Two months ago, in Singh v. Attenborough, the Delaware Supreme Court clarified the defendant-favorable standards for determining liability of directors and their advisors following change in control transactions, where such transactions are approved by a vote of a majority of disinterested, uncoerced, and informed stockholders of the target company. Last week, the Delaware Court of Chancery in In re Volcano Corporation Stockholder Litigation[1] extended that protection to transactions “approved” by fully informed, uncoerced stockholders tendering a majority of shares in a two-step merger pursuant to Section 251(h). The Chancery Court rejected the plaintiffs’ argument that the Recommendation Statement inadequately disclosed the financial advisors’ alleged conflict of interest and applied the irrebuttable business judgment rule standard, extinguishing all claims against the directors for breach of fiduciary duty and all claims against the target’s financial advisor for aiding and abetting that breach. Given this claim extinguishment and in the absence of any claims of waste the Court dismissed the complaint.
In finding that the business judgment rule irrebuttably applied, Vice Chancellor Montgomery-Reeves held that stockholder approval by tendering a majority of shares in a two-step merger pursuant to Section 251(h) can invoke the same highly deferential standard of review as a “vote in favor of a merger by a fully informed, disinterested, uncoerced stockholder majority.” Slip. op. at 41. Since the first-step tender offer of a merger consummated under Section 251(h) “essentially replicates a statutorily required stockholder vote in favor of a merger,” the Court held that they should be treated no differently in post-closing damages actions after a majority of fully-informed, uncoerced stockholders approved the transaction. Id. at 34.
The Court also analyzed the Recommendation Statement supporting the tender offer to conclude that the stockholders were fully informed, thus triggering the irrebuttable business judgment rule. While plaintiffs had argued that the financial advisor’s alleged conflict (which arose from the effect of the merger on a pre-existing call spread transaction) was hidden from stockholders, the Court found to the contrary. Plaintiffs alleged that the Recommendation Statement failed to disclose the “deterioration of the value” of the call spread warrants over time, id. at 45, but the Court found that the disclosures in the Recommendation Statement allowed a reasonable stockholder to infer that, all other factors being equal and in light of the call spread, the financial advisor would have preferred that a merger take place sooner rather than later. The Court further found that, even if the warrants’ value did decay at an “exponential—rather than ‘linear’ or ‘gradual’—rate,” the disclosure of that information would only change the degree of the financial advisor’s interest, and “a reasonable stockholder would not have viewed that fact as significantly altering the total mix of available information” regarding the relationship between the financial advisor’s interests in the call spread transaction and the merger. Id. at 47.
In the final part of the opinion, and notwithstanding that the Court had already ruled that the aiding and abetting claims against the target’s financial advisor were extinguished due to the fully informed, uncoerced tender, the Court emphasized the high bar for pleading aiding and abetting breach of fiduciary duty claims. Vice Chancellor Montgomery-Reeves cited the Supreme Court’s recent guidance in Attenborough, which “reiterated the high burden that a plaintiff faces in attempting to plead facts from which a court could reasonably infer that a financial advisor acted with the requisite scienter for an aiding and abetting claim.” Id. at 49. As in Attenborough, the Court noted that “[n]othing in this record comes close to approaching the sort of [financial advisor misconduct] at issue” in other cases, where there was “fraud on the Board” or “intentional[] dup[ing]” of the board. Id. at 49 & n. 95 (alterations in original).
The Volcano decision again underscores the importance of disclosure to stockholders in post-closing damages cases, providing the crucial carrot of claim extinguishment where adequate disclosure is made. The decision also provides another counter, in addition to Attenborough, to a number of recent cases allowing aiding and abetting claims against financial advisors to proceed past the pleading stage or imposing liability for such claims.
[1] Cleary Gottlieb served as a defense counsel in this case.