In re Volcano Corp. Stockholder Litigation

Delaware Court of Chancery · 2016 · Corporations

CorporationsMergers and acquisitionsFiduciary dutiesTender offersStockholder approvalbusiness judgment ruleRevlonCorwin

Facts

Volcano agreed to be acquired by Philips for $18 per share in an all-cash, two-step merger under DGCL Section 251(h), even though Philips had offered $24 per share about five months earlier before Volcano lowered guidance and negotiations evolved. Volcano's board recommended the tender offer, and 89.1% of the company's outstanding shares were tendered, with additional shares subject to guaranteed delivery notices. Plaintiffs alleged the board acted uninformed and was influenced by merger-related benefits, and that Goldman was conflicted because termination of preexisting call spread transactions upon the merger produced a net $24.6 million payment from Volcano to Goldman. The board's recommendation materials disclosed Goldman's interests in the warrants and that their value would decrease over time until expiration.

Issue

Does acceptance of a first-step tender offer in a Section 251(h) merger by a majority of fully informed, uncoerced, disinterested stockholders have the same cleansing effect as a stockholder vote under Corwin, thereby invoking irrebuttable business-judgment review? If so, did plaintiffs plead that Volcano's stockholders were not fully informed, or otherwise state a viable claim for fiduciary breach or aiding and abetting?

Rule

When a transaction not subject to entire fairness is approved by fully informed, uncoerced, disinterested stockholders, the business judgment rule applies irrebuttably and the transaction may be challenged only as waste. In a two-step merger under DGCL Section 251(h), stockholder acceptance of a first-step tender offer by holders of a majority of the outstanding shares has the same cleansing effect as a stockholder vote in favor of the merger. Stockholders are fully informed if they receive all material information; an omitted fact is material only if there is a substantial likelihood a reasonable stockholder would view it as significantly altering the total mix of information.

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Pine Harbor Medical, a Delaware corporation based in Minneapolis, agreed to be acquired in an all-cash two-step merger under DGCL Section 251(h) by Lake Meridian Holdings, a fictional buyer based in Seattle. After the board approved the merger agreement and recommended the tender offer, holders of 72% of Pine Harbor's outstanding shares tendered; the complaint alleges only that the directors failed to maximize value under Revlon, and does not plead entire fairness, coercion, or any material disclosure defect.

What is the most likely standard of review for a post-closing damages challenge to the merger?

Explanation. Under the majority opinion, acceptance of a first-step tender offer by holders of a majority of the outstanding shares in a Section 251(h) merger has the same cleansing effect as a stockholder vote, so long as the stockholders are fully informed, uncoerced, and disinterested and the transaction is not subject to entire fairness. In that circumstance, business judgment review applies irrebuttably, and the only remaining possible challenge is waste. (Derived from In re Volcano Corp. Stockholder Litigation (2016).)