In Binks v. DSL.net, Inc., the Delaware Chancery Court found that the defendant’s board acted consistent with its fiduciary duties under Revlon when, facing no other alternatives to bankruptcy, it approved a financing transaction that ultimately led to the sale of the company in a short form merger. The court found that the board acted in good faith, that a majority of its members were disinterested and that it was well-informed by an independent advisor.
At the start of 2006, DSL.net was in dire financial condition, with continuing operating losses and a looming term loan maturity. Its board obtained the services of a financial advisory firm that, after six months, was able to find only one party willing to finance or acquire the company without it first entering bankruptcy. With bankruptcy the only other alternative, the board approved the financing, under the terms of which the company issued notes convertible into over 90% of its stock. Following the financing, the holder of the notes converted them and ultimately acquired the remaining stock of the company through a short form merger. As a result of the merger, the plaintiff stockholder was offered $24,000 for shares that he had purchase for $1.5 million.
The court assumed without deciding that the issuance of the notes, which when converted gave the holder control of DSL.net, should be reviewed under the Revlon standard. The court stated that it was not unreasonable to collapse the issuance of the convertible notes with the short-form merger, creating a single-step transaction for purposes of its analytical review. Under Revlon, a board’s duty in a change of control transaction is to obtain the best price that can reasonably be obtained for the corporation’s stockholders. The court then went on to decide that the board met this duty.
The court ruled that so long as a board is independent and adequately informed and so long as it pursues a reasoned course of action to maximize stockholder value, its decision to enter into a change in control transaction should be upheld. First, the court found that the DSL.net board was independent. Although the plaintiff alleged that a minority of the directors of the company’s board had interests in the transaction, the plaintiff failed to allege that this minority exerted control over the remaining board members. The court also found that the board was well informed. In doing so, it rejected the plaintiff’s claim that the service of the acquirer’s president and chief executive officer as a consultant to a subsidiary of the financial adviser rendered the financial adviser interested. Finally, the court found that selecting the financing transaction over bankruptcy was within the board’s business judgment.