February 9, 2017
Delaware: Chancery Clarifies “Cleansing Effect” of Shareholder Vote
This K&L Gates blog reviews the Delaware Chancery Court’s recent decision in In re Merge Healthcare Inc. Stockholders Litigation (Del. Ch.; 1/17). The Court’s decision further clarifies when a fully informed stockholder vote will result in application of the business judgment rule to post-closing claims:
The plaintiffs argued that a well-pled entire fairness case bars cleansing under Corwin v. KKR Financial Holdings LLC, 125 A.3d 304, 313–14 (Del. 2015). The Court reached a different conclusion, relying on the Chancery Court’s exposition of the cleansing doctrine in Larkin v. Shah, 2016 WL 4485447 (Del. Ch. Aug. 25, 2016).
Under Larkin, the trigger for entire fairness is not “the mere presence” of a controlling stockholder “per se,” but when a controlling stockholder engages in a conflicted transaction, by sitting on both sides of the deal or competing with common stockholders for consideration. In such conflicted transactions, the Court writes, coercion is “deemed inherently present” and cannot be cleansed by a stockholder vote. But without a controlling stockholder pursuing personal gain, cleansing remains available and the business judgment rule applies, even if individual directors face conflicts that would ordinarily warrant entire fairness review.
The Court held that the plaintiffs failed to plead facts that showed the target’s alleged controlling stockholder extracted personal benefits from the transaction, & therefore could not rebut the cleansing effect of an un-coerced shareholder vote.
– John Jenkins