DealLawyers.com Blog

November 2, 2021

Injunctive Relief: Delaware Chancery Again Refuses to Enjoin a Merger

This Sidley blog discusses a recent bench ruling in which the Chancery Court temporarily enjoined a vote on a merger until curative disclosure had been made, but refused to enjoin the transaction in its entirety, despite evidence that the deal may have violated a charter provision requiring equal treatment of the holders of both classes of the target’s common stock.

The transaction involved the proposed acquisition of QAD, which has a dual class structure, by Thoma Bravo.  Under the terms of the proposal, each class of shares would receive the same consideration, but one of the company’s founders and a Class B holder, Pam Lopker, would be permitted to roll over equity into the acquiring entity. The plaintiffs contended that this violated charter provisions entitling the holders of each class of stock to receive “an amount and form of consideration per share no less favorable than the per share consideration” provided to the holders of the other class.

They also contended that the special committee put the founder’s interests ahead of other shareholders in the negotiation process, and that the company’s proxy statement failed to disclose these conflicts, and that these omissions made an informed vote impossible. As the blog discusses, the Chancery Court agreed, and while it granted the plaintiffs’ motion to enjoin the vote temporarily in order to provide additional disclosure, the merger itself was another story:

The Court refused to enjoin the merger entirely. While the Court noted the plausibility of the plaintiff’s contract claim for the breach of the charter provision, it determined that enjoining the merger risked substantial harm to QAD stockholders given the 20% premium offered and the absence of any rival bidder. The Court noted that a contract claim would survive the merger, and it expressed confidence that “after-the-fact money damages” have “some value as a remedial instrument in this case.”

The blog goes on to explain that this has become Delaware’s preferred approach in recent years, particularly where no competing deal has surfaced:

This approach is consistent with a long line of cases in Delaware that have compelled additional disclosure but refused to enjoin a transaction outright for fear that it would jeopardize shareholders’ ability to enjoy the benefits of an otherwise beneficial deal. Such refusals are often in spite of potential violations of fiduciary duty or breaches of contract. As the Delaware Supreme Court has explained, where there is no claim by a rival bidder that it was unable to make a bid, and shareholders are fully informed of all the facts and not coerced, “the Court of Chancery should be reluctant to take the decision out of their hands.”

John Jenkins