C&J Energy Services, Inc. v. City of Miami General Employees’ and Sanitation Employees’ Retirement Trust, Del. Supr., No. 655/657, 2014 (Dec. 19, 2014). This Delaware Supreme Court opinion is noteworthy because it clarifies the version of fiduciary duties known as the Revlon standard that apply to a board of directors when they are selling their company, or there is a change in control. Elaboration follows but a shorthand reference for this opinion is that a formal auction is not required to satisfy the Revlon standard as long as other bidders have an opportunity to bid. It also features a rare reversal of the Court of Chancery, and clarifies the standard that Chancery must follow when granting a mandatory injunction.
This case involved a transaction between C&J Energy Services, Inc. and Nabors Industries Ltd. Of course the factual details are important, and the first 25 pages of the decision described the facts extensively. Suffice it to say for purposes of this short blog post that the selling company was found to include a board with a majority of independent and disinterested directors.
One unusual procedural aspect of this decision is that the appeal was based on a bench decision, without a formal opinion. The bench decision and order were entered shortly before Thanksgiving on Nov. 25, 2014, and the appellate briefing and oral argument, as well as this 38-page opinion, were concluded by Dec. 19, 2014. That is fast work.
The parts of the decision with more widespread relevance are the statements of Delaware law involving the Revlon duties of directors, which involves an enhanced review by the court to determine if the fiduciary duties of the directors were fulfilled in connection with the sale of control of a company.
The Delaware Supreme Court determined that the Court of Chancery based its ruling on “an erroneous understanding of what Revlon requires.” Delaware’s high court emphasized that “Revlon made clear that when a board engages in a change of control transaction, it must not take actions inconsistent with achieving the highest immediate value reasonably attainable.” However, the court also emphasized that Revlon does not require a board to set aside its own view of what is best for the company’s stockholders, nor does it require an auction in every instance.
Importantly, the Delaware Supreme Court underscored that: “There is no single blueprint that a board must follow to fulfill its duties” when the company is for sale, and a court applying the enhanced scrutiny under Revlon must determine “whether the directors made a reasonable decision, not a perfect decision.”
In order for a market check to be effective, an act of solicitation is not needed “so long as interested bidders have a fair opportunity to present a higher-value alternative, and the board has the flexibility to eschew the original transaction and accept the higher-value deal.” Moreover, the Court stated that the “ability of the stockholders themselves to freely accept or reject the board’s preferred course of action is also of great importance in this context.” See footnotes 84 through 88.
Delaware’s high court ruled that the Court of Chancery ignored its own precedent and the precedent of the Supreme Court to the effect that: “There are no legally prescribed steps that directors must follow to satisfy the Revlon duties . . .. Directors’ decisions must be reasonable, not perfect.” See footnotes 94 and 95.
Delaware’s high court reasoned that there were no material barriers that would have prevented a rival bidder from making a superior offer. For example, there was a broad “fiduciary out” that enabled the board to terminate the transaction with a more favorable deal emerged.
The Court explained that the facts in the original Revlon case involved the resistance by a selling board to a particular bidder and attempts by that board to prevent market forces from allowing the highest bidder to participate. In this case, there was no barrier to the emergence of another bidder and there was sufficient time to allow a higher bidder to emerge. The court also found it to be important that the stockholders of the seller had the chance to vote on whether to accept the deal that had been presented.
Mandatory Injunction Standard
In addition to finding that the trial court applied the wrong Revlon standard, the Delaware Supreme Court found that the Court of Chancery should not have issued any injunction, but certainly should not have entered a mandatory injunction. The appellate court found that the Court of Chancery also applied the wrong standard for a mandatory injunction.
Before a mandatory injunction can be issued, the Court of Chancery must “either hold a trial and make findings of fact, or base an injunction solely on undisputed facts.” See footnote 107.
This appellate decision also took the Court of Chancery to task by finding that the trial court erred in its issuance of an order that infringed on the contractual rights of the parties without justification. This opinion is unusually harsh in its criticism of the trial court for not applying the correct standard for a mandatory injunction and for not correctly applying the Revlon standard, the purpose of which is to insure that fiduciary duties are fulfilled.
The Supreme Court explained that the denial of a preliminary injunction does not include any final determinations of any facts or law and, in essence, is an acknowledgement that monetary damages after trial are the remedy that the plaintiff needs to pursue. Thus, this corporate litigation will now continue in light of the clarifications provided.