The Delaware Court of Chancery recently held that where a majority of a corporation’s fully informed, disinterested, and un-coerced stockholders tender their shares as part of a two-step merger, that has the same “cleansing” effect as a shareholder vote and will result in the application of the business judgment rule to subsequent shareholder challenges to the transaction.
In a June 30, 2016 opinion, the Delaware Court of Chancery held that where a majority of a corporation’s fully informed, disinterested, and uncoerced stockholders tender their shares as part of a two-step merger, that has the same “cleansing” effect as a shareholder vote and will result in the application of the business judgment rule to subsequent shareholder challenges to the transaction. In re Volcano Corp. Stockholder Litigation, C.A. No. 10485-VCMR.
In Volcano, the court granted the defendants’ motion to dismiss claims challenging a two-step merger. The court concluded that the business judgment rule irrebuttably applies where a majority of disinterested, fully informed, and uncoerced stockholders tender into a two-step merger under section 251(h) of the Delaware General Corporate Law (the “DGCL”). The court’s opinion establishes that a tender of shares to the acquirer in a section 251(h) transaction “essentially replicates [the] statutorily required stockholder vote in favor of a merger.”
The court’s decision is an important extension of the Delaware Supreme Court’s decisions in Corwin v. KKR Financial Holdings LLC, No 629, 2014 (Del. Oct. 2, 2015), and Singh v. Attenborough, No. 645, 2015 (Del, May 6, 2016). Both decisions gave cleansing effect to mergers that were approved by fully informed stockholder votes.
Volcano involved a stockholder challenge to a completed two-step tender offer structured under section 251(h) of the DGCL. Section 251(h), adopted in 2013, permits a buyer to promptly consummate a second-step merger without having to call a stockholders meeting or reaching the 90% threshold to consummate a short-form merger if, among other conditions, it acquired the same number of shares in the tender offer that would be required to approve a long-form merger. In this transaction, 89.1% of the outstanding shares were tendered to the buyer. The plaintiffs then filed suit and sought to have the court review the directors’ negotiation and approval of the transaction under the Revlon enhanced scrutiny standard.
In examining whether to apply Corwin and Attenborough, the court looked to whether (1) stockholder acceptance of a tender offer in connection with a section 251(h) transaction was equivalent to a stockholder vote to approve a merger, and (2) such tendering stockholders were fully informed, disinterested and uncoerced. The court answered both questions in the affirmative and dismissed the stockholders’ challenge to the transaction.
Specifically, the court held that “the acceptance of a first-step tender offer by fully informed, disinterested, uncoerced stockholders representing a majority of a corporation’s outstanding shares in a two-step merger under Section 251(h) has the same cleansing effect under Corwin as a vote in favor of a merger by a fully informed, disinterested, uncoerced stockholder majority.”
Volcano is important because prior decisions of the Court of Chancery had left open the question of whether Corwin would apply to transaction structures other than a traditional long-form merger. Because a section 251(h) transaction mirrors a long-form merger in many respects by requiring, among other things, that the board approve a merger agreement and declare its advisability, the court found this type of tender offer to be sufficiently analogous to extend the doctrine.
Applying Attenborough, the court further held that the business judgment rule was irrebuttable, such that the only way for the stockholders’ claims to survive a motion to dismiss was for them to allege facts indicating that the transaction constituted corporate waste. Because “the test for waste is whether any person of ordinary sound business judgment could view the transaction as fair,” the court noted that “it is logically difficult to conceptualize how a plaintiff” could prove such a claim in light of the approval of many disinterested stockholders.
The decision in Volcano continues the trend of deferring to the fully informed and uncoerced judgment of disinterested stockholders by relying on the business judgment rule, rather than on enhanced judicial scrutiny to approve transactions. This trend makes it increasingly difficult for stockholder-plaintiffs to challenge transactions once they are approved by a majority of stockholders.