Delaware Chancery Court Dismisses Revlon Claims Based on Fully Informed, Uncoerced Stockholder Vote
In In Re OM Group, Inc. Stockholder Litigation, C.A. No. 11216-VCS (Del. Ch. Oct. 12, 2016), the Delaware Court of Chancery dismissed Revlon claims, on the basis that the challenged merger had been approved by a disinterested, uncoerced and fully-informed majority vote of the target’s stockholders and therefore the business judgment rule applied.
In this case, the plaintiffs, former stockholders of OM, alleged that defendants breached their fiduciary duties in approving a sale of OM Group Inc. (“OM”) to a private equity firm. The plaintiffs’ theory rested on several allegations including that: (1) the defendant directors ignored the advice of its financial advisors that separate sales of OM’s many diverse business units would yield maximum value for OM stockholders and instead favored a financial buyer that was interested in acquiring the whole company; (2) defendants rushed to close the deal with the financial buyer to avoid an embarrassing and prolonged proxy fight with dissident investors; (3) defendants failed to manage conflicts between the company and its investment banker which had significant relationships with the buyer; and (4) the defendants relied on artificially low business projections to drive down the merger price and close the sale.
OM’s stockholders overwhelmingly approved the merger, with approximately 75% of the company’s outstanding common shares voting in favor. However, plaintiffs alleged that the vote was uninformed and should not have altered the standard of review under Corwin v. KKR Financial Holdings, LLC 125 A.3d 304 (Del. 2015). Specifically, plaintiffs alleged that the proxy statement was incomplete and misleading because it: (1) failed to disclose a director conflict between OM’s director Steven J. Demetriou who also was CEO of a company in which the buyer separately owned a 19% interest; (2) did not disclose fully the conflicts with OM’s investment banker nor disclose that the board initially contemplated hiring the bank on a fixed-fee basis instead of a contingency basis; and (3) failed to provide sufficient detail of a competing indication of interest received by the OM board from a strategic buyer during the post-signing, go-shop period.
Defendants moved to dismiss on three grounds. First, defendants argued the plaintiffs failed to sufficiently plead that the OM board acted unreasonably under Revlon. Second, defendants contended that the fully informed, uncoerced stockholder vote triggered the irrebuttable business judgment rule. Finally, defendants argued that the plaintiffs failed to plead either a breach of the duty of loyalty or bad faith sufficient to overcome the exculpatory provision in OM’s certificate of incorporation.
The court first examined whether the sale of OM was subject to the business judgment rule or enhanced scrutiny under Revlon. Under Revlon, the court would review the sales process to determine whether the directors acted reasonably to maximize stockholder value. However, the court determined that it was required to first determine whether Revlon was the applicable standard of review. Under Corwin, if the stockholders’ approval was the product of a fully informed, uncoerced vote, then the irrebuttable business judgment rule applies to a transaction otherwise subject to enhanced scrutiny under Revlon and insulates the transaction from all attacks other than on grounds of waste. The plaintiffs did not allege corporate waste, so the court turned to consideration of whether the stockholder vote was fully informed and uncoerced.
The court analyzed the plaintiffs’ allegations regarding the merger disclosure and rejected each. First, it rejected that the plaintiffs’ allegations regarding the competing bid received from the strategic buyer, finding that the merger proxy statement did disclose that competing bids were received, even if it didn’t identify the strategic buyer by name. Second, the court found that the allegations of director conflict of interest between several of its directors and the buyer were conclusory and immaterial to a reasonable investor. Finally, the court rejected plaintiffs’ claim that the stockholders were uninformed about the fees due to OM’s investment banker and relationship between the bank and the buyer, on the grounds that the proxy statement did disclose the prior fee arrangements and the amount of the fees which had been paid to OM’s banker by the buyer.
Because the court found the stockholder vote to be fully informed and uncoerced, the business judgment rule applied in the absence of waste. The court did not address whether the plaintiffs pled a viable breach of fiduciary duty under Revlon.