United States: The Ropes Recap: Mergers & Acquisitions Law News - Second Quarter 2016


Delaware Court of Chancery Rejects Transaction Price as the Best Measure of Fair Value in Dell Appraisal Litigation

On May 31, 2016, the Delaware Court of Chancery released its post-trial opinion in the closely-watched appraisal action that arose from the buyout of Dell Inc. by Michael Dell, its founder, and a private equity backer. Despite finding that the transaction resulted from a disinterested, fair, and robust process that would have "sailed through" a traditional fiduciary duty review, Vice Chancellor Travis Laster nonetheless held, after a four-day trial featuring 1,200 exhibits and extensive witness testimony, including from five experts, that the $13.75 per share transaction price did not provide Dell stockholders with fair value for their shares.

The Dell opinion is notable in that, contrary to the recent trend in Delaware, the court did not accept the transaction's market price as presumptively representative of fair value. Vice Chancellor Laster refused to view the market price as determinative for a number of reasons, including the fact that the transaction was a management buy-out, evidence showing a gap between Dell's intrinsic value and its share price, and certain limitations in the transaction process, including the lack of meaningful pre-signing price competition and the limitations of the go-shop provision.

The Court instead employed a discounted cash flow (DCF) analysis to render an independent conclusion. Interestingly, the Court rejected the company's internal projections as overly optimistic, and instead focused on projections prepared by the special committee's financial advisor, the Boston Consulting Group, Inc., in connection with the transaction, as well as projections provided to the buyout group's lenders. The Court also rejected many of the conclusions offered by the parties' experts concerning the proper DCF inputs, seeing them as litigation-driven. Ultimately, the Court selected different inputs from each of the experts, and valued Dell at $17.62 per share, an approximate $6 billion increase from the total consideration paid. However, because so few stockholders participated in the appraisal action, Dell likely will pay former stockholders only $35 million as a result.

The Dell opinion reminds merger parties that although deal price may be the best indicator of fair value in most instances, it is not determinative. The Delaware Court of Chancery will scrutinize the transaction process to evaluate whether it is a reliable measuring stick for assessing fair value.

And even if that process would pass muster under a traditional fiduciary duty analysis, it may not be deemed the best measure of value. Here, the contrast between the market's "myopic" valuation of Dell and management's long-view assessment of the company raised concerns that the transaction price was artificially low and resulted from asymmetric information. Mr. Dell's role in the buyout also raised concerns about conflicts of interest and fairness. While some may view this opinion as breathing life into Delaware appraisal actions, the facts and circumstances surrounding the Dell transaction suggest that it may be an anomaly confined to its unusual facts. In a merger presenting none of these concerns, the Court of Chancery might very well follow its recent practice of giving substantial (often determinative) weight to a transaction price fairly and rigorously set. (In re: Appraisal of Dell, Inc., C.A. No. 9322-VCL (Del. Ch. May 31, 2016)).

Delaware Court Rejects Claim of Bad Faith Where Board Instructed Financial Advisor to Ignore Management's Optimistic Financial Projections

On May 20, 2016, Vice Chancellor Glasscock of the Delaware Court of Chancery issued a ruling in In Re Chelsea Therapeutics International Ltd. Stockholders Litigation granting dismissal of breach of fiduciary duty claims brought against the directors of Chelsea Therapeutics arising from a tender offer and intermediate merger under Section 251(h) of the Delaware General Corporation Law. The plaintiffs contended that the directors acted in bad faith by knowingly selling the company for an amount substantially below its standalone value, including by instructing the company's financial advisors to ignore a more optimistic internal financial model in favor of projections prepared by a consulting firm when conducting their fairness analysis.

The plaintiffs, however, failed to allege that the directors were interested in the transaction or otherwise lacked independence. Because the Chelsea directors were not alleged to have lacked independence in connection with the transaction, and because Chelsea's governing documents included a Section 102(b)(7) exculpatory provision, the Court focused its ruling on the narrow question of whether the plaintiffs had sufficiently alleged a non-exculpated claim that the directors had breached their duty of care. The Court noted that the plaintiffs were required to show an extreme set of facts to establish either that "disinterested directors were intentionally disregarding their duties" or that the Board's decision was "so far beyond the bounds of reasonable judgment that it seems essentially inexplicable on any ground other than bad faith." Scrutinizing the plaintiffs' allegations against that high bar, Vice Chancellor Glasscock dismissed the complaint because it was well within the bounds of reason for directors to decline to use optimistic projections of speculative value as indicators of the company's value.

In reaching its decision, the Court expressly declined to decide whether the holding of Corwin v. KKR Financial Holdings LLC—which held that the business judgment rule protects the conduct of directors in connection with transactions approved by a vote of fully informed, uncoerced, and disinterested stockholders—would apply to a transaction effected pursuant to Section 251(h). In declining to do so, the Court noted that it is unclear under Corwin whether a stockholder vote cleanses a board action in bad faith, even if the act is disclosed to stockholders before the vote. Second, the rule in Corwin applied to one-step mergers, not tender offers where there is no formal vote. (Note that the Chancery Court's subsequent decision in the Volcano case summarized below did apply the rule in Corwin to tender offers.) Given the particular difficulty of alleging a non-exculpated breach of fiduciary duties, this opinion highlights the deference Delaware courts will continue to extend to disinterested and independent directors not otherwise shown to be intentionally disregarding their duties in the conduct of a sale process. (In Re Chelsea Therapeutics Int'l Ltd. S'holders Litig., Consol. C.A. No. 9640-VCG (Del. Ch. May 20, 2016)).

Chancery Court Equates Tender of Shares to a Stockholder Vote in Determining the Standard of Judicial Scrutiny for Board of Directors Who Approved Volcano Corp. Merger

In a recent case, the Delaware Chancery Court held that business judgment review irrebuttably applies to board decisions in mergers where a majority of holders of a company's outstanding stock express their consent to a merger by tendering their shares in a "two-step" merger pursuant to Section 251(h) of the Delaware General Corporation Law (DGCL). Although such tenders offers are not formal stockholder votes, the Court held that the acceptance of a tender offer by a majority of the stockholders will have the same cleansing effect on board decisions under Delaware law as the approval of a merger by a vote of the majority of the stockholders.

The case arose from the acquisition of Volcano Corporation by Phillips Holding USA through a two-step merger pursuant to Section 251(h) of the DGCL. Certain shareholders of Volcano filed suit alleging that (among other things) the board breached its duties of care and loyalty because (1) the board members were motivated by certain benefits that they received in the transaction and (2) the board relied on the "flawed advice" of its conflicted financial advisor, Goldman, Sachs & Co., who had previously entered into a series of hedging transactions with Volcano in 2012. In its analysis of the standard applicable to the board's decision, the Chancery Court reviewed the recent Delaware Supreme Court decisions in Gantler v. Stevens and Corwin v. KKR Financial Holdings LLC and determined that business judgment review applies to mergers when a majority of a corporation's fully informed, un-coerced, and disinterested stockholders approve the merger though a statutorily-required vote. The Court went on to hold that, although there was no formal stockholder vote in this case, a tender offer commenced and consummated pursuant to Section 251(h) had a similar "cleansing effect" as a statutorily required stockholder vote. Citing the policy rationales for applying business judgment review to mergers that are approved by a statutory vote of the stockholders, the Volcano court held that there was no basis for distinguishing a statutory stockholder vote and a tender offer accepted by the majority of the stockholders pursuant to Section 251(h).

The Court's decision in Volcano makes clear that, if properly executed, the tender offer that comprises the first step of a two-step merger pursuant to Section 251(h) will be viewed in the same manner as a statutorily-required stockholder vote with respect to the standard of review for board decisions regarding such a transaction. Thus, so long as a majority of disinterested and fully informed stockholders have accepted such a tender offer, Delaware courts will apply business judgment review in examining the board decision relating to the tender offer. (In re Volcano Corp. Stockholder Litig., C.A. No. 10485-VCMR (Del. Ch. June 30, 2016)).

New York Court of Appeals Adopts Delaware Law, Affirming Business Judgment Deference for Kenneth Cole's Controlling Stockholder Transactions Structured with Minority Protections

On May 5, 2016, New York's highest court confirmed that, under New York law, business judgment deference—rather than the more searching "entire fairness" review—applies to controlling stockholder transactions that are approved by a duly empowered special committee of independent directors and that receive a "majority of the minority" vote from stockholders not affiliated with the controlling party. In In the Matter of Kenneth Cole Productions Inc. Shareholder Litigation, a case in which plaintiffs challenged the take-private of a New York corporation by its controlling stockholder, the New York Court of Appeals affirmed the trial court's dismissal of the case and adopted the Delaware Supreme Court's 2014 holding in Kahn v. M&F Worldwide Corp. (MFW). In adopting the MFW framework, the Court of Appeals aligned New York law with Delaware law, making the MFW mechanism available to New York corporations and offering a path for New York corporations to reduce litigation risk in connection with controlling party transactions.

The Kenneth Cole Productions litigation arose in 2012 after Mr. Kenneth Cole, the controlling stockholder of the prominent fashion retailer bearing his name, offered to purchase all of the outstanding Kenneth Cole stock that he did not already own. He also made clear that he would not sell his shares to another potential acquiror. In response, the company formed a special committee of independent directors to negotiate with Mr. Cole. The special committee engaged in successful negotiations to increase Mr. Cole's offer, and a deal was ultimately approved by the special committee and a majority of the non-controlling stockholders. Nonetheless, several stockholders sued in New York State court, challenging the transaction as unfair. In view of the protections afforded the non-controlling stockholders—an independent special committee and a majority of the minority vote—the trial court applied business judgment review and dismissed the consolidated action. After the intermediate Appellate Division affirmed and endorsed business judgment review, the plaintiff appealed to the State's highest court, the Court of Appeals, which similarly affirmed the trial court's determination.

The decision makes business judgment review available to controlling-party transactions involving New York corporations where the transaction at the outset is conditioned on its approval by both (1) a special committee comprised of independent, duly empowered directors and (2) a majority of the minority stockholders in a fully informed vote. To avoid application of business judgment review at the motion to dismiss stage, the burden is now on the plaintiff challenging such a transaction to "sufficiently and specifically allege" that the protections afforded the minority were not adhered to. Absent such allegations (or sufficient allegations of fraud or bad faith), New York law requires business judgment review for challenges to going-private transactions between a company and its controlling stockholder that are structured with the requisite minority protections, and transaction planners for New York corporations can now be confident that New York is aligned with Delaware in deferentially reviewing these types of transactions. (In the Matter of Kenneth Cole Productions, Inc., Shareholder Litigation, No. 54 (N.Y. May 5, 2016)).

To read this Newsletter in full, please click here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.