Authored by Jim Kramer, Judy Kwan and Alex Talarides
On February 9, 2017, the Supreme Court of Delaware summarily affirmed the Court of Chancery's decision in In re Volcano Corp. Stockholder Litigation which had dismissed plaintiffs' complaint on defendants' 12(b)(6) motion to dismiss.
Plaintiffs, former stockholders of Volcano Corporation, had brought an action against defendants for breaches of fiduciary duty arising from the all-cash merger between Volcano and Philips Holding USA Inc. The parties had disputed what standard of review the Court of Chancery should apply: the Revlon test, as plaintiffs claimed, because Volcano's stockholders received cash for their shares, or the irrebuttable business judgment rule, as defendants argued, because Volcano's stockholders were "fully informed, uncoerced, and disinterested" when they approved the merger by tendering a majority of Volacano's shares into a tender offer. As the Court of Chancery explained, if a business judgment rule is irrebuttable, plaintiffs could only challenge the transaction on the basis of waste. Thus, plaintiffs also argued in the alternative that if the business judgment rule did apply, it should only be a rebuttable presumption.
The Court of Chancery recognized that recent Delaware Supreme Court decisions have confirmed that the approval of a merger by a majority of a corporation's outstanding shares pursuant to a statutorily required vote of the corporation's fully informed, uncoerced, disinterested stockholders renders the business judgment rule irrebuttable. Moreover, it found that the stockholder approval under the merger via acceptance of the tender offer, under Section 251(h), had the same cleansing effect as a vote in favor of said transaction. Thus, because Volcano's stockholders were fully informed, disinterested and uncoerced, the business judgment rule irrebuttably applied to the merger.
Since the irrebuttable business judgment rule applied, the only viable claim left was plaintiffs' claim for waste. However, the Court of Chancery was quick to dismiss this claim as well, finding that the complaint failed to plead how the merger constituted waste and noting that it was "logically difficult" to even "conceptualize how a plaintiff can ultimately prove a waste or gift claim in the face of a decision by fully informed, uncoerced, independent stockholders to ratify the transaction" when "the test for waste is whether any person of ordinary sound business judgment could view the transaction as fair."
The Delaware Supreme Court's affirmance of the Court of Chancery's decision decisively put to rest the question of whether a fully informed, uncoerced, disinterested approval of a merger by a majority of a corporation's outstanding shares pursuant to a statutorily required vote renders the business judgment rule irrebuttable. It does, and subjects a post-closing damages action challenging a merger to dismissal.
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