In this memorandum opinion, Vice Chancellor Laster granted the plaintiff stockholder an award of attorneys’ fees and expenses of $1.1 million in connection with a contested fee application following approval of the settlement of the action. In doing so, Vice Chancellor Laster discussed various issues relating to top-up options, including the statutory prerequisites for the proper authorization of a top-up option under Delaware law.
The litigation related to a challenge to the acquisition of ev3 by Covidien Group S.a.r.l. (“Covidien”) pursuant to an agreement and plan of merger (the “Merger Agreement”). The Merger Agreement provided for Covidien to acquire ev3 in a two-step transaction pursuant to which Covidien’s wholly owned subsidiary would first commence a tender offer to purchase ev3’s outstanding shares and then effect a prompt second step merger in which all remaining ev3 stockholders would receive the same consideration. The Merger Agreement included a top-up option (the “Top-Up Option”), which Covidien’s wholly owned subsidiary could exercise if certain conditions were met. The Top-Up Option was designed to permit Covidien’s wholly owned subsidiary to increase its stock ownership to at least 90 percent, the threshold needed to effect a short-form merger under Section 253 of the Delaware General Corporation Law (the “DGCL”). The Merger Agreement provided that Covidien’s wholly owned subsidiary could pay for the Top-Up Option shares in cash or by delivering a promissory note to ev3, with the promissory note’s terms to be set in the future and determined in the first instance by Covidien or its wholly owned subsidiary.
The plaintiff stockholder filed a complaint in the Delaware Court of Chancery that “sought a preliminary injunction blocking the transaction on the grounds that (i) the Top-Up Option failed to comply with Sections 152, 153 and 157 of the of the DGCL. . . , (ii) the exercise of the Top-Up Option would coerce stockholders to tender because of the threat of ‘appraisal dilution,’ (iii) the ev3 directors breached their fiduciary duties in granting the Top-Up Option, and (iv) COV aided and abetted their breach.” After the Court granted a motion to expedite, the parties entered into a memorandum of understanding. The parties thereafter drafted settlement papers and attempted to agree on a fee award that the defendants would not oppose. The parties were unsuccessful, and the plaintiffs applied for an award of $1.1 million while the defendants argued for a fee award of $525,000.
To determine the appropriate fee award, the Court applied the factors indentified in Sugarland Industries, Inc. v. Thomas, 420 A.2d 142 (Del 1980), though it primarily focused upon one factor, the benefit achieved for ev3 and its stockholders.
The Court first considered the benefits conferred by the settlement in alleviating the threat of “appraisal dilution.” While it concluded that the plaintiff stockholder “obtained complete relief on this claim,” by securing an agreement that the shares issued under the Top-Up Option and any related consideration would not be considered for purposes of appraisal, the Court deemed the resulting benefit to be “ephemeral at best.” It did so upon finding that the plain language of Delaware’s appraisal statute, Section 262 of the DGCL, calls for the Top-Up Option shares exclusion because the issuance of such shares and the receipt of cash or a promissory note in payment of those shares is an element of value arising from the accomplishment or expectation of the merger. Even assuming that the appraisal statute did not govern, however, the Court found that “the real-world operation of the appraisal process” was unlikely to result in coercion from “appraisal dilution.” As such, the Court awarded the plaintiff only $100,000 for this aspect of the settlement.
The Court next considered the benefits the litigation conferred upon ev3 and its stockholders by addressing the statutory problems created by the Top-Up Option. The Court found those benefits to be far more meaningful, as “the Merger Agreement, the Top-Up Option and any shares issued upon its exercise likely were void,” as originally structured. First, the Court found that the plaintiff stockholder had a strong argument that the Top-Up Option did not comply with Section 157(b) of the DGCL, which requires that the option terms, including the consideration to be provided for the shares, be set forth in the certificate of incorporation “or in a resolution adopted by the board of directors providing for the creation and issue of such rights or options, and, in every case, shall be set forth or incorporated by reference in the instrument or instruments evidencing such rights or options.” The Merger Agreement, which was the instrument evidencing the Top-Up Option, arguably failed to set forth the consideration to be paid for the shares. Although the Merger Agreement “authorized the consideration for the Top-Up [Option shares] to be paid with a promissory note, [it] failed to set forth the material terms of the note, including the terms of repayment, provisions for interest, whether the note will be secured, negotiable or transferable, or other material terms.” The Court noted that Section 157(b) of the DGCL also requires that the terms be set forth in board resolutions and surmised that it was likely that there were no such board resolutions given the absence of terms in the Merger Agreement. In addition, the Court suggested that ev3 may have failed to comply with Sections 153(a) and 157(d) of the DGCL as it was not clear that the ev3 board of directors made a determination that the consideration to be received for the shares to be issued in the Top-Up Option had a value of at least par value. Finally, the Court found that the ev3 directors may have failed to satisfy their statutory obligation to determine the sufficiency of the consideration to be received for the shares to be issued in the Top-Up Option because the directors did not make any such determinations under the terms of the Merger Agreement and instead left that determination to a future date. The Court rejected the defendants’ attempts to minimize the statutory problems by arguing that the directors generally knew what they were doing and that the Top-Up Option shares would only briefly be outstanding, finding that statutory violations are not cured either by general understanding or brevity.
Deeming these to be “serious statutory flaws,” the Court observed that the MOU “administered a preventative cure.” It amended the Merger Agreement to spell out the terms of the promissory note, required the ev3 board to meet to approve the amended Merger Agreement and adopt an implementing resolution, and required Covidien to pay the par value of any Top-Up Option shares in cash. Thus, by pursuing the litigation and obtaining this settlement, the Court found that the plaintiff stockholder “and her counsel prevented the seeds of a future legal crisis from germinating.” It held an award of $1 million to be “fair and reasonable compensation” for remedying such statutory concerns.
Finally, the Court turned to the disclosures of the amendments to the Merger Agreement and changes to the Top-Up Option required by the terms of the settlement. Because the disclosures “did not provide any incremental value beyond the substantive terms already discussed,” the Court did not award any incremental fees.
Accordingly, the Court awarded plaintiff’s counsel fees and expenses totaling $1.1 million. The full opinion is available here.