United States: Chancery: § 251(h) Tender Offers Get Irrebuttable Business Judgment Review

John O'Toole writes:

In In re Volcano Corporation Stockholder Litigation, the Court of Chancery held that stockholders' acceptance of tender offers as part of mergers accomplished under § 251(h) of the Delaware General Corporation Law ("DGCL") "has the same cleansing effect as a stockholder vote in favor of a transaction." C.A. No. 10485-VCMR, 2016 WL 3583704, at *11 (Del. Ch. June 30, 2016). Thus, as "the business judgment rule irrebuttably applies" to a transaction approved by the "fully informed vote [of] a majority of a company's disinterested, uncoerced stockholders," the same result obtains upon "the acceptance of a first-step tender offer by fully informed, disinterested, uncoerced stockholders representing a majority of a corporation's outstanding shares in a two-step merger under section 251(h)...."

The Court's decision in Volcano is particularly noteworthy for two reasons. First, Vice Chancellor Montgomery-Reeves determined that the fully informed, disinterested, uncoerced acceptance of a tender offer done pursuant to § 251(h) is functionally identical to a fully informed, disinterested, uncoerced stockholder vote. Second, the Court's determination that the acceptance of tender offers and stockholder votes are, at least in this context, the same, extends the irrebuttable application of the business judgment rule as discussed in the line of Supreme Court cases from Corwin to Attenborough, to § 251(h) tender offers and mergers.

In equating § 251(h) tender offers to stockholder votes, the Vice Chancellor determined that § 251(h) sufficiently protects stockholder interests and that the policy analysis undertaken by the Supreme Court in Corwin as to stockholder votes applies equally to § 251(h) tender offers. The Court held that because § 251(h) requires merger agreements, which in turn activate directors' disclosure obligations and fiduciary duties, and prohibits structural coercion, stockholder interests are no less protected than if a vote were required. Further, where the Supreme Court in Corwin held that, in the context of a vote, "stockholders [should] have...the free and informed chance to decide on the economic merits of a transaction for themselves" and "that judges are poorly positioned to evaluate the wisdom of business decisions," the Court here found such policy "equally applicable to a tender offer in a Section 251(h) merger." Vice Chancellor Montgomery-Reeves held that "a stockholder is no less exercising her 'free and informed chance to decide on the economic merits of a transaction' simply by virtue of accepting a tender offer rather than casting a vote." Thus, the Court held that because of such statutory protections and policy considerations, there is no "basis for distinguishing between a stockholder vote and a [§ 251(h)] tender offer."

It follows then, and the Court held, that mergers approved by the acceptance of § 251(h) tender offers should be afforded the same "cleansing effect" as mergers approved by stockholder votes. Thus, for both § 251(h) mergers and mergers approved by stockholder votes, the business judgment standard of review irrebuttably applies. In so holding, the Court clarified and expanded upon the recent line of Chancery and Supreme Court opinions discussing the effect of fully informed, disinterested, uncoerced stockholder votes. Vice Chancellor Montgomery-Reeves explained that "[i]n this context, if the business judgment rule is 'irrebuttable,' then a plaintiff only can challenge a transaction on the basis of waste....If, by contrast, the business judgment rule is 'rebuttable,' then a board's violation of either the duty of care or duty of loyalty...would render the business judgment rule inapplicable." By expanding the irrebuttable application of the business judgment rule, the Court necessarily expanded the types and number of mergers that will now be, at least practically speaking, insulated from stockholder challenges.

John O'Toole is a summer associate, resident in the firm's Wilmington office.

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