In the recent case of Steinhardt v. Howard-Anderson, discussed previously on this site with respect to the court’s position regarding certain proxy disclosures, Vice Chancellor Laster offered a new insight into the application of the enhanced Revlon review to a transaction where the consideration was a combination of cash and stock. The court enjoined the acquisition of Occam Networks, Inc. by Calix, Inc. pending additional disclosures regarding certain actions of Occam’s financial advisor. However, the plaintiff in the case had also argued for an injunction on process grounds. The court rejected that argument, but expressed its belief that Revlon applied.
In this deal, the Occam shareholders were to receive approximately 50% cash and 50% stock, with the stock portion perhaps ending up at just over the 50% measure. Immediately following the merger, the former Occam shareholders would own approximately 15% of the surviving corporation. Vice Chancellor Laster appeared persuaded that, because the shareholders would only hold a 15% minority stake in the surviving corporation, they would not likely be in a position to negotiate the size of the premium in any subsequent sale of Calix, making the present merger a “final stage transaction.” He explained: “The reason enhanced scrutiny applies to a change of control is because it’s a constructive final stage transaction. You’re giving up control to a person who could then cash you out because he’s the new controller. This is a situation where the target stockholders are in the end stage in terms of their interest in Occam. This is the only chance they have to have their fiduciaries bargain for a premium for their shares as the holders of equity interests in that entity.”