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In re BioClinica, Inc. S'holder Litig., C.A. No. 8272-VCG (Del. Ch. Oct. 16, 2013) (Glasscock, V.C.)

October 16, 2013

In this memorandum opinion, the Court of Chancery dismissed post-merger breach of fiduciary duty, disclosure and aiding and abetting claims arising from the acquisition of BioClinica, Inc. (the “Company”) by JLL Partners, Inc. and affiliates (collectively, “JLL”)Among other things, the Court discussed the circumstances in which a flawed fairness opinion might lead to a successful merger challenge, and distinguished Koehler v. NetSpend, Inc., which also involved attacks on a fairness opinion.

In early 2012, the Company’s board determined to explore a sale of the Company and formed an independent committee and engaged a financial advisor, EP Securities, LLC (“Excel”), to conduct the process.  This began a eight-month sales process during which Excel, on behalf of the Company, contacted twenty-one potential buyers, including both private equity firms and strategic acquirers.  JLL, having initially declined to bid on the Company, reentered the sales process in the fall of 2012 and bid $7.00-7.25 per share, conditioned on due diligence and exclusivity.  As all other potential buyers had dropped out of the process, the special committee granted the exclusivity request so long as JLL’s final offer was no lower than $7.25 a share.  During this exclusivity period, JLL raised concerns regarding the Company’s projected capital expenditures, which Plaintiffs alleged the Company had revised upward significantly.  Despite the revision, JLL did not lower its offer and confirmed its $7.25 per-share bid.    On the committee’s recommendation, the board approved the transaction, and the merger agreement was finalized on January 29, 2013.

Plaintiffs, former stockholders of the Company, originally sought to enjoin the acquisition, but the Court found the claims asserted were not colorable and denied the motion to expedite.  After the transaction closed, plaintiffs amended their complaint, and the defendants moved to dismiss.  The Court described the amended complaint as presenting a “common set of facts” that plaintiffs had labored to convert into a “scandal,” and explained that it advanced substantially the same allegations as the original complaint – allegations that the Court previously held were not colorable in denying plaintiffs’ motion to expedite.   The Court nevertheless reexamined each claim under the more exacting “conceivability” standard in analyzing defendants’ motions to dismiss.

The centerpiece of plaintiffs’ amended complaint was the allegation that the Company’s directors had breached their fiduciary duty of loyalty in approving the transaction.  Plaintiffs first contended the directors breached their duty of loyalty because the directors benefited by having their stock options vest as a result of the acquisition.  The Court rejected this theory, noting that stock ownership aligns the interests of directors and stockholders and that Delaware courts have routinely concluded that the mere vesting of director stock optionsin connection with a mergerdoes not result in a violation of the duty of loyalty.   Plaintiffs also claimed that two directors suffered conflicts because oneobtained employment with the surviving company and the other had a prior relationship with JLL.  The Court explained that, even assuming the two directors were conflicted, a majority of the board was not, the two directors did not serve on the special committee, and plaintiffs did not allege that the twoallegedly interested directors controlled or otherwise dominated the special committee or the board.

Plaintiffs also contended the Company’s directors breached their duty of loyalty by not acting in good faith.  As evidence of the alleged bad faith, plaintiffs pointed to the Company’s initial decision to pursue transactions only with private equityfirms, the Company’s revision of its projected capital expenditures, and deal protection measures, which plaintiffs alleged impermissibly locked up the transaction.  The Court found those allegations of bad faith conclusory.  Indeed, the Court explained that the pleaded facts supported a contrary conclusion: (i) the attempt to target private equity appeared an appropriate mechanism to protect Company’s confidential information; (ii) the adjustment to the capital expenditures was contrary to the directors’ interest, given their stock holdings; and (iii) the deal protection measures were ones the Court had routinely found permissible.

Invoking the Court’s decision in NetSpend, Plaintiffs further argued that the directors acted in bad faith by relying on a fairness opinion they allegedly knew was “weak.”  The Court explained that in NetSpend,  the company had engaged in a single-bidder process, and the fairness opinion was therefore the only indication of fair value.  Moreover, the fairness opinion at issue in NetSpend contained a discounted cash flow analysis indicating that NetSpend’s shares had a higher value than the merger price. The BioClinica directors, in contrast, had engaged in an extensive market check, the fairness opinion was not the sole indicator of fair value, and the opinion itself did not suffer from the types of deficiencies alleged in NetSpend.  Accordingly, the Court distinguished NetSpend, rejected plaintiffs’ arguments regarding the fairness opinion, and explained that allegations of reliance on a “weak” fairness opinion will “not create a new basis to challenge every sales process.”  Rather, the Court explained, “[a] board’s reliance on a ‘weak’ fairness opinion is relevant where the fairness opinion provides the only equivalent of a market check.” 

Plaintiffs also allegedthat the merger documents failed to disclose material information regarding the acquisition.  As the Court explained, post-merger disclosure claims are rare due to the high burden a plaintiff faces.  In order to state a claim for breach of the duty of disclosure after a merger has closed, a plaintiff must show: (i) a reasonable stockholder would have considered the missing or misleadingly disclosed information material; (ii) the failure to disclose breached the duty of loyalty; (iii) had the information been disclosed, the merger would not have received stockholder approval; and (iv) the stock’s value was greater than the merger price.  Plaintiffs’ claims failed to meet this standard.  Plaintiffs’ claims that the Company should have disclosed why it revised its capital expenditures upwards and that the Company had failed to disclose certain inputs their financial advisor used were simply repeats of allegations that the Court had found not colorable in its pre-merger decision.  Because plaintiffs did not argue this earlier decision was incorrect, the Court dismissed those claims based on the analysis set forth in its pre-merger decision.  Plaintiffs also asserted that the directors ought to have disclosed whether non-disclosure agreements with potential bidders contained don’t-ask-don’t-waive standstill provisions.  The Court observed that plaintiffs had not alleged that the NDAs actually contained don’t-ask-don’t-waive standstill provisions, and rejected the notion that disclosures should, or could, attempt to describe all provisions not contained.

The Court found plaintiffs’ last claim – that JLL aided and abetted the board’s breaches of fiduciary duties – also failed to state a claim upon which relief could be granted.  The Court explained that JLL could not have aided and abetted a breach of the duty of loyalty because plaintiffs failed  adequately to plead such a breach.  The Court did acknowledge that, despite the existence of a Section 102(b)(7) exculpatory provision in BioClinica’s certificate of incorporation, it would be possible for a bidder such as JLL to aid and abet a breach of the duty of care.  Plaintiffs’ allegations, however, failed to show that JLL had participated in or otherwise caused any alleged violation of the directors’ duty of care.  In light of that fact, the Court concluded that plaintiffs’ final claim failed to state a claim upon which relief could be granted.

The full opinion is available here