Revlon Applied in 50/50 Cash/Stock Merger; Injunction Denied

In In Re Smurfit-Stone Container Corp. Shareholder Litigation (C.A. No. 6164-VP, Del. Ch. May 24, 2011), the Chancery Court declined to enjoin a merger in which approximately half of the consideration would be cash and the other half would be stock of the acquirer.  A large portion of the opinion addresses whether the merger constituted a “change of control” transaction, which under Revlon would require the board to act reasonably to maximize short-term value for the shareholders.  The Smurfit-Stone Container transaction falls between In re Santa Fe Pacific Corp., in which the Delaware Supreme Court held that a merger where only 33% of the merger consideration was cash did not trigger Revlon duties, and  In re Lukens Inc. Shareholders Litigation, where the Chancery Court assumed that Revlon applied to a transaction where each shareholder had the right to elect to receive cash consideration, with a maximum total cash payout of 62% of the total consideration.  In this case, the Court followed the reasoning in Lukens, holding that while the matter is not free from doubt, Revlon scrutiny is needed for “a transaction that constitutes an end-game for all or a substantial part of a stockholder’s investment in a Delaware corporation.”   The Court found that the substantial cash-out constituted a sufficient end-game for their investment even though Smurfit-Stone shareholders could realize a control premium in future transactions involving the acquirer’s stock.

      Applying the Revlon standard to the merger, the Court held that the plaintiff shareholder class was unlikely to prevail in its claims that the board had breached its fiduciary duties by engaging in a deficient sale process and obtaining an inadequate price.  The Court noted that although management and the company’s inside director were active in merger negotiations, Smurfit-Stone established a special committee consisting of all nine outside directors and appointed a three-person sub-committee to manage the day-to-day tasks associated with the negotiations.  The Court deemed it significant that many of the substantive terms of the merger agreement were negotiated not through management but rather through Smurfit-Stone’s legal and investment advisors.   The Court found that the Special Committee challenged management projections and obtained concessions from Smurfit-Stone’s investment advisor regarding its fee structure and the acquirer with respect to deal protection devices.  The Court held that the merger agreement’s no-shop (with a fiduciary out), matching rights and termination fee provisions were relatively standard and were neither preclusive nor coercive.  Finally, the Court found that because the essence of the plaintiffs’ claim was the inadequacy of the price, which could be remedied at law or in an appraisal action, they had not established that failure to enjoin the merger would result in irreparable harm. 

Link to Chancery Court opinion:

http://courts.delaware.gov/opinions/download.aspx?ID=155480

As part of the ongoing refinement of Section 220 of the Delaware Corporate Code, the Delaware Supreme Court holds that a derivative lawsuit in California Federal Court does not bar a subsequent Section 220 claim. 
In King v. Verifone Holdings, Inc. (No. 330, 2010, Del. Supr. January 28, 2011), the Delaware Supreme Court reversed a Court of Chancery decision that had precluded shareholders from utilizing a Section 220 proceeding to gain inspection of the company’s books and records.  The plaintiffs’ derivative lawsuit in federal court in California had been dismissed without prejudice for failure to allege facts sufficient to excuse a pre-suit demand.  The California federal court granted the plaintiffs leave to amend the complaint, suggesting that they utilize 8 Del. Code §220 to obtain the necessary particularized facts.  The Delaware Chancery Court, however, held that the initiation of the action in California violated the public policy-based rule that requires plaintiffs to utilize Section 220 prior to filing a derivative action.  In reversing, the Delaware Supreme Court noted that while the Chancery Court’s rule describes the preferred procedure for prosecuting derivative suits, Section 220 merely requires a “proper purpose.”   Provided that plaintiff’s original suit has been dismissed without prejudice and with leave to amend the complaint, a proper purpose may be found in that the Section 220 request may result in obtaining the particularized facts necessary to survive a motion to dismiss for failure to adequately plead demand futility.  The Court suggested that the policy goal of preventing a plaintiff from bringing suit prematurely and without adequate investigation might be served instead by denying the plaintiff “lead plaintiff” status,  by dismissing the complaint with prejudice and with no leave to amend, or by granting leave to amend one time, conditioned on the plaintiff paying the defendant’s attorney’s fees for the initial motion to dismiss. (Link to Supreme Court opinion: http://courts.delaware.gov/opinions/download.aspx?ID=149820)