While Revlon1 placed paramount importance on directors' duty to seek the highest sale price once their corporation is on the block, simply pointing to a less-than-ideal purchase price is not enough to trigger heightened scrutiny of the directors' actions during the sale process. In its November 30, 2007 opinion in Globis Partners, L.P. v. Plumtree Software, Inc., et al. (Del. Ch., Nov. 30, 2007), the Delaware Court of Chancery dismissed at the pleading stage claims that directors failed to fulfill their duties under Revlon in connection with a sale of the corporation they oversaw because the complaint did not allege facts sufficient to rebut the business judgment rule. The opinion also clarified standards for merger-related disclosures in several distinct areas.
The case related to the purchase of Plumtree Software by BEA Systems. Purchase price negotiations between the two software companies were complicated when the Plumtree board learned that Plumtree was in breach of a contract with the U.S. General Services Administration (the "GSA contract"), and that a significant liability would likely result from the breach. Accordingly, Plumtree lowered its selling price in order to induce BEA to proceed with the purchase.
After the merger was announced, Globis Partners, L.P., a Plumtree shareholder, sued Plumtree and its directors on behalf of all Plumtree shareholders, claiming that Plumtree's directors breached their fiduciary duties in agreeing to the lower sales price. The sale of Plumtree was a "fire sale" at the lowered price that was motivated, the complaint alleged, by a desire of the Plumtree directors to avoid personal liability in connection with the breached GSA contract.2 The complaint also alleged fiduciary breaches due to deficiencies in the merger proxy disseminated by the Plumtree directors.
The Court first summarized the bedrock principles of Delaware corporate law relating to directors' fiduciary duties:
- Directors owe a duty of "unremitting loyalty" to shareholders, and in particular, when the board has determined to sell the company for cash or engage in a change of control transaction, it must, under Revlon, act reasonably in order to secure the highest price reasonably available;
- In making their decisions, however, directors enjoy the protection of the "business judgment rule" - the "presumption that in making a business decision the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interest of the company"; and
- If a "proper" decision-making process is followed by the directors, a court will not review the wisdom of the decision itself; the plaintiff must plead facts challenging the directors' decision making in order to rebut the business judgment rule's presumption.
The plaintiff alleged a breach of the directors' "duty of loyalty" to the corporation.3 The Court was not clear on the gravamen of Globis' allegations as to why the directors approved the merger at a lower price, and interpreted the plaintiff's complaint as alleging that the Plumtree directors either rubber-stamped the merger so as to shield themselves from derivative liability in connection with the GSA contract breach, or received some merger-related consideration such that they would be self-interested in the merger's consummation (warranting an "entire fairness" review of the merger by the Court).
As to the first possibility, the Court cited Lewis v. Ward4 for the analysis to be undertaken in reviewing allegations that directors approved the merger at a sub-optimal price to avoid derivative liability. The plaintiff must plead facts showing: (i) that the directors faced substantial liability; (ii) that the directors were motivated by such liability; and (iii) that the merger was pretextual. Globis failed to plead facts necessary to establish any of these three elements. The Court chided Globis for failing to even identify which fiduciary duty the Plumtree directors might have breached in connection with the GSA contract, and for failing to plead any facts at all suggesting that any board member took (or failed to take) any direct action with respect to the GSA contract. While Globis argued that the directors "had to know" about the problems with the GSA contract, the Court quickly foreclosed this line of argument by construing it as a Caremark5 "duty of oversight" claim. Already facing a high burden as "possibly the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment," the "duty of oversight" claim here failed because the plaintiff did not allege "either that Plumtree had no system of controls that would have prevented the GSA overcharges or that there was sustained or systemic failure of the board to exercise oversight." Turning to the last two prongs of the Lewis v. Ward analysis, the Court concluded that because the merger negotiations were well underway before the Plumtree board became aware of the GSA contract breach, it was unlikely that the merger was motivated by this liability, or was a pretext without a valid business purpose.
As to the second possibility, while the Court acknowledged that there was no "bright-line rule" for determining when merger-related benefits compromise a director's loyalty, it found the allegations in Globis' complaint so lacking that they did "not require the Court to draw fine distinctions." The Court quickly ran down the list of supposed benefits to the directors and determined that they were either immaterial (in the case of the directors' indemnification rights and the CEO director's severance), untainted by conflicts of interest (acceleration of options, the value of which would increase as the purchase price rose) or shared by all shareholders (option cash-outs).
The remainder of the decision addressed Globis' claims that the Plumtree merger proxy omitted many material facts, in particular with respect to the rendering of a fairness opinion by Plumtree's investment bankers. The Court emphasized its bedrock principle of disclosure: for an omission to be material, "there must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by [a] reasonable investor as having significantly altered the 'total mix' of information."6 In weighing the materiality of several alleged omissions, the Court concluded that:
- a disclosure of the investment banker fees that states simply that they are "customary" and contingent in nature was sufficient - the exact amount of the fees need not be further disclosed;
- while reliable financial projections should generally be disclosed, and unreliable projections do not need to be disclosed, Plumtree's omission of any projections was not grounds for a disclosure claim, because Globis did not allege that there existed any reliable projections that should have been disclosed; and
- the merger proxy did not need to disclose the identity of third parties that were approached by Plumtree as alternative merger partners.
Indeed, the Court determined that most of the alleged defects in the merger proxy's fairness opinion were with respect to the substance or quality of the opinion and its analyses and not the adequacy of the disclosure of the facts upon which the fairness opinion was based or the process by which it was reached. The Court noted that any such "quibble with the substance of a banker's opinion does not constitute a disclosure claim."
The Globis Partners decision is significant for two reasons in particular. First, it demonstrates that without alleging specific facts suggesting a breach of fiduciary duty on the part of the directors, simply citing Revlon and alleging an arguably sub-optimal company sale price will not overcome the business judgment rule. Second, the decision contains a helpful discussion of merger proxy disclosure standards, especially with regard to the processes used and compensation received by investment bankers in connection with the fairness opinion.