The Delaware Court of Chancery recently ruled that a company's board of directors is vested with discretion to choose between competing buyout offers — even if the ultimate choice is favorable to the personal interests of the company's controlling stockholder and chief executive officer. The ruling was made in connection with the court's dismissal of a complaint alleging that the board of a medical device maker (the "target") had breached its fiduciary duties when it approved a cash and stock acquisition offer from another corporation (the "acquirer"). The acquisition had closed in June 2012 but stockholders were still pursuing damages, claiming that the target's board had rejected a better offer from an unnamed private equity firm because the acquirer's offer was more favorable for tax purposes for the target's controlling stockholder, who was also the company's CEO.
The merger, the plaintiffs contend, was a conflicted transaction that should be reviewed under the entire fairness standard or at least be subject to enhanced scrutiny under the so-called Revlon standard articulated in Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986), which requires the board to take reasonable measures to get the highest price reasonably attainable. The defendants countered that the entire fairness standard was not warranted because the controlling stockholder did not have a disabling conflict of interest and thus the business judgment rule shielded the board from liability for choosing the acquirer's offer over that of the private equity firm. Moreover, the defendants argued that Revlon was not applicable because the merger, which was for 65 percent stock and 35 percent cash, was not a change of control transaction.
Chancellor Leo Strine, in dismissing the complaint with prejudice, rejected the plaintiffs' attempt to "try to gin up a conflict of interest" and ruled that the board had conducted a thorough sales process over two years, which maximized the buyout price without sacrificing the rights of minority stockholders. Further, the chancellor ruled that the board's decision put the controlling stockholder and the minority stockholders on equal footing. A controlling stockholder was not required to "subsidize a better deal for the minority stockholders by subjecting him to a different and worse form of consideration. To hold otherwise would turn on its head the basic tenet that controllers have a right to vote their shares in their own interest." The Court of Chancery held that the plaintiffs had failed to plead any facts which would support an inference that the controlling stockholder's interests constituted a conflict of interest sufficient to justify invocation of the entire fairness standard. All stockholders received equal treatment in the merger and the business judgment rule applied to insulate the board's decision to approve the merger.
In re Synthes, Inc. Shareholder Litigation, No. 6452 (Del. Ch. Aug. 17, 2012)