In Mercier v. Inter-Tel (Delaware), Incorporated, 2007 WL 2332454 (Del. Ch. Aug. 14, 2007), read opinion here, the Chancery Court provides a veritable "mini-textbook" on the Delaware corporate law that applies to the review of actions taken by directors in connection with shareholder votes on a merger, especially when no serious entrenchment claim exists. This opinion arguably writes a new chapter in Delaware corporate law that clarifies the applicable standards in reviewing board behavior when an imminent shareholder meeting is postponed in connection with a proposed merger. There is far too much to say about this “law review article of a court decision” than can be shortly summarized in a blog post, but try we shall to the extent we can do so without making paying clients wait.
In this opinion, the Court denied a request for a preliminary injunction and explained in great detail the circumstances under which: “well-motivated independent directors may reschedule an imminent special meeting at which the stockholders are to consider an all cash, all shares offer from a third-party acquiror.” The Court began the opinion by summarizing its approach in determining the standard of review that it would apply. The Court explained that:
“ . . . consistent with the directional teaching of cases like MM Companies, Inc. v. Liquid Audio, Inc., 813 A.2d 1118 (Del. 2003) . . . the Blasius standard should be reformulated in a manner consistent with using it as a genuine standard of review that is useful for the determination of cases, rather than as an after-the-fact label placed on a result. Such a reformulation would be consistent with prior decisions recognizing the substantial overlap between the redundancy of the Blasius and Unocal standards, and would have the added benefit of creating a less prolix list of standards of review.”
The Court paid respect to the Delaware Supreme Court’s recent decision in Liquid Audio and also employed the “compelling justification” standard from Blasius Industries, Inc. v. Atlas Corp., 564 A.2d 651 (Del. Ch. 1988), within the context of an appropriate review based on Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985), of director conduct that affects a corporate election touching on corporate control.
In sum, the Court concluded that: “The plaintiff’s request for preliminary injunction application based on the contrary assumption – – that directors have no discretion as fiduciaries to reschedule a vote once a stockholder meeting is imminent and the directors know that the vote won’t go their way if it is held as originally scheduled – – is denied.”
The specific equitable claim presented was whether the postponement by the Special Committee of a special shareholders meeting on the same morning that it was scheduled, was equitably justified or whether there were inequitable motivations for the Special Committee seeking a delay. In its effort to determine the applicable standard of review that would apply to the equitable claim, the Court struggled with the argument by the plaintiff that the “compelling justification” standard of Blasius should apply based on the allegation that the postponement of the meeting by the Special Committee was flouting the will of the majority of shareholders. In the course of its analysis, the Court discussed the recent decision of In Re: MONY Group, Inc. Shareholders Litigation, 853 A.2d 661 (Del. Ch. 2004).
At page 27 of the Westlaw version of this Mercier opinion, the Court explained in detail why the traditional Blasius standard should not apply to its review of the director actions in this case. In sum, the Court explained that:
“The primary purpose of the Inter-Tel board was not to disenfranchise its stockholders. Rather, it was to give the stockholders more time to deliberate before exercising their right to vote. Because the Special Committee did not preclude stockholders from making a free and uncoerced choice about the Merger, its decision to reschedule the meeting does not invoke Blasius at all.”
Moreover, the Court explained that the “Special Committee has demonstrated a compelling justification for its action, even if that standard applies.” The Court went on to explain when compelling circumstances are present such as when independent directors believe that: (1) The stockholders are about to reject a third-party merger proposal that the independent directors believe is in their best interests; (2) Information useful to the stockholders’ decisionmaking process has not been considered adequately or not yet been publicly disclosed; and (3) If the stockholders vote no, the acquiror will walk away without making a higher bid and that the opportunity to receive the bid will be irretrievably lost.
The Court observed the real world economic reality that the reason stockholders invest in companies is for the following purpose:
"to make moolah, cash, ching, green, scratch, cabbage, benjamins – – to obtain that which Americans have more words for than Eskimos have for snow – – money. When directors act for the purpose of preserving what the directors believe in good faith to be a value-maximizing offer, they act for a compelling reason in the corporate context. Of course, that does not mean that they have unlimited freedom to advance that purpose. But that is a question about the fit between the means they employ, not the end they are seeking to achieve.”
Here is another take on the case from the Harvard Corporate Governance Blog. Here is another analysis also posted on the same foregoing blog, by a few highly respected Delaware lawyers. Here again is another post about the case from the Harvard blog.