April 6, 2017

Delaware: Corwin’s Winning Streak is Over

It’s not quite as dramatic as the end of the UConn women’s basketball team’s epic run, but after 5 straight wins in the Chancery Court, mighty Corwin has at last tasted defeat.

Delaware has been liberal in its application of the Corwin decision and the path to business judgment rule review that it provides for deals that are approved by a fully informed & uncoerced shareholder vote. But there’s a limit to everything – and as this Paul Weiss memo notes, the Chancery Court made it clear that this includes Corwin’s cleansing power. Here’s an excerpt:

In a recent decision in In re Saba Software, Inc. Stockholder Litigation, the Delaware Court of Chancery demonstrated the limits of the application of the business judgment rule under Corwin KKR Financial Holdings LLC.  The court held that the target stockholder vote approving an all-cash merger with a third party buyer was coerced and not fully informed, and therefore did not “cleanse” the transaction and invoke the application of the business judgment rule.

This case involved a public company that couldn’t get a necessary restatement of its financial statements in time to avoid deregistration of its shares by the SEC.  Shortly after it “went dark,” Saba entered into a merger agreement providing for a sale of the company.

Although that deal was approved by shareholders, the Chancery Court found a number of shortcomings in the company’s disclosures relating to its inability to complete the restatement and other matters. It also concluded that shareholders were coerced into approving the deal because they were compelled to either accept a depressed price for their shares due to the failure to complete the restatement or continue to hold a highly illiquid stock.

As a result, the Chancery Court found the vote was not fully informed and uncoerced – and declined to apply the business judgment rule.  Instead, Revlon continued to apply – and that had some pretty significant implications for the individual director defendants:

The individual defendants were not exculpated by the Section 102(b)(7) provision in Saba’s certificate of incorporation because such provisions do not insulate directors from claims of bad faith or breaches of the duty of loyalty. Here, the court found that the plaintiff pled adequate facts to justify a pleading-stage inference of bad faith, including that the board rushed the sales process, refused to consider alternatives to a sale, cashed in worthless equity awards before the merger and directed the banker to rely on pessimistic projections.

There’s a lot to digest in Vice Chancellor Slights’  67-page opinion, but in the end, what may be its most interesting aspect is his fairly extensive discussion of Delaware authority on what constitutes shareholder coercion.  Coercion is a word that gets tossed out a lot, but rarely receives a detailed analysis like the one provided here.

John Jenkins