DealLawyers.com Blog

This Fried Frank memo discusses the Chancery Court’s recent decision in In re Paramount Gold and Silver Stockholders Litigation (Del. Ch.; 4/17), which left unanswered the question of whether fully informed shareholder approval under Corwin would result in business judgment rule review for a board’s decision to adopt deal protections that ran afoul of Unocal.

The plaintiffs contended that a royalty agreement between the parties to a pending merger was a deal protection that could not pass muster under Unocal – which views deal protections as “defensive measures” subject to heightened scrutiny for reasonableness & proportionality.

The court concluded that the royalty agreement was not a deal protection, but noted that Unocal’s continued application to deal protections in a transaction that had received fully informed & uncoerced shareholder approval was an open issue.  Here’s an excerpt summarizing Chancellor Bouchard’s analysis:

The defendants had argued that the Unocal heightened scrutiny standard of review did not apply to the deal protections in this case because the stockholders had approved the transaction in a fully informed, uncoerced vote and Corwin business judgment review therefore applied. The plaintiffs had countered that application of Corwin to the deal protection issue could not be squared with the 1995 holding in Santa Fe Pacific Corp. Shareholder Litigation, where the Delaware Supreme Court held, in the context of a post-closing action for damages, that stockholder approval of the transaction did not constitute ratification of the deal protection measures that had been put into place and were effective before the stockholder vote.

The Chancellor noted that Corwin does not discuss or expressly overrule this “apparent tension” with Santa Fe. The Chancellor reasoned that the issue did not have to be addressed in this case because the issue raised by the defendants here was that Corwin could not apply because the deal protection device was unreasonable under Unocal. Having concluded that that was not so, the court did not have to reach the issue whether Corwin has the potential to, in effect, cleanse a fee that could be found unreasonable under Unocal. It is thus uncertain whether a post-closing challenge to deal protection devices under Unocal would or would not survive if Corwin were applicable.

Given the distance that Delaware courts traveled on the effect of shareholder ratification to get to Corwin in the first place, I’d be surprised if they ultimately concluded that Corwin couldn’t cleanse a deal with a Unocal problem, but it remains an open issue for now.

Update: Stan Keller of Locke Lord weighed in with some thoughts about why the Unocal issue isn’t a slam-dunk:

“Keep in mind that while theoretically, under the Delaware agency analysis, a Corwin vote could result in business judgment review of deal protections that ran afoul of Unocal, those very same deal protections are likely to be found to be coercive, thus negating the Corwin result. The disclosure is also likely to be problematic absent essentially fessing up to the Unocal violations.”

Stan’s point on coercion is particularly well-taken in light of Vice Chancellor Slights’ extensive discussion of the coercion issue in the Saba Software case, which I blogged about earlier this month.

– John Jenkins