In re Volcano Corporation Stockholder Litigation, C.A. No. 10485-VCMR (Del. Ch. June 30, 2016) (Montgomery-Reeves, V.C.).
In this memorandum opinion, the Court of Chancery dismissed claims for breach of fiduciary duty under Chancery Rule 12(b)(6), holding that an irrebuttable business judgment rule standard applies to a merger effected under Section 251(h) (“Section 251(h)”) of the Delaware General Corporation Law (“DGCL”) because a majority of informed, disinterested and uncoerced stockholders accepting a tender offer had the same cleansing effect as a vote in favor of a merger by such stockholders.
Former stockholders (“Plaintiffs”) of Volcano Corporation (the “Company”) challenged an all-cash merger (the “Merger”) in which the Company was acquired by Koninklijke Phillips, N.V. (the “Acquiror”) for $18 per share, where the Company had received an offer of $24 per share from the Acquiror five months earlier. Plaintiffs alleged that the Company’s board of directors (the “Board”) breached its fiduciary duties, and that the Company’s financial advisor Goldman Sachs & Co. (“Goldman”) aided and abetted those breaches.
In December 2012, the Company, with Goldman acting as a co-underwriter, raised funds through a convertible notes offering resulting in an issuance of $460 million in convertible notes (the “Convertible Notes”). To mitigate the potential dilutive effect of the Convertible Notes, the Company entered into a series of hedging transactions with its underwriters (the “Call Spread Transactions”), comprised of call options (the “Options”) and warrants (the “Warrants”). The Options and Warrants were interrelated, such that the Options were scheduled to expire first in conjunction with expiration of the Convertible Notes, with the Warrants then expiring over a period thereafter. The net effect of the Call Spread Options in the event of a change of control was that both the Options and Warrants would terminate, the Company would pay the fair value of the Warrants and the underwriters would pay the fair value of the Options.
Beginning in January 2014, the Board explored merger options, including the retention of Goldman to perform a market check with strategic buyers. In July 2014, when the Company’s stock price was approximately $16 per share, the Acquiror delivered a non-binding indication of interest to acquire the Company for $24 per share, subject to an exclusivity and due diligence period. Following internal discussions between the Board and Goldman, which included the triggering effect of the acquisition on the Call Spread Transactions, the Board elected to continue negotiations with the Acquiror without committing to either the $24 per share price as well as authorizing a transaction committee of independent directors to oversee the merger process (the “Transaction Committee”).
After the completion of additional due diligence and several rounds of negotiations, which included incremental non-binding offers by the Acquiror in the $16 - $17 per share range and an internal presentation by Goldman to the Transaction Committee addressing Goldman’s financial interest in the Call Spread Transactions, the Acquiror made an offer for the all-cash Merger at $18 per share. The Merger proposal was a two-step transaction under Section 251(h) by which the Acquiror would complete a first-step tender offer to the Company’s stockholders at $18 per share (the “Tender Offer”). The Board unanimously approved the Merger and recommended that the Company’s stockholders tender their shares in response to the Tender Offer. The Tender Offer closed with 89.1% of the Company’s outstanding shares having tendered, after which the Merger was consummated without a stockholder vote in accordance with Section 251(h). As a result of the Merger, the Call Spread Transactions were triggered thereby producing a net payment of $24 million by the Company to Goldman.
The Plaintiffs then filed suit alleging that the Board acted in an uninformed manner, which included receiving “flawed advice” due to Goldman’s financial interest in the Call Spread Transactions. The Court of Chancery first determined that, although the Revlon standard presumptively applied due to the all-cash Merger, based on recent Delaware precedent, including the Supreme Court’s decisions in Corwin v. KKR Financial Holdings, LLC and Singh v. Attenborough, an informed, uncoerced and disinterested stockholder approval required by the DGCL would trigger application of the irrebuttable business judgment rule.
Importantly, the Court of Chancery then held that a stockholder acceptance of a tender offer under Section 251(h) constitutes a stockholder approval under the DGCL that produces the same cleansing effect as a stockholder vote in favor of a merger. The Court reasoned that a tender offer and stockholder vote are equivalent on two significant grounds. First, because the requirements for merger approval under Sections 251(a), (b) and (h) of the DGCL collectively mandate that the target’s board of directors negotiate, agree to, and declare advisable both steps of a Section 251(h) merger in a manner that mirrors the role of the target board in a merger involving a stockholder vote under Section 251(c) of the DGCL. Second, because the requirements of Section 251(h) that (i) the tender offer include all the target company’s outstanding stock, (ii) the second-step merger must be consummated as soon as practicable after the tender offer, (iii) the consideration of the second-step merger be of “the same amount and kind” as the tender offer, and (iv) appraisal rights are available to dissenting stockholders; negate any concerns of the coercive effect of a Section 251(h) merger on stockholders. Therefore, the Court concluded that since a first-step tender offer is a mechanism that essentially replicates a vote of a majority of stockholders in favor of a merger, a tender offer should be ascribed with the same Corwin-based cleansing effect for purposes of triggering an irrebuttable business judgment rule standard of review.
The Court of Chancery then held that the Company’s stockholders accepting the Tender Offer were informed, disinterested and uncoerced. Plaintiffs alleged only that the stockholders were not informed due to the Board’s failure to disclose that Goldman was incented for the Company to complete a merger transaction in a timely manner in light of the decreasing value of its interest in the Call Spread Transaction over time due to expiration of the Warrants. In rejecting the argument, the Court noted that the Board disclosed that the value of the Warrants would decrease over time, although not specifically addressing the magnitude of this decrease in value, and this did not significantly alter the universe of available information so as to render the stockholders not informed.
After concluding that the irrebuttable business judgment rule applied, the Court noted that the only remaining basis to challenge the Merger was on a claim of waste, which Plaintiffs had failed to allege entirely. Notably, the Court specifically observed that it would be “difficult to conceptualize” a waste claim in the context of a Section 251(h) merger given that by its nature, such a merger would be ratified by the disinterested approval of stockholders exercising their respective business judgment. The Court then dismissed all breach of fiduciary duty claims against the Board under Chancery Rule 12(b)(6).
Finally, the Court dismissed the aiding and abetting claim against Goldman based on the failure to state a claim, and specifically noted that the Plaintiffs failed to allege “misconduct” by Goldman of a nature similar to the RBC Capital Markets decision.