In re Synthes, Inc. Shareholder Litigation

Delaware Court of Chancery · 2012 · Corporations

CorporationsFiduciary DutiesControlling StockholdersMergers and Acquisitionsbusiness judgment ruleentire fairnessRevlonUnocal

Facts

Synthes explored strategic alternatives through a lengthy process, contacting strategic buyers and private equity firms, providing diligence access, and negotiating over months. A private equity consortium offered CHF 151 per share in cash but only for part of the company because the deal required Hansjoerg Wyss, the alleged controller, to roll over a substantial portion of his equity and remain a major investor. The board instead continued negotiations with Johnson & Johnson, used the private equity bid to press for a higher price, and ultimately approved a merger at CHF 159 per share, with 65% stock and 35% cash, on the same terms for all stockholders including Wyss. The merger agreement included standard deal protections, and no topping bid emerged before the stockholder vote or before closing.

Issue

Whether the complaint stated a non-exculpated fiduciary-duty claim by alleging that the controlling stockholder was conflicted because he refused to support a partial-company bid requiring him to remain invested, thereby triggering entire fairness review, or alternatively whether the merger was subject to and violated Revlon or Unocal. Also at issue was whether standard deal protections and the board's conduct during the sale process supported a reasonably conceivable claim.

Rule

In a third-party merger, entire fairness is not triggered unless the controller is alleged to have obtained a material personal financial benefit not shared ratably with the minority and to the minority's detriment. A controller's desire for the same liquidity as other stockholders, or refusal to accept a worse and different form of consideration than the minority receives, does not create a disabling conflict when the merger treats all stockholders equally. Revlon applies only when a transaction results in a sale or change of control, and no change of control occurs when stockholders receive a substantial stock component in a surviving company whose shares trade in a large, fluid market.

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Redwood Surgical Devices, a Delaware corporation based in Minneapolis, has a 54% stockholder, Martin Hale. After a six-month sale process, Redwood agrees to merge with Harbor Biologics, a widely held public company based in Seattle, for the same per-share consideration to all stockholders: 60% Harbor stock and 40% cash. A private equity group had earlier proposed an all-cash deal for the public stockholders only, but only if Martin rolled over 45% of his shares into the post-closing private company.

If minority stockholders sue, arguing that Martin's refusal to support the private equity proposal triggers entire fairness review, how should a Delaware court most likely rule?

Explanation. A controller conflict in a third-party merger requires well-pled facts that the controller received a material personal financial benefit not shared ratably with the minority and to the minority's detriment. Here, Martin would receive the same merger consideration as everyone else, and the rejected proposal required only him to retain illiquid equity. Delaware law does not require a controller to sacrifice his own legitimate interests so the minority can obtain better terms than he receives. Under the majority's reasoning, pro rata treatment is a strong safe harbor for business judgment review.