In re Comverge, Inc. Shareholders Litigation, Cons. C.A. No. 7368-VCP (Nov. 25, 2014).
This Court of Chancery opinion addresses a motion to dismiss a stockholder challenge to a completed merger. The plaintiffs contend that the board of directors of Comverge breached their fiduciary duties by conducting a flawed sales process and agreeing to unreasonable deal protection measures that precluded the possibility of a topping bid and related claims. This 54-page opinion granted in part and denied in part the motion to dismiss.
Two parts of this opinion are notable. One is the discussion of the Revlon standard as enhanced scrutiny in connection with a review of the fiduciary duties of board members in the service of maximizing the sale price of the enterprise when there is a transaction that will result in a change of control, especially when the merger consideration paid to the target stockholders is cash. See page 22.
Although the enhanced scrutiny under Revlon is more exacting than the deferential rationality standard applicable to conventional decisions governed by the business judgment rule, the court described the Revlon test as one of reasonableness. In that regard, the questions before the court in this case were:
(1) Whether the decision-making process employed by the directors, including the information on which the directors based their decision, was adequate; and,
(2) Whether the directors’ actions, in light of the circumstances that were existing, were reasonable. Thus, the court explained that the Revlon enhanced scrutiny is both subjective and objective. There is an objective reasonableness evaluation, however, Revlon is not a license for the courts to second guess reasonable, but debatable, choices that directors have made in good faith. See footnote 26.
The court found that for purposes of the motion to dismiss, it was reasonably conceivable that the Comverge Board breached its duty of care and possibly acted in bad faith in approving deal protection measures in connection with the merger that were impermissibly preclusive.
The court next turned to the claim that the acquiring company aided and abetted a breach of fiduciary duty by the target board. In connection with this analysis, the court considered other Delaware decisions involving persons misleading directors into breaching their duty of care. The court also referred to the recent Chancery decision of In Re Rural Metro Corp., 88 A.3d 54, 97 (Del. Ch. 2014), in which the target company’s financial advisor knowingly participated in breaches of the duty of care by members of the board because the advisor had “created the unreasonable process and informational gaps that led to the board’s breach of duty.” Id. at 99.
The court observed that a similar theme in these cases is that the third party aider-and-abettor possessed the requisite degree of “knowing participation” because the factual record pointed to evidence of a conflict of interest diverting the advisor’s loyalties from its client, such that the advisor, like the banker in Del Monte, is being paid in some manner something he would not otherwise get in order to assist in the breach of duty. Id. at 100.
The court concluded in this case that the claim failed because it falls in the category of cases where the claim does not involve a situation in which the third party bidder attempted to create or exploit conflicts of interest in the board, nor did the bidder conspire in or agree to the fiduciary breach of the board. Nor, as a financial advisor might, did it serve in the role of a gatekeeper.