September 17, 2012

Delaware Court Dismisses Post-Closing Merger Validity Claim

John Grossbauer of Potter Anderson notes: In Septa v. Volgenau, Delaware Vice Chancellor Noble granted a motion to dismiss a claim that a completed going private merger violated the terms of a charter provision requiring equal treatment of 2 classes of common stock by allowing the rollover of equity of the target company’s alleged controlling stockholder, but permitting a breach of fiduciary duty claim based on that alleged invalidity to survive. The Court cited DGCL Section 124 in finding that the stockholders lost the right to challenge the validity of the merger. Section 124 limits the ultra vires doctrine, providing that no corporate act will be invalid by reason of the lack of corporate power to do the act. Section 124 (1) permits such a challenge to be made “by a stockholder against the corporation to enjoin the act.” (The corporation itself may have standing to challenge certain acts for the purpose of obtaining recovery form responsible directors or officers, and the Delaware Attorney General may assert the lack of power in an action to enjoin the transaction or to dissolve the corporation.)

Because the plaintiff did not seek to enjoin the merger, it lost standing to challenge the validity of the merger when it closed. However, the plaintiff was permitted to pursue a damages claim against the individual directors for allegedly causing the corporation to violate its certificate of incorporation. The Court could not rule out, at this stage, the possibility that a non-exculpated breach of duty occurred in connection with the approval of a merger that allegedly violated the certificate of incorporation.