The Borders of Revlon Duties
In re Synthes, Inc. S’holder Litig., C.A. No. 6452-CS (Del. Ch. Aug. 17, 2012). This recent opinion by Chancellor Leo Strine, Jr. from the Court of Chancery includes a discussion of the contours of fiduciary duties that were announced many years ago in the Delaware Supreme Court’s Revlon decision. Professor Stephen Bainbridge has already provided scholarly commentary in a piece he has entitled: Strine on the Borders of Revlon-land.
The good professor’s latest scholarship on the topic of duties under Revlon begins as follows (but deserves to be read in full):
My article The Geography of Revlon-Land (forthcoming 81 Fordham L Rev ___ (2013)), explains that when a target board of directors enters Revlon-land, the board’s role changes from that of “defenders of the corporate bastion to auctioneers charged with getting the best price for the stockholders at a sale of the company.”
A critical question then is to identify the check points at which target boards cross the border into Revlon-land. My article argues that a number of Chancery Court decisions in the last decade have erred by holding that certain cases fall within the borders of Revlon-land even though both binding Delaware Supreme Court precedents and sound policy argue that those cases do not do so.
He concludes that this most recent decision in the Synthes case, however, gets it right.
Supplement: Professor Larry Hamermesh, Director of the Institute of Delaware Corporate and Business Law of the Widener University Law School, provides insightful and learned commentary on this case at this link. Jim Hamilton provides additional analysis here.
Further Supplement: Now that the scholars have weighed in, I provide a more conventional summary of the case for practioners, with a cursory background that highlights those aspects of the opinion that may be of the most practical application to the practitioner, especially regarding the duties of a controlling shareholder.
Issue Addressed: Whether the controlling stockholder breached its fiduciary duty by refusing to consider an acquisition offer that would have cashed-out all the minority stockholders of Synthes, Inc., but required the controlling stockholder to remain as an investor in Synthes.
Short Answer: No.
The plaintiffs complained that because the controller did not give a consortium of private equity buyers a chance to make an all-cash offer, and ultimately accepted a bid by Johnson & Johnson for 65% stock and 35% cash, that the controlling stockholder breached his fiduciary duty to the minority stockholders. In this 46-page opinion the Court rejected the arguments of the plaintiffs on multiple levels.
This case provides a helpful recitation of Delaware law on the duties of controlling shareholders. For example, the Court observes that self-sacrifice is not required. Although the controlling shareholder of the company is entitled to a premium for his shares, the controlling shareholder in this case shared that premium with all other shareholders.
The Court explained why the Revlon duties were not triggered, in part because 65% of the acquisition price was for stock in a AAA-rated public company which itself had no controlling stockholder, but rather, control in which was diversified throughout a “large, fluid, changeable and changing market.”
The legal analysis of the Court includes some of the more well-known Delaware decisions that form part of the bedrock of Delaware corporate law in connection with the duties of directors.
As a preliminary matter, in the context of a motion to dismiss, the Court observed that because the directors on the board were protected by DGCL Section 102(b)(7), which provision in their charter exculpated them from personal liability stemming from breach of the duty of care, the complaint must be dismissed against the directors unless the plaintiffs have successfully pled non-exculpated claims for breach of the duty of loyalty against them. See footnotes 54 and 55.
The Court underscored the core tenet of Delaware corporate law that: “The directors of a corporation are presumed to have acted independently, with due care, and good faith and in the honest belief that their actions were in the stockholders’ best interest.” See footnote 56.
Among the traditional ways of rebutting the presumption of the business judgment rule that the board is entitled to, is for a plaintiff to allege that the merger transaction was an interested one in which the corporation was on the wrong side of the table from its majority stockholder. However, when the merger involves a third party, the plaintiffs have sought to invoke the entire fairness standard by arguing that the controlling stockholder received materially different terms from the third party in the merger than the minority stockholders and that the third party merger should be subject to fairness review regardless of the fact that the controlling stockholder was not on both sides of the table. See footnotes 58 to 59. The argument in that context is based on the controlling shareholder exercising its power to cause the company to enter into a deal that is not equal to all stockholders and especially unfair to the minority because the controller allegedly diverted proceeds to itself that should have been shared equally among all stockholders.
In addition to rejecting the application of the entire fairness standard in this case, the Court explained in detail why the premise of those foregoing challenges was not supported by the facts of this case or the applicable law.
In explaining why Delaware law does not require, as part of the fiduciary duty of a controlling stockholder, to engage in self-sacrifice, for the benefit of minority shareholders, the Court explained that instead that duty is to: “Put the best interests of the corporation and its shareholders above any interest not shared by the stockholders generally.” See footnotes 86 and 87. As explained by Chancellor Allen in Thorpe v. CERBCO, Inc., a controlling shareholder, “will not be allowed to use their control over corporate property for processees or procedures to exploit the minority, but are not required to act altruistically towards them.” See footnote 89.
The discussion of why the Revlon standard does not apply has been ably addressed by Professors Bainbridge and Hamermesh on these pages and I recommend their discussion of that aspect of the Court’s opinion.