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Larkin v. Shah, C.A. No. 11053-VCA (Del. Ch. Aug. 25, 2016) (Slights, V.C.)

August 25, 2016

In this memorandum opinion, the Court of Chancery dismissed claims for breach of fiduciary duty pursuant to Rule 12(b)(6) in connection with a two-step, medium-form merger pursuant to Section 251(h) of the Delaware General Corporation Law. The Court held that, following Corwin v. KKR Financial Holdings, LLC and related authority on the legal effect of fully informed stockholder approval, the irrebuttable business judgment rule applied, extinguishing all challenges to the merger except those predicated on waste.

Former stockholders (“Plaintiffs”) of Auspex Pharmaceuticals, Inc. (the “Company”) brought a putative class action, seeking post-closing damages and challenging the propriety of the Company’s merger (the “Merger”) with Teva Pharmaceuticals Industries, Inc. (“Teva”). The Merger closed in May 2015 after stockholders owning seventy-eight percent of Auspex’s outstanding common stock, including seventy percent of shares not contractually bound to support the transaction, voted to approve the transaction in the first-step of the 251(h) merger process.  Plaintiffs alleged that the Company’s board of directors (the “Board”) breached its fiduciary duties by permitting senior management to conduct a flawed sales process that ultimately resulted in stockholders receiving inadequate consideration for their shares.  In support thereof, Plaintiffs claimed that certain Board members (“VC Directors”) affiliated with different venture capital funds holding Auspex stock (“VC Stockholders”) were motivated to quickly monetize the investment of the VC Stockholders.

Following Singh v. Attenborough, In re Volcano and Corwin, the Court held that the business judgment rule irrebuttably applied because a majority of disinterested, uncoerced stockholders approved the transaction in the absence of a looming conflicted controller.

In finding that there was no conflicted controller, the Court held that no possible permutation of the VC Stockholders and VC Directors amounted to a controlling stockholder because no well-pled allegations permitted even a reasonable inference that any such controller or control block could “exercise actual control over [the Company’s] board.” The Court noted that the VC Stockholders’ combined holdings was approximately twenty-three percent of Auspex’s outstanding shares and no facts suggested that the VC Stockholders or any VC Director compromised or otherwise influenced other directors’ independence.  Further, the Court noted that even if the three VC Directors were controlled, Plaintiffs failed to adequately plead that at least two of the remaining six directors owed any allegiance to the VC Stockholders.  The Court further held that even if Plaintiffs had properly alleged the presence of a controller, Plaintiffs would remain unable to invoke entire fairness on a controlling stockholder theory due to a failure to plead that the controller engaged in a conflicted transaction.  In holding that the alleged controllers were not conflicted as a matter of law, the Court found the complaint devoid of non-conclusory allegations that would support a reasonable inference that the VC Stockholders faced a unique liquidity need, a specific need for cash or an exigency that would prompt them to seek a fire sale.

After establishing the absence of a conflicted controller, the Court held that the Merger was approved by fully-informed, disinterested and uncoerced stockholders. Applying the holding of Volcano, the Court held that a first-step tender offer completed according to Section 251(h) qualifies as a “stockholder vote” under Corwin.  In so holding, the Court noted that, excluding stockholders who contractually agreed to tender their shares, stockholders of roughly seventy percent of the outstanding shares of Auspex agreed to the Merger by tendering their shares.

After concluding that the irrebutable business judgment rule applied, the Court noted that the only remaining basis to challenge the Merger was on a claim of waste, which Plaintiffs failed to allege.

Accordingly, the Court held that the complaint must be dismissed in its entirety, and denied Plaintiffs’ request to amend their complaint pursuant to Rule 15(aaa).

The full opinion is available here