Chancery Rejects Revlon Claims in Two Recent Decisions
In Re Morton’s Restaurant Group, Inc. Shareholders Litigation, C. A. No. 7122-CS (Del. Ch. July 23, 2013). This is one of two recent Chancery opinions that dismisses claims that directors did not meet their burden under Revlon to receive the best price in connection with the sale of a company.
In this Morton’s Restaurant Group case, the Court reasoned that:
But the plaintiffs’ attempt to invoke entire fairness scrutiny fails on two levels. First, they point to no authority under Delaware law that a stockholder with only a 27.7% block and whose employees comprise only two out of ten board seats creates a rationalinference that it was a controlling stockholder. Under our Supreme Court precedent indecisions like Kahn v. Lynch Communication Systems, the plaintiffs’ allegations fall shortof creating a rational inference that Castle Harlan had effective control of Morton’s, and thus was a controlling stockholder, especially where the Complaint does not even attempt to cast into doubt the independence of the seven disinterested directors from the alleged controller. 25
Second, even if Castle Harlan could be considered a controlling stockholder, the plaintiffs have failed to make any wellpled allegations indicating that Castle Harlan had a conflict of interest with the other stockholders of Morton’s. That is, the plaintiffs plead no facts supporting a rational inference that it is conceivable that Castle Harlan’s support for an extended market check involving an approach to over 100 bidders in a nine month process reflected a crisis need for a fire sale. As is recognized by decisions like Unitrin, Inc. v. American General Corp, Delaware law presumes that large shareholders have strong incentives to maximize the value of their shares in a change of control transaction.26 When a large stockholder supports an arm’s length transaction resulting from a thorough market check that spreads the transactional consideration ratably across how to guide to structure a deal in a manner that increases the chances of successfully challenging a Revlon claim all stockholders, Delaware law does not regard that as a conflict transaction. To the contrary, as cases like Citron v. Fairchild Camera and Instrument Corp. and In re Synthes point out, such conduct presumptively considers equal treatment as a safe harbor and immunizes the transaction because it allows all the stockholders to share in the benefits of a transaction equally with the large blockholder. 27
Because the Complaint does not plead any facts supporting a rational inference of a conflict of interest on Castle Harlan’s or on any board member’s part, the Complaint fails to plead a viable damages claim. Given that Morton’s has an exculpatory charter provision, the plaintiffs must plead a non-exculpated claim that the directors of Morton’s breached their duties under Revlon.28 Because the Complaint fails to plead any rational motive for the directors to do anything other than attempt to maximize the sale value of Morton’s, it fails. In this regard, the plaintiffs face the reality that under Revlon, the duty of the board was to take a reasonable course of action to ensure that the highest value reasonably attainable was secured….
Bloomberg has an article on the opinion. On a procedural level, this decision also provides helpful commentary on what “documents related to or incorporated in the complaint” will be considered by the court in the context of a motion to dismiss.
Miramar Firefighter’s Pension Fund v. AboveNet, Inc., C.A. No. 7376-VCN (Del. Ch. July 31, 2013). This opinion cited the Morton’s decision (see, e.g., footnotes 48 to 50 and 53), and also dismisses Revlon claims.
Taken together with the Morton’s decision, these rulings provide the latest Delaware teachings on the hurdles plaintiffs’ lawyers must overcome in order to successfully challenge a merger on the basis that the procedures the directors followed did not suffice to fulfill their duty to find the highest bidder in connection with the sale of a company. In the course of reasoning that a majority of the directors were independent, the Court of Chancery also explained the following high threshold that must be met to prevail on a Revlon claim:
In the Revlon context, directors are obligated to obtain the best sale price reasonably attainable.36 Thus, “bad faith will be found if [the AboveNet Directors] intentionally fail[ed]” to obtain the best price reasonably attainable for AboveNet, “demonstrating a conscious disregard for [their] duties.”37 “A breach of the duty of loyalty may also exist, notwithstanding approval by a majority of disinterested and independent directors, “where the decision under attack is so far beyond the bounds of reasonable judgment that it seems essentially inexplicable on any ground other than bad faith.‟”38