County of York Employees Ret. Plan v. Merrill Lynch & Co., et al., C.A. No. 4066-VCN (Del. Ch. Oct. 17, 2008) (VC Noble)
In this letter opinion, the Court of Chancery denied Merrill Lynch & Co. and Bank of America Corp.’s (the “Defendants”) motion to dismiss or stay and granted Plaintiff’s motion for expedited discovery in a class action in which County of York Employees Retirement Plan (“Plaintiff”) challenges the proposed merger of Merrill Lynch & Co., Inc. with Bank of America Corp. Plaintiff claims that the Merrill directors breached their fiduciary duties by (1) hastily agreeing to the merger without adequately informing themselves; (2) agreeing to unreasonable deal protection measures; (3) engaging in self-dealing, and (4) failing to provide adequate disclosures in the preliminary proxy. Defendants moved to stay or dismiss the action in favor of an action pending in the United States District Court for the Southern District of New York (the “Federal Derivative Action”). In addition, Plaintiff moved for expedited discovery in support of a possible preliminary injunction.
In applying the McWane doctrine and the forum non conveniens analysis, Vice Chancellor Noble denied Defendants’ motion to dismiss or stay. First, the Court held that both actions must be treated as simultaneously filed. The amended complaint in the Federal Derivative Action, filed three days prior to The Delaware action, could not be said to relate back to the initial complaint and thus could not be treated as first-filed for purposes of the McWane analysis. Second, the issues raised in the Federal Derivative Action (i.e., “whose fault it was and whether blame can be fairly assessed for the improvident financial commitments”) and the Delaware action (i.e., “whether the merger process was appropriate and the disclosures adequate”) were found not to share a “substantial or functional identity.” Third, under the forum non conveniens analysis, the Court found this case “implicat[ed] important issues of Delaware corporate governance law in light of the current market conditions” and that disclosure claims and the substantive challenges to the merger “have been squarely raised in this venue.” The balance of the factors was found to favor Delaware and the Court found nothing in the analysis to persuade it to deny Plaintiff’s their choice of venue. In distinguishing the Bear Stearns case (see Bear Stearns Cos., Inc. S’holder Litig., 2008 WL 95992 (Del. Ch. Apr. 9 2008)), the Court noted that Bear Stearns presented unique factual circumstances, particularly the progress of the New York action and the danger inconsistent judgments would pose, that were not applicable here.
On the motion to expedite discovery, the Court considered whether Plaintiff had articulated a colorable claim and shown a sufficient possibility of threatened irreparable injury to justify an expedited preliminary injunction proceeding. For the self-dealing claims, the Plaintiff failed to show that a majority of the board was interested or not independent. With respect to the duty of care claims, the Court noted the well-known market conditions at the time of the challenged decision, but relied solely upon the facts presented in the pleadings to find the duty of care claims colorable. As to the deal protection provisions—an equity termination fee, a “force-the vote” provision and a “no-talk” provision—in the overall context, the Court found the Plaintiff’s claim colorable, given the “minimal threshold.” The Plaintiff’s claims that the proxy was materially deficient because it does not adequately inform shareholders of the events leading up to the merger and elaborate on the risks Merrill would face in the event the merger did not occur were found to be colorable. The remainder of the disclosure claims were found not to be colorable.
Concerning disclosures made about Merrill’s financial advisor, the Court found that the preliminary proxy adequately disclosed the reason the financial advisor was chosen and disclosed which Merrill officers and directors had an interest in the merger. Not disclosing the precise amount of compensation the financial advisor would receive and instead stating that a contingent fee would be paid is sufficient. Boards are also not required to disclose specific details regarding the analysis or financial projections informing a financial advisor’s opinion. Finally, the Court noted that while Defendants are required to disclose material facts; they are not required to engage in “’self-flagellation’ or draw legal conclusions.” Defendants argued there could be no irreparable harm since money damages would be possible.The Court observed that where damages are difficult to calculate and subject to other uncertainties, a sufficient showing of irreparable harm has been made. Expedited discovery was granted on those claims found colorable.