June 12, 2017

Delaware: Ties that Bind May Also Coerce

The Corwin standard generally results in the business judgment rule applying to post-closing claims arising out of a deal that’s been approved by a fully-informed shareholder vote – unless shareholder approval was somehow “coerced.”  In Saba Software, the Chancery Court found that a vote was coerced when shareholders were forced to choose between a discount-priced merger & continuing to own shares in a company that had “gone dark.”

Now, in Sciabacucchi v. Liberty Media, the Court has found coercion in another setting – Charter Communications’ decision to condition a couple of beneficial acquisitions on shareholder approval of share issuances to Liberty Media, its largest shareholder, to help finance the deals.  Here’s an excerpt from Steve Quinlivan’s blog summarizing the Court’s holding:

The Court held Plaintiffs had pled facts making it reasonably conceivable that the vote was structurally coercive. Those facts, and related favorable inferences, indicate that the Defendant directors achieved value for the stockholders in the acquisitions. They then conditioned receipt of those benefits on a vote in favor of transactions extraneous to the acquisitions, the Liberty share issuances and other matters.

Assuming that viable breaches of fiduciary duty inhere in the Liberty share issuances, they could not be cleansed by the vote, since that vote was not a free vote to accept or reject those transactions alone; it was a vote to preserve the benefit of the acquisitions. In other words, ratification can cleanse defects inherent in a transaction, because the stockholders can simply reject the deal. The Court stated fiduciaries cannot interlard such a vote with extraneous acts of self-dealing, and thereby use a vote driven by the net benefit of the transactions to cleanse their breach of duty.

So far, arguments that shareholder approval was coerced have proven to be the most viable line of attack against Corwin’s application to merger claims.

John Jenkins