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Morgan v. Cash, C.A. No. 5053-VCS (Del. Ch. 7/16/10) (Vice Chancellor Strine)

July 16, 2010

In this memorandum opinion, the Court of Chancery dismissed a claim brought against an acquiror for aiding and abetting the target company’s board members in breaching their Revlon duties.

The transaction at issue was EMC Corporation’s acquisition of Voyence, Inc. in an all-cash merger that resulted in Voyence becoming a wholly-owned subsidiary of EMC. Voyence had a capital structure that was representative of other venture-capital funded corporations: the three firms that provided Voyence’s initial capital each held preferred stock, the right to designate a director to the Voyence board, and a liquidation preference over the common stockholders. When EMC purchased Voyence in Fall 2007, after EMC revised its offer down upon learning that Voyence would not meet its third-quarter revenue projections, the proceeds from the transaction were not sufficient to satisfy the preferred stockholders’ liquidation preference, and as a result, the common stockholders received nothing for their stock, which was retired and cancelled under the merger agreement.

A now-former common stockholder of Voyence challenged the transaction by filing a complaint in the Court of Chancery. In the first count of the complaint, the stockholder alleged that certain officers of Voyence and the members of its board of directors violated their duty of loyalty to the common stockholders by favoring their own interests, taking an offer that was too low to provide a return to the common stockholders, and otherwise breaching their Revlon duties. In the second count, the plaintiff alleged that EMC aided and abetted the Voyence board members in that breach. EMC moved to dismiss this count for failure to state a claim upon which relief could be granted.

In addressing EMC’s motion to dismiss, the Court reviewed the four elements of an aiding-and-abetting claim: (1) the existence of a fiduciary relationship, (2) breach of the fiduciary’s duty, (3) knowing participation in that breach by defendants, and (4) damages proximately caused by the breach. The Court focused on the knowing-participation element and the plaintiff’s two theories in that regard. First, the plaintiff alleged that EMC diverted funds to Voyence’s management in exchange for their support of its lower offer price. Second, the plaintiff claimed that EMC attempted to exploit conflicts of interest within Voyence’s board.

In considering the facts supporting the first theory, the Court recognized the allegation that Voyence’s CEO and CFO received increases in their bonus percentages just prior to the merger, but found no allegation that EMC was involved in that decision. Accordingly, the only fact in the complaint supporting plaintiff’s claim of improper management benefits was that EMC extended employment offers to Voyence’s CEO and CFO. The Court, however, found that those packages were “hardly eyebrow-raising” and were “comparable to what both executives had been making at Voyence before the merger,” and consequently, it was implausible to view the offers as a quid pro quo for management’s support of the transaction. The Court further noted that “retaining management is a routine occurrence” in these transactions, and thus, “to view the retention of management on reasonable terms with suspicion would only undermine business practices that often facilitate the difficult transitions required when two businesses merge.” The Court also rejected plaintiff’s argument because, even if the Voyence CEO and CFO had received improper benefits from EMC, there were no allegations that these managers in turn exerted any material influence over the board’s decision to accept EMC’s offer.  As for the second theory – that EMC attempted to exploit conflicts of interest within Voyence’s board – the Court explained that the term “exploit,” in the aiding-and-abetting context, refers to a situation “where a bidder gets a fiduciary to trade away his trust for personal advantage as a means to further the bidder’s aims.” Here, there was no allegation that EMC actually attempted to exploit the Voyence board’s alleged conflicts, nor were there even facts in the complaint explaining why accepting a lower offer was in the Voyence directors’ selfinterest or that this fact was known by EMC. According to the Court, with the facts alleged, the plaintiff was essentially seeking an inference that the bidder aided and abetted fiduciary misconduct simply because the bidder knowingly entered into a merger with a target board dominated by preferred holders at a price that did not yield a return to common stockholders. The Court declined to grant such an inference and recognized the detrimental effect such a rule would have on value-maximizing transactions given that in reality there are companies that are worth less than the liquidation preference held by preferred stockholders and bondholders and the fact that it is “hardly unusual for corporate boards to be comprised of representatives of preferred stockholders, who often bargain for representational rights when they put their capital up in risky situations.”

The Court rejected both theories presented by the plaintiff that EMC knowingly participated in the target board members’ alleged breach of their Revlon duties and thus dismissed the aiding-and-abetting claim brought against EMC.

The full opinion is available here