Teamster Members Ret. Plan v. Dearth, C.A. No. 2020-0807-MTZ (Del. Ch. May. 31, 2022) (Zurn, V.C.)
In this memorandum opinion, the Court of Chancery dismissed a derivative action filed by a former stockholder (“Plaintiff”) of Calgon Carbon Corporation (the “Company”) challenging the Company’s $1.1 billion cash-out acquisition by Kuraray Co, Ltd. and Kuraray Holdings U.S.A., Inc. (together, “Kuraray”). The Court held that, while cash-out transactions are presumptively subject to enhanced scrutiny under Revlon, the transaction was cleansed by the fully informed vote of an uncoerced majority of the Company’s stockholders, as contemplated by the procedures set forth in Corwin. The Court of Chancery thus granted the defendants’ motion to dismiss, concluding that any information withheld from stockholders was not material and therefore that the vote was fully informed.
In connection with its consideration of strategic alternatives, the Company engaged Boston Consulting Group (“BCG”) to assess the Company’s prospects and present a report on these topics (the “BCG Report”) to the Company’s board of directors (the “Board”). The BCG Report identified six long-term strategic options for the Company, advising that any sale of the Company would be most profitable once one of the other strategic initiatives was underway and showing results. To that end, the Company considered potential opportunities relating to the International Maritime Organization’s (“IMO”) nascent ballast water initiative (the “Ballast Water Initiative”).
Months later, Kuraray sent the Company a $20-per-share acquisition offer, which included a proposal to retain the Company’s management team and U.S. headquarters. Around this time, Company management made two changes to its internal projections. First, the Company revised its five-year financial plan to account for a two-year delay in the implementation of the Ballast Water Initiative. The second change was to the Company’s EBITDA projections relating to a recently acquired business, which resulted in certain adjustments to other business segments, all of which was suggested by the Company’s financial advisor in a July 27, 2017 email (the “July 27 Email”). In August, Kuraray raised its offer to $21 per share, and then to $21.50 per share, the latter representing a 72% premium over the Company’s then-current stock price. After the Company’s financial advisor opined that $21.50 per share was a fair price from a financial perspective, the Company’s Board approved the acquisition.
The Company filed a proxy statement recommending that its stockholders approve the acquisition and disclosing, among other things, the Company’s adjusted five-year projections. At a special stockholders meeting, 94% of the voted shares were cast in support the acquisition.
Plaintiff challenged the acquisition, asserting that three alleged disclosure violations rendered the stockholder vote uninformed and, as a result, enhanced scrutiny applied to the transaction. Specifically, Plaintiff alleged that the proxy statement: (1) disclosed financial projections that failed to reflect the “full value” of the Ballast Water Initiative, (2) omitted the EBITDA adjustment “offset” discussion referenced in the July 27 Email, and (3) failed to include information about the “existence, nature, and substance of BCG’s analyses.” The Court rejected each of these arguments.
The Court first noted that Corwin “gives rise to the irrebuttable presumption of the business judgement rule when a transaction ‘is approved by a fully informed, uncoerced vote of disinterested stockholders.’” In determining whether the alleged breaches of fiduciary duty were cleansed by an informed and uncoerced vote of the stockholders, the Court considered whether the allegedly omitted or misleading disclosures were material to Company stockholders.
First, in response to Plaintiff’s assertion that the Company should have used a ten-year (rather than five-year) plan in order to capture projected earnings from the delayed Ballast Water Initiative, the Court determined that Plaintiff failed to allege that any ten-year plan existed and recognized that five-year forecasts are routine in fairness opinions supporting mergers. As such, the Court held that the alleged omission of a ten-year plan was immaterial.
Second, in response to Plaintiff’s allegations that the EBITDA adjustment reflected in the July 27 Email was adopted in order to artificially depress projections in an attempt to facilitate the acquisition, the Court noted that this adjustment was initiated by the Company’s financial advisor rather than by a conflicted Company fiduciary, the adjustment was minimal, and the record reflected no facts to suggest the adjustment was made in an effort to advance management’s self-interest or to deceive the Board, in contrast to prior cases where adjustments were drastic and made under suspicious circumstances.
Lastly, the Court determined the omission of certain information related to the BCG Report was not material. The Court explained that “Delaware law does not require disclosure of a play-by-play of negotiations leading to a transaction or of potential offers that a board has determined were not worth pursuing.” In other words, “the stockholders who approved the Acquisition were fully informed even without the details from or about the BCG Report.” The Court also rejected an argument that disclosure would have attracted competing offers, noting that disclosure obligations are intended to inform stockholders, not serve as marketing materials.
Having determined that none of the three alleged omissions was material, and because plaintiffs did not allege coercion of the Company’s stockholders, the Court held that Corwin applied to cleanse the challenged transaction and granted the defendants’ motion to dismiss.