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
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:
