Mercier v. Inter-Tel (Delaware), Inc.

Delaware Court of Chancery · 2007 · Corporations

CorporationsMergersShareholder votingFiduciary dutiesUnocalBlasiusshareholder franchisemerger vote

Facts

Inter-Tel's independent Special Committee approved an all-cash merger with Mitel at $25.60 per share and called a June 29 stockholder meeting. As the meeting approached, the committee knew with virtual certainty that stockholders would reject the merger, feared Mitel would walk away if that happened, and believed rejection would cause Inter-Tel's stock price to fall. The committee also believed stockholders had not yet adequately considered recent developments, including weak second-quarter performance, worsening credit markets, Mitel's refusal to raise its bid, and the weaknesses in founder Mihaylo's competing recapitalization proposal. On the morning of the meeting, the committee postponed the vote, set a later meeting and new record date, and the merger was later approved by a large majority.

Issue

May independent directors postpone an imminent stockholder meeting on a merger after learning the merger will lose if held as scheduled, in order to give stockholders more time and information before voting? If so, what standard of review applies, and did the board's postponement and new record date breach fiduciary duties or disclosure duties?

Rule

When directors take action affecting a stockholder vote touching corporate control, the board must identify a legitimate corporate objective, prove its motivations were proper and not selfish, and show its actions were reasonable in relation to that objective and neither preclusive nor coercive. In the merger-vote context, independent directors may reschedule an imminent special meeting when they in good faith believe the merger is in stockholders' best interests, know the merger will otherwise be rejected, reasonably fear the bidder will walk and the opportunity will be lost, seek more time to communicate and provide information, and postpone only for a reasonable period without precluding or coercing stockholders' free choice. Even using Blasius terminology, directors have a compelling justification for a short postponement when they act to preserve what they in good faith believe is a value-maximizing offer that may be irretrievably lost.

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Blue Mesa Robotics, a Delaware corporation based in Denver, agrees to a cash merger at $34 per share with Harbor Peak Systems, a third-party buyer. The independent board learns the day before the special meeting that the merger will lose, believes the deal is the best available option, fears Harbor Peak will terminate if stockholders reject it, and postpones the meeting for 18 days so stockholders can review newly available quarterly results showing a sharp downturn.

If a stockholder sues to enjoin the merger, what is the most likely standard and result?

Explanation. When directors affect a stockholder vote touching corporate control, the majority opinion requires a form of enhanced reasonableness review. The board must identify a legitimate corporate objective, prove proper non-selfish motives, and show the response was reasonable and neither preclusive nor coercive. A short postponement to preserve what independent directors in good faith believe is a value-maximizing offer, while providing more current information before the offer may be lost, is likely permissible.