IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
)
IN RE VOLCANO CORPORATION ) CONSOLIDATED
STOCKHOLDER LITIGATION ) C.A. NO. 10485-VCMR
OPINION
Date Submitted: March 15, 2016
Date Decided: June 30, 2016
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 LLP, New York, New York; Julia
J. Sun, LEVI & KORSINSKY LLP, New York, New York; Juan E. Monteverde,
FARUQI & FARUQI LLP, New York, New York; Attorneys for Plaintiffs Melvin
Lax, Melissa Gordon, and Mohammed Munawar.
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.
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).
1
I. BACKGROUND1
A. Parties
Plaintiffs Melvin Lax, Melissa Gordon, and Mohammed Munawar
(“Plaintiffs”) were common stockholders of Volcano Corporation (“Volcano” or
the “Company”) at all relevant times.
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
1
The facts are drawn from the well-pled allegations of the plaintiffs’ Verified
Consolidated Amended Class Action Complaint (the “Complaint”). Further, on a
motion to dismiss under Rule 12(b)(6), the Court “draw[s] all reasonable
inferences in the plaintiff’s favor.” Norton v. K-Sea Transp. P’rs L.P., 67 A.3d
354, 360 (Del. 2013). Those allegations and inferences, as well as the facts drawn
from the documents incorporated into the Complaint by reference, are assumed
true for purposes of the defendants’ motions to dismiss. In re Morton’s Rest. Gp.,
Inc. S’holders Litig., 74 A.3d 656, 659 n.3 (Del. Ch. 2013) (“To be incorporated
by reference, the complaint must make a clear, definite and substantial reference to
the documents.” (quoting DeLuca v. AccessIT Gp., Inc., 659 F. Supp. 2d 54, 60
(S.D.N.Y. 2010))). Notably, the documents incorporated by reference include
Volcano’s Schedule 14D-9 Solicitation/Recommendation Statement filed with the
U.S. Securities and Exchange Commission (the “SEC”) on December 30, 2014
(the “Recommendation Statement”). See Trans. Aff. of Richard Li (“Li Aff.”), Ex.
A (“Recommendation Statement”).
2
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.
2
Compl. ¶ 34.
3
I note that, in one paragraph of the Complaint, Plaintiffs also allege that Volcano’s
stock was traded on the New York Stock Exchange rather than on the NASDAQ.
Compl. ¶ 34. Because the press release announcing the merger, which is
excerpted in the Complaint, only describes Volcano as being listed on NASDAQ, I
assume that the reference to the New York Stock Exchange is an error. See
Compl. ¶ 99.
4
The Complaint originally named Philips and Clearwater Merger Sub, Inc.
(“Merger Sub”), a wholly-owned subsidiary of Philips’s that was created to
effectuate the merger, as defendants. Philips and Merger Sub moved to dismiss
the Complaint, and, in response to that motion, Plaintiffs voluntarily dismissed
them from this action pursuant to Court of Chancery Rules 41(a)(1)(i) and 23. See
Notice and Order of Voluntary Dismissal, Docket Item No. 49.
3
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 $460 million of Convertible Notes was convertible into approximately
14.01 million shares of Volcano common stock at $32.83 per share under the
circumstances described in the Convertible Notes’ indenture. Because the Board
was concerned about the potentially dilutive effect on Volcano’s common
stockholders if the Convertible Notes’ holders sought to exercise their conversion
rights, the Company also entered into a series of hedging transactions with the
4
Underwriters5 (the “Call Spread Transactions”). To mitigate that equity dilution
risk, the Call Spread Transactions were intended to (1) increase the effective
conversion premium and (2) reduce the effective dilution of the Convertible Note
Issuance.
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
5
Volcano actually entered into the Call Spread Transactions with an affiliate of J.P.
Morgan’s—JP Morgan Chase Bank, National Association, London Branch. That
distinction, however, is immaterial for purposes of this decision.
5
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
6
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’ interest in a transaction. The Board and Goldman considered a total of
thirteen potential buyers for Volcano, separated into six “tier 1 buyers”—including
Philips—and seven “tier two buyers.” The Board decided to narrow the scope of
their market check by excluding (1) counterparties that would face significant
regulatory approval issues and (2) financial buyers, based on Goldman’s advice
that Volcano’s negative cash flow likely would not support a leveraged acquisition.
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.
7
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
8
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.
After the Board’s July 30, 2014 meeting, Goldman conveyed to Lazard the
Board’s position that Philips could proceed with due diligence, but that the price
would have to be increased above $24 per share for Volcano to consider
exclusivity. On August 2, 2014, the Transaction Committee held a meeting with
Volcano’s senior management, Goldman, and the Board’s legal advisor. Goldman
informed the attendees that Philips had declined to increase its price above $24 per
share and that it simply would proceed through due diligence without exclusivity.
To accommodate Philips’s due diligence requests, Volcano gave Philips access to a
data room that contained the relevant documents. The Transaction Committee then
9
directed Goldman to reach out to Company A and Company D to gauge their
respective interests in renewing talks regarding a potential transaction. Once
again, the Transaction Committee declined to contact direct competitors with
significant regulatory approval risks. Goldman followed up with both Company A
and Company D, but neither was interested in renewing discussions regarding a
potential acquisition of Volcano. At no point did either Volcano or Goldman
receive any unsolicited expressions of interest from other potential suitors.
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
10
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 indication of interest to acquire Volcano for $17.25 per share and
requested a response by October 22.
11
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
12
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.
13
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 Transactions.
Goldman then left the meeting, and the Transaction Committee consulted with its
legal counsel and senior management about Goldman’s interest in the Call Spread
Transactions. Volcano’s legal counsel and Goldman’s legal counsel had discussed
the Call Spread Transactions in both August and September 2014. Ultimately, the
Transaction Committee decided that Goldman was not conflicted from serving as
Volcano’s financial advisor for the proposed transaction with Philips as a result of
the Call Spread Transactions.
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;
14
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 Section 251(h) (“Section 251(h)”) of the Delaware General
Corporation Law (the “DGCL”).6 As such, the Board also resolved to recommend
that Volcano’s stockholders tender their shares into the first-step tender offer (the
“Tender Offer”) of that two-step transaction. Volcano and Philips then signed the
Merger Agreement, and, on December 17, 2014, they issued a joint press release
announcing the Merger.
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
6
8 Del. C. § 251(h) (allowing an acquiring company to consummate a merger
without a target company stockholder vote after acquiring a majority of the
target’s shares pursuant to a tender or exchange offer for all of the target
company’s outstanding shares, subject to certain conditions).
15
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 Section 251(h). Merger Sub merged into
Volcano, and Volcano survived as a wholly-owned subsidiary of Philips’s. As
required by Section 251(h), non-tendering Volcano stockholders who were cashed
out in the second-step merger received the same consideration—$18 per share in
cash—as the stockholders that had accepted the Tender Offer. The Merger was
valued at $1.2 billion, and Philips financed it with a combination of cash-on-hand
and a debt issuance.
As a result of the Merger, the Convertible Notes and, correspondingly, the
Call Spread Transactions were terminated. Because neither the Options nor the
Warrants had expired as of the date of the Merger, the Underwriters had to pay
Volcano the Options’ fair value, and Volcano had to pay the Underwriters the
Warrants’ fair value. The net result of the termination of the Call Spread
Transactions, as between Volcano and Goldman, was a $24.6 million payment
from Volcano to Goldman. Further, the Board and Volcano’s senior management,
collectively, received approximately $8.9 million in Volcano stock options and
restricted stock units that were accelerated as a result of the Merger. Finally,
16
Huennekens received the $7.8 million in severance benefits that he had negotiated
as part of the Consulting Agreement.
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 Rule
12(b)(6) on May 8, 2015 (the “Motions”). By August 2015, the parties had
completed their initial round of briefing on the Motions. In December 2015,
however, the parties stipulated to a supplemental round of briefing on the Motions
to account for relevant Delaware Supreme Court decisions that had been published
in the interim. The parties completed that supplemental round of briefing in
7
See Li Aff., Ex. K (“Recommendation Statement Supplement”).
17
February 2016, and I held an oral argument on the Motions on March 15, 2016.
This Opinion contains my rulings on Defendants’ Motions.
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 Warrants
8
See supra note 4.
9
Pl.’s Answering Br. 1.
18
were terminated upon consummation of the Merger. Plaintiffs also allege that
Goldman hid its conflicts from the Board and Volcano’s stockholders.
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 Rule 12(b)(6) for failure to
state a claim if a complaint does not allege facts that, if proven, would entitle the
plaintiff to relief. “[T]he governing pleading standard in Delaware to survive a
motion to dismiss is reasonable ‘conceivability.’” 10 When considering such a
10
Cent. Mortg. Co. v. Morgan Stanley Mortg. Capital Hldgs. LLC, 27 A.3d 531, 537
(Del. 2011) (footnote omitted).
19
motion, the Court must “accept all well-pleaded factual allegations in the
Complaint as true . . . , draw all reasonable inferences in favor of the plaintiff, and
deny the motion unless the plaintiff could not recover under any reasonably
conceivable set of circumstances susceptible of proof.”11 This reasonable
“conceivability” standard asks whether there is a “possibility” of recovery. 12 The
Court, however, need not “accept conclusory allegations unsupported by specific
facts or . . . draw unreasonable inferences in favor of the non-moving party.”13
Failure to plead an element of a claim precludes entitlement to relief, and,
therefore, is grounds to dismiss that claim.14
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
11
Id. at 536 (citing Savor, Inc. v. FMR Corp., 812 A.2d 894, 896-97 (Del. 2002)).
12
Id. at 537 & n.13.
13
Price v. E.I. duPont de Nemours & Co., Inc., 26 A.3d 162, 166 (Del. 2011) (citing
Clinton v. Enter. Rent-A-Car Co., 977 A.2d 892, 895 (Del. 2009)).
14
Crescent/Mach I P’rs, L.P. v. Turner, 846 A.2d 963, 972 (Del. Ch. 2000).
15
See TW Servs., Inc. v. SWT Acq. Corp., 1989 WL 20290, at *7 (Del. Ch. 1989).
20
tendering a majority of the Company’s outstanding shares into the Tender Offer,
the business judgment rule standard of review irrebuttably applies.16 According to
Defendants, the stockholders’ approval of the Merger had that cleansing effect
despite the fact that (1) the Merger otherwise would have been subject to the
Revlon standard of review and (2) the Tender Offer was statutorily required to
consummate the Merger. Defendants, therefore, assert that Plaintiffs can challenge
the Merger solely on the basis that it constituted waste.
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
16
In this context, if the business judgment rule is “irrebuttable,” then a plaintiff only
can challenge a transaction on the basis of waste—i.e., that it “cannot be
‘attributed to any rational business purpose.’” See Cede & Co. v. Technicolor,
Inc., 634 A.2d 345, 361 (Del. 1993) (“The business judgment rule posits a
powerful presumption in favor of actions taken by the directors in that a decision
made by a loyal and informed board will not be overturned by the courts unless it
cannot be ‘attributed to any rational business purpose.’” (quoting Sinclair Oil
Corp. v. Levien, 280 A.2d 717, 720 (Del. 1971))). If, by contrast, the business
judgment rule is “rebuttable,” then a board’s violation of either the duty of care or
duty of loyalty—even based on facts that were disclosed to stockholders before
they approved a transaction—would render the business judgment rule
inapplicable. See id. (“To rebut the [business judgment] rule, a shareholder
plaintiff assumes the burden of providing evidence that directors, in reaching their
challenged decision, breached [the duties of] loyalty or due care. If a shareholder
plaintiff fails to meet this evidentiary burden, the business judgment rule attaches
to protect corporate officers and directors and the decisions they make, and our
courts will not second-guess these business judgments.” (citations omitted)).
21
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 Section 251(h) by accepting a tender offer has the same
cleansing effect as a vote in favor of that merger. Third, I find that the business
judgment rule irrebuttably applies to the Merger because Volcano’s disinterested,
uncoerced, fully informed stockholders tendered a majority of the Company’s
outstanding shares into the Tender Offer.
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
22
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
17
101 A.3d 980 (Del. Ch. 2014).
18
2015 WL 5853693 (Del. Ch. Oct. 1, 2015) (“Zale I”).
19
125 A.3d 304 (Del. 2015).
20
2015 WL 6155894 (Del. Ch. Oct. 20, 2015).
21
2015 WL 6551418 (Del. Ch. Oct. 29, 2015) (“Zale II”).
22
101 A.3d at 1001 (citing Harbor Fin. P’rs v. Huizenga, 751 A.2d 879, 890 (Del.
Ch. 1999); In re Wheelabrator Techs., Inc. S’holders Litig., 663 A.2d 1194, 1200
(Del. Ch. 1995)).
23
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
stockholders, Vice Chancellor Parsons applied the Revlon standard of review and
stated that “[u]ntil the Supreme Court signals otherwise, I interpret Gantler as
holding that an enhanced standard of review cannot be pared down to the business
judgment rule as a result of” a statutorily required vote.25 Vice Chancellor Parsons
cited In re Santa Fe Pacific Corp. Shareholder Litigation for the proposition that
“[p]ermitting the vote of a majority of stockholders on a merger to remove from
judicial scrutiny unilateral Board action in a contest for corporate control would
23
Id.
24
Id.
25
2015 WL 5853693, at *10 (citing In re Santa Fe Pacific Corp. S’holder Litig., 669
A.2d 59, 68 (Del. 1995)).
24
frustrate the purposes underlying Revlon,” but also indicated that he “would follow
the reasoning articulated in KKR if it permitted a review of the Merger under” the
rebuttable, as opposed to an irrebuttable, business judgment rule presumption.26
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 should have applied the business
judgment rule standard of review rather than the Revlon standard of review.29 Vice
Chancellor Parsons interpreted Corwin, however, as diverging from KKR in that it
allowed for application of the rebuttable business judgment rule presumption, on
the following bases:
26
Id.
27
125 A.3d 304.
28
Id. at 308-09.
29
2015 WL 6551418, at *2.
25
[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 sufficiently pled that the defendant-board
was grossly negligent during the merger process, as opposed to evaluating simply
whether the plaintiffs’ had stated a waste claim.31
30
Id. at *3 (citing In re TIBCO Software Inc. S’holders Litig., 2015 WL 6155894
(Del. Ch. Oct. 20, 2015); Corwin, 125 A.3d at 308-09 nn.13 & 19) (quoting
Corwin, 125 A.3d at 312).
31
Id. at *4-5.
26
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
In Attenborough, therefore, the Supreme Court held that upon a fully informed
vote by a majority of a company’s disinterested, uncoerced stockholders, the
business judgment rule irrebuttably applies to a court’s review of the approved
32
2016 WL 2765312 (Del. May 6, 2016) (ORDER).
33
Id. at *1.
27
transaction, even when that vote is statutorily required and the transaction
otherwise would be subject to the Revlon standard of review. Thus, such an
approved transaction only can be challenged on the basis that it constituted waste.
I now examine whether that same reasoning applies to a merger approved through
stockholder acceptance of a tender offer.
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 Section 251(h) in 2013 and
amended it in 2014 and 2016.34 Section 251(h) “permit[s] a merger agreement to
include a provision eliminating the requirement of a stockholder vote to approve
certain mergers”35 if, among other requirements, the acquiror consummates a
tender or exchange offer that results in the acquiror owning “at least such
percentage of the shares of stock of [the target] corporation . . . that, absent
34
See 79 Del. Laws ch. 72, § 6 (2013), as amended by 79 Del. Laws ch. 327, § 7
(2014), 80 Del. Laws ch. 265, § 7 (2016). Because the parties entered into the
Merger Agreement in December of 2014, the General Assembly had not yet
adopted the 2016 amendments to Section 251(h). Those 2016 amendments,
therefore, are inapplicable to the Merger. See 80 Del. Laws ch. 265, § 17 (2016)
(“Section 7 shall be effective only with respect to merger agreements entered into
on or after August 1, 2016.”). For the sake contemporaneousness, however, I
quote the most updated version of Section 251(h) in this Opinion. The differences
between the 2014 version and the 2016 version of Section 251(h) are immaterial to
this Opinion.
35
Del. H.B. 127 syn., 147th Gen. Assem. (2013).
28
[Section 251(h)], would be required to adopt the agreement of merger by [the
DGCL] and by the certificate of incorporation of [the target] corporation.”36
Similar two-step mergers were consummated with some regularity before Section
251(h)’s enactment, largely through “top-up options,”37 which gave acquirors—
after completing a first-step tender offer—the ability to purchase up to 90% of the
target corporation’s stock and consummate a second-step, short-form merger
without a stockholder vote.38 Through Section 251(h), therefore, “the Delaware
General Assembly essentially . . . approved [the two-step merger] transactional
structure . . . [and] facilitate[d] the ability of the acquirer in a two-step acquisition
. . . to use a short-form back-end merger without resorting to a top-up option.”39
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. Section 251(h) addresses each of those concerns. The
36
8 Del. C. § 251(h)(3).
37
See, e.g., In re Cogent, Inc. S’holder Litig., 7 A.3d 487, 504-08 & n.56 (Del. Ch.
2010) (describing top-up options and noting that the vast majority of two-step
mergers included those options).
38
8 Del. C. § 253 (permitting a parent company that owns 90% of a subsidiary
corporation’s outstanding stock to merge with that subsidiary without the approval
of the subsidiary’s minority stockholders).
39
In re Comverge, Inc., 2014 WL 6686570, at *14 (Del. Ch. Nov. 25, 2014).
29
first concern suggests that tender offers may differ from statutorily required
stockholder votes based on “the lack of any explicit role in the [DGCL] for a target
board of directors responding to a tender offer.”40 A target board’s role in
negotiating a two-step merger subject to a first-step tender offer under Section
251(h), however, is substantially similar to its role in a merger subject to a
stockholder vote under Section 251(c) of the DGCL.41 Section 251(h) requires that
the merging corporations enter into a merger agreement that expressly “[p]ermits
or requires such merger be effected under [Section 251(h)].”42 Because Section
251(h) requires a merger agreement, Sections 251(a) and (b) of the DGCL subject
that agreement to the same obligations as a merger or consolidation consummated
under any other section of the DGCL.43 For example, the target corporation’s
board must “adopt a resolution approving” that agreement “and declaring its
advisability,” and the merger agreement must provide “[t]he terms and conditions
of the merger.”44 The first-step tender offer also must be made “on the terms
40
See, e.g., Espinoza v. Zuckerberg, 124 A.3d 47 (Del. Ch. 2015) (quoting In re
CNX Gas Corp. S’holders Litig., 4 A.3d 397, 407 (Del. Ch. 2010)).
41
Compare 8 Del. C. § 251(h), with id. § 251(c).
42
Id. § 251(h)(1)(a).
43
Id. § 251(a)-(b).
44
Id. § 251(b), (b)(1).
30
provided” in the negotiated merger agreement.45 And, in recommending that its
stockholders tender their shares in connection with a Section 251(h) merger, the
target corporation’s board has the same disclosure obligations as it would in any
other communication with those stockholders.46 Taken together, therefore,
Sections 251(a), (b), and (h) of the DGCL mandate that a target corporation’s
board negotiate, agree to, and declare the advisability of the terms of both the first-
step tender offer and the second-step merger in a Section 251(h) merger, just as a
target corporation’s board must negotiate, agree to, and declare the advisability of
a merger involving a stockholder vote under Section 251(c). The target board also
45
Id. § 251(h)(2).
46
See Matador Capital Mgmt. Corp. v. BRC Hldgs., Inc., 729 A.2d 280, 294-95
(Del. Ch. 1998) (citing Zirn v. VLI Corp., 621 A.2d 773, 778 (Del. 1993)) (“At
argument, counsel for [one of the defendants] suggested that I should construe the
[target corporation’s] directors’ state law based fiduciary duty of disclosure more
narrowly in the case of a Schedule 14D–9 [recommending that stockholders accept
a first-step tender offer] than would be true in the case of a proxy statement
[recommending that stockholders vote in favor of a one-step merger], because
Schedules 14D–9 are reactive documents requiring, by federal law, only a limited
amount of disclosure. The point is well taken, of course, that it is federal law, not
state law, that prescribes the items of disclosure required by Schedule 14D–9 and
that mandates the dissemination of that disclosure statement to the stockholders of
the subject company. The actual recommendation itself, however, is the product of
state law, in this case the requirement under Section 251 of the DGCL that the
[target corporation’s] directors approve and recommend the proposed Agreement.
State law, not federal law, establishes the norms within which such approval and
recommendation is given. Thus, it is hardly surprising that state fiduciary duty
law has a role to play in regulating what directors actually say when
recommending approval of a proposal or transaction to their stockholders, whether
that recommendation is communicated in a Schedule 14D–9 or some other
document.”).
31
is subject to the same common law fiduciary duties, regardless of the subsection
under which the merger is consummated.
The second concern suggests that a first-step tender offer in a two-step
merger arguably is more coercive than a stockholder vote in a one-step merger.47
Section 251(h), however, alleviates the coercion that stockholders might otherwise
be subject to in a tender offer because (1) the first-step tender offer must be for all
of the target company’s outstanding stock,48 (2) the second-step merger must “be
effected as soon as practicable following the consummation of the” first-step
tender offer,49 (3) the consideration paid in the second-step merger must be of “the
same amount and kind” as that paid in the first-step tender offer,50 and (4) appraisal
rights are available in all Section 251(h) mergers,51 subject to the conditions and
47
See, e.g., In re Pure Res., Inc., S’holders Litig., 808 A.2d 421, 441-42 (Del. Ch.
2002) (“Indeed, many commentators would argue that the tender offer form is
more coercive than a merger vote. In a merger vote, stockholders can vote no and
still receive the transactional consideration if the merger prevails. In a
tender offer, however, a non-tendering shareholder individually faces an uncertain
fate.” (footnote omitted)).
48
8 Del. C. § 251(h)(2).
49
Id. § 251(h)(1)(b).
50
Id. § 251(h)(5).
51
Id. § 262(b)(3) (“In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under § 251(h) . . . is not owned by the parent
immediately prior to the merger, appraisal rights shall be available for the shares
of the subsidiary Delaware corporation.”).
32
requirements of Section 262 of the DGCL. Thus, Section 251(h) appears to
eliminate the policy bases on which a first-step tender offer in a two-step merger
may be distinguished from a statutorily required stockholder vote, at least as it
relates to the cleansing effect rendered therefrom.52
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 long-standing 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,
52
The parallels between Sections 251(c) and 251(h) of the DGCL are evidenced
further by Section 251(h)(3), which requires that the first-step tender offer result in
the acquiror holding as many shares of the target corporation’s outstanding stock
as would otherwise be required to vote in favor of a merger under Section 251(c).
See id. § 251(h)(3). In other words, the same number of the target corporation’s
outstanding shares must approve a merger, regardless of whether it is
consummated under Section 251(c) or Section 251(h).
33
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.53
Those justifications are equally applicable to a tender offer in a Section 251(h)
merger. When a merger is consummated under Section 251(h), the first-step
tender offer essentially replicates a statutorily required stockholder vote in favor of
a merger in that both require approval—albeit pursuant to different corporate
mechanisms—by stockholders representing at least a majority of a corporation’s
outstanding shares to effectuate the merger. A stockholder is no less exercising her
“free and informed chance to decide on the economic merits of a transaction”
simply by virtue of accepting a tender offer rather than casting a vote. And, judges
are just as “poorly positioned to evaluate the wisdom of” stockholder-approved
mergers under Section 251(h) as they are in the context of corporate transactions
with statutorily required stockholder votes.
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
53
Corwin, 125 A.3d at 312-13.
54
See, e.g., id at 306, 310 (“[W]e find that the Chancellor was correct in finding that
the voluntary judgment of the disinterested stockholders to approve the merger
34
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 where “the first-step tender offer in a two-step transaction is
invoked the business judgment rule standard of review and that the plaintiffs’
complaint should be dismissed. . . . [T]he plaintiffs did not contest the defendants’
argument below that if the merger was not subject to the entire fairness standard,
the business judgment standard of review was invoked because the merger was
approved by a disinterested stockholder majority. The Chancellor agreed with that
argument below, and adhered to precedent supporting the proposition 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.”).
55
See id. at 310 n.19 (citing Morton’s, 74 A.3d at 663 n.34).
56
See, e.g., Bershad v. Curtiss-Wright Corp., 535 A.2d 840, 842 (Del. 1987) (“An
informed minority stockholder . . . who either votes in favor of a merger or accepts
the benefits of the transaction [by accepting a tender offer] cannot thereafter attack
the fairness of the merger price.”); Morton’s, 74 A.3d at 663 n.34 (characterizing a
tender offer as “approv[al] by 92% of the stockholders in a non-coerced, fully
informed manner” and noting that “when disinterested approval of a sale to an
arm’s-length buyer is given by a majority of stockholders who have had the
chance to consider whether or not to approve a transaction for themselves, there is
a long and sensible tradition of giving deference to the stockholders’ voluntary
decision, invoking the business judgment rule standard of review, and limiting any
challenges to the difficult argument that the transaction constituted waste”); In re
Orchid Cellmark Inc. S’holder Litig., 2011 WL 1938253, at *13 (Del. Ch. May 12,
2011) (“Tendering, of course, is a substitute for shareholder vote, and courts
should be careful about depriving shareholders of their opportunity to make such a
35
conditioned on tenders of a majority of the outstanding shares.”57 As such, I am
convinced that the Supreme Court did not intend that its holding in Corwin be
limited to stockholder votes only.
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
choice, especially with such a significant premium to prior market price.”);
Matador Capital, 729 A.2d at 294 (noting that, in a two-step transaction where the
first-step was a cash tender offer for a majority of the corporation’s outstanding
common stock, the corporation’s “ stockholders are being asked to decide to
approve the sale of their corporation as a part of their decision whether or not to
tender shares in the first-step tender offer”); see also J. Travis Laster, The Effect of
Stockholder Approval on Enhanced Scrutiny, 40 WM. MITCHELL L. REV. 1443,
1459 n.57 (2014) (“This article discusses the concept of stockholder approval in
terms of a stockholder vote, which is the typical context in which the issue arises.
Stockholders also can consent to a transaction by tendering their shares. If the
first-step tender offer in a two-step transaction is conditioned on tenders of a
majority of the outstanding shares, and if sufficient stockholders tender to satisfy
the condition, then it should have the same effect as an affirmative stockholder
vote.” (citation omitted)).
57
See Laster, supra note 56, at 1459 n.57.
58
Pls.’ Supplemental Answering Br. 2-4 (citing Zuckerberg, 124 A.3d 47).
59
124 A.3d at 51-52.
36
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
60
Id. at 49.
61
Id. at 52-53.
62
Id. at 54-55.
63
Id. at 66.
37
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 Section 228 of the [DGCL].”65 The controlling
stockholder’s informal approval did not constitute ratification in Zuckerberg
precisely because it diverged from the DGCL’s required corporate formalities. In
this case, there is no dispute that the Board complied with the DGCL’s prescribed
procedures for consummating a merger under Section 251(h). Thus, Zuckerberg
largely is inapposite.
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
64
See id. at 57-58 (“In sum, the provisions of the DGCL governing the ability of
stockholders to take action, whether by voting at a meeting or by written
consent, demonstrate the importance of ensuring precision, both in defining the
exact nature of the corporate action to be authorized, and in verifying that the
requirements for taking such an action are met, including that the transaction
received enough votes to be effective. They also demonstrate the importance of
providing transparency to stockholders, whose rights are affected by the actions of
the majority. In particular, stockholders have the right to participate in a meeting
at which a vote is to be taken after receiving notice and all material information or,
in the case of action taken by written consent, to receive prompt notice after the
fact of the action taken.” (footnote omitted)).
65
Id. at 50.
38
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
66
Pls.’ Supplemental Answering Br. 2-4.
67
Id. at 61 (footnotes omitted) (citing Orchid Cellmark Inc., 2011 WL 1938253, at
*13; Matador Capital, 729 A.2d at 294).
39
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 as expressed through acceptance of such a
68
KKR, 101 A.3d at 1002-03 (“I read the Supreme Court’s discussion of the doctrine
of ratification in Gantler to have been intended simply to clarify that the term
‘ratification’ applies only to a voluntary stockholder vote. As the Supreme Court
stated in a footnote at the end of its decision, ‘[t]his Opinion clarifies that
“ratification” legally describes only corporate action where stockholder approval
is not statutorily required for its effectuation.’” (footnote omitted) (quoting
Gantler, 965 A.2d at 714 n.55)).
69
Zuckerberg, 124 A.3d at 61.
70
Id.
71
Corwin, 125 A.3d at 308-09.
40
tender offer. Interpreting Zuckerberg differently would contradict Corwin’s
holding.72
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 Section 251(h) has the same
cleansing effect under Corwin as a vote in favor of a merger by a fully informed,
disinterested, uncoerced stockholder majority. As a result, I now examine whether
the Volcano stockholders that accepted the Tender Offer were fully informed,
disinterested, and uncoerced.
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
72
In fact, in Zuckerberg, Chancellor Bouchard cited both Gantler and Corwin and
recognized that although a statutorily required vote does not constitute ratification,
it can have same cleansing effect. Zuckerberg, 124 A.3d at 62-63
(“In Gantler, the Supreme Court held that the scope of ‘the shareholder ratification
doctrine must be limited . . . to circumstances where a fully informed shareholder
vote approves director action that does not legally require shareholder approval in
order to become legally effective.’ . . . Corwin v. KKR . . . confirmed that
stockholder approval from a statutorily required vote can be used to invoke the
business judgment rule the same way [stockholder ratification] can . . . .”
(footnotes omitted) (quoting Gantler, 965 A.2d at 713)). That same principle
applies to a first-step tender offer under Section 251(h).
41
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 stockholders that tendered 89.1% of the Company’s outstanding
shares into the Tender Offer were interested or coerced. Instead, Plaintiffs allege
that “Defendants have failed to disclose all material information regarding the
[Merger].”73 Aside from that conclusory statement, the Complaint largely is
devoid of allegations regarding Volcano’s Merger-related disclosures to its
stockholders. Many of those allegations were brought in Plaintiffs’ original, pre-
Merger complaints. Plaintiffs withdrew those claims after Defendants released
supplemental disclosures, and the operative Complaint reflects those withdrawals.
As a result, Defendants contend that Plaintiffs have conceded that Volcano’s
stockholders were fully informed as to the Merger.74
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
73
Compl. ¶ 153.
74
Oral Arg. Tr. 16 (“The bottom line is after the supplemental disclosures were
made, the plaintiffs voluntarily withdrew their application for preliminary
injunction, later filed the amended complaint that has no disclosure claims in it.
We submit that they’ve waived the opportunity to assert them at this point, and
they’re just not there. They can’t amend their complaint by making arguments in
their briefing or otherwise.”).
42
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 stockholders were fully informed as to all material facts regarding the
Merger, I need not decide whether Plaintiffs waived their disclosure-based
arguments.
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
75
Oral Arg. Tr. 63-64 (“I would submit that it’s . . . fairly obvious that if the board
wasn’t fully informed, the stockholders weren’t fully informed.”).
76
KKR, 101 A.3d at 999.
77
Solomon v. Armstrong, 747 A.2d 1098, 1127-28 (Del. Ch. 1999) (quoting Santa
Fe, 669 A.2d at 66).
43
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 generally bears the
burden of proving a material deficiency when asserting a duty of disclosure
claim,80 a defendant bears the burden of demonstrating that the stockholders were
fully informed when relying on stockholder approval to cleanse a challenged
transaction.81
78
Rosenblatt v. Getty Oil Co., 493 A.2d 929, 944 (Del. 1985) (quoting TSC Indus.,
Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976) and adopting TSC’s materiality
standard as Delaware law).
79
Skeen v. Jo-Ann Stores, Inc., 750 A.2d 1170, 1172 (Del. 2000) (quoting Louden v.
Archer–Daniels–Midland Co., 700 A.2d 135, 142 (Del. 1997)).
80
In re Siliconix Inc. S’holders Litig., 2001 WL 716787, at *9 (Del. Ch. June 21,
2001).
81
KKR, 101 A.3d at 999 (citing Bershad, 535 A.2d at 846); see also Solomon, 747
A.2d at 1128 (“In their analyses of Delaware’s disclosure jurisprudence, there
appears to be some dispute among the litigants over who bears the burden of proof
on disclosure issues. The answer is that it depends on which type of disclosure
claim is made by whom. As far as claims of material misstatements, omissions
and coercion go, the law is clear that plaintiff bears the burden of proof that
disclosure was inadequate, misleading, or coercive. On the other hand, when it
comes to claiming the sufficiency of disclosure and the concomitant legal effect of
shareholder ratification after full disclosure (e.g., claim extinguishment, the
retention of the business judgment rule presumptions, or the shift of the burden of
proof of entire fairness from the defendant to the plaintiff) it is the defendant who
bears the burden.”).
44
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 Warrants’ value decreased “exponentially.”83 According to Plaintiffs, this
information is material because it indicates a possible conflict of interest between
Volcano’s stockholders and Goldman, as “it was in Goldman Sachs’ direct
financial interest that a change in control transaction, involving all or nearly all
cash, be consummated as soon as possible, regardless of whether the transaction
maximizes Volcano stockholder value.”84 In other words, Plaintiffs allege that
Volcano’s stockholders were not fully informed that the exponential decrease in
the Warrants’ value over time may have given Goldman an incentive to seek a sale
82
Oral Arg. Tr. 63, 67.
83
See Compl. ¶¶ 15, 63, 65, 76.
84
Id. ¶ 15.
45
as soon as possible when waiting for a better offer or deciding not to sell the
Company at all may have been in Volcano’s stockholders’ interests.
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 describe the decline in the Warrants’ value as “exponential.”
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
85
Recommendation Statement Supplement.
86
See Solomon, 747 A.2d at 1128 (“The determination of the materiality of an
alleged omission or misstatement ‘requires a careful balancing of the potential
benefits of disclosure against the resultant harm.’ The theory goes that there is a
risk of information overload such that shareholders’ interests are best served by an
economy of words rather than an overflow of adjectives and adverbs in solicitation
statements.” (footnote omitted) (quoting Arnold v. Soc’y for Sav. Bancorp, Inc.,
650 A.2d 1270, 1279 (Del. 1994))).
46
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 majority of the Company’s outstanding shares
into the Tender Offer, the business judgment rule irrebuttably applies. The
Merger, therefore, only can be challenged on the basis that it constituted waste. In
other words, the Complaint must plead that the Merger “cannot be attributed to any
87
Recommendation Statement at 31.
88
Kahn v. Lynch Commc’n Sys., Inc., 669 A.2d 79, 89 (Del. 1995).
89
Siliconix, 2001 WL 716787, at *9.
47
rational business purpose.”90 The Complaint fails to plead that the Merger
constituted waste. And, even if it did, I note that “it [is] logically difficult to
conceptualize how a plaintiff can ultimately prove a waste or gift claim in the face
of a decision by fully informed, uncoerced, independent stockholders to ratify the
transaction,” given that “[t]he test for waste is whether any person of ordinary
sound business judgment could view the transaction as fair.”91 Because the Merger
did not constitute waste, the Complaint fails to state a valid breach of fiduciary
duty claim against the Board.
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
duty, . . . (3) knowing participation in that breach by the defendants,’ and (4)
damages proximately caused by the breach.”92 “An aiding and abetting claim[,
however,] ‘may be summarily dismissed based upon the failure of the breach of
90
Cede & Co., 634 A.2d at 361 (internal quotation marks omitted).
91
Harbor Fin., 751 A.2d at 901 (citing Michelson, 407 A.2d at 224); see also
Attenborough, 2016 WL 2765312, at *1.
92
Malpiede v. Townson, 780 A.2d 1075, 1096 (Del. 2001) (quoting
Penn Mart Realty Co. v. Becker, 298 A.2d 349, 351 (Del. Ch. 1972)).
48
fiduciary duty claims against the director defendants.’”93 Further, in Attenborough,
the Supreme Court 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.94 Just as in that case,
“[n]othing in this record comes close to approaching the sort of [financial advisor
misconduct] at issue in RBC Capital Markets.”95 The Complaint, therefore, fails to
state a valid aiding and abetting claim against Goldman.
III. CONCLUSION
For the foregoing reasons, Defendants’ Motions are granted, and the
Complaint is dismissed.
IT IS SO ORDERED.
93
KKR, 101 A.3d at 1003 (quoting Meyer v. Alco Health Servs. Corp., 1991 WL
5000, at *4 (Del. Ch. Jan. 17, 1991)); see also Attenborough, 2016 WL 2765312,
at *2 (“Having correctly decided, however, that the stockholder vote was fully
informed and voluntary, the Court of Chancery properly dismissed the plaintiffs’
claims against all parties.”).
94
Attenborough, 2016 WL 2765312, at *2.
95
Id. (citing RBC Capital Mkts. v. Jervis, 129 A.3d 816, 865 (Del. 2015) (finding, in
the context of a change-of-control transaction, that “[t]he claim for aiding and
abetting was premised on [the financial advisor]’s ‘fraud on the Board,’ and that
RBC aided and abetted the Board’s breach of duty where, for [the financial
advisor]’s own motives, it ‘intentionally duped’ the directors into breaching their
duty of care. The record evidence amply supports the trial court’s conclusion that
[the financial advisor] purposely misled the Board so as to proximately cause the
Board to breach its duty of care.”)).
49
In Re Volcano Corporation Stockholder Litigation
Combined Opinion