143 A.3d 727
Del. Ch.2016Background
- Volcano Corporation entered into convertible note financing and hedging (Call Spread Transactions) with Goldman Sachs; those hedges would terminate upon a cash change-of-control, producing a $24.6 million net payment from Volcano to Goldman if a sale occurred.
- Philips negotiated a series of bids for Volcano during 2014; after multiple rounds the parties signed a merger agreement for $18 per share in a two-step transaction under 8 Del. C. § 251(h) (tender offer followed by short-form merger).
- Volcano’s board (with an independent Transaction Committee) recommended the deal; 89.1% of outstanding shares tendered in the first-step offer and the merger closed without a stockholder vote under § 251(h).
- Plaintiffs (former Volcano stockholders) sued, alleging the board approved an uninformed, conflicted sale and that Goldman aided and abetted breaches by concealing its conflicts and favoring a quick cash deal.
- Defendants moved to dismiss under Court of Chancery Rule 12(b)(6), arguing the deal was cleansed by the fully informed, disinterested, uncoerced majority tender and thus review is irrebuttably under the business judgment rule.
- The Court found stockholder acceptance of the § 251(h) tender offer had the same cleansing effect as a statutorily required stockholder vote, concluded Volcano’s disclosures were not materially deficient, and dismissed all claims (including aiding and abetting) for failure to state a claim.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Applicable standard of review | Revlon (enhanced scrutiny) applies because this was a change-of-control cash sale | Corwin cleansing applies: fully informed, uncoerced, disinterested majority approval invokes business judgment rule | Business judgment rule irrebuttably applies after informed, voluntary majority tender under § 251(h) |
| Does a § 251(h) tender offer equal a stockholder vote for cleansing? | Tender offers are different/coercive and should not get Corwin’s cleansing effect | A § 251(h) first-step tender replicates a statutorily required vote and satisfies the same safeguards | Acceptance of a conditioned § 251(h) tender by a majority has the same cleansing effect as a vote |
| Were Volcano stockholders fully informed? | No — Goldman failed to disclose material details about the Warrants’ value decay (allegedly exponential), concealing a conflict | Recommendation Statement disclosed Goldman’s hedges and that Warrants’ value decays over time; further supplemental disclosures were made pre-closing | Disclosures were adequate; omission of the word "exponential" was not material and shareholders were sufficiently informed |
| Aiding-and-abetting liability for Goldman | Goldman knowingly participated in breaches by hiding conflicts and pushing a quick cash deal | Plaintiffs fail to plead an underlying breach (because business judgment rule applies) and fail to plead Goldman’s knowing participation with required particularity | Claim dismissed: aiding-and-abetting fails because plaintiffs did not adequately plead a breach or the requisite scienter |
Key Cases Cited
- Corwin v. KKR Financial Holdings LLC, 125 A.3d 304 (Del. 2015) (a fully informed, uncoerced vote of disinterested stockholders invokes the business judgment rule)
- Gantler v. Stephens, 965 A.2d 695 (Del. 2009) (distinguishes statutory shareholder approval from post hoc ratification; addresses scope of ratification doctrine)
- In re KKR Financial Holdings LLC Shareholder Litigation, 101 A.3d 980 (Del. Ch. 2014) (Chancery Court decision applying cleansing effect to a statutorily required approval)
- Cede & Co. v. Technicolor, Inc., 634 A.2d 345 (Del. 1993) (defines waste and explains extreme standard required to overcome business judgment rule)
- In re Morton’s Restaurant Group, Inc. Shareholders Litigation, 74 A.3d 656 (Del. Ch. 2013) (characterizes tender offers as shareholder approval and discusses deference to voluntary, informed stockholder decisions)