Police & Fire Ret. Sys. of The City of Detroit v. Bernal, No. 4663-CC (June 25, 2009), read letter decision here. This Chancery Court decision provides a useful guide for the standard that will be applied to a motion to expedite proceedings. It also provides insight into the types of facts that may warrant injunctive relief in the context of a three-way contest for control when Revlon duties are triggered.
In this short letter that followed oral arguments on the same day, the Chancery Court provides a reasoned decision for granting a motion for expedited proceedings in connection with a motion to enjoin certain provisions of a merger agreement between Data Domain and NetApp, Inc. The plaintiff alleged that the merger agreement contained “deal protection mechanisms” such as a “no solicitation clause” and a termination fee. The board also entered into a voting agreement whereby they pledged to vote their shares, representing approximately 20% of Data Domain’s outstanding shares, in favor of the NetApp merger. The plaintiff also alleged that the officers and directors of Data Domain would receive benefits separate and apart from the Data Domain shareholders such as indemnification from liability for matters arising from the completion of the merger, and for some individuals, positions with the company after the merger.
On June 1, EMC launched an all-cash tender offer for Data Domain at a price of $30 per share. On June 3, NetApp increased the cash component of its merger consideration which raised the overall value of its offer to $30 per share, but left all deal protection measures in place. The Data Domain board has stated that it is unable to negotiate with EMC because of the deal protection provisions of the merger agreement and if it failed to reject the EMC bid, Data Domain would be at risk of losing the NetApp bid.
Analysis to Determine whether Court will Grant Expedited Proceedings
The court explained that in deciding whether to grant expedited proceedings, the court must determine:
“Whether in the circumstances the plaintiff has articulated a sufficiently colorable claim and shown a sufficient possibility of a threatened irreparable injury, as would justify imposing on the defendants and the public the extra (and sometimes substantial) costs of an expedited preliminary injunction hearing.”
In this case, the plaintiffs have alleged that the directors violated their Revlon duties by not maximizing the sale price of the enterprise. This duty is triggered based on the allegations that the deal results in a change of control because the majority of the shareholders are being paid off with cash, and the preclusive deal protection measures deter other bidders and in any event the directors failed to inform themselves about the possibility for greater value to be obtained through the EMC bid.
At this early stage in the proceedings, in order to determine whether the motion to expedite should be granted, the court need only determine if the plaintiff has “stated a sufficiently colorable claim to justify proceeding on an expedited schedule.” (emphasis in original.) In determining whether there was a sufficiently colorable claim, the court recognized that Revlon does not require a certain blueprint that the board must follow, however, the board must exercise its duties in order to obtain the maximum price reasonably available. The court found that the plaintiff alleged facts that state a colorable claim that the Data Domain board is “favoring one bidder over others, thereby deterring bids from third parties that could provide greater value to Data Domain shareholders.”
In addition, importantly, the court emphasized that:
“On a motion for a preliminary injunction, the plaintiff does not have to overcome the hurdle of an exculpatory provision that, as permitted by 8 Del. C. Section 102(b)(7), exculpates directors from personal liability from monetary damages for certain breaches of fiduciary duty.” (emphasis in original.)
The court also found a “sufficient likelihood of irreparable injury” because by deterring potential bidders, such as EMC, with deal protection measures, the resulting harm from such deterrents would be “incalculable,” (which is the word used by the court). Moreover, the court explained that it would be impossible to “unscramble the eggs” (the court’s phrase), by attempting to unwind the merger once it has been completed.
Finally, the court reasoned that injunctive relief may be the only relief reasonably available to shareholders for certain breaches of fiduciary duty in connection with the sale and control transaction, “particularly where the company has adopted a provision exculpating its directors from personal liability from monetary damages for breach of the duty of care.” (citing Lyondell Chemical Co. v. Ryan, 970 A.2d 235, 243-244 (Del. 2009) (recognizing the significant burden that a plaintiff faces to show that the board acted in bad faith by failing to reasonably inform themselves or otherwise carry out their fiduciary duties in a sale of control)).
Thus, the court concluded that in cases such as these, the only realistic remedy shareholders may have for certain breaches of fiduciary duty in connection with a sale of control transaction may be injunctive relief. The court scheduled a preliminary injunction hearing to be held in this case on August 13th at 10:00 a.m. in Georgetown, Delaware, scarcely two months after the complaint was filed in this case.