As regular readers know, this blog typically covers the latest developments and trends emerging from the Delaware Court of Chancery. For this post, however, we revisit first principles and remind our readers of the bedrock decisions of modern Delaware M&A practice, and highlight 11 key decisions with which every practitioner should be familiar.
- Unocal v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985) (Moore, J.): The touchstone for evaluating board action in contests for corporate control, Unocal reaffirmed the board’s power—indeed, its duty—to adopt defensive measures in response to reasonably perceived harm to the corporate enterprise, regardless of its source. Facing a hostile tender offer from a stockholder pursuing a two-step, squeeze-out merger — which the Unocal board concluded was both inadequate in price and coercive in its design — the board approved a selective exchange offer intended to defeat the takeover or, alternatively, at least ensure that Unocal stockholders would receive fair value in the second step of the merger. Unocal confirmed that such measures are entitled to business judgment deference, provided that the directors can first establish (1) that they had reasonable grounds for believing that a threat to corporate policy and effectiveness existed (which, in the context of a takeover threat, may include inadequacy of price, nature, and timing of the offer, quality of the securities being offered in exchange, and impact on other, non-stockholder constituencies, among other things), and (2) that the defensive measure adopted was reasonable in relation to the threat posed.
- Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986) (Moore, J.): On the heels of Unocal, the Delaware Supreme Court soon established a key constraint on the board’s power to resist a takeover threat: once a sale has become inevitable and an auction is underway, the directors’ central objective is to obtain the highest price for the benefit of the stockholders. Thus, business judgment review is unavailable where a board’s selective dealings with a particular bidder have the effect of precluding competing bids and prematurely shutting down an auction to the detriment of stockholders.
- Blasius Indus., Inc. v. Atlas Corp., 564 A.2d 651 (Del. Ch. 1988) (Allen, C.): Another key limit on board action in corporate control contests, Blasius invalidated board action taken to thwart a stockholder vote by enlarging the board and installing new directors in response to a proxy contest for control of the company’s board. Highlighting the central role of stockholder democracy in Delaware’s corporate governance regime, Blasius requires a compelling justification for any board interference with stockholders’ statutory right to elect directors.
- Aronson v. Lewis, 473 A.2d 805 (Del. 1984) (Moore, J.)/Rales v. Blasband, 634 A.2d 927 (Del. 1993) (Veasey, C.J.): In the context of stockholder derivative suits challenging corporate decisions, Aronson delineates when a stockholder may be excused from making a demand upon the board to remedy an alleged wrong pursuant to Chancery Rule 23.1. To establish demand futility in that context, a derivative plaintiff must allege particularized facts that create a reasonable doubt as to whether (1) the directors are disinterested and independent, or (2) the challenged transaction was otherwise the product of a valid exercise of business judgment. Where the board that would be considering the demand did not make a business decision that is being challenged in the derivative suit, however, the Delaware Supreme Court explained in Rales that a derivative plaintiff must allege particularized facts that create a reasonable doubt as to whether, as of the time the complaint is filed, the board of directors could have properly exercised its independent and disinterested business judgment in responding to a demand. It remains an open question whether a standard different from Aronson or Rales would apply to a derivative complaint challenging corporate inaction.
- In re Caremark Int’l Inc. Derivative Litig., 698 A.2d 959 (Del. Ch. 1996) (Allen, C.): A pillar of the modern-day risk and compliance apparatus (whose standard and analysis have been fully adopted by the Delaware Supreme Court), Caremark emphasizes that directors can be held personally liable for failed oversight of the corporation’s ongoing business operations (though Caremark itself did not involve such a finding). To avoid that outcome, boards should begin by assuring themselves that information and reporting systems exist in the organization that are reasonably designed to provide timely, accurate information sufficient to allow management and the board to reach informed judgments concerning both the corporation’s compliance with law and its business performance. But the bar remains high to establish a breach: Caremark requires a “sustained or systematic” failure of the board to exercise oversight, such as an utter failure to attempt to assure a reasonable information and reporting system exists.
- In re MFW S’holders Litig., 67 A.3d 496 (Del. Ch. 2013) (Strine, C.): In merger transactions involving a controlling stockholder, MFW charts a path toward business judgment review for those who give careful attention to the process followed in negotiating and approving the deal. Where a merger proposed by a controlling stockholder is conditioned before the start of negotiations on both the approval of an independent, adequately empowered Special Committee that fulfills its duty of care, and the uncoerced, informed vote of a majority of the minority stockholders, that merger, once consummated, is entitled business judgment rule protection.
- Corwin v. KKR Fin. Holdings LLC, 125 A.3d 304 (Del. 2015) (Strine, C.J.): A contemporary landmark, Corwin provides a counterpoint with respect to transactions not involving a controlling stockholder: when a transaction not subject to the entire fairness standard is approved by a fully informed, uncoerced vote of the disinterested stockholders, the business judgment rule applies. Post-Corwin, litigation often centers on whether the applicable stockholder vote was “fully informed,” placing a premium on comprehensive and accurate disclosure.
- Dell, Inc. v. Magnetar Glob. Event Driven Master Fund Ltd, 177 A.3d 1 (Del. 2017) (Valihura, J.)/DFC Glob. Corp. v. Muirfield Value Partners, L.P., 172 A.3d 346 (Del. 2017) (Strine, C.J.): In a pair of decisions that helped douse the prevailing appraisal-arbitrage fervor, the Delaware Supreme Court reversed two appraisal awards where the Chancery Court had determined that fair value exceeded the deal price negotiated by the parties. In both Dell and DFC, the Supreme Court reversed, at least in part, because the decision to give limited or no weight to deal price was not consistent with the Chancery Court’s factual findings (which, in both cases, described a competitive sale process) and accepted financial principles. Dell and DFC emphasized that the deal price resulting from a robust market check will often be the most reliable evidence of fair value and should be given substantial weight.
- Akorn, Inc. v. Fresenius Kabi AG, 2018 WL 4719347 (Del. Ch. Oct. 1, 2018) (Laster, V.C.): Most recently, the Chancery Court issued its first-ever decision finding that a material adverse effect clause was properly invoked and permitted a buyer to terminate a public company merger agreement. But as reflected in the Vice Chancellor’s 246-page opinion, the decision hinged on a “dramatic,” unexpected set of events (including a company-specific downturn in the seller’s business and alarming revelations of serious and pervasive data integrity problems that came to light when the buyer received anonymous whistleblower letters post-signing) that established a material adverse effect under the merger agreement, which, under the circumstances, authorized the buyer’s termination.