Chancery Denies Request to Enjoin Deal Based on Revlon, Process and Disclosure Claims
In re Orchid Cellmark Inc. Shareholder Litigation, C.A. No. 6373-VCN, 2011 WL 1938253 (Del. Ch. May 12, 2011).
The Court addressed whether a preliminary injunction was warranted to enjoin a cash tender offer based on Revlon claims and based on arguments that the deal was the result of a flawed process and misleading disclosures.
The lawsuit in this matter is related to the sale (“Proposed Transaction”) of Orchid Cellmark Inc. to Laboratory Corporation of America Holdings, Inc. (“LabCorp”) and is between Plaintiffs, company shareholders (“Shareholders”), and Defendants, Orchid Cellmark Inc. (“Orchid”). Plaintiffs sought a preliminary injunction, claiming that the board members (the “Board”) did not use proper financial information and that the shareholders did not have adequate information for making a decision.
Prior to any discussion of material facts, the Court of Chancery sets forth the elements that a plaintiff must prove in order to obtain the “extraordinary remedy” of a preliminary injunction:
First, a reasonable probability that they will be successful on the merits of their claims at trial; second, that they will suffer imminent, irreparable harm if an injunction is denied; and third, that a balancing of the equities favors the entry of interim injunctive relief.
Merits: Price and Process Claims
Plaintiffs contend the following: first, that the board failed to conduct a sufficient market check; second, that the Board ignored the possibility that an alternative transaction involving only Orchid’s U.K. operations could provide substantially superior value to Orchid’s shareholders; third, that the Board and Oppenheimer disregarded management input, resulting in financial projections that undervalued the Company; fourth, that the Board ignored Mr. Bologna’s (Orchid’s Chief Executive Officer) dissent to the Proposed Transaction; and fifth, that the Board agreed to deal protection measures that cut short the market check and that were not reasonably calculated to increase shareholder value.
In addressing these claims, the Court of Chancery states that when a board of directors decides to sell the company, it is obligated to secure the “best value reasonably attainable for the company’s shareholders.” The court explained that it is first called upon to determine whether the information relied upon by the Board was adequate; the second step is to examine the reasonableness of the directors’ decision in light of the circumstances at the point in time when the directors made the decision. The Court of Chancery emphasized that Delaware courts recognize that “there is no single blueprint to follow in reaching the ultimate goal of maximizing shareholder value.”
The Court of Chancery found that the Plaintiffs failed to satisfy the first element needed for a preliminary injunction with respect to the price and process claims. That is, they failed to demonstrate a reasonable probability of success on the merits of their price and process claim. On the first argument, the court stated that the potential bidders seemingly understood that the solicitations by Oppenheimer invited them to make a bid and that Plaintiffs assertion is therefore unfounded. As for the second assertion, the Court of Chancery found that the Board acted reasonably in deciding not to pursue further sale of Orchid’s U.K. operations. With respect to the third assertion, the court determined that the Board and Orchid used the best set of financial projections that most accurately captured Orchid’s future performance, concluding that it did not appear to be unreasonable as alleged by the Plaintiffs. As for the fourth assertion, the Court of Chancery found that the other directors appear to have been informed of Bologna’s opinion and that the Board simply disagreed with him. With respect to the fifth assertion regarding deal protection measures, the court stated that there is no bright line test and that the measures must be addressed in sum, not individually. Further, aggressive deal protection measures “run the risk of being deemed so burdensome and costly as to render the ‘fiduciary out’ illusory,” but that the line had not been crossed in this case. For those reasons, the Court of Chancery found that the Plaintiffs had not demonstrated a reasonable probability of success on their price and process claims.
Merits: Disclosure Claims
The Plaintiffs sought several disclosures: first, disclosures surrounding several U.K. private equity firms’ interest in purchasing only Orchid’s U.K. operations; second, disclosures of projections regarding the prospects of continuing as a stand-alone entity; third, disclosures about how Oppenheimer conducted the market check; fourth, the reasons why Orchid’s two largest shareholders decided not to enter tender agreements; and fifth, disclosure of details regarding conflicts within the Board over whether to continue negotiating with LabCorp.
The Court of Chancery explained that directors of Delaware corporations “‘have a fiduciary duty to disclose fully and fairly all material information within the board’s control when it seeks shareholder action.’” (quoting Gantler v. Stephens, 965 A.2d 695, 710 (Del. 2009)).
Regarding the first request, the court found that the requested information is not necessarily incompatible with the existing disclosures and that the question of whether the Plaintiffs have shown reasonable probability that they will succeed in proving materiality is a very close one. With respect to the second request, the court determined that the Board, Special Committee, and Oppenheimer deemed their projections more reliable than the projections provided by Mr. Bologna and, therefore, the Plaintiffs will not succeed on that argument. Regarding the third request, the Court of Chancery finds that further disclosure about Oppenheimer’s market check would not be material to the Shareholders’ decision. As for the fourth request, the court sides with the Defendants’ argument that they should not be held responsible for third-party thought-process. Regarding the fifth and final request, the court determined that the additional information about the conflicts within the Board would not alter the mix of information available to shareholders and therefore is not material either.
The Court of Chancery dealt with the aspect of irreparable harm swiftly. It stated that, “in these cases if there is a probability of success on the merits, irreparable harm usually follows, because, once consummated, rescinding the transaction is difficult, if not impossible.” The court concluded this aspect of the preliminary injunction motion by reasoning that, with respect to the merits-based conclusion, this prong counsels against relief.
Balancing the Equities
The Court of Chancery warned that courts should be careful about depriving shareholders of their opportunity to make choices regarding the sale of a company. The court held that with regard to the close disclosure issues, this aspect of a preliminary injunction motion tipped the scale in favor of ruling against an injunction.
Therefore, the Court of Chancery concluded that the Plaintiffs’ motion for preliminary injunction would be denied.