The Vice Chancellor's legal analysis essentially consisted of a detailed comparison against his own ruling in In re Plains Exploration & Production Company Stockholder Litigation, (Del. Ch. May 9, 2013) (see Legal Update, In re Plains: Revlon Duties Met Despite No Special Committee or Pre-agreement Market Check). In Plains, the Vice Chancellor found that the board of the target company had satisfied its Revlon duties when it conducted a single-bidder negotiation process, even though it had neither conducted a pre-signing market check nor actively shopped the company post-signing with the benefit of a go-shop provision. The Vice Chancellor noted the similarities between the two situations, including that no topping bids had emerged in either situation in spite of relatively modest deal protections. He also acknowledged that the C&J stockholders are adequately informed of the transaction details and arguably should be given a chance to vote for themselves.

However, the Vice Chancellor distinguished Plains along four lines. This was critical, because in the Vice Chancellor's view, the Plains scenario "approached the line for what may be considered an adequate sale process." The shortcomings in the process here were therefore enough to cross that line and warrant an injunction.

The distinctions were:

After reviewing these four distinctions, the Vice Chancellor stated that the plaintiffs had made a "plausible showing of a likelihood of success on the merits." Even then, the Vice Chancellor confessed that it was a "very close call," noting that no other bids had come forward and that the stockholders were fully informed. In addressing whether there existed a threat of irreparable injury that would warrant an injunction, the Vice Chancellor said only that the stockholders are entitled to have a sale process run when the company was being sold. Here too, the Vice Chancellor admitted that that answer was "not a particularly satisfying one."

The Vice Chancellor also held that the balancing of equities favored an injunction, again because the board had not thought at all about the transaction as a sale of the company. To remedy that failing, the Vice Chancellor ordered a delay for 30 days, a "very brief respite," during which the board would actively solicit superior offers.

At the outset, the Supreme Court criticized the Vice Chancellor's bench ruling for applying the wrong standard to a motion for a preliminary injunction. The Supreme Court noted that while the Vice Chancellor correctly identified the standard for a preliminary injunction as "reasonable probability of success on the merits," the Vice Chancellor mistakenly based his decision on a conclusion that the plaintiff had made a "plausible" showing of success.

The Supreme Court also highlighted the Vice Chancellor's own findings that the case was a close call and that no topping bid had emerged in the ensuing months. In this regard, the Supreme Court approvingly cited to a Court of Chancery decision for the principle that when a plaintiff seeks to enjoin a corporate transaction and no other bidder has emerged despite "relatively mild deal-protection devices," the showing of a reasonable probability of success must be "particularly strong" (Wayne Cnty. Emps' Ret. Sys. v. Corti, 954 A.2d 319, 331 (Del. Ch. 2008)).

From a substantive point of view, the Supreme Court explained that the Vice Chancellor's bench ruling relied on an "erroneous understanding" of what Revlon requires. As the Delaware courts have reiterated many times, there is no "single blueprint" that a board must follow to fulfill its Revlon duties of obtaining the highest value reasonably attainable for the stockholders once the corporation is bound to undergo a change of control (Barkan v. Amsted Indus., Inc., 567 A.2d 1279, 1286 (Del. 1989)). This includes a lack of any per se duty to conduct a pre-singing auction or post-signing market check, which the Supreme Court understood the Vice Chancellor to be mandating. Rather, a passive market check in which interested bidders have the ability to submit bids with mild resistance from deal-protection devices is frequently enough for the board to satisfy its duties. The Supreme Court also reminded (for the benefit of those who "seem to forget") that the Revlon and QVC decisions, which could be read on their own as requiring more active efforts to find a superior offer, involved situations in which a board was resistant to a particular bidder and attempting to prevent topping bids from emerging. But in cases where there are no such barriers and bidders have had adequate time to submit an offer, a passive market check suffices. The Supreme Court considered the present case to be such a situation, because the board of C&J negotiated a broad fiduciary out and low break-up fee, with plenty of time before closing for interested parties to submit a bid.

Based on this understanding of the requirements of Revlon, the Supreme Court also rejected the Vice Chancellor's comment that the board's lack of "impeccable knowledge" was a fatal flaw in the board's efforts. (The Supreme Court apparently understood the Vice Chancellor to be ruling that the lack of impeccable knowledge meant that the C&J board should have conducted an auction.)

In deciding that the C&J board had done enough on the basis of the preliminary record to avoid an injunction, the Supreme Court placed greater weight on certain factual findings than the Vice Chancellor had. In the Supreme Court's view, the C&J board was sufficiently engaged in the process, as demonstrated, for example, by the email from the board's financial advisor.

The Supreme Court disputed the Vice Chancellor's conclusion that the board did not recognize that it was overseeing a sale of the company. The Court highlighted the window-shop and fiduciary out provisions, which are rare for a buyer to negotiate yet common for target companies. The other corporate governance protections would also temper Nabors' majority control, which showed that the C&J board understood that majority control would be shifting to the Nabors stockholders.

The Vice Chancellor acknowledged that the fully informed stockholder vote made the decision a "very close call," but the Supreme Court considered the vote even more critical. The Court went so far as to say that the board, in evaluating the merits of the transaction for its own satisfaction, could "take into account that its stockholders would have a fair chance to evaluate the board's decision for themselves." The Court cited several Court of Chancery decisions that support this principle, including In re El Paso S'holders Litig., 41 A.3d 432, 449 (Del. Ch. 2012), In re Cogent, Inc. S'holder Litig., 7 A.3d 487, 515 (Del. Ch. 2010), In re Netsmart Techs., Inc. S'holders Litig., 924 A.2d 171, 208 (Del. Ch. 2007) and In Re Toys "R" Us, Inc. S'holders Litig., 877 A.2d 975, 1023 (Del. Ch. 2005).

The Supreme Court also expressed unease with the Vice Chancellor's decision to blue pencil a go-shop provision in the merger agreement on the basis of a truncated record. The Supreme Court acknowledged the Court of Chancery's broad authority to make equitable rulings, but held that the Vice Chancellor exceeded that authority here. Whereas the Court of Chancery can grant a motion for an expedited trial on a truncated record, it should be reticent about granting affirmative relief until it has developed a fuller record.

The Supreme Court took particular issue with the ruling for binding Nabors to a modified contract, even though Nabors had not been found to have aided and abetted any breach by the C&J board. Effectively, the Vice Chancellor had negotiated a go-shop to C&J's benefit without C&J giving anything in return to Nabors. This was not an appropriate remedy in the absence of a finding on a fuller record that Nabors was liable for aiding and abetting.

Beyond these high-level takeaways, though, the C&J decision is somewhat disappointing for its lack of rigor in certain key areas. Most glaringly, the decision spends virtually no time reckoning with Plains, never once mentioning it by name and only referencing it almost in passing by waving away the "impeccable knowledge" standard. As a result, the decision unhelpfully caricatures the Vice Chancellor's bench ruling and fails to shed light on the possible limits of the efficacy of a single-bidder process.

Throughout its opinion, the Supreme Court treats the bench ruling as if Vice Chancellor Noble thought that Revlon always requires the board to conduct an auction. But Vice Chancellor Noble never thought this, as both his bench ruling and Plains make clear. Indeed, the single-most important takeaway of C&J, that a board can run a single-bidder process and rely on a passive market check, was already known after Plains. What Vice Chancellor Noble attempted to explore in his bench ruling were the limits of Plains and when it is inappropriate for a board, though unconflicted and representing an informed stockholder base, to conduct a single-bidder process. In this regard, the Vice Chancellor carefully analyzed Plains and found four distinctions with the situation in C&J. Two of those distinctions in particular—the questions surrounding the board's approach to the transaction as an acquisition and the board's understanding of the value of the consideration—are meaningful differences and warrant juridical treatment.

It is clear enough that the Supreme Court does not share the Vice Chancellor's view that Plains represents the limit of the latitude afforded to boards under Revlon. But it would have been more helpful had the Supreme Court compared Plains in the same way that the Vice Chancellor did and explained whether the differences that the Vice Chancellor identified matter substantively. The Supreme Court only does this in a roundabout way by highlighting the C&J board's negotiation of a window-shop and fiduciary out, and casting aside the Vice Chancellor's "impeccable knowledge" phrasing. But neither of these findings are totally availing.

The Supreme Court's heavy emphasis on the negotiation of a fiduciary out as proof of the board's understanding that it was negotiating a sale seems misplaced. Fiduciary outs are not usually negotiated by buyers, as the Supreme Court rightly notes, but they are far from uncommon for buyers in stock deals. When the acquiring company intends to issue enough stock in the deal to require its own stockholders to vote on the transaction, the buyer's board sometimes negotiates deal protections reciprocal to the target company's. This does not prove that the buyer's board sees its own company as the target of the transaction. By way of example, see this summary of the 50 most recent all-stock deals in the What's Market public merger agreements database. In many of those transactions, the buyer has the same freedoms as the target company to exit the transaction if a superior offer for the buyer emerges, even though the buyer's stockholders will own a majority of the combined entity's stock.

The Supreme Court also takes the Vice Chancellor's emphasis on the C&J board's lack of impeccable knowledge as an indication that the Vice Chancellor believed that the board must auction the company if it has anything less than impeccable knowledge of the company's value. But this was not what the Vice Chancellor meant. He stated explicitly in his bench ruling that he had no questions about the board's understanding of C&J's value. Rather, the Vice Chancellor had questions about the board's understanding of the value of the consideration coming back to the C&J stockholders in the form of the CPS businesses, particularly in light of their accounting difficulties. These questions did not necessarily call for an auction. Presumably it would have been enough for Vice Chancellor Noble if the C&J board had done more due diligence on the value of those businesses. The issue for the Vice Chancellor was that it appeared to him that the board had not done enough to investigate that value precisely because the board did not think of the transaction as a sale of C&J. The Supreme Court does not address those concerns from that angle, other than by pointing to the fiduciary out as proof of the board's cognizance of the implications of the transaction.

The C&J decision is also structurally lacking due to its failure to spell out when it is analyzing which prong of the three-part test for a preliminary injunction. The Supreme Court outlines the test in the beginning of its analysis, stating that a preliminary injunction requires:

But after identifying the test, the Court does not discretely analyze those prongs or identify which of its findings are relevant to which prong. This is unfortunate, because the Court had an opportunity to give guidance on an emerging issue in corporate law. In two recent decisions, the Court of Chancery has opined that, in cases that do not invoke the entire-fairness standard of review, a fully informed, non-coerced stockholder vote should not merely be weighed as a factor in Revlon cases, but should take the board out of Revlon's enhanced scrutiny and restore the presumptions of the business judgment rule. For more on those opinions, see Legal Updates, Chen v. Howard-Anderson: Chancery Court Describes Limits of Exculpation in Revlon Deals, Suggests Business Judgment if Vote Fully Informed and KKR Financial and Crimson Exploration: Chancery Court Describes Degree of Control Required to Trigger Entire Fairness (see also J. Travis Laster, The Effect of Stockholder Approval on Enhanced Scrutiny, 40 Wm. Mitchell L. Rev. 1443 (2014)).

This issue was directly relevant in C&J because the Supreme Court so heavily weighed the stockholder vote in concluding that the plaintiffs had not carried their burden for an injunction. But the Supreme Court's opinion does not mention the broader issue of modifying the standard of review, or approach the matter from that angle. Indeed, the decision is not completely clear if the fact of an informed vote goes to the probability of success on the merits, the threat of injury or the balancing of equities; the factor is mentioned several times in the opinion in contexts that can be applied to any of those prongs. Consequently, it is impossible to conclude whether, in the Supreme Court's view, the vote took the C&J board out of Revlon (in which case the board likely committed no breach at all) or whether it is still possible that the board breached its fiduciary duties under Revlon (but that the breach did not warrant an injunction). The Supreme Court does say that it assumes for the purposes of its opinion that Revlon applies, but that is only in regard to the question of whether the transaction was a change of control. The Court could still have concluded that even though the transaction was a change of control, the informed stockholder vote removed enhanced scrutiny.

By not addressing the standard of review, the Supreme Court leaves certain questions open. One question is the ultimate availability of monetary damages, which a board can owe even if no injunction is issued, if either the corporation does not have a Section 102(b)(7) exculpation provision or if the board is found to have acted in bad faith. In other circumstances, a financial advisor can be found liable for damages if it is found to have aided and abetted a breach for which the board is exculpated.

Another question that remains open is the extent to which the board can "take into account," in the Supreme Court's words, that an informed stockholder vote will take place. The Court does say that "board had to satisfy itself that the transaction was the best course of action for stockholders," but it does not further explore the implications of that statement. A stockholder "no" vote obviously cannot replace active negotiations. The question therefore is at what point can the board decide it has done enough to satisfy its duties and leave the rest to the stockholders for their input. One could also reasonably ask whether the deal-protection measures should be milder if the board is consciously off-loading part of its decision to the stockholders. For example, to avoid being used as a stalking horse, a buyer can typically negotiate a break-up fee at 4% of the deal value without fear that a Delaware court will consider it preclusive or coercive. But if the stockholders are (at least to some extent) taking over for the board as decision-maker, they can be thought of as assuming the role of negotiator to that same extent. If so, the break-up fee should arguably be set at little or nothing, in order to make further negotiations as frictionless as possible. The C&J decision does not bring these questions any closer to resolution.

Ultimately, it is hard to avoid the conclusion that the Supreme Court's decision is in no small part about optics. The transaction at issue was announced five months before the bench ruling and no topping bid had emerged in that time. The Supreme Court may have been motivated by a concern that Delaware not be feared as a jurisdiction where courts unnecessarily create market risk by delaying transactions for an extra 30 days, during which time any number of things can happen that derail the closing. In addition, recent Delaware decisions on fee-shifting and forum-selection by-laws and rejections of negotiated settlements have brought the issue of rote litigation over nearly every public merger to bear. An award of a go-shop at the preliminary-injunction stage might be perceived as a reward to class action lawyers that the Supreme Court does not want to grant if it can avoid doing so.