Though it is not uncommon for Chancery Court decisions to be in the area of 100-pages long, due to its length, my summary will be longer than usual for the blurbs on this blog. Oliver v. Boston University is 105-pages long and deals with a voluminous set of facts and a multitude of legal issues. I have divided the downloadable opinion into 2 parts for the user’s convenience: Part I and Part II.
Specifically, the case involves a financially troubled biotechnology company by the name of Seragen, Inc., which was controlled by Boston University (“BU”), as well as its friends and affiliates, who on several occasions came to its fiscal rescue in transactions implemented without procedures reasonably designed to protect the interests of minority shareholders. With Seragen on the precipice of financial doom, a company by the name of Ligand offered merger consideration of approximately $75 million to acquire Seragen, but that amount would not satisfy all of the stakeholders because the claims of many stakeholders asserting rights to priority payment exceeded the amount of Ligand’s offer. A group of minority shareholders brought to trial a series of claims challenging certain transactions before the merger between Seragen and Ligand and the process by which the merger proceeds were allocated. This 105-page decision followed that trial. The court noted that if the merger did not succeed, bankruptcy was the likely result on a very short timetable and that bankruptcy may have necessarily involved sacrificing the interests of the minority shareholders to placate other stakeholders, and it is within that troubled context that the court addressed the corporate governance issues.
Unlike other similar factual settings, this case did not deal with the issue of possible duties that the directors may have owed to creditors, because it was only the minority shareholders who were complaining that their ox was gored, primarily because they did not receive enough of the allocated proceeds of the merger. Among the legal issues addressed were: equity dilution and voting power dilution; business judgment rule; entire fairness standard; duty of loyalty that majority owes to the minority; duty to disclose material facts in proxy; aiding and abetting breaches of duty; and the difference between derivative and direct claims.
One of the claims addressed was equity dilution but the court determined that that was a derivative claim and that the plaintiffs did not have standing because they were no longer shareholders of Seragen–which was not the surviving company in the merger. The claim for voting power dilution, however, was determined to be a direct claim.
The court also determined that the entire fairness standard applied and discussed the duty of loyalty which was implicated because of the directors that appeared on both sides of the transaction or received a personal benefit not received by the shareholders generally.
The court noted that the duty of loyalty also requires that a controlling shareholder not act or cause its representatives to act in such a manner as to deal unfairly with the minority shareholders.
The court further held that Boston University and its affiliates had a controlling interest and that the majority of the board was also controlled by Boston University. Moreover, five of the six directors had a substantial outcome in the challenged transaction.
Although the fairness of the amount paid by Ligand in the merger was not questioned, the plaintiffs questioned the allocation of the merger proceeds by the directors among the common shareholders, preferred shareholders and creditors.
This also required the court to address the valuation of various derivative claims, as part of the corporate assets, that should have been included in the merger price.
The court noted that even though the presumption of the business judgment rule was not available due to the breach of the duty of loyalty, and therefore the burden was shifted to the directors to show entire fairness, because the shareholders, after allocation of the merger proceeds, voted and approved the merger (and the allocation) it was possible that the allocation could have been insulated from burdening the directors with demonstrating entire fairness as a result of the ratification by shareholders (see footnote 194 which also refers to Solomon v. Armstrong, 747 A.2d 1098, 1115 (Del. Ch. 1999) (in the context of the duty of loyalty claim where minority shareholders state a claim of self dealing at their expense, and then informed shareholder ratification by the minority shifts the burden of proof of entire fairness to the plaintiff). In the facts of this case, however, the defendants did not establish that the shareholder vote was informed and therefore they continued to bear the burden of demonstrating entire fairness. The court observed that the defendants treated the merger allocation negotiations with a surprising degree of informality and that no steps were taken to insure fairness to the minority common shareholders. The court found more disturbing that no representatives negotiated on behalf of the minority common shareholders and that the process implementing the negotiations was severely flawed in light of no person acting to protect the interests of the minority common shareholders.
The court noted that one of the creditors received 100 cents on the dollar when everyone else was forced to take a discount, but the plaintiffs failed to appreciate that the creditors had no fiduciary duty to the shareholders and were entitled to insist upon full payment for their debts owed by Seragen. The court recognized the exigencies and the serious time constraints that the fiduciaries were presented with in the dire straits that they found themselves in.
The court realized that unless an agreement with a merger partner was reached promptly that Seragen might well have run out of money before the merger could have been consummated. In addition, in light of the limited cash available, there was an incentive not to make the process more costly than necessary.
Unfortunately, the court found there was no process whatsoever and in the absence of the most rudimentary measures to protect the interests of the minority shareholders, especially when the participating fiduciaries were conflicted, those fiduciaries should not be surprised with the adverse consequences that resulted.
In sum, the court concluded that the defendants failed to demonstrate that the merger allocation was entirely fair because “not only was there no process to ensure its fairness, but also because the price assigned to the interests of Boston University was unfair and the price paid to Boston University was unfair.”
That is, at footnote 258, the court concluded that the share of the merger proceeds given to Boston University was not fairly allocated to it.
There were also claims that there was a failure to fulfill the fiduciary duty to disclose fully and fairly all material facts within the control of the board that would have significant effect upon a stockholder vote.
The court ruled that to prevail on such a disclosure claim, the plaintiff must prove not only an omission or misstatement of a particular fact, but also that an omitted fact is material. Citing Delaware cases and SCOTUS precedent, the court made clear that an omitted or misstated fact is material if it “would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available.” Here, many of the facts that form the basis for the various challenges were either disclosed or were in the public domain. The court, however, found a failure to inform shareholders that Boston University had waived its right to receive a specific amount for each of the remaining shares after all conversion rights had been exhausted because in the context of allocating the merger proceeds, the diversion of such an amount would have been significant to an informed exercise of the shareholder franchise. Because the award of damages for the overpayment of the shares fairly compensates the minority shareholders, the plaintiff not only entitled to nominal damages from the disclosure failure due to the award of damages based on the underlying allocation. Whether an accurate disclosure would have induced more shareholders to seek appraisal cannot be ascertained at this point, as the court reasoned.
The court concluded that the plaintiffs did not demonstrate any injury from their claim of voting dilution and also recited in closing the four elements of a claim for aiding and abetting a breach of fiduciary duty but found that the elements were not satisfied.
This lengthy opinion covers many of the touchstone principles of corporate governance, especially in the context of a company on its financial deathbed that was struggling for any means to stay alive, but the court reasoned that such a crisis was no justification for the failure to comply with corporate governance principles.