February 2009
Skadden
Recent Developments in Delaware M&A Law
Skadden, Arps, Slate, Meagher & Flom LLP
& Affiliates
If you have any questions
regarding the matters
discussed in this memorandum, please contact the
following attorneys or call
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contact.
hree recent cases decided by the Delaware courts, all in the M&A arena,
reinforce certain settled principles of Delaware law and provide guidance in
a number of developing areas. Key points include:
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Gantler v. Stephens (Del. Supr. Ct.)
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Reaffirms that rejecting an acquisition offer, without more, is not a defensive action that requires enhanced scrutiny by the courts. Normally, it
would be reviewed within the traditional business judgment framework,
with its presumption favoring the board’s business judgment. However,
where the plaintiff adequately alleges that a majority of the board is
materially conflicted, the standard of review will be entire fairness.
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Rules as a stated matter of first impression that corporate officers owe
fiduciary duties that are identical to those owed by corporate directors.
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Limits the common law doctrine of shareholder ratification “to circumstances where a fully informed shareholder vote approves director action
[specifically submitted for approval] that does not legally require
shareholder approval in order to become legally effective.”
Peter Atkins
New York
212.735.3700
Edward Welch
Wilmington
302.651.3060
Edward Micheletti
Wilmington
302.651.3220
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Pfeffer v. Redstone (Del. Supr. Ct.)
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Reaffirms that Delaware law does not require an entire fairness review
where a company makes a voluntary, noncoercive exchange offer to its
shareholders.
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Concludes that where the shares offered are those of a controlled subsidiary, the parent’s board was not required to disclose a cash flow
analysis created by a “mid-level treasury manager” of the controlled
subsidiary in the absence of adequately pled facts supporting the directors’
awareness of the analysis.
Alliance Data Systems Corp. v. Blackstone Capital Partners V L.P. (Del. Ch. Ct.)
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Rules that a merger agreement’s “best efforts” clause may be enforced
against parties to the agreement, but not against persons who are not
parties, including parent entities.
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Rules that a best efforts clause will not be interpreted to require a party
to force its parent company to make concessions the parent never agreed
to make.
In Gantler v. Stephens, No. 132, 2008 (Del. 2009), the Supreme Court reversed and
remanded a Court of Chancery dismissal pursuant to Rule 12(b)(6) of a shareholder
“complaint alleging that the defendants, who are officers and directors of [the Company],
violated their fiduciary duties by rejecting a valuable opportunity to sell the Company,
deciding instead to reclassify the Company’s shares to benefit themselves...” The
court concluded, in part, that “the complaint pleads sufficient facts to overcome the
business judgment presumption...”
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In the opinion, the Supreme Court confirmed that “[r]ejecting an acquisition offer, without more, is not
‘defensive action’ under Unocal.” The court also held that “[a] board’s decision not to pursue a merger opportunity is normally reviewed within the traditional business judgment framework. In that context, the board is entitled to a strong presumption in its favor, because implicit in the board’s statutory
authority to propose a merger, is also the power to decline to do so.” However, the Supreme Court
found that the plaintiffs had adequately alleged that a majority of the board was materially conflicted
in the decision to terminate the sales process (based on the alleged threat of personal financial loss if
they lost certain business relationships with the company after its acquisition pursuant to the merger)
and, thus, the business judgment presumption had been rebutted and entire fairness should apply. The
court expressly commented that “[a]lthough it may be problematic to determine the fair price of a
transaction that was never finalized, our decisions have applied the entire fairness standard in a
non-transaction context. See Nixon v. Blackwell, . . . applying the fair dealing prong of entire fairness.”
As a separate matter, in a ruling described as one of first impression, the Supreme Court definitively held that “corporate officers owe fiduciary duties that are identical to those owed by corporate
directors.” As a result, the court also held that the plaintiffs had adequately alleged that two officers
who had allegedly helped undermine the due diligence process in connection with the terminated
sales process breached their duties of loyalty in their capacities as corporate officers.
The court also held that the common law doctrine of shareholder ratification would not serve as a
defense to the plaintiffs’ claim that the board members breached their duty of loyalty in connection
with the reclassification. Specifically, the Supreme Court held that the doctrine of shareholder
ratification is 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.
Moreover, the only director conduct that can be ratified is that which the shareholders are specifically
asked to approve. With one exception, the ‘cleansing’ effect of such a ratifying shareholder vote is
to subject the challenged director action to business judgment review, as opposed to ‘extinguishing’
the claim altogether (i.e., obviating all judicial review of the challenged action).” The court explained
that the “one exception” is when the doctrine is used to “validly extinguish . . . a claim that the directors
lacked the authority to take action that was later ratified.”
The court then applied these principles to the facts of the case, concluding that “the ratification
doctrine does not apply to transactions where shareholder approval is statutorily required. Here, the
Reclassification could not become legally effective without a statutorily mandated shareholder
vote approving the amendment to First Niles’ certificate of incorporation.” Thus, the court held that
the ratification doctrine would not apply. The court also noted that ratification would not apply here
in any event, given that the plaintiffs had adequately alleged disclosure claims.
In Pfeffer v. Redstone, No. 115, 2008 (Del. 2009), the Delaware Supreme Court affirmed dismissal
with prejudice of claims in a class action brought against directors of Viacom, Blockbuster and others.
Viacom owned 82 percent of Blockbuster. Among other things, the litigation challenged an offer
to Viacom’s shareholders to exchange their Viacom stock for Blockbuster stock.
The Delaware Supreme Court first rejected an argument that the Viacom directors had breached
their fiduciary duties in structuring the transaction, confirming that Delaware law does not require
entire fairness scrutiny where a controlling corporation engages in a voluntary, non-coercive offer.
The Viacom directors did have a duty to structure the terms of the exchange offer in a manner that
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was noncoercive and to disclose all material facts, but the Supreme Court agreed with the Court of
Chancery that Viacom’s directors had satisfied that duty.
The court also rejected a series of claims challenging Viacom’s disclosures. Among other things,
the Supreme Court rejected the argument that Blockbuster’s internal cash flow analysis, created by
a “mid-level treasury manager,” should be disclosed, emphasizing that the plaintiff did not sufficiently plead any facts to support the inference that Viacom directors were aware of the analysis.
The court concluded that an assertion that the Viacom directors knew of the cash flow analysis
because Blockbuster’s chairman and CEO would have told Sumner Redstone about it “could not
be more conclusory.”
Alliance Data Systems Corp. v. Blackstone Capital Partners V L.P., C.A. No. 3796-VCS (Del.
Ch. 2009), involved a claim by Alliance Data Systems (ADS) against defendants Aladdin and
Blackstone Capital Partners V L.P. (BCP) after their agreement to acquire ADS was terminated.
Aladdin was formed by BCP for the purpose of acquiring ADS. BCP in turn was controlled by the
Blackstone Group L.P. (Blackstone). In the merger agreement, Aladdin promised to use its
reasonable best efforts to obtain approval of the deal by the Office of the Comptroller of the
Currency (OCC).
ADS sued Aladdin and BCP, arguing that Aladdin breached the merger agreement by failing to
cause its parent companies to assent to the demands of the OCC. The court granted the defendants’
motion to dismiss, finding that any contractual claim against the defendants must be predicated on
a breach by Aladdin because it was the only party, aside from ADS, that signed the merger agreement.
The court concluded that Aladdin was not required by the terms of that agreement to force its parent
companies to enter into an arrangement with the OCC in order to satisfy a condition of the merger. The merger agreement’s best efforts clause required Aladdin to use its reasonable best efforts,
and not BCP or Blackstone. Those companies did not have any contractual obligation to enter into
an arrangement with the OCC, and Aladdin made no contractual promise that it would compel
them to do so. At a minimum, the decision illustrates the unwillingness of the Delaware courts to
expand the obligations of parties to a merger agreement, and impose obligations and bind parties
not contemplated by the agreement.
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