In re Orchid Cellmark Inc. S’holder Litig., C.A. No. 6373-VCN (Del.Ch. May 12, 2011) (V.C. Noble)
In this letter opinion, the Court of Chancery declined to enjoin a negotiated acquisition of Orchid Cellmark Inc. by way of a tender offer that was set to expire on May 17, 2011. The Court held that the plaintiffs, who were stockholders of Orchid, failed to demonstrate a probability of success on the merits of their claims that the director defendants violated their “Revlon” obligations. The Court also held that plaintiffs failed to show a probability of success on the merits of their disclosure claims.
In August 2010, LabCorp approached Orchid proposing a transaction at a price between $2 and $2.25 per share. LabCorp had expressed unsolicited interest in acquiring Orchid several times in the preceding years and was rebuffed each time. After Orchid rebuffed LabCorp’s August 2010 offer, LabCorp raised its proposal from $2.25 to $2.55 per share. Though declining to accept this offer, the board allowed LabCorp to commence due diligence and entered into a confidentiality and standstill agreement.
On October 19, LabCorp submitted a non-binding indication of interest for $2.55 per share subject to an exclusivity period. To evaluate the proposed transaction, Orchid formed a committee of three outside directors and retained Oppenheimer as a financial advisor. Eventually, LabCorp agreed to move forward with negotiations based on Orchid’s counter-proposal for a deal at $2.80 per share, subject to a 30-day period of exclusivity. After Oppenheimer advised that a superior bid from a third party was unlikely, the board voted to approve the transaction, which represented a 40% premium over the trading price just prior to the announcement of the transaction.
The plaintiffs alleged that the directors violated their obligations under Revlon by failing to conduct a sufficient market check. Orchid’s financial advisors contacted six potential bidders indicating that Orchid “was not putting itself up for sale but, having received an unsolicited indication of interest, was checking the indication against the market.” The Court found that “Plaintiffs’ quibbles with such a strategy are unfounded as the potential bidders seemingly understood that Oppenheimer’s solicitations invited them to make a bid.” Oppenheimer did not reach out to additional strategic bidders out of concern that doing so might negatively impact the company should it decide to continue on a stand-alone basis. Ultimately, only one strategic buyer expressed any interest in a transaction with Orchid and several private equity firms expressed an interest only in purchasing Orchid’s U.K. business. Both the special committee and the board as a whole deliberated about the risks and uncertainties associated with pursuing an alternative transaction where no offer had been made and determined that a transaction involving only Orchid’s U.K. business would not provide shareholders with a superior means of achieving value. As a result, plaintiffs were unlikely to demonstrate that the board acted unreasonably in conducting the market check and in deciding not to pursue a sale of the U.K. operations.
The Court also rejected plaintiffs’ argument that the board “massaged” management’s projections to support the transaction. Finding that there was no reason to question the motivations of the special committee or the financial advisors, the Court found that the board’s determination as to which projections most accurately captured Orchid’s future performance did not appear to be unreasonable.
The Court also rejected plaintiffs’ arguments surrounding the opposition to the transaction by Orchid’s CEO, who was also a board member and abstained from voting on the transaction. The Court explained that the board did not fail to consider the CEO’s objections, but simply disagreed with his optimism about Orchid’s future prospects as a stand-alone company. The Court also observed that the CEO’s objection to the transaction might have been influenced by the fact that he held stock options that were currently out of the money.
The plaintiffs also challenged the merger agreement’s inclusion of a top-up option, a no-shop clause, matching rights, information rights, and a termination fee. Considered individually, these deal protection devices were “unremarkable.” The Court also rejected plaintiffs’ attempt to calculate the termination fee as 4.6% of the company’s enterprise value after discounting for the company’s cash balance. Noting that Delaware law teaches that termination fees are calculated as a percentage of equity value, the termination fee represented less than 3% of the deal price, which the Court viewed as reasonable under the circumstances. Finally, the Court noted that top-up options are a common element of two-step tender offer deals. Addressing the plaintiffs’ argument that the effect of deal protection devices must be viewed cumulatively, the Court recognized that, at some point, the cumulative effect of these types of devices might become so burdensome as to render the fiduciary out illusory. However, the Court found that the measures used in the proposed transaction at issue were reasonable under the circumstances.
The plaintiffs also failed to show a reasonable probability of success on their claims that it was unreasonable to exempt LabCorp from the company’s poison pill rights plan, while including a prohibition in the merger agreement preventing the company from redeeming the rights plan with respect to other bidders. The Court explained that the board would be able to redeem the rights plan for a different bidder only if the merger agreement was first terminated, in which case Orchid would be required to pay a termination fee. The Court found that the deterrent effect of the merger agreement’s covenants regarding the rights plan was minimal because any sophisticated and serious bidder would understand that the board would eventually be required to redeem the rights plan in response to a superior offer.
The Court also considered and rejected plaintiffs’ disclosure claims. Though it was a “close call,” the Court concluded that the disclosures surrounding the private equity firms’ interest in the company’s U.K. operations were sufficient. The board could have reasonably judged that LabCorp’s $2.80 per share offer represented greater value than the riskier possibility that a higher price might be offered for the U.K. operations, leaving stockholders with U.S. operations having a negative value. The Court found unpersuasive plaintiffs’ argument that the disclosure about the nature of Oppenheimer’s retention was insufficient, explaining that “the terms of the financial advisor’s engagement here do not create an unavoidable conflict of interest that requires a curative disclosure.” The Court also concluded that plaintiffs had not shown a probability of success on their challenge to the decision not to disclose management’s more optimistic projections because the board, which is vested with responsibility for managing a corporation’s affairs, determined that the base case projections were more reliable than management’s projections. The Court also rejected plaintiffs’ other disclosure claims, including claims that disclosures regarding the market check and the disagreement within the boardroom were inadequate.
Having found that the plaintiffs had not shown a probability of success on any of their claims, the Court also found that the irreparable harm and balancing of the equities prongs of the preliminary injunction analysis weighed against granting relief. For these reasons, the plaintiffs’ motion for preliminary injunction was denied.
On May 16, the plaintiffs’ application for certification of an interlocutory appeal and expedited proceedings was denied by the Delaware Supreme Court.