Delaware Supreme Court Affirms Chancery Court "Volcano" Decision Extending Business Judgment Rule to Tender Offers
The Delaware Supreme Court affirmed the Court of Chancery's 2016 decision in Volcano. The affirmance establishes that the Corwin rule—which applies the presumptions of the business judgment rule to transactions ordinarily subject to enhanced scrutiny if the disinterested stockholders approve the transaction in an informed, uncoerced vote—applies equally to transactions structured as front-end tender offers when a majority of the disinterested stockholders' shares are tendered into the offer.
In a one-sentence order, the Delaware Supreme Court affirmed the Delaware Court of Chancery's decision in Volcano, extending the Corwin rule to transactions structured as front-end tender offers (In re Volcano Corp. S'holder Litig., 143 A.3d 727 (Del. Ch. 2016), aff'd, Lax v. Goldman, Sachs & Co., 2017 WL 563187 (Del. Feb. 9, 2017)).
The facts of the case and the Chancery Court's decision are summarized in Legal Update, In re Volcano Corp.: Delaware Court of Chancery Extends "Corwin" Rule to Tender Offer, Dismisses Claim Against Financial Advisor ( www.practicallaw.com/w-002-7582) . As a result of the Supreme Court's affirmance, the following principles are now confirmed as a matter of Delaware law:
The rule described in the Delaware Supreme Court's Corwin decision applies equally in the context of a front-end tender offer followed by a back-end merger, even though no stockholder vote is actually held. Under Corwin, the standard of review of the board's conduct in a change-of-control transaction shifts from enhanced scrutiny to the business judgment rule when a majority of the disinterested stockholders approve a single-step merger in an informed and uncoerced vote (Corwin v. KKR Fin. Hldgs. LLC, 125 A.3d 304, 308 (Del. 2015)). The same rule now applies to two-step mergers conducted under Section 251(h) of the DGCL when the disinterested, informed, uncoerced stockholders tender their shares into an offer, even though they do not vote on the merger.
When the cleansing effect under Corwin is available (in either a single-step or two-step merger), the business judgment rule applies irrebuttably to the plaintiffs' allegations and insulates the merger from a challenge on any grounds other than waste. This is significant for the reason given in the Delaware Supreme Court's order in Singh v. Attenborough, which is that a challenge based on waste is unlikely to succeed because it is hard to conceive of the stockholders voting in favor of a wasteful transaction (137 A.3d 151 (Del. 2016)). As the Chancery Court explained in Volcano, if the business judgment rule were only a rebuttable presumption, then a board's violation of its fiduciary duties—even based on facts that were disclosed to the stockholders before they approved a transaction—would render the business judgment rule inapplicable. However, the Chancery Court concluded, and the Supreme Court now confirms, that the business judgment rule applies irrebuttably.
For more information about the duties of directors and the appropriate standard of review in M&A transactions, see Practice Note, Fiduciary Duties in M&A Transactions ( www.practicallaw.com/w-001-8263) .