Chancery Court Dismisses Stockholders' Breach of Fiduciary Duty And Aiding And Abetting Claims Relating To Stock For Stock Merger
In In re MeadWestvaco Stockholders Litigation, the defendants moved to dismiss class action claims brought by stockholders of MeadWestvaco Corporation (the “Company”) for breach of fiduciary duty and aiding and abetting claims relating to the Company’s board of director’s approval of a strategic stock-for-stock merger of equals entered into between the Company and Rock-Tenn Company that closed in 2015. The court held that the complaint did not contain factual allegations sufficient to state a claim against the directors for bad faith in connection with the approval of the merger.
The plaintiffs, CWA Local 1180 Administrative Fund and CWA Local 1180 Members Annuity Fund (the “Plaintiffs”), stockholders of the Company, filed a complaint asserting that the board of directors (the “Board”) of the Company entered into a merger with Rock-Tenn Company (“Rock-Tenn”) in reaction to a threatened proxy contest by an activist investor leaving $3 billion in value behind. Per the terms of the merger agreement, the Company’s stockholders received 0.78 shares of stock in the combined entity for each share of the Company they owned, representing a 9.1% premium. The Company’s stockholders received approximately 50.1% of the shares of the combined entity. The merger was opined on as being fair by three separate financial advisors of the Company. ISS Proxy Advisory Services (“ISS”) and Glass Lewis & Co., LLC (“Glass Lewis”) each recommended that the Company’s stockholders vote in favor of the merger. The Company’s stockholders approved the merger, with 98% of the voted shares voting in favor of the merger.
The Defendants moved to dismiss the Plaintiffs’ claims for failure to state a claim for relief. The primary issue determined by the court was whether the Plaintiffs’ complaint contained sufficient factual allegations to state a reasonably conceivable claim against the Board for bad faith in approving the merger. The court first held that the Board’s decision presumptively is governed by the business judgment rule. The court indicated in its reasoning that since there were no controllers of the Company and of Rock-Tenn and since the Company’s stockholders received only stock of the combined entity as merger consideration, the merger is not subject to entire fairness review ab initio or enhanced scrutiny under Revlon. Noting that the Company’s certificate of incorporation contained a Section 102(b)(7) provision exculpating its directors from personal liability for any breach of the fiduciary duty of care, the court further held that to avoid summary dismissal, the Plaintiffs’ needed to allege facts “that (1) a majority of the Board was not both disinterested and independent or (2) that the [Board] did not act in good faith.” The Plaintiffs effectively conceded that the first prong did not apply and thus their case rested on their claim of bad faith.
The court stated that to show bad faith requires either (1) “an extreme set of facts to establish that disinterested directors were intentionally disregarding their duties” or (2) “that the decision under attack is so far beyond the bounds of reasonable judgment that it seems essentially inexplicable on any ground other than bad faith.” The primary argument made by the Plaintiffs was that the Board entered into the merger in bad faith in reaction to a threatened proxy contest by an activist investor that acquired a 6.1% ownership stake during the merger negotiation period. The Plaintiffs argued that by “flying blind” and doing “virtually nothing” to meet the Board’s fiduciary duties, the Board’s approved merger pricing undervalued the Company and therefore deprived the Company’s stockholders of significant value.
The court found that the Board, comprised of eight independent and disinterested directors and one interested director, was actively engaged as it had at least six meetings over the nine months of merger negotiations and twice terminated discussions with Rock-Tenn during this period. The court also noted that (1) the merger agreement provided for a premium to be received the Company’s stockholders; (2) three financial advisors opined that the merger was fair; (3) deal protection provisions included in the merger agreement including a nonsolicitation clause, a fiduciary out in the case of a superior offer and a $230 million termination fee were reasonable; and (4) ISS and Glass Lewis each recommended that Company stockholders approve the merger. Based upon these findings, the court ruled that Plaintiffs’ factual allegations failed to show either an extreme set of facts or that the Board’s decision was so far beyond the bounds of reasonable judgment that it seemed essentially inexplicable on any ground other than bad faith. Holding that the Plaintiffs failed to state a reasonably conceivable claim for breach of good faith by the Board, the court granted the Defendants’ motion to dismiss both (a) the breach of fiduciary duty claim and (b) the aiding and abetting claim, as breach of fiduciary duty is a required element to establish aiding and abetting.
In Re MeadWestvaco Stockholders Litigation