In this opinion denying stockholder plaintiffs’ application for a preliminary injunction, the Court of Chancery found that the plaintiffs were likely to prevail on their argument that the heightened Revlon standard should apply to a transaction where merger consideration consists of 50% cash and 50% stock. Nevertheless, the Court ultimately denied the plaintiffs’ application for a preliminary injunction, finding that the defendant directors’ actions were reasonable under the Revlon standard.
Seven months after emerging from bankruptcy, the board of the Smurfit-Stone Container Corp. (“Smurfit- Stone” or the “Company”) unanimously approved an agreement and plan of merger (the “merger agreement”) to be acquired by Rock-Tenn Co. (“Rock-Tenn”) in a transaction whereby the Smurfit-Stone stockholders would be entitled to receive approximately 50% of the merger consideration in cash and the other 50% in shares of Rock-Tenn common stock. Plaintiff stockholders alleged that the Smurfit-Stone board failed to comply with its obligations under Revlon by conducting an inadequate sales process and obtaining an inadequate price from Rock-Tenn. Plaintiffs also alleged that Smurfit-Stone’s board failed to adequately shop the Company before deciding to negotiate exclusively with Rock-Tenn, that the allegedly onerous deal protections precluded potential topping bids, and that the deal was tainted by conflicts on the part of the Company’s executives and financial adviser who allegedly had monetary incentives to back a quick sale.
Vice Chancellor Parsons noted that the question whether Revlon applies to a merger in which the consideration is evenly split between cash and stock was unsettled. The Vice Chancellor concluded that plaintiffs were likely to prevail on their argument that Revlon was applicable in this instance because the deal constituted “an end game for all or a substantial part of a stockholder’s investment in a Delaware corporation.” The Court explained that although no Smurfit-Stone stockholder will be cashed out entirely, “100% of its stockholders who elect to participate in the merger will see approximately 50% of their Smurfit-Stone investment cashed out.”
The Vice Chancellor noted that although there is no single path that a board must follow to satisfy its obligations under Revlon, “the directors must follow a path of reasonableness which leads toward [the] end [of value maximization].” The Court emphasized that “reasonableness, and not perfection, is what Revlon requires.”
After reviewing the record, the Vice Chancellor found that the process undertaken by the board included “sufficient indicia of reasonableness under the circumstances to satisfy Revlon.” First, the Court observed that the record indicated that nine of the ten Smurfit-Stone directors were outside, independent directors with experience in a diverse range of industries. Second, the Vice Chancellor noted that the board created a special committee to deal with potential bidders, and such committee retained competent advisors. Third, the Court found that the “Board made appropriate use of the Special Committee . . . which asserted its control over the negotiations with . . . Rock-Tenn, as well as their own personnel, from a very early stage.” The Court further noted that the special committee met multiple times to consider the Rock-Tenn offers, “did not bow to management pressure, and, instead, engaged in real, arm’s length dealings with potential acquirers.” From these facts, the Court concluded that the plaintiffs were not likely to succeed on their claims that the board was not adequately informed and failed to take sufficient actions toward the goal of maximizing stockholder value in its sales process.
Similarly, the Court rejected plaintiffs’ claim that the directors breached their fiduciary duties by deciding to deal exclusively with Rock-Tenn and failing to conduct a presigning market check. The Vice Chancellor acknowledged that directors have a duty to maximize stockholder value, but noted that they are under “no duty to employ a specific device such as the auction or market check mechanism.” Here, the special committee had carefully considered a “sufficient amount of reliable evidence” from which it could reasonably conclude that a market check was not worth the risks of jeopardizing the Rock-Tenn transaction. Additionally, Vice Chancellor Parsons observed that because the Smurfit-Stone board knew that other bidders were not likely to step forward and had a reasonable belief that Rock-Tenn’s offer was superior to remaining as a stand-alone company, “the Board reasonably could have sought to sign an exclusive deal with Rock-Tenn to prevent the latter from considering other acquisitions, subject to its fiduciary duties.” The Court also rejected plaintiffs’ contention that the special committee’s decision to permit an inside director and the Company’s chief administrative officer and general counsel to take active roles in the due diligence process and negotiating the merger transaction created “significant conflicts.” Vice Chancellor Parsons found that it was appropriate to permit the two employees to perform those functions because of their “intimate knowledge of the Company” and, “because management’s potential conflicts were recognized, the Board took firm control of the sales process and management’s involvement in it.”
Vice Chancellor Parsons next rejected plaintiffs’ arguments that the challenged deal protections, which included a no-shop provision, matching rights, and a $120 million termination fee of approximately 3.4% of equity value, were preclusive or coercive. The Court found that the matching rights and the no-shop provision were relatively standard in form and were not shown to be preclusive or coercive. The Court also held that the termination fee, while “toward the upper boundary of permissibility under Delaware law,” was still within the range previously found to be reasonable. The Court further emphasized that the termination fee was reciprocal.
Having concluded that plaintiffs were unlikely to succeed on the merits of their claims, the Court held that plaintiffs faced no imminent threat of irreparable harm and that enjoining the transaction would create a risk that Smurfit-Stone’s stockholders could lose out on the transaction altogether. Accordingly, the Court denied the plaintiffs’ motion for preliminary injunction.
The full opinion is available here.