On May 24, 2011, in In Re Smurfit-Stone Container Corp. Shareholder Litigation, C.A. No. 6164-VCP, the Court of Chancery denied a motion for preliminary injunction and a request that the Court delay a stockholder vote regarding a merger. The Court also addressed the issue of “whether and in what circumstances Revlon applies when merger consideration is split roughly evenly between cash and stock. Read revised opinion here. Letter from Court explaining clerical revision to opinion is available here. Professor Stephen Bainbridge provides a scholarly critique of the decision here.
This summary was prepared by Kevin F. Brady of Connolly Bove Lodge & Hutz LLP.
Plaintiffs are stockholders Smurfit-Stone and they brought this action to challenge a merger in which a third-party acquiror agreed to merge with Smurfit-Stone for consideration valued at $35 per share – with half of the merger consideration in cash and the other half in stock of the acquiror. Plaintiffs, among other things, challenged the merger alleging that the $35 merger price was unreasonable and that the Smurfit-Stone board failed to maximize stockholder value under the Revlon line of cases. Plaintiffs moved for a preliminary injunction and requested that the Court delay the Smurfit-Stone stockholder vote and enjoin the deal protections for a period of 45 to 60 days so as to allow Smurfit-Stone to seek higher bids. The Court denied that request.
The Court addressed the issue of “when does a corporation enter Revlon mode such that its directors must act reasonably to maximize short-term value of the corporation for its stockholders. The Court noted that the Delaware Supreme Court had already determined that a board might find itself faced with a Revlon obligation when, among other things, approval of a transaction results in a sale or change of control[.]” Here, plaintiffs alleged that Revlon should apply because the merger consideration was comprised of 50% cash and 50% stock at the time the parties entered into the merger agreement, which qualified the proposed transaction as a “change of control” transaction. The Court noted, however, that a question remained as to when a mixed stock and cash merger constituted a change of control transaction for Revlon purposes. The Court stated
Pure stock-for-stock transactions do not necessarily trigger Revlon. If, for example, the resulting entity has a controlling stockholder or stockholder group such that the target’s stockholders are relegated to minority status in the combined entity, Delaware Courts have found a change of control would occur for Revlon purposes. But, if ownership shifts from one large unaffiliated group of public stockholders to another, that alone does not amount to a change of control. In this event, the target’s stockholders’ voting power will not be diminished to minority status and they are not foreclosed from an opportunity to obtain a control premium in a future change of control transaction involving the resulting entity. On the other hand, Revlon will govern a board’s decision to sell a corporation where stockholders will receive cash for their shares. Revlon applies in the latter instance because, among other things, there is no tomorrow for the corporation’s present stockholders, meaning that they will forever be shut out from future profits generated by the resulting entity as well as the possibility of obtaining a control premium in a subsequent transaction. Heightened scrutiny is appropriate because of an “omnipresent specter” that a board, which may have secured a continuing interest of some kind in the surviving entity, may favor its interests over those of the corporation’s stockholders.
Because the Delaware Supreme Court has not yet clarified the boundaries of when Revlon applies in the situation where merger consideration consists of an equal or almost equal split of cash and stock, the Court had to evaluate the circumstances of the proposed transaction “based on economic implications and relevant judicial precedent.” The Court concluded that:
The approximately 50% being cashed out of each stockholder’s investment in Smurfit-Stone obviously falls between the 33% cash out that the Supreme Court held did not trigger Revlon in Santa Fe and the 62% proportion of cash consideration that Vice Chancellor Lamb determined would trigger Revlon in Lukens. Mathematically, this situation is closer to Lukens, but only marginally. Thus, assuming the Court’s analysis in Lukens was correct, as I do, this case is necessarily approaching a limit in relation to the Supreme Court’s holdings in Santa Fe and Arnold, which, again, involved a stock-for-stock transaction. As previously noted, however, my conclusion that Revlon applies here is not free from doubt.
In the end, the Court concluded that the plaintiffs were not likely to prevail on the merits and denied the application for injunctive relief.