on multiple grounds. First, the Supreme Court flagged a critical procedural error in the lower court’s ruling. The Court of Chancery based its preliminary injunction on a finding that there was “a plausible showing of a likelihood of success on the merits as to a breach of the duty of care.” The Supreme Court noted that applicable standard of review required that the plaintiff show a “reasonable probability” of success on the merits. The Supreme Court highlighted the importance of applying the correct standard because, under Delaware law, “the showing of a reasonable probability of success must be particularly strong when no other bidder has emerged despite relatively mild deal protection devices,” as was true in this case.
Second and more substantively, the Supreme Court held that the lower court misinterpreted Revlon by conjuring up a previously non-existent requirement for an active market check in all circumstances. The Supreme Court explained that a board can satisfy Revlon through passive market checks such as a “fiduciary out” clause so long as those checks ensure there is “no barrier to the emergence of another bidder” and “adequate time for such a bidder to emerge.” The Supreme Court also disagreed with the lower court’s implied requirement of “impeccable” knowledge, explaining that Revlon requires directors to make a “reasonable decision, not a perfect decision.” After reviewing the facts, the Court held that the C&J board’s passive market checks were sufficient to satisfy Revlon.
This decision adds to a long line of Delaware cases expounding a flexible and equitable interpretation of Revlon. The Supreme Court again refused to make Revlon into a “structured, mechanistic, mathematical exercise” by requiring a go-shop period in every case. Instead, the Court reinforced a board’s right to exercise its business judgment to enter strategic transactions that promise the greatest potential value for the company. The Court’s analysis demonstrates that a board’s conduct will be judged on its equitable effect on the company and its stockholders rather than a formulaic checklist of one-size-fits-all requirements.
The decision also continues a strong trend disfavoring preliminary injunctions in merger disputes. Delaware courts have rarely granted preliminary injunctions in such suits. Even in cases involving potentially serious breaches of fiduciary duty, Delaware courts have declined requests for an injunction out of respect for the right of the shareholders to approve or reject the merger. In keeping with this principle, the Delaware Supreme Court noted that C&J’s “shareholders were adequately informed” and would have “a fair chance to evaluate the board’s decision for themselves” and “to vote on whether to accept the benefits and risks that come with the transaction.”