The Delaware Court of Chancery has refused to enjoin a tender offer by 3M Company for the stock of Cogent, Inc., despite claims by Cogent's stockholders that its board of directors breached fiduciary duties owed to them by agreeing to preclusive deal protection measures and failing to pursue the best transaction reasonably available.
In refusing the stockholder's claims, the court analyzed the actions taken by the Cogent board for reasonableness, with particular emphasis on the reasonableness of a termination fee contained in the transaction merger agreement. The termination fee, one of many deal-protection provisions in the merger agreement, was $28.3 million, representing 3% of the $943 million required to purchase the Cogent shares (the "equity value"). Plaintiffs claimed the cash on Cogent's books ($513 million) should reduce the equity value for purposes of determining the reasonableness of the termination fee and that the reduced value (the "enterprise value"), should instead be used. Based on the target's enterprise value ($430 million), the termination fee equaled 6.6%, which the plaintiffs challenged as being unreasonably high and a preclusive deal protection measure approved by Cogent's board of directors in breach of its fiduciary duties to its stockholders.
The court rejected the plaintiffs' claims, holding that Cogent's equity value, not its enterprise value, should be used in determining the reasonableness of the termination fee and that the 3% fee was within the range of reason. According to the court, the fact that Cogent had a significant amount of cash on its books did not change the fact that an acquirer must pay the full equity value in order to consummate the transaction. The court similarly held that the other deal-protection provisions in the merger agreement (including a no-shop, matching rights and so-called top-up option) were also reasonable and adopted by an informed board of directors. This case highlights the courts' unwillingness to enjoin transactions supported by a fully-informed and deliberative board of directors.
In re Cogent, Inc. S'holder Litig., Consol. C.A. No. 5780-VCP (Del. Ch. Oct. 5, 2010)