IN RE VOLCANO CORPORATION STOCKHOLDER LITIGATION
CONSOLIDATED C.A. NO. 10485-VCMR
Court of Chancery of Delaware
Date Submitted: March 15, 2016 Date Decided: June 30, 2016
143 A.3d 727
MONTGOMERY-REEVES, Vice Chancellor.
Derrick B. Farrell and James R. Banko, FARUQI & FARUQI LLP, Wilmington, Delaware; Seth D. Rigrodsky, Brian D. Long, Gina M. Serra, and Jeremy J. Riley, RIGRODSKY & LONG, P.A., Wilmington, Delaware; Kent A. Bronson, Roy Shimon, and Christopher Schuyler, MILBERG
William M. Lafferty, D. McKinley Measley, and Richard Li, MORRIS, NICHOLS, ARSHT & TUNNELL LLP, Wilmington, Delaware; Koji Fukumura and Peter Adams, COOLEY LLP, San Diego, California; Attorneys for Defendants Kieran T. Gallahue, Lesley H. Howe, R. Scott Huennekens, Siddhartha Kadia, Alexis V. Lukianov, Ronald A. Matricaria, Leslie V. Norwalk, and Daniel J. Wolterman.
Kevin G. Abrams, J. Peter Shindel, Jr., and Daniel R. Ciarrocki, ABRAMS & BAYLISS LLP, Wilmington, Delaware; Mitchell A. Lowenthal and Meredith Kotler, CLEARY GOTTLIEB STEEN & HAMILTON LLP, New York, New York; Attorneys for Defendant Goldman, Sachs & Co.
Raymond J. DiCamillo, J. Scott Pritchard, and Rachel E. Horn, RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; Michael H. Steinberg and Edward E. Johnson, SULLIVAN & CROMWELL LLP, Los Angeles, California; Attorneys for Nominal Defendant Volcano Corporation.
OPINION
MONTGOMERY-REEVES, Vice Chancellor.
The plaintiffs in this action are former public stockholders of a company that was acquired for $18 per share in an all-cash merger. Just five months prior, the target company had declined an offer of $24 per share from the same acquiror. After the companies announced the merger, the plaintiffs brought this action against the target company‘s board of directors and its financial advisor. The gist of the plaintiffs’ complaint is that the board breached its fiduciary duties in approving the merger and the financial advisor, motivated by its own conflicts of interest, aided and abetted those breaches. Both the board and the financial advisor moved to dismiss the complaint under Court of Chancery Rule 12(b)(6).
The defendants argue, among other things, that stockholders representing a majority of the target company‘s outstanding shares expressed their fully informed, uncoerced, disinterested approval of the merger. As such, according to the defendants, the business judgment rule standard of review irrebuttably applies to the plaintiffs’ allegations and insulates the merger from a challenge on any ground other than waste, which the plaintiffs fail to allege. As further explained in this Opinion, I agree with the defendants and, therefore, grant their motions to dismiss under Rule 12(b)(6).
I. BACKGROUND1
A. Parties
Plaintiffs Melvin Lax, Melissa Gordon, and Mohammed Munawar (“Plaintiffs“)
Defendants R. Scott Huennekens, Kieran T. Gallahue, Lesley H. Howe, Siddhartha Kadia, Alexis V. Lukianov, Ronald A. Matricaria, Leslie V. Norwalk, and Daniel J. Wolterman were members of Volcano‘s board of directors (the “Board“) at the time of the complained-of merger. Huennekens also served as the Company‘s President and Chief Executive Officer (“CEO“).
Defendant Goldman, Sachs & Co. (“Goldman“) is a New York-based investment banking firm. Goldman served as Volcano‘s financial advisor in connection with the merger. The Board and Goldman, together, are referred to as “Defendants.”
Nominal Defendant Volcano was a San Diego-based Delaware corporation and “the global leader in intravascular imaging for coronary and peripheral applications[] and physiology.”2 Volcano‘s shares were listed on the NASDAQ under the symbol “VOLC.”3
Non-party Philips Holding USA Inc. is a Delaware corporation and a wholly-owned subsidiary of Koninklijke Philips, N.V. (together with Philips Holding USA Inc., “Philips“).4 Philips is an Amsterdam-based Dutch technology company that focuses on healthcare, consumer lifestyle, and lighting products. Philips‘s stock is listed on the New York Stock Exchange under the symbol PHG.
B. Facts
1. Volcano issues convertible notes and enters into hedge transactions with Goldman
In 2012, Volcano sought to raise funds through a convertible note offering. To that end, the Company entered into an underwriting agreement (the “Underwriting Agreement“) with Goldman and J.P. Morgan Securities LLC (“J.P. Morgan” and, together with Goldman, the “Underwriters“) on December 4, 2012. Pursuant to the Underwriting Agreement, Volcano agreed to sell $400 million of 1.75% Convertible Senior Notes due in 2017 (the “Convertible Notes“) and, at the option of the Underwriters, up to an additional $60 million of those Convertible Notes. The Underwriters exercised that option on December 5, 2012 and issued the full $460 million of Convertible Notes (the “Convertible Note Issuance“). The Convertible Note Issuance closed on December 10, 2012.
The Call Spread Transactions addressed these dual objectives through the two separate transactions between Volcano and the Underwriters that comprised the Call Spread Transactions. In the first transaction, Volcano paid $78,085,344 to purchase from the Underwriters call options (the “Options“) for 14.01 million shares of Volcano common stock at an initial strike price of $32.83 (the “Option Transaction“). Because the Option Transaction gave Volcano the ability to repurchase the same number of shares that the Convertible Notes could be converted into at a strike price equal to the conversion price of the Convertible Notes, Volcano could ensure that the total number of its shares outstanding would remain static.
In the second transaction, the Underwriters paid $46,683,206 to purchase from Volcano warrants (the “Warrants“) for 14.01 million shares of Volcano common stock at an initial strike price of $37.59 (the “Warrant Transaction“). The Warrant Transaction partially offset the cost to Volcano of the Option Transaction and effectively raised the conversion price of the Convertible Notes from $32.83 to $37.59. As a result of the Call Spread Transactions, therefore, the Convertible Notes likely would not have had any dilutive effect until Volcano‘s common stock reached a price of $37.59 per share.
Goldman sold 65% of the Options under the Option Transaction and purchased 65% of the Warrants under the Warrant Transaction. J.P. Morgan sold and purchased the other 35%. The Options were set to expire on December 1, 2017, the same day that the Convertible Notes matured. The Warrants were set to expire over a 120-business day period beginning in March 2018. Alternatively, both the Options and the Warrants would terminate immediately upon the consummation of certain change in control transactions that required redemption of the Convertible Notes, including a cash-out merger. In the event of such a transaction, the Underwriters would pay Volcano the Options’ fair value, and Volcano would pay the Underwriters the Warrants’ fair value.
2. The Board explores merger options
In January 2014, as part of the Company‘s general business development outreach, Huennekens had meetings with two companies (“Company A” and “Company B“) regarding their respective interests in a strategic transaction with Volcano. Afterwards, Volcano and the companies entered into confidentiality agreements, and Volcano‘s senior management gave presentations to each of the companies.
In April 2014, as discussions with Company A and Company B progressed, Volcano retained Goldman to help perform a market check to gauge other companies’
Ultimately, Volcano contacted five strategic buyers. In addition to Company A and Company B, the Board directed Goldman to contact two companies (“Company C” and “Company D“) with whom Volcano‘s senior management had prior confidential discussions and authorized Huennekens to contact another company (“Company E“). In April 2014, Huennekens led a management presentation to Company E regarding a strategic transaction with Volcano. For various reasons, each of Companies A through E declined to pursue a strategic transaction with Volcano, and the Board ended its market check process.
3. Volcano and Philips enter into merger discussions, which end after Philips proposes an insufficient offer price
In June 2014, Philips, with which Volcano had a commercial relationship since 2007, expressed to Goldman that it was interested in exploring a strategic acquisition of the Company. Goldman relayed that information to Huennekens, who then consulted with Matricaria, the Chairman of the Board.
On June 23, 2014, Volcano and Philips entered into a confidentiality agreement, and merger discussions between the companies began in earnest. During the remainder of June and July 2014, Goldman and Lazard Ltd. (“Lazard“)—Philips‘s financial advisor—held a number of meetings and telephone calls regarding a potential transaction and Volcano‘s financial performance. Members of Philips‘s and Volcano‘s management also communicated with one another and attended those financial advisor meetings during that time period.
On July 25, 2014, when Volcano‘s common stock closed at a price of $16.18 per share, Philips delivered a non-binding indication of interest to acquire Volcano for $24 per share, subject to an eight week period of exclusivity during which it would perform due diligence. On July 29, 2014, Goldman discussed with Volcano‘s senior management the potential effects that a change in control transaction would have on the Call Spread Transactions and proposed that Volcano consider the matter further. On July 30, 2014, the Board, members of Volcano‘s senior management, Goldman, and Volcano‘s legal counsel met to discuss Philips‘s $24 per share indication of interest. At that meeting, the Board decided to allow Philips to proceed with due diligence, but without any commitment as to the $24 per share price or eight week exclusivity period. After Goldman‘s representatives left the meeting, the Board authorized the retention of Goldman as its financial advisor for the potential merger with Philips. As the Board‘s financial advisor, Goldman stood to earn a $17 million advisor fee, contingent on the consummation of Volcano‘s sale. The Board also authorized the creation of a transaction committee comprised of independent Board members to oversee the merger process and appointed Gallahue, Howe, Lukianov, and Matricaria to that committee (the “Transaction Committee“). Matricaria served as the Chairman of the Transaction Committee.
On August 7, 2014, while Philips was proceeding with due diligence, Volcano issued its earnings press release for the second quarter and shared with Philips that it was lowering its revenue guidance for the remainder of 2014 and reducing its projected long term growth rate. On August 8, 2014, Volcano‘s common stock closed at $12.56 per share. Philips continued its due diligence process, and the parties and their advisors began drafting a merger agreement. In connection with their ongoing discussions, Goldman told Lazard that the Board was meeting on September 12, 2014 and stated that if Volcano and Philips had not reached a firm agreement by that point, then the Board would halt negotiations and focus on running Volcano as a standalone company.
On September 12, 2014, Philips indicated to Huennekens that it had not completed its due diligence, but if Philips had to make a firm offer then it would be in the range of $17 to $18 per share. Huennekens relayed that message to the Board, and Matricaria, on behalf of the Transaction Committee, instructed Goldman to inform Philips that the proposed price was insufficient. Volcano then closed the data room and directed its advisors to stop working on the transaction.
4. Volcano and Philips rekindle their merger discussions, but cannot agree on a price
On September 15, 2014, Huennekens met with Bert van Meurs, Senior Vice President of Philips Healthcare, at van Meurs‘s request. At their meeting, van Meurs indicated that Philips still was interested in a transaction with Volcano and wanted to complete due diligence. Huennekens reiterated that Philips‘s proposed price range was inadequate, but indicated that he and Matricaria would be willing to meet with members of Philips‘s senior management.
On September 29, 2014, Engaged Capital, an investment management firm and large stockholder of Volcano‘s, released a public letter to the Board calling for it to replace both Huennekens and Volcano‘s Chief Financial Officer and pressing for a sale of the Company. On October 1, 2014, Philips requested an October 10 meeting with Huennekens and Matricaria, to which they agreed. Before that meeting, Volcano agreed to reopen the data room to allow Philips to continue with its due diligence. Ten days later, on October 20, 2014, Philips presented another non-binding indica-
After receiving Philips‘s updated offer, the Transaction Committee met with its advisors. Goldman updated the Transaction Committee on its discussions with Lazard, and Matricaria described his discussions with Volcano‘s stockholders. The Transaction Committee reviewed the financial aspects of the revised indication of interest and discussed strategic alternatives. Ultimately, the Transaction Committee decided to recommend that the Board schedule another meeting to review strategic alternatives before responding to the offer. Subsequently, Goldman called Lazard and indicated that Volcano would not enter into any transaction at a price of less than $18 per share. On October 23, 2014, Philips withdrew its $17.25 per share indication of interest. Volcano once again closed access to the data room, and Goldman told Lazard that the Board had decided to cease merger discussions and instead focus on running Volcano as a standalone company.
5. Volcano and Philips enter into merger discussions for a third and final time
On October 28, 2014, Philips sent Volcano another non-binding indication of interest at $16 per share. The Transaction Committee met to discuss that offer, and Goldman, at Matricaria‘s direction, reiterated to Lazard that Volcano would not consider any offer below $18 per share. On November 6, 2014, Volcano announced better-than-expected financial results for the third quarter of 2014 and the Company‘s turnaround plan. On November 17, Philips‘s CEO, Frans van Houten, called Matricaria to express Philips‘s continuing interest in acquiring Volcano at $16 per share. Matricaria responded that he expected Volcano‘s stock price to increase from its current price of $11.59 per share to $13 or $14 per share in the near future. As such, the Board would not consider a price less than $18 per share.
On November 21, 2014, van Houten again called Matricaria and expressed Philips‘s willingness to increase its offer to $18 per share, subject to the negotiation of a merger agreement and completion of its due diligence. Matricaria said that he would take the $18 per share price to the Board for approval if the parties could complete the merger agreement and announce the transaction by the week of December 1, 2014. Due diligence and negotiations over the merger agreement continued beyond December 1.
Philips also desired to retain Huennekens for a short period post-merger to assist with the transition. As such, on December 11, 2014, Philips sent a draft consulting agreement to be signed by Huennekens before the companies’ boards signed the merger agreement. Huennekens, with the assistance of separate counsel, negotiated that consulting agreement (the “Consulting Agreement“) with Philips from December 11 until December 15. Under the Consulting Agreement, Philips would pay Huennekens up to $500,000 for five months of consulting services for the surviving company in the merger between Philips and Volcano. Further, upon consummation of such a merger, the Consulting Agreement provided that Huennekens would be terminated without cause from Volcano and, therefore, receive benefits totaling $7.8 million, including $3.1 million in cash.
On December 12, 2014, the Transaction Committee held a meeting to discuss the progress of the transaction. At that meeting, Goldman made a presentation regarding its financial interest in the Call Spread
6. Volcano and Philips enter into a two-step merger under Section 251(h) of the Delaware General Corporation Law
On December 15, 2014, Philips informed Volcano that its board of directors had approved a cash-out merger with the Company at a price of $18 per share (the “Merger“). The Board met the next day along with its legal counsel, Goldman, and Volcano‘s senior management to consider the Merger. During that meeting, the Board‘s legal counsel reviewed the key provisions of the merger agreement (the “Merger Agreement“), including each of the agreed-to deal protection devices; Huennekens reviewed the terms of the Consulting Agreement with the rest of the Board; and Goldman reviewed its financial analysis of the offer price and rendered an oral fairness opinion—which Goldman subsequently confirmed in a written opinion—in favor of Philips‘s $18 per share all-cash offer.
After Goldman left the meeting, the Board further discussed the Merger and unanimously approved the Merger and the Merger Agreement. The Merger Agreement provided that the Merger was to be consummated as a two-step transaction under
Philips, through Merger Sub, commenced the Tender Offer to purchase all of Volcano‘s outstanding common stock for $18 per share in cash on December 30, 2014. That same day, Volcano filed the Recommendation Statement with the SEC recommending that Volcano‘s stockholders accept the Tender Offer. On February 17, 2015, the Tender Offer closed, with 89.1% of Volcano‘s outstanding shares having tendered. In addition, notices of guaranteed delivery were provided with respect to 5.7% of Volcano‘s outstanding shares. On February 17, 2015, following the Tender Offer‘s expiration, Volcano and Philips consummated the Merger without a stockholder vote under
C. Procedural History
On December 22, 2014 and January 9, 2015, before the Merger closed, each of the three Plaintiffs filed their individual class action complaints seeking to enjoin the Merger. On January 12, 2015, Plaintiffs each filed separate motions for expedited proceedings. On January 16, the Court consolidated the three actions into this single action. A hearing on Plaintiffs’ motion for a preliminary injunction was scheduled for January 27, but, after Volcano made supplemental disclosures on January 22,7 Plaintiffs withdrew that motion and the hearing was cancelled.
On March 2, 2015, after the Merger closed, Plaintiffs filed the amended Complaint. Defendants filed motions to dismiss the Complaint under
D. Parties’ Contentions
Plaintiffs’ Complaint alleges three causes of action against Defendants. Count I claims that the Board breached its duties of care and loyalty in connection with the Merger. Count II—which Plaintiffs withdrew when they dismissed Philips and Merger Sub from this action8—claims that Philips and Merger Sub aided and abetted the Board‘s alleged fiduciary duty breaches. Count III claims that Goldman aided and abetted the Board‘s alleged fiduciary duty breaches.
As to Counts I and III, Plaintiffs contend that the Board (1) acted in an uninformed manner in approving the Merger and (2) was motivated by certain benefits—including Huennekens‘s Consulting Agreement and the other Board members’ accelerated vesting of stock options and restricted stock units—that its members stood to receive as a result of the Merger. Further, Plaintiffs posit that the Board relied on “flawed advice” rendered by its “highly conflicted financial advisor,” Goldman.9 Goldman‘s alleged conflicts resulted from the fact that it, along with J.P. Morgan, served as Volcano‘s counterparty in the Call Spread Transactions and profited at Volcano‘s expense when the Options and
Defendants deny that the Board was uninformed as to the Merger and maintain that any benefits the Board stood to receive from the Merger were routine and aligned the Board‘s interests with Volcano‘s stockholders’ interests. Defendants also dispute whether Goldman‘s position in the Call Spread Transactions rendered Goldman conflicted and contend that, to the extent any such conflicts existed, the Board and Volcano‘s stockholders were fully informed regarding the impact of the Merger on the Options and Warrants. Finally, Defendants argue that the Complaint should be dismissed because Volcano‘s stockholders approved the Merger by overwhelmingly tendering into the Tender Offer.
II. ANALYSIS
A. Legal Standard for a Motion to Dismiss Under Rule 12(b)(6)
This Court may grant a motion to dismiss under
B. The Business Judgment Rule Irrebuttably Applies to the Merger
As an initial matter, I must determine what standard of review to apply in evaluating Defendants’ alleged fiduciary duty breaches. Because Volcano‘s stockholders received cash for their shares, the Revlon standard of review presumptively applies. 15 Defendants contend, however, that because Volcano‘s fully informed, uncoerced, disinterested stockholders approved the Merger by tendering a majority of the Company‘s outstanding shares into the Tender Offer, the business judgment rule standard of review irrebuttably applies.16
Plaintiffs disagree. Plaintiffs counter that because a tender offer does not have the same cleansing effect as a stockholder vote, the Court should not shift its standard of review from Revlon to the business judgment rule. Alternatively, Plaintiffs maintain that even if a tender offer has the same cleansing effect as a stockholder vote and the business judgment rule presumption applies, that presumption is rebuttable. Finally, Plaintiffs argue that regardless of the theoretical cleansing effect of Volcano‘s stockholders’ approval of the Merger by tendering their shares, no such cleansing effect should be accorded here because those stockholders were not, in fact, fully informed.
I resolve the parties’ disputes in the following manner. First, recent Supreme Court decisions confirm that the approval of a merger by a majority of a corporation‘s outstanding shares pursuant to a statutorily required vote of the corporation‘s fully informed, uncoerced, disinterested stockholders renders the business judgment rule irrebuttable. Second, I conclude that stockholder approval of a merger under
1. The fully informed, uncoerced, disinterested approval of a merger by a majority of a corporation‘s outstanding shares pursuant to a statutorily required vote renders the business judgment rule irrebuttable
The parties’ disagreement regarding the applicable standard of review stems from a recent line of decisions issued by this Court and the Supreme Court, including (1) this Court‘s October 14, 2014 In re KKR Financial Holdings LLC Shareholder Litigation (“KKR“) decision,17 (2) this Court‘s October 1, 2015 In re Zale Corp. Stockholders Litigation (“Zale I“) decision,18 (3) the Supreme Court‘s October 2, 2015 Corwin v. KKR Financial Holdings LLC (“Corwin“) decision,19 (4) this Court‘s October 20, 2015 In re TIBCO Software, Inc. Stockholders Litigation decision,20 and (5) this Court‘s October 29, 2015 In re Zale Corp. Stockholders Litigation (“Zale II“) decision.21
In KKR, Chancellor Bouchard cited a number of cases that support the proposition that after “a fully-informed stockholder vote of a transaction with a non-controlling stockholder ... the business judgment rule applies and insulates the transaction from all attacks other than on the grounds of waste, even if a majority of the board approving the transaction was not disinterested or independent.”22 The Chancellor then noted that “[i]n light of the Delaware Supreme Court‘s 2009 decision in Gantler v. Stephens, there has been some debate as to whether [that rule applies] when the stockholder vote is statutorily required as opposed to a purely voluntary stockholder vote.”23 Chancellor Bouchard disagreed with that interpretation of Gantler, however, and found that it simply clarified that the term “ratification” applies only to non-statutorily required stockholder votes rather than “alter[ing] the legal effect of a stockholder vote when it is statutorily required.”24 He then granted the defendants’ motion to dismiss.
In Zale I, Vice Chancellor Parsons declined to follow Chancellor Bouchard‘s holding in KKR. Despite the presence of a fully informed, uncoerced vote in favor of the merger at issue by a majority of the target corporation‘s disinterested stock-
On October 2, 2015, the day after Zale I was published, the Supreme Court issued Corwin.27 In Corwin, the Supreme Court affirmed KKR and held, in relevant part, that “when a transaction not subject to the entire fairness standard is approved by a fully informed, uncoerced vote of the disinterested stockholders, the business judgment rule applies,” even in a statutorily required vote on a transaction otherwise subject to the Revlon standard of review.28
After the Supreme Court issued Corwin, the Zale I defendants moved for reargument. In Zale II, Vice Chancellor Parsons granted the defendants’ motion for reargument, finding that, under Corwin, he
[A]lthough the Supreme Court generally affirmed KKR, the Court also suggested that “the gross negligence standard for director due care liability under Van Gorkom” is the proper standard for evaluating “post-closing money damages claims.” While the Court in Corwin quotes KKR and a law review article for the proposition that a fully informed majority vote of disinterested stockholders insulates directors from all claims except waste in the explanatory parentheticals of two footnotes, the Court itself does not hold that anywhere in its opinion. And, in In re TIBCO Software, Inc. Stockholders Litigation, which was issued after Corwin, Chancellor Bouchard, the author of KKR, denied a motion to dismiss after finding it reasonably conceivable that the directors had breached their duty of care by acting in a grossly negligent manner, despite the absence of any indication that the merger was not approved by a majority of disinterested stockholders in a fully informed vote.30
Thus, although he eventually concluded in Zale II that the plaintiffs’ duty of care claims should be dismissed, Vice Chancellor Parsons examined the substance of those claims to determine whether they
On May 6, 2016, after the parties here already had completed their briefing, the Supreme Court issued Singh v. Attenborough.32 In Attenborough, the Supreme Court affirmed Zale I, as modified by Zale II, but clarified the standard of review that the Court of Chancery should have applied to the plaintiffs’ duty of care claims in Zale II:
[T]he reargument opinion‘s decision to consider post-closing whether the plaintiffs stated a claim for the breach of the duty of care after invoking the business judgment rule was erroneous. Absent a stockholder vote and absent an exculpatory charter provision, the damages liability standard for an independent director or other disinterested fiduciary for breach of the duty of care is gross negligence, even if the transaction was a change-of-control transaction. Therefore, employing this same standard after an informed, uncoerced vote of the disinterested stockholders would give no standard-of-review-shifting effect to the vote. When the business judgment rule standard of review is invoked because of a vote, dismissal is typically the result. That is because the vestigial waste exception has long had little real-world relevance, because it has been understood that stockholders would be unlikely to approve a transaction that is wasteful.33
2. Stockholder acceptance of a tender offer pursuant to a Section 251(h) merger has the same cleansing effect as a stockholder vote, in favor of a transaction
The Delaware General Assembly adopted
Two concerns have been raised to support the argument that stockholder acceptance of a tender offer and a stockholder vote differ in a manner that should preclude the cleansing effect articulated by the Supreme Court in Corwin from applying to tender offers.
The second concern suggests that a first-step tender offer in a two-step merg-
Further, the policy considerations underlying the holding in Corwin do not provide any basis for distinguishing between a stockholder vote and a tender offer. In Corwin, the Supreme Court justified its decision to afford a transaction approved pursuant to a statutorily required stockholder vote the benefit of the irrebuttable business judgment rule presumption as follows:
[W]hen a transaction is not subject to the entire fairness standard, the longstanding policy of our law has been to avoid the uncertainties and costs of judicial second-guessing when the disinterested stockholders have had the free and informed chance to decide on the economic merits of a transaction for themselves.... The reason for that is tied to the core rationale of the business judgment rule, which is that judges are poorly positioned to evaluate the wisdom of business decisions and there is little utility to having them second-guess the determination of impartial decision-makers with more information (in the case of directors) or an actual economic stake in the outcome (in the case of informed, disinterested stockholders). In circumstances, therefore, where the stockholders have had the voluntary choice to accept or reject a transaction, the business judgment rule standard of review is the presumptively correct one and best facilitates wealth creation through the corporate form.54
Additionally, although much of Corwin refers to a stockholder vote in favor of a transaction, the Supreme Court, at times, uses the terms “approve” and “vote” interchangeably.54 The Supreme Court also included In re Morton‘s Restaurant Group, Inc. Shareholders Litigation—a case involving a two-step merger with a first-step tender offer—among the cases it cited “for the proposition that the approval of the disinterested stockholders in a fully informed, uncoerced vote that was required to consummate a transaction has the effect of invoking the business judgment rule.”55 In addition, numerous other Delaware decisions have equated stockholder acceptance of a tender offer with a stockholder vote in favor of a merger,56 especially
Finally, Plaintiffs cite to Chancellor Bouchard‘s Espinoza v. Zuckerberg decision for the proposition that tender offers should not be given the same cleansing effect under Corwin as a statutorily required vote.58 The plaintiff-stockholder‘s derivative action in Zuckerberg challenged a board‘s approval of a compensation plan for a majority of the board‘s directors.59 The parties agreed that the board‘s approval of that compensation was a self-dealing transaction that would be subject to the entire fairness standard of review in the first instance.60 After the plaintiff-stockholder filed his lawsuit, however, the company‘s 61% controlling stockholder expressed his approval of that compensation in a deposition and an affidavit.61 According to the defendants, the controlling stockholder‘s post hoc approval constituted ratification, subjecting the board‘s decision to approve the director compensation to the business judgment rule standard of review rather than entire fairness.62
Chancellor Bouchard rejected the defendants’ argument that the controlling stockholder‘s informal approval of the compensation constituted ratification and held “that stockholder ratification of an interested transaction, so as to shift the standard of review from entire fairness to the business judgment presumption, cannot be achieved without complying with the statutory formalities in the DGCL for taking stockholder action.”63 Zuckerberg, therefore, focuses on corporate formalities and emphasizes that stockholders must follow the DGCL‘s prescribed methods for taking stockholder action to obtain the benefits of ratification.64 Specifically, stockholders must either “vot[e] at a stockholder meeting or act[] by written consent in compliance with
Nonetheless, Plaintiffs contend that Chancellor Bouchard recognized a substantive distinction between tender offers and stockholder votes that precludes this Court from affording a Corwin-based cleansing effect to mergers accomplished through first-step tender offers.66 To support that contention, Plaintiffs rely on the following excerpt from Zuckerberg:
[D]efendants suggest that stockholder acts such as tendering shares serve as an example of less formal ratification. This suggestion is unpersuasive, because expressing approval of the sale of a company by tendering shares is not analogous to stockholder ratification. “Approving” a two-step transaction by tendering a sufficient number of shares in a tender offer is a functional requirement for completing such a transaction. Directors cannot tender stockholders’ shares for them, so stockholders are not ratifying the transaction, but effectuating it in the first instance.... Thus tendering shares bears no meaningful resemblance to a post hoc ratification of directors’ actions.67
I disagree with Plaintiffs’ interpretations of both (1) Defendants’ argument regarding the Tender Offer‘s cleansing effect and (2) Chancellor Bouchard‘s decision in Zuckerberg. First, Chancellor Bouchard distinguishes a post hoc stockholder vote or written consent from a first-step tender offer in the context of deciding what form stockholder assent must take to constitute ratification. But, Defendants do not argue that the Tender Offer constituted stockholder ratification. Instead, Defendants argue that the Tender Offer affords the Merger the same cleansing effect that Corwin affords to a statutorily required vote in favor of a merger.
Second, in Gantler, the Supreme Court differentiated between a statutorily required vote and stockholder “ratification.”68 It is consistent with Gantler, therefore, that just as a statutorily required vote does not constitute “ratification,” stockholder acceptance of a tender offer also does not constitute “ratification.”69 Despite that distinction, the Supreme Court in Corwin held that a statutorily required vote by a stockholder majority—which, just as a first-step tender offer in a two-step merger, “effectuat[es a transaction] in the first instance”70—irrebuttably invokes the business judgment rule.71 As such, the fact that a first-step tender offer in a two-step merger does not constitute “ratification” is not dispositive as to the cleansing effect of stockholder approval
I conclude that the acceptance of a first-step tender offer by fully informed, disinterested, uncoerced stockholders representing a majority of a corporation‘s outstanding shares in a two-step merger under
3. Volcano‘s stockholders were fully informed, disinterested, and uncoerced
Because stockholders representing a majority of Volcano‘s outstanding shares approved the Merger, Plaintiffs must plead facts from which it reasonably can be inferred that those stockholders were interested, coerced, or not fully informed in accepting the Tender Offer to avoid application of the business judgment rule. The Complaint does not allege—and Plaintiffs do not argue—that the Volcano stock-
Plaintiffs point out, however, that the Complaint contains allegations that the Board was not fully informed regarding the Merger and Goldman‘s interest in the Call Spread Transactions. It follows, according to Plaintiffs, that if the Board was not fully informed as to certain aspects of the Merger, Volcano‘s stockholders also were not fully informed, as they received their information regarding the Merger from the Board‘s Recommendation Statement.75 Because I conclude that Volcano‘s
a. Legal standard for determining whether Volcano‘s stockholders were fully informed
“For stockholder approval of any corporate action to be valid, the [approval] of the stockholders must be fully informed.”76 Evaluating “[w]hether shareholders are ‘fully-informed’ ” as to a particular transaction depends on whether those stockholders were apprised of “all material information” related to that transaction.77 “An omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding [whether to approve the challenged transaction].”78 “Stated another way, there must be ‘a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable stockholder as having significantly altered the “total mix” of information made available.‘”79 Although a plaintiff gener-
b. Defendants have carried their burden of demonstrating that Volcano‘s stockholders were fully informed in approving the Merger
At oral argument, Plaintiffs agreed that the allegation in their Complaint regarding Volcano‘s deficient disclosure is based solely on their contention “that neither Volcano‘s board nor its stockholders were fully informed because Goldman failed to disclose sufficiently detailed information regarding the extent of the deterioration of the value of the [W]arrants over time.”82 More specifically, Plaintiffs claim that although the Board and Volcano‘s stockholders were apprised of the fact that the Warrants’ value decreased over time, Goldman never disclosed that the War-
The Board, however, disclosed that “[i]f the [Merger was] announced at a later date, assuming other inputs remain the same, the value of the [Warrants] would decrease over time as the result of option time decay until the [W]arrants’ expiration.”85 Based on that disclosure, Volcano‘s stockholders were aware that Goldman‘s payout under the Warrants would have decreased if the Merger was consummated at a later date. Volcano‘s stockholders also were aware that the Warrants eventually would expire. Plaintiffs’ argument that the Merger-related disclosures were materially deficient, therefore, boils down to the fact that the Board did not
Assessing materiality is a difficult practice that requires balancing the benefits of additional disclosures against the risk that insignificant information may dilute potentially valuable information.86 Here, Volcano announced that Goldman had an interest in the Warrants and that their value would decline until they expired “over a series of expiration dates in 2018.”87 A reasonable stockholder could infer from this information that, all else held equal, Goldman would have preferred to consummate a deal sooner rather than later. Assuming the Warrants truly did decay at an exponential—rather than “linear” or “gradual“—rate, the Board‘s disclosure of this information only would change the degree of Goldman‘s interest. Thus, although a more exhaustive disclosure of the Warrants’ value decay over time may have been “somewhat more informative,”88 a reasonable stockholder would not have viewed that fact as significantly altering the total mix of available information regarding the relationship between Goldman‘s interests in the Call Spread Transactions and the Merger.89
C. The Complaint Fails to State a Claim for Waste
Because Volcano‘s fully informed, uncoerced, disinterested stockholders approved the Merger by tendering a majori-
D. The Complaint Fails to State a Claim for Aiding and Abetting
Finally, Plaintiffs assert that Goldman aided and abetted the Board‘s fiduciary duty breaches. To state a valid aiding and abetting claim, Plaintiffs must allege “(1) the existence of a fiduciary relationship, (2) a breach of the fiduciary‘s
III. CONCLUSION
For the foregoing reasons, Defendants’ Motions are granted, and the Complaint is dismissed.
IT IS SO ORDERED.