In recent years, the announcement of an impending merger has often been followed by the filing of a securities fraud class action seeking to enjoin the proposed transaction. Several decisions in M&A cases from this past year underscore the heavy burden plaintiffs face under Delaware law if they seek to delay a shareholder vote based on allegations that additional disclosures are required.
In most instances, Delaware courts refuse to delay the shareholder vote, finding that the requested additional disclosures are not necessary. For example, Alston & Bird recently represented CheckFree Corporation in cases filed in Delaware and Georgia as a result of the company’s proposed merger with Fiserv, Inc.87 In connection with this transaction, CheckFree’s Board of Directors had received a fairness opinion from Goldman Sachs. CheckFree’s proxy statement approving the merger contained a description of the financial analyses underlying the fairness opinion, but did not provide the details of management’s financial projections. Plaintiffs claimed that CheckFree’s disclosures were deficient under Delaware law and, as a result, they requested that the merger be enjoined.88
The Delaware Court of Chancery wisely held that it was not necessary to include in the proxy statement all financial data needed to make an independent determination of fair value.89 The mere fact that the company’s financial advisors may have considered certain non-disclosed information did not alter this analysis, and cases where additional disclosures had been required were distinguishable because those companies had spoken affirmatively on the subject matter at issue.90 As explained by the CheckFree Court, it remains the case under Delaware law that “[t]he burden of demonstrating a disclosure violation and of establishing the materiality of requested information lies with the plaintiffs.”91
Similarly, in other recent opinions, Delaware courts have stressed that they “place great faith in the discernment and acumen of shareholders and directors.”92 Thus, “[o]nly in extraordinary circumstances will th[e] Court substitute its business judgment for that of directors, or usurp the rights of shareholders to make their own informed decisions.”93 In Louisiana Municipal Police Employees’ Retirement System v. Crawford, the Chancery Court was asked to enjoin a $21 billion stock-for-stock merger between Caremark Corporation and CVS Corporation.94 After considering the existence of shareholder appraisal rights among other factors, the court declined to grant the broad injunctive relief requested by plaintiffs.95 Instead, the court postponed the shareholder vote for only 20 days to allow Caremark shareholders to consider additional disclosures on their appraisal rights and the structure of bankers’ fees.96 In so ruling, the court made clear that plaintiffs “bear a heavy burden to persuade the Court that shareholders are somehow unable to provide for their own protection, or that the effective use of the corporate franchise is barred by some critical lack of information.”97
In re Netsmart Technologies, Inc. Shareholders Litigation98 is likewise instructive. There, the court considered whether to enjoin a shareholder vote to approve a “going private” merger in which two private equity firms would purchase Netsmart from its shareholders. The court, however, refused to grant plaintiffs’ request to “enjoin the only deal on the table, when the stockholders can make that decision for themselves.”99 Although additional disclosures were ordered, the court recognized that “granting of a broader injunction would . . . pose a risk that [the purchasers] might walk or materially lower [the] bid.”100 The court concluded that it “would be hubristic for me to take a risk of that kind for the Netsmart stockholders . . . .”101
One additional merger case from this past year is also worth mentioning: United Rentals, Inc. v. RAM Holdings, Inc.102 United Rentals, Inc. (“URI”), a party to a failed merger, brought suit against the prospective buyer, seeking to enforce the merger. The case turned on a provision of the merger agreement that, on its face, appeared to give URI the right to seek injunctive relief, including specific performance, to enforce the agreement.103 That provision was, however, subject to another part of the agreement stating that URI’s sole remedy if the merger was not consummated was a termination fee of $100 million.104
After a two-day trial to determine the parties’ understanding of these provisions, Chancellor William Chandler held that the proposed buyer, Cerberus, had made clear during the negotiation process its understanding of the agreement. The evidence showed that Cerberus understood its obligations were limited to the payment of the $100 million termination fee.105 Accordingly, URI’s claim for specific performance was denied.106
While the opinion largely turned on principles of contract interpretation, the case presents an important lesson regarding the need for clear communications during the negotiation process. As the court observed, “Cerberus and its attorneys have aggressively negotiated this contract, and along the way they have communicated their intentions and understandings . . . . Despite the Herculean efforts of its litigation counsel at trial, URI could not overcome the apparent lack of communication of its intentions and understandings to defendants.”107
In 2007, various federal courts applying Delaware law dismissed derivative suits where plaintiffs failed to allege with particularity why they were unable to make the required pre-lawsuit demand on the company’s board of directors. These courts invariably recognized that plaintiffs cannot rely merely on generalized and conclusory allegations of domination and control, personal or business relationships with other directors, receipt of directors’ fees, or committee membership to show that the directors were interested or lacked independence and, for that reason, would have been unable to consider a demand.
For example, in In re Coca-Cola Enterprises, Inc., Derivative Litigation,108 the district court dismissed with prejudice derivative claims brought against the officers and directors of Coca-Cola Enterprises (“CCE”), who were represented in the case by Alston & Bird. Plaintiff alleged that The Coca-Cola Company exercised domination and control over CCE, the largest bottler of Coca-Cola products, and over its board.109 The court, however, found that plaintiff’s “generalized allegations fail[ed] to offer any particularized facts describing how Coca-Cola exerted its allegedly improper domination over CCE directors.”110 The court also rejected plaintiff’s attempts to show demand futility through generalized allegations of membership on the board’s audit committee, insider trading, or employment with CCE.111
Other recent, well-reasoned decisions have recognized that a pre-suit demand will not be excused due to social or business interests shared by board members. 112 Such relationships are unremarkable and, in fact, are considered “de rigueur in today’s executive circles.”113 Also, the mere fact that a defendant may own significant amounts of company stock or belong to a family who owns the majority of shares does not establish that the board was dominated or controlled by this individual such that demand is excused.114 In addition, courts routinely reject allegations that directors could not adequately consider a demand because they face potential liability from the claims at issue.115 The common practice of naming all members of the board as defendants and alleging demand futility based on their potential liability is insufficient.116 Similarly, courts will not excuse demand based on mere allegations that the director defendants are indemnified by the corporation for breaches of the duty of care.117 A director’s independence is not called into question simply because the company has agreed to indemnify that individual to the full extent authorized under Delaware law.118