On February 9, 2017, the Supreme Court of Delaware summarily affirmed the Court of Chancery’s decision in In re Volcano Corp. Stockholder Litigation which had dismissed plaintiffs’ complaint on defendants’ 12(b)(6) motion to dismiss.
Plaintiffs, former stockholders of Volcano Corporation, had brought an action against defendants for breaches of fiduciary duty arising from the all-cash merger between Volcano and Philips Holding USA Inc. The parties had disputed what standard of review the Court of Chancery should apply: the Revlon test, as plaintiffs claimed, because Volcano’s stockholders received cash for their shares, or the irrebuttable business judgment rule, as defendants argued, because Volcano’s stockholders were “fully informed, uncoerced, and disinterested” when they approved the merger by tendering a majority of Volacano’s shares into a tender offer. As the Court of Chancery explained, if a business judgment rule is irrebuttable, plaintiffs could only challenge the transaction on the basis of waste. Thus, plaintiffs also argued in the alternative that if the business judgment rule did apply, it should only be a rebuttable presumption.
On March 14, 2014, the Delaware Supreme Court unanimously affirmed an important Delaware Court of Chancery decision issued in 2013 that offered a roadmap to companies and their directors on how to obtain the protections of the deferential business judgment rule when entering into a change-in-control transaction with a controlling stockholder. As we discussed previously, in In re MFW Shareholders Litigation, then-Chancellor (now Chief Justice) Strine held as a matter of first impression that the deferential business judgment rule – as opposed to the more onerous “entire fairness” – standard of review should apply to a merger with a controlling stockholder where (i) the controller conditions the transaction on the approval of both a Special Committee and a majority of the minority stockholders; (ii) the Special Committee is independent; (iii) the Special Committee is empowered to freely select its own advisors and to say no definitively; (iv) the Special Committee acts with care; (v) the minority vote is informed; and (vi) there is no coercion of the minority.
Ever had one of those days where you think you’re acting with good faith, diligence, and care, and yet you still get sued by the FDIC? The directors and officers of the now defunct Buckhead Community Bank in Georgia find themselves in the government’s crosshairs and, unlike their D-and-O counterparts at public companies, a federal court in Georgia thinks it’s not so clear that they’ll be able to claim the protections of the business judgment rule to avoid the FDIC’s claim that they caused the bank to lose millions of dollars.
The background in this case reads like so many others in similar suits around the country. According to the FDIC, the bank implemented an “aggressive growth strategy” beginning in 2005 that resulted in a 240 percent increase in the bank’s loan portfolio through 2007, primarily from gains in the bank’s “high-risk real estate and construction loans.” The bank’s adversely classified assets grew from twelve percent to more than 200 percent of its tier-1 capital, and by December 2009 the bank had landed in FDIC receivership. The FDIC later sued the bank’s directors and officers in federal court alleging that they were negligent for repeated violations of the bank’s loan policy, underwriting requirements, banking regulations, and “prudent and sound banking practices.” READ MORE
Corporations contemplating going private should take note of recent rulings from the Delaware Court of Chancery, which provide clear guidance on how to structure their transactions to reduce the risk of being subjected to the “entire fairness” standard of review.
Several months ago, the Delaware Court of Chancery issued an important MFW decision, in which Chancellor Strine set forth the procedural mechanisms a company can employ so that a going-private transaction with its controlling stockholder can be reviewed under the deferential business judgment rule, as opposed to the more stringent entire fairness standard. In that decision, Chancellor Strine held that the business judgment rule would apply if: (1) the controlling stockholder at the outset conditions the transaction on the approval of both a special committee and a non-waivable vote of a majority of the minority investors; (2) the special committee was independent, (3) fully empowered to negotiate the transaction, or to say no definitively, and to select its own advisors, and (4) satisfied its requisite duty of care; and (5) the stockholders were fully informed and uncoerced.
More recently, in SEPTA v. Volgenau, C.A. No. 6354-VCN (Del. Ch. Aug. 5, 2013), Vice Chancellor Noble provided further clarity on when a sale of a company with a controlling stockholder will be entitled to business judgment rule review. In SEPTA, Vice Chancellor Noble applied the business judgment rule and granted summary judgment to the defendants in case that challenged the acquisition of SRA International by Providence Equity Partners. Like the change-in-control transaction in MFW, the change-in-control transaction in SEPTA was negotiated by a disinterested and independent special committee and approved by a majority of the minority stockholders. Unlike MFW, however, where the controlling stockholder was the buyer in the transaction, SEPTA involved a transaction in which a third party was the buyer, and in which the controlling stockholder agreed to roll over a portion of his shares into the merged entity. READ MORE
On August 17, 2012, a shareholder filed a derivative suit in Delaware federal court against Viacom Inc.’s board of directors, alleging they wasted corporate assets by awarding lavish corporate bonuses. In a novel approach that hardly mentions the “say-on-pay” provisions of Dodd-Frank, the plaintiff argued that the company violated §162(m) of the Internal Revenue Code. Section 162(m) limits corporate tax deductions that can be taken by a company for any senior executive compensation over $1 million to that which is determined by objective, performance-based criteria such that a “third party having knowledge of the relevant facts could determine whether the goal is met.” 26 CFR § 1.162-27(e)(2)(ii).
The complaint alleges that Viacom’s tax deductions for the compensation in excess of $1 million paid to executive chairman Sumner Redstone and two other senior executives were based on subjective criteria like “leadership and vision” and therefore violated Section 162(m). The complaint seeks to force repayment to Viacom of $36 million in past compensation. The complaint also seeks broader voting rights on executive compensation issues. Specifically, the plaintiff wants Class B shareholders to have voting rights on executive compensation (currently, only Class A shareholders have them).
The complaint further alleges that Viacom’s Compensation Committee awarded these annual bonuses to its senior executives in a manner that violated its own shareholder-approved 2007 compensation plan, which required the Committee meet the requirements of §162(m). READ MORE