In re Volcano Corporation Stockholder Litigation

Delaware Court of Chancery · Corporations

CorporationsMergers and acquisitionsFiduciary dutiesTender offersSection 251(h)business judgment ruleCorwinSection 251(h)

Facts

Volcano agreed to be acquired by Philips for $18 per share in a two-step, all-cash merger under DGCL Section 251(h), even though Philips had offered $24 per share about five months earlier before Volcano's financial performance declined and negotiations later resumed. Goldman served as Volcano's financial advisor and also was a counterparty to call spread transactions tied to Volcano's convertible notes; when the merger closed, those transactions terminated and Volcano made a net $24.6 million payment to Goldman. The board disclosed Goldman's interest in the warrants and that their value would decrease over time until expiration, and Volcano recommended that stockholders tender into Philips's offer. Stockholders tendered 89.1% of Volcano's outstanding shares, and the merger closed without a stockholder vote under Section 251(h).

Issue

Whether, in a Section 251(h) merger, acceptance of a first-step tender offer by a fully informed, uncoerced, disinterested majority of outstanding shares has the same cleansing effect as a stockholder vote under Corwin, thereby invoking irrebuttable business judgment review. If so, whether plaintiffs adequately alleged that Volcano's stockholders were not fully informed or that the merger constituted waste.

Rule

When a transaction not subject to entire fairness is approved by fully informed, uncoerced, disinterested stockholders, the business judgment rule applies irrebuttably, leaving waste as the only basis for challenge. In a two-step merger under DGCL Section 251(h), stockholder acceptance of a first-step tender offer by a majority of the outstanding shares has the same cleansing effect as a statutorily required stockholder vote, provided the tendering stockholders are fully informed, disinterested, and uncoerced. An omitted fact is material only if there is a substantial likelihood that a reasonable stockholder would consider it important and that disclosure would significantly alter the total mix of information available.

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Pine Mesa Robotics, a Delaware corporation based in Phoenix, agreed to be acquired in an all-cash two-step merger under DGCL Section 251(h). The target board recommended the offer, 82% of the outstanding shares were tendered, and no controller or conflicted stockholder is alleged; the complaint seeks post-closing damages for an allegedly inadequate price.

What is the most likely standard of review if the tendering stockholders were fully informed and uncoerced?

Explanation. The majority held that in a Section 251(h) two-step merger, acceptance of the first-step tender offer by a fully informed, uncoerced, disinterested majority of outstanding shares has the same cleansing effect as a stockholder vote. When that cleansing applies and the transaction is not subject to entire fairness, business judgment review applies irrebuttably, with waste as the sole remaining challenge. (Derived from In re Volcano Corporation Stockholder Litigation (n.d.).)