In order for a proposed merger not to trigger Revlon duties, control of the company must reside in “the market” before & after the deal and there must be a significant stock component to the consideration. As usual in Delaware, the fun part is deciding where to draw the line – how much stock is enough? That involves a case-by-case analysis.
It’s pretty clear that a deal that isn’t mostly stock won’t cut it, and the Chancery Court has held that a 50/50 cash & stock deal won’t either. On the other hand, in In re Santa Fe Pacific Corp, (Del. 11/95), the Delaware Supreme Court held that a deal with 66% stock consideration wouldn’t trigger Revlon. Just to make matters a little more complicated, there’s even case law out there suggesting that it isn’t just the percentage of stock in the consideration, but the percentage of the surviving entity that the target’s shareholders will own post-closing, that needs to be taken into account.
Anyway, this is a long-winded introduction to the fact that the Chancery Court just weighed in on this issue again, in Flannery v. Genomic Health Inc., et al., (Del. Ch. 8/21). In that case, Vice Chancellor Slights held that a deal in which 58% of the consideration was in the form of stock didn’t trigger Revlon:
[T]he consideration mix agreed to in the Merger Agreement dictates that 58% of each Genomic stockholder’s shares would be converted into Exact stock. Ultimately, it cannot be said that Genomic abandoned its long-term strategy, triggering a duty to maximize short-term gain, where 100% of Genomic’s stockholders received Exact stock in exchange for 58% of their shares. Because Plaintiff has failed to plead that Exact does not trade in a “a large, fluid, changeable and changing market” such that Genomic’s stockholders were prevented from obtaining a control premium for their shares in future transactions following the Merger, there is no reason to apply Revlon under the Court’s holding in Santa Fe.
There’s also an interesting Section 203 issue addressed in the case – check out this blog from Steve Quinlivan for a discussion of that aspect of the decision.
– John Jenkins